If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ

~~Indicate by check mark whether the registrant~~ is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐

No ☑

As of ~~November 3, 2021,~~May 6, 2022, there were ~~11,728,076 shares~~11,826,663 shares of common stock ($0.01 par value per share) outstanding.

VECTRUS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


		Page No.
	PART I. FINANCIAL INFORMATION	4
Item 1.	Financial Statements	4
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Cash Flows	7
	Condensed Consolidated Statements of Changes to Shareholders' Equity	8
	Note 1. Description of Business and Summary of Significant Accounting Policies	109
	Note 2. Recent Accounting Standards Update	1110
	Note 3. ~~Revenue~~Proposed Merger with Vertex Aerospace	1110
	Note 4. ~~Acquisitions~~Revenue	1410
	Note 5. Receivables	1513
	Note 6. Goodwill and Intangible Assets	1513
	Note 7. Debt	1614
	Note 8. Derivative Instruments	1715
	Note 9. Leases	1815
	Note 10. Commitments and Contingencies	2017
	Note 11. Stock Based Compensation	2118
	Note 12. Income Taxes	2219
	Note 13. Earnings Per Share	2320
	Note 14. ~~Multiemployer Pension Plans~~Deferred Employee Compensation	2320
	Note 15. Multi-employer Pension Plan	20
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2421
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3229
Item 4.	Controls and Procedures	3329
	PART II. OTHER INFORMATION	3431
Item 1.	Legal Proceedings	3431
Item 1A.	Risk Factors	3431
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3431
Item 3.	Defaults upon Senior Securities	3431
Item 4.	Mine Safety Disclosures	3431
Item 5.	Other Information	3431
Item 6.	Exhibits	3532
	Signatures	3532

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


		Three Months Ended				Nine Months Ended					Three Months Ended
		October 1,		October 2,		October 1,		October 2,			April 1,		April 2,
(In thousands, except per share data)	(In thousands, except per share data)	2021		2020		2021		2020		(In thousands, except per share data)	2022		2021
Revenue	Revenue	$	459,408	$	352,415	$	1,364,257	$	1,040,212	Revenue	$	456,471	$	434,004
Cost of revenue	Cost of revenue	418,900		320,234		1,235,209		951,743		Cost of revenue	419,275		393,648
Selling, general, and administrative expenses	Selling, general, and administrative expenses	27,618		17,344		77,045		58,718		Selling, general, and administrative expenses	31,959		23,823

Operating income	Operating income	12,890		14,837		52,003		29,751		Operating income	5,237		16,533
Interest expense, net	Interest expense, net	(1,955)		(939)		(6,140)		(3,988)		Interest expense, net	(1,681)		(1,932)

Income from operations before income taxes	Income from operations before income taxes	10,935		13,898		45,863		25,763		Income from operations before income taxes	3,556		14,601
Income tax expense	Income tax expense	677		3,507		7,623		5,593		Income tax expense	701		2,553
Net income	Net income	$	10,258	$	10,391	$	38,240	$	20,170	Net income	$	2,855	$	12,048

Earnings per share	Earnings per share									Earnings per share
Basic	Basic	$	0.87	$	0.89	$	3.27	$	1.74	Basic	$	0.24	$	1.03
Diluted	Diluted	$	0.87	$	0.88	$	3.23	$	1.72	Diluted	$	0.24	$	1.02
Weighted average common shares outstanding - basic	Weighted average common shares outstanding - basic	11,726		11,621		11,696		11,590		Weighted average common shares outstanding - basic	11,759		11,648
Weighted average common shares outstanding - diluted	Weighted average common shares outstanding - diluted	11,849		11,751		11,830		11,743		Weighted average common shares outstanding - diluted	11,902		11,827

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

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


		Three Months Ended				Nine Months Ended					Three Months Ended
		October 1,		October 2,		October 1,		October 2,			April 1,		April 2,
(In thousands)	(In thousands)	2021		2020		2021		2020		(In thousands)	2022		2021
Net income	Net income	$	10,258	$	10,391	$	38,240	$	20,170	Net income	$	2,855	$	12,048
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax									Other comprehensive income (loss), net of tax
Changes in derivative instruments:	Changes in derivative instruments:									Changes in derivative instruments:
Net change in fair value of interest rate swaps	Net change in fair value of interest rate swaps	242		290		766		(1,035)		Net change in fair value of interest rate swaps	439		295
Net change in fair value of foreign currency forward contracts	Net change in fair value of foreign currency forward contracts	(62)		204		(557)		338		Net change in fair value of foreign currency forward contracts	30		(396)

Tax (expense) benefit	Tax (expense) benefit	(3)		(202)		(30)		56		Tax (expense) benefit	(95)		24
Net change in derivative instruments	Net change in derivative instruments	177		292		179		(641)		Net change in derivative instruments	374		(77)
Foreign currency translation adjustments, net of tax	Foreign currency translation adjustments, net of tax	(3,093)		2,042		(5,019)		2,578		Foreign currency translation adjustments, net of tax	(616)		(2,356)
Other comprehensive income (loss) net of tax	Other comprehensive income (loss) net of tax	(2,916)		2,334		(4,840)		1,937		Other comprehensive income (loss) net of tax	(242)		(2,433)
Total comprehensive income	Total comprehensive income	$	7,342	$	12,725	$	33,400	$	22,107	Total comprehensive income	$	2,613	$	9,615

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

VECTRUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

October 1, December 31,
(In thousands, except share information) 2021 2020
Assets
Current assets
Cash and cash equivalents $ 56,232 $ 66,949
Restricted cash — 1,778
Receivables 337,072 314,959
Other current assets 39,331 24,702
Total current assets 432,635 408,388
Property, plant, and equipment, net 23,560 22,573
Goodwill 316,978 339,702
Intangible assets, net 69,088 48,105
Right-of-use assets 43,111 18,718
Other non-current assets 9,379 6,325
Total non-current assets 462,116 435,423
Total Assets $ 894,751 $ 843,811
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 211,585 $ 159,586
Compensation and other employee benefits 73,521 79,568
Short-term debt 10,400 8,600
Other accrued liabilities 46,803 40,657
Total current liabilities 342,309 288,411
Long-term debt, net 116,623 168,751
Deferred tax liability 39,966 39,386
Other non-current liabilities 54,052 42,325
Total non-current liabilities 210,641 250,462
Total liabilities 552,950 538,873
Commitments and contingencies (Note 10) 0 0
Shareholders' Equity
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; 11,726,707 and 11,624,717 shares issued and outstanding as of October 1, 2021 and December 31, 2020, respectively 117 116
Additional paid in capital 86,285 82,823
Retained earnings 260,266 222,026
Accumulated other comprehensive loss (4,867) (27)
Total shareholders' equity 341,801 304,938
Total Liabilities and Shareholders' Equity $ 894,751 $ 843,811


	April 1,		December 31,
(In thousands, except per share information)	2022		2021
Assets
Current assets
Cash and cash equivalents	$	22,999	$	38,513

Receivables	377,571		348,605
Prepaid expenses	25,923		21,160
Other current assets	11,083		15,062
Total current assets	437,576		423,340
Property, plant, and equipment, net	24,049		23,758
Goodwill	321,734		321,734


Intangible assets, net	64,281		66,582
Right-of-use assets	42,074		43,651
Other non-current assets	9,876		10,394
Total non-current assets	462,014		466,119
Total Assets	$	899,590	$	889,459
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	234,713	$	212,533

Compensation and other employee benefits	59,059		80,284

Short-term debt	10,400		10,400
Other accrued liabilities	55,421		55,031
Total current liabilities	359,593		358,248


Long-term debt, net	108,392		94,246
Deferred tax liability	32,620		32,214
Operating lease liability	33,167		34,536
Other non-current liabilities	11,643		20,128
Total non-current liabilities	185,822		181,124
Total liabilities	545,415		539,372
Commitments and contingencies (Note 10)	0		0
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; 11,805 and 11,738 shares issued and outstanding as of April 1, 2022 and December 31, 2021, respectively	118		117
Additional paid in capital	89,590		88,116
Retained earnings	270,609		267,754
Accumulated other comprehensive loss	(6,142)		(5,900)
Total shareholders' equity	354,175		350,087
Total Liabilities and Shareholders' Equity	$	899,590	$	889,459

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

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


		Nine Months Ended					Three Months Ended
		October 1,		October 2,			April 1,		April 2,
(In thousands)	(In thousands)	2021		2020		(In thousands)	2022		2021
Operating activities	Operating activities					Operating activities
Net income	Net income	$	38,240	$	20,170	Net income	$	2,855	$	12,048
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	Depreciation expense	4,788		3,001		Depreciation expense	1,591		1,548
Amortization of intangible assets	Amortization of intangible assets	7,521		3,031		Amortization of intangible assets	2,301		2,450
Loss on disposal of property, plant, and equipment		65		63
(Gain) Loss on disposal of property, plant, and equipment						(Gain) Loss on disposal of property, plant, and equipment	(16)		43
Stock-based compensation	Stock-based compensation	6,927		6,499		Stock-based compensation	2,558		2,622
Amortization of debt issuance costs	Amortization of debt issuance costs	689		286		Amortization of debt issuance costs	204		232
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Receivables	Receivables	(22,835)		3,584		Receivables	(29,898)		(46,544)
Prepaid expenses						Prepaid expenses	(4,849)		(3,137)
Other assets	Other assets	(15,743)		(8,826)		Other assets	4,520		(648)
Accounts payable	Accounts payable	55,653		(1,988)		Accounts payable	22,693		42,054
Deferred taxes	Deferred taxes	780		(7,575)		Deferred taxes	—		2,716
Compensation and other employee benefits	Compensation and other employee benefits	(5,737)		813		Compensation and other employee benefits	(21,138)		(22,818)
Other liabilities	Other liabilities	(16,970)		18,597		Other liabilities	(7,202)		(12,295)
Net cash provided by operating activities		53,378		37,655
Net cash used in operating activities						Net cash used in operating activities	(26,381)		(21,729)
Investing activities	Investing activities					Investing activities
Purchases of capital assets and intangibles		(7,650)		(3,348)
Purchases of capital assets						Purchases of capital assets	(2,195)		(2,611)
Proceeds from the disposition of assets	Proceeds from the disposition of assets	16		—		Proceeds from the disposition of assets	17		—
Business acquisition purchase price adjustment		262		—
Contribution to joint venture		(2,496)		—

