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Item 1. Financial Statements

2021-05-11 compared with 2020-11-10 · 244 added, 349 removed, 341 unchanged (63% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Nine Months Ended

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

Three Months Ended

April 2, April 3,

(In thousands, except per share data) 2021 2020

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Nine Months Ended

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

Three Months Ended

April 2, April 3,

(In thousands) 2021 2020

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Changes in derivative instruments:

Net change in fair value of interest rate swap 290 ( 194 ) ( 1,035 ) ( 1,570 )

Net change in fair value of interest rate swaps 295 ( 1,386 )

Net change in fair value of foreign currency forward contracts ( 396 ) ( 261 )

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

Tax (expense) benefit ( 202 ) 88 56 357

Tax benefit 24 357

Net change in derivative instruments ( 77 ) ( 1,290 )

Foreign currency translation adjustments, net of tax ( 2,356 ) ( 1,934 )

Accounting Standards Update (ASU) 2018-02 reclassification of certain tax effects to Retained Earnings — — — ( 259 )

Other comprehensive income (loss), net of tax 2,334 ( 1,847 ) 1,937 ( 3,353 )

Other comprehensive loss net of tax ( 2,433 ) ( 3,224 )

Total comprehensive income $ 9,615 $ 5,444

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

October 2, December 31,

April 2, December 31,

(In thousands, except share information) 2021 2020

Current assets

Cash $ 63,734 $ 35,318

Cash and cash equivalents $ 38,347 $ 66,949

Restricted cash 1,778 1,778

Receivables 359,182 314,959

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100,000,000 shares authorized;

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

11,700,232 and 11,624,717 shares issued and outstanding as of April 2, 2021 and December 31, 2020, respectively

Additional paid in capital 82,735 82,823

6 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended

October 2, September 27,

Three Months Ended

April 2, April 3,

(In thousands) 2021 2020

1 unchanged sentence

Net income $ 12,048 $ 8,668

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation expense 1,548 996

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Other liabilities ( 12,295 ) 1,182

Net cash provided by operating activities 37,655 28,448

Net cash (used in) provided by operating activities ( 21,729 ) 1,137

Investing activities

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 )

Purchases of capital assets ( 2,611 ) ( 917 )

Net cash used in investing activities ( 2,611 ) ( 917 )

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Exchange rate effect on cash ( 191 ) ( 1,080 )

Net change in cash 28,416 ( 25,095 )

Cash-beginning of year 35,318 66,145

Cash-end of period $ 63,734 $ 41,050

Net change in cash, cash equivalents and restricted cash ( 28,602 ) 110,854

Cash, cash equivalents and restricted cash-beginning of year 68,727 35,318

Cash, cash equivalents and restricted cash-end of period $ 40,125 $ 146,172

Supplemental disclosure of cash flow information:

Interest paid $ 1,371 $ 1,469

Income taxes paid $ 12,570 $ 5,076

Non-cash investing activities:

Income taxes (refunded) paid $ ( 97 ) $ 36

Purchase of capital assets on account $ ( 132 ) $ ( 606 )

6 unchanged sentences

Net income 8,668 8,668

Cumulative effects of adoption of ASU 2018-02 reclassification of certain tax effects from AOCI 259 ( 259 ) —

Foreign currency translation adjustments ( 1,934 ) ( 1,934 )

3 unchanged sentences

Stock-based compensation 1,720 1,720

Balance at March 29, 2019 11,352 $ 114 $ 72,764 $ 158,973 $ ( 4,600 ) $ 227,251

Net income 7,617 7,617

Foreign currency translation adjustments 547 547

Unrealized loss on cash flow hedge ( 611 ) ( 611 )

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 April 3, 2020 11,588 $ 116 $ 78,690 $ 193,743 $ ( 8,306 ) $ 264,243

Balance at December 31, 2020 11,625 $ 116 $ 82,823 $ 222,026 $ ( 27 ) $ 304,938

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Balance at April 2, 2021 11,700 $ 117 $ 82,735 $ 234,074 $ ( 2,460 ) $ 314,466

Net income 1,111 1,111

Foreign currency translation adjustments 2,470 2,470

Unrealized gain on cash flow hedge 357 357

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 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.

facility and base operations, supply chain and logistics services, information technology mission support, and engineering and digital integration services.

Vectrus was incorporated in the State of Indiana in February 2014.

On September 27, 2014, Exelis Inc.

(Exelis) completed a spin-off (the Spin-off) of Vectrus, and Vectrus became an independent, publicly traded company.

