Thank you for joining us for the Vectrus First Quarter 2022 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Gary, and I'll be the operator for today's call. And now I'll pass the call over to your host, Mike Smith, Vice President of Treasury, Investor Relations and Corporate Development at Vectrus.

Thank you. Good afternoon, everyone. Welcome to the Vectrus First Quarter 2022 Earnings Conference Call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Susan Lynch, 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. The company assumes no obligation to update its forward-looking statements. Additionally, I'd like to point out that, in addition to GAAP earnings, we will be discussing and reporting adjusted non-GAAP metrics, including adjusted operating income and margin, adjusted EBITDA and margin, adjusted net income and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials, press release and Form 10-Q. 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. Before we get started, I would like to thank all of our employees and their continued commitment to our clients, our team's demonstrated agility and outstanding performance supporting several of the DoD's most critical and high-profile missions during the quarter. Please turn to Slide 4. We started 2022 on a strong note with revenue growth across several areas of our business. During the quarter, revenue grew 5% year-over-year and 9% sequentially to $456 million. Revenue growth was driven by the continued phasing of LOGCAP V, continued high OPTEMPO in the region we operate in support of ongoing world affairs as well as the progress made in executing growth in our core programs. Adjusted EBITDA for the quarter was $18.2 million or 4% margin as we work through program efficiencies in the early phases of LOGCAP V implementation. LOGCAP V is generating higher revenue volumes, with a greater amount of material and pass-through content that have a different margin complexion. I would like to point out that approximately 2/3 of our revenue is coming from contracts in the first 18 months of their life cycle, which provides substantial revenue visibility. As is standard in our business, operating margins tend to be lower at the beginning of the contract and generally improve over time as we execute our well-established process improvement and enterprise Vectrus initiatives. EPS for the quarter was $0.24, and adjusted diluted EPS was $1.01. Importantly, during the quarter, we continued to expand our geographic footprint through additional growth in INDOPACOM which now makes up 4% of revenue. We expect continued growth in the region and note that the DoD's recently released fiscal year 2023 budget calls for another major exercise in the region, which…

Thanks, Chuck. And good afternoon, everyone. Turn with me now to Slide 7 to discuss our first quarter results. First quarter 2022 revenue was $456.5 million, up $23 million or 5.2% year-on-year. Our solid top line growth was boosted by the transition to full operational capability on LOGCAP V programs in Iraq and Kuwait late last year and Kwajalein this year. In addition, revenue benefited from transitioning the Fort Benning program and volume associated with rapid response and contingency efforts. Importantly, we were able to grow the top line despite the headwinds of the withdrawal of U.S. military from Afghanistan. Operating income was $5.2 million and was impacted by the incurrence of $9.1 million of M&A and integration-related cost. Adjusted EBITDA was $18.2 million or 4% margin as compared to $20.7 million or 4.8% in the prior year. Adjusted EBITDA margin was influenced by the significant amount of revenue and contracts that are in the early stages of their life cycle. We believe margin on these contracts will improve over time as we apply our process improvement and enterprise Vectrus initiatives. Margin was also affected by our increased support of our clients' supply chain needs which is driving an increase in material and pass-through content that typically carries a lower margin. In aggregate, on average and over time, we expect to see improvement in the margin profile as we drive operational efficiencies and diversify into higher-margin scopes of work. Net income for the first quarter of 2022 was $2.9 million. The effective tax rate in the first quarter of 2022 was 19.7% compared to 17.5% in Q1 2021. The effective tax rate this quarter was higher than anticipated due primarily to the accounting treatment of certain M&A transaction costs related to the Vertex merger. Adjusted net income was $12 million…

