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Edited Transcript of VEC earnings conference call or presentation 26-Feb-19 9:30pm GMT

Q4 2018 Vectrus Inc Earnings Call

COLORADO SPRINGS Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Vectrus Inc earnings conference call or presentation Tuesday, February 26, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles L. Prow

Vectrus, Inc. - President, CEO & Director

* Matthew M. Klein

Vectrus, Inc. - Senior VP & CFO

* Michael J. Smith

Vectrus, Inc. - Director of IR

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Conference Call Participants

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* David Neil Williams

Drexel Hamilton, LLC, Research Division - Former Equity Research Associate

* Jonathan G. Ladewig

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Joseph Anthony Gomes

NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst

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Presentation

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Operator [1]

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Thank you for joining us for the Vectrus Fourth Quarter and Full Year 2018 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Jen, and I'll be the operator for today's call. (Operator Instructions) And now I'll pass the call over to your host, Mike Smith, Vice President of Investor Relations and Corporate Development at Vectrus.

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Michael J. Smith, Vectrus, Inc. - Director of IR [2]

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Thank you. Good afternoon, everyone. Welcome to the Vectrus Fourth Quarter and Full Year 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 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. We assume no obligation to update our forward-looking statements. At this time, I would like to turn the call over to Chuck Prow.

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [3]

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Thank you, Mike. Good afternoon, everyone. Thank you for joining us on the call today. Please turn to Slide 3. We had a solid year of 2018, reaching several important public company milestones. Importantly, we remain on track to achieve our 5-year goal of $2.5 billion in revenue with 7% EBITDA margins. From a financial perspective, we had a strong end of the year, with fourth quarter results that showed double-digit year-over-year improvements in both revenue and adjusted diluted earnings per share. Additionally, expanded EBITDA margin by 50 basis points year-over-year, all while phasing in several new business wins. For the full year, we reached several milestones as a public company, with record revenue, operating margin and adjusted diluted earnings per share. Revenue for the full year increased 15% compared to 2017 and adjusted diluted earnings per share increased 35%.

We continued to focus on expanding our margin profile and increased EBITDA margin by 30 basis points. I'm especially pleased with our ability to expand EBITDA margin, given our teams focused on phasing in approximately $350 million of new business that was won throughout 2018.

A major positive financial attribute of Vectrus is our ability to generate strong, predictable cash flow. In 2018, our teams continued to emphasize cash generation and grew net cash from operations 13% year-over-year, which represents 114% cash conversion compared to net income. We ended 2018 in a strong financial position with $9 million in net debt, which will afford us the flexibility to execute our long-term strategy.

We have spent considerable time establishing a solid foundation for Vectrus and strengthening our core. This is demonstrative in our portfolio diversification strategy, which continued to show momentum in 2018 as our revenue with the Air Force increased almost 50% year-over-year. Additionally, the acquisition of SENTEL in 2018 provided access to new clients in the intelligence community. We're seeing solid traction with this new client and see significant opportunity for expansion of our core business.

We were also successful in achieving geographic diversification and grew our revenue in the U.S. and Europe by 60% year-over-year. In 2018, we initiated Enterprise Vectrus, which is an enterprise-wide program to combine our performance improvement initiatives under a single enterprise-wide management system. We've made great progress implementing Enterprise Vectrus in 2018 and successfully established a regional service center, which leverages our global presence, enhances client support and lowers cost.

We also have several other initiatives underway which we believe will improve client delivery, efficiency and create competitive differentiation. Regarding LOGCAP V, bids are submitted and award notifications are expected 12 April 2019. Vectrus remained well positioned to win a seat on the contract vehicle and the CENTCOM area of responsibility, or AOR. As a reminder, Vectrus is the largest service provider to the DoD and the CENTCOM AOR, with incumbency on the major portion of the enduring CENTCOM workload expected under the LOGCAP V construct. It is also important to note that during 2018 we continued to solidify our position in the region through additional new contract wins in Kuwait, Jordan and United Arab Emirates. We continue to believe that Vectrus winning the LOGCAP CENTCOM area of responsibility would provide significant continuity and mission assurance to the DoD.

On a related note, we recently received our latest contractor performance assessment report from our Army client on the K-BOSSS contract, which will be incorporated as an enduring task order into the LOGCAP V competition. I'm proud to announce that we once again received the highest possible rating across all evaluated areas. Additionally, subsequent to the fourth quarter, in January, we were notified by the U.S. government of its intent to exercise an option to extend K-BOSSS until March of 2020, with an additional 6 months option period through September of 2020.

