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Item 1. Financial Statements

2022-11-08 compared with 2022-08-09 · 297 added, 262 removed, 408 unchanged (58% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Six Months Ended

July 1, July 2, July 1, July 2,

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

(In thousands, except per share data) 2022 2021 2022 2021

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Interest expense, net ( 27,265 ) ( 1,955 ) ( 30,908 ) ( 6,140 )

Income from operations before income taxes 13,058 20,327 16,614 34,928

Income tax expense 2,586 4,393 3,287 6,946

Net income $ 10,472 $ 15,934 $ 13,327 $ 27,982

Earnings per share

(Loss) income from operations before income taxes ( 22,778 ) 10,935 ( 6,164 ) 45,863

Income tax (benefit) expense ( 5,739 ) 677 ( 2,453 ) 7,623

Net (loss) income $ ( 17,039 ) $ 10,258 $ ( 3,711 ) $ 38,240

(Loss) earnings per share

Basic $ ( 0.57 ) $ 0.87 $ ( 0.21 ) $ 3.27

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Six Months Ended

July 1, July 2, July 1, July 2,

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

(In thousands) 2022 2021 2022 2021

Net income $ 10,472 $ 15,934 $ 13,327 $ 27,982

Net (loss) income $ ( 17,039 ) $ 10,258 $ ( 3,711 ) $ 38,240

Other comprehensive income (loss), net of tax

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Other comprehensive income (loss) net of tax ( 2,136 ) ( 2,916 ) ( 5,421 ) ( 4,840 )

Total comprehensive income $ 7,429 $ 16,443 $ 10,042 $ 26,058

Total comprehensive (loss) income $ ( 19,175 ) $ 7,342 $ ( 9,132 ) $ 33,400

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

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

July 1, December 31,

September 30, December 31,

(In thousands, except per share information) 2022 2021

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100,000 shares authorized;

11,846 and 11,738 shares issued and outstanding as of July 1, 2022 and December 31, 2021, respectively

30,460 and 11,738 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

Additional paid in capital 735,357 88,116

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended

July 1, July 2,

Nine Months Ended

September 30, October 1,

(In thousands) 2022 2021

Operating activities

Net income $ 13,327 $ 27,982

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

Net (loss) income $ ( 3,711 ) $ 38,240

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

Depreciation expense 8,663 4,788

Amortization of intangible assets 28,597 7,521

(Gain) Loss on disposal of property, plant, and equipment ( 15 ) 60

Loss on disposal of property, plant, and equipment 59 65

Stock-based compensation 18,800 6,927

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Proceeds from the disposition of assets 20 16

Business acquisition purchase price adjustment — 262

Acquisition of business, net of cash acquired 194,431 262

Contribution to joint venture — ( 2,496 )

Net cash used in investing activities ( 5,587 ) ( 6,401 )

Net cash provided by (used in) investing activities 186,220 ( 9,868 )

Financing activities

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Income taxes paid $ 10,344 $ 9,068

Non-cash investing activities:

Purchase of capital assets on account $ 438 $ 480

Common stock issued for business acquisition $ 630,636 $ —

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

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Employee stock awards and stock options 75 1 113 114

Taxes withheld on restricted stock unit compensation awards ( 2,184 ) ( 2,184 )

Taxes withheld on stock compensation awards ( 2,184 ) ( 2,184 )

Stock-based compensation 1,983 1,983

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Employee stock awards and stock options 24 — — —

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

Taxes withheld on stock 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

Net income 10,258 10,258

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

Unrealized gain on cash flow hedge 177 177

Employee stock awards and stock options 3 — — —

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

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

Balance at December 31, 2021 11,738 $ 117 $ 88,116 $ 267,754 $ ( 5,900 ) $ 350,087

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Balance at April 1, 2022 11,805 $ 118 $ 89,590 $ 270,609 $ ( 6,142 ) $ 354,175

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

Shares Amount Retained Earnings

Net income 10,472 10,472

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Employee stock awards and stock options 41 — 369 369

Taxes withheld on restricted stock unit compensation awards ( 70 ) ( 70 )

Taxes withheld on stock compensation awards ( 70 ) ( 70 )

Stock-based compensation 1,575 1,575

Balance at July 1, 2022 11,846 $ 118 $ 91,464 $ 281,081 $ ( 9,185 ) $ 363,478

Net loss ( 17,039 ) ( 17,039 )

Foreign currency translation adjustments ( 2,136 ) ( 2,136 )

Unrealized loss on cash flow hedge —

Employee stock awards and stock options 22 —

Issuance of common stock in connection with a business combination 18,592 187 630,449 630,636

Taxes withheld on stock compensation awards ( 237 ) ( 237 )

Stock-based compensation 13,681 13,681

Balance at September 30, 2022 30,460 $ 305 $ 735,357 $ 264,042 $ ( 11,321 ) $ 988,383

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

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Description of Business and Basis of Presentation

V2X, Inc., formerly known as Vectrus, Inc., (V2X or the Company) is a leading provider of services to the United States Government (U.S.

government) worldwide.

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

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

V2X was incorporated in the State of Indiana in February 2014.

On September 27, 2014, Exelis Inc.

completed the spin-off (the Spin-off) of Vectrus, Inc.

and Vectrus, Inc.

became an independent, publicly traded company.

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

V2X, Inc., an Indiana Corporation, formerly known as Vectrus, Inc.

(Vectrus), is a leading provider of critical mission solutions and support to defense clients globally.

The Company operates as one segment and delivers a comprehensive suite of integrated solutions across the operations and logistics, aerospace, training and technology markets to national security, defense, civilian and international clients.

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

On September 27, 2014, Exelis Inc, an Indiana corporation, spun-off (the Spin-off) Vectrus and Vectrus became an independent, publicly traded company.

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

and its consolidated subsidiaries (other than Vectrus).

Exelis was acquired by a predecessor entity of L3Harris Technologies, Inc.

Unless the context otherwise requires or unless stated otherwise, references in these notes to "V2X", "we," "us," "our," "the Company" and "our Company" refer to V2X, Inc.

and all of its consolidated subsidiaries, taken together as a whole, and does not include Vertex Aerospace Services Holding Corp., a Delaware corporation (Vertex), and/or its consolidated subsidiaries as of July 1, 2022.

On July 5, 2022 (the Closing Date), the Company completed its previously announced business transaction with Vertex, Andor Merger Sub LLC, a Delaware limited liability company (Merger Sub LLC), and Andor Merger Sub Inc., a Delaware corporation (Merger Sub Inc.), thereby forming V2X, Inc.

(the Merger).

For a description of the Merger, see Note 15.

Su bsequent Event, in this Quarterly Report on Form 10-Q.

On March 7, 2022, Vectrus entered into an Agreement and Plan of Merger (the Merger Agreement) with Vertex Aerospace Services Holding Corp., a Delaware corporation (Vertex), Andor Merger Sub Inc., a Delaware corporation (Merger Sub Inc.) and Andor Merger Sub LLC, a Delaware limited liability company (Merger Sub LLC).

On July 5, 2022 (the Closing Date), Vectrus completed its merger (Merger) thereby forming V2X, Inc.

For a description of the Merger, see Note 3, Merger .

Unless the context otherwise requires or unless stated otherwise, references in these notes to "V2X", "we," "us," "our," “combined company”, "the Company" and "our Company" refer to V2X, Inc.

and all of its consolidated subsidiaries (including, subsequent to the Merger, Vertex and its consolidated subsidiaries), taken together as a whole.

Equity Investments

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

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

We record our proportionate share of income or losses from HDSS, J&J, and ServCore in selling, general and administrative (SG&A) expenses in the Condensed Consolidated Statements of Income.

