Good day, and welcome to the Vectrus Incorporated Fourth Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Michael Smith, Director of Investor Relations. Please go ahead, Sir.

Thank you, Derek. Good morning, everyone. Welcome to the Vectrus fourth quarter and full year 2015 earnings conference call. Joining us today are Ken Hunzeker, Chief Executive Officer and President, and Matt Klein, Senior Vice President and Chief Financial Officer. Slides from today's presentation are available on our Investor Relations website, investors.vectrus.com. Please turn to slide 2. During today's presentation, management will be making forward-looking statements pursuant to the Safe Harbor provisions of the federal securities laws. Please review our Safe Harbor statement in our press release 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. We assume no obligation to update our forward-looking statements. Also we'll be making reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. You can find the non-GAAP reconciliations and other disclosures in our earnings release, and in our presentation slides which are publicly available on the Vectrus website at investors.vectrus.com. At this time, I would like to turn the call over to Ken Hunzeker.

Thank you, Mike. Good morning, everyone. Thank you for joining us on the call. Today we reported fourth quarter and full-year 2015 financial results. Each quarter, we make it a point to recognize the Vectrus workforce for their contributions to the success of our customers and our business. For this call, we'd like to recognize our veterans. Vectrus was recently selected as Victory Media Top 100 Military Friendly Employer. We are proud of the more than 35% of our employees that report prior militarily service, and the contributions they make to our customers on our programs. We are equally proud that they have chosen this path, and continue to serve the nation in this manner. Also to the – to all 6,000 employees of Vectrus, I'd like to publicly recognize you for your commitment to excellence, and your service around the world. You work tirelessly to deliver large scale IT, logistics and infrastructure services to enable customer success. You do this exceptionally well, and it's reflected in these results. Please turn to slide 3. I'm pleased to report we successfully completed our first full year as an independent public company. In the fourth quarter, our core business revenue which excludes the Afghanistan contracts increased 16% year-over-year. Total revenue increased 9% year-over-year to $311 million. Our adjusted operating margin in the fourth quarter was 3.6%, up 60 basis points over the prior year. Diluted earnings per share were $0.55. For the full year, we reported results that were consistent with or exceeded the mid-point of our 2015 guidance. Our core business revenue increased 12% year-over-year. Total revenue was $1.18 billion, up slightly from the 2014 adjusted revenue. We are proud to report that after 2 years of revenue declines, 2015 showed a return to growth. Our adjusted operating margin for the…

Thank you, Ken. Good morning, everyone. Please turn to slide 6. Today I will be discussing our results for the three months and year ended December 31, 2015. The tables at the top of page 6 and 7 reflect the generally accepted accounting principles financial results of Vectrus. The tables on the bottom of page 6 and 7 reflect the adjusted financial results to exclude the Tethered Aerostat Radar System program, separation costs required to become a standalone company, and one-time favorable settlements of tax liabilities. The TARS program was retained by our former parent as part of the spin, and separation costs and favorable tax settlements are a non-recurring part of the business. I will address the financial results on an adjusted basis, which we believe better reflect the ongoing business trends. You can reference the appendix of this presentation for the reconciliation of our adjusted results to GAAP. I'd like to turn your attention to table shown on the lower half of slide 6, which reflects the adjusted financial results for the fourth quarter of 2015. Funded orders were $132 million. Orders were down $46 million, compared to the fourth quarter of 2014 due to timing of awards. Revenue for the quarter was $311 million, $25 million higher when compared to the same period of 2014. This is a positive year-over-year revenue growth of 9% in the quarter. In the fourth quarter, our core business revenue, which excludes the Afghanistan contracts equated to $272 million, up 16% compared to the prior year's adjusted revenue. This is attributed to the ramp up of the ACE-IT and Turkey/Spain Base maintenance contracts, which began full performance in 2015, and growth on our existing contracts based in the Middle East. Afghanistan contracts contributed $39 million of revenue, down $12 million or 23%…

Thank you, sir. [Operator Instructions] And our first question comes from Brian Ruttenbur with BB&T. Please go ahead.

Yes, thank you very much. A couple quick questions. First of all, on guidance. It includes, there is a range, can you go through what's the top end of the range and what's the bottom end of the range? I know its K-BOSSS, APS-5 and Maxwell Air Force Base. If everything gets extended through '16, that would be the top end, is that correct? And then, what's the bottom end of the range, what's included in that or excluded?

Okay. Sure. So we'll start with the top end. The top end, we would need to see our existing contracts maintain their current level, which we feel comfortable that they will. Our contracts that are currently under re-compete, extend all the way through 2016. We would also need to realize the $30 million of new business, and we feel good that we have some good pursuits lined up to do that, and that would get us to the top end of the revenue range. The bottom end of the revenue range would be early re-competes, early awards, which we don't anticipate. We expect those awards to happen in the second half of 2016. But if for some reason they award early, those contracts still come into our portfolio, we would expect those revenue streams to be a little bit lower, because of the repricing effect of re-competes. And then, if we see further delays in new business, that would also put pressure on our top line revenue which would bring us to the lower end of the range.

