Q3 2023 V2X Inc Earnings Call

Operator: Thank you for joining us for V2X third quarter 2023 earnings conference call and webcast. Today's call is being recorded. My name is Sherry, I will be the operator for today's call. At this time, all participants have been placed in a listen only mode. Following management's presentation, I will open up the call for a question and answer session.

I will open up the call for a question and answer session. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad and now I'll pass the call over to your host Mike Smith, Vice President Treasury Investor Relations and corporate development for feature Labs, you may begin.

I will open up the call for a question and answer

If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.  And now I'll pass the call over to your host Mike Smith, Vice President Treasury Investor Relations and Corporate Development for V2X. You may begin.

Michael Smith: Thank you. Good morning, everyone. Welcome to the V2X third quarter 2023 earnings conference call. Joining us today are Chuck Prow; President and Chief Executive Officer, and Shawn Mural; Senior Vice President and Chief Financial Officer.

Joining me today are Chuck Prow, President and Chief Executive Officer, and Sean Bureau, Senior Vice President and Chief Financial Officer.

Slides for today's presentation are available on the Investor Relations section of our website, gov2x.com. Please turn to slide three.

<unk> 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 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.

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, although. Like to point out that in addition to GAAP earnings. Discussing and reporting various adjusted non-GAAP metrics.

The company assumes no obligation to update its forward looking statements

Additionally, although.

Additionally, I'd like to point out that in addition to GAAP earnings. We'll be discussing and reporting various adjusted non-GAAP metrics, including adjusted EBITDA, and margin adjusted operating cash flow, adjusted net income, and adjusted diluted earnings per share.

Like to point out that in addition to GAAP earnings.

Discussing and reporting various adjusted non-GAAP metrics.

<unk> 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 our presentation materials available on our Investor Relations website and in our press release filed with the SEC. At this time, I'd like to turn the call over to Chuck Prow.

At this time I'd like to turn the call over to Chuck Crow.

Chuck Prow: Thank you, Mike, and good morning everyone. Thank you for joining us on the call today. I'd like to take a second to introduce and welcome Shawn Mural, our new Chief Financial Officer. Shawn joined V2x from RPX Corporation, just last month.

I could take a second you introduce and welcome Sean you're all our new Chief Financial Officer.

Sean joined eat UX from RPX Corporation, just last month Sean.

Shawn brings a wealth of financial experience, most recently serving as CFO of Raytheon. Well as a deep understanding of the aerospace and defense industry, which will be beneficial to V2X, as we continue to the next phase of our company's growth.

Well as a deep understanding of the aerospace and defense industry, which will be beneficial to <unk> and we continue to the next phase of our company.

Shawn Mural: Thank you Chuck, I'm excited to join V2X, be part of the continued success of the company, executing on our strategy and delivering on our commitments, to increase value to shareholders.

The continued success of the company executing on our strategy and delivering on our commitments to increase value to shareholders.

Chuck Prow: Please turn to slide three. Before we get started, in advance of the Veterans Day, I would like to take a moment to recognize all veterans for their service to our nation, particularly those who are part of the V2X team and support many of our clients' critical missions every day, and in all environments. 

Before we get started in advance of the veterans day, I would like to take a moment to recognize all veterans for their service to our nation, particularly those who are part of the V to X gene.

Support many of our clients critical mission every day and in all environments. We thank you for you for all you do for our nation and for our company.

Support many of our clients critical mission every day and in all

We thank you, for all you do for our nation and for our company. I'd also like to recognize all of the 15,000 plus V2X global employees, for their continued around the clock and uninterrupted support to our clients, especially in light of current global affairs.

I'd also like to recognize all of the 15000 plus V to X global employees for their continued around the clock and uninterrupted support to our clients, especially in light of current global Affairs.

Your commitment and resilience are unwavering, and something we are extraordinarily proud of. Finally, I would like to note that V2X recently released its inaugural environmental, social and governance or ESG report.

Finally, I would like to note that beat you extra recently released its inaugural environmental social and governance or ESG report.

This report, which is now available on our website, marks a significant milestone for our company, furthering our long standing commitment to ESG, and creating long-term value for our stakeholders. Our ESG journey has always been an integral part of our corporate values, and we continued to make great strides towards a brighter, and more sustainable future.

Our long standing commitment to ESG, and creating long term value for our stakeholders.

Our ESG journey has always been an integral part of our corporate values and we continued to make great strides towards a brighter and more sustainable future.

Please turn to slide four. Revenue in the third quarter exceeded $1 billion, which is a record for V2X and was driven by growth in CENTCOM and INDOPACOM. Adjusted EBITDA for the quarter was $64.7 million, or 6.5% margin, and adjusted diluted earnings per share was $0.73.

In the third quarter exceeded $1 billion, which is a record for <unk> and was driven by growth in Centcom and Adobe com.

Adjusted EBITDA for the quarter was $64 $7 million or six 5% margin.

And adjusted diluted earnings per share was 73 cents.

Our margin in the quarter was lower than expected, due to contract mix changes, higher volume for mission and infrastructure support, as well as the performance in certain integrated electronic security programs.

Volume from Michigan and infrastructure support as well.

Performance in certain integrated electronic security programs.

We have taken the actions necessary to improve the program performance issues, we experienced this quarter. Our cash flow generation was strong and have enabled V2X, to reduce its net debt by approximately $89 million, through the third quarter.

Cash flow generation was strong and have enabled <unk> to reduce its net debt by approximately $89 million.

