V2X Inc (VVX) 2015 Q4 法說會逐字稿

Good day, and welcome to the Vectrus Incorporated fourth-quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Smith, Director of Investor Relations. Please go ahead, sir.

Thank you, Derek. Good morning, everyone. Welcome to the Vectrus fourth quarter and full-year 2015 earnings conference call. Joining us today are Ken Hunzeker, Chief Executive Officer and President, and Matt Klein, Senior Vice President and Chief Financial Officer. Slides from today's presentation are available on our Investor Relations website, investors.vectrus.com.

Please turn to slide 2. During today's presentation, management will be making forward-looking statements pursuant to the Safe Harbor provisions of the federal securities laws. Please review our Safe Harbor statement in our press release 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.

Also we'll be making reference to non-GAAP financial measures during this call. We remind you that these non-GAAP financial measures are not a substitute for their comparable GAAP measures. You can find the non-GAAP reconciliations and other disclosures in our earnings release, and in our presentation slides which are publicly available on the Vectrus website at investors.Vectrus.com.

At this time, I would like to turn the call over to Ken Hunzeker.

Thank you, Mike. Good morning, everyone. Thank you for joining us on the call. Today we reported fourth-quarter and full-year 2015 financial results. Each quarter, we make it a point to recognize the Vectrus workforce for their contributions to the success of our customers and our business.

For this call, we'd like to recognize our veterans. Vectrus was recently selected as Victory Media Top 100 Military Friendly Employer. We're proud of the more than 35% of our employees that report prior militarily service, and the contributions they make to our customers on our programs. We are equally proud that they have chosen this path, and continue to serve the nation in this manner.

Also to the all 6,000 employees of Vectrus, I'd like to publicly recognize you for your commitment to excellence, and your service around the world. You work tirelessly to deliver large scale IT, logistics and infrastructure services to enable customer success. You do this exceptionally well, and it's reflected in these results.

Please turn to slide 3. I'm pleased to report, we successfully completed our first full year as an independent public company. In the fourth quarter, our core business revenue, which excludes the Afghanistan contracts, increased 16% year-over-year. Total revenue increased 9% year-over-year to $311 million. Our adjusted operating margin in the fourth quarter was 3.6%, up 60 basis points over the prior year. Diluted earnings per share were $0.55.

For the full year, we reported results that were consistent with, or exceeded the midpoint of our 2015 guidance. Our core business revenue increased 12% year-over-year. Total revenue was $1.18 billion, up slightly from the 2014 adjusted revenue. We are proud to report that after two years of revenue declines, 2015 showed a return to growth.

Our adjusted operating margin for the year was 3.7%, which is at the high end of our guided range, and above our original 2015 guidance. Our margin was driven by our commitment to operational excellence, and to the successful phase-in of new contracts performed by our team. Our adjusted diluted earnings per share for 2015 were $2.23.

Our cash flow in 2015 enabled us to make $12 million in voluntary debt payments, for a total debt repayment of $23 million during the year. Since our spin-off in September 2014, we have reduced our total debt by 19%.

In 2015, we won positions on seven important indefinite-delivery, indefinite-quantity or IDIQ contract vehicle. These vehicles strengthen our foundation, and will be important components of our future growth.

2015 was an important and defining year for Vectrus. Not only did we have to run the business, focus on our re-competes, and complete this spin process, we also had execute the phase-in of roughly $1 billion worth of new contracts, which I can tell you is no easy task.

Our team executed the phase-ins flawlessly, and I couldn't be happy with our -- with the performance. Importantly, our success and performance out of the gate on these contracts positions us well with our customers.

Finally 2015, highlighted our enhanced focus in the IT and network communication markets. I'll discuss the importance of this endeavor later in the presentation.

Please turn to slide 4. The President recently submitted his FY17 defense budget. The budget supports readiness with the DoD, and increases funding for operations and maintenance or O&M, which is the primary funding source that ties to Vectrus.

