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Item 1. Financial Statements

2023-05-09 compared with 2022-11-08 · 244 added, 364 removed, 341 unchanged (64% of the section changed)

FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Nine Months Ended

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

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED)

Three Months Ended

March 31, April 1,

(In thousands, except per share data) 2023 2022

3 unchanged sentences

Operating income 30,579 5,237

Loss on extinguishment of debt ( 22,052 ) —

Interest expense, net ( 31,744 ) ( 1,681 )

8 unchanged sentences

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Nine Months Ended

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

Three Months Ended

March 31, April 1,

(In thousands) 2023 2022

Net (loss) income $ ( 17,480 ) $ 2,855

Other comprehensive income (loss), net of tax

Other comprehensive loss, net of tax

Changes in derivative instruments:

1 unchanged sentence

Net change in fair value of foreign currency forward contracts — 30

Tax (expense) benefit — ( 3 ) 272 ( 30 )

Tax expense 148 ( 95 )

Net change in derivative instruments ( 2,199 ) 374

Foreign currency translation adjustments, net of tax 1,806 ( 616 )

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

Other comprehensive loss, net of tax ( 393 ) ( 242 )

Total comprehensive (loss) income $ ( 17,873 ) $ 2,613

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30, December 31,

March 31, December 31,

(In thousands, except per share information) 2023 2022

1 unchanged sentence

Cash and cash equivalents $ 62,145 $ 116,067

Restricted cash 3,312 —

Receivables 759,813 728,582

17 unchanged sentences

Long-term debt, net 1,291,969 1,262,811

Deferred tax liability 50,249 32,214

Operating lease liability 40,234 34,536

Deferred tax liabilities 9,927 15,813

Operating lease liabilities 37,082 41,083

Other non-current liabilities 131,698 133,185

10 unchanged sentences

100,000 shares authorized;

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

31,005 and 30,470 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

Additional paid in capital 748,137 748,877

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended

September 30, October 1,

Three Months Ended

March 31, April 1,

(In thousands) 2023 2022

1 unchanged sentence

Net (loss) income $ ( 17,480 ) $ 2,855

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

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

Depreciation expense 5,412 1,591

Amortization of intangible assets 22,606 2,301

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

Loss (gain) on disposal of property, plant, and equipment 31 ( 16 )

Stock-based compensation 12,872 2,558

Amortization of debt issuance costs 2,513 204

Loss on extinguishment of debt 22,052 —

Changes in assets and liabilities:

6 unchanged sentences

Other liabilities ( 11,740 ) ( 7,202 )

Net cash provided by operating activities 99,768 53,378

Net cash used in operating activities ( 38,492 ) ( 26,381 )

Investing activities

1 unchanged sentence

Proceeds from the disposition of assets — 17

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

Contribution to joint venture — ( 2,496 )

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

Net cash used in investing activities ( 9,076 ) ( 2,178 )

Financing activities

Proceeds from issuance of long-term debt 250,000 —

Repayments of long-term debt ( 421,013 ) ( 2,600 )

3 unchanged sentences

Payment of debt issuance costs ( 7,507 ) ( 458 )

Prepayment premium on early redemption of debt ( 1,600 ) —

Payments of employee withholding taxes on share-based compensation ( 12,806 ) ( 1,626 )

Net cash used in financing activities ( 165,251 ) ( 53,220 )

Net cash (used in) provided by financing activities ( 7,921 ) 12,316

Exchange rate effect on cash 1,567 729

Net change in cash, cash equivalents and restricted cash 108,860 ( 12,494 )

Cash, cash equivalents and restricted cash - beginning of year 38,513 68,727

Cash, cash equivalents and restricted cash - end of period $ 147,373 $ 56,232

Net change in cash and cash equivalents ( 53,922 ) ( 15,514 )

Cash and cash equivalents - beginning of period 116,067 38,513

Cash and cash equivalents - end of period $ 62,145 $ 22,999

Supplemental disclosure of cash flow information:

1 unchanged sentence

Income taxes paid $ 300 $ 66

Non-cash investing activities:

Purchase of capital assets on account $ 494 $ 5

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

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

5 unchanged sentences

Foreign currency translation adjustments — — — — ( 616 ) ( 616 )

Unrealized loss on cash flow hedge ( 77 ) ( 77 )