Net cash used in investing activities	Net cash used in investing activities	(9,868)		(3,348)		Net cash used in investing activities	(2,178)		(2,611)
Financing activities	Financing activities					Financing activities

Repayments of long-term debt	Repayments of long-term debt	(6,000)		(4,500)		Repayments of long-term debt	(2,600)		(2,000)
Proceeds from revolver	Proceeds from revolver	352,000		151,000		Proceeds from revolver	217,000		110,000
Repayments of revolver	Repayments of revolver	(397,000)		(151,000)		Repayments of revolver	(200,000)		(110,000)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	113		59		Proceeds from exercise of stock options	—		113
Payment of debt issuance costs	Payment of debt issuance costs	(17)		—		Payment of debt issuance costs	(458)		—

Payments of employee withholding taxes on share-based compensation	Payments of employee withholding taxes on share-based compensation	(2,317)		(1,918)		Payments of employee withholding taxes on share-based compensation	(1,626)		(2,184)
Net cash used in financing activities		(53,221)		(6,359)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	12,316		(4,071)
Exchange rate effect on cash	Exchange rate effect on cash	(2,784)		468		Exchange rate effect on cash	729		(191)
Net change in cash, cash equivalents and restricted cash	Net change in cash, cash equivalents and restricted cash	(12,495)		28,416		Net change in cash, cash equivalents and restricted cash	(15,514)		(28,602)
Cash, cash equivalents and restricted cash-beginning of year	Cash, cash equivalents and restricted cash-beginning of year	68,727		35,318		Cash, cash equivalents and restricted cash-beginning of year	38,513		68,727
Cash, cash equivalents and restricted cash-end of period	Cash, cash equivalents and restricted cash-end of period	$	56,232	$	63,734	Cash, cash equivalents and restricted cash-end of period	$	22,999	$	40,125

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Interest paid	Interest paid	$	4,706	$	3,030	Interest paid	$	1,513	$	1,371
Income taxes paid		$	9,068	$	12,570
Income taxes paid (refunded)						Income taxes paid (refunded)	$	66	$	(97)

Purchase of capital assets on account	Purchase of capital assets on account	$	480	$	373	Purchase of capital assets on account	$	5	$	(132)

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

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES TO SHAREHOLDERS' EQUITY (UNAUDITED)

Common Stock Issued Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders' Equity
(In thousands) Shares Amount Retained Earnings
Balance at December 31, 2019 11,524 $ 115 $ 78,757 $ 185,075 $ (5,082) $ 258,865
Net income 8,668 8,668
Foreign currency translation adjustments (1,934) (1,934)
Unrealized loss on cash flow hedge (1,290) (1,290)
Employee stock awards and stock options 64 1 — 1
Taxes withheld on restricted stock unit compensation awards (1,787) (1,787)
Stock-based compensation 1,720 1,720
Balance at April 3, 2020 11,588 $ 116 $ 78,690 $ 193,743 $ (8,306) $ 264,243
Net income 1,111 1,111
Foreign currency translation adjustments 2,470 2,470
Unrealized gain on cash flow hedge 357 357
Employee stock awards and stock options 32 — 58 58
Taxes withheld on restricted stock unit compensation awards (86) (86)
Stock-based compensation 1,282 1,282
Balance at July 3, 2020 11,620 $ 116 $ 79,944 $ 194,854 $ (5,479) $ 269,435
Net income 10,391 10,391
Foreign currency translation adjustments 2,042 2,042
Unrealized gain on cash flow hedge 292 292
Employee stock awards and stock options 2 — — —
Conversion of liability-based stock compensation awards to equity-based stock compensation awards 405 405
Taxes withheld on restricted stock unit compensation awards (44) (44)
Stock-based compensation 1,284 1,284
Balance at October 2, 2020 11,622 $ 116 $ 81,589 $ 205,245 $ (3,145) $ 283,805
Balance at December 31, 2020 11,625 $ 116 $ 82,823 $ 222,026 $ (27) $ 304,938
Net income 12,048 12,048
Foreign currency translation adjustments (2,356) (2,356)
Unrealized loss on cash flow hedge (77) (77)
Employee stock awards and stock options 75 1 113 114
Taxes withheld on stock compensation awards (2,184) (2,184)
Stock-based compensation 1,983 1,983
Balance at April 2, 2021 11,700 $ 117 $ 82,735 $ 234,074 $ (2,460) $ 314,466


	Common Stock Issued			Additional Paid-in Capital				Accumulated Other Comprehensive Loss		Total Shareholders' Equity
(In thousands)	Shares	Amount				Retained Earnings
Balance at December 31, 2020	11,625	$	116	$	82,823	$	222,026	$	(27)	$	304,938
Net income						12,048				12,048
Foreign currency translation adjustments								(2,356)		(2,356)
Unrealized loss on cash flow hedge								(77)		(77)
Employee stock awards and stock options	75	1		113						114
Taxes withheld on restricted stock unit compensation awards				(2,184)						(2,184)
Stock-based compensation				1,983						1,983
Balance at April 2, 2021	11,700	$	117	$	82,735	$	234,074	$	(2,460)	$	314,466
















Balance at December 31, 2021	11,738	$	117	$	88,116	$	267,754	$	(5,900)	$	350,087
Net income						2,855				2,855
Foreign currency translation adjustments								(616)		(616)
Unrealized gain on cash flow hedge								374		374
Employee stock awards and stock options	67	1		—						1
Taxes withheld on stock compensation awards				(1,626)						(1,626)
Stock-based compensation				3,100						3,100
Balance at April 1, 2022	11,805	$	118	$	89,590	$	270,609	$	(6,142)	$	354,175

Net income 15,934 15,934
Foreign currency translation adjustments 430 430
Unrealized loss on cash flow hedge 79 79
Employee stock awards and stock options 24 — — —
Taxes withheld on restricted stock unit compensation awards (88) (88)
Stock-based compensation 2,003 2,003
Balance at July 2, 2021 11,724 $ 117 $ 84,650 $ 250,008 $ (1,951) $ 332,824
Net income 10,258 10,258
Foreign currency translation adjustments (3,093) (3,093)
Unrealized loss on cash flow hedge 177 177
Employee stock awards and stock options 3 — — —
Taxes withheld on stock compensation awards (45) (45)
Stock-based compensation 1,680 1,680
Balance at October 1, 2021 11,727 $ 117 $ 86,285 $ 260,266 $ (4,867) $ 341,801

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

Our Business

Vectrus, Inc. is a leading provider of services to the United States Government (U.S. government) worldwide. The Company operates as 1 segment and provides the following services and offerings: facility and base operations, supply chain and logistics services, information technology mission support, and engineering and digital integration ~~services, including integration, security, maintenance, repair and overhaul.~~services.

Vectrus was incorporated in the State of Indiana in February 2014. On September 27, 2014, Exelis Inc. (Exelis) completed the spin-off (the Spin-off) of Vectrus, and Vectrus became an independent, publicly traded company. References in these notes to "Vectrus", "we," "us," "our," "the Company" and "our Company" refer to Vectrus, Inc. References in these notes to "Exelis" or "Former Parent" refer to Exelis Inc., an Indiana corporation, and its consolidated subsidiaries (other than Vectrus). Exelis was acquired by ~~Harris Corporation~~a predecessor entity of L3Harris Technologies, Inc. in May 2015.

Equity Investments

In 2011, we entered into a joint venture agreement with Shaw Environmental & Infrastructure, Inc., which is now APTIM Federal Services LLC. Pursuant to the joint venture agreement, High Desert Support Services, LLC (HDSS) was established to pursue and perform work on the Ft. Irwin Installation Support Services Contract, which was awarded to HDSS in October 2012. In 2018, we entered into a joint venture agreement with J&J Maintenance. Pursuant to the joint venture agreement, J&J Facilities Support, LLC (J&J) was established to pursue and perform work on various U.S. government contracts. 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 Vectrus and others around the world.

We account for our investments in HDSS, J&J, and ~~J&J~~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 40%, 50%, and ~~50%~~40% shares, respectively, of income or losses from HDSS, J&J, and ~~J&J~~ServCore in selling, general and administrative expenses in the Condensed Consolidated Statements of Income. ~~Income or losses from HDSS and J&J are insignificant.~~ Our ~~joint venture~~ investment in ~~HDSS and J&J~~these joint ventures is recorded in other non-current assets in the Condensed 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 Condensed 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 Condensed Consolidated Statements of Cash Flows. During the ~~nine~~three months ended ~~October~~April 1, ~~2021,~~2022, Vectrus ~~made cash contributions of $2.5~~received a $0.8 million todistribution, representing a return on investment from our joint ventures.As of ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020~~2021 our joint venture investment balance was ~~$4.2~~$4.6 million and ~~$1.4~~$5.4 million, respectively. Our proportionate share of income from the HDSS, J&J, and ServCore joint ventures was immaterial for the first quarters of 2022 and 2021.

Basis of Presentation

Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter ~~(October~~(April 1, 2022 for the first quarter of 2022 and April 2, 2021 for the ~~third~~first quarter of ~~2021 and October 2, 2020 for the third quarter of 2020)~~2021), except for the last quarter of the fiscal year, which ends on December 31. For ease of presentation, the quarterly financial statements included herein are described as three months ended.

The unaudited interim Condensed Consolidated Financial Statements of Vectrus have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the U.S. have been omitted. These unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position and operating results. Revenue and net income for any interim period are not necessarily indicative of future or annual results.

109

~~Deferred Compensation Plan~~

During the first quarter of 2021, the Company established a non-qualified deferred compensation plan under which participants are eligible to defer a portion of their compensation on a tax deferred basis. The assets in the plan are held in a Rabbi trust. Plan investments and obligations were recorded in other non-current assets and other non-current liabilities, respectively, in the condensed consolidated balance sheets, representing the fair value related to the deferred compensation plan. Adjustments to the fair value of the plan investments and obligations are recorded in operating expenses. The plan assets and liabilities as of October 1, 2021 and operating expenses for the three and nine months ended October 1, 2021 ~~were not material.~~

NOTE 2

RECENT ~~ACCOUNTING~~ACCOUNTING STANDARDS UPDATE

Accounting Standards Issued but Not Yet Effective

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

~~Accounting Standards That Were Adopted~~

In ~~December 2019,~~October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ~~2019-12,~~No. 2021-08, ~~Income Taxes~~Business Combinations (Topic ~~740) Simplifying the~~805): Accounting for ~~Income Taxes~~Contract Assets and Contract Liabilities from Contracts with Customers ~~(ASU 2019-12)~~(ASU 2021-08). The ~~objectives~~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. 2021-08 is effective for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted. The Company is currently evaluating the potential impact of ASU ~~2019-12 are (i)~~2021-08 to ~~simplify~~its consolidated financial statements and expects to early adopt ASU 2021-08 during 2022 in conjunction with the proposed merger discussed below.

