What changed in this filing

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Item 1. Financial Statements

2020-11-10 compared with 2020-08-11 · 147 added, 108 removed, 543 unchanged (32% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Six Months Ended

July 3, June 28, July 3, June 28,

Three Months Ended Nine Months Ended

October 2, September 27, October 2, September 27,

(In thousands, except per share data) 2020 2019 2020 2019

5 unchanged sentences

Income from operations before income taxes 13,898 10,509 25,763 29,189

Income tax (benefit) expense ( 27 ) 2,247 2,086 3,989

Income tax expense 3,507 2,668 5,593 6,657

Net income $ 10,391 $ 7,841 $ 20,170 $ 22,532

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Six Months Ended

July 3, June 28, July 3, June 28,

Three Months Ended Nine Months Ended

October 2, September 27, October 2, September 27,

(In thousands) 2020 2019 2020 2019

4 unchanged sentences

Net change in fair value of foreign currency forward contracts 204 ( 207 ) 338 ( 123 )

Net (loss) gain reclassified to interest expense — ( 8 ) — 43

Tax (expense) benefit ( 202 ) 88 56 357

7 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

July 3, December 31,

October 2, December 31,

(In thousands, except share information) 2020 2019

32 unchanged sentences

100,000,000 shares authorized;

11,619,544 and 11,523,691 shares issued and outstanding as of July 3, 2020 and December 31, 2019, respectively

11,621,709 and 11,523,691 shares issued and outstanding as of October 2, 2020 and December 31, 2019, respectively

Additional paid in capital 81,589 78,757

6 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended

July 3, June 28,

Nine Months Ended

October 2, September 27,

(In thousands) 2020 2019

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Purchases of capital assets and intangibles ( 3,348 ) ( 14,440 )

Proceeds from the disposition of assets — 5,400

Acquisition of business, net of cash acquired — ( 43,963 )

Net cash (used in) investing activities ( 3,348 ) ( 53,003 )

17 unchanged sentences

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES TO SHAREHOLDERS' EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES TO SHAREHOLDERS' EQUITY (UNAUDITED)

Common Stock Issued Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders' Equity

6 unchanged sentences

Employee stock awards and stock options 85 1 601 602

Taxes withheld on restricted stock unit compensation awards ( 683 ) ( 683 )

Stock-based compensation 1,117 1,117

4 unchanged sentences

Employee stock awards and stock options 154 1 2,864 2,865

Taxes withheld on restricted stock unit compensation awards ( 85 ) ( 85 )

Stock-based compensation 1,099 1,099

Balance at June 28, 2019 11,506 $ 115 $ 76,642 $ 166,590 $ ( 4,664 ) $ 238,683

Net income 7,841 7,841

Foreign currency translation adjustments ( 1,526 ) ( 1,526 )

Unrealized loss on cash flow hedge ( 321 ) ( 321 )

Stock-based compensation 1,124 1,124

Balance at September 27, 2019 11,506 $ 115 $ 77,766 $ 174,431 $ ( 6,511 ) $ 245,801

Balance at December 31, 2019 11,524 $ 115 $ 78,757 $ 185,075 $ ( 5,082 ) $ 258,865

3 unchanged sentences

Employee stock awards and stock options 64 1 — 1

Taxes withheld on stock compensation awards ( 1,787 ) ( 1,787 )

Stock-based compensation 1,720 1,720

4 unchanged sentences

Employee stock awards and stock options 32 — 58 58

Taxes withheld on restricted stock unit compensation awards ( 86 ) ( 86 )

Stock-based compensation 1,282 1,282

Balance at July 3, 2020 11,620 $ 116 $ 79,944 $ 194,854 $ ( 5,479 ) $ 269,435

Net income 10,391 10,391

Foreign currency translation adjustments 2,042 2,042

Unrealized gain on cash flow hedge 292 292

Employee stock awards and stock options 2 — — —

Conversion of liability-based stock compensation awards to equity-based stock compensation awards 405 405

Taxes withheld on restricted stock unit compensation awards ( 44 ) ( 44 )

Stock-based compensation 1,284 1,284

Balance at October 2, 2020 11,622 $ 116 $ 81,589 $ 205,245 $ ( 3,145 ) $ 283,805

The accompanying notes are an integral part of these financial statements.