Third quarter.

Furthermore, our solid fundamental profile has allowed V2X to improve its interest expense through a repricing of our Term Loan B. Our backlog in the third quarter increased to $13.3 billion, in all time high for the company, and was driven by bookings of $1.3 billion, which represents a 1.3 book-to-bill for the quarter at over three times revenue.

I'll beat you X to improve its interest expense.

Repricing of our term loan b.

Our backlog in the third quarter increased to $13 $3 billion, an all time high for the company and was driven by bookings of $1 $3 billion.

<unk> represents a one three book to bill for the quarter.

Our backlog represents solid revenue visibility going into 2024. Notable bookings in the third quarter include our $440 million Naval Test Wing Pacific Award, which was which achieved full operational capability in September.

None of our bookings in the third quarter include our $440 million Naval Desperate [laughter] Award, which was which achieved full operational capability in September.

We were also awarded a $190 million contract for training sports services, that I will discuss in greater detail shortly. During the quarter, we continued organic expansion of our environmental capabilities and were awarded an $85 million, two year contract to support the recovery and remediation of drinking water in the Pacific region.

During the quarter, we continued organic expansion of our environmental capabilities and were awarded an $85 million junior contract to support the recovery and remediation of drinking water in the Pacific region.

This win builds on V2X at original work won in December of 2021, to support the Department of Defense with the establishment of a water supply system, for a military housing at Red Hill, Hawaii. Our ability to deliver solutions that generate tangible results, and public health benefits have led, to incremental work and are now helping, to deliver a safe drinking water, to the local communities.

Work and are now helping to deliver a safe drinking water and the local communities.

This capability has also been leveraged to win similar work in Japan. We are proud to be supporting such an important environmental mission, and believe there is significant opportunity to expand our efforts to other geographic reaches.

And believe there are significant opportunity to expand our efforts to other geographic regions.

Additionally, and related to the Pacific. During the quarter, we were awarded a small, but important sub contract to support the establishment of a smart warehousing capability for the Navy in Guam. This builds on our work performed at Naval Base Coronado developing a 5G enabled smart warehouse. In Guam, V2X will provide 5G asset tracking design implementation and testing, as well as cyber-security support.

It related to the Pacific during the quarter, we were awarded a small but important sub contract to support the establishment of a smart warehousing capability for the Navy in Guam, Yes builds on our work performed at Naval base Coronado developing a five G enabled smart or smart warehouse and Guam B to us will provide five.

Asset tracking design implementation and testing as well as cyber security support.

Our continued expansion in the Pacific or INDOPACOM has resulted in 25% year over year increase in revenue in the third quarter. We believe INDOPACOM remains a key growth driver for V2X.

And the 25% year over year increase in revenue in the third quarter. We believe Endo Paypal remains a key growth driver for <unk> of note on October 19th the D O D real Eastern China Military power report, which continues to identify China.

And the 25% year over year increase in revenue in the third quarter. We believe Endo Paypal remains a key growth driver

Of note, on October 19th the DoD released its China Military Power Report, which continues to identify China as a top facing challenge. The report details China's National economic and military strategy, current capabilities and future modernization goals pursuant to that country's stated objectives in the region and across the globe.

Facing challenge.

For a detailed China national economic and military strategy.

Current capabilities and future modernization Gulf for certain pursuant to that country stated objectives in the region and across the globe.

The DoD is continuing to invest in capabilities for new operational concepts, deepening relationships with regional allies, and modernizing its force posture in the region. We remain committed to supporting our clients' initiatives and priorities in the region.

Turning relationships with regional allies, and modernizing its force posture in the region, we remain committed to supporting our clients initiatives and priorities in the region.

I'm pleased to announce that subsequent to the quarter end, V2X was awarded a $458 million, five-year fixed price program to provide organizational, intermediate and limited depot level maintenance and logistics support for the F-5 Adversary Aircraft for the Navy and Marine Corps.

Your immediate and limited depot level maintenance and logistics support for the S. Five administering aircrafts for the Navy and Marine Corps, Yes.

The F-5 contract, combined with our Naval Test Wing Pacific and Atlantic Award equates to over $1.7 billion, we have been awarded with the U.S. Navy over the past 18 months. These wins are a testament, to our strong past performance as well as our commitment to delivering unique and value added solutions that, provide differentiation and enhanced client outcomes.

Alright differentiation and enhanced client outcomes importantly.

Importantly, we are executing the expand the base component of our strategic framework, and we're successful in achieving extended scope, trough client engagement initiatives on existing business, which have yielded $332 million of awards in the quarter and $1.2 billion year to date.

This is a testament to our deep client relationships, past performance and capabilities. Beyond the awards, we've just discussed we believe our strong pipeline of new business, including $6 billion of bids currently pending award, and the $19 billion of bids, we plan to submit over the next 12 months bode well for future growth.

On the awards, we've just discussed we believe our strong pipeline of new business.

<unk> $6 billion of bids currently pending award.

And that $19 billion of beds, we plan to submit over the next 12 months bode well for future growth.

Regarding guidance, based on our performance to date, and the strength of our backlog, we are increasing the 2023 revenue mid point. With respect to adjusted EBITA and adjusted EPS, we are lowering our outlook and midpoint to reflect Q3 performance, reduced joint venture income and the year, as well as delay in national security related effort.

Reduced joint venture income and the year as well as the delay in national security related effort.

