Greetings, and welcome to the Vectrus Second Quarter 2018 Earnings Conference Call and Webcast. Today's call is being recorded. And my name is Michelle, and I'll be your 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 questions following the presentation. [Operator Instructions] And now, I'll pass of the call over to your host, Mike Smith, Director of Investor Relations and Corporate Development at Vectrus. Thank you. You may begin.

Thank you. Good afternoon, everyone. Welcome to the Vectrus second quarter 2018 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 report a strong second quarter across the board. Revenue increased 24% year-over-year. Our operating margin improved 50 basis points year-over-year. Importantly, we won two new firm fixed-price maintenance contracts in Europe and North America valued at over $125 million. This brings our year-to-date new business wins in 2018 to over $250 million. I'd like to thank our team of over 7,000 global employees for their execution in the quarter and our clients for their continued confidence in our business to support their missions. Award activity was solid in the second quarter, and we saw a continued expansion in our current contracts with modifications and extensions that totaled $165 million. Additionally, we were awarded new business valued in excess of $125 million that extends over the next several years. Specifically, during the quarter, we were awarded an $84 million, 7-year firm fixed-price contract to provide base maintenance support services at Sheppard Air Force Base in Texas. Sheppard Air Force Base was activated on October 17, 1941, and is the largest and most diverse training base in the Air Education and Training Command, or AETC. This is an important win for Vectrus and importantly represents the third contract we have secured with AETC. Our team has done a great job differentiating our offering and delivering innovative and cost-effective solutions with this important client. In total, within the past 18 months, Vectrus had won facility support service of contract with AETC valued in excess of $450 million. We continue to make excellent progress expanding our presence with the Air Force, and currently are a trusted provider of facilities and logistic services to the Air Force in 9 countries. Our…

Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 5. Our second quarter financial results were solid with revenue of $321 million, up $62 million or 24% year-over-year when compared to the second quarter of 2017. Importantly, excluding the revenue from SENTEL, our second quarter revenue grew 12% year-over-year due to growth in the Vectrus base business. Operating margin in the second quarter was 4% and diluted earnings per share were $0.81. Days sales outstanding for the second quarter of 2018 was 60 days, a 1-day improvement from the same period of 2017. Our growth efforts and investments over the past year have resulted in a 17% increase in total backlog, which now stands at $3.3 billion. Our total backlog provides solid visibility into the future and continues to offer a significant opportunity to apply innovation and enterprise-wide improvement initiatives to an expanding business base. As a reminder, in January, we acquired SENTEL Corporation for $36 million. And I am pleased to report that the integration remains on schedule and will likely be completed in the third quarter. Furthermore, our year-to-date transaction and integration costs associated with the acquisition are trending below our estimates and total $1.7 million year-to-date. While the integration is still ongoing, we believe that, in total, transaction and integration costs associated with the acquisition will be below our original $3 million full-year estimate. Additionally, we are assessing the potential reimbursement of some of these expenses, which may be reimbursable under Federal Acquisition Regulations. As of June 29, 2018, our leverage ratio was 1.44x, which is well below our covenant level of 3.0x. Total debt at the end of the quarter was $77 million and our cash balance increased to $41 million, resulting in $36 million of net debt. Our financial position remains strong, and we…

Thank you. [Operator Instructions] Our first question comes from the line of Brian Ruttenbur with Drexel Hamilton. Please proceed with your question.

Yes. Thank you very much. First of all, good quarter. Next, the real questions are around K-BOSSS and LOGCAP. You mentioned that you had the highest rating possible. How is that different from past ratings? Is it better? Or can you describe the rating other than highest rating possible in the history of your ratings?

Brian, hi, this is Chuck. How are you?

Good Chuck.

We, for the last several quarters, at least, have received the highest possible scores. So, we're really pleased with, a, our performance and the longevity of that performance. As we've mentioned in the call, we do expect to hear on the LOGCAP award in the fourth quarter of this year, and we've indicated several times together that we're really confident with our position.

Okay. And then moving on over to some housekeeping. Book-to-bill in the quarter, I didn't see that. It appears to be less than one. Is that correct?

