What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-07 · 94 added, 54 removed, 230 unchanged (39% of the section changed)

10 unchanged sentences

Department of Defense (DoD).

For the three months ended March 29, 2024 and March 31, 2023, the Company had total revenue of $1.0 billion and $0.9 billion, respectively, the substantial majority of which was derived from U.S.

For the six months ended June 28, 2024 and June 30, 2023, the Company had total revenue of $2.1 billion and $1.9 billion, respectively, the substantial majority of which was derived from U.S.

government customers.

For the three months ended March 29, 2024 and March 31, 2023, we generated approximately 43% and 41%, respectively, of our total revenue from the U.S.

For the six months ended June 28, 2024 and June 30, 2023, we generated approximately 43% and 41%, respectively, of our total revenue from the U.S.

Executive Summary

Our revenue increased $67.1 million, or 7.1%, for the three months ended March 29, 2024 as compared to the three months ended March 31, 2023.

Our revenue increased $94.3 million, or 9.6%, for the three months ended June 28, 2024 as compared to the three months ended June 30, 2023.

Revenue increased primarily due to organic growth for legacy programs.

Revenue from our programs in the Middle East, Europe and Asia increased by $62.1 million, $4.6 million, $4.5 million, respectively, partially offset by a decrease in revenue from our programs in the U.S.

of $4.0 million.

Revenue from our programs in the Middle East, Asia and the U.S.

increased by $82.0 million, $19.1 million, and $0.4 million, respectively, partially offset by a decrease in revenue from our programs in Europe of $7.2 million, during the three months ended June 28, 2024 as compared to the three months ended June 30, 2023.

During the performance of long-term contracts, estimated final contract prices and costs are reviewed periodically, and revisions are made as required, which are recorded as changes in revenue and cost of revenue in the periods in which they are determined.

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These changes can increase or decrease operating income depending on the dynamics of each contract.

Further details related to consolidated financial results for the three months ended March 29, 2024, compared to the three months ended March 31, 2023, are contained in the "Discussion of Financial Results" section.

Further details related to consolidated financial results for the three and six months ended June 28, 2024, compared to the three and six months ended June 30, 2023, are contained in the "Discussion of Financial Results" section.

Significant Contracts

1 unchanged sentence

% of Total Revenue

Three Months Ended

March 29, March 31,

Six Months Ended

June 28, June 30,

Contract Name 2024 2023

1 unchanged sentence

Revenue associated with a contract will fluctuate based on increases or decreases in the work being performed on the contract, award fee payment assumptions, and other contract modifications within the term of the contract resulting in changes to the total contract value.

The LOGCAP V - Kuwait Task Order is currently exercised through June 30, 2024, with two additional twelve-month options and one six-month option through December 31, 2026.

The LOGCAP V - Kuwait Task Order is currently exercised through June 30, 2025, with one additional twelve-month option and one six-month option through December 31, 2026.

The task ord er provides services to support the Geographical Combatant Commands and Army Service Component Commands throughout the full range of military operations in the Kuwait region.

The LOGCAP V - Kuwait Task Order contributed $110.7 million a nd $127.9 million of revenue for the three months ended March 29, 2024 and March 31, 2023 , respectively.

The LOGCAP V - Kuwait Task Order contributed $218.5 million a nd $257.1 million of revenue for the six months ended June 28, 2024 and June 30, 2023 , respectively.

Total backlog includes remaining performance obligations, consisting of both funded backlog (firm orders for which funding is contractually authorized and appropriated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer and unexercised contract options).

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The following is a summary of funded and unfunded backlog:

March 29, December 31,

June 28, December 31,

(In millions) 2024 2023

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Funded orders (different from funded backlog) represent orders for which funding was received during the period.

We received funded orders of $860.4 million during the three months ended March 29, 2024, which was a decrease of $121.6 million compared to the three months ended March 31, 2023.

