V2X, Inc. (VVX) Earnings Call Transcript & Summary

Okay. Hello, everyone. We'll keep forging ahead with our next presentation out of the aerospace and defense sector, which is from V2X. With me on the stage is Shawn Mural, who is the CFO of the company. So Shawn, thanks so much for being with us.

Great. Thanks for hosting us.

Shawn is going to kick off with a few slides that give a brief overview of the business, and then I'll jump into some questions I have, and we can take any questions from anybody here in the audience as well.

Awesome. Excellent. Well, thanks, everyone, for joining us today. I'll walk through a little bit of who we are and what we do. You should think of us as a pure-play government services provider supporting readiness around the globe. And readiness, we define that in a variety of ways with logistics, with trainings, with maintenance, repair and overhaul and with modernization and sustainment to a multitude of platforms. So here's a little bit more about what we do and who we do it for. So our largest customer is the U.S. Army. We support that U.S. Army customer around the globe. We have a very heavy presence in the Middle East, you see as well as here domestically in the U.S. The majority of the business is cost reimbursable, meaning all of our costs are reimbursed with a fee associated with them. So about almost 60%, and that has been growing for the last couple of years. It was about 50%. It's growing, and we think it will continue to grow. Last year, about $4.3 billion of revenue. The midpoint of our guide this year would suggest about 4% revenue. In the most recent quarter, we did 8% year-over-year revenue growth in Q3. About 16,000 employees, as I mentioned, most are fully deployed with our customers around the globe, executing the missions to support them and just a variety of locations. Here's a couple of things that are, I'll say, notable in terms of where the business has been as we think about working on franchise enduring mission programs. So T-6, it's a training platform. We were awarded this contract. It's $4.3 billion. We were awarded the contract in August. It's currently under protest. We're awaiting that protest resolution. We are executing the transition on that contract today, and we expect that when the protest is resolved, that will be the successful offer and execute ramp-up of that contract. F-16, this is another one that I'll highlight. This has been a contributor to our growth here in the back half of the year, Noah, when we talk about Q3's 8% top line growth and what we expect will be additional growth here in the fourth quarter. F-16 Iraq. So this is a foreign military sale contract that we were awarded in about the middle of this year, where we're supporting a base as well as the fleet of F-16s for the Iraqi customer. A couple of other things down there that I'll mention in rapid prototyping, about $200 million. This is a little bit different, and we're really happy to have launched the Tempest family of products back at AUSA, for those of you that follow the industry back at AUSA a couple of months ago. And the Tempest family of products is a counter-UAS solution that incorporates a Hellfire missile with a radar and either a fixed or mobile platform. I highlight it because it went from paper design to fielded asset in a very short period of time, meaning less than a year. And so our engineering capabilities at a facility we have in Indianapolis, Indiana certainly led our ability to go do that. The other interesting aspect of it is you've heard me mention, I'll call it, field support, logistics. Not only are we developing that system, we're doing the depot support in various environments around the world. So what you're seeing as we're approaching the market and a lot of these opportunities is bringing the breadth of capability that the company has to offer. Okay. So that's a brief overview of where we are. Happy to take any of your questions. Noah.

That's great. Thank you for that.

Maybe at a high level, we've been in this world where there's been change in the actual administration. There's been change in prioritization within funding. And you and others in the industry have discussed that creating some choppiness in just the normal cadence of bookings. Then we had a government shutdown. But how close to normal are you, I guess? What is life like right now as a government contractor? How quickly are they recovering from the shutdown? Are the things that were going on before that still going on? Or are we normal yet?

It's interesting. The shutdown was more calm than I thought in terms of what we experienced. Customers were still paying their bills. People were moving funding around. That's not atypical. They do that all the time. But I didn't get a sense from the customers that there was a significant amount of panic. There were a couple of pockets here and there because I'll give you a brief example. we manage a number of training platforms. The T-45 is an asset that delivers training. If that platform is down for a day, it takes between 5 and 7 days to recover from a training schedule standpoint. So very meaningful and impactful to our customers. So they were moving money around to make sure that, that didn't happen. Now that we've emerged from the shutdown, I'm still seeing funding perturbations and changes. So it's not like there was a blitz that said, "Oh, okay, now we're open here, let's move all these money to you. So in some cases, we're still being funded on a weekly basis while they're adjudicating. Important to note that funding on a contract might come from a variety of customers. It might not all just be U.S. Army. We see this, for example, in INDOPACOM, I know an area that we've talked to you about before, where we have a presence -- that funding stream comes from multiple parties. And so adjudicating that and ensuring that it gets on time to accomplish the mission has been some challenges. The award environment, we talked previously, I can't remember, but on our third quarter call, we did move out our expectation in some awards this year as a result of the shutdown as a result of delays. We moved them into 2026 because we're not seeing those things being adjudicated. That hasn't changed. Nothing has been poked and left.

