Vectrus, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for Vectrus, Inc., not V2X, Inc. Verify that this is the intended filing. Reporting period ended June 29, 2018; comparisons are with the quarter and six months ended June 30, 2017. Vectrus provides facility, logistics, IT and network communications services, primarily to U.S. government customers.
Financial results
| Metric | Three months ended June 29, 2018 | Year-over-year change | Six months ended June 29, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $321.1 million | +23.8% | $641.6 million | +16.8% |
| Operating income | $13.0 million | +41.2% | $21.7 million | +3.9% |
| Operating margin | 4.0% | Up from 3.5% | 3.4% | Down from 3.8% |
| Net income | $9.2 million | +68.4% | $15.3 million | +26.2% |
| Diluted EPS | $0.81 | Up from $0.49 | $1.35 | Up from $1.09 |
| Operating cash flow | Not separately reported for the quarter | — | $4.2 million | Down from $5.7 million |
For the first half, cost of revenue was $586.1 million, or 91.3% of revenue, versus 90.7% a year earlier. SG&A was $33.9 million, up 12.0%, though it declined as a share of revenue to 5.3% from 5.5%. Net interest expense was $2.3 million for the half. The effective tax rate was 21.0%, compared with 35.0%; management attributed the lower rate to the Tax Act and one-time discretionary items.
Balance sheet, cash flow and liquidity
- At June 29, cash was $41.0 million, down from $77.5 million at year-end 2017; approximately $20.1 million was held by foreign subsidiaries.
- Receivables were $217.1 million, including $177.8 million of unbilled contract assets. Days sales outstanding increased to 60 from 54 at year-end.
- Debt was $77.0 million before unamortized financing costs (carrying value, net, was $75.4 million). The company had no revolver borrowings at quarter-end and $109.8 million of available capacity after letters of credit.
- First-half investing cash use was $38.0 million, primarily the $37.2 million SENTEL acquisition. Financing cash use was $1.4 million; cash declined by $36.5 million overall.
- Management said cash, operating cash flow and revolver availability should be sufficient for anticipated needs and debt repayments for at least the next 12 months. The company was in compliance with its debt covenants; reported leverage was 1.44x debt/EBITDA and interest coverage was 11.04x.
Material changes and operating developments
- Revenue growth reflected SENTEL, acquired January 23, 2018, and increased activity in U.S. and European programs. SENTEL contributed $53.3 million of first-half revenue and an insignificant amount of pretax operating income. Acquisition consideration, net of cash acquired, was $37.2 million.
- First-half revenue growth was partly offset by a $3.6 million decline in Middle East program revenue. The Middle East remained the largest geographic market, with $439.1 million of first-half revenue.
- The Army represented approximately 74% of first-half revenue, down from 85% a year earlier. All reported revenue was from U.S. government customers.
- Funded and unfunded backlog totaled $3.277 billion at June 29, 2018, including $951 million funded. Remaining performance obligations were $975 million; the company expected to recognize approximately 61% in 2018 and 39% in 2019. These measures are subject to funding, options and contract changes.
- ASC Topic 606 was adopted January 1, 2018. It produced a $0.1 million unfavorable opening retained-earnings adjustment. For the first half, reported operating income under the new guidance was $21.7 million versus $29.1 million under the former guidance, while revenue was nearly unchanged. The filing explains that timing and presentation of contract-estimate adjustments, especially for fixed-price work, changed.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management expected the effective tax rate to be approximately 22% for the balance of 2018.
- Management cited U.S. government budget and procurement changes, competition, contract renewals and re-competes, cost control, staffing and subcontractor performance as business risks. Government contracts may be terminated or suspended, and options are not guaranteed.
- K-BOSSS contributed $258 million, or 40.3% of first-half revenue. Its exercised option ran through December 28, 2018; a further option extended through March 28, 2019, at the government’s discretion. The contract was to be re-competed under LOGCAP V, with an anticipated award announcement in December 2018. Losing the award could constrain future Army bidding.
- OMDAC-SWACA represented 14.0% of first-half revenue. A $106 million contract modification extended work through November 30, 2018; re-competition was expected in 2019.
- First-half operating income included $6.6 million of net favorable cumulative contract-estimate adjustments. Management noted these adjustments can reverse or vary with contract performance and estimates.
- The company accrued $6.9 million for legal and government-contract claims. A Kuwait employment class action had a proposed settlement preliminarily approved; final approval and a fairness hearing were pending. Potential adjustments from former-parent indirect-rate negotiations for 2007–2014 costs could not be estimated.
- Tax accounting under the Tax Act remained provisional; management expected to complete its analysis by December 31, 2018. The filing also identifies interest-rate and foreign-exchange exposure.
Investor verification priorities
- Confirm the intended issuer: the supplied filing names Vectrus, Inc., whereas the request names V2X, Inc.
- Track K-BOSSS and OMDAC-SWACA re-compete outcomes, extensions, funding and any resulting revenue or margin effects.
- Assess how much reported earnings growth reflects SENTEL, contract-estimate adjustments and the lower tax rate; compare operating results under consistent revenue-recognition accounting.
- Monitor receivables, unbilled contract assets, DSO and operating cash conversion, particularly following the acquisition-related cash decline.
- Review SENTEL integration, final purchase-price allocation, acquired-business controls and realized profitability.
- Follow government contract claims, the employment settlement, former-parent indirect-rate exposure, and covenant headroom.