Earnings Call Transcript - VVX Q3 2025

Operator, Operator

Thank you for joining us for the V2X Third Quarter 2025 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Steve, and I'll be the operator for today's call. Now I'll pass the call over to your host, Mike Smith, Vice President of Treasury, Investor Relations and Corporate Development at V2X.

Michael Smith, Vice President of Treasury, Investor Relations and Corporate Development

Thank you. Good afternoon, everyone. Welcome to the V2X Third Quarter 2025 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. 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. 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 filed with the SEC, both of which are available on the Investor Relations section of our website. At this time, I would like to turn the call over to Jeremy.

Jeremy Wensinger, President and CEO

Thank you, Mike, and good afternoon, everyone. Thank you for joining us today. I am proud to share the results from this quarter. The dedication of our team continues to drive outstanding execution. Please turn to Slide 3. During today's call, I'm going to recap our third quarter results, discuss our positioning and how our strategic execution has created tailwinds for growth. Let's start with our quarter 3 results. Performance was strong, yielding both record revenue and adjusted EPS in the third quarter. Revenue increased 8% year-over-year to $1.17 billion, delivering adjusted EPS of $1.37. Adjusted EBITDA was $85 million in the quarter or a 7.3% margin. Importantly, to date, we have not seen a material impact on our business from the current government shutdown. If anything, this event has reinforced just how essential our services are to the government. Last quarter, Shawn and I described our capital allocation strategy to you. Since then, we've been executing on this strategy. During the quarter, we completed an acquisition that brings new capabilities and increases access to customers in the intelligence community. This customer access cannot be understated, and we believe it will add to our already robust pipeline. Additionally, we repurchased $10 million worth of shares in the quarter, further driving value for our shareholders. Our strategic execution is paying off. This quarter, we delivered a solid 1.2x book-to-bill ratio, which speaks to the strong demand we are seeing. We also recently achieved 2 of the 5 major captures we've been pursuing that I discussed in prior calls. This includes the T-6 and F-16 Iraq program, each worth over $1 billion, demonstrating the momentum we are building. We remain optimistic about what's ahead. Given our performance to date and the trends in our business, we're increasing the midpoint of our revenue, adjusted EBITDA, and adjusted EPS ranges. Although we have not seen a material impact from the government shutdown, we are proactively lowering the midpoint of our cash flow guidance to account for possible temporary delays in collections. I want to emphasize this is only a timing related and not reflective of the underlying changes in our business. Please turn to Slide 4. Our customers are seeing differentiation in our solutions and offerings and the programs on this slide showcase those examples. From start to finish, we work alongside our customers, delivering a full spectrum of capabilities that maintain readiness around the globe. In the last 18 months, we've won 3 strategic awards greater than $1 billion using the breadth of the company and execution. The cumulative value of these awards exceeded $9 billion. An example is the previously announced T-6 award. This is a cornerstone award and critical to the readiness by ensuring that every single Navy, Air Force, and Army pilot will be trained by V2X. This ties into the theme you're seeing in the training, mission support, and modernization that are foundational to everything we provide. While this award is under protest, we're confident in our solution and continue to execute the transition activities to support our customer. We've been awarded what we expect to be a $1 billion foreign military sales for the Iraq's F-16 program. This, coupled with our $425 million cockpit modernization contract with the U.S. Air Force showcases our expertise in supporting the F-16 fleet for multiple customers. Finally, we were awarded approximately $275 million for rapid prototyping, engineering, integration, and follow-on support for platforms like Tempest, our counter-UAS solution, and our Gateway Mission Router family of systems. There's a strong demand for our technology, and I'll touch on that later. These awards are validation of our partnership with our customers and the disciplined execution of our strategy. Please turn to Slide 5. V2X is capitalizing on large and growing market opportunities while investing in technologies that will shape our future and our industry. We see data and AI as powerful tools that can deliver mission success. These tools help us enhance readiness, drive efficiencies, and even change the way the marketplace operates. Combined with our operational experience and close relationships with our customers, we are in a strong position to turn data into real decision advantages. On the readiness front, we continue to expand our training portfolio and a good example is that of our support of the Army's Saber Junction training exercise in Germany, which simulated chemical attacks. This demonstrates how the scope of our training portfolio continues to expand. Additionally, our focus areas on readiness and modernization continue to align with our customers' mission and budgetary priorities. Our counter-UAS platform has demonstrated our capabilities to deliver rapid prototyping and hardware integration to support customers. In the near future, we are expecting orders from new customers looking to deploy the platforms in various theaters around the globe. We are now leveraging the core capabilities of that system to adapt it for use across other operational environments and emerging threat landscapes, positioning us for continued growth. With the combination of our investments in technology, our ability to convert opportunities into success and our over $50 billion pipeline, our path forward looks strong. With that, I'll turn the call over to Shawn for a review of our financials.

