Thank you for joining us for the V2X First Quarter 2023 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Joanna, and I will be the operator for today's call. [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. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to the V2X first quarter 2023 earnings conference call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Susan Lynch, Senior Vice President and Chief Financial Officer. Slides for today's presentation are available on the Investor Relations section of our website www.gov2x.com. Please turn to Slide 3. 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 would like to point out that in addition to GAAP earnings, we will be discussing and reporting various adjusted non-GAAP metrics, including pro forma revenue, 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, President and CEO of V2X.

Thank you, Mike, and good afternoon, everyone. Thank you for joining us on the call today. Please turn to Slide 4. This afternoon, Susan and I will update you on a strong quarter for V2X, our 12% organic revenue growth, significant new business win, and the retention of key recompete contracts demonstrate V2X's continued momentum in the marketplace. This momentum validates our strategy and differentiation, but more importantly is a result of our talented employees, the foundation on which V2X is built. As you can see on the slide, V2X has an extremely diverse workforce. For example, more than 42% of our U.S. employees report a military background and 45% identified as a person of color. The metrics on this page are something we are extremely proud of, and our diversity allows us to achieve even greater performance. I'd like to thank our over 15,000 global employees that are helping drive positive results across our business and improve outcomes for our clients and are important contributors in the communities that we are privileged to operate in. Please turn to Slide 5. Our strong 12% year-over-year revenue growth is a great start to the year and was generated by continued expansion on existing programs, contribution from new award, and success securing recompete wins. Adjusted EBITDA for the quarter was $68 million, or 7.2% margin, and adjusted diluted earnings per share was $0.80. We continue to experience significant growth in INDOPACOM. With our presence and footprint in the region proving to be a key channel to support increasing mission requirements. Revenue in the region grew 300% year over year and 18% sequentially to $64 million, driven by the expansion of existing programs and exercises, such as Talisman Sabre, the largest bilateral combined training activity with the Australian Defense Force and the United…

Thanks, Chuck, and good afternoon, everyone. Please turn to Slide 10. Our first quarter financial results reflect a strong start to the year for V2X. Pro forma revenue increased 12% year over year to $943.5 million. Revenue growth was driven by momentum in the Pacific, expansion on existing programs, and the contribution from new business wins. Revenue from the Pacific increased 300% year over year and 18% sequentially, reflecting our agile readiness position to support the increased op tempo of mission exercises in the region. While these exercises were included in our guidance for the year, they occurred earlier than we anticipated and are expected to be completed in the second quarter. Adjusted EBITDA was $68 million, or 7.2% margin. Adjusted EBITDA adds back merger and integration related cost of $9.4 million and amortization of acquired intangible assets of $22.6 million. Adjusted EBITDA was higher than expected in the first quarter due to program performance as well as contribution from the exercises in the Pacific which, as mentioned, occurred sooner than expected. Interest expense for the quarter was $31.7 million. Cash interest expense, which adds back amortization of debt issuance costs, was $29.2 million. Adjusted diluted EPS, which adds back amortization of intangible assets, integration, and debt issuance cost was $0.80. Diluted shares outstanding were 31.3 million shares. Total backlog was $11.8 billion in the first quarter and does not reflect contracts currently under protest. Including recent wins that are under protest, total backlog is approximately $12.4 billion, representing over 3x revenue coverage. This key metric and leading indicator is an important attribute of our business and provides excellent revenue visibility for V2X. Turn now to Slide 11. Cash flow followed our normal seasonal pattern in the first quarter and was a use of cash. Adjusted net cash used in…

Thank you, Susan. We are proud of our results so far in 2023 and continue to believe V2X is well positioned to benefit from its alignment to mission-critical funding streams and a differentiated set of converged solutions. Now I'd like to turn the call open to questions. Operator?

[Operator Instructions] This question comes from Joe Gomes at NOBLE Capital.

Congrats on the quarter. So I wanted to start out, 1 of the things that's been in the topics that's been in the news, obviously, is the debt limit. Do you see that having any potential impact on the company? And similarly, you did mention this quarter it seems that contracts might be letting out a little bit faster than they were in the first quarter. What's your sense of that over the next couple of quarters?

