V2X(US:VVX)2023-03-02 21:16PART I Item 1. Business V2X provides critical mission solutions to global defense clients, expanding its capabilities through a significant 2022 merger and focusing on converged solutions - V2X, Inc (formerly Vectrus, Inc) is a leading provider of critical mission solutions primarily to defense clients, operating in 343 locations and 45 countries and territories worldwide15 - On July 5, 2022, Vectrus completed its merger with Vertex Aerospace Services Holding Corp, forming V2X, creating a larger, more diversified company capable of competing for integrated business opportunities17 - V2X's business strategies include expanding its base, capturing new markets, delivering with excellence, and enhancing its culture to connect people, technology, and capabilities202123 - Effective January 1, 2023, the Company is organized across three core business areas: Aerospace Solutions, Advanced Technology, and Global Mission Training and Sustainment242526 - As of December 31, 2022, V2X employed approximately 15,400 full-time employees, a significant increase of 7,300 from the prior year, primarily due to the Vertex merger51 Revenue by Customer (2020-2022) | (In thousands) | 2022 | 2021 | 2020 | |:---|:---|:---|:---| | Army | $1,342,406 | $1,134,849 | $965,558 | | Navy | $713,732 | $224,407 | $68,748 | | Air Force | $459,849 | $266,291 | $299,272 | | Other | $374,873 | $158,118 | $61,951 | | Total revenue | $2,890,860 | $1,783,665 | $1,395,529 | Revenue by Contract Type (2020-2022) | Contract type | 2022 | 2021 | 2020 | |:---|:---|:---|:---| | Cost-plus and cost-reimbursable | 56 % | 71 % | 68 % | | Firm-fixed-price | 40 % | 25 % | 29 % | | Time-and-materials | 4 % | 4 % | 3 % | | Total revenue | 100 % | 100 % | 100 % | Item 1A. Risk Factors The company faces risks from personnel retention, contract competition, international operations, cybersecurity, and integration challenges from the Vertex merger - Key business risks include the inability to recruit and retain qualified personnel, potential harm from prolonged work stoppages due to a significant unionized workforce (35% of employees as of Dec 31, 2022), and intense competition78868889 - The company's profitability and growth are highly dependent on winning new contracts and successfully recompeting existing ones, with a substantial majority of revenue derived from U.S government contracts9192 - A significant portion of revenue (31.0% in 2022) is derived from a few large contracts, such as LOGCAP V Kuwait and Iraq Task Orders, making the company vulnerable to their loss9798 - Operating in international, high-risk locations exposes employees and contractors to security risks, potentially leading to substantial costs and legal challenges115116117 - The merger with Vertex introduces integration challenges, potential difficulties in realizing anticipated benefits, and the need to effectively manage expanded operations138139141 - Following the merger, V2X assumed significantly more indebtedness, totaling approximately $1,336.8 million as of December 31, 2022, which could adversely affect its business and exposes it to interest rate risks175181 Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments203 Item 2. Properties V2X operates globally with key leased corporate and operations offices in Virginia, Colorado, and Mississippi - V2X has 343 locations in 45 countries and territories, with contract performance primarily at government customer facilities204 - Key leased properties include the corporate headquarters in McLean, Virginia (24,400 sq ft), an operations office in Colorado Springs, Colorado (65,000 sq ft), and an operations office in Madison, Mississippi (164,000 sq ft)204 Item 3. Legal Proceedings The company is involved in various legal matters incidental to its business but does not expect them to have a material adverse effect - V2X is subject to various investigations, lawsuits, arbitration, claims, enforcement actions, and other legal proceedings, including government audits and claims related to its operations205 - The company believes the outcome of ongoing government audits and investigations will not have a material impact on its results of operations, financial condition, or cash flows205 Item 4. Mine Safety Disclosures This item is not applicable to V2X, Inc - Mine Safety Disclosures are not applicable to the registrant207 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities V2X common stock trades on the NYSE under "VVX", with no dividends paid to date and no equity repurchases in 2022 - V2X common stock is traded on the NYSE under the symbol "VVX"210 - As of February 28, 2023, there were approximately 3,899 stockholders