| | | | | | | 101 | The following materials from V2X, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022,2023, formatted in Inline Extensible Business Reporting Language ("Inline XBRL"): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements.# | 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) # |
† Certain schedules to this exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K. * Indicates management contract or compensatory plan or arrangement. + Indicates this document is filed as an exhibit herewith. ++ Indicates this document is furnished as an exhibit herewith. # Submitted electronically with this report.
The Company’s Commission File Number for Reports on Form 10-K, Form 10-Q and Form 8-K is 001-36341.
(b)Financial Statement Schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements filed as part of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
V2X, INC. Index to Consolidated Financial Statements | | | | | | | | | | | Page No. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Note 6. (Loss) Earnings Per Share | | | Note 7. Property, Plant and Equipment, Net | | | | | | | | | | | | | | | | | | | | | Note 12. Leases | | | Note 13. Income Taxes | | | Note 14. Post-Employment Benefit Plans | | | | | | | | | Note 15. Commitments and Contingencies | | | | | | | | | Note 18. Subsequent Events | | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of V2X, Inc.
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheetsheets of V2X, Inc. and subsidiaries (the “Company”)Company) as of December 31, 2023 and 2022, the related consolidated statements of (loss) income,loss, comprehensive (loss) income,loss, shareholders’ equity and cash flows, for the yearyears then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the yearyears then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022,2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our2013. Our report dated March 2, 20235, 2024 expressed an unqualified opinion onthat the effectiveness of the Company'sCompany had not maintained effective internal control over financial reporting.reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit providesprovide a reasonable basis for our opinion.
Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
As described in Notes 1, 4 and 5 of the consolidated financial statements, the Company recognizes revenue derived from contracts over time. For the year ended December 31, 2022,2023, revenue was $2,890.9$3,963.1 million. Accounting for contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For contracts, management estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit over the life of the contract. Contract estimates are based on 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.
We have identified the assessment of the total estimated costs to complete a contract in order to accurately recognize the associated revenue on contracts in process as a critical audit matter because of the significant assumptions management makes in determining the costs and revenues related to the performance obligations. Auditing management’s judgments related to Company’s contracts involves a high degree of auditor judgment and increased audit effort due to the volume and complexity of contracts and the assumptions related to total revenue and costs.
Our audit procedures related to management’s estimates of total revenue and costs for the performance obligations used to recognize revenue included the following, among others:
•We obtained an understanding of the relevant controls related to revenue recognition and costs and tested such controls for design and operating effectiveness, including management’s controls over the estimation of total contract costs to be incurred to complete uncompleted contracts.
•We selected a sample of contracts and performed the following for each contract: ◦Evaluated whether the contract was properly included in management’s calculation based on the terms and conditions, including whether the customers simultaneously receive and consume the benefits of the Company’s services. ◦Evaluated the Company’s identification of performance obligations by evaluating whether the services to be performed under the contract were capable of being distinct or an integrated set of tasks and deliverables as a single solution. ◦Compared the transaction prices to the consideration expected to be received under the contract, including all executed contract modifications that were agreed upon with the customers. ◦Evaluated the estimates of total revenue and costs for the performance obligations as follows: ▪Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation. ▪Evaluated performance obligations and the associated estimate of profitability at completion as prepared by management and compared it to the recorded cost and revenue. ▪Evaluated management’s ability to estimate total costs and revenue accurately by comparing actual costs and profits to management’s historical estimates for performance obligations that have been fulfilled. ▪Evaluated performance obligation results occurring after the measurement period and, when applicable, understood changes to the estimate and impacts on the measurement period.
•We performed analytical procedures to evaluate the amount of revenue recorded to date and related contract balance, by comparing changes in the estimated costs at completion, including changes in transaction price when relevant, for a sample of contracts throughout the period.
•We performed analytical procedures over contract margins by comparing the current year results to prior results and to post-close results.
Fair Value Estimation of Certain Customer-Related and Contractual Intangible Assets Acquired in Business Combination
As described in the Note 3 to the consolidated financial statements, on July 5, 2022, Vectrus, Inc. merged with Vertex Aerospace Services Corp forming V2X for total consideration of $634.0 million. The Company conducted valuations of certain intangible assets as of the date of acquisition, including customer-related and contractual intangible assets of $480 million. The Company used an income approach in its valuation of intangible assets, which is a method of using discounted cash flows. The model requires management to make significant assumptions, which include revenue growth rates and the selection of an appropriate discount rate.
We identified the fair value determination of certain customer-related and contractual intangible assets as a critical audit matter due to the high degree of auditor judgment and subjectivity in applying audit procedures relating to the fair value measurement of the intangible assets acquired. Increased audit effort was required in performing procedures and evaluating the significant assumptions relating to the estimate, including the use of valuation specialists.
Our audit procedures related to management’s estimates for the fair value of customer-related intangible assets acquired in business combination included the following, among others:
•We obtained an understanding of the relevant controls related to the valuation of customer-related and contractual intangible assets and tested design and operating effectiveness, including management’s controls for identifying the intangible assets, determining forecasts of future cash flows and selecting the discount rate.
•We tested the completeness and accuracy of the underlying data used in the fair value models which included inspecting contractual documents and comparing projected cash flows to both historical actual results and industry data.
•With the assistance of our valuation specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation.
•We performed sensitivity analyses over assumptions used in the fair value calculations, to evaluate the risk associated with a change in assumptions to the recorded fair value of the customer-related intangible assets.
•We evaluated the adequacy of the Company’s financial statement disclosures related to the acquisition.
/s/ RSM US LLP
We have served as the Company's auditor since 2022.
McLean, Virginia March 2, 20235, 2024
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of V2X, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of V2X, Inc. (formerly Vectrus, Inc.) and subsidiaries (the "Company") as of December 31, 2021, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows of V2X, Inc. (formerly Vectrus, Inc.) for each of the two years in the periodyear ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and the results of its operations and its cash flows for each of the two years in the periodyear ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditsaudit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Denver, Colorado March 7, 2022
We began serving as the Company’s auditor in 2013. In 2022 we became the predecessor auditor.
V2X, INC. CONSOLIDATED STATEMENTS OF (LOSS) INCOME | | Year Ended December 31, | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands, except per share data) | (In thousands, except per share data) | | 2022 | | 2021 | | 2020 | (In thousands, except per share data) | | 2023 | | 2022 | | 2021 | Revenue | Revenue | | $ | 2,890,860 | | | $ | 1,783,665 | | | $ | 1,395,529 | | Cost of revenue | Cost of revenue | | 2,595,848 | | | 1,623,245 | | | 1,271,375 | | Selling, general and administrative expenses | Selling, general and administrative expenses | | 239,241 | | | 98,400 | | | 80,679 | | | Operating income | Operating income | | 55,771 | | | 62,020 | | | 43,475 | | Operating income | | Operating income | | Loss on extinguishment of debt | | Interest expense, net | Interest expense, net | | (61,879) | | | (7,985) | | | (4,793) | | | Other expense, net | | (Loss) income from operations before income taxes | (Loss) income from operations before income taxes | | (6,108) | | | 54,035 | | | 38,682 | | Income tax expense | | 8,222 | | | 8,307 | | | 1,731 | | Income tax (benefit) expense | | Net (loss) income | Net (loss) income | | $ | (14,330) | | | $ | 45,728 | | | $ | 36,951 | | | (Loss) earnings per share | (Loss) earnings per share | | (Loss) earnings per share | | (Loss) earnings per share | | Basic | | Basic | | Basic | Basic | | $ | (0.68) | | | $ | 3.91 | | | $ | 3.19 | | Diluted | Diluted | | $ | (0.68) | | | $ | 3.86 | | | $ | 3.14 | | Weighted average common shares outstanding – basic | Weighted average common shares outstanding – basic | | 20,996 | | | 11,705 | | | 11,599 | | Weighted average common shares outstanding – diluted | Weighted average common shares outstanding – diluted | | 20,996 | | | 11,836 | | | 11,751 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
V2X, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME | | Year Ended December 31, | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | 2022 | | 2021 | | 2020 | (In thousands) | | 2023 | | 2022 | | 2021 | Net (loss) income | Net (loss) income | | $ | (14,330) | | | $ | 45,728 | | | $ | 36,951 | | Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | | Changes in derivative instrument: | Changes in derivative instrument: | | Changes in derivative instrument: | | Changes in derivative instrument: | | Net change in fair value of interest rate swaps | | Net change in fair value of interest rate swaps | | Net change in fair value of interest rate swaps | Net change in fair value of interest rate swaps | | 666 | | | 1,099 | | | (756) | | Net change in fair value of foreign currency forwards | Net change in fair value of foreign currency forwards | | 31 | | | (434) | | | 589 | | | Tax benefit | | 272 | | | 121 | | | 36 | | Tax (expense) benefit | | Tax (expense) benefit | | Tax (expense) benefit | | Net change in derivative instrument | Net change in derivative instrument | | 969 | | | 786 | | | (131) | | Foreign currency translation adjustments | Foreign currency translation adjustments | | (596) | | | (6,659) | | | 5,186 | | Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | | 373 | | | (5,873) | | | 5,055 | | Total comprehensive (loss) income | Total comprehensive (loss) income | | $ | (13,957) | | | $ | 39,855 | | | $ | 42,006 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
V2X, INC. CONSOLIDATED BALANCE SHEETS | | December 31, | (In thousands, except per share data) | | 2022 | | 2021 | | | December 31, | | | | December 31, | (In thousands, except shares and per share data) | | (In thousands, except shares and per share data) | | 2023 | | 2022 | Assets | Assets | | | | | Current assets | Current assets | | Cash and cash equivalents | | $ | 116,067 | | | $ | 38,513 | | Current assets | | Current assets | | Cash, cash equivalents and restricted cash | | Cash, cash equivalents and restricted cash | | Cash, cash equivalents and restricted cash | | | Receivables | Receivables | | 728,582 | | | 348,605 | | Prepaid expenses | | 74,234 | | | 21,160 | | Receivables | | Receivables | | | Other current assets | | 13,049 | | | 15,062 | | Inventory, net | | Inventory, net | | Inventory, net | | Prepaid expenses and other current assets | | Total current assets | Total current assets | | 931,932 | | | 423,340 | | Property, plant, and equipment, net | Property, plant, and equipment, net | | 78,715 | | | 23,758 | | Goodwill | Goodwill | | 1,653,822 | | | 321,734 | | Intangible assets, net | Intangible assets, net | | 497,951 | | | 66,582 | | Right-of-use assets | Right-of-use assets | | 52,825 | | | 43,651 | | Other non-current assets | Other non-current assets | | 17,858 | | | 10,394 | | Total non-current assets | Total non-current assets | | 2,301,171 | | | 466,119 | | Total Assets | Total Assets | | $ | 3,233,103 | | | $ | 889,459 | | Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | | | | | Current liabilities | Current liabilities | | Current liabilities | | Current liabilities | | Accounts payable | | Accounts payable | | Accounts payable | Accounts payable | | $ | 406,706 | | | $ | 212,533 | | | Compensation and other employee benefits | Compensation and other employee benefits | | 168,038 | | | 80,284 | | Compensation and other employee benefits | | Compensation and other employee benefits | | | Short-term debt | | Short-term debt | | Short-term debt | Short-term debt | | 11,850 | | | 10,400 | | Other accrued liabilities | Other accrued liabilities | | 196,538 | | | 55,031 | | Total current liabilities | Total current liabilities | | 783,132 | | | 358,248 | | | | Long-term debt, net | | | Long-term debt, net | | | Long-term debt, net | Long-term debt, net | | 1,262,811 | | | 94,246 | | Deferred tax liabilities | Deferred tax liabilities | | 15,813 | | | 32,214 | | Operating lease liabilities | Operating lease liabilities | | 41,083 | | | 34,536 | | Other non-current liabilities | Other non-current liabilities | | 133,185 | | | 20,128 | | Total non-current liabilities | Total non-current liabilities | | 1,452,892 | | | 181,124 | | Total liabilities | Total liabilities | | 2,236,024 | | | 539,372 | | Commitments and contingencies (Note 15) | Commitments and contingencies (Note 15) | | | | | Commitments and contingencies (Note 15) | | | Shareholders' Equity | Shareholders' Equity | | Preferred stock; $0.01 par value; 10,000 shares authorized; No shares issued and outstanding | | — | | | — | | Common stock; $0.01 par value; 100,000 shares authorized; 30,470 and 11,738 shares issued and outstanding as of December 31, 2022 and 2021, respectively | | 305 | | | 117 | | Preferred stock; $0.01 par value; 10,000,000 shares authorized; No shares issued and outstanding | | Preferred stock; $0.01 par value; 10,000,000 shares authorized; No shares issued and outstanding | | Preferred stock; $0.01 par value; 10,000,000 shares authorized; No shares issued and outstanding | | Common stock; $0.01 par value; 100,000,000 shares authorized; 31,191,628 and 30,470,475 shares issued and outstanding as of December 31, 2023 and 2022, respectively | | Additional paid in capital | Additional paid in capital | | 748,877 | | | 88,116 | | Retained earnings | Retained earnings | | 253,424 | | | 267,754 | | Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (5,527) | | | (5,900) | | Total shareholders' equity | Total shareholders' equity | | 997,079 | | | 350,087 | | Total Liabilities and Shareholders' Equity | Total Liabilities and Shareholders' Equity | | $ | 3,233,103 | | | $ | 889,459 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