Employee stock awards and stock options 75 1 113 114

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

Stock-based compensation 1,983 1,983

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

Net income 15,934 15,934

Foreign currency translation adjustments 430 430

Unrealized gain on cash flow hedge — — — — 374 374

2 unchanged sentences

Stock-based compensation — — 3,100 — — 3,100

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

Net income 2,855 2,855

Foreign currency translation adjustments ( 616 ) ( 616 )

Unrealized gain on cash flow hedge 374 374

Employee stock awards and stock options 67 1 — 1

Taxes withheld on stock compensation awards ( 1,626 ) ( 1,626 )

Stock-based compensation 3,100 3,100

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

Foreign currency translation adjustments ( 3,637 ) ( 3,637 )

Unrealized loss on cash flow hedge 594 594

Employee stock awards and stock options 41 — 369 369

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

Balance at December 31, 2022 30,470 $ 305 $ 748,877 $ 253,424 $ ( 5,527 ) $ 997,079

Net loss — — — ( 17,480 ) — ( 17,480 )

2 unchanged sentences

Employee stock awards and stock options 535 5 — — — 5

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

Taxes withheld on stock compensation awards — — ( 12,806 ) — — ( 12,806 )

Stock-based compensation — — 12,066 — — 12,066

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

Balance at March 31, 2023 31,005 $ 310 $ 748,137 $ 235,944 $ ( 5,920 ) $ 978,471

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

1 unchanged sentence

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

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

18 unchanged sentences

government contracts.

In 2020, we entered into a joint venture agreement with Kuwait Resources House for Human Resources Management a nd Services Company .

In 2020, we entered into a joint venture agreement with Kuwait Resources House for Human Resources Management and Services Company (KRH) .

Pursuant to the joint venture agreement, ServCore Resources and Services Solutions, LLC.

(ServCore) was established to operate and manage labor and life support services outside of the continental United States at designated locations serviced by V2X and other contractors around the world.

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 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.

(ServCore) was established to operate and manage labor and life support services outside of the continental United States at designated locations serviced by V2X and others around the world.

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.

We record our proportionate 25 %, 50 %, and 40 % shares, respectively, of income or losses from HDSS, J&J, and ServCore in selling, general and administrative expenses in the Condensed Consolidated Statements of (Loss) Income.

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

2 unchanged sentences

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 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.

As of March 31, 2023 and December 31, 2022 our joint venture investment balance was $ 6.5 million and $ 7.0 million, respectively.

Our proportionate share of income from the HDSS, J&J, and ServCore joint ventures was $ 1.8 million for the first quarter of 2023 and not material for the first quarter 2022.

Basis of Presentation

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.

Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (March 31, 2023 for the first quarter of 2023 and April 1, 2022 for the first quarter of 2022), 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.

3 unchanged sentences

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, 2021.

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, 2022.

It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position and operating results.

Revenue and net income for any interim period are not necessarily indicative of future or annual results.

Restricted Cash

The Company had restricted cash of $ 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

Restricted cash 3,312

Total cash, cash equivalents and restricted cash $ 147,373

RECENT AC COUNTING STANDARDS UPDATE

Accounting Standards That Were Adopted

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

2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08).

The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer had originated the contract.

The amendment also provides certain practical expedients when applying the guidance.

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

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):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04).

To ease the burden in accounting for reference rate reform on financial reporting, the ASU provides companies with optional expedients and exceptions for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform.

The Company adopted the standard during the first quarter of 2022.

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.

There have been no accounting standards issued or adopted during the first quarter of 2023 that are expected to have a material impact on the Company's financial statements.

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

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

Assets that normally would not be recorded in ordinary operations, such as intangibles related to contractual relationships, were recorded at their estimated fair values.

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

On the Closing Date, Vectrus completed its previously announced Merger with Vertex, forming V2X 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

10 unchanged sentences

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.

As of March 31, 2023, we considered these amounts to be preliminary because we are still in the process of gathering and reviewing information to support the details surrounding tax matters and assumptions underlying certain existing or potential reserves.

The final determination could result in further adjustments.

(In thousands) Preliminary Fair Value

2 unchanged sentences

Prepaid expenses 49,172

Property, plant, and equipment, net 53,618

Intangibles assets, net 522,000

Other assets 18,670

Property, plant, and equipment 53,618

Intangible assets 480,000

Other non-current assets 18,895

Right-of-use assets 21,062

Accounts payable ( 121,515 )

Net debt ( 1,352,304 )

Accrued payroll ( 49,282 )

Other liabilities ( 235,905 )

Debt ( 1,352,303 )

Compensation and other employee benefits ( 45,968 )

Other current and non-current liabilities ( 334,469 )

Total identifiable net assets ( 699,860 )

4 unchanged sentences

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.

