Thank you for joining us for the Vectrus First Quarter 2018 Earnings Conference Call and Webcast. Today’s call is being recorded. My name is Michelle and I will be the operator for today’s call. [Operator Instructions] And now, I will pass the call over to your host, Mike Smith, Director of Investor Relations and Corporate Development at Vectrus.

Thank you. Good afternoon, everyone. Welcome to the Vectrus first 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 would 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. This year is off to a great start with solid first quarter financial results that showed growth due to improving sales and operational execution and the great program performance of our teams throughout the world. Revenue increased 11% year-over-year to $321 million, while backlog increased to $3.3 billion, the highest level since becoming a public company. Additionally, adjusting for the required adoption of ASC 606 and one-time transaction cost associated with SENTEL, our operating margin for the quarter was 4%. Matt will discuss the impact of ASC 606 adoption later in the presentation. Our first quarter results, combined with the recent contract wins and extensions, have increased our overall revenue visibility and as such, we are modestly increasing our full year 2018 guidance for revenue and EPS. I have visited our programs in all areas of operation, the U.S., the Middle East and Europe thus far in 2018 and can attest to the progress our teams are making in all aspects of our strategy. Through the application execution of innovative tools and methods, technological convergence, leveraging best available commercial practices and through our enterprise-wide management approach, Enterprise Vectrus, Vectrus is transforming the way in which we sell and deliver services within the federal facilities, logistics and select IT markets. These efforts have the opportunity to significantly improve the outcomes of our clients’ missions, while creating a higher value growth-oriented platform. I would like to thank all of our employees for their hard work as we continue to execute our long-term strategy and position Vectrus as a leader in the converged infrastructure market. In particular, I would like to take this moment to recognize our veteran workforce. Vectrus remains a leading…

Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 6. Before we review the financial results, I would like to discuss our adoption of the new revenue recognition accounting standard, ASC 606, revenue from contracts with customers better known as ASC 606. While we have a strong quarter with revenue increasing 10.5% year-over-year, the change to the new standard adversely impacted operating income, net income and diluted earnings per share in the first quarter. The first quarter 2018 operating income decreased by $3.1 million when compared to the previous revenue recognition methodology required under ASC 605. The impact on operating income and margin is solely reflective of the accounting change and does not represent a change in the fundamentals of our business. The $3.1 million impact is only timing and will result in increased GAAP operating income and margins over the remaining quarters of 2018 with no impact to full year 2018 guidance. Financial results for the quarter were solid with revenue of $321 million, up $31 million or 10.5% when compared to the first quarter of 2017. GAAP operating margin was 2.7% in the first quarter and diluted earnings per share were $0.54. Operating margin adjusted under the prior ASC 605 guidance would have been 3.7%. Additionally, operating margin adding back $1.2 million of non-recurring transaction and integration costs would have been 4%. On January 23, 2018, we acquired SENTEL for $36 million. The acquisition aligns directly with our strategy and our first quarter results were strong with revenue of $23 million, up $3 million compared to our internal expectations. Additionally, debt related to the acquisition was paid off at the end of the quarter. In 2018, SENTEL is expected to contribute revenue of $115 million and is expected to be accretive to our full year GAAP diluted…

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. So, a couple quick questions. First of all on book-to-bill ex your acquisition of SENTEL, can you give me that number? I just want to make sure I am not doing an incorrect calculation?

Sure, sure. Let me just walk you back from our total backlog. So, if you start from $3.3 billion and you exclude SENTEL of $281 million that gives an adjusted number and then our awarded value in the quarter would be $390 million. That includes the K-BOSSS award and $120 million of new-new.

Okay. So what I would be taking to do your core book-to-bill would be then backing out SENTEL revenue also and so that your – I would just look at your core revenue ex-SENTEL would be $300 million. So I do $300 million by your bookings of $390 million. Is that the way to look at it?

So, the $281 million is net of the revenue. So it’s after revenue. So, the adjusted quarterly position from $320 million, less $23 million of SENTEL gets you about $297.5 million and that’s the number you should draw for the awards.