V2X, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS | | Year Ended December 31, | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | 2022 | | 2021 | | 2020 | (In thousands) | | 2023 | | 2022 | | 2021 | Operating activities | Operating activities | | | | | | | Net (loss) income | | Net (loss) income | | Net (loss) income | Net (loss) income | | $ | (14,330) | | | $ | 45,728 | | | $ | 36,951 | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | Depreciation expense | Depreciation expense | | 13,472 | | | 6,526 | | | 4,097 | | Amortization of intangible assets | Amortization of intangible assets | | 48,643 | | | 10,028 | | | 4,029 | | Loss (gain) on disposal of property, plant, and equipment | | 59 | | | 65 | | | (14) | | Loss on disposal of property, plant, and equipment | | Stock-based compensation | Stock-based compensation | | 32,736 | | | 8,331 | | | 9,445 | | Deferred taxes | | Amortization of debt issuance costs | Amortization of debt issuance costs | | 7,805 | | | 912 | | | 386 | | Loss on extinguishment of debt | | Gain on disposition of business | Gain on disposition of business | | (2,082) | | | — | | | — | | Changes in assets and liabilities: | Changes in assets and liabilities: | | Receivables | Receivables | | (52,311) | | | (36,376) | | | 1,000 | | Prepaid expenses | | (3,971) | | | (5,178) | | | (3,588) | | | Receivables | | Receivables | | Inventory, net | | Other assets | Other assets | | 15,333 | | | (7,667) | | | (3,644) | | Accounts payable | Accounts payable | | 71,837 | | | 56,985 | | | (2,680) | | | Deferred taxes | | (15,554) | | | (7,280) | | | (10,665) | | Compensation and other employee benefits | Compensation and other employee benefits | | 42,878 | | | 1,133 | | | 12,004 | | Other liabilities | Other liabilities | | (51,020) | | | (11,868) | | | 16,760 | | Net cash provided by operating activities | Net cash provided by operating activities | | 93,495 | | | 61,339 | | | 64,081 | | Investing activities | Investing activities | | | | | | | Purchases of capital assets and intangibles | Purchases of capital assets and intangibles | | (12,425) | | | (9,776) | | | (4,500) | | Purchases of capital assets and intangibles | | Purchases of capital assets and intangibles | | Proceeds from the disposition of assets | Proceeds from the disposition of assets | | 9 | | | 16 | | | 84 | | Acquisition of business, net of cash acquired | Acquisition of business, net of cash acquired | | 193,677 | | | 262 | | | (133,609) | | Disposition of business | Disposition of business | | (5,303) | | | — | | | — | | Distributions from (contributions to) joint venture | Distributions from (contributions to) joint venture | | — | | | (3,145) | | | — | | | Net cash provided by (used in) investing activities | | 175,958 | | | (12,643) | | | (138,025) | | Net cash (used in) provided by investing activities | | Financing activities | Financing activities | | | | | | | | Proceeds from issuance of long-term debt | | Proceeds from issuance of long-term debt | | Proceeds from issuance of long-term debt | | Repayments of long-term debt | Repayments of long-term debt | | (108,400) | | | (8,600) | | | (6,500) | | Proceeds from revolver | Proceeds from revolver | | 392,000 | | | 529,000 | | | 314,000 | | Repayments of revolver | Repayments of revolver | | (472,925) | | | (594,000) | | | (199,000) | | | Proceeds from exercise of stock options | Proceeds from exercise of stock options | | 408 | | | 379 | | | 59 | | Payment of debt issuance costs | Payment of debt issuance costs | | (2,325) | | | (17) | | | (830) | | | Prepayment premium on early redemption of debt | | Payments of employee withholding taxes on share-based compensation | Payments of employee withholding taxes on share-based compensation | | (1,994) | | | (2,347) | | | (1,955) | | | Net cash (used in) provided by financing activities | | (193,236) | | | (75,585) | | | 105,774 | | Net cash used in financing activities | | Exchange rate effect on cash | Exchange rate effect on cash | | 1,337 | | | (3,325) | | | 1,579 | | Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | | 77,554 | | | (30,214) | | | 33,409 | | Cash, cash equivalents and restricted cash – beginning of year | Cash, cash equivalents and restricted cash – beginning of year | | 38,513 | | | 68,727 | | | 35,318 | | Cash, cash equivalents and restricted cash – end of year | Cash, cash equivalents and restricted cash – end of year | | $ | 116,067 | | | $ | 38,513 | | | $ | 68,727 | | | Supplemental Disclosure of Cash Flow Information: | Supplemental Disclosure of Cash Flow Information: | | | | | | | Interest paid | | Interest paid | | Interest paid | Interest paid | | $ | 54,267 | | | $ | 5,801 | | | $ | 3,717 | | Income taxes paid | Income taxes paid | | $ | 13,416 | | | $ | 9,703 | | | $ | 14,520 | | Non-cash investing activities: | Non-cash investing activities: | | | | | | | Purchase of capital assets on account | Purchase of capital assets on account | | $ | 2,716 | | | $ | 277 | | | $ | 2,226 | | Purchase of capital assets on account | | Purchase of capital assets on account | | Common stock issued for business acquisition | Common stock issued for business acquisition | | $ | 630,636 | | | $ | — | | | $ | — | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
V2X, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | | Common Stock Issued | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity | | | Common Stock Issued | | | | Common Stock Issued | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity | (In thousands) | (In thousands) | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity | Balance at December 31, 2019 | | 11,524 | | | $ | 115 | | | Net income | | — | | | — | | | — | | | 36,951 | | | — | | | 36,951 | | | Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | 5,186 | | | 5,186 | | Unrealized gain on cash flow hedge | | — | | | — | | | — | | | — | | | (131) | | | (131) | | Employee stock awards and stock options | | 101 | | | 1 | | | 58 | | | — | | | — | | | 59 | | Conversion of liability-based stock compensation awards to equity-based stock compensation awards | | — | | | — | | | 405 | | | — | | | — | | | 405 | | Taxes withheld on stock compensation awards | | — | | | — | | | (1,955) | | | — | | | — | | | (1,955) | | Stock-based compensation | | — | | | — | | | 5,558 | | | — | | | — | | | 5,558 | | Balance at December 31, 2020 | | Balance at December 31, 2020 | | Balance at December 31, 2020 | Balance at December 31, 2020 | | 11,625 | | | $ | 116 | | | $ | 82,823 | | | $ | 222,026 | | | $ | (27) | | | $ | 304,938 | | Net income | Net income | | — | | | — | | | — | | | 45,728 | | | — | | | 45,728 | | | Foreign currency translation adjustments | Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | (6,659) | | | (6,659) | | Foreign currency translation adjustments | | Foreign currency translation adjustments | | Unrealized loss on cash flow hedge | Unrealized loss on cash flow hedge | | — | | | — | | | — | | | — | | | 786 | | | 786 | | Employee stock awards and stock options | Employee stock awards and stock options | | 113 | | | 1 | | | 377 | | | — | | | — | | | 378 | | | Taxes withheld on stock compensation awards | Taxes withheld on stock compensation awards | | — | | | — | | | (2,345) | | | — | | | — | | | (2,345) | | | Taxes withheld on stock compensation awards | | Taxes withheld on stock compensation awards | | Stock-based compensation | Stock-based compensation | | — | | | — | | | 7,261 | | | — | | | — | | | 7,261 | | Balance at December 31, 2021 | Balance at December 31, 2021 | | 11,738 | | | $ | 117 | | | $ | 88,116 | | | $ | 267,754 | | | $ | (5,900) | | | $ | 350,087 | | Net loss | Net loss | | — | | | — | | | — | | | (14,330) | | | — | | | (14,330) | | | Foreign currency translation adjustments | | Foreign currency translation adjustments | | Foreign currency translation adjustments | Foreign currency translation adjustments | | — | | | — | | | — | | | — | | | (596) | | | (596) | | Unrealized loss on cash flow hedge | Unrealized loss on cash flow hedge | | — | | | — | | | — | | | — | | | 969 | | | 969 | | Employee stock awards and stock options | Employee stock awards and stock options | | 140 | | | 2 | | | 406 | | | — | | | — | | | 408 | | Issuance of common stock in connection with a business combination | Issuance of common stock in connection with a business combination | | 18,592 | | | 186 | | | 630,450 | | | — | | | — | | | 630,636 | | Taxes withheld on stock compensation awards | Taxes withheld on stock compensation awards | | — | | | — | | | (1,994) | | | — | | | — | | | (1,994) | | Stock-based compensation | Stock-based compensation | | — | | | — | | | 31,899 | | | — | | | — | | | 31,899 | | Balance at December 31, 2022 | Balance at December 31, 2022 | | 30,470 | | | $ | 305 | | | $ | 748,877 | | | $ | 253,424 | | | $ | (5,527) | | | $ | 997,079 | | Net loss | | Foreign currency translation adjustments | | Unrealized gain on cash flow hedge | | Employee stock awards and stock options | | Taxes withheld on stock compensation awards | | Stock-based compensation | | Balance at December 31, 2023 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
V2X, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business and Basis of Presentation Our Business V2X, Inc., an Indiana Corporation, formerly known as Vectrus, Inc. (Vectrus), is a leading provider of critical mission solutions and support to defense clients globally. The Company operates as one segment and delivers a comprehensive suite of integrated solutions and critical service offerings across the operations and logistics, aerospace, training and technology markets to national security, defense, civilian and international clients. Vectrus was incorporated in the State of Indiana in February 2014. On September 27, 2014, Exelis Inc, an Indiana corporation, spun-off (the Spin-off) Vectrus and Vectrus became an independent, publicly traded company. References herein to "Exelis" or "Former Parent" refer to Exelis Inc. and its consolidated subsidiaries (other than Vectrus). Exelis was acquired by a predecessor entity of L3Harris Technologies, Inc. in May 2015.
On March 7, 2022, Vectrus entered into an Agreement and Plan of Merger (the Merger Agreement) with Vertex Aerospace Services Holding Corp., a Delaware corporation (Vertex), Andor Merger Sub Inc., a Delaware corporation (Merger Sub Inc.) and Andor Merger Sub LLC, a Delaware limited liability company.company (Merger Sub LLC). On July 5, 2022 (the Closing Date), Vectrus completed its merger (Merger) thereby forming V2X, Inc. For a description of the Merger, see Note 3, Merger and Acquisitions. Unless the context otherwise requires or unless stated otherwise, references in these notes to "V2X", "we," "us," "our," “combined company”, "the Company" and "our Company" refer to V2X, Inc. and all of its consolidated subsidiaries (including, subsequent to the Merger, Vertex and its consolidated subsidiaries), taken together as a whole. Equity Investment In 2011, we entered into a joint venture agreement with Shaw Environmental & Infrastructure, Inc., which is now APTIM Federal Services LLC. Pursuant to the joint venture agreement, High Desert Support Services, LLC (HDSS) was established to pursue and perform work on the Ft. Irwin Installation Support Services Contract, which was awarded to HDSS in October 2012. In 2018, we entered into a joint venture agreement with J&J Maintenance. Pursuant to the joint venture agreement, J&J Facilities Support, LLC (J&J) was established to pursue and perform work on various U.S. government contracts. 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 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 Consolidated Statements of Income. Our investment in these joint venturesThe carrying value of our investments is recorded in other non-current assets in the Consolidated Balance Sheets. When we receive cash distributions from our equity method investments, the cash distribution is compared to cumulative earnings and cumulative cash distributions. Cash distributions received are recorded as a return on investment in operating cash flows within the Consolidated Statements of Cash Flows to the extent cumulative cash distributions are less than cumulative earnings. Any cash distributions in excess of cumulative earnings are recorded as a return of investment in investing cash flows within the Consolidated Statements of Cash Flows. As of December 31, 20222023 and December 31, 2021,2022, our combined investment balance in these joint ventures was $7.0$5.4 million and $5.4$7.0 million, respectively. Our proportionate share of income from HDSS, J&J and ServCore joint venturesequity method investments was $2.84.0 million, $1.9$2.8 million, and $0.6$1.9 million for the years ended December 31, 2023, 2022, and 2021, and 2020, respectively.
Summary of Significant Accounting Policies Principles of Consolidation V2X consolidates companies in which it has a controlling financial interest. All intercompany transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, revenue recognition; income taxes; fair value and impairment of goodwill and intangible assets; valuation of assets and certain contingent liabilities. Actual results could differ from these estimates.
Segment Information Management has concluded that the Company operates as one segment based upon the information used by the chief operating decision maker (CODM) in evaluating the performance of the Company’s business and allocating resources and capital. Although we perform services worldwide, substantially allthe substantial majority of our revenue for the years ended December 31, 2023, 2022 2021 and 20202021 was from the U.S. government. Reclassifications Certain reclassifications have been made to the presentation of amounts in our Consolidated Balance Sheet as of December 31, 2022 to conform to the current year presentation. Specifically, inventory, net was reclassified from prepaid expenses and presented separately on our Consolidated Balance Sheets, and prepaid expenses were combined with other current assets on our Consolidated Balance Sheets. Changes in inventory, net were reclassified from changes in prepaid expenses and presented separately on our Consolidated Statements of Cash Flows, and changes in prepaid expenses were combined with changes in other assets on our Consolidated Statements of Cash Flows. Revenue Recognition As a defense contractor engaging in long-term contracts, substantially allthe substantial majority of our revenue is derived from long-term service contracts. The unit of account for revenue in ASC Topic 606, Revenue from Contracts with Customers (Topic 606) is a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. 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 IDIQindefinite delivery and indefinite quantity (IDIQ) contracts are considered to be separate performance obligations when the option or IDIQ task order is exercised or awarded. Our performance obligations are satisfied over time as services are provided throughout the contract term. We recognize revenue over time using the input method (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Our over time recognition is reinforced by the fact that our customers simultaneously receive and consume the benefits of our services as they are performed. 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. This continuous transfer of control requires that we track progress towards completion of performance obligations in order to measure and recognize revenue. 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 nature of our contracts gives rise to several types of variable consideration, including award and incentive fees, inspection of supplies and services, undefinitized change orders, and fluctuation in allowable indirect reimbursable costs. We include award or incentive fees in the estimated transaction price when there is certainty and a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. The inspection of supplies and services is a factor because the U.S. government can reduce the transaction price if we do not perform the services in compliance with contract requirements. Variable consideration associated with undefinitized change orders is included to the extent related estimated costs have been included in the expected costs to complete a contract. The fluctuation of allowable indirect reimbursable costs is a factor because the U.S. government has the right to review our accounting records and retroactively adjust the reimbursable rate. Any prior adjustments are reflected in the U.S. government reserve amounts recorded in our financial statements. We estimate variable consideration at the most likely amount that we expect to be entitled to receive, which is included in the transaction price to
the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. Refer to Note 15, Commitments and Contingencies, for additional information regarding U.S. government reserve amounts.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract estimates regularly. We recognize adjustments in estimated profit on executed contracts cumulatively. The impact of the adjustments on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified. Contracts are often modified to account for changes in contract specifications and requirements. If the modification either creates new enforceable rights and obligations or changes the existing enforceable rights and obligations, the modification will be treated as a separate contract. Our contract modifications, except for those to exercise option years, have historically not been distinct from the existing contract and have been accounted for as if they were part of that existing contract. 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 Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. These advance billings and payments are not considered significant financing components because they are frequently intended to fund current operating expenses under the contract. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Restricted Cash AtAs of December 31, 20202023 the Company had total cash, cash equivalents and restricted cash of $68.7$72.7 million which included $1.8$2.0 million of restricted cash related to collateral security for an outstanding letter of credit.cash. The Company's restricted cash was immaterial atnot material as of December 31, 2022 and we had no restricted cash at December 31, 2021.2022.