Our growth-related activities have resulted in significant new business and expand the scope of existing work, which is represented in the $1.4 billion of contract bookings in 2018. These awards resulted in a total backlog at year-end of $3 billion. Our large backlog is another unique attribute of our business and provides significant visibility, representing approximately 2.3x the midpoint of our 2019 revenue guidance. Please note that our total backlog does not include any value associated with the potential K-BOSSS extension past March of 2019.

I'd like to thank our team of approximately 6,700 global employees for their execution in 2018 and our clients for their continued confidence in our business to support their missions.

Please turn to Slide 4. I'd like to spend the next few minutes talking about our business, strategy and opportunities. We have made great strides in executing our 3 core strategies of enhancing the foundation, expanding the portfolio and adding more value, and positioned Vectrus to grow and innovate in the emerging converged infrastructure market. We believe that the strength of our core capabilities combined with the emerging converged addressable market presents a significant opportunity to grow and to continue to transform Vectrus into a more diverse, more capable and higher-value platform.

During the year, we made significant progress enhancing the foundation of both our facilities and IT business through new wins, increased scope on existing contracts, the development and insertion of new solutions, as well as successfully integrating both clients and capabilities from our first acquisition. Expanding the portfolio with new clients, new capabilities and new solutions is transforming our business into a more balanced, higher value platform.

On today's call, we address growth in our Air Force, Navy and intelligence community clients, the introduction and growth of our new technology-enabled solutions and the growth of our pipeline by the execution of discrete, highly differentiated campaigns. In short, due to technological change and advancement and cost pressures, our clients are rapidly moving to integrated infrastructure solutions, which we refer to as the converged market. The Vectrus strategy fully embraces this change and we expect to lead with our clients to this exciting future. As we move to this converged future with our clients, we will continue to drive our strategic execution to adding more value. Whether we are adding more value as contract types move from cost types to fixed-price, or we insert technology into new or existing infrastructures, or we move to more as-a-service type offerings, or we improve the performance of our core business and advisory processes, we will drive better value for our clients' mission and Vectrus' business performance.

One quick final comment on the market. The federal market that Vectrus has historically operated in, client purchase services in nonintegrated ways. Services like IT and facility management are rarely purchased together. And the converged market has facilities and infrastructures that are becoming IT enabled, digitalized and censored. Clients are purchasing in more integrated fashion. Vectrus continued to take steps to position for the buying behavior through solutions development and capability expansion. The net result of the transition is that Vectrus will have greater access to both traditional O&M funding, in addition to an increasing spend on operational technologies to be inserted into government infrastructures. Additionally, we will have access to adjacent international markets, where large infrastructure related prime contractors are looking for O&M providers with both operational and digital competency.

Please turn to Slide 5. As can be seen from our financial results and portfolio composition on the right-hand side of the slide, we have made substantial progress in strengthening the foundation of Vectrus and further building a unique platform that is a leading provider of facility and base operations, supply chain and logistics services, IT mission support, and engineering and digital technology services to U.S. Federal Government, primarily the DoD and the intelligence community. Our core competency at Vectrus is operating in global and austere environments. Our geographic presence in 22 countries as well as our capability are differentiated versus many competitors, given the complex global operating and performance requirements. For example, in terms of competition, in our primary markets, we generally see a dozen or so viable competitors of varying sizes. Irrespective of size, we've been able to compete effectively against these competitors, which is demonstrated in our new business wins.

In 2018, our facilities and logistics services comprised 74% of total revenue and is aligned to strong and enduring funding sources. For reference, today, the Department of Defense has 234 major active military installations that require an annual budget of over $25 billion for operation support. Additionally, these DoD facilities require sustainment, restoration and modernization programs, which have an annual budget in excess of $12 billion. Regarding the 26% of our revenue that comes from our IT and network communication services, we focus on providing mission-centric support. Our capabilities include agile software development, communications, network and cybersecurity, sensor integration infusion, electromagnetic effects, spectrum management and border and perimeter surveillance. Today, we're also piloting the insertion of important new cognitive, robotic and artificial intelligence capabilities to improve the resiliency and reliability of our support admissions. Our core facilities and IT capabilities are a differentiator and important to future growth as the traditional market for our services is changing as we migrate towards the converged market. This migration will require technology insertion, which we are well on our way to doing. This technology insertion will be a key component of our future margin expansion, driven by a greater amount of fixed-price contracts from which we can apply innovation and solutions. For example, in 2018, we won approximately $350 million of new business, of which 60% is fixed price in nature. As you can see from the pie chart in the middle of the Slide 5, this is a significant change from our current contract mix, which consists of 22% fixed-price type work. In 2018, we make great progress expanding our client portfolio and footprint. As you can see from the pie chart on the bottom of Slide 5, approximately 27% of our revenue come from clients outside of the Army. Notably, this is 11 percentage points higher from where we were in 2016 and now includes new clients such as the intelligence community. Finally, and as mentioned previously, we continue to make good progress diversifying our geographic presence, with 60 -- with a 60% increase in both U.S. and European revenues over the prior year.

