V2X, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 29, 2024; comparisons are with the three months ended March 31, 2023. V2X provides mission, operations, logistics, aerospace, training and technology services, primarily to U.S. government defense customers. The company reports one operating segment.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $1,010.6 million | $943.5 million |
| Operating income | $30.3 million | $30.6 million |
| Operating margin | 3.0% | 3.2% |
| Net income (loss) | $1.1 million | ($17.5 million) |
| Diluted EPS | $0.04 | ($0.57) |
| Net cash used in operating activities | $57.2 million | $38.5 million |
| Cash, cash equivalents and restricted cash, quarter-end | $35.7 million | $62.1 million |
Cost of revenue was $940.3 million, or 93.0% of revenue, versus $864.6 million, or 91.6%, a year earlier; accordingly, gross margin was approximately 7.0% versus 8.4%. SG&A declined to $39.9 million from $48.3 million. Net income turned positive largely because the prior-year quarter included a $22.1 million debt-extinguishment loss; Q1 2024 also included $1.6 million of receivables-sale discount fees and other expense. Interest expense, net, fell to $27.6 million from $31.7 million.
At March 29, 2024, total assets were $3.140 billion, total liabilities $2.146 billion, and shareholders’ equity $993.7 million. Reported short-term and long-term debt totaled approximately $1.170 billion. The company had $56.0 million drawn on its revolver, $17.2 million of letters of credit, and $426.8 million of available revolver capacity. Cash included $34.4 million held by foreign subsidiaries; $2.1 million was restricted. Management stated that cash, operating cash flows, the revolver and the receivables facility should fund anticipated needs for at least 12 months.
Changes and operating trends
- Revenue rose 7.1%, primarily from organic growth in legacy programs. Middle East revenue increased $62.1 million; Europe and Asia each grew, while U.S. revenue declined $4.0 million.
- Cost of revenue grew faster than sales, mainly due to higher revenue and contract mix. Operating income was nearly flat, and operating margin declined 0.2 percentage points.
- SG&A declined 17.2%, reflecting cost optimization and lower merger and integration costs. Favorable cumulative contract estimate adjustments were $0.5 million, versus $13.1 million in Q1 2023.
- Receivables rose to $788.5 million from $706.0 million, including unbilled contract assets of $658.9 million versus $561.9 million. DSO increased to 66 days from 58 at year-end.
- Operating cash outflow increased, with management citing working-capital outflows of $119.8 million. The company also received $33.7 million of net operating cash inflow from receivables sales. Investing cash outflow was $24.7 million, including a $16.9 million business acquisition and $7.8 million of capital expenditures.
- Funded backlog was $2.689 billion and total backlog $12.559 billion at quarter-end, down from $2.778 billion and $12.789 billion, respectively, at December 31, 2023. Funded orders received during the quarter were $860.4 million, $121.6 million less than the prior-year quarter.
Outlook, risks and other notable items
- The filing provides no formal quantitative earnings or revenue guidance. Of $3.268 billion in remaining performance obligations, V2X expects to recognize approximately 63% in 2024 and 37% in 2025. These obligations exclude certain potential IDIQ orders and unexercised options; contract options are not assured.
- The LOGCAP V–Kuwait task order generated $110.7 million, or 11.0% of revenue, compared with $127.9 million, or 13.6%, a year earlier. It was exercised through June 30, 2024, with additional options through December 31, 2026.
- Management cited uncertain government funding and procurement, competition, inflation, rising interest rates, geopolitical conditions, contract mix, and the possibility of contract suspension or termination as risks. Fixed-price and time-and-materials work may be particularly exposed if labor or supply costs rise more than expected.
- Debt carries significant variable-rate exposure. Effective rates at quarter-end were 9.48% on the First Lien Credit Agreement, 9.14% on the revolver and 8.38% on the 2023 Term Loan. The company reported compliance with debt covenants. Interest-rate swaps had a $343.8 million notional value.
- V2X accrued $12.4 million for legal proceedings and U.S. government contract claims. Management did not expect asserted or unasserted matters, individually or in aggregate, to have a material adverse effect, while noting government audits and claims may lead to adjustments or penalties.
- Disclosure controls were deemed ineffective because of a previously reported material weakness in internal control over financial reporting at an acquired subsidiary. Management said remediation was underway and expected before year-end 2024; the weakness was not yet considered remediated.
Important facts for investors to verify
- Whether revenue growth converts to stronger operating margins, particularly as contract mix and cost estimates change.
- Collections and billing progress on the rising unbilled receivables balance, DSO, and working-capital cash outflows.
- Backlog conversion, new funded orders, contract renewals and options, especially the Kuwait task order and exposure to U.S. government funding decisions.
- Debt balances, interest costs, covenant headroom, revolver availability, and the extent to which foreign-held cash is available for U.S. needs.
- Progress in remediating the material weakness and the outcome of government contract audits, claims and other contingencies.