VVX - NYSE

Good day, and welcome to the V2X First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Mike Smith, Corporate Vice President, Treasury, Investor Relations and Corporate Development. Please go ahead, sir.

Thank you. Good afternoon, everyone. Welcome to the V2X First quarter 2025 Earnings Conference Call. Joining us today are Jeremy Wensinger, 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 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. In addition, in today's remarks, we will refer to certain non-GAAP financial measures because management believes such measures are useful to investors. You can find a reconciliation of these measures to the most comparable measure calculated and presented in accordance with GAAP on our slide presentation and in our earnings release filed with the SEC, both of which are available on the Investor Relations section of our website. At this time, I would like to turn the call over to Jeremy.

Thank you, Mike, and good afternoon, everyone. Thank you for joining us today. Before we get started, I'd like to recognize our team for their contributions and unwavering commitment to our customers' mission success. This commitment was demonstrated firsthand during the quarter with our customers, being awarded a meritorious unit commendation for exceptional performance in training student naval aviators. V2X is proud to have contributed to this achievement by delivering industry-leading aircraft and fleet readiness that is yielding unprecedented success in preparing the next generation of naval aviators. Our people are the foundation of our business. And with that, we are delighted to welcome Melon Yeshoalul as Chief Human Resources Officer. As we continue to scale globally and invest in growth and our people, Melon brings the right combination of experience and leadership to help shape the future of our workforce. Please turn to Slide 3. In today's call, I'm going to discuss the trends we are seeing in our business, our solid positioning and catalysts in front of us to drive future growth and value creation. Starting with the first quarter results. Revenue was $1.02 billion, driven by a 10% year-over-year increase in the Indo-Pacific region. Adjusted EBITDA was $67 million, consistent with our anticipated quarterly cadence. Adjusted EPS was $0.98. The overall trends in our market remain positive and are being driven by customer requirements to improve deterrence, enhance readiness and strengthen national security. We are performing well as V2X possesses full life cycle mission-driven solutions that deliver on these requirements. The V2X value proposition is being recognized by customers and is demonstrated by our recent awards and extensions, which provide substantial visibility for the next several years. We are leveraging our portfolio of capabilities, geographic footprint and limited recompete cycle to pursue larger opportunities that leverage the full breadth of capabilities that I'll discuss in further detail shortly. Additionally, the foreign military sales and international markets continue to represent a large and growing opportunity for us to deliver more solutions across areas we've already operate. These customers know us and trust us, and they see the benefits of our solutions. Our focused engagement strategy and visible presence with customers is yielding substantial traction over several opportunities that align exactly to our core capabilities. I look forward to updating you on these opportunities as they mature here in 2025. In total, our bid velocity is increasing under the leadership of Roger Mason. Our visibility has improved. We are investing for growth and taking advantage of the tailwinds to drive future bookings, revenue, cash flow and value for our shareholders. Our solid and consistent financial performance once again allowed us to enhance our capital structure, further reducing interest expense and improving key terms of our credit facility. Importantly, our liquidity profile is strong at approximately $650 million. There is nothing we have seen to date from tariffs, budgetary requests, administration priorities that would change our strong position in the markets we serve. Our visibility into future macroeconomic decisions, policy trends, national security and emerging defense budget priorities suggest positive impacts on our current work as well as favorable opportunities for our new business pipeline. Given our first quarter performance, market positioning and visibility, we are remaining confident in our ability to achieve our 2025 commitments. As such, we are reaffirming our guidance. Please turn to Slide 4. The V2X value proposition is being recognized by customers and is demonstrated by wins and accomplishments that are listed on this slide. Today, we are with our customers at every phase of execution, playing a critical role delivering comprehensive end-to-end capabilities that support enduring missions of consequence around the globe. This was recently demonstrated through a $62 million contract with the Space Force to ensure operational readiness of the COBRA DANE radar system in Alaska. V2X is extending the capabilities and readiness of the key radar that supports U.S. ballistic missile defense and space domain awareness. On the upper right side of the page and with the same customer, but over 8,000 miles away from COBRA DANE, our value, trust and ability to provide full life cycle solutions was further recognized through a $140 million award to support a key Space Force tracking and instrumentation station at the Ascension Island. Ascension Island, combined with COBRA DANE showcased our ability to deliver critical capabilities in support of national security at scale across the globe. V2X is emerging as a critical enabler of our nation's marquee space domain awareness infrastructure. One of our customers' major priorities is ensuring our war fighters have the absolute best training in order to deter threats. Additionally, with military recruiting reaching the highest levels in decades, we believe the demand for training solutions will continue to grow and receive strong support for overall troop readiness as outlined by the administration. This emphasis aligns precisely to where V2X is positioned and growing. For example, during the quarter, we were awarded positions on two training service programs, which are listed on the upper middle section of the slide. These wins, when combined with our WTRS award completes V2X with the trifecta of premier Army training contracts. From every soldier and every weapon system to every major training installation, V2X supports every stage of the war fighters training journey with integrated solutions that enhance preparedness and national security. Another top priority of administration is improving overall readiness capabilities, which is also a core V2X offering and a differentiator. We deliver readiness multiplying solutions that are generating some of the highest aircraft readiness rates and are well positioned to capitalize on increasing customer demand. This was most recently demonstrated through a $103 million award to provide engineering, upgrade maintenance and modifications to the Navy's C-26 aircraft. This win highlights the Navy's confidence in V2X's ability to deliver mission-capable aircraft with industry-leading readiness rates north of 90%. Our world-class execution backed by customer ratings, global footprint and comprehensive capabilities are creating avenues and opportunities with new customers that want the V2X solution. This was evidenced in the first quarter with $100 million award with the FBI to make sure the aircraft remain fully mission-ready to meet evolving operational demands. This customer saw the performance, solutions, agility and value V2X is delivering to other customers and sought after V2X to deliver the same operational readiness for their mission. V2X improves customer outcomes with mission-matched solutions. Our past performance has demonstrated our ability to support some of the highest priority national security requirements every single day. This is what makes us a trusted partner and was further validated with the Army's notification to extend several of our LOGCAP task orders into June 2030. This, combined with our recent awards, further strengthens our foundation. Now I'd like to turn it over to Shawn, who will discuss how these achievements are significantly improving our visibility in the base from which we can grow. Shawn?