Please turn to Slide 6. Over the past 2 years, we have made significant investments in growth and business development, which have resulted in higher win rates across the board and helped Vectrus to achieve client and contract diversification. We believe these investments, as well as our internal initiative, position Vectrus to execute on our new business pipeline in 2019. Our current new business pipeline is $9.1 billion and includes almost $8 billion of opportunities we plan to bid over the next 12 months, which is up from almost $7 billion of opportunities we had at this time last year. Additionally, we're currently have $1.4 billion of bids submitted awaiting award. Just to reiterate, this is all new business to Vectrus. In total, with a larger pipeline and increased win rates, we see excellent opportunities to continue our growth path.

On the top of Slide 6, we highlight some of our new contracts that we won in 2018. Of note, in September of 2018, Vectrus was awarded a position on the U.S. Army's ITES-3S contract vehicle. The multiple award IDIQ contract vehicle will enable the Army to procure information technology services throughout the world. The ITES-3S contract replaces the predecessor contract, ITES-2S, and has a $12.1 billion ceiling with a period of performance, including options, through September of 2027.

Importantly, this is a contract vehicle that Vectrus was not on in the past, and we look forward to leveraging our strong IT capabilities, which include operating the largest overseas Army cyber center, to compete for task orders under this new vehicle.

Please turn to Slide 7. As previously mentioned, our diversification strategy is yielding demonstrable results and is tied to Vectrus growth campaigns. Our campaigns lay out a deliberate approach to growth in a specific client center market by establishing differentiated value, strategic positioning, a tailored attack plan and a specific goal to build or take market share. In 2018, we continued to advance our U.S. Air Force campaign, which has resulted in an almost 50% revenue growth year-over-year with this important client. We're proud of our progress serving the Air Force client and notably, our recent $84 million contract award to provide support services at Sheppard Air Force Base, which builds on our Maxwell and Keesler Air Force Base contract wins. Now with almost $0.5 billion of successful contract wins, Vectrus is the largest full and open base operations support services provider to the Air Education and Training Command. We have done a great job expanding our presence with the Air Force and we are currently a trusted provider of facilities and logistics services to the Air Force in 9 countries.

As you can see, this targeted campaign has yielded positive results, and we're currently executing a similar campaign with the U.S. Navy. We are seeing early progress with our Navy campaign, and in the fourth quarter were awarded a $60 million, 2-year task order to provide support services at Naval Station Guantanamo Bay. Importantly, subsequent to the fourth quarter we were successful in winning our Navy fleet systems engineering team, or FSET, recompete, which we have supported since the program's inception in 1999. This is a $151 million task order under which we will continue to provide end-to-end engineering support for C4ISR systems to the U.S. Navy's afloat force. This recompete win, in addition to our successful new business awards, are example of how we are applying innovation to our existing business and future opportunities. Through our FSET program, spectrum management next-generation contract and Naval Station Guantanamo Bay win, Vectrus has been successful in expanding its Navy footprint, and we look forward to further growth and opportunity with this important client.

Please turn to Slide 8. In 2018, we further implemented Enterprise Vectrus and are beginning to demonstrate improving performance and enhanced margins. In aggregate, based on projects currently underway and other identified initiatives, we believe that over the course of our 5-year strategic plan, Enterprise Vectrus will add approximately 80 basis points of EBITDA margin improvement to our 2018 level. Additionally, technology-based solutions in client mix are growing component of our portfolio and strategy to differentiate and achieve 7% EBITDA margin. In 2018, we introduced several solutions focused on energy management and operational technology solutions, which includes Argus, a Vectrus IT mission support solution that produces aggregate sensor, video and map data on a single screen. This platform helped clients close gaps in security, operational efficiency and time management. Additionally, we successfully infuse commercial operational technologies to introduce process automation for work order management and rapid onboarding of system access on one of our key contracts. Finally, we made excellent progress in advancing our as-a-service, or white-label converged infrastructure capabilities. This includes Vectrus thermal coating, which is a white label product, our water purification solution and power generation as a service. We will continue to advance our solutions through in-house development, joint ventures and partnerships or through M&A. As you can see on the chart, we anticipate Vectrus solutions and client mix to drive a large portion of our margin improvement over time.