Shawn Mural, Senior Vice President and CFO

Thank you, Jeremy, and good afternoon, everyone. Please turn to Slide 6. Our momentum continued in the third quarter, reflecting focus on operational performance. Revenue in the third quarter increased 8% to $1,167 million. Growth was fueled by the WTRS, F-5, and Iraq F-16 programs. Adjusted EBITDA in the quarter was $85.2 million, delivering a margin of 7.3%. Interest expense in the third quarter was $20 million. Cash interest expense was $18.4 million, improving $7.2 million year-over-year. Net income for the quarter was $24.6 million. Adjusted net income was $43.7 million, up 6% year-over-year. Third quarter diluted EPS was $0.77 based on 31.9 million weighted average shares. Adjusted diluted EPS in the quarter increased approximately 6% to $1.37 from the prior year. Adjusted operating cash flow in the quarter was $35.8 million. We are leveraging our strong balance sheet. During Q3, we made notable progress executing our capital allocation strategy. As Jeremy mentioned, we completed a small acquisition that provides additional market opportunity and repurchased $10 million worth of shares. These activities clearly demonstrate our focus on delivering value for our shareholders. Please turn to Slide 7, where I'll discuss our year-to-date results. Year-to-date revenue was $3,261 million, up 3% year-over-year. Adjusted EBITDA increased 5% for the first 9 months of the year to $234.6 million, reflecting a 10 basis point increase in margin to 7.2%. Year-to-date interest expense was $60.3 million. Cash interest expense was $55.7 million, improving approximately $22 million compared to the prior year period. Year-to-date net income was $55.1 million. Adjusted net income was $117.5 million, increasing 22% year-over-year. Diluted EPS in the first 9 months was $1.73. Adjusted diluted EPS was $3.68, up 22% compared to last year. Year-to-date net cash used by operating activities was $27.5 million. Adjusted net cash used by operating activities was $24.1 million. Please turn to Slide 8. Our strategy and the continued demand for our solutions is yielding awards that support future growth and value creation. This was reflected in third quarter net bookings of $1.4 billion and sequential backlog growth of approximately $240 million. Total backlog at the end of the third quarter was $11.6 billion. Funded backlog was $2.3 billion. With respect to the current government shutdown, the impact on the funding or operations of the current contracts has been modest to date. We feel it important to note that backlog does not include the approximate $4 billion T-6 award as it is currently under protest. We continue to execute the transition activities supporting the customer at this time. Additionally, as it relates to the F-16 Iraq program, backlog does not reflect any value beyond the transition amount initially awarded in Q2 of this year. The contract is currently being definitized and we expect these programs will add substantially to our backlog and ability to continue our growth. The book-to-bill ratio for the trailing 12 months was 0.9x. Looking ahead, based on potential slippage of awards due to the shutdown, we believe the book-to-bill will be below 1 for the full year and accelerate to above 1 in fiscal year 2026. With that said, I want to be clear that we believe the company is in an excellent position to demonstrate top-line growth heading into 2026. Let's move to Slide 9 for our updated guidance. We continue our focus on execution. Given our solid performance, we are increasing the midpoint of our 2025 guidance for revenue, adjusted EBITDA, and adjusted EPS to $4.5 billion, $316 million, and $4.95, respectively. We're proactively lowering the midpoint of our adjusted operating cash flow guidance to account for potential timing delays and collections related to the government shutdown. These adjustments reflect potential near-term payments or contract actions that we had contemplated being completed by year-end 2025, which may now slip into 2026. Again, this is purely a timing adjustment and doesn't reflect any changes to the fundamentals of the business. Overall, we're very pleased with the execution of our strategic priorities, ability to deliver differentiated technology solutions, and strong program performance. We are confident in a strong close to 2025 and continued momentum into 2026. Jeremy, back to you.

