Thank you for joining us for the V2X Second Quarter 2022 Earnings Conference Call and Webcast. Today's call is being recorded. [Operator Instructions] 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;Vice President of Treasury, Investor Relations and Corporate Development: Thank you. Good afternoon, everyone. Welcome to the V2X Second Quarter 2022 Earnings Conference Call. Joining us today are Charles Prow, President and Chief Executive Officer; and Susan Lynch, Senior Vice President and Chief Financial Officer. Slides for today's presentation are available on our Investor Relations website, investors.vectrus.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 these 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 operating income and margin, adjusted EBITDA and margin, adjusted net income and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials, press release and Form 10-Q. At this time, I'd like to turn the call over to Chuck Prow.

Thank you, Mike, and good afternoon, everyone. Thank you for joining us on the call today. Please turn to Slide 4. Before we begin, I would like to point out that on July 5, Vectrus completed the combination with The Vertex Company and introduced the combined company as V2X. I'd like to thank the employees of Vectrus and Vertex for all of their hard work in bringing this combination to fruition, while continuing to deliver solid results with high-quality uninterrupted service and support to our clients. The agenda on this slide outlines the topics we plan to discuss today. First, we will introduce V2X, talk about the momentum of the combined company, the leading indicators of our business, future opportunities and second half financial guidance. From there, we will touch on the Vectrus second quarter highlights and financial results. At the conclusion, we will provide an update on the integration of the merger. Please turn to Slide 5. On July 5, we formally started our journey as V2X with 14,000 employees, $3.6 billion in pro forma revenue and $290 million of pro forma adjusted EBITDA. V2X is a leader in the operational segment of federal services market, providing converged solutions throughout the mission lifecycle of our clients, most critical and enduring global mission. The company also has a strong financial profile with significant free cash flow and long-term revenue visibility through a $12 billion backlog, V2X will have no recompete that is more than 2% of revenue over the next 2.5 years. As you can see on this slide, V2X has markedly improved the geographic clients and contract diversity, including over 300 contracts with no task order over 11% of revenue. V2X's geographic footprint spans across 330 locations globally, presenting opportunities to further deliver comprehensive solutions across INDOPACOM, CENTCOM, EUCOM…

Thanks, Chuck, and good afternoon, everyone. Turn now to Slide 10. We are establishing second half 2022 guidance ranges for V2X, which includes the contribution from both Vectrus and The Vertex Company. Our focus for the remainder of the year will be delivering on our committed results, while executing our integration and synergies. Revenue is expected to be in the range of USD1.9 billion to USD1.94 billion. Adjusted EBITDA is expected to be USD140 to USD150 million. Adjusted diluted EPS is expected to be in the range of $1.94 to $2.19. Regarding the net cash provided by operating activities, please note that the guidance does not include M&A cost. Due to merger activities associated with Vertex, we are not providing GAAP guidance or reconciliation due to the difficulty in quantifying certain amounts related to the transaction that are necessary for the reconciliation. Please turn with me now to Slide 11. The fundamentals of V2X are impressive, improved scale, strong margins and significant cash generation. Net debt of V2X at July 5 was approximately $1.3 billion, which incorporates the merger closing ahead of schedule. The ability to generate strong cash with low CapEx requirements is an important attribute of V2X. Our cash generation capabilities, combined V2X's strong backlog, limited recompete risk and revenue visibility, provide a clear path for us to rapidly delever the company's debt. We anticipate ending the year at approximately $1.2 billion in net debt and leverage of approximately 3.7x net leverage. Debt reduction is a primary goal for our management team and we believe through continued cash generation and EBITDA expansion, net leverage should be around 3x by the end of 2023. Our longer-term target range for net leverage is in the 2x to 3x range. Back to you, Chuck.