Receivables Receivables include amounts billed and currently due from customers, amounts unbilled, certain estimated contract change amounts, estimates related to expected award fees, claims or REAs in negotiation that are probable of recovery, and amounts retained by the customer pending contract completion. Unbilled receivables are classified as current assets based on our contract operating cycle. Substantially all billed receivables are due from the U.S. government, either directly as prime contractor to the U.S. government or as subcontractor to another prime contractor to the U.S. government. Because the Company’s billed receivables are with the U.S. government, the Company does not believe it has a material credit risk exposure. Inventory, Net Inventory, reported in the prepaid expenses balance on the face of the Consolidated Balance Sheets,net is substantially comprised of partsfinished goods inventory and is valued at the lower of cost or net realizable value, generally using the average cost method. We establish provisions for excess and obsolete inventories after evaluation of historical sales, current economic trends, forecasted sales, and current inventory levels.
(Loss) Earnings Per Share We compute (loss) earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods. Stock-Based Compensation We recognize stock-based compensation expense based on the grant date fair values of the equity instruments issued or on the fair values of the liabilities incurred. The expense is recognized primarily within selling, general and administrative expenses over the requisite service periods of the awards, which are generally equivalent to the vesting terms. Property, Plant and Equipment, Net Property, plant and equipment, net areis stated at cost less accumulated depreciation. Major improvements are capitalized at cost while expenditures for maintenance, repairs and minor improvements are expensed. For asset sales or retirements, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in operating income.
Depreciation and amortization are generally computed using either an accelerated or straight-line method and is based on estimated useful lives or lease terms as follows: | | | | | | | | | | | Years | Buildings and improvements | | 3 – 11 | Machinery, equipment and vehicles | | 3 – 12 | Office furniture and equipment, computers and software | | 3 – 7 |
Long-Lived Asset Impairment Long-lived assets are tested for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable. We assess the recoverability of long-lived assets based on the undiscounted future cash flow the assets are expected to generate. When carrying value exceeds the undiscounted future cash flow, an impairment is recorded when the carrying value of the asset exceeds its estimated fair value based on a discounted cash flow approach or, when available and appropriate, comparable market values. Goodwill Goodwill represents purchase consideration paid in a business combination that exceeds the fair values assigned to the net assets of acquired businesses. Goodwill is not amortized, but instead is tested for impairment annually (or more frequently if impairment indicators arise, such as changes to the reporting unit structure or significant adverse changes in the business climate). We conduct our annual impairment testing on the first day of the Company's fourth fiscal quarter. In reviewing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we then perform a quantitative impairment test as described below. Otherwise, no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. For the quantitative impairment test we compare the estimated fair value of a reporting unit to its carrying value, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of the reporting unit, including goodwill, exceeds its estimated fair value, a goodwill impairment loss is recognized in an amount equal to that excess limited to the total amount of goodwill allocated to that reporting unit. We estimate the fair value of our reporting unit using an income approach and a market approach. Under the income approach, we estimate fair value based on the present value of estimated future cash flows. Under the market approach, we compare our company to select reasonably similar publicly traded companies. Intangible Assets We recognize acquired intangible assets apart from goodwill whenever the intangible assets arise from contractual or other legal rights, or whenever they can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their estimated useful lives unless the estimated useful life is determined to be indefinite. Finite lived intangible assets are being amortized over useful lives of four to twelve years. The straight-line method of amortization is used as it has been determined to approximate the use pattern of the assets. Leases In accordance with ASC Topic 842, Leases (ASC Topic 842), operating leases are included on our Consolidated Balance Sheets as right-of-use (ROU) assets, other accrued liabilities and operating lease liabilities. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Because most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate as of January 1, 2019 was applied to operating leases in effect as of that date. The lease ROU assets also include any prepaid lease payments and exclude lease incentives. Many of our leases include one or more options to renew or terminate the lease, solely at our discretion. Such options are factored into the lease term when it is reasonably certain that we will exercise the option. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.
As allowed under ASC Topic 842, the Company elected the package of practical expedients permitted under the transition guidance which allowed the Company to carry forward the historical lease classification, assessment of whether a contract was or contained a lease and assessment of initial direct costs. In addition, we have made policy elections to apply the short-term leases practical expedient, whereby leases with a term of 12 months or less are not recorded on our balance
sheet, and the practical expedient to not separate lease components from non-lease components. The latter expedient is applied to all of our leases. We did not elect to apply the hindsight practical expedient in determining lease terms and assessing impairment of ROU assets. See Note 12, Leases, for further information. Income Taxes We determine the provision or benefit for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies, and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates. Commitments and Contingencies We record accruals for commitments and loss contingencies when they are probable of occurrence and the amounts can be reasonably estimated. In addition, legal fees are accrued for cases where a loss is probable and the related fees can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount of loss. We review these accruals quarterly and adjust the accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information. Derivative Instruments Derivative instruments are recognized as either an asset or liability at fair value in our Consolidated Balance Sheets and are classified as current or long-term based on the scheduled maturity of the instrument. Our derivative instruments have been formally designated and qualify as part of a cash flow hedging relationship under applicable accounting standards. The interest rate derivative instruments are adjusted to fair value through accumulated other comprehensive income (loss). If we were to determine that a derivative was no longer highly effective as a hedge, we would discontinue the hedge accounting prospectively. Gains or losses would be immediately reclassified from accumulated other comprehensive income (loss) to earnings relating to hedged forecasted transactions that are no longer probable of occurring. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions would still be probable of occurring would be deferred and recognized consistent with the income or loss recognition of the underlying hedged item. Refer to Note 11, Derivative Instruments, for additional information regarding our derivative activities. Severance Expense We periodically initiate management-approved restructuring activities to achieve cost savings through reduced operational redundancies and to strategically position ourselves in the market in response to prevailing economic conditions and associated customer demand. Costs associated with restructuring actions can include severance and related benefit charges. For involuntary separation plans, a liability is recognized when it is probable, reasonably estimable, and communicated to employees. For voluntary separation plans, a liability is recognized when the employee irrevocably accepts the termination. Fair Value Measurements We determine fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In measuring fair value, a fair value hierarchy is applied which categorizes and prioritizes the inputs used to estimate fair value into three levels. The fair value hierarchy is based on maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. Classification within the fair value hierarchy is based on the lowest level input that is significant to the fair value measurement. There are three levels of the fair value hierarchy. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices (in nonactive markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs are unobservable inputs for the assets or liabilities.
Foreign Currency Translation The financial statements of programs for which the functional currency is not the U.S. dollar are translated into U.S. dollars. Balance sheet accounts are translated at the exchange rate in effect at the end of each period; income statement accounts are translated at the average rates of exchange prevailing during the period. Gains and losses on foreign currency translations are recorded as translation adjustments to other comprehensive (loss) income. Net gains or losses from foreign currency transactions are reported in selling, general and administrative expenses and have historically been insignificant.
NOTE 2 RECENT ACCOUNTING STANDARDS UPDATES Accounting Standards Updates Issued but Not Yet Adopted There were no accounting standards issued during 2022 that are expected to have a material impact on the Company's financial statements.
Accounting Standards Updates Adopted
In October 2021,November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-08, Business Combinations2023-07, Segment Reporting (Topic 805): Accounting for Contract Assets280), to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. Amongst other amendments, the standard requires annual and Contract Liabilities from Contracts with Customers (ASU 2021-08).interim disclosures of significant segment expenses that are regularly provided to the CODM, and interim disclosures about a reportable segment’s profit or loss and assets that are currently required annually. This standard does not change how an entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. 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. ASU No. 2021-08standard is effective for interim and annual periodsfiscal years beginning after December 15, 2022, on a prospective basis, with early adoption permitted.2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is to be applied to all business combinations that occur duringpermitted. The Company is currently evaluating the fiscal year that the amendment is adopted. We adoptedimpact of adoption of this standard in the third quarter of 2022 and applied the guidance to our Merger.on its consolidated financial statements. In March 2020,December 2023, the FASB issued ASU 2020-04, Reference Rate ReformNo. 2023-09 Income Taxes (Topic 848): Facilitation of740) to improve income tax disclosures primarily related to the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). To ease the burdenrate reconciliation and income taxes paid information. The amendments in accountingthis ASU are effective 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 LIBOR or another reference rate expected to be discontinued because of reference rate reform.fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company adoptedis currently evaluating the impact of adoption of this standard during the first quarter of 2022. It did not have a material impact on the Company'sits consolidated financial statements. NOTE 3 MERGER AND ACQUISITIONS In accordance with ASC Topic 805, Business Combinations, we accounted for the below transactionstransaction using the acquisition method. We conducted valuations of certain acquired assets and liabilities for inclusion in our Consolidated Balance Sheets as of the date of the acquisitions.acquisition. 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. MERGER
On July 5, 2022, 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 $908.4 million and net loss of $39.9 million for the period from the Closing Date until December 31, 2022. The Company recognized $39.9 million of acquisition-related costs that were expensed as incurred during the year ended December 31, 2022. These costs are included in selling, general and administrative expenses in the Consolidated Statements of Income. Purchase Price Allocation The Merger is accounted for as a business combination. As such, the assets acquired and liabilities assumed are accounted for at fair value, with the excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed recorded as goodwill.
The Closing Date fair value of the consideration transferred totaled $634.0 million, which was comprised of the following: | | | | | | | | | ($ in thousands, except share and per share amounts) | | Purchase Price | Shares of V2X common stock issued | | 18,591,866 | | Market price per share of V2X as of Closing Date | | $ | 33.92 | | Fair value of common shares issued | | $ | 630,636 | | Fair value of cash consideration | | 3,315 | | Total consideration transferred | | $ | 633,951 | |
The following table summarizes the preliminaryfinal fair values of the assets acquired and liabilities assumed in the Merger as of the Closing Date. The estimated fair value of Vertex’s assets acquired and liabilities assumed at the acquisition date are determined based on preliminary valuations and analyses. As of December 31, 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 workers compensation and loss and below market contracts which are included in current and non-current liabilities below. The final determination could result in material adjustments. | | | | | | | | | (In thousands) | | Preliminary Fair Value | Cash and cash equivalents | | $ | 196,993 | | Receivables | | 334,655331,300 | | Inventory | | 34,735 | | Prepaid expenses and other current assets | | 49,17216,103 | | | | | | | | Property, plant, and equipment | | 53,61855,678 | | | | | Intangible assets | | 480,000 | | Other non-current assets | | 18,89517,104 | | Right-of-use assets | | 21,062 | | | | | Accounts payable | | (121,515) | | Debt | | (1,352,303) | | Compensation and other employee benefits | | (45,968) | | | | | | | | | | | | | | Other current and non-current liabilities | | (332,746)(334,469) | | Total identifiable net assets | | (698,137)(701,280) | | Goodwill | | 1,332,0881,335,231 | | Total purchase consideration | | $ | 633,951 | |
As a result of the Merger, the Company recognized $1,332.1 million$1.3 billion of goodwill. The goodwill recognized is attributable to operational and general and administrative cost synergies, expanded market opportunities and other benefits that do not qualify for separate recognition. None of the goodwill is expected to be deductible for tax purposes. In addition, 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$331.3 million represent fair value and are considered fully collectible as of December 31, 2022.2023. 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. (AIP). As of December 31, 2022,2023, the Company recorded $2.3$2.8 million of income related to the TSA with Crestview, which was recorded as a reduction in cost of sales. As of December 31, 2023, AIP currently holdsheld approximately 60.1%59.3% of V2X common stock. The following unaudited pro forma information shows the combined results of our operations for the years ended December 31, 2022 and 2021 as if the Merger had occurred on January 1, 2021. The unaudited pro forma information reflects the effects of applying our accounting policies and certain pro forma adjustments to the combined historical financial information of Vertex. The pro forma adjustments include: a) incremental amortization expense associated with identified intangible assets; b) incremental interest expense resulting from fair value adjustments applied to the Vertex debt that we
assumed; and c) a reduction of revenues and operating expenses associated with fair value adjustments made to acquire assets and assumed liabilities, such as contract cost assets and contract liabilities.
This unaudited pro forma information is presented for informational purposes only and may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations. | | | | | | | | | | | | | | | | | Year Ended December 31, | (Unaudited, in thousands) | | 2022 | | 2021 | Pro forma revenue | | $ | 3,669,567 | | | $ | 3,371,828 | | Pro forma net (loss) income | | $ | (11,281) | | | $ | 60,137 | |
Zenetex
On December 31, 2020, we acquired Zenetex, a leading provider of technical and strategic solutions focused on enabling mission readiness, performance, and enhancement of protection for defense and national security clients globally.
The total net consideration paid for the acquisition was approximately $117.6 million, consisting of the purchase price of $122.8 million, net of cash acquired, less $5.2 million for a working capital shortfall compared with the working capital requirement agreed upon in the stock purchase agreement. The acquisition was funded by utilizing available capacity from our Amended Revolver (as defined in Note 10,
Debt) and cash on hand.