Please turn to Slide 9. Regarding LOGCAP V, Vectrus remains well positioned for an award, as we are the largest service provider to the DoD in the CENTCOM AOR, with incumbency on a major portion of the CENTCOM workload as is expected under LOGCAP V. Additionally, our client continues to score our performance on this work at the highest possible levels. Our current K-BOSSS contract, which is our largest program, representing approximately 40% of our 2018 revenue, will be a major portion of the enduring CENTCOM workload expected under LOGCAP V. As the DoD potentially realigns its contingency operations overseas, which could include reduction in troop levels in certain areas near and within CENTCOM, we believe there is a significant benefit to being the incumbent on the largest enduring Army base in the AOR. On 17 January 2019, we were notified by the U.S. government of an intent to exercise an option to extend our contract until March of 2020, with an additional 6-month option through September of 2020. As a reminder, LOGCAP V is an $82 billion, 10-year IDIQ contract. There are expected to be up to 6 IDIQ contract awards. One award will be made to support each of the DoD 6 global combatant commands, while Afghanistan would be treated as its own area of responsibility. Retaining the K-BOSSS contract will require a seat on the LOGCAP V contract and winning the associated CENTCOM AOR. Bids for LOGCAP V are currently under evaluation with award expected on 12 April of 2019. With approximately $900 million of annual revenue in the Middle East, Vectrus is the largest service provider in the region and we believe that Vectrus award of the CENTCOM AOR would provide significant continuity and mission assurance to the DoD. Now I'd like to turn the call over to Matt, who will go through our financial results.

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Matthew M. Klein, Vectrus, Inc. - Senior VP & CFO [4]

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Thank you, Chuck. Good afternoon, everyone. Please turn to Slide 10. We reported strong fourth quarter and full year 2018 results. In the fourth quarter of 2018, revenue was $330 million, up $34 million or 11% compared to the fourth quarter of 2017. Operating margin in the fourth quarter of 2018 was 3.8%, EBITDA margin was 4.2% and diluted earnings per share were strong at $0.89.

For the full year 2018, revenue was $1,279,000,000, an increase of $165 million or 15% as compared to 2017. Operating margin for 2018 was 3.8%, EBITDA margin was 4.1% and diluted earnings per share were $3.10. Importantly, as you can see in the chart on the upper right-hand side of the slide, our historical revenue demonstrates the predictable nature of our business. Additionally, our EBITDA margins are expanding versus historical levels and are expected to accelerate with Enterprise Vectrus initiatives and scale.

Our growth-related initiatives during the year resulted in approximately $1.4 billion in contract bookings, with $350 million representing new business to Vectrus. These efforts help propel our total backlog to $3 billion. As Chuck mentioned, with a significant new business pipeline and increased win rates, we are confident in our ability to continue to achieve additional new contract wins in 2019.

We realized strong cash flow from operations in 2018, finishing the year at $40.1 million, up 13% year-over-year, which translates into 114% cash conversion compared to net income. As you can see on the chart on the bottom right-hand side of Slide 10, our ability to generate strong cash flow is an important characteristic of our business. We expect to continue generating over 100% cash conversion compared to net income in 2019 and beyond. Through our strong cash generation in 2018, we were able to acquire and completely pay off the SENTEL acquisition and end the year with $9 million of net debt. Our financial position remains strong, and we continue to focus on deploying capital prudently on efforts that support our growth strategy.

Please turn to Slide 11. Today I will be discussing our financial results for the 3 months and year ended December 31, 2018. In the fourth quarter of 2018, revenue was $330 million, up $34 million or 11% as compared to the fourth quarter of 2017. The increase in revenue is due to favorability on U.S. programs of $13.1 million, $7.2 million from European programs and $13.5 million from Middle East programs. During the quarter, K-BOSSS contributed $134 million to revenue or 40% of total revenue.