In addition, we recognized two intangible assets related to backlog and customer contracts arising from the Merger.

The fair value of backlog was $ 316.0 million, and the fair value of the customer contracts was $ 164.0 million with amortization periods of 4.5 years and 14.0 years, respectively.

The receivables of $ 334.7 million represent fair value and are considered fully collectible.

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.

As of March 31, 2023, the Company recorded $ 0.7 million of income related to the TSA with Crestview, which was recorded as a reduction in cost of sales.

AIP held approximately 60.0 % of V2X common stock as of March 31, 2023.

The following unaudited information shows the combined actual results of our operations for the three months ended March 31, 2023 and pro forma results for the three months ended April 1, 2022 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.

2 unchanged sentences

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.

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

Three Months Ended

March 31, 2023 April 1, 2022

(Unaudited, in thousands) Actual Pro forma

Revenue $ 943,460 $ 842,741

Net (loss) income $ ( 17,480 ) $ 11,953

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue in ASC Topic 606.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

To determine the proper revenue recognition method, consideration is given as to whether a single contract should be accounted for as more than one performance obligation.

For most of our contracts, the customer contracts with us to perform an integrated set of tasks and deliverables as a single service solution, whereby each service is not separately identifiable from other promises in the contract and therefore is not distinct.

As a result, when this integrated set of tasks exists, the contract is accounted for as one performance obligation.

The vast majority of our contracts have a single performance obligation.

Unexercised contract options and indefinite delivery and indefinite quantity (IDIQ) contracts are considered to be separate performance obligations when the option or IDIQ task order is exercised or awarded.

Performance obligations represent firm orders by the customer and excludes potential orders under indefinite delivery and indefinite quantity (IDIQ) contracts, unexercised contract options and contracts awarded to us that are being protested by competitors with the U.S.

Government Accountability Office (GAO) or in the U.S.

Court of Federal Claims (COFC).

The level of order activity related to programs can be affected by the timing of government funding authorizations and their project evaluation cycles.

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

Contracts are often modified to account for changes in contract specifications and requirements.

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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 contract terms 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 September 30, 2022 and December 31, 2021 are presented in the following table:

September 30, December 31,

Performance obligations as of March 31, 2023 and December 31, 2022 are presented in the following table:

March 31, December 31,

(In millions) 2023 2022

Performance Obligations $ 3,425 $ 2,997

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.

We expect to recognize approximately 62 % of the performance obligations as of March 31, 2023 as revenue in 2023 and the remaining 38 % during 2024.

Contract Estimates

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

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

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

These assumptions include:

labor productivity and availability;

the complexity of the services being performed;

the cost and availability of materials;

the performance of subcontractors;

and negotiations with the customer on contract modifications.

When the estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at a contract level and is recognized in the period in which the loss was determined.

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 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.

Cumulative catch-up adjustments for the three months ended March 31, 2023 and April 1, 2022 increased operating income by $ 13.1 million and $ 0.6 million, respectively.

For the three months ended March 31, 2023 and April 1, 2022, the cumulative catch-up adjustments to operating income increased revenue by $ 13.9 million and $ 0.6 million, respectively.

Revenue by Category

Generally, the sales price elements for our contracts are cost-plus, cost-reimbursable or firm-fixed-price.

We commonly have elements of cost-plus, cost-reimbursable and firm-fixed-price contracts on a single contract.

On a cost-plus type contract, we are paid our allowable incurred costs plus a profit, which can be fixed or variable depending on the contract’s fee arrangement, up to funding levels predetermined by our customers.

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

We commonly have elements of cost-plus, cost-reimbursable, time-and-materials and firm-fixed-price contracts on a single contract.

On a cost-plus contract, we are paid our allowable incurred costs plus a profit, which can be fixed or variable depending on the contract’s fee arrangement, up to funding levels predetermined by our customers.

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

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

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

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

Award fees provide for a fee based on actual performance relative to contractually specified performance criteria.

Incentive fees provide for a fee based on the relationship between total allowable and target cost.

On most of our contracts, a cost-reimbursable element captures consumable materials required for the contract.

On most of our contracts, a cost-reimbursable element captures consumable materials required for the program.

Typically, these costs do not bear fees.

On a firm-fixed-price type contract, we agree to perform the contractual statement of work for a predetermined contract price.

A firm-fixed-price type contract typically offers higher profit margin potential than a cost-plus type contract, which is commensurate with the greater levels of risk we assume on a firm-fixed-price type contract.