Okay. In terms of K-BOSSS' extension through March, Maxwell's extension through May, and then APS-5, can you remind me where the extension is? And then, can you talk about the timing of when you expect awards or extensions on those three contracts?

Sure. So let's start with K-BOSSS. So we're on contract through the end of this month, which means we would likely see an extension, because we have not heard an award. We'll see what that extension really plays out. But the last extension was about six months. Maxwell, we are on contract through May. As we approach May, and we consume the next couple months, and if we don't hear an award, we could see an extension there. We just don't know, have to wait and see how that plays out.

But they have the ability to extend - there's the ability to have - add two three month extensions, Brian.

Correct. They have contract vehicle to extend that naturally. And then, APS-5 Kuwait, we're on contract through August of this year, and the procurement communication is expected to award around that time, maybe a little bit later. And there is also some extension vehicles aligned in it, if they see some delays, we could see extensions on APS-5. That goes to the dialogue of saying, if we see additional extensions, revenue streams stay to level that we saw and third and fourth quarter. That's where we get to the top end of our range.

Okay. Very good. And then, your share count is increasing slightly. I assume that's primarily founder's grants and increased options that we should expect a couple hundred thousand share creep per year, is that correct?

Yes, that's correct. So this year we had little over 350,000 shares vest, and increased our total share count. In 2017, roughly we think another 300,000, and then on a normalized basis going forward about 200,000, once founder's grants kind of get through.

Okay. And then, the DC and IT network communication office, of those you talked about I think about $6 billion of new bids that you're putting in? How much of that is related to this new DC office and the IT initiative?

Actually, very little. The DC office is aligned to attack or tackle IT IDIQ vehicles. So those are a year or two off. We have to win seats on those vehicles, and then win task orders underneath it. The pipeline, is our natural pipeline, there are some IT business in there, but it's incrementally, the investment is above and beyond the $6 billion that we communicated.

We'll still keep the larger pursuits that we're going after here in Colorado Springs, Brian, and basically we will use the office in, you know, we'll use the capture managers, will be positioned there with the operations folks co-located, and then as we get the IDIQ vehicles, then we'll turn the task orders there, and use the synergy of the office in DC.

We're excited about this. This is something that we were not able to do, under our former parent's guidance. This is in our core capabilities. We have past performance to win seats on these vehicles. If we're successful on a couple, this is all upside to what the business has generated. We have IT network capability today and this really is something that will provide strong returns in the future.

I mean, when it happened in the 2008, 2009 time frame, all these IDIQ vehicles came of age, our sister division was the prime. If we - when we were with Exelis, we couldn't be the prime, we were the sub. Now that we're our own company, we can get our own seats. And as Matt said, it gives us a lot, lot more opportunities. So of the seven IDIQ vehicles we won last year, in our new business forecast we actually have task orders from those, not necessarily in IT, but we are actually seeing business from that. So just having the IDIQ seats is something new to us, and something that's allowing us to get new opportunities and new business.

Very good. And then I just wanted clarity on something Matt said. You said something about being down to two times leverage debt to EBITDA, and that's by the end of '16 or '18 was the goal?

End of '16, Brian.

End of '16.

Okay. Yes, I just wanted to make sure I heard '16. Perfect. Thank you very much.

Thanks, Brian.

Thanks, Brian.

Our next question comes from Bill Loomis with Stifel.

Hi, thank you. Good morning. On the Afghan work declining, you mentioned one of your programs coming down, was that LOGCAP?

We haven't talked specifically about any specific Afghan contract. We do have a LOGCAP contract. What's changing from the last guidance of about $100 million is our work share is changing. It's something that we can't control. It's something that we anticipated. We would expect, or at least last quarter, we expected this to run out a little bit longer, unfortunately, it's not. What we're really pleased with, is our core business growth of 12% this year, and another 6% in '16, this year being '15 is - was the plan. We needed to have the core business grow to replace the declining anticipated declines in Afghanistan revenue and we're doing a nice job on that and we expect that to continue.

Okay. When you say work share is changing, does that mean the prime is taking more of the work directly?

Yes, Bill.

And then, on the APS-5, does that in terms of run rate, is that still around $100 million roughly a year?

Yes. Nothing's really change in our re-competes be overall, and I'll just reset everybody. K-BOSSS is the largest by revenue. It's about 30% of our total revenue. What we've said in the past and this is a little sensitive, because it's competition-sensitive information. Our Maxwell contract is $30 million to $50 million, depending on construction projects and APS is over $100 million a year. When you add all three of those contracts up, it makes roughly about 50% of the business.

Okay. And then, just on – just kind of focusing on APS-5, well, I guess any of them, but mostly APS-5, given all the changes to the structure and the consolidation. But you're mostly cost type contracting. Let's say that, by a low probability, you're not successful, given the nature of the program and mostly cost type, how would this impact the overall margins? Obviously, revenue would drop by the contract value. But how would margins be impacted, if you were unsuccessful on one of these?

