V2X, Inc. (VVX) Q2 2019 Earnings Report, Transcript and Summary

Thank you for joining us for the Vectrus Second Quarter 2019 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Brenda 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 call will be opened for your questions following the presentation. [Operator Instructions]And now I would like to turn the call over to your host, Mike Smith, Vice President of Investor Relations and Corporate Development at Vectrus. Thank you. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to the Vectrus Second Quarter 2019 Earnings Conference Call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Bill Noon, acting 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 material for a discussion 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, President and CEO.

Thank you, Mike. Good afternoon, everyone. Thank you for joining us on the call today. Please turn to Slide 3.The second quarter demonstrated our continued momentum in the marketplace and in the execution of our strategy. Our growth-related efforts continue to be successful. We significantly increased our revenue with the Navy and Air Force; won new contracts including our first contract with the Department of State; expanded existing contracts; secured re-compete business; and won a seat on the previously announced LOGCAP V contract.We also continued to invest in all aspects of our business, which includes the acquisition of Advantor early in the third quarter and we are preparing for substantial growth in 2020 and beyond. We are well on our way to creating a $2.5 billion and 7% EBITDA margin company and will be a leading converged infrastructure provider in the market.Our second quarter financial results demonstrated the anticipated sequential ramp for the second half of the year. Revenue grew 2% sequentially and 3% year-over-year, in part due to the $350 million of new programs won in 2018, of which, $200 million were fixed price. We recorded adjusted EBITDA margin of 4.2%, consistent with our expectations.Adjusted EBITDA margin expanded 30 basis points sequentially. While we do not normally make sequential comparisons, this year, it is appropriate as it reflects our expectation of quarter-to-quarter improvements, particularly as we move into the second half of the year and completed the phase-in of our 2018 contract.Excluding approximately $1.2 million of M&A costs related to the acquisition of Advantor and fees associated with the LOGCAP V, which support our pre-operational legal efforts, adjusted EPS was $0.74.Our momentum in growth-related activities continued and during the second quarter, we were pleased to have been awarded our first ever IDIQ contract with the Department of State to provide logistics, life and mission support, and other operation and maintenance services at any country where the Department of State has a presence.The five-year IDIQ contract vehicle, known as DiPSS, has a $6 billion ceiling value and was awarded to Vectrus and ten other companies. We look forward to bidding on task orders under the DiPSS contracts.Our organic expansion, targeted campaigns, and diversification strategy are becoming increasingly visible in our revenue streams and backlog and our momentum in 2019 continues.Based on all the things I've just mentioned, our 2019 results to-date and the Advantor acquisition, we now expect to generate revenue growth of 7% to 9% in 2019. This is up from our prior revenue guidance of 2% to 4%.Additionally, we continue to believe that based on our current new business awards, pipeline and anticipated timing of LOGCAP V revenue, we can achieve double-digit revenue growth in 2020. Our confidence in our top-line outlook is supported by a strong backlog which, including LOGCAP V, equates to 3.6 times our 2018 revenue and a robust new business pipeline.Our new business pipeline includes almost $7 billion of opportunities we plan to bid over the next twelve months. Additionally, we currently have $1.6 billion of new business awaiting awards, which includes protested contracts.Our balance sheet and cash flow generation remains strong with ample financial flexibility to drive our future organic and inorganic strategies. At quarter's end, net debt improved to approximately $3 million from $26 million in the first quarter. This improvement was driven by strong cash management by our teams, resulting in cash from operations of approximately $22 million in the second quarter.On April 12th, we received the news regarding LOGCAP V. The award of both the U.S. Central Command or CENTCOM, and the U.S. Indo-Pacific Command, or INDOPACOM, areas of responsibility or AORs, are game-changing and will significantly enhance our growth profile.Given this result, we are expediting the pace of our internal investments in order to further enhance our capability and foundation to support the significant volume growth in 2020 and beyond.As mentioned, we have increased our 2019 revenue outlook, but are utilizing the return on this additional volume to pull forward internal investments in global operations; to support our anticipated growth, and long-term margin expansion.Specifically, we are expediting the execution of our enterprise-wide performance improvement initiatives, Enterprise Vectrus to streamline and automate our core program and support processes, transform our supply chain, and more effectively integrate and leverage our global operations to generate better client outcomes.All of these efforts are fulfilling the opportunity we have to transform Vectrus into a larger-scale, higher-value differentiated platform. Therefore, while we have increased our revenue range, we have lowered and tightened our EPS range. Importantly, we have tightened the range for our adjusted EBITDA margin and slightly increased the midpoint.Additionally, based on one-time acquisition-related expenses and pre-operational legal costs associated with LOGCAP V, we are presenting non-GAAP measures to better reflect the operations of our business. Despite the investments we are making in 2019, it is important to note that at the midpoint, we still anticipate achieving year-over-year improvement in adjusted EBITDA margin.Bill will discuss this in more detail shortly.Now let's move to Slide 4 and discuss the recent acquisition of Advantor. In July, we acquired Advantor Systems, a leading provider of integrated electronic security systems that protects over 2,000 facilities and assets for the U.S. DoD, federal civilian and international clients, including those in the INDOPACOM AOR.While relatively small in size, this is a highly strategic acquisition and align with our strategy. Advantor provides real-world, immediately practical capabilities that extend our maintenance of facilities to the electronic protection and security, strengthening Vectrus as an innovator in the emerging converged infrastructure market. Advantor is the only vertically integrated command, control and communications network security technology platform in the industry.Aside from Advantor’s presence in INDOPACOM, an extremely important geographic region for Vectrus going forward, Advantor is a sole source and exclusive provider of integrated C3 network services to U.S. Forces Korea, as well as the security provider of choice for an important aircraft program with Japan's Ministry of Defense.This expands Vectrus' client and geographic footprint, allowing for greater cross-selling opportunities. Vectrus and Advantor are similar in many ways. Our cultures, mission, vision, values and client-centricity are all very closely aligned. Additionally, from an operational perspective, our businesses are complementary.For example, we provide 24/7 facility and base operations at the Thule Air Force Base where Advantor has provided integrated electronic security solutions for over a decade. This transaction, which is expected to be accretive in 2019 earnings per share, excluding one-time transaction costs, supports our immediate scale and future growth and advances our transformation into a higher value, technology-enabled and differentiated platform.Now, I'd like to turn the call over to Bill Noon, our acting Chief Financial Officer to take you through the results in more detail. Bill?