We received funded orders of $2.1 billion during the six months ended June 28, 2024, which was a decrease of $0.3 billion compared to the six months ended June 30, 2023.

Economic Opportunities, Challenges and Risks

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On March 23, 2024, the President signed into law the Further Consolidated Appropriations Act for FY 2024, which provides $825 billion in funding for the DoD, through September 30, 2024.

On April 24, 2024, the President signed a bill providing $95 billion in additional supplemental funding for Ukraine, Israel and the Indo-Pacific region.

The Fiscal 2025 budget request was submitted to the U.S.

Congress on March 11, 2024, and requested $895 billion for National Defense, with $850 billion of the total allocated to the DoD.

Congress, over the coming months, will need to approve or revise the Fiscal 2025 budget request through enactment of appropriations and other legislation, which would require final approval from the President to become law.

In January 2023, the statutory debt ceiling limit of $31.4 trillion was reached and on June 3, 2023, the President signed “The Fiscal Responsibility Act” (FRA) into law, which suspends the debt ceiling until January 1, 2025.

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The FRA cap on discretionary spending for National Defense in FY 2024 and FY 2025 is $886 billion and $895 billion, respectively.

The $95 billion in additional supplemental funding described above is not subject to the FRA caps.

While it is difficult to predict the specific course of future defense budgets, V2X believes the core functions the Company performs are mission-essential and spending to maintain readiness, improve performance, increase service life, lower cost, and modernize digital and physical environments will continue to be a U.S.

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DISCUSSION OF FINANCIAL RESULTS

Three months ended March 29, 2024, compared to three months ended March 31, 2023

Three months ended June 28, 2024, compared to three months ended June 30, 2023

Selected financial highlights are presented in the following table:

Three Months Ended Change

March 29, March 31,

June 28, June 30,

(In thousands, except for percentages) 2024 2023 $ %

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Other expense, net (4,735) (311) (4,424) 1422.5 %

Income (loss) from operations before income taxes 1,124 (23,217) 24,341 (104.8) %

(Loss) income from operations before income taxes (8,114) 2,009 (10,123) (503.9) %

% of revenue (0.8) % 0.2 %

Income tax benefit (20) (5,737) 5,717 (99.7) %

Income tax (benefit) expense (1,570) 210 (1,780) (847.6) %

Effective income tax rate 19.3 % 10.5 %

Net income (loss) $ 1,144 $ (17,480) $ 18,624 (106.5) %

Net (loss) income $ (6,544) $ 1,799 $ (8,343) (463.8) %

*Percentage change is not meaningful.

Revenue increased $67.1 million, or 7.1%, for the three months ended March 29, 2024 as compared to the three months ended March 31, 2023.

Revenue increased $94.3 million, or 9.6%, for the three months ended June 28, 2024 as compared to the three months ended June 30, 2023.

Revenue increased primarily due to organic growth for legacy programs.

of $4.0 million.

Revenue from our programs in the Middle East, Asia, and the U.S.

increased by $82.0 million, $19.1 million, and $0.4 million, respectively, partially offset by a decrease in revenue from our programs in Europe of $7.2 million.

Cost of Revenue

Cost of revenue increased $75.7 million, or 8.8%, for the three months ended March 29, 2024 as compared to the three months ended March 31, 2023, primarily driven by increases in revenue and changes in contract mix.

Cost of revenue increased $107.9 million, or 12.1%, for the three months ended June 28, 2024 as compared to the three months ended June 30, 2023, primarily driven by increases in revenue and changes in contract mix.

Selling, General, & Administrative (SG&A) Expenses

SG&A expenses decreased $8.3 million, or 17.2%, for the three months ended March 29, 2024 as compared to the three months ended March 31, 2023, primarily due to cost optimization and lower merger and integration-related costs.

SG&A expenses decreased $6.7 million, or 12.7%, for the three months ended June 28, 2024 as compared to the three months ended June 30, 2023, primarily due to cost optimization and lower integration-related costs.