of record and 30.9 million shares of common stock outstanding210 - The company has not declared or paid any dividends on its common stock to date, and future dividend decisions are at the discretion of the Board of Directors211 - V2X did not repurchase any of its equity securities for the year ended December 31, 2022213 Item 6. Selected Financial Data This section is reserved, indicating no selected financial data is presented here - This section is reserved, meaning no selected financial data is provided216 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial results, highlighting the Vertex merger's impact on revenue growth, operating income, backlog, and liquidity - V2X's primary customer is the U.S Department of Defense, with substantially all revenue derived from U.S government customers222 - Revenue increased by $1,107.2 million (62.1%) in 2022, with $908.4 million attributed to the Vertex merger and the remainder from organic growth in legacy programs223252 - Operating income decreased by 10.1% primarily due to amortization of intangible assets and acquisition-related costs from the merger224255 - The COVID-19 pandemic had an immaterial impact on financial results for 2022 and 2021, but caused an estimated $63.1 million reduction in revenue in 2020233546 - Total backlog increased by $7.3 billion in 2022, primarily due to the Vertex merger243 - V2X's liquidity is primarily supported by cash flows from operations, cash on hand, and credit facilities, with the company refinancing its debt on February 28, 2023259268 - Net cash provided by operating activities increased in 2022 primarily due to the merger, while net cash from investing activities was largely due to $193.7 million cash acquired in the merger272275 Key Financial Highlights (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Revenue | $2,890,860 | $1,783,665 | $1,107,195 | 62.1 % | | Cost of revenue | $2,595,848 | $1,623,245 | $972,603 | 59.9 % | | Operating income | $55,771 | $62,020 | $(6,249) | (10.1)% | | Operating margin | 1.9 % | 3.5 % | - | - | | Interest expense, net | $(61,879) | $(7,985) | $(53,894) | 674.9 % | | Net (loss) income | $(14,330) | $45,728 | $(60,058) | (131.3)% | Total Backlog (Funded and Unfunded) (as of December 31) | (In millions) | 2022 | 2021 | |:---|:---|:---| | Funded backlog | $2,567 | $1,033 | | Unfunded backlog | $9,695 | $3,972 | | Total backlog | $12,262 | $5,005 | Net Cash Flow Activities (Year Ended December 31) | (In thousands) | 2022 | 2021 | 2020 | |:---|:---|:---|:---| | Operating activities | $93,495 | $61,339 | $64,081 | | Investing activities | $175,958 | $(12,643) | $(138,025) | | Financing activities | $(193,236) | $(75,585) | $105,774 | | Foreign exchange | $1,337 | $(3,325) | $1,579 | | Net change in cash | $77,554 | $(30,214) | $33,409 | Forward-Looking Statement Information The report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from expectations - These risks include the impact of COVID-19, contract awards, competition, security breaches, and economic conditions217218219220 Overview V2X operates as a single segment providing integrated mission solutions, with the U.S Army being a primary customer - V2X, formerly Vectrus, is a global provider of critical mission solutions, primarily to defense clients, operating as a single segment221 Revenue from U.S. Government Customers (2020-2022) | Year | Total Revenue (in billions) | % from U.S. Army | |:---|:---|:---| | 2022 | $2.9 | 46% | | 2021 | $1.8 | 64% | | 2020 | $1.4 | 69% | Executive Summary Revenue grew 62.1% in 2022 due to the Vertex merger, though operating income declined 10.1% from related acquisition costs and amortization - Revenue increased by $1,107.2 million (62.1%) in 2022 compared to 2021, with $908.4 million from the Vertex merger and the rest from organic growth223252 - Operating income decreased by $6.2 million (10.1%) in 2022, primarily due to amortization of intangible assets and acquisition-related costs associated with the merger224255 - The effective income tax rate was (134.6)% in 2022, compared to 15.4% in 2021, influenced by non-deductible costs and the release of prior year uncertain tax positions228258 Merger with Vertex Details regarding the merger with Vertex and its financial implications are referenced in the Consolidated Financial Statements - The merger with Vertex and related debt and stock-based compensation obligations are discussed in detail in Notes 3, 10, and 16 of the Consolidated Financial Statements230 COVID-19 Impact The financial impact of COVID-19 was immaterial in 2022 and 2021, but significantly reduced revenue and EPS in 2020 - The impact of COVID-19 on V2X's financial results was