Vectrus : 2020 Annual Report

VECTRUS, INC.

2020 ANNUAL REPORT

LETTER TO OUR SHAREHOLDERS

First, I'd like to thank our entire workforce for their innovation and fortitude throughout the pandemic and commitment to delivering outstanding service in support of our clients' critical infrastructures and missions across the globe.

2020 demonstrated the financial and operational resiliency of our business model, the dedication of our team to our clients' missions, and the advancements we're making to lead in the converged infrastructure market.

We delivered full-year revenue of approximately $1.4 billion, which was up 1% year-over-year despite a $63 million or 4.6% headwind associated with COVID-19. Adjusted EPS1 for 2020 was $3.07 despite an estimated $0.39 impact associated with COVID-19. In addition, we reported strong operating cash flows of $50.9 million excluding the benefit from the CARES Act, a new company high. Our ability to generate substantial cash from operations remains an important characteristic of our business.

We continued to grow our backlog, which ended the year at $5.1 billion, up 84% year-over-year, an all-time high for Vectrus. The increased backlog was partly driven by the recent $882 million recompete win of our OMDAC-SWACA2 contract, the second largest contract in our portfolio, which significantly improves our visibility over the next five years.

Our targeted growth campaigns continue to yield favorable results and in 2020 we made great progress executing our Navy growth campaign, which is harnessing capabilities across the Vectrus portfolio 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 22% year- over-year in 2020. Notable wins during the year include the following:

• $210 million firm-fixed-price contract to provide base operations support in Bahrain.
• $196 million five-year recompete contract to continue base operations support services at Naval Station Guantanamo Bay2.
• $154 million seven-yearfirm-fixed price contract to support the U.S. Naval Academy. This contract was secured through a joint venture2.
• $45 million firm-fixed-price contract to provide base operations support at the Naval Support Facility in Romania.

Looking forward, our robust pipeline of new business opportunities, which exceeds $11 billion, also represents our efforts in continuing to execute targeted growth campaigns and further balance our client portfolio. Our pipeline also supports a shift to more advantageous contract types, and higher margin solutions.

Our continued progress driving organic growth can be attributed to our leadership in the emerging converged infrastructure market. As an example, through our differentiated capabilities Vectrus was awarded a prime contract for the Navy Smart Warehouse 5G initiative. Under this effort, Vectus will provide industry-leading inventory management, network security, robotic material moving, and environmental sensing capabilities at Naval Base Coronado. While we expect the initial contribution from the award to be small in value, the win reinforces Vectrus as a leader in this emerging market where digital solutions are now being applied within traditional facility and base operations and IT services.

The inorganic dimension of our business model is founded on making strategic acquisitions that will diversify our client portfolio and expand the breadth of our capabilities. In December 2020, we acquired two companies, Zenetex and HHB Systems, that accelerate our strategy and enable us to deliver a more integrated and comprehensive suite of solutions to our clients globally. Zenetex brings new capabilities including high-end logistics, integrated security, mission-critical readiness services for vital defense aviation programs, while expanding our engineering and digital integration offerings. Importantly, the acquisition brings unique access to new intelligence and foreign military clients, providing key channels for future growth. HHB provides integrated solutions that support physical and digital infrastructures within the intelligence community and enhances our capabilities in computer-aided facility management, engineering, design, and planning. I am delighted with the new talent, clients, and capabilities that will enhance the diversification of our business. We look forward to leveraging our combined capabilities to accelerate growth and yield greater opportunities for the business.

In conjunction with our acquisitions, we also negotiated and expanded our credit facility, increasing the amount of funding available under our revolver while improving our covenants. This improved facility is indicative of our strong financial position. Additionally, our balance sheet remains strong and provides flexibility for Vectrus to pursue organic and inorganic growth opportunities that align with our strategy.

The people of Vectrus have been, and continue to be, foundational to our success. Vectrus' values-based culture is tightly coupled with our demonstrated focus on corporate social responsibility and diversity, equity, and inclusion. With more than 40% of our workforce made up of veterans, we are a leading participant in the veterans' ecosystem and were once again recognized as a Top Company for Veterans by DiversityInc. Vectrus' Diversity, Equity, and Inclusion Council, Employee Resource Groups championed by senior leaders, and diversity and inclusion summits for our employees are essential to our culture and management system. For more information on our current workforce demographics, visit vectrus.com/culture.