Thanks, Chuck, and good afternoon, everyone. Let's move to Slide 5 to discuss our second quarter results. Before we get started, I would like to point out that we will be discussing non-GAAP measures, including adjusted operating income and margin, adjusted EBITDA and margin, adjusted net income and adjusted diluted earnings per share.These adjusted non-GAAP measures remove the impact of expenses associated with M&A and LOGCAP V pre-operational legal costs and better reflect the underlying operations of the business.In the second quarter, revenue growth continued, and we recorded sequential expansion in EBITDA margin and earnings per share, keeping with the expected progression of our results throughout the year.Second quarter 2019 revenue was $331.6 million, up $10.5 million or 3.3%, as compared with the second quarter of 2018. The increase in revenue is due to increases of $8.6 million from European programs and $4.4 million from Middle East programs, partially offset by a decrease of $2.5 million from U.S. programs.During the quarter, our K-BOSSS contract contributed $119.3 million to revenue or 36% of total revenue. Our growth-related activities, targeted campaigns and diversification strategy continued to contribute increasingly to our revenue.During the second quarter, we grew our revenue with the Navy by 68% year-over-year and increased our Air Force revenue by 20%. Our expansion within our intelligence and other federal clients increased 32%. Operating income for the second quarter of 2019 was $11.2 million or 3.4% margin, a decrease of $1.8 million or 70 basis points, compared to the second quarter of 2018.This decrease is primarily due to an increase in SG&A costs associated with investments in our business, in addition to M&A and LOGCAP V pre-operational legal costs of $1.2 million.Adjusted operating margin, excluding M&A and LOGCAP V-related costs, was 3.8%, down $1.1 million or 40 basis points, compared to the second quarter of 2018 due to higher SG&A costs, partially offset by higher revenue volume.During the second quarter of 2019, we recorded net favorable cumulative adjustments to operating income of $1.9 million, compared to net favorable adjustments of $3.7 million for the second quarter of 2018.There are many factors that drive contract performance, including program execution, contract modifications and scope changes. Cumulative catch-up adjustments can be positive or negative and are a normal part of our business and our guidance contemplates this reality.Second quarter 2019 interest expense was $1.3 million, $200,000 higher than second quarter 2018, reflecting variations associated with financing short-term working capital requirements.EBITDA for the second quarter of 2019 was $12.6 million or 3.8% margin, a decrease of $1.2 million or 50 basis points from the second quarter of 2018. Adjusted EBITDA margin, which excludes the M&A and LOGCAP costs, was 4.2%, down $400,000 or 30 basis points from the second quarter of 2018. This decrease is primarily due to increased SG&A costs associated with investments in our business.Net income for the second quarter of 2019 was $7.6 million, compared to $9.2 million in the second quarter of 2018. The effective tax rate in the second quarter was 22.8%, compared to 22.5% in the second quarter of 2018.Adjusted net income, which excludes M&A and LOGCAP cost, was $8.6 million, down $1 million from the second quarter of 2018. The year-over-year change is due to higher SG&A and interest expense, partially offset by higher revenue volume.Diluted earnings per share for the second quarter of 2019 was $0.66, compared to $0.81 in the second quarter of 2018. Adjusted EPS, excluding $0.08 of M&A and LOGCAP costs, was $0.74, down 12%, compared to $0.84 in the second quarter of 2018. The change is related to the factors associated with net income and a slightly higher share count.Now moving to our balance sheet and cash flow. Net cash generated from operating activities in the first six months of 2019 was $15.5 million including cash generated in the second quarter of $22 million, an improvement of $6 million as compared to the second quarter of 2018.Days sales outstanding for the second quarter of 2019 was 63 days, compared to 60 days in the second quarter of 2018. Our ability to generate strong cash flow is an important characteristic of our business, and we continue to expect to generate over 100% cash conversion, compared to net income in 2019 and beyond.Total debt at the end of the quarter was $73 million, down from $77 million in the second quarter of 2018. Our leverage ratio is 1.17 times and down from 1.44 times in the second quarter of 2018. Our leverage ratio remains well below our covenant levels of three times.Cash at quarter end was $70.3 million or net debt of approximately $3 million. At quarter end, we had $112 million of available borrowing capacity under our revolver with the possibility to expand borrowings by an additional $100 million.In July, we acquired Advantor Systems for $44 million using cash on hand and drawing on the company's revolver. While we expect net debt to increase in the third quarter to reflect the acquisition, we continue to have ample flexibility to continue our organic and inorganic growth strategies.Let's now move to Slide 6 to update you on our backlog. Second quarter 2019 total backlog was $3.2 billion, of which $934 million was funded. Funded backlog decreased 15% from the first quarter and 2% year-over-year as we implement recently won awards.Book-to-bill for the second quarter of 2019 was 0.6 times and in line with historical second quarter trends. Given that our order flow fluctuates significantly from quarter-to-quarter, particularly in the second quarters of each year, a trailing 12 months view of book-to-bill is a more accurate reflection of our business. Our trailing 12 months' book-to-bill was one times.As a reminder, our book-to-bill does not reflect contracts under protest and it does not reflect LOGCAP V.Total backlog includes both funded and unfunded backlog and represents firm orders and potential orders on multi-year contracts. Our contracts are multi-year contracts and the right to exercise an option period is at the sole discretion of the U.S. government or the prime contractor when we are a subcontractor.Total backlog excludes potential orders under indefinite delivery and indefinite quantity contracts and new contract awards that are under protest. If LOGCAP V were included in our reported backlog, pro forma total backlog would rise significantly and will be approximately $4.6 billion.And now I'd like to turn the call back over to Chuck.