Within the DoD, the Army is requesting a 5% funding increase for O&M. Importantly, the Army's number one priority is readiness. The Army's budget builds operational readiness for potential major combat operations, and also ensures deploying units are ready for ongoing contingency operations.

While it's difficult to align budgets to a potential revenue streams, we believe Vectrus is well-positioned in areas that are considered high priority by our customers. Part of what is driving the DoD's emphasis on readiness is the overall global threat environment. Tensions remain high in the Middle East and Eastern Europe. Our government remains committed to both regions including NATO, which is the strongest coalition in the world.

The Middle East remains a challenging and unstable environment, with military experts recommending additional capability in Iraq, Syria and Afghanistan. Furthermore, Iran's influence in the Middle East continues to be a security concern for the DoD, despite last year's nuclear deal. Continued civil unrest in Turkey, and Isis proliferation in northern Africa add additional complexity to the region.

Regarding Europe, the DoD is working to reassure allies of the US commitment to their security and territorial integrity, has requested $3.4 billion in FY17 to support the European reassurance initiative. This funding represents a significant reinvestment in Europe after decades of drawdown.

The majority of the funding is expected to go to the Army, and seeks amongst other things to increase warfighting capacity on the continent through increased pre-positioned equipment stocks. While well-positioned in the Middle East and Europe to support our customers' missions, expeditionary capability is, and will continue to be a core strength for Vectrus.

The procurement and award environment remains fluid. Award delays are a natural part of our business, and modeling the financial impacts of such delays remains a challenge in our industry. This is something we witnessed firsthand in 2015, as many of our expected awards slipped into 2016.

For example, all of our major re-competes that were expected to award last year, have extended into 2016. Additionally, one of our recent IDIQ awards is currently delayed due to protest. The delayed award cycle can benefit the incumbent contractor, but lengthens the new business cycle. Based on current information, we believe new business awards should occur in the coming months.

Please turn to slide 5. I'd like to now discuss how Vectrus is positioned for 2016 and beyond. As you may know, 2015 was expected to be a heavy re-compete year for Vectrus, with three major contracts up for renewal. However, all of our re-competes have extended into 2016, and we currently expect all three to award in the latter part of the year.

I'd like to provide you with an update on the individual status of our three large re-competes. Our largest re-compete on a revenue basis is the Kuwait Base Operations and Security Support Services program, also known as K-BOSSS. Our last extension on the existing contract was awarded in the third quarter of 2015, and runs through the end of the month. We submitted our proposal for K-BOSSS re-compete in May of 2015. As it stands, bids are under evaluation, and the process ongoing.

We continue to be optimistic regarding our position for the re-compete. It is important to note we recently received an exceptional rating from our customer during our most recent award period, which is the highest possible rating.

Turning to our re-compete on the APS-5 Kuwait and Qatar contracts. The contracts were consolidated into a single solicitation, and proposals have been submitted. We received an extension for both existing contracts in the fourth quarter, which now have potential to run through February of 2017.

The contract will be awarded under the EAGLE IDIQ contract, which is a very competitive contract vehicle, and we believe the consolidation of our prior contracts make them even more compelling to competitors. Overall, we believe we are well-positioned for this re-compete, but to understand that in some instances, requirements, competitive space, and the contract vehicle can make it more challenging to differentiate as a provider.

Regarding our Maxwell Base Operations Support program, we are currently performing under a bridge contract that runs into May of 2016, and has the potential for an additional two, three month option periods. We have strong past performance on Maxwell, and recently received an assessment rating of exceptional by our customer, which again is the highest possible rating.

We understand the importance of our re-competes, and they have been a critical focus of our management team. We do not take our incumbency for granted, and we believe we are well-positioned to win.

Importantly, we have focused on building new business, and have a robust [bid] pipeline that positions Vectrus well for 2016 and beyond. We currently have over $1 million of bids submitted for new business that are waiting award, and while award time is difficult to predict, we believed new business awards should occur in the coming months. Additionally, over the course of the next 12 months, we plan to submit proposals on about $6 billion of new pursuits.

