Greetings, ladies and gentlemen. Thank you for joining us for the Vectrus Second Quarter 2021 Earnings Conference Call and Webcast. Today's call is being recorded. My name is Jen, and I will be your operator for today's call. At this time, all participants have been placed in a listen-only mode.

Following management's presentation, I will open up the call for a Q&A session. [Operator Instructions] And now I'll pass the call over to your host, Mike Smith, Vice President of Treasury, Corporate Development and Investor Relations at Vectrus..

Thank you. Good afternoon, everyone. Welcome to the Vectrus second quarter 2021 earnings conference call. Joining us today are Chuck Prow, President and Chief Executive Officer; and Susan Lynch, 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. The company assumes no obligation to update its forward-looking statements.

Additionally, I'd like to point out that we will be discussing and reporting adjusted non-GAAP metrics, including adjusted EBITDA and margin, adjusted net income and adjusted diluted earnings per share. The definition of these non-GAAP measures can be found in our presentation materials, press release and Form 10-Q.

At this time, I would like to turn the call over to Chuck Prow..

Thank you, Mike, and good afternoon, everyone. Thank you for joining us on the call today. Please turn to Slide 3. I am pleased to announce that our business continues to advance on all fronts, resulting in a very solid second quarter.

This success wouldn't be possible without the innovation and dedication of our employees who stand with our clients across the globe in support of their most critical missions. We continue to build on our first quarter momentum with revenue increasing 40% year-over-year to $471 million, an all-time high for Vectrus.

We grew organically 21% driven by new business, base expansion and phase-ins. Our topline strength was matched by a significant increase in EBITDA margin to 5.6%. The combination of increased revenue and strong margin performance in the quarter yielded adjusted diluted earnings per share of $1.52.

In the second quarter, we were issued a LOGCAP V task order to support a major client exercise in INDOPACOM, known as Defender Pacific 21. This exercise is illustrative of the rapid response and quick turnaround requirements that we expect to see over the next decade under the LOGCAP V contract.

We expect our momentum in the Pacific to continue to grow as we phase-in Kwajalein task order and become fully operational in mid-2022. Additionally, we achieved two major milestones during the second quarter, successfully transitioning both Iraq and Kuwait task orders and reaching full operational capability.

I'd like to thank our team for their significant contributions and challenging environments to ensure client success. We look forward to serving as the Army's preferred source for logistics and base operations support and sustainment services in CENTCOM over the next several years.

We ended the quarter with total backlog of approximately $5 billion, and pro forma backlog of $5.3 billion. With regard to our OMDAC-SWACA recompete win, our client have lifted the stop work order and we have started performing on the new contract. The OMDAC-SWACA award is included in our total backlog.

One protest in the Court of Federal Claims remains on OMDAC-SWACA. Because of our strong year-to-date results and backlog, we are increasing our 2021 revenue and EPS guidance. Please turn to Slide 4.

Vectrus continues to execute a strategic framework, which is driving improved performance and growth across the business and positioning us to lead in the converged market.

Our momentum is being advanced by our growth and capital allocation model, which is focused on investing in organic growth, targeted M&A and developing and inserting operational technologies aligned with our strategy.

The growth generated from this dimension of our model leverages our Enterprise Vectrus performance improvement initiatives which are increasing value by automating our core program and support processes, cost efficiencies, supply chain and technical enhancements to modernize our programs and support functions.

The foundational aspect of this framework that catalyzes and connects all of our efforts together is our team and cultural development initiatives. The people of Vectrus have been and continue to be pivotal to our success. We utilize our leadership development framework to grow this talent base.

Additionally, Vectrus' value-based culture is tightly coupled with our demonstrated focus on corporate social responsibility, diversity, equity and inclusion. Vectrus as a majority minority company with approximately 60% of our workforce representing people of color.

Vectrus Diversity, Equity and Inclusion Council, Employee Resource Groups and DE&I town halls and leadership summits for our employees are essential to our culture and management system.

These components of our value system and strategic framework are enabling Vectrus to deliver on our strategy three core elements, enhance the foundation, expand the portfolio and add more value, which are transforming Vectrus into a larger scale, higher value and differentiated platform. Please turn to Slide 5.

