V2X, Inc. (NYSE:VVX) Q1 2024 Earnings Call Transcript May 7, 2024
V2X, Inc. beats earnings expectations. Reported EPS is $0.9, expectations were $0.75. V2X, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for joining us for the V2X First Quarter 2024 Earnings Conference Call and Webcast. Today’s call is being recorded. My name is Rob and I’ll be the operator for today’s call. At this time, all participants have been placed in listen-only mode. Following management’s presentation, I will open the call up for a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded. And now, I’ll pass the call over to your host, Mike Smith, Vice President of Treasury, Investor Relations and Corporate Development at V2X.
Mike Smith: Thank you. Good morning everyone. Welcome to the V2X first quarter 2024 earnings conference call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Shawn Mural, Senior Vice President and Chief Financial Officer. Today Chuck will highlight the company’s recent awards as well as highlight some strategic initiatives and then Shawn will walk us through the first quarter financial performance. 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. Additionally, I’d like to point out that in addition to GAAP earnings, we will 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. 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.
Chuck Prow: Thank you, Mike and good morning everyone. Thank you for joining us on the call today. Please turn to Slide 3. I’d like to thank our employees for all of their contributions and commitment to our clients’ missions that resulted in a great start to the year. In particular, I would like to take a moment to recognize our veteran workforce. V2X remains a leading participant in the veterans ecosystem with almost 50% of our 16,000 employees having prior military service. Our veteran talent base has been key to V2X’s growth and I am honored that V2X has once again been recognized as a top Military-Friendly Employer by VIQTORY. On a similar note, this month will recognize Memorial Day, as we honor the brave men and women who gave their lives in the service of our country, I would like to thank all of those, past and present, who have served to protect our freedom.
Please turn to Slide 4. V2X reported a great start to the year with revenue increasing 7% year-over-year. Revenue in the first quarter was driven by a 22% year-over-year growth in the Middle East and 7% in the Pacific. Our growth in the Middle East or CENTCOM was driven primarily by expansion in Qatar and our recent aviation support and training contract to support the Saudi Arabian Ministry of National Guard. This is a substantial foreign military sales program valued at approximately $400 million over five years. I am pleased to report that phase and activities are well underway and the contract continues to ramp up. We anticipate the program to be operating at full run rate in the second half. As we have discussed previously, the demand signals from our clients in the region remain heightened with the recent supplemental funding package, we are starting to see new requirements emerge.
V2X is a top provider of services to the DoD in the region and we remain ready to support our clients’ mission requirements. We continue to demonstrate growth in the Pacific or INDOPACOM, with revenue in the region increasing 7% year-over-year. This growth highlights the successful execution of our strategy to expand offerings utilizing our geographic footprint. Our teams continue to demonstrate outstanding performance in INDOPACOM, which is leading to greater number of opportunities to support our clients’ increasing mission requirements. For example, V2X has been asked to support a series of smaller exercises in 2024 under Balikatan/Salaknib. This INDOPACOM growth is particularly notable since 2023 included the more significant Pacific exercises schedule that occurs in the odd numbered years.
Additionally, we are further expanding capabilities in the region and I’m pleased to announce that just last week, we were awarded a new $88 million contract with the US Navy. Under the new five-year firm fixed-price contract V2X will provide IT O&M of Navy systems at the Naval Computer and Telecommunications Master Station Pacific. This win builds on our 40-year track record of providing cyber security, mission IT and critical communications across the globe. I’ll speak more on how we are expanding our offerings in existing business in the region shortly. Adjusted EBITDA in the quarter was $69.1 million or 6.8% margin. Adjusted EPS increased 8% year-over-year to $0.90. V2X is differentiating as capability offering through converged solutions that sit at the intersection of technology and operations.
This differentiation has led to recent awards valued at $75 million to provide technology solutions for the threat detection and response to Chemical, Biological, Radiological and Nuclear hazards. I’ll describe this award in more detail shortly. Our agility and ability to deliver mission critical capabilities on a global scale, places V2X that have a unique position to support our clients’ evolving mission requirements and were demonstrated to recent notable awards. First, we were recently awarded over $140 million in task order to continue providing support services to the US Air Force in Jordan and Romania. The awards, which are firm fixed priced, were made under the Air Force Contract Augmentation Program V, which is a multiple award IDIQ contract that provides worldwide contingency and humanitarian support.