A breakdown of the purchase price allocation, net of cash acquired, is as follows: | | | | | | | | | (In thousands) | | Allocation of Purchase Price | | | | Receivables | | $ | 40,144 | | Deferred taxes | | 88 | | Other current assets | | 1,314 | | Property, plant and equipment | | 1,108 | | Goodwill | | 53,541 | | Intangible assets | | 57,100 | | Right-of-use assets | | 7,930 | | | | | Accounts payable | | (7,381) | | Other current liabilities | | (15,821) | | Accrued compensation | | (12,087) | | Lease liabilities | | (8,275) | | Other non-current liabilities | | (55) | | Purchase price, net of cash acquired | | $ | 117,606 | |
We finalized our determination of the fair values of the assets acquired and liabilities assumed during the fourth quarter of 2021.
The Company recognized customer related intangible assets arising from the acquisition. The related fair value was $57.1 million with an amortization period of 11.8 years. Fair value of intangible assets was based upon a cash flow analysis using management's best estimate of future revenue, earnings and cash flows, as well as analysis of historic performance of Zenetex. The cash flow analysis was discounted to adjust for risks in these estimates.
Additionally, the Company recognized goodwill of $53.5 million arising from the acquisition, which relates primarily to acquired product and services strengthening our position as a leading fully-integrated provider in the converged infrastructure market, as well as extending our operations and maintenance services to increase content and scope at client installations. Goodwill also includes other intangibles that do not qualify for separate recognition. The goodwill recognized for the Zenetex acquisition is fully deductible for income tax purposes. Zenetex results of operations have been included in our Consolidated Statements of Income for the periods subsequent to acquisition on December 31, 2020. On a proforma basis, the acquired business would have recognized revenue of $238.0 million for the year ended December 31, 2020, and an insignificant amount of income before taxes after proforma adjustments.
HHB
On December 31, 2020, we acquired HHB, a leading provider of high-end solutions for facilities management, logistics, engineering, enterprise operations and asset management solutions for supporting intelligence community projects. The total net consideration paid for the acquisition was approximately $15.5 million. The acquisition was funded by utilizing available capacity from our Amended Revolver and cash on hand.
We finalized our determination of the fair values of the assets acquired and liabilities assumed during the fourth quarter of 2021.
The Company recognized a customer related intangible assets arising from the acquisition. The fair value was $8.6 million with an amortization period of 7.4 years. Fair value of the intangible assets was based upon a cash flow analysis using management's best estimate of future revenue, earnings and cash flows, as well as analysis of historic performance of HHB. The cash flow analysis was discounted to adjust for risks in these estimates.
Additionally, the Company recognized goodwill of $6.1 million arising from the acquisition, which relates primarily to growth opportunities in the intelligence community as a converged infrastructure provider. Goodwill also includes other intangibles that do not qualify for separate recognition. The goodwill recognized for the HHB acquisition is fully deductible for income tax purposes.
The remainder of the purchase price was allocated primarily to working capital.
NOTE 4 REVENUE Remaining Performance Obligations Remaining performance obligations represent firm orders by the customer and excludes potential orders under IDIQ contracts, unexercised contract options and contracts awarded to us that are being protested by competitors with the U.S. GAOGovernment Accountability Office (GAO) or in the U.S. COFC.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. The Company's contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year (or less) option periods. The number of option periods varies by contract, and there is no guarantee that an option period will be exercised. The right to exercise an option period is at the sole discretion of the U.S. government when we are the prime contractor or of the prime contractor when we are a subcontractor. We expect to recognize a substantial portion of our performance obligations as revenue within the next 12 months. However, the U.S. government or the prime contractor may cancel any contract at any time through a termination for convenience or for cause. Substantially all of our contracts have terms that would permit us to recover all or a portion of our incurred costs and fees for work performed in the event of a termination for convenience. Remaining performance obligations as of December 31, 20222023 and December 31, 20212022 are presented in the following table: | | | | | | Year Ended December 31, | | Year Ended December 31, | (In millions) | (In millions) | | 2022 | | 2021 | (In millions) | | 2023 | | 2022 | Performance Obligations | Performance Obligations | | $ | 2,997 | | | $ | 1,398 | | |
We expect to recognize approximately 72%76% of the remaining performance obligations as of December 31, 20222023 as revenue in 2023.2024. Contract Estimates The impact of adjustments in contract estimates on our operating income can be reflected in either revenue or cost of revenue. Cumulative adjustments for the years ended December 31, 2023 and 2022 were favorable by $22.7 million and $13.3 million, respectively, and for the year ended December 31, 2022 were favorable by $13.3 million, and for the years ended December 31, 2021 and 2020 were unfavorable by $1.3 million and $3.7 million, respectively.million. For the years ended December 31, 2023, 2022, and 2021 the net adjustments to operating income increased revenue by $38.1 million$7.5, $7.5 million, andand $0.4 million, respectively. For the year ended December 31, 2020, the net adjustments to operating income decreased revenue by $1.8 million. Revenue by Category Generally, the sales price elements for our contracts are cost-plus, cost-reimbursable, ortime-and-materials and firm-fixed-price. 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 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 program. Typically, these costs do not bear fees. 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 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. The following tables present our revenue disaggregated by different categories. Revenue by contract type for the years 2022, 2021 and 2020 areis as follows: | | Year Ended December 31, | | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | 2022 | | 2021 | | 2020 | (In thousands) | | 2023 | | 2022 | | 2021 | Cost-plus and cost-reimbursable | Cost-plus and cost-reimbursable | | $ | 1,625,196 | | | $ | 1,271,167 | | | $ | 955,506 | | Firm-fixed-price | Firm-fixed-price | | 1,159,743 | | | 452,112 | | | 403,994 | | Time-and-materials | Time-and-materials | | 105,921 | | | 60,386 | | | 36,029 | | Total revenue | Total revenue | | $ | 2,890,860 | | | $ | 1,783,665 | | | $ | 1,395,529 | |
Revenue by geographic region in which the contract is performed for the years 2022, 2021 and 2020 areis as follows: | | Year Ended December 31, | | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | 2022 | | 2021 | | 2020 | (In thousands) | | 2023 | | 2022 | | 2021 | United States | United States | | $ | 1,494,255 | | | $ | 578,255 | | | $ | 328,214 | | Middle East | Middle East | | 1,024,674 | | | 1,000,877 | | | 902,162 | | Asia | | Europe | Europe | | 204,302 | | | 142,606 | | | 155,169 | | Asia | | 167,629 | | | 61,927 | | | 9,984 | | Total revenue | Total revenue | | $ | 2,890,860 | | | $ | 1,783,665 | | | $ | 1,395,529 | |
Revenue by contract relationship for the years 2022, 2021 and 2020 areis as follows: | | Year Ended December 31, | | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | 2022 | | 2021 | | 2020 | (In thousands) | | 2023 | | 2022 | | 2021 | Prime contractor | Prime contractor | | $ | 2,695,067 | | | $ | 1,663,828 | | | $ | 1,324,628 | | Subcontractor | Subcontractor | | 195,793 | | | 119,837 | | | 70,901 | | Total revenue | Total revenue | | $ | 2,890,860 | | | $ | 1,783,665 | | | $ | 1,395,529 | |
Revenue by customer is as follows: | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | (In thousands) | | 2023 | | 2022 | | 2021 | Army | | $ | 1,633,525 | | | $ | 1,342,406 | | | $ | 1,134,849 | | Navy | | 1,233,463 | | | 713,732 | | | 224,407 | | Air Force | | 538,698 | | | 459,849 | | | 266,291 | | Other | | 557,440 | | | 374,873 | | | 158,118 | | Total revenue | | $ | 3,963,126 | | | $ | 2,890,860 | | | $ | 1,783,665 | |
Revenue by customer for the years 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | (In thousands) | | 2022 | | 2021 | | 2020 | Army | | $ | 1,342,406 | | | $ | 1,134,849 | | | $ | 965,558 | | Navy | | 713,732 | | | 224,407 | | | 68,748 | | Air Force | | 459,849 | | | 266,291 | | | 299,272 | | Other | | 374,873 | | | 158,118 | | | 61,951 | | Total revenue | | $ | 2,890,860 | | | $ | 1,783,665 | | | $ | 1,395,529 | |
Contract Balances The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. These advance billings and payments are not considered significant financing components because they are frequently intended to ensure that both parties are in conformance with the primary contract terms. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. As of December 31,January 1, 2022, we had contract assets of $240.0 million. As of December 31, 2023 and 2022, we had contract assets of $561.9 million and $487.8 million.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. The balance of unbilled receivables consists of costs and fees that are: (i) billable immediately; (ii) billable on contract completion; or (iii) billable upon other specified events, such as the resolution of a request for equitable adjustment. Refer to Note 5, Receivables, for additional information regarding the composition of our receivables balances. As of December 31,January 1, 2022, we had contract liabilities of $5.5 million. As of December 31, 2023 and 2022, we had contract liabilities of $109.6 million and $76.4 million, respectively, included in other accrued liabilities in the Consolidated Balance Sheets. NOTE 5 RECEIVABLES Receivables were comprised of the following: | | December 31, | | | December 31, | | | | December 31, | (In thousands) | (In thousands) | | 2022 | | 2021 | (In thousands) | | 2023 | | 2022 | Billed receivables | Billed receivables | | $ | 227,718 | | | $ | 104,074 | | Unbilled receivables (contract assets) | Unbilled receivables (contract assets) | | 487,758 | | | 239,979 | | Other | Other | | 13,106 | | | 4,552 | | Total Receivables | | $ | 728,582 | | | $ | 348,605 | | Total receivables | |
As of December 31, 20222023 and 2021,2022, substantially all billed receivables are due from the U.S. government, either directly as prime contractor to the U.S. government or as subcontractor to another prime contractor to the U.S. government. Because the Company’s billed receivables are with the U.S. government, the Company does not believe it has a material credit risk exposure. Unbilled receivables are contract assets that represent revenue recognized on long-term contracts in excess of amounts billed as of the balance sheet date. We expect to bill customers for the majority of the December 31, 20222023 contract assets during 2023.2024. Changes in the balance of receivables are primarily due to the timing differences between our performance and customer payments.
NOTE 6 (LOSS) EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects potential dilution that could occur if securities that are convertible to issue common stock were exercised or converted into common stock. Diluted EPS includes the dilutive effect of share-based compensation outstanding after application of the treasury stock method. | | | | Year Ended December 31, | | | Year Ended December 31, | (In thousands, except per share data) | (In thousands, except per share data) | | 2022 | | 2021 | | 2020 | (In thousands, except per share data) | | 2023 | | 2022 | | 2021 | Net (loss) income | Net (loss) income | | $ | (14,330) | | | $ | 45,728 | | | $ | 36,951 | | | Weighted average common shares outstanding | Weighted average common shares outstanding | | 20,996 | | | 11,705 | | | 11,599 | | Weighted average common shares outstanding | | Weighted average common shares outstanding | | Add: Dilutive impact of stock options | Add: Dilutive impact of stock options | | — | | | 37 | | | 37 | | Add: Dilutive impact of restricted stock units | Add: Dilutive impact of restricted stock units | | — | | | 94 | | | 115 | | Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | | 20,996 | | | 11,836 | | | 11,751 | | | (Loss) earnings per share | (Loss) earnings per share | | (Loss) earnings per share | | (Loss) earnings per share | | Basic | | Basic | | Basic | Basic | | $ | (0.68) | | | $ | 3.91 | | | $ | 3.19 | | Diluted | Diluted | | $ | (0.68) | | | $ | 3.86 | | | $ | 3.14 | |
The following table below summarizes the weighted average of anti-dilutive securities excluded from the diluted earnings per shareEPS calculation. | | Year Ended December 31, | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | 2022 | | 2021 | | 2020 | (In thousands) | | 2023 | | 2022 | | 2021 | | Anti-dilutive restricted stock units | Anti-dilutive restricted stock units | | — | | | 1 | | | 2 | | Anti-dilutive restricted stock units | | Anti-dilutive restricted stock units | | |
NOTE 7 PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net consisted of the following at December 31: | (In thousands) | (In thousands) | | 2022 | | 2021 | (In thousands) | | 2023 | | 2022 | Buildings and improvements | Buildings and improvements | | $ | 23,941 | | | $ | 2,232 | | Machinery, equipment and vehicles | Machinery, equipment and vehicles | | 42,874 | | | 19,756 | | Office furniture and equipment, computers and software | Office furniture and equipment, computers and software | | 44,150 | | | 21,672 | | Property, plant and equipment, gross | Property, plant and equipment, gross | | 110,965 | | | 43,660 | | Less: accumulated depreciation and amortization | Less: accumulated depreciation and amortization | | (32,250) | | | (19,902) | | Property, plant and equipment, net | Property, plant and equipment, net | | $ | 78,715 | | | $ | 23,758 | |
Depreciation expense of property, plant and equipment was $22.4 million, $13.5 million and $6.5 million in 2023, 2022, and $4.1 million in 2022, 2021, and 2020, respectively. NOTE 8 GOODWILL AND INTANGIBLE ASSETS 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. The annual qualitative assessment tests performed in the three years ended December 31, 20222023 indicated there was no goodwill impairment.