Thank you, Susan. Now I'd like to give you an update on the merger we announced on March 7 with Vertex. On April 27, 2022, we issued the special meeting proxy which provides shareholders with more information pertaining to the specifics of the transaction. Additionally, today, we filed a supplemental investor briefing with the SEC that contains information regarding the merger with Vertex, much of which was contained in the proxy. For the remainder of the call, we will cover several of the slides contained in this investor briefing. Please turn to Slide 12. The combination of Vectrus and Vertex creates a stronger, more diversified company and a leading global provider of mission essential solutions and technology to national security, defense, civilian and international clients. The combination provides a significant value creation opportunity for our shareholders, broader and deeper capabilities to our clients and greater opportunities for the people of the combined company. There are many benefits to this combination, several of which are being identified on this slide. Pro forma revenue and adjusted EBITDA for the combined business is approximately $3.6 billion and $290 million, which includes $20 million of previously disclosed run rate synergies. This equates to an adjusted EBITDA margin greater than 8%. This should not be construed as 2022 guidance. We plan to issue 2022 formal guidance after the merger closes. The visibility and long-term contracts of the combined company is an important attribute and differentiator. Inclusive of Vertex's recent $850 million Navy Test Wing Atlantic win, the combined business will have over $12 billion in backlog. Please turn to Slide 13. Many of you know that Vectrus has a proud history going back to 1945 at Federal Electric Corporation, which was a service arm of ITT. However, it is also worth noting that Vertex has…

Thanks, Chuck. Please turn to Slide 18. The pro forma financial profile of the company remains compelling with improved scale, strong margins with significant cash generation. Revenue for the combined company is expected to be approximately double where Vectrus is today and provides enhanced scale and ability to compete. Additionally, pro forma adjusted EBITDA and margin is expected to improve markedly from the midpoint of Vectrus' 2022 guidance of 4.6%. Inclusive of $20 million in run rate synergies, EBITDA margin would exceed 8%. An important characteristic of both Vertex and Vectrus are the very low capital requirements to operate the business. We believe that normalized capital expenditures of the pro forma business would be less than 1% of revenue. As we mentioned during our last call, there are also several attractive tax attributes that lower the effective tax rate and generate cash tax savings for the combined company. The tax attributes are $1.1 billion in aggregate and are estimated to yield $18 million in annual cash savings over the next 12 years. Please turn to Slide 19. As Chuck mentioned, both companies have won a substantial amount of recompete and new business, which provides excellent visibility over the next several years with a solid platform for growth. We believe the combination of revenue growth, strong margin and high cash generation will result in significant value creation for shareholders over the next several years. The left-hand side of the page shows our opportunity to potentially achieve materially higher revenue in the future. While revenue growth is subject to timing of awards, protests, budgets and other factors, we believe that looking ahead, top line growth can yield strong adjusted EBITDA and margin. This is expected to be achieved through business mix, supply chain, contract and business efficiencies, the automation of core processes,…

Thank you, Susan. Please turn to Slide 22. We remain confident that the merger with Vertex will create significant value for our shareholders while further exemplifying our leadership in the emerging converged market and creating larger, more balanced and differentiated business with greater growth opportunities for our people. In terms of timing, since announcing the intent to merge with Vertex on March 7, we have been working several actions required to close the transaction. Myself and the members of the senior leadership team have had several integration planning meetings with Vertex leadership. We are unanimous in our feeling that our cultures could not be more complementary, and we are eager to work together post close. We remain on track to close this transaction in the third quarter as noted on Slide 23. Now I'd like to turn the call open to questions.

Our first question is from Joe Gomes with NOBLE Capital.

So the first one I have here, revenues in the quarter were up 5.2% above the 2% to 4% guide. Just wondering, for the quarter, was that in line with your expectations, better than expectations? What kind of drove the, for lack of a better word, outperformance on the top line in the quarter?

There are a couple of items, Joe, and thanks for identifying that. We were very successful in the case of the INDOPACOM Kwajalein task of moving the full operational date to the left by about 6 weeks, as I noted in my remarks, which was a portion of that overperformance. Secondly, there were some aspects of an exercise in INDOPACOM again that were initially planned for later in the year that occurred earlier in the year. And finally, the water remediation effort in Hawaii actually went a bit longer at a slightly larger scope than we had anticipated.