Jeremy Wensinger, President and CEO

Thanks, Shawn. Please turn to Slide 10. We want to provide some additional color about 2026. With solid awards secured and minimal recompete exposure, we're confident of our future growth. In addition to our continued success in training programs like the WTRS, recent wins like our rapid prototyping awards and the Iraq F-16 program support top line growth next year. The completion of contingency task orders is partially offsetting this growth. Overall, the net of these items are expected to drive year-over-year revenue growth in 2026. A successful outcome of the T-6 protest would have incremental improvements in 2026. While we're keeping an eye on potential impacts from the ongoing government shutdown, our essential mission-critical work gives us confidence in the strength of demand. The maturity of the company is becoming increasingly apparent in our ability to capture and win new business. We continue to deliver on our commitments. We are proud of our third quarter performance. Our teams continue to bring the full spectrum of V2X to meet our customers' critical mission requirements. And with that, I'd like to open the call to questions.

Operator, Operator

The first question comes from Peter Arment with Baird.

Peter Arment, Analyst

Nice results. Shawn, could you just give us a little more color on the reduction in the cash? You said it's sort of being more cautious just given the government environment. But if the government reopens here relatively soon, does that change? Or how are we approaching that?

Shawn Mural, Senior Vice President and CFO

Yes, thank you. It's good to hear from you, Peter. In our guidance, we've considered certain contract actions that are a normal part of our business, including routine change orders. These may not happen immediately, even if the government were to reopen tomorrow. We're noticing that while we're still receiving payments, the timing has been stretched out, averaging about 7 days longer now compared to the first half of the year. As a result, we felt it necessary to lower the midpoint by about $25 million, mainly due to timing. We don't believe there's a risk to the receipts; it's just a matter of whether they get pushed into 2026. That's our perspective on it.

Peter Arment, Analyst

Got it. I appreciate that. And then just, Jeremy, you've talked a little bit about this year about just a much bigger qualified pipeline and the ability to bid more. Maybe you could just give us a little more color on how you're doing and making progress there.

Jeremy Wensinger, President and CEO

I previously mentioned that we hired Roger Mason as the Chief Growth Officer. We are seeing the company's maturity becoming evident. I am pleased that we have retired 2 of the 5 major initiatives we previously identified as successful. We will see how T-6 develops, but the company's maturity and the growth organization's development are enhancing our ability to win, build a pipeline, and explore various opportunities. I am particularly excited that the bids I am observing are engaging the entire company in these initiatives, which is making a significant difference.

Operator, Operator

The next question comes from Jon Siegmann with Stifel.

Jonathan Siegmann, Analyst

Just real quickly, a simple one for you. So you're very clear that you did not include T-6 award in the backlog. But just because there are some companies in the public arena that do include protested contracts in the backlog, I just wanted to confirm this is your standard practice and not an indication of any higher risk associated with this decision.

Shawn Mural, Senior Vice President and CFO

Yes, absolutely. It's our policy that we have. Anything in protest, we would not take a booking on. There is a modest amount of work that we are doing today, to be very clear, on transition. We did book that, but it's low single-digit millions. The main award, should it stick to the schedule that it was awarded under, would have us begin work in February of 2026 and then go on for the period of 10 years. None of that work is in backlog, and that's our standard practice, Jon.

Jeremy Wensinger, President and CEO

And Jon, just to be clear, that modest transition that we're doing was funded.

Jonathan Siegmann, Analyst

That's real helpful. And then the other 3 of the 5 contracts that you're elephant hunting there, is there any sense of when the timing of those could be? Is that probably all delayed with the government shutdown as well?

Jeremy Wensinger, President and CEO

It's a great question. I think it's still to be determined, but we're actively bidding on a few of those. We will see what happens with the government shutdown and the timing of awards. Right now, it's all a bit uncertain because many of our contracting officers are not at work. As Shawn mentioned, on the cash side, we are waiting for them to process contract modifications. So this remains unknown for now. However, once we have clarity about the government resuming operations, we will have more information because they will be back to work and we can ask those questions.

