V2X Inc (VVX) 2016 Q1 法說會逐字稿

Good day, and welcome to the Vectrus Incorporated first-quarter 2016 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, Levi. Good morning, everyone. Welcome to the Vectrus first-quarter 2016 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, and thank you for joining us on the call. Today we are reporting first-quarter 2016 financial results.

Before we get started, I would like to recognize two of our programs for the recent achievement of an important accolade. Our Operations, Maintenance and Supply - Europe team in Germany and the Consolidated Installation Property Book Office team at the Logistics Readiness Center at Fort Rucker, Alabama, were both awarded the Army Chief of Staff Supply Excellence Award.

Since 1986, these awards have been used to recognize supply excellence at various Army units and various organizational levels. The winners represent the best of the best in supply discipline and logistics readiness across the Army, Army Reserves and the Army National Guard. Our teams underwent a rigorous competition, but prevailed. These coveted awards showcase the high standards we meet in support of customer requirements, and help us achieve our vision of being their first choice and most trusted partner. It's our success of programs like these and our commitment to continuous improvement that enables Vectrus to report the strong results that we will be discussing today.

Please turn to slide 3. First-quarter results were strong. Our total revenue increased 19% year-over-year to $311 million, driven by strong performance in our existing business, and contributions from programs that achieved full operating capability in the second and third quarter of last year.

We were able to achieve this strong revenue growth despite the continued and expected year-over-year reductions in our Afghanistan-based programs. Excluding Afghanistan, our revenue increased 28% year-over-year. Our operating margin in the first quarter was 3.8%, up 20 basis points over operating margin in the prior year. Diluted earnings per share increased 33% year over year on a GAAP basis, and 30% on an adjusted basis to $0.61.

Emphasis by our team on cash collections resulted in a $29 million year-over-year improvement in free cash flow to $1.7 million. Our days sales outstanding, or DSOs, were 57 days in the first quarter, representing the lowest recorded level as Vectrus, which now takes us back more than 18 months. We were awarded multiple modifications to our existing contracts during the first quarter. These actions resulted in a strong funded orders of $605 million, or a 1.9 book-to-bill ratio.

Of note, we were awarded a $329 million modification to our Kuwait Base Operations and Security Support Services, or K-BOSSS contract. The modification runs through December 28, 2016, and additionally, we received a $22 million modification under our Turkey/Spain base maintenance contract, to support the contingency operations for Operation Inherent Resolve. As a reminder, under this contract, Vectrus provides the full spectrum of day-to-day base operations and maintenance services in locations across Turkey, including Incirlik Air Base and Moron Air Base in Spain. The modification runs through March 27, 2017.

Please turn to slide 4, where I'll provide an operational update on Vectrus. First, regarding our major re-competes for 2016, our largest re-compete on a revenue basis is the K-BOSSS program. As I mentioned previously, we were recently awarded a $329 million modification. The extension will allow Vectrus to continue to provide exceptional value through strong performance on the largest US military footprint in the Middle East.

While the K-BOSSS extension improves funded backlog and revenue visibility, there are still uncertainties surrounding the precise timing of the re-compete. Bids are under evaluation, and the process is ongoing. It is important to note that our performance remains strong, and is validated by our contract to performance assessment ratings.

Turning to our re-compete on S-5 Kuwait and Qatar, we received an extension for both of these existing contracts in the fourth quarter of 2015. The extensions have the potential to run through February of 2017. The combined contract will be awarded under the Eagle indefinite-delivery, indefinite-quantity, or IDIQ contract, which is a very competitive contract vehicle.

We believe the consolidation of our prior contracts make this program even more compelling to competitors, and ultimately, more challenging to defend. However, we still believe we're well-positioned for this re-compete.

Regarding our Maxwell Base Operations Support Program, we are performing under a bridge contract that runs into May 2016. Subsequent to the first quarter, Vectrus was awarded a three-month modification that extends into August. Our Maxwell contract also has another three-month option period that could potentially run from August through November 2016.

Our past performance on Maxwell is strong, and this option period provides an opportunity for Vectrus to continue our excellent performance, and increase our track record of success with this customer. As we have stated on past calls, we understand the importance of our re-competes, and they have been a critical focus for our management team. We do not take our incumbency for granted, but we believe we are well-positioned to win.

On the topic of re-competes, subsequent to the first quarter, we successfully won the $12 million re-compete for a UCSC program which is an IT contract we have supported for almost 20 years. The contract is now known as Enterprise Legacy Voice and Information System, or ELVIS for short. The ELVIS contract runs through March of 2021, and provides integrated reliable command and control, intelligence, and deployable communications for to manned and unmanned Air Force sites at Belgium, Germany, United Kingdom and Turkey.