Our strong revenue performance and collections year to date, we are maintaining guidance for adjusted net cash provided by operating activities. Please turn to slide 5.

Please turn to slide five.

We are purpose built to deliver technology and operational solutions across the mission lifecycle. We remain focus on providing converged solutions in our core operations and logistics, aerospace training and technology markets.

We remain focused on providing converged solutions in our core operations and logistics aerospace training and technology markets.

Last quarter, we spoke about V2X's operational technology capabilities and solutions and our unique ability to deliver engineering, software development, testing and production solutions in support of modernization and sustainment efforts.

Our development testing and production solutions in support of modernization and Sustainment efforts.

Today, I'd like to discuss the training market and how V2X's is delivering comprehensive global training solutions while shaping the foundation for the modernization of next generation, live virtual and constructive training.

Well training solutions Wow shaping the foundation for the modernization of next generation live virtual and constructive training beat.

V2X has a track record of being a leader in this market with institutional knowledge that has been built over almost 30 years of managing U.S. combat training centers.

Institutional knowledge that has been built over almost 30 years of managing U S combat training centers.

We provide training for any environment, anywhere in the world and proudly support the training of approximately 120,000 war fighters annually. During the quarter, we secured a $190 million, five year fixed price contract to continue providing training and range operation services to the U.S. Army in CENTCOM, specifically at Camp Arifjan and Camp Buehring in Kuwait.

During the quarter, we secured a $190 million five year fixed price contract to continue providing training and range operation services to the U S Army and Satcom.

Typically I can't bear, if Jon and camp Gary Wade.

V2X team will provide training support services, as well as instruction for operation and maintenance of training aids devices and stimulators, fixed and deployable ranges, and numerous facilities.

Fixed and apply what ranges and numerous facilities.

If you visited Kuwait today, you would see V2X employees, providing a full spectrum of services that support that mission lifecycle. This includes operating and maintaining installation, and infrastructures, providing end to end cyber security and network engineering support, aviation maintenance, and repair and training.

This includes operating and maintaining installation and infrastructure, providing end to end cyber security and network engineering support.

Maintenance and repair and training.

This breadth and scale allows V2X the opportunity to deliver a higher value, high impact services through the expansion of scope on existing business and execution of our sell-through model. Beyond CENTCOM, V2X also delivers training solutions at Fort Irwin in California, which is home to the U.S. Army National Training Center.

Beyond Satcom beat your wife's also delivers training solutions at Fort Irwin in California, which is home to the U S Army National Training Center.

All U.S Military Services, as well as other government agencies and some foreign military units train at the NTC. Additionally, V2X provides similar services at the Joint Multinational Readiness Center or JMRC in Germany, which oversees training of US Army Europe.

JMRC provides training capabilities to the U.S. Army European allies, and other partners. JMRC integrates multinational participation into every rotation. As you can see V2X is delivering training capabilities at scale across the globe. We also continue to invest in the future and are developing the next generation of training capabilities, techniques, and enablers. Turn to slide six.

As you can see <unk> is delivering training capabilities at scale across the globe. We also continue to invest in the future and are developing the next generation of training capabilities techniques and enablers.

Turn to slide six.

We remain focused on delivering solutions that can be applied across all aspects of our clients' mission lifecycle. This slide identifies its representative capabilities and programs that V2X is delivering for our clients across the globe.

That's why to identify its representative capabilities and programs.

<unk> is delivering for our clients across the globe.

V2X is differentiating its capabilities and service offerings at the intersection of technology and operations. This scale breadth and diversification of our capabilities and offerings to provide end to end support of our client's requirements, expand the V2X addressable market, provides additional opportunities for our people, and will continue to create value. Please turn to slide seven.

Scale breadth and diversification of our capabilities and offerings to provide end to end support of our clients' requirements.

Expand the V to X addressable market provides additional opportunities for our people and will continue to create value.

Please turn to slide seven.

The capability just discussed are demonstrating momentum, which is visible in our $1.3 billion of awards and record $13.3 billion in backlog. Importantly, our funded backlog is approximately $3.2 billion, which is up from $2.6 billion at the end of 2022. This provides strong revenue visibility moving into 2024. Backlog does not include the $458 million F-5 contract discussed earlier.

Our funded backlog at approximately $3 $2 billion, which is up from $2 $6 billion at the end of 2022.

This provides strong revenue visibility moving into 2024. Backlog does not include the $458 million F. Five contract discussed

Backlog does not include the $458 million F. Five contract discussed earlier. Additionally, backlog does not include the approximately $100 million Cyber security support award.

Backlog does not include the $458 million F. Five contract discussed

Additionally, backlog does not include the approximately $100 million cyber security support award, that was announced in the first quarter as the contract remains in protest status.

As announced in the first quarter as the contract remains in protest status.

Finally beyond the previously mentioned awards, we believe our strong pipeline of new business, including $6 billion of bids pending award, and the $19 billion of bids, we plan to submit over the next 12 months bode well for our ability to continue adding new work backlog. Now I'd like to turn the call over to Shawn for a review of the financials. Shawn?

Our review of the financials Sean.

Shawn Mural: Thank you, Chuck, and good morning, everyone. Please turn to slide eight, where I'll discuss our third quarter results. V2X reported revenue of $1 billion in the quarter, 4.5% growth year over year, which was a record for the company as Chuck mentioned.

Let's turn to slide eight where I'll discuss our third quarter results. <unk> reported revenue of $1 billion in the quarter, four 5% growth year over year, which was a record for the company as Chuck mentioned.