As our capabilities continue to evolve in support of the converged infrastructure market, we are taking this opportunity to insert environmentally friendly solutions into the missions we operate. For example, Vectrus was recognized for leading a team of contractors in a base composting demonstration examining new biodegradable materials and identifying processes best suited for building base resiliency, reducing waste sent to landfills, and establishing an enduring legacy of environmental sustainability efforts on U.S. Army installations in Kuwait.

We believe our strategic focus, significantly enhanced capabilities, strong balance sheet, robust backlog, large new business pipeline, and talented team support our ability to continue delivering solid financial results and on our service of clients' missions. I look forward to updating you on our progress.

Charles L. Prow

President and Chief Executive Officer

1Adjusted diluted earnings per share is defined as adjusted net income divided by the weighted average diluted common shares outstanding. Adjusted net income is defined as net income, adjusted to exclude items that may include, but are not limited to, significant charges or credits that impact current results but are not related to our ongoing operations and unusual and infrequent non-operating items and non-operating tax settlements or adjustments, such as revaluation of our deferred tax liability as a result of the Tax Cuts and Jobs Act, and net settlement of uncertain tax positions.

2This program is currently in protest with the U.S. Government Accountability Office (GAO) or the Federal Claims Court.

Safe Harbor Statement - Certain material presented herein includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about the Company's growth, including growth in revenue, cash flow and margins, backlog, business strategy, acquisitions of Zenetex and HHB, contract opportunities, bids, awards and business pipeline and transition process, outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements, our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, the risk factors set forth in Part I, Item 1A, "Risk Factors," and elsewhere in our 2020 Annual Report on Form 10-K. We undertake no obligation to update any forward-looking statements.

INTEGRITY - RESPECT - RESPONSIBILITY

The unyielding belief system and principles that guide us in all we say and do, each and every day. They guide not only how we engage our customers, but also how we treat each other.

VECTRUS VISION-BE AN INNOVATOR AND GLOBAL LEADER IN THE CONVERGENCE OF OUR CLIENTS' PHYSICAL AND DIGITAL INFRASTRUCTURE AND SUPPLY CHAINS.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

• ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

or

• TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to

Commission File Number: 001-36341

Vectrus, Inc.

(Exact name of registrant as specified in its charter)

Indiana				38-3924636
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)
2424 Garden of the Gods Road, Colorado Springs, Colorado	80919
(Address of Principal Executive Offices)	(Zip Code)
Registrant's telephone number, including area code:
	[phone]
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class	Trading		Name of Exchange on Which Registered
symbol(s)
Common Stock, Par Value $.01 Per Share	VEC		New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☑	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing price at which the common equity was last sold as of July 3, 2020, the last business day of the registrant's most recently completed second quarter, was $552,792,653.

As of February 26, 2021, there were 11,625,708 shares of common stock ($0.01 par value per share) outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the registrant's Annual Meeting of Shareholders to be held on May 6, 2021 will be incorporated by reference in this Form 10-K in response to Items 10,11,12,13 and 14 of Part III.

	VECTRUS, INC.
	INDEX TO ANNUAL REPORT ON FORM 10-K
	TABLE OF CONTENTS
		Page No.
	PART I
Item 1.	Business	4
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	30
Item 3.	Legal Proceedings	30
Item 4.	Mine Safety Disclosures	30
	PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer	31
	Purchases of Equity Securities
Item 6.	Selected Financial Data	33
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	43
Item 9A.	Controls and Procedures	44
Item 9B.	Other Information	46
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	46
Item 11.	Executive Compensation	46
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related	46
	Stockholder Matters
Item 13.	Certain Relationships and Related Transactions and Director Independence	46
Item 14.	Principal Accounting Fees and Services	46
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	47
Item 16.	Form 10-K Summary	50
Signatures		51