immaterial for 2022 and 2021, but caused an estimated $63.1 million reduction in revenue and a $0.39 reduction in diluted EPS in 2020233546 - The ultimate impact of the pandemic remains uncertain, depending on future developments, vaccine effectiveness, and government regulations232545 Significant Contracts Several large U.S Army contracts, including LOGCAP V task orders, represent a significant portion of the company's total revenue - The LOGCAP V - Kuwait Task Order contributed $472.9 million in revenue in 2022 and $210.8 million in 2021236 - The LOGCAP V - Iraq Task Order contributed $282.5 million in revenue in 2022 and $209.0 million in 2021237 - The OMDAC-SWACA contract contributed $122.7 million in 2022 and $139.5 million in 2021238 - The K-BOSSS contract, which had components re-competed under LOGCAP V, contributed $18.9 million in 2022 and $282.2 million in 2021239 Significant Contracts as % of Total Revenue (2020-2022) | Contract Name | 2022 | 2021 | 2020 | |:---|:---|:---|:---| | LOGCAP V - Kuwait Task Order | 16.4% | 11.8% | —% | | LOGCAP V - Iraq Task Order | 9.8% | 11.7% | —% | | OMDAC-SWACA | 4.2% | 7.8% | 14.2% | | K-BOSSS | 0.7% | 15.8% | 34.1% | Backlog Total backlog increased significantly to $12.3 billion in 2022, driven primarily by the Vertex merger - Total backlog increased by $7.3 billion in 2022, primarily due to the Merger243 - The company expects to recognize a substantial portion of its funded backlog as revenue within the next 12 months, though government contracts can be canceled at any time242 Total Backlog (Funded and Unfunded) (as of December 31) | (In millions) | 2022 | 2021 | |:---|:---|:---| | Funded backlog | $2,567 | $1,033 | | Unfunded backlog | $9,695 | $3,972 | | Total backlog | $12,262 | $5,005 | Economic Opportunities, Challenges and Risks The company faces a mix of opportunities from defense spending and challenges from fiscal pressures, inflation, and rising interest rates - The U.S government's investment in national security creates opportunities, but fiscal challenges and political environment could pressure revenue and profit margins244 - The FY 2023 Omnibus Appropriations Act provided $817 billion to the Defense Department, a $44 billion increase over the President's request, indicating continued high priority on national security spending245 - Macroeconomic conditions, including inflation and rising interest rates, pose challenges that could adversely affect profit margins, especially on fixed-price contracts248 Discussion of Financial Results Financial results for 2022 show a 62.1% revenue increase due to the Vertex merger, offset by a 10.1% drop in operating income from related costs - Revenue increased by 62.1% in 2022, primarily due to the Vertex merger ($908.4 million) and organic growth252253 - SG&A expenses rose by 143.1% in 2022, mainly due to the merger, including $39.9 million in acquisition-related costs254255 - Net interest expense increased significantly by $53.9 million (674.9%) in 2022, driven by increased debt assumed with the merger257258 Selected Financial Highlights (Year Ended December 31, 2022 vs. 2021) | (In thousands) | 2022 | 2021 | Change ($) | Change (%) | |:---|:---|:---|:---|:---| | Revenue | $2,890,860 | $1,783,665 | $1,107,195 | 62.1 % | | Cost of revenue | $2,595,848 | $1,623,245 | $972,603 | 59.9 % | | Selling, general and administrative expenses | $239,241 | $98,400 | $140,841 | 143.1 % | | Operating income | $55,771 | $62,020 | $(6,249) | (10.1)% | | Interest expense, net | $(61,879) | $(7,985) | $(53,894) | 674.9 % | | (Loss) income before taxes | $(6,108) | $54,035 | $(60,143) | (111.3)% | | Income tax expense | $8,222 | $8,307 | $(85) | (1.0)% | | Net (loss) income | $(14,330) | $45,728 | $(60,058) | (131.3)% | Liquidity and Capital Resources V2X manages liquidity through cash flows and credit facilities, having undertaken significant debt restructuring and refinancing post-merger - V2X expects to fund operations, capital expenditures, and growth through cash flows, cash on hand, credit facilities, and potential equity/debt issuances259 - In conjunction with the merger, V2X assumed $1,182.7 million in first lien debt and $185.0 million in second lien debt, and an ABL Credit Agreement for up to $200.0 million264 - On February 28, 2023, V2X refinanced its debt, securing a new $750 million senior secured financing package to repay existing credit facilities268 Contractual Obligations (as of December 31, 2022) | (In thousands) | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | |:---|:---|:---|:---|:---|:---| | Operating leases | $65,603 | $19,588 | $22,313 | $12,437 | $11,265 | | Principal payments on Vertex First Lien Credit