Our investment in these joint ventures is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.

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

During the six months ended July 1, 2022, we made a cash contribution of $ 2.1 million to our joint ventures and received a $ 0.8 million cash distribution.

As of July 1, 2022 and December 31, 2021 our joint venture investment balance was $ 6.7 million and $ 5.4 million, respectively.

Our proportionate share of income from the HDSS, J&J, and ServCore joint ventures was immaterial for the first two quarters of both 2022 and 2021.

During the nine months ended September 30, 2022, we received a net cash distribution of $ 0.8 million from our joint ventures.

As of September 30, 2022 and December 31, 2021 our joint venture investment balance was $ 6.0 million and $ 5.4 million, respectively.

Our proportionate share of income from the HDSS, J&J, and ServCore joint ventures was $ 1.4 million for the first three quarters of both 2022 and 2021.

Basis of Presentation

Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (July 1, 2022 for the second quarter of 2022 and July 2, 2021 for the second quarter of 2021), 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 (September 30, 2022 for the third quarter of 2022 and October 1, 2021 for the third quarter of 2021), 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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Restricted Cash

The Company had restricted cash of $ 3.3 million related to collateral security for two outstanding letters of credit at July 1, 2022 and no restricted cash as of December 31, 2021.

Reconciliation of cash, cash equivalents and restricted cash as of July 1, 2022 is presented in the following table:

(In thousands) July 1, 2022

The Company had restricted cash of $ 3.3 million related to collateral security for two outstanding letters of credit at September 30, 2022 and no restricted cash as of December 31, 2021.

R econciliation of cash, cash equivalents and restricted cash as of September 30, 2022 is presented in the following table:

(In thousands) September 30, 2022

Cash and cash equivalents $ 144,061

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RECENT AC COUNTING STANDARDS UPDATE

Accounting Standards Issued but Not Yet Effective

Accounting Standards That Were Adopted

In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

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2021-08 is effective for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted.

The Company is currently evaluating the potential impact of ASU 2021-08 to its consolidated financial statements and expects to early adopt ASU 2021-08 during 2022 in conjunction with the Merger (See Note 15.

Subsequent Event, in this Quarterly Report on Form 10-Q).

Accounting Standards That Were Adopted

Early adoption is to be applied to all business combinations that occur during the fiscal year that the amendment is adopted.

We adopted this standard in the third quarter of 2022 and applied the guidance to our Merger .

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

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It did not have a material impact on the Company's financial statements.

On July 5, 2022, the Closing Date, Vectrus completed its previously announced Merger with Vertex, forming V2X, a global leader in aerospace and defense technologies, by acquiring all of the outstanding shares of Vertex.

On the Closing Date, Vertex and its consolidated subsidiaries became wholly-owned subsidiaries of the Company.

The combined V2X entity from the Merger is a larger and more diversified Company with the ability to compete for more integrated business opportunities and generate revenue across geographies, clients, and contract types in supporting the mission of our customers.

The operating results of Vertex subsequent to the Closing Date are included in the Company's consolidated results of operations.

Vertex and its consolidated subsidiaries recognized revenue of $ 451.6 million, operating income of $ 0.6 million and net loss of $ 12.6 million for the period from the Closing Date until September 30, 2022.

The Company recognized $ 28.2 million and $ 41.3 million of acquisition-related costs that were expensed as incurred during the three and nine months ended September 30, 2022, respectively.

These costs are included in SG&A expense in the Condensed Consolidated Statements of Income.

Purchase Price Allocation

The Merger is accounted for as a business combination.

As such, the assets acquired and liabilities assumed are accounted for at fair value, with the excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed recorded as goodwill.

The Closing Date fair value of the consideration transferred totaled $ 634.0 million, which was comprised of the following:

($ in thousands, except share and per share amounts) Purchase Price

Shares of V2X common stock issued 18,591,866

Market price per share of V2X as of Closing Date $ 33.92

Fair value of common shares issued $ 630,636

Fair value of cash consideration 3,315

Total consideration transferred $ 633,951

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the Merger as of the Closing Date.

The estimated fair value of Vertex’s assets acquired and liabilities assumed at the acquisition date are determined based on preliminary valuations and analyses.

As of September 30, 2022, we considered these amounts to be preliminary because we are still in the process of gathering and reviewing information to support the valuations of certain contractual and operational factors underlying the customer related intangible assets, details surrounding tax matters and assumptions underlying certain existing or potential reserves, such as those for legal matters.

The final determination could result in material adjustments.

(In thousands) Preliminary Fair Value

Cash and cash equivalents $ 197,747

Receivables 336,169

Prepaid expenses 49,531

Property, plant, and equipment, net 53,618

Intangibles assets, net 522,000

Other assets 18,670

Accounts payable ( 122,269 )

Net debt ( 1,352,304 )

Accrued payroll ( 49,282 )

Other liabilities ( 235,905 )

Total identifiable net assets ( 582,025 )

Goodwill 1,215,976

Total purchase consideration $ 633,951

As a result of the Merger, the Company recognized $ 1,216.0 million of goodwill.

The goodwill recognized is attributable to operational and general and administrative cost synergies, expanded market opportunities and other benefits that do not qualify for separate recognition.

None of the goodwill is expected to be deductible for tax purposes.

In addition, $ 522.0 million was recognized for customer related amortizable intangible assets with a weighted average life of 7.4 years.

As part of the Merger, V2X acquired certain contracts, including a Transition Services Agreement (TSA) with Crestview Aerospace LLC (Crestview), which was previously divested to American Industrial Partners Capital Fund VI, L.P.

As of September 30, 2022, the Company recorded $ 0.9 million of income related to the TSA with Crestview, which was recorded as a reduction in cost of sales.

AIP currently holds approximately 62 % of V2X common stock.

The following unaudited pro forma information shows the combined results of our operations for the three and nine months ended September 30, 2022 and 2021 as if the Merger had occurred on January 1, 2021.

The unaudited pro forma information reflects the effects of applying our accounting policies and certain pro forma adjustments to the combined historical financial information of Vertex.

The pro forma adjustments include:

a) incremental amortization expense associated with identified intangible assets;

b) incremental interest expense resulting from fair value adjustments applied to the Vertex debt that we assumed;

and c) a reduction of revenues and operating expenses associated with fair value adjustments made to acquire assets and assumed liabilities, such as contract cost assets and contract liabilities.

This unaudited pro forma information is presented for informational purposes only and may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations.

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

In thousands 2022 2021 2022 2021

Pro forma Revenue $ 961,281 $ 876,267 $ 2,691,399 $ 2,555,502

Pro forma Net Income (Loss) $ 9,576 $ 19,476 $ 5,583 $ ( 4,645 )

Performance Obligations

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For most U.S.

government contracts, this continuous

transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process.

government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process.

This continuous transfer of control requires that we track progress towards completion of performance obligations in order to measure and recognize revenue.

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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 1, 2022 and December 31, 2021 are presented in the following table:

July 1, December 31,

Remaining performance obligations as of September 30, 2022 and December 31, 2021 are presented in the following table:

September 30, December 31,

(In millions) 2022 2021

Performance Obligations $ 3,362 $ 1,398

As of July 1, 2022, we expect to recognize approximately 57 % of the remaining performance obligations as revenue in 2022 and the remaining 43 % d uring 2023.

As of September 30, 2022, we expect to recognize approximately 26 % of the remaining performance obligations as revenue in 2022 and the remaining 74 % d uring 2023.

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 1, 2022 increased operating income by $ 6.8 million and $ 7.4 million , respectively.

