Hello, and welcome to Vectrus, Inc. Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please note today’s event is being recorded. I now will like to turn the conference over to Mike Smith, Director of Investor Relations and Corporate Development. Mr. Smith, please go ahead.

Thank you. Good afternoon, everyone. Welcome to the Vectrus third 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. 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 would like to point out that we will be discussing and reporting adjusted non-GAAP metrics, including adjusted operating income and margin, 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 and press release. 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. Before we get started, I would like to thank all of our employees for their dedication and remarkable contributions in supporting the recent evacuation of thousands of Afghan refugees, third country nationals, and Americans from Afghanistan. This undertaking was the largest non-combatant evacuation in U.S. history, and our team’s commitment to the mission and performance was exceptional. I recently visited our overseas locations in CENTCOM and met with our teams and clients that directly supported this major humanitarian effort. The accomplishments, stories, and feedback I received from clients regarding the contributions of our employees were outstanding. I'll discuss some noteworthy highlights shortly. Our third quarter results were strong, driven by a 30% year-over-year increase in revenue. Organic growth was also strong, increasing 13% year-over-year, reflecting expansion in our core business, new wins, and phase-ins. The ability to generate substantial cash from operations remains an important characteristic of our business, and during the quarter, we delivered $39 million of operating cash flow. Adjusted EBITDA margin in the quarter was 4.5%. Adjusted diluted earnings per share increased 19% year-over-year to $1.15. We are continuing to grow and expand our presence in the Pacific or INDOPACOM. For example, just last month, we were awarded a task order with an eight-year performance period to provide logistics and support in the Philippines. In addition, we recently completed the pre-transition site survey for a LOGCAP V quadrant task order, and we anticipate the phase-in to start by the end of the year and to reach full operational capability and revenue run rate by mid-2022. Importantly, our revenue in INDOPACOM now makes up approximately 5% of our total revenue versus 1% in the same period last year. We believe INDOPACOM will be a key long-term growth driver for Vectrus, given the DoD’s intent to improve posture in the region. Our prime position under LOGCAP V enables us to support our clients throughout the full range of operations in the region over the next decade. Our client campaigns remain instrumental to our growth and diversification strategy. During the third quarter, we continued to build on our Navy campaign and recorded several notable technology-enabled wins that further our position as a premier converged infrastructure company. We also continued to advance our leadership in 5G and our supporting cutting-edge testing and experimentation for the DoD. For example, we recently supported the successful demonstration of a 5G network for Smart Warehouse and see significant applications for our clients' converged infrastructure operations. We ended the quarter with a total backlog of approximately $5 billion and pro forma total backlog of $5.1 billion. Given our solid year-to-year results, we are reiterating our 2021 guidance ranges. Vectrus is well-known for its ability to provide rapid response, convert solutions across all time zones and operating environments, which was demonstrated in full by our team during the recent mission to evacuate various populations from Afghanistan. Supporting our client's mission was a historical undertaking that our teams tackled with the highest level of skill, precision, and dedication. In one case, our team received a LOGCAP V task to build out living space that could accommodate several thousand Afghan refugees in 45 days. Our teams worked around the clock under extreme weather conditions to design, construct, and operate over 250,000 square feet of living space. This was a remarkable achievement. While we have one example shown on this slide, several Vectrus locations in Qatar and Bahrain supported this important humanitarian effort. I commend our entire team for going above and beyond to support this critically important mission.

Thanks, Chuck. And good afternoon, everyone. Please turn with me to Slide 9. Third quarter 2021 revenue grew 30%, or approximately $107 million year-on-year, to $459 million. Exploiting the contribution from our 2020 acquisitions, organic revenue grew 13%. Organic revenue was driven by expansion in INDOPACOM, ramped to full operational capability on LOGCAP V Iraq, and support of the humanitarian refugee mission. Adjusted EBITDA for the third quarter of 2021 was $20.5 million, or a 4.5% margin compared to 4.8% in a prior year's quarter. Margin in the third quarter was influenced by the timing and phase-in of new awards, program completions, and increasing volume of material and passthrough content, which carry a lower fee. Third quarter 2021 interest expense was $2 million, approximately $1 million year-on-year due to the company's two acquisitions. Diluted earnings per share for the third quarter of 2021 was $0.87. Adjusted diluted EPS, adding back amortization from acquisitions, M&A and integration costs, and removing the benefit associated with prior year's tax credits was $1.15. Relative to last year, adjusted diluted EPS increased by 19% due to the company's organic revenue growth, income from our two acquisitions, and a lower tax rate, offset by higher M&A-related interest expense. Operating cash flows were $39.4 million for the quarter compared to $3.3 million in the same period last year, an impressive result driven by our teams' focus on cash collections and process improvement. Operating cash flows were $53.4 million for the nine-month period compared to $37.7 million in the prior year's period. Excluding the prior year benefit of the CARES Act payroll tax deferrals, year-to-date cash flow from operations improved 92% over last year.