Our customers at strategic locations in Europe and Asia rely on Vectrus, not only for facilities and infrastructure support services, but IT and network solutions, as well. We plan to leverage our existing geographic footprint in order to expand our IT and network services business, while providing more value to our customers. Regarding our IT and network services business, our investment and hiring initiatives continue, and we remain optimistic on the prospects for growth in this market. As mentioned on past calls, the benefits of our investment will take some time to materialize. We're already seeing solid progress from our teams in Reston.

I'd like to provide an update on the status of new business. The global threat environment remains elevated, and current Department of Defense priorities align well with our core capabilities. Vectrus is positioned in order to quickly respond to the needs of our customers, should these requirements materialize.

For example, we are starting to see opportunities for global contingency support materialize under our Air Force Contract Augmentation Program, or AFCAP. As with all of our opportunities, various factors make award timing difficult to predict. However, our capabilities, global footprint, and strong position in the Middle East and Europe position Vectrus well, in order to capture these opportunities. We currently have over $1 billion in proposals for new business submitted awaiting award.

We have been active in submitting bids for new business, but our lack of recent success has been disappointing. To that end, I have decided to reorganize the elements within our business development organization, and reallocate resources in order to better align our teams. We believe these changes will improve our probability of success on new business and pursuits. Overall, new business remains a top priority for Vectrus, and we believe our addressable markets and roughly $6 billion identified pipeline we expect to submit bids over the next 12 months bodes well. I would like to point out that our new initiatives associated IT and networks are not currently included in this pipeline.

Regarding the status of the $411 million Thule Base Maintenance Contract, there's been no change or update since our last earnings call on March 16. The contract has been under protest litigation for over a year. Oral argument at the United States Court of Appeals for Federal Circuit was held on March 9. While there's no definite time line, we hope to have resolution by mid-year. As we have stated in the past, we believe we have a strong case.

We saw solid improvement in our operating margin in the first quarter and remain committed to improving our margin profile through operational excellence and continuous improvement. Embedded in our business culture is a strong desire to improve continuously. We refer to these deliberate, thoughtful and lean-based approaches as Vectrus Improvement Programs, or VIPs. We have ongoing VIPs across all of our lines of business that include warehouses, dining facilities, vehicle maintenance, cyber centers, IT help desks, and other work sites across the programs we manage. Our VIPs are presented quarterly to our leadership, and represent a key component of how we support the customer and increase stakeholder value.

Finally, our operational and financial performance has allowed us to amend and improve our existing credit facility. As you may know, we have focused diligently on reducing our overall leverage profile, paying down 20% of our debt over the last 15 months. We believe our operational focus and financial achievements suggest improved confidence in Vectrus by the lending community. Now, I'd like to turn the call over to Matt, and he'll go through our financial results, and provide details regarding our updated 2016 guidance, and then we'll open the call for questions.

Thank you, Ken. Good morning, everyone. Please turn to slide 5.

Today, I will be discussing our first-quarter results for the three months ended April 1, 2016. The table at the top of page 5 reflects the Generally Accepted Accounting Principle financial results of Vectrus. The table at the bottom of page 5 reflects adjustments made to operating income, and diluted earnings per share in the prior-year period. I will address operating income and diluted earnings per share 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.

Funded orders during the quarter were $605 million. Orders were up $462 million compared to the first quarter of 2015. This change is primarily driven to recent contract modifications. Our book-to-bill ratio was 1.9 times in the quarter.

Revenue for the quarter was $311 million, $50 million higher when compared to the same period of 2015. This is a positive year-over-year revenue growth of 19% in the quarter. In the first quarter, revenue excluding Afghanistan contracts was $279 million, up $61 million or 28% compared to the prior year's revenue. Revenue benefited from the ramp up of the Turkey, Spain base maintenance and ASA contracts, which began full performance in the second and third quarter of 2015, respectively. We also witnessed growth on our existing contracts based in the Middle East. Afghanistan contracts contributed $32 million of revenue, down $12 million or 26% compared to the prior year's quarter.

First-quarter operating income was $12 million or 3.8% operating margin. This represents $2.3 million or a 20-basis point improvement when compared to the first quarter of 2015 adjusted operating income and margin. This improvement is driven by an increase in operating income from our Middle East and Europe business, partially offset by lower income from programs based in Afghanistan.