For the three and six months ended July 2, 2021, the adjustments decreased operating income by $ 1.7 million and $ 3.0 million, respectively.

For the three and six months ended July 1, 2022 the cumulative catch-up adjustments to operating income increased revenue by $ 6.8 million and $ 7.4 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.

Cumulative catch-up adjustments are driven by changes in contract terms, program performance, customer scope changes, and changes to estimates in the reported period.

These changes can increase or decrease operating income depending on the dynamics of each contract.

Cumulative catch-up adjustments for the three and nine months ended September 30, 2022 decreased operating income by $ 1.5 million and increased operating income $ 5.9 million , respectively.

For the three and nine months ended October 1, 2021, the adjustments increased operating income by $ 2.6 million and decreased operating income by $ 0.4 million , respectively.

For the three and nine months ended September 30, 2022, the cumulative catch-up adjustments to operating income decreased revenue by $ 1.7 million and increased revenue by $ 6.1 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.

Revenue by Category

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For this contract type, we bear the risk when our labor costs and allocable indirect expenses exceed the fixed hourly rate specified within the contract.

The following tables present our revenue disaggregated by several categories.

Revenue by contract type for the three and six months ended July 1, 2022 and July 2, 2021 is as follows:

Three Months Ended Six Months Ended

July 1, July 2, % July 1, July 2, %

Revenue by contract type for the three and nine months ended September 30, 2022 and October 1, 2021 is as follows:

Three Months Ended Nine Months Ended

September 30, October 1, % September 30, October 1, %

(In thousands) 2022 2021 Change 2022 2021 Change

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Total revenue $ 958,156 $ 459,408 $ 1,912,693 $ 1,364,257

Revenue by geographic region in which the contract is performed for the three and six months ended July 1, 2022 and July 2, 2021 is as follows:

Three Months Ended Six Months Ended

July 1, July 2, % July 1, July 2, %

Revenue by geographic region in which the contract is performed for the three and nine months ended September 30, 2022 and October 1, 2021 is as follows:

Three Months Ended Nine Months Ended

September 30, October 1, % September 30, October 1, %

(In thousands) 2022 2021 Change 2022 2021 Change

Middle East $ 250,222 $ 258,488 ( 3.2 ) % $ 485,313 $ 498,500 ( 2.6 ) %

United States $ 582,817 $ 139,357 318.2 % $ 908,271 $ 435,717 108.5 %

Middle East 261,997 263,257 ( 0.5 ) % 747,310 761,758 ( 1.9 ) %

Europe 62,669 34,902 79.6 % 143,847 111,604 28.9 %

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Total revenue $ 958,156 $ 459,408 $ 1,912,693 $ 1,364,257

Revenue by contract relationship for the three and six months ended July 1, 2022 and July 2, 2021 is as follows:

Three Months Ended Six Months Ended

July 1, July 2, % July 1, July 2, %

Revenue by contract relationship for the three and nine months ended September 30, 2022 and October 1, 2021 is as follows:

Three Months Ended Nine Months Ended

September 30, October 1, % September 30, October 1, %

(In thousands) 2022 2021 Change 2022 2021 Change

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Total revenue $ 958,156 $ 459,408 $ 1,912,693 $ 1,364,257

Revenue by customer for the three and six months ended July 1, 2022 and July 2, 2021 is as follows:

Three Months Ended Six Months Ended

July 1, July 2, % July 1, July 2, %

Revenue by customer for the three and nine months ended September 30, 2022 and October 1, 2021 is as follows:

Three Months Ended Nine Months Ended

September 30, October 1, % September 30, October 1, %

(In thousands) 2022 2021 Change 2022 2021 Change

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Contract Balances

The timing of revenue recognition, billings, and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets.

The timing of revenue recognition, billings, and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities).

Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly).

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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 1, 2022 and December 31, 2021, we had contract assets of $ 277.6 million and $ 240.0 million, respectively.

As of September 30, 2022 and December 31, 2021, we had contract assets of $ 490.1 million and $ 240.0 million, respectively.

Contract assets primarily consist of unbilled receivables, which represent rights to consideration for work completed but not billed as of the reporting date.

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(ii) billable on contract completion;

or (iii) billable upon other specified events, such as the resolution of a request for equitable adjustment.

Refer to Note 4.

"Receivables" for additional information regarding the composition of our receivable balances.

As of both July 1, 2022 and December 31, 2021, our contract liabilities were insignificant.

or (iii) billable upon other specified events, such as the resolution of a request for equitable adjustment (REA).

For additional information regarding the composition of our receivables, see Note 5, Receivables.

As of both September 30, 2022 and December 31, 2021, our contract liabilities were $ 80.7 million and $ 5.5 million, respectively.

Receivables were comprised of the following:

(In thousands) July 1, 2022 December 31, 2021

(In thousands) September 30, 2022 December 31, 2021

Billed receivables $ 190,358 $ 104,074

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Total receivables $ 690,943 $ 348,605

As of July 1, 2022 and December 31, 2021, substantially all billed receivables are due from the U.S.

As of September 30, 2022 and December 31, 2021, substantially all billed receivables are due from the U.S.

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

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

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

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

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

We expect to bill customers for the majority of the July 1, 2022 contract assets during 2022.

We expect to bill customers for the majority of the September 30, 2022 contract assets during 2022.

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

GOODWILL AND INTANGIBLE ASSETS

As of July 1, 2022 and December 31, 2021 the carrying amount of goodwill was $ 321.7 million.

As of September 30, 2022 and December 31, 2021 the carrying amount of goodwill was $ 1,537.7 million and $ 321.7 million respectively.

The $ 1,216.0 million increase for the nine months ended September 30, 2022 relates to the Merger.

For a description of the Merger, see Note 3, Merger .

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 1, 2022 December 31, 2021

September 30, 2022 December 31, 2021

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

Contract backlogs and recompetes $ 77,300 $ ( 18,568 ) $ 58,732 $ 77,300 $ ( 14,988 ) $ 62,312

Contract backlogs $ 441,300 $ ( 39,621 ) $ 401,679 $ 77,300 $ ( 14,988 ) $ 62,312

Customer contracts 165,200 ( 7,353 ) 157,847 7,200 ( 3,572 ) 3,628

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Balance $ 607,749 $ ( 47,764 ) $ 559,985 $ 85,749 $ ( 19,167 ) $ 66,582

Identifiable intangible asset amortization expense was $ 2.1 million and $ 4.4 million for the three and six months ended July 1, 2022, respectively.

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

As of July 1, 2022, the remaining average intangible asset amortization period was 9.0 years .

Identifiable intangible asset amortization expense was $ 24.2 million and $ 28.6 million for the three and nine months ended September 30, 2022, respectively.

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

As of September 30, 2022, the remaining average intangible asset amortization period was 7.43 years .

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

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2022 (remainder of the year) $ 25,165

2023 $ 100,661

2024 $ 99,554

2025 $ 98,757

2026 $ 98,286

After 2026 $ 137,562

Senior Secured Credit Facilities

Term Loan and Revolver .

In September 2014, we and our wholly-owned subsidiary, Vectrus Systems Corporation (VSC), entered into a credit agreement.

The credit agreement was subsequently amended on December 24, 2020 and January 24, 2022 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 1, 2022.

The Amended 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 Amended 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 $ 2.6 million for the fiscal quarters ending September 30, 2022 through September 30, 2023, with the balance of $ 37.2 million due on November 15, 2023.

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 1, 2022, the balance outstanding under the Amended Term Loan was $ 50.2 million .

