V2X, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 29, 2023; comparisons are with the quarter ended September 30, 2022. Nine-month comparisons are with the nine months ended September 30, 2022. V2X provides mission solutions and support, primarily to U.S. defense and government customers, and reports as one segment. The merger with Vertex closed July 5, 2022, affecting year-over-year comparability.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,001.5 million | $958.2 million | $2,922.8 million | $1,912.7 million |
| Operating income | $21.0 million | $4.5 million | $85.9 million | $24.7 million |
| Operating margin | 2.1% | 0.5% | 2.9% | 1.3% |
| Net loss | $6.4 million | $17.0 million | $22.1 million | $3.7 million |
| Loss per share, diluted | $0.21 | $0.57 | $0.71 | $0.21 |
Q3 revenue rose 4.5%, which management attributed to organic growth in legacy programs, especially in the Middle East and Asia. Nine-month revenue increased 52.8%; management attributed $855.1 million of the increase to the merger, with the remainder from legacy-program growth. Q3 operating income improved primarily because merger and integration costs were much lower than in Q3 2022. Nine-month operating income also benefited from the merger and improved legacy-program performance.
Cost of revenue was 92.9% of revenue in Q3, versus 89.9% a year earlier, reflecting contract mix and non-recurring deliverables. For nine months, it was 91.9%, versus 90.6%. The nine-month net loss reflected $22.1 million in debt-extinguishment loss and substantially higher interest expense; nine-month net interest expense was $93.9 million versus $30.9 million.
Cash flow, balance sheet and debt
- Cash flow: Nine-month operating cash flow was $135.2 million, up from $91.6 million. Investing used $15.7 million, versus $186.2 million provided in the prior period, which included $194.4 million of net cash acquired in the merger. Financing used $155.7 million. Cash, cash equivalents and restricted cash declined $37.8 million to $78.3 million.
- Liquidity: Cash was $78.3 million, including $2.0 million restricted; $42.8 million was held by foreign subsidiaries. The company reported $434.1 million of availability under its $500 million revolving facility, with $50.0 million drawn and $15.9 million of letters of credit outstanding. Management said available resources, operating cash flow and credit facilities should cover anticipated needs for at least 12 months.
- Debt: Balance-sheet short-term and long-term debt totaled approximately $1.169 billion, net of applicable discounts and financing costs. The debt agreements’ reported principal balances totaled approximately $1.208 billion. Effective rates at quarter-end were 9.69% on the first-lien term loan, 8.37% on the 2023 term loan and 8.18% on the revolver. The company reported covenant compliance. It repaid the second-lien facility, prior ABL borrowings and an incremental first-lien tranche in February 2023, recording $22.1 million of extinguishment losses for the nine months.
- Working capital and receivables: Receivables were $715.4 million, including $570.9 million of unbilled receivables; management expected to bill most contract assets during 2023. DSO was 62 days, down from 68 days at year-end. The receivables-sale facility generated $87.9 million of net operating cash inflow during the nine months; $20.9 million of sold receivables remained at quarter-end. Fees were $2.1 million for the nine months.
- Other balance-sheet data: Total assets were $3.126 billion and shareholders’ equity was $989.1 million at September 29, 2023. Goodwill was $1.657 billion and net intangible assets were $430.1 million.
Material changes, outlook and risks
- Funded backlog was $3.151 billion and total backlog $13.264 billion at September 29, 2023, up from $2.567 billion and $12.262 billion, respectively, at December 31, 2022. Funded orders received during the nine months totaled $3.5 billion. Backlog includes unfunded work and options and is not assured revenue.
- Remaining performance obligations were $3.463 billion; the company expected to recognize approximately 10% in 2023 and 90% in 2024. The filing notes that options may not be exercised and government contracts can be terminated.
- Contract-estimate cumulative catch-up adjustments increased operating income by $5.0 million in Q3 and $27.2 million for the nine months. These adjustments depend on contract terms, performance, scope changes and cost estimates.
- Management cited inflation, rising interest rates, geopolitical events and uncertainty in government budgets and appropriations as risks. The filing described a continuing resolution funding the U.S. government through November 17, 2023, and the potential for shutdown-related impacts if funding lapsed. Fixed-price and time-and-materials work is particularly exposed to unexpected labor and supply-chain cost increases.
- Management said it believed liquidity was sufficient, and was monitoring costs and pursuing cost reductions and deleveraging. The filing provides no specific revenue or earnings guidance. The company does not currently plan to pay a regular dividend.
- Accrued liabilities included $19.4 million for legal proceedings and U.S. government contract claims. Management did not expect known legal or contractual matters to have a material adverse effect, while noting that government audits, investigations, cost disallowances, contract funding and termination risks remain.
- Subsequent event: On October 3, 2023, the company refinanced the $911.1 million first-lien term-loan balance with new term loans maturing December 6, 2028; the filing does not state the new loans’ pricing terms in the provided text.
Important facts for investors to verify
- How much reported growth and future performance depend on the Vertex merger versus organic growth, and how margins develop as contract mix changes.
- Whether the company can sustain operating cash generation while managing substantial debt, floating-rate exposure and refinancing terms; assess covenant headroom and actual interest costs.
- Conversion and collection timing for unbilled receivables, and the ongoing economics and use of the receivables-sale facility.
- Backlog funding, option exercise and contract-renewal assumptions, including reliance on major LOGCAP task orders and government appropriations.
- Potential effects of cost inflation, government audits or claims, geopolitical developments and funding interruptions on contract profitability and liquidity.