Okay. And then you've talked a couple of times on the margin improvement, that we're in early days of a lot of the contracts and, as the contracts mature, you should see some margin improvement. Is there a way to quantify or provide color as to at what point -- I mean, you were saying, around 18 months, I think -- you mentioned a number, I don't have it right in front of me, of what percent of revenues are within the first -- 2/3 of revenues is within the first 18 months of their contract. I mean is it 24 months, 36 months when you think you really start to see margin improvement? Is it longer than that? Just trying to get a little better sense of when we should start to see some more margin improvement.

I would say at the every year mark of each of the contracts. So the way things typically work is you'll have a base year, the lowest margin, if you will, which is where the pricing reset that we always talk about occur. And then what will happen from there is we'll see some margin improvement going into year to the first option year or the second year of the contract. And then from there, the second option year and the third option year is where we really get to a full operational realization of the margins in those particular contracts. And if we look back over history at some of our wins over the last 5 or 6 years, you see a very similar ramp to that. I will tell you that having 2/3 of our revenue in the first 18 months, which would be the base year and a portion of the option year is highly unusual. It's a great thing, by the way, don't get me wrong. We're very fortunate to have that situation. But again, I like the way our teams are working together with our clients to, again, reposition work that could have been fixed price initially. I'm sorry, strike that -- could have been cost type initially to more of a fixed price orientation.

Okay. And kind of switching gears a little bit here. 3 of the major contracts that you guys are on, K-BOSSS, LOGCAP Iraq, LOGCAP Kuwait all come up for -- I think K-BOSSS expires in August. The LOGCAPs go into, I think, it's the first option year for those. Can you kind of walk us through how that all plays out? K-BOSSS was about a $280 million revenue opportunity in 2021. Does that bulk of that revenue just flow now into the LOGCAP Kuwait contract construct? Or maybe you can just kind of illustrate how that all will work going forward.

Yes, that's exactly right, Joe. So we continue to wind down the historical K-BOSSS task. The vast majority of that work moves into the Kuwait task under LOGCAP. And as you know, as we've talked about over time, there are components of the K-BOSSS -- the original K-BOSSS contract as they are not part of LOGCAP, but specifically the security portion of K-BOSSS. So we should get to a kind of a standard run rate, if you will, on the new Kuwait task without K-BOSSS here in the second half of the year, and that should be then very visible to everybody. Susan, anything to add?

No, I think you're right on. The last 2 quarters, we've been at about $98 million to $105 million. So I think we're probably right in that range going forward.

If we could turn to the Vertex acquisition for a moment, obviously, you went -- come through a time line here. You just filed the proxy. Chuck, in your discussions with your stakeholders, your shareholders, how have they come across to you about the acquisition? Or any concerns being expressed by some of your major shareholders? And if so, how do you address them?

Yes. This is a transformational merger to be very clear. Early after the announcement, we had many conversations with our current investors, other analysts like yourself, and as the logic became clear, our investor base at that point in time became comfortable that the strategic objectives of the acquisition, such as the increased profitability of margins, the increased diversification of those contracts and geography, so the industrial logic becomes very clear. So while I had a taste to predict the future, at this point in time, I feel that there is a general understanding of the strategic benefit of the acquisition and we look forward to moving into the shareholder vote.

And maybe I can sneak a couple more quick ones in here. So you were talking about the -- Susan, the cost synergies and you always talked about the $20 million when you announced the call and then you had the $290 million of adjusted EBITDA number. And then today, you're mentioning about $18 million more cost synergies from the Vertex acquisition -- I was thinking of the Raytheon assets. Is that additive to the $290 million or how does that all play out?

Yes. Thanks for the question. So there is a small portion of the $18 million that is already in that $290 million or the $193 million specific to Vertex, but it kind of ramps in 2023 and then it is all in the 2024 numbers and beyond that you see in the proxy. So it's already kind of tethered into the plans that you have in the proxy.

And two more quick ones, if I may. In the last couple of years, you have a lot of base restrictions due to COVID. Is any of that remained or left or they're all pretty much gone? And two, obviously, one of the key items that's brought up here in the entire earnings season has been employee attraction and retention. Just wondering how you guys are faring in that area.