We have done an excellent job of managing our costs, and SG&A as a percent of revenue dropped to 4.9% versus 5.8% last year. Looking to the remainder of 2016, we believe SG&A will likely increase slightly from the levels witnessed in the first quarter. It is important to note that we believe our business can support significant increases in revenue while maintaining a roughly $60 million annual run-rate of SG&A.

Afghanistan programs contributed $600,000 of operating income to the quarter, down $2.2 million compared to the prior year. Our operating margin for programs based in Afghanistan was 1.8% in the first quarter, which was impacted by the completion and closeout of a contract. However, we anticipate the remaining business should enable us to reach full operating margin of 4% for Afghanistan programs in 2016.

Diluted earnings per share for the first quarter were $0.61, compared to $0.47 per share on an adjusted basis in the first quarter of 2015. A 30% year-over-year increase. The favorability was due to an increase in total revenue and operating income, partially offset by lower Afghanistan revenue and operating income.

Additionally, net cumulative catch-ups added $1.7 million to our operating income, compared to the first quarter of 2015. Cumulative catch-ups are a natural part of our business, and are driven by changes in contract terms, program performance, customer scope changes, and changes to estimates in the reported period. These changes can go in either direction depending on the dynamics of a program, but we are pleased with the favorable results in this quarter.

During the quarter, we generated $2 million of positive free cash flow, which is an improvement of $29 million when compared to the first quarter of 2015. This year-over-year improvement is due to our team's focus and commitment to improving free cash flow generation, which resulted in DSOs of 57 this quarter, which is the lowest we have reported as a public company.

Looking to the balance of the year, we expect DSOs to increase from the levels witnessed in the first quarter. It is worth noting that one of our Vectrus improvement projects is to reduce our DSOs over time. For reference, over the past ten quarters, our DSOs have averaged 67 days and ranged from 57 to 78 days. Overall, we believe DSOs in the low 60s range are achievable over time.

Additionally, our operating and financial performance has allowed us to renegotiate and improve our existing credit facility, subsequent to the quarter end. For example, since becoming public, we have aggressively focused on reducing our leverage profile through both mandatory and voluntary debt payments. Additionally, we currently plan to continue this effort in 2016, and expect to make voluntary debt payments of $5 million to $10 million, in addition to our $14 million of mandatory payments. We believe the renegotiation is an important milestone, suggesting improved confidence in Vectrus by our banking partners. These changes to the credit agreement will provide operational flexibility, given the size of our programs and the potential variability of collections in our business.

Please turn to slide 6. For the first quarter total backlog was $2.5 billion. Total backlog represents firm orders and potential options on multi-year contracts, which exclude the ceiling values of IDIQ contract vehicle awards. Our funded backlog was approximately $1 billion.

During the quarter, we were awarded several contract modifications. Our funded backlog equates to approximately 80% of our annualized first-quarter revenue, which we believe suggests solid revenue visibility for 2016. We expect total backlog levels to increase, once re-compete contracts are awarded, and new business pursuits are won.

Please turn to slide 7. With the strong performance we experienced in the first quarter, we are in a position to adjust our full-year guidance. For 2016, we are increasing the lower end of our revenue range, diluted earnings per share and free cash flow. We increased the lower end of revenue by $40 million. We now estimate revenue to range from $1.15 billion to $1.19 billion, with a midpoint of $1.17 billion.

We increased the lower end of earnings per share by $0.08. We now estimate earnings per share to range from $2.02 to $2.31. The midpoint of diluted earnings per share is $2.16.

We increased the lower end of free cash flow by $2 million. We now estimate free cash flow to range from $22 million to $30 million, with a midpoint of $26 million. We are maintaining the range of operating margin at 3.6% to 3.9% with a midpoint of 3.75%. Again, this margin guidance assumes our 2016 investment in IT and networks.

Revenue from programs based in Afghanistan is tracking to the full-year plan of $80 million. As I have previously mentioned, our operating margin for programs based in Afghanistan was 1.8% in the first quarter, but we anticipate a rebound, which should ultimately average out to 4% for the full year. Looking forward, and given that our contribution from Afghanistan-based programs are becoming less material, comprising approximately 7% of our 2016 estimated revenue at the midpoint, we plan to move away from discussing this item on future earnings call. However, we will continue to report Afghanistan revenue and profitability for the remainder of 2016 in our earnings press releases.

Depreciation and amortization is expected to be $4.1 million in 2016. Interest expense is forecasted at $5.8 million, and we currently estimate a 36.4% tax rate for the full year.