Sure. So, coming off of a strong first quarter book-to-bill, second quarter we had $125 million of new, new – new business wins, and another $165 million of contract expansion. So, if you take a look at year-to-date book-to-bill, and you exclude SENTEL, our awards were $651 million, which is 1.1x. That would imply the second quarter is about 0.9 book-to-bill.

Okay. And that 0.9 is an internal number. With SENTEL, do you have like a quarter, kind of book-to-bill with SENTEL, roughly at 0.9?

Our awards, including SENTEL for the quarter, were $292 million. And then SENTEL had about $30 million of sales. So that adjusts the award value to $262 million. I hope that helps.

Okay. And then you mentioned, you've got to pay down roughly $4 million of debt. How much have you paid down so far this year?

It's about a $1 million a quarter, so those are the minimum payments. And the way we structured the new debt agreement was really to minimize our mandatory payments upfront. And so, it's $4 million in 2018 and another $4.5 million next year. And right now, we're just intending to pay the mandatory payments and no voluntary payments.

Okay. And then just one more question along the same lines with capital deployment. I assume you're not going to be making a whole lot of capital deployment plans aggressive until K-BOSSS happens. But once K-BOSSS happens, is their plans to either: a, pay down the rest of the debt; b, lever up and make acquisitions; c, buyback stock? Is there some kind of plan in place?

Yes. There are plans in place. And I would like to say that we are continuously looking in the market for assets that not only meet our strategy, but could expand either our client footprint or capability set. So, while we're obviously going to be cautious between now and K-BOSSS, we are actively looking at – we continue to look at assets in the market.

And just one other thing, is there a chance that this K-BOSSS LOGCAP gets pushed further to the right? Or is this pretty much the deadline of deadlines?

If you've been around government contracting for a long time, you'd never say never in this business. I will tell you that it looks like we are trending toward a fourth quarter award. The acquisition community seems confident in the way they talk about that award date and just kind of sensing my pulse on the marketplace, fourth quarter seems about right.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Joe DeNardi with Stifel. Please proceed with your question.

Hi, good afternoon everybody. Chuck, you talked a little bit about the converged infrastructure market opportunity. I'm wondering if you could just spend a little bit of time talking about that in more detail. How you see that opportunities pooling up? Is any of your business currently considered converged infrastructure? And then if you had to take a guess, how much of the $2.5 billion you think you can get to in a few years comes from that market?

Thanks for the question. We on all of our existing programs and essentially every bid that we're submitting include some form or fashion of a converged physical and digital capability. I'll give you, I guess, a very quick example like. One of my first trips in the role, early in 2017, I went to Incirlik in Turkey, and one of the visits I took was to look at the water treatment facility throughout the base. I did that in a vehicle over about a 90-minute period of time, where we touched all the sensor infrastructure. A few months ago, when I was at Incirlik, I took the same tour from an air-conditioned room with a screen that monitored all the sensor points along the water infrastructure. So, that's one example. The next part of your question, we're not seeing and, quite frankly, we don't expect to see any pure-play converged infrastructure, at least, in the short-term. But I will tell you that in the IT aspect of our business, we are seeing an increasing number of opportunities around sensor integration, which really would be pure play. So, the short answer is, we continue to see trending toward the converged infrastructure. We continue to see our Army client and Air Force clients, in particular, talking about their move to smart infrastructure, more resilient infrastructures. And we feel real confident with regard to the solutions that are emerging.

So, Chuck, would your argument be that, you're one of the only providers of that type of solution. And so that gives you an advantage in some of these competitions if it's not going to be a pure-play opportunity?

I wouldn't know whether we would have an advantage with that, but I will tell you it feels to me that we're early. It feels to me that our clients are being very receptive to the conversation. And I can't say with certainty this allows us to deliver with a higher degree of quality and a lower cost.

Okay. And then – sorry, just enough on K-BOSSS. When you look at the solicitation for LOGCAP and compare that to, I guess, the process where K-BOSSS didn't go your way before, were there factors that position you better for this than previously, like is cost less important, is best performance more important? Just any color there in terms of what gives you confidence going into it.

