Thank you for joining us for the Vectrus Fourth Quarter and Full Year 2017 Earnings Conference Call and webcast. Today's call is being recorded. My name I Omar and I'll be the operator for today's call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] And now I'll pass the call over to your Mike Smith, Director of Investor Relations and Corporate Development at Vectrus.

Thank you. Good afternoon, everyone. Welcome to the Vectrus Fourth Quarter and Full Year 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 statement in our press release and presentation material 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 Prow.

Thank you, Mike. Good afternoon, everyone. Thank you for joining us on the call today. Please turn to Slide 3. I am pleased to announce that we completed 2017 with strong fourth quarter results. We reported 3% year-over-year organic revenue growth, 51 basis point improvement in operating margin and a 43% increase in adjusted diluted earnings per share. Additionally for the full year, we reported revenue, diluted earnings per share and net cash from operations that were all ahead of guidance. We have made progress in every aspect of our business during 2017. The execution of our strategy is providing demonstrable results and we recognize record quarterly operating margins, backlog and contract awards. Additionally, we want all of our schedule recompete and successfully phased in $1.4 billion of contracts. I'd like to thank our almost 7,000, employees for their amazing contributions and helping us reach several important milestones during the year. Turning to 2018, with the backlog of $2.9 billion, additional talent at all levels of the organization, an expanded credit facility, enhanced capabilities via SENTEL, an acquisition we announced in January and robust new business opportunities. We have a solid foundation from which to grow. Furthermore, the passage of the Tax Cuts and Jobs Act also known as tax reform will allow us to continue investing in the business to drive growth, enhance our talent base and improve the foundational infrastructure of our business. Now I'd like to discuss our fourth quarter and full year 2017 financial highlights. Revenue for the fourth quarter was $296 million, up $ 8 million year-over-year and $26 million sequentially from the third quarter of 2017. Our year-over-year growth is particularly notable when considering the F5 Kuwait contract contributed $47 million of revenue in the fourth quarter of 2016, which did not reoccur this…

Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 9. Today, I’ll be discussing our financial results for the three months and year ended December 31, 2017. In the fourth quarter of 2017, revenue was $295.8 million, up $7.6 million or 2.6% as compared to the fourth quarter of 2016. And up $26.2 million sequentially from the third quarter of 2017. For the fourth quarter of 2017, revenue increased $20.2 million from US programs, $15.5 million from European programs. And $3.9 million from Afghanistan programs, offset partially by a decrease of $32 million from Middle East programs. Namely F5 Kuwait, F5 Kuwait contributed $47 million in the fourth quarter of 2016. Operating income for the fourth quarter of 2017 was $10.3 million, an increase of $1.7 million or 20.1% compared to the fourth quarter of 2016, primarily due to the decrease in SG&A cost. Operating margin for the fourth quarter of 2017 was 3.5% compared to 3% operating margin in the fourth quarter of 2016. During the fourth quarter of 2017, we recorded net favorable cumulative adjustments to operating income of $3 million compared to $3.3 million in the same period of 2016. There are many factors that drive contract performance, including successful contract modifications and extensions of current contracts. Cumulative catch up adjustments can be positive or negative are normal part of this business. And our guidance contemplates this reality. Interest expense for the fourth quarter of 2017 was $1.4 million or approximately $100,000 higher than the same period of 2016. The increase in interest expense was due to the expense of unamortized differed financing fees related to the prior credit agreement, partially offset by decreased interest expense on a lower debt balance. Net income for the quarter ended December 31, 2017 was $41.6 million compared to $4.4…

[Operator Instructions] Our first question comes from Brian Ruttenbur, Drexel Hamilton LLC. Please proceed with your question.

Yes and so a couple of quick questions, very good year. Congratulations, but book-to-bill, it looks like it was down in the fourth quarter was that due to just large wins in the third period, was there anything just seasonal because it looked like book-to-bill was less than 1, is that correct?

Hi Brian, it’s Matt, how you’re doing? You’re correct our bookings for the fourth quarter was $171 million which was down, but you remember in the third quarter we had a pretty significant book-to-bill, annual book-to-bill we were at $1.6 billion. So all of the wins that Chuck discussed in his prepared remarks contributed at $1.6 billion. So 1.4 was new wins and then another $200 million of contract add-ons. So, overall, I think we had an outstanding year our bookings. Some of that kind of plays out differently over the course of the year in different quarters.

Okay. And then in terms of use of cash, you’re investing a little bit more in the company but is there, should we expect more acquisition, what else should we be looking for here in the near term.

Thank you, Brian. We, we are going to focus on integrating SENTEL here early in the year. As you mentioned, we are going to invest in hardening our infrastructure, but we fully expect to continue to invest in advancing our strategy. So I wouldn’t expect to see any acquisitive sorts of activities in the first half of this year. We are aggressively monitoring our pipeline of potential acquisition for the future. And continue to make prudent decisions with regard to how we utilize cash to grow.

Okay. So the plan then Matt is to have assuming no more acquisitions this year in 2018, what would the plan be in terms of cash and debt by the end of 2018?

The end of -- we believe related to the SENTEL acquisition; we believe that the whole acquisition would be paid for by the third quarter. If you read the K which I know we just posted, we ended the year at $77 million of cash on hand. So we use cash on hand in a slight different to the revolver, so that will all be behind us this year. So then we’re just talking about mandatory payments on the $80 million facility we just find in the fourth quarter. Mandatory payments will be about $4 million in 2018. We ended the year at $79 million of debt less $4 million at the end of this year we had $75 million of debt.

And just one clarification too, I didn’t indicate that we wouldn’t expect any additional acquisitive source of activities for 2018 but just probably not for the first half of this year.