Although a firm-fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract.

On a time-and-materials contract, we are reimbursed for labor at fixed hourly rates and generally reimbursed separately for allowable materials, costs and expenses at cost.

For this contract type, we bear the risk that our labor costs and allocable indirect expenses are greater than the fixed hourly rate defined within the contract.

On a firm-fixed-price contract, we agree to perform the contractual statement of work for a predetermined contract price.

A firm-fixed-price contract typically offers higher profit margin potential than a cost-plus contract, which is commensurate with the greater levels of risk we assume on a firm-fixed-price contract.

Although a firm-fixed-price contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract.

Although the overall scope of work required under the contract may not change, profit may be adjusted as experience is gained and as efficiencies are realized or costs are incurred.

On a time-and-materials type contract, we are reimbursed for labor at fixed hourly rates and generally reimbursed separately for allowable materials, costs, and expenses at cost.

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.

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

The following tables present various revenue disaggregations.

Revenue by contract type for the three months ended March 31, 2023 and April 1, 2022 is as follows:

Three Months Ended

March 31, April 1, %

(In thousands) 2023 2022 Change

Cost-plus and cost-reimbursable $ 523,030 $ 311,094 68.1 %

Firm-fixed-price 385,112 128,004 200.9 %

Time and material 35,795 15,782 126.8 % 67,326 46,039 46.2 %

Time-and-materials 35,318 17,373 103.3 %

Total revenue $ 943,460 $ 456,471

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

Revenue by geographic region in which the contract is performed for the three months ended March 31, 2023 and April 1, 2022 is as follows:

Three Months Ended

March 31, April 1, %

(In thousands) 2023 2022 Change

United States $ 548,770 $ 167,980 226.7 %

Middle East 281,121 235,754 19.2 %

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

Asia 64,317 16,206 296.9 %

Europe 49,252 36,531 34.8 %

Total revenue $ 943,460 $ 456,471

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

Revenue by contract relationship for the three months ended March 31, 2023 and April 1, 2022 is as follows:

Three Months Ended

March 31, April 1, %

(In thousands) 2023 2022 Change

Prime contractor $ 879,179 $ 427,093 105.9 %

1 unchanged sentence

Total revenue $ 943,460 $ 456,471

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

Revenue by customer for the three months ended March 31, 2023 and April 1, 2022 is as follows:

Three Months Ended

March 31, April 1, %

(In thousands) 2023 2022 Change

Army $ 390,503 $ 280,113 39.4 %

Air Force 165,085 63,569 159.7 % 295,015 207,565 42.1 %

Navy 292,690 75,217 289.1 %

Air Force 129,981 61,474 111.4 %

Other 130,286 39,667 228.4 %

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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).

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

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

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However, we may receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities.

These advance billings and payments are not considered significant financing components because they are frequently intended to fund current operating expenses under the contract.

These advance billings and payments are not considered significant financing components because they are frequently intended to ensure that both parties are in conformance with the primary contract terms.

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

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

As of March 31, 2023 and December 31, 2022, we had contract assets of $ 559.3 million and $ 487.8 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 (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.

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

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

As of March 31, 2023 and December 31, 2022, our contract liabilities, included in other accrued liabilities in the Condensed Consolidated Balance Sheets, were $ 73.1 million and $ 76.4 million, respectively.

Receivables were comprised of the following:

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

(In thousands) March 31, 2023 December 31, 2022

Billed receivables $ 189,247 $ 227,718

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Total receivables $ 759,813 $ 728,582

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

As of March 31, 2023 and December 31, 2022, 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 material credit risk exposure.

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

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

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

We expect to bill customers for the majority of the March 31, 2023 contract assets during 2023.

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 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:

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 $ 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

Trade names and other 1,249 ( 790 ) 459 1,249 ( 607 ) 642

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

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):

Period Amortization

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

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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.

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.

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).

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;

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;

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).

On February 28, 2023, Vertex Borrower entered into a credit agreement (the 2023 Credit Agreement) among the lenders identified therein and Bank of America, N.A., as administrative agent, collateral agent, swingline lender and letter of credit issuer.

The 2023 Credit Agreement provides for $ 750.0 million in senior secured financing, with a first lien on substantially all the Borrower’s assets, consisting of a $ 500.0 million five-year Revolving Credit Facility (2023 Revolver) and a five-year $ 250.0 million Term Loan.

