Q2 2023 V2X Inc Q2 2023 Earnings Call
[music].
Good day and welcome to the V to X second quarter 2023 earnings Conference call.
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I would now like to turn the conference over to Michael Smith, Vice President of Treasury, Investor Relations and corporate development at P. Two acts.
Thank you.
Afternoon, everyone welcome to the Beach second quarter 2023 earnings Conference call.
Joining us today are Chuck Crow, President and Chief Executive Officer.
Susan Lynch Senior Vice President and Chief Financial Officer.
For today's presentation are available on the Investor Relations section of our website Www Dot go beat you ask dot com.
Please turn to slide three.
During today's presentation, we'll be making forward looking statements pursuant to the safe Harbor provisions of the federal Securities laws.
Please review our safe Harbor statements in our press release and presentation materials for a description of 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.
Definition of these non-GAAP measures can be found in our presentation materials available on our Investor Relations website and in our press release filed with the FCC.
At this time I would like to turn the call over to Chuck Prow, President and Chief Executive Officer of <unk>.
Thank you Mike 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 our strong second quarter for <unk>.
Our over 10% organic revenue growth significant bookings and awards and key nearer term opportunities are representative of our momentum and differentiation in the marketplace.
Our future results reflect a continued innovation value and commitment that our talented employees are bringing to our clients most complex missions.
I'd like to highlight a foundational aspect of our business and one that I and the beat UX Senior leadership team are extremely proud of.
With more than 42% of our U S employees reporting had military background.
<unk> is a leading participant in the veterans equal system.
I am pleased to announce that during the second quarter V to X was once again recognized leading employer a veteran by Vets index.
Our employee culture and diversity enable success for me to ask I'd like to thank our over 15000 global employees that are helping drive positive results across our business.
Improving outcomes for our clients.
Please turn to slide five.
Our strong 10, 2% year over year revenue growth.
Can use a double digit performance demonstrated in last quarter and it was due to continued expansion on existing programs.
Contribution from New awards as well as further success in securing recompete wins.
Adjusted EBITDA for the quarter was $76.4 million or seven 8% margin and adjusted diluted earnings per share was $1 and one set.
Importantly, during the second quarter, our net debt to EBITDA leverage ratio improved and is now below three five times.
The Pacific Orange to pick a region.
To be a key long term growth driver for <unk>.
Revenue increased 41% year over year in the region driven by expansion on existing programs.
New efforts and exercises, including Talisman Sabre.
Emission requirements continue to increase in the region just a couple of weeks ago. The Secretary of defense conducted a week long trip in the region visiting with allies to discuss enhanced force posture.
He believes in development.
Defense Industrial base cooperation and regional security integration.
Paul oversees the Secretary also visited with American service members participating in the Talisman Sabre 2023 exercise.
Exercise that involves more than 30000 military personnel from 13 nations Bto exited privilege to support this important biannual exercise that is strengthening partnerships and interoperability among key allies.
[noise] ahead, we see numerous opportunities to further support our clients' initiatives and priorities in the region.
Bookings activity in the quarter was strong at $2.1 billion in awards to beat UX.
Resulting in a book to Bill ratio of 2.2 times. This yield a total backlog of $13 billion growing 10% sequentially.
Recent awards, including Naval test when he Pacific would.
Would drive backlog to over $13 $5 billion, our backlog so they shouldn't be two extra positive momentum leading into 2024.
Contributing to bookings was notable success in capturing several new business pursuits, including a 100 million dollar five year task order with the department of state.
Logistics support internationally.
This represents our most substantive and strategic win with the department of state.
And it's a culmination of a multiyear client engagement and targeted growth campaign.
We are also seeing successful results executing our sell through business model that is leveraging our engineering software development.
<unk> production capabilities Btu.
<unk> has enhanced the breadth of its addressable market with differentiated solutions, allowing <unk> to win new work that I'll discuss in greater detail shortly.
I am pleased to announce that subsequent to the quarter N V to X began the phase in of the 440 million dollar Naval Test linked Pacific Award supporting critical test and evaluation activities for the Navy over the next seven years.
Given the momentum on our business, we are increasing the midpoint of our 2023 guidance for revenue adjusted EBITDA and adjusted earnings per share.