Unless the context otherwise requires, references in these notes to "Vectrus", "we," "us," "our," "the Company" and "our Company" refer to Vectrus, Inc.

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

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

(Exelis) completed the spin-off (the Spin-off) of Vectrus and Vectrus became an independent, publicly traded company.

References in these notes to "Vectrus", "we," "us," "our," "the Company" and "our Company" refer to Vectrus, Inc.

References in these notes to "Exelis" or "Former Parent" refer to Exelis Inc., an Indiana corporation, and its consolidated subsidiaries (other than Vectrus).

Exelis was acquired by Harris Corporation in May 2015.

Basis of Presentation

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.

Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (April 2, 2021 for the first quarter of 2021 and April 3, 2020 for the first quarter of 2020), 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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Revenue and net income for any interim period are not necessarily indicative of future or annual results.

Immaterial Restatement of Prior Period Balances

Subsequent to the issuance of our Annual Report on Form 10-K for the year ended December 31, 2019, we identified an error in our historical financial statements related to estimated contract costs for the year ended December 31, 2019 as well as an error in our historical financial statements related to overbilling for a separate contract dating back to 2013, prior to the Spin-off.

In the first instance, management determined that additional subcontractor costs should have been included as part of estimated contract costs, resulting in a misstatement in other accrued liabilities and cost of revenue as well as revenue and accounts receivable to a lesser extent.

In the second instance, management identified that certain contract costs were incorrectly included in customer billings for one contract, resulting in a misstatement in revenue and other accrued liabilities .

The cumulative impact of the errors was a $ 2.5 million decrease in retained earnings as of December 31, 2019.

The impact of the errors on net income for the year ended December 31, 2019 is $ 1.5 million.

The impact on diluted earnings per share is a decrease of $ 0.13 for the year ended December 31, 2019.

The impact to diluted earnings per share in the first, second, third, and fourth quarters of 2019 is a decrease of $ 0.00 , $ 0.00 , $ 0.13 , and $ 0.00 , respectively.

The impact on diluted earnings per share is a decrease of $ 0.02 and $ 0.01 for the years ended December 31, 2018 and 2017, respectively.

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, 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

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

Income from operations before income taxes 12,476 ( 1,967 ) 10,509 31,178 ( 1,989 ) 29,189

Income tax expense 3,094 ( 426 ) 2,668 7,088 ( 431 ) 6,657

Net income $ 9,382 $ ( 1,541 ) $ 7,841 $ 24,090 $ ( 1,558 ) $ 22,532

Earnings per share

Basic $ 0.82 $ ( 0.14 ) $ 0.68 $ 2.11 $ ( 0.14 ) $ 1.97

Diluted $ 0.80 $ ( 0.13 ) $ 0.67 $ 2.08 $ ( 0.13 ) $ 1.95

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

September 27, 2019 Nine Months Ended

September 27, 2019

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

Net income $ 9,382 $ ( 1,541 ) $ 7,841 $ 24,090 $ ( 1,558 ) $ 22,532

Total comprehensive income $ 7,535 $ ( 1,541 ) $ 5,994 $ 20,737 $ ( 1,558 ) $ 19,179

The effects of the corrections to each of the individual affected line items on our Condensed Consolidated Balance Sheet were as follows:

December 31, 2019

(In thousands) As Previously Reported Correction As Corrected

Receivables $ 269,239 $ ( 95 ) $ 269,144

Total current assets 320,711 ( 95 ) 320,616

Total Assets 636,484 ( 95 ) 636,389

Other accrued liabilities 34,587 2,822 37,409

Total current liabilities 242,257 2,822 245,079

Deferred tax liability 49,808 ( 401 ) 49,407

Total non-current liabilities 132,846 ( 401 ) 132,445

Total Liabilities 375,103 2,421 377,524

Retained earnings 187,591 ( 2,516 ) 185,075

Total shareholders' equity 261,381 ( 2,516 ) 258,865

Total Liabilities and Shareholders' Equity $ 636,484 $ ( 95 ) $ 636,389

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

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

Net cash provided in operating activities $ 28,448 $ — $ 28,448

The effects of the corrections to each of the individual affected line items on our Condensed Consolidated Statements of Changes in Shareholders' Equity were as follows:

Retained Earnings Total Shareholders' Equity

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

Balance at December 31, 2018 $ 152,616 $ ( 976 ) $ 151,640 $ 221,300 $ ( 976 ) $ 220,324

Net income 7,091 ( 17 ) 7,074 7,091 ( 17 ) 7,074

Balance at March 29, 2019 159,966 ( 993 ) 158,973 228,244 ( 993 ) 227,251

Net income 7,617 — 7,617 7,617 — 7,617

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

Restricted Cash

The Company had restricted cash of $ 1.8 million related to collateral security for an outstanding letter of credit at both April 2, 2021 and December 31, 2020.