Operating income for the fourth quarter of 2018 was $12.6 million or 3.8%, an increase of $2.3 million or 30 basis points compared to the fourth quarter of 2017. This change is due to an increase in revenue, partially offset by an increase in SG&A cost related to the addition of SENTEL. EBITDA for the 3 months ended December 31, 2018, was $13.9 million or 4.2% margin, representing an increase of $3.1 million or 28% as compared to the prior year period. Net income for the quarter ended December 31, 2018, was $10.1 million compared to $41.6 million in the fourth quarter of 2017. Net income in the fourth quarter 2018 was favorably impacted by an accelerated tax deduction of $1.8 million that is not expected to reoccur in the future. Additionally, net income in the fourth quarter of 2017 was favorably impacted by a change in tax code by $35.1 million, a direct result of revaluing deferred tax liabilities from the previous 35% federal tax rate to the new 21% federal tax rate. Adjusted net income for the fourth quarter of 2018, excluding the aforementioned onetime tax benefits, was $8.3 million compared to the adjusted net income for 2017 of $6.4 million. Diluted earnings per share for the fourth quarter of 2018 were $0.89 compared to the diluted earnings per share of $3.70 in the fourth quarter of 2017. As mentioned earlier, fourth quarter of 2018 and 2017 were favorably impacted by onetime tax benefits of $0.16 and $3.13 per share respectively. Adjusted diluted earnings per share for the fourth quarter of 2018 were $0.73 compared to $0.57 in the same period of 2017.

Now I'd like to discuss the financial results for the year ended December 31, 2018, reflected on the table at the bottom of Slide 11. Revenue was $1,279,000,000 million, an increase of $165 million or 15% as compared to 2017. The increase in revenue was attributed mainly to increases from our U.S. programs of $103.2 million, our European programs of $45.1 million and our Middle East programs of $16.2 million. During the year, K-BOSSS contributed $517 million to revenue or 40.5% of total revenue. Full year 2018 operating income was $48.3 million, up $7.1 million or 17% when compared to the same period in 2017. This change is due to the impact of increased revenue, partially offset by an increase in SG&A cost due to the addition of SENTEL in 2018.

Net favorable adjustments to operating income for the year ended December 31, 2018, and 2017, were $1.6 million and $11.6 million, respectively. Operating income as a percentage of revenue was 3.8% for 2018 compared to 3.7% for 2017. Full year 2018 EBITDA was $52.1 million, up $9.2 million or 22% when compared to the same period in 2017. EBITDA as a percentage of revenue was 4.1% for 2018 compared to 3.8% for 2017. Net income for the year ended December 31, 2018, was $35.3 million compared to $59.5 million for the same period of 2017. As previously discussed, net income for the full year 2018 and 2017 were favorably impacted by onetime tax benefits associated with tax reform. Adjusted net income excluding the onetime tax benefits was $33.4 million in 2018, up 37% from $24.4 million in 2017. Diluted earnings per share were $3.10 compared to diluted earnings per share of $5.31 for the same period in 2017. Adjusted diluted earnings per share were $2.94, up 35% from $2.17 in 2017.

Year-end 2018 net cash provided by operating activities was $40.1 million, which is an increase of $4.7 million compared to the same period in 2017. The cash conversion when compared to net income was 114%. As of December 31, 2018, our leverage ratio was 1.25x, which is well below our covenant level of 3.0x. Total debt at the end of the year was $75 million, down $4 million from the same period in 2017. Our cash balance was $66 million, resulting in $9 million of net debt. Our financial position remains strong and we continue to focus on deploying capital prudently on efforts that support our growth path.

Please turn to Slide 12. For the fourth quarter of 2018, total backlog was $3 billion. Funded backlog was $688 million. Our new business wins, successful recompete awards, in addition to scope expansion through performance and client partnerships on existing contracts, has resulted in solid total backlog, providing future revenue visibility. Please note that our current backlog does not include awarded value associated with K-BOSSS beyond March 2019. As discussed, on January 17, 2019, we were notified by the U.S. government of its intent to exercise an option to extend the K-BOSSS contract until March 28, 2020, and an additional 6-month option period through September 28, 2020. We expect that once finalized, the new K-BOSSS extension would add over $400 million of value to backlog. Total backlog includes both funded and unfunded backlog and represents firm orders and potential options on multiyear contracts. Our contracts are multiyear 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.