I would say that the bulk of the COVID-related operational realities are behind us, but there is -- we still have pressure staffing around the globe like you would imagine. So again, I would not attribute our current staffing tension, if you will, to only COVID. But COVID obviously set a stage that now needs to be continued to improve over time. Secondly, there are supply chain realities and supply chain operational realities out there that I would say would have their root in COVID. But again operationally, I think we're behind most of those situations.

The next question is from Tobey Sommer with Truist Securities.

With respect to the merger, I was wondering if you could comment on the revenue synergy opportunities. And I have in mind one of the slides you have that has the checks of capabilities on one side versus the other and where there isn't overlap, where do you see the best opportunities?

Thank you, Tobey. One of the great things about this acquisition that we've talked about on several occasions is that we are 2 very complementary businesses. And we do not see much, what we call, revenue dyssynergies at all because of the fact that we are focused on different segments within the operational aspects of the federal services marketplace. Having said that, we do believe strongly that there will be revenue synergies that our combined capabilities and our combined scale will be able to address, and we see this in areas that have not been in our traditional markets, such as at the international markets and certain foreign military sales markets as well as within our core markets, where, as I've already stated, the combined capabilities just make, I'd say, a larger, more capable offering to our clients. So we do believe strongly that there will be revenue synergies. And as we get through the vote and into operating as a combined company, we fully expect to update you and the investor base in general about where we see those opportunities.

Could you maybe give us a sense of the cadence within the corridor and then in here so far in 2Q about maybe OPTEMPO and what that's been like as we clearly have a major conflict in the world and some of your customers may be responding to that from a pure budgetary standpoint. We then got a budget midmonth in March and I'm curious what it was like sort of before and after from an award perspective.

I would say from an award perspective, the first quarter or the first 4 months of the year are always -- have traditionally been, I should say, a bit slower for us. But in terms of the OPTEMPO around our existing program base as well as, we discussed in the prepared remarks, those contingency contracts we have, that OPTEMPO had been very high and very strong across the globe for obvious reasons. We obviously talked a bit about the European activities but there are still activities in the Middle East dealing with the particular changes that occurred in Afghanistan. And we had talked about, again in the prepared remarks, activities in INDOPACOM that actually moved to the left in terms of exercise support. So it's a bit of a long-winded way of answering your question. The OPTEMPO around our current installed program base and in our contingency contracts has been a tailwind for us here in the first quarter of the year. And as you know that we kind of held our guidance but tilted toward the top end of the range for revenue. We'll be able, I think, to provide a little bit more clarity on that as we get through the first half of the year and the next time we talk to you in August.

My last question is also kind of a budgetary one. But what are you hearing your contacts on Capitol Hill with respect to President Biden's budget request, which is kind of a marker in the different branches of military and their sort of budget outlook as we look into fiscal '23. And I know we just got a budget for fiscal '22, but it's always onto the next thing so.

Well, our focus, as you know, have -- it's traditionally on the O&M lines of the budget. And we continue to see strong demand maintaining the infrastructures and the operations that we support. And I would also mention, although not part of the combined business, yes, at this point in time, the older platforms in the aerospace market fall under that same category. So yes, I think there will obviously, given the amount of spending in the various national security operations globally, there's always pressure on that funding. But I'd also say that, that actually tells favorably to the O&M components of the budget. And it's really up to us at this point in time to work with our clients in value-adding ways and ways that we can demonstrate how we can improve the O&M operations, just making things -- they extend longer and ultimately providing a higher value in the total life cycle cost of, again, the operations and the platforms we support.

The next question is from Bert Subin with Stifel. Please go ahead.

Chuck. If we strip out LOGCAP V, what's the best way to think about organic growth for the rest of the business? And maybe just a follow-up to that, what should we expect the full run rate for LOGCAP to be as a percentage of Vectrus' revenue?

