V2X, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS VECTRUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended April 2, April 3, (In thousands, except per share data) 2021 2020 Revenue $ 434,004 $ 351,734 Cost of revenue 393,648 319,693 Selling, general, and administrative expenses 23,823 19,558 Operating income 16,533 12,483 Interest expense, net ( 1,932 ) ( 1,703 ) Income from operations before income taxes 14,601 10,780 Income tax expense 2,553 2,112 Net income $ 12,048 $ 8,668 Earnings per share Basic $ 1.03 $ 0.75 Diluted $ 1.02 $ 0.74 Weighted average common shares outstanding - basic 11,648 11,545 Weighted average common shares outstanding - diluted 11,827 11,745 The accompanying notes are an integral part of these financial statements. 4 Table of Contents VECTRUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended April 2, April 3, (In thousands) 2021 2020 Net income $ 12,048 $ 8,668 Other comprehensive income (loss), net of tax Changes in derivative instruments: Net change in fair value of interest rate swaps 295 ( 1,386 ) Net change in fair value of foreign currency forward contracts ( 396 ) ( 261 ) Tax benefit 24 357 Net change in derivative instruments ( 77 ) ( 1,290 ) Foreign currency translation adjustments, net of tax ( 2,356 ) ( 1,934 ) Other comprehensive loss net of tax ( 2,433 ) ( 3,224 ) Total comprehensive income $ 9,615 $ 5,444 The accompanying notes are an integral part of these financial statements. 5 Table of Contents VECTRUS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) April 2, December 31, (In thousands, except share information) 2021 2020 Assets Current assets Cash and cash equivalents $ 38,347 $ 66,949 Restricted cash 1,778 1,778 Receivables 359,182 314,959 Other current assets 27,319 24,702 Total current assets 426,626 408,388 Property, plant, and equipment, net 21,410 22,573 Goodwill 315,401 339,702 Intangible assets, net 71,254 48,105 Right-of-use assets 20,802 18,718 Other non-current assets 6,839 6,325 Total non-current assets 435,706 435,423 Total Assets $ 862,332 $ 843,811 Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 197,447 $ 159,586 Compensation and other employee benefits 56,349 79,568 Short-term debt 9,200 8,600 Other accrued liabilities 41,249 40,657 Total current liabilities 304,245 288,411 Long-term debt, net 166,383 168,751 Deferred tax liability 41,999 39,386 Other non-current liabilities 35,239 42,325 Total non-current liabilities 243,621 250,462 Total liabilities 547,866 538,873 Commitments and contingencies (Note 10) Shareholders' Equity Preferred stock; $ 0.01 par value; 10,000,000 shares authorized; No shares issued and outstanding — — Common stock; $ 0.01 par value; 100,000,000 shares authorized; 11,700,232 and 11,624,717 shares issued and outstanding as of April 2, 2021 and December 31, 2020, respectively 117 116 Additional paid in capital 82,735 82,823 Retained earnings 234,074 222,026 Accumulated other comprehensive loss ( 2,460 ) ( 27 ) Total shareholders' equity 314,466 304,938 Total Liabilities and Shareholders' Equity $ 862,332 $ 843,811 The accompanying notes are an integral part of these financial statements. 6 Table of Contents VECTRUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended April 2, April 3, (In thousands) 2021 2020 Operating activities Net income $ 12,048 $ 8,668 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation expense 1,548 996 Amortization of intangible assets 2,450 1,015 Loss on disposal of property, plant, and equipment 43 — Stock-based compensation 2,622 2,367 Amortization of debt issuance costs 232 99 Changes in assets and liabilities: Receivables ( 46,544 ) 3,942 Other assets ( 3,785 ) ( 5,715 ) Accounts payable 42,054 ( 162 ) Deferred taxes 2,716 ( 1,522 ) Compensation and other employee benefits ( 22,818 ) ( 9,733 ) Other liabilities ( 12,295 ) 1,182 Net cash (used in) provided by operating activities ( 21,729 ) 1,137 Investing activities Purchases of capital assets ( 2,611 ) ( 917 ) Net cash used in investing activities ( 2,611 ) ( 917 ) Financing activities Repayments of long-term debt ( 2,000 ) ( 1,500 ) Proceeds from revolver 110,000 144,000 Repayments of revolver ( 110,000 ) ( 29,000 ) Proceeds from exercise of stock options 113 1 Payments of employee withholding taxes on share-based compensation ( 2,184 ) ( 1,787 ) Net cash (used in) provided by financing activities ( 4,071 ) 111,714 Exchange rate effect on cash ( 191 ) ( 1,080 ) 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 (refunded) paid $ ( 97 ) $ 36 Purchase of capital assets on account $ ( 132 ) $ ( 606 ) The accompanying notes are an integral part of these financial statements. 7 Table of Contents VECTRUS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES TO SHAREHOLDERS' EQUITY (UNAUDITED) Common Stock Issued Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders' Equity (In thousands) Shares Amount Retained Earnings Balance at December 31, 2019 11,524 $ 115 $ 78,757 $ 185,075 $ ( 5,082 ) $ 258,865 Net income 8,668 8,668 Foreign currency translation adjustments ( 1,934 ) ( 1,934 ) Unrealized loss on cash flow hedge ( 1,290 ) ( 1,290 ) Employee stock awards and stock options 64 1 — 1 Taxes withheld on restricted stock unit compensation awards ( 1,787 ) ( 1,787 ) Stock-based compensation 1,720 1,720 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 Net income 12,048 12,048 Foreign currency translation adjustments ( 2,356 ) ( 2,356 ) Unrealized loss on cash flow hedge ( 77 ) ( 77 ) Employee stock awards and stock options 75 1 113 114 Taxes withheld on stock compensation awards ( 2,184 ) ( 2,184 ) Stock-based compensation 1,983 1,983 Balance at April 2, 2021 11,700 $ 117 $ 82,735 $ 234,074 $ ( 2,460 ) $ 314,466 The accompanying notes are an integral part of these financial statements. 