Okay. What's behind that? Is that -- is that still change in personnel? Or is that reprioritization and it sort of takes time to land all that and where they want it to land? Or why -- I guess, why is that still going on?

I think it's change in personnel more so than anything else. Interesting in one of the sessions we were having upstairs earlier, we haven't seen a change yet to prioritization of activities from an administration standpoint, meaning, all right, hey, you got the continuing resolution, you've gone through this reconciliation and now we're going to emphasize this and deemphasize that. I haven't necessarily seen that. What I've seen is administrative contractual delays in executing whatever the objective was, could be a funding modification, could be an award delay, something of that nature.

Okay. Interesting. You referenced the organic revenue growth acceleration in the third quarter compared to the first half, talked about F-16 Iraq. What else was behind that? It was pretty significant acceleration. How much should we think about that kind of growth rate as being possible on a longer-term basis versus that having some lumpiness in it?

Yes. So we were really happy. It's kind of funny when I step back and I think about the year in total, it's kind of played out very much in line with kind of what we expected, back half weighted for growth. The other contributing factor that we've had is -- so a program called WTRS for us was a $3.7 billion contract. We are the largest training provider for the U.S. Army. And so we took that contract over. We were awarded it in August of '24. We achieved FOC or full operational capability in August of '25. And so you had a pretty decent chunk of that activity in the third quarter as well, Noah, that contributed to that growth. So those 2 things, the F-16 Iraq activity that I mentioned as well as WTRS. Now fast forwarding to your question about growth, where will that be? Those 2 things will be incrementals to the kind of the first half of '26, right, because we didn't have any of those. So we see those continuing to grow into next year. We did have a modest headwind in the quarter as well as we will have in the first half of '26. We do some contingency support operations around the globe. This happened to be in the Middle East, where we saw a wind down of some activities that we were supported. Not unusual, not atypical at all in our business. Those things happen.

That's sort of just like an off-the-shelf, we need some surge...

Yes, we need some surge. We need some capabilities that are less of an enduring mission capability, but more of exactly right, a surge. That went away. That started winding down in the -- probably in the second quarter, third quarter of this year. So that will create an incremental headwind when we think about going into 2026.

Is that -- the decline in that '26 versus '25, how does that compare in size to the ramp on the things that are ramping?

Yes. It will -- at least in the first half, it will offset growth in F-16 Iraq. It's in the Middle East. So what you'll see is, I think, in the Middle East, will be flattish to perhaps slightly down because of that. But again, these things happen. Not worried about it. There's no fundamental change in the business. where we have a strong presence in the Middle East. That's evidenced by the F-16 award that we got. And folks may or may not know the degree of difficulty in acquiring an FMS contract. This is not something that just came about kind of earlier in '25. This has been being worked for years. And so our customers saw the value proposition that we have. Our presence in the region and what we've been able to do and so picked us to go do that.

So Waters was a takeaway?

It was.

And T-6 is a takeaway.

It is.

Can you talk about what you're doing in the business to drive the seemingly higher rates of takeaway?

Yes. I think a couple of things. The breadth of capabilities that the company has are being brought to bear in each of these examples. Let me be specific on them. When we're executing training for the U.S. Army, it's not just about getting people in a PowerPoint briefing or things like this. There is real-world simulated training environments that are created, usually in austere areas, we build villages, we build towns, things of this nature to simulate what conditions will look like and then you go through and conduct those exercises. Well, why is that important? Well, because we maintain a warehouse of capabilities. So this is the logistics side of it. Our warehouse of capabilities that within 24 hours, we can get any training device to any place on the planet to ensure that those training activities can take place. And again, that's mission success for us is ensuring that the assets are where they need to be. So you couple that with the training expertise of actually being the adjudicator and administering those things, you're seeing the breadth of capabilities that the company brings together. T-6 is an example as well where we're, again, leveraging readiness rates. And we define readiness is, as I mentioned earlier, availability of assets and platforms consistently. We think we have some of the highest readiness rates for platforms in the industry. And that means that we revamp the workforce. We revamp the tooling. We revamp everything that is necessary to ensure a very high ops tempo to support the customer's mission. And those are examples of kind of what we're doing across the enterprise.

