V2X Inc. Q1 2023 Earnings Call
Thank you for joining us for <unk> first quarter 2023 earnings conference call and webcast.
Today's call is being recorded my name is Joanna and I will be the operator for today's call. At this time, all participants have been placed in a listen only mode.
Following the management presentation I will open up the call for Q&A session.
Do you have any questions at that time. Please press star followed by the one on your Touchtone phone if you already see a speaker phone. Please lift the handset before pressing any Keith.
And now I'll pass the call over to your host Mike Smith, Vice President of Treasury Investor Relations and corporate development at <unk>. Please go ahead.
Thank you good.
Good afternoon, everyone welcome to the <unk> first quarter 2023 earnings conference call.
Joining us today are Chuck Prow, President and Chief Executive Officer and.
Susan Lynch.
As president and Chief Financial Officer.
Slides for today's presentation are available on the Investor Relations section of our website.
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Dot com.
Please turn to slide three.
During today's presentation management will be making forward looking statements pursuant to the safe Harbor provisions of the Federal Securities Law.
Please review, our Safe Harbor statement in our press release and presentation materials.
Scripts it up some of the factors that may cause actual results to differ materially from the results contemplated by these forward looking statements.
The company assumes no obligation to update its forward looking statements.
Additionally, I would like to point out that in addition to GAAP earnings we will be discussing and reporting various adjusted non-GAAP metrics, including pro forma revenue.
Adjusted EBITDA and margin adjusted operating cash flow adjusted net income.
And adjusted diluted earnings per share.
The definition of these non-GAAP measures can be found in the presentation materials available on our Investor Relations website and in our press release filed with the SEC.
At this time I would like to turn the call over to Chuck Prow, President and CEO of <unk>.
Thank you Mike and good afternoon, everyone. Thank you for joining us on the call today, Please turn to slide four.
This afternoon, Susan and I will update you on a strong quarter for <unk>.
Alright, 12% organic revenue growth significant new business win and the retention of key recompete contracts demonstrate <unk> continued momentum in the marketplace.
Momentum validates our strategy and differentiation.
Importantly, as a result of our talented employees the foundation on which <unk> is built.
As you can see on the slide <unk> has an extremely diverse workforce for example, more than 42% of our U S employees report, a military background and 45% identify as a person of color.
The metrics on this page are something we are extremely proud of and our diversity allows us to achieve even greater performance.
I'd like to thank our over 15000 global employees that are helping drive positive results across our business improve outcomes for our clients and are important contributor in the communities that we're privileged to operate in.
Please turn to slide five.
Our strong 12% year over year revenue growth is a great start to the year and was generated by continued expansion on existing programs contribution from New award and success securing recompete win.
Adjusted EBITDA for the quarter was $68 million.
Or seven 2% margin and adjusted diluted earnings per share was <unk> 80.
We continue to experience significant growth in Indo Paypal.
With our presence and footprint in the region proving to be a key channel to support increasing mission requirements.
Revenue in the region grew 300% year over year, and 18% sequentially to $64 million driven by the expansion of existing programs that exercises such as talisman sabre the largest bilateral combined training activity with the Australian Defense Force and the United States.
We are also supporting <unk> and 2023 are critical exercise with the U S and Philippines that enhanced the tactics techniques and procedures across a wide range of military operations. This year marks a third iteration of the training event and is the largest to date.
During the quarter the pace of award activity improve which led to approximately $600 million.
Of New business Awards are.
The recent award activity is encouraging and we believe <unk> is well positioned to win a share of wallet.
$1 billion of new business opportunities currently under evaluation.
We continue to protect our foundation and went over $250 million of Recompete in the quarter. Sorry example, we secured a five year $142 million contract lift Naval Air Systems Command.
Our <unk> <unk> PMA $2 81.
281 is responsible for the acquisition of lifecycle management of various mission planning control systems.
And execution tool that are developed and integrated in partnership with other services and foreign allies.
Furthermore, subsequent to the quarter closed we were awarded an eight year fixed price recompete contract valued at $300 million to continue providing support services to the Navy in Cuba.
This was an excellent outcome for <unk> and a testament to the strong relationships our teams have built with their clients.
New version of this contract is significantly longer than the predecessor contract and provides a great opportunity to drive enhanced value to our clients through the delivery of our converged solutions over the next eight years.
These two successful Recompete wins are demonstrative of the continued success, we are having with our navy client.
We remain focused on expanding our work with the Navy as part of our targeted growth campaign and are looking forward to broadening our presence with this important client.
Given our first quarter results, we are reiterating our 2023 guidance.