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

There were $ 40.0 million of outstanding borrowings under the Amended Revolver at July 1, 2022.

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

As of July 1, 2022, there were two letters of credit outstanding in the aggregate amount of $ 3.2 million, which reduced our borrowing availability under the Amended Revolver to $ 226.8 million.

At December 31, 2021, there were $ 50.0 million of outstanding borrowings under the Amended Revolver.

The Amended R evolver will mature and the commitments thereunder will terminate on November 15, 2023 .

The aggregate scheduled maturities of the Amended Term Loan and Amended Revolver as of July 1, 2022, are as follows:

In September 2014, Vectrus and its wholly-owned subsidiary, Vectrus Systems Corporation (VSC), entered into a senior secured credit agreement.

The credit agreement was subsequently amended on December 24, 2020 and January 24, 2022 and is collectively referred to as the Prior Credit Agreement.

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

On the Closing Date, the outstanding debt from the Amended Term Loan and the Amended Revolver, $ 50.2 million and $ 40.0 million, respectively, was repaid and related guarantees and liens were discharged and released.

Repayment was made using proceeds from the Vertex First Lien Credit Agreement described below.

As of December 31, 2021, the balance outstanding under the Amended Term Loan and the Amended Revolver, was $ 55.4 million and $ 50.0 million, respectively

On the Closing Date, certain of our subsidiaries, including VSC (and together with VSC, the Company Guarantor Subsidiaries), that became direct or indirect subsidiaries of Vertex Aerospace Service Corp., a Delaware corporation and wholly-owned indirect subsidiary of Vertex (Vertex Borrower), have provided guarantees of the indebtedness under each of:

(i) the First Lien Credit Agreement, dated as of December 6, 2021 (as amended by the Amendment No.

1 to First Lien Credit Agreement, dated as of the Closing Date, and as further amended, restated, amended and restated, supplemented and otherwise modified from time to time, the Vertex First Lien Credit Agreement), by and among

Vertex Borrower, as borrower, Vertex Aerospace Intermediate LLC, a Delaware limited liability company, direct parent entity of Vertex Borrower and wholly-owned indirect subsidiary of Vertex (Vertex Holdings), the lenders from time to time party thereto and Royal Bank of Canada, as administrative agent;

(ii) the Second Lien Credit Agreement, dated as of December 6, 2021 (as amended, restated, amended and restated, supplemented and otherwise modified from time to time, the Vertex Second Lien Credit Agreement), Vertex Borrower, as borrower, Vertex Holdings, the lenders from time to time party thereto and Royal Bank of Canada, as administrative agent;

(iii) the ABL Credit Agreement, dated as of June 29, 2018 (as amended by the First Amendment to ABL Credit Agreement, dated as of May 17, 2019, as further amended by the Second Amendment to ABL Credit Agreement, dated as of May 17, 2021, and as further amended by the Third Amendment to ABL Credit Agreement, dated as of December 6, 2021, as further amended by the Fourth Amendment to ABL Credit Agreement, dated as of the Closing Date, and as further amended, restated, amended and restated, supplemented and otherwise modified from time to time, the Vertex ABL Credit Agreement), by and among Vertex Borrower, Vertex Holdings, certain other subsidiaries of Vertex Borrower from time to time party thereto as co-borrowers, the lenders from time to time party thereto and Ally Bank, as administrative agent (in such capacity, the ABL Agent).

Vertex First Lien Credit Agreement.

The Vertex First Lien Credit Agreement provides for senior secured first lien term loans in an aggregate principal amount of $ 1,185.0 million, consisting of a $ 925.0 million term loan “B” tranche, (the First Lien Initial Term Tranche) and a $ 260.0 million incremental term loan “B” tranche (the First Lien Incremental Term Tranche and, together with the First Lien Initial Term Tranche, collectively, the First Lien Term Facility).

As provided in the Merger Agreement, the proceeds of the First Incremental Term Tranche were used by the Vertex Borrower to redeem all of the shares of previously issued preferred stock on the Closing Date (but prior to the Merger).

The remaining First Lien Incremental Term Tranche proceeds were used to repay in full all outstanding indebtedness under the Prior Credit Agreement, and other transaction costs.

Approximately $ 54.0 million of cash remained after funding the preferred stock redemption, repayment of the Prior Credit Agreement and other transaction costs.

The loans under the First Lien Term Facility will be payable in full on December 6, 2028.

The First Lien Term Facility amortizes in an amount equal to approximately $ 3.0 million per quarter for the fiscal quarters ending September 30, 2022, through September 30, 2028, with the balance of $ 1,108.6 million due on December 6, 2028.

The Vertex Borrower’s obligations under the First Lien Term Facility, which were assumed in the Merger, are guaranteed by Vertex Holdings and Vertex Borrower’s wholly-owned domestic subsidiaries (including the Company Guarantor Subsidiaries, collectively, the First Lien Guarantors), subject to customary exceptions and limitations.

The Vertex Borrower’s obligations under the First Lien Term Facility and the First Lien Guarantors’ obligations under the related guarantees are secured by (i) a first priority-lien on substantially all of the Vertex Borrower’s and the First Lien Guarantors’ assets other than the ABL Priority Collateral, as defined below (subject to customary exceptions and limitations), and (ii) a second-priority lien on substantially all of the Vertex Borrower’s and the First Lien Guarantors’ accounts receivable, inventory and certain other assets arising therefrom or related thereto (collectively, the ABL Priority Collateral) (subject to customary exceptions and limitations).

The borrowings under the First Lien Initial Term Tranche bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the federal funds rate, plus a margin of 2.50 % to 3.75 % per annum, or a Eurodollar rate, determined by reference to LIBOR, plus a margin of 3.50 % to 3.75 % per annum, in each case, depending on the consolidated first lien net leverage ratio of the Vertex Borrower and its subsidiaries.

As of September 30, 2022, the effective interest rate for the First Lien Initial Term Tranche was 7.63 %.

The borrowings under the First Lien Incremental Term Tranche bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the federal funds rate, plus a margin of 3.00 % per annum, or a term benchmark rate, determined by reference to Term SOFR, plus a margin of 4.00 % per annum.

As of September 30, 2022, the effective interest rate for the First Lien Incremental Term Tranche was 7.90 %

The Vertex First Lien Credit Agreement contains customary representations and warranties and affirmative covenants.

The Vertex First Lien Credit Agreement also includes negative covenants that limit, among other things, additional indebtedness, additional liens, sales of assets, dividends, investments and advances, prepayments of debt and mergers and acquisitions.

The Vertex First Lien Credit Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the First Lien Term Facility to be in full force and effect, and a change of control.

an event of default occurs and is continuing, the Vertex Borrower may be required immediately to repay all amounts outstanding under the Vertex First Lien Credit Agreement.

As of September 30, 2022, the carrying value of the First Lien Credit Agreement was $ 1,122.8 million, net of deferred discount and unamortized deferred financing costs of $ 56.9 million.

The estimated fair value of the First Lien Credit Agreement as of September 30, 2022 was $ 1,138.4 million .

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.

Vertex Second Lien Credit Agreement.

The Vertex Second Lien Credit Agreement provides for senior secured second lien term loans in an aggregate principal amount of $ 185.0 million (the Second Lien Term Facility).

The entire amount of the proceeds from the Second Lien Term Facility were previously used to finance the Sky Acquisition in December 2021.

The loans under the Second Lien Term Facility will be payable in full on December 6, 2029.

The Vertex Borrower’s obligations under the Second Lien Term Facility are guaranteed by Vertex Holdings and the Vertex Borrower’s wholly-owned domestic subsidiaries (including the Company Guarantor Subsidiaries, collectively, the Second Lien Guarantors), subject to customary exceptions and limitations.

