V2X, Inc. (filed as Vectrus, Inc.; NYSE: VEC) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 27, 2019, compared with the periods ended September 28, 2018. The filing identifies the registrant as Vectrus, Inc., not V2X, Inc.
Business context
Vectrus provided facility and logistics services, information technology, and network communications services, primarily to U.S. government customers. It operated as one segment; the U.S. Army was its largest customer. The July 8, 2019 acquisition of Advantor expanded its electronic security offerings.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $359.9 million | $308.1 million | $1,017.4 million | $949.7 million |
| Operating income | $14.4 million | $14.0 million | $36.0 million | $35.7 million |
| Operating margin | 4.0% | 4.5% | 3.5% | 3.8% |
| Net income | $9.4 million | $9.9 million | $24.1 million | $25.2 million |
| Diluted EPS | $0.80 | $0.86 | $2.08 | $2.21 |
- Q3 revenue rose 16.8%; nine-month revenue rose 7.1%. Nine-month growth reflected increases in Middle East, U.S., and European programs.
- Q3 cost of revenue was 90.5% of revenue, unchanged year over year; nine-month cost of revenue improved to 90.6% from 91.1%. SG&A grew faster than revenue, including Advantor costs, internal operations investments, and LOGCAP V-related legal costs.
- Operating income grew only 2.7% in Q3 and 0.9% for nine months; net income declined 4.9% and 4.3%, respectively. Higher interest expense and SG&A weighed on results. Effective tax rates were 24.8% for Q3 and 22.7% for nine months, above the prior-year rates.
- Nine-month operating cash flow was $28.4 million, versus $8.7 million; investing cash outflow was $53.0 million, including the Advantor acquisition and capital spending. Cash declined $25.1 million to $41.1 million.
- At September 27, 2019, total debt was approximately $71.9 million ($5.5 million short-term and $66.4 million long-term, net); cash was $41.1 million. Revolver borrowings were zero at period-end, with $111.9 million available after letters of credit. The company reported covenant compliance and leverage of 1.04x debt to EBITDA.
Changes, outlook, and risks
- Advantor was acquired for $44.0 million net of cash acquired, funded with cash and revolver capacity. It contributed $10.2 million of revenue after acquisition through quarter-end, with insignificant operating income before taxes. Acquisition-related costs were $1.0 million.
- Remaining performance obligations were $959 million, up from $858 million at year-end 2018; management expected approximately 34% to be recognized in 2019 and 66% in 2020. Total backlog was $3.045 billion, including $807 million funded. These amounts are not guaranteed revenue: options may not be exercised, orders may be delayed, and government contracts can be terminated.
- The company received four LOGCAP V IDIQ awards and task orders, but competitor protests were pending in the Court of Federal Claims, with decisions expected by early December 2019. The outcome was uncertain. K-BOSSS, the largest contract, was exercised through March 2020 with a six-month option; OMDAC-SWACA was exercised through November 2019 with options through February 2020.
- Management believed cash, operating cash flows, and the revolver would fund expected needs for at least 12 months. About $12.7 million of cash was held by foreign subsidiaries. No regular dividend was planned.
- Key risks include dependence on U.S. government funding and contract renewals, award protests, concentrated revenue from major programs, competitive and margin pressure, contract cost estimates, audits and government claims, acquisition integration, and floating interest and foreign-currency exposure. The filing reported $12.0 million accrued for legal proceedings and government contract claims. A dispute over former-parent indirect costs was under appeal; the company stated it believed potential cumulative liability was insignificant and believed it was indemnified.
- Unusual items included a $5.4 million seller payment for a contract that could not be novated, with removal of the related intangible asset. A prior-year Q3 $1.4 million benefit from resolving a closed-contract item also affected the comparison. No specific full-year earnings or revenue guidance was provided.
Investor verification checklist
- Confirm the issuer identity and ticker: the supplied filing is Vectrus, Inc. (VEC), despite the request metadata naming V2X, Inc.
- Track the LOGCAP V protests and whether expected task-order revenue materializes; assess renewal and transition risks for K-BOSSS and OMDAC-SWACA.
- Review contract margins, SG&A growth, acquisition integration, and the impact of contract estimate adjustments on reported earnings.
- Monitor receivables and collections: receivables were $254.8 million, including $194.7 million of unbilled contract assets; reported DSO was 62 days.
- Check cash generation, acquisition and capital spending, revolver availability, debt repayment, covenant headroom, and the outcome of government audits and claims.