Joe, yes, the current both budget and debt ceiling negotiations are becoming regular. I think this is the 11th one in the last 12 to 13 years, I think, is the way it plays out. It's very hard to read the future. I will tell you that both in the past with regard to budget, impasses as well as deficit or ceiling impasses. Our business has weathered those realities pretty well. As you know, and we've talked about a lot on these calls, that because of the funding that supports the vast majority of our programs being O&M funding and so much of what we do is actually mission critical in terms of supporting national security, we haven't seen big impacts in the past. Again, this is uncharted territory, but we're pretty confident of our position and the ability to navigate through the current uncertainties. With regard to the with regard to the pace of awards, yes, we've seen an improvement in the flow of awards over the past 3 to 4 months. As you can see, we still have $4 billion of bids currently being evaluated. I think the pace is still labored, if you will. It's a bit slow, but many of these bids have been in the cycle long enough now that we would expect to see continued progress against the adjudication of that $4 billion.

Okay, great. And on the guidance, even though you had a phenomenal first quarter, understand the contracts came sooner than expected. So if we're looking at the model, you always talk about that 40%-60% split first half versus second half. How do you see that playing out this year with the exercise is coming in sooner than expected?

That would basically -- yes, we had the reality that the exercises were initiated earlier in the year than originally anticipated. I think on the revenue side, we were 48% of guidance and 44% on the EBITDA. Again, I still like this 40%-60% split. It may be a little frontend loaded this year, but that is and does reflect the natural and historical cycle within our business.

Okay. And then just 1 more for me if I may...

So Joe...

Go ahead.

Yes, Joe, I was just going to clarify. So Chuck was mentioning first half, second half percentages there, just in case that wasn't clear.

And then last time you talked about taking some of the synergies in the Advanced Technology, bringing that to some of your Aerospace Solutions and Global Mission Training clients. How is that being received -- I know early days -- by the clients?

It's actually going very, very well. We spent a good amount of time on this call talking about some of our advanced solutions. We're going to continue to talk more and more about the embedded intellectual property we have throughout our business. We didn't disclose this year, but we probably will in the first half. We've had a very nice set of contract expansion actions happen here in the first quarter. And again, I really believe that's largely a result of having these improved capabilities that work across the entire spectrum of operational missions, point 1. And then point 2, just incredible people who have really embraced this new way of operating mission-critical missions, if you will, and are just doing a great job of bringing these new solutions to their existing clients. So a lot of words there, but it's going very well and you can just tell the momentum of our people to continue to stay focused on this is really right where it needs to be.

Looking forward to how the rest of the year unfolds.

Next question comes from Tobey Sommer from Truist Securities.

This is Jasper Bibb on for Toby. My first question was just on Naval Test Wing Pacific. I guess I was hoping you could outline how you expect that program to ramp once it gets out of any transition or protest periods. And is there any associated contribution from that award in the [reiterated] '23 guidance?

Yes. Our expectation is, as normally occurs on these programs, you have the 100-day protest cycle. As you know, you can't go to another round, but we typically expect 100 days and then we plan for the ramp of that contract to begin once the 100 days is up, which is early-to-mid July timeframe. So we have essentially 0.5 year of Naval Test Wing Pacific baked into our guidance.

Okay, understood. And then on the 40%-60% split, that implies looks like pretty low margins in the second quarter. So is there anything specific that's causing margins to be lower in the second quarter or it's just the normal cadence of the business?

It's a normal cadence of the business. I'll make it -- render it a bit explicit is that when we begin new programs, it's always the case, and you have the lower margins in the very early phases of the contracts, which allow for the phase-in and all of the other lower-margin activities, point 1. Point 2, as we've talked about on recent calls that the contingency aspect of our business carries a bit of higher margins along with them and the exercises moving to the left were indicative of a contingency operation. So, yes, a little longwinded, but I would say it's really just the natural flow of our business, and I'll also reiterate that I really think the teams are doing a great job on a day in and day out working to expand margins and bring new higher value ways of operating these missions to our clients.

Last 1 for me. I just wanted to ask about the cost synergy target. Any update there with respect to the $20 million in synergies by January '24? And I guess now that you've owned the Vertex assets for a few quarters, are you thinking any differently about maybe potential upside to that synergy target over time?