The change in the net carrying amount of goodwill for 20212022 and 20222023 is as follows (in thousands): | | | | | | | Balance at December 31, 2020 | $ | 339,702 | | | Adjustments to preliminary purchase price allocation of Zenetex | (13,383) | | | Adjustments to preliminary purchase price allocation of HHB | (4,585) | | | Balance at December 31, 2021 | $ | 321,734 | | | Acquisition of Vertex | 1,332,088 | | | Balance at December 31, 2022 | 1,653,822 | | | Adjustments to preliminary purchase price allocation of Vertex and other | 3,104 | | | Balance at December 31, 2023 | $ | 1,653,8221,656,926 | | |
Other identifiable intangible assets consist of the following: | | December 31, 2022 | | December 31, 2021 | | | December 31, 2023 | | | | December 31, 2023 | | December 31, 2022 | (In thousands) | (In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | (In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Contract backlogs and recompetes | Contract backlogs and recompetes | | $ | 393,300 | | | $ | (56,210) | | | $ | 337,090 | | | $ | 77,300 | | | $ | (14,988) | | | $ | 62,312 | | Customer contracts | Customer contracts | | 171,200 | | | (10,748) | | | 160,452 | | | 7,200 | | | (3,572) | | | 3,628 | | Trade names and other | Trade names and other | | 1,260 | | | (851) | | | 409 | | | 1,249 | | | (607) | | | 642 | | Total intangible assets | Total intangible assets | | $ | 565,760 | | | $ | (67,809) | | | $ | 497,951 | | | $ | 85,749 | | | $ | (19,167) | | | $ | 66,582 | |
Intangible amortization expense was approximately $90.4 million, $48.6 million, and $10.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2022,2023, the weighted-average intangible asset amortization period was 7.67.1 years. The estimated future annual amortization expense for intangible assets for the next five years is as follows (in thousands):follows: | Period | | Amortization | 2023 | | $ | 90,423 | | (In thousands) | | (In thousands) | | Amortization | 2024 | 2024 | | $ | 89,316 | | 2025 | 2025 | | $ | 88,518 | | 2026 | 2026 | | $ | 88,048 | | 2027 | 2027 | | $ | 18,666 | | After 2027 | | $ | 122,980 | | 2028 | | After 2028 | |
NOTE 9 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS The following tables present financial information underlying certain balance sheet captions. Prepaid expenses and other current assets Prepaid expenses and other current assets were comprised of the following at December 31: | | | | | | | | | | | | | | | (In thousands) | | 2023 | | 2022 | Prepaid expenses | | $ | 30,664 | | | $ | 29,260 | | Prepaid taxes | | 10,715 | | | 8,926 | | Other | | 7,863 | | | 4,123 | | Total | | $ | 49,242 | | | $ | 42,309 | |
Compensation and other employee benefits Compensation and other employee benefits are affected by short-term fluctuations in the timing of payments and were comprised of the following at December 31: | | | | | | | | | | | | | | | (In thousands) | | 2022 | | 2021 | Accrued salaries and wages | | $ | 37,795 | | | $ | 37,883 | | Accrued bonus | | 23,484 | | | 14,364 | | Accrued employee benefits | | 106,759 | | | 28,037 | | Total | | $ | 168,038 | | | $ | 80,284 | |
| | | | | | | | | | | | | | | (In thousands) | | 2023 | | 2022 | Accrued salaries and wages | | $ | 25,417 | | | $ | 37,795 | | Accrued bonus | | 27,135 | | | 23,484 | | Accrued employee benefits | | 105,536 | | | 106,759 | | Total | | $ | 158,088 | | | $ | 168,038 | |
Other accrued liabilities Other accrued liabilities were comprised of the following at December 31: | (In thousands) | (In thousands) | | 2022 | | 2021 | (In thousands) | | 2023 | | 2022 | Contract related reserves | | $ | 74,915 | | | $ | 15,699 | | | Contract liabilities | | Contract and other reserves | | Current operating lease liabilities | Current operating lease liabilities | | 17,564 | | | 11,983 | | Workers' compensation, auto and general liability reserve | | Accrued non-payroll taxes | Accrued non-payroll taxes | | 4,145 | | | 6,425 | | Workers' compensation, auto and general liability reserve | | 2,799 | | | 3,169 | | Other | Other | | 97,115 | | | 17,755 | | Total | Total | | $ | 196,538 | | | $ | 55,031 | |
Other non-current liabilities Other non-current liabilities were comprised of the following at December 31: | (In thousands) | (In thousands) | | 2022 | | 2021 | (In thousands) | | 2023 | | 2022 | Long-term contract-related reserves | Long-term contract-related reserves | | $ | 111,534 | | | $ | — | | Income taxes payable | Income taxes payable | | 9,202 | | | 9,724 | | CARES Act payroll tax deferral | | — | | | 8,448 | | Other | Other | | 12,449 | | | 1,956 | | Total | Total | | $ | 133,185 | | | $ | 20,128 | |
NOTE 10 DEBT Senior Secured Credit Facilities Term Loan and Revolver.Revolver In September 2014, we and our wholly-owned subsidiary, VSC,Vectrus Systems Corporation (VSC), entered into a credit agreement. The credit agreement was subsequently amended on December 24, 2020 and January 24, 2022 and is collectively referred to as(collectively, the Prior Credit Agreement.Agreement). The credit agreement consisted of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver). In connection with the Merger described in Note 3, Merger and Acquisitions, on the Closing Date, the outstanding debt from the Amended Term Loan and the Amended Revolver, $50.2 million and $40.0 million, respectively, was repaid and related guarantees and liens were discharged and released. Repayment was made using proceeds from the Vertex First Lien Credit Agreement described below. As of December 31, 2021, the balance outstanding under the Amended Term Loan and the Amended Revolver, was $55.4 million and $50.0 million, respectively. On the Closing Date, certain of ourthe Company's subsidiaries, including VSC (and together with VSC, the Company Guarantor Subsidiaries), that became direct or indirect subsidiaries of Vertex Aerospace Service Corp., a Delaware corporation and wholly-owned indirect subsidiary of Vertex (Vertex Borrower), have provided guarantees of the indebtedness under each of:
i.the First Lien Credit Agreement, dated as of December 6, 2021 (as amended by the Amendment No. 1 to First Lien Credit Agreement, dated as of the Closing Date, as further amended by Amendment No. 2 to First Lien Credit Agreement, dated as of May 31, 2023, as further amended by Amendment No. 3 to First Lien Credit Agreement, dated as of October 3, 2023, and as further amended, restated, amended and restated, supplemented and otherwise modified from time to time, the Vertex First Lien Credit Agreement), by and among Vertex Borrower, as borrower, Vertex Aerospace Intermediate LLC, a Delaware limited liability company, direct parent entity of Vertex Borrower and wholly-owned indirect subsidiary of Vertex (Vertex Holdings), the lenders from time to time party thereto and Royal Bank of Canada, as administrative agent; (ii) ii.the Second Lien Credit Agreement, dated as of December 6, 2021 (as amended, restated, amended and restated, supplemented and otherwise modified from time to time, the Vertex Second Lien Credit Agreement), Vertex Borrower, as borrower, Vertex Holdings, the lenders from time to time party thereto and Royal Bank of Canada, as administrative agent; and
(iii) the ABL Credit Agreement, dated as of June 29, 2018 (as amended by the First Amendment to ABL Credit Agreement, dated as of May 17, 2019, as further amended by the Second Amendment to ABL Credit Agreement, dated as of May 17, 2021, and as further amended by the Third Amendment to ABL Credit Agreement, dated as of December 6, 2021, as further amended by the Fourth Amendment to ABL Credit Agreement, dated as of the Closing Date, as further amended by the Fifth Amendment to ABL Credit Agreement, dated September 21, 2022, 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 The Vertex First Lien Credit Agreement provides for senior secured first lien term loans in an aggregate principal amount of $1,185.0 million, consisting of a $925.0 million term loan “B” tranche, (the First Lien Initial Term Tranche) and a $260.0 million incremental term loan “B” tranche (the First Lien Incremental Term Tranche and, together with the First Lien Initial Term Tranche, collectively, the First Lien Term Facility). The entire amount of the proceeds from the (i) First Lien Initial Term Tranche were previously used to finance the acquisition of certain subsidiaries of Raytheon Company, a Delaware corporation, and related transaction costs (the Sky Acquisition in December 2021). As provided in the Merger Agreement, the proceeds of the First Lien Incremental Term Tranche were used by the Vertex Borrower to redeem all of the shares of previously issued preferred stock on the Closing Date (but prior to the Merger). The remaining First Lien Incremental Term Tranche proceeds were used to repay in full all outstanding indebtedness under the Prior Credit Agreement, and other transaction costs. Approximately $54.0 million of cash remained after funding the preferred stock redemption, repayment of the Prior Credit Agreement and other transaction costs. 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 Consolidated Statements of (Loss) Income for the year ended December 31, 2023. On October 3, 2023, the Vertex First Lien Credit Agreement was amended to provide a new tranche of term loans under the First Lien Initial Term Tranche in an aggregate original principal amount of $911.1 million (the New Term Loans), in which the New Term Loans replace or refinance in full all the existing term loans outstanding under the First Lien Initial Term Tranche (the Existing Term Loans) and these loans mature on December 6, 2028. The amendment also reduced the interest rate applicable to the New Term Loans by 0.25%. The replacement of the Existing Term Loans with the New Term Loans resulted in a loss on extinguishment of debt of $0.2 million in the Consolidated Statement of (Loss) Income for the year ended December 31, 2023. The remaining loans under the First Lien Term Facility will be payable in full on December 6, 2028. The First Lien(consisting solely of the New Term FacilityLoans) amortizes in an amount equal to approximately $3.0$2.3 million per quarter for the fiscal quarters ending September 30, 2022, through September 30,29, 2028, with the balance of $1,108.6$865.6 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-lienfirst-lien on substantially all of the Vertex Borrower’s and the First Lien Guarantors’ assets other thanwhich exists on a pari passu basis with the ABL Priority Collateral, as defined below (subject to customary exceptions and limitations), and (ii) a second-priority lien on substantially all ofheld by 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).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 a margin of 2.50% to 3.75% per annum,0.50%, (b) the prime lending rate, or a Eurodollar(c) an adjusted Secured Overnight Financing Rate (SOFR) rate determined by reference to LIBOR,plus 1.00%, plus a margin of 3.50% to 3.75%2.25% per annum, in each case, depending on the consolidated first lien net leverage ratioor SOFR, plus a margin of the Vertex Borrower and its subsidiaries.3.25% per annum. As of December 31, 2022,2023, the effective interest rate for the First Lien Initial Term Tranche was 8.65%. 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 the Secured Overnight Financing Rate (SOFR), plus a margin of 4.00% per annum. As of December 31, 2022, the effective interest rate for the First Lien Incremental Term Tranche was 9.19%9.51%. The Vertex First Lien Credit Agreement contains customary representations and warranties and affirmative covenants. The Vertex First Lien Credit Agreement also includes negative covenants that limit, among other things, additional indebtedness, additional liens, sales of assets, dividends, investments and advances, prepayments of debt and mergers and acquisitions. The Vertex First Lien Credit Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the First Lien Term Facility to be in full force and effect, and a change of control. 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 December 31, 2022,2023, the carrying value of the First Lien Credit Agreement was $1,176.8$908.8 million, excluding deferred discount and unamortized deferred financing costs of $54.6$36.4 million. The estimated fair value of the First Lien Credit Agreement as of December 31, 20222023 was $1,157.6$908.8 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 providesprovided 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 Company voluntarily prepaid $25.0 million of the Second Lien Term Facility on December 30, 2022. 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 Consolidated Statements of (Loss) Income for the year ended December 31, 2023. Under the terms of the Vertex Second Lien Credit Agreement, the Vertex Borrower was required to remit a prepayment premium of $0.3$1.6 million with the voluntary prepayment. The remaining balance2023 Payoff, which was recorded as a loss on extinguishment of loans underdebt in the Second Lien Term Facility will be payable in full on December 6, 2029. The Vertex Borrower’s obligations underConsolidated Statements of (Loss) Income for 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 year ended December 31, 2022, the effective interest rate for Second Lien Term Facility was 12.55%.
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 December 31, 2022, the carrying value of the Second Lien Credit Agreement was $160.0 million, excluding a deferred discount of $7.5 million. The estimated fair value of the Second Lien Credit Agreement as of December 31, 2022 was $152.0 million. The fair value is based on observable inputs of interest rates that are currently available to us for debt with similar terms and maturities2023 for non-public debt (Level 2).
Vertex ABL Credit Agreement The Vertex ABL Credit Agreement providesprovided 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 providesprovided 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 underOn February 28, 2023, the outstanding ABL Facility expire on June 29, 2026,borrowings of $67.5 million were repaid and any ABL Loans then outstanding will be payable in full at that time. Availability under the ABL Facility is subjectrelated guarantees and liens were discharged and released. The balance of unamortized deferred financing costs related 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 HoldingsABL Credit Agreement of $1.5 million was recorded as a loss on extinguishment of debt in the Consolidated Statements of (Loss) Income for the year ended December 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 mostconsists of (a) the Vertex Borrower’s wholly-owned domestic subsidiaries (including the Company Guarantor Subsidiaries, collectively, the ABL Guarantors), after adjusting2023 Revolver (which includes (i) a $50.0 million sublimit of availability 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 lesserand (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 aggregate commitments under2023 Credit Agreement amortizes at approximately $1.6 million per quarter for the ABL Facility (currently $200.0 million) orfiscal quarters ending June 30, 2023 through March 31, 2025, increasing to $3.1 million per quarter for the Borrowing Base. Tofiscal quarters ending June 30, 2025 through December 31, 2027, with 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 subjectbalance of $203.1 million due on February 28, 2028.