The Vertex Borrower’s obligations under the Second Lien Term Facility and the Second Lien Guarantors’ obligations under the related guarantees are secured by (i) a second priority-lien on substantially all of the Vertex Borrower’s and Second Lien Guarantors’ assets other than the ABL Priority Collateral (subject to customary exceptions and limitations), and (b) a third-priority lien on substantially all of the Vertex Borrower’s and Second Lien Guarantors’ assets ABL Priority Collateral (subject to customary exceptions and limitations).

The borrowings under the Second Lien Term Facility bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the federal funds rate, plus a margin of 6.50 % per annum, or a Eurodollar rate, determined by reference to LIBOR, plus a margin of 7.50 % per annum.

As of September 30, 2022, the effective interest rate for Second Lien Term Facility was 11.28 %.

The Vertex Second Lien Credit Agreement contains customary representations and warranties and affirmative covenants.

The Vertex Second Lien Credit Agreement also includes negative covenants that limit, among other things, additional indebtedness, additional liens, sales of assets, dividends, investments and advances, prepayments of debt and mergers and acquisitions.

The Vertex Second Lien Credit Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the First Lien Term Facility to be in full force and effect, and a change of control.

If an event of default occurs and is continuing, the Vertex Borrower may be required immediately to repay all amounts outstanding under the Vertex Second Lien Credit Agreement.

As of September 30, 2022, the carrying value of the Second Lien Credit Agreement was $ 176.0 million, net of a deferred discount of $ 9.0 million.

The estimated fair value of the Second Lien Credit Agreement as of September 30, 2022 was $ 173.0 million.

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.

Vertex ABL Credit Agreement

The Vertex ABL Credit Agreement provides for a senior secured revolving loan facility (the ABL Facility) of up to an aggregate amount of $ 200.0 million (the loans thereunder, the ABL Loans).

The Vertex ABL Credit Agreement also provides for (i) a $ 30.0 million sublimit of availability for letters of credit, and (ii) a $ 10.0 million sublimit for short-term borrowings on a swingline basis.

The commitments under the ABL Facility expire on June 29, 2026, and any ABL Loans then outstanding will be payable in full at that time.

Availability under the ABL Facility is subject to a borrowing base (the Borrowing Base), which is based on 85 % of eligible accounts receivable, eligible government account receivable and eligible government subcontract accounts receivable, plus 50 % of eligible unbilled accounts receivable, plus the lesser of (x) 65 % of the book value of eligible inventory, and (y) 85 % of the net orderly liquidation value of eligible inventory of the Vertex Borrower, Vertex Holdings and most of the Vertex Borrower’s wholly-owned domestic subsidiaries (including the Company Guarantor Subsidiaries, collectively, the ABL Guarantors), after adjusting for customary reserves that are subject to the ABL Agent’s discretion.

The aggregate amount of the ABL Loans made and letters of credit issued under the ABL Facility shall at no time exceed the lesser of the aggregate commitments under the ABL Facility (currently $ 200.0 million) or the Borrowing Base.

To the extent that the Vertex Borrower’s and ABL Guarantors’ eligible accounts receivable, eligible government account receivable, eligible government subcontract accounts receivable, eligible unbilled accounts receivable, and eligible inventory, decline, the Borrowing Base will decrease, and the availability under the ABL Facility may decrease below $ 200.0 million.

Any ABL Loans requested are subject to a number of customary conditions, including accuracy of representations and warranties and no default.

The proceeds from the ABL Loans may be used to finance the working capital needs and general corporate purposes of the Vertex Borrower and its subsidiaries.

The Vertex Borrower’s obligations under the ABL Term Facility are guaranteed by the ABL Guarantors, subject to customary exceptions and limitations.

The Vertex Borrower’s obligations under the ABL Facility and the ABL Subsidiary Guarantors’ obligations under the related guarantees are secured by (a) a first priority-lien on substantially all of the Vertex Borrower’s and the ABL Guarantors’ ABL Priority Collateral (subject to customary exceptions and limitations), and (b) a third priority-lien on substantially all of the Vertex Borrower’s and the ABL Guarantors’ assets other than the ABL Priority Collateral (subject to customary exceptions and limitations).

The borrowings under the ABL Facility bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the federal funds rate, plus a margin of 0.75 % to 1.25 % per annum, or a term benchmark rate, determined by reference to Term SOFR, plus a margin of 1.75 % to 2.25 % per annum, in each case, depending on the aggregate availability under the ABL Facility.

Unutilized commitments under the ABL Facility are subject to a per annum fee of (x) 0.375 % if the total outstandings were equal to or less than 50 % of the aggregate commitments, or (y) 0.25 % if such total outstandings were more than 50 % of the aggregate commitments.

The Vertex Borrower is also required to pay a letter of credit fronting fee to each letter of credit issuer equal to 0.125 % per annum of the amount available to be drawn under each such letter of credit (or such other amount as may be mutually agreed by the Vertex Borrowers and the applicable letter of credit issuer), as well as a fee to all lenders equal to the applicable margin for Term SOFR ABL Loans times the average daily amount available to be drawn under all outstanding letters of credit.

The Vertex ABL Credit Agreement contains customary representations and warranties, that must be accurate in order for the Vertex Borrower to borrow under the ABL Facility, and affirmative covenants.

The Vertex ABL Credit Agreement also includes negative covenants that limit, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions.

The Vertex ABL Credit Agreement also includes a financial covenant that requires the fixed charge coverage ratio to be at least 1.00 to 1.00 as of the end of any period of four fiscal quarters while aggregate availability is less than the greater of (i) $ 10.0 million and (ii) 10 % of the aggregate borrowing base.

The Vertex ABL Credit Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the ABL Facility to be in full force and effect, and a change of control.

If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the Vertex ABL Credit Agreement.

As of September 30, 2022, there was no outstanding balance under the ABL Credit Facility and $ 14.0 million outstanding for letters of credit.

Unamortized deferred financing fees related to the ABL Credit Agreement of $ 1.7 million are included in Other Non-Current Assets in the Condensed Consolidated Balance Sheets.

As of September 30, 2022, the fair value of the ABL Credit Agreement approximated the carrying value because the debt bears a floating interest rate.

The aggregate scheduled maturities of the First Lien Credit Agreement, Second Lien Credit Agreement and ABL Credit Agreement as of September 30, 2022, are as follows:

(In thousands) Payments Due

2022 (remainder of the year) $ 2,962

After 2026 1,314,363

Total $ 1,364,725

Guarantees and Collateral.

The indebtedness and other obligations under the Amended Agreement are unconditionally guaranteed jointly and severally on a senior secured basis by us and certain of our restricted subsidiaries and are secured, subject to permitted liens and other exceptions, by a first-priority lien on substantially all of our tangible assets and those of each domestic guarantor.

Voluntary Prepayments.

We may voluntarily prepay the Amended Term Loan in whole or in part at any time without premium or penalty, subject to the payment of customary breakage costs under certain conditions.

Voluntary prepayments of the Amended Term Loan will be applied to the remaining installments thereof as directed by us.

We may reduce commitments under the Amended Revolver in whole or in part at any time without premium or penalty.

The Amended Agreement contains customary covenants, including covenants that, under certain circumstances and subject to certain qualifications and exceptions:

limit or restrict our ability to incur additional indebtedness;

merge, dissolve, liquidate or consolidate;

make acquisitions, investments, advances or loans;

dispose of or transfer assets;

pay dividends;

redeem or repurchase certain debt;

and enter into certain restrictive agreements.

