V2X, Inc. Q2 FY2024 Earnings Call

Thank you for joining us for the V2X Second Quarter 2024 Earnings Conference Call and Webcast. Today’s call is being recorded. My name is Megan and I’ll be the operator for today’s call. 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.

Thank you. Good morning everyone. Welcome to the V2X second quarter 2024 earnings conference call. Joining us today are Jeremy Wensinger, President and Chief Executive Officer and Shawn Mural, 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 2. During today’s presentation, management will be making forward-looking statements pursuant to the Safe Harbor provisions of the federal securities laws. The company assumes no obligation to update its forward-looking statements. In addition, in today’s remarks, we will refer to certain non-GAAP financial measures, because management believes such measures are useful to investors. You can find a reconciliation of these measures to the most comparable measure, calculated and presented in accordance with GAAP on our slide presentation and in our earnings release, both of which are available on the Investor Relations section of our website. At this time, I’d like to turn the call over to Jeremy.

Thank you, Mike, and good morning everyone. Thank you for joining us today. Before I get started, I’d like to thank 16,000 V2X employees for their warm welcome. I am honored to be part of the organization that is supporting some of the most important missions around the globe and play such a critical role in our national security. V2X reported record quarter two revenue of $1.1 billion, increasing 10% year-over-year. Growth was driven by the company’s continued momentum in the Pacific and Middle East. Adjusted EBITDA margin in the quarter was 6.7% and adjusted diluted EPS was $0.83. The demand for our mission-oriented full lifecycle solutions remains strong and was demonstrated through several recent awards valued at over $4 billion. This includes a production award for our Gateway Mission Routers, an award from NASA valued at $265 million, the award of the adversarial aircraft program named F-5 at $747 million, and finally, a $3 billion plus award to deliver next generation readiness. Given our year-to-date performance, backlog, and awards, we are raising our 2024 revenue guidance and reaffirming our adjusted EBITDA, EPS, and net cash from operations. Our focus on providing mission-based technology solutions that enable assured communications is yielding results. This was exemplified in approximately $280 million of recent awards, which are listed on the left-hand side of the slide. First, V2X secured a $49 million award to provide enhanced communications across multiple domains with the Gateway Mission Router, or GMR. GMR has broad applicability across numerous aviation and ground platforms and we believe offers opportunity for growth beyond this initial award. Additionally, we believe GMR is positioned to be a key enabler for the Department of Defense Combined Joint All-Domain Command and Control initiative. Next, V2X is delivering assured communications to the U.S. Navy, while further expanding its footprint in the Pacific. Our new 5-year $88 million Naval Computer and Telecommunications Pacific award, also known as NCTAMS, will provide vital C4I support to over 700 U.S. and allied forces across the Pacific and Indian oceans. Moving to the center of the slide, V2X continues to be a leader in providing global solutions to our customers’ most critical and high-impact missions. This market strength was recently demonstrated through approximately $1 billion of awards, including our 9-year award to support NASA operations and preparedness for the upcoming Artemis 2 mission. Lastly, V2X is harnessing its capabilities to deliver next generation readiness solutions for customers, recently securing an award valued at $3 billion over 5 years to enable full spectrum readiness. This award is representative of the capability synergies that can be generated by V2X. V2X has a robust set of solutions that being further leveraged to pursue new opportunities. Our new business pipeline will continue to reflect the opportunity presented by the combination of our capabilities. With that, I’d like to turn the call over to Shawn for a review of the financials.

Thanks, Jeremy. It’s a pleasure to be working with you and thanks to everyone joining us today. Strong top line performance continued in Q2. Record revenue of $1.072 billion in the quarter represents growth of 10% year-over-year. Revenue growth in the quarter was again achieved through the expansion of existing business in the Middle East and Pacific regions as well as new programs. Adjusted EBITDA in the quarter was $72.3 million delivering a margin of 6.7%. As a reminder, we are referring to certain non-GAAP financial measures, because we believe such measures are useful to investors. Interest expense for the quarter was $28.8 million. Cash interest expense was $26.8 million. Adjusted diluted EPS was $0.83. I’d like to point out that the adjusted tax rate in the second quarter was 28% due to the executive transition, so our adjusted tax rate would have been approximately 23% yielding adjusted EPS of $0.88. Consistent with our expectations, year-to-date revenue is $2.083 billion, increasing 8% year-over-year. Adjusted EBITDA for the first half of the year was $141.4 million or a 6.8% margin compared to $147.1 million in the prior year. Year-to-date, adjusted diluted EPS was $1.72 based on 31.9 million weighted average shares. Year-to-date, net cash used by operating activities was $31.6 million. Adjusted net cash used by operating activities was $137.3 million. During the quarter, we repriced and extended a $904 million term loan B, yielding an 85 basis point improvement in interest rate pricing since October of last year. Net debt improved by $27 million compared to prior year. The net debt-to-EBITDA leverage ratio was 3.6x at the end of the quarter. Total backlog was $12.2 billion in the second quarter, representing approximately 3x revenue at the midpoint of guidance. We expect backlog to increase in the second half of the year due to awards and contract definitizations. Given our strong year-to-date top line performance, we are raising our revenue guidance to $4.175 billion to $4.275 billion. We are reaffirming adjusted EBITDA, adjusted EPS, and adjusted net cash from operating activities.