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The Company operates as one segment and provides the following services and offerings:

facility and logistics services, information technology and network communications services, and operational technologies and converged solutions.

facility and base operations;

supply chain and logistics services;

information technology mission support;

and engineering and digital technology services.

Vectrus was incorporated in the State of Indiana on February 4, 2014.

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References in these notes to Exelis or "Former Parent" refer to Exelis Inc.

and its consolidated subsidiaries (other than Vectrus).

and its consolidated subsidiaries (other than Vectrus) or successor entities.

Basis of Presentation

Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (July 3, 2020 for the second quarter of 2020 and June 28, 2019 for the second quarter of 2019), except for the last quarter of the fiscal year, which ends on December 31.

Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (October 2, 2020 for the third quarter of 2020 and September 27, 2019 for the third quarter of 2019), except for the last quarter of the fiscal year, which ends on December 31.

For ease of presentation, the quarterly financial statements included herein are described as three months ended.

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Accordingly, the Company is restating the relevant financial statements and related footnotes for all applicable periods for these errors and related tax effect and will correct the respective financial statements as they appear in future filings.

Management has evaluated the materiality of these misstatements and concluded they were not material to prior periods.

Management has evaluated the materiality of these misstatements and concluded they were not material to prior periods, individually or in aggregate.

The effects of the corrections to each of the individual affected line items in our Condensed Consolidated Statements of Income were as follows:

Three Months Ended June 28, 2019 Six Months Ended June 28, 2019

Three Months Ended

September 27, 2019 Nine Months Ended

September 27, 2019

(In thousands, except per share data) As Previously Reported Correction As Corrected As Previously Reported Correction As Corrected

Revenue $ 359,854 $ 19 $ 359,873 $ 1,017,371 $ ( 3 ) $ 1,017,368

Cost of revenue 325,537 1,986 327,523 921,685 1,986 923,671

Operating income 14,383 ( 1,967 ) 12,416 35,989 ( 1,989 ) 34,000

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The effects of the corrections to each of the individual affected line items on our Condensed Consolidated Statements of Comprehensive Income were as follows:

Three Months Ended June 28, 2019 Six Months Ended June 28, 2019

Three Months Ended

September 27, 2019 Nine Months Ended

September 27, 2019

(In thousands) As Previously Reported Correction As Corrected As Previously Reported Correction As Corrected

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The effects of the corrections to each of the individual affected line items on our Condensed Consolidated Statements of Cash Flows were as follows:

Six Months Ended June 28, 2019

Nine Months Ended

September 27, 2019

(In thousands) As Previously Reported Correction As Corrected

Net income $ 24,090 $ ( 1,558 ) $ 22,532

Changes in receivables ( 7,521 ) ( 19 ) ( 7,540 )

Changes in deferred taxes ( 4,240 ) ( 430 ) ( 4,670 )

Changes in other liabilities 7,781 2,007 9,788

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Balance at June 28, 2019 167,583 ( 993 ) 166,590 239,676 ( 993 ) 238,683

Net income 9,382 ( 1,541 ) 7,841 9,382 ( 1,541 ) 7,841

Balance at September 27, 2019 $ 176,965 $ ( 2,534 ) $ 174,431 $ 248,335 $ ( 2,534 ) $ 245,801

RECENT ACCOUNTING STANDARDS UPDATE

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The adoption of the standard did not have a material impact on our financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Loses (Topic 326) (ASU 2016-13).

The objective of ASU 2016-13 is to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASU 2016-13).

The objective of ASU 2016-13 is to provide financial statement users with more useful information about the expected credit losses

on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses.

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Substantially all of our contracts have terms that would permit us to recover all or a portion of our incurred costs and fees for work performed in the event of a termination for convenience.

Remaining performance obligations increased by $ 170.7 million as of July 3, 2020 as compared to December 31, 2019.

We expect to recognize approximately 62 % of the remaining performance obligations as of July 3, 2020 as revenue in 2020, and the remaining 38 % during 2021.

Remaining performance obligations as of July 3, 2020 and December 31, 2019 are presented in the following table:

July 3, December 31,

Remaining performance obligations increased by $ 306.4 million as of October 2, 2020 as compared to December 31, 2019.

We expect to recognize approximately 30 % of the remaining performance obligations as of October 2, 2020 as revenue in 2020, and the remaining 70 % during 2021.