Please turn to Slide 13, where I will discuss 2019 guidance assumptions. For 2019, we expect revenue to be in the range of $1.3 billion to $1.33 billion, with a midpoint of $1.315 billion. In terms of quarterly revenue cadence, we expect revenue in the first quarter of 2019 to be at similar levels to the first quarter of 2018 and to build through the year, as recent new business wins becomes fully phased in and specific contract projects are executed. We have solid visibility heading into 2019, as 97% of our revenue guidance at the midpoint is expected to come from existing contracts. Our 2019 revenue guidance assumes the extension of K-BOSSS through the entire year and does not contemplate any scope changes or modifications associated with the LOGCAP V award. Operating margin is expected to be in the range of 3.8% to 4.2%, with a midpoint of 4%. EBITDA margin is expected to be in the range of 4.1% to 4.5%, with a midpoint of 4.3%. Part of our 2019 margin improvement is expected to come from the advancement of supply chain management and continued progress on Enterprise Vectrus. Net income will be in the range of $35.3 million to $40.4 million. Diluted earnings per share will be in the range of $3.07 to $3.51. The midpoint of diluted earnings per share is $3.29. The range for diluted EPS assumes an estimated 11.5% weighted average diluted shares outstanding. 2019 net cash provided by operating activities is expected to be in the range of $40 million to $46 million. Regarding capital expenditures, it's important to note that our 2018 capital expenditures were $10 million, which was higher than historical levels. The elevated capital requirements in 2018 were driven by our reinvestment into our new headquarters facilities and by a few contracts that required capital expenditures and delivery of services to clients. It should be noted that when capital expenditures are contract related, the associated costs are considered in the contract price and will be recouped all or in part over the performance the contract. Capital expenditures for 2019 are expected to be approximately $8.5 million, driven by our application modernization project of $4 million, with the remainder coming from program requirements. Depreciation and amortization is expected to be $4.1 million in 2019. 2019 mandatory debt payments are $4.5 million. Interest expense is forecasted at $4.7 million, and we currently estimate a 21% tax rate for the full year of 2019. Now I'd like to pass the call back to Chuck for some closing remarks.

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [5]

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Thank you, Matt. To summarize, Vectrus is on track to achieve our 5-year goal of $2.5 billion in revenue and 7% EBITDA margins. In 2018, we had solid performance, which included double-digit revenue and diluted EPS growth, strong cash flow generation and we added $350 million of new contract awards to the backlog. Additionally, we maintained strong strategic execution and we have momentum within our business to include continued activities to enhance our foundation, we have sufficient pipeline to continue growing and diversifying our revenue portfolio, and we're adding value through Enterprise Vectrus and through solutions. We are well positioned for LOGCAP V, and finally, our 2019 guidance is supported by a solid backlog and opportunity pipeline. With that, I'll turn it back for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Williams with Drexel Hamilton.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [2]

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You guys are certainly moving right along, so that's very nice to see and congrats there. I wanted to see if you could talk a little bit about the ongoing discussion to reduce the overseas contingency footprint and how that may impact your business. Thinking kind of maybe a little longer term, how's does that affect your base ops in the Middle East and overall the K-BOSSS contract?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [3]

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So in general, the bases that we support throughout the Middle East, and Turkey for that matter, are enduring bases. So we are seeing a bit, we'll call it [op tempo] declines, particularly in Turkey and Incirlik. But in general, I expect to see a stable revenue base and it's -- that revenue base is reflected in the guidance that Matt just described.

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Matthew M. Klein, Vectrus, Inc. - Senior VP & CFO [4]

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Yes, just to give you an anchor on Turkey spending, we have an OIR, operation inherent resolve, contract mod. That averages about $30 million a year. We don't expect that to change dramatically in '19, but that would be something outside of the normal base operations on Incirlik.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [5]

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Okay, Matt, and I think on the last call you had mentioned you could see organic growth in the 3% to 5% range if K-BOSSS kind of remained at the current levels through the year. Is that still kind of the right way to think about it, if nothing changes in that contract, if you were at a steady state?

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Matthew M. Klein, Vectrus, Inc. - Senior VP & CFO [6]

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Sure. So let me kind of walk you forward through '19 expectations. If you use the '18 results of 1,289 -- or $1,279 million, the first change that we're working with is change in scope on contract -- existing contracts or contract closeouts. And the discussion around Turkey is one of the things that we're seeing some headwinds from a revenue perspective. The other item, we had an IT contract close out in midpart of last year. That's also putting some pressure in our year-over-year change. And that -- these scopes and our scope changes and contract closeouts contribute a negative about $75 million year-over-year. On the positive side, we have our significant contract wins that we won in '18, phased in at different times during '18. They will contribute about $60 million incrementally in '19. And then lastly, we're expecting about $50 million or so related to the contracts we have in the pipeline now we expect to win and earn revenue in '19. And just to kind of give you some reference on that number, we won about $100 million -- or we earned about $100 million of new contracts in '18 that were either won in '17 or won in '18, and that's the same estimate that we have going into 2019.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [7]

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Okay, great, thanks for the color. And then, when you think about the M&A front, what level of comfort in terms of leverage do you think you're willing to take at this point, just thinking about opportunities for M&A transactions? And just kind of how you see that, is there -- are there any holes you need to fill in the gaps you would be wanting to step out and maybe expand that leverage a bit just in order to get a better handle on any specific point of the business?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [8]

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No, we're very actively looking at M&A opportunities. Again, as I stated many times, we're not going to acquire for scale's sake, but we're going to acquire based upon our strategy to enhance our capabilities and to grow our client set. We've said on several occasions that debt-to-EBITDA in the 3x to 3.5x range is about as much as we would go. And as you can see from our net debt right now, we have a lot of flexibility, and we're continuing to look at several opportunities in the marketplace and we will continue to do so.