Operator, Operator

The next question comes from Andre Madrid with BTIG.

Andre Madrid, Analyst

Not to harp on the shutdown, but it is the elephant in the room here. I mean, how should we think about this weighing on the potential benefit of your previously disclosed recompete holiday? Does this kind of just get pushed out into '26, like what you guys teased on the 10 slide there?

Shawn Mural, Senior Vice President and CFO

Well, yes, candidly, that's a lot of why we wanted to talk a little bit and give some color around '26. So I think we say, right, 7% recompetes next year. As we sit here today, one, that's a great spot to be in, of course. We'll see how those recompetes play out. I mean there's always the opportunity to do a bridge or exercise an extension or something, I don't know. But again, I think we feel good in terms of where we sit today, what we have in backlog and our ability to continue to grow.

Andre Madrid, Analyst

Got it. Got it. And I guess on that point, looking at '26, I feel like each quarter, it looks like growth could be kind of lumpy based on the service branch based on the geography. But I guess, as we look ahead into the new year, what do you really expect to be the fastest-growing branches and geographies?

Shawn Mural, Senior Vice President and CFO

Well, I think a couple of things. Thanks for the question. I'll give a little bit of color. I think we'll see cost-type revenue grow faster, I should say. When we think about things, we see that becoming a greater percentage of the portfolio. I think we see from a region standpoint, the U.S. growing faster than some other areas. And that's, again, things like we've seen WTRS, things of that nature. So that's a little bit of additional color as we sit here today. There's a lot to go relative to funding, right? So again, we're trying to provide a little bit of color and context for '26. Funding, as you can imagine, in light of the shutdown is a significant variable, right? Customers are making changes and stuff like that to do as much as they possibly can. So I am certain that, we will provide additional clarity and visibility to you as we report Q4, but felt it very important because we're seeing good demand. You saw a very good book-to-bill in the quarter. That had been a question previously. So hopefully, that gives you a little bit more color.

Operator, Operator

The next question comes from Ken Herbert with RBC Capital Markets.

Kenneth Herbert, Analyst

When we look at the strong growth in the third quarter, you called out specifically F-16, F-5, and WTRS driving the 8% growth. Is it possible to parse that out a bit? Were any of those maybe a little better than expected or better performance on contracts in the quarter?

Shawn Mural, Senior Vice President and CFO

Not really. I think things are playing out kind of as we expected. We did get some modest material that had previously been planned to come in Q3 came in, but it wasn't really significant, to be honest with you, Ken. I think we're, again, happy with where we sit. We see sequential growth continuing as we go into Q4. Obviously, you saw us bring up the low end of the range as a result of that. Still, some variables out there, of course. But the strength of those 3 programs continues, and we expect that trajectory to continue into Q4.

Jeremy Wensinger, President and CEO

Yes. And Ken, I would just add, I think Shawn has been very clear all year long. The second half of the year was going to be the opportunity for us based on program execution on F-5 and on the WTRS program. So again, I don't think anything we saw in the quarter was really unexpected. The program team is executing the way they should execute. They're doing great, and we're just bringing these programs online.

Kenneth Herbert, Analyst

That's great. And as we look at the revised guide, it implies a bit of a sequential step down in margins into the fourth quarter. Is that maybe just conservatism? Or is there anything else we should keep in mind on that?

Shawn Mural, Senior Vice President and CFO

There's always some timing of expenses. We have some additional expenses in the fourth quarter, but they were not unanticipated. The teams have effectively managed risks, and nothing stands out as overly significant. Overall, we're pleased to raise the midpoint of our guidance to approximately $3.5 million to $4 million, along with about a 10 basis point increase in margin compared to our previous midpoints. So, primarily, it's just a matter of expense timing.

Kenneth Herbert, Analyst

That's great. Nice results, you guys.

Operator, Operator

The next question comes from Tobey Sommer with Truist.

Tobey Sommer, Analyst

What does the opportunity look like for sales ongoing and new sales outside the U.S., maybe just to push it outside the constraints of a shutdown?