Accounting Standards That Were Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). To ease the burden in accounting for ~~income taxes by removing certain~~reference rate reform on financial reporting, the ASU provides companies with optional expedients and exceptions ~~(ii)~~for applying accounting guidance to ~~update certain requirements~~contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to ~~simplify the accounting for income taxes, and (iii) to make minor codification improvements for income taxes.~~be discontinued because of reference rate reform. The Company adopted the standard asduring the first quarter of ~~January 1, 2021 and it~~2022. It did not have a material impact on the ~~Company’s~~Company's financial statements.

NOTE 3

PROPOSED MERGER WITH VERTEX AEROSPACE

On March 7, 2022, the Company, including its newly incorporated subsidiaries Andor Merger Sub LLC (Merger Sub LLC) and Andor Merger Sub Inc. (Merger Sub Inc.), and Vertex Aerospace Services Holding Corp. (Vertex), entered into an agreement and plan of merger (the Merger Agreement) proposing that Merger Sub Inc. merge with and into Vertex (the First Merger), and immediately thereafter, Vertex, as the surviving company of the First Merger, merge with and into Merger Sub LLC (the Second Merger), with Merger Sub LLCsurviving the Second Merger as a direct, wholly owned subsidiary of the Company (the Proposed Transaction).

The Proposed Transaction is structured so that the existing stockholders of Vertex will own approximately 62.25% of the issued and outstanding Company common shares following the consummation of the Proposed Transaction, and the existing shareholders of the Company will own approximately 37.75%.

The consummation of the Proposed Transaction is subject to the satisfaction of certain conditions, including, among others, the expiration or termination of antitrust waiting periods and receipt of certain other regulatory approvals, absence of injunctions or restraints prohibiting consummation of the Proposed Transaction, the Vectrus shareholder approval being obtained, the shares issued to Vertex being approved for listing on the New York Stock Exchange and the execution and delivery of a shareholder rights and registration rights agreements. The obligation of each party to consummate the Proposed Transaction is also conditioned on the other party’s representations and warranties being true and correct, the other party having performed in all material respects its obligations under the Merger Agreement, and the absence of any material adverse effect after the date of the Merger Agreement.

The Merger Agreement provides certain termination rights for both the Company and Vertex, and further provides that a termination fee equal to $16.6 million will be payable by the Company to Vertex upon termination of the Merger Agreement under certain circumstances, including, among others, (i) as a result of the termination of the Merger Agreement by the Company to accept a Parent Superior Proposal (as defined in the Merger Agreement), (ii) the Company having Willfully Breached (as defined in the Merger Agreement) any of its obligations under the no solicitation provisions of the Merger Agreement, or (iii) the Board having changed its recommendation to shareholders.

NOTE 4

REVENUE

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. To determine the proper revenue recognition method, consideration is given as to whether a single contract should be accounted for as more than one performance obligation. For most of our contracts, the customer contracts with us to perform an integrated set of tasks and deliverables as a single service solution, whereby each service is not separately identifiable from other promises in the contract and therefore is not distinct. As a result, when this integrated set of tasks exists, the contract is accounted for as one performance obligation. The vast majority of our contracts have a single performance obligation. Unexercised contract options and indefinite delivery and indefinite quantity (IDIQ) contracts are considered to be separate performance obligations when the option or IDIQ task

order is exercised or awarded.

~~Contract modifications are routine in the performance of our contracts.~~ Contracts are often modified to account for changes in contract specifications orand requirements. ~~In most instances, contract modifications are for goods or services that are not distinct, and therefore, are accounted for as part of~~If the ~~existing contract. Modifications to exercise option years create~~modification either creates new enforceable rights and obligations or changes the existing enforceable rights and ~~therefore are~~obligations, the modification will be treated as a separate ~~performance obligations.~~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 Company's 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. Determining progress on performance obligations requires us to make judgments that affect the timing of revenue recognition. 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. Government Accountability Office (GAO) or in the U.S. Court of Federal Claims. The level of order activity related to contracts can be affected by the timing of U.S. government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others.

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)~~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 ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020~~2021 are presented in the following table:


		October 1,		December 31,			April 1,		December 31,
(In millions)	(In millions)	2021		2020		(In millions)	2022		2021
Performance Obligations	Performance Obligations	$	1,560	$	993	Performance Obligations	$	1,288	$	1,398

We expect to recognize approximately ~~24%~~64% of the remaining performance obligations as of ~~October~~April 1, ~~2021~~2022 as revenue in ~~2021~~2022 and the remaining ~~76%~~36% during ~~2022.~~2023.

Contract Estimates

Accounting for contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include labor productivity and availability; the complexity of the services being performed; the cost and availability of materials; the performance of subcontractors; and negotiations with the ~~availability~~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 ~~timing of funding from~~is recognized in the ~~customer.~~period in which the loss was determined.

The impact of adjustments in contract estimates on our operating income can be reflected in either revenue or cost of revenue. Cumulative catch-up adjustments for the three ~~and nine~~ months ended ~~October~~April 1, 2022 and April 2, 2021 increased operating income by ~~$2.6~~$0.6 million and decreased operating income by ~~$0.4 million, respectively. For the three and nine months ended October 2, 2020, the adjustments increased operating income by less than $0.1 million and decreased operating income by $3.8~~$1.3 million, respectively.

For the three ~~and nine~~ months ended ~~October~~April 1, 2022 and April 2, 2021, the cumulative catch-up adjustments to operating income increased revenue by ~~$3.0~~$0.6 million and ~~$1.4 million, respectively. For the three and nine months ended October 2, 2020, the cumulative catch-up adjustments to operating income~~ decreased revenue by ~~$1.1 million and $0.5~~$1.9 million, respectively.

Revenue by Category

Generally, the sales price elements for our contracts are cost-plus, cost-reimbursable or firm-fixed-price. We commonly have elements of cost-plus, cost-reimbursable and firm-fixed-price contracts on a single contract. On a cost-plus type contract, we are paid our allowable incurred costs plus a profit, which can be fixed or variable depending on the contract’s fee arrangement, up to funding levels predetermined by our customers. On cost-plus type contracts, we do not bear the risks of unexpected cost overruns, provided that we do not incur costs that exceed the predetermined funded amounts. Most of our cost-plus contracts also contain a firm-fixed price element. Cost-plus type contracts with award and incentive fee provisions are our primary variable contract fee arrangement. Award fees provide for a fee based on actual performance relative to contractually specified performance criteria. Incentive fees provide for a fee based on the relationship between total allowable and target cost. On most of our contracts, a cost-reimbursable element captures consumable materials required for the contract. Typically, these costs do not bear fees.

On a firm-fixed-price type contract, we agree to perform the contractual statement of work for a predetermined contract price. A firm-fixed-price type contract typically offers higher profit margin potential than a cost-plus type contract, which is commensurate with the greater levels of risk we assume on a firm-fixed-price type contract. Although a firm-fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract. 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.

The following tables present our revenue disaggregated by several categories. Revenue by contract type for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020~~2021 is as follows:


		Three Months Ended						Nine Months Ended							Three Months Ended
		October 1,		October 2,		%		October 1,		October 2,		%			April 1,		April 2,		%
(In thousands)	(In thousands)	2021		2020		Change		2021		2020		Change		(In thousands)	2022		2021		Change
Cost-plus and cost-reimbursable ¹		$	353,789	$	249,484	41.8	%	$	1,018,465	$	748,543	36.1	%
Cost-plus and cost-reimbursable														Cost-plus and cost-reimbursable	$	311,094	$	290,230	7.2	%
Firm-fixed-price	Firm-fixed-price	105,619		102,931		2.6	%	345,792		291,669		18.6	%	Firm-fixed-price	128,004		128,757		(0.6)	%
Time and material														Time and material	17,373		15,017		15.7	%
Total revenue	Total revenue	$	459,408	$	352,415			$	1,364,257	$	1,040,212			Total revenue	$	456,471	$	434,004

¹ Includes time and material contracts

Revenue by geographic region in which the contract is performed for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020~~2021 is as follows:


		Three Months Ended						Nine Months Ended							Three Months Ended
		October 1,		October 2,		%		October 1,		October 2,		%			April 1,		April 2,		%
(In thousands)	(In thousands)	2021		2020		Change		2021		2020		Change		(In thousands)	2022		2021		Change
Middle East	Middle East	$	263,257	$	223,544	17.8	%	$	761,758	$	677,449	12.4	%	Middle East	$	235,754	$	240,013	(1.8)	%
United States	United States	139,357		87,979		58.4	%	435,717		250,900		73.7	%	United States	167,980		149,811		12.1	%
Europe	Europe	34,902		38,108		(8.4)	%	111,604		106,171		5.1	%	Europe	36,531		40,623		(10.1)	%
Asia	Asia	21,892		2,784		686.3	%	55,178		5,692		869.4	%	Asia	16,206		3,557		355.6	%
Total revenue	Total revenue	$	459,408	$	352,415			$	1,364,257	$	1,040,212			Total revenue	$	456,471	$	434,004

Revenue by contract relationship for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020~~2021 is as follows:


		Three Months Ended						Nine Months Ended							Three Months Ended
		October 1,		October 2,		%		October 1,		October 2,		%			April 1,		April 2,		%
(In thousands)	(In thousands)	2021		2020		Change		2021		2020		Change		(In thousands)	2022		2021		Change
Prime contractor	Prime contractor	$	429,370	$	332,564	29.1	%	$	1,272,671	$	980,301	29.8	%	Prime contractor	$	427,093	$	403,262	5.9	%
Subcontractor	Subcontractor	30,038		19,851		51.3	%	91,586		59,911		52.9	%	Subcontractor	29,378		30,742		(4.4)	%
Total revenue	Total revenue	$	459,408	$	352,415			$	1,364,257	$	1,040,212			Total revenue	$	456,471	$	434,004

Revenue by customer for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020~~2021 is as follows:


		Three Months Ended						Nine Months Ended							Three Months Ended
		October 1,		October 2,		%		October 1,		October 2,		%			April 1,		April 2,		%
(In thousands)	(In thousands)	2021		2020		Change		2021		2020		Change		(In thousands)	2022		2021		Change
Army	Army	$	304,341	$	236,267	28.8	%	$	869,690	$	711,173	22.3	%	Army	$	280,113	$	257,349	8.8	%
Air Force	Air Force	63,569		79,425		(20.0)	%	207,565		231,088		(10.2)	%	Air Force	61,474		78,170		(21.4)	%
Navy	Navy	52,556		18,785		179.8	%	165,391		48,564		240.6	%	Navy	75,217		56,427		33.3	%
Other	Other	38,942		17,938		117.1	%	121,611		49,387		146.2	%	Other	39,667		42,058		(5.7)	%
Total revenue	Total revenue	$	459,408	$	352,415			$	1,364,257	$	1,040,212			Total revenue	$	456,471	$	434,004

Contract Balances

The timing of revenue recognition, billings, and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. 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~~fund current operating expenses under the ~~primary contract terms.~~contract. These assets and liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.

