Vectrus, Inc. — 2019 Form 10-K Summary
Entity and period: The filing is for Vectrus, Inc. (NYSE: VEC), not a company identified as V2X, Inc. It covers the fiscal year ended December 31, 2019; fourth-quarter figures are also reported. The financial statements received an unqualified audit opinion. Management and the auditor concluded internal control over financial reporting was effective, although Advantor was excluded from the internal-control assessment following its acquisition.
Business context
Vectrus provides facility and logistics, information technology and network communications, and converged infrastructure services, primarily to the U.S. government and Department of Defense. It operates as one segment. Substantially all revenue is government-related; the U.S. Army generated 69% of 2019 revenue. The two largest contracts, K-BOSSS and OMDAC-SWACA, together represented 51.4% of annual revenue.
Financial results
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $1,382.6 million | $1,279.3 million | +8.1% |
| Gross profit | $129.9 million | $114.7 million | +13.3% |
| Operating income | $51.6 million | $48.3 million | +6.8% |
| Operating margin | 3.7% | 3.8% | Down 0.1 percentage point |
| Net income | $34.7 million | $35.3 million | −1.6% |
| Diluted EPS | $2.99 | $3.10 | −3.5% |
| Cash from operations | $27.6 million | $40.1 million | −31.2% |
Fourth-quarter revenue was $365.3 million versus $329.6 million in 2018; operating income was $15.6 million versus $12.6 million; net income was $10.6 million versus $10.1 million; and diluted EPS was $0.91 versus $0.89.
Annual revenue growth came mainly from Middle East programs (+$50.0 million), U.S. programs (+$35.2 million, including $22.7 million from Advantor), and European programs (+$18.1 million). SG&A rose 18.0% to $78.3 million, including acquisition expenses, LOGCAP V pre-operational legal costs, and investments in global operations. Operating income benefited from $3.1 million of favorable cumulative contract estimate adjustments. Net income declined despite higher operating income, partly reflecting higher net interest expense and a higher effective tax rate (23.1%, versus 18.4%).
Liquidity and debt: Cash was $35.3 million at year-end, down from $66.1 million. Total debt was $70.5 million, down from $75.0 million; there were no revolver borrowings at year-end and $117.0 million of revolver capacity remained available. Operating cash flow was lower primarily because of working-capital outflows. Investing cash outflow was $55.8 million, including $45.1 million for Advantor. Management said cash, operating cash flow and the revolver were expected to cover anticipated needs for at least 12 months. Funded backlog was $707 million; total backlog was $2.751 billion, down from $3.012 billion.
Material changes, outlook and risks
- Acquisition: Vectrus acquired electronic security systems provider Advantor in July 2019 for net consideration of $45.1 million. Advantor contributed $22.7 million of 2019 revenue and an insignificant amount of operating income before taxes.
- Contract transition and protests: K-BOSSS, which generated $495 million of 2019 revenue, was recompeted under LOGCAP V. Vectrus received LOGCAP V task orders, but competing offerors protested the awards. As described in the filing, three protests had been dismissed by February 2020 and one remained pending. The K-BOSSS contract was exercised through March 28, 2020, with a six-month option; the transition could materially affect revenue.
- Other major contract: OMDAC-SWACA generated $216 million of 2019 revenue and was exercised into August 2020. A $121.8 million contract modification was reported on February 28, 2020, after year-end, for work estimated to run through August 28, 2020.
- Management outlook: No specific company revenue or earnings guidance is provided. Management sees opportunity in defense sustainment, IT and converged infrastructure, but notes competitive pricing, acquisition reform and budget uncertainty. The filing cites enacted FY2020 defense funding and higher FY2020–FY2021 spending limits, while warning that future appropriations, continuing resolutions and shutdowns could delay awards or funding.
- Key risks: High dependence on a few contracts and the U.S. government; recompete and protest outcomes; partial funding and termination rights; contract cost and performance estimates; fixed-price cost overruns; international security and compliance exposure; cyber and information-security threats; subcontractor and staffing risks; government audits and potential cost disallowances; and debt covenants and variable interest rates. The filing also identifies the novel coronavirus as a potential source of business disruption.
- Contingencies and unusual items: Vectrus accrued $12.1 million for legal proceedings and government-contract claims at year-end, versus $7.8 million in 2018, but said it did not expect asserted or unasserted matters to have a material adverse effect. A dispute over pre-spin-off costs remained under appeal; the company said potential liability was insignificant and believed it was indemnified by its former parent. Goodwill was $262.0 million, about 41% of assets; no goodwill impairment was recorded in 2019.
Important facts for investors to verify
- Final disposition of the remaining LOGCAP V protest, task-order scope, and the financial impact of the K-BOSSS transition.
- Renewal, extension or recompete outcomes for OMDAC-SWACA and other large contracts, and the effect on revenue concentration.
- Whether backlog converts to funded, recognized revenue as expected; unfunded backlog and options are not assured.
- Cash conversion and working-capital trends, particularly receivable collections and the growth in contract assets.
- Advantor integration, profitability and internal-control assessment, which was still in progress at filing.
- Resolution of government audits, claims and the former-parent cost appeal, including whether accrued amounts or indemnification change.