8 Table of Contents NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business and Basis of Presentation Our Business Vectrus, Inc. is a leading provider of services to the United States government (U.S. government) worldwide. 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 integration services. Vectrus was incorporated in the State of Indiana in February 2014. On September 27, 2014, Exelis Inc. (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 (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. The unaudited interim Condensed Consolidated Financial Statements of Vectrus have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (GAAP) have been omitted. These unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020. It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position and operating results. Revenue and net income for any interim period are not necessarily indicative of future or annual results. 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 . 9 Table of Contents NOTE 2 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 Company adopted the standard as of January 1, 2021 and it did not have a material impact on the Company’s financial statements. NOTE 3 REVENUE Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. To determine the proper revenue recognition method, consideration is given as to whether a single contract should be accounted for as more than one performance obligation. For most of our contracts, the customer contracts with us to perform an integrated set of tasks and deliverables as a single service solution, whereby each service is not separately identifiable from other promises in the contract and therefore is not distinct. As a result, when this integrated set of tasks exists, the contract is accounted for as one performance obligation. The vast majority of our contracts have a single performance obligation. Unexercised contract options and indefinite delivery and indefinite quantity (IDIQ) contracts are considered to be separate performance obligations when the option or IDIQ task order is exercised or awarded. Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and therefore, are accounted for as part of the existing contract. 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 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. Our over time recognition is reinforced by the fact that our customers simultaneously receive and consume the benefits of our services as they are performed. This continuous transfer of control requires that we track progress towards completion of performance obligations in order to measure and recognize revenue. Determining progress on performance obligations requires us to make judgments that affect the timing of revenue recognition. Remaining performance obligations represent firm orders by the customer and excludes potential orders under IDIQ contracts, unexercised contract options, and contracts awarded to us that are being protested by competitors with the U.S. government Accountability Office (GAO) or in the U.S. Court of Federal Claims. The level of order activity related to contracts can be affected by the timing of government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others. The Company's contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year (or less) option periods . The number of option periods varies by contract, and there is no guarantee that an option period will be exercised. The right to exercise an option period is at the sole discretion of the U.S. government when we are the prime contractor or of the prime contractor when we are a subcontractor. We expect to recognize a substantial portion of our performance obligations as revenue within the next 12 months. However, the U.S. government or the prime contractor may cancel any contract at any time through a termination for convenience or for cause. 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 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. 10 Table of Contents Contract Estimates 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. These assumptions include labor productivity and availability; the complexity of the services being performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer. 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 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 Generally, the sales price elements for our contracts are cost-plus, cost-reimbursable or firm-fixed-price. We commonly have elements of cost-plus, cost-reimbursable and firm-fixed-price contracts on a single contract. On a cost-plus type contract, we are paid our allowable incurred costs plus a profit, which can be fixed or variable depending on the contract’s fee arrangement, up to funding levels predetermined by our customers. 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. Award fees provide for a fee based on actual performance relative to contractually specified performance criteria. Incentive fees provide for a fee based on the relationship between total allowable and target cost. On most of our contracts, a cost-reimbursable element captures consumable materials required for the contract. Typically, these costs do not bear fees. On a firm-fixed-price type contract, we agree to perform the contractual statement of work for a predetermined contract price. A firm-fixed-price type contract typically offers higher profit margin potential than a cost-plus type contract, which is commensurate with the greater levels of risk we assume on a firm-fixed-price type contract. Although a firm-fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract. Although the overall scope of work required under the contract may not change, profit may be adjusted as experience is gained and as efficiencies are realized or costs are incurred. The following tables present our revenue disaggregated by several categories. 