Thank you, Susan. Please turn to Slide 13, where I will discuss Vectrus highlights from the second quarter. I'd like to point out that the financial results presented on this slide are Vectrus stand-alone financial metrics for the second quarter and do not include contribution from The Vertex Company. I'm pleased to report that we ended our journey as Vectrus on a high note, posting strong second quarter results with record revenue and momentum continuing across the business. I'd like to thank all of the Vectrus employees, past and present for their many contributions and support in making Vectrus a leader in this market and importantly for their unwavering dedication to our client's missions across the globe. We accomplished a great deal as Vectrus and our future as V2X looks even brighter. During the quarter, revenue grew 6% year-over-year and 9% sequentially to $498 million. Revenue growth was driven by continued high OPTEMPO in support of ongoing world affairs, LOGCAP V momentum as well as contract growth on our core programs. Adjusted EBITDA for the quarter was $25 million, or 5% margin, and adjusted diluted EPS was $1.41. Importantly, cash generation was strong at $46 million and represents the significant cash flow characteristics of our business. Awards for Vectrus in the quarter exceeded $600 million and were driven primarily by growth on our current programs. Looking ahead, we expect award activity to remain solid in the second half as our teams continued to expand on core programs and the pace of new business awards from government accelerates. During the quarter, we continued to experience growth in INDOPACOM, which now makes up 9% of revenue. This was primarily driven by achieving full operational capability on the LOGCAP V Kwajalein task order. Additionally, we continued to support contingency efforts in Europe as…

Turn with me now to Slide 15 to discuss the stand-alone results for Vectrus second quarter. As Chuck mentioned, second quarter 2022 results for Vectrus were strong with record revenue, a great capstone in our journey as Vectrus start to V2X. Second quarter 2022 revenue was $498.1 million, up $27.2 million, or a growth of 5.8% year-on-year. Top line growth was boosted by our transition to full operational capability on LOGCAP V programs in Iraq and Kuwait late last year and INDOPACOM this quarter. In addition, revenue benefited from transitioning Fort Benning and volume associated with rapid response and contingency efforts. We were able to demonstrate this growth despite the headwinds we have from the withdrawal of the US Military from Afghanistan in the third quarter of last year. Operating income was $15 million, and was impacted by the incurrence of $5.9 million of M&A and integration-related costs as well as the amortization of acquired intangible assets of $2.1 million. Adjusted EBITDA was $24.7 million, or a 5% margin, increasing sequentially to 6.5 and 100 basis points. That compares to $26.6 million, or 5.6% in the prior year. The year-on-year margin change was influenced by the significant amount of revenue and contracts that are in the early stages of their lifecycle. In aggregate, on average and over time, we expect to see improvement in the margin profile as we drive operational efficiencies and diversify into higher-margin scopes of work. Net income for the second quarter of 2022 was $10.5 million. The effective tax rate in the second quarter of 2022 was 19.8% compared to 21.6% in Q2 2021. Adjusted net income was $16.9 million compared to $17.9 million in the prior year. Fully diluted earnings per share for the second quarter of 2022 was $0.88. Adjusted EPS, which adds back merger, integration and amortization of acquired intangible assets was $1.41 compared to $1.52 in the prior year. The change in adjusted EPS was primarily due to the aforementioned change in adjusted EBITDA. Turn now to Slide 16 to discuss cash and liquidity. Cash generated in the quarter was strong with cash provided from operating activities of $46 million. Year-to-date cash from operating activities was favorable at $19.6 million compared to $14 million in the prior year. Year-to-date cash flow, excluding the $8 million CARES Act repayment and the roughly $6 million of merger-related payments, would have been approximately $34 million, more than double our year-to-date cash flows in the prior year. I want to thank our operations, contracts and finance teams for the focus on collections and the momentum they have delivered in the first half of the year. The company's total leverage ratio was 1.09x, down from 1.76x in Q2 2021. The substantial reduction of Vectrus debt profile is representative of our priority and commitment to appropriately managing the balance sheet and leverage ratio. Chuck, back to you.

Thank you, Susan. I would now like to provide a brief update on the merger integration and relevant focus areas. Please turn to Slide 18. Integration activities are well underway. Our cultural alignment is helping to deliver a unified approach. Our integration strategy and framework has been developed and being actioned by leaders across both organizations that have deep experience in integration execution. Our approach and planned efforts have already resulted in several collaborative summits among our business advisory functions that focus on harmonizing processes and accelerating integration. Additionally, we remain focused on speed to value and have planned very specific actions among functions and programs that are attracted through a robust method. Detailed metrics are discussed among the joint team regularly and are supporting our ability to generate rapid outcomes and synergy achievements. We have spent significant time and effort in preparing a phased IT integration roadmap that focuses on prudently and seamlessly optimizing our systems, tools and processes for maximum efficiency, security and scalability. Next slide, please. Our integration timeline is shown here on Slide 19 and highlight some key objectives. As you can see, our priority for the remainder of the year will be on delivering our 2022 results, while executing integration plans and synergy achievement. We look forward to updating you on our progress as we execute our planned approach. Please turn to Slide 20. Financial and strategic attributes of V2X continued to drive a compelling investment thesis with significant value creation opportunities for our shareholders. We list several of the notable characteristics on this slide, which include enhanced scale and leadership in the operational segment of the federal services market with differentiated capabilities that can deliver full life cycle converged solutions throughout the mission lifecycle. V2X has a diverse and resilient business with significant geographic…