<unk> reported revenue of $1 billion in the quarter, four 5% growth year over year, which was a record for the company as Chuck mentioned.

This topline performance was achieved through expansion on existing programs, the contribution from recent new business phasings and securing over $1 billion recompete programs year to date.

Several successful captures throughout the year have contributed to revenue growth for the company. This includes our initial task order with the Department of State, which was awarded in Q2 and reached full operational capability, approximately two weeks ahead of schedule.

This includes our initial task order with the department of State, which was awarded in Q2 and reached full operational capability approximately two weeks ahead of schedule.

Importantly, our performance has already resulted in additional scope and work related to this effort. Adjusted EBITDA, which adds back merger and integration related costs was $64.7 million with a 6.5% margin.

Adjusted EBITDA, which adds back merger and integration related costs was $64 $7 million with a six 5% Mark.

Adjusted EBITDA and margin in the third quarter was lower on a year over year basis due to contract mix, driven by mission and infrastructure support volume performance, on certain integrated electronic security programs and strong execution achieved in the prior year.

Contract mix, driven by mission and infrastructure support volume performance.

Performance on certain integrated electronic security programs and strong execution achieved in the prior year.

We expect a sequential improvement in adjusted EBITDA and margin in the fourth quarter. Adjusted diluted EPS, which adds back amortization of intangible assets, integration and debt issuance costs was $0.73, based on 31.8 million shares outstanding.

Adjusted diluted EPS, which adds back amortization of intangible assets and integration and debt issuance costs was 73 cents based on 31 8 million shares outstanding.

Interest expense for the quarter was $30.3 million. Cash interest expense, which adds back amortization of debt issuance costs was $28.1 million. Please turn to slide nine, where I'll discuss our year to date portfolio composition.

Please turn to slide nine where I'll discuss our year to date portfolio composition.

Our geographic mix through the third quarter, reflects our progression and expansion in the Middle East and the Pacific. The Middle East comprises 30% of revenue, and the Pacific now contribute 7% of our revenue.

The middle East comprises 30% of revenue in the Pacific now contribute 7% of our revenue.

Our revenue from the U.S. and Europe currently comprises 58%, and 5% respectively. From a client perspective, our engagement initiatives and growth on LOGCAP V have increased our percentage of revenue with the army to 41%.

From a client perspective, our engagement initiatives and growth on Logcap buys have increased our percentage of revenue with the army to 41%.

Navy contributes 31% to revenue and it is expected to increase in 2024, as we execute the full year of Naval Test Wing Pacific, and reach full operational capability on the F-5 program. Right. Regarding contract type, a percentage of cost plus revenue is currently 54%.

Right. Regarding contract type. Our percentage of cost plus revenue is currently 54%.

Regarding contract type.

Our percentage of cost plus revenue is currently 54%.

Based on our current backlog and pipeline, we believe our contract mix will likely remain more weighted, towards cost plus type contracts in the near term. Please turn to slide 10, to discuss cash and liquidity.

Our contract mix will likely remain more weighted towards cost plus type contracts in the near term.

Please turn to slide 10 to discuss cash and liquidity.

Cash generation was strong, and net cash provided by operating activities was $135.2 million year to date. Adjusted net cash provided by operating activities was $83.6 million year to date, which adds back $20.9 million of M&A and integration costs with $13.4 million of CARES Act payments and removes the $85.8 million contribution from the markup.

Adjusted net cash provided by operating activities was $83.6 million year to date, which adds back $20 million to $29 million of M&A and integration costs with $13 4 million affairs after payments and removes the $85 8 million contribution from the Martha.

Cash on the balance sheet at quarter end was $76.3 million, excluding $2 million of restricted cash. At the end of the quarter net debt was $1.132 billion. Our cash generation has enabled us to reduce total debt by $88.9 million year to date.

At the end of the quarter net debt was $1.132 billion.

Our cash generation has enabled us to reduce total debt by $88 $9 million year to date.

The net debt to EBITDA leverage ratio was 3.46. Our strong fundamentals and cash flow profile allowed V2X to achieve improved pricing on our Term Loan B, which occurred shortly after the quarter close. We expect the new pricing to yield over $2 million of annual interest expense savings.

Our strong fundamentals and cash flow profile, although it'd be two extra achieved improved pricing on our term loan b.

Which occurred shortly after the quarter close we expect the new pricing to yield over $2 million of annual interest expense savings.

The company's liquidity position remains strong with over $500 million in capacity, which includes approximately $434 million of availability on our revolver. Please turn to slide eleven.

Please turn to slide 11.

As Chuck mentioned previously, and based on what we are seeing in the business, we are raising the low end and midpoint of our full year revenue projections. This reflects the growth that we have seen on awards from earlier in the year.

Given Q3 results, and our Q4 expectations, we are lowering the ranges for adjusted EBITDA and adjusted EPS. This change incorporates year to date results, including the program performance issues mentioned earlier, reduce JV income and timing of a national security support activities. We are affirming guidance for adjusted net cash provided by operating activities. Chuck, back over to you.

This change incorporates year to date results, including the program performance issues mentioned earlier reduce JV income and timing of any national security support activity.