Thanks, Bill. Let's move to Slide 7 to discuss contract wins that are driving organic growth. Vectrus' dedication to providing exceptional program performance to our clients and our significant investments in growth-focused talent and capabilities continue to drive our success and win rate. These are the contracts that make up $2.3 billion in awarded activity year-to-date with several important awards and renewals occurring in the second quarter.First and foremost, as I mentioned earlier, on April 12th, that Vectrus was awarded a seat on the $82 billion LOGCAP V contract and was awarded two of seven AORs, CENTCOM and INDOPACOM. I'll discuss LOGCAP in greater detail shortly. But suffice it to say, we appreciate the Army's confidence in our ability to support their most critical mission requirements.Our Air Force campaign has been an area of significant focus and growth for Vectrus, which has resulted in 20% year-over-year revenue growth in the second quarter. Our momentum continues, and during the quarter, we were successful at winning two AFCAP IV task orders, one being a recompete worth a combined $24 million to provide installation support services in CENTCOM.Importantly, so far in the third quarter, we have won two additional task orders worth a combined $21 million, bringing our year-to-date awards under AFCAP IV to $45 million, which is a 25% increase, compared to our full year 2018 AFCAP award of $36 million.During the second quarter, we were also successful in retaining our Kaiserslautern family housing maintenance contract. This program supports the largest U.S. military community overseas, providing maintenance services for more than 1,900 family housing units in Germany. This is a five year, $24 million fixed-price contract, which we have held since 2014.Importantly, through new contracts, scope expansion and successful recompete, our revenue and presence in Europe continues to increase. And it was demonstrated by 32% year-over-year revenue growth in the region during the quarter.As I mentioned earlier, we won a spot on the Department of State to provide diplomatic platform support services, or DiPSS, through a potential five year $6 billion IDIQ contract. This program offers Vectrus strong adjacencies in not only with the State Department, but with the Department of Defense and the intelligence community.Importantly, Department of State anticipates a large portion of this contract will focus on locations in the Middle East and South Central Asia contingency environment where Vectrus has a strong and long-standing presence.With approximately $900 million of annual revenue in the Middle East, Vectrus is one of the largest service providers in the region and with over 70 years of experience providing rapid response capabilities in support of contingency mission requirements, we believe Vectrus is well positioned to support the Department of State in these focused contingency environments.On last quarter's call, we discussed our new five year $117 million contract to provide defense cyber operations and operational and maintenance IT services, which was subsequently protested. I am pleased to announce that the protest has been adjudicated in the favor of the government and Vectrus, and we look forward to supporting our client with exceptional performance.Additionally, further building on our first quarter IT win, during the second quarter, we were awarded a $26 million firm fixed-price subcontract to provide defensive cyber operations on all Army Military networks in the INDOPACOM AOR.Vectrus' ability to provide complex, mission-critical IT services in austere and challenging environments is a differentiator and an important reason behind both wins. We leveraged our strong IT capabilities, which includes operating the largest overseas Army Cyber Center and historical performance on our OMDAC-SWACA contract to provide our client with a value-added and differentiated solution.Now let's move to Slide 8 to give you an update on LOGCAP V. In the second quarter, Vectrus was awarded a position on LOGCAP V and the initial value of our task orders in the CENTCOM and INDOPACOM AORs at approximately $1.4 billion or 40% of the $3.5 billion total initial value of task orders awarded to all seats.The protest process began early and is ongoing and we are confident in our position. In the mean time, we have been actively preparing for a phase-in. Vectrus teams have been spending time in both AORs and are making internal preparations in order to get ready for the notice to proceed. We are moving ahead on schedule and expect to be set for phase-in.On July 31st, the GAO denied one of the 4 LOGCAP V protests, remaining 3 GAO protests are still anticipated to be resolved by mid-August. Given the complexity and probable timing of program