Please turn to slide six feet.
<unk> is harnessing its converged capabilities and have a growing its core programs, securing recompete and winning new business.
During the quarter, we went over $520 million of Recompete.
Further extending our strong foundation of business. This includes an eight year $328 million contract with the naval facilities systems Command, you provide infrastructure sustainment, including the application of our unique converged solutions.
We also secured a five year 122 million dollar contract with Navier Fleet readiness center southwest for depot level maintenance support services.
A compelling example of how our teams are leveraging our core competencies to win new business with new clients is the department of state when referenced on the prior slide.
This department of State, Michigan is also being supported by our Wildcat five team.
At a 165 million dollar one year task order to provide critical operational and life support logistics to the state effort.
I was in the Middle East region last week, engaging with our clients and teams our agility and high level of readiness to support mission requirements was evident recognized by our clients and with a strategic differentiator for <unk> in the department of State and Logcap Award looking ahead, we see significant opportunity to further support.
For the global mission.
And the state, while leveraging vitro actually global contingency and logistics capabilities with our geographic footprint.
We are seeing successful results executing our sell through business model by leveraging our engineering and manufacturing center of excellence.
This unique facility provides over 900000 square feet of space, allowing <unk> to deliver engineering software development.
Testing and production solutions in support of modernization and Sustainment efforts.
Our ability to provide full lifecycle solutions from concept to sustainment.
A significant differentiator that is driving new awards.
Example, during the quarter <unk> successfully finalized three separate efforts with new clients that utilize our engineering integration and manufacturing capabilities.
It's important to note because it is a true representation of the increased pipeline and opportunity due to the merger.
We were also awarded an engineering development and prototyping effort with a new client that is expected to lead to new proprietary products listen during follow on business. This opportunity represents a brand new product that will be designed produced and sustained by V to X our market approach and the <unk>.
Merger enabled the successful capture of that program.
Please turn to slide seven.
Okay.
We see significant opportunities to drive growth with our modernization and Sustainment solution.
<unk> core markets, while unlocking additional opportunities that the company was not able to previously person.
One opportunity, we see nearer term and what's the proprietary gateway mission router 1000, our GMI 1000, which is a fully ruggedized and cyber hardened multi domain router that provides cutting edge situational awareness. The DMR solution was originally developed and.
Employed to provide enhanced situational awareness for helicopter pilots.
Our continued advancement of the technology.
Have yielded the GMI 1000, which is capable of integrating data from multiple sources across classified and unclassified connections.
Enabling a fully converged environment on the battlefield.
Over the past year. The GMI 1000 has been successfully integrated and tested on air and land systems.
Demonstrating its ability to lake information across various technologies and platforms.
As an outcome of a successful demonstration the army recently issued a notice stating that it intends to issue a sole source contract with <unk> to produce up to 3000 G M ours.
Beyond this potential near term opportunity.
He believes a platform agnostic forced multiplier benefits of the GMI 1000 are broad applicability and can be integrated on numerous platforms in support of the Dod's joint all domain command and control our <unk> efforts.
Please turn to slide eight.
<unk> is a perfect example of how <unk> is able to combine its deep capabilities and mission expertise.
Cutting edge solutions for use on tomorrow battlefield.
<unk> also had a rich history of developing solutions that are in innovative technologies to modernize our capability of legacy platform significantly improving their useful life. For example, today b two axes of modernizing and enhancing the effectiveness of the F 16 fighting Falcon buy in starting new.
Allergy and upgrading the aircraft's center display unit or CDU.
It's important to note that <unk> is the OEM of the CDU and our success in helping the Air Force provided pilots do technology and advanced capabilities at minimal cost has allowed us to expand our original work.
We are now extending our efforts across the entire Air Force fleet of F 16, which currently stand at over 1000 aircraft.
We believe <unk> is well positioned to grow its work associated with this program.
And modernization of the F 16, nearer term you are forced to an expected to award a contract to upgrade approximately 300 cities.
Longer term our team is focused on continuously incorporating new technology to enhance the digital backbone.
It's important aircraft that's expected to continue flying the next couple of decades.