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Matthew M. Klein, Vectrus, Inc. - Senior VP & CFO [9]

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Yes, let me add some color too. Our current covenants are at 3x. We do have an acquisition holiday. That gives us another quarter turn that would give us some flexibility. I think the SENTEL type acquisitions that we encountered in '18 kind of fit perfectly within that. We would potentially buy an asset, to what Chuck said, that aligns with our strategy and then quickly pay it down. So if we -- in our current covenant, if we reach 3x, that won't be there for very long. Now larger deals we would have to consider outside of the covenant; would just be a different financing attribute.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [10]

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Okay, all right, very good. I appreciate that. And then maybe lastly for me. You kind of think about the labor pool, are you having any issues, I guess, filling the positions that you may have open? Is that a constraint at this point? Or you're not seeing any issues there?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [11]

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The labor market is tightening. Remember, though, that a good deal of our revenue is overseas revenue. I continue to be very pleased with the retention of our existing workforce and our ability to backfill into open positions. So it is true that the labor market is tightening, but I feel very confident with our ability to keep our contracts staffed at their maximum level.

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Operator [12]

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Our next question comes from the line of Joe DeNardi with Stifel.

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Jonathan G. Ladewig, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [13]

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This is Jon on for Joe. First question is pretty easy for you all. You may have already said it. Just kind of curious what's the organic growth in the quarter?

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Matthew M. Klein, Vectrus, Inc. - Senior VP & CFO [14]

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So the organic growth in the quarter is a little under 1%, but for the full year, it's 4.7%. And organic is defined by less SENTEL. The overgrowth was 15% in total, full year.

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Jonathan G. Ladewig, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [15]

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Okay. So you guys reiterated your long-term guidance for that $2.5 billion, but growth here looks to be a little bit more moderate than what we were thinking going into the quarter. Can you kind of give us your thoughts around Vectrus' long-term growth? I mean, is this growth that you're seeing in the pipeline right now? Or is there something you can point to that's going to be driving that long-term growth after '19 and '20 that you can kind of talk about?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [16]

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We feel very strong about not only our pipeline, but the campaign that we're executing within that pipeline, continue to see positive results from a win rate perspective. So we're going to continue to grow that pipeline organically. We're going to look for very targeted M&A opportunities, and that's the path we're on. And I feel that the marketplace is receiving our strategy well, again as evidenced by our win rates.

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Matthew M. Klein, Vectrus, Inc. - Senior VP & CFO [17]

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And I would also say, Jon, our teams have really been focused on LOGCAP and reprocuring that. So the last 18 -- 12 months or so, that has been our focus and once that's behind us, and we expect an award in April, that gives us some more capacity to do some other things.

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Jonathan G. Ladewig, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [18]

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Okay. Since I've got the time, I'm going to keep on asking questions. If you don't mind, I think the one thing that's really been on some investors' minds has been the up-tempo color that we’re seeing coming out of CENTCOM. When you look at how the Pentagon is framing their footprint there in CENTCOM, how should investors think about that opportunity and winning LOGCAP V? Is this a growth opportunity? Or is it basically going to be steady as she goes, if you can retain that work on LOGCAP V?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [19]

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You can never predict the future, which is the essence of a contingency contract like LOGCAP. I will say that LOGCAP V is very different than its predecessor contracts, and that LOGCAP V includes the enduring base footprint. So I'm very pleased to say that we have the largest enduring base footprint in the region, that by the very nature of those bases being enduring, they're in sustainment mode even when individual operations may begin to curtail. So again, you can't predict the future. But the enduring base footprint is a very important way to look at presence in the CENTCOM AOR.

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Jonathan G. Ladewig, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [20]

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Okay. And lastly, and then I'll jump back in the queue. Can you give me an update on the OMDAC-SWACA? How should we think of the timing of this award? And if you could give us any color on the past performance, that would be fantastic.

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [21]

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Yes, first of all, our past performance remains very strong. We are very pleased with our client relationship and our mission performance first and foremost. The procurement is underway, and we expect an award by the end of this year, although it's still so early in the procurement and things can tend to slip to the right a bit. So performance remains very high. Our client intimacy remains very strong, and again, remain very confident with regard to our prospect for the recompete.