[Operator Instructions] One moment, please, for the first question, which comes from the last name of Sommer from Truist Securities.

This is actually Jasper Bibb on for Tobey. So I just wanted to ask about the -- so just on the second half guidance, if I take a look at the merger proxy and net out the synergy assumptions, the outlook you provided today would seem to imply a bit stronger combined run rate than previously contemplated for '22 on revenue and EBITDA. Would you say you're a bit ahead of plan here? Or is the second half outlook more in line with your prior expectations?

I would say that, in general, we have a lot of momentum in the business. The guidance is a little bit stronger than we had kind of originally projected. We're very focused on the kind of the results that we had committed to at the time of announcement. So I'll just [ say on ] that is we have some good momentum in the business. Teams are executing very strongly. We believe the guidance is obviously very achievable, or we would not have provided it. And we like the way things are right now, both from an operational perspective and a market support perspective.

And then I was just hoping, you could update us on your bookings activity for the second quarter and what you're seeing on the customer side. In the past couple of weeks, some of the peers have talked about issues with getting past quarters clear. I was just curious if you're seeing the same thing.

Yes, we have. In terms -- I kind of break this down into pieces, right? So in terms of our historical pipeline, as I mentioned in my prepared remarks, we are seeing a bit of a slowdown. But I will tell you, the combination of Vertex is very strong first half of the year, and quite frankly, the end of last year and our very strong growth on our existing contract base that really left us in a good position, which is the momentum I discussed. So the macro market has slow down a bit, but we've really been bolstered by the wins here over the last 12 months and a kind of a very strong set of current contract growth activities. And I think our teams continue to support our clients very nicely and grow our contract base in line with our expectations.

Last question for me. Do you have any assumptions for cost synergies in the second half guide? And maybe following up on the timeline to achieve that synergy target by '24, should we think about that $20 million synergy target being more front or back-half weighted over the next 18 months?

We feel very strongly that the $20 million full run rate into 2024 is very achievable. We're off to a good start and the -- and baked into the second half of this year is a kind of a $3 million plus or minus number. So it is -- I wouldn't call it back half loaded because we're just kind of getting started. But from everything we can see so far, the status of the various integration activities, we feel very comfortable of the $20 million full run rate going into 2024.

The next question comes from the last name of Subin from Stifel.

So maybe just to start off for the Vectrus margins in the quarter, you called out 5% EBITDA margin that was, I don't know, somewhere close to 100 basis points above, I think, where you guys were sort of talking to last quarter. Is that sustainable, that improvement? Should we think about Vectrus in this higher OPTEMPO world as having the ability to push more fixed price work and ultimately, the ability to sort of have higher margins? Clearly, your combination with Vertex is driving that margin higher. But if there's ability for Vectrus' core margins to also be higher, I think that'd be interesting to highlight.

As we highlighted on last quarter's earnings call, a significant amount -- the number we used last quarter was 40% plus of our business, is in the very early stages of its contract life. We think we're ahead of schedule in migrating our recently won contracts to different contract structures. A bit of this year was -- a bit of this quarter's improvement was some one-time close-out activity. So I'll answer your question by saying our trajectory is, I would say, a bit ahead of schedule to 5% this quarter, again, was bolstered a bit by some close-out activity. Our teams are moving in a very good direction in terms of getting the run rate margin back to our projections as we migrated contract structure from old contracts and new contracts. Answer your question?

It does. Yes. And maybe just a follow-up on some of your comments on previous questions. Something we've been hearing throughout this earnings season is just a lot of questions around the budget flush. Outlays have been unusually low year-to-date, and there's a lot of money to be spent. I'm just curious what your thoughts for your business are on a budget flush? Is it as simple as this OPTEMPO rises, things -- you see more activity in the Taiwan Strait? Or like you noted, the European Deterrence Initiative starts to rise and then ultimately, that materialize into additional spend just over time? Or are there also opportunities for you guys to capitalize on additional money being out there on a shorter-term basis?