Thanks, Jeremy, and good afternoon, everyone. Please turn to Slide 5. Our year-to-date success with securing new awards, recompetes and extensions has resulted in significantly reducing the overall percentage of recompetes that comprise our expected 2025 revenue. The progress we are seeing in efforts that Jeremy just discussed as well as our growth-related activities focused on increasing proposal volume and larger scale opportunities bode well for continued growth and value creation. Furthermore, with our awards and extensions, visibility is improving with our top five programs having approximately five years of revenue runway. This provides improved revenue visibility while also presenting optionality to allocate resources for continued growth. We anticipate the combination of these efforts will yield bookings growth, further strengthening backlog, which already represents approximately 3x annual revenue. I'd like to note that at the current time, the LOGCAP extensions and the Space Force Ascension Island award we just discussed are not included in backlog. Additionally, as previously discussed, we expect to incrementally book activities associated with the war fighter training and readiness program into backlog as they are transitioned. I'll now turn it back over to Jeremy to discuss our growth efforts and catalysts.

Please turn to Slide 6. V2X is in an enviable position with our top five programs extending through mid-2029 and beyond. This significant recompete holiday creates a remarkable opportunity to further our focus to win new programs. We are already well underway capitalizing on this position through accelerating bid velocity. The total volume of bids we plan to submit this year is 50% more than that what we submitted in 2024. We are not only bidding more opportunities, we are bidding bigger pursuits in key franchise programs by leveraging the full depth and breadth of our portfolio. This focus is reflected in the fact that over the next 12 months, we anticipate submitting bids on five opportunities that are valued at or above $1 billion. A majority of these bids require the capabilities from across the company executed as one V2X to pursue and win, thus unlocking a larger pipeline of opportunities to drive future growth. Importantly, we have the proof points that V2X can win large multidimensional programs, which was clearly demonstrated with the recent WTRS award. Since the award of WTRS, we have incrementally added larger pursuits that leverage the full breadth of V2X and look forward to updating you on the progress as these opportunities are awarded. In addition to harnessing the full capability set of V2X, we are prioritizing key partnerships that further elevate the value proposition of our solutions and expand our global addressable market. These channels have not been a material component of our business in the past, but represent a real near-term opportunity to the growth of V2X on a global basis via new channels. I'm excited about the opportunity to capture this expanding addressable market. What I can tell you after being here almost a year is this team has accomplished many things. Our revenue visibility has increased. Our access and routes to markets have grown. Our bid volume is doubling. Our differentiated ability to train, equip, connect, support, renew and modernize is enabling us to pursue and capture larger and more complex contracts, thus expanding our addressable market. We are unlocking value and are excited about the future for our shareholders, customers and employees. Now I'd like to turn the call over to Shawn for the review of the financials.