In addition, we are required to comply with (a) a maximum ratio of total consolidated indebtedness to consolidated earnings before interest, tax, depreciation and amortization (EBITDA) of 3.00 to 1.00 ( 3.50 to 1.00 for the 12 months following a qualified acquisition), and (b) a minimum ratio of consolidated EBITDA to consolidated interest expense (net of cash interest income) of 4.50 to 1.00.

As of July 1, 2022, we had a ratio of total consolidated indebtedness to EBITDA of 1.09 to 1.00 and a ratio of consolidated EBITDA to consolidated interest expense of 12.41 to 1.00.

We were in compliance with all covenants related to the Amended Agreement as of July 1, 2022.

Interest Rates and Fees.

Outstanding borrowings under the Amended Agreement accrue interest, at our option, at a per annum rate of (i) SOFR p lus the applicable margin, which ranges from 1.85 % to 2.60 % 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 Agreement at July 1, 2022 was 3.63 % .

We pay a commitment fee on the undrawn portion of the Amended Revolver ranging from 0.30 % to 0.45 %, depending on the leverage ratio.

Carrying Value and Fair Value.

As of July 1, 2022 and December 31, 2021, the fair value of the Amended Agreement 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.

As of September 30, 2022, we were in compliance with all covenants related to the First Lien Term Facility, the Second Lien Term Facility and the ABL Facility.

DERIVATIVE INSTRUMENTS

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Interest Rate Derivative Instruments

On June 29, 2022, in conjunction with our planned extinguishment of the related hedged debt interest expense, we terminated our remaining interest rate swaps that were designated and qualified as effective cash flow hedges (See Note 15.

Subsequent Event in this Quarterly Report on Form 10-Q).

Interest rate swap losses in accumulated other comprehensive loss upon termination were immaterial.

The following table summarizes the amount at fair value and balance sheet caption of the derivative instruments used for our interest rate hedges in the Condensed Consolidated Balance Sheets as of December 31, 2021:

(In thousands) Fair Value

Balance sheet caption Amount

(In thousands) Balance sheet caption Amount

Interest rate swap designated as cash flow hedge Other accrued liabilities $ 666

Net interest rate derivative losses of $ 0.4 million and $ 0.5 million were recognized in interest expense, net, in our Condensed Consolidated Statements of Income during the first six months of 2022 and 2021, respectively.

Net interest rate derivative losses of $ 0.4 million and $ 0.8 million were recognized in interest expense, net, in our Condensed Consolidated Statements of Income during the first nine months of 2022 and 2021, respectively.

Foreign Currency Derivative Instruments

The Company had no outstanding foreign currency forward contracts at July 1, 2022 and had outstanding forward contracts with a current liability value of less than $ 0.1 million at December 31, 2021.

Net foreign currency derivative gains and losses recognized in SG&A expenses during the first six months of 2022 and 2021 were immaterial.

The Company had no outstanding foreign currency forward contracts at September 30, 2022 and had outstanding forward contracts with a current liability value of less than $ 0.1 million at December 31, 2021.

Net foreign currency derivative gains and losses recognized in SG&A expenses during the first nine months of 2022 and 2021 were immaterial.

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 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Three Months Ended Nine Months Ended

(In thousands) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Operating lease expense $ 4,390 $ 3,307 $ 11,671 $ 7,372

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

(In thousands) July 1, 2022 December 31, 2021

(In thousands) September 30, 2022 December 31, 2021

Right-of-use assets $ 51,968 $ 43,651

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Total operating lease liabilities $ 55,536 $ 46,519

Additional right-of-use assets of $ 2.6 million we re recognized as non-cash asset additions that resulted from new operating lease liabilities during the first six months of 2022 .

The weighted average remaining lease term and discount rate for our operating leases at July 1, 2022 was 5.1 years and 3.8 %, respectively.

Maturities of lease liabilities at July 1, 2022 were as follows:

During the first nine months of 2022, we recognized additional right-of-use assets of $ 3.6 million from newly executed operating leases and $ 15.2 million from the Merger.

The weighted average remaining lease term and discount rate for our operating leases at September 30, 2022 was 5.2 years and 4.1 %, respectively.

Maturities of lease liabilities at September 30, 2022 were as follows:

(In thousands) Payments Due

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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 $ 9.8 million and $ 9.6 million as of July 1, 2022 and December 31, 2021, 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 $ 39.6 million and $ 9.6 million as of September 30, 2022 and December 31, 2021, 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 standards for our business systems, including our accounting, earned value management, estimating, materials management and accounting, purchasing, and property management systems.

In the performance of our contracts, we routinely request contract modifications that require additional funding from U.S.

government customers.

Most often, these requests are due to customer-directed changes in the scope of work.

While we are entitled to recovery of these costs under our contracts, the administrative process with our U.S.

government customer may be protracted.

Based on the circumstances, we periodically file REAs that are sometimes converted into claims.

In some cases, these requests are disputed by our U.S.

government customer.

We believe our outstanding modifications, REAs and other claims will be resolved without material adverse impact to our results of operations, financial condition or cash flows.

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

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On March 11, 2020, the World Health Organization designated the outbreak of COVID-19 as a global pandemic.

Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, social distancing guidelines, and restrictions on employees going to work.

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

The Company has observed, and continues to experience, some disruptions to 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.

For the three and six months ended July 1, 2022, the impact of COVID-19 was immaterial to our financial results.

COVID-19 has negatively impacted public health and the global economy, disrupted global supply chains, and created volatility in financial markets.

Furthermore, in September 2021, the Biden Administration issued an executive order mandating a COVID-19 vaccination requirement for federal contractors, except in certain limited circumstances.

Since then, multiple courts have enjoined the executive order’s implementation, although the court decisions are not uniform in their application or the states to which the injunction applies.

The federal government has indicated that it will not, for the time being, enforce the vaccination mandate.

The extent of the ultimate impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our programs in the expected timeframe, will depend on future developments, including any potential subsequent waves or variants of COVID-19, the effectiveness, distribution and acceptance of COVID-19 vaccines, the ultimate impact on financial markets and the global economy, new government regulations for defense contractors (including vaccination mandates) and other related actions taken by the U.S.

government, state and local government officials, and international governments to prevent disease spread, all of which remain uncertain and cannot be predicted.

For the three and nine months ended September 30, 2022, the impact of COVID-19 was immaterial to our financial results.

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 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021

Three Months Ended Nine Months Ended

(In thousands) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

Compensation costs for equity-based awards $ 13,681 $ 1,680 $ 18,357 $ 5,666

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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 1, 2022, total unrecognized compensation costs related to equity-based awards and liability-based awards were $ 8.3 million and $ 2.8 million, respectively, which are expected to be recognized ratably over a weighted average period of 2.00 years and 2.17 years, respe ctively.

The following table provides a summary of the activities for NQOs and RSUs for the six months ended July 1, 2022:

As of September 30, 2022, total unrecognized compensation costs related to equity-based awards and liability-based awards were $ 39.9 million and $ 2.4 million, respectively, which are expected to be recognized ratably over a weighted average period of 1.44 years and 1.98 years, respe ctively.

The following table provides a summary of the activities for NQOs and RSUs for the nine months ended September 30, 2022 :

(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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Granted — $ — 236 $ 35.83

Replacement awards — $ — 1,346 $ 33.92

Exercised ( 16 ) $ 24.43 — $ —

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Forfeited or expired — $ — ( 27 ) $ 38.84

Outstanding at July 1, 2022 43 $ 22.76 331 $ 42.19

During the six months ended July 1, 2022, we granted long-term incentive awards to employees consisting of 208,397 RSUs with a weighted average grant date fair value per share of $ 36.09 and to our directors consisting of 22,309 RSUs with a weighted average grant date fair value per share of $ 34.07 .

