V2X(VVX) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's Q3 2022 financial statements show revenue more than doubled post-Vertex merger, but a net loss resulted from merger costs and increased debt Condensed Consolidated Statements of Income Q3 2022 revenue surged 108.6% to $958.2 million post-merger, resulting in a $17.0 million net loss despite revenue growth Q3 & Nine Months 2022 vs 2021 Financial Performance (in thousands) | Metric | Q3 2022 | Q3 2021 | Change | Nine Months 2022 | Nine Months 2021 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $958,156 | $459,408 | +108.6% | $1,912,693 | $1,364,257 | +40.2% | | Operating Income | $4,487 | $12,890 | -65.2% | $24,744 | $52,003 | -52.4% | | Net (Loss) Income | $(17,039) | $10,258 | -266.1% | $(3,711) | $38,240 | -109.7% | | Diluted (Loss) EPS | $(0.56) | $0.87 | - | $(0.21) | $3.23 | - | Condensed Consolidated Balance Sheets The balance sheet expanded significantly post-merger, with total assets reaching $3.17 billion and liabilities $2.18 billion by September 30, 2022 Balance Sheet Comparison (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $925,197 | $423,340 | | Goodwill | $1,537,710 | $321,734 | | Intangible assets, net | $559,985 | $66,582 | | Total Assets | $3,168,452 | $889,459 | | Total Current Liabilities | $717,683 | $358,248 | | Long-term debt, net | $1,286,985 | $94,246 | | Total Liabilities | $2,180,069 | $539,372 | | Total Shareholders' Equity | $988,383 | $350,087 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, operating cash flow increased to $99.8 million, with positive investing activities from $194.4 million cash acquired in the merger Cash Flow Summary - Nine Months Ended (in thousands) | Activity | Sep 30, 2022 | Oct 1, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $99,768 | $53,378 | | Net cash provided by (used in) investing activities | $186,220 | $(9,868) | | Net cash used in financing activities | $(165,251) | $(53,220) | | Net change in cash | $108,860 | $(12,494) | Note 3. Merger Vectrus completed its merger with Vertex on July 5, 2022, forming V2X, Inc., with a $634.0 million consideration, recognizing $1.22 billion in goodwill - Vectrus completed its merger with Vertex on July 5, 2022, acquiring all outstanding shares of Vertex[38] Merger Consideration (in thousands) | Component | Value | | :--- | :--- | | Fair value of common shares issued | $630,636 | | Fair value of cash consideration | $3,315 | | Total consideration transferred | $633,951 | - The merger resulted in the recognition of $1,216.0 million of goodwill and $522.0 million for customer-related amortizable intangible assets[44] - Acquisition-related costs totaled $41.3 million for the nine months ended September 30, 2022, and were expensed as incurred within SG&A[41] Note 4. Revenue Remaining performance obligations surged to $3.36 billion by September 30, 2022, reflecting Vertex contracts, and Q3 2022 revenue mix shifted significantly Remaining Performance Obligations (in millions) | Date | Amount | | :--- | :--- | | September 30, 2022 | $3,362 | | December 31, 2021 | $1,398 | Q3 Revenue by Contract Type (in thousands) | Contract Type | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Cost-plus and cost reimbursable | $505,743 | $338,007 | 49.6% | | Firm-fixed-price | $416,618 | $105,619 | 294.5% | | Time and material | $35,795 | $15,782 | 126.8% | Q3 Revenue by Geographic Region (in thousands) | Region | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | United States | $582,817 | $139,357 | 318.2% | | Middle East | $261,997 | $263,257 | (0.5)% | | Europe | $62,669 | $34,902 | 79.6% | | Asia | $50,673 | $21,892 | 131.5% | Note 7. Debt The company's debt structure was overhauled post-merger, with prior debt repaid and $1.185 billion First Lien and $185.0 million Second Lien facilities assumed - On the merger closing date, the company repaid its existing Amended Term Loan ($50.2 million) and Amended Revolver ($40.0 million)[71] - The company assumed new debt facilities, including a First Lien Credit Agreement for $1,185.0 million and a Second Lien Credit Agreement for $185.0 million[72][79] - An ABL Credit Agreement provides for a revolving loan facility of up to $200.0 million, with no outstanding balance as of September 30, 2022[85][93] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q3 revenue growth to the Vertex merger, but operating income declined due to M&A costs, while total backlog more than doubled to $12.7 billion post-merger Backlog Total backlog significantly increased to $12.7 billion by September 30, 2022, from $5.0 billion at year-end 2021, primarily due to the Vertex merger Backlog Summary (in millions) | Category | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Funded backlog | $2,943 | $1,033 | | Unfunded backlog | $9,762 | $3,972 | | Total backlog | $12,705 | $5,005 | Discussion of Financial Results Q3 2022 revenue grew 108.6% due to the Vertex merger, but operating income declined 65.2% as SG&A expenses, including $44.9 million in M&A costs, significantly increased - Q3 2022 SG&A expenses increased by $65.0 million, which included $44.9 million in M&A and integration costs from the merger[167] - Nine-month 2022 SG&A expenses increased by $77.3 million, including $59.9 million in M&A and integration costs[173] - The increase in net interest expense of $24.8 million for the nine months ended September 30, 2022, was due to increased debt assumed with the Merger[176] Liquidity and Capital Resources The company maintains sufficient liquidity with $144.1 million cash and $184.9 million ABL availability, despite adding over $1.3 billion in debt post-merger, while DSO improved to 65 days - As of September 30, 2022, the company had $144.1 million in unrestricted cash and $184.9 million of available borrowing capacity under the ABL Facility[195] - In conjunction with the Merger, V2X assumed first and second lien debt of $1,182.7 million and $185.0 million respectively[183] - Days Sales Outstanding (DSO) improved to 65 days as of September 30, 2022, from 75 days as of December 31, 2021[188] Item 3. Quantitative and Qualitative Disclosures about Market Risk Post-merger, the company's market risk profile shows heightened exposure to interest rate fluctuations, with a 1% change impacting annual interest expense by $13.6 million - A one percentage point change in interest rates on the variable rate Vertex First and Second Lien Credit Agreements would change annual cash interest expenses by $13.6 million[205] - The company terminated its remaining interest rate swaps on June 29, 2022, in conjunction with the extinguishment of its prior debt[206] Item 4. Controls and Procedures Management deemed disclosure controls effective as of September 30, 2022, but excluded newly acquired Vertex from internal control over financial reporting evaluation per SEC guidance - Management has excluded the internal control over financial reporting of the newly acquired Vertex from its evaluation of disclosure controls and procedures as of September 30, 2022, as permitted by SEC guidance[209] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, but management does not anticipate any material adverse effects on its financial condition or operations - The company does not expect that any asserted or unasserted legal claims or proceedings will have a material adverse effect on its results of operations, financial condition or cash flows[213] Item 1A. Risk Factors Post-merger, a key risk factor is increased exposure to losses from fixed-price contracts, which now constitute approximately 40% of U.S. government contract revenue - Post-merger, approximately 40% of the company's U.S. government contract revenue is derived from fixed-price and time and materials contracts[216] - The higher proportion of fixed-price contracts subjects the company to greater risks of losses from cost overruns, technological difficulties, inflation, and supplier problems[216][218] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, merger-related credit agreements, and executive certifications