The Vertex Borrower’s obligations under the ABL Facility2023 Credit Agreement are guaranteed by the ABL Guarantors, subject to customary exceptions and limitations. The Vertex Borrower’s obligations under the ABL Facility2023 Credit Agreement 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 Collateralassets (subject to customary exceptions and limitations), and (b) which exists on a third priority-lien on substantially all ofpari passu basis with the Vertex Borrower’s andlien held by the ABL Guarantors’ assets other than the ABL Priority Collateral (subject to customary exceptions and limitations).First Lien Credit Agreement lenders. The borrowings under the ABL Facility2023 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 SOFR rate plus 1.00%, plus a margin of 0.75%1.00% to 1.25%2.25% per annum, or a term benchmark rate, determined by reference to SOFR, plus a margin of 1.75%2.00% to 2.25%3.25% per annum, in each case, depending on the aggregate availability underconsolidated total net leverage ratio of the ABL Facility.Vertex Borrower and its subsidiaries. As of December 31, 2023, the effective interest rate for the Term Loan portion of the 2023 Credit Agreement was 8.41%. Unutilized commitments under the ABL Facility2023 Revolver are subject to a per annum fee of (x) 0.375% ifranging from 0.25% to 0.50% depending on the consolidated total outstandings were equal to or less than 50%net leverage ratio of the aggregate commitments, or (y) 0.25% if such total outstandings were more than 50% of the aggregate commitments.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 ABL LoansRevolving Credit loans times the average daily amount available to be drawn under all outstanding letters of credit. The Vertex ABL2023 Credit Agreement contains customary representations and warranties, which must be accurate for the Vertex Borrower to borrow under the ABL Facility,2023 Credit Agreement, and affirmative covenants. The Vertex ABL2023 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 ABL2023 Credit Agreement also includes acontains financial covenant that requirescovenants requiring (a) the fixed chargeconsolidated 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 to be at least 1.002.00 to 1.00 as ofcommencing with the end of anyreporting 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.ending on June 30, 2023. The Vertex ABL2023 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 Facility2023 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 Vertex ABL2023 Credit Agreement. As of December 31, 2022,2023, there waswere no outstanding balanceborrowings and $17.5 million of outstanding letters of credit under the ABL Facility and $14.9 million outstanding for letters of credit.2023 Revolver. Availability under the ABL Facility2023 Revolver was $184.4$482.5 million as of December 31, 2022.2023. Unamortized deferred financing feescosts related to the ABL Credit Agreement2023 Revolver of $1.6$4.2 million are included in Other Non-Current Assetsother non-current assets in the Consolidated Balance Sheets. As of December 31, 2022,2023, the fair value of the ABL Credit Agreement2023 Revolver approximated the carrying value because the debt bears a floating interest rate. As of December 31, 2023, the carrying value of the Term Loan portion of the 2023 Credit Agreement was $245.3 million, excluding unamortized deferred financing costs of $2.1 million. The estimated fair value of the Term Loan portion of the 2023 Credit Agreement as of December 31, 2023 was $245.6 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 Company's aggregate scheduled maturities atas of December 31, 20222023 are as follows: | | | | | | | | | (In thousands) | | Payments due | 2023 | | $ | 11,850 | | 2024 | | 11,850 | | 2025 | | 11,850 | | 2026 | | 11,850 | | 2027 | | 11,850 | | Thereafter | | 1,277,513 | | Total | | $ | 1,336,763 | |
Voluntary Prepayments. We may voluntarily prepay the First Lien Facility or Second Lien Facility in whole or in part at any time, subject to the payment of customary breakage costs under certain conditions. Voluntary prepayments of the Second Lien Facility prior to December 6, 2023 require payment of a 1% prepayment premium.Voluntary prepayments of the First Lien Facility will be applied to the remaining installments thereof as directed by us. We may reduce the commitments under the ABL Facility in whole or in part at any time without premium or penalty. | | | | | | | | | (In thousands) | | Payments due | 2024 | | $ | 15,361 | | 2025 | | 20,049 | | 2026 | | 21,611 | | 2027 | | 21,611 | | 2028 | | 1,075,528 | | | | | Total | | $ | 1,154,160 | |
As of December 31, 2022, we were2023, the Company was in compliance with all covenants related to the First Lien Term Facility, the Second Lien Term FacilityCredit Agreement and the ABL Facility.2023 Credit Agreement.
NOTE 11 DERIVATIVE INSTRUMENTS Interest Rate Derivative Instruments The Company is exposed to the risk that our earnings and cash flows could be adversely impacted due to fluctuations in interest rates. To manage this risk, the Company has periodically entered into interest rate swaps in which we agree to exchange, at specified intervals, the difference between variable and fixed interest amounts calculated by reference to an agreed-upon notional amount. Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities. OurThe Company's outstanding derivative instruments have not contained credit risk related contingent features nor is collateral generally required. The interest rate swaps are measured at fair value on a recurring basis and are determined using the income approach based on a discounted cash flow model to determine the present value of future cash flows over the remaining term of the contract incorporating observable market inputs such as prevailing interest rates as of the reporting date (Level 2). Changes in fair value of the interest rate swap are recorded, net of tax, as a component of accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets. We reclassifyThe Company reclassifies the effective gain or loss from accumulated other comprehensive loss, net of tax, to interest expense on the Consolidated Statements of Income as the interest expense is recognized on the related debt. The ineffective portion of the change in fair value of the interest rate swap, if any, is recognized directly in earnings in interest expense. On June 29, 2022, in conjunction with our planned extinguishmentThe Company entered into $350.0 million of the related hedged debt interest expense, we terminated our remaining interest rate swaps that wereswap contracts during the first six months of 2023. These contracts had a notional value of $345.3 million as of December 31, 2023. These contracts are designated and qualifiedqualify 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 location of the derivative instruments in the Consolidated Balance Sheet as of December 31, 2021:2023: | | | | | | | | | | | | | | | | | Fair Value | | | | (In thousands) | | Fair Value (Level 2) | | | Balance sheet caption | | Amount | Interest rate swap designated as cash flow hedge | | Other accrued liabilitiesPrepaid expenses and other current assets | | $ | 6663,381 | | Interest rate swap designated as cash flow hedge | | Other non-current liabilities | | $ | 3,006 | | Interest rate swap designated as cash flow hedge | | Accumulated other comprehensive income | | $ | 375 | |
There were no interest rate swaps designated as cash flow hedges for the year ended December 31, 2022. The Company regularly assesses the creditworthiness of the counterparty. As of December 31, 2023, the counterparty to the interest rate swaps had performed in accordance with its contractual obligations. Both the counterparty credit risk and the Company's credit risk were considered in the fair value determination. Net interest rate derivative gains of $4.1 million and net interest rate derivative losses of $0.4$0.4 million, and $1.0 million and less than $0.9 million were reclassified from accumulated other comprehensive loss torecognized in interest expense, net in ourthe Consolidated Statements of Income during 2023, 2022, and 2021, and 2020, respectively. The Company expects $3.5 million of existing interest rate swap gains reported in accumulated other comprehensive income as of December 31, 2023 to be recognized in earnings within the next 12 months. Foreign Currency Derivative Instrument We transactThe Company transacts business in various foreign countries and areis therefore exposed to foreign currency exchange rate risk that impacts the reported U.S. dollar amounts of revenues, costs, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in cash flows and earnings caused by fluctuations in foreign exchange rates, we havethe Company has entered into forward contracts to buy and sell foreign currency. By policy, we dothe Company does not enter into these contracts for trading purposes or speculation.
The Company had no outstanding foreign currency forward contracts at as of December 31, 20222023 and had outstanding forward contracts with a current liability value of less than $0.1 million at December 31, 2021.2022. Net foreign currency derivative gains and losses recognized in selling, general and administrative expense during 2023, 2022, 2021 and 20202021 were immaterial.not material. NOTE 12 LEASES We determine whether an arrangement contains a lease at inception. We have operating leases for office space, apartments, vehicles, and machinery and equipment. Our operating leases have lease terms of less than one year to ten years.
We do not separate lease components from non-lease components (e.g., common area maintenance, property taxes, and insurance) but account for both components in a contract as a single lease component.
The components of lease expense are as follows: | | Year Ended | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | December 31, 2022 | | December 31, 2021 | (In thousands) | | 2023 | | 2022 | | Operating lease expense | Operating lease expense | | $ | 17,167 | | | $ | 11,477 | | Variable lease expense | Variable lease expense | | 568 | | | 783 | | Short-term lease expense | Short-term lease expense | | 82,952 | | | 62,124 | | Total lease expense | Total lease expense | | $ | 100,687 | | | $ | 74,384 | |
Supplemental balance sheet information related to our operating leases is as follows: | | | Year Ended | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | December 31, 2022 | | December 31, 2021 | (In thousands) | | 2023 | | 2022 | Right-of-use assets | Right-of-use assets | | $ | 52,825 | | | $ | 43,651 | | | Current lease liabilities (recorded in other accrued liabilities) | Current lease liabilities (recorded in other accrued liabilities) | | $ | 17,564 | | | $ | 11,983 | | Current lease liabilities (recorded in other accrued liabilities) | | Current lease liabilities (recorded in other accrued liabilities) | | Long-term operating lease liabilities | Long-term operating lease liabilities | | 41,083 | | | 34,536 | | Total operating lease liabilities | Total operating lease liabilities | | $ | 58,647 | | | $ | 46,519 | |
During the year ended December 31, 2022,2023, we recognized additional right-of-use assets of $5.0$7.7 million from newly executed operating leases and $21.1 million from the Merger.leases. The weighted average remaining lease term and discount rate for our operating leases at December 31, 20222023 were 5.15.0 years and 4.1%4.7%, respectively. Maturities of lease liabilities at December 31, 20222023 were as follows: | (In thousands) | (In thousands) | | Payments due | (In thousands) | | Payments due | 2023 | | $ | 19,588 | | 2024 | 2024 | | 13,670 | | 2025 | 2025 | | 8,643 | | 2026 | 2026 | | 7,137 | | 2027 | 2027 | | 5,300 | | After 2027 | | 11,265 | | 2028 | | After 2028 | | Total minimum lease payments | Total minimum lease payments | | $ | 65,603 | | Less: Imputed interest | Less: Imputed interest | | (6,956) | | Total operating lease liabilities | Total operating lease liabilities | | $ | 58,647 | |
NOTE 13 INCOME TAXES We determineThe Company determines the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, we lookthe Company looks to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates. For the year ended December 31, 2022, we2023, the Company did not establish or release an additional valuation allowance.
The sources of pre-tax income and the components of income tax expense for the years ended December 31, 2023, 2022 2021 and 2020,2021, respectively, are as follows: | (in thousands) | (in thousands) | | 2022 | | 2021 | | 2020 | (in thousands) | | 2023 | | 2022 | | 2021 | Income Components | Income Components | | | | | | | United States | | United States | | United States | United States | | $ | (8,324) | | | $ | 51,532 | | | $ | 33,946 | | Foreign | Foreign | | 2,216 | | | 2,503 | | | 4,736 | | Total pre-tax (loss) income | Total pre-tax (loss) income | | $ | (6,108) | | | $ | 54,035 | | | $ | 38,682 | | Income tax expense components | Income tax expense components | | | | | | | Current income tax provision | Current income tax provision | | Current income tax provision | | Current income tax provision | | United States-Federal | | United States-Federal | | United States-Federal | United States-Federal | | $ | 1,145 | | | $ | 11,860 | | | $ | 9,920 | | United States-State and local | United States-State and local | | 334 | | | 740 | | | 735 | | Foreign | Foreign | | 4,558 | | | 1,477 | | | 1,704 | | Total current income tax provision | Total current income tax provision | | 6,037 | | | 14,077 | | | 12,359 | | Deferred income tax provision (benefit) | | | | | | | Deferred income tax (benefit) provision | | United States-Federal | | United States-Federal | | United States-Federal | United States-Federal | | (317) | | | (5,008) | | | (9,953) | | United States-State and local | United States-State and local | | 2,577 | | | (211) | | | (342) | | Foreign | Foreign | | (75) | | | (551) | | | (333) | | Total deferred income tax provision (benefit) | | 2,185 | | | (5,770) | | | (10,628) | | Total income tax expense | | $ | 8,222 | | | $ | 8,307 | | | $ | 1,731 | | Total deferred income tax (benefit) provision | | Total income tax (benefit) expense | | Effective income tax rate | Effective income tax rate | | (134.6) | % | | 15.4 | % | | 4.5 | % | Effective income tax rate | | 7.9 | % | | (134.6) | % | | 15.4 | % |
A reconciliation of the income tax provision at the U.S. statutory rate to the effective income tax rate as reported is as follows: | | 2022 | | 2021 | | 2020 | | | 2023 | | | | 2023 | | 2022 | | 2021 | Tax provision at U.S. statutory rate | Tax provision at U.S. statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % | Tax provision at U.S. statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % | State and local income tax, net of federal benefit | State and local income tax, net of federal benefit | | (38.1) | % | | 1.1 | % | | 1.5 | % | State and local income tax, net of federal benefit | | (7.7) | % | | (38.1) | % | | 1.1 | % | Foreign taxes | Foreign taxes | | (24.6) | % | | 0.3 | % | | 0.8 | % | Foreign taxes | | (3.6) | % | | (24.6) | % | | 0.3 | % | Uncertain tax positions | Uncertain tax positions | | 16.3 | % | | 4.1 | % | | (4.5) | % | Uncertain tax positions | | 8.2 | % | | 16.3 | % | | 4.1 | % | Return to provision true-ups | Return to provision true-ups | | 8.6 | % | | (0.5) | % | | 0.3 | % | Return to provision true-ups | | (7.3) | % | | 8.6 | % | | (0.5) | % | Foreign derived intangible income deduction | Foreign derived intangible income deduction | | 11.3 | % | | (7.3) | % | | (13.8) | % | Foreign derived intangible income deduction | | — | % | | 11.3 | % | | (7.3) | % | Non-deductible compensation expense | | (79.0) | % | | 0.5 | % | | 1.1 | % | Non-deductible compensation expense1 | | Non-deductible compensation expense1 | | (12.5) | % | | (79.0) | % | | 1.6 | % | Stock-based compensation1 | | Stock-based compensation1 | | 3.9 | % | | (1.5) | % | | (1.1) | % | Non-deductible transaction expense | Non-deductible transaction expense | | (59.5) | % | | — | % | | — | % | Non-deductible transaction expense | | — | % | | (59.5) | % | | — | % | Tax credits | Tax credits | | 12.2 | % | | (3.8) | % | | (1.0) | % | Tax credits | | 9.4 | % | | 12.2 | % | | (3.8) | % | Other | | (2.8) | % | | — | % | | (0.9) | % | | Meals and entertainment1 | | Meals and entertainment1 | | (2.0) | % | | (0.3) | % | | — | % | Other1 | | Other1 | | (1.5) | % | | (1.0) | % | | — | % | Effective income tax rate | Effective income tax rate | | (134.6) | % | | 15.4 | % | | 4.5 | % | Effective income tax rate | | 7.9 | % | | (134.6) | % | | 15.4 | % | 1 Prior year rates have been reclassified to conform to current year presentation. | |
