V2X, Inc. (filing registrant: Vectrus, Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended April 3, 2020; comparable quarter ended March 29, 2019. The filing is for Vectrus, Inc., not a registrant named V2X.
Business context and results
Vectrus provides facility and logistics, IT and network communications, and related mission-support services, primarily to the U.S. Government. About 70% of quarterly revenue came from the Army. Results are unaudited.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $351.7 million | $325.9 million |
| Operating income | $12.5 million | $10.4 million |
| Net income | $8.7 million | $7.1 million |
| Diluted EPS | $0.74 | $0.62 |
| Operating margin | 3.5% | 3.2% |
| Cash from operations | $1.1 million | $(6.4) million |
Financial position and liquidity
- Cash was $146.2 million at April 3, 2020, including $13.7 million held by foreign subsidiaries. Total debt on the balance sheet was approximately $183.1 million: $122.0 million short-term and $61.1 million long-term, net. Management reported net debt of $37.8 million.
- The company drew $115 million net on its revolver during the quarter as a precaution amid COVID-19 uncertainty. With $2.4 million of letters of credit, only $2.6 million of revolver capacity remained. A significant portion of the revolver was subsequently repaid, but the filing does not state the repayment amount.
- Current assets were $431.0 million and current liabilities were $350.8 million. The company said cash, operating cash flows, and the credit facility should cover anticipated needs for at least 12 months.
- Capital spending was $0.9 million. Cash increased by $110.9 million, primarily reflecting revolver borrowings. DSO was 66 days, unchanged from year-end.
- The company was in compliance with debt covenants: debt-to-EBITDA was 2.62x against a 3.00x maximum; EBITDA-to-interest was 11.28x against a 4.50x minimum.
Changes versus the prior year
- Revenue increased 7.9%, driven by $14.6 million of expansion on existing contracts and $11.2 million from Advantor, acquired in July 2019. Revenue rose in the Middle East, U.S., and Europe.
- Operating income increased 20.1%; Middle East program gains more than offset declines in U.S. and European programs. Cost of revenue increased 8.2%, slightly faster than revenue, and was 90.9% of revenue versus 90.7%.
- Net income rose 22.5%. Net cash from operations improved from a $6.4 million use to $1.1 million provided, though working-capital movements remained unfavorable in 2020.
- Cash was up from $35.3 million at year-end, while reported short-term debt rose from $6.5 million to $122.0 million, largely reflecting precautionary revolver borrowing.
Outlook, risks, and unusual items
- No specific financial earnings or revenue guidance was provided. Remaining performance obligations were $1.217 billion, up $368.0 million from year-end; management expected about 72% to be recognized as 2020 revenue and 28% in 2021. Total backlog was $4.068 billion, including $1.034 billion funded. Backlog includes unfunded work and options and is not guaranteed revenue.
- Funded orders received in the quarter were $957.1 million. LOGCAP V transition activities began after the Army affirmed its award; one related protest remained before the Court of Federal Claims, with an appeal also filed. The K-BOSSS contract, which generated 35.1% of quarterly revenue, was exercised through September 28, 2020 and had been recompeted under LOGCAP V.
- COVID-19 had no material overall first-quarter impact, but management estimated it reduced revenue by $2.2 million and EPS by $0.02. Access restrictions and supplier delays were emerging; prolonged workforce, facility, travel, supply-chain, or customer-payment disruption could materially affect future results and cash flows.
- Contract-estimate adjustments reduced operating income by $2.3 million, versus $1.1 million in Q1 2019. The filing cites lower contract staffing margins and increased other direct costs.
- The filing disclosed an immaterial restatement of prior-period errors: December 31, 2019 retained earnings decreased by $2.5 million; the errors reduced 2019 net income by $1.5 million. The Q1 2019 comparative net income was corrected downward by $17,000, with no change to reported EPS.
- Goodwill was $262.0 million. A COVID-related qualitative assessment found no basis to conclude impairment was more likely than not. Accrued legal and government-contract claims were $12.3 million; management did not expect the matters discussed to have a material adverse effect, while noting outcomes remain uncertain.
- Other risks include U.S. Government funding and contract termination, audits and cost adjustments, protests and contract renewals, contract performance estimates, leverage and interest rates, and international operating conditions. The company did not plan a regular dividend.
Important facts for investors to verify
- Post-quarter revolver repayments, current borrowing capacity, and cash availability, particularly given the limited $2.6 million capacity reported at quarter-end.
- Resolution of remaining LOGCAP V protests and the status and replacement timing of K-BOSSS and other major contracts.
- Whether COVID-19 access restrictions, supplier delays, and any unrecoverable costs materially affect contract execution, collections, or margins.
- Conversion of backlog into funded work and revenue, including exercise of options and timing of government funding.
- Developments in contract-estimate adjustments, government audits and claims, and the prior-period accounting corrections.