Please turn to Slide 7. We again are performing well, particularly in light of the overall market environment. We remain on track to achieve our commitments and are confident in the strength and resiliency of our business model that generates strong predictable cash flow. Revenue in the first quarter was $1.02 billion. This reflects continued growth in the Pacific region, ramping of the WTRS program and sunsetting of the previously discussed KC-10 and T1A programs. Adjusted EBITDA in the quarter was $67 million, delivering a margin of 6.6%. As we discussed previously, we expect revenue and adjusted EBITDA to be weighted approximately 45% in the first half and 55% in the second half of the year. Interest expense in the first quarter was $19.7 million. Cash interest expense was $18.2 million, improving $7.2 million, or 28% year-over-year, driven by our successful repricing activities, debt paydown and cash generation. Net income for the quarter was $8.1 million, up from $1.1 million from the prior year. Adjusted net income was $31.5 million, increasing 10% year-over-year. First quarter EPS was $0.25, improving $0.21 from the prior year. Adjusted EPS in the quarter was $0.98, increasing approximately 9% from the prior year. An important attribute of our business is the ability to generate strong cash flow with low capital expenditure requirements. We continue to expect adjusted net cash provided by operating activities to be in the range of $150 million to $170 million for the year, representing over 100% adjusted net income conversion at the midpoint. During the quarter, adjusted net cash used by operating activities was $118.1 million, consistent with our expectations. Please turn to Slide 8. During the quarter, we continued to demonstrate our steadfast commitment to increasing shareholder value by making further enhancements to our capital structure. Our strong fundamentals and consistent financial performance created a compelling opportunity to reprice and extend both our revolver and Term Loan A. The outcome was extremely positive with the cost of debt on these facilities improving by over 50 basis points. This yields additional interest expense savings and cash flow on top of the benefits announced just last quarter with the successful Term Loan B repricing. From a liquidity perspective, we are in a strong and enviable position with approximately $170 million of cash on the balance sheet and a $500 million revolver that had a zero balance at the end of the quarter. The strength of our business is in its cash generation, and we remain focused on delivering strong, predictable cash flow that can be thoughtfully deployed to generate the best returns for shareholders. Please turn to Slide 9. The trends and demand signals in our business remain positive, and we believe our strategy, visibility and targeted growth opportunities will yield substantial value creation. As it relates to tariffs, we do not expect a noticeable financial impact from any tariffs that have been discussed thus far. Given our performance in the first quarter and current trends, the company is reaffirming guidance for 2025. At the midpoint, this reflects revenue of $4.4 billion, adjusted EBITDA of $313 million, adjusted EPS of $4.65 and over 100% net income conversion to cash. In summary, we are pleased with the performance across our business and the start of the year. Our teams continue to execute in a dynamic market, bringing the best of V2X to meet our customers' critical mission requirements. With that, we'd like to open the call to your questions. Operator?

[Operator Instructions] The first question comes from Andre Madrid with BTIG. Please go ahead.

Yes, thank you. Good afternoon, everyone. You talked about the growth in the international portfolio, but can you maybe talk about international book-to-bill? Is that something you'd be willing to share?

Andre, good to hear from you. So we don't talk about the book-to-bill by region. I will give a little bit of color on what we're expecting as we go forward a bit. When we think about where we are in the year, we do have more concentration in expected awards that we believe will contribute to the backlog in fixed price activities, which we're very encouraged by. You heard Jeremy talk in the prepared remarks around larger scale opportunities that we're pursuing. We're seeing those in the back half of the year predominantly and fixed price in nature. Jeremy, anything else?