Reconciliation of cash, cash equivalents and restricted cash as of April 2, 2021 and December 31, 2020 are presented in the following table:

(In thousands) April 2, 2021 December 31, 2020

Cash and cash equivalents $ 38,347 $ 66,949

Restricted cash 1,778 1,778

Total cash, cash equivalents and restricted cash $ 40,125 $ 68,727

Deferred Compensation Plan

During the first quarter of 2021, the Company established a non-qualified deferred compensation plan under which participants are eligible to defer a portion of their compensation on a tax deferred basis.

The assets in the plan are held in a Rabbi trust.

Plan investments and obligations were recorded in other non-current assets and other non-current liabilities, respectively, in the condensed consolidated balance sheets, representing the fair value related to the deferred compensation plan.

Adjustments to the fair value of the plan investments and obligations are recorded in operating expenses.

The plan assets, liabilities and operating expenses were not material for the quarter ended April 2, 2021 .

RECENT ACCOUNTING STANDARDS UPDATE

Accounting Standards Issued but Not Yet Effective

There were no accounting standards issued during the first quarter of 2021 that are expected to have a material impact on the Company's financial statements.

Accounting Standards That Were Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (ASU 2019-12).

The objectives of ASU 2019-12 are (i) to simplify the accounting for income taxes by removing certain exceptions, (ii) to update certain requirements to simplify the accounting for income taxes, and (iii) to make minor codification improvements for income taxes.

The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Early adoption is permitted.

The Company does not expect the adoption of this standard to have a material impact on the Company’s financial statements.

Accounting Standards That Were Adopted

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) (ASU 2018-15).

The objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software.

The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted.

The amendments can be applied either retrospectively or prospectively.

We adopted ASU 2018-15 on January 1, 2020 using the retrospective method.

As a result of the adoption, $ 0.3 million was reclassified from 2019 year-end property, plant and equipment, net, to other non-current assets on our Condensed Consolidated Balance Sheet.

In addition, $ 0.3 million of cash outflows from investing activities incurred during the third and fourth quarters of 2019 was reclassified to cash outflows from operating activities.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04).

The objective of ASU 2017-04 is to simplify the subsequent measurement of goodwill by entities performing their annual goodwill impairment tests by comparing the fair value of a reporting unit, including income tax effects from any tax-deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds fair value.

ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

ASU 2017-04 should be applied on a prospective basis.

We adopted ASU 2017-04 on January 1, 2020.

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 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.

We adopted the standard on January 1, 2020.

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

The Company adopted the standard as of January 1, 2021 and it did not have a material impact on the Company’s financial statements.

Performance Obligations

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Modifications to exercise option years create new enforceable rights and obligations and therefore are treated as separate performance obligations.

The Company's performance obligations are typically satisfied over time as services are provided throughout the contract term.

The Company's performance obligations are satisfied over time as services are provided throughout the contract term.

We recognize revenue over time using the input method (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress.

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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 $ 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

Remaining performance obligations as of April 2, 2021 and December 31, 2020 are presented in the following table:

April 2, December 31,

(In millions) 2021 2020

Performance Obligations $ 1,289 $ 993

We expect to recognize approximately 62 % of the remaining performance obligations as of April 2, 2021 as revenue in 2021, and the remaining 38 % during 2022.

Contract Estimates

Accounting for contracts involves the use of various techniques to estimate total contract revenue and costs.

We estimate the profit on our contracts as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Accounting for contracts and programs involves the use of various techniques to estimate total contract revenue and costs.

For contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events.

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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 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.

Cumulative catch-up adjustments for the three months ended April 2, 2021 and April 3, 2020 were unfavorable to operating income by $ 1.3 million and $ 2.3 million, respectively.

For the three months ended April 2, 2021 and April 3, 2020 the cumulative catch-up adjustments to operating income decreased revenue by $ 1.9 million and $ 1.6 million, respectively.

Revenue by Category

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On cost-plus type contracts, we do not bear the risks of unexpected cost overruns, provided that we do not incur costs that exceed the predetermined funded amounts.

