Yahoo Finance V2X, Inc. (NYSE:VVX) Q4 2023 Earnings Call Transcript
V2X, Inc. (NYSE:VVX) Q4 2023 Earnings Call Transcript March 5, 2024
V2X, Inc. misses on earnings expectations. Reported EPS is $-0.01 EPS, expectations were $1.07. VVX 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 Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Maria, and I'll be the operator for today's call. At this time, all participants have been placed in a 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. You may go ahead, sir.
Mike Smith: Thank you. Good morning, everyone. Welcome to the V2X fourth quarter and full-year 2023 earnings conference call. Joining us today are Chuck Prow, 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 two. 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 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 three. Before we get started, I'd like to thank you over 16,000 V2X employees for their contributions and in particular their performance during the fourth quarter to end 2023 on a high note. I just returned from a trip to the Middle East visiting our clients and people. The feedback I receive from our clients underscore the unwavering service, agility, innovation and technology enabled solutions that we are delivering in support of their most critical missions. It's this around the clock, around the globe commitment to our clients that would drive our continued leadership and growth. Please turn to slide four.
The transformation of V2X continues. Organic and inorganic growth, which improves scale, profitability, diversification and capabilities has allowed us to emerge as a leader in the operational segment of the broader federal services marketplace. Our company is purpose built across an expanded client, contract and geographic footprint to deliver value in this market. Our market has witnessed significant structural changes in recent years and continues to rapidly evolve. We are advancing how missions are operated by leveraging converged and engineered solutions at the intersection of technology and operations. This includes modernization and sustainment support that elongates platform lifecycles, while enhancing capabilities. These improved outcomes yield greater value for our clients and shareholders, while providing greater opportunities for our people.
Please turn to slide five. Top line momentum extended into the fourth quarter with revenues once again exceeding $1 billion. This resulted in revenue growth of 6% year-over-year and 4% sequentially. Revenue for the full-year increased 8% on a pro forma basis to $3.96 billion, which was also ahead of our guidance range. Revenue in the fourth quarter was driven by 31% year-over-year growth in the Pacific and 18% in the Middle East. Our work in the Pacific, or INDOPACOM, continued to expand, reaching $71.2 million, a record for V2X, and was particularly impressive given the Talisman Sabre exercises that occurred in the first-half of this year. This is a testament to our team's ability to drive on-contract growth, while further expanding our services and footprint in the region.
Our growth in the Middle East was partially driven by increased scope and services with the Department of State. This expansion builds on our initial work awarded in early 2023 that at the time represented our most substantive win with state. I recently had the opportunity to meet with our client and team supporting this effort and I am exceptionally pleased with how we have been able to deliver successful outcomes at speed and ahead of schedule for this critical operations and logistics effort. We remain excited about the opportunity to expand our relationship with this client through our global presence and capabilities that are ideally suited to support state's worldwide missions and strategy. The strong revenue performance in the quarter yielded solid profitability with adjusted EBITDA of $82.1 million, or 7.9% margin.
For the year, adjusted EBITDA was $293.9 million, or 7.4% margin. Cash flow was notable during the quarter, resulting in year-to-date adjusted cash flow from operations at $159.5 million, which was ahead of our guidance range. This strong cash generation equates to a net leverage ratio of 3.3 times. Our engineering, integration and modernization and sustainment solutions are gaining momentum with approximately $70 million of awards to V2X in the quarter. Importantly, we recently demonstrated these capability through the successful design and fielding of defense platform that leveraged and enhanced existing systems. This effort originally started as an engineering development prototyping effort with a new client and today has yielded a brand new product that's designed, produced and sustained by V2X.
We see substantial opportunity to further expand our revenue and market presence associated with these capabilities. For example, we continue to be optimistic regarding the growth prospects associated with our proprietary Gateway Mission Router 1000, or GMR-1000. As mentioned on past calls, this family of products is a fully ruggedized and cyber hardened multidomain router that provides cutting edge situational awareness. V2X continues to increase its army footprint by integrating on additional different air and ground platforms. During the quarter, we submitted our proposal for a sole-sourced RFP which includes production for up to 3,000 GMRs. In addition, we are seeing good traction with potential new clients that have acknowledged GMR-1000 capabilities and maturity for other applications.
Building on our momentum in the Middle East, I am pleased to announce that during the quarter, V2X was awarded a new task order with the US Air Force valued at $100 million over the next five years. Under this award, V2X will provide civil engineering and infrastructure support services to the US Air Force in the region. We are honored to have been selected to support such an important mission and look forward to building on our exemplary service with the Air Force. Additionally, V2X recently achieved a significant milestone, the company's first substantial foreign military sales win, which provides aviation support and training to an FMS client in the Middle East. The overall op tempo in the region remains elevated and the demand signals from our clients remain heightened.
To date, the majority of current requirements are generally being routed to our existing contracts. However, we believe emerging requirements could result in new contracts or task orders. Please turn to slide six, where I will demonstrate our recent FMS win and multiyear campaign. Over the past few years, we have methodically planned and invested in our four military sales campaign, which is now yielding results. As mentioned, we were recently awarded a long-term aviation support and training contract in the Middle East. The award is valued at approximately $400 million over the next five years and with an exceptional win for V2X, representing a culmination over two years of planning and engagement. The majority of the award is not included in our fourth quarter backlog as the contract is being definitized.