Okay. So you are obviously better than 1.0 and change, so like a 1.2 book-to-bill, which is one of the highest in the industry. Do you expect that the bookings going forward to be at this level? I know that when you had K-BOSSS come through on a renewal, that’s a big one. I would imagine that you will see a drop of 1.0 or better going forward or less, what you think?

This is Chuck. We don’t know that yet. We do like our pipeline for the second quarter. As you know, we don’t determine exactly when the government awards, but I would not be handicapping below 1.0 right now, just wait and see how the next couple of weeks progresses and we will go from there.

I would say that we have also increased our bids pending award, which means they are in final award state. So, that increased to $1.4 billion. We would expect the second and third quarter to increase in award activity.

Okay, very good. So that gives me roughly 1.3x book-to-bill which is very good on your core. DSOs, you expect to drop what by second quarter or third quarter or is it going to be fourth quarter, give me a reference point when you are going to get?

Sure. We expect DSO to come right back in the second quarter. This was a one-time anomaly. They are just pushed out of the quarter. We have large contracts. Our invoices are large. They can drive some material variability. So, DSOs are our plan to come down to normal levels in the second quarter. The one item to note is the 4-day impact for ASC 606. That will continue on at times during the year and so you have to take that into account when you compare prior periods.

Okay. So where would DSOs be if they are going to come back down to normal levels in the second quarter? Is that 62, but then you add 4 for the accounting change or give me a ballpark where we are low 60s, mid 60s, high 60s?

Sure. So the adjusted Q1 number would be 68 less 4, so it’s 64, I would say, in the low 60s and the 60 range or below.

Okay, okay. And then in terms of SENTEL, when do you view this as fully integrated? Are you – because this is smaller acquisition, is it within one quarter, two quarters, when do you view yourself as fully integrated?

I would say that we are tracking really well. I mean, we are 2 months into this. So it’s fairly early. The second quarter will be a big quarter for us to really complete most of the activities. At that time, we will know the total non-recurring spend and we will be well on our way for full integration.

Yes, I would like to add to that. That’s a back office view, which is exactly the right view. But on the front office and how we are interfacing with our clients, how we are going to market, I consider us already fully integrated. So, I really like how the teams have come together in short order to have market impact.

Okay. And then just last question in terms of sequential revenue, trying to understand any – should we see a sequentially up second quarter versus first quarter? I am just trying to understand, because I don’t know how SENTEL is. I assume similar view where you have a drop off in the fourth quarter, but if you could give me some kind of perspective on revenue flow?

Sure. So, we ended the quarter at $320 million as we reported. There were a couple deliverables that were completed in the first quarter, we don’t project in the future quarters and that’s about $10 million. So right now, for the second quarter, we are projecting around $310 million give or take a few million dollars. And then as we get through the year, that could level off and flatten out to get us to the 1.25 midpoint guidance. Now, we will say there is some opportunities to reach the higher end of our revenue guidance range. If we continue to see margin or contract expansion above and beyond what we saw in the first quarter, which should happen, that could get us to the upper end of the range. But going back to prior comments, as award activity is expected to increase in the second and third quarter, if those are timely, protests are cleared quickly if at all, we can see some revenue in the fourth quarter.

Okay, thank you.

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

Alright, thank you. First just a quick modeling related question, your CapEx spend during the quarter was nominal. I am curious when the accelerated spending levels are going to really pickup and then at what point you think they are going to come back down towards normalized levels?

Sure. So that’s a great question. Normally, we see about $2 million to $4 million of CapEx to run our contracts. This year, we guided to higher number about $9 million. The first quarter was light. We do have some equipment on order that we will deliver and be placed in service in the second and third quarter for our Thule contract and then activity for our investments in software, our application monetization and our supply chain as well as moving our facility to a more cost effective location will all occur in the second half of the year. Right now, it’s still a solid number.

Okay. So, you think that will – the kind of accelerated spend will be done then by the end of 2018 barring any additional new work or anything like that?

Sure. That is the plan today and then it would come down to more normal levels, but we will report out as we complete the coming quarters, but we are on track so far.

Okay, perfect. And Chuck, I appreciated your comments on the Middle East revenue breakdown to help us understand the potential of CENTCOM. I am curious though of the $221 million Middle East revenue that you reported, how does I compare to the total addressable market within CENTCOM that you see?