The proceeds of these Credit Facilities were used to, among other things, (i) repay the First Lien Incremental Term Tranche (as defined below), (ii) repay the entire outstanding amount of the Second Lien Credit Agreement, and (iii) repay the entire outstanding ABL Credit Facility.

Vertex First Lien Credit Agreement

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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 %

On February 28, 2023, the outstanding balance of the First Incremental Term Tranche of $ 258.7 million was repaid.

The balance of unamortized deferred financing costs related to the First Incremental Term Tranche of $ 11.9 million was recorded as a loss on extinguishment of debt in the Condensed Consolidated Statements of (Loss) Income for the three months ended March 31, 2023.

The remaining loans under the First Lien Term Facility (consisting solely of the Initial Term Loan Tranche) amortize in an amount equal to approximately $ 2.3 million per quarter for the fiscal quarters ending March 31, 2023, through September 30, 2028, with the balance of $ 864.9 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 Guarantors), subject to customary exceptions and limitations.

The Vertex Borrower’s obligations under the First Lien Term Facility and the Guarantors’ obligations under the related guarantees are secured by a first-lien on substantially all of the Vertex Borrower’s and the Guarantors’ assets which exists on a pari passu basis with the lien held by the 2023 Credit Agreement lenders.

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 greater of (a) the federal funds rate plus 0.50 %, (b) the prime lending

rate, or (c) an adjusted Eurodollar rate plus 1.00 %, plus a margin of 2.50 % to 2.75 % 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 March 31, 2023, the effective interest rate for the First Lien Initial Term Tranche was 9.11 %.

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

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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.

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.

As of March 31, 2023, the carrying value of the First Lien Credit Agreement was $ 915.8 million, excluding deferred discount and unamortized deferred financing costs of $ 40.8 million.

The estimated fair value of the First Lien Credit Agreement as of March 31, 2023 was $ 910.0 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 (Level 2).

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 Vertex Second Lien Credit Agreement provided 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.

The Company voluntarily prepaid $ 25.0 million of the Second Lien Term Facility on December 30, 2022 (the Voluntary Prepayment).

On February 28, 2023, the remaining Second Lien Term Facility balance of $ 160.0 million was repaid (the 2023 Payoff) and related guarantees and liens were discharged and released.

The balance of unamortized deferred financing costs related to the Second Lien Term Facility of $ 7.1 million was recorded as a loss on extinguishment of debt in the Condensed Consolidated Statements of (Loss) Income for the three months ended March 31, 2023.

Under the terms of the Vertex Second Lien Credit Agreement, the Vertex Borrower was required to remit a prepayment premium of $ 1.6 million with the 2023 Payoff which was recorded as a loss on extinguishment of debt in the Condensed Consolidated Statements of (Loss) Income for the three months ended March 31, 2023.

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:

The Vertex ABL Credit Agreement provided 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 provided 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.

On February 28, 2023, the outstanding ABL Facility borrowings of $ 67.5 million were repaid and related guarantees and liens were discharged and released.

The balance of unamortized deferred financing costs related to the Vertex ABL Credit Agreement of $ 1.5 million which was recorded as a loss on extinguishment of debt in the Condensed Consolidated Statements of (Loss) Income for the three months ended March 31, 2023.

2023 Credit Agreement

The 2023 Credit Agreement provides for $ 750.0 million in senior secured financing, with a first lien on substantially all the Borrower’s assets and consists of (a) a $ 500.0 million five-year Revolving Credit Facility (which includes (i) a $ 50.0 million sublimit of availability for letters of credit, and (ii) a $ 50.0 million sublimit for short-term borrowings on a swingline basis) and (b) a five-year $ 250.0 million Term Loan.

The Term Loan portion of the 2023 Credit Agreement amortizes at approximately $ 1.6 million per quarter for the fiscal quarters ending June 30, 2023 through March 31, 2025, increasing to $ 3.1 million per quarter for the fiscal quarters ending June 30, 2025 through December 31, 2027, with the balance of $ 203.1 million due on February 28, 2028.

The Vertex Borrower’s obligations under the 2023 Credit Agreement are guaranteed by the Guarantors, subject to customary exceptions and limitations.

The Vertex Borrower’s obligations under the 2023 Credit Agreement and the Guarantors’ obligations under the related guarantees are secured by a first priority-lien on substantially all of the Vertex Borrower’s and the Guarantors’ assets (subject to customary exceptions and limitations) which exists on a pari passu basis with the lien held by the First Lien Credit Agreement lenders.