As of ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020,~~2021, we had contract assets of ~~$249.3~~$235.3 million and ~~$203.1~~$240.0 million, respectively. Contract assets primarily consist of unbilled receivables which represent rights to consideration for work completed but not billed as of the reporting date. 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 receivable balances. As of both ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020,~~2021, our contract liabilities were insignificant.

~~NOTE 4~~

~~ACQUISITIONS~~

~~Zenetex~~

On December 31, 2020, we acquired Zenetex, LLC (Zenetex) a leading provider of technical and strategic solutions focused on enabling mission readiness, performance, and enhanced protection for defense and national security clients globally.

The total net consideration paid for the acquisition was approximately $117.6 million, consisting of the purchase price of $122.8 million, net of cash acquired, less $5.2 million for a working capital shortfall compared with the working capital requirement agreed upon in the stock purchase agreement. The acquisition was funded by utilizing available capacity from our Amended Revolver (as defined in Note 7, “Debt”) and cash on hand.

~~A breakdown of the preliminary purchase price allocation, net of cash acquired, is as follows:~~


~~(In thousands)~~	~~Allocation of Purchase Price~~

~~Receivables~~	$	~~40,343~~
~~Deferred taxes~~	88
~~Other current assets~~	~~1,261~~
~~Property, plant and equipment~~	~~1,108~~
~~Goodwill~~	~~48,959~~
~~Intangible assets~~	~~57,100~~
~~Right-of-use assets~~	~~7,930~~

~~Accounts payable~~	~~(7,381)~~
~~Other current liabilities~~	~~(11,385)~~
~~Accrued compensation~~	~~(12,087)~~
~~Lease liabilities~~	~~(8,275)~~
~~Other non-current liabilities~~	~~(55)~~
~~Purchase price, net of cash acquired~~	$	~~117,606~~

Adjustments to the initial purchase accounting for the acquired net assets will be completed, as needed, up to one year from the acquisition date as we obtain additional information regarding facts and circumstances that existed as of the acquisition date. The Condensed Consolidated Statement of Income for the first nine months of 2021 was not impacted by any such adjustments.

The Company recognized customer related intangible assets arising from the acquisition. The fair value was $57.1 million with an amortization period of 11.8 years. Additionally, the Company recognized goodwill of $49.0 million arising from the acquisition, which relates primarily to acquired services strengthening our position as a leading fully-integrated provider in the converged infrastructure market, as well as extending our operations and maintenance services to increase content and scope at client installations. Goodwill also includes other intangibles that do not qualify for separate recognition. The goodwill recognized for the Zenetex acquisition is fully deductible for income tax purposes.

Zenetex's results of operations have been included in our Condensed Consolidated Statements of Income for the periods subsequent to acquisition on December 31, 2020. For the three and nine months ended October 1, 2021, Zenetex recognized revenue of $57.4 million and $183.0 million, respectively. For the three and nine months ended October 1, 2021, income from operations before income taxes was $2.5 million and $7.0 million, respectively. For the three and nine months ended October 2, 2020, on a pro forma basis, the acquired business would have recognized revenue of $62.6 million and $177.5 million, respectively and an insignificant amount of income from operations before income taxes after pro forma adjustments.

~~HHB~~

On December 31, 2020, we acquired Higgins, Hermansen, Banikas, LLC (HHB). HHB is a leading provider of high-end solutions for facilities management, logistics, engineering, enterprise operations and asset management solutions for supporting Intelligence Community (IC) 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 (as defined in Note 7, “Debt”) and cash on hand.

The Company recognized customer related intangible assets arising from the acquisition. The fair value was $8.6 million with an amortization period of 7.4 years. Additionally, the Company recognized goodwill of $6.1 million arising from the acquisition, which relates primarily to growth opportunities in the IC 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 preliminary purchase price allocation was primarily working capital.~~

NOTE 5

RECEIVABLES

Receivables were comprised of the following:


(In thousands)	(In thousands)	October 1, 2021		December 31, 2020		(In thousands)	April 1, 2022		December 31, 2021
Billed receivables	Billed receivables	$	81,737	$	102,045	Billed receivables	$	136,287	$	104,074
Unbilled receivables (contract assets)	Unbilled receivables (contract assets)	249,299		203,127		Unbilled receivables (contract assets)	235,341		239,979
Other	Other	6,036		9,787		Other	5,943		4,552
Total receivables	Total receivables	$	337,072	$	314,959	Total receivables	$	377,571	$	348,605

As of ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 ~~October~~April 1, ~~2021~~2022 contract assets during ~~the next twelve months.~~2022. Changes in the balance of receivables are primarily due to the timing differences between our performance and customers' payments.

NOTE 6

GOODWILL AND INTANGIBLE ASSETS

~~The changes in~~As of April 1, 2022 and December 31, 2021 the carrying amount of goodwill ~~for the nine months ended October 1, 2021 are as follows:~~

~~(In thousands)~~

~~Balance at December 31, 2020~~

~~339,702~~

~~Adjustments to preliminary purchase price allocation of Zenetex~~

~~(18,140)~~

~~Adjustments to preliminary purchase price allocation of HHB~~

~~(4,584)~~

~~Balance at October 1, 2021~~

~~316,978~~

was $321.7 million.

The Company tests goodwill for impairment on the first day of the Company's fourth fiscal quarter each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Identifiable intangible assets consist of the following:


		October 1, 2021						December 31, 2020							April 1, 2022						December 31, 2021
(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	$	77,300	$	(12,902)	$	64,398	$	48,800	$	(6,645)	$	42,155	Contract backlogs and recompetes	$	77,300	$	(16,868)	$	60,432	$	77,300	$	(14,988)	$	62,312
Customer contracts	Customer contracts	7,200		(3,212)		3,988		7,200		(2,133)		5,067		Customer contracts	7,200		(3,932)		3,268		7,200		(3,572)		3,628
Trade names and other	Trade names and other	1,248		(546)		702		1,243		(360)		883		Trade names and other	1,249		(668)		581		1,249		(607)		642
Balance	Balance	$	85,748	$	(16,660)	$	69,088	$	57,243	$	(9,138)	$	48,105	Balance	$	85,749	$	(21,468)	$	64,281	$	85,749	$	(19,167)	$	66,582

Identifiable intangible asset amortization expense was ~~$2.6~~$2.3 million and ~~$7.5~~$2.5 million for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021, respectively. Intangible amortization for the three~~2022 and ~~nine months ended October~~April 2, ~~2020 was $1.0 million and $3.0 million,~~2021, respectively. As of ~~October~~April 1, ~~2021,~~2022, the remaining average intangible asset amortization period was ~~9.7~~9.2 years.

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


Period	Period	Amortization		Period	Amortization
2021 (excluding the nine months ended October 1, 2021)		$	2,507
2022		$	8,499
2022 (remainder of the year)				2022 (remainder of the year)	$	6,365
2023	2023	$	8,403	2023	$	8,486
2024	2024	$	7,296	2024	$	7,379
2025	2025	$	6,499	2025	$	6,582
After 2025		$	35,884
2026				2026	$	6,112
After 2026				After 2026	$	29,357

NOTE 7

DEBT

Senior Secured Credit Facilities

Term Loan and Revolver. In September 2014, we and our wholly-owned subsidiary, Vectrus Systems Corporation (VSC), entered into a credit agreement. The credit agreement was subsequently amended ~~with the most recent amendment occurring~~ on December 24, 2020 and January 24, 2022 and is collectively referred to as the Amended Agreement. The credit agreement consists of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver) as of ~~October~~April 1, ~~2021.~~2022.

~~Additionally, the~~The Amendment Agreement includes an accordion feature that allows the Company to draw up to an additional $100.0 million, subject to the lender's consent on the same terms and conditions as the existing commitments. The Amendment Agreement also permits the Company to borrow up to $75.0 million in unsecured debt as long as the aggregated sum of both the unsecured debt and the accordion does not exceed $100.0 million.

The Amended Term Loan amortizes in an amount equal to $2.6 million for the fiscal quarters ending ~~December 31, 2021~~July 1, 2022 through September 30, ~~2022,~~2023, with the balance of ~~$47.6~~$37.2 million due on November 15, ~~2022.~~2023. Amounts borrowed under the Amended Term Loan that are repaid or prepaid may not be re-borrowed. Any unpaid amounts must be repaid by the maturity dates. As of ~~October~~April 1, ~~2021,~~2022, the balance outstanding under the Amended Term Loan was ~~$58.0~~$52.8 million.

The Amended Revolver is available for working capital, capital expenditures and other general corporate purposes. There were $67.0 million of outstanding borrowings under the Amended Revolver at April 1, 2022. Up to $25.0 million of the Amended Revolver is available for the issuance of letters of credit. As of ~~October~~April 1, ~~2021,~~2022, there were 2 letters of credit outstanding in the aggregate amount of $2.7 million ~~and $70.0~~which reduced our borrowing availability under the Amended Revolver to $200.3 million. At December 31, 2021, there were $50.0 million of outstanding borrowings under the Amended ~~Revolver resulting in borrowing capacity of $197.3 million under the Amended~~ Revolver. ~~The outstanding borrowings under the Amended Revolver have been reduced by $45.0 million in the first nine months of 2021 from an outstanding balance of $115.0 million as of December 31, 2020.~~ The Amended Revolver will mature and the commitments thereunder will terminate on November 15, ~~2022~~2023.