Most of our cost-plus contracts also contain a firm-fixed price element.

Cost-plus type contracts with award and incentive fee provisions are our primary variable contract fee arrangement.

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The following tables present our revenue disaggregated by several categories.

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

Revenue by contract type for the three months ended April 2, 2021 and April 3, 2020 is as follows:

Three Months Ended

April 2, April 3, %

(In thousands) 2021 2020 Change

Cost-plus and cost-reimbursable ¹ $ 305,247 $ 256,319 19.1 %

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¹ Includes time and material contracts

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

Revenue by geographic region in which the contract is performed for the three months ended April 2, 2021 and April 3, 2020 is as follows:

Three Months Ended

April 2, April 3, %

(In thousands) 2021 2020 Change

Middle East $ 241,813 $ 237,937 1.6 %

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Total revenue $ 434,004 $ 351,734

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

Revenue by contract relationship for the three months ended April 2, 2021 and April 3, 2020 is as follows:

Three Months Ended

April 2, April 3, %

(In thousands) 2021 2020 Change

Prime contractor $ 403,262 $ 333,393 21.0 %

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Total revenue $ 434,004 $ 351,734

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

Revenue by customer for the three months ended April 2, 2021 and April 3, 2020 is as follows:

Three Months Ended

(In thousands) 2021 2020 Change

Army $ 257,349 $ 247,555 4.0 %

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

As of April 2, 2021 and December 31, 2020, we had contract assets of $ 234.4 million and $ 203.1 million, respectively.

Refer to Note 5, "Receivables" for additional information regarding the composition of our receivable balances.

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

Effective Tax Rate

Income tax expense during interim periods is based on an estimated annual effective income tax rate, plus any significant unusual or infrequently occurring items recorded in interim periods.

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 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 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.

and Infrasafe, LLC (collectively, Infrasafe).

Advantor is a leading provider of integrated electronic security systems to the U.S.

In accordance with ASC Topic 805, Business Combinations , we accounted for this transaction using the acquisition method.

We conducted valuations of certain acquired assets and liabilities for inclusion in our Condensed Consolidated Balance Sheets as of the date of acquisition.

Assets that normally would not be recorded in ordinary operations (i.e.

intangibles related to contractual relationships) were recorded at their estimated fair values.

The excess purchase price over the estimated fair value of the net assets acquired was recorded as goodwill.

The total net consideration paid for the acquisition was $ 45.1 million, consisting of the purchase price of $ 44.0 million, net of cash acquired, and $ 1.1 million for working capital in excess of the working capital requirement agreed upon in the stock purchase agreement.

The acquisition was funded by utilizing cash on hand and available capacity from our Amended Revolver (as defined in Note 9, “Debt”).

A breakdown of the purchase price allocation, net of cash acquired, is as follows:

As of both April 2, 2021 and December 31, 2020, our contract liabilities were insignificant.

On December 31, 2020, we acquired Zenetex, LLC (Zenetex) a leading provider of technical and strategic solutions focused on enabling mission readiness, performance, and enhance protection for defense and national security clients globally.

The total net consideration paid for the acquisition was approximately $ 117.9 million, consisting of the purchase price of $ 123.1 million, net of cash acquired, less $ 5.2 million for a working capital shortfall compared with the working capital requirement agreed upon in the stock purchase agreement.

The acquisition was funded by utilizing available capacity from our Amended Revolver (as defined in Note 7, “Debt”) and cash on hand.

A breakdown of the preliminary purchase price allocation, net of cash acquired, is as follows:

(In thousands) Allocation of Purchase Price

Receivables $ 40,152

Deferred taxes 88

Other current assets 1,261

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Intangible assets 54,200

Other non-current assets 1,868

Right-of-use assets 7,930

Accounts payable ( 7,381 )

1 unchanged sentence

Accrued compensation ( 12,087 )

Lease liabilities ( 8,275 )

Other non-current liabilities ( 55 )

Purchase price, net of cash acquired $ 117,868

We completed purchase accounting for the acquisition as of July 3, 2020 with no material adjustments.

The Company recognized two intangible assets related to customer contracts (backlog) and the Advantor trade name arising from the acquisition.

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 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.

Additionally, the Company recognized goodwill of $ 28.5 million arising from the acquisition, which relates primarily to acquired product and services strengthening our advance into a higher value, technology-enabled and differentiated platform, as well as extending our facilities and logistics services to include the electronic protection and security of facilities.