Please turn to slide six.
<unk> remained focus on inserting technology that uses the digital and physical aspects of our clients' missions.
This differentiation and focus on driving growth through new business wins.
And expansion on existing programs or.
For example, during the quarter, we were awarded the Naval Test main Pacific contract.
$440 million over seven years.
This effort to support their critical test and evaluation activities for the Navy leverage <unk> innovative technology based aircraft maintenance and management optimization or ammo solution.
Proprietary animal solution was also instrumental in <unk> $880 million enabled wrestling Atlantic win last year.
Ammo at the <unk> differentiator and is designed to provide clients with significantly enhanced operational readiness.
And real time visibility into flight operations maintenance readiness and supply chain by leveraging technology and data analytics.
The investments made in ammo are yielding results with the technology being foundation to several important new business and Recompete wins for example over the past 28 months ammo has helped to drive over $5 billion in wins for <unk>.
These wins illustrate how we are generating growth by creating more value in our core markets with converged solutions and increasing market share where our operational knowledge sets us apart.
Please turn to slide seven.
Our advanced technology capabilities continue to gain traction and are an important component of growth for <unk>.
We are seeing momentum built in the cyber security mission.
And critical communications domain.
<unk> had an over a 40 year track record, providing the solution and now had annual revenue of approximately $350 million.
It's almost 1800 highly skilled personnel across 17 countries.
This momentum was demonstrated in the first quarter through a new three year contract win valued at approximately $100 million to provide critical cyber security support across the U S government client.
The contract is currently under protest, but once phased in will add to <unk> existing cyber work, which includes operating the largest cyber center for the U S Army outside of the United States defending all Army network throughout Centcom area of operation.
It also after the full range of enterprise it and cyber defense support services that <unk> provides to the U S Army Europe .
With Air Force is Europe .
The U S European command and U S Africa demand areas of responsibility as well as to the U S Navy worldwide.
As you can see on the slide <unk> has strong cyber security capabilities.
And we are advancing and investing in our operational technology offerings, which increased the pace that converged solutions transform operational missions.
Please turn to slide eight.
I would like to take a moment to recognize our NASA team, where they are remarkable achievements, which include recently being awarded the NASA Supernova Award for excellence in safety and.
Also the directors award for their support to the arguments program.
The <unk> team has been supporting asset neutral buoyancy laboratory since 2003. The lab is a $6 2 million gallon instrumented pool at the NASA Johnson Space Center, where astronauts learning to work in space and trained for missions Davita.
<unk> provides all resources necessary to operate and maintain the lab, including sustaining engineering and fabrication of spacecraft Markups. We also support engineering evaluations and test related to new extra vehicular activity.
Philippines astronaut flight controller training operations.
Today <unk> is transforming the facility to support NASA as it prepares to send astronauts back to the Moon, Alright Artemis program.
I'd like to thank our team for their dedication to this important mission and their recent achievements.
Looking ahead, we are excited to build on the great performance of our team to further expand our relationship with NASA.
We believe the combined capabilities that <unk> can deliver a broad set of solutions to NASA, which can't be an important catalyst for future growth.
Please turn to slide nine as mentioned <unk> is seeing continued expansion in the Pacific future growth on existing programs such as Kwajalein.
Volume associated with exercises in the region.
<unk> is currently a full run rate and could show incremental growth as the Dod invest as a part of its broader Pacific to terms initiatives.
In March the Doj released its fiscal 2020 for budget and outlined the investments. It is planning to make at the part of the Pacific Deterrent initiative.
As part of the initiative the Dod have identified investments from $35 billion to $1 billion over the next five years to modernize and strengthen its presence in the Pacific improved logistics maintenance repositioning of stack conduct exercises and training upgrade infrastructure and build defense capabilities.
<unk> footprint across the Philippines one.
Thailand, South Korea, Japan, and Hawaii continued to provide key channels to support our clients' initiatives.
For example, we believe our position in and around the Philippines bodes well to support the recent establish bilateral defense guidelines and updated alliance framework between the U S and Philippines.
This alliance commenced the U S to help bring the Philippines modernize its military Bob collaborating on a security sector assistance roadmap to identify priority defense platforms and forest packages that will bolster combined to terex.
<unk> is bringing the full suite of best complementary capabilities to meet our clients' mission.
I mentioned priorities and anticipate that we.
We continue to believe into opaque.
Notable opportunity for future growth over the next several years and stand ready to support our clients now I would like to turn the call over to our Chief Financial Officer, Susan Lynch to discuss our first quarter results.