Our second quarter results are demonstrative of Vectrus' increasing position and significant opportunity in the Pacific region. During the quarter, our INDOPACOM revenue grew meaningfully as we increased our operations and supported mission requirements in the region. Our revenue in INDOPACOM now comprises 6% of our total revenues.

Additionally, we believe the longer-term opportunity for Vectrus to expand and grow in the region remains strong as our prime position under LOGCAP V enables us to support the Army throughout the full range of operations in the region over the next 10 years.

Furthermore, we have strategically invested to bolster and increase our core set of capabilities in INDOPACOM since 2018. Today, Vectrus provides several key solutions that are aligned to support the growing requirements of our clients. One of these solutions is the integrated electronic security and protection of critical assets and installations.

Vectrus is the exclusive provider of C3 integrated network security systems for the U.S. bases across Korea. Vectrus is also the exclusive provider of security design and C3 network solutions supporting and protecting the foreign military sales F-35 program in Japan.

Additionally, under our fleet systems engineering team, FSET program, Vectrus provides specialized IT systems engineering and communication support to forward deploy Naval forces in Japan and throughout the region. Our FSET teams help ensure the readiness of U.S.

naval ships and continuity of Navy C4I Systems in the event a systems malfunction, attack, cyber-attack and other system impacting incidents.

Through our engineering and digital integration solutions, today Vectrus is integrating CBRN sensors, force protection assets, and other data sources as part of an IoT solution at certain INDOPACOM installations that will provide early warning and enhance situational awareness of potential threats.

Vectrus have a legacy providing multi-functional logistics and sustainment level maintenance of vehicles and prepositioned stock. We also provide full spectrum MRO services for legacy and next-generation aircraft.

Currently, in INDOPACOM, we are providing maintenance of the C-130 aircraft in Japan, in addition to maintenance and readiness support services for ground vehicles in the region. We believe the requirement for these services will expand and Vectrus remains positioned to support our client requirements.

Vectrus' facility and operations and maintenance services are critical to the expected future growth in INDOPACOM. Our converged infrastructure solution support all DoD clients and today are providing operations support services at several locations in the Pacific.

This aspect of our business will increase as we complete the transition and ramp-up of enduring operations at the Kwajalein Atoll which is currently planned to reach full operational capability in mid-2022.

In summary, Vectrus is well positioned in the Pacific to support our clients' requirements as well as the DoD's intent to improve faster in the region. Please turn to Slide 6. We continue to deliver our strategy to diversify our client portfolio, win new business and improve operational performance by aggressively leveraging technology.

Our Navy growth campaign continue to expand as we combine our capabilities to deliver innovative technology-based solutions while improving mission effectiveness. The results of this campaign are seen in our financial results with Navy revenue increasing 288% year-over-year driven by organic wins and M&A.

The Navy now comprises 12% of our total revenue versus 4% last year. During the second quarter, we were awarded a position on the Navy's Worldwide Expeditionary Multiple Award IDIQ Contract for WEXMAC.

The contract provides worldwide expeditionary supplies and services to support humanitarian and disaster relief, military exercises and contingencies in 22 geographic regions. This award builds on our position under the Naval Global Contingency Services contract which has been an instrumental part of our Navy campaign.

While the contract is currently under protest, we plan to utilize this vehicle as another route to access some important client. In aggregate, based on the demand from our client and opportunities in our pipeline, we expect our work with the Navy to expand over the next several years. Please turn to Slide 7.

Our acquisitions of Zenetex and HHB remain on track and have resulted in a more capable and diverse company. Our combined pipeline of future opportunities continues to expand as our teams are leveraging joint capabilities, past performance and client intimacy.

We are building on Zenetex's foreign military sales capabilities and continue to see future growth in this area, especially as the company was just awarded a contract to provide support services to the State of Kuwait. We believe that over time, the higher margin FMS market will increase as an overall percentage of Vectrus' total revenue.

As you can see on this slide, our acquisition strategy have resulted in a significantly enhanced company from a capability and client perspective. In 2018, we materially expanded our sensor integration, Internet of Things and perimeter security solutions. In 2019, we acquired a leading provider of integrated electronic security systems.

In late 2020, we introduced Zenetex and HHB allowing us to deliver a more integrated and comprehensive suite of solutions to our clients globally. Our balance sheet remains strong and we continue to pursue inorganic activities that will increase the diversity of our portfolio, expand margins and make Vectrus a premier provider of converged solutions.