transitions associated with these awards, we continue to expect revenue resulting from these task orders to begin in 2020.We are proud of our CENTCOM incumbency and our team's high level of performance and support of many missions in the region. We look forward to providing the government with the same excellent service in INDOPACOM. INDOPACOM is a strategic focal point of our nation's national security and we thank the Army for their confidence in Vectrus to support their critical operations in the region.As I previously stated, this award significantly expands our footprint and market positioning in that vast region. LOGCAP V also offers additional growth potential through access to all additional non-urgent and compelling opportunities in all commands for the contract's ten year duration.We see significant opportunity for future growth beyond our current awarded task, and we are eagerly awaiting the protest conclusions so we can proceed full throttle to support our clients.Let's move to Slide 9 to look at how we are tracking to our five year goals. Our five year financial goals are $2.5 billion in revenue, and 7% EBITDA margin. Last quarter, we discussed three components of our long-term margin expansion plan, volume and contract mix, Enterprise Vectrus, and client mix and solutions, and introduced a scorecard of strategic levers that correspond to each component.In order to prepare for and leverage the significant revenue growth expected in 2020 and beyond, this year we are aggressively reinvesting in our business to further solidify the margin advancement components of our goal.The first dimension, volume and contract mix, seeks to drive 80 basis points of margin improvement over the next four years by driving operating leverage through scaling both organically and inorganically and working with clients toward more advantageous contract structures. In the second quarter, our fixed-price contracts comprised 23% of our revenue and we believe that while the overall percentage will be difficult to forecast, the dollar value will continue to increase over time.We are investing in our expected increase in fixed-price contracts given the higher margins that can be generated over time. Specifically, we are ensuring that program phase-in leverage processes and technology for a repeatable and transferable construct. The phase-in foundational construct will also leverage Enterprise Vectrus, which aims to deliver another 80 basis points of margin expansion.This program is receiving significantly heightened attention this year. Priorities in 2019 remain delivery excellence; to include program phase-in; evolving our global talent chain; establishing supply chain as a core competency; implementing our modernized IT platform announced in 2018; and to quicken the pace of technology insertion, such as Advantor, into our current program base and as a stand-alone offering.Given the high priority of Enterprise Vectrus, we have strengthened our leadership in this area and are pleased to announce that Mario Coracides has joined Vectrus to lead this dimension of our business. Mario brings 25 years of operations, shared service, supply chain and Six Sigma experience within the aerospace, automotive and oil and gas manufacturing segments.And with the volume and contract mix dimension, in Enterprise Vectrus, we are pulling forward initiatives with respect to program delivery. In aggregate, these investments will further our ability to attain the margin advancement associated with volume, contract mix and Enterprise Vectrus. We are assessing Enterprise Vectrus qualitatively this year, but aim to begin disclosing a quantitative assessment in 2020.The third dimension of our margin expansion plan, solution and client mix, targets a contribution of 130 basis points. Advantor is a key example of the company executing this strategy, which will enhance and expand our operational technology offerings and margin profile.In addition, from an organic perspective, we currently have several bids submitted to provide water treatment and power generation solutions to existing clients. These solutions are being injected into our existing contracts and are expected to yield greater contract profitability and client outcomes. Importantly, this is exactly what our converged strategy has intended to accomplish.We will continue to benchmark our progress toward these targets on a quarterly basis and over time, may adjust the individual component target as we execute against our growth strategies.Overall, we have a tremendous opportunity to expand our profitability, as we grow and further transform into a higher-value, differentiated business, leading in the converged infrastructure market.Now, I am going to turn the call back over to Bill to discuss our 2019 guidance.