Adjustments to the initial purchase accounting for the acquired net assets will be completed, as needed, up to one year from the acquisition date as we obtain additional information regarding facts and circumstances that existed as of the acquisition date.

The Condensed Consolidated Statement of Income for the first three months of 2021 was not impacted by any such adjustments.

The Company recognized customer related intangible assets arising from the acquisition.

The fair value was $ 54.2 million with an amortization period of 11.8 years.

Additionally, the Company recognized goodwill of $ 47.2 million arising from the acquisition, which relates primarily to acquired product and services strengthening our position as leading fully-integrated provider in the converged infrastructure market, as well as extending our operations and maintenance services to increase content and scope at client installations.

Goodwill also includes other intangibles that do not qualify for separate recognition.

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

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

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

Zenetex's results of operations have been included in our Consolidated Statements of Income for the periods subsequent to acquisition on December 31, 2020.

For the quarter ended April 2, 2021, Zenetex contributed $ 64.9 million of revenue and $ 2.7 million of income from operations before income taxes.

For the quarter ended April 3, 2020, on a pro forma basis, the acquired business would have recognized revenue of $ 55.9 million and an insignificant amount of income from operations before income taxes after pro forma adjustments.

On December 31, 2020, we acquired Higgins, Hermansen, Banikas, LLC (HHB).

HHB is a leading provider of high-end solutions for facilities management, logistics, engineering, enterprise operations and asset management solutions for supporting Intelligence Community (IC) projects.

The total net consideration paid for the acquisition was approximately $ 15.5 million.

The acquisition was funded by utilizing available capacity from our Amended Revolver and cash on hand.

The Company recognized a customer related intangible assets arising from the acquisition.

The fair value was $ 8.6 million with an amortization period of 7.4 years.

Additionally, the Company recognized goodwill of $ 6.1 million arising from the acquisition, which relates primarily to growth opportunities in the intelligence community as a converged infrastructure provider.

Goodwill also includes other intangibles that do not qualify for separate recognition.

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

The remainder of the preliminary purchase price allocation was primarily working capital.

The Condensed Consolidated Statement of Income for the first three months of 2021 was not impacted by any such adjustments.

Receivables were comprised of the following:

(In thousands) April 2, 2021 December 31, 2020

Billed receivables $ 115,574 $ 102,045

Unbilled receivables (contract assets) 234,358 203,127

Other 9,250 9,787

Total receivables $ 359,182 $ 314,959

As of April 2, 2021 and December 31, 2020, substantially all billed receivables are due from the U.S.

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

government or as subcontractor to another prime contractor to the U.S.

Because the Company's billed receivables are with the U.S.

government, the Company does not believe it has a material credit risk exposure.

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 expect to bill customers for the majority of the April 2, 2021 contract assets during 2021.

Changes in the balance of receivables are primarily due to the timing differences between our performance and customers' payments.

GOODWILL AND INTANGIBLE ASSETS

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 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.

The changes in the carrying amount of goodwill for the three months ended April 2, 2021 are as follows:

(In thousands)

Balance at December 31, 2020 $ 339,702

Adjustments to preliminary purchase price allocation of Zenetex ( 19,717 )

Adjustments to preliminary purchase price allocation of HHB ( 4,584 )

Balance at April 2, 2021 $ 315,401

The Company tests goodwill for impairment on the first day of the Company's fourth fiscal 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.

Identifiable intangible assets consist of the following:

October 2, 2020 December 31, 2019

April 2, 2021 December 31, 2020

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

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Balance $ 82,844 $ ( 11,590 ) $ 71,254 $ 57,243 $ ( 9,138 ) $ 48,105

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.

Identifiable intangible asset amortization expense was $ 2.5 million and $ 1.0 million for the three months ended April 2, 2021 and April 3, 2020, respectively.

As of April 2, 2021, the remaining average intangible asset amortization period was 9.9 years.

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

Period Amortization

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

2021 (excluding the three months ended April 2, 2021) $ 7,328

After 2025 $ 34,209

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding for the period.

Diluted EPS reflects potential dilution that could occur if securities to issue common stock were exercised or converted into common stock.