Thanks, Shawn. I’d like to close with some observations and what I believe are opportunities for V2X to achieve its next stage of growth and drive additional value. V2X has the size and scale to compete in its core markets. Additionally, our global footprint, spanning over 50 countries, is an extremely important differentiator. V2X is aligned to well-funded federal budgets, including the largest component of the DoD spending at over $300 billion annually. Furthermore, V2X has solid past performance in all aspects of its business that provides excellent insight into how missions are evolving. In terms of opportunities, the market is rapidly evolving, and V2X is in a great position to accelerate technology insertion, such as artificial intelligence and machine learning, into the missions we support. Our new business pipeline will continue to reflect the opportunity presented by the combination of our capabilities. We are in the early stages of what we can achieve and see multiple opportunities to build on this win. In conclusion, V2X has great momentum, and I believe there is substantial opportunity to build upon our strong performance. The core of our foundation remains our employees and our commitment to deliver differentiated solutions to ensure customer mission success. Now I’d like to open the call to questions.

Our first question comes from Joe Gomes with Noble Capital. Please go ahead.

Good morning and thanks for taking my questions.

Good morning, Joe.

Good morning, Joe.

Jeremy, welcome on board. Nice to meet you, even though telephonically. Just wondering what your initial impressions are. What you see, what you like, and where you think some of your focus needs to go.

Thank you for the question, Joe. My first impression is that I’m genuinely impressed with the people. The talent in this company is remarkable, doing impressive work around the globe. It’s more complex than I thought. I had the opportunity to meet with the management team in our Indianapolis facility, and I was genuinely impressed with their demonstrated performance and the growth they have achieved. I believe there’s a lot to build on, particularly in areas of execution and performance excellence. As we come out of integration, our focus will be on optimizing and leveraging the broader portfolio.

Thanks for that, I appreciate it. One of the things in the past couple of quarters has been the awards pace. Is the pace of awards coming out as you expected or is it slower due to last year’s continuing resolution?

In the quarter, we had a book-to-bill that was around $0.7 billion. When we think about year-to-date, we’re looking at about $1.5 billion in award. We expect that to pick up in the back half of the year.

Can you give us any color on what the pipeline stood at the end of the quarter?

I don’t think there was any material change to the pipeline. It’s consistent with what you’ve seen in the past. I am more excited about what the pipeline will look like as we come out of integration and start leveraging our combined capabilities.

I appreciate it. I’ll jump back in the queue.

Our next question comes from Tobey Sommer with SunTrust. Please go ahead.

I wanted to ask a question about the forward outlook with the slightly better revenue growth but holding the profit metrics in line. What are the factors restraining profit metrics from accompanying the higher expected revenue?

Some of it is the contingency support we do around the globe. We are seeing good strong continued growth in the Middle East, which often has a lower margin. We expect to drive improvements from contract actions in the second half of the year.

Can you give us an indication of the book-to-bill for the year?

We expect the book-to-bill to end around 1.0 for the year.

Any significant protests or recompetes for us to consider?

The big one was the F-5 that we’re transitioning on. There’s nothing material in the back half of this year.

Thank you very much.

Our next question comes from Ken Herbert with RBC Capital Markets. Please go ahead.

Jeremy, I wanted to drill down into some of the comments on the optimization opportunities. Can you provide more granularity on the areas for better margin performance or investing in areas of growth?

Optimization is about providing local teams the information that allows them to enhance performance at all levels whether it's through the supply chain, staffing, or execution. We will leverage our engineering capabilities and global footprint as differentiators.

Can you provide early indications on how margins might progress into next year?

There is some seasonality in margins that we typically see, so it would be early to talk about ‘25, but it’s likely margins won’t be at par with the end of 2024.

Can you walk through the free cash outlook for the second half of the year?

In the second quarter, we had a timing impact on receipts. We expect to get back on track in the second half of the year to meet our commitments.

Our next question comes from Trevor Walsh with Citizens JMP. Please go ahead.

How are you positioning resources to deal with the complexities in the geopolitical environment?

Our global footprint is a true differentiator and aligns well with where government is spending, especially in the Pacific and Middle East regions.

Can you provide more details on the GMR contract?

I’m excited about GMR. This is a proven capability, and our goal is to move it into a program of record which will benefit many vehicles and aircraft.

Can you give us color on how backlog should track for the balance of the year?

We expect bookings to increase, especially in Q3 and Q4, as we capitalize on our global network to meet customers’ needs.

Can you help us understand the sequential progression in margin given the growth in the Middle East?

We expect continued growth, but may see a mix of lower margin contracts in the region. We expect productivity improvements in the back half of the year.

Can you give us clarity on the next generation readiness contract?

We’re not at liberty to name it, but it is a notable single award that we will be working through with the customer.

Any thoughts on the interest expense guidance?

The guidance is around $111 million for the total year, reflecting some of the restructuring efforts we've implemented.

Optimization is about providing our teams with the right information and tools they need to execute their programs. This is a shift from integration to a focus on leveraging operational insights to enhance performance.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jeremy Wensinger for any closing remarks.

Thank you for your questions today. I am excited to be here. The welcome has been exceptionally warm and I look forward to working with you all as we drive this company forward.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.