Okay so assuming that there are no more acquisitions in 2018, I’m just going to make that assumption because it’s hard for me to model out acquisitions. You should end the year with roughly no cash and $75 million of debt or something in that ballpark is that correct Matt?

No we should have plenty of cash, we’ll have our normal cash balance for the $60 million and no debt, yes; I think it had that reversed.

Yes, sorry about that multi-tasking with another company, so perfect, those are my -- and then final question was on LOGCAP V, you expect with K-BOSSS an extension of nine months, what is the update of the actual re-bid of LOGCAP V or it’s not a re-bid but the LOGCAP V with K-BOSSS rolling into that, is it still going to be the fall that we’re going to see all that come out, an award in the fall or do you expect it to get pushed out.

So right now the current plan, we submitted the bid this week actually. The current plan is to have an award in the fall; we don’t know anything to the contrary. I would be highly confident however that the second to three year option that we had, second three month option that we had discussed which would take us January through March of next year. I would anticipate that as well. Now other than that it’s really depending on the timing of the acquisition process.

We should have more clarity as we move through this year as well. And so we’ll report as the quarters transpire in 2018.

Our next question comes from Ben Klieve, NOBLE Financial. Please proceed with your question.

Thank you. So first congrats on solid end for 2017 and a pretty exciting start at 2018 here. Few questions for you guys, first question regarding the tax law changed, curious with how this has impacted the status of differed tax liability beyond one-time, one-time adjustments. And specifically how can we look at cash taxes for this year relative to your 22% tax rate that you guided to?

Sure, sure. So really our differed tax liability is made up of two large components, one had to do with the goodwill that's on the books from the spin. And then the other large chunk had to do with the unbilled receivables that we’re allowed to differ historically. So that whole balance has been re-valued at 21% and it kind of reflected in the $35 million benefit we received in net income of tax in the fourth quarter and full year. What has changed on a differed tax liability is we’ll no longer be able to differed unbilled receivables. There is a phase out of that plans, so we’ll do that over the next five or so years. And so our cash tax impact changes very little. So we paid a little bit more in cash taxes the last couple of years, we managed that very effectively. I really don’t expect that to change in the next two or three years until we actually get to this, the change in the unbilled portion of the tax law.

Okay, perfect. Then couple of questions regarding the SENTEL acquisition, you talked about the [Fort Bragg], running through 2021, outside of this what does the portfolio look like from a recompete standpoint?

They have one contract that was on for recompete this year versus several, we just got news that they won the IRS tips contract. There was a three year award, so we’re pleased with that, real pleased with that. Their exposure of the rest of the year or the exposure for the SENTEL contract is minimal in 2018 so--

Okay. And can you talk a bit about SENTEL’s business development efforts, pre-acquisitions? They, you know, did they kind of take their foot off the gasoline up to the acquisition or have they been pretty aggressive in their business development efforts? I guess what I am trying to understand is, are you going be able to, it’s a really juice up there, you know, their business development or have they been doing a solid job before you acquired them?

I’ve been very pleased with the intensity, if you will the go-to-market activities in SENTEL. As with most small businesses of activities, they are very opportunistic. And I really look forward to leveraging our more robust infrastructure and process around go-to-market activities. With SENTEL’s relationships, and so I’m very pleased with how I see the go-to-market activities with regard to the SENTEL client shaping up.

Okay, very good, thank you. And one other just minor question here, the $3 million of acquisition expenses that you’re expecting in 2018, was there any acquisition related expenses that fell into the fourth quarter?

There were few couple of $100,000 in the fourth quarter but most of those would be incurred in 2018. And quite honestly the $3 million might in conservative; I think we can manage that very appropriately. And we should see that come down as we can kind of move to the next couple of quarters.

Our next question comes from Joe DeNardi with Stifel. Please proceed with your question.

Hey guys, this is John [Larkin] for Joe. Great quarter and full year. First question I have is your thoughts on the impact of tax reform on margins. Do you guys seek peers kind of competing away the gains from the lower tax rate, especially given the more commoditized nature of this type of work at your end?

Hey, John how you doing? It’s Matt; no I don’t expect that to really change a whole lot, we are a low margin business. I would expect very similar to what we’re doing as a company reinvestment into the business fundamentals. That can be either in rewarding employees, buying back stock potentially or reinvesting in their businesses. So I think that's the way you’ve got to see tax perform play out in the government services space. But as far as margins are potentially pricing at discount into the bid, we’re already talking pretty thin margins. So it is not much room there.

Okay. Then just kind of looking at your customer base, it’s been a fundamental change in the past few weeks given the balanced-budget agreement that came out. And I am just curious to hear what you are hearing from your customers in terms of how extra dollars that they kind of incrementally see coming their way. Is that changing how they are going to bring work to market? And in terms of RFP’s, are they going back to--and kind of maybe tweaking a few things. Or are they kind of staying with their plans? And I’m probably really looking at LOGCAP V, will that get extra dollar that they could easily get, change the way that they’re approaching that work?

Hey, given where we have been as an industry over the last several years, although we’ve had budget stability, our clients really hasn't had a vision of how their budgets were going to materialize in the future. That is much more certain now, so we’re actually hearing our clients talking about looking into the future and making investments to improve their long -term operations and their long term mission. So I see this as a really positive step toward in our case having our clients move to their next level of operational efficiencies which we believe will be the converging of the physical and digital infrastructures.

Just lastly, is the Air Force Range support service contract is that now a full run rate?

It is. It’s a full run rate in this quarter. As you know that we’re a subcontractor on that particular engagement. And again the point that we made in the prepared remarks that the fact that we are now very scaled type provider, providing support to the air force in eight countries is really a positive change for our business model both in 2018 and beyond.

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

I want to thank you very much for your support today. Thank you all who attended the call. And we look forward to updating you on our progress as the year proceeds. Thanks very much.

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