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

Three Months Ended Nine Months Ended

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

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

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

Weighted average common shares outstanding 11,621 11,506 11,590 11,420

Dilutive impact of stock options 34 37 38 45

Dilutive impact of restricted stock units 96 135 115 101

Diluted weighted average common shares outstanding 11,751 11,678 11,743 11,566

Earnings per share

Basic $ 0.89 $ 0.68 $ 1.74 $ 1.97

Diluted $ 0.88 $ 0.67 $ 1.72 $ 1.95

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 Nine Months Ended

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

(In thousands) 2020 2019 2020 2019

Anti-dilutive stock options — — — 1

Anti-dilutive restricted stock units 3 — 2 3

Total 3 — 2 4

Receivables were comprised of the following:

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

Billed receivables $ 59,445 $ 71,068

Unbilled receivables (contract assets) 199,301 186,365

Other 9,397 11,711

Total receivables $ 268,143 $ 269,144

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.

Government or as subcontractor to another prime contractor to the U.S.

Because our billed receivables are with the U.S.

Government, we do not believe they represent a material credit risk exposure.

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 $ 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.

Government review of indirect rates and contract line item realignments with our customers.

Changes in the balance of receivables are primarily due to the timing differences between our performance and customers' payments.

Senior Secured Credit Facilities

Term Loan and Revolver .

In September 2014, we and our wholly-owned subsidiary, VSC, entered into a credit agreement with a group of lenders, including JPMorgan Chase Bank, N.A.

as administrative agent.

The credit agreement was subsequently amended in November 2017 by the Amendment and Restatement Agreement (the Amendment Agreement) with a group of lenders, including JPMorgan Chase Bank, N.A., as administrative agent.

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.

In September 2014, we and our wholly-owned subsidiary, VSC, entered into a credit agreement.

The credit agreement was subsequently amended, with the most recent amendment occurring on December 24, 2020 and is collectively referred to as the Amended Agreement.

The credit agreement consists of a term loan (Amended Term Loan) and a $ 270.0 million revolving credit facility (Amended Revolver) as of April 2, 2021.

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.

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.

The Amended Term Loan amortizes in an amount equal to $ 2.0 million per quarter for the fiscal quarters ending April 2, 2021 through September 30, 2021, $ 2.6 million for the fiscal quarters ending December 31, 2021 through September 30, 2022, with the balance of $ 47.6 million due on November 15, 2022.

Amounts borrowed under the Amended Term Loan that are repaid or prepaid may not be re-borrowed.

Any unpaid amounts must be repaid by the maturity dates.

As of April 2, 2021 the balance outstanding under the Amended Term Loan was $ 62.0 million.

The Amended Revolver is available for working capital, capital expenditures, and other general corporate purposes.

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

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.

As of April 2, 2021, there were two letters of credit outstanding in the aggregate amount of $ 2.4 million, and $ 115.0 million outstanding borrowings under the Amended Revolver resulting in borrowing capacity of $ 152.6 million under the Amended Revolver.

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

The aggregate scheduled maturities of the Amended Term Loan, are as follows:

The aggregate scheduled maturities of the Amended Term Loan and Amended Revolver as of April 2, 2021, are as follows:

(In thousands) Payments due

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

2021 (excluding the three months ended April 2, 2021) $ 6,600

Total $ 177,000

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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 ( 3.50 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 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.

As of April 2, 2021, we had a ratio of total consolidated indebtedness to EBITDA of 2.00 to 1.00 and a ratio of consolidated EBITDA to consolidated interest expense of 19.53 to 1.00.

We were in compliance with all covenants related to the Amended Credit Facilities as of April 2, 2021.

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 October 2, 2020 was 2.15 %.

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 April 2, 2021 was 2.36 %.

Carrying Value and Fair Value.

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.

As of April 2, 2021 and December 31, 2020, 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 $ 49.6 million at October 2, 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 October 2, 2020:

The contracts, with expiration dates through November 2022 and notional amounts totaling $ 46.7 million at April 2, 2021, are recorded at fair value.

(In thousands) Fair Value

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We regularly assess the creditworthiness of the counterparty.

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

As of April 2, 2021, 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 $ 0.7 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.

Net interest rate derivative losses of $ 0.3 million and $ 0.1 million were recognized in interest expense, net in our Condensed Consolidated Statements of Income during the first quarters of 2021 and 2020, respectively.

We expect $ 1.0 million of existing interest rate swap losses reported in accumulated other comprehensive loss as of April 2, 2021 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 October 2, 2020:

(In thousands) Fair Value

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Balance sheet caption Amount

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

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.

Foreign currency forward designated as cash flow hedge Other current assets $ 404

At April 2, 2021, we had outstanding foreign currency forward contracts, for the exchange of U.S.

dollars and Euros, with a notional amount of $ 5.8 million and expiration dates through December 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 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 were not required to, and did not, post collateral as of April 2, 2021.