Jeremy Wensinger, President and CEO

I think the one we announced on the F-16 with Iraq is an emerging opportunity for us on the FMS side. I think that is an opportunity that customers see what we're doing for our primary set of customers, and those country customers are really saying, 'Hey, I want that kind of support, and I need that kind of modernization.' So that part has been an opportunity for us to look at how do we take what we do for the U.S. government and take it to these other countries that need our support and are allies of the U.S. So I think outside the country, that's a channel for us. But inside the country, it has been really the modernization side of it, along with the work that we're doing in the aero business.

Tobey Sommer, Analyst

If we fast forward 2 or 3 years from now, do you think you'll have a wider array of foreign military sales contracts that you'll be working on?

Jeremy Wensinger, President and CEO

The foreign military sales require a significant amount of time, making it challenging for me to predict exactly what the situation will look like in three years. We've been engaged in the F-16 FMS deal for some time, so I can't specify when a country will make a decision or the timing involved. However, I appreciate the demand pull that we are experiencing. Other countries are observing our work with the U.S. government and expressing their interest. Being present in the region is something we often discuss as it drives demand for our services. Having logistics and support in that region allows for a smoother process for them. It is difficult for me to project three years ahead, but I can say that being closely aligned with our customers in the region and the visible support from our allies has generated a demand pull that I find encouraging.

Shawn Mural, Senior Vice President and CFO

I think a great example of that to amplify it is our Tempest product, right, that was highlighted at the recent AUSA. When we think about global demand for a product like that, that has applications around the globe, the team is sensing some strong demand pull. Jeremy mentioned it, I think, in his prepared remarks. So could those things go FMS? Could they go DCS? I don't know. We'll see. It's an emerging market for us. We're really happy with the rapid prototyping and our ability to deliver that capability in a very short period of time, and it's getting some good traction from customers.

Tobey Sommer, Analyst

Appreciate it. And then with respect to the timing of payments and the elongation of DSO, is that a widespread phenomenon with the shutdown? Or is it a discrete impact of some payment offices that just happen to matter for the company?

Shawn Mural, Senior Vice President and CFO

Yes, it's interesting. As I mentioned earlier when Peter asked, we are noticing that payments are taking longer, roughly 7 days more than what we experienced earlier this year. The issue here is that there are sometimes contract actions requiring adjudication to facilitate the movement of funding to the appropriate claims and similar matters. This represents a secondary effect of the current inability to resolve those issues. Will they be completed by the end of the year? Potentially. We don't perceive any overall risk; it is purely a matter of timing regarding the movement of funding for a specific claim, for instance, which needs to be authorized before we can issue the invoice and accommodate what are now extended payment terms compared to what we have seen in the past. It's nothing more than that, if that clarifies the situation.

Operator, Operator

Next question comes from Joe Gomes with NOBLE Capital.

Joseph Gomes, Analyst

Congrats on the quarter. I was wondering, maybe you can give us a little update on the efforts in the INDOPACOM and how that transpired in the third quarter and what you're seeing here for the fourth quarter?

Jeremy Wensinger, President and CEO

We remain very confident in our position in INDOPACOM. Being present in the region has provided us with the opportunity to engage with the customer both directly and indirectly. I believe INDOPACOM is an emerging market for us, particularly with the potential mentioned regarding the Tempest unit. There is a chance for us to continue expanding our presence in that area. While I am a bit disappointed that some training activities fell short of our expectations for the year, overall, we are very proud of our positioning and look forward to maintaining a long-term relationship with that customer in the region.

Joseph Gomes, Analyst

Okay. Great. I don’t want to dwell on it, but I know it's tough to answer fully. We've discussed the government shutdown and the delays it causes. Regarding the T-6, under protest, how far might we expect the February start date to be pushed back compared to some other things that could come together quicker? Do you have any insight or additional details on this?

Jeremy Wensinger, President and CEO

Yes. That one is a hard one. Obviously, as you know, that's in the court of federal claims. It's a hard one to predict the exact timing on it. We continue to monitor it, and I know they're making progress. Again, that's going to be a hard one for us to predict if that will or will not slide.