Remaining performance obligations as of October 2, 2020 and December 31, 2019 are presented in the following table:

October 2, December 31,

(In thousands) 2020 2019

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The impact of adjustments in contract estimates on our operating income can be reflected in either revenue or cost of revenue.

Cumulative catch-up adjustments for the three and six months ended July 3, 2020 were unfavorable to operating income by $ 1.5 million and $ 3.8 million, respectively.

For the three and six months ended June 28, 2019, the net favorable adjustments to operating income were $ 1.9 million and $ 0.8 million, respectively.

For the three and six months ended July 3, 2020 the cumulative catch-up adjustments to operating income increased revenue by $ 2.3 million and $ 0.6 million, respectively.

For the three and six months ended June 28, 2019, the cumulative catch-up adjustments to operating income increased revenue by $ 0.6 million and $ 0.2 million, respectively.

Cumulative catch-up adjustments for the three and nine months ended October 2, 2020 were favorable to operating income by less than $ 0.1 million and unfavorable to operating income by $ 3.8 million, respectively.

For the three and nine months ended September 27, 2019, the net favorable adjustments to operating income were $ 0.7 million and $ 1.5 million, respectively.

For the three and nine months ended October 2, 2020 the cumulative catch-up adjustments to operating income decreased revenue by $ 1.1 million and $ 0.5 million, respectively.

For the three and nine months ended September 27, 2019, the cumulative catch-up adjustments to operating income increased revenue by $ 4.0 million and $ 4.2 million, respectively.

Revenue by Category

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The following tables present our revenue disaggregated by several categories.

Revenue by contract type for the three and six months ended July 3, 2020 and June 28, 2019 is as follows:

Three Months Ended Six Months Ended

July 3, June 28, % July 3, June 28, %

Revenue by contract type for the three and nine months ended October 2, 2020 and September 27, 2019 is as follows:

Three Months Ended Nine Months Ended

October 2, September 27, % October 2, September 27, %

(In thousands) 2020 2019 Change 2020 2019 Change

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¹ Includes time and material contracts

Revenue by geographic region in which the contract is performed for the three and six months ended July 3, 2020 and June 28, 2019 is as follows:

Three Months Ended Six Months Ended

July 3, June 28, % July 3, June 28, %

Revenue by geographic region in which the contract is performed for the three and nine months ended October 2, 2020 and September 27, 2019 is as follows:

Three Months Ended Nine Months Ended

October 2, September 27, % October 2, September 27, %

(In thousands) 2020 2019 Change 2020 2019 Change

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Total revenue $ 352,415 $ 359,873 $ 1,040,212 $ 1,017,368

Revenue by contract relationship for the three and six months ended July 3, 2020 and June 28, 2019 is as follows:

Three Months Ended Six Months Ended

July 3, June 28, % July 3, June 28, %

Revenue by contract relationship for the three and nine months ended October 2, 2020 and September 27, 2019 is as follows:

Three Months Ended Nine Months Ended

October 2, September 27, % October 2, September 27, %

(In thousands) 2020 2019 Change 2020 2019 Change

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Total revenue $ 352,415 $ 359,873 $ 1,040,212 $ 1,017,368

Revenue by customer for the three and six months ended July 3, 2020 and June 28, 2019 is as follows:

Three Months Ended Six Months Ended

July 3, June 28, % July 3, June 28, %

Revenue by customer for the three and nine months ended October 2, 2020 and September 27, 2019 is as follows:

Three Months Ended Nine Months Ended

September 27, % October 2.

September 27, %

(In thousands) 2020 2019 Change 2020 2019 Change

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These assets and liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.

As of July 3, 2020 and December 31, 2019, we had contract assets of $ 196.2 million and $ 186.4 million, respectively.

As of October 2, 2020 and December 31, 2019, we had contract assets of $ 199.3 million and $ 186.4 million, respectively.

Refer to Note 8, "Receivables" for additional information regarding the composition of our receivable balances.

As of both July 3, 2020 and December 31, 2019, our contract liabilities were insignificant.

As of both October 2, 2020 and December 31, 2019, our contract liabilities were insignificant.

Effective Tax Rate

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The computation of the estimated effective income tax rate at each interim period requires certain estimates and judgment including, but not limited to, forecasted operating income for the year, projections of the income earned and taxed in various jurisdictions, newly enacted tax rate and legislative changes, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.

