Business context and reporting period
V2X, Inc. provides mission-support services primarily to U.S. defense and government customers and reports as one operating segment. This unaudited Form 10-Q covers the three months ended March 31, 2023; the comparable quarter ended April 1, 2022. The July 2022 merger with Vertex materially expanded the company, so reported year-over-year comparisons are not on a like-for-like basis.
Financial performance and position
| Metric | Q1 2023 | Prior comparable quarter |
|---|---|---|
| Revenue | $943.5 million | $456.5 million |
| Operating income / margin | $30.6 million / 3.2% | $5.2 million / 1.1% |
| Net income (loss) | $(17.5) million | $2.9 million |
| Diluted EPS | $(0.57) | $0.24 |
| Operating cash flow | $(38.5) million | $(26.4) million |
| Capital expenditures | $9.1 million | $2.2 million |
Cost of revenue was $864.6 million, or 91.6% of revenue, compared with 91.9% in the prior period; SG&A was $48.3 million, or 5.1% of revenue, compared with 7.0%. Revenue growth was 106.7%, with $412.5 million attributed to the merger and the remainder to organic growth. Management cited merger contribution and improved legacy-program performance for higher operating income.
Net loss included a $22.1 million loss on extinguishment of debt and $31.7 million of net interest expense. The extinguishment loss arose from refinancing and repayment of prior facilities. The company reported a $5.7 million income tax benefit, versus $0.7 million of tax expense in the prior quarter.
At March 31, cash and equivalents were $62.1 million, including $25.4 million held by foreign subsidiaries; current assets were $926.2 million and current liabilities $760.2 million. Receivables were $759.8 million, including $559.3 million of unbilled receivables. DSO was 70 days, up from 68 at year-end.
Balance-sheet debt was $1.31 billion, comprising $15.5 million short-term and $1.292 billion long-term debt, net. The company also had $185.0 million drawn and $14.9 million of letters of credit under its new revolver, with $300.1 million available. Effective rates were 9.11% on the remaining first-lien term tranche, 8.15% on the revolver and 8.35% on the new term loan. The company was in compliance with its debt covenants at quarter-end and had entered into $300 million of interest-rate swaps.
Material changes and outlook
The February 2023 refinancing established a $500 million revolver and $250 million term loan and repaid the prior incremental first-lien tranche, second-lien debt and ABL borrowings. The refinancing generated the $22.1 million extinguishment loss. The merger also increased reported amortization, stock-based compensation and interest expense.
Performance obligations were $3.425 billion at quarter-end, up from $2.997 billion at December 31, 2022; management expects approximately 62% to convert to revenue during 2023 and the remainder during 2024. Total backlog was $11.829 billion, down from $12.262 billion at year-end, including $2.603 billion funded and $9.226 billion unfunded. Funded orders received during the quarter were $982.0 million. The filing provides no specific earnings or revenue guidance. Management believes cash, operating cash flows and revolver availability will cover anticipated operating costs, capital expenditures and current debt obligations for at least 12 months.
Management identified potential pressure from inflation and rising interest rates, federal budget and debt-ceiling uncertainty, government contract funding and termination rights, contract competition, and labor and subcontractor costs. Fixed-price and time-and-materials work may be particularly exposed to cost increases. Revenue remains heavily dependent on U.S. government customers. Contract estimate catch-up adjustments increased operating income by $13.1 million in Q1 2023, versus $0.6 million a year earlier. Accrued legal and U.S. government contract claims were $27.6 million; management did not expect legal or contractual claims to have a material adverse effect. The merger purchase-price allocation remained preliminary, with possible further adjustments related to tax matters and reserves.
Important facts for investors to verify
- Assess merger-adjusted operating performance: reported growth includes $412.5 million from the merger, and Q1 included $13.1 million of favorable contract estimate adjustments.
- Track cash conversion and receivables, particularly the $559.3 million of unbilled receivables and the quarter’s $38.5 million operating cash outflow.
- Monitor debt costs, floating-rate exposure, covenant headroom and the $300.1 million of revolver availability; $25.4 million of cash was held by foreign subsidiaries.
- Evaluate backlog quality and conversion, including the large unfunded portion, contract options and government funding or termination risk.
- Review resolution of government audits, claims and the $27.6 million accrued contingency, as well as final purchase-accounting adjustments from the merger.