In the late 2015, we embarked on an effort to expand our IT and network communication market share, and recently announced the opening of a new office in northern Virginia that will be our IT and network operations center. Over the course of the next two to three years, we plan to invest in our IT and network communication services offerings, which is something we were unable to do prior to the spinoff. We plan to leverage the existing past performance, customer relationships, global footprint, and a solid financial position to pursue capture opportunities in this market.

There are three primary reasons supporting our investment in this market. First, we believe we can be successful in winning positions on some of the IT contracts that are coming up for renewal. We plan to utilize our robust set of certifications and capabilities to achieve seats on these contract vehicles.

As a side note, the IDIQ contracts within the IT space are experiencing the biggest refresh since 2008. We currently have two IDIQ bids in the evaluation, and expect to submit bids on three more as a prime contractor during 2016.

Second, this is a very large market space, and winning additional work in this area will assist in, one, balancing our portfolio and two, providing more value to shareholders. These are two important components of our long-term strategy, that is as a reminder, is to enhance the foundation, balance the portfolio, and provide more value.

In terms of the market size and potential, according to [Dell Tech], the overall federal IT market is roughly $98 billion, with defense making up about $47 billion. Those are big numbers, and we aren't saying the entire market is currently addressable by Vectrus, but the Department of Defense, which is our primary customer spends roughly $33 billion each year on IT services, and communications and network services. Overall, we believe there is an opportunity for Vectrus to capture some of this market.

Third, the potential for strong returns are driving investment in our offerings over the next two to three years. As many of you know, the IT and network market generally supports a higher margin profile than our other markets.

We are comfortable making this investment, and optimistic on its prospects, because Vectrus is not new to this market for these opportunities. We were incorporated in 1945, and have been in the IT business in one way or another ever since. Vectrus provides communication systems to sustainment, network security, systems installation, and full lifecycle management of IT systems for DoD in various locations across the globe.

To better -- to provide a better sense of what we do today, today we operate the largest overseas cyber center, and provide network assistance management, communications O&M, network defense, and information assurance. We also provide various IT support services to over 37,000 Army Corps of Engineer customers.

For the Navy, we provide a shore and afloat fleet system engineers in support of Navy networks and complex C4ISR systems worldwide. While the benefits of our investments will take some time to materialize, we are truly excited about the prospects for this market, and look forward to updating you on the progress in the future.

I also want provide an update on the status of the $411 million Thule Base maintenance contract that our Danish company was originally awarded in October 2014. The contract has been under protest litigation for over a year. Oral arguments were held at the United States Court of Appeals for the Federal Circuit on March 9. While there is no definitive time line, we hope to have a resolution mid year. As we have stated in the past, we believe we have a strong case.

We remain committed to improving our margin profile, and have made good progress so far. Our success has been partly driven by our commitment to operational excellence. Our internal initiatives are generally -- are generating true value for stakeholders and customers. Also they are differentiating us, relative to some of our competitors.

We will continue to emphasize and drive operational excellence through our organization, and expect to see continued benefits to margin. In 2015, we did an excellent job on reducing our debt, and improving our leverage profile.

Looking to 2016, we anticipate improvements in our free cash flow. We'll continue focus on paying down debt, partly through additional voluntary payments. We expect to end 2016 with roughly $90 million in debt. This would represent a 36% reduction of debt, since our spin-off in September 2014.

Now I'd like to call back over to Matt, and he will go over our financial results, and provide details of our 2016 guidance. Then we'll open the call up for questions.

Thank you, Ken. Good morning, everyone. Please turn to slide 6. Today I will be discussing our results for the three months and year ended December 31, 2015. The tables at the top of page 6 and 7 reflect the Generally Accepted Accounting Principles financial results of Vectrus. The tables on the bottom of page 6 and 7 reflect the adjusted financial results to exclude the Tethered Aerostat Radar System program, separation costs required to become a standalone company, and one-time favorable settlements of tax liabilities.