Shawn Mural, Senior Vice President and CFO

I think, Joe, that's a little bit why, again, the materials that Jeremy walked through at the conclusion of the prepared remarks, we wanted to give color around we're treating T-6 as kind of a binary event for '26 for exactly the reasons that Jeremy mentioned, and we're going to grow. Again, we're not issuing guidance for '26. But because of the nature of how that could play out, if it stays according to schedule, fantastic. If it slips, we'll see irrespective, this company is going to grow and continue to do that, like I said, in 2026.

Operator, Operator

The next question comes from Trevor Walsh with Citizens JMP.

Trevor Walsh, Analyst

On the Tempest piece, really impressive just to see or understand the time to development to getting that system fielded. Just more broadly, I guess, within counter-UAS or even just training support around UAS generally, what things or opportunities might be out there that we're not necessarily thinking about? That Tempest just seems to come along very, very fast and ferocious. So what kind of things might there be within the realm of unmanned systems that we could be thinking about for you guys?

Jeremy Wensinger, President and CEO

I think Tempest is a good example of what this evolving landscape of threat is showing us as a country. But I'll highlight something that we've talked about before. On the unmanned system side, when you think about an unmanned aerial vehicle, it has an airframe. It has many of the same characteristics that we support today with the MRO front. I look at modernization and upgrades and our ability to support those aircraft no differently than I do what we're doing on an F-16 or C-130. When I think about the emerging market on UAVs, it can be what we're doing today with Tempest or it can go extend all the way down to flight line support, all the way down to modernization and upgrades of those aircraft. So I think it's an opportunity for us. I think we've shown that as an opportunity with Tempest, and I think we'll continue to demonstrate our toehold in the UAS market.

Shawn Mural, Senior Vice President and CFO

The underlying capability is the engineering prowess and capability that the corporation has to move with speed and agility and deliver that rapid prototyping. That's what you saw. It has a variety of applications, as Jeremy just walked through. We're continuing to add to that capability set across the organization with delivering technology, infusing it into a variety of platforms and ways that, again, Jeremy mentioned.

Trevor Walsh, Analyst

Great. I have one last question regarding the acquisition you recently closed. I understand it may have a smaller impact on 2025, but could you share insights on how the pipeline for 2026 and beyond might be influenced by bringing in that customer from the acquisition? Is that included in the $50 billion pipeline mentioned in your slides? Additionally, how much ramp-up time is necessary to fully leverage the broader opportunities presented by this acquisition?

Jeremy Wensinger, President and CEO

Yes, thank you for the question. It's important to note that this is not currently in the pipeline as we are focused on integration at the moment. However, there is nothing new on that front that is not already being addressed at V2X. We simply did not have customer access to showcase our capabilities. This is primarily about increasing customer access rather than the size of the acquisition. Although the acquisition itself was modest, our goal was to reconnect with that customer base and demonstrate our core capabilities, which would instill confidence in our talent and services. That was the main reason for pursuing this deal.

Operator, Operator

The next question comes from Mariana Perez with Bank of America. The current line has been disconnected. We'll move on to the next question. It's from the line of Kristine Liwag with Morgan Stanley.

Kristine Liwag, Analyst

Jeremy, you called out funding as the uncertainty with the government shutdown. When you look at the strong book-to-bill of 1.2x in the quarter, was that a pull forward of contract awards for the customers anticipating this funding uncertainty and trying to get those awards out the door?

Jeremy Wensinger, President and CEO

I believe it was primarily just a matter of timing. I didn't notice any significant changes. As we've mentioned before, even with some government initiatives in the first half of the year, award distributions largely occurred on schedule. They were not unexpected and weren't advanced; these were all awards we anticipated. However, I'm unsure if, in the fourth quarter, the items we expected to be processed will actually be adjudicated due to the absence of contracting officers. I'm confident in our bid velocity and the bids we've submitted, but I'm uncertain about whether they will be adjudicated because of the government shutdown.

Kristine Liwag, Analyst

I see. And look, if I could squeeze a second question. The U.S. decision to withdraw some troops out of Romania was a surprise to many. So I was wondering, was that a surprise to you? Or was that anticipated? I know you don't have direct revenue from that specific base. But when you look at regional priorities, how do you think about potential incremental headwinds from Europe? And how does that balance with the stronger demand signals from INDOPACOM?