The aggregate scheduled maturities of the Amended Term Loan and Amended Revolver as of ~~October~~April 1, ~~2021,~~2022, are as follows:


(In thousands)	(In thousands)	Payments due		(In thousands)	Payments due

2021 (excluding the nine months ended October 1, 2021)		$	2,600
2022		125,400
2022 (remainder of the year)				2022 (remainder of the year)	$	7,800
2023				2023	112,000

Total	Total	$	128,000	Total	$	119,800

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

Voluntary Prepayments. We may voluntarily prepay the Amended Term Loan in whole or in part at any time without premium or penalty, subject to the payment of customary breakage costs under certain conditions. ~~Amounts borrowed under~~Voluntary prepayments of the Amended Term Loan ~~that are repaid~~will be applied to the remaining installments thereof as directed by us. We may reduce commitments under the Amended Revolver in whole or ~~prepaid may not be re-borrowed.~~in part at any time without premium or penalty.

Covenants. The Amended ~~Credit Facilities~~Agreement contain customary covenants, including covenants that, under certain circumstances and subject to certain qualifications and exceptions: limit or restrict our ability to incur additional indebtedness; merge, dissolve, liquidate or consolidate; make acquisitions, investments, advances or loans; dispose of or transfer assets; pay dividends; redeem or repurchase certain debt; and enter into certain restrictive agreements.

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

income) of 4.50 to 1.00. As of ~~October~~April 1, ~~2021,~~2022, we had a ratio of total consolidated indebtedness to EBITDA of ~~1.33~~1.40 to 1.00 and a ratio of consolidated EBITDA to consolidated interest expense of ~~15.55~~12.32 to 1.00. We were in compliance with all covenants related to the Amended Credit Facilities as of ~~October~~April 1, ~~2021.~~2022.

Interest Rates and Fees. Outstanding borrowings under the Amended ~~Credit Facilities~~Agreement accrue interest, at our option, at a per annum rate of (i) ~~LIBOR plus~~SOFR plus the applicable margin, which ranges from ~~1.75%~~1.85% to ~~2.50%~~2.60% depending on the leverage ratio, or (ii) a base rate plus the applicable margin, which ranges from 0.75% to 1.50% depending on the leverage ratio. The interest rate under the Amended Credit Facilities at ~~October~~April 1, ~~2021~~2022 was ~~2.34%~~2.41%. We pay a commitment fee on the undrawn portion of the Amended Revolver ranging from 0.30% to 0.45%, depending on the leverage ratio.

Carrying Value and Fair Value. As of ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020,~~2021, the fair value of the Amended Credit Facilities approximated the carrying value because the debt bears interest at a floating rate of interest. The fair value is based on observable inputs of interest rates that are currently available to us for debt with similar terms and maturities for non-public debt.

NOTE 8

DERIVATIVE INSTRUMENTS

During the periods covered by this report, we have made no changes to our policies or strategies for the use of derivative instruments and there has been no change in our related accounting methods. For our derivative instruments, which are designated as cash flow hedges, gains and losses are initially reported as a component of accumulated other comprehensive loss and subsequently recognized in earnings with the corresponding hedged item.

Interest Rate Derivative Instruments

Our interest rate swaps are designated and qualify as effective cash flow hedges. The contracts, with expiration dates through November 2022 and notional amounts totaling ~~$43.7~~ $39.8 million at ~~October~~April 1, ~~2021,~~2022, are recorded at fair value.

The following table summarizes the amount at fair value and location of the derivative instruments in our balance sheet for our interest rate hedges in the Condensed Consolidated Balance Sheets as of ~~October~~April 1, ~~2021:~~2022:

(In thousands)

Fair Value

Balance sheet caption

Amount

Interest rate swap designated as cash flow hedge

Other accrued liabilities

~~904~~

~~Interest rate swap designated as cash flow hedge~~

~~Other non-current liabilities~~

95227

The following table summarizes the amount at fair value and location of the derivative instruments used for our interest rate hedges in the Condensed Consolidated Balance Sheets as of December 31, ~~2020:~~2021:

(In thousands)

Fair Value

Balance sheet caption

Amount

Interest rate swap designated as cash flow hedge

Other accrued liabilities

~~1,015~~666

~~Interest rate swap designated as cash flow hedge~~

~~Other non-current liabilities~~

~~750~~

We regularly assess the creditworthiness of the counterparty. As of ~~October~~April 1, ~~2021,~~2022, the counterparty to the interest rate swaps had performed in accordance with its contractual obligations. Both the counterparty credit risk and our credit risk were considered in the fair value determination.

Net interest rate derivative losses of ~~$0.8~~$0.2 million and ~~$0.7~~$0.3 million were recognized in interest expense, net, in our Condensed Consolidated Statements of Income during the first ~~nine~~three months of ~~2021~~2022 and ~~2020,~~2021, respectively. We expect ~~$0.9~~$0.2 million of existing interest rate swap losses reported in accumulated other comprehensive loss as of ~~October~~April 1, ~~2021~~2022 to be recognized in earnings within the next 12 months.

Foreign Currency Derivative Instruments

The ~~following table summarizes the amount at fair value and location of the derivative instruments used for our forward contract hedges in the Condensed Consolidated Balance Sheets as of October 1, 2021:~~

~~(In thousands)~~

~~Fair Value~~

~~Balance sheet caption~~

~~Amount~~

~~Foreign currency forward designated as cash flow hedge~~

~~Other accrued liabilities~~

~~153~~

The following table summarizes the amount at fair value and location of the derivative instruments used for our forward contract hedges in the Condensed Consolidated Balance Sheets as of December 31, 2020:

~~(In thousands)~~

~~Fair Value~~

~~Balance sheet caption~~

~~Amount~~

~~Foreign currency forward designated as cash flow hedge~~

~~Other current assets~~

~~404~~

~~At October 1, 2021, we~~Company had no outstanding foreign currency forward contracts ~~for the exchange of U.S. dollars~~at April 1, 2022 and ~~Euros,~~outstanding forward contracts with a ~~notional amount~~current liability value of ~~$3.4~~less than $0.1 million ~~and expiration dates through January 2022.~~

Counterparty default risk is considered low because the forward contracts that we entered into are over-the-counter instruments transacted with highly-rated financial institutions. We were not required to, and did not, post collateral as of October 1,at December 31, 2021.

Net foreign currency derivative gains ~~of $0.2 million~~ and losses of ~~$0.2 million~~ ~~were~~ recognized in selling, general and administrative expenses during the first ~~nine~~three months of 2022 and 2021 and 2020, respectively. We expect $0.2 million of existing foreign currency forward contract losses reported in accumulated other comprehensive loss as of October 1, 2021 to be recognized in earnings within the next 12 months.were immaterial.

NOTE 9

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.

1815

The components of lease expense are as follows:


		Three Months Ended				Nine Months Ended					Three Months Ended
(In thousands)	(In thousands)	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020		(In thousands)	April 1, 2022		April 2, 2021

Operating lease expense	Operating lease expense	$	3,307	$	1,349	$	7,372	$	5,621	Operating lease expense	$	3,673	$	1,825
Variable lease expense	Variable lease expense	184		191		599		546		Variable lease expense	130		203
Short-term lease expense	Short-term lease expense	16,630		14,323		47,367		40,483		Short-term lease expense	13,669		13,448
Total lease expense	Total lease expense	$	20,121	$	15,863	$	55,338	$	46,650	Total lease expense	$	17,472	$	15,476

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


(In thousands)	(In thousands)	October 1, 2021		December 31, 2020		(In thousands)	April 1, 2022		December 31, 2021
Right-of-use assets	Right-of-use assets	$	43,111	$	18,718	Right-of-use assets	$	42,074	$	43,651

Current lease liabilities (recorded in other accrued liabilities)		$	11,280	$	6,245
Long-term lease liabilities (recorded in other non-current liabilities)		34,308		13,970
Current lease liabilities (recorded in Other accrued liabilities)						Current lease liabilities (recorded in Other accrued liabilities)	$	11,979	$	11,983
Long-term lease liabilities (recorded in Operating lease liability)						Long-term lease liabilities (recorded in Operating lease liability)	33,167		34,536
Total operating lease liabilities	Total operating lease liabilities	$	45,588	$	20,215	Total operating lease liabilities	$	45,146	$	46,519

Additional right-of-use assets of ~~$31.4~~$1.9 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the first ~~nine~~three months of ~~2021.~~2022.

The weighted average remaining lease term and discount rate for our operating leases at ~~October~~April 1, ~~2021~~2022 was ~~5.3~~5.2 years and 3.7%, respectively.

Maturities of lease liabilities at ~~October~~April 1, ~~2021~~2022 were as follows:


(In thousands)	(In thousands)	Payments due		(In thousands)	Payments due

2021 (excluding the nine months ended October 1, 2021)		$	3,300
2022		12,020
2022 (remainder of the year)				2022 (remainder of the year)	$	9,842
2023	2023	11,825		2023	13,121
2024	2024	7,435		2024	8,607
2025	2025	3,488		2025	4,565
After 2025		13,139
2026				2026	3,889
After 2026				After 2026	10,480
Total minimum lease payments	Total minimum lease payments	51,207		Total minimum lease payments	50,504
Less: Imputed interest	Less: Imputed interest	(5,619)		Less: Imputed interest	(5,358)
Total operating lease liabilities	Total operating lease liabilities	$	45,588	Total operating lease liabilities	$	45,146

On September 30, 2021, the Company signed a forward-starting lease agreement in support of its contractual obligations under a task order issued under the Logistics Civil Augmentation Program (LOGCAP) V support services contract in support of the U.S. Military. The lease commencement date, which is anticipated in early 2022, is subject to the completion of certain documents and the receipt of related government regulatory and other third-party approvals. The lease term consists of 8 one-year extension options and 1 additional six month option period. The annual rent obligations are $20 million per year, subject to a market adjustment beginning in the sixth year, and additional rent obligations for certain operating expenses.

1916

NOTE 10

COMMITMENTS AND CONTINGENCIES

General

From time to time, we are involved in legal proceedings that are incidental to the operation of our business. Some of these proceedings seek remedies relating to employment matters, matters in connection with our contracts and matters arising under laws relating to the protection of the environment. Additionally, U.S. government customers periodically advise the Company of claims and penalties concerning certain potential disallowed costs. When such findings are presented, Vectrus and the U.S. government representatives engage in discussions to enable Vectrus 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 recent information available to us. We have estimated and accrued ~~$8.2~~$9.8 million and ~~$11.7~~$9.6 million as of ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, in "Other accrued liabilities" in the Condensed Consolidated Balance Sheets for legal proceedings and for claims with respect to our U.S. government contracts as discussed below, including years where the U.S. government has not completed its incurred cost audits. Although the ultimate outcome of any legal matter or claim cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that any asserted or unasserted legal or contractual claims or proceedings, individually or in the aggregate, including the lawsuit discussed below, will have a material adverse effect on our cash flow, results of operations or financial condition.