It's really a three-part answer to your question. First of all, we're going to have a very solid year this year, at the mid-point well over 25% growth, total growth, I should say. I wouldn't call it being conservative, but we are being mindful of three things. Thing one is like everyone else, we did have some effects from Afghanistan that were not overall material, as we talked about in our last call, but there were some effects from Afghanistan, point one. Point two, is we do have a number of contracts in transition and closeout between prior contract structures and new contract structures such as LOGCAP. The final point is that we were greatly benefited in quarter two and quarter three from the contingency work that I described earlier. One of the areas that we need to continue to work with you and your colleagues and our investors is to show how with the blessing of LOGCAP comes a bit of reeducation in terms of how our revenue can be a bit lumpy from quarter to quarter. Having said all of that, we are not prepared, and we're not going to give 2022 guidance yet. But I see, as I look into 2022, an organic business base that will lead to growth in 2022.

Good evening, Chuck and Susan. Thank you for taking the questions. It has been another solid quarter, and we seem to be consistently performing well. Regarding INDOPACOM, you've done an excellent job there. Is there a way to gauge the potential opportunity? I understand that much depends on the contracts, but could you provide any additional details or insights on what the prospects for INDOPACOM might mean for Vectrus?

Hi, Joe this is Chuck. How are you? A great question. INDOPACOM is an increasing portion of our overall pipeline. We don't really talk about the composition of the pipeline per se, but it is rapidly increasing. Point two, as you know, Kwajalein was one of the tasks we were awarded during LOGCAP. Kwajalein is currently, as we stated in the prepared remarks, beginning to phase in and should be fairly well phased in by the middle of next year. We do expect that contract to be more than 10% of our revenue. So, we will begin to report that as it comes online. In the last part, as you hear from a geopolitical perspective, quite often the pivot to Asia is real from both a military and foreign policy perspective. Our results both in this quarter as well as the prior quarter were favorably impacted by the Pacific Defender activity, which was a contingency operation to support an exercise. We expect to see that type of activity continue and increase over the coming years. The last part on Pacific Defender is a real example of how the contingency operations portion of the LOGCAP contract will increasingly affect our financials, making them somewhat more lumpy because that kind of revenue doesn't really show up in backlog. In the case of Pacific Defender, the opportunity was identified, booked, and billed in less than two quarters. It's a great question. To your point, we will consider, and we are considering, providing a bit more color to our pipeline in the future to demonstrate where we think we have emerging demand.

Okay. Thank you for that. Much appreciated. And one of the recurring themes on a lot of the companies, at least that I follow, is the very difficult labor market and difficulty in finding staffing, combined with the vaccine mandates that have been issued by the Biden administration, especially for federal contractors. I was just wondering how you guys are dealing with staffing availability here? And where do you stand on the spectrum of getting the workforce vaccinated? Are you having issues with that? Is that something that's moving smoothly? I'm just curious if it could be a potential hiccup down the road.

So, a lot of questions in your one question. Let me break them down piece by piece. Like other companies, we continue to face challenges in identifying and deploying resources. A big part of our business model is the use of foreign national and local labor. In terms of staffing our programs, COVID has been difficult, but as you can see by our results, we've been able to find the right types of people in the right locations to continue to drive revenue. Regarding the vaccine mandate, we take this very seriously. We've been tracking both COVID effects and COVID mandates from the beginning. We and most of our businesses have been affected by COVID, and we aim to get our staff vaccinated per the order as quickly as possible. It's important to note, however, that about 80% of our business comes outside the continental United States, and the current executive order is really focused on U.S.-based employees. While there's a need to get people vaccinated quickly to keep our people and clients safe, the mandate effect itself mainly impacts our corporate office and our U.S.-based contracts more directly.

Okay, thanks for that insight. One more, if I may. Again, really nice quarter here, but you did raise the guidance. You kept it the same. One would have thought that showing such a nice quarter, maybe you would have increased a little bit. What was the thought process behind maintaining guidance where you had it at the end of the second quarter? Thank you.

It's really a three-part answer. First of all, we expect a very solid year this year, at the mid-point well over 25% total growth. We're being mindful of three things. First, we did have some effects from Afghanistan that were not overall material, as we discussed in our last call, point one. Point two, we have several contracts in transition between prior contract structures and new ones like LOGCAP. Finally, we benefited a lot in quarters two and three from the contingency work I described earlier. We need to continue to clarify how our revenue can be a bit lumpy from quarter to quarter, especially with LOGCAP. Having said all that, we aren't prepared to offer guidance for 2022 yet, but I see an organic business base that will lead to growth in 2022.

Great. Thanks for that, Chuck. And much appreciated again, really nice quarter.

Thank you, Joe. Good talking to you.

Thanks, Joe.

Thank you. And this concludes the question-and-answer session. I would like to return the floor to Chuck Prow for any closing comments.

Thank you. Thanks for joining the call today. We look forward to updating you on our full-year performance next time we meet. Thanks, and have a good day.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.