No. Andre, thank you for the question. I think it's a great question. And I think as I look at the pipeline and I look at what we have in terms of being awarded, as Shawn said, we're excited about getting stuff adjudicated, but we're also excited about that for which is in the pipeline, as I mentioned, of around the $5-plus billion of $1 billion-plus awards that we're talking about. So I'm excited about the opportunity we have in front of us.

Got it. And then I guess, beyond deleveraging, I guess, what are the other capital deployment priorities that you guys are looking at as you continue to push forward with strong cash generation? And I guess on that point, too, how have you been finding the M&A environment as of late?

Yes, I'll say this, Andre. We're always looking at optionality. Jeremy has said it repeatedly. The things that will return the greatest value to shareholders are our utmost priority. Relative to M&A, it's stuff that we're consistently looking at. We've never stopped. We won't -- I don't want to get into specifics on the market itself. Jeremy, anything else?

No. What I would say is we're exceptionally patient. I don't believe we're on a burning platform, but I do believe that we are in a position to look at optionality around what is going to create the greatest shareholder value. But again, I think in this market, I think patience is well served, and I think you'll see us look at optionality as we go out throughout this fiscal year.

Could you give any color on what you guys might even be looking for if that were to be the approach?

I think as I -- if you look at back to when we talked about the wheel, obviously, getting more balanced in the wheel is something that we would look at as favorable to the shareholders and also to the markets we serve. But again, I think patience is probably best served at this point in time to see how the market is going to react to this administration and things that might or might not become available. But again, I think the best thing we can do for the shareholder at this point is try to create greater optionality around what we serve in terms of core markets, and that means creating greater balance in terms of how we serve that customer.

We think about it from a complementary nature, perhaps, Andre, right? When we talk about the things that we do and do very, very well, it's training, equipping, deploying, modernization and repair and refurbishment. So those are core capabilities that the company offers, and I think you'll see us stay true to what and who we are.

Absolutely.

Our next question is from Peter Arment with Baird. Please go ahead.

Yes, thanks. Good afternoon, Jeremy. Sean, Mike. Nice results to start the year. Just for clarification, what is left for recompetes for this year? I don't know if I heard you give a percentage at all.

We didn't. We're -- it's fairly modest. So we started the year at right around 5%, Peter, and it's less -- it's right around 2% -- between 1% and 2% for the total year with recompetes to go.

Great. And then kind of related to what Andre asked around the foreign military sales opportunities. When you're looking, I guess, Jeremy, when you called out these kind of new top five new pursuits that are over kind of $1 billion, are any of those in that bucket on the international side?

Yes, they are. And I think that between that and partnerships that we have opened up with other key partners in the industry, I'm excited about these new channels to market and excited about the opportunity they have for the company because I think they are channels that have been historically underserved, but represent an opportunity for us as we go forward.

Okay. Great. And then just regarding, I guess, Shawn, on the liquidity side, great progress there, and congrats on the repricing and everything else. What's the expectations for kind of a target on debt reduction for this year?

Yes. Thanks. We're very happy, obviously, we were below 3%. We said we would be to see that continue, of course, in the first quarter, very encouraged. We're comfortable between 2% and 3%. There's always going to be fluctuations to it. The plan will obviously be at the end of the year, we'll be in a better position, and I see it sequentially improving as we go throughout the year, unless we have anything other to talk about, right? But from a -- again, the normal cash flow cadence of the business will be back half weighted, and that's the way we see it playing out right now, Peter.

Perfect. And just lastly, on the extensions and everything else, that's great kind of visibility here for you guys. Just how are we thinking about kind of the -- when we think about the second half of the year, just this is the first time we're seeing a full year CR, how do you -- how has it affected your business so far?

I'd say from what we've seen modest, right? So we have generally been I won't say, entirely immune, Peter, but by and large, CRs have not been perturbations for us. I will highlight one of the things we did see in the quarter, and it was modest and very temporary in nature, but we did see some disruption to some funding streams on two small programs. They very quickly restarted and got going. So there were a couple of perturbations, but it was not at all CR related. It was just changes in funding profiles, that sort of stuff.