U.S. Government Contracts, Investigations and Claims

We have U.S. government contracts that are funded incrementally on a year-to-year basis. Changes in U.S. government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could have a material adverse effect on our 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 unreimbursable expenses or charges or otherwise adversely affect our 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 Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA) and others, routinely audit and review our performance on U.S. government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. Accordingly, costs billed or billable to U.S. government customers are subject to potential adjustment upon audit by such agencies. The U.S. government agencies also review the adequacy of our compliance with U.S. government standards for our business systems, including our accounting, earned value management, estimating, materials management and accounting, purchasing, and property management systems.

As a result of final indirect rate negotiations between the U.S. government and our Former Parent, we may be subject to adjustments to costs previously allocated by our Former Parent to our business, which was formerly Exelis’ Mission Systems Business, from 2007 through 2014. We are in discussions with our Former Parent and the U.S. government regarding these cost adjustments from 2007 through 2014 and believe that our potential cumulative liability for these years is insignificant. Between June 2019 and March 2021, the U.S. government provided us with three Contracting Officers Final Decisions (COFD) for the years from 2007 through 2014 related to Former Parent costs. We filed appeals of the COFDs with the Armed Services Board of Contract Appeals (ASBCA), which have been consolidated. The ASBCA has granted Vectrus’ and the U.S. government’s joint requests to stay proceedings in the appeal, most recently through ~~November 12, 2021,~~May 23, 2022, to enable ongoing discussions regarding the matter between the parties. The U.S. government subsequently offered a settlement to reduce the costs to an insignificant amount to address errors and costs related to contracts novated to our Former Parent, which we are currently reviewing. We believe we are fully indemnified under our Distribution Agreement with our Former Parent and have notified our Former Parent of our appeal of the U.S. government's decision in this matter.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of COVID-19 as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, social distancing guidelines, and restrictions on employees going to work. Uncertainty with respect to the economic impacts of the pandemic has introduced significant volatility in the financial markets. The Company has observed, and continues to experience, some

2017

disruptions on its operations due to government and supply chain delays related to the global pandemic. While the extent to which COVID-19 ultimately impacts the Company’s future results will depend on future developments, the pandemic and associated economic impacts, particularly with respect to newly issued vaccine mandates for government contractors and subcontractors, could result in a material impact to the Company’s future financial condition, results of operations and cash flows.

Contractual Commitment

On September 30, 2021, the Company signed a forward-starting agreement for warehouse space in support of its contractual obligations under a task order issued under the Logistics Civil Augmentation Program (LOGCAP) V support services contract in support of the U.S. Military. The agreement commencement date, which is anticipated in the second quarter 2022, is subject to the completion of certain documents and the receipt of related government regulatory and other third-party approvals. The term of the agreement consists of 8 one-year extension options and 1 additional six-month option period, consistent with our LOGCAP V contract with the U.S. Military. The annual obligations are $20 million per year, subject to a market adjustment beginning in the sixth year, and additional obligations for certain operating expenses.

NOTE 11

STOCK-BASED COMPENSATION

The Company maintains an equity incentive plan, the 2014 Omnibus Incentive Plan, as amended and restated effective as of May 13, 2016 (the 2014 Omnibus Plan), to govern awards granted to Vectrus employees and directors, including nonqualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards and other awards. We account for NQOs and stock-settled RSUs as equity-based compensation awards. TSR awards, described below, and cash-settled RSUs are accounted for as liability-based compensation awards.

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


		Three Months Ended				Nine Months Ended					Three Months Ended
(In thousands)	(In thousands)	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020		(In thousands)	April 1, 2022		April 2, 2021
Compensation costs for equity-based awards	Compensation costs for equity-based awards	$	1,680	$	1,284	$	5,666	$	4,286	Compensation costs for equity-based awards	$	3,100	$	1,983
Compensation costs for liability-based awards	Compensation costs for liability-based awards	324		(196)		1,261		2,213		Compensation costs for liability-based awards	(542)		639
Total compensation costs, pre-tax	Total compensation costs, pre-tax	$	2,004	$	1,088	$	6,927	$	6,499	Total compensation costs, pre-tax	$	2,558	$	2,622
Future tax benefit	Future tax benefit	$	435	$	235	$	1,504	$	1,404	Future tax benefit	$	555	$	569

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

As of ~~October~~April 1, ~~2021,~~2022, total unrecognized compensation costs related to equity-based awards and liability-based awards were ~~$7.2~~$9.3 million and ~~$2.7~~$2.6 million, respectively, which are expected to be recognized ratably over a weighted average period of ~~1.79~~2.25 years and ~~1.71~~2.36 years, respectively.

The following table provides a summary of the activities for NQOs and RSUs for the ~~nine~~three months ended ~~October~~April 1, ~~2021:~~2022:


		NQOs			RSUs				NQOs			RSUs
(In thousands, except per share data)	(In thousands, except per share data)	Shares	Weighted Average Exercise Price Per Share		Shares	Weighted Average Grant Date Fair Value Per Share		(In thousands, except per share data)	Shares	Weighted Average Exercise Price Per Share		Shares	Weighted Average Grant Date Fair Value Per Share
Outstanding at January 1, 2021		74	$	23.37	253	$	41.67
Outstanding at January 1, 2022								Outstanding at January 1, 2022	59	$	23.19	245	$	51.18
Granted	Granted	—	$	—	155	$	56.43	Granted	—	$	—	208	$	36.09
Exercised	Exercised	(5)	$	20.62	—	$	—	Exercised	—	$	—	—	$	—
Vested	Vested	—	$	—	(135)	$	57.23	Vested	—	$	—	(101)	$	45.90

Forfeited or expired	Forfeited or expired	—	$	—	(25)	$	50.73	Forfeited or expired	—	$	—	(10)	$	43.13
Outstanding at October 1, 2021		69	$	23.59	248	$	51.05
Outstanding at April 1, 2022								Outstanding at April 1, 2022	59	$	23.19	342	$	43.44

2118

During the nine months ended October 1, 2021, we granted long term incentive awards to employees consisting of 134,442 RSUs with a weighted average grant date fair value per share of $57.15 and to our directors consisting of 21,020 RSUs with a weighted average grant date fair value per share of $51.86.

For employee RSUs, one-third of the award vests on each of the three anniversary dates following the grant date. Director RSUs are granted on the date of an annual meeting of shareholders and vest on the business day immediately prior to the next annual meeting. The fair value of each RSU grant was determined based on the closing price of Vectrus common stock on the date of grant. Stock compensation expense will be recognized ratably over the vesting period of the awards.

Total Shareholder Return Awards

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. During the ~~nine~~three months ended ~~October~~April 1, ~~2021,~~2022, we granted TSR awards with an outstanding aggregate target TSR value of ~~$2.4~~$2.8 million. The fair value of TSR awards is measured quarterly and is based on the Company’s performance relative to the performance of the Aerospace and Defense Companies in the S&P 1500 Index. Depending on the Company’s performance during the three-year performance period, payments can range from 0% to 200% of the target value.

NOTE 12

INCOME TAXES

Effective Tax Rate

Income tax expense during interim periods is based on an estimated annual effective income tax rate, plus discrete items that may occur in any given interim periods. The computation of the estimated effective income tax rate at each interim period requires certain estimates and judgment including, but not limited to, forecasted operating income for the year, projections of the income earned and taxed in various jurisdictions, newly enacted tax rate and legislative changes, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.

For the three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~2021, we recorded an income tax provision of $0.7 million and ~~$3.5~~$2.6 million, representing effective income tax rates of ~~6.2%~~19.7% and ~~25.2%~~17.5%, respectively. For the nine months ended October 1, 2021 and October 2, 2020, we recorded income tax provisions of $7.6 million and $5.6 million, representing effective income tax rates of 16.6% and 21.7%, respectively. The reduction in our effective tax rate is due to the utilization of tax credits on previously filed tax returns. The effective income tax rates vary from the federal statutory rate of 21.0% due to state and foreign taxes, required tax income exclusions, nondeductible expenses, available deductions not reflected in book income, and income tax credits.

Uncertain Tax Provisions

As of ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020,~~2021, unrecognized tax benefits from uncertain tax positions were $~~9.1~~9.5 million and ~~$7.4~~$9.3 million, respectively. The increase in the uncertain tax positions was principally the result of the additional Foreign Derived Intangible Income (FDII) deduction as the Company reserves a portion of the FDII benefit claimed or expected to be claimed on its income tax return filings.

2219

NOTE 13

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects potential dilution that could occur if securities to issue common stock were exercised or converted into common stock. Diluted EPS includes the dilutive effect of stock-based compensation outstanding after application of the treasury stock method.


		Three Months Ended				Nine Months Ended					Three Months Ended
		October 1,		October 2,		October 1,		October 2,			April 1,		April 2,
(In thousands, except per share data)	(In thousands, except per share data)	2021		2020		2021		2020		(In thousands, except per share data)	2022		2021
Net income	Net income	$	10,258	$	10,391	$	38,240	$	20,170	Net income	$	2,855	$	12,048

Weighted average common shares outstanding	Weighted average common shares outstanding	11,726		11,621		11,696		11,590		Weighted average common shares outstanding	11,759		11,648
Add: Dilutive impact of stock options	Add: Dilutive impact of stock options	34		34		38		38		Add: Dilutive impact of stock options	27		43
Add: Dilutive impact of restricted stock units	Add: Dilutive impact of restricted stock units	89		96		96		115		Add: Dilutive impact of restricted stock units	116		136
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	11,849		11,751		11,830		11,743		Diluted weighted average common shares outstanding	11,902		11,827

Earnings per share	Earnings per share									Earnings per share
Basic	Basic	$	0.87	$	0.89	$	3.27	$	1.74	Basic	$	0.24	$	1.03
Diluted	Diluted	$	0.87	$	0.88	$	3.23	$	1.72	Diluted	$	0.24	$	1.02

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


		Three Months Ended		Nine Months Ended			Three Months Ended
		October 1,	October 2,	October 1,	October 2,		April 1,	April 2,
(In thousands)	(In thousands)	2021	2020	2021	2020	(In thousands)	2022	2021

Anti-dilutive restricted stock units	Anti-dilutive restricted stock units	3	3	3	2	Anti-dilutive restricted stock units	5	1

NOTE 14

~~MULTIEMPLOYER~~DEFERRED EMPLOYEE COMPENSATION

During the first quarter of 2021, the Company established a non-qualified deferred compensation plan under which participants are eligible to defer a portion of their compensation on a tax deferred basis. The assets in the plan are held in a Rabbi trust. 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 selling, general, and administrative expenses.The plan assets and liabilities were $0.8 million and $0.5 million as of April 1, 2022 and December 31, 2021, respectively.