Chuck Prow: Thanks, Shawn. Please turn to the final slide. I'd like to reiterate our strong belief that V2X is well-poised for future growth, and value creation. V2X is a leader in the operational segment of the broader federal services marketplace with a robust $160 billion addressable market, significant contract backlog, differentiated capabilities, diversified portfolio and alignment till well funded budgets and our clients' most pressing, enduring and contingency critical mission priorities. Now I'd like to open the call to questions. Operator?

Back over to you. Thanks, Sean Please turn to the final slide.

Thanks, Sean Please turn to the final slide.

I'd like to reiterate our strong belief that V. Two axis, well poised for future growth and value creation V to X as a leader in the operational segment with a broader federal services marketplace with a robust 160 billion dollar addressable market significant.

Significant contract backlog differentiating capabilities diversified portfolio and alignment till well funded budget and our clients' most pressing enduring and contingency critical mission priorities now I'd like to open the call to questions operator.

Operator: Thank you. If you would like to ask a question, please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

You May press star two if he would like to remove your question from the queue.

For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

Our first question is from Joe Gomes with Noble Capital Markets. Please proceed.

Good morning. Thanks for taking my questions. Hi, Joe how are you. Good. So Chuck I was wondering maybe give us a little update last quarter you talked about. The <unk> thousand and the Army and the Air Force are the C. D U how those two programs are proceeding here.

Good morning. Thanks for taking my questions. Hi, Joe how are you.

Joe Gomes: Good morning. Thanks for taking my questions.

Chuck Prow:  Hi, Joe. How are you?

Hi, Joe how are you.

Joe Gomes: Good, so Chuck, why don't--maybe give us a little update, last quarter you talked about the GMR-1000 in the Army and the Air Force the CDU. How those two programs are proceeding here?

Good.

So Chuck I was wondering maybe give us a little update last quarter you talked about.

The <unk> thousand and the Army and the Air Force are the C. D U how those two programs are proceeding here.

Chuck Prow: Yes, but both have actually made progress. We've received one of them a sole source. Request for proposal, which we're in the process of providing. Neither of them have started nor will start this year. You know, some of the backdrop there is the current global affair. But again, we're very pleased with our client acceptance of those two capabilities. And in one case again, we have in fact received and are responding to a sole source RFP.

A request for proposal, which we're in the process of providing neither of them have started nor nor will start this year.

Some of the backdrop there is the current global affair, but again, we're we're very pleased with our client acceptance of those two capabilities.

And in one case again, we have in fact received and are responding to a sole source of R. E.

Joe Gomes: Okay. Thank you for that, and then, we've talked about this in the past, you know, in a continuing resolution and normally you have stated how given where you guys are focused, they typically don't have that big of an impact on V2X. I was just wondering, you have a 6 billion of pending awards, obviously, there's plenty more opportunity out there. How if at all, is the continuing resolution impacting you guys the pace of pending awards, or maybe pushing out some of these new opportunities that are out there?

Yeah, we've talked about this in the past you know on a continuing resolution and normally you.

You have stated how given where you guys are focused they typically don't have that big of an impact on.

<unk> I was just wondering.

<unk> 6 billion of pending awards, obviously, there's plenty more opportunity out there.

How if at all is the continuing resolution impacting your guys the pace of pending awards. Or maybe pushing out some of these new opportunities that are out there.

Or maybe pushing out some of these new opportunities that are out there.

Chuck Prow: Joe you're right on-- the continuing resolution does affect the rate and pace of new awards. We're very pleased with our $1.3 billion awards, we just announced here for the quarter. But you can tell by the bids submitted, as well as the 13-- I'm sorry, the $19 billion of bids in the next year, it continues slow as it has for a while. 

<unk> I'm, sorry, the $19 billion of bids in the next in the next year.

It is a continued slow as it has for a while I will tell you.

I will tell you, and you saw some of this in the revenue we just announced, that the OPTEMPO is also a big driver of our business and we are seeing, as you would imagine, very high levels of OPTEMPO, given what's going on across the globe.

That the op tempo is also a big driver of our business and we are seeing as you would imagine a very high level of op tempo, given what's going on across the globe.

Joe Gomes: Right.  And one more from me, if I may, and I'll get back in queue. Great job on the recompetes. But just kind of the flip side, were there any recompetes during the quarter that were meaningful that you lost?

One more for me if I, if I may and I'll get back in queue and great job on the Recompete.

But just kind of on the flip side were there any re competes during the quarter that were meaningful that you lost.

Chuck Prow: No. There was nothing material that was lost. And again as we talked about in the past, as we look into 2024 as well, we have no recompete more than 2% of revenue that will be awarded next year.

As we look into 2024 as well.

We have no we can see more than 2% of revenue that will be that will be awarded next year.

Joe Gomes: Great. Thanks, again. Nice quarter, and I'll get back in queue.

Yeah.

Chuck Prow: Thank you. Good talking to you.

Operator: Our next question is from Ken Herbert with RBC Capital Markets. Please proceed.

Ken Herbert: Yes. Hi, good morning, Chuck, and Mike, and Shawn, welcome to the call.

Chuck and Mike and Sean welcome to the call.

Chuck Prow: Thank you.

Ken Herbert: Maybe Chuck or Shawn, just to start out, is it possible to parse out maybe the gross margin impact in the quarter, from either mix or the-- sounds like a specific program around electronic security or maybe a few programs. But how much of those respectively maybe impacted gross margins or maybe adjusted EBIDTA? But how do we think about parsing those out if possible?

From either mix or the it sounds like a specific program around electronic security or maybe a few programs, but how much of how much of those respectively maybe impacted.