I kind of break that down into 3 components. There is opportunity to take share in some of the newer budget activity that's been announced. We're focused on that. Much of it is right in line with our core competencies, and we're very focused on that, point one. Point 2 is, as I discussed in our prepared remarks and we talked last quarter, a significant amount of our business is in the early stages of their contract lifecycle. So as we begin to phase that business in, we always see opportunity to increase scope on current contracts. And we talked about the success we had doing that here in the second quarter. And the third point is, as you indicated, our business, because of the nature of our business is very OPTEMPO dependent. And as OPTEMPO increases in various regions around the globe, depending on where that is, the opportunity for us to support our clients' core missions, while simultaneously growing our business becomes very high.

Yes. That's super helpful, Chuck. And maybe just one last follow-up and I'll turn it over. On the Vertex side, notable contract, $850 million Navy Test Wing contract. That's fixed price. Can you explain maybe or delineate between fixed price work that Vertex may have versus Vectrus in terms of how you think about it from a risk perspective? Are they similar and that fixed price just gives you a greater opportunity for margin? Or is there some additional risk that you get on the Vertex side?

Thank you for the question. It's an important question. It's actually quite similar. The aerospace maintenance business is a business that is a very mature business. Many of the platforms we support are very mature platform. Because of that, the scope is very well known. And as that scope changes, it is very well understood by both our teams and our clients that cost and price fluctuate accordingly. But just like in our business, the mature nature of what we do allows us to work with our clients closely as scope changes, price changes. I see the very same characteristics in the aerospace and training businesses as well.

Just a clarification there. I mean, MRO specifically, there's been challenges getting technicians and additional labor for maintenance. And presumably, that's lifting labor cost there. What's your ability? Do you end up taking on those headwinds under a fixed price contract? Or do you generally have the ability to reprice these such that it's not a…

It's a combination. So much of the labor base is under agreements that do allow inflation type adjustments, full stop. The other point is, and like our core businesses, the insertion of new technology and new capabilities and new and better ways of doing things are also applied to that business as well. I do want to make the point, however, that inflation is real, both in terms of labor and supply chain. And those are areas like any other business in the country, really, we're focused on managing those effects on both our fixed and cost type projects. But in terms of kind of the overall macro effect, we believe we have the protections, and we believe we have the momentum in terms of understanding how to improve effectiveness and efficiencies through the application of technology that we think we can keep the inflation realities in check.

The next question comes from the line of Joe Gomes from NOBLE Capital.

So wanted to circle back first on the synergies. I think the goal was, you put out about 1.3% of trailing 12-month revenues, which seems kind of a low bar. Given -- normally, in these types of acquisitions, you see it more of about a 3% level. Is this just being conservative on your end? Or do you think that there actually might be some more synergies as you delve deeper into the -- putting the 2 firms together there?

Yes. I think we're being conservative. I would not call that we're really conservative, however. We have to remember also that the Vertex aspect of this combination recently went through a combination with the former Raytheon businesses. Those synergies are kind of baked into the run rate that you already have. So in macro, in totality, I'd like to think that we can overachieve on the $20 million. But putting these businesses together, you see a portion of the synergies that are affected in the run rate from the Vertex aspect of this combination. Makes sense?

Yes. Yes. And you mentioned in your remarks Talisman Saber kind of a, call it, similar to the Pacific Defender. Can you kind of size that -- the potential opportunity for Talisman Saber?

Yes, I can't -- it probably wouldn't be prudent to project future activities. I can tell you though that Pacific Defender was plus or minus $50 million over 2 quarters in last year. And as you saw, we were more than able to overcome that "erosion" from that high OPTEMPO kind of activity, which makes our results this quarter really even more impressive from a growth perspective. So it's tough to judge, but looking back a couple of years, I mean, you study this stuff deeply, I know and you can compare what we did last year versus what you see kind of emerging in that theater now and make some projections based upon that knowledge.

Okay. When you talked about having 40% or so of contracts or revenues in early stages of contracts, and you mentioned about getting success into -- getting into different contract structures. Can you just kind of walk us through how you go from the original contract structure into a more favorable contract structure?