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 % Firm-fixed-price 128,757 95,415 34.9 % Total revenue $ 434,004 $ 351,734 ¹ Includes time and material contracts 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 % United States 151,582 81,469 86.1 % Europe 40,609 32,328 25.6 % Total revenue $ 434,004 $ 351,734 11 Table of Contents 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 % Subcontractor 30,742 18,341 67.6 % Total revenue $ 434,004 $ 351,734 Revenue by customer 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 Army $ 257,349 $ 247,555 4.0 % Air Force 78,170 73,341 6.6 % Navy 56,427 15,237 270.3 % Other 42,058 15,601 169.6 % Total revenue $ 434,004 $ 351,734 Contract Balances The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. These advance billings and payments are not considered significant financing components because they are frequently intended to ensure that both parties are in conformance with the primary contract terms. 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 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 April 2, 2021 and December 31, 2020, our contract liabilities were insignificant. NOTE 4 ACQUISITIONS Zenetex 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. 12 Table of Contents 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 Property, plant and equipment 1,116 Goodwill 47,207 Intangible assets 54,200 Right-of-use assets 7,930 Accounts payable ( 7,381 ) Other current liabilities ( 6,288 ) Accrued compensation ( 12,087 ) Lease liabilities ( 8,275 ) Other non-current liabilities ( 55 ) Purchase price, net of cash acquired $ 117,868 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 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. HHB 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. 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. 13 Table of Contents NOTE 5 RECEIVABLES 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. government. 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. NOTE 6 GOODWILL AND INTANGIBLE ASSETS 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: April 2, 2021 December 31, 2020 (In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Contract backlogs and recompetes $ 74,400 $ ( 8,665 ) $ 65,735 $ 48,800 $ ( 6,645 ) $ 42,155 Customer contracts 7,200 ( 2,500 ) 4,700 7,200 ( 2,133 ) 5,067 Trade names and other 1,244 ( 425 ) 819 1,243 ( 360 ) 883 Balance $ 82,844 $ ( 11,590 ) $ 71,254 $ 57,243 $ ( 9,138 ) $ 48,105 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. 14 Table of Contents The estimated amortization expense for the next five years is as follows (in thousands): Period Amortization 2021 (excluding the three months ended April 2, 2021) $ 7,328 2022 $ 8,257 2023 $ 8,157 2024 $ 7,050 2025 $ 6,253 After 2025 $ 34,209 NOTE 7 DEBT Senior Secured Credit Facilities Term Loan and Revolver . 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 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 and Amended Revolver as of April 2, 2021, are as follows: (In thousands) Payments due 2021 (excluding the three months ended April 2, 2021) $ 6,600 2022 170,400 Total $ 177,000 Voluntary Prepayments. We may voluntarily prepay the Amended Term Loan in whole or in part at any time without premium or penalty, subject to the payment of customary breakage costs under certain conditions. Amounts borrowed under the Amended Term Loan that are repaid or prepaid may not be re-borrowed. Covenants . The Amended Credit Facilities contain customary covenants, including covenants that, under certain circumstances and subject to certain qualifications and exceptions: limit or restrict our ability to incur additional indebtedness; merge, dissolve, liquidate or consolidate; make acquisitions, investments, advances or loans; dispose of or transfer assets; pay dividends; redeem or repurchase certain debt; and enter into certain restrictive agreements. 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 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 15 Table of Contents 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 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. NOTE 8 DERIVATIVE INSTRUMENTS During the periods covered by this report, we have made no changes to our policies or strategies for the use of derivative instruments and there has been no change in our related accounting methods. For our derivative instruments, which are designated as cash flow hedges, gains and losses are initially reported as a component of accumulated other comprehensive loss and subsequently recognized in earnings with the corresponding hedged item. Interest Rate Derivative Instruments 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 $ 46.7 million at April 2, 2021, 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 April 2, 2021: (In thousands) Fair Value Balance sheet caption Amount Interest rate swap designated as cash flow hedge Other accrued liabilities $ 970 Interest rate swap designated as cash flow hedge Other non-current liabilities $ 500 The following table summarizes the amount at fair value and location of the derivative instruments used for our interest rate hedges in the Condensed Consolidated Balance Sheets as of December 31, 2020: (In thousands) Fair Value Balance sheet caption Amount Interest rate swap designated as cash flow hedge Other accrued liabilities $ 1,015 Interest rate swap designated as cash flow hedge Other non-current liabilities $ 750 We regularly assess the creditworthiness of the counterparty. 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 $ 0.3 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 April 2, 2021: (In thousands) Fair Value Balance sheet caption Amount Foreign currency forward designated as cash flow hedge Other current assets $ 77 Foreign currency forward designated as cash flow hedge Other accrued liabilities $ 69 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 December 31, 2020: (In thousands) Fair Value Balance sheet caption Amount Foreign currency forward designated as cash flow hedge Other current assets $ 404 16 Table of Contents 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 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. NOTE 9 Leases We determine whether an arrangement contains a lease at inception. We have operating leases for office space, apartments, vehicles, and machinery and equipment. Our operating leases have lease terms of less than one year to ten years . We do not separate lease components from non-lease components (e.g., common area maintenance, property taxes and insurance) but account for both components in a contract as a single lease component. The components of lease expense are as follows: Three Months Ended (In thousands) April 2, 2021 April 3, 2020 Operating lease expense $ 1,825 $ 2,964 Variable lease expense 203 170 Short-term lease expense 13,448 10,690 Total lease expense $ 15,476 $ 13,824 Supplemental balance sheet information related to our operating leases is as follows: (In thousands) April 2, 2021 December 31, 2020 Right-of-use assets $ 20,802 $ 18,718 Current lease liabilities (recorded in other accrued liabilities) $ 6,093 $ 6,245 Long-term lease liabilities (recorded in other non-current liabilities) 16,374 13,970 Total operating lease liabilities $ 22,467 $ 20,215 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 2021 (excluding the three months ended April 2, 2021) $ 5,322 2022 5,069 2023 4,157 2024 2,950 2025 2,365 After 2025 5,396 Total minimum lease payments 25,259 Less: Imputed interest ( 2,792 ) Total operating lease liabilities $ 22,467 17 Table of Contents NOTE 10 COMMITMENTS AND CONTINGENCIES General From time to time, we are involved in legal proceedings that are incidental to the operation of our business. Some of these proceedings seek remedies relating to employment matters, matters in connection with our contracts and matters arising under laws relating to the protection of the environment. Additionally, U.S. government customers periodically advise the Company of claims and penalties concerning certain potential disallowed costs. When such findings are presented, Vectrus and the U.S. government representatives engage in discussions to enable Vectrus to evaluate the merits of these claims as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect probable losses related to the matters raised by the U.S. government representatives. 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 $ 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. U.S. Government Contracts, Investigations and Claims We have U.S. government contracts that are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could have a material adverse effect on our financial condition or results of operations. Furthermore, our contracts with the U.S. government may be terminated or suspended by the U.S. government at any time, with or without cause. Such contract suspensions or terminations could result in unreimbursable expenses or charges or otherwise adversely affect our financial condition and results of operations. Departments and agencies of the U.S. government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages. U.S. government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. government contracts or the loss of export privileges for a company or an operating division or subdivision. Suspension or debarment could have a material adverse effect on the Company because of its reliance on U.S. government contracts. U.S. 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. government customers are subject to potential adjustment upon audit by such agencies. The U.S. government agencies also review the adequacy of our compliance with government standards for our business systems, including our accounting, earned value management, estimating, materials management and accounting, purchasing, and property management systems. As a result of final indirect rate negotiations between the U.S. 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. 18 Table of Contents COVID-19 Pandemic On March 11, 2020, the World Health Organization designated the outbreak of COVID-19 as a global pandemic. governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, social distancing guidelines, and restrictions on employees going to work. 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. NOTE 11 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: NQOs RSUs (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 19 Table of Contents 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. NOTE 12 INCOME TAXES 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 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. 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 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. NOTE 13 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 Add: Dilutive impact of stock options 43 41 Add: 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 20 Table of Contents 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 April 2, April 3, (In thousands) 2021 2020 Anti-dilutive stock options — — Anti-dilutive restricted stock units 1 1 Total 1 1 NOTE 14. 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.