The TARS program was retained by our former parent as part of the spin, and separation costs and favorable tax settlements are a nonrecurring part of the business. I will address the financial results on an adjusted basis, which we believe better reflect the ongoing business trends. You can reference the appendix of this presentation for the reconciliation of our adjusted results to GAAP.

I'd like to turn your attention to table shown on the lower half of slide 6, which reflects the adjusted financial results for the fourth quarter of 2015. Funded orders were $132 million. Orders were down $46 million, compared to the fourth quarter of 2014 due to timing of awards. Revenue for the quarter was $311 million, $25 million higher when compared to the same period of 2014. This is a positive year-over-year revenue growth of 9% in the quarter.

In the fourth quarter, our core business revenue, which excludes the Afghanistan contracts, equated to $272 million, up 16% compared to the prior year's adjusted revenue. This is attributed to the ramp up of the ACE-IT and Turkey/Spain Base maintenance contracts, which began full performance in 2015, and growth on our existing contracts based in the Middle East. Afghanistan contracts contributed $39 million of revenue, down $12 million or 23% compared to the prior year's quarter.

Fourth-quarter adjusted operating income was $11.3 million or 3.6% operating margin, which is $2.7 million or 60 basis point improvement when compared to the same period in 2014. This improvement is driven by an increase in operating income from our core business, lower SG&A, and partially offset by lower revenue and income from contracts based in Afghanistan, which contributed $2.2 million in the quarter, down $1 million compared to the prior year.

Adjusted diluted earnings per share for the fourth quarter were $0.55, compared to $0.33 per share in the fourth quarter of 2014. The favorability was due to an increase in operating income from our core business, lower SG&A related to Founder's Grants expense, and cost control initiated by management. The favorability was offset by an increase in interest expense, and lower revenue and income from contracts based in Afghanistan. Additionally, in the fourth quarter of 2014, the tax rate was 49% due to a one-time catch-up of non-deductible spin costs, and a one-time change in the state deferred tax.

Please turn to slide 7. I'd like to draw your attention to the table shown on the lower half of slide 7, which reflects the adjusted financial results for the year ended December 31, 2015. Our adjusted funded orders were $1.1 billion, down $294 million compared to the prior year due primarily to timing of funded awards.

Adjusted revenue in 2015 was $1.181 billion, an increase of $9 million, or up 1% when compared to the same period of 2014. The increase was driven by a ramp up of new contracts, growth on our Middle East programs, and partially offset by the decline in revenue from our Afghanistan Base programs. Afghanistan contracts contributed $168 million of revenue, down $102 million or 38% compared to the prior year.

In 2015, we saw improvements in our revenue and portfolio mix. We increased our percentage of revenue from the Air Force to 13% from 7%. This resulted in a lower concentration associated with the Army, which was 85% in 2015, down from 88% in 2014. Our revenue derived from fixed price contracts increased 300 basis points in 2015 to 27%, while our revenue tied to cost plus contracts decreased 73% from 76%.

We performed as a prime contractor on 90% of our revenue in 2015, which was a 400 basis point improvement from 2014. Our core business revenue was $1.013 billion, up $111 million, or 12% when compared to 2014 adjusted revenue. This increase in revenue in the period is due to contributions from our new contracts and growth on our existing core business.

Adjusted operating income was $43.4 million in 2015 or 3.7% operating margin, which is $6.6 million or 60 basis points unfavorable when compared to the same period in 2014. The decrease is due to a reduction operating profit associated with our Afghanistan contracts which contributed $10.5 million of operating profit in 2015, down $13.8 million or 57% compared to the prior year. This decrease was partially offset by increased income from our core business and lower SG&A expenses.