Our team is currently working on transition related activities and expect to have the contract operating at full run rate in the second-half. Importantly, our evolution as a company has been an enabler to participate in this market. With this new work, the total awarded value of our FMS portfolio is approximately $700 million, with accretive margins across eight countries. Looking ahead, we see a near term pipeline of FMS opportunities valued at approximately $5 billion. As such, we are continuing to invest and pursue opportunities that leverage our geographic footprints, robust partnerships and enhanced capability where V2X deliver differentiated, cost effective solutions. Please turn to slide seven. Our ability to deliver unique and differentiated solutions is driving momentum in our business that is visible in our leading growth indicators.
For example, total backlog at the end of the year was $12.8 billion, up from $12.3 billion last year, and provide solid top line visibility moving into 2024. It's important to note that backlog does not include the full performance period of the previously mentioned FMS win or the $458 million F-5 Adversary program as the award remains in protest status. Our pipeline of bids submitted stands at over $9 billion, a company high, and is up substantially from $6 billion last quarter, reflecting the somewhat muted award environment. Our business development engine is geared to support future backlog and revenue expansion with a $15 billion pipeline of opportunities expected to be submitted over the next 12 months. Finally, our visibility is enhanced by the limited recompetes we are facing throughout the year.
At the midpoint of our 2024 guidance, recompetes comprise less than 5% of our revenue mix. To summarize, V2X's leading growth indicators, strong backlog, notable recent awards, and limited recompetes provides an excellent foundation and solid visibility moving into 2024. Now, I'd like to turn the call over to Shawn for a review of the financials. Shawn?
Shawn Mural: Thanks, Chuck; and good morning, everyone. Please turn to slide eight, where I'll discuss our fourth quarter financial results. Performance across all metrics was in line or above our expectations for the quarter. Revenue of $1.04 billion in the quarter represents growth of 6% year-over-year and exceeded our expectations due to exceptional team performance, delivering milestones ahead of schedule, expansion on existing programs and new business. Adjusted EBITDA in the quarter was $82.1 million, delivering a margin of 7.9%. Adjusted EBITDA and the margin increased sequentially as anticipated. Adjusted diluted EPS was $1.22, up 26% from the 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 $28.5 million. Cash interest expense was $26.3 million. The team delivered strong cash flow performance with adjusted operating cash flow of $75.9 million, representing a 195% net income conversion. Please turn to slide nine, where I'll discuss our full-year results. Full year 2023 revenue was $3.96 billion, increasing 8% on a pro forma basis year-over-year. Adjusted EBITDA for the full-year was $293.9 million, or 7.4% margin, compared to $278 million on a pro forma basis in the prior year. Adjusted diluted EPS was $3.74 based on 31.6 million weighted average shares. Interest expense for the year was $122.4 million. Cash interest expense was $113.4 million. Net cash provided by operating activities was $188 million for the year.
Adjusted operating cash flow was $159.5 million, exceeded the upper end of our guidance range. The strong performance represents 135% adjusted net income conversion and contributed to a record day sales outstanding of 58 days. Please turn to slide 10 to discuss cash and liquidity. As mentioned, cash generation was strong and enabled us to reduce total net debt by $137.1 million in 2023. We ended the year with $70.6 million of cash on the balance sheet, excluding $2 million of restricted cash. Net debt was $1,084 million. Importantly, the net debt to EBITDA leverage ratio was 3.3 times at the end of the year, which improved notably from 3.7 times at the end of 2022 and approximately 4 times at merger close. We believe the free cash flow generated by our business supports our ability to continue to delever and achieve a net leverage ratio at or below 3 times by the end of 2024.
The company's balance sheet and liquidity position remains strong with over $550 million in capacity, which includes approximately $482 million of availability on our revolver. Please turn to slide 11. We are establishing 2024 guidance as follows. Revenue is expected to be $4.1 billion to $4.2 billion, representing 5% growth at the midpoint. Importantly, guidance at the midpoint assumes approximately 90% of revenue from existing contracts and less than 5% from recompetes. Adjusted EBITDA is estimated at $300 million to $315 million, representing 5% growth at the midpoint. Adjusted diluted earnings per share guidance $3.85 to $4.20, representing 8% growth at the midpoint. Regarding the cadence we expect throughout the year, revenue and adjusted EBITDA will ramp sequentially.
This reflects the phase in of new business and the previously discussed wind down and completion of the KC-10 and the T-1A programs. We expect adjusted net cash provided by operating activities to be $145 million to $165 million. In terms of cadence, cash flow should be in line with our normal seasonal pattern with cash generation occurring in the second-half of the year. Cash interest and other expense is expected to be approximately $116 million. Capital expenditures for the year are estimated to be approximately $30 million and will be first half weighted. Now, I'd like to turn the call back over to Chuck.
Chuck Prow: Thanks, Shawn. Please turn to Slide 12. V2X remains focused on creating value for shareholders. The four components by which we plan to achieve this include: one, continued focus on generating top line revenue growth through backlog conversion, on contract growth and execution of our robust pipeline into new awards in our core markets. Two, increasing profit via revenue growth and operating leverage, as well as margin improvement through program performance, technology insertion and campaigns. Three, continued strong conversion of profit into operating cash flow through disciplined working capital management and low capital intensity. And, four, utilizing our high reoccurring cash flow to strengthen our balance sheet and further reduce interest expense and net debt.
In conclusion, V2X continues to transform to deliver enhanced capabilities in an expanding market. We have strong momentum, robust backlog, highly aligned pipeline, limited recompetes, and high free cash generation that provides an excellent fundamental profile to support value creation in 2024. Now, I'd like to turn the call open to questions. Operator?
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