Now I'd like to turn the call over to our Chief Financial Officer, Susan Lynch to discuss our second quarter results.
Thanks, Chuck and good afternoon, everyone. Please turn to slide nine.
Our second quarter financial results were excellent across the board and reflect continued momentum in our business.
Pro forma revenue increased 10.2% year over year to $977 $9 million.
Revenue growth was achieved by expansion on existing programs.
The contribution from new business wins award in late 2022.
Now securing key recompete programs in the first half of 'twenty to 'twenty three.
Thus far in 2023, we witnessed an acceleration of deliverables that were not originally contemplated to be recognized in the second half of the year, including the exercises and endo pay call.
Advancing our protecting our core in addition to growth through new pursuit wins.
Fundamental to V to X growing its backlog and delivering on its commitments.
During the quarter, our teams hard work and dedication yielded strong results driving significant bookings of $2 $1 billion.
This resulted in a total backlog of $13 billion.
It was up 10% on a sequential basis, representing over 3.3 times revenue coverage.
Our total backlog provide solid visibility for 'twenty, 'twenty, three and beyond and.
Does not include the over 400 million dollar Naval test when Pacific Award.
Or the 100 million dollar three years cyber security contract win.
The Cyber Security award is still under protest and here's the sister contract to our deck work, which supports the largest fiber center for the U S Army outside the U S.
We are an incumbent on Amdocs since 1995 and are excited to begin transition and deliver enhanced value for our client in the Continental U S.
Adjusted EBITDA, which adds back merger and integration related costs were $76 $4 million or seven 8% margin.
Adjusted EBITDA in the second quarter was driven by program performance.
Do you see from the exercises in Indo pay com and recognition of milestones on specific programs that occurred earlier in the year than anticipated.
Interest expense for the quarter was $32 million.
Cash interest expense, which adds back amortization of debt issuance costs was $29 $8 million.
Adjusted diluted EPS, which adds back amortization of intangible assets integration and debt issuance cost, what's the dollar and once at Duluth.
Diluted shares outstanding were 31 6 million shares.
Moving on now to slide 10.
Cash on the balance sheet at quarter end was $70.3 million.
Our net debt was 1.1 $77 billion.
Net debt improved a $112 million sequentially in the second quarter.
End of the quarter, our net consolidated indebtedness to EBIT Dol or net leverage ratio was 3.48 times and approximately four tenths of a turn improvement from last quarter.
This improved leverage ratio lowers the grid pricing on our term loan helping to further lower interest expense and offset recent increases in the forward yield curve we.
We believe our net debt position and leverage ratio will continue to show improvement in 2023 as operating cash flow ramps in the second half of the year consistent with normal seasonality.
Cash flow from operations in the second quarter was $116 $6 million and benefited from the establishment of a master accounts receivable purchase agreement for Marpol.
This facility further enhances our liquidity and balance sheet flexibility.
Operating cash flow for the quarter was $10 $9 million and excludes the benefit of the previously mentioned Martha facility and $7.3 million of M&A integration and related payments in the quarter.
With approximately $400 million of available capacity under the revolver and over $17 million of cash on the balance sheet. The company has nearly $500 million of liquidity for future growth and to support the needs of our customers.
The two axis fundamentals remained strong our solid free cash flow generation long term backlog and an excellent revenue visibility support our ability to rapidly delever further enhancing equity value for our shareholders.
Please turn to slide 11.
I am pleased with our excellent results this quarter and for the first half of the year or.
Our teams continue to drive excellent results across the board executing on all aspects of our strategy to be a leader in the operational segment.
The broader federal services market.
V to X remains highly aligned to well funded and key priority spending areas for our clients, which is trading tailwind and opportunities for growth.
Given the momentum solid visibility and positive trends in our business, we are raising the midpoint of our full year revenue adjusted EBITDA and adjusted diluted EPS guidance.
Now I'd like to open the call to questions operator.
Oh, thank you.
At this time, we will begin the question and answer session. The queue is now open for questions.
To ask a question you May Press Star then one on your Touchtone phone.
If you were using a speakerphone please pick up your handset before pressing the keys.
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And at this time, we will pause momentarily to assemble our roster.