Thanks, Chuck and good afternoon, everyone. Please turn to slide 10.
Our first quarter financial results reflect a strong start to the year for <unk>.
Pro forma revenue increased 12% year over year to $943 five.
Yes.
Revenue growth was driven by momentum in the Pacific expansion on existing programs and the contribution from new business wins.
Revenue from the Pacific increased 300% year over year, and 18% sequentially, reflecting our agile right in this position to support the increased to optimal.
Mission exercises in the region.
While these exercises were included in our guidance for the year. They occurred earlier than we anticipated and are expected to be completed in the second quarter.
<unk> EBITDA was $68 million or seven 2% margin.
Adjusted EBITDA adds back merger and integration related cost of $9 4 million and amortization of acquired intangible assets of $22 6 million.
Adjusted EBITDA was higher than expected in the first quarter due to program performance as well as contribution from the exercises in the Pacific, which as mentioned occurred sooner than expected.
Interest expense for the quarter was $31 7 million.
Cash interest expense, which adds back amortization of debt issuance costs was $29 $2 million.
Adjusted diluted EPS, which adds back amortization of intangible assets integration and debt issuance cost was 80.
Diluted shares outstanding were 31 3 million shares.
Total backlog was 11 8 billion in the first quarter and does not reflect contracts currently under protest.
<unk> recent wins that are under protest total backlog is approximately $12 4 billion.
Representing over three times revenue coverage.
This key metric and leading indicator is an important attribute of our business and provides excellent revenue visibility for <unk>.
Turning now to slide 11.
Cash flow followed our normal seasonal pattern in the first quarter and was a use of cash.
Adjusted net cash used in operating activities was $23 4 million.
Which adds back the last cares act payment of $13 4 million and $1 $7 million of M&A integration and related activities.
Operating cash flow is expected to ramp and be within our previously communicated guidance range of $115 million to $135 million for the year.
In the first quarter <unk> successfully enhanced its capital structure.
Lower cost credit facility with greater liquidity.
The new $750 million credit facility.
Dominated the second lien term loan b.
The incremental portion of the first lien term loan b.
And the asset based loan revolver and was replaced with a lower cost 500 million revolver and a $250 million term loan a.
This new structure is expected to generate substantial interest savings with additional benefits through lower grid pricing.
In order to manage interest rate risks and uncertainty the company entered into interest rate swaps converting 30% of its variable term loan debt into fixed rate debt.
I would like to thank our banking partners for their support and trust in our business.
With approximately $300 million of available capacity of jewelry revolver and over $60 million of cash on the balance sheet. The company has significant flexibility and liquidity to support continued organic growth.
At the end of the quarter, our net consolidated indebtedness to EBITDA or net leverage ratio was three eight times.
Leverage ratio is expected to show improvement in 2023 as operating cash flow ramps.
Net debt at the end of the first quarter was $1 289 billion.
Cash at the end of the first quarter with $62 $1 million.
Our financial position remains extremely healthy with robust backlog.
Solid revenue visibility substantial liquidity and a strong free cash flow outlook.
Primary goal remains lowering our overall net debt and achieving a mid term net leverage ratio of two to three times.
Please turn to slide 12.
I am pleased with our strong start to the year. Our teams continue to work together seamlessly, making notable progress on integration milestones, while driving results across the board.
We have made great strides in harmonizing, our processes technology and applications, which is allowing us to deliver on our commitments.
As such we remain confident in our ability to achieve results in accordance with our previously issued guidance.
I'd like to now turn the call back over to you Chuck.
Thank you Susan we are proud of our results. So far in 2023 and continue to believe <unk> is well positioned to benefit from much alignment mission critical funding streams and a differentiated set of converged solutions now I'd like to turn the call open to questions operator.
Thank you ladies.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone. If you are using a speaker phone. Please lift the handset pricing any keys.
Next question comes from Joe Gomes of Noble capital. Please go ahead.
Good afternoon, congrats on the quarter, thanks for taking my questions.
Thanks, Joe how are you.
So I wanted to just start out one of the things that's been in the topics thats been in the news obviously.
Debt limit.
Do you see that having any potential impact on the company and kind of similarly.
You did mention this quarter it seems that contracts might be.
Letting out a little bit faster than they were in the first quarter kind of what's your sense of that over the next couple of quarters.
Thanks, Joe.
Current.
Budget and debt ceiling negotiations are.
Becoming regular I think this is the.
The 11th one in the last call.
12 to 13 areas I think the way it plays out.
It's very hard to read the future I will tell you that both in the past with regard to budget.