Okay. That's great. And the T-6 award number is a pretty large number relative to just the revenue base of the company. I guess, is it -- has any of that gone into backlog or you're holding off given the protest?

We're holding off. Yes. So we don't book anything that's in protest. It's over $4 billion. Important to note. So we are doing transition today. So a very modest amount, low single millions of dollars went into backlog that will be sold this year. As we're doing that transition, we'll wait the adjudication and just again to put some color on it, think of that as an incremental $250 million to $300 million a year of revenue should that protest resolve favorably.

Okay. And presumably it will take a year or 2 to ramp to that?

No, actually, I don't expect that. I expect it to be -- because we're doing the transition today, and this is also a little bit different in terms of what we saw from this. Typically, a customer when there's a protest might issue a stop work. They haven't done that in this case. We're continuing to execute that. That contract, as we were awarded it, is expected to begin, I think, it's February 1, '26. I do expect that to push while the protest is being resolved, but it would be pretty much transition -- transition will have been completed, and we're kind of up and running.

Interesting. And then can you speak to Waters similarly? Where is that in the ramp to full rate? And what does it look like when it gets to full rate?

Yes. So we're there now. So as of August, we're at full rate. We think that the customer is delighted with the work that we're doing to support them. It will be an incremental in the first half of next year, if you will, probably less -- slightly less than $100 million or so in the first half from an incremental standpoint. But it's reached its full rate now. Team is doing a great job, and we're really happy with the support there.

It's up $100 million in the first half.

Yes.

'26 [ versus ] '25.

Yes.

Okay. And so is it correct that T-6, Waters and F-16 are the 3 largest kind of new program growth drivers in '26?

They are. I want to -- I do want to -- so they are, yes. However, I want to mention the -- we call it city states. It's -- what I -- when I mentioned that Tempest family of products, that is also growing in an area that we think is, again, demonstrating some real engineering prowess and capability for us with those customers. They're smaller numbers, of course. But I think from a differentiation standpoint, I also think from a longer term, those contracts are fixed price. We're very excited about what that capability offers us, not just in '26, but beyond from an addressable market.

Can you elaborate more on what you do in the counter-UAS process?

Yes. So it's Tempest. It's the -- so it's the integration of a Hellfire missile to prosecute a drone. Now they're not the quadcopter drones, right? They're -- you're not going to use a Hellfire on that. But I want to highlight a little bit, again, the engineering. So a Hellfire missile is not typically designed to be a ground air missile. Our team did that and took it, repurposed it, took a -- I won't call a radar a couch product, but a radar that is readily available in the market, integrated a fire control system and put it on a mobile platform for deployment and did that in months. And so as you can picture environments where there's a lot of counter-UAS -- UAS activity and these fulfill a mission for that customer. And they're not -- no, they're probably never -- we're probably never going to build 5,000 of these. I think that the key for us that it demonstrates is our ability to take things that were never intended for that type of mission, engineer them, put them together in a manner that is filling a niche for our customer and driving value for the corporation. And so that's a continuum for us, which is why I want to highlight it.

Is that -- will that sell into a specific program of record? Or is the customer now just buying many C-UAS systems?

They're buying many C-UAS systems. And I think not just the U.S. customer, we're getting interest from international customers for these products, right, because of, again, some of that capability that -- the key to our success there is speed. Its speed to go from a paper design to deployment and measured in months. That's what was the successful offering here, and we're continuing to demonstrate that with different capabilities to those customers, but we see addressable markets with -- in the international community as well. Again, very -- because it's -- like I said, it's not quite cuts, but there's not ITAR restrictions on them either.

Right. Okay. That's interesting. And then I guess these new wins make me think, are there other things you are bidding on that you can discuss as the next large new program opportunities? Or is there like a little wave here that you got through?

No.

Not so little, but a wave.

One of the things that we've talked about in both '24 and '25, the customer -- or we have a very low amount of recompetes, okay? So our revenue going into 2026, about 7% of our revenue in '26 is up for recompete. So we refer to it as kind of a bit of a recompete holiday. That is atypical, and it has to do with the procurement cycle that folks that are...

What would be an average year?

20-plus percent.

Right. Basically 5-year contracts every...

