Vectrus, Inc. — FY 2017 Form 10-K
Filing identity: The filing is for Vectrus, Inc. (NYSE: VEC), not V2X, Inc. It covers the fiscal year ended December 31, 2017; quarterly figures are provided separately. The company operates as one segment, providing facility and logistics, and information technology and network communications services primarily to the U.S. government.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $1,114.8 million | $1,190.5 million |
| Gross profit / margin | $101.9 million / 9.1% | $106.9 million / 9.0% |
| Operating income / margin | $41.2 million / 3.7% | $42.8 million / 3.6% |
| Net income | $59.5 million | $23.7 million |
| Diluted earnings per share | $5.31 | $2.16 |
| Cash from operating activities | $35.4 million | $36.6 million |
| Cash at year-end | $77.5 million | $47.7 million |
| Total debt at year-end | $79.0 million | $85.0 million |
FY 2017 interest expense, net, was $4.6 million. About $10.8 million of year-end cash was held by foreign subsidiaries. The company had $108 million of available revolver capacity after letters of credit, and management expected cash, operating flows, and the revolver to cover anticipated needs for at least 12 months. DSO improved to 54 days from 57.
FY 2017’s $22.9 million income tax benefit materially boosted reported net income: the company said it would have recorded approximately $12.2 million of tax expense under prior law. The benefit primarily reflected remeasurement of deferred tax liabilities following the Tax Act’s federal rate reduction. It should not be treated as an ordinary operating gain.
In Q4 2017, revenue was $295.8 million versus $288.2 million in Q4 2016; operating income was $10.3 million versus $8.6 million. Net income was $41.6 million versus $4.4 million, largely reflecting the annual tax benefit; Q4 diluted EPS was $3.70 versus $0.40.
Material changes versus prior period
- Revenue fell 6.4% year over year, primarily from lower Middle East activity, including a $121 million decline on APS-5 Kuwait, and lower Afghanistan activity. European and U.S. program increases partly offset the declines.
- Operating income declined 3.8%, but operating margin edged up to 3.7% from 3.6%. SG&A decreased 5.2%, reflecting cost savings initiatives.
- Facility and logistics revenue was $812.6 million, 73% of total revenue, down from 78% in 2016. IT and network communications revenue rose to $302.2 million, 27% of total, from 22%.
- Net cash from operations was slightly lower, while year-end cash rose. Working-capital movements included a $35.3 million reduction in deferred tax liabilities and unfavorable net working-capital changes overall.
- Total backlog increased to $2.933 billion from $2.356 billion, but only $718.8 million was funded. The company cautions that backlog may not convert fully or on schedule.
Outlook, significant items, and risks
- Contract concentration: K-BOSSS and OMDAC-SWACA generated 57.9% of FY 2017 revenue. K-BOSSS generated 42.7%; its options are at the government’s discretion. OMDAC-SWACA generated 15.1%; its then-current option period ran through May 2018, with recompete timing uncertain.
- Acquisition after year-end: On January 23, 2018, Vectrus acquired SENTEL for $36 million, funded with cash and revolver borrowings. SENTEL reported $107 million of revenue for the year ended September 30, 2017 and had approximately 700 employees. Purchase-price allocation remained pending.
- Management outlook: The company anticipated revenue and profitability reductions on certain programs, including contracts not renewed to Vectrus, while other programs were expanding. Management saw continuing demand for affordable facility, logistics, equipment, and IT-network support, but noted budget and procurement uncertainty. No quantified company-wide earnings or revenue guidance is provided.
- Government funding: At filing time, FY 2018 appropriations were not finalized; a continuing resolution ran through March 23, 2018. Funding delays could defer procurement and revenue.
- Contract accounting: Favorable cumulative catch-up adjustments increased FY 2017 operating income by a net $11.6 million, versus $7.5 million in FY 2016. Results depend on estimates of contract costs, performance, and fees. ASC 606 adoption in 2018 was expected to increase period-to-period revenue variability for firm-fixed-price contracts, without materially changing opening net assets.
- Other risks and contingencies: The company depends entirely on U.S. government customers, with 82% of FY 2017 revenue from the Army; contract options, appropriations, recompetes, audits, cost allowability, cybersecurity, overseas operations, and subcontractor performance are significant risks. A Kuwait employment class action remained pending. The company accrued $5.8 million for legal proceedings and government-contract claims and did not expect asserted or unasserted matters to have a material adverse effect. Goodwill was $216.9 million, or 43.8% of assets; no impairment was recorded in 2015–2017.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Key facts for investors to verify
- Confirm the filing entity and ticker: Vectrus, Inc. (VEC), rather than V2X, Inc.
- Track K-BOSSS and OMDAC-SWACA option exercises, recompete awards, and any resulting revenue or margin changes.
- Assess how much of the $2.933 billion backlog is funded and converts to revenue, and whether SENTEL integration delivers expected benefits.
- Separate recurring operating performance and cash generation from the one-time Tax Act benefit; monitor future tax effects and cash taxes.
- Review subsequent debt, liquidity, and covenant disclosures, including acquisition funding and variable-rate exposure.
- Monitor the Kuwait class action, government audits and claims, and any changes to the $5.8 million accrued contingency balance.