Filing Summary
Entity and period: The supplied filing is Vectrus, Inc.’s unaudited Form 10-Q for the quarter ended March 30, 2018—not a filing under the name V2X, Inc. Vectrus provided U.S. government facility and logistics, and information technology and network communications services. All reported revenue came from U.S. government customers.
Financial Results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $320.5 million | $290.1 million |
| Operating income | $8.7 million | $11.6 million |
| Operating margin | 2.7% | 4.0% |
| Net income | $6.1 million | $6.7 million |
| Diluted EPS | $0.54 | $0.60 |
| Operating cash flow | $(11.6) million | $9.9 million |
| Cash at period end | $28.7 million | $53.7 million |
Cost of revenue was $294.1 million, or 91.7% of revenue, versus 91.3% a year earlier. SG&A rose 29.8% to $17.8 million, including SENTEL-related expenses and increased sales and marketing costs. The effective tax rate fell to 18.6% from 36.6%, reflecting the Tax Act and one-time discretionary items; management expected approximately 22% for the balance of 2018.
At March 30, 2018, total debt was $78.0 million, comprising $4.0 million short-term and $74.0 million long-term debt before unamortized financing fees. The company had $109.8 million of revolver availability and reported compliance with its credit covenants. Current assets were $282.7 million and current liabilities $216.2 million. Of $28.7 million cash, $17.5 million was held by foreign subsidiaries and was not available for U.S. operations unless repatriated.
Material Changes and Business Developments
- Revenue increased 10.5%. Higher U.S. program activity contributed $33.8 million, including $23.1 million from SENTEL, and Europe added $10.7 million; Middle East revenue declined $14.0 million.
- Operating income declined 25.6%, primarily due to lower results in Middle East and U.S. programs. Net income fell 8.4%.
- Vectrus acquired SENTEL on January 23, 2018, for $37.2 million net of cash acquired. SENTEL contributed $23.1 million revenue and an insignificant amount of pretax income during the post-acquisition period. Purchase accounting remained preliminary.
- Funded backlog was $723 million, essentially unchanged from $719 million at year-end. Total backlog rose to $3.3 billion from $2.9 billion, including $281 million attributable to SENTEL. The company expected to recognize about 90% of funded backlog at quarter-end as 2018 revenue and the remainder in 2019.
- Operating cash flow was negative, mainly due to a $20.1 million unfavorable working-capital movement, particularly the timing of collections. Receivables increased to $246.1 million; days sales outstanding rose to 68 from 54 at year-end.
- Adoption of ASC Topic 606 changed presentation and timing for certain firm-fixed-price contract estimates. For Q1, the new guidance reported operating income of $8.7 million versus $11.8 million under the former guidance; the filing says contract cash flows and total profitability at completion are unchanged.
Outlook, Risks, and Contingencies
Management stated that cash, operating cash flows, and revolver capacity were expected to fund anticipated operating costs, capital expenditures, and current debt obligations for at least the next 12 months. The company did not provide a full-year revenue or earnings forecast. It noted that some programs could decline as contracts expire or are not recompeted, while others were expanding.
On April 27, 2018, Vectrus received notice of a $106 million modification to the OMDAC-SWACA contract, extending work through November 30, 2018. The government’s anticipated recompete process was expected to begin with a solicitation in February 2019. The K-BOSSS contract, which represented 40.4% of Q1 revenue, had an exercised option through December 28, 2018; a further option was at the government’s discretion.
Key risks include dependence on U.S. government spending and contract awards, discretionary option exercises and termination rights, program recompetes, cost-estimate and performance risks, audits and potential adjustments to government contract costs, and SENTEL integration. The company had accrued $6.7 million for legal proceedings and government contract claims. A long-running Kuwait employment class action was in settlement negotiations, subject to court review and approval. Potential adjustments related to indirect-rate negotiations for costs allocated by the former parent for 2007–2014 could not be estimated. Management did not expect the disclosed legal and contractual matters, individually or collectively, to materially adversely affect the company, based on information then available.
The filing states that disclosure controls were effective as of March 30, 2018. Integration of SENTEL’s financial reporting processes and controls was ongoing.
Important Facts for Investors to Verify
- Confirm the issuer: this document identifies the registrant as Vectrus, Inc., despite the request metadata naming V2X, Inc.
- Track collections, receivables, and working capital: operating cash flow turned negative and DSO increased materially.
- Assess whether margins recover after the year-over-year decline, and distinguish reported results from the effects of ASC 606 and cumulative contract-estimate adjustments.
- Monitor SENTEL integration, final purchase-price allocation, and whether the acquisition contributes meaningfully to earnings and cash generation.
- Verify subsequent government contract options and recompete outcomes, especially K-BOSSS and OMDAC-SWACA, given customer concentration.
- Follow the class-action settlement approval and any government audit or former-parent indirect-rate adjustments.