Adjusted diluted earnings per share in 2015 were $2.23, compared to $2.80 per share in the prior period. The change was primarily driven by increased interest expense, and reduced income from programs based in Afghanistan.

We generated $9 million of free cash flow in the fourth quarter, and year-to-date free cash flow was $18.1 million. Our cash collections enabled us to voluntarily pay down $3 million of debt in the fourth quarter, and $12 million in 2015. Our debt now stands at $114 million, representing a total debt to trailing 12 month consolidated EBITDA ratio below 2.3 times.

Please turn to slide 8. For the fourth quarter, total backlog was $2.4 billion, with approximately $700 million funded. Total backlog represents firm orders and potential options on multi-year contracts, which excludes the ceiling values of IDIQ contract vehicle awards. We expect total backlog levels to replenish once re-compete contracts are awarded, and new business pursuits are successfully won.

Please turn to slide 9. Before we discuss the full year 2016 guidance ranges, I'd like to discuss key assumptions for 2016. For revenue at the midpoint, we estimate 84% of revenue will come from our existing contracts, 7% from Afghanistan contracts, 6% from re-competes, and 3% from potential new business awards in 2016. Re-competes continue to be a focus this year with K-BOSSS, APS-5, and Maxwell up for renewal.

As you recall, we expected these contracts to be awarded in 2015, however, due to the delays and unpredictability of the government procurement cycle, these re-competes are still under evaluation. If the procurement cycle remains on schedule, we anticipate these contracts will award in the latter part of 2016. Our 2016 guidance contemplates the timing of these awards, and we do not think that there will be a material change to our range at this time.

The new business pipeline is strong, with over $1 billion of proposals submitted pending potential award. We have factored approximately $30 million of revenue from potential new business awards into our guidance. We anticipate the potential new business will contribute to revenue in the third and fourth quarter.

Depreciation and amortization is estimated to be $4.1 million. Equity-based compensation expense includes the impact of non-recurring Founder's Grants. The 2016 impact of these equity awards are expected to be $800,000. Our operating margin is estimated to be 3.75% at the midpoint, which is slightly above our 2015 adjusted operating margin.

As Ken mentioned earlier, a component of delivering margin improvement is our commitment to operational excellence. In order to add continued focus on these margin improvements, we have implemented Vectrus Improvement Projects or VIPs, which combine ongoing lean initiatives and process improvements that align our business objectives, benefiting our shareholders, customers, employees, and past performance.

Our continuous improvement in operational excellence focus is helping us to achieve a slight improvement in margin at the midpoint, even considering our investment in IT and network communications in 2016. Overall, we are executing our strategy, and have a path forward that will allow us to achieve our previously communicated normalized operating margin range of 4% to 5%.

Debt management will continue to be a focus in 2016. We have approximately $14 million of mandatory payments due this year, and anticipate making voluntary payments in the range of $5 million to $10 million. This should bring our debt leverage ratio to 2 times EBITDA by the end of 2016.

Interest expense is forecasted to be $5.8 million. We anticipate an effective tax rate of 36.4%, and the total diluted number of shares outstanding to be 11.2 million.

Please turn to slide 10. The graph at the top of the page reflects revenue and operating income trends for programs based in Afghanistan for calendar years 2011 through 2016. We ended 2015 with revenue of $168 million, and operating margin of 6% for programs based in Afghanistan. In 2016, we are forecasting the revenue on these programs to reduce to $80 million, and operating margin to be around 4%.

The revenue contribution from Afghanistan is lower than our previously expected range. The reduction is not in any way tied to, or reflective of, our performance on Afghanistan programs. Rather, the revised estimate takes into account, the recent trends we are witnessing on one of our contracts. While we are disappointed in the lower than expected contribution, we stand ready to meet the needs of our customer, and support their mission.

I'd like to turn your attention to the graph, at the lower half of slide 10. This reflects the revenue mix from 2013 through 2016. Overall, in 2015 we experienced 12% growth in our core business, and at our guidance midpoint, expect core business to increase an additional 6% this year.