The borrowings under the 2023 Credit Agreement bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the greater of (a) the federal funds rate plus 0.50 %, (b) the prime lending rate, or (c) an adjusted Eurodollar rate plus 1.00 %, plus a margin of 1.00 % to 2.25 % per annum, or a Eurodollar rate, determined by reference to SOFR, plus a margin of 2.00 % to 3.25 % per annum, in each case, depending on the consolidated total net leverage ratio of the Vertex Borrower and its subsidiaries.

As of March 31, 2023, the effective interest rates for the 2023 Revolver and Term Loan portion of the 2023 Credit Agreement were 8.15 % and 8.35 %, respectively.

Unutilized commitments under the 2023 Revolver are subject to a per annum fee ranging from 0.25 % to 0.50 % depending on the consolidated total net leverage ratio of the Vertex Borrower and its subsidiaries.

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 to SOFR of Revolving Credit loans times the average daily amount available to be drawn under all outstanding letters of credit.

The 2023 Credit Agreement contains customary representations and warranties, which must be accurate for the Vertex Borrower to borrow under the 2023 Credit Agreement, and affirmative covenants.

The 2023 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 2023 Credit Agreement contains financial covenants requiring (a) the consolidated total net leverage ratio not to exceed 5.00 to 1.00 for the reporting periods ending on or after June 30, 2023, and on or prior to June 30, 2024, with further step downs thereafter, and (b) the consolidated interest coverage ratio be at least 2.00 to 1.00 commencing with the reporting period ending on June 30, 2023.

The 2023 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 2023 Credit Agreement 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 2023 Credit Agreement.

As of March 31, 2023, there were $ 185.0 million of outstanding borrowings and $ 14.9 million of outstanding letters of credit under the 2023 Revolver.

Availability under the 2023 Revolver was $ 300.1 million as of March 31, 2023.

Unamortized deferred financing costs related to the 2023 Revolver of $ 4.9 million are included in other non-current assets in the Condensed Consolidated Balance Sheets.

As of March 31, 2023, the fair value of the 2023 Revolver approximated the carrying value because the debt bears a floating interest rate.

As of March 31, 2023, the carrying value of the Term Loan portion of the 2023 Credit Agreement was $ 250.0 million, excluding unamortized deferred financing costs of $ 2.5 million.

The estimated fair value of the Term Loan portion of the 2023 Credit Agreement as of March 31, 2023 was $ 246.3 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 (Level 2).

The aggregate scheduled maturities of the First Lien Credit Agreement and 2023 Credit Agreement as of March 31, 2023 are as follows:

(In thousands) Payments due

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Total $ 1,350,750

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.

As of March 31, 2023 we were in compliance with all covenants related to the First Lien Credit Agreement and the 2023 Credit Agreement.

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.

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) 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 $ 0.8 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 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.

We have operating leases for office space, apartments, vehicles, and machinery and equipment.

Our operating leases have lease terms of less than one year to ten years .

We do not separate lease components from non-lease components (e.g., common area maintenance, property taxes and insurance) but account for both components in a contract as a single lease component.

The components of lease expense are as follows:

Three Months Ended 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

Variable lease expense 130 184 389 599

Short-term lease expense 21,862 16,630 59,993 47,367

Total lease expense $ 26,382 $ 20,121 $ 72,053 $ 55,338

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

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

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

Current lease liabilities (recorded in Other accrued liabilities) $ 15,302 $ 11,983

Long-term lease liabilities (recorded in Operating lease liability) 40,234 34,536

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

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

2022 (remainder of the year) $ 4,295

After 2026 15,128

Total minimum lease payments 62,253

Imputed interest ( 6,717 )

Total operating lease liabilities $ 55,536

The Company is exposed to the risk that the earnings and cash flows could be adversely impacted due to fluctuations in interest rates.

To mitigate this risk, the Company entered into interest rate swap contracts in the amount of $ 300 million in March 2023.

These contracts are designated and qualify as effective cash flow hedges.

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 March 31, 2023:

(In thousands) Fair Value (level 2)

Balance sheet caption Amount

Interest rate swap designated as cash flow hedge Other current assets $ 2,839

Interest rate swap designated as cash flow hedge Other non-current liabilities $ 5,186

There were no interest rate swaps designated as cash flow hedges for the period ended December 31, 2022.

We regularly assess the creditworthiness of the counterparty.

As of March 31, 2023, 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 gains and losses of a nominal amount and $ 0.2 million were recognized in interest expense, net, in our Condensed Consolidated Statements of (Loss) Income during the first three months of 2023 and 2022, respectively.