Gross margins are maybe adjusted EBIDTA, but how do we think about Pershing goes out if possible.

Shawn Mural: The best way to think about that is our expectation for the quarter was something closer to $70 million versus $65 million. And the--that gap is from the electronic security program performance issue that we discussed and have addressed, as well as equity income. The remaining amount of EBITDA to the midpoint of the prior guide is all timing related with regard to mix and the National Security that we discussed.

And the that that gap is from the electronic security program performance issue that we discussed and have addressed as well as.

As well as equity income.

The remaining amount of EBITDA to the midpoint of the prior guide is all timing related with regard to mix and the national security that can be a week discussed.

Ken Herbert: Okay, helpful, helpful. And it sounds like your commentary, I mean, the fourth quarter should see a nice sequential inflection, and it sounds like you should have good visibility on that based on the revised guidance. As you look at the fourth quarter, is there any area you'd called out, Chuck, as maybe an area of risk? Or what's the opportunity, as you think about the range of adjusted EBITDA in the quarter that gets you to sort of the upper end or the lower end for the full year?

And it sounds like your commentary I mean, the fourth quarter should see a nice sequential inflection and it sounds like you should have good visibility on that based on our revised guidance as you look at the fourth quarter is there any area you'd called out Chuck as maybe an area of risk or what's the opportunity as you think about the range of.

EBITDA in the quarter that gets you to sort of be up returns oil rins for the full year.

Chuck Prow: Again, I think the risk is associated with timing. You know, there are upsides from our kind of business results perspective, given the current global affairs, but there's also a reality of potential delays. So the fluidity right now, and our clients' demands of us are at a very, very high level, probably the highest level since I've been in the role.

Yes. There are there are there are.

Upsides from our kind of business results perspective, given the current global affairs, but Theres also a reality of potential delays. So the fluidity right now and our clients' demands of US are are at a very very high level probably the.

So I would say the risk is more around timing of things that we had counted on here in the near term. And again it is timing risk. The opportunities aren't going away, it's just a prioritization, given recent global affairs.

And again it is timing with the opportunities aren't going away. It's just a prioritization given recent global affairs.

Ken Herbert: Okay. That's helpful. Because it sounds like it's more just broader timing issues, than specifically around say, timing of the CR. And to that point, I know it's early but your backlog activity, contract activity, everything's great. How much better could topline growth and '24 perhaps be than the implied growth this year?

The implied growth this year.

Chuck Prow: So, again, how I would answer that is around the realities of the current global situation. We have a higher OPTEMPO, as you can see in our revenue. But we have several demand signals from our clients, that have yet to come to fruition. So that would say is that, we see higher OPTEMPO on our current contracts.

We have a higher op tempo as you can see in our our revenue.

But we have several demand signals from our clients.

That have have yet to come to fruition that would say is that we see higher op tempo on our current contracts, we have several demand requirements from our clients, which could lead to new contracts, but at this point in time, none of those have actually closed and <unk>.

That have have yet to come to fruition that would say is that we see higher op tempo on our current

We have several demand requirements from our clients, which could lead to new contracts, but at this point in time, none of those have actually closed. And again the situation remains fluid and we continue our steadfast support of our clients around the globe.

The situation remains fluid and we continue our steadfast support of our clients around the globe ..

Ken Herbert: Perfect. Thanks, Chuck.

Chuck Prow: You're welcome. Good talk.

Welcome to the task.

Operator: Our next question is from Bert Subin with STIFEL. Please proceed.

Hi, good morning, and I appreciate the question. Chuck, has your view towards CENTCOM changed at all following events in Israel? I mean, based on the commentary there, you've noted sort of increased demand indications. I think previously, you know, we were seeing a lot of growth and to INDOPACOM, and I think the expectation was CENTCOM would be pretty flat.   I know Israel itself I think falls into you calm, but I imagine there.

Bert William Subin: Hi, good morning, and I appreciate the question. Chuck, has your view towards CENTCOM changed at all following events in Israel? I mean, based on the commentary there, you've noted sort of increased demand indications. I think previously, you know, we were seeing a lot of growth and to INDOPACOM, and I think the expectation was CENTCOM would be pretty flat.

Chuck as your view towards Satcom changed at all following invest in Israel I mean based on the commentary there you've noted sort of increased demand indications I think previously you know we were seeing a lot of growth and to pay com and I think the expectation was satcom would be pretty flat I know Israel itself I think falls into you calm, but I imagine there.

I know Israel itself, I think falls into EUCOM, but I imagine there's greater demand or greater OPTEMPO in the region. Does that now become a story, where you're seeing sort of increased demand for task orders in both parts of your LOGCAP contract?

Greater demand or greater op tempo in the region.

Does that now become a story, where you're seeing sort of increased demand for task orders and in both parts of your Logcap contract.

Chuck Prow: Actually, because of an alignment a couple of years ago, Israel does fall into CENTCOM. Again, that's a change in the last 18 to 24 months, but I I'll add-- I understood your question is exactly the right question.

Israel does fall into satcom.

Again, that's a change in the last 18 to 24 months, but I I'll add I understand your question is exactly the right question.

And again, just from a provider to our clients' perspective. We see a very balanced response and the associated balanced the on OPTEMPO across both INDOPACOM, CENTCOM, and particularly Eastern Europe. As you are aware from our LOGCAP perspective, we're aligned to both CENTCOM and INDOPACOM, and we stand ready every day to support our clients as their OPTEMPO changes, as well as to provide input to potential new demand signals wherever we can.