Again passes as well as deficit.
Ambassador.
Our business has weathered those reality pretty well.
As you know as we talked about a lot on these calls that because.
Funding support.
Of course, the vast majority of our program being O&M funding.
And so much of what we do is actually mission critical in terms of supporting National security.
We haven't seen.
<unk> impacts in the past again this is <unk>.
Uncharted territory, but we're pretty confident of.
With our position and the ability to kind of navigate through the current uncertainties.
With regard to the with regard to the pace of awards, Yes, we've had we've seen.
An improvement in the flow of awards.
Over the past three or four months.
As you can see we still have $4 billion.
<unk> is currently being evaluated.
I think the the pace is still labor if you will is a bit slow.
But many of these bids have been in the cycle long enough now that we would expect to see continue.
Continued progress against the adjudication of that $4 billion.
Okay, great. Thanks.
Pardon me.
The.
The guidance.
Even though you had a phenomenal first quarter.
I understand that.
Contract came sooner than expected. So we're looking at the model you have always talked about that 40%, 60% split first half versus second half kind of how do you see that playing out this year with those.
The exercise is coming in sooner than expected.
And that was that was basically yes.
We had the.
On the reality that the exercises were initiated earlier in the year than originally anticipated.
I think on the revenue side.
We're 48% of.
Guidance and <unk>.
44% on the on.
On the EBITDA again, I still liked it I still like this 40 60 split it may be a little front end loaded this year, but that is it does reflect the.
Natural than historical.
Cycle within our business.
Okay, and then just wonder Joe if I mentioned.
Yes, Joe just to clarify so Chuck was mentioning first half second half percentages there.
In case it wasn't clear.
Thank you for that.
And then.
Last time, you talked about taking some of the synergies in the advanced technology.
You add to some of your Aero Aerospace solutions and global missile training clients.
How is that being received early days, but by the clients.
It's actually going very very well, we spent a good amount of time on this call talking about.
Some of our advanced solutions, we're going to continue to talk more and more about the embedded intellectual property, we have throughout our business. We didn't disclose this year, but we probably will in the first half we've had a very nice set of contract expansion.
Actions have been here in the first quarter and again I really believe that's largely a result of having these improved capabilities that work across the entire spectrum of operational missions 0.1, and point to get incredible people, who have really embraced this new way.
Operating.
Our mission critical emissions, if you will and are just doing a great job of bringing these new solution into their existing clients. So yes, a lot of words, there, but its going very well and you can just tell the most.
Momentum of our people to continue to stay focused on this is really right where it needs to be.
Great. Thanks for taking the questions looking forward to how the rest of the year unfolds.
Thanks, Joe good talking to you.
Okay.
Thank you next question comes from Tobey Sommer from tourists Securities. Please go ahead.
Hey, good afternoon. This is jasper bibb on for Tobey.
My first question was just on naval Crosswinds specific.
I guess I was hoping you could outline how you expect that program to ramp.
Once it gets out of any transition or protest periods and is there any associated contribution from that award in the regulated 'twenty three guidance.
Yes.
Our expectation is as normally occurs on these programs.
You have the 100 day protest cycle.
As you know you can't go into another round, but we typically expect.
Dave we plan for the ramp of that contract.
To begin.
Once the 100 days is up which is kind of.
Early to mid July timeframe that we have essentially a half a year of.
Naval Test wing.
Pacific baked into our guidance.
Okay understood and then on the 40 60 split.
It looks like pretty low margins in the second quarter.
So is there anything.
Specific that's causing margins to be lower.
In the second quarter, or just kind of the normal cadence of the business.
It's a normal cadence.
I guess kind of render a bit express it as that.
When we begin new programs is always the case.
The lower margins in the early very early phases of the contracts.
Which allows for the phase in and all of the other lower margin activities <unk> one.
<unk> to add we've talked about.
On recent calls that they have contingency aspect of our business carries a better higher margins along with them.
And the exercises moving to the left award indicative of a contingency operation. So again, a little long winded, but I would say, it's really just the natural.
Flow of our business and I'll also reiterate that I really think the teams are doing a great job.
Day in and day out working too.
Expand margins and bring new kind of higher value.
Higher value ways of operating the mission to our clients.
Got it.
Last one for me so I just wanted to ask you about the cost synergy target.
Any update there with respect to the $20 million in synergies by January 24.
And I guess now that you've got on the vertex assets for a few quarters.
Are you thinking any differently about maybe potential upside to that synergy target over.
Over time.
Yes Allison.
To reiterate that we feel very comfortable with regard to the rate and pace of achieving the synergy benefit.