So we're very low. Why is that important? We're taking advantage of that. And in our Q3 call, we talked about a $50 billion addressable pipeline over a 3-year period. So we're focused on takeaways because we're not going into new-new. When you think about us, we're not doing the DARPA programs that are going to go develop the next whatever capability. We're playing in mostly O&M dollars for our customer, which means someone is already doing it, and we're probably working to go and see somebody. And so we highlighted -- we didn't give the names of them, but we highlighted 5 things in excess of $1 billion. Two of them, we have been successfully awarded. I already mentioned them, T-6 and the F-16 Iraq. Both of those are in excess of -- the F-16 Iraq, we think, will be greater than $1 billion over the next 5 years. The other 3, one of them was bid going into the customer in November, probably be adjudicated a year from now, roughly. That's a typical time frame. Another one is being bid next year and another one in '27. So why do we even bring these up because some of them are further out? Because we're doing the shaping today to go improve our probability of success and deliver the capability that we think we're able to deliver value to the customer. So that's where we stand, and we've talked about 5 big pursuits on our calls. Those are the 5. I won't go into exactly what they are or what they're named, but that's where we stand.

Okay. How long will you have recompetes well under 20% of revenue?

You'll see a tick up in '27 and '28. So this, call it, 24-month type of period, it will -- now it won't go from 7% to 25%. It's not that dramatic. It will ramp, but you'll see probably mid-teens, something like that in kind of the '26 time -- '27 time frame, and it will rise to get on a more normal cadence.

Okay. That's super helpful. Maybe going to margins. Your margins have been relatively flat for the last several quarters. I think it's a pretty consistent margin model business. But are there -- how are you all as a team thinking about margins? Do you think there's a right to higher margins? Are there margin expansion initiatives? Or are you more focused on top line growth, hold the margin?

No, it's great. Yes, as a matter of fact, so I've been with the firm now 2 years, and margins have actually come down during that time, mostly as a result of what's in backlog. Those backlog margins because of exactly what you highlighted, you have 5 or 7 years' worth of activity. I can't accelerate that revenue and burn through it faster. It's just not the way our contracts work. So it's going to take some time to get through it. That's also why you see that cost type revenue. Our cost type margins are definitely dilutive typically to where we are. Now there are a couple of exceptions. The F-16 that I mentioned in Iraq, that's a cost-type contract and the WTRS contract. They will get to the point where they are accretive. We are not there yet. We're kind of just getting there. I just mentioned Waters ramped up and F-16 will be. So yes, we are looking at -- and again, the reason that we're focused on that pipeline, pursuing things that are incremental margin improvement. The margins, I do expect to improve. I don't expect it to be today, if we're 7.1, 7.2, it won't go from 7.1, 7.2 to 7.8. It will be an incremental 10, 20 bps a year type of thing. It won't be dramatic.

Margins got you choked up.

Yes, I guess so.

Feel free to jump into that water. Okay. That's interesting. So if I'm hearing you correctly, as you've come into the role, you want to focus more on margins, you see an opportunity to improve margins.

I do.

It's really a matter of -- I mean, one, you got to go do it, but also just from a timing perspective, you have things in backlog in a long-cycle business. You need to have enough turnover before you really have those things start to flow in.

Absolutely.

Okay.

Absolutely.

And when you described F-16 and Waters as cost plus, but eventually accretive to the margin, does that mean that despite being cost plus, they can eventually have a higher than 7.5% EBITDA margin?

Correct.

Okay.

Correct.

And then how much opportunity or maybe opportunity is not the right word. How do you think about the fixed price mix? Because when I think about the nature of your business, I'm hearing you describe a lot of things where you have decades of expertise and a lot of legacy and you know what you're doing, and it's not insanely new technology that's really complex and hard to do and susceptible to cost overrun. So that would seem like it could be done on a fixed price basis and have a higher margin. But I don't know if maybe those are the famous last words and then you do that and then there's just -- you forgot one thing that overruns cost. I don't know. How do you think about that?

We put in front of customers ideas to take things fixed price all the time. I don't -- we don't shy away from it.

They don't want to do it?

Correct. I've gotten resist, which -- yes, exactly. We found it very interesting, especially in this environment, right? Because a year ago, we were...

[ Their staff may want to do it. ]

Exactly. We haven't seen it showed up. Now we've seen customers say, yes, hey, we'll listen. Now why don't customers want to do it? Well, it won't work on the front end, right? Because -- and if I want to take a job fixed price, it's really incumbent on the customer to know, well, what's the condition of the various assets that they have? How many buildings do they have, what condition are they in? What -- they have to have a very good set of understandings. If they're not, I'm going to submit a change order. That's a lot of upfront work.

It's actually just easier for them to say, just go do it and send us a bill.

That's right. It is. And so we will not shy away from our desire to convert things from cost type to fixed price.