Our first question today will come from Ken Herbert of RBC capital markets. Please go ahead.
Hi, Chuck Susan and Mike Congrats on the first quarter. This is Steve <unk> on for Ken Herbert.
Hey, Steve how are you good.
First question would be on the significant bookings in the quarter. It looks like you guys had a really nice quarter with the book to Bill, but could you maybe discuss the margin profile of that backlog and maybe how the combination of vertex and vectors is really helping generate some revenue synergies.
Yes, I think it's too it's a great. It's a great question and really have a two part answer to it so we.
We had a very nice sales quarter and as normally happen.
Mix of that those sales are actually pretty much in line with what you see the results that we produce today.
I'll also say however that there were significant amount of those sales both with new contracts as well as what we call base expansion the expansion of our existing contracts.
We're largely due to driving capabilities from both prior organizations.
And to the other into the other clients and admissions that were again privilege of support so we're really seeing a really nice.
Set of revenue synergies from the combination and I'm also thrilled that our win rates.
Have maintained.
They are pre their pre merger levels, which is obviously something we spend a lot of time, making sure would happen.
Got it and then maybe if I can just ask one more it looks like free cash flow in the quarter. It was quite positive, but can you discuss the availability to payback, that's a little bit sooner than initially anticipated I think your initial goal for the full year was to have a net leverage ratio of about $3. Six you guys are certainly ahead of that so just any commentary around that as well.
Right. So yeah, we implemented the master account services agreement in the quarter, which generated about $113 million of incremental cash flow and check 112 with that and paid down the revolver, which put us at about 3.48 times leverage ratio.
So for us.
For the quarter with 1.177 billion.
A million dollars of debt.
We had previously targeted just seemed to be you know added about three and a half times by the end of the year.
Right now we're going to work hard to get that net debt below $1.1 billion and you know hopefully to continue to improve our leverage ratio.
Awesome. Thanks, so much I appreciate it.
Thank you.
Our next question will come from Brian just fall of Raymond James. Please go ahead.
Hey, good evening and nice job on the quarter.
I wanted to maybe peel into that pipeline of opportunities you've got 5 billion pending adjudication in another.
What is it that I think he said.
19 billion in the pipeline.
Those are huge numbers can you maybe talk a little bit about where some of the opportunities lie by broader customer sets.
That department of state win was impressive and it seems like you're really broadening the base of business as well as the entities are coming together with the integration here.
Sure Andy.
What is a.
Really great from my perspective to see is that that pipeline is a very broad based pipeline.
We have significant opportunity in state additional opportunity.
We have opportunities, obviously with our logcap clients in all additional opportunities.
With regard potential exercises as well as contingency operations, our aerospace business.
<unk> continues to.
We have a very very healthy pipeline, but I'd also like to really emphasize that our advanced technology business to include our advanced solutions that we've talked a bit about today.
It would be very robust.
And those solutions are really.
The springboard by which we can see.
Additional services into our existing clients and the results that we get the results that we posted this quarter.
Were evident of that of that strategy are really really working the revenue synergies of the combination of becoming.
Apparent to all of us through the numbers and what we what we posted this quarter.
Oh fantastic, maybe just a follow up because it did sound like some of the products are really starting to gain some traction can you remind us maybe of the mix of that as a part of the business.
Just generally speaking and then I imagine the margin profile is quite accretive as well.
The margin profile is accretive.
We're thrilled with the solutions themselves.
Our yet I would say, probably a sub 10% of our business.
But up from not very much at all and we will also say that the overall advanced technology aspect of our business.
Continues to grow and it is in fact quite material. So this transition that we've been on to the converged strategy and applying that converged strategy to the broader operational segment of the broader federal services marketplace is really bearing out in terms of new awards and new work.
I would like to thank the here over the next couple of three or four quarters, we may get more specific in terms of the actual scale.
Scale and profitability of those of the solutions, we're talking about.
Great just one more for me then I'll jump back into the queue.
<unk> continued to be strong and we have really.
Ambitious views for that longer term can you maybe help us shape. The first half of the year in the second half of the year, sometimes it can be a little bit lumpy with exercises.
Exercises and other things kind of thrown in there.