Jeremy Wensinger, President and CEO

I think the work we do in Romania is an extremely important part of our defense strategy. So we were not affected by that, and I cannot believe that that work we're doing would go away anytime soon. It is extremely important in terms of defense. So that's all I'm going to say. The Aegis Ashore program is a very important program, and I don't see a strategic move off that unless there's a policy change in the government.

Operator, Operator

The next question comes from Noah Poponak with Goldman Sachs.

Noah Poponak, Analyst

If I consider the updated full year revenue guidance with only the last quarter left, it suggests that the fourth quarter could either remain flat or increase by up to 7% at the highest end. Is the low end of this range solely related to the government shutdown, or are there other factors that could influence this range?

Shawn Mural, Senior Vice President and CFO

Yes. No, great question. As you can imagine, funding is a dynamic situation, and we've got a wonderful cadence within the organization that looks at a typical contracts waterfall based on how funding may change or not. To date, we've had very modest impact, as I think we said in the prepared remarks. But if I look out through the end of the quarter, there could be more impacts in terms of reductions on current contracts we have. Hence, kind of the range of the guide, nothing more than that. We wanted to make sure that we took that into account because it's a variable. The teams are like I said, all over it. To date, we have seen customers move funding to ensure that capability persists and remains. I think that speaks to the underlying critical nature of how our customers look at the services we provide. So that, hence, the basis for the distribution on the range.

Noah Poponak, Analyst

Okay. Shawn, when I look at the progression throughout the year, it was nearly flat in the first half. Now, we're seeing an 8% increase at the midpoint of the range for the fourth quarter, which is a mid-single digit growth. You mentioned that we needed WTRS to ramp up to achieve that higher growth rate in the second half. As IProject forward into 2026, with WTRS continuing to scale and easier comparisons in the first half, why wouldn't it be reasonable to consider 2026's growth rate similar to the exit rate of 2025 for the top line? Or is it more complex than that?

Shawn Mural, Senior Vice President and CFO

Yes. There's a couple of things. I'll give a little bit of color, like I said, we wanted to make sure we talked about '26 because it's top of mind for obviously everyone. When I think about it, WTRS will continue to ramp next year, the F-16 Iraq award will ramp next year from an incremental standpoint. There is contingency support activities, specifically in the Middle East that have largely ramped down throughout 2025. We've seen that. That will present rather a headwind going into the first 3 quarters, if you will, of 2026. I won't talk numbers specifically because funding is so variable right now, to be honest with you. But yes, WTRS and F-16 Iraq should continue to ramp at the exit rate that they conclude at in '26.

Noah Poponak, Analyst

Okay. That's really helpful. On margins, should we think of V2X as a multiyear margin expansion opportunity? Or should we think of it as top-line growth and hold the margins and convert it to cash flow?

Shawn Mural, Senior Vice President and CFO

I believe that over time, we will definitely see opportunities for margin expansion. That's part of our goal, and our program teams consistently achieve it. We are working through what is in our backlog as expected. With the introduction of new programs, they usually start off at a lower level and then gradually ramp up and improve. The positive aspect of the awards we have recently is that they involve long-term franchise programs, typically lasting over five years, including WTRS and F-16 Iraq, with the potential for up to a ten-year program depending on the outcome of T-6. This provides good stability and creates opportunities for margin expansion, but it is indeed a multi-year process.

Noah Poponak, Analyst

Okay. Last one for me. If you do, in fact, have the $20 million to $30 million of cash flow slide from payment timing given the shutdown, should we then think of '26 as your normal 100% conversion from the adjusted net income to free cash flow plus getting that $20 million to $30 million back? Or is it the type of thing that kind of ends up being recaptured over a longer window of time and you never really quite see it in a shorter window of conversion?

Shawn Mural, Senior Vice President and CFO

No, we're considering 2026 in the same way you are as I speak today. It's reliant on the revenue, of course. If the revenue aligns with the midpoint of the guidance, then it would simply be a matter of timing, and we would be incremental and at or above 100% in 2026. That's the way to look at it.

Operator, Operator

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

Jeremy Wensinger, President and CEO

Thank you so much for the time today. I appreciate everyone taking the opportunity to share with us our quarter results. Again, just much appreciated for everything that you guys are doing in terms of showing interest in V2X. Thank you, and have a great day.

Operator, Operator

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