Operating Income

Operating income decreased $0.2 million, or 0.8%, for the three months ended March 29, 2024 as compared to the three months ended March 31, 2023.

Operating income as a percentage of revenue was 3.0% for the three months ended March 29, 2024, compared to 3.2% for the three months ended March 31, 2023 primarily driven by changes in contract mix offset by decreased SG&A expenses.

Aggregate cumulative catch-up adjustments increased operating income by $0.5 million and $13.1 million for the three months ended March 29, 2024 and March 31, 2023, respectively.

The aggregate cumulative catch-up adjustments for the three months ended March 29, 2024 and March 31, 2023 related to changes in contract terms, program performance, customer changes in scope of work and changes to estimates in the reported period.

Operating income decreased $6.8 million, or 20.0%, for the three months ended June 28, 2024 as compared to the three months ended June 30, 2023.

Operating income as a percentage of revenue was 2.6% for the three months ended June 28, 2024, compared to 3.5% for the three months ended June 30, 2023, primarily driven by changes in aggregate cumulative adjustments and contract mix, partially offset by decreased SG&A expenses.

Aggregate cumulative adjustments increased operating income by $0.7 million and $9.1 million for the three months ended June 28, 2024 and June 30, 2023, respectively.

The aggregate cumulative adjustments for the three months ended June 28, 2024 and June 30, 2023 related to changes in contract terms, program performance, customer changes in scope of work and changes to estimates in the reported period.

Loss on Extinguishment of Debt

Loss on extinguishment of debt decreased $22.1 million for the three months ended March 29, 2024 as compared to the three months ended March 31, 2023 due to a $22.1 million loss on extinguishment of debt recorded for the three months ended March 31, 2023.

A loss on extinguishment of debt of $2.0 million was recorded for the three months ended June 28, 2024 due to a refinancing of the First Lien Credit Agreement.

Six months ended June 28, 2024, compared to six months ended June 30, 2023

Selected financial highlights are presented in the following table:

Six Months Ended Change

June 28, June 30,

(In thousands, except for percentages) 2024 2023 $ %

Revenue $ 2,082,747 $ 1,921,312 $ 161,435 8.4 %

Cost of revenue 1,938,638 1,755,082 183,556 10.5 %

% of revenue 93.1 % 91.3 %

Selling, general, and administrative expenses 86,352 101,381 (15,029) (14.8) %

% of revenue 4.1 % 5.3 %

Operating income 57,757 64,849 (7,092) (10.9) %

Operating margin 2.8 % 3.4 %

Loss on extinguishment of debt (1,998) (22,052) 20,054 (90.9) %

Interest expense, net (56,381) (63,694) 7,313 (11.5) %

Other expense, net (6,368) (311) (6,057) 1,947.6 %

Loss from operations before income taxes (6,990) (21,208) 14,218 (67.0) %

% of revenue (0.3) % (1.1) %

Income tax benefit (1,590) (5,527) 3,937 (71.2) %

Effective income tax rate 22.7 % 26.1 %

Net loss $ (5,400) $ (15,681) $ 10,281 (65.6) %

Revenue increased $161.4 million, or 8.4%, for the six months ended June 28, 2024 as compared to the six months ended June 30, 2023.

Revenue increased primarily due to organic growth for legacy programs.

Revenue from programs located in the Middle East and Asia increased by $144.2 million and $23.6 million, respectively, partially offset by a decrease in revenue from programs located in the U.S.

and Europe of $3.7 million and $2.7 million, respectively.

Cost of Revenue

Cost of revenue increased $183.6 million, or 10.5%, for the six months ended June 28, 2024 as compared to the six months ended June 30, 2023, primarily driven by increases in revenue and changes in contract mix.

Selling, General, & Administrative (SG&A) Expenses

SG&A expenses decreased $15.0 million, or 14.8%, for the six months ended June 28, 2024 as compared to the six months ended June 30, 2023 primarily due to cost optimization and lower integration-related costs.