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expectthe Company expects the differences will reverse. Deferred tax assets and liabilities include the following: | | | | | | | | | | | | | | | (in thousands) | | 2022 | | 2021 | Deferred tax assets | | | | | | | | | | Compensation and benefits | | $ | 12,461 | | | $ | 8,125 | | Reserves | | 45,952 | | | 4,632 | | Lease liability | | 13,585 | | | 10,204 | | Social security deferral | | — | | | 1,874 | | Research expenditures | | 8,269 | | | — | | Tax credits | | 1,468 | | | — | | Disallowed interest | | 23,345 | | | — | | Net operating losses | | 2,415 | | | 1,912 | | Other | | 4,416 | | | 2,515 | | | | | | | | | | | | Total deferred tax assets | | $ | 111,911 | | | $ | 29,262 | | Deferred tax liabilities | | | | | Goodwill and intangibles | | $ | (97,014) | | | $ | (47,228) | | | | | | | Property, plant and equipment, net | | (13,279) | | | (2,179) | | Right-of-use assets | | (12,278) | | | (9,571) | | Other liabilities | | (5,153) | | | (1,845) | | Total deferred tax liabilities | | (127,724) | | | (60,823) | | Net deferred tax liabilities | | $ | (15,813) | | | $ | (31,561) | |
| | | | | | | | | | | | | | | (in thousands) | | 2023 | | 2022 | Deferred tax assets | | | | | Compensation and benefits | | $ | 16,952 | | | $ | 12,461 | | Reserves | | 36,193 | | | 45,952 | | Lease liability | | 11,272 | | | 13,585 | | | | | | | Research expenditures | | 14,916 | | | 8,269 | | Tax credits | | — | | | 1,468 | | Disallowed interest | | 40,130 | | | 23,345 | | Net operating losses | | 792 | | | 2,415 | | Other | | 3,165 | | | 4,416 | | Total deferred tax assets | | $ | 123,420 | | | $ | 111,911 | | Deferred tax liabilities | | | | | Goodwill and intangibles | | $ | (96,653) | | | $ | (97,014) | | Unbilled receivables | | (14,212) | | | — | | Property, plant and equipment, net | | (9,941) | | | (13,279) | | Right-of-use assets | | (9,591) | | | (12,278) | | Other liabilities | | (4,786) | | | (5,153) | | Total deferred tax liabilities | | (135,183) | | | (127,724) | | Net deferred tax liabilities | | $ | (11,763) | | | $ | (15,813) | |
Uncertain Tax Positions A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31, 2022, 2021 and 2020 is as follows: | (in thousands) | (in thousands) | | 2022 | | 2021 | | 2020 | (in thousands) | | 2023 | | 2022 | | 2021 | Unrecognized tax benefits-January 1, | Unrecognized tax benefits-January 1, | | $ | 9,321 | | | $ | 7,411 | | | $ | 7,945 | | Additions for: | Additions for: | | Current year tax positions | Current year tax positions | | 373 | | | 2,139 | | | 2,765 | | Current year tax positions | | Current year tax positions | | Prior year tax positions | Prior year tax positions | | 613 | | | 251 | | | — | | Reductions for: | Reductions for: | | Lapse of statute of limitations | | Lapse of statute of limitations | | Lapse of statute of limitations | | | Lapse of statute of limitations | | (1,696) | | | (480) | | | — | | Prior year tax positions | | — | | | — | | | (3,299) | | Unrecognized tax benefits-December 31, | Unrecognized tax benefits-December 31, | | $ | 8,611 | | | $ | 9,321 | | | $ | 7,411 | | Unrecognized tax benefits-December 31, | | Unrecognized tax benefits-December 31, | |
As of December 31, 2023, 2022, 2021, and 2020,2021, unrecognized tax benefits from uncertain tax positions were $6.6 million, $8.6 million $9.3 million and $7.4$9.3 million, respectively. It is reasonably possible that the Company's total unrecognized tax benefits will decrease by approximately $2.5$3.0 million during the next 12 months in connection with matters which may be resolved. The total amount of unrecognized benefit that, if recognized, would affect the effective tax rate was $7.1 million, $8.3 million, $9.3 million, and $7.1$9.3 million as of December 31, 2023, 2022, 2021, and 2020,2021, respectively, excluding the interest and penalties. During the quarter ended December 31, 2020, the Company undertook a profit split transfer pricing analysis to determine if any potential Foreign Derived Intangible Income (FDII) deduction could be derived for financial reporting purposes. V2X performed a functional analysis focusing on the U.S. and non-U.S. roles and support activities relating to the V2X programs for services being provided to U.S military bases that are located in foreign countries. Based on this further analysis, it was determined that the Company could support $7.1 million of federal and state FDII benefit over the three-year period from 2018 to 2020, with $2.6 million, $2.5 million, and $2.0 million related to December 31, 2020, 2019, and 2018, respectively. During the quarter ended December 31, 2022, the Company updated the profit split analysis for 2022 to account for changes in the V2X programs. Based on the updated analysis, the Company provided for a FDII benefit of $0.4 million. During the quarter ended December 31, 2022, the Company released the 2018 unrecognized tax benefit from uncertain positions of $1.7 million as the statute of limitations for the 2018 tax year expired at the end of 2022. The Company continues
to reserve a portion of the FDII benefit on an annual basis and continues to monitor further guidance and potential U.S. Tax Reform which could make changes to the mechanics around the way FDII is calculated.
We classify interestInterest relating to tax matters is classified as a component of interest expense, and tax penalties are classified as a component of income tax expense in ouron the Consolidated Statements of Income. The Company recognized net interest related to tax matters of $0.2 million, $0.2 million, and $0.0$0.2 million during the years ended December 31, 2023, 2022 2021 and 2020,2021, respectively. The Company has accrued $0.8$0.1 million and $0.4$0.8 million of net interest and penalties as of December 31, 20222023 and 2021,2022, respectively.
The Company has not recorded a deferred tax liability for undistributed earnings of certain foreign subsidiaries since such earnings are considered to be reinvested indefinitely. If the earnings were distributed, the Company may be subject to federal income and foreign withholding taxes.
The Company files income tax returns in the United States and in various foreign jurisdictions. The Company is no longer subject to U.S. federal or state income tax examinations for years prior to 2018.2020. Under U.S. GAAP, we arethe Company is allowed to make an accounting policy choice of either (i) treating taxes due on future U.S. inclusions in taxable income related to global intangible low taxed income (GILTI) as a current-period expense when incurred (the “period cost method”) or (ii) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). We haveThe Company has chosen to account for GILTI under the period cost method as an accounting policy, and therefore the anticipated future expense associated with GILTI is not reflected in our financial statements.the Consolidated Financial Statements. NOTE 14 POST-EMPLOYMENT BENEFIT PLANS We sponsor two defined contribution savings plans, which allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. The Company matches a percentage of eligible employee contributions up to certain limits of employee base pay. Our portion of the matching contributions charged to income amounted to $17.430.8 million, $8.7$17.4 million and $6.5$8.7 million for the years ended December 31, 2023, 2022 and 2021, and 2020, respectively. The increase in 2022 was due primarily to the Merger. The Company participates in multiemployer pension plans for certain employees covered by collective bargaining agreements. Contributions are based on specified hourly rates for eligible hours. Company expenses related to these plans were $12.9 million, $6.3 million and $1.1 million during 2023, 2022, and $3.0 million during 2022, 2021, and 2020, respectively. The increase in 2022 from 2021 was due to the Merger and the decrease in the 2021 expense was attributable to the completion of a subcontract in September 2020. At the time the subcontract was completed, the individuals ceased being Company employees and the Company was relieved of its contractual obligation to fund the related multiemployer pension plans on the former employee's behalf.The Company is unaware of any significant future obligations or funding requirements related to these plans other than the ongoing contributions that are paid as hours are worked by plan participants. None of these multiemployer pension plans are individually significant to the Company. V2X, Inc.The Company has two non-qualified deferred compensation plans one established during the first quarter of 2021 and one assumed in the Merger. Under these plans, participants are eligible to defer a portion of their compensation on a tax deferred basis. The assets in the plan are held in a Rabbi trust. Plan investments and obligations were recorded in other non-current assets and other non-current liabilities, respectively, in the consolidated balance sheets, representing the fair value related to the deferred compensation plan. Adjustments to the fair value of the plan investments and obligations are recorded in operating expenses. The plan assets and liabilities as of December 31, 2023 and 2022 and 2021 were $1.5$3.2 million and $0.5$1.5 million, respectively.
On September 11, 2014, our Board of Directors adopted and approved the Vectrus Systems Corporation Excess Savings Plan (the Excess Savings Plan). Since federal law limits the amount of compensation that can be used to determine employee and employer contribution amounts to our tax-qualified plans, we established the Excess Savings Plan to allow for Company contributions based on an eligible employee's base salary in excess of these limits. No employee contributions are permitted. All balances under the Excess Savings Plan are maintained on the books of the Company and credits and deductions are made to the accumulated savings under the plan based on the earnings or losses attributable to a stable value fund as defined in the Excess Savings Plan. Benefits will be paid in a lump sum generally in the seventh month following the date on which the employee's separation from service occurs. Employees are 100% vested at all times in any amounts credited to their accounts. Although the plan did not end, excess savings were paid out due to the Merger. As of December 31, 20222023 and December 31, 2021 we had2022 accrued $0.1 million and $0.2 million of contributions under the Excess Savings Plan.Plan were $0.1 million and $0.1 million, respectively. The Company has an amended and restated Senior Executive Severance Pay Plan (the Amended Plan) that has been effective since 2016. Termination benefits offered under the Amended Plan are other post-employment benefits as defined by ASC 712-10 - Compensation - Nonretirement Postemployment Benefits. Benefits under the Amended Plan vest or accumulate with the employee’s years of service; however, the payment of benefits is not probable, and the Company does
not have the ability to reliably estimate when there will be an involuntary termination without cause under the Amended Plan. Accordingly, the Company does not accrue a benefit obligation for severance costs under the Amended Plan over the duration of executive employment.
NOTE 15 COMMITMENTS AND CONTINGENCIES General From time to time, we are party to the Company is involved in various investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings including government investigations and claims, thatwhich are incidental to the operation of ourits business.Some of these proceedings seek remedies relating to employment matters, matters in connection with the Company's contracts and matters arising under laws relating to the protection of the environment. Additionally, U.S. government customers periodically advise the Company of claims and penalties concerning certain potential disallowed costs. When such findings are presented, V2X and the U.S. 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. 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 recentlatest information available to us. We have The Company estimated and accrued $27.6$12.1 millionand $9.6$27.6 million as of December 31, 20222023 and 2021,2022, respectively, in other accrued liabilities in the Consolidated Balance Sheets for legal proceedings and for claims with respect to ourits 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 ourthe assessment of the merits of thea particular claim, we dothe Company does not expect that any asserted or unasserted legal or contractual claims or proceedings, individually or in the aggregate, will have a material adverse effect on ourits cash flow,flows, results of operations or financial condition. U.S. Government Contracts, Investigations and Claims We haveThe Company has U.S. government contracts that are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could have a material adverse effect on ourthe Company’s financial condition or results of operations. Furthermore, our contracts with the U.S. government may be terminated or suspended by the U.S. government at any time, with or without cause. Such contract suspensions or terminations could result in non-reimbursable expenses or charges or otherwise adversely affect ouraffecting the Company's financial condition and results of operations.
Departments and agencies of the U.S. government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages. U.S. government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. government contracts or the loss of export privileges for a company or an operating division or subdivision. Suspension or debarment could have a material adverse effect on the Company because of its reliance on U.S. government contracts. U.S. government agencies, including the DCAA,Defense Contract Audit Agency, the DCMADefense Contract Management Agency and others, routinely audit and review ourthe Company's performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. Accordingly, costs billed or billable to U.S. government customers are subject to potential adjustment upon audit by such agencies. The U.S. government agencies also review the adequacy of our compliance with government standards for our business systems, including our accounting, earned value management, estimating, materials management and accounting, purchasing, and property management systems. In the performance of ourits contracts, wethe Company routinely requestrequests contract modifications that require additional funding from U.S. government customers. Most often, these requests are due to customer-directed changes in the scope of work. While we are the Company is entitled to recovery of these costs under ourits contracts, the administrative process with ourthe U.S. government customer may be protracted. Based on the circumstances, wethe Company periodically filefiles REAs that are sometimes converted into claims. In some cases, these requests are disputed by ourthe U.S. government customer. We believe our The Company believes its outstanding modifications, REAs and other claims will be resolved without material adverse impact to ourits results of operations, financial condition or cash flows. As a result of final indirect rate negotiations between the U.S. government and our Former Parent, we were subject to adjustments to costs previously allocated by our Former Parent to our business from 2007 through 2014. On July 7, 2022, we accepted an offer by the U.S. 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 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 year ended December 31, 2022, the impact of COVID-19 was immaterial to our financial results.
NOTE 16 STOCK-BASED COMPENSATION 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 accountThe Company accounts for NQOs, and stock-settled RSUs and PSUs as equity-based compensation awards. TSR awards, described below, and cash-settled RSUs 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. There were 3.5 million shares of the Company's common stock authorized for issuance under the 2014 Omnibus Plan. As of December 31, 2022, 1.42023, 0.9 million shares remained available for future awards. Stock-based compensation expense and the associated tax benefits impacting our Consolidated Statements of Income were as follows: | | Year Ended December 31, | | | Year Ended December 31, | | | | Year Ended December 31, | (In thousands) | (In thousands) | | 2022 | | 2021 | (In thousands) | | 2023 | | 2022 | | 2021 | Compensation costs for equity-based awards | Compensation costs for equity-based awards | | $ | 31,897 | | | $ | 7,261 | | Compensation costs for liability-based awards | Compensation costs for liability-based awards | | 839 | | | 1,070 | | Total compensation costs, pre-tax | Total compensation costs, pre-tax | | $ | 32,736 | | | $ | 8,331 | | Future tax benefit | Future tax benefit | | $ | 7,726 | | | $ | 1,810 | |
Liability-based awards were revalued at the end of each reporting period to reflect changes in fair value. For 2022, in concurrence with the Merger, fair value was measured as of the Closing Date and the aggregate future award payouts were fixed at $4.6 million. The Company paid $2.9$1.5 million and $2.5$2.9 million related to liability-based compensation awards during the years ended December 31, 20222023 and 2021,2022, respectively. At December 31, 2022,2023, total unrecognized compensation costs related to equity-based awards and liability-based awards were $26.4$18.0 million and $2.1$0.7 million, respectively, which are expected to be recognized ratably over a weighted average period of 1.531.51 years and 1.81 years,1.00 year, respectively. Non-Qualified Stock Options NQOs vest in one-third increments on the first, second and third anniversaries of the grant date and expire 10 years from the date of grant.