I don’t know that I would have a market share number for you, but what I will tell you is from all the information we can find we are the leader, if not amongst the top couple of firms in the CENTCOM AOR. And remember, the CENTCOM AOR is not just the Army contracts. Most of our AFCAP activity is included in these numbers, in Turkey, Spain especially. So as the AFCAP continues to stay at the levels that it is today, again, we see our revenue level of maintaining a consistent balance to the op tempo across the theater.

Okay, perfect. Thank you. And just one more from me, I guess, I am curious what the passage of the budget here. How this is going to impact bookings from a facility’s perspective versus more pure IT work? Were awards for either segment more or less held up during the continuing resolution? And therefore you expect bookings to accelerate more or do you think that the continuing resolution had the same impact kind of across the board for all of your activities?

I would frame it this way. I believe the new budget will have a stabilizing effect on both the IT and the facility’s budgets. However, I will say that during the uncertainties over the last couple of years that the facility maintenance budgets were probably more negatively impacted because of the multiple year nature of those activities. So from everything we can see in our pipeline, we like the rate and pace of conversations we are having and awards that we are seeing in the marketplace with regards to our facilities, supply chain, logistics businesses. So I think you see that in our backlog numbers and it’s again just the amount of activity we see and discussing potential activity with our clients in the marketplace we like the activity.

That’s very helpful. Thanks so much, Chuck. I will get back in queue.

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

Hey, guys. This is John for Joe. How are you all doing?

Yes, great. Thank you. Excellent.

So I just want to talk for a second about the awards, one of the questions we were wondering is when you break it down into actual contracts versus task orders about how much of your work right now is task order related?

Yes. I think the only contract compilation that would be considered task order related is our AFCAP contracts.

Okay. So, go ahead.

No, I am sorry.

Alright. And then kind of along the AFCAP, I mean, who do you – right now in terms of your interaction with the customer who seems to be best prepared to start making these awards? And when do you – in terms of your own discussion with contracts, when are they starting to think that they are going to see in cash and being able to get stuff on contract?

I think across our client set, there is an increasing – again with the budget stability, there is an increasing confidence that our clients have in their schedule from their timeline. So I don’t think you would see an inordinate confidence on the part of the Army or the Navy or the combatant commander. So again, we like the stability that this budget deal has brought to us. Our clients you can tell feel more confident in their timelines and as a result, not only ourselves, but I think industry will benefit from that stability.

Okay. You guys mentioned on the last call the long-term growth prospects growing out to $2.5 billion by 2023 and 7% EBITDA margins. One of the questions that Brian just had, it seems that, that’s going to require a lot of inorganic growth. I was just wondering if you could walk us through kind of what you are thinking in terms of your M&A strategy for the next 5 years? Is there any specific assets or if you could just give us some color as to the direction of where you are heading? I appreciate that.

Sure. I will start from a kind of a strategic framework perspective and I will turn it to Matt for the modeling. First of all, we really like the rate and pace of the progress that we are making in our organic growth activities. So we are planning to grow significantly above the market just based upon our organic prepositioning and work we are doing with our clients and full staff on that. As we move into the inorganic aspect of our growth strategy, we think almost entirely in terms of new capabilities, greater depth in our current clients and expansion into new clients. So, as we see acquisition targets, if you will, that could help us expand capability, move more deeply into existing clients or be able to expand our client base. And by the way SENTEL touched all three of those activities. That’s when we see ourselves moving to acquisitive type growth. So Matt, from a modeling perspective?

Sure. So from a growth rate perspective, as Chuck said, we expect the core business really grow organically in the 6% to 8% range. So that gets us part of the way there and connecting back to some of the things, Chuck said. We believe that smart consistent acquisitions along the way that increased our capability. We will be able to leverage the core business and kind of build upon itself and we will be able to over the next 5 years, we will be able to get to the $2.5 billion and 7% margins or EBITDA margins.

Alright. Thank you, guys.

Thank you. [Operator Instructions] 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, Michelle and thanks to everybody who joined the call today. We think we had a very good quarter and we look forward to updating you on our progress in our next earnings report. Thank you.

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.