Thanks, Chuck. Let's move to Slide 10. As Chuck mentioned, we are updating our 2019 guidance to include our results to-date in 2019, the acquisition of Advantor, higher non-operational costs and the redeployment of profit dollars in new investments to support growth and long-term margin improvement.As mentioned, we have included the following non-GAAP measures: adjusted operating income and margin, adjusted EBITDA and margin, adjusted net income and adjusted EPS, to better reflect the business' performance. The adjustments exclude non-operating M&A costs, and LOGCAP V pre-operational legal costs.For 2019, we now expect revenue to grow 7% to 9% year-over-year and be in the range of $1.37 billion to $1.39 billion. Revenue is expected to build through the year as we phase-in recent new business wins, expand our base and account for Advantor. Our operating margin outlook is now in the range of 3.5% to 3.7%.Operating margins, adjusted for one-time costs, are now expected to be in the range of 3.8% to 4%. EBITDA margin is now expected to be in the range of 4% to 4.2%. Adjusted EBITDA margins, which exclude one-time costs are expected to be in the range of 4.3% to 4.5%. The midpoint of our adjusted EBITDA margin is now 4.4%, which should equate to 20 basis point improvement compared to 2018.As we realize performance from the investments made into our recently won programs, we continue to expect margin expansion to build sequentially throughout the year with the second half of 2019 being greater than the first. We have increased our outlook for interest expense to $6 million to reflect somewhat higher debt levels and working capital required to support new contracts.Depreciation and amortization is now anticipated to be $7.1 million. The increase reflects the acquisition of Advantor, as well as updated amortization associated with the purchase of IT mission support contracts in late March and the timing of program requirements. We now estimate a 22% tax rate for the year, up slightly from 21%.Net income guidance has been revised to $32.7 million to $35.4 million with diluted earnings per share in the range of $2.82 to $3.05. Adjusted EPS is expected to be in a range of $3.06 to $3.29. Like revenue, we expect EPS to build sequentially throughout the year.Weighted average diluted shares outstanding are estimated at 11.6 million. Our 2019 net cash provided by operating activities is now expected to be in the range of $38 million to $42 million, reflecting over 100% conversion of net income and incorporates our increased internal investments.Operational capital expenditures guidance is at approximately $10 million, including our application modernization project of $4 million, with the remainder coming from program requirements.As a reminder, program-related capital expenditures are considered in contract pricing and will be recouped all or in part over the performance of the contract.Finally, 2019 mandatory debt payments are $4.5 million.Now let's move to Slide 11 to look at the puts and takes in our guidance update. This slide summarizes the per share impacts of the adjustments we have made to our 2019 guidance. This waterfall also illustrates the relative dollar values of operating and non-operating costs we will incur this year, demonstrating the rationale behind our non-GAAP measures.During 2019, we expect to incur M&A and LOGCAP V pre-operational legal cost of $0.24 or $3.7 million. Additionally, based on our current estimates, we have assumed approximately $0.08 of contribution from Advantor, which could change based on our final purchase price allocation.We anticipate the higher interest, tax, depreciation and amortization will have a $0.20 impact relative to our prior guidance. As mentioned, working capital requirements, as well as the updated amortization associated with the purchase of IT mission support contracts and the timing of program requirements are driving the higher forecast.Importantly, based on increased momentum and expected revenue in our core business, we are deploying incremental profitability to build capabilities and prepare for our substantial growth.These investments are slightly offset by our revenue volume and are expected to have a net positive impact of $0.01.Finally, when adding back the one-time M&A and LOGCAP V pre-operational legal costs, the midpoint of our adjusted non-GAAP diluted EPS moves to $3.18.Chuck?