So Bill, we haven't talked specifically about any one contract in general about margins. I will say, some programs are a little bit more profitable than others. Our historical record has been mixed. There is no service line theme for us, we are trending. Obviously, we closed the books at 3.7%. We think going forward, our IT margins could get better with this IT investment. So we do see, there is opportunity in the future in that service line. But I mean, I think with our overall consolidated numbers, you can use that as an estimate for APS-5 and it's reasonable.

But I am saying, if you - let's say, you were unsuccessful, and you have that revenue drop, obviously it's not covering your overhead, some of your overhead costs any longer. Is there other cost cuts you would able be able to take to offset that?

Yes. We feel - we've said before this is a flexible business. We have a variable cost structure. We need to maintain a certain level of revenue streams. I mean, it's not all variable. But we think that if APS-5 had some difficulties, but we feel like we're performing well in the contract now. But if it doesn't come into the portfolio, that we could cut additional costs and keep our proportional G&A competitive.

Okay. Great. And then, on Turkey/Spain, is some of the added - the anti-terror added work that you received on that program, is that going to continue, or is that going to end?

Well, I think what we got in Incirlik, like clearly, what's going on in Moron will continue, because that's in support of VazMarine [ph] and they're not going anywhere. The stuff that went on in Incirlik was a surge. But I think, with the operation is going on for at least the next year or so, I think we're going to continue to see that, Bill.

Okay, great. Thank you.

Thank you.

[Operator Instructions] We will take a question from Morey Marcus with Sidoti & Company.

Hey, guys. How are you doing?

Hi, Morey.

Hi, Morey.

So you guys mentioned that one of the IDIQs you guys won protested. Can you guys say which one it was?

Morey, to be honest, we haven't talked specifically about our contracts.

Okay.

So we're just going to kind of wait for that to play out.

Okay. That's fair. And then, just more so on the IDIQs. On the AFCAP and SeaPort-e, is there any idea or have the government made it any kind of clear to you, as to when you might see some type of deal flow from that, from those contracts?

AFCAP in particular, we're starting to see some pretty significant task orders that align exactly with our core capabilities.

And we're seeing a lot of activity on AFCAP, it's very active. So SeaPort-e, there's stuff that comes out on that every day. A lot of it does not align with some of the stuff that we have the capability to go after, but we look at SeaPort-e every day. But AFCAP, really is - there is some activity. In fact, if you look at our new business forecast, some of that is AFCAP task orders.

Okay, okay. And then, just changing gears a little bit, just because you guys are making more voluntary debt payments. I guess, have you guys discussed internally, about going back to the bank, and refinancing that debt, so you could actually allocate your capital more efficiently?

That's one of the considerations that we're evaluating. To be honest though, we need to have these re-competes re-award and come back…

Okay.

So that's kind of the unfortunate overhang, by not - by seeing delays here. We want these to re-award, come back to us, and then we have five years of revenue visibility. But until that happens we expect to just continue down this path.

Okay. And then lastly, this more just kind of a macro question. The DoD kind of wants another BRAC in 2019. If that were to happen, I know this is way down the road how - I guess, how vulnerable are you guys to another base realignment?

That's a great question. I was intimately involved inside the Pentagon during the last BRAC. And when you look at what that does, in many cases, you close one base, so if you have operations on that, you're really affected. But if you're going - and it's going, and you are moving the facilities, and increasing the workload at another base, and you benefit from it. So it all depends. So you really don't know until the decisions are made in BRAC, if you're a winner or loser in the process. So quite candidly, if you look at Maxwell Airforce base, which is second most visited base by the Air Force right now, and you look at the infrastructure, I can't see that shutting down anytime soon. So I would envision that it in a BRAC, it would be the winner and more stuff would be added there. So I don't think that would affect us. So that's our biggest base in the continental United States. If you look at the infrastructure that takes place for the Corps of Engineers, it's been in existence since the 1800s. So a lot of that isn't going to change either, where in all 50 states, it's leveraged to where dams are, where the - along all the major waterways and things like that. So those aren't going to change either. So based upon our stance in the United States, I don't think it will change much.

Okay. Great. Thank you, guys.

Thank you.

And that does conclude today's question-and-answer session. I would now like to turn the conference back over to Ken Hunzeker for additional or closing remarks.

Well, thank you for joining us on the call today. 2015 was a defining year for Vectrus. We were able to report a return to growth in the total revenue, while posting double-digit growth in our core business. We also enhanced our IT and network service line, and won positions on several IDIQ vehicles. All this was done, as we phased in roughly $1 billion worth of new business, and executed the complete separation from our former parent. However, what's most important, is that we have positioned Vectrus for future growth and success. We expect that our new business pipeline, investment in IT in networks, and operational excellence initiatives will translate to improvements in shareholder value. We thank you for your interest. And look forward to updating you on our progress next quarter.

That does conclude today's conference call. We appreciate your participation.