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

(Operator Instructions)

And we'll take our first question from Brian Ruttenbur with BB&T Bank.

Yes, thank you very much. A couple of questions. First of all, on Afghanistan, you mentioned $80 million this year. You're on a much stronger run rate than that appears. Do you expect weakening in the second half of the year, and then maybe you can talk about where you see things going in 2017?

Sure. So, Brian, we had $32 million of revenue in Afghanistan this quarter. For the second quarter, it should trend slightly lower than that, and then it will come down in Q3 and Q4. So the second half of our year, we're anticipating that to come down to match the $80 million revenue projection.

As far as 2017, what we're expecting is that revenue stream to continue. We still expect that to come down slightly, slightly being about 50%, because of the contract closeouts we experienced in 2016. So we're projecting $80 million in 2016. We expect that at this point in time to be around $40 million in 2017.

Okay. Can you maintain the margins on $40 million, if you cut things in half? Can you maintain a 4% margin there?

Yes. At this point it's very similar to other contracts that we have in our portfolio. That's why we're going to get away from reporting it, or separating it from our financials. Historically, it was such a large contributor to our income base that we felt it was important to give visibility on where it was going.

But going forward, there will be additional contracts in Afghanistan that we'll compete on, and we can win. But it will be more in line to what we would expect on a normalized basis in the 4% to 5%. Maybe a little bit more, maybe a little bit less, depending on the contract dynamics.

Okay. And then on your core business, you had good core growth this first quarter. Can you talk about, beyond 2016 where you see your core growing and what the dynamics are with that?

Sure. That's a great question. We are starting to get some visibility into 2017. 2016 is shaping up nicely, obviously as we talked about. From 2017 perspective, we have -- there's some key elements that we need to make everybody aware of. Obviously we've been talking about re-competes. We need to win our re-competes first and foremost, and we're in good position to do that.

The second element of re-competes that need to be considered is almost in every case, we would expect those awards to come in at a lower run-rate than what we're currently experiencing. Those run-rate declines could be as much as 10% or more. Due to the competitive and sensitive nature we're in right now, I don't want to elaborate any more. But we will see a decline in those re-competes coming into 2017.

We talked about Afghanistan. So another 50% decline is a reasonable estimate if you're modeling 2017. On a more positive note, new business, depending on the timing of new business award in the second half of this year, if we see something in early fall or even later in the year, we could see a full contribution into 2017 that replaces some of the headwinds we're seeing on our existing contracts.

And then Thule is part of the new business. If Thule comes back our way, and assuming nothing has changed in the new contract, we could see as much as $60 million of annual revenue from that contract alone. So when you look at the broad picture, we need these re-competes to award. We need to bring them back in, and we're focused on that.

That would give us five years of revenue visibility. That gives us a nice, solid foundation to build on. So any increment or additional award that we receive after that, we could see some growth in the future.

Okay. So to sum up, the core -- well, first of all, the Afghanistan business is going to be cut by half in 2017, more than likely, which is what you're thinking. And then your core business, assuming you win all of your rebids, that's going to be down, let's say, ballpark 10%-ish. Will those margins be the same? You said already on Afghanistan, the margins will be in the same ballpark. Will the re-competes you anticipate being in the same ballpark as where they are now or better?

Well, so we've seen some good progress to date, right? A 4% core business margin this quarter is a nice outcome. Some of that has to do with timing on how we record our EACs, but nonetheless, we've seen some steady improvement there.

As we've said in the past, these re-competes give us more levers to improve profitability. We would expect those profit margins to increase. They're more fixed-priced elements, so as long as we get these contracts off on the right foot, and perform well, we have more levers to manage cost and improve margins. So that is our expectation, to realize our 4% to 5% operating margin going forward.

Great. Thank you very much.

And we'll take our next question from Bill Loomis with Stifel.

Just on EACs, just to be clear, I thought you said in your talk $1.7 million contribution to net income, but the Q says $2.7 million.

Sure. That $1.7 million is the change year-over-year. So $2.6 million in the Q.

I get it.

It's just the change that we had in our script.

Okay. And then the second is on the new wins. Can you just elaborate a bit on the $1 billion outstanding? First of all, I know you didn't have any new wins in the first quarter. Was there any awarded that you just weren't successful on?

And then of that $1 billion that you have out, is it lumpy? In other words, is there like a $500 million of it in one contract? If you can just talk about that, the make-up, and then timing. So when you expect those awards to play out, mostly in third quarter, some in second? Thanks.

