VSE Corp. :VSEC-US: Earnings Analysis: 2016 By the Numbers : March 10, 2017

VSE Corp. reports financial results for the year ended December 31, 2016.

We analyze the earnings along side the following peers of VSE Corp. – Kratos Defense & Security Solutions, Inc., Engility Holdings, Inc., Raytheon Company, Lockheed Martin Corporation, Northrop Grumman Corporation, General Dynamics Corporation, Aerojet Rocketdyne Holdings, Inc. and Teledyne Technologies Incorporated (KTOS-US, EGL-US, RTN-US, LMT-US, NOC-US, GD-US, AJRD-US and TDY-US) that have also reported for this period.

Highlights

  • Gross margins narrowed from 10.16% to 8.60% compared to the same period last year, operating (EBITDA) margins now 11.41% from 14.43%.
  • Year-on-year change in operating cash flow of 25.60% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 691.79 533.98 424.07 471.64 546.76
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings 26.79 24.92 20.49 23.99 27.36
Earnings Growth (YOY) 7.52 21.62 -14.59 -12.33 33.15
Net Margin 3.87 4.67 4.83 5.09 5
EPS 2.47 2.31 1.81 2.14 2.01
Return on Equity 11.06 11.46 10.45 13.66 17.77
Return on Assets 4.17 5.1 5.57 6.07 6.33

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Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 8.60% to 10.16% for the same period last year, while operating margins (EBITDA margins) went from 11.41% to 14.43% over the same time frame.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

VSEC-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 56.56 days, compared to last year’s level of 47.05 days.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

VSEC-US‘s change in operating cash flow of 25.60% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 9.64% to 7.64% and (2) one-time items that contributed to a decrease in pretax margins from 7.68% to 6.02%

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

VSE Corp. engages in the provision of engineering and technical support services. It operates through the following segments: Supply Chain Management Group; Aviation Group; Federal Services Group; and IT, Energy and Management Consulting Group. The Supply Chain Management Group segment distributes vehicle parts and accessories. The Aviation Group segment offers maintenance, repair, and operations services, supply chain solutions, and engine parts and equipment. The Federal Services Group segment includes engineering, industrial, logistics, and legacy equipment sustainment services. The IT, Energy and Management Consulting Group segment provides technical and advisory services to government agencies. The company was founded on January 22, 1959 and is headquartered in Alexandria, VA.

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