Welcome to the Vectrus Incorporated First Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mike Smith, Director of Investor Relations and Corporate Development. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to the Vectrus First Quarter 2017 Earnings Conference Call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Matt Klein, Senior Vice President and Chief Financial Officer. Slides for 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 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. We assume no obligation to update our forward-looking statements. At this time, I'd like to turn the call over to Chuck Pro.

Thank you, Mike. Good afternoon, everyone. Thank you for joining us on the call. Please turn to Slide 3. Before we get started, I'd like to recognize our veteran workforce. Vectrus has a leading employee of veterans with over 35% of our employees reporting prior military service. I'm proud of our veterans as they bring valuable leadership skills and a unique understanding of our client's missions. I'm also proud to say that Victory Media once again recognized Vectrus with the 2017 military-friendly employer designation. On a related note, later this month, we will recognize Memorial Day. As we honor the brave men and women who have given their lives in service of our country, I'd like to thank all of those, past and present, who have served to protect our freedom. Now I'd like to discuss our first quarter 2017 financial highlights. Revenue for the first quarter was $290 million, down $21 million year-over-year, due to lower revenue from our Afghanistan programs. Operating margin was 4%, up 20 basis points year-to-year. Diluted earnings per share was $0.60, down $0.01 year-over-year and the first quarter net cash provided by operating activities was strong at $10 million, up $8 million year-over-year. We were off to a fast start in 2017 and in the first quarter, we have been awarded new business, recompetes and contract modifications and extensions which significantly improve our visibility for 2017 and beyond. In March, we were awarded the extension of our Kuwait-Base Operations and Security Support Services contract known as K-BOSSS. The K-BOSSS extension has a 1-year base period of performance which extends through March 2018. Additionally, the extension includes 2 option period, the first being 9 months and the second being 3 months which, if exercised by the client, would extend performance through March 2019. We look…

Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 5. Today, I will be discussing our financial results for the 3 months ended March 31, 2017. In the first quarter, revenue was $290 million, reflecting a decrease of $21 million or 6.6% as compared to the 3 months ended April 1, 2016. This decrease in revenue was attributed to lower revenue from Afghanistan programs of $20.2 million and our European programs of $3.2 million, partially offset by an increase of $2.8 million from our U.S. and Middle East programs. Operating income for the 3 months ended March 31, 2017 was $11.6 million which was $200,000 or 1.4% lower compared to the first quarter of 2016. The operating margin for the 3 months ended March 31, 2017 was 4% compared to 3.8% operating margin in the first quarter of 2016. We recorded a net favorable cumulative catchup in the first quarter of 2017, up $2.7 million compared to $2.8 million in the same period of 2016. There are many factors that drive this performance, including successful contract modifications and extensions of current contracts. Adjustments can be positive or negative, are normal part of this business and our guidance contemplates this reality. As you will see in our 2017 guidance discussed later in the presentation, we're holding our full year operating margin at the previously communicated midpoint of 3.5%. This implies a lower run rate for the balance of the year relative to the 4% we reported in the first quarter. The potential change from the first quarter performance is the reflection of the potential temporary pressures of phasing in several new contracts and the implementation of our new strategic imperative. We believe the new programs, successful recompete wins, contract extensions, along with the successful implementation of our strategic imperatives, will…

[Operator Instructions]. The first question comes from Brian Ruttenbur with Drexel Hamilton.

So couple of quick questions on Keesler. Is this assumed in your projections that you're giving in your guidance that you're giving for '17 that Keesler is in there or not in there?

Brian, this is Matt. We have very little new business in our new guidance. If you notice, if we roll it from the prior guidance, we increased it about $80 million. Most of that change has to do with K-BOSSS. We slightly changed our new business assumption from prior guidance. So very little has to do with new business in 2017. Keesler will roll into 2018 in a full run rate.

Okay. So how big is Keesler on a run-rate basis?

That's $97 million over 5 years -- over 7 years -- I'm sorry, corrected. Need to correct the period of performance.

Okay. 7 years. $97 million over 7 years, so not that big of a needle mover versus Maxwell or K-BOSSS?

Correct, correct.

Okay. A couple of other. The K-BOSSS program, you've got a 1 year contract with a 1 year or is it a 9-month and a 3-month extension? Is it -- can you remind me of that?