Hi, Bill. This is Ken. Lumpy is a good word, because when you look at new business, it's really impacted by a bunch of factors, really delays and some outright cancellations. So we've actually had some bids come back in based upon protests and things along those lines, and there's some that we actually haven't won. But it's been steady, about a $1 billion awaiting award, and we continue to submit, as you saw, we have about $6 billion over the next 12 months in our pipeline, that we're going to submit.

And that doesn't even include some of the new IT things that we're looking at, based upon bidding the IDIQs that we're actually going after. I think if you look at the continuous improvement and what we're trying to do on the BD side, as far as the reorganization and looking at the pursuits, and really getting in front of a lot of these things, I really expect a better win rate and being able to address this corporately across the team. These improvements to our processes will allow us -- I really think, a better percentage win on these opportunities.

Yes, Bill, I would add, too, look at our re-competes. If you drawback to 2015 at the beginning of the year, we thought we would have all of these re-competes decided last year, and it's taken a full year to get resolution.

So that's a very similar dynamic that's going on in our pipeline. That's not all the activity that's going on in our pipeline. But clearly, the same effect is playing out there as well.

And we're continuing to look at our addressable market within all of our service lines, and look for opportunities and things that we can bid. But every year that we continue to look at the marketplace, it is lumpy.

So just going back to my question, in the first quarter, were there some meaningful bids that you just weren't successful on? And then also of the composition, the $1 billion, is half of it one contract, or any big programs in there, or is it a lot of smaller?

Sure. So, Bill, we haven't talked specifically about pursuits. I mean, it's a big pipeline. We have a very active process that's qualified and close to our core. What's important to us is that we make sure that if pursuits come out of that, in that waiting award bucket, that we have enough behind it, that we can put it in, and have more in consideration.

We're constantly looking at our addressable market to increase that pipeline. I think our investment in IT will do that over time. It may take a couple years to realize substantive results there, but we feel good about where we are. We have made some changes internally that will help adjust where we need to, and our success rate will improve.

But the biggest challenge is things are moving to the right, and that's the biggest challenge right now, Bill.

Okay, and then on the reorganization of business development, can you tell us, or did you realign by customer, or just give us a little more flavor, any new people brought in? Things like that, thanks.

No. We're just really reorganizing. We do a centralized business development and what I've really done is taken the capture piece and really reorganized our general managers. And when you look at how we do that, it's really the front end of the business. And then I've taken the costing and estimating and really moved that into the business development function.

So it's really working more on the front end, and looking at how we do it on the back end. So it's looking holistically across the entire process.

If you think of it from an investment perspective, we're taking costs that are centralized now and putting it at the beginning of a process, and we think our solutions will be even stronger than they are today, and we'll be able to optimize our investment, because we will only bid on things that we have a really good opportunity to win.

Okay. Great. Thank you.

(Operator Instructions)

We'll go to our next question from Maury Marcus with Sidoti & Company.

So my first question is on the [mauling] side. Share count in 1Q came in a little bit lighter than I was expecting. So just to get to the 11.2 million that you are expecting for the full year, should we see this pick up in Q2, or will that be more back-half weighted?

We'll see it pick up in the second quarter and it will level out in the third and fourth quarter. But the 11.2 million is still solid.

Okay. Got it. Okay. So then now, just on AFCAP, I know you've talked about, you've seen opportunities. Can you talk about what those opportunities are, and maybe a little bit on the timing side of that?

Again, we don't talk about specific opportunities. We are seeing heavy RFPs on AFCAP, and we expect those to turn pretty quickly. So as on other pursuits, we're seeing delays.

On this contract vehicle, and they're right in our core space, we expect the RFPs to come in. We'll submit bids, and then the awards to be announced really quickly.

We can see some activity in the second half of 2016 on AFCAP. We have a number of drafts that come in. It's really a very lively IDIQ.

Okay. That's good. Now, just on K-BOSSS, you said that you have a strong rating. Did you -- can you just tell us what that rating was for 2015? In the past you talked about having been 97%, 98% award score. What was that in 2015?

So we're still actually waiting for the most recent award period, but we're over 90%. More importantly, we've been rated as excellent. So that's the highest rating that you can have, and so our performance is strong.

As you would expect, with activity in the region, there's a lot of dynamics going in the contract, and the team has done an outstanding job managing that volume, and performing and not having an interruption in performance. The one thing we can control is our performance, and our performance will weigh into K-BOSSS 2.0 evaluation, and we're doing that quite well.