NOTE 15

MULTI-EMPLOYER PENSION ~~PLANS~~PLAN

Certain Company employees ~~that~~who perform work on contracts within the continental United States participate in a multiemployer pension ~~plans~~plan of which the Company is not the sponsor. Expense recognized for ~~these plans~~this plan was $0.2 million ~~and~~ ~~$0.8 million~~for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021, respectively,~~2022 and ~~$1.0 million and $3.1 million for~~ the three ~~and nine~~ months ended ~~October~~April 2, ~~2020, respectively. Contributions were made to~~ 1 ~~plan for the first nine months of 2021 and~~ 8 plans for the first nine months of 2020. The decrease in expense and the amount of multiemployer pension plan participation by the Company is attributable to the completion of a subcontract in September 2020. At the time the contract was completed, the individuals ceased being Vectrus employees. Those employees were hired by the successor contractor who then inherited the contractual obligation to fund the related multiemployer pension plans on the individual's behalf.2021.

2320

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q as well as the audited Consolidated Financial Statements and notes thereto and the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. This Quarterly Report provides additional information regarding the Company, our services, industry outlook and forward-looking statements that involve risks and uncertainties, including those related to the potential impact of the coronavirus pandemic (COVID-19), and any current or future government mandated COVID-19 precautions, including mandatory vaccination, and its impact on us, our operations, or our future financial or operational results. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements. Refer to "Forward-Looking Information" for further information regarding forward-looking statements. Amounts presented in and throughout this Item 2 are rounded and, as such, any rounding differences could occur in period over period changes and percentages reported.

Overview

Vectrus, Inc. is a leading provider of ~~global service solutions with a history in~~services to the United States Government (U.S. government) worldwide. The Company operates as one segment and provides the following services ~~market that dates back more than 75 years. The company provides~~and offerings: facility and base ~~operations;~~operations, supply chain and logistics ~~services;~~services, information technology mission ~~support;~~support, and engineering and digital ~~technology services, including~~ integration security, maintenance, repair and overhaul, primarily to U.S. government customers around the world. Vectrus is differentiated by operational excellence, superior program performance, a history of long-term customer relationships and a strong commitment to its clients’ mission success.services.

Our primary customer is the U.S. Department of Defense (DoD), with a high concentration in the U.S. Army. For the ~~nine~~three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~2021, we had total revenue of ~~$1,364.3~~$456.5 million and ~~$1,040.2~~$434.0 million, respectively, substantially all of which was derived from U.S. government customers. For the ~~nine~~three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~2021, we generated approximately ~~64%~~61% and ~~68%~~59% of our total revenue from the U.S. Army, respectively.

Executive Summary

Our revenue increased ~~$107.0~~$22.5 million, or ~~30.4%~~5.2%, for the three months ended ~~October~~April 1, ~~2021~~2022 compared to the three months ended ~~October~~April 2, ~~2020. The increase in revenue was attributable to a $45.8 million expansion on our existing contracts and $61.2 million from our acquisitions of Zenetex and HHB.~~2021. Revenue from our U.S.~~, Middle East,~~ and Asia programs increased by $~~51.4 million,$39.7~~18.2 million and ~~$19.1~~$12.6 million, respectively, and decreased from our Middle East and Europe programs by ~~$3.2 million.~~$4.3 million and $4.1 million, respectively.

Operating income for the three months ended ~~October~~April 1, ~~2021,~~2022, was ~~$12.9~~$5.2 million, a decrease of ~~$1.9~~$11.3 million, or ~~13.1%~~68.3%, compared to the three months ended ~~October~~April 2, ~~2020.~~2021. The ~~increase~~decrease was due to ~~improved operating performance~~an increase in SG&A expenses related to M&A and ~~the impact of the acquisitions of Zenetex and HHB.~~integration costs.

During the performance of our contracts, we periodically review estimated final contract prices and costs and make revisions as required, which are recorded as changes in revenue and cost of revenue in the periods in which they are determined. Additionally, the fees under certain contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue when there is sufficient information to reasonably assess anticipated contract performance. Amounts representing contract change orders, claims, requests for equitable adjustment, or limitations in funding on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated. Changes in estimated revenue, cost of revenue and the related effect to operating income are recognized using cumulative catch-up adjustments, which recognize in the current period the cumulative effect of the changes on current and prior periods based on a contract's percentage of completion. Cumulative catch-up adjustments due to aggregate changes in contract estimates increased operating income by ~~$2.6~~$0.6 million and ~~less than $0.1~~decreased operating income by $1.3 million for the three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~2021, respectively. Cumulative catch-up adjustments are driven by changes in contract terms, program performance, customer scope changes and changes to estimates in the reported period. These changes can increase or decrease operating income depending on the dynamics of each contract.

Further details related to our financial results for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021,~~2022, compared to the three ~~and nine~~ months ended ~~October~~April 2, ~~2020,~~2021, are contained in the "Discussion of Financial Results" section.

Proposed Merger with Vertex Aerospace

Recent Developments

Information regarding certain significant contracts is discussed in "Significant Contracts" below.

COVID-19 Impact

The COVID-19 pandemic continues to present significant business challenges in ~~2021.~~2022. During the first ~~nine~~three months of ~~2021,~~2022, we continued to experience impacts related to COVID-19, including continued increased coronavirus-related costs, global supply chain disruptions, local immigration regulations limiting the ability to deploy personnel, delays in supplier deliveries, impacts of travel restrictions, site access and quarantine restrictions, and the impacts of remote work and adjusted work schedules. In addition, President Biden announced new vaccine mandates on September 9, 2021 for government contractors and subcontractors. If these mandates are implemented, the extent of the regulatory impact is unclear and could have a material adverse impact on the Company's operations. As new variants of the virus emerge, we remain cautious as many factors remain unpredictable. We continue to take measures to protect the health and safety of our employees, including measures to facilitate the provision of vaccines to our employees in line with state and local guidelines, to work with our customers to minimize ultimate potential disruptions, and to support our community in addressing the challenges posed by this global pandemic.

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 of COVID-19 infection, the effectiveness, distribution and acceptance of COVID-19 vaccines, new government regulations for defense contractors and other related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which remain uncertain and cannot be predicted.

For the three months ended ~~October~~April 1, ~~2021,~~2022, the impact of COVID-19 was immaterial to our financial results.

In accordance with the DoD guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, our U.S. facilities have continued to operate in support of essential products and services required to meet our commitments to the U.S. government and the U.S. military; however, facility closures or work slowdowns or supply chain disruptions have affected our financial results and projections. In addition, other countries are responding to the pandemic differently which have affected our international operations and the operations of our suppliers and customers. However, any closures to date have not significantly impacted Vectrus' business.

We continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19. We continue to assess possible implications to our business, supply chain and customers and to take actions in an effort to mitigate adverse consequences in order to support our customers' mission critical business and national security.

For additional risks to the company related to the COVID-19 pandemic, see Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Significant Contracts

The following table reflects contracts that accounted for more than 10% of our total revenue for the ~~nine~~three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020:~~2021:

% of Total Revenue

Nine Months Ended

Three Months Ended

Contract Name

October 1, 2021

October 2, 2020

Contract Name

April 1, 2022

April 2, 2021

Kuwait Base Operations and Security Support Services (K-BOSSS)

19.9%

33.3%

Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order

21.6%

2.0%

Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order

10.3%

0.1%

Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order

15.7%

2.3%

Operations, Maintenance and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA)

8.0%

15.2%

Operations, Maintenance and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA)

6.6%

10.8%

Kuwait Base Operations and Security Support Services (K-BOSSS)

2.2%

27.0%

Revenue associated with a contract will fluctuate based on increases or decreases in the work being performed on the contract, award fee payment assumptions, and other contract modifications within the term of the contract resulting in changes to the total contract value. See "Backlog" below.

The ~~K-BOSSS contract~~LOGCAP V - Kuwait Task Order is currently exercised through ~~August 28,~~June 30, 2022, with four additional twelve-month options and ~~is our largest base operations support services contract within the State of Kuwait. Components of the K-BOSSS contract were re-competed as a~~one six-month option through December 31, 2026. The task order ~~under~~provides services to support the Geographical Combatant Commands and Army Service Component Commands throughout the full range of military operations in the Kuwait region. The LOGCAP V ~~contract vehicle~~ - Kuwait Task Order contributed $98.4 million and ~~were awarded to us on April 12, 2019. The K-BOSSS contract contributed $271.4 million and $346.8~~$8.6 million of revenue for ~~nine~~the three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~ 2021, respectively.

The LOGCAP V - Iraq Task Order is currently exercised through June 21, 2022, with four additional twelve-month options and one six-month option through December 21, 2026. The task order provides services to support the Geographical Combatant Commands and Army Service Component Commands throughout the full range of military operations in the Iraq region. The LOGCAP V - Iraq Task Order contributed ~~$141.2~~$71.5 million and ~~$0.8~~$10.1 million of revenue for ~~nine~~the three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~ 2021, respectively.

On December 29, 2020, the U.S. Army announced that Vectrus Systems Corporation (VSC), our wholly-owned subsidiary was awarded an $882.5 million cost-plus-fixed-fee contract to continue Operations, Maintenance, and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA). Work will be based in Kuwait with additional locations throughout Southeast Asia. On March 8, 2021, the U.S. government received a protest from a competitor, which was filed at the Government Accountability Office (GAO). The GAO decided the case and denied the protest on June 1, 2021. Subsequently, on July 13, 2021, the unsuccessful competitor filed a protest at the U.S. Court of Federal Claims (COFC). Performance is ongoing on the contract awarded to Vectrus as there is no "stay" of performance due to the filing of the protest. A hearing at the COFC ~~is expected by~~took place January 11, 2022. On March 28, 2022, COFC issued its decision denying all but one of the ~~end of 2021.~~unsuccessful competitor's grounds and ordered additional briefings to address the applicable relief that should be granted. The parties submitted their briefs on April 11, 2022, and the court's decision remains pending. The estimated completion date of this contract is December 26, 2025. The OMDAC-SWACA contract contributed ~~$109.2~~$30.3 million and ~~$158.5~~$46.9 million of revenue for the ~~nine~~three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020~~2021, respectively.