Please turn to slide 11. For 2016, we are estimating revenue to range from $1.11 billion to $1.19 billion, with a midpoint of $1.15 billion. Operating margins are estimated to range from 3.6% to 3.9%, with a midpoint of 3.75%. Again this margin guidance assumes our aforementioned 2016 investment in IT and networks.

We are estimating diluted earnings per share to range from $1.94 to $2.31. The mid point of diluted earnings per share is $2.12. We estimate free cash flow to range from $20 million to $30 million, with a mid point of $25 million.

Now I'd like to turn the call over for questions.

Thank you, sir.

(Operator Instructions)

Brian Ruttenbur, BB&T.

Yes, thank you very much. A couple quick questions. First of all, on guidance. It includes -- there's a range. Can you go through what's the top end of the range, and what's the bottom end of the range? I know it's K-BOSSS, APS-5 and Maxwell Air Force Base. If everything gets extended through 2016, that would be the top end, is that correct? And then, what's the bottom end of the range, what's included in that or excluded?

Okay. Sure. So we'll start with the top end. The top end, we would need to see our existing contracts maintain their current level, which we feel comfortable that they will, our contracts that are currently under re-compete, extend all the way through 2016. We would also need to realize the $30 million of new business, and we feel good that we have some good pursuits lined up to do that. And that would get us to the top end of the revenue range.

The bottom end of the revenue range would be early re-competes, early awards, which we don't anticipate. We expect those awards to happen in the second half of 2016. But if for some reason they award early, those contracts still come into our portfolio, we would expect those revenue streams to be a little bit lower, because of the repricing effect of re-competes. And then, if we see further delays in new business, that would also put pressure on our top line revenue which would bring us to the lower end of the range.

Okay. In terms of K-BOSSS' extension through March, Maxwell's extension through May, and then APS-5, can you remind me where the extension is? And then, can you talk about the timing of when you expect awards or extensions on those three contracts?

Sure. So let's start with K-BOSSS. So we're on contract through the end of this month, which means we would likely see an extension, because we have not heard an award. We'll see what that extension really plays out, but the last extension was about six months.

Maxwell, we are on contract through May. As we approach May, and we consume the next couple months, and if we don't hear an award, we could see an extension there. We just don't know, have to wait and see how that plays out

But they have the ability to extend -- there's the ability to have -- add two three month extensions, Brian.

Correct. They have contract vehicle to extend that naturally. And then, APS-5 Kuwait, we're on contract through August of this year, and the procurement communication is expected to award around that time, maybe a little bit later. And there is also some extension vehicles aligned in it, if they see some delays, we could see extensions on APS-5. That goes to the dialogue of saying, if we see additional extensions, revenue streams stay to level that we saw and third and fourth quarter. That's where we get to the top end of our range.

Okay. Very good. And then, your share count is increasing slightly. I assume that's primarily Founder's Grants and increased options that we should expect a couple hundred thousand share creep per year, is that correct?

Yes, that's correct. So this year we had little over 350,000 shares vest, and increased our total share count. In 2017, roughly we think another 300,000, and then on a normalized basis going forward about 200,000, once Founder's Grants get through.

Okay. And then, the DC and IT network communication office, of those, you talked about I think about $6 billion of new bids that you're putting in? How much of that is related to this new DC office and the IT initiative?

Actually, very little. What, the DC office is aligned to attack or tackle IT IDIQ vehicles, so those are a year or two off. We have to win seats on those vehicles, and then win task orders underneath it.

The pipeline, is our natural pipeline, there are some IT business in there. But it's incrementally, the investment is above and beyond the $6 billion that we communicated.

We'll still keep the larger pursuits that we're going after here in Colorado Springs, Brian, and basically we will use the office in -- we'll use the capture managers, will be positioned there with the operations folks co-located, and then as we get the IDIQ vehicles, then we'll turn the task orders there, and use the synergy of the office in DC.

