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Item 1. Financial Statements

2021-08-10 compared with 2021-05-11 · 152 added, 126 removed, 459 unchanged (38% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended

April 2, April 3,

Three Months Ended Six Months Ended

July 2, July 3, July 2, July 3,

(In thousands, except per share data) 2021 2020 2021 2020

5 unchanged sentences

Income from operations before income taxes 20,327 1,084 34,928 11,865

Income tax expense 2,553 2,112

Income tax expense (benefit) 4,393 ( 27 ) 6,946 2,086

Net income $ 15,934 $ 1,111 $ 27,982 $ 9,779

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended

April 2, April 3,

Three Months Ended Six Months Ended

July 2, July 3, July 2, July 3,

(In thousands) 2021 2020 2021 2020

4 unchanged sentences

Net change in fair value of foreign currency forward contracts ( 100 ) 395 ( 495 ) 134

Tax benefit 24 357

Tax (expense) benefit ( 51 ) ( 98 ) ( 27 ) 258

Net change in derivative instruments 79 357 2 ( 933 )

Foreign currency translation adjustments, net of tax 430 2,470 ( 1,926 ) 536

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

Other comprehensive income (loss) net of tax 509 2,827 ( 1,924 ) ( 397 )

Total comprehensive income $ 16,443 $ 3,938 $ 26,058 $ 9,382

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

April 2, December 31,

July 2, December 31,

(In thousands, except share information) 2021 2020

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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

11,724,430 and 11,624,717 shares issued and outstanding as of July 2, 2021 and December 31, 2020, respectively

Additional paid in capital 84,650 82,823

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended

April 2, April 3,

Six Months Ended

July 2, July 3,

(In thousands) 2021 2020

1 unchanged sentence

Net income $ 27,982 $ 9,779

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

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

Depreciation expense 3,097 1,971

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Other liabilities ( 14,884 ) 15,252

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

Net cash provided by operating activities 14,026 34,406

Investing activities

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

Purchases of capital assets and intangibles ( 4,833 ) ( 2,246 )

Proceeds from the disposition of assets 16 —

Business acquisition purchase price adjustment 262 —

Contribution to joint venture ( 1,846 ) —

Net cash used in investing activities ( 6,401 ) ( 2,246 )

4 unchanged sentences

Proceeds from exercise of stock options 113 59

Payment of debt issuance costs ( 17 ) —

Payments of employee withholding taxes on share-based compensation ( 2,272 ) ( 1,873 )

Net cash (used in) provided by financing activities ( 4,071 ) 111,714

Net cash used in financing activities ( 6,176 ) ( 4,814 )

Exchange rate effect on cash ( 373 ) 55

4 unchanged sentences

Interest paid $ 3,111 $ 2,527

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

Income taxes paid $ 5,747 $ 70

Purchase of capital assets on account $ 618 $ 447

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

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

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 15,934 15,934

Foreign currency translation adjustments 430 430

Unrealized loss on cash flow hedge 79 79

Employee stock awards and stock options 24 — — —

Taxes withheld on restricted stock unit compensation awards ( 88 ) ( 88 )

Stock-based compensation 2,003 2,003

Balance at July 2, 2021 11,724 $ 117 $ 84,650 $ 250,008 $ ( 1,951 ) $ 332,824

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 integration services.

facility and base operations, supply chain and logistics services, information technology mission support, and engineering and digital integration services, including integration, security, maintenance, repair and overhaul.

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

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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.

Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (July 2, 2021 for the second quarter of 2021 and July 3, 2020 for the second 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.

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

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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 .

The plan assets and liabilities as of July 2, 2021 and operating expenses for the three and six months ended July 2, 2021 were not material.

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.

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

Accounting Standards That Were Adopted

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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.

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.

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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.

The level of order activity related to contracts can be affected by the timing of U.S.

government funding authorizations and their project evaluation cycles.

Year-over-year comparisons could, at times, be impacted by these factors, among others.

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

April 2, December 31,

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

July 2, December 31,

(In millions) 2021 2020

Performance Obligations $ 1,450 $ 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.

We expect to recognize approximately 51 % of the remaining performance obligations as of July 2, 2021 as revenue in 2021, and the remaining 49 % during 2022.

Contract Estimates

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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 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.

Cumulative catch-up adjustments for the three and six months ended July 2, 2021 decreased operating income by $ 1.7 million and $ 3.0 million, respectively.

For the three and six months ended July 3, 2020, the adjustments decreased operating income by $ 1.5 million and $ 3.8 million, respectively.

For the three and six months ended July 2, 2021 the cumulative catch-up adjustments to operating income decreased revenue by $ 1.7 million and $ 3.6 million, respectively.

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

Revenue by Category

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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

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

Three Months Ended Six Months Ended

July 2, July 3, % July 2, July 3, %

(In thousands) 2021 2020 Change 2021 2020 Change

Cost-plus and cost-reimbursable ¹ $ 359,429 $ 242,740 48.1 % $ 664,676 $ 499,059 33.2 %

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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

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

Three Months Ended Six Months Ended

July 2, July 3, % July 2, July 3, %

(In thousands) 2021 2020 Change 2021 2020 Change

Middle East $ 258,488 $ 215,968 19.7 % $ 498,500 $ 453,905 9.8 %

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Europe 36,084 35,533 1.6 % 76,706 68,063 12.7 %

Asia 29,724 1,892 1471.0 % 33,281 2,908 1044.5 %

Total revenue $ 470,845 $ 336,063 $ 904,849 $ 687,797

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

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

Three Months Ended Six Months Ended

July 2, July 3, % July 2, July 3, %

(In thousands) 2021 2020 Change 2021 2020 Change

Prime contractor $ 440,040 $ 314,345 40.0 % $ 843,303 $ 647,738 30.2 %

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Total revenue $ 470,845 $ 336,063 $ 904,849 $ 687,797

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

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

Three Months Ended Six Months Ended

July 2, July 3, % July 2, July 3, %

(In thousands) 2021 2020 Change 2021 2020 Change

Army $ 310,638 $ 227,351 36.6 % $ 567,987 $ 474,906 19.6 %

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

As of July 2, 2021 and December 31, 2020, we had contract assets of $ 250.9 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.

As of both July 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.

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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 Condensed Consolidated Statement of Income for the first six 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.

Additionally, the Company recognized goodwill of $ 49.6 million arising from the acquisition, which relates primarily to acquired services strengthening our position as a 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.

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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.

For the three and six months ended July 2, 2021, Zenetex recognized revenue of $ 60.6 million and $ 125.5 million, respectively.

For the three and six months ended July 2, 2021 income from operations before income taxes was $ 1.8 million and $ 4.5 million, respectively.

For the three and six months ended July 3, 2020, on a pro forma basis, the acquired business would have recognized revenue of $ 59.1 million and $ 115.0 million, respectively 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).

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

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

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

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

Receivables were comprised of the following:

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

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

Billed receivables $ 92,653 $ 102,045

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Total receivables $ 353,813 $ 314,959

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

As of July 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.

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

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

We expect to bill customers for the majority of the July 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

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

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

(In thousands)

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

Balance at April 2, 2021 $ 315,401

Balance at July 2, 2021 $ 317,608

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

July 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 $ 82,848 $ ( 14,030 ) $ 68,818 $ 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.

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

Identifiable intangible asset amortization expense was $ 2.4 million and $ 4.9 million for the three and six months ended July 2, 2021, respectively.

Intangible amortization for the three and six months ended July 3, 2020 was $ 1.0 million and $ 2.0 million, respectively.

As of July 2, 2021, the remaining average intangible asset amortization period was 9.8 years.

Future estimated amortization expense is as follows (in thousands):

Period Amortization

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

2021 (excluding the six months ended July 2, 2021) $ 4,891

After 2025 $ 34,214

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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.

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

The Amended Term Loan amortizes in an amount equal to $ 2.0 million per quarter for the fiscal quarter ending October 1, 2021, and $ 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.

As of July 2, 2021 the balance outstanding under the Amended Term Loan was $ 60.0 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.

As of July 2, 2021, there were two letters of credit outstanding in the aggregate amount of $ 2.7 million, and $ 115.0 million outstanding borrowings under the Amended Revolver resulting in borrowing capacity of $ 152.3 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:

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

(In thousands) Payments due

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

2021 (excluding the six months ended July 2, 2021) $ 4,600

Total $ 175,000

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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 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.

As of July 2, 2021, we had a ratio of total consolidated indebtedness to EBITDA of 1.76 to 1.00 and a ratio of consolidated EBITDA to consolidated interest expense of 18.71 to 1.00.

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

Interest Rates and Fees.

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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 %.

The interest rate under the Amended Credit Facilities at July 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.

As of July 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 $ 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:

The contracts, with expiration dates through November 2022 and notional amounts totaling $ 45.2 million at July 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 April 2, 2021, the counterparty to the interest rate swaps had performed in accordance with its contractual obligations.

As of July 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.

Net interest rate derivative losses of $ 0.5 million and $ 0.3 million were recognized in interest expense, net in our Condensed Consolidated Statements of Income during the first half of 2021 and 2020, respectively.

We expect $ 0.9 million of existing interest rate swap losses reported in accumulated other comprehensive loss as of July 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 $ 91

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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.

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

dollars and Euros, with a notional amount of $ 6.3 million and expiration dates through January 2022.

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.

We were not required to, and did not, post collateral as of July 2, 2021.

Net foreign currency derivative gains of $ 0.3 million and losses of $ 0.2 million were recognized in selling, general and administrative expenses during the first half of 2021 and 2020, respectively.

We expect $ 0.1 million of existing foreign currency forward contract losses reported in accumulated other comprehensive loss as of July 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

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

Three Months Ended Six Months Ended

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

Operating lease expense $ 2,240 $ 1,308 $ 4,065 $ 4,272

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

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

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

Right-of-use assets $ 26,997 $ 18,718

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Total operating lease liabilities $ 29,271 $ 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:

Additional right-of-use assets of $ 12.4 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the first half of 2021.

The weighted average remaining lease term and discount rate for our operating leases at July 2, 2021 was 7.0 years and 4.1 %, respectively.

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

(In thousands) Payments due

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

2021 (excluding the six months ended July 2, 2021) $ 5,945

After 2025 11,634

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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 $ 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.

We have estimated and accrued $ 12.1 million and $ 11.7 million as of July 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 U.S.

government contracts as discussed below, including years where the U.S.

government has not completed its incurred cost audits.

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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.

Changes in U.S.

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.

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government contracts.

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.

government agencies, including the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA) and others, routinely audit and review our performance on U.S.

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.

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.

government agencies also review the adequacy of our compliance with U.S.

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.

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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.

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

Between June 2019 and March 2021, the U.S.

government provided us with three Contracting Officers Final Decisions (COFD) for the years from 2007 through 2014 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.

government’s joint requests to stay proceedings in the appeal, most recently through September 13, 2021, to enable ongoing discussions regarding the matter between the parties.

Currently, the appeals have been consolidated.

The final COFD was issued on March 31, 2021.

We have requested the U.S.

government rescind or reconsider the COFD as it contains errors and costs related to contracts novated to our Former Parent.

On June 11, 2021, we filed an appeal with the ASBCA while the U.S.

government is considering our request to rescind the March 2021 COFD.

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.

government's decision in this matter.

COVID-19 Pandemic

2 unchanged sentences

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

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

The Company has observed, and continues to experience, 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.

4 unchanged sentences

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

Three Months Ended Six Months Ended

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

Compensation costs for equity-based awards $ 2,003 $ 1,282 $ 3,986 $ 3,002

3 unchanged sentences

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:

As of July 2, 2021, total unrecognized compensation costs related to equity-based awards and liability-based awards were $ 9.5 million and $ 3.6 million, respectively, which are expected to be recognized ratably over a weighted average period of 1.86 years and 1.82 years, respectively.

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

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

4 unchanged sentences

Forfeited or expired — $ — ( 7 ) $ 53.76

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

Outstanding at July 2, 2021 69 $ 23.59 266 $ 50.96

During the six months ended July 2, 2021, we granted long term incentive awards to employees consisting of 130,945 RSUs with a weighted average grant date fair value per share of $ 57.44 and to our directors consisting of 21,020 RSUs with a weighted average grant date fair value per share of $ 51.86 .

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

5 unchanged sentences

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

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

During the six months ended July 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.

3 unchanged sentences

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.

For the three months ended July 2, 2021 and July 3, 2020, we recorded an income tax provision of $ 4.4 million and an income tax benefit of less than $0.1 million, representing effective income tax rates of 21.6 % and ( 2.5 )%, respectively.

For the six months ended July 2, 2021 and July 3, 2020, we recorded income tax provisions of $ 6.9 million and $ 2.1 million, representing effective income tax rates of 19.9 % and 17.6 %, 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.

As of July 2, 2021, and December 31, 2020, unrecognized tax benefits from uncertain tax positions were $ 8.6 million and $ 7.4 million, respectively.

EARNINGS PER SHARE

2 unchanged sentences

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,

Three Months Ended Six Months Ended

July 2, July 3, July 2, July 3,

(In thousands, except per share data) 2021 2020 2021 2020

8 unchanged sentences

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,

Three Months Ended Six Months Ended

July 2, July 3, July 2, July 3,

(In thousands) 2021 2020 2021 2020

Anti-dilutive stock options — —

Anti-dilutive restricted stock units 5 2 2 1

1 unchanged sentence

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.

Expense recognized for these plans was $ 0.3 million and $ 0.5 million for the three months and six months ended July 2, 2021, respectively, and $ 1.0 million and $ 2.0 million for the three and six months ended July 3, 2020, respectively.

Contributions were made to one plan for the first half of 2021 and eight plans for the first half of 2020 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.

1 unchanged sentence

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