For the quarters ended July 3, 2020 and June 28, 2019, we recorded an income tax benefit of less than $0.1 million and an income tax provision of $ 2.2 million, respectively, representing effective income tax rates of ( 2.5 )% and 22.8 %.

For the six months ended July 3, 2020 and June 28, 2019, we recorded income tax provisions of $ 2.1 million and $ 4.0 million, representing effective income tax rates of 17.6 % and 21.4 %, respectively.

The difference in the tax rates between the 2020 and 2019 periods is due to the resolution of a foreign tax matter in the current quarter.

For the quarters ended October 2, 2020 and September 27, 2019, we recorded an income tax provision of $ 3.5 million and $ 2.7 million, respectively, representing effective income tax rates of 25.2 % and 25.4 %.

For the nine months ended October 2, 2020 and September 27, 2019, we recorded income tax provisions of $ 5.6 million and $ 6.7 million, representing effective income tax rates of 21.7 % and 22.8 %, respectively.

The effective income tax rates vary from the federal statutory rate of 21.0% due to state and foreign taxes, required tax income exclusions, nondeductible expenses and available deductions not reflected in book income.

Uncertain Tax Provisions

As of July 3, 2020, and December 31, 2019, unrecognized tax benefits from uncertain tax positions were $ 9.1 million and $ 7.9 million, respectively.

As of October 2, 2020, and December 31, 2019, unrecognized tax benefits from uncertain tax positions were $ 12.5 million and $ 7.9 million, respectively.

The increase in the uncertain tax positions was principally the result of the additional Foreign Derived Intangible Income (FDII) deduction.

On July 8, 2019, we acquired Advantor from Infrasafe Holding, Inc.

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The fair value of the customer contracts was $ 7.2 million, and the fair value of the Advantor trade name was $ 1.1 million with amortization periods of 5.0 years and 4.5 years, respectively.

As of July 3, 2020, the remaining weighted-average amortization period for these intangible assets was 4.0 years.

The Company recorded amortization expense of $ 0.9 million

during the first six months of 2020.

As of October 2, 2020, the remaining weighted-average amortization period for these intangible assets was 3.7 years.

The Company recorded amortization expense of $ 1.3

million during the first nine months of 2020.

The amortization expense is included in cost of revenue in our Condensed Consolidated Statements of Income.

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The goodwill recognized for the Advantor acquisition is fully deductible for income tax purposes.

Advantor's results of operations have been included in our Condensed Consolidated Statements of Income for the period subsequent to acquisition on July 8, 2019.

For the three and six months ended June 28, 2019, Advantor recognized revenue of $ 11.9 million and $ 22.1 million, respectively.

Income from operations before income taxes was insignificant during these prior year periods.

Advantor's operating results have been included in our reported results since the date of acquisition.

GOODWILL AND INTANGIBLE ASSETS

As of July 3, 2020 and December 31, 2019 the carrying amount of goodwill was $ 262.1 million and $ 262.0 million, respectively.

The $ 0.1 million increase during the first six months of 2020 is due to a final adjustment to the Advantor purchase price allocation.

The Company tests goodwill for impairment as of October 1 each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

As of October 2, 2020 and December 31, 2019 the carrying amount of goodwill was $ 262.1 million and $ 262.0 million, respectively.

The $ 0.1 million increase during the first nine months of 2020 is due to a final adjustment to the Advantor purchase price allocation.

The Company tests goodwill for impairment as of the beginning of the fourth quarter each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Due to the COVID-19 pandemic and the negative effect on the U.S.

and global economy, the Company completed a qualitative assessment to evaluate whether or not it is more likely than not that the fair value of goodwill is less than its carrying amount.

Based on our assessment of the totality of events and circumstances as of July 3, 2020, including the estimated impact of the COVID-19 pandemic on our business forecast and the Company's market capitalization, we determined that it is not more likely than not that the fair value of our reporting unit is below its carrying amount.

The annual tests performed in the three years ended December 31, 2019 also resulted in no impairment of goodwill.

Based on our assessment of the totality of events and circumstances as of October 2, 2020, including the estimated impact of the COVID-19 pandemic on our business forecast and the Company's market capitalization, we determined that it is not more likely than not that the fair value of our reporting unit is below its carrying amount.