Okay. Got it. Great. One last question. I know you are targeting on operating margin long-term of 4% to 5%, and right now you are at the high 3%. How do you get there, just because you're doing a really good job of managing your costs. Is it just winning new contracts that just have higher margins? Given the current environment, it seems like margin is tough to come by.

Right. No doubt. It's a challenge. Our bid program is really important to us. Every opportunity that we can lean out operations and create more value for our customers, we're going to take that. And that gives us some opportunity.

Now, there's some natural caps on how much margin we can realize on existing contracts. What we've talked about in the past is, we need these contracts to re-award. So some of those natural dynamics that we're currently experiencing reset, gives us some new opportunities to improve margins.

Those new contracts, by and large, have a larger complement of fixed price elements, which can help us, if we do things correctly. If we perform well, meet customers' expectations and then we can optimize, using our VIP program, optimize that cost, then we can benefit from increasing margins. 4% to 5% is a reasonable target for this business.

Historically, on every contract, we've improved margin year-over-year, through our continuous improvement, or our VIPs. And that's just the legacy of ITT coming over from Exelis, and it's a culture. It's part of the culture of what we do within Vectrus.

Okay. Great. Thank you.

And we'll go to our next question from Michael French with Drexel Hamilton.

Congratulations on a strong performance for the quarter.

Thanks.

So I had an item that's in the news, that was announced, that the United States sent 250 special operators into Syria, and you have bases in the area. Are you involved in supporting them, and does that result in any uptick in activity on your bases?

Well, as you know, we have a lot of folks that are in the region, and we basically -- when you look at what operations take place there, we don't really talk in a classified scenario on anything taking place there. But when you look at the bases that exist in Turkey, and what takes place in Kuwait, and what takes place in Qatar and support structures that exist there, you can just assume that if anybody is going in and out of the region, that they're going to come out of one of those different locations, and they're going to get equipment from one of those regions, if they're going to go into Afghanistan, Syria or into Iraq.

Okay. Understood. And I'd like to ask you if you could elaborate on the comment you made about Reston. You said you've seen some solid progress there. Would you care to add some color to that?

Sure. Well, as you know, we've started -- we've been in the IT and network business for a long time. It's part of the legacy of when we started out the company 70 years ago, and we've been on the existing contracts. We've been running the network in the Middle East for multiple years on an existing contract. There was [UMBEX WACA], which before that was TAX WACA.

We've been running in Europe under different names and contracts for a while, which is now MSE. So we've had quite a -- almost 2,000 network engineers. And what we decided to do is because when we were under Exelis, we couldn't really bid the IDIQs, because there was another division that had a lot of that work, so we recognized a lot of those IDIQs in the IT network business were coming of age.

So after our first year of running the business, we said, well, we want to expand into that business area, because those IDIQs are becoming available. And so we opened the office in Reston. Hired our new Chico Moline, our new General Manager. Came over to us from Harris.

And then basically said, we're going to go after those pursuits, hired a bunch of new capture managers, decided to basically run it out of Reston, because when you look at where all of the customers are, where a lot of the talent is, and where a lot of people in the IT network business is, it's really in the Washington DC area. It's a hub. It's where the action is. It's where a lot of the things take place.

And that's where we started this process in January. And we're building it out. I go back and forth to there quite a few times, and I sit with the team. And it's really come together well. Matt, anything to add?

No. It's a minimal investment for a pretty sizable opportunity. We talked about, it's going to take a little while. But if we do this correctly, and hit some early wins into 2017, we see this as an increasing addressable market for us. And we're really small in this market, at this point in time.

Okay. Well, Reston specifically, there's a lot of intelligence community contractors in that area. And you're mostly with DoD. So are you still focused looking at the Pentagon, or are you looking at other agencies as well?

We'll take -- we'll work for anybody, Mike. So, quite candidly we'd like to get into three letter agencies, and do some of that work. We have bid some of that work in the past. We've done that. So quite candidly I'd like to get on some of those new contract vehicles.

Okay. Very good. Thank you, and good luck with that.

And there are no further questions at this time. Mr. Hunzeker, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you for joining us on the call today. We're off to a strong start in 2016, posting improvements in revenue, operating margin, earnings per share, and cash flow in the first quarter. Our execution and improved visibility have allowed us to increase the lower end of our 2016 revenue, free cash flow, and diluted earnings per share guidance. Thank you for your interest and look forward to updating you on our progress in the next quarter.

This concludes today's conference. We appreciate your participation. You may now disconnect.