Would you say that you're still submitting that -- those ideas at the same rate as you were 12, 18 months ago? Or have you started to kind of give up a little bit? Give up is the wrong word, but...

I wouldn't say give up. I would say there's a couple of customers that it has resonated with, but it has taken 6 or 8 months to get an audience with a broader group within that customer community. So Yes, we're still doing it. We talk about it daily regularly with the customers, but it hasn't taken foot.

Okay. And then from top line to margin to cash flow, how should we think about your conversion from either net income or EBITDA, however you look at it to free cash flow? And talk about how '25 and '26 are tracking to that. I know you -- coming out of the shutdown, there's a bit of a race to collections for everybody, how is that going?

Yes. Yes, we did lower the guide on the cash flow for the year in '25, mostly because in order to go from costs incurred to receipt, sometimes I need contract actions. And with the shutdown, I don't have contract administrators to do that. So the reason that we lowered the guide was the timetable within which to adjudicate those contract actions. It's not a matter of when or if the cash shows up, it's just a matter of when.

So it's literally you need the people back in the seats.

To give me the mod to authorize me to invoice the cost or to move the money or whatever the case may be. So I don't worry about it at all. But as a result, back to your question on conversion, I look at us being between 95% and 110% per year conversion against net income. We'll be less this year because of where we are and what we lowered the guide to. But then that will imply we'll be higher next year. And so I think the underlying thing that we've done from a cash standpoint, really, really happy with the progress that the company has made with delevering. I think if I go back a couple of years, we were I won't say well over 3x levered, but certainly over. And we're certainly less today, about 2.85x. We're comfortable between 2x and 3x. And so we're putting that cash to work, put all the mechanisms in place and the team has done a wonderful job of it. That's the value of this type of business. Because of that cost type nature, that 60%, I can turn that cash in 14 days in many cases. So it might not be the most -- the highest margin work that I have, but there's value to that cash flow that we can then put to work in a variety of ways.

Yes. Okay. So the leverage in the high 2s, are you then done incrementally paying down debt? Or do you have maturities sometime soon that you'll be doing either way? How should we expect that to progress from here?

So I think we're comfortable between 2 and 3. The answer is yes, we've got some maturities coming up in the next couple of years. But I think from a -- we think about generating value for the shareholders, we think about share buybacks. We were authorized for $100 million share buyback in May. We've done $30 million of that $100 million so far. And then M&A. And we did a modest M&A activity earlier this year back in August. So I think you're seeing us put those things in place to continue to generate that shareholder value.

Okay. So we can think of you kind of hold the line on leverage, give or take, half a turn here or there. And as you generate free cash flow, we'll see that now go more into share repurchase and M&A.

Yes. We're going to put it to work. We're comfortable between 2 and 3 because I'm confident in what I know of the characteristics of the contracts, the nature our customers pay, that sort of stuff. So we're going to work to drive additional value.

What did you buy in August? And what else is there to buy?

Yes. We bought a modest -- a small set of activities from QinetiQ. And what was very attractive to us about this is that, one, it was a customer base that we did not have access to. And two, it was one of one from a capability standpoint for the customer. It's not a customer I can name, but I can tell you that, that customer and both Jeremy, our CEO, myself and Roger Mason have experience with this customer, they buy everything that V2X offers. And so that entry point was extremely valuable to us. It was less than $30 million acquisition. So pretty small, but we think we'll bring the breadth of, again, everything that we can do with that entry point and to have, again, one of one asset we thought was -- made it desirable for us.

Interesting. And as you look at further possible acquisitions, is that the model you'll want to pursue? Or is there an opportunity to buy actual capability that you do not currently have?

Yes, there's opportunity to buy capability that we don't have or supplement, I should say, right? And I think specifically in engineering, part of the reason that I brought up that Tempest product a couple of times and that engineering capability is that is an extremely attractive area for us. Now I'll say, you asked from a model standpoint, I'm very sensitive to that leverage ratio. So I'm comfortable with where it's at, but I also don't really feel like taking investors on that roller coaster of levering way up and then coming back down and way up and back down. So staying in that 2 to 3 range is pretty important to me. Now we might average maybe do we get us a little bit over 3, okay. That could be a timing of a quarter thing as opposed to an average over a period.

Okay. We just have about a minute left. If anybody in the room had a question for Shawn. Anything at all? Don't be shy. Okay.

Okay.

Well, that was great. It was very thorough. I really appreciate your time. So we can wrap up there. Shawn, thanks so much for being with us.

Thanks for hosting us. Appreciate it. Thank you.

Thanks.