Please turn to Slide 8. In terms of our new business pipeline, Vectrus remains well positioned to grow organically and win its fair share of over $11 billion in new opportunities we have in our pipeline. It's important to note that recompetes are not included in this amount.

I'd like to point out that given the velocity of the LOGCAP V task, our pipeline does not reflect these potential opportunities. As an example, the pipeline does not reflect recent activity in support of the emerging Afghan refugee situation, but we are actively engaged in discussions requiring potential roles in support of the situation.

Now, I would like to turn the call over to our Chief Financial Officer, Susan Lynch, for a review of the financials..

Thanks, Chuck and good afternoon, everyone. Please turn to Slide 9. Our financial and operational strength demonstrated in the second quarter is representative of Vectrus' ability to generate solid growth and earnings power. Second quarter 2021 revenue grew 40% or approximately $135 million year-on-year to $471 million.

Excluding the contribution from our two recent acquisitions of $64.4 million, organic revenue grew $70.4 million or 21%. Organic revenue was driven by our support of the Defender Pacific 21 exercise in INDOPACOM, and ramp to full operational capability of LOGCAP V Iraq in the quarter.

Adjusted EBITDA for the second quarter of 2021 was $26.6 million or 5.6% margin.

Margin was driven by our acquisitions at the end of Q4 2020, our enterprise performance improvement initiatives, contract execution in the quarter, ability to convert cost plus components of contracts to fixed price and our continued efforts to transform Vectrus into a higher margin business.

Second quarter 2021 interest expense was $2.3 million, up approximately $1 million year-on-year due to the company's two acquisitions late last year. Diluted earnings per share for the second quarter of 2021 was $1.35. Adjusted EPS adding back the amortization from acquired intangible assets was $1.52.

Relative to last year, the increase in diluted EPS was driven by the company's improved operating performance, two recent acquisitions, both of which were partially offset by higher interest expense and a higher effective tax rate. Operating cash flows for the quarter were $35.7 million and for the half $14 million.

This compares to operating cash flows in the prior year of $20 million in the same quarter last year and $21 million for the half excluding the benefit of the CARES federal and payroll tax deferrals.

In summary, our second quarter results demonstrate our ability to grow organically and execute on our strategy of inorganic growth, enabling the transformation of the company into a higher value platform. Please turn to Slide 10, our strategic execution and recent acquisitions have resulted in a more capable and diverse company.

Navy revenue now represents 12% of total revenue compared to 4% during the same period last year and a growth of 288% year-over-year. Our organic growth and strategic acquisitions have also further diversified our geographic portfolio.

In the second quarter, our revenue in INDOPACOM grew approximately $28 million year-on-year and now represents 6% of total revenue. Our target is focused on increasing our capabilities and presence in the region as well as the phase-in of LOGCAP V is now visible in our results.

Our footprint in INDOPACOM will continue to increase as we ramp up the Kwajalein task order. Additionally, our U.S. based revenue composition grew to 31% of total revenue as compared to 25% at the same time last year, driven mainly by our two recent acquisitions. Please turn to Slide 11.

Second quarter 2021 total backlog was approximately $5 billion compared to $3.8 billion in the second quarter of 2020. Total pro forma backlog was $5.3 billion and includes contract wins currently under protest. Funded backlog was $1.3 billion.

Please note that OMDAC-SWACA is included in total backlog as Vectrus was given the notice to proceed on the new contract. The company's trailing 12-month pro forma book-to-bill was 1.5 times compared to 1.4 times in Q2 of 2020. Please turn to Slide 12. Cash at quarter end was approximately $69.8 million.

Total debt was $175 million and net debt was $105.2 million. Both total and net debt were up from prior period due to the acquisitions of Zenetex and HHB on December 31, 2020. The company's total leverage ratio was 1.76 times, well below its covenant level of 3.5 times.

We plan to utilize our strong balance sheet to enhance Vectrus' position in the market through the prudent deployment of capital that generates solid returns for shareholders. Please turn now to Slide 13. Given our strong first half performance, we are increasing our guidance for revenue and adjusted diluted EPS.

Revenue guidance is $1.745 billion to $1.780 billion. The revised revenue guidance represents year-on-year growth of 25% to 28%. Adjusted diluted earnings per share guidance adding back amortization from acquired intangible assets is increasing to $4.76 to $5.07. This new range for EPS reflects year-on-year growth of 42% to 51%.