Identifiable intangible assets consist of the following:

July 3, 2020 December 31, 2019

October 2, 2020 December 31, 2019

(In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount

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Balance $ 20,043 $ ( 8,141 ) $ 11,902 $ 20,036 $ ( 5,110 ) $ 14,926

Identifiable intangible asset amortization expense was $ 1.0 million and $ 2.0 million for the three and six months ended July 3, 2020, respectively.

Intangible amortization expense for the three and six months ended June 28, 2019 was $ 0.7 million and $ 1.3 million, respectively.

As of July 3, 2020, the remaining average intangible asset amortization period was 3.8 years.

Identifiable intangible asset amortization expense was $ 1.0 million and $ 3.0 million for the three and nine months ended October 2, 2020, respectively.

Intangible amortization expense for the three and nine months ended September 27, 2019 was $ 0.8 million and $ 2.1 million, respectively.

As of October 2, 2020, the remaining average intangible asset amortization period was 3.6 years.

The estimated amortization expense for the next five years is as follows (in thousands):

Period Amortization

2020 (excluding the six months ended July 3, 2020) $ 2,001

2020 (excluding the nine months ended October 2, 2020) $ 998

After 2024 $ 673

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Diluted EPS includes the dilutive effect of stock-based compensation outstanding after application of the treasury stock method.

Three Months Ended Six Months Ended

July 3, June 28, July 3, June 28,

Three Months Ended Nine Months Ended

October 2, September 27, October 2, September 27,

(In thousands, except per share data) 2020 2019 2020 2019

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The following table provides a summary of securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented:

Three Months Ended Six Months Ended

July 3, June 28, July 3, June 28,

Three Months Ended Nine Months Ended

October 2, September 27, October 2, September 27,

(In thousands) 2020 2019 2020 2019

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Receivables were comprised of the following:

(In thousands) July 3, 2020 December 31, 2019

(In thousands) October 2, 2020 December 31, 2019

Billed receivables $ 59,445 $ 71,068

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Total receivables $ 268,143 $ 269,144

As of July 3, 2020 and December 31, 2019, substantially all billed receivables are due from the U.S.

As of October 2, 2020 and December 31, 2019, substantially all billed receivables are due from the U.S.

Government, either directly as prime contractor to the U.S.

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Unbilled receivables are contract assets that represent revenue recognized on long-term contracts in excess of amounts billed as of the balance sheet date.

We estimate that approximately $ 8.1 million of our unbilled receivables as of July 3, 2020 may not be collected within the next 12 months.

We estimate that approximately $ 6.1 million of our unbilled receivables as of October 2, 2020 may not be collected within the next 12 months.

These amounts relate to the timing of the U.S.

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The Amendment Agreement provides for $ 200.0 million in senior secured financing, consisting of a $ 80.0 million five-year term loan facility (the Amended Term Loan) and a $ 120.0 million five-year senior secured revolving credit facility (the Amended Revolver, and together with the Amended Term Loan, the Amended Credit Facilities).

Additionally, the Amendment Agreement includes an accordion feature that allows the Company to draw up to an additional $ 100.0 million, subject to the lender's consent on the same terms and conditions as the existing commitments.

Additionally, the Amendment Agreement includes an accordion feature that allows the Company to draw up to an additional $ 100.0 million, subject to the lender's consent.

The Amendment Agreement also permits the Company to borrow up to $ 75.0 million in unsecured debt as long as the aggregated sum of both the unsecured debt and the accordion does not exceed $ 100.0 million.

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Up to $ 25.0 million of the Amended Revolver is available for the issuance of letters of credit.

As of July 3, 2020, there were two letters of credit outstanding in the aggregate amount of $ 2.4 million, and no outstanding borrowings under the Amended Revolver resulting in borrowing capacity of $ 117.6 million under the Amended Revolver.

As of October 2, 2020, there were two letters of credit outstanding in the aggregate amount of $ 2.4 million, and no outstanding borrowings under the Amended Revolver resulting in borrowing capacity of $ 117.6 million under the Amended Revolver.

The Amended Revolver will mature and the commitments thereunder will terminate on November 15, 2022 .