We see a very balanced response and the associated balanced the op tempo.

Across both into opaque centcom, and particularly OE Eastern Europe.

As you are aware from our Logcap perspective, we're aligned to both send and opaque.

And we stand ready every day to support our clients as their op tempo of changes as well as due to provide input to potential new demand signals wherever we can.

Bert William Subin: Maybe following up to that, or following up to at least the Ken's question on the margin side. I think if we went back to the merger, Vectrus and Vertex, the blended multiple just by putting you guys together was right around 8%.

I think if we went back to the merger vectors and vertex the blended multiple just by putting you guys together was right around 8%.

I mean, since then, it seems like legacy Vectrus has been outgrowing due to some of those demand indicators that you mentioned. As we think forward, maybe not 4Q, but maybe '24, '25 and beyond, is there enough growth sort of on both sides of the business to where you start thinking about 8% plus of synergies come into the mix?

enough growth sort of on both sides of the business to where you start thinking about 8% plus of synergies come into the mix? And just generally how should we think about the margin you know trying to balance some of these things like I guess, when you're saying contract mix, you're talking about me more cost plus heavy which would make me think probably more leaning toward the vectra side.

enough growth sort of on both sides of the business to where you start thinking about 8% plus of synergies come into the

And just generally, how should we think about the margin, you know, trying to balance some of these things like, I guess when you're saying contract mix, you're talking about being more cost plus heavy, which would make me think, probably more leaning toward the Vectrus side.

So, just any commentary about, how to think about margins and whether you think you can get back, to at least at, or above the blended multiple from the merger or the blended margin?

Chuck Prow: Yes. So let's-- I actually wouldn't characterize that in terms of former like legacy of Vertex and Vectrus. However, the point that you're on is an excellent point. At the time, the merger was announced the approximate cost type mix was 50%.

Yeah, So, let's I I actually wouldnt characterize that in terms of pharmacy like legacy of vertex and Vectra is however, the point that you're on is an excellent point.

At the time, the merger was announced the <unk>.

Submit cost type mix was 50%.

And as you saw in this most recent quarter, we were at 59%. You know, that is--that reflects both continued OPTEMPO and contract awards in our contingency contracts, as well as we just, with the recent awards of $1.7 billion of aerospace contracts that we signed between Test Wing Atlantic Pacific, and the most recent award that we announced year today.

You know that is.

That reflects both continued op tempo and contract awards in our contingency contracts as well as we get.

With the recent award of one $7 billion of aerospace contracts that we signed between test weak Atlantic Pacific.

And the most recent award that we announced here today.

So, those happen to be also cost type contracts, but also in the very early stages of their lifecycle. We've been very fortunate and blessed, to be winning things that above market rate.

Also in the very early stages of their lifecycle.

We've been very fortunate and blessed to be you know.

Winning thing that above market rate it does.

It does take us, you know, an option year or two to blend those cost type contracts up, with additional fixed price add-ons. So long winded answer to your question, we remain committed to margin expansion. The realities of our current portfolio mix play a role in that, and you know, between now and the time, we announce guidance for next year.

To blend those cost type contracts up with additional add ons.

So a long winded answer to your question, we may remain committed to margin expansion. The realities of our current portfolio mix play a role in that and you know between now and the time, we announce guidance for next year.

The realities of our current portfolio mix play a role in that and you know between now and the time, we announce guidance for next year.

We'll package that up very neatly, to include what we expect to do with regard to our broader cost structure throughout '24 into future.

Future.

Bert William Subin: Got it. Okay. Thanks, Chuck. And then just one last question, maybe on the leverage side of things. Can you just update us on what your expectations are for net leverage in '24? I think you guys used to talk about getting two, three times or below three times. Is that still the goal, and during this quarter you paid down quite a bit debt, should we assume that cadence continues?

Can you just update us on what your expectations are for net leverage in 'twenty. Four I think you guys used to talk about getting to three times or below three times is that still the goal and during this quarter you paid down quite a bit that should we assume that cadence continues.

Shawn Mural: Yes. Hi, Bert, this is Shawn. Thanks for the question. So yes, finished at 3.46, relatively flat, right. Sequentially, the goal remains, you know, to get down to 3.0, or around it by the end of next year, continued-- to continue payment of that debt, to help that position overall. So no, no change from that.

Bert This is Shawn thanks for the question. So yeah finished at 3.46.

Relatively flat sequentially.

Sequentially.

The goal remains.

To get down to three point or around it.

By the end of next year continued to can you continued payment of that debt.

Hum.

To help that position overall, so no no. No change from that.

No change from that.

Bert William Subin: Thank you very much.

Operator: As a reminder press star one on your telephone keypad, if you would like to ask a question. Our next question is from Tobey Sommer wit Truist Securities. Please proceed.

These securities. Please proceed.

Tobey Sommer: Thanks. Just so, I understand the impacts on profitability, you know, in the quarter and guidance. Is there a lingering effect, or are you-- have you normalized in terms of profitability relative to your prior expectations post quarter, and post whatever actions you've taken?

Just so I understand the impacts on profitability you know.

In the quarter in the guidance is there a lingering effect or are you a have you normalized in terms of profitability relative to your prior expectations post quarter and post whatever actions you've taken.

