Business context and reporting period
The supplied filing is Vectrus, Inc.’s Form 10-Q for the three months ended March 29, 2019; it identifies the registrant as Vectrus (NYSE: VEC), not V2X, Inc. Vectrus provides facility, logistics, information technology and network communications services, primarily to U.S. government customers, and reports as one segment.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $325.9 million | $320.5 million |
| Operating income / margin | $10.4 million / 3.2% | $8.7 million / 2.7% |
| Net income | $7.1 million | $6.1 million |
| Diluted EPS | $0.62 | $0.54 |
| Operating cash flow | $(6.4) million | $(11.6) million |
Cost of revenue was 90.7% of revenue, versus 91.7% a year earlier. SG&A increased 11.9% to $19.9 million. Net interest expense rose to $1.6 million from $1.2 million, primarily due to use of the revolver for working capital during the quarter.
Cash was $48.2 million at March 29, down from $66.1 million at year-end; $19.5 million was held by foreign subsidiaries. Receivables were $244.1 million, including $195.7 million of unbilled contract assets. The company reported $72.7 million of debt, approximately $24.6 million of net debt, and $109.8 million of available revolver capacity. It was in compliance with debt covenants. Management said available cash, operating cash flows and revolver capacity should fund anticipated needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue increased 1.7%, reflecting higher Middle East and European revenue, partly offset by lower U.S. revenue.
- Operating income grew 20.1%; operating margin improved by 0.5 percentage points. Contract estimate adjustments were net unfavorable by $1.1 million, compared with net favorable adjustments of $2.8 million in Q1 2018.
- Net income rose 16.0%. The effective tax rate increased to 19.8% from 18.6%, which management attributed to one-time discretionary items in the prior-year period.
- Operating cash outflow narrowed, but remained negative. Working-capital movements, mainly receivables and payables, were a significant cash use. Investing outflow was $9.9 million, primarily for capital assets and intangibles; the prior-year period included $37.2 million for the SENTEL acquisition.
- Total backlog increased to $3.354 billion from $3.012 billion at year-end. Remaining performance obligations were $1.478 billion, up $619.7 million from year-end.
Outlook, commentary, risks and unusual items
- No formal earnings or revenue guidance is provided. The company expected to recognize about 75% of March 29 remaining performance obligations as revenue in 2019 and the balance in 2020; the filing notes that options and government funding affect conversion and are not assured.
- On April 12, 2019, Vectrus was awarded LOGCAP V task orders for PACOM and CENTCOM. Protests were filed, and the company could not predict their timing or outcome. The award is subsequent to the reporting period and is excluded from stated backlog.
- Customer and contract concentration are material: the Army generated about 70% of revenue, and the K-BOSSS contract represented 37.3% of revenue. K-BOSSS was extended through March 2020, with a further six-month option, and was recompeted under LOGCAP V.
- Key risks cited include government budget or funding changes, contract termination or nonrenewal, award protests, audits and potential cost adjustments, competitive and margin pressure, labor availability, and interest-rate and foreign-exchange exposure.
- The company accrued $6.0 million for legal proceedings and government-contract claims. It said it did not expect known legal or contractual matters to have a material adverse effect, but potential adjustments relating to former-parent indirect rates for 2013–2014 remained unclear.
- Adoption of lease accounting in Q1 added $19.6 million of right-of-use assets and $20.3 million of lease liabilities. This accounting change did not alter the manner in which lease expense is recorded.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Vectrus, Inc. (VEC), although the request names V2X, Inc.
- Track LOGCAP V protests, task-order performance and whether awards translate into funded revenue and backlog.
- Monitor K-BOSSS renewal/recompetition outcomes and concentration in Army and other major contracts.
- Assess cash conversion, receivables and unbilled contract assets, given negative quarterly operating cash flow and higher days sales outstanding.
- Review contract estimate adjustments, government audit exposures and the unresolved former-parent indirect-rate matters.
- Monitor leverage, covenant headroom, floating-rate exposure and availability of the revolver.