We're excited about this. This is something that we were not able to do, under our former parent's guidance. This is in our core capabilities.

We have past performance to win seats on these vehicles. If we're successful on a couple, this is all upside to what the business has generated. We have IT network capability today, and this really is something that will provide strong returns in the future.

I mean, when it happened in the 2008, 2009 time frame, all these IDIQ vehicles came of age, our sister division was the prime. If we, when we were with Exelis, we couldn't be the prime, we were the sub. Now that we are our own company, we can get our own seats. And as Matt said, it gives us a lot, lot more opportunities.

So of the seven IDIQ vehicles we won last year, in our new business forecast, we actually have task orders from those, not necessarily in IT, but we are actually seeing business from that. So just having the IDIQ seats is something new to us, and something that's allowing us to get new opportunities and new business.

Very good. And I just wanted clarity on something Matt said. You said something about being down to 2 times leverage debt to EBITDA, and that's by the end of 2016 or 2018 was the goal?

End of 2016, Brian.

End of 2016.

Okay. Yes, I just wanted to make sure I heard 2016. Perfect. Thank you very much.

Thanks, Brian.

Bill Loomis, Stifel.

Hi, thank you. Good morning. On the Afghan work declining, you mentioned one of your programs coming down. Was that LOGCAP?

We haven't talked specifically about any specific Afghan contract. We do have a LOGCAP contract. What's changing, from the last guidance of about $100 million, is our work share is changing. It's something that we can't control. It's something that we anticipated.

We would expect, or at least last quarter, we expected this to run out a little bit longer. Unfortunately, it's not. What we're really pleased with, is our core business growth of 12% this year, and another 6% in 2016, this year being 2015 is -- was the plan. We needed to have the core business grow, to replace the declining anticipated declines in Afghanistan revenue and we are doing a nice job on that and we expect that to continue.

Okay. When you say work share is changing, does that mean the prime is taking more of the work directly?

Yes, Bill.

And then, on the APS-5, does that in terms of run rate, is that still around $100 million roughly a year?

Yes. Nothing's really change in our re-competes be overall, and I'll just reset everybody. K-BOSSS is the largest by revenue, it's about 30% of our total revenue. What we've said in the past, and this is a little sensitive, because it's competition-sensitive information. Our Maxwell contract is $30 million to $50 million, depending on construction projects and APS is over $100 million a year. When you add all three of those contracts up, it makes roughly about 50% of the business.

Okay. And then, just on focusing on APS-5, well, I guess any of them, but mostly APS-5, given all the changes to the structure and the consolidation, but you're mostly cost type contracting. Let's say that, by a low probability, you're not successful, what -- given the nature of the program and mostly cost type, how would this impact the overall margins? Obviously, revenue would drop by the contract value, but how would margins be impacted, if you were unsuccessful on one of these?

So Bill, we haven't talked specifically about any one contract in general about margins. I will say, some programs are a little bit more profitable than others. Our historical record has been mixed. There is no service line theme for us. We are trending, obviously, we closed the books at 3.7%.

We think going forward, our IT margins could get better with this IT investment. So we do see, there's opportunity in the future in that service line. But I mean, I think with our overall consolidated numbers, you can use that as an estimate for APS-5 and it's reasonable.

But I am saying, if you -- let's say, you were unsuccessful, and you have that revenue drop, obviously it's not covering your overhead -- some of your overhead costs any longer. Is there other cost cuts you would able be able to take to offset that?

Yes. We feel -- we've said before, this is a flexible business. We have a variable cost structure. We need to maintain a certain level of revenue streams, I mean, it's not all variable. But we think that if APS-5 had some difficulties, but we feel like we're performing well in the contract now. But if it doesn't come into the portfolio, that we could cut additional costs, and keep our proportional G&A competitive.