I think that what we have talked about here publicly is that LOGCAP as a vehicle is significant to our business. I will indicate very clearly that the exercises and so forth that we continue to perform on and win were not a part of the original award. So LOGCAP, as a route to market for us is significant and will continue to be significant. With regard to very specifically the Kwajalein task which as you know was not new to Vectrus and the Kuwait task which was protective of our base. We see the Kuwait task very similar less the security scope as we encountered in the prior K-BOSSS activity. Kwajalein, we see looking not dissimilar to the prior incumbent that was in Kwajalein. And with regard to Iraq, Iraq current run rate as you can see in the prepared materials is much more significant in terms of dollar run rate than we had originally bid and announced initially. So not an exact answer to your question, but LOGCAP as a route to market is substantial, and we continue to leverage with new wins activities under the LOGCAP contract. I can move to other contracts like the spectrum work that we had just talked about today, like the AFCAP work which is addressing additional contingency operations globally as well as the continued string of wins we've had in the Navy as a way to demonstrate that we continue, I believe, to be very successful in both the protection of our base and new wins in not only LOGCAP but across the various areas in the operational space that we support.

Would you say it's fair to say that outside of LOGCAP, just excluding that contract vehicle, the underlying business is organically growing? I know you've highlighted several...

The short answer to your question is yes.

And then maybe just digging deeper on the non-LOGCAP stuff, you noted in the release increased activity during the quarter that was coming from EDI, European Deterrence Initiatives. The funding there, if we go back a few years, has been cut and seems to be growing again. It looks like the budget request there is getting better. Can you help us frame what opportunity you have as a company there, maybe this year or next?

When it comes to the various European activities, the demand signal we've seen to date have been predominantly through the Air Force and in parts of our client sets that we can't spend a lot of time talking about today. I will say, however, that the to the activities, not just in Europe, but the other exercises and, I guess, call it, OPTEMPO enhancements that we've seen in INDOPACOM is also significant. We talked a bit about in the prepared remarks the start-up of Benning -- Fort Benning, that start-up was very quick, it was very seamless. That contract did not go through a protest and the ability to bring net new contracts like that online quickly at the cost profile that we projected is a big deal. And again, we continue to demonstrate an opportunity -- we continue to demonstrate an ability, I should say, not just to continue to take scope competitively in the marketplace, but then to get that scope transitioned in to full operational capability in very -- in kind of a very efficient way.

Just to clarify on the -- I know you said Air Force and it sounds like some classified customers there in Europe, you noted in the release that it's sort of immaterial now, the Air Force. Do you expect that to become material? Or is that sort of too hard to say right now?

I would say it's obviously too hard to say, but my experience has been if you arrive in support of a mission and you perform at a very high level, the likelihood of that mission expanding is good, right? And again, as we normally do, as our teams normally do, we demonstrated in Hawaii earlier this year or the end of last year that's -- that is the proof point that we always fall back to with our clients and that's ability to execute seamlessly, to execute with agility in support of their various missions.

But just one last one for me. Have you noticed -- have you noted any change in the competitive environment for the contracts you're bidding on, it seems like the largest competitor that you used to historically go against have started to move up the higher tech end of the spectrum, but they do still do operations, logistics work. It just seems like they're doing less of it. I'm curious if you're seeing any change in the competitive environment for contractors.

I think we are, I think we are. As you know quite well, because you've covered the space, the consolidation that has occurred in the operational aspect of the federal services marketplace has been significant. We've seen that, and Vertex has seen it in the aerospace business as well. So as a result, that doesn't mean competition is any less. That just means our competitors are that much more kind of focused and coordinated. We continue to execute our go-to-market strategy. We stay very much focused on the campaigns that matter to us. And as -- when any industry consolidates, it actually provides some opportunities, but it also provides some challenges, and we're fairly -- we're very aware of both the opportunities and the challenges in a converging marketplace.

This concludes our question-and-answer session. I would like to turn the conference back over to Chuck Prow for any closing remarks.

Thank you very much, everyone, and thank you for joining us on the call today. We look forward to reporting back to you both on the status and progress on the merger as we move through this quarter and to the next time we talk in August. Thank you very much, and we'll talk to you soon. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.