Business context and reporting period
This is Vectrus, Inc.’s Form 10-Q for the three months ended March 27, 2015; the filing does not identify the registrant as V2X, Inc. Vectrus provides infrastructure, logistics, and IT/network services primarily to the U.S. government, operating as one segment. Results are compared with the three months ended March 29, 2014. Vectrus became independent of Exelis in September 2014, so the prior-year figures reflect combined operations and allocated parent-company costs, and may not be fully comparable with stand-alone results.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $260.9 million | $304.0 million |
| Operating income / margin | $9.4 million / 3.6% | $17.6 million / 5.8% |
| Net income | $5.0 million | $11.2 million |
| Diluted EPS | $0.46 | $1.07 |
| Cash from operations | $(27.2) million | $(56.5) million |
| Capital expenditures | $0.5 million | $0.5 million |
Cost of revenue was $236.4 million, or 90.6% of revenue, versus $267.9 million, or 88.2%, a year earlier. SG&A was $15.2 million, or 5.8% of revenue, versus $18.5 million, or 6.1%. Net interest expense was $1.6 million; the effective tax rate was 36.0%.
At March 27, 2015, cash was $28.7 million; current assets were $273.3 million and current liabilities $241.5 million. Total debt was $137.4 million, including $16.4 million short-term and $121.0 million long-term. The company had $60.7 million of revolver availability after letters of credit. Shareholders’ equity was $59.1 million. Operating cash outflow and working-capital movements reduced cash by $14.1 million during the quarter; financing provided $14.1 million, principally from insurance financing.
Changes versus prior period
- Revenue fell $43.0 million, or 14.2%, mainly due to lower Afghanistan program activity following U.S. troop withdrawals, reduced service requirements, and transferred maintenance responsibilities. Afghanistan-related revenue declined to $43.6 million from $80.7 million.
- Operating income declined 46.7% and net income declined 55.8%. Lower revenue and reduced leverage of program costs outweighed SG&A savings from cost reductions and lower separation-related costs.
- Operating cash use improved by $29.2 million year over year, largely because of stronger receivables collections, but remained negative.
- Backlog was $2.638 billion, down $214.3 million from December 31, 2014, as older Middle East and Afghanistan contracts approached the end of their performance periods. Funded backlog was $697 million and unfunded backlog $1.941 billion.
Outlook, risks and unusual items
Management provided no specific quarterly or full-year earnings or revenue guidance. It expects cash, operating cash flows, and revolver access to cover anticipated operating costs, capital expenditures, and current debt repayments for at least 12 months. Management intends to prepay $5.0 million of term debt over the next 12 months. The company reported compliance with debt covenants; leverage was 3.02x against a 3.50x maximum, and interest coverage was 7.15x against a 4.50x minimum. Tighter leverage limits take effect later in 2015 and in 2016.
Management expects Afghanistan drawdowns and related funding reductions to continue pressuring revenue and operating income. Other risks include changes to U.S. defense budgets and procurement, government contract termination or suspension, audits and potential cost disallowances, competition and acquisition reform, contract protests, and the company’s dependence on government customers. The U.S. Army generated 90.5% of revenue, and the four largest contracts represented 70.0%.
Vectrus was phasing in several significant awarded contracts, including Thule Air Base maintenance (approximately $411 million), Army Corps of Engineers IT support (approximately $517 million), and U.S. Air Forces in Europe support in Turkey and Spain (approximately $458 million). Three unsuccessful competitors challenged the Thule award at the Court of Federal Claims after earlier protests were denied; a decision was expected in 2015. The filing reports no material expected adverse effect from current legal proceedings and no material outstanding environmental liabilities. Government contract audits and reviews were underway. Contract estimate revisions added a net $1.1 million to Q1 2015 operating income, versus $2.8 million in Q1 2014.
Key facts for investors to verify
- Confirm the intended issuer: this filing is for Vectrus, Inc., not V2X, Inc.
- Track Afghanistan exposure, contract transition and performance, and replacement business as older programs wind down.
- Assess funded versus unfunded backlog, contract options, and the impact of government funding and termination rights.
- Monitor operating cash flow, receivables and unbilled balances, and the timing of customer collections.
- Review debt repayment, floating-rate exposure, covenant headroom, and insurance-financing installments.
- Follow the Thule protest and ongoing government audits, claims, and potential cost adjustments.