Net foreign currency derivative gains of $ 0.1 million and losses of $ 0.1 million were recognized in selling, general and administrative expenses during the first quarters of 2021 and 2020, respectively.

We expect less than $ 0.1 million of existing foreign currency forward contract gains reported in accumulated other comprehensive loss as of April 2, 2021 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 Nine Months Ended

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

Three Months Ended

(In thousands) April 2, 2021 April 3, 2020

Operating lease expense $ 1,825 $ 2,964

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

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

(In thousands) April 2, 2021 December 31, 2020

Right-of-use assets $ 20,802 $ 18,718

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Total operating lease liabilities $ 22,467 $ 20,215

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:

Additional right-of-use assets of $ 3.9 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the first three months of 2021.

The weighted average remaining lease term and discount rate for our operating leases at April 2, 2021 was 5.27 years and 4.1 %, respectively.

Maturities of lease liabilities at April 2, 2021 were as follows:

(In thousands) Payments due

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

2025 and beyond 2,843

Total lease payments 13,288

2021 (excluding the three months ended April 2, 2021) $ 5,322

After 2025 5,396

Total minimum lease payments 25,259

Imputed interest ( 2,792 )

Total operating lease liabilities $ 22,467

STOCK-BASED COMPENSATION

We maintain an equity incentive plan (the 2014 Omnibus Plan) to govern awards granted to Vectrus employees and directors, including nonqualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards and other awards.

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 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 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

Compensation costs for liability-based awards ( 196 ) 798 2,213 2,613

Total compensation costs, pre-tax $ 1,088 $ 1,922 $ 6,499 $ 5,952

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

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

Outstanding at January 1, 2020 77 $ 23.30 301 $ 30.30

Granted — $ — 129 $ 51.98

Exercised ( 3 ) $ 21.43 — $ —

Vested — $ — ( 147 ) $ 30.55

Issued in exchange — $ — 16 $ 52.28

Cancelled in exchange — $ — ( 16 ) $ 29.00

Forfeited or expired — $ — ( 18 ) $ 40.67

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.

Director RSUs are granted on the date of an annual meeting of shareholders and vest on the business day immediately prior to the next annual meeting.

The fair value of each RSU grant was determined based on the closing price of Vectrus common stock on the date of grant.

Stock compensation expense will be recognized ratably over the vesting period of the awards.

Total Shareholder Return Awards

TSR awards are performance-based cash awards that are subject to a three-year performance period.

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

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.

Depending on the Company’s performance during the three-year performance period, payments can range from 0 % to 200 % of the target value.

COMMITMENTS AND CONTINGENCIES

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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 $ 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.

We have estimated and accrued $ 12.0 million and $ 11.7 million as of April 2, 2021 and December 31, 2020, 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 years where the U.S.

government has not completed its incurred cost audits.

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.

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government contracts.

Government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency and others, routinely audit and review our performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards.

government agencies, including the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA) and others, routinely audit and review our performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards.

Accordingly, costs billed or billable to U.S.

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As a result of final indirect rate negotiations between the U.S.

Government and our Former Parent, we may be subject to potential adjustments to costs previously allocated by our Former Parent to our business, which was formerly Exelis’ Mission Systems Business, from 2007 through 2014.

We are in discussions with our Former Parent regarding the negotiated adjustments from 2007-2014 and believe that our potential cumulative liability for these years is insignificant.

In June 2019, the U.S.

Government provided us with the Contracting Officers Final Decision (COFD) for the years 2007-2010 related to Former Parent costs.

In August 2019, we filed an appeal of the COFD with the Armed Services Board of Contract Appeals (ASBCA).

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 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.

government and our Former Parent, we may be subject to adjustments to costs previously allocated by our Former Parent to our business, which was formerly Exelis’ Mission Systems Business, from 2007 through 2014.

We are in discussions with our Former Parent and U.S.

government regarding the these cost adjustments from 2007 through 2014 and believe that our potential cumulative liability for these years is insignificant.

Between June 2019 and June 2020, the U.S.

government provided us with the Contracting Officers Final Decision (COFD) for the years from 2007 through 2010 and 2013 related to Former Parent costs.

We filed appeals of the COFDs with the Armed Services Board of Contract Appeals (ASBCA).