A summary of the status of our NQOs as of December 31, 2023, 2022 2021 and 20202021 and changes during the years then ended is presented below: | | | Year Ended December 31, | | 2022 | | 2021 | | 2020 | | | 2023 | | | | 2023 | | | | 2023 | | | 2022 | | 2021 | (In thousands, except per share data) | (In thousands, except per share data) | | Shares | | Weighted Average Exercise Price Per Share | | Shares | | Weighted Average Exercise Price Per Share | | Shares | | Weighted Average Exercise Price Per Share | (In thousands, except per share data) | | Shares | | Weighted Average Exercise Price Per Share | | Shares | | Weighted Average Exercise Price Per Share | | Shares | | Weighted Average Exercise Price Per Share | Outstanding at January 1, | Outstanding at January 1, | | 59 | | | $ | 23.19 | | | 74 | | | $ | 23.37 | | | 77 | | | $ | 23.30 | | Granted | Granted | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | Exercised | Exercised | | (17) | | | $ | 24.02 | | | (15) | | | $ | 24.04 | | | (3) | | | $ | 21.43 | | Forfeited, canceled or expired | Forfeited, canceled or expired | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | Outstanding and exercisable at December 31, | Outstanding and exercisable at December 31, | | 42 | | | $ | 22.86 | | | 59 | | | $ | 23.19 | | | 74 | | | $ | 23.37 | | |
All outstanding NQOs are exercisable. The following table summarizes information about NQOs outstanding and exercisable as of December 31, 2022:2023: | (In thousands, except per share data) | (In thousands, except per share data) | | Options Outstanding and Exercisable | | | (In thousands, except per share data) | | (In thousands, except per share data) | | Range of Exercise Prices Per Share | | Range of Exercise Prices Per Share | | Range of Exercise Prices Per Share | Range of Exercise Prices Per Share | | Number | | Weighted Average Remaining Contractual Life (In Years) | | Weighted Average Exercise Price Per Share | | Aggregate Intrinsic Value | | | $20.06 - $21.98 | $20.06 - $21.98 | | 34 | | | 3.03 | | $ | 21.68 | | | $ | 661 | | | | $24.61 - $32.49 | | 8 | | | 0.84 | | 27.83 | | | 107 | | | | $20.06 - $21.98 | | $20.06 - $21.98 | | $26.05 - $32.04 | | $26.05 - $32.04 | | $26.05 - $32.04 | | Total options and aggregate intrinsic value | Total options and aggregate intrinsic value | | 42 | | | 3.87 | | $ | 22.86 | | | $ | 768 | | | | Total options and aggregate intrinsic value | | Total options and aggregate intrinsic value | |
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $41.29$46.44 per share on December 31, 2022,2023, which would have been received by the option holders if all option holders had exercised their options as of that date. There were no exercisable options "out of the money" as of December 31, 2022.2023. The aggregate intrinsic value of options exercised during the year ended December 31, 2023 was not material. The aggregate intrinsic value of options exercised during the years ended December 31, 2022 2021 and 20202021 was $0.2 million $0.4 million and $0.1$0.4 million, respectively. Restricted Stock Units The fair value of RSUs is determined based on the closing price of V2X common stock on the date of the grant. In general, under the 2014 Omnibus Plan, for employee RSUs granted in 2014 and after, one-third of the award vests on each of the three anniversary dates following the grant date. Director RSUs are typically granted annually and vest approximately one year after the grant date. 2022 grants for three directors vested over an abbreviated service term which ended on the July 5, 2022, the Merger Closing Date. RSUs have no voting rights. If an employee leaves the Company prior to vesting, whether through resignation or termination for cause, the RSUs are forfeited. If an employee retires or is terminated by the Company other than for cause, all or a pro rata portion of the RSUs may vest. 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 (Replacement Awards). The Replacement Awards will be settled in shares of the Company's common stock, with 517,918 Replacement Awards vestinghaving vested on the six-month anniversary following the grant date and a quarter of the remaining 828,171 Replacement Awards vesting on each of four six-month anniversary dates following the grant date.
The table below provides a roll-forward of outstanding RSUs for the years ended December 31, 2023, 2022 2021 and 2020.2021. | | | Year Ended December 31, | | 2022 | | 2021 | | 2020 | | | 2023 | | | | 2023 | | | | 2023 | | | 2022 | | 2021 | (In thousands, except per share data) | (In thousands, except per share data) | | Shares | | Weighted Average Grant Date Fair Value Per Share | | Shares | | Weighted Average Grant Date Fair Value Per Share | | Shares | | Weighted Average Grant Date Fair Value Per Share | (In thousands, except per share data) | | Shares | | Weighted Average Grant Date Fair Value Per Share | | Shares | | Weighted Average Grant Date Fair Value Per Share | | Shares | | Weighted Average Grant Date Fair Value Per Share | Outstanding at January 1, | Outstanding at January 1, | | 245 | | | $ | 51.18 | | | 253 | | | $ | 41.67 | | | 301 | | | $ | 30.30 | | Granted | Granted | | 236 | | | $ | 35.83 | | | 155 | | | $ | 56.43 | | | 130 | | | $ | 51.82 | | Replacement awards | Replacement awards | | 1,346 | | | $ | 33.92 | | | — | | | $ | — | | | — | | | $ | — | | Vested | Vested | | (171) | | | $ | 44.85 | | | (137) | | | $ | 40.04 | | | (152) | | | $ | 30.60 | | Issued in exchange | | — | | | $ | — | | | — | | | $ | — | | | 16 | | | $ | 52.28 | | Cancelled in exchange | | — | | | $ | — | | | — | | | $ | — | | | (16) | | | $ | 29.00 | | | Forfeited or canceled | | | Forfeited or canceled | | | Forfeited or canceled | Forfeited or canceled | | (28) | | | $ | 44.12 | | | (26) | | | $ | 48.73 | | | (26) | | | $ | 45.59 | | Outstanding at December 31, | Outstanding at December 31, | | 1,628 | | | $ | 35.47 | | | 245 | | | $ | 51.18 | | | 253 | | | $ | 41.67 | |
The total grant date fair value of RSUs that vested during the years ended December 31, 2023, 2022 and 2021 and 2020 was $7.7$40.0 million, $5.57.7 million and $4.6$5.5 million, respectively. On August 11, 2020, our total outstanding 15,839 liability-based cash-settled restricted stock unit compensation awards (CRSUs) were exchanged for 15,839 RSUs. As of the exchange date, both the CRSUs and RSUs had the same vesting conditions, fair value of $52.28, and unrecognized compensation expense of $0.4 million.
Total Shareholder Return Awards TSR awards are performance-based cash awards that are subject to a three-year performance period. Any payments earned are made in cash following completion of the performance period according to the achievement of specified performance goals. In concurrence with the Merger, 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 TSR awards granted during the year ended December 31, 2023. During the years endedDecember 31, 2022, and 2021, and 2020, wethe Company granted TSR awards with aggregate target TSR values of $2.8 million, $2.22.8 million and $3.1$2.2 million, respectively. The fair value of TSR awards was measured quarterly based on the Company’s performance relative to the performance of the Aerospace and Defense Companies in the S&P 1500 Index. Depending on the Company’s performance during the three-year performance period, payments could range from 0% to 200% of the target value. For the years ended December 31, 2023, 2022 and 2021, and 2020,$1.4 million, $0.8 million $1.1 million and $3.6$1.1 million, respectively, was recorded in selling, general, and administrative expenses for TSR awards. Payments of $1.0 million were made in January 2024 for the 2021 TSR awards, and payments of $0.4 million were made in October 2023 related to a former employee's 2021 and 2022 TSR awards. Payments of $1.1 million were made in January 2023 for the 2020 TSR awards, and payments of $2.9 million were made in January 2022 for the 2019 TSR awards, and payments of $2.5 million were made in January 2021 for the 2018 TSR awards. Payments, if any, for the 2021 andremaining 2022 TSR awards are expected to be made in January 2024 and January 2025, respectively.2025. As of December 31, 20222023 and 2021,2022, we had $2.52.4 million and $4.5$2.5 million, respectively, recorded as a liability related to TSR awards in other accrued liabilities and other non-current liabilities on the Consolidated Balance Sheets. Performance Share Units During the first and second quarters 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 vesting 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. The table below provides a roll-forward of outstanding PSUs for the year ended December 31, 2023. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In thousands, except per share data) | | Shares | | Weighted Average Grant Date Fair Value Per Share | | | | | | | | | Outstanding at January 1, | | — | | | $ | — | | | | | | | | | | Granted | | 279 | | | $ | 40.41 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Forfeited or canceled | | (12) | | | $ | 51.38 | | | | | | | | | | Outstanding at December 31, | | 267 | | | $ | 43.45 | | | | | | | | | |
As of December 31, 2023, there was $5.2 million of unrecognized PSU related compensation expense. NOTE 17 SHAREHOLDERS' EQUITY As of December 31, 2022,2023, our authorized capital was comprised of 100.0 million shares of common stock and 10.0 million shares of preferred stock. At December 31, 2022,2023, there were 30.531.2 million shares of common stock issued and outstanding. No preferred stock was issued and outstanding at December 31, 20222023 and 2021.2022. We issue shares of our common stock in connection with our 2014 Omnibus Plan. There arewere 3.5 million shares of common stock authorized under this plan. At December 31, 2022,2023, we had a remaining balance of 1.40.9 million shares of common stock available for future grants under this plan. Any shares related to awards that terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of shares, are settled in cash in lieu of shares or are exchanged with the Committee's permission for awards not involving shares and are available again for grant under the 2014 Omnibus Plan.
NOTE 18 SUBSEQUENT EVENTSSALE OF RECEIVABLES
DEBT
Senior Secured Credit Facilities
On February 28,During 2023, Vertex Aerospace Services Corp. (the “Borrower”), an indirect, wholly owned subsidiary of the Company entered into a Master Accounts Receivable Purchase Agreement (MARPA Facility) with MUFG Bank, Ltd. (MUFG) for the sale of certain designated eligible receivables up to a maximum amount of $200.0 million with the U.S. government. The receivables sold under the MARPA Facility are without recourse for any U.S. government credit agreement (the “Credit Agreement”) amongrisk.
The Company accounts for these receivable transfers under the lenders identified thereinMARPA Facility as sales under ASC Topic 860, Transfers and Bank of America, N.A.Servicing, as administrative agent, collateral agent, swingline lender and letter of credit issuer.removes the sold receivables from its balance sheet. The Credit Agreement provides for $750 million in senior secured financing, with a first lien on substantially all the Borrower’s assets, consisting of a $500 million five-year Revolving Credit Facility and a five-year $250 million Term Loan. The proceeds of these Credit Facilities were used to, among other things, (i) repay a portionfair value of the First Lien Credit Agreement, (ii) repaysold receivables approximated their book value due to their short-term nature. | | | | | | | | | | | | | As of and for the | | | Year Ended December 31, | (In thousands) | | 2023 | | | Beginning balance: | | $ | — | | | | Sale of receivables | | 1,394,998 | | | | Cash collections | | (1,322,284) | | | | Outstanding balance sold to MUFG1 | | 72,714 | | | | Cash collected, not remitted to MUFG2 | | (10,160) | | | | Remaining sold receivables | | $ | 62,554 | | | | 1 For the year ended December 31, 2023, the Company recorded a net cash inflow from sale of receivables of $72.7 million from operating activities. | | | 2 Includes the cash collected on behalf of, but not yet remitted to, MUFG as of December 31, 2023. This balance is included in other accrued liabilities as of the balance sheet date. | | |
During the entire outstanding amountyear ended December 31, 2023, the Company incurred purchase discount fees, net of servicing fees, of $4.0 million, which are presented in other expense, net on the Second Lien Credit Agreement,Consolidated Statements of Loss and (iii) repayare reflected as cash flows from operating activities on the entire outstanding ABL Credit Facility.Consolidated Statements of Cash Flows. The Company does not retain an ongoing financial interest in the transferred receivables other than cash collection and administrative services. The Company estimated that its servicing fee was at fair value and therefore has not recognized a servicing asset or liability as of December 31, 2023. Proceeds from the sale of receivables are reflected as cash flows from operating activities on the Consolidated Statements of Cash Flows.
ITEM 16. FORM 10-K SUMMARY None.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | V2X, INC. | | /s/ William B. Noon | | By: William B. Noon | | Chief Accounting Officer | (Principal Accounting Officer) | Date: March 2, 20235, 2024 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and the dates indicated. | | | | | | | | | SIGNATURE | TITLE | DATE | /s/ Charles L. Prow Charles L. Prow | President and Chief Executive Officer, Director (Principal Executive Officer) | March 2, 20235, 2024 | /s/ Susan D. LynchShawn Mural Susan D. LynchShawn Mural
| Chief Financial Officer (Principal Financial Officer) | March 2, 20235, 2024 | /s/ William B. Noon William B. Noon | Chief Accounting Officer | March 2, 20235, 2024 | /s/ Mary L. Howell Mary L. Howell | Chair and Director | March 2, 2023 | /s/ John Edward Boyington Jr.
John “Ed” Boyington Jr.
| Director | March 2, 20235, 2024 | /s/ Dino M. Cusumano Dino M. Cusumano | Director | March 2, 20235, 2024 | /s/ Abbas Elegba Abbas Elegba | Director | March 5, 2024 | /s/ Lee E. Evangelakos Lee E. Evangelakos | Director | March 2, 20235, 2024 | /s/ Melvin F. Parker Melvin F. Parker | Director | March 2, 20235, 2024 | /s/ Eric M. Pillmore Eric M. Pillmore | Director | March 2, 20235, 2024 | /s/ Joel M. Rotroff Joel M. Rotroff | Director | March 2, 20235, 2024 | /s/ Neil D. Snyder Neil D. Snyder | Director | March 2, 20235, 2024 | /s/ Stephen L. Waechter Stephen L. Waechter | Director | March 2, 20235, 2024 | /s/ Phillip C. Widman Phillip C. Widman | Director | March 2, 20235, 2024 |
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