1 unchanged sentence

(In thousands) Payments due

2020 (excluding the six months ended July 3, 2020) $ 3,500

2020 (excluding the nine months ended October 2, 2020) $ 2,000

Total $ 66,000

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In addition, we are required to comply with (a) a maximum ratio of total consolidated indebtedness to consolidated earnings before interest, tax, depreciation and amortization (EBITDA) of 3.00 to 1.00 ( 3.25 to 1.00 for the 12 months following a qualified acquisition), and (b) a minimum ratio of consolidated EBITDA to consolidated interest expense (net of cash interest income) of 4.50 to 1.00.

As of July 3, 2020, we had a ratio of total consolidated indebtedness to EBITDA of 1.08 to 1.00 and a ratio of consolidated EBITDA to consolidated interest expense of 9.93 to 1.00.

We were in compliance with all covenants related to the Amended Credit Facilities as of July 3, 2020.

As of October 2, 2020, we had a ratio of total consolidated indebtedness to EBITDA of 0.99 to 1.00 and a ratio of consolidated EBITDA to consolidated interest expense of 12.60 to 1.00.

We were in compliance with all covenants related to the Amended Credit Facilities as of October 2, 2020.

Interest Rates and Fees.

Outstanding borrowings under the Amended Credit Facilities accrue interest, at our option, at a per annum rate of (i) LIBOR plus the applicable margin, which ranges from 1.75 % to 2.50 % depending on the leverage ratio, or (ii) a base rate plus the applicable margin, which ranges from 0.75 % to 1.50 % depending on the leverage ratio.

The interest rate under the Amended Credit Facilities at July 3, 2020 was 2.68 %.

The interest rate under the Amended Credit Facilities at October 2, 2020 was 2.15 %.

Carrying Value and Fair Value.

As of July 3, 2020 and December 31, 2019, the fair value of the Amended Credit Facilities approximated the carrying value because the debt bears interest at a floating rate of interest.

As of October 2, 2020 and December 31, 2019, the fair value of the Amended Credit Facilities approximated the carrying value because the debt bears interest at a floating rate of interest.

The fair value is based on observable inputs of interest rates that are currently available to us for debt with similar terms and maturities for non-public debt.

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Our interest rate swaps are designated and qualify as effective cash flow hedges.

The contracts, with expiration dates through November 2022 and notional amounts totaling $ 50.7 million at July 3, 2020, are recorded at fair value.

The following table summarizes the amount at fair value and location of the derivative instruments in our balance sheet for our interest rate hedges in the Condensed Consolidated Balance Sheets as of July 3, 2020:

The contracts, with expiration dates through November 2022 and notional amounts totaling $ 49.6 million at October 2, 2020, are recorded at fair value.

(In thousands) Fair Value

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We regularly assess the creditworthiness of the counterparty.

As of July 3, 2020, the counterparty to the interest rate swaps had performed in accordance with its contractual obligations.

As of October 2, 2020, the counterparty to the interest rate swaps had performed in accordance with its contractual obligations.

Both the counterparty credit risk and our credit risk were considered in the fair value determination.

Net interest rate derivative losses of $ 0.3 million and interest rate derivative gains of $ 0.1 million were recognized in interest expense, net in our Condensed Consolidated Statements of Income during the first half of 2020 and 2019, respectively.

We expect $ 1.1 million of existing interest rate swap losses reported in accumulated other comprehensive loss as of July 3, 2020 to be recognized in earnings within the next 12 months.

Net interest rate derivative losses of $ 0.7 million and net interest rate derivative gains of less than $ 0.1 million were recognized in interest expense, net in our Condensed Consolidated Statements of Income during the first three quarters of 2020 and 2019, respectively.

We expect $ 1.0 million of existing interest rate swap losses reported in accumulated other comprehensive loss as of October 2, 2020 to be recognized in earnings within the next 12 months.

Foreign Currency Derivative Instruments

The following table summarizes the amount at fair value and location of the derivative instruments used for our forward contract hedges in the Condensed Consolidated Balance Sheets as of July 3, 2020:

(In thousands) Fair Value

Balance sheet caption Amount

Foreign currency forward designated as cash flow hedge Other current assets $ 197

Foreign currency forward designated as cash flow hedge Other accrued liabilities $ 44

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Foreign currency forward designated as cash flow hedge Other accrued liabilities $ 185

At July 3, 2020, we had outstanding foreign currency forward contracts, for the exchange of U.S.

dollars and Euros, with a notional amount of $ 7.5 million and expiration dates through June 2021.