Agreements | $1,176,763 | $11,850 | $23,700 | $23,700 | $1,117,513 | | Principal payments on Vertex Second Lien Credit Agreement | $160,000 | $0 | $0 | $0 | $160,000 | | Interest on Vertex First and Second Lien Credit Agreements | $688,689 | $115,603 | $228,636 | $222,872 | $121,578 | | Total | $2,091,055 | $147,041 | $274,649 | $259,009 | $1,410,356 | Critical Accounting Estimates The company's financial statements rely on critical accounting estimates for revenue recognition, business combinations, goodwill, and income taxes - Critical accounting estimates include revenue recognition, business combinations, goodwill impairment, intangible assets, and income taxes, which involve significant judgment283 - Revenue from long-term service contracts is recognized over time using the input method, requiring estimates of total contract revenue and costs284286289 - Goodwill and other intangible assets are tested for impairment annually, with no goodwill impairment recorded in 2022 or 2021293294298 - Income tax provisions are determined using the asset and liability approach, with deferred tax assets and liabilities based on temporary differences and enacted tax rates300 Item 7A. Quantitative and Qualitative Disclosures About Market Risk V2X is exposed to market risks from interest rate and foreign currency fluctuations, particularly due to its significant variable rate debt - V2X is exposed to market risks from fluctuations in interest rates and foreign currency exchange rates305 - A one percentage point change in interest rates would result in a $13.4 million change in annual cash interest expenses for its variable rate debt306 - The company terminated its interest rate swaps on June 29, 2022, and its foreign currency forward contracts expired in January 2022308309 Item 8. Financial Statements and Supplementary Data This section refers to the Index to Consolidated Financial Statements for detailed financial information - This item directs readers to the Index to Consolidated Financial Statements for detailed financial information311 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants on accounting and financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure312 Item 9A. Controls and Procedures Management concluded that disclosure controls were effective, though the internal control assessment excluded the recently acquired Vertex business - As of December 31, 2022, V2X's disclosure controls and procedures were deemed effective by management, including the CEO and CFO313 - The internal control over financial reporting (ICFR) of Vertex was excluded from management's assessment due to the recent merger, with Vertex's excluded assets and revenues representing 45.1% and 31.4% of consolidated totals, respectively314325 - Management concluded that V2X's ICFR was effective as of December 31, 2022, based on the COSO framework, and this effectiveness was audited by RSM US LLP, who expressed an unqualified opinion317323 Item 9B. Other Information The company reported no other information for this item - No other information is reported under this item332 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to V2X, Inc - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable333 PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement, with executive officer details also in Part I, Item 1 of this 10-K335 Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Executive compensation information is incorporated by reference from the 2023 Proxy Statement336 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2023 Proxy Statement - Security ownership information for beneficial owners and management, along with related stockholder matters, is incorporated by reference from the 2023 Proxy Statement337 Item 13. Certain Relationships and Related Transactions and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's 2023 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement338 Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2023 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement339 PART IV Item 15. Exhibit and Financial Statement Schedules This section lists all documents filed as part of the report, including financial statements, various agreements, and certifications - This item lists documents filed as part of the report, including financial statements, merger agreements, credit agreements, and various certifications343 - Financial statement schedules are omitted because the required information is either absent or already included in the Consolidated Financial Statements347 Item 16. Form 10-K Summary The company reported no Form 10-K Summary for this item - There is no Form 10-K Summary provided566