As you know will continue to grow substantially organically as well so that's a and so thats an important balance to keep so feeling very comfortable about the synergies.
I will tell you that our teams again both.
Cultures.
Formed now <unk> are very operationally oriented cultures and.
Pipeline of <unk>.
<unk> has started to develop.
Yeah, it's it's actually going quite well I mean, we initially the.
Initial number of new opportunities we we.
Hey, get about 20 billion dollar grief.
Selected a good number of those but we do have and you see that are and are increasing pipeline.
Several opportunities.
That we're pursuing now Ah crossed our business.
That either predecessor company, probably would not have primed, so feeling not only comfortable about the revenue synergies on the large new deals, but as I think it with Joe brought up earlier on in the questions. The the synergies that are available to us <unk>.
Kicking capabilities across the entire spectrum up Miss <unk>, we support now it really pretty impressive and our teams are really embracing it and as a result.
We continue to look at on contract gross out an important channel far growth into the future.
Okay, Great and then just one more is that if I came back into what the vertex revenues were in the quarter.
It looks like the sort of stepped down the quarter over quarter and.
Is that the normal seasonality or there's something going on there. It's just because you know we don't have a full year yet of the combine two businesses. So just wondering what's going on with the legacy vertex revenue.
Yeah, there was some material acceleration and the fourth quarter on one of the programs and then one of the contracts on the aircraft M. R. O side does have some retirement that are starting to filter in throughout 2023 and 24.
Okay, great. Thanks, Okay.
Yeah, Yeah that that was retirement, where contemplate it in the in the early and ongoing cases too.
Okay, Okay, alright, great. Thanks for taking my question.
Thanks Robert.
Thank you. The next question comes from can hear back from I B C capital markets. Please go ahead.
Alright, so excuse me and I'm like this is Steve <unk>.
Steve how are Ya.
Good.
Question, the free cash flow it looks like <unk> in the quarter with working capital kind of waiting for results. There Oh can you walk us through how you speak about working capital with regard with somebody will be rewards that you've won do you expect an additional cash flow into the second quarter kind of with an infection into the second half or just you know how should we think about that.
Yeah.
So the question or a general trend is a you said capital you know in the first quarter. We do that's when we have our incentive payments and you know the higher fringe right and then we start generating cash in Q2 with the majority of cash really in the back half of the year. So I don't see any difference in that trend this year.
It's it's just really kind of the way our business and it seems like our competitors business is kind of operate.
Uhm within if you're looking at the cash flow statement. There were a couple one off set we carved out of <unk>. We had the cares Act repayment and then we had some M&A expenses that had to be paid in the first quarter.
Most of that is behind us for the rest of the year.
Got it and then in terms of capital allocation. It looks like you restructure some that <unk> keep kind of talk about how you think about capital allocation moving forward is that Peter on kind of a top priority.
God also beating <unk>, we just talked about the M. A real market it sounds like a cross the <unk> the.
<unk> I'm in a pipeline, there's a lot more assets kind of coming coming available any thoughts sir.
Yeah, you know again, thank you for the question I mean.
With interest rates, where they are you know, it's pretty much all hands on deck to pay down the debt as quickly as we can.
<unk>, absolutely makes sense and then just one more if I can squeeze it in it looks like <unk> a bit lower in the quarter then in three Q or four Q outside of the previous question is there anything really specific to to kind of call out there.
Briefly talked about some of the new contract's kind of coming on board.
Yeah. So I think I'll check mentioned you know with all of the awards that we get you know are generally a little bit less profitable and there's always gonna be of use of cash early on in the awards. So that's just something to kind of think about as he award activity picks up.
And one of the things that we talked about you in queue for when we gave our guidance again was these aircraft retirements that we're going to start to kind of filter in and 2023 and 2024 and so.
Yeah, and then I would say probably the the growth in Indo pay calm you know that's really coming out of our.
Our base operations business, which tends to be a little bit lower margin.
Some of the aircraft MRO in training businesses. So that's really kind of you know what you're seeing there and.
You know everything has been included in our a O P N and guidance and we feel really good about our guidance and you pay within that range for the remainder of the year.
Awesome. Thanks, so much for the color.
Alright, thank you.
Thank you yeah, no further questions and I'll turn the call over to check Prof closing comments.
Thank you very much for joining us on a call today and a good call and we look forward to updating you at the end of the next quarter have a good rest of your day. Thank you.
Ladies and gentlemen, this concludes our conference for today, we thank you for participating and we ask that you. Please disconnect your lines.