Let's move to Slide 12 and end with our near-term priorities and execution. Our results at the halfway point of the year demonstrate that we are executing consistently on our strategy to innovate and lead in the emerging converged infrastructure market. Through each of these three core elements enhance the foundation, expand the portfolio and add more value.Our near-term priorities remain the same. As an organization, we are entirely focused on their execution. Our growth teams are hard at work, and we are driving activity to extend recompete wins, prosecute campaigns to both expand with existing clients and diversify our client base. And finally, we are advancing our M&A strategy to build out our service portfolio capabilities and add key client verticals with the backing of our strong balance sheet.With respect to Enterprise Vectrus, we have added leadership and accountability to drive enterprise performance and efficiency improvement to establish repeatable practices for superlative client outcomes and margin expansion over time.This is an example of how, as an organization, we are focused on pulling the levers in every aspect of our operations, particularly supply chain, to drive process improvement in order to maximize profitability in preparation for accelerating growth.Our goal to make Vectrus the premier converged infrastructure company in the market will be unattainable without the drive and dedication to client service and mission excellence of our entire team.I'd like to thank the people of Vectrus for their commitment to duty and the missions we support.Before we close, I would like to highlight that yesterday we announced that Susan Lynch was appointed Senior Vice President and Chief Financial Officer. Effective August 7, Susan brings over 25 years of senior leadership financial experience to Vectrus and a strong track record in the government services, technology, defense, and manufacturing industries.In addition to her deep financial experience, her focus on both performance and cost control will support us well on our journey to our five year goals of $2.5 billion in revenue and 7% EBITDA margins. We are thrilled to welcome Susan to the Vectrus team.I'd also like to take this opportunity to thank Bill for his hard work, dedication, and leadership as acting CFO during this period. Bill is a tremendous asset to Vectrus and we are proud to have him continue in his role as Chief Accounting Officer. Thanks, again, Bill.Now, I'd like to open the call up for questions.