The next question is from Trevor Walsh with Citizens JMP. Please go ahead.

Great agents, thanks for taking the questions; on the -- great to see all the wins kind of across the platform kind of that you laid out, Jeremy. But I did notice that the Air Force revenues were down pretty significantly year-over-year. I understand there's some sunsetting of programs that's probably kind of messing with that a little bit or at least influencing that. Can you provide maybe a little bit of a normalized kind of growth rate absent those sunsetting programs? And then maybe just comment generally on how Air Force award activity was progressing in the quarter?

Yes. Let me -- thanks for the question, Trevor. Let me give you a bit of a walk on the quarter specifically, consistent with what we've said before, right? So we had the ramp that happened in the quarter on the WTRS program. fairly modest Again, what we've said before is that, that will predominantly ramp in the second half of the year. So that was in the $10 million, $15-ish million range. We had a full quarter of the F5 that we've talked about before. That's in a comparable range. And then we had the sunsetting programs, again, consistent with what we said on KC-10 and T1A. And so that was the downward pressure that you saw there a little bit on the Air Force, but that's how it played out in the quarter. Nothing really inconsistent with what we talked about previously. There are ebbs and flows to things, as you rightly point out, that we see time to time periodically, but nothing that we think is inconsistent with what our expectations were.

Great. Maybe sticking with you, although Jeremy, feel free to jump in. Also great to hear that the LOGCAP got extended out to 2030. Can you maybe just remind us kind of how much optionality you feel like you'll have given there's kind of a new 5-year plus time horizon for kind of EBIT or just earnings margin expansion around that contract specifically in those task orders? Or is this really as we think about kind of where you kind of can gain leverage more in the newer things that you're bringing on, those $1 billion-plus contracts, et cetera, those kind of newer contracts that you can kind of optimize over time?

Yes. If you think where Roger Mason and his team are spending their time, they're spending it on new awards. To have this type of recompete holiday is -- it's a unique position to be in. And I feel very comfortable that what we're burning calories on are things that are going to drive additional top line growth. I look at it as an opportunity for the company to, like I said, through partnerships and through additional markets like foreign military sales to continue the growth trajectory of the company. So I'm very comfortable with what we're doing in the new market side under Roger's leadership.

Awesome. Maybe just one last quick one. On for the tariff kind of impacts, I understand that it's kind of broadly speaking, not necessarily an issue. Is there anything -- I know this is a smaller kind of piece of the business, but with your more product-focused type of efforts like GMR 1000, those types of initiatives, any issues that you kind of foresee? I know they're small, but just around components or just the pieces of those hardware kind of aspects, anything kind of coming on the radar from a tariff perspective there?

No. We haven't seen anything. We're doing constant surveillance, if you will, Trevor, to make sure that we're checking with the supply base and that sort of stuff. And given the nature of what those things are, largely domestic sourcing. And so we're not seeing anything with those product-based activities.

The next question is from Ken Herbert with RBC Capital Markets. Please go ahead.

Yeah, hey Jeremy. Hey Sean and Mike. Just it sounds like bookings in the first quarter, obviously, the extensions, water, some of the other stuff, not in the quarter. Was there anything else that maybe you were expecting to get in the first quarter in terms of bookings that might explain some of the book-to-bill in the quarter and where it ended up?

Actually, bookings playing out, let me give a little bit more color on it. We see it very much back half weighted from a bookings profile standpoint for the total year. We're somewhat consistent with what we saw last year. We didn't necessarily see delays. We did see -- well, I should say, we're more hearing, Ken, on contracting officers, administrative kind of processing of things, that sort of stuff, but we didn't see it result in necessarily changes to expected order intake.

Okay. That's helpful. And your 45%-25% sort of first half, second half dynamic implies a relatively soft second quarter in sales within a pretty big uptick, sort of high single-digit growth in the back half. And I think it's pretty consistent seasonally with what you've talked about and obviously, some of your awards. But just want to see if there was anything in particular in the second quarter we should keep in mind or that you'd call out that might drive a little bit more weakness. But then also beyond what you've outlined already in terms of second half strength, anything else in particular that you would say to really help with confidence on that second half ramp?