The contract extends through May of 2031 and was recently modified to increase the program ceiling value to $15 billion from $6.4 billion. Second and building on AFCAP, during the first quarter V2X was awarded a position on the US Navy’s Global Contingency Services Multiple Award Contract III or GCS MAC III, the contract extends through April of 2032 and provides a similar scope of support services to AFCAP, but as executed by the Navy. The total contract ceiling value of GCS MAC III is $2 billion and V2X is one of six awardees. This ceiling value was significantly increased from the last version, which reached a ceiling value of $900 million. Importantly, we were the leading provider of services under the prior iteration of contract securing $300 million in task orders.
We are honored to continue our support for the Navy and look forward to building on our track record of success. Please turn to slide 5. V2X is creating more value in its core markets by inserting operational technologies into mission essential operations. This was recently exemplified through wins valued at $75 million to operationalize next generation solutions, the threat detection and response to Chemical, Biological, Radiological and Nuclear or CBRN hazards. Importantly, this work expanded from our prototype effort to a new sole source award for the production, upgrade and fielding of cutting-edge systems at overseas operational locations. As part of this effort, we are the lead systems integrator for the CBRN support to command and control program.
This program known as CSC2 is the program of record for the integration of CBRN, which will leak sensors together to provide integrated situational awareness about potential had a hazard to inform and user decision making. In addition to CSC2, V2X will modernize and re-architect the CBRN threat warning and notification application and predictive hazard propagation tool for enhanced operational decision support. In awards to illustrate how we are harnessing technology based solutions, operational expertise and global footprint to address high consequence emission requirements, please turn to slide 6. One of our strategic imperatives includes enhancing value through technology expansion in our existing business. Our teams are demonstrating this through recent new awards to provide 5G, smart warehousing and integrated electronic security solutions.
As it relates to 5G and smart warehousing, we were awarded additional scope under our existing LOGCAP V contract to deploy an assured and protected private 5G communication solution and enable smart logistics in the Philippines. While currently small in value, we believe this solution is scalable across INDOPACOM region. You provide protected and secure network infrastructure to support warehouse operations, field appointments and exercises. This solution also aligns the type of investments. The DoD is making as part of the Pacific Deterrence Initiative or PDI. The DoD recently released its fiscal 2025 PDI budget, which requests $9.9 billion, a 9% increase from the prior year and a 59% increase from 2023. Beyond LOGCAP, we also are supporting the design, implementation, testing and operation of our private 5G cellular network and asset-tracking support solution on Guam naval base.
We continue to be optimistic about our ability to further expand these offerings on existing contracts. As it relates to electronic security, we remain a leader in providing integrated electronic security solutions that protect thousands of facilities and assets. Historically, these solutions have generally been procured on a standalone basis. However, I am pleased to announce that our team received a new task order, under an existing contract vehicles in the Middle East. This award established as our solution on the region and displaces an incumbent. This further demonstrates our ability to insert technology solutions into operations and logistics programs. We believe we are positioned to grow from this initial step and deliver a modernized integrated solution that significantly improve our client’s security posture.
Building on the traction in the Middle East, we were also awarded task to provide the initial establishment of this solution and capability in the Philippines. These two recent awards improve the installed base of our solutions and also offer an ongoing operations and maintenance opportunity. These wins would not have been possible without our unified approach to growth and sell-through business model that has inserting solutions through existing contracts. Please turn to Slide 7. We believe our new business pipeline continues to support future backlog and revenue expansion. Our pipeline of near-term opportunities for new business currently stands at approximately $25 billion, comprising $16 billion of bids expected to submit over the next 12 months and $9 billion of bids pending award.