I mean, the confidence is, first and foremost, around our continued performance. I do feel that we have a real momentum in the marketplace in terms of winning new business, which makes me feel that we have the pricing components of our markets pretty well understood. So, between those two factors, I feel – again, I feel it's confident you can feel about a government award before you know the answer.

Okay. And Matt, just on the leverage, and I guess, your banks' kind of appreciation for this binary event towards the end of the year. I mean, should we expect – are there going to be any surprises if this doesn't go your way in terms of – from leverage standpoint or anything or balance sheet standpoint, anything like that?

No. We renegotiated the credit facility last fall, and we have long-term relationships with our banks. They are the same banks and J.P. Morgan is our lead bank, same banks that were with us from the spend, so they understand the business and the binary event of K-BOSSS. And the covenant levels contemplate the business reality of what could happen. I will say, there is no trigger event that our covenants come down lower than what we've described in our filings. So, everyone understands the implications and believe, as we do, the strategy is strong. And recent events, we won $250 million of new business. Time helps us. As the solicitation continues on, we'll win new business and fill that gap if it goes in the negative direction. So, there's no concerns from our banking partners.

Great. And then, Matt, just any other recompetes of size that we should be aware of next year?

The only other material contract that we have in the portfolio and we disclosed is the OMDAC-SWACA contract. And right now, we're on contract through November. And the full service -- or the RFP is not due until 2019, so that will kind of go out through next year and play out like a normal recompete. Other than that, everything else is normal.

Thank you very much.

Thank you. [Operator Instructions] Our next question comes from the line of Ben Klieve with NOBLE Capital Markets. Please proceed with your question.

Thank you. Couple of questions from me. First of all, on the revenue guidance. Through one half of the year, you're certainly trending towards the high end of that range. Wondering if you could talk about the variability in that guidance that remains. What would cause the high end versus the low end at this point?

Sure. So, we're real pleased with the performance so far, $642 million year-to-date is a good place to be with significant growth in the second quarter. The midpoint of $1.25 billion implies that the second half of the year comes down slightly. We do have some transition on certain contracts, so we are ramping up three contracts this year that will contribute into the fourth quarter of the year. So, to your question, midpoint is solid, I believe, at this point. The upper end of the range is really how fast can we get these contracts on boarded and do we see any additional contract awards related to the new business on those contracts. On the downside, on the lower end of the range, at this point, it's very unlikely that we would see the downside of the range. It would have to be a change in service that has not occurred yet. And then a rapid deployment or descope. And that's why I said, at this point being this late in the year that, that outcome is probably unlikely. So, we're at, really, the midpoint or above.

Okay, perfect. Thank you. And then a couple of questions regarding the pipeline and bookings here. I'm curious if – how do you view the pending announcement of LOGCAP V impacting the pace of award adjudication. I mean, has this kind of slowed down the award phase through the first half of the year? Do you expect, as you get closer, that there will be any change to the pace? And how is that dynamic playing out?

What we are experiencing in the marketplace today is really the second full-year budget stability and that's evident. Our clients feel that they have a stable platform by which they can make decisions, while we see funding leveling off in 2020. But we do expect to see a stable funding and budget environment. So, all of that together provide both the contract community and the acquisition community confidence. I'll tell you that one of the awards that we announced in the first quarter was the Kuwait DFAC opportunity, which is essentially out of the same contracting command as LOGCAP. So, we were very pleased with the rate and pace to that acquisition. We're obviously very pleased with the outcome of that acquisition. So, a long-winded answer to your question, maybe, but it feels to me like the contracting community has a good rate and pace behind it. Obviously, we want to get the outcome we're looking for at the end of the year on LOGCAP, and we'll move from there.

Okay. Very good. Appreciate the color. That’s all from me.

Thanks, Ben.

Thank you. There are no further questions. At this time, I would like to turn the call back over to Mr. Chuck Prow for any closing remarks.

Thank you very much, Michelle. And thanks to everybody who joined the call today. We enjoyed ourselves, and we look forward to updating you on our progress this time next quarter. Have a good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.