Sure. We're extended for 12 months. It takes us through March of next year and then we have 2 option periods, 1 for 9 months and then another one for 3 months. So it could complete all the way through March of 2019.

Okay. And then your net debt is roughly $28 million and you're talking about generating $22 million to $28 million on the year. It seems like you could be net cash positive maybe by this time next year?

Yes. We have -- with the contract revenue visibility, we have many more options as it relates to capital allocations. I think our current focus is really to focus on the strategic imperatives, make sure those are implemented effectively and really phasing in these contracts. Yes, our net debt will be much more positive into next year, but as we move into the next couple of quarters, we'll take a look at our credit agreement and we'll work with our lending partners to make improvements there. And then as our capital allocation strategy change and evolve, we'll communicate it at the appropriate time.

Yes. It seems like it's time to do given how strong you are in the cash flow and the visibility, a much better credit agreement needs to happen. I assume you want to get that done in the next quarter or 2, is that what you're saying?

Yes. So when we originally signed up for the credit agreement, it was in a much different time in 2014 with much more risk. So it was very restricted and we communicated that over the course of the last couple of years. We're looking to expand our capital allocation options with the new credit agreement. How that plays out, we're not exactly sure. We're looking to proceed this year with those decisions and discussions and we'll communicate at the right appropriate time.

Okay. And then a couple other questions. SG&A. is this the right level around $14 million kind of moving forward? Or was there anything abnormal in that quarter, up or down?

Nothing abnormal. We did have some savings as it relates to our actions in October. If you kind of benchmark to where we ended in '16 which was about $64 million of SG&A and we were projecting about $8 million of annual savings, we would be in maybe $55 million to $56 million in SG&A assumptions in 2017. I think the important thing is we're going to leverage our enterprise Vectrus and we're going to leverage consistency in what we do everyday. So as the business starts to grow, we don't think proportionally SG&A will need to grow with it. So we'll get to natural phasing that way.

Okay. And then in terms of -- I know you're not giving guidance for '18, but where do you sit right now? And you didn't win any new business and just were on a run-rate going forward, you would be flattish in '18 or would you be up slightly?

Yes. So with the recent awards, we have clarity on 2017, so we're really pleased with that and we feel good about our prospects in 2018. We have not been specific around 2018 guidance. There are some levers that you need to think about when you're modeling this. It's really around the K-BOSSS extension. We're on contract through March of '18. If that extends to its full period of performance with all the options, that could extend all the way through 2019. We have the APS-5 Kuwait year-over-year change which will be about $48 million going into '18. You have things like a full run rate of Thule and then really the success around our current pipeline, Keesler being the nearest term award that would fill in any potential gaps.

Looks like '18 would be -- if everything just came through including just Keesler, you getting through the protest period, you would have 3% or 4% growth off of '17 to '18, as I just do back of the envelope. Is that ballpark right?

We're going to see how '17 plays out. If everything stays stable, we see consistency on K-BOSSS and we realize the Keesler contract to clear protest, we could see some growth. Anything more than that, I don't -- I want to stay away from specifics.

Understood. And then maybe 1 macro question about the CR going away, budget going in place. Was there anything specifically that helped you out? Or is it just all up-tempo activity in the Middle East that is helping you out internally?

Brian, I would break it down this way. I think the kind of the fundamental point is actually just yielding on our existing pipeline. We've talked about that in prior quarters as well. We do see the stability of the budget is the helpful item to not only ourselves, but the entire industry. And other than that, again, I would just market up to good execution by the teams.

Okay. And then final question on -- you talked recently about putting technology into bids. Was Keesler one of those situations where you added some technology and to a bid that helped you? Or -- and maybe you can elaborate on that.

Well, I think, in general, we're applying technology to our existing contracts wherever we can as well as to new bids. You know the life cycle of these programs. I mean, that bid was bid quite a while ago, but in terms of executing against our base of business, again, we have several initiatives underway by the teams to infuse technology wherever possible, point one. And point two, I have been very pleased with the conversations we've had with not only clients -- potential clients, but with the investor community as well as partners in terms of strategy. Still very early into strategy, but encouraging.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Chuck Prow for closing remarks.

Thank you. Appreciate it and thank for joining the call today. And I look forward to updating you as to the progress and we'll see you on next quarter's call. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.