We expect $ 2.8 million of existing interest rate swap gains reported in accumulated other comprehensive loss as of March 31, 2023 to be recognized in earnings within the next 12 months.

COMMITMENTS AND CONTINGENCIES

From time to time, we are involved in legal proceedings that are incidental to the operation of our business.

From time to time, we are involved in various investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings, including government investigations and claims, which are incidental to the operation of our business.

Some of these proceedings seek remedies relating to employment matters, matters in connection with our contracts and matters arising under laws relating to the protection of the environment.

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government representatives engage in discussions to enable V2X to evaluate the merits of these claims as well as to assess the amounts being claimed.

Where appropriate, provisions are made to reflect probable losses related to the matters raised by the U.S.

Where appropriate, provisions are made to reflect probable losses related to the matters raised by U.S.

government representatives.

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

We have estimated and accrued $ 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.

The Company estimated and accrue d $ 27.6 million as of March 31, 2023 and December 31, 2022 in other accrued liabilities in the Condensed Consolidated Balance Sheets for legal proceedings and for claims with respect to our U.S.

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

government has not completed its incurred cost audits.

Although the ultimate outcome of any legal matter or claim cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that any asserted or unasserted legal or contractual claims or proceedings, individually or in the aggregate, including the lawsuit discussed below, will have a material adverse effect on our cash flow, results of operations or financial condition.

Government Contracts, Investigations and Claims

government contracts that are funded incrementally on a year-to-year basis.

Changes in U.S.

government policies, priorities or funding levels through agency or program budget reductions by the U.S.

Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S.

Congress or executive agencies could have a material adverse effect on our financial condition or results of operations.

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government at any time, with or without cause.

Such contract suspensions or terminations could result in unreimbursable expenses or charges or otherwise adversely affect our financial condition and results of operations.

Such contract suspensions or terminations could result in non-reimbursable expenses or charges or otherwise adversely affect our financial condition and results of operations.

Departments and agencies of the U.S.

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government contracts.

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

government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards.

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

Accordingly, costs billed or billable to U.S.

government customers are subject to potential adjustment upon audit by such agencies.

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

government standards for our business systems, including our accounting, earned value management, estimating, materials management and accounting, purchasing, and property management systems.

government agencies also review the adequacy of our compliance with 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.

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government customer may be protracted.

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

Based on the circumstances, we periodically file requests for equitable adjustments (REAs) that are sometimes converted into claims.

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

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government to settle this legal matter involving our payment of an insignificant amount, thereby bringing closure to the matter.

With respect to our Former Parent, we believe we are fully indemnified under our distribution agreement and have notified our Former Parent of the closure of our appeal of the U.S.

government's decision in this matter.

COVID-19 Pandemic

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

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.

With respect to our Former Parent, we believe we are fully indemnified under our distribution agreement and recently reached a final settlement with them on this matter.

STOCK-BASED COMPENSATION

The Company maintains an equity incentive plan, the 2014 Omnibus Incentive Plan, as amended and restated effective as of May 13, 2016 (the 2014 Omnibus Plan), to govern awards granted to V2X employees and directors, including nonqualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards and other awards.

We account for NQOs and stock-settled RSUs as equity-based compensation awards.

TSR awards, described below, and cash-settled RSUs are accounted for as liability-based compensation awards.

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

Three Months Ended Nine Months Ended

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

The Company maintains an equity incentive plan, the 2014 Omnibus Incentive Plan, as amended and restated effective as of October 27, 2022 (the 2014 Omnibus Plan), to govern awards granted to V2X employees and directors, including nonqualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards, performance share units (PSUs) and other awards.

We account for NQOs, stock-settled RSUs and PSUs as equity-based compensation awards.

TSR awards, described below, are accounted for as liability-based compensation awards.

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

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

Three Months Ended

(In thousands) March 31, 2023 April 1, 2022

Compensation costs for equity-based awards $ 12,066 $ 3,100

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Future tax benefit $ 2,971 $ 555

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

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

Compensation costs for equity-based awards for the three months ended March 31, 2023, included $ 5.6 million related to RSUs issued in connection with the Merger.

As of March 31, 2023, total unrecognized compensation costs related to equity-based awards and liability-based awards were $ 34.4 million and $ 1.7 million, respectively, which are expected to be recognized ratably over a weighted average period of 1.85 years and 1.59 years, respectively.

Total unrecognized compensation costs included $ 15.6 million of expense related to RSUs granted in connection with the Merger.