Chuck Prow: Yeah, I would say that the activities that caused us, to not meet our own expectations for the quarter are behind us. They were-- as we mentioned on the call, performance related and we obviously aggressively addressed them. We're going to continue to drive, you go ahead, I'm sorry.

Caused us did not meet our own expectations for the quarter are behind us. They were as we mentioned on the call performance related and we obviously aggressively addressed.

We're going to continue to drive, you go ahead I'm sorry.   No no.

We're going to continue to drive, you go ahead I'm sorry.

No no.

Tobey Sommer: No, please Chuck, you can finish.

Chuck you can finish.

I'm done, back to you.  okay, and then relative to the variability of your.

Chuck Prow: I'm done. Back to you.

Tobey Sommer: Okay. And then relative to the variability of your clients needs, due to current events is there, does that represent more risk to what you had expected to occur? Or is it a, you know, a more evenly split set of risks and opportunities, depending on how things play out?   How things play out. I would I would say on that on that spectrum. more opportunity with regard to volume. And the risk will be in mix, because there are certain aspects of our business and attract higher margin. That may not be as aggressively pursued by our clients as they deal with the. the real world challenges that that largely up here through

Tobey Sommer: Okay. And then relative to the variability of your clients needs, due to current events is there, does that represent more risk to what you had expected to occur? Or is it a, you know, a more evenly split set of risks and opportunities, depending on how things play out?

Clients needs.

Due to current events is there does that represent more risk to what you had expected to occur or is it a you know a more evenly split set of risks and opportunities depending on.

Chuck Prow: I would say on that spectrum more opportunity with regard to volume. And the risk will be in mix, because there are certain aspects of our business that attract, you know, higher margin that may not be as aggressively pursued by our clients, as they deal with the real world challenges that largely appear that through contingency type contracts. 

How things play out. I would I would say on that on that spectrum. More opportunity with regard to volume. And the risk will be in mix, because there are certain aspects of our business and attract higher margin. That may not be as aggressively pursued by our clients as they deal with the.

I would I would say on that on that spectrum.

More opportunity with regard to volume.

And the risk will be in mix, because there are certain aspects of our business and attract higher margin.

That may not be as aggressively pursued by our clients as they deal with the.

The real world challenges that that largely up here through.

Tobey Sommer: Okay. That makes sense, and then you had mentioned relative sort of lack of concentration of recompete risk next year, with nothing over 2%. Is the overall year, a below average recompete year, or are you just trying to convey there's nothing sort of hugely consequential that's up for rebid?

Okay that makes sense and then you had mentioned.

Relative lack of concentration of Recompete risk next year with nothing over 2% is the overall year a below average recompete year or are you just trying to convey there is nothing sort of hugely consequential that's up for rebid.

Relative lack of concentration of Recompete risk next year with nothing over 2% is the overall year a below average recompete year or are you just trying to convey there is nothing sort of hugely consequential that's up for rebid.

Chuck Prow: Both points as we've been talking about this now for a while, we are again very fortunate and blessed, to be very front end loaded on our backlog, because of the recent awards. So I would say, you know, even as we get into '25, the recompete risk will be, kind of a lower than average, and that all kind of begins to normalize, into '25 and into '26.

Because of the reset awards.

So I would say.

You know, even as we get into 'twenty five D D.

We can peak risk will be kind of lower than average and that all kind of begins to normalize and a 25% to 26.

Tobey Sommer: Okay. And then with respect to aircrafts training and maintenance that you've had some kind of a string of success on here, over the last 18 months. Is there more opportunity there, and if so, is it, you know, new platforms or other military branches? Thanks.

With respect to.

Aircrafts.

Training and in maintenance that you've had some kind of a string of success on here over the last 18 months.

Is there more opportunity there. Is there more opportunity there.

Is there more opportunity there.

Hum.

And if so is it a.

New platforms or.

Other military branches.

Chuck Prow: We have, we continue to be thrilled, with the performance of our Aerospace team from a new business perspective. All three of the major components of that $1.7 billion were takeaways from competitors.

We continue to be thrilled with the performance of our aerospace team from a new business perspective.

All three of the major components of that $1.7 billion were takeaways from competitors.

So our teams are performing very well, as we've talked about in the past, Tobey, we have had some headwinds in terms of airframe retirements and the KC-10, and the T-1A. The bulk of that headwind occurred here.

So our teams are performing very well, as we've talked about in the past, Tobey, we have had some headwinds in terms of airframe retirements and the KC-10, and the T-1A.

Airframe retirements and the KC 10, and the T. One eight.

The bulk of that headwind occurred here.

The bulk of that headwind occurred here, in '23 and both of those frames will get down to their kind of stated levels, by the middle to the end of next year. And then once that happens, we have no known retirement headwinds again for quite some time.

In 'twenty, three and both of those frames will get down to there kind of stated levels by the middle to the end of next year and then once that happens that we have no known retirement headwinds again for quite some time.

Thank you very much.  I appreciate it good talking to you.

Tobey Sommer: Thank you very much.

Chuck Prow: I appreciate it. Good talking to you.

I appreciate it good talking to you.

Operator: We have reached the end of our question and answer session. I would like to turn the conference back over to Chuck for closing remarks.

Very good. Thank you very much. Thank you for joining us today. Again welcome to Shawn. We look forward to talking to you again next quarter. Have a good rest of your day. Thank you.  Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Chuck Prow: Very good. Thank you very much. Thank you for joining us today. Again welcome to Shawn. We look forward to talking to you again next quarter. Have a good rest of your day. Thank you.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

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