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Operator [22]

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Our next question comes from the line of Joe Gomes with NOBLE Capital.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [23]

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You've talked a little bit a couple times about improvements in win rates. And I was just wondering if you can provide a little bit more color or detail there, where you were in the past and where you guys are today and where you think you might be able to go in the future?

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Matthew M. Klein, Vectrus, Inc. - Senior VP & CFO [24]

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Yes, I'll go ahead and start. So I think our campaigns -- focused campaigns around certain clients is really important to understand. Each client has a different buying pattern and attributes that are important to them for performing facilities and logistics and IT work for the agency. So our Air Force effort in the last year or so, as we said in our prepared remarks, has been really, I would say, outstanding. So we're real pleased with that effort. Our Navy campaign is also advancing in a very positive way, and we expect some better -- some improved results in the next couple of years. Beyond that, I think it takes a little bit of time to mature these processes and really to work through our strategies and our pricing. And I think our results in the last couple of years have been great.

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Joseph Anthony Gomes, NOBLE Capital Markets, Inc., Research Division - Senior Generalist Analyst [25]

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Okay, thanks on that. And just I wonder if you might be able to provide a little more color or detail on some of the work you guys are doing in the intelligence communities, as much as you can. How big of a business is that to you guys now? And how fast is it growing? And how big do you think you can get to?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [26]

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Well first, it's under 3% of our business. We don't break out individual clients in detail, if you will. But I will tell you that the work we do in the intelligence community is very complementary to the work that we provide to the military. It's a very large addressable market. We are in our infancy of attacking the intelligence community campaign, but I feel highly confident, given our past performance with the DoD, that we are going to be a kind of market share taker, if you will, over the coming years. We're investing in that marketplace, both from a talent and a capability perspective. And it is one of the areas that we feel very strongly about for the future.

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Operator [27]

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We have a follow-up question from the line of David Williams with Drexel Hamilton.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [28]

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Just wanted to see if you could help me understand a little bit on the K-BOSSS contract and if that rolls into LOGCAP, and kind of how that, I guess, impacts the revenue trajectory? But kind of thinking about K-BOSSS -- or excuse me, LOGCAP being awarded in April, assuming you were on that contract, how would the K-BOSSS contract slip, I guess? And how does that step out over the next couple of quarters or maybe through the year? It doesn't necessarily just end the K-BOSSS, when you think of it, LOGCAP, right? There'll be some time before that will begin?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [29]

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Yes, so as we indicated in the prepared remarks, that we expect to receive an extension on K-BOSSS for 1 year to March of 2020 with an additional 6-month option. So our anticipation is that a transition, either to ourself or to somebody else, will occur throughout the remainder of 2019 and early 2020. And a transition to the new approach will happen sometime on or about March of 2020, again, with that potential for a 6-month option. So we fully expect the same K-BOSSS relationship for the next year, with transition planning to occur toward the end of that period.

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David Neil Williams, Drexel Hamilton, LLC, Research Division - Former Equity Research Associate [30]

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Okay, great. And do you have any other large recompetes that are coming up this year?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [31]

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OMDAC is the largest recompete that we just described in the prior question.

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Operator [32]

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We have another follow-up from the line of Joe DeNardi with Stifel.

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Jonathan G. Ladewig, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [33]

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Just a follow-up here is, what is the customer saying about your push to move into this integrated base and injecting technology into the mission? What are the aspects that they're most interested in? And when you think about it, what's kind of the timeline for them to go from where they are now to where the technology and the base operation aspects are all kind of merged into one larger contract?

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Charles L. Prow, Vectrus, Inc. - President, CEO & Director [34]

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I'll frame it this way, and I spend a good deal of my time around the world in the field talking to clients. The range is from receptive to demanding. So our clients realize that they can no longer drive down cost and improve resiliency by purely labor-based methods. And so they are very open and, in fact, in many cases, demanding that we innovate and find better, faster, cheaper ways to perform the same mission at lower cost and with greater resiliency. As you may know, I mean, this trend has been in the commercial infrastructure markets for a while now, and I'm very pleased to see where our clients are in their, again, receptivity. And they all realize that this is the way that they are going to provide greater capabilities at a lower cost point.

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Operator [35]

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(Operator Instructions) Ladies and gentlemen, it appears there are no further questions at this time. This conclude today's teleconference. I would like to thank everyone for your participation. And you may disconnect your lines at this time.