[Operator Instructions] Our first question comes from the line of Jon Ladewig with Stifel.

Hey, guys. Good quarter.

Thanks, Jon. How are you?

I am doing well. I am doing well. So, can you guys just kind of update us on up-tempo in the CENTCOM and INDOPACOM regions? We are just kind of getting the sense for what the recent events in the Gulf have been pretty newsworthy and we are just kind of – is that affecting your outlook around the up-tempo going forward and demand in those key areas?

In the CENTCOM AOR, we are certainly seeing an uptick in up-tempo. I will say, however, that that region has been at a high up-tempo for a long period of time. So, we are seeing it. We will see some, I would assume, kind of tailwinds from a revenue perspective as we move through the second half of the year. And as you've indicated, it's very consistent with what we all see in the news reports.

Okay. Can you guys give us – excuse me, an update on OMDAC-SWACA? Has there anything been or anything changed in terms of the timeline for that recompete?

It has not. We have submitted our bid. We expect an award in November of this year. We’ve heard not anything to the contrary. And again, I continue to be very pleased with the performance of our team and have high expectations for the outcome of the award.

Okay. Bigger picture for recompetes, what's the risk going forward for the remainder of 2019? And what are your initial thoughts on 2020?

In 2019, the only real swinger that we have from a recompete perspective is, OMDAC-SWACA, as you have indicated. And in 2019, there won't be any change to OMDAC, independent of how that contract is awarded until well into 2020 at best. In 2020, we don't have any programs that exceed our 10% threshold that we typically disclose. But in general, 2020 is a light recompete year.

Perfect. Okay. Well, big focus on the call has been talking about the emerged convergent infrastructure markets. Can you kind of elaborate where the customer is in their approach? I guess, do they have a plan to get there? Are they still taking inventory? And, kind of where does Vectrus perceive itself within this market?

Again, we believe that we are leaders in the market. We believe and have evidence that our clients are all focused on the requirement to further utilize and insert technology into their operations. An example of this is the Army Installation to the future activity. We've been heavily involved in that, both from a solutioning and positioning perspective.And I would also like to say that, with regard to our existing contract base, the missions that we support, our clients are very open to us providing kind of new and innovative ways to become more efficient, more effective, and obviously allow the government to do more work with the same amount of money. So, long-winded way of saying that our clients, in many respects, are really leading us to be even more aggressive in this area.

Okay. Just a few more questions, I promise. When you look at the customers right now your Army, Navy, Air Force, can you kind of give us some color around which ones are being more proactive about embracing the fixed price, which one is kind of the leader in the converged infrastructure? And really who is still kind of using the LPTA approach to their contracts? If you can give us some additional color and then I'll jump back in the queue.

So, by and large, all of our clients are very open to utilizing new and innovative ways to become more efficient and more effective. We do see a lot of fixed-price contracting in the Air Force. But in general, I would say that, across the military, all of the commands that are responsible for maintaining infrastructures are all very similar in how aggressive they want themselves to be as acquirers and how they would like for industry to be as solution providers.

All right. Thank you guys.

Thank you. Appreciated.

The next question is from the line of Joe Gomes with NOBLE Capital.