Operating Income

Operating income decreased $7.1 million, or 10.9%, for the six months ended June 28, 2024 as compared to the six months ended June 30, 2023.

Operating income as a percentage of revenue was 2.8% for the six months ended June 28, 2024, compared to 3.4% for the six months ended June 30, 2023.

The decrease in operating income was primarily driven by changes in aggregate cumulative adjustments and contract mix, partially offset by decreased SG&A expenses.

Aggregate cumulative adjustments increased operating income by $1.2 million and $22.2 million for the six months ended June 28, 2024 and June 30, 2023, respectively.

The aggregate cumulative adjustments for the six months ended June 28, 2024 and June 30, 2023 related to changes in contract terms, program performance, customer changes in scope of work and changes to estimates in the reported period.

Interest (Expense) Income, Net

Interest (expense) income, net for the three months ended March 29, 2024 and March 31, 2023 was as follows:

Three Months Ended Change

March 29, March 31,

Interest (expense) income, net for the three and six months ended June 28, 2024 and June 30, 2023 was as follows:

Three Months Ended Change Six Months Ended Change

June 28, June 30, June 28, June 30,

(In thousands, except for percentages) 2024 2023 $ % 2024 2023 $ %

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Interest expense is related to borrowings under our senior secured credit facilities, with the amortization of debt issuance costs, and derivative instruments used to hedge a portion of exposure to interest rate risk.

Interest expense, net decreased $4.2 million for the three months ended March 29, 2024 compared to the three months ended March 31, 2023 due to both a decrease in our debt balance in the first quarter of 2024 compared to the first quarter of 2023, and our interest rate swap contracts, which we entered into at the end of the first quarter of 2023.

Interest expense, net decreased $7.3 million for the six months ended June 28, 2024 compared to the six months ended June 30, 2023 due to both a decrease in our debt balance in the first half of 2024 compared to the first half of 2023, and our interest rate swap contracts, which we entered into at the end of the first quarter of 2023.

Other Expense, Net

During the three months ended March 29, 2024, we incurred purchase discount fees and other expenses of $1.6 million, related to the sale of accounts receivable through the MARPA Facility.

During the three and six months ended June 28, 2024, we incurred purchase discount fees and other expenses of $2.5 million and $4.2 million, respectively, related to the sale of accounts receivable through the MARPA Facility.

In addition, during the three and six months ended June 28, 2024, we incurred a $2.2 million impairment charge on a non-operating, long-lived asset, primarily due to a decreased fair market value.

During the three and six months ended June 30, 2023, we incurred purchase discount fees and other expenses of $0.2 million and $0.1 million, respectively, related to the sale of accounts receivable through the MARPA Facility.

Income Tax Benefit

We recorded income tax benefits which were not material and $5.7 million for the three months ended March 29, 2024 and March 31, 2023, respectively.

Our effective income tax rates for the three months ended March 29, 2024 and March 31, 2023, were (1.8)% and 24.7%, respectively.

We recorded income tax benefits of $1.6 million and an income tax provision of $0.2 million for the three months ended June 28, 2024 and June 30, 2023, respectively.

Our effective income tax rates for the three months ended June 28, 2024 and June 30, 2023, were 19.3% and 10.5%, respectively.

For the six months ended June 28, 2024 and June 30, 2023, the Company recorded income tax benefits of $1.6 million and $5.5 million, representing effective income tax rates of 22.7% and 26.1%, respectively.

The effective income tax rates vary from the federal statutory rate of 21.0% mainly due to state and foreign taxes, disallowed compensation deduction under Internal Revenue Code Section 162(m), offset by available deductions not reflected in book income, and income tax credits.

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We cannot provide assurance that such financing will be available on acceptable terms or that such financing will be available at all.

As of March 29, 2024, there were $56.0 million of outstanding borrowings and $17.2 million of outstanding letters of credit under the 2023 Revolver.