The ASBCA has granted Vectrus’ and the U.S.

government’s joint requests to stay proceedings in the appeal, most recently through May 12, 2021, to enable ongoing discussions regarding the matter between Vectrus and our Former Parent.

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

On March 31, 2021, the U.S.

government issued a consolidated COFD for 2011, 2012 and 2014.

We have requested the government rescind or reconsider the COFD as it contains errors, however, we will appeal to the ASBCA if the COFD is not rescinded.

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.

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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.

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.

STOCK-BASED COMPENSATION

The Company maintains an equity incentive plan, the 2014 Omnibus Incentive Plan, as amended and restated effective as of May 13, 2016 (the 2014 Omnibus Plan), to govern awards granted to Vectrus employees and directors, including nonqualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards and other awards.

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.

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

Three Months Ended

(In thousands) April 2, 2021 April 3, 2020

Compensation costs for equity-based awards $ 1,983 $ 1,720

Compensation costs for liability-based awards 639 647

Total compensation costs, pre-tax $ 2,622 $ 2,367

Future tax benefit $ 569 $ 511

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

As of April 2, 2021, total unrecognized compensation costs related to equity-based awards and liability-based awards were $ 9.9 million and $ 5.3 million, respectively, which are expected to be recognized ratably over a weighted average period of 2.02 years and 2.04 years, respectively.

The following table provides a summary of the activities for NQOs and RSUs for the three months ended April 2, 2021:

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

Outstanding at January 1, 2021 74 $ 23.37 253 $ 41.67

Granted — $ — 118 $ 58.25

Exercised ( 5 ) $ 20.62 — $ —

Vested — $ — ( 106 ) $ 58.92

Forfeited or expired — $ — ( 3 ) $ 55.04

Outstanding at April 2, 2021 69 $ 23.59 262 $ 50.41

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

Director RSUs are granted on the date of an annual meeting of shareholders and vest on the business day immediately prior to the next annual meeting.

The fair value of each RSU grant was determined based on the closing price of Vectrus common stock on the date of grant.

Stock compensation expense will be recognized ratably over the vesting period of the awards.

Total Shareholder Return Awards

TSR awards are performance-based cash awards that are subject to a three-year performance period.

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

During the three months ended April 2, 2021, we granted TSR awards with an aggregate target TSR value of $ 2.7 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.

Depending on the Company’s performance during the three-year performance period, payments can range from 0 % to 200 % of the target value.

Effective Tax Rate

Income tax expense during interim periods is based on an estimated annual effective income tax rate, plus any significant unusual or infrequently occurring items recorded in interim periods.

For the three months ended April 2, 2021 and April 3, 2020, we recorded income tax provisions of $ 2.6 million and $ 2.1 million, representing effective income tax rates of 17.5 % and 19.6 %, respectively.

Uncertain Tax Provisions

As of April 2, 2021, and December 31, 2020, unrecognized tax benefits from uncertain tax positions were $ 8.0 million and $ 7.4 million, respectively.

The increase in the uncertain tax positions was principally the result of the additional Foreign Derived Intangible Income (FDII) deduction as the Company reserves a portion of the FDII benefit claimed or expected to be claimed on tax return filings.

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding for the period.

Diluted EPS reflects potential dilution that could occur if securities to issue common stock were exercised or converted into common stock.

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

Three Months Ended

April 2, April 3,

(In thousands, except per share data) 2021 2020

Net income $ 12,048 $ 8,668

Weighted average common shares outstanding 11,648 11,545

Dilutive impact of stock options 43 41

Dilutive impact of restricted stock units 136 159

Diluted weighted average common shares outstanding 11,827 11,745

Earnings per share

Basic $ 1.03 $ 0.75

Diluted $ 1.02 $ 0.74

Three Months Ended

April 2, April 3,

(In thousands) 2021 2020

Anti-dilutive stock options — —

Anti-dilutive restricted stock units 1 1

MULTIEMPLOYER PENSION PLANS

Certain Company employees that perform work on contracts within the continental United States participate in multiemployer pension plans of which the Company is not the sponsor.

Expense recognized for these plans was $ 0.2 million and $ 1.0 million for the three months ended April 2, 2021 and April 3, 2020, respectively, covering one and eight separate plans, respectively.

The decrease in expense and the amount of multiemployer pension plan participation by the Company is attributable to the completion of a subcontract in September 2020.

At the time the contract was completed, the individuals ceased being Vectrus employees.

Those employees were hired by the successor contractor who then inherited the contractual obligation to fund the related multiemployer pension plans on the individual's behalf.

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