Yeah. So when we're talking specifically about 2023 the teams did an excellent job in working with our clients and.
Much of the extra size work that we had planned for the year was in fact pulled into the first half of the year.
I will tell you, though that the emphasis from our clients on strengthening the capabilities and presence across the Indo pig region remains significant.
We have opportunities in our pipeline in the second half of the year and early 2024.
And as you've seen the last couple of quarters. The teams have executed very very nicely in terms of pulling both revenue and profit to the left.
We're anticipating.
Good second half of this year and going to continue to focus with the team on expediting as much 24 revenue as we can.
And to the back half of this year.
And if I could just add onto that.
We transitioned.
Logcap five claws causal leanne.
On April 2022, so as you go into the third quarter. This will be the first time, where we have a year over year comparison, it is pretty close to apples to apples.
And the other thing that's interesting to note is the revenue coming from Asia now is greater than the revenue coming from Europe .
For <unk>, which I found to be interesting.
Great appreciate the color. Thank you.
Yeah.
Question is from Tobey Sommer of tourists Securities. Please go ahead.
So I'll pick up where you left off them.
Say in the Indo page Tom region.
In a way because we've already established the necessary infrastructure, such as country registrations tax capabilities et cetera to operate very seamlessly in that region.
Thank you.
Are there additional geographies.
But from the customers' perspective for Naval Test wing.
It would make sense operationally to smooth things out and.
From the customers' perspective that you could bid on now that you've got.
Some significant geographies under your belt.
Yes, the way the concept of operation work is that having both Navy test wing Atlantic and Pacific.
<unk> is a big deal from the Navy perspective.
Again, our points of presence.
In the middle East and and opaque.
Have opened up additional avenues for our aerospace team to pursue new opportunities.
But when we get back to these clients client campaigns that we talked about often.
The focus that we have in our aerospace business is it broadening the scope of our relationship with both the army.
As well as a special forces and the and the Air Force.
Obviously, you have work and all of those clients.
But the depth that we have in the Navy is something that wed like to replicate across the entire client set.
And then with the clients that will come geographies.
Last one from me if I could sneak one in when do you think the company will again be poised to entertain material acquisitions based on your schedule.
Debt repayment, and where you're comfortable from a leverage perspective.
Well we've talked about.
We've wanted to get below three five we've done that now we don't really like to be in the two to two and a half range I want to be very clear that we are always looking at.
New and creative ways to grow Inorganically.
But current course and speed when you take our growth plus paydown.
It would probably say.
After this year.
But again as you know there are always new and creative ways to.
To grow Inorganically, if the market conditions are right.
Thank you very much.
I appreciate it.
Your next question is from Joe Maxa of Noble capital. Please go ahead.
Good afternoon, great quarter, Thanks for taking my questions.
Thank you Joe how are you.
Good so.
Chuck last quarter, when we talk we talk a little bit about the pace of award.
<unk> said that we're a little bit labored on the last call. It looks like that might have changed just wanted to get your insight.
Insight into the kind of the pace of awards that Youre seeing here in a second what you would expect in the second half of this year.
Well the floodgates broke for the quarter for sure and we're and we're thankful for that.
As it was not in the prepared comments, but it wasn't a press release, we now have.
$19 billion of of.
Total pipe.
5 billion currently under evaluation, which.
Both up substantially from last quarter.
So the point that I would make there is that the rate and pace of the rfps that we're responding to is not slowing down at all.
As I think has historically been the case is that the awards may be a bit lumpy, but it is it is fair to say that.
The pace that we saw year over the over the last.
A couple of months was significantly improved over let's just say 2022.
And any.
In the second quarter any awards that were.
Given out.
That you missed out on that you thought you were in good position to win.
Well I think across across the portfolio.
We're doing an excellent job protecting our base both in terms of Recompete and new wins.
When it comes to taking business away.
From our traditional competitors.
I think we're as I've always said, we don't give out the win rates, but I think we bet.
With that with a pretty high pretty high average and again I want to dig up too much data from the past, but as you might remember both Navy test with Pacific and Navy test wing Atlantic or takeaway from.
Multiple decade incumbents, if you will so.