The following table provides a summary of the activities for NQOs, RSUs and PSUs for the three months ended March 31, 2023:

NQOs RSUs PSUs

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

Outstanding at January 1, 2023 42 $ 22.86 1,628 $ 35.47 — $ —

Granted — $ — 278 $ 39.39 254 $ 35.86

Replacement awards — $ — 1,346 $ 33.92

Exercised — $ — — $ — — $ —

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Forfeited or expired — $ — ( 6 ) $ 40.59 — $ —

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 .

Outstanding at March 31, 2023 42 $ 22.86 1,061 $ 36.41 254 $ 35.86

Restricted Stock Units

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 RSUs have been or 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 or having vested 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.

RSUs awarded to employees, excluding the RSU awards awarded under the Merger Agreement, discussed above, vest in one-third increments on each of the three anniversary dates following the grant date subject to continued employment.

Director RSUs are granted on the date of an annual meeting of shareholders and vest on the business day immediately prior to the next annual meeting or the one-year anniversary of the grant date, if earlier.

The fair value of each RSU grant 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 requisite service period of the RSU awards.

As of March 31, 2023, there was $ 27.8 million of unrecognized RSU related compensation expense.

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.

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 .

As a result of the Merger and pursuant to the terms of the TSR awards, performance achievement fair value was measured at July 4, 2022 at $ 4.6 million and the aggregate future award payouts were fixed at that value.

There were no cash-based TSR awards granted in the first quarter of 2023.

As of March 31, 2023, there was $ 1.7 million of unrecognized TSR related compensation expense.

Performance Share Units

During the first quarter of 2023, the Company granted two types of performance-based awards with market conditions.

The first award will vest and the stock will be issued at the end of a three-year period based on the attainment of certain total shareholder return performance measures relative to Aerospace and Defense companies in the S&P 1500 Index and the employee's continued service through the vest date.

The number of shares ultimately awarded, if any, can range up to 200 % of the specified target awards.

If performance is below the threshold level of performance, no shares will be issued.

The second award will vest and stock will be issued at the end of a three-year period based on achievement of certain stock price targets, shareholder return performance measures relative to certain Aerospace and Defense companies in the S&P 1500 Index and the employee's continued service through the vest date.

The numbers of shares ultimately awarded, if any, can range up to the specified target awards.

As of March 31, 2023, there was $ 6.5 million of unrecognized PSU 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 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 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.

EARNINGS PER SHARE

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

For the three months ended March 31, 2023 and April 1, 2022, we recorded an income tax benefit of $ 5.7 million and a provision of $ 0.7 million, respectively, representing effective income tax rates of 24.7 % and 19.7 %, respectively.

The effective income tax rates vary from the federal statutory rate of 21.0% mainly due to state and foreign taxes, disallowed compensation deduction under Internal Revenue Code Section 162(m), available deductions not reflected in book income, and income tax credits.

Uncertain Tax Positions

As of March 31, 2023 and December 31, 2022, unrecognized tax benefits from uncertain tax positions were $ 8.4 million and $ 8.6 million, respectively.

The decrease in uncertain tax positions was principally the result of the release of a position for lapse of statute of limitation.

(LOSS) EARNINGS PER SHARE

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

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

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

Three Months Ended Nine Months Ended

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

Three Months Ended

March 31, April 1,

(In thousands, except per share data) 2023 2022

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

Net (loss) income $ ( 17,480 ) $ 2,855

Weighted average common shares outstanding 30,927 11,759

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

Three Months Ended Nine Months Ended

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

Three Months Ended

March 31, April 1,

(In thousands) 2023 2022

Anti-dilutive restricted stock units — 5

POST-EMPLOYMENT BENEFIT PLANS

Deferred Employee Compensation

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

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

The Company sponsors two non-qualified deferred compensation plans.

Under these plans, participants are eligible to defer a portion of their compensation on a tax deferred basis.

Plan investments and obligations were recorded in other non-current assets and other non-current liabilities, respectively, in the Condensed Consolidated Balance Sheets, representing the fair value related to the deferred compensation plan.

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

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 $ 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.

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

The plan assets and liabilities were $ 2.4 million and $ 1.5 million as of March 31, 2023 and December 31, 2022, respectively.

Multi-Employer Pension Plans

Certain Company employees who perform work on contracts within the continental United States participate in multi-employer pension plans of which the Company is not the sponsor.

Company expenses related to these plans were $ 3.3 million and $ 0.2 million for the three months ended March 31, 2023 and April 1, 2022, 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