At first glance quite a good quarter - EPS is up nicely, thank you, and above all the operating margin is finally creeping up. Anyone following VSEC will know that it suffers from appalingly thin margins, but the flip side is that any improvement from this low level has the potential to send a rocket under the stock price.

Well that is what happened : margins went from 3.2% to 4.2% yoy. How?

"A substantial portion of the revenues earned on our R2 contract are from subcontracted work that has a lower profit margin. Our efforts to replace the subcontracted work with revenues generated by work performed by our employees would be expected to improve profit margins. As of June 30, 2009, our employee count was 2,410, which represents an increase of 490 employees, or approximately 26% since December 31, 2008."

And there's the rub. Because the at-first-glance good results were earned on the back of Flat revenues. Fixed costs are increasing relative to variable costs, which is fine when times are good, but should revenues decrease (and remember the R2 contract is running out) you have a problem. And in that sense the Backlog numbers are troubling:

(in millions)
2009 2008
---- ----
Bookings $464 $695
Revenue(*) $496 $440
Funded backlog $536 $674

(*) strip out the consolidation of G&B in 2009 and the revenues are flat. Plus, I can't make out from the 10Q what and when the impact of the R2 cancellation is. They talk about shifting resources to other contracts but it's all gibberish to me.

Bottom line : Backlog is down sharply, and I'm not convinced the margin improvement is sustainable, so no rocket.

On the bright side, Koonce is buying again (at $30 now) and since he knows a lot more than me about this company, you may want to join him, rocket or no rocket. As I've said before these guys rarely get their timing wrong.