At October 2, 2020, we had outstanding foreign currency forward contracts, for the exchange of U.S.

dollars and Euros, with a notional amount of $ 9.5 million and expiration dates through September 2021.

Counterparty default risk is considered low because the forward contracts that we entered into are over-the-counter instruments transacted with highly-rated financial institutions.

We were not required to, and did not, post collateral as of July 3, 2020.

Net foreign currency derivative losses of $ 0.2 million and $ 0.3 million were recognized in selling, general and administrative expenses during the first half of 2020 and 2019, respectively.

We expect $ 0.1 million of existing foreign

currency forward contract losses reported in accumulated other comprehensive loss as of July 3, 2020 to be recognized in earnings within the next 12 months.

We were not required to, and did not, post collateral as of October 2, 2020.

Net foreign currency derivative losses of $ 0.2 million and $ 0.4 million were recognized in selling, general and administrative expenses during the first three quarters of 2020 and 2019, respectively.

We expect $ 0.2 million of existing

foreign currency forward contract gains reported in accumulated other comprehensive loss as of October 2, 2020 to be recognized in earnings within the next 12 months.

We determine whether an arrangement contains a lease at inception.

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The components of lease expense are as follows:

Three Months Ended Six Months Ended

(In thousands) July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019

Three Months Ended Nine Months Ended

(In thousands) October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019

Operating lease expense $ 1,349 $ 3,827 $ 5,621 $ 10,890

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Supplemental balance sheet information related to our operating leases is as follows:

(In thousands) July 3, 2020 December 31, 2019

(In thousands) October 2, 2020 December 31, 2019

Right-of-use assets $ 9,970 $ 14,654

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Total operating lease liabilities $ 11,002 $ 15,554

Additional right-of-use assets of $ 1.5 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the first six months of 2020.

The weighted average remaining lease term and discount rate for our operating leases at July 3, 2020 were 5.1 years and 6.2 %, respectively.

Maturities of lease liabilities at July 3, 2020 were as follows:

Additional right-of-use assets of $ 1.5 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the first nine months of 2020.

The weighted average remaining lease term and discount rate for our operating leases at October 2, 2020 were 5.2 years and 6.3 %, respectively.

Maturities of lease liabilities at October 2, 2020 were as follows:

(In thousands) Payments due

2020 (excluding the six months ended July 3, 2020) $ 4,618

2020 (excluding the nine months ended October 2, 2020) $ 4,014

2025 and beyond 2,843

5 unchanged sentences

We account for NQOs and stock-settled RSUs as equity-based compensation awards.

TSR awards, described below, and cash-settled RSUs are accounted for as liability-based compensation awards.

TSR awards, described below, and cash-settled RSUs are accounted for as liability-based compensation awards and are revalued at the end of each reporting period to reflect changes in fair value.

Stock-based compensation expense and the associated tax benefits impacting our Condensed Consolidated Statements of Income were as follows:

Three Months Ended Six Months Ended

(In thousands) July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019

Three Months Ended Nine Months Ended

(In thousands) October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019

Compensation costs for equity-based awards $ 1,284 $ 1,124 $ 4,286 $ 3,339

2 unchanged sentences

Future tax benefit $ 235 $ 416 $ 1,404 $ 1,288

Liability-based awards are revalued at the end of each reporting period to reflect changes in fair value.

As of July 3, 2020, total unrecognized compensation costs related to equity-based awards and liability-based awards were $ 7.6 million and $ 5.4 million, respectively, which are expected to be recognized ratably over a weighted average period of 1.85 years and 1.89 years, respectively.

The following table provides a summary of the activities for NQOs and RSUs for the three months ended July 3, 2020:

As of October 2, 2020, total unrecognized compensation costs related to equity-based awards and liability-based awards were $ 6.7 million and $ 3.3 million, respectively, which are expected to be recognized ratably over a weighted average period of 1.68 years and 1.96 years, respectively.