Yes. Let me provide some clarity on the split. So on the revenue side, Ken, and you might say, we're splitting hairs here a little bit, but it's probably slightly -- it might be closer to 46% on the revenue side and 45% on the profit side in the first half. It's not perfect. Of course, there's always timing of material receipts and things of that nature. We saw some of that happen in the end of the first quarter. So, nothing that's material in nature. And like I said, the maybe 46%-ish type for first half revenue.

Okay. That's perfect, Shawn. And I guess the second half ramp, I mean, obviously, you've called out your -- between waters and a number of other programs, you feel pretty good about that, I guess.

We do. And again, consistent with what we said, and I'll give a little bit of color, the WTRS program will ramp really beginning in that July time frame when transition is complete. That's to say we're doing some activities today. Obviously, you heard me talk about some of the Q1 numbers, but the ramp is really back half weighted, and we'll get a good second half on that. And then we'll have the F5, right? So we're executing F5. Transition was completed late last year. Team has done a wonderful job. And from a comp standpoint in the back half of the year, we didn't have that previously. And then again, the KC-10 and T1A headwinds. So nothing that we've seen in the first quarter, I'll say, that is causing any perturbations or difference to what we would expected with that ramp.

The next question is from Jason Gursky with Citigroup.

A few questions here. First, can you talk a little bit about any exposure that you might have to GSA buying kind of writ large and whether you're seeing a push to move any of the work that you're currently doing more into the purview of the GSA?

Not that we're seeing. I mean, again, most of our work in the O&M world is well funded. It's part of the priorities of this administration and in terms of readiness. So I don't see anything today.

Okay. Fair enough. And then look, there's been a bit of a push here by the administration through executive order in particular, to go through a bit of a reform process on FAR, Federal Acquisition Regulation. I'm just kind of curious what impacts you think this effort might have to the industrial base writ large and to the company here specifically?

I think it's very early in the play to determine how they're going to go about doing that. Obviously, we're listing like everybody else is in the industry. But again, I think it's very early to try to draw a conclusion as to where they're going to go with that.

Okay. Great. And then lastly, I guess, the budget was released on Friday last week, a skinny budget with some top line numbers in it. Not a lot of programmatic stuff, but clearly, some indications about spending priorities going forward. The $113 billion of the $119 billion plus up for national security spending. It looks like it's going to be spread across five different buckets, golden dome, shipbuilding, nuclear deterrence, space domain and protecting the border. Wondering if you wouldn't just spend a few minutes talking through the capability set at the company and how it kind of lines up with those five spending priorities that the administration would like to focus on here going forward.

I think the administration has been very clear about their priority around readiness. And when I look at what we do, and Shawn had highlighted earlier with regards to training the warfighter, equipping the warfighter, supporting the warfighter and renewing and refreshing that equipment as it's required. I think those are all things that fit very well with this administration's priorities. Again, I know they gave some top line, items that they were interested in. But again, if you look at where we are supporting the warfighter, I think they align very well with this administration's priorities.

I think there's also the geography base, right? We've talked about where we are around the globe and how those enduring missions sustain. And I think we're extremely well positioned. One of the things that's exciting, if we think about some of our journey here since the WTRS award last year, when we brought the breadth of the entirety of the company together, and you heard Jeremy talk about this, we're seeing that take root in a number of different areas in various geographies around the globe. So in terms of exactly as Jeremy said, administration priorities as well as geography, we think we're exceptionally well positioned to continue to be successful.

And I think it shows itself, honestly, Jason, with regards to the growth we saw in INDOPACOM. I think the administration priorities in terms of that theater, we are well positioned to support the administration and their efforts to fulfill their administration priorities.

The next question is from Tobey Sommer with Truist. Please go ahead.

Thanks. From a cadence perspective, could you give us a little bit more color on the principal drivers of the better year-over-year growth in the back half of the year? Just kind of want to understand the upside and downside risks to the top line at that period?

Sure. In the back half of this year, it's -- and I think I said this before, and again, nothing's changed in the first quarter. So I think for the total year, we expect WTRS to contribute an incremental, call it, $125 million or so, and that is predominantly back half weighted. And then the second half of the year, we get a full two quarters of the F5 and think of that as $50 million, okay. So those are really some of that growth in the back half of the year. There's obviously other things that are coming on, and the team is doing a wonderful job of continuing to grow in a variety of areas, but that's a lot of the back half of the year growth.

And with respect to your international opportunities, have the -- the last couple of months with a lot of new decisions coming out of Washington, has that boost and enhanced the opportunity or detracted from it?

I don't think it's changed it. I think the team that's doing that work for us has seen a persistent demand. Granted, they take time. They're not as clean as some of the RFPs coming out of the U.S. government in terms of time schedules. So they do take time. But we've not seen any change in the demand pull from the international market. And the team that's doing that is doing an exceptional job in terms of serving those customers on a global basis.

Appreciate that. Last one for me. With the deleveraging that has occurred and the repricing of debt sort of up and down the stack, are you at a juncture now where you would, in addition to potentially delevering, look at deploying capital towards acquisitions?

Yes. I think I said it earlier, we are continually looking at optionality -- and so again, the team has done a wonderful job delevering, as you point out, Tobey. And we'll look at those things consistently. It could be buybacks, it could be M&A. It could be investing in ourselves, right, in other things. Those are top of mind consistently. And I'm encouraged the leverage ratio at 2.98 did exactly what we said we were going to go do. We think it will continue to decline sequentially as we go throughout the year. And I think we're encouraged by the opportunity set that's in front of us in those areas. Jeremy, anything else to?

No -- I think Shawn is right. I think patience is what is awarded right now. And we will look at the optionality that is created by the work the team has done to bring the leverage ratio down. But again, I think patience in terms of how do we build shareholder value is front of mind.

The next question is from Joe Gomes with NOBLE Capital. Please go ahead.

Good afternoon. Assuming I did my math correctly here, it looks like gross margin was up about 75 basis points in the quarter. Just wondering what was the driver for that?

I'm sorry, say that again, Joe? I didn't hear you.

It looks like gross margin or what I would call the gross margin for the company was up about 75 basis points in the quarter. I was just wondering what was the drivers behind that?

I think it's just some timing of some of the expenses that we had in the quarter versus prior year, but nothing of note that is causing us any either concern or anything other than what we had planned.

Okay. And then one of the things that has been a benefit for the company historically is some of the exercises that have been done in the INDOPACOM's. Wondering, are any of those significantly -- any significant exercises scheduled for this year and when you would expect to see those occur?

We're doing some today. I will say -- so you're exactly right. This is an odd year, an odd number year, and therefore, those initiatives and activities take place. We have been tasked with very modest support today. We'll see if having a budget and getting some additional clarity changes that. But right now, we're often executing some of those activities in the region between now and, call it, the end of the summer type of time frame.

Okay. And then one more. And I know you've talked about you're expecting the second half to be bigger than the first half. And we are under that, we'll call it the full year CR. But kind of just through the year-to-date, how have you seen the pace of awards so far? And are you starting to see any pickup here as maybe we get some little more clarity on budgeting?

I think, we saw the awards in the first quarter pretty consistent with what we expected. So we're very encouraged that the awards will stay on schedule. I think Shawn referenced some of the contracting officers having elected to take the offer has created some interesting items in terms of funding profiles. But in terms of awards, we're very excited about the fact the pace stayed on what we thought it would be in the first quarter, and we're excited to get the Ascension Island program up and running.

Yes. To amplify that, Joe, we've seen, albeit modest occasionally and more than previously perhaps some changes in funding. And just for clarity, sometimes we get funded monthly, sometimes we get funded annually, right? Every contract is different. And so changes in personnel, changes in funding streams, whatever, can cause some perturbations. That did play out, albeit modest in the quarter, and we don't expect anything of material issues or anything going forward.

Our next question is from Kristine Liwag with Morgan Stanley. Please go ahead.

Hey, this is Justin on for Kristine. Just on the revenue by region, it looked like Middle East revenue was down a little bit this quarter after some pretty nice growth over the past few quarters. So just wondering if any discrete to call out there or maybe it's just tougher comps or if anything is related to some of the sunsetting programs you called out? Any color there would be helpful.