The adjusted EBITDA margin range is unchanged at 4.8% to 5.0%. We expect net cash provided by operating activities to remain in the range of $58 million to $65 million due to the number and magnitude of new program ramps. I'd like to now open the call up to questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Joe Gomes with NOBLE Capital. Please proceed with your question..

Good afternoon, Chuck and Susan. Great quarter..

Thank you, Joe.

How are you?.

Thank you..

Doing well here.

So I guess kind of the first question I just wanted to throw out there on the LOGCAP INDOPACOM, there had been some issues in the past, we're getting base access due to the COVID and now that we've got this Delta variant going around and making its name, are we seeing any additional increases in base access difficulties or are you that pretty much in the past?.

We have -- so it's a good question. We do have people in the Marshall Islands and we've been through some of the preliminary transitional activities. At this point in time, the communications we have with our clients has us transitioning the full operational capability in mid-2022. So where we are right now, we've heard nothing to the contrary.

But obviously with everything to do with COVID, we're tracking the situation closely on a daily basis..

Okay. And I know this has come up in some of the other calls that we've talked about, staffing in inflation cost of things. Are you guys having any difficulties in staffing up -- with some of all these wins that you recently got? Is inflation causing any issues for you guys? Thanks for that.

Any insight on that one?.

Yes. It is a competitive market, no doubt. And frankly in some of our business advisory functions that are more impacted by the U.S. -- the current U.S. staffing situation is something that we're monitoring on a daily basis as well.

Again, one of the benefits of having cost-type contract portfolio being in the 70%-ish, we do have some protection in terms of labor costs. But at this point in time, predominantly for our iconic roles, while we are monitoring the situation very carefully we seem to be doing a good job making sure that open seats are full.

But again, it's an environment like nothing we've had in the last handful of years, and that's something that we're watching closely. And by the way, I'd like to also add that we've deployed some new technology suites here over the last couple of quarters that are really making us I think a bit more agile which has helped the situation..

Yes. And Joe, I would just add even on some of our fixed price programs that are covered by a collective bargaining agreement, the majority of those cases were able to recoup from our customer when those CBA or those negotiations occur, we're able to get reimbursed, even under the fixed price..

Okay, that's good knowledge. You talked some on the pipeline and the backlog, but if I'm looking from the first quarter to the second quarter, the pipeline seems to have shrunk a little bit from $12 billion to $11.4 billion, and I think even the backlog has shrunk a little bit.

I just wondered if you could kind of add some more detail or color there as to what was going on quarter-to-quarter?.

So, we could -- it's normal contractual movement. Quite frankly, we've had some wins, as you know. I have to tell you, I couldn't be more pleased with the -- with not only the shape of our new business pipeline, but the diversity across our client sets.

The acquisitions that we've done over the last couple of years has really broadened our capabilities that, that I'd like to think that we have a much more diverse new bids in pipeline now than we did just a few years ago. So it's -- there's a lot of -- there's almost $11 billion in our new business pipeline.

It's very healthy and I continue to think that our win rates are at least at the market levels..

Okay. And one more for me and I'll jump back in queue. On the guidance, two quick questions. You didn't increase the adjusted EBITDA margin guidance and I think in the first quarter it was 4.8%. And I think in the second quarter, you said it was 5.6%. One, no increase on the adjusted EBITDA margin.

And two, if I do my math real quick -- I'm looking at your mid-point guidance on the revenue side, it would suggest that the second half of the year revenues are going to be down from the first half of the year.

It seem to recall that historically it's been switched, you guys have typically done stronger in the second half of the year than the first half of the year. So just again, looking for a little more detail or insight on that. Thank you..

Sure. And so this year for Vectrus 2021, we're really fortunate and blessed to have a significant number of new contracts phasing into the portfolio. We have really for the first time ever now the LOGCAP has moved in the full swing beginning to introduce kind of quick introduction, quick burn types of program.

So how I would look at our 2021, we were very successful at moving some of that new revenue to the left. The reality is that we're phasing out of certain programs that is now being taken into the LOGCAP and other environments for that matter. So it's really just a timing issue.

What you'll notice is that we're going to move from 4% full year margins in '20 to full year -- at the midpoint 4.9% in 2021. So our activities to increase the profitability of our business continue to make progress.