Good afternoon.

Hi, Joe. How are you?

Good. So, it's been two quarters in a row where you've mentioned the top-line is really been driven by the Middle East and Europe. What's going on in the U.S. that it's been lagging behind those two in terms of at least contributing to the top-line recently?

So, as we've talked in the past that the U.S. is very much more aligned with small business with regards to base and operations support. So as such, we do see our U.S. business as somewhat cyclical. In fact, 2020 has some very large U.S.-based opportunities in our pipeline.It is however, almost essential that the Middle East, to a certain extent, Europe and certainly Asia Pacific, is relying upon companies of scale like Vectrus to really support those missions. So that would be the summary. But again, the real takeaway is U.S. is more small business-centric, although we see some changes to that to the positive and overseas is more dependent upon larger business as of scale.

Okay. Got it. Thank you. And I think last quarter, you talked a little bit about some commercial opportunities and just was wondering, could you give a little bit more for the update there?

Yes. So the commercial opportunities are opportunities at this point in time where we are largely subcontracting our solutions to more commercial-type entities. We do have a pipeline in that area. We have not fully disclosed our solutions pipeline yet. But we are intending to do that later on this year, either in the third quarter or the fourth quarter.Advantor provides an excellent conduit for us to do that and as I mentioned in my prepared remarks, one of the clients that is a part of the Advantor acquisition is the Ministry of Defense in Japan, which is very exciting to us, because that's a new channel and it provides us additional reach in the INDOPACOM AOR.

Okay. Great. Thank you very much.

Thank you. Appreciated.

[Operator Instructions] Our next question is from the line of Daniel Drawbaugh with FBR. Please go ahead.

Hi, thanks for taking my questions and congrats on the quarter.

Thanks.

Thank you.

So, just to start on the State Department award, can you provide us a little color on how that came about, it being your first award with that customer? And it seems like a fairly large IDIQ. Are there any sort of historical perspective you could provide on the spending levels towards those – towards this contract?

This is the first of a type award for the Department of State. I'd like to thank we are here because of the positioning and past performance that we bring to the infrastructure support aspects of our defense business. We – the Department of State has not disclosed anything in addition to the contract ceiling of $6 billion.But we have been working with the State Department and much of all of this is public that the intent is to utilize that contract very similar to the Department of Defense with both Middle East and East Asian opportunities in general. So, no real market dollar availability yet, other than the contract ceiling.

Okay. Fair enough. And then, the Advantor acquisition, congratulations on that. Can you give us a little color on the timeframe for the revenue synergies, because it seems like that's a really, really compelling opportunity from that acquisition in particular?

Yes. The Advantor team ran, in my view, a very good business. Their pipeline is clean and clear and executable. And what I like about the revenue synergy is that, in addition to the bases that they have in their pipeline, we can add our existing deployed contract base to that pipeline. So, I like the opportunity for revenue synergies.Our sales teams are working together already very early on into the acquisition and I look forward to a real successful integration, both operationally and from a sales perspective.

Great. And then last one from me. Can you offer a little bit of an outlook on your SG&A spending rates as we move through this year and into 2020? Just seeing as you've pulled ahead some of the investments, as you mentioned and you've added Advantor. So, how should we be thinking about your margin trend line as you move beyond 2019 into 2020?

Again, we have, as we mentioned several times on the call, aggressively began to implement performance improvements, both in program execution and supply chain. If you take that in combination with the expected increase of volume over 2020 and beyond, we really like the trend line.Now obviously, we have to demonstrate that and as we gain additional clarity on LOGCAP timing, we'll become very transparent in our expectations for margin and margin expansion in 2020 and beyond.

Okay. Fair enough. Thanks guys. I appreciate the time.

Appreciated. Thank you.

Thank you. We've now reached the end of our question-and-answer session. I would now like to turn the floor back to Chuck Prow for closing comments.

Thank you, Brenda, and thank you to everybody on the call today. We appreciate your time and inputs and we look forward to updating you on the progress that we are making in the next quarter's call.Thank you very much, and have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.