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

Director RSUs were granted on May 13, 2022 with 3,229 scheduled to vest on the Closing Date and the balance scheduled to vest on May 12, 2023.

Outstanding at September 30, 2022 43 $ 22.76 1,642 $ 35.51

During the nine months ended September 30, 2022, we granted long-term incentive awards to employees consisting of 213,299 RSUs with a weighted average grant date fair value per share of $ 36.01 and to our directors consisting of 22,309 RSUs with a weighted average grant date fair value per share of $ 34.07 .

On July 5, 2022, pursuant to the terms of the Merger Agreement, the Company issued an additional 1,346,089 RSUs, with a grant date fair value of $ 33.92 per share, to certain employees of Vertex.

The RSUs will be settled in shares of the Company's common stock, with 517,918 RSUs vesting on the six-month anniversary following the grant date and a quarter of the remaining 828,171 RSUs vesting on each of four six-month anniversary dates following the grant date.

The fair value of each RSU grant to employees and directors was determined based on the closing price of V2X common stock on the date of grant.

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

For employee RSUs, excluding the RSUs granted under the terms of the Merger Agreement, one-third of the award vests on each of the three anniversary dates following the grant date.

Director RSUs were granted on May 13, 2022 with 3,229 vesting on the Closing Date and the balance scheduled to vest on May 12, 2023.

The fair value of each RSU grant to employees and directors was determined based on the closing price of V2X common stock on the date of grant.

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

Total Shareholder Return Awards

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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 1, 2022, we granted TSR awards with an outstanding aggregate target TSR value of $ 2.8 million.

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

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

In concurrence with the Merger, performance achievement fair value was measured as of the Closing Date and the aggregate future award payouts were fixed at $ 4.6 million.

As of September 30, 2022, there was $ 2.4 million of unrecognized TSR related compensation expense .

Effective Tax Rate

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

For the three months ended July 1, 2022 and July 2, 2021, we recorded an income tax provision of $ 2.6 million and $ 4.4 million, representing effective income tax rates of 19.8 % and 21.6 %, respectively.

For the six months ended July 1, 2022 and July 2, 2021, we recorded income tax provisions of $ 3.3 and $ 6.9 million, representing effective income tax rates of 19.8 % and 19.9 %, 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, available deductions not reflected in book income, and income tax credits.

For the three months ended September 30, 2022, we recorded an income tax benefit of $ 5.7 million and for the three months ended October 1, 2021 an income tax provision of $ 0.7 million, representing effective income tax rates of 25.2 % and 6.2 %, respectively.

For the nine months ended September 30, 2022, we recorded an income tax benefit of $ 2.5 million and for the nine months ended October 1, 2021 an income tax provision of $ 7.6 million, representing effective income tax rates of 39.8 % and 16.6 %, respectively.

The effective income tax rates vary from the federal statutory rate of 21% mainly due to state and foreign taxes, non-deductibility of transaction costs from the recent Merger, disallowed compensation deduction under Internal Revenue Code Section 162(m), and available deductions not reflected in book income, and income tax credits.

The higher effective tax rate for the nine ended September 30, 2022, was primarily due to non-deductible costs related to the transaction described in Note 3, Merger.

The Merger qualified as a nontaxable, type “A” reorganization within the meaning of the IRC Section 368(a)(1)(A).

The historical tax basis of the assets and liabilities, net operating losses, and other tax attributes of Vertex, including tax deductible goodwill existing as of the Closing Date from prior acquisitions of the legacy Vertex will be carried over to V2X.

No additional tax-deductible goodwill was created in connection with the Merger.

Since ASC 740-10-25-3(d) prohibits recognition of a deferred tax liability relating to temporary differences for goodwill, no deferred tax liability on goodwill resulting from this Merger was recorded.

In accordance with ASC 805-740-25-3, based on initial purchase accounting calculations, a net deferred tax liability of $ 26.9 million for the opening book versus tax basis differences was reported per valuation of assets and liabilities as of the Closing Date.

Uncertain Tax Provisions

As of July 1, 2022 and December 31, 2021, unrecognized tax benefits from uncertain tax positions were $ 10.1 million and $ 9.3 million, respectively.

As of September 30, 2022 and December 31, 2021, unrecognized tax benefits from uncertain tax positions were $ 10.8 million and $ 9.3 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.

3 unchanged sentences

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 1, July 2, July 1, July 2,

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

(In thousands, except per share data) 2022 2021 2022 2021

Net income $ 10,472 $ 15,934 $ 13,327 $ 27,982

Net income (loss) $ ( 17,039 ) $ 10,258 $ ( 3,711 ) $ 38,240

Weighted average common shares outstanding 29,830 11,726 17,806 11,696

2 unchanged sentences

Diluted weighted average common shares outstanding 30,172 11,849 18,020 11,830

Earnings per share

(Loss) earnings per share

Basic $ ( 0.57 ) $ 0.87 $ ( 0.21 ) $ 3.27

1 unchanged sentence

The following table summarizes the weighted average of anti-dilutive securities excluded from the diluted earnings per share calculation.

Three Months Ended Six Months Ended

July 1, July 2, July 1, July 2,

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

(In thousands) 2022 2021 2022 2021

5 unchanged sentences

Adjustments to the fair value of the plan investments and obligations are recorded in SG&A expenses.

The plan assets and liabilities were $ 0.9 million and $ 0.5 million as of July 1, 2022 and December 31, 2021, respectively.

The plan assets and liabilities were $ 1.3 million and $ 0.5 million as of September 30, 2022 and December 31, 2021, respectively.

MULTI-EMPLOYER PENSION PLAN

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

Expense recognized for this plan was $ 0.3 million and $ 0.5 for the three and six months ended July 1, 2022, respectively, and $ 0.3 million and $ 0.5 million for the three and six months ended July 2, 2021, respectively.

SUBSEQUENT EVENT

On the Closing Date, Vectrus, Inc.

completed its previously announced Merger with Vertex, a global leader in aerospace and defense technologies, by acquiring all of the outstanding shares of Vertex .

O n the Closing Date, Vertex and its consolidated subsidiaries became a wholly-owned subsidiary of the Company.

We recognized $ 5.9 million an d $ 14.9 million of acquisition-related costs that were expensed as incurred during the three and six months ended July 1, 2022, respectively.

These costs are included in SG&A expense in the Condensed Consolidated Statements of Income .

Preliminary Purchase Price Allocation

The Merger will be accounted for as a purchase business combination.

As such, the Company will record the assets acquired and liabilities assumed at fair value, with the excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed recorded as goodwill.

None of the goodwill is expected to be deductible fo r tax purposes.

The Company expects to finalize its purchase price allocation in 2023 after we have further analyzed and assessed a number of the factors used in establishing the fair values of assets acquired and liabilities assumed as of the Closing Date including, but not limited to, contractual and operational factors underlying the customer-related intangible assets and property, plant and equipment;

details surrounding tax matters;

and assumptions underlying certain existing or potential reserves, such as those for legal and environmental matters.

The final fair value determination could result in material adjustments.

The Closing Date fair value of the consideration transferred totaled $ 634 million , w hich was comprised of the following:

($ in millions, except share and per share amounts) Purchase Price

Shares of V2X common stock issued 18,591,866

Market price per share of V2X as of Closing Date $ 33.92

Fair value of common shares issued $ 631

Fair value of cash consideration $ 3

Total consideration transferred $ 634

Outstanding debt from the Company’s Amended Agreement (See Note 6.