And again at the midpoint of revenue, that's a 20 somewhat -- 26% revenue increase for the year and we'd like to think that our organic growth would be approaching the 10% within the 26%.

So, while I agree that the timing is a little different than in prior years, it's really reflective of the success that we've had both winning in and now phasing in now that we're past COVID, new programs while phasing out of old vehicles.

Susan, anything to add?.

Just maybe two things. So I think, Chuck, in your prepared remarks, you mentioned something about the velocity of the task orders and that's kind of what we saw in the second quarter. So in some respects that pull forward some revenue out of Q3.

We also have the drawdown in Afghanistan that we're covering in our outlook, and a number of program completions. And I think you are aware the OMDAC-SWACA recompete and the pricing reset that goes along with that.

And so, as Chuck said, I think with our outlook, we're looking at 26.5% at the midpoint growth, which we're ecstatic about and the high single-digit growth rate on our organic is, I think, a really good new story for us, and then increasing by 90 basis points, our adjusted EBITDA margin is just, you know, we couldn't be more pleased..

Great. Thanks for that color. And just -- I got the answer to that. And it's very insightful. I appreciate that. And again, thanks for taking my questions. Great quarter and look forward to the second half of the year. Thank you..

Appreciate it. Thanks for the questions..

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

Hey, guys. Rob here for Joe DeNardi at Stifel. Congrats on the quarter..

Thank you..

Just I guess qualitatively on INDOPACOM, it's still at relatively small levels. I believe the numbers were 6% of revenues, grew about $28 million year-over-year. Conceptually, when you sort of look at that is there anything that you give us color wise on the potential for INDOPACOM in the long-run or qualitatively where you're at right now.

I believe in the press release, you'd point out you're ramped up on just [indiscernible] pronunciation.

But just one of the islands in the Marshall Islands like longer term, what are some of the potentials there?.

Yes, sure. We devoted quite a bit of time to INDOPACOM in our prepared remarks. We couldn't be more pleased with our positioning both from a delivery perspective and a contract vehicle perspective.

The Kwajalein base, which is the base that you referred to in the Marshall Islands, it's actually a nuclear mission and that task was a part of the original LOGCAP win unfortunately. Because of COVID, the transition has been delayed.

But again, I had mentioned in my prepared remarks, we're on the island, we've been through transition planning, we're in constant dialog with our client. And to this day as we speak today, the transition to full operational capability should be scheduled for the May-ish timeframe, I think I said the mid-2022 timeframe.

So again we are very pleased with our positioning. The exercise that we talked about in the prepared remarks is an exercise -- type of an exercise, I should say, that we should see on a regular basis in the areas of operations that we are responsible for which would include both CENTCOM and INDOPACOM. So a long-winded answer to your question.

There are a lot of moving pieces, most of them very favorable in the INDOPACOM region and we'll continue to see that geography progressing as a percent of our total revenue over the next year or two..

Okay. All right, thanks. And then, just sort of -- I guess, two questions, somewhat related. Well, just two questions. One on the EBITDA margin guidance essentially going up 90 bps year-over-year.

Can you talk qualitatively like how much was M&A, how much of the increases are organic and just any color around that?.

Yes. We're not going to get into the specific profit profiles of individual acquisition, but I will say that the acquisitions that we did at the end of last year have been accretive and that is a model for our continued capital deployment strategy.

We're going to continue to stay focused on acquisitions that will be technology-enabled acquisitions that will be accretive to our overall portfolio.

I would say, a good piece of the increase in margin for 2021 is going to be attributable to both our Enterprise Vectrus activities where we are continuing to automate our business advisory functions in support of our projects. And yes, just outstanding performance on the part of our delivery teams year-over-year.

The base operations business does have -- it is a margin sensitive business, but our teams are making very good progress in implementing new capabilities, new techniques, more highly automated ways to do things that used to be done in a more manual way.

And that's what you're seeing in the margin expansion that we're projecting for the remainder of 2021..

Okay, great. Thanks for taking my questions and congrats on a good quarter..

Thank you very much. I appreciate it..

Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn the floor back to Chuck Prow for closing comments..

Thank you very much and thank you to everyone who joined the call today. Again we're pleased with the results of the second quarter and we look forward to updating you with the results of the third quarter in October. We'll talk to you soon. Thanks..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..