Okay. Great. And then, on Turkey/Spain, is some of the added -- the anti-terror added work that you received on that program, is that going to continue, or is that going to end?

Well, I think if -- what we got in in Incirlik. Like clearly, what's going on in Moron will continue, because that's in support of [Vasmarain], and they're not going anywhere. The stuff that went on in Incirlik was a surge, but I think, with the operation is going on for at least the next year or so, I think we're going to continue to see that, Bill.

Okay, great. Thank you.

Thank you.

(Operator Instructions)

Morey Marcus, Sidoti & Company.

Hey, guys. How are you doing?

Hi, Morey.

So you guys mentioned that one of the IDIQs you guys won protested. Can you guys say which one it was?

Morey, to be honest, we haven't talked specifically about our contracts.

Okay.

So we're just going to kind of wait for that to play out.

Okay. That's fair. And then, just more so on the IDIQs. On the AFCAP and SeaPort-e, is there any idea -- have the government made it any kind of clear to you, as to when you might see some type of deal flow from that, from those contracts?

AFCAP in particular, we're starting to see some pretty significant task orders that align exactly with our core capabilities.

And we're seeing a lot of activity on AFCAP, it's very active. So SeaPort-e, there's stuff that comes out on that every day. A lot of it does not align with some of the stuff that we have the capability to go after, but we look at SeaPort-e every day. But AFCAP, really is -- there is some activity. In fact, if you look at our new business forecast, some of that is AFCAP task orders.

Okay. And then, just changing gears a little bit. Just because you guys are making more voluntary debt payments. I guess, have you guys discussed internally, about going back to the bank, and refinancing that debt, so you could actually allocate your capital more efficiently?

That's one of the considerations that we're evaluating. To be honest though, we need to have these re-competes re-award and come back (multiple speakers).

Okay.

So that's kind of the unfortunate overhang, by not -- by seeing delays here. We want these to re-award, come back to us, and then we have five years of revenue visibility. But until that happens, we expect to just continue down this path.

Okay. And then lastly, this more just kind of a macro question. The DoD kind of wants another BRAC in 2019. If that were to happen, I know this is way down the road how -- I guess, how vulnerable are you guys to another base realignment?

That's a great question. I was intimately involved inside the Pentagon during the last BRAC. When you look at what that does, in many cases, you close one base -- so if you have operations on that, you're really affected. But if you're going -- and it's going, and you're moving the facilities, and increasing the workload at another base, and you benefit from it. So it all depends.

So you really don't know until the decisions are made in BRAC, if you're a winner or loser in the process. So quite candidly, if you look at Maxwell Airforce base, which is second most visited base by the Air Force right now, and you look at the infrastructure, I can't see that shutting down anytime soon.

So I would envision that it in a BRAC, it would be the winner, and more stuff would be added there. So I don't think that would affect us. So that's our biggest base in the continental United States.

If you look at the infrastructure that takes place for the Corps of Engineers, it's been in existence since the 1800s. So a lot of that isn't going to change either, where in all 50 states, it's leveraged to where dams are, where the -- along all the major waterways and things like that. So those aren't going to change either. So based upon our stance in the United States, I don't think it will change much.

Okay. Great. Thank you, guys.

Thank you.

And that does conclude today's question-and-answer session. I would now like to turn the conference back over to Ken Hunzeker for additional or closing remarks.

Well, thank you for joining us on the call today. 2015 was a defining year for Vectrus. We were able to report a return to growth in the total revenue, while posting double-digit growth in our core business. We also enhanced our IT and network service line, and won positions on several IDIQ vehicles.

All this was done, as we phased in roughly $1 billion worth of new business, and executed the complete separation from our former parent. However, what's most important, is that we have positioned Vectrus for future growth and success. We expect that our new business pipeline, investment in IT in networks, and operational excellence initiatives will translate to improvements in shareholder value. We thank you for your interest, and look forward to updating you on our progress next quarter.

That does conclude today's conference call. We appreciate your participation.