Yes. There's -- so some mission support activities that we do have done on a consistent basis, if you will. There's some timing associated with those things. The volume of activities in that region, you're absolutely right, was down from what we had done before. I think you said it probably better than I. There are some tough comps from a prior year standpoint. We're nothing outside of what we had planned -- is what we saw in the quarter. I do think the year-over-year in the Middle East could be down slightly. But again, this team does a wonderful job to respond at a moment's notice to our customers' needs. This team did that last year. Will that continue at the same pace? Hard exactly to say. Everything that we've talked about has contemplated it, so nothing unusual.

Okay. Great. That's helpful. And then maybe just quickly circling back to earlier questions around booking trends. It sounds like you have a lot of exciting opportunities coming in the back half here, but you're also expecting some nice revenue acceleration. So I guess, net-net, are you expecting book-to-bill to be sort of above 1 for the full year?

Say it this way, Justin. From a net bookings standpoint, we expect to add to our backlog. It's back half weighted, as I said. And I'll put some other finer points on it just to give color to folks. Think of the first half from a net bookings order intake standpoint, 30% to 40% of what we would expect in the total year and then obviously, much more in the back half, more fixed price in nature and more domestic, okay? Some of that is consistent with the awards that we've already talked about that are not necessarily in backlog. So obviously, we expect to end the year with accretive backlog.

The next question is from Noah Poponak with Goldman Sachs. Please go ahead.

Hey, good evening, everyone. I wonder if you could just spend another minute on cash flow, just given the use in 1Q. I know it's seasonally usually a use, but it looks larger than it's been in the past. Can you just give us a little more detail on what drove that and how the cadence shakes out through the rest of the year and what full year free cash to net income conversion you're looking for?

Yes. So the adjusted net income to cash conversion in excess of 100% for the total year, absolutely back half weighted, consistent with what we have. We were -- if you look year-over-year, we were slightly down, right? I think we consumed about $83 million last year, about $118 million. We had -- it was absolutely in line with what we expected, a little bit more working capital usage. Nothing that causes us concern at this point. I would say, we expect to be positive in every subsequent quarter and build throughout the year. So I think we're in good shape. I would tell you that we saw some very good collections after the quarter closed. And so nothing that's sticking out as being anything other than what we had planned.

Okay. So maybe just some working capital timing late in the quarter, sliding 2Q.

Precisely, precisely.

Excellent. And then I wanted to ask just with the framework for a year that's a little back-end loaded in a backdrop where funds seem to be flowing a little slower. Is there anything in the back half that you see as risk of sliding into the early part of '26? And then I also just wanted to ask, as Waters ramps up, what does the early margin profile look like on that program as we try to map out the margin ramp in addition to the revenue ramp?

Yes. I'll start with the last part first, and then, Jeremy, you can add color on the total year.

Sure.

So relative to Waters, our margins are accretive to when Waters comes online in the second half of the year, they will be accretive to where the company composite is. There's -- today, that is not necessarily the case, Noah. And it's because of the types of stuff that we're procuring and things of that nature as we get ready to kind of ramp up. But it will be, like I said, accretive to the company's composite in the back half of the year. If I were to look at our total margin, it's going to -- it's -- depending on how the growth exactly plays out, you heard me reference $125 million year-over-year. It's a few basis points to the company's composite cost plus margin performance.

And I'll address the award side. When I look at where we are in terms of the enviable nature of the recompete holiday that we're experiencing, and I look at the bid volume that Roger and his team are putting out in terms of being 50% more than last year, provided they stay on schedule, which to date, if you look at first quarter and you look at the awards, we have been on schedule with regards to what we thought they were going to award. I'm very excited about the opportunity as we look forward to capture the stuff that we bid and also the stuff that we're going to bid. So again, I've not seen any perturbations to-date. But again, I think the work that the team is doing is exceptional. And we're taking advantage of the opportunities we have in terms of partnerships, foreign military sales and also domestic sales as well.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jeremy Wensinger, CEO, for any closing remarks.

Thank you, everyone, for joining today. I really appreciate you taking the time to join us on this first quarter call. The team has done an exceptional job. I'm excited about the opportunity we have in front of us, and I think you'll see these results manifest itself over the next several quarters. So thank you again for joining the call, and have a great day. Thanks.