The pace of award activity was somewhat muted through the first quarter but is increasing, with several notable bids expected to award this year. Importantly, our strategy and company-wide focus on converged solutions is evident in our pipeline metrics, with higher value and technology solutions, comprising an increase – an increasing percentage of the total. As can be seen on this slide, over 50% of the bids we expect to submit in the next 12 months are tied to operational technology, engineered solutions and training versus 20% of bids pending award. This demonstrates the enhanced capabilities that V2X brings to the market across a more diversified client base. We believe our pipeline, strong backlog, preliminary re-competes and budgetary environment provides continued confidence and visibility to achieve our commitments.
Now, I’d like to turn the call over to Shawn for a review of the financials. Shawn?
Shawn Mural: Thanks, Chuck and thanks, everyone for joining us here today. Please turn to Slide 8. We have started 2024 with strong performance, building on the momentum from 2023. Performance across our metrics was in line with our expectations for the quarter. Revenue of $1.11 billion in the quarter, represents growth of 7% year-over-year. Revenue growth in the quarter was achieved through continued expansion of existing business in the Middle East and Pacific regions, as well as new programs. This reflects the strong demand for our service offerings around the globe. Adjusted EBITDA in the quarter was $69.1 million, delivering a margin of 6.8%. As discussed previously, we expect revenue and adjusted EBITDA will ramp sequentially throughout the year.
Adjusted diluted EPS was $0.90, up 8% from prior year. The growth reflects lower income tax and interest expense, partially offset by higher depreciation and other expense. Interest expense for the quarter was $27.6 million. Cash interest expense was $25.4 million. An important attribute of our business, is the ability to generate strong cash flow with low capital expenditure requirements, and continue to expect adjusted net cash provided by operating activities to be in the range of $145 million to $165 million for the year, representing 120% adjusted net income conversion at the midpoint. During the quarter net cash used by operating activities was $57.2 million following our historical pattern and reflective of a receivable delay that collected shortly after the quarter closed.
Adjusted net cash used by operating activities was $83.5 million adding back M&A and integration costs and remove and removing the contribution of the Master Accounts Receivable Purchase Agreement. Regarding capital expenditures CapEx in the quarter was approximately $8 million. We expect our CapEx profile to be more heavily weighted towards the first half of 2024, as we deploy some Engineering and infrastructure tools to enhance capabilities and further streamline back-office operations, continue to expect capital expenditures of approximately $30 million for the year. Please turn to slide 9. We ended the quarter with $33.6 million of cash on the balance sheet, excluding $2.1 million of restricted cash. Net debt improved by $115.9 million compared to the prior year, demonstrating the strong cash flow nature of our business.
At the end of the first quarter, net debt was $1,173 million. Net debt to EBITDA leverage ratio was 3.5 times at the end of the quarter, which improved notably from approximately four times at merger closed. Additionally, we continue to expect cash generation to follow the normal pattern of our business and build throughout the year, achieving a net leverage ratio at or below three times by the end of 2024. The company’s balance sheet and liquidity position remains strong, with over $460 million in capacity which includes approximately $427 million of availability on our revolver. Please turn to slide 10. Total backlog was $12.6 billion in the first quarter representing three times revenue at the guidance midpoint. This key metric and leading indicator is an important attribute of our business and provides excellent revenue visibility.
Backlog increased 6% year-over -year and does not reflect the full value of the approximate $400 million FMS win, for the $458 million F-5 Adversary Aircraft programs currently under protest. It also does not include the $88 million Navy contract, Chuck mentioned earlier, as the award was made subsequent to the first quarter. Please turn to slide 11. The company is reaffirming our guidance for 2024, which at the midpoint reflects 5% revenue and adjusted EBITDA growth 8% adjusted EPS growth and 120% net income conversion to cash. In summary, we are pleased with the performance across the business and start of the year. Our teams continue to execute driving expansion on existing programs phasing in new programs and further improving our functional and core business operations.
With that, we’d like to open the call to questions, Operator?
See also 15 Best Places in Missouri for a Couple To Live on Only Social Security and Kevin O’Leary’s Stock Portfolio: 10 Stock Picks for 2024.
To continue reading the Q&A session, please click here.