Again, I'll continue to reiterate that we feel very comfortable with regard to the rate and pace of achieving the synergy benefit. As you know, we're continuing to grow substantially organically as well, so that's an important balance to keep. So feeling very comfortable about the synergies. And I will tell you that our teams, again, both cultures that formed now V2X are very operationally oriented cultures, and I'm not at all going to be surprised if once we get through this initial synergy phase that together we're going to find new, innovative, more creative ways, cheaper ways to work, and we're going to stay focused on that. And I'll just say, more to come.

Next question comes from Robert Connors from Stifel.

So carrying on that last question, I'm forgetting the exact figure, but I believe you guys had pointed out a pipeline of revenue synergies since the merger, so not cost synergies but more so on the revenue synergy side. Just wondering with a couple quarters under your belt, how that pipeline of opportunities has started to develop.

It's actually going quite well. We initially -- the initial number of new opportunities we pegged at about $20 billion we've. We've deselected a good number of those, but we do have, and you see that in our increasing pipeline, several opportunities that we're pursuing now across our business that either predecessor company probably would not have primed. So feeling not only comfortable about the revenue synergies on the large new deals, but as I think it was Joe brought up earlier on in the questions, the synergies that are available to us by taking capabilities across the entire spectrum of this mission, we support now is really pretty impressive, and our teams are really embracing it. And as a result, we continue to look at on-contract growth as an important channel for our growth into the future.

Okay, great. And then just 1 more is that if I turning back into what the Vertex revenues were in the quarter, it looks like they stepped down quarter over quarter. And is that the normal seasonality or if there's something going on there? Just because we don't have a full year yet of the combined 2 businesses. So just wondering what's going on with the legacy vertex revenue.

Yes, there was some material acceleration in the fourth quarter on 1 of the programs. And then 1 of the contracts on the aircraft MRO side does have some retirements that are starting to filter in throughout 2023 and '24.

Okay, great.

Yes, those retirements were contemplated in their early and ongoing cases, too.

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

This is actually Steve Strackhouse on for Ken Herbert. So a question on the free cash flow. It looks like it was a use in the quarter with working capital weighing on the results there. Can you walk us through how you think about working capital with regard to some of the new awards that you've won? Do you expect an additional cash outflow into the second quarter with an inflection into the second half or just how should we think about that?

Yes. Our general trend is a use of capital. in the first quarter we that's when we have our incentive payments and the higher fringe rates and then we start generating cash in Q2 with the majority of cash really in the back half of the year. So I don't see any difference in that trend this year. It's just really the way our business and it seems like our competitors' businesses operate. Within -- if you're looking at the cash flow statement, there were a couple one-offs that we carved out of our adjusted OCF. We had the CARES Act repayment and then we had some M&A expenses that we had to be paid in the first quarter. Most of that is behind us for the rest of the year.

And then in terms of capital allocation, it looks like you restructured some debt in the quarter. Can you talk about how you think about capital allocation moving forward? Is debt paydown the top priority? My thought also being that we just talked about the MRO market. It sounds like across the M&A pipeline, there's a lot more assets coming available. Any thoughts there?

Yes. With interest rates where they are, it's pretty much all hands on deck to pay down the debt as quickly as we can.

Got it. Absolutely makes sense. And then just 1 more, if I could squeeze it in. It looks like gross margins were a bit lower in the quarter than in 3Q or 4Q. Outside of the previous question, is there anything really specific to call out there? I know you had briefly talked about some of the new contracts coming onboard.

So I think, as Chuck mentioned, with all of the awards that we get, we're generally a little bit less profitable, and there's always going to be a use of cash early on in the awards. And so that's just something to think about as the award activity picks up. And 1 of the things that we talked about in Q4 when we gave our guidance again was these aircraft retirements that we're going to start to filter-in in 2023 and 2024. And so there's -- and then I would say probably the growth in INDOPACOM that's really coming out of our base operations business, which tends to be a little bit lower margin than some of the aircraft MRO and training businesses. So that's really what you're seeing there and everything has been included in our AOP and guidance, and we feel really good about our guidance and being within that range for the remainder of the year.

There are no further questions. I will now turn the call over to Chuck Prow for closing comments.

Thank you very much for joining us on the call today. It's been a good call, and we look forward to updating you at the end of the next quarter. Have a good rest of your day. Thank you.

Ladies and gentlemen, this concludes the conference for today. We thank you for participating, and we ask that you please disconnect your lines.