V2X, Inc. (identified in this filing as Vectrus, Inc.) — Form 10-Q summary
Reporting period: Quarter ended September 25, 2015; comparisons are with the quarter ended September 26, 2014. Nine-month figures compare periods ended on those same dates. The filing states Vectrus was spun off from Exelis in September 2014, so prior-period results are combined historical results and may not be fully comparable with Vectrus as a standalone company.
Business context and financial results
Vectrus provides infrastructure, logistics, supply-chain, and information-technology services primarily to the U.S. government. The U.S. Army accounted for about 91% of revenue in the first nine months of 2015; the four largest contracts represented about 66%.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $299.1 million | $300.7 million | $869.5 million | $917.5 million |
| Operating income | $8.5 million | $3.3 million | $28.7 million | $30.3 million |
| Operating margin | 2.8% | 1.1% | 3.3% | 3.3% |
| Net income | $14.0 million | $2.1 million | $25.0 million | $19.5 million |
| Diluted EPS | $1.29 | $0.20 | $2.31 | $1.86 |
For the first nine months, operating cash flow was $10.0 million, versus $40.2 million a year earlier; capital expenditures were $0.8 million, and cash declined $1.7 million to $41.2 million. The operating cash-flow decline primarily reflected lower collections and changes in other liabilities.
At September 25, 2015, current assets were $277.3 million and current liabilities were $243.7 million. Receivables totaled $214.9 million, including $167.5 million of unbilled contract receivables. Debt outstanding under the term facility was $120.5 million; the balance sheet reported $17.0 million of short-term debt and $100.5 million of long-term debt, net. Revolver availability was $61.2 million after letters of credit. The company reported compliance with debt covenants.
Material changes and unusual items
- Revenue fell 0.5% in Q3 and 5.2% year to date. Afghanistan program revenue declined $26.2 million in Q3 and $90.5 million year to date as U.S. activity and service requirements decreased. Non-Afghanistan programs, including new Army Corps of Engineers and Turkey/Spain base-maintenance work, partly offset the reductions.
- Compared with Q3 2014, operating income rose $5.2 million, primarily reflecting lower standalone-company separation costs and improved non-Afghanistan program results. Nine-month operating income declined 5.3%.
- Q3 net income included a non-cash income-tax benefit of $7.1 million and a reported effective tax rate of negative 103.7%. The filing attributes the unusual tax results to settlement of uncertain tax positions and cautions that the lower 2015 tax rates are not expected to indicate a future trend.
- Adjusted operating margin, a non-GAAP measure, was 3.9% for Q3 versus 3.3% a year earlier, and 3.7% year to date versus 4.7%. Adjusted results exclude specified items; they should not be treated as GAAP results.
- Total backlog was $2.4 billion at quarter-end, down from $2.9 billion at year-end 2014. Funded backlog was $864 million and unfunded backlog was $1.536 billion. Funded orders received in the first nine months were $919.8 million, down about $273.1 million from the prior-year period.
Outlook, risks, and contingencies
Management expected cash on hand, operating cash flows, and available revolver borrowings to fund anticipated operating costs, capital expenditures, and debt repayments for at least 12 months. It expected Afghanistan revenue to continue declining, while citing growth opportunities in other programs and government agencies. The filing provides no specific consolidated revenue or earnings guidance.
A roughly $411 million Thule Base Maintenance contract had been set aside by the U.S. Court of Federal Claims following competitor protests; work stopped, and Vectrus appealed. The outcome could affect anticipated business and backlog. Other key risks include changes to U.S. government budgets and priorities, contract cancellations or funding delays, audits and possible cost adjustments, competition, and the company’s concentration in government contracting. The company reported ongoing government audits and reviews but said it did not expect known legal proceedings to have a material adverse effect.
Debt bears variable interest; management estimated that a one-percentage-point rate change would alter annual cash interest on the term loan by $1.2 million. Vectrus had entered into an interest-rate swap covering a portion of its rate exposure. Management also stated it did not plan to pay a regular dividend.
Important facts for investors to verify
- Confirm issuer identity: the supplied filing names Vectrus, Inc., not V2X, Inc.; verify the intended company and filing before relying on this summary.
- Review the Thule contract appeal and any effect on contract awards, backlog, and future revenue.
- Track Afghanistan program reductions, replacement growth in other programs, and subsequent funded orders and backlog composition.
- Assess receivables collection and operating cash flow, particularly the large unbilled receivables balance and requests for equitable adjustments.
- Separate recurring earnings from the one-time tax benefit and other adjustments; verify debt repayment, covenant headroom, and sensitivity to variable interest rates.