Debt, in this Quarterly Report on Form 10-Q) was repaid on the Merger Closing Date and related guarantees and liens were discharged and released.

Repayment was made using proceeds from the Vertex First Lien Credit Agreement described below.

Senior Secured Credit Facilities

Senior Secured Credit Facilities .

On the Closing Date, following the Merger and a series of certain intercompany contributions described in the Agreement and Plan of Merger, dated as of March 7, 2022, by and among Vertex, the Company, Merger Sub Inc., and Merger Sub LLC (the Merger Agreement), certain of our subsidiaries, including VSC (and together with VSC, the Company Guarantor Subsidiaries), that became direct or indirect subsidiaries of Vertex Aerospace Service Corp., a Delaware corporation and wholly-owned indirect subsidiary of Vertex (Vertex Borrower), have provided guarantees of the indebtedness under each of (i) the First Lien Credit Agreement, dated as of December 6, 2021 (as amended by the Amendment No.

1 to First Lien Credit Agreement, dated as of the Closing Date (the Vertex First Lien Amendment), and as further amended, restated, amended and restated, supplemented and otherwise modified from time to time, the Vertex First Lien Credit Agreement), by and among Vertex Borrower, as borrower, Vertex Aerospace Intermediate LLC, a Delaware limited liability company, direct parent entity of Vertex Borrower and wholly-owned indirect subsidiary of Vertex (Vertex Holdings), the lenders from time to time party thereto and Royal Bank of Canada, as administrative agent, (ii) the Second Lien Credit Agreement, dated as of December 6, 2021 (as amended, restated, amended and restated, supplemented and otherwise modified from time to time, the Vertex Second Lien Credit Agreement), Vertex Borrower, as borrower, Vertex Holdings, the lenders from time to time party thereto and Royal Bank of Canada, as administrative agent, and (iii) the ABL Credit Agreement, dated as of June 29, 2018 (as amended by the First Amendment to ABL Credit Agreement, dated as of May 17, 2019, as further amended by the Second Amendment to ABL Credit Agreement, dated as of May 17, 2021, and as further amended by the Third Amendment to ABL Credit Agreement, dated as of December 6, 2021, as further amended by the Fourth Amendment (the Vertex ABL Amendment) to ABL Credit Agreement, dated as of the Closing Date, and as further amended, restated, amended and restated, supplemented and otherwise modified from time to time, the Vertex ABL Credit Agreement), by and among Vertex Borrower, Vertex Holdings, certain other subsidiaries of Vertex Borrower from time to time party thereto as co-borrowers, the lenders from time to time party thereto and Ally Bank, as administrative agent (in such capacity, the ABL Agent).

Vertex First Lien Credit Agreement.

The Vertex First Lien Credit Agreement provides for senior secured first lien term loans in an aggregate principal amount of $ 1,185,000,000 , consisting of a $ 925,000,000 term loan “B” tranche (the First Lien Initial Term Tranche) and a $ 260,000,000 incremental term loan “B” tranche (the First Lien Incremental Term Tranche and, together with the First Lien Initial Term Tranche, collectively, the First Lien Term Facility).

The entire amount of the proceeds from the (i) First Lien Initial Term Tranche were previously used to finance the acquisition of certain subsidiaries of Raytheon Company, a Delaware corporation, and related transaction costs (the Sky Acquisition), and (ii) First Lien Incremental Term Tranche were used on the Closing Date to finance the repayment in full all outstanding indebtedness, terminate all commitments and release and

discharge all liens and guarantees under that certain Credit Agreement, dated as of September 17, 2014 (as amended, restated, amended and restated, supplemented and otherwise modified from time to time prior to the Closing Date), by and among us, VSC, as borrower, the lenders and issuing banks from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent.

The loans under the First Lien Term Facility will be payable in full on December 6, 2028.

Guarantees and Collateral.

The Vertex Borrower’s obligations under the First Lien Term Facility are guaranteed by Vertex Holdings and Vertex Borrower’s wholly-owned domestic subsidiaries (including the Company Guarantor Subsidiaries, collectively, the First Lien Guarantors), subject to customary exceptions and limitations.

Interest Rates.

The borrowings under the First Lien Initial Term Tranche bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the federal funds rate, plus a margin of 2.75 % to 3.00 % per annum, or a Eurodollar rate, determined by reference to LIBOR, plus a margin of 3.75 % to 4.00 % per annum, in each case, depending on the consolidated first lien net leverage ratio of the Vertex Borrower and its subsidiaries.

Representations and Warranties;

The Vertex First Lien Credit Agreement contains customary representations and warranties and affirmative covenants.

Events of Default.

If an event of default occurs and is continuing, the Vertex Borrower may be required immediately to repay all amounts outstanding under the Vertex First Lien Credit Agreement.

Vertex Second Lien Credit Agreement.

The Vertex Second Lien Credit Agreement provides for senior secured second lien term loans in an aggregate principal amount of $ 185,000,000 (the Second Lien Term Facility).

The entire amount of the proceeds from the Second Lien Term Facility were previously used to finance the Sky Acquisition.

The loans under the Second Lien Term Facility will be payable in full on December 6, 2029.

Guarantees and Collateral.

Interest Rates .

Representations and Warranties;

The Vertex Second Lien Credit Agreement contains customary representations and warranties and affirmative covenants.

Events of Default.

If an event of default occurs and is continuing, the Vertex Borrower may be required immediately to repay all amounts outstanding under the Vertex Second Lien Credit Agreement.

Vertex ABL Credit Agreement

ABL Facility .

The Vertex ABL Credit Agreement provides for a senior secured revolving loan facility (the ABL Facility) of up to an aggregate amount of $ 200,000,000 (the loans thereunder, the ABL Loans).

The Vertex ABL Credit Agreement also

provides for (i) a $ 15,000,000 sublimit of availability for letters of credit, and (ii) a $ 10,000,000 sublimit for short-term borrowings on a swingline basis.

The commitments under the ABL Facility expire on June 29, 2026, and any ABL Loans then outstanding will be payable in full at that time.

Availability.

Any ABL Loans in requested are subject to a number of customary conditions, including accuracy of representations and warranties and no default.

The proceeds from the ABL Loans may be used to finance the working capital needs and general corporate purposes of the Vertex Borrower and its subsidiaries.

Guarantees and Collateral .

The Vertex Borrower’s obligations under the ABL Term Facility are guaranteed by the ABL Guarantors, subject to customary exceptions and limitations.

Interest Rates and Fees.

Representations and Warranties;

The Vertex ABL Credit Agreement contains customary representations and warranties, that must be accurate in order for the Vertex Borrower to borrow under the ABL Facility, and affirmative covenants.

The Vertex ABL Credit Agreement also includes a financial covenant that requires the fixed charge coverage ratio to be at least 1.00 to 1.00 as of the end of any period of four fiscal quarters while aggregate availability is less than the greater of (i) $ 10,000,000 and (ii) 10 % of the aggregate borrowing base.

Events of Default.

If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the Vertex ABL Credit Agreement.

Stock-based Compensation

Pursuant to and subject to the terms of the Merger Agreement, the Company agreed to issue up to 1,346,139 restricted stock units to certain employees of Vertex following the consummation of the Merger, which restricted stock units will be settled in shares of the Company's common stock upon satisfaction of the applicable vesting conditions.

The grant price of these awards was $ 33.92 per share.

Expense recognized for this plan was $ 2.3 million and $ 2.8 million for the three and nine months ended September 30, 2022, respectively, and $ 0.2 million and $ 0.8 million for the three and nine months ended October 1, 2021, respectively.

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