Business context and reporting period
This is Vectrus, Inc.’s unaudited Form 10-Q for the quarter ended September 29, 2017; the supplied filing is for Vectrus, not a company identified as V2X. Vectrus provides facility, logistics, IT and network communications services to U.S. government customers worldwide. All reported revenue came from government customers, with the U.S. Army accounting for approximately 80% of third-quarter and 83% of nine-month revenue.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $269.6 million | $283.8 million | $819.0 million | $902.4 million |
| Operating income | $10.1 million | $11.2 million | $30.9 million | $34.3 million |
| Operating margin | 3.7% | 3.9% | 3.8% | 3.8% |
| Net income | $5.8 million | $6.6 million | $17.9 million | $19.2 million |
| Diluted EPS | $0.51 | $0.60 | $1.61 | $1.76 |
Cost of revenue was 90.9% of revenue in Q3 and 90.8% for the nine-month period. SG&A was $14.3 million and $44.6 million, respectively. Nine-month operating cash flow was $22.4 million, down from $33.5 million; capital expenditures were $0.9 million. Cash increased to $63.4 million from $47.7 million at year-end 2016, including $11.5 million held by foreign subsidiaries.
At September 29, 2017, current assets were $258.6 million and current liabilities $194.9 million. Term Loan principal was $74.5 million ($73.7 million net of debt issuance costs on the balance sheet); there were no Revolver borrowings and $62.8 million remained available. The company reported leverage of 1.58x EBITDA and interest coverage of 10.40x and was in compliance with its covenants. Management said available cash, operating cash flow and Revolver capacity should cover anticipated needs for at least 12 months.
Material changes and operating developments
- Revenue fell 5.0% in Q3 and 9.2% for the first nine months year over year. Nine-month declines were concentrated in Middle East ($38.1 million) and Afghanistan ($36.5 million) programs, as well as U.S. programs ($10.1 million).
- Q3 operating income declined 9.6%; nine-month operating income declined 9.7%. Lower revenue and weaker U.S. program income were key factors. Operating margin was flat year over year for the nine-month period.
- Contract estimate changes added $3.7 million to Q3 operating income and $8.6 million over nine months, versus $1.2 million and $4.2 million in the corresponding 2016 periods. These cumulative catch-up adjustments included favorable items offset by unfavorable cost and estimate changes.
- Total backlog rose to $3.06 billion from $2.36 billion at December 2016, including $824 million funded and $2.23 billion unfunded. K-BOSSS represented 42.5% of nine-month revenue; its extension runs through March 2018, with additional options. The Thule contract entered full operations October 1, 2017. The APS-5 Kuwait and Qatar contracts ended in April 2017.
Outlook, risks and unusual items
No specific revenue or earnings guidance is provided. Management expects reductions in revenue and profitability from certain programs, including contracts not renewed to Vectrus, while other programs are expanding. The federal continuing resolution funded government activities through December 8, 2017; delayed appropriations may delay procurement. Contract options and funding are discretionary, and government contracts may be suspended or terminated.
Management was negotiating a replacement credit facility and anticipated closing in Q4 2017, subject to definitive agreements and market conditions. The company accrued $5.2 million for legal proceedings and government-contract claims. It continues to defend a Kuwait employment class action; the Supreme Court denied review of class certification on October 2, 2017. Management did not expect legal or contractual matters, individually or together, to materially affect financial condition, results or cash flow. The company also planned to adopt the new revenue standard in Q1 2018 using the modified retrospective method; it expected greater period-to-period revenue variability for firm-fixed-price contracts, which represented 25% of nine-month revenue, but no change to contract cash flows or total profitability at completion.
Important facts for investors to verify
- Whether K-BOSSS options and other major contract renewals or re-competes sustain revenue as legacy programs wind down.
- How much backlog is funded, the timing of conversion to revenue, and whether the significant unfunded portion is ultimately realized.
- Whether favorable contract estimate adjustments recur and how the revenue-standard transition affects reported results.
- Final terms and completion of the replacement credit facility, and continued compliance with debt covenants.
- Outcomes of government audits, contract claims and the Kuwait class action, including any change to recorded reserves.