As of June 28, 2024, there were $46.0 million of outstanding borrowings and $17.8 million of outstanding letters of credit under the 2023 Revolver.

Unamortized deferred financing costs related to the 2023 Revolver of $3.7 million are included in other non-current assets in the Condensed Consolidated Balance Sheets.

As of March 29, 2024, the fair value of the 2023 Revolver approximated the carrying value because the debt bears a floating interest rate.

As of March 29, 2024, the carrying value of the 2023 Term Loan portion was $243.8 million, excluding unamortized deferred financing costs of $2.0 million.

The estimated fair value of the 2023 Term Loan as of March 29, 2024 was $244.1 million.

As of June 28, 2024, the fair value of the 2023 Revolver approximated the carrying value because the debt bears a floating interest rate.

As of June 28, 2024, the carrying value of the 2023 Term Loan portion was $242.2 million, excluding unamortized deferred financing costs of $1.8 million.

The estimated fair value of the 2023 Term Loan as of June 28, 2024 was $242.5 million.

The fair value is based on observable inputs of interest rates that are currently available to us for debt with similar terms and maturities for non-public debt.

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and international cash from wholly owned subsidiaries.

Approximately $34.4 million of our $35.7 million in cash, cash equivalents and restricted cash as of March 29, 2024 is held by foreign subsidiaries and is not available to fund U.S.

Approximately $36.6 million of our $44.8 million in cash, cash equivalents and restricted cash as of June 28, 2024 is held by foreign subsidiaries and is not available to fund U.S.

operations unless repatriated.

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We determine our DSO by calculating the number of days necessary to exhaust our ending accounts receivable balance based on our most recent historical revenue.

DSO wa s 66 and 58 d ays as of March 29, 2024 and December 31, 2023, respectively.

DSO was 65 and 58 days as of June 28, 2024 and December 31, 2023, respectively.

The following table sets forth net cash (used in) provided by operating activities, investing activities and financing activities:

Three Months Ended

March 29, March 31,

Six Months Ended

June 28, June 30,

(in thousands) 2024 2023

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1 Impact on cash balances due to changes in foreign exchange rates.

Net cash used in operating activities for the three months ended March 29, 2024 primarily consisted of net cash outflows in working capital accounts of $119.8 million and net cash outflows in other long-term assets and liabilities of $8.0 million, partially offset by cash inflows from non-cash net income items of $35.8 million, cash inflows from the sale of receivables through the MARPA Facility of $33.7 million and net income of $1.1 million.

Net cash used in operating activities for the three months ended March 31, 2023 primarily consisted of net cash outflows in working capital accounts of $68.7 million, other long-term assets and liabilities of $17.8 million, and a net operating loss of $17.5 million, partially offset by cash inflows from non-cash net income items of $65.5 million.

Net cash used in investing activities for the three months ended March 29, 2024 consisted of $16.9 million for the acquisition of businesses and $7.8 million of capital expenditures for the purchase of software and hardware, vehicles and equipment related to ongoing operations.

Net cash used in investing activities for the three months ended March 31, 2023 consisted of $9.1 million of capital expenditures for the purchase of software and hardware, vehicles and equipment related to ongoing operations.

Net cash provided by financing activities during the three months ended March 29, 2024 consisted of proceeds from the revolver of $375.3 million, partially offset by revolver repayments of $319.3 million, payments for employee withholding taxes on share-based compensation of $5.7 million, and repayments of long-term debt of $3.8 million.

Net cash used in financing activities during the three months ended March 31, 2023 consisted of repayments of long-term debt of $421.0 million, revolver repayments of $163.8 million, payments for employee withholding taxes on share-based compensation of $12.8 million, and payments for debt issuance costs of $7.5 million, partially offset by proceeds from long term debt and the revolver of $250.0 million and $348.7 million, respectively.