Again, I think from a from a win rate perspective, we're continuing to do well, we don't win them all but you know that.
It's the way that that's.
The way the marketplace works.
But again I believe we're winning more than our fair share Joe.
And one more if I may you know historically, we've talked about kind of that 40 60 split between the first half and second half and looking what the very strong.
First half is bad and you've talked a couple of times about pulling somewhat some business into the first half, but it looks like the second this year is going to be more of a 50 50 split between the first and the second half is that accurate.
And that's what the that's what the guidance would indicate and.
And again the execution of our team for the last couple of quarters have just been.
Nothing short of outstanding.
Pulling transactions and deliverables milestones to the left that doesn't always happen.
I'm going to I'll continue to bet on the team, but this year based upon our first half results and the guidance for the full year. It's looking more like 50, 50, and I really attribute that more to the execution of our teams.
Because I think that the normal posture for for our business anyway is that 40 60 split we've talked about for the last five or six years.
Great. Thanks for that and congrats again on a very good quarter.
I appreciate it good talking to you. Thank you Joe.
Our next question will come from side sang.
Stifel. Please go ahead.
Hey, guys.
Had you owned <unk> good afternoon.
Hi, how are you.
Doing well thanks.
I guess, maybe I'll touch on MRO.
<unk>.
MRO is was expected to be a headwind coming into the year and now that we're halfway through the year, how has that headwind changed and what is your view towards maybe the near term and then.
Also the medium term in terms of opportunities specific to MRO.
Yes first of all the MRO business is is a phenomenal business and with the with the elongation of the various platforms out there.
That business.
Does nothing but look more promising overtime with regard to the natural retirements that occurred this year.
We're on pace to our plan.
I'll continue in place through 2023, and will actually begin to moderate a bit as we move into the second half of 'twenty four.
But again these are all they were planned retirement they are progressing as planned and in fact, some of them actually slowed a bit too.
To the positive side, but again that MRO business again think about as platforms continue to be elongated in terms of their useful life.
That is an enormous opportunity for us the other part ill point that I'll make on that with regard to sustainment.
Indianapolis facility, and a 900000 square feet of.
Kind of manufacturing and modification capabilities is really beginning to demonstrate.
A life of its own the one of the benefits that we.
Have realized through the vertex acquisition has been the fact that that Indianapolis facility is no longer encumbered with OCI realities that they had when they were owned by Raytheon.
And so we're seeing the benefit of that it's early stages early innings as I'll say.
But we're seeing some really really positive signs that data that.
And the capability within that facility is going to be is going to be is going to be good for a long long time to come.
Okay. That's helpful. Thank you.
Maybe maybe I'll touch on logistics really quick as well.
Just generally what are you.
What do you see as the staying power of logistics demand maybe within the Army and then how strong is that demand across the various different branches.
Is it as simple as correlating topline spend through buckets like.
Specific to turn some insured for example.
Yeah, I would I would I would frame it yes, that's a good way to look at it but I would also look at the kind of the underlying demand signal.
Okay.
Loan combatant commands are either exercising or conducting other types of activities. It is the industrial base. It is an essential part.
Of that capability and through Logcap and ask gap for that matter.
We have a significant advantage in the Centcom and <unk> regions.
So with logistics.
And the op tempo increases either through natural activities like storms.
Exercises are.
Activity like we're seeing today in eastern Europe that all is a again the demand signal for increased op tempo to both <unk> and our industry. The last point I'll make this within our prepared remarks, and I can't emphasize it enough.
The $100 million state department when to conduct an important humanitarian activity.
Was currently being supported by a $165 million task.
To do all of the job to do the.
<unk> and life support for that.
For that same state department activity, that's a model there.
If we can replicate that model, which we fully intend to do.
That bodes well for.
First of all the mission intimacy that we will have as an organization as well as future revenue growth overtime.
Yeah. Thank you that's helpful color.
I'll stop there thanks Chuck.
Hey, Thanks, good talking to you.
At this time, we will conclude the question and answer session I would like to turn the conference back over to Chuck Prow for any closing remarks.
First of all thank everyone for being on the call today I think our analysts for their great questions. We look forward to continuing to drive results and we'll talk to you here next quarter have a good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.