V2X, Inc. (formerly Vectrus, Inc.) — Form 10-Q Summary
Filing identity: The supplied filing is for Vectrus, Inc., not V2X, Inc. It covers the quarter ended June 26, 2015, and was filed August 5, 2015. Vectrus was spun off from Exelis in September 2014; the 2014 comparison includes periods when the business was part of Exelis, so it may not be fully comparable with stand-alone results.
Business context and reporting period
Vectrus provides infrastructure asset management, logistics and supply chain management, and information technology and network communications services, primarily to the U.S. government. It reports one operating segment. All revenue for the first half of 2015 came from U.S. government customers; the U.S. Army accounted for 90.9% of revenue. Its four largest contracts represented 66.0% of first-half revenue.
Financial results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $309.5 million | $312.9 million | $570.4 million | $616.9 million |
| Operating income | $10.8 million | $9.4 million | $20.2 million | $27.0 million |
| Operating margin | 3.5% | 3.0% | 3.5% | 4.4% |
| Net income | $6.0 million | $6.1 million | $11.0 million | $17.4 million |
| Diluted EPS | $0.56 | $0.59 | $1.02 | $1.66 |
| Operating cash flow | Not stated separately | Not stated separately | $(0.2) million | $2.6 million |
- First-half revenue declined 7.5% year over year. Q2 revenue declined 1.1%.
- Q2 operating income rose 15.1%, helped by lower SG&A and separation-related costs. First-half operating income fell 25.1%, while net income declined 36.7%.
- First-half SG&A was $31.3 million, down 17.6%. First-half net interest expense was $3.0 million, versus net interest income of $49,000 in the prior-year period. The effective tax rate was 36.0%.
- At June 26, cash was $40.0 million, current assets $277.7 million, and current liabilities $250.5 million. Cash declined $2.8 million from year-end 2014. First-half capital expenditures were $0.7 million.
- Debt included a $126.1 million term loan principal balance; the balance sheet reported $19.1 million of short-term debt and $103.9 million of long-term debt, net. The $75 million revolver had $58.1 million available after letters of credit. The reported interest rate was 3.19%.
- Backlog totaled $2.5 billion at quarter end ($720 million funded and $1.783 billion unfunded), down from $2.852 billion at December 31, 2014. Funded backlog was $476 million as reported in the six-month discussion. DSO was 62 days, compared with 68 days at year-end.
Material changes and unusual items
Afghanistan-based contract activity fell by $27.2 million in Q2 and $64.3 million in the first half compared with the corresponding 2014 periods, reflecting U.S. troop withdrawals, transfer of maintenance responsibilities, and reduced service levels. These declines were partly offset by $26.5 million of increased revenue from core business, including ACE-IT and Turkey/Spain base-maintenance work. SG&A reductions included staff reductions and a leaner headquarters model.
The company reported a first-half net cash outflow from operations of $0.2 million, with working-capital movements and lower earnings affecting cash generation. It also corrected the presentation of revolver borrowings and repayments to show them gross in the six-month cash-flow statement; the correction did not change total financing cash flow.
The company’s Danish subsidiary’s approximately $411 million Thule Base Maintenance contract was set aside by the Court of Federal Claims on May 28, 2015, and the Air Force ordered work to stop. Vectrus appealed. The outcome could affect expected future work and revenue.
Outlook, risks, and contingencies
- Management expected Afghanistan revenue and operating income to continue declining as U.S. presence and related funding decrease. It cited new awards and opportunities in other areas as potential offsets, but gave no formal numeric earnings or revenue guidance.
- Management said cash, operating cash flows, and revolver availability were expected to cover operating needs, capital expenditures, and current debt repayments for at least the next 12 months. It intended to make an additional $6 million voluntary term-loan prepayment over the following 12 months. No regular dividend was planned.
- Debt covenants required maximum leverage of 3.50x, stepping down to 3.00x in Q3 2015 and 2.75x in Q1 2016, and minimum interest coverage of 4.50x. At quarter end, leverage was 2.55x and interest coverage 7.84x; the company reported compliance.
- U.S. government contracts are subject to annual funding decisions and may be suspended or terminated. Government audits of the company’s controls, accounting, billing, indirect and direct cost systems, and Cost Accounting Standards compliance were underway; cost adjustments, penalties, or other actions remain possible.
- Management did not expect pending legal proceedings to materially affect the company, and reported no material outstanding environmental liabilities. Unrecognized tax benefits were $7.6 million; the company expected most uncertain tax positions to decrease within 12 months as examinations were resolved.
Investor verification points
- Confirm the issuer and ticker: this source is a 2015 Vectrus, Inc. filing, despite the request metadata naming V2X, Inc.
- Track the Thule contract appeal and any resulting change to contract awards, backlog, or revenue expectations.
- Monitor Afghanistan-related revenue declines, replacement awards, and the conversion of funded and unfunded backlog into revenue.
- Review operating cash flow and receivables, including $168.9 million in unbilled contract receivables and approximately $3.6 million estimated potentially not collectible within 12 months.
- Check debt repayment, variable-rate exposure, covenant headroom, and the planned voluntary prepayment; also distinguish term-loan principal from balance-sheet debt net of issuance costs.
- Consider the limited comparability of pre-spin-off 2014 results and the effect of stand-alone costs on reported and adjusted operating performance.