Net cash used in operating activities for the six months ended June 28, 2024 primarily consisted of net cash outflows in working capital accounts of $198.9 million, net cash outflows in other long-term assets and liabilities of $26.6 million and net loss of $5.4 million, partially offset by cash inflows from the sale of receivables through the MARPA Facility of $121.9 million and cash inflows from non-cash net income items of $77.5 million.

Net cash provided by operating activities for the six months ended June 30, 2023 , primarily consisted of cash inflows from non-cash net income items of $104.3 million and sales of accounts receivable through the MARPA Facility of $113.0 million, partially offset by net cash outflows in working capital accounts of $123.5 million and a net loss of $15.7 million.

Net cash used in investing activities for the six months ended June 28, 2024 consisted of $16.9 million for the acquisition of businesses and $8.5 million of capital expenditures for the purchase of software and hardware, vehicles and equipment related to ongoing operations.

Net cash used in investing activities for the six months ended June 30, 2023 consisted of $11.5 million of capital expenditures for the purchase of software and hardware, vehicles and equipment related to ongoing operations.

Net cash provided by financing activities during the six months ended June 28, 2024 consisted of proceeds from the revolver of $648.8 million , partially offset by revolver repayments of $602.8 million , payments for employee withholding taxes on share-based compensation of $5.8 million , repayments of long-term debt of $7.7 million, and payments for debt issuance costs of $1.2 million .

Net cash used in financing activities during the six months ended June 30, 2023 consisted of repayments of long-term debt of $424.9 million, revolver repayments of $467.8 million, payments for employee withholding taxes on share-based compensation of $14.6 million, and payments for debt issuance costs of $7.5 million, partially offset by proceeds from long term debt and the revolver of $250.0 million and $552.8 million, respectively.

Capital Resources

As of March 29, 2024, we held cash, cash equivalents and restricted cash of $35.7 million, which included $34.4 million held by foreign subsidiaries, and had $426.8 million of available borrowing capacity under the 2023 Revolver, which expires on February 25, 2028.

We believe that our cash, cash equivalents and restricted cash as of March 29, 2024, as supplemented by cash flows from operations, the 2023 Revolver, and the MARPA Facility will be sufficient to fund our anticipated operating costs, capital expenditures, and current debt repayment obligations for at least the next 12 months.

As of June 28, 2024, we held cash, cash equivalents and restricted cash of $44.8 million, which included $36.6 million held by foreign subsidiaries, and had $436.2 million of available borrowing capacity under the 2023 Revolver, which expires on February 25, 2028.

We believe that our cash, cash equivalents and restricted cash as of June 28, 2024, as supplemented by operating cash flows, the 2023 Revolver, and the MARPA Facility will be sufficient to fund our anticipated operating costs, capital expenditures, and current debt repayment obligations for at least the next 12 months.

Contractual Obligations

As of March 29, 2024, commitments to make future payments under long-term contractual obligations were as follows:

As of June 28, 2024, commitments to make future payments under long-term contractual obligations were as follows:

Payments Due by Period

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Total $ 1,799,975 $ 125,316 $ 261,715 $ 445,333 $ 967,611

¹ Includes unused funds fee and is based on the March 29, 2024 interest rate and outstanding balance.

¹ Includes unused funds fee and is based on the June 28, 2024 interest rate and outstanding balance.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

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however, actual results in these areas could differ from management's estimates under different assumptions or conditions.

We believe that the assumptions and estimates associated with revenue recognition, business combinations, goodwill and other intangible assets, and income taxes have the greatest potential impact on our financial statements.

We believe that the assumptions and estimates associated with revenue recognition, business combinations, goodwill impairment, intangible assets, and income taxes have the greatest potential impact on our financial statements.

Therefore, we consider these to be our critical accounting policies and estimates.

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our mix of cost-plus, cost-reimbursable, firm-fixed-price and time-and-materials contracts;

maintaining the our reputation and relationship with the U.S.

maintaining our reputation and relationship with the U.S.

protests of new awards;

34 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis