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Item 1. Financial Statements

2021-11-09 compared with 2021-08-10 · 150 added, 118 removed, 493 unchanged (35% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

October 1, October 2, October 1, October 2,

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

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Income from operations before income taxes 10,935 13,898 45,863 25,763

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

Income tax expense 677 3,507 7,623 5,593

Net income $ 10,258 $ 10,391 $ 38,240 $ 20,170

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

October 1, October 2, October 1, October 2,

(In thousands) 2021 2020 2021 2020

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

July 2, December 31,

October 1, December 31,

(In thousands, except share information) 2021 2020

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100,000,000 shares authorized;

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

11,726,707 and 11,624,717 shares issued and outstanding as of October 1, 2021 and December 31, 2020, respectively

Additional paid in capital 86,285 82,823

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended

July 2, July 3,

Nine Months Ended

October 1, October 2,

(In thousands) 2021 2020

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

Net income 10,391 10,391

Foreign currency translation adjustments 2,042 2,042

Unrealized gain on cash flow hedge 292 292

Employee stock awards and stock options 2 — — —

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

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

Stock-based compensation 1,284 1,284

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

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

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

Net income 10,258 10,258

Foreign currency translation adjustments ( 3,093 ) ( 3,093 )

Unrealized loss on cash flow hedge 177 177

Employee stock awards and stock options 3 — — —

Taxes withheld on stock compensation awards ( 45 ) ( 45 )

Stock-based compensation 1,680 1,680

Balance at October 1, 2021 11,727 $ 117 $ 86,285 $ 260,266 $ ( 4,867 ) $ 341,801

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

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Exelis was acquired by Harris Corporation in May 2015.

Equity Investments

In 2011, we entered into a joint venture agreement with Shaw Environmental & Infrastructure, Inc., which is now APTIM Federal Services LLC.

Pursuant to the joint venture agreement, High Desert Support Services, LLC (HDSS) was established to pursue and perform work on the Ft.

Irwin Installation Support Services Contract, which was awarded to HDSS in October 2012.

In 2018, we entered into a joint venture agreement with J&J Maintenance.

Pursuant to the joint venture agreement, J&J Facilities Support, LLC (J&J) was established to pursue and perform work on various U.S.

government contracts.

We account for our investments in HDSS and J&J under the equity method as we have the ability to exercise significant influence, but do not hold a controlling interest.

We record our proportionate 40 % and 50 % shares, respectively, of income or losses from HDSS and J&J in selling, general and administrative expenses in the Consolidated Statements of Income.

Income or losses from HDSS and J&J are insignificant.

Our joint venture investment in HDSS and J&J is recorded in other non-current assets in the Consolidated Balance Sheets.

When we receive cash distributions from our equity method investments, the cash distribution is compared to cumulative earnings and cumulative cash distributions.

Cash distributions received are recorded as a return on investment in operating cash flows within the Consolidated Statements of Cash Flows to the extent cumulative cash distributions are less than cumulative earnings.

Any cash distributions in excess of cumulative earnings are recorded as a return of investment in investing cash flows within the Consolidated Statements of Cash Flows.

During the nine months ended October 1, 2021, Vectrus made cash contributions of $ 2.5 million to our joint ventures.

As of October 1, 2021 and December 31, 2020 our joint venture investment balance was $ 4.2 million and $ 1.4 million, respectively.

Basis of Presentation

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.

Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (October 1, 2021 for the third quarter of 2021 and October 2, 2020 for the third 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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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.

Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the U.S.

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.

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

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.

The plan assets and liabilities as of October 1, 2021 and operating expenses for the three and nine months ended October 1, 2021 were not material.

RECENT ACCOUNTING STANDARDS UPDATE

Accounting Standards Issued but Not Yet Effective

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.

There were no accounting standards issued during the first nine months 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).

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.

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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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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 July 2, 2021 and December 31, 2020 are presented in the following table:

July 2, December 31,

Remaining performance obligations as of October 1, 2021 and December 31, 2020 are presented in the following table:

October 1, December 31,

(In millions) 2021 2020

Performance Obligations $ 1,560 $ 993

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.

We expect to recognize approximately 24 % of the remaining performance obligations as of October 1, 2021 as revenue in 2021 and the remaining 76 % 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 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.

Cumulative catch-up adjustments for the three and nine months ended October 1, 2021 increased operating income by $ 2.6 million and decreased operating income by $ 0.4 million, respectively.

For the three and nine months ended October 2, 2020, the adjustments increased operating income by less than $ 0.1 million and decreased operating income by $ 3.8 million, respectively.

For the three and nine months ended October 1, 2021, the cumulative catch-up adjustments to operating income increased revenue by $ 3.0 million and $ 1.4 million, respectively.

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

Revenue by Category

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The following tables present our revenue disaggregated by several categories.

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

Three Months Ended Six Months Ended

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

Revenue by contract type for the three and nine months ended October 1, 2021 and October 2, 2020 is as follows:

Three Months Ended Nine Months Ended

October 1, October 2, % October 1, October 2, %

(In thousands) 2021 2020 Change 2021 2020 Change

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¹ Includes time and material contracts

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

Three Months Ended Six Months Ended

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

Revenue by geographic region in which the contract is performed for the three and nine months ended October 1, 2021 and October 2, 2020 is as follows:

Three Months Ended Nine Months Ended

October 1, October 2, % October 1, October 2, %

(In thousands) 2021 2020 Change 2021 2020 Change

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Total revenue $ 459,408 $ 352,415 $ 1,364,257 $ 1,040,212

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, %

Revenue by contract relationship for the three and nine months ended October 1, 2021 and October 2, 2020 is as follows:

Three Months Ended Nine Months Ended

October 1, October 2, % October 1, October 2, %

(In thousands) 2021 2020 Change 2021 2020 Change

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Total revenue $ 459,408 $ 352,415 $ 1,364,257 $ 1,040,212

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, %

Revenue by customer for the three and nine months ended October 1, 2021 and October 2, 2020 is as follows:

Three Months Ended Nine Months Ended

October 1, October 2, % October 1, October 2, %

(In thousands) 2021 2020 Change 2021 2020 Change

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

As of July 2, 2021 and December 31, 2020, we had contract assets of $ 250.9 million and $ 203.1 million, respectively.

As of October 1, 2021 and December 31, 2020, we had contract assets of $ 249.3 million and $ 203.1 million, respectively.

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

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.

As of both October 1, 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 enhanced protection for defense and national security clients globally.

The total net consideration paid for the acquisition was approximately $ 117.6 million, consisting of the purchase price of $ 122.8 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.

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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 six months of 2021 was not impacted by any such adjustments.

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

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

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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 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.

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

For the three and nine months ended October 1, 2021, Zenetex recognized revenue of $ 57.4 million and $ 183.0 million, respectively.

For the three and nine months ended October 1, 2021, income from operations before income taxes was $ 2.5 million and $ 7.0 million, respectively.

For the three and nine months ended October 2, 2020, on a pro forma basis, the acquired business would have recognized revenue of $ 62.6 million and $ 177.5 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 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.

The Company recognized 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.

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

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

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

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

Receivables were comprised of the following:

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

(In thousands) October 1, 2021 December 31, 2020

Billed receivables $ 81,737 $ 102,045

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Total receivables $ 337,072 $ 314,959

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

As of October 1, 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 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.

We expect to bill customers for the majority of the October 1, 2021 contract assets during the next twelve months.

C hanges 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 six months ended July 2, 2021 are as follows:

The changes in the carrying amount of goodwill for the nine months ended October 1, 2021 are as follows:

(In thousands)

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

Balance at July 2, 2021 $ 317,608

Balance at October 1, 2021 $ 316,978

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:

July 2, 2021 December 31, 2020

October 1, 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 $ 85,748 $ ( 16,660 ) $ 69,088 $ 57,243 $ ( 9,138 ) $ 48,105

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.

Identifiable intangible asset amortization expense was $ 2.6 million and $ 7.5 million for the three and nine months ended October 1, 2021, respectively.

Intangible amortization for the three and nine months ended October 2, 2020 was $ 1.0 million and $ 3.0 million, respectively.

As of October 1, 2021, the remaining average intangible asset amortization period was 9.7 years.

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

Period Amortization

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

2021 (excluding the nine months ended October 1, 2021) $ 2,507

After 2025 $ 35,884

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Term Loan and Revolver .

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

In September 2014, we and our wholly-owned subsidiary, Vectrus Systems Corporation (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 July 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 October 1, 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 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.

The Amended Term Loan amortizes in an amount equal to $ 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 July 2, 2021 the balance outstanding under the Amended Term Loan was $ 60.0 million.

As of October 1, 2021, the balance outstanding under the Amended Term Loan was $ 58.0 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 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.

As of October 1, 2021, there were two letters of credit outstanding in the aggregate amount of $ 2.7 million, and $ 70.0 million outstanding borrowings under the Amended Revolver resulting in borrowing capacity of $ 197.3 million under the Amended Revolver.

The outstanding borrowings under the Amended Revolver have been reduced by $ 45.0 million in the first nine months of 2021 from an outstanding balance of $ 115.0 million as of December 31, 2020.

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 July 2, 2021, are as follows:

The aggregate scheduled maturities of the Amended Term Loan and Amended Revolver as of October 1, 2021, are as follows:

(In thousands) Payments due

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

2021 (excluding the nine months ended October 1, 2021) $ 2,600

Total $ 128,000

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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 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.

As of October 1, 2021, we had a ratio of total consolidated indebtedness to EBITDA of 1.33 to 1.00 and a ratio of consolidated EBITDA to consolidated interest expense of 15.55 to 1.00.

We were in compliance with all covenants related to the Amended Credit Facilities as of October 1, 2021.

Interest Rates and Fees.

ratio, or (ii) a base rate plus the applicable margin, which ranges from 0.75 % to 1.50 % depending on the leverage ratio.

The interest rate under the Amended Credit Facilities at July 2, 2021 was 2.36 %.

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

The interest rate under the Amended Credit Facilities at October 1, 2021 was 2.34 %.

Carrying Value and Fair Value.

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.

As of October 1, 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 $ 45.2 million at July 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 July 2, 2021:

The contracts, with expiration dates through November 2022 and notional amounts totaling $ 43.7 million at October 1, 2021, are recorded at fair value.

(In thousands) Fair Value

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We regularly assess the creditworthiness of the counterparty.

As of July 2, 2021, the counterparty to the interest rate swaps had performed in accordance with its contractual obligations.

As of October 1, 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 $ 0.5 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.

Net interest rate derivative losses of $ 0.8 million and $ 0.7 million were recognized in interest expense, net, in our Condensed Consolidated Statements of Income during the first nine months of 2021 and 2020, respectively.

We expect $ 0.9 million of existing interest rate swap losses reported in accumulated other comprehensive loss as of October 1, 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 July 2, 2021:

(In thousands) Fair Value

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

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

At October 1, 2021, we had outstanding foreign currency forward contracts, for the exchange of U.S.

dollars and Euros, with a notional amount of $ 3.4 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 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 were not required to, and did not, post collateral as of October 1, 2021.

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

We expect $ 0.2 million of existing foreign currency forward contract losses reported in accumulated other comprehensive loss as of October 1, 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 Six Months Ended

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

Three Months Ended Nine Months Ended

(In thousands) October 1, 2021 October 2, 2020 October 1, 2021 October 2, 2020

Operating lease expense $ 3,307 $ 1,349 $ 7,372 $ 5,621

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

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

(In thousands) October 1, 2021 December 31, 2020

Right-of-use assets $ 43,111 $ 18,718

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Total operating lease liabilities $ 45,588 $ 20,215

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:

Additional right-of-use assets of $ 31.4 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the first nine months of 2021.

The weighted average remaining lease term and discount rate for our operating leases at October 1, 2021 was 5.3 years and 3.7 %, respectively.

Maturities of lease liabilities at October 1, 2021 were as follows:

(In thousands) Payments due

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

2021 (excluding the nine months ended October 1, 2021) $ 3,300

After 2025 13,139

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Total operating lease liabilities $ 45,588

On September 30, 2021, the Company signed a forward-starting lease agreement in support of its contractual obligations under a task order issued under the Logistics Civil Augmentation Program (LOGCAP) V support services contract in support of the U.S.

The lease commencement date, which is anticipated in early 2022, is subject to the completion of certain documents and the receipt of related government regulatory and other third-party approvals.

The lease term consists of eight one-year extension options and one additional six month option period.

The annual rent obligations are $ 20 million per year, subject to a market adjustment beginning in the sixth year, and additional rent obligations for certain operating expenses.

COMMITMENTS AND CONTINGENCIES

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

We have estimated and accrued $ 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.

We have estimated and accrued $ 8.2 million and $ 11.7 million as of October 1, 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.

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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.

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

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

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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).

We filed appeals of the COFDs with the Armed Services Board of Contract Appeals (ASBCA), which have been consolidated.

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

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.

government’s joint requests to stay proceedings in the appeal, most recently through November 12, 2021, to enable ongoing discussions regarding the matter between the parties.

government subsequently offered a settlement to reduce the costs to an insignificant amount to address errors and costs related to contracts novated to our Former Parent, which we are currently reviewing.

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.

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

The Company has observed, 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.

The Company has observed, and continues to experience, some

disruptions on its operations due to government and supply chain 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, particularly with respect to newly issued vaccine mandates for government contractors and subcontractors, could result in a material impact to the Company’s future financial condition, results of operations and cash flows.

STOCK-BASED COMPENSATION

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

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

(In thousands) October 1, 2021 October 2, 2020 October 1, 2021 October 2, 2020

Compensation costs for equity-based awards $ 1,680 $ 1,284 $ 5,666 $ 4,286

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

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:

As of October 1, 2021, total unrecognized compensation costs related to equity-based awards and liability-based awards were $ 7.2 million and $ 2.7 million, respectively, which are expected to be recognized ratably over a weighted average period of 1.79 years and 1.71 years, respectively.

The following table provides a summary of the activities for NQOs and RSUs for the nine months ended October 1, 2021:

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

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Forfeited or expired — $ — ( 25 ) $ 50.73

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 .

Outstanding at October 1, 2021 69 $ 23.59 248 $ 51.05

During the nine months ended October 1, 2021, we granted long term incentive awards to employees consisting of 134,442 RSUs with a weighted average grant date fair value per share of $ 57.15 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.

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

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

During the nine months ended October 1, 2021, we granted TSR awards with an outstanding aggregate target TSR value of $ 2.4 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.

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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.

Income tax expense during interim periods is based on an estimated annual effective income tax rate, plus discrete items that may occur in any given 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 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.

For the three months ended October 1, 2021 and October 2, 2020, we recorded an income tax provision of $ 0.7 million and $ 3.5 million, representing effective income tax rates of 6.2 % and 25.2 %, respectively.

For the nine months ended October 1, 2021 and October 2, 2020, we recorded income tax provisions of $ 7.6 million and $ 5.6 million, representing effective income tax rates of 16.6 % and 21.7 %, respectively.

The reduction in our effective tax rate is due to the utilization of tax credits on previously filed tax returns.

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, available deductions not reflected in book income, and income tax credits.

Uncertain Tax Provisions

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.

As of October 1, 2021 and December 31, 2020, unrecognized tax benefits from uncertain tax positions were $ 9.1 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 its income tax return filings.

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

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

October 1, October 2, October 1, October 2,

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

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

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

October 1, October 2, October 1, October 2,

(In thousands) 2021 2020 2021 2020

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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 $ 0.3 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.

Expense recognized for these plans was $ 0.2 million and $ 0.8 million for the three and nine months ended October 1, 2021, respectively, and $ 1.0 million and $ 3.1 million for the three and nine months ended October 2, 2020, respectively.

Contributions were made to one plan for the first nine months of 2021 and eight plans for the first nine months 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