Yes. Without going into a lot of detail, it really breaks down in a pretty straightforward way. I mean you have opportunities at certain points in a contract. The opportunity -- the first opportunity is between phase-in and a base year and then you have opportunities at each subsequent option year. And what our teams work very hard every day, every week, every month, every quarter to do, is to demonstrate to our clients that certain portions of our scope can actually be well defined and in fact, defined well enough that they can be moved to fixed price. And so we look at the transition between phase-in and base year and base year in option 1, option 1 to option 2. Those are the points by which we can transition to different contract structures. And also, by the way, it's the reason that we have, A, always talked about and B, always demonstrate an ability to drive margins higher over time.

Okay. And then on the second half guide, can you give us the overall numbers? Is there any type of seasonality or cadence to that? Vectrus stand-alone had some -- often, we talked about the second half being significantly stronger than the first. Just wondering for the second half here on the numbers you gave us, is it a 50-50 type of breakdown between the third and the fourth quarters? Or do you see 1 quarter more weighted than the other?

We are thinking somewhere in the 45%, 55% kind of breakdown. Susan?

That's the breakdown.

[ Comfortable with that ]. So you can think 45% for Q3, 55% for Q2. And as a backdrop, and Joe, I know you know this, but all of the recent kind of new wins and ramp-ups both between the former Vertex and former Vectrus companies, many of those are beginning to phase-in, right? So we have that momentum that plays into that 45-55 split as well. Okay. Great. Pardon me. And just one last one for me. I know you talked a little bit about hiring of some of the other defense companies that I've talked with you, talking about real difficulty in hiring people with security classifications. Is that an issue with you guys?

It's always difficult. It's always difficult. At this point in time, our national security business is a smaller portion of our overall portfolio. But just like any other company that's in the security business is tough. I mean, it's tough. I think we've done a very good job of keeping and retaining people, but it's a day in and day out. Our team is working very hard to kind of recruit and retain people. But again, the overall percentage of our national security business is not a substantial part yet of our overall portfolio, which is how we can kind of keep that risk balanced throughout the overall portfolio.

Okay. Great. Congrats on the quarter.

Thank you. Good to talk to you.

The next question comes from the line of Subin from Stifel.

I just had 2 quick questions. On the Vertex side, the KC transport platforms being talked about being replaced with a new platform. Is that a risk in terms of thinking about the core revenue base for Vertex? Or do you think the wins that you have recently on that side are helping to mitigate any potential risk there?

Yes. I think the -- Bert, I think the risks are a bit mitigated just by the overall lifecycle of these platforms. There are long lifecycles. They tend to extend well past their projected maturation date, if you will. And we've planned that type of erosion in our both annual and 5-year planning process. So it's something that short answer is something that we're planning for and believe that we can manage within all the projections that we've made.

Okay. And then just a follow-up sort of to my budget flush question earlier. We've heard that August 15 is sort of like this unofficial hard date, when, if you don't reach, don't get things allocated by then, it's sort of hard to get the additional money in the fiscal quarter. Maybe as it pertains to probably more defer tax, are you seeing that -- one, is that -- do you agree with that sentiment? And 2, have you seen any sort of uptick as we think about going into next week? Or is that sort of not the case and you could continue to get additional project work on both sides of the business in the next 6 weeks or 7 weeks?

Yes. We've -- in my prepared remarks and our earlier question, I am very comfortable with the rate and pace of our kind of on-contract growth, if you will. The program that we've talked about that have been won are all now, if not fully, at full operational capabilities. They're very near that point. I never want to trivialize budget realities. But I'll make one last point is that between our combined company and I'll say it this way, we rely very significantly on O&M dollars, which is, in many respects, in advantage of our business model because of the kind of the more stable aspect of that funding mechanism.

[Operator Instructions] Mr. Prow, there are no further questions at this time. I'll now turn the call back to you. Just continue with the presentation, and/or closing remarks.

Thank you very much, and thank you to everyone for joining us on the call today. Thank you for the questions. We're thrilled with what we see in the very early stages of this combination, and we look forward to bringing you up-to-date in our next earnings call in early November. We'll talk to you soon. Thank you. Bye.

That does conclude the conference call for today. We thank you for your participation, and ask you to please disconnect your lines.