The following table provides a summary of the activities for NQOs and RSUs for the nine months ended October 2, 2020:

(In thousands, except per share data) Shares Weighted Average Exercise Price Per Share Shares Weighted Average Grant Date Fair Value Per Share

3 unchanged sentences

Vested — $ — ( 147 ) $ 30.55

Issued in exchange — $ — 16 $ 52.28

Cancelled in exchange — $ — ( 16 ) $ 29.00

Forfeited or expired — $ — ( 18 ) $ 40.67

Outstanding at July 3, 2020 74 $ 23.37 271 $ 39.93

During the six months ended June 28, 2019, we granted long term incentive awards to employees consisting of 105,737 RSUs with a weighted average grant date fair value per share of $ 52.98 and to our directors consisting of 20,311 RSUs with a weighted average grant date fair value per share of $ 47.76 .

Outstanding at October 2, 2020 74 $ 23.37 265 $ 41.41

During the nine months ended October 2, 2020, we granted long term incentive awards to employees consisting of 108,490 RSUs with a weighted average grant date fair value per share of $ 52.76 and to our directors consisting of 20,311 RSUs with a weighted average grant date fair value per share of $ 47.76 .

On August 11, 2020, our total outstanding 15,839 CRSUs were exchanged for 15,839 RSUs.

As of the exchange date, both the CRSUs and RSUs had the same vesting conditions, fair value of $ 52.28 , and unrecognized compensation expense of $ 0.4 million.

For employee RSUs, one-third of the award vests on each of the three anniversary dates following the grant date.

5 unchanged sentences

Any payments earned are made in cash following completion of the performance period according to the achievement of specified performance goals.

During the six months ended July 3, 2020, we granted TSR awards with an aggregate target TSR value of $ 3.1 million.

During the nine months ended October 2, 2020, we granted TSR awards with an aggregate target TSR value of $ 3.1 million.

The fair value of TSR awards is measured quarterly and is based on the Company’s performance relative to the performance of the Aerospace and Defense Companies in the S&P 1500 Index.

10 unchanged sentences

Such assessments, along with any assessments regarding provisions for legal proceedings, are reviewed on a quarterly basis for sufficiency based on the most recent information available to us.

We have estimated and accrued $ 13.5 million and $ 12.1 million as of July 3, 2020 and December 31, 2019, respectively, in "Other accrued liabilities" in the Condensed Consolidated Balance Sheets for legal proceedings and for claims with respect to our government contracts as discussed below, including open years subject to audit.

We have estimated and accrued $ 11.6 million and $ 12.1 million as of October 2, 2020 and December 31, 2019, respectively, in "Other accrued liabilities" in the Condensed Consolidated Balance Sheets for legal proceedings and for claims with respect to our government contracts as discussed below, including open years subject to audit.

Although the ultimate outcome of any legal matter or claim cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that any asserted or unasserted legal or contractual claims or proceedings, individually or in the aggregate, including the lawsuit discussed below, will have a material adverse effect on our cash flow, results of operations or financial condition.

24 unchanged sentences

Since October 2019, the ASBCA has granted Vectrus’ and the U.S.

Government’s joint requests to stay proceedings in the appeal, most recently through November 30, 2020, to enable ongoing discussions regarding the matter between Vectrus and our Former Parent.

Government’s joint requests to stay proceedings in the appeal, most recently through January 11, 2021, to enable ongoing discussions regarding the matter between Vectrus and our Former Parent.

In June 2020, the U.S.

Government provided us with the COFD for 2013 related to Former Parent costs.

In September 2020, we filed an appeal of this COFD to the ASBCA and sought a deferral of payment.

In addition, we filed a motion to consolidate both appeals.

The ASBCA granted our motion to consolidate.

We believe we are fully indemnified under our Distribution Agreement with our Former Parent and have notified our Former Parent of our appeal of the U.S governments decision in this matter.

3 unchanged sentences

Uncertainty with respect to the economic impacts of the pandemic has introduced significant volatility in the financial markets.

The Company has observed some disruptions on its operations due to government delays related to the global pandemic.

While the extent to which COVID-19 ultimately impacts the Company’s

future results will depend on future developments, the pandemic and associated economic impacts could result in a material impact to the Company’s future financial condition, results of operations and cash flows.

The Company has observed some disruptions on its operations due to

government delays related to the global pandemic.

While the extent to which COVID-19 ultimately impacts the Company’s future results will depend on future developments, the pandemic and associated economic impacts could result in a material impact to the Company’s future financial condition, results of operations and cash flows.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements