Vectrus, Inc. — FY2015 Form 10-K
Filing-period note: The supplied filing is for Vectrus, Inc. (NYSE: VEC), fiscal year ended December 31, 2015; it is not a V2X, Inc. filing. Results cover the full year, not Q4 alone. Vectrus became an independent public company in September 2014, so pre-spin-off comparative financials are combined results and may not reflect stand-alone performance.
Business context
Vectrus provides infrastructure, logistics and supply-chain, and IT/network services worldwide, primarily to the U.S. Department of Defense. All 2015 revenue came from U.S. government customers; approximately 85% came from the Army. The company reported one operating segment.
Financial and operating metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1,180.7 million | $1,203.3 million |
| Operating income / margin | $40.0 million / 3.4% | $38.4 million / 3.2% |
| Net income | $31.0 million | $22.8 million |
| Diluted EPS | $2.86 | $2.13 |
| Operating cash flow | $18.9 million | $43.0 million |
| Cash at year-end | $40.0 million | $42.8 million |
| Debt | $114.0 million principal; $111.6 million carrying amount | $137.4 million reported debt |
Investing activities provided $0.1 million and financing activities used $21.7 million in 2015. The effective tax rate was 7.4%, versus 38.2% in 2014; management said the lower 2015 rate was driven by a one-time settlement of tax positions and should not be treated as a future trend. The filing reports a $6.9 million release of uncertain tax benefits.
Revenue mix: infrastructure asset management was $722.7 million (61%); logistics and supply-chain management was $219.4 million (19%); IT and network communication was $238.6 million (20%). Funded backlog was $685 million and unfunded backlog $1.727 billion, for total backlog of $2.412 billion, down from $2.852 billion in 2014. Funded orders received in 2015 were $1.1 billion, down $319.1 million year over year.
Changes versus prior periods
- Revenue declined 1.9% from 2014, mainly from a $102.4 million decrease in Afghanistan program activity and the absence of $31.3 million of TARS revenue retained by former parent Exelis. A $111.1 million increase in core, non-Afghanistan business—including ACE-IT and Turkey/Spain base-maintenance work—partly offset those declines.
- Operating income rose 4.0%, supported by lower stand-alone separation costs and improved core-business operating income, partly offset by reduced Afghanistan earnings and a $3.3 million tax-indemnification settlement expense.
- Net income increased 35.8%, while operating cash flow fell to $18.9 million, primarily reflecting weaker receivables collections and changes in other liabilities.
- Compared with 2013, revenue fell 21.9% and operating income fell 69.6% in 2014; the filing attributes the deterioration largely to reduced Afghanistan and Middle East activity. Afghanistan revenue continued to decline, from $513.1 million in 2013 to $270.1 million in 2014 and $167.7 million in 2015.
Outlook, risks and unusual items
- Management anticipated continued Afghanistan revenue declines but believed essential maintenance, logistics, infrastructure, and communications services and opportunities outside Afghanistan could support the business. It cited potential growth in IT services and expansion to other U.S. government customers. No quantified earnings or revenue guidance was provided.
- Four contracts represented approximately 65.7% of 2015 revenue. The Army accounted for about 85%, creating significant customer, contract, and recompete concentration.
- The Thule Base Maintenance award, valued at approximately $411 million, was set aside by the Court of Federal Claims following competitor protests. Vectrus stopped work and appealed; oral argument took place March 9, 2016. The outcome and timing remained uncertain.
- Government funding, appropriations, contract options, terminations, audits, and procurement changes may affect revenue and cash flows. Other material risks include fixed-price cost overruns, contract-estimate changes, cybersecurity and compliance exposure, international operating conditions, and difficulty recruiting or retaining cleared personnel.
- At year-end, cash was $40.0 million, including $5.9 million held abroad; revolving-credit availability was $61.3 million after letters of credit. The company said liquidity was expected to cover at least the next 12 months. It was in compliance with debt covenants; leverage was 2.27x and interest coverage 7.55x. Debt had variable rates, partly hedged with a $37.4 million interest-rate swap.
- The Thule dispute was a major contract uncertainty. Separately, routine government audits were ongoing; Vectrus had accrued $2.4 million for open audit years. Management did not expect asserted or unasserted legal matters, individually or collectively, to materially affect financial condition, results, or cash flow.
- Operating income included estimate revisions on long-term contracts: net unfavorable cumulative catch-up adjustments were $1.9 million in 2015, versus $2.6 million unfavorable in 2014; 2013 included $38.3 million favorable adjustments. Goodwill was $216.9 million, about 44.5% of assets, with no impairment recorded in 2015.
Most important facts for investors to verify
- Whether Afghanistan exposure and the concentration in four major contracts continue to decline, and whether new/core awards replace that revenue profitably.
- The resolution, timing, and financial impact of the Thule contract appeal and the status of key contract extensions and recompetes.
- Whether operating cash flow improves, particularly collections and receivables; year-end DSO was 68 days.
- Debt principal, required repayments, covenant headroom, interest-rate exposure, and the company’s ability to maintain liquidity as backlog converts to funded work.
- The sustainability of reported earnings: the 2015 effective tax rate was unusually low, and contract revenue and margins rely on estimates that can produce cumulative catch-up adjustments.
- Whether unfunded backlog converts to revenue; the government may delay funding, decline options, modify work, or terminate contracts.