The K-BOSSS contract is currently exercised through August 28, 2022. Components of the K-BOSSS contract were re-competed as a task order under the LOGCAP V contract vehicle and were awarded to us on April 12, 2019. The K-BOSSS contract contributed $10.2 million and $117.0 million of revenue for three months ended April 1, 2022 and April 2, 2021, respectively.

Backlog

Total backlog includes remaining performance obligations, consisting of both funded backlog (firm orders for which funding is contractually authorized and appropriated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer and unexercised contract options). Total backlog excludes potential orders under IDIQ contracts and contracts awarded to us that are being protested by competitors with the GAO or in the COFC. The value of the backlog is based on anticipated revenue levels over the anticipated life of the contract. Actual values may be greater or less than anticipated. Total backlog is converted into revenue as work is performed. The level of order activity related to programs can be affected by the timing of U.S. government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others.

Our contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year ~~(or less)~~or less option periods for the remaining contract period. The number of option periods vary 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. The U.S. government may also extend the term of a program by issuing extensions or bridge contracts, typically for periods of one year or less.

We expect to recognize a substantial portion of our funded backlog 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. ~~Most~~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.

For the ~~nine~~three months ended ~~October~~April 1, ~~2021,~~2022, total backlog was ~~$4.9~~$4.5 billion as compared to ~~$5.1~~$5.0 billion at December 31, ~~2020.~~2021. The following is a summary of our backlog as of ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020:~~2021:


		October 1,		December 31,			April 1,		December 31,
(In millions)	(In millions)	2021		2020		(In millions)	2022		2021
Funded backlog	Funded backlog	$	1,197	$	843	Funded backlog	$	818	$	1,033
Unfunded backlog	Unfunded backlog	3,713		4,221		Unfunded backlog	3,676		3,972
Total backlog	Total backlog	$	4,910	$	5,064	Total backlog	$	4,494	$	5,005

Funded orders (different from funded backlog) represent orders for which funding was received during the period. We received funded orders of ~~$1,718.4~~$249.9 million during the ~~nine~~three months ended ~~October~~April 1, ~~2021,~~2022, which was ~~an increase~~a decrease of ~~$130.8~~$177.6 million compared to the ~~nine~~three months ended ~~October~~April 2, ~~2020.~~2021.

Economic Opportunities, Challenges and Risks

The U.S. government’s investment in services and capabilities in response to changing security challenges creates a complex and fluid business environment for Vectrus and other firms in this ~~market segment.~~market. However, the U.S. continues to face substantial fiscal and economic challenges in addition to a varying political environment which could affect funding. The pace and depth of U.S. government acquisition reform and cost savings initiatives, combined with increased industry competitiveness to win long-term positions on key programs, could add pressure to revenue levels and profit ~~margins going forward.~~margins. However, we expect the U.S. government will continue to place a high priority on national security and will continue to invest in affordable ~~solutions~~solutions. We believe that our capabilities, particularly in base operations support, supply chain and logistics, IT mission support, engineering and digital integration, security, or maintenance, repair, and overhaul, should help our clients increase efficiency, reduce costs, improve readiness, and strengthen national security and, as a result, continue to allow for ~~its facilities, logistics, equipment, operational technology, and communication needs, which aligns with~~long-term profitable growth in our ~~services and strengths.~~business. Further, the DoD budget remains the largest in the world and ~~management~~ managementbelieves our addressable portion of the DoD budget offers substantial opportunity for growth.

The U.S. government's fiscal year (FY) begins on October 1 and ends on September 30. On ~~April 9, 2021,~~March 15, 2022, the ~~Biden Administration introduced~~Consolidated Appropriations Act of 2022 was signed into law by the ~~initial~~President and provides funding through the end of FY 2022 ~~discretionary budget plan.~~- September 30, 2022. The ~~proposal requests $753~~bill provides $782 billion in ~~discretionary funding for~~total national defense ~~and includes $715~~spending, including $742 billion for the DoD. ~~The $715 billion DoD request compares to the FY 2021 enacted amount of $704 billion. While a proposal has been introduced, risks remain to FY~~

On March 28, 2022, as the budget has not yet been passed. On September 30, 2021, the President signed a continuing resolution (CR) into law that provides continuing FY 2022 appropriations to federal agencies through the earlier of December 3, 2021, or the enactment of the applicable appropriations act. The CR funds most programs and activities at the FY2021 levels with several exceptions. Congress will have to pass a broader funding package or another short-term bill by December 3, 2021, to avoid a government shutdown.

~~There are risks associated with the timing and amount of future appropriations. If annual appropriations bills are not enacted,~~ the U.S. government ~~may operate under a CR, restricting new contract or program starts and additional government shutdowns,~~submitted the FY 2023 Federal budget, which ~~might involve all government agencies,~~requests $813 billion for total national defense spending including $773 billion for the DoD, could arise. Future CR’s and government shutdowns may lead to delays in procurement of services due to lack of funding, and; those delays may adversely affect our revenue, results of operations and cash flow. Finally, there remains uncertainty surrounding future discretionary defense funding levels and priorities of the Administration and Congress, which could adversely impact demand for our services.DoD.

We believe spending on ~~operation~~maintaining, operating, and ~~maintenance of~~hardening national security defense assets, as well as civilian agency infrastructure and equipment, will continue to be a U.S. government priority. Our focus is on sustaining ~~facilities,~~and protecting infrastructures, equipment, and IT networks, while utilizing operational technologies and converged solutions to improve efficiency and the outcomes of our clients' missions. We believe this aligns with our customers' intent to utilize and harden existing equipment and infrastructure rather than executing new purchases. Many of the core functions we perform are mission-essential. The following are examples of a few of these core functions: (i) keeping communications networks operational; (ii) maintaining ~~airfields;~~airfields and aircraft; (iii) providing emergency ~~services.~~services; (iv) guarding our nation’s military bases, and other critical resources with integrated electronic security systems; and (v) supporting rapid response contingency efforts. While customers may reduce the level of services required from us, we do not currently anticipate the complete elimination of these services.

The information provided above does not represent a complete list of trends and ~~uncertainties~~uncertainties that could impact our business in either the near or long-term and should be considered along with the risk factors identified under the caption “Risk Factors” identified in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 and the matters identified under the caption “Forward-Looking Statement Information"herein.

DISCUSSION OF FINANCIAL RESULTS

~~Operating Income (Expense)~~

Three months ended ~~October~~April 1, ~~2021,~~2022, compared to three months ended ~~October~~April 2, ~~2020~~2021

Selected financial highlights are presented in the following table:


		Three Months Ended						Change					Three Months Ended						Change
(In thousands, except for percentages)	(In thousands, except for percentages)	October 1, 2021			October 2, 2020			$		%		(In thousands, except for percentages)	April 1, 2022			April 2, 2021			$		%
Revenue	Revenue	$	459,408		$	352,415		$	106,993	30.4	%	Revenue	$	456,471		$	434,004		$	22,467	5.2	%
Cost of revenue	Cost of revenue	418,900			320,234			98,666		30.8	%	Cost of revenue	419,275			393,648			25,627		6.5	%
% of revenue	% of revenue	91.2		%	90.9		%					% of revenue	91.9		%	90.7		%
Selling, general, and administrative expenses	Selling, general, and administrative expenses	27,618			17,344			10,274		59.2	%	Selling, general, and administrative expenses	31,959			23,823			8,136		34.2	%
% of revenue	% of revenue	6.0		%	4.9		%					% of revenue	7.0		%	5.5		%

Operating income	Operating income	12,890			14,837			(1,947)		(13.1)	%	Operating income	5,237			16,533			(11,296)		(68.3)	%
Operating margin	Operating margin	2.8		%	4.2		%					Operating margin	1.1		%	3.8		%
Interest expense, net	Interest expense, net	(1,955)			(939)			1,016		108.2	%	Interest expense, net	(1,681)			(1,932)			(251)		(13.0)	%

Income from operations before income taxes	Income from operations before income taxes	10,935			13,898			(2,963)		(21.3)	%	Income from operations before income taxes	3,556			14,601			(11,045)		(75.6)	%
% of revenue	% of revenue	2.4		%	3.9		%					% of revenue	0.8		%	3.4		%
Income tax expense	Income tax expense	677			3,507			(2,830)		(80.7)	%	Income tax expense	701			2,553			(1,852)		(72.5)	%
Effective income tax rate	Effective income tax rate	6.2		%	25.2		%					Effective income tax rate	19.7		%	17.5		%
Net Income	Net Income	$	10,258		$	10,391		$	(133)	(1.3)	%	Net Income	$	2,855		$	12,048		$	(9,193)	(76.3)	%

Revenue

Revenue for the three months ended ~~October~~April 1, ~~2021~~2022 was ~~$459.4~~$456.5 million, an increase of ~~$107.0~~$22.5 million, or ~~30.4%~~5.2%, as compared to the three months ended ~~October~~April 2, ~~2020. The increase in revenue was attributable to a $45.8 million expansion on our existing contracts and $61.2 million from our acquisitions of Zenetex and HHB.~~2021. Revenue from our U.S.~~, Middle East,~~ and Asia programs increased by $~~51.4 million, $39.7~~18.2 million, and ~~$19.1~~$12.6 million, respectively, and decreased from our Middle East and Europe programs by ~~$3.2 million.~~$4.3 million and $4.1 million, respectively.

Cost of Revenue

Cost of revenue as a percentage of revenue was ~~91.2%~~91.9% compared to ~~90.9%~~90.7% for the three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~2021, respectively. The increase in cost of revenue of ~~$98.7~~$25.6 million, or ~~30.8%~~6.5%, for the three months ended ~~October~~April 1, ~~2021,~~2022, as compared to the three months ended ~~October~~April 2, ~~2020,~~2021, was primarily due to the volume fluctuations described for revenue.

In addition, the three months ended April 1, 2022 had increased material and pass through content which carries a lower gross margin.

Selling, General, & Administrative (SG&A) Expenses

For the three months ended ~~October~~April 1, ~~2021,~~2022, SG&A expenses of ~~$27.6~~$32.0 million increased by ~~$10.3~~$8.1 million, or ~~59.2%~~34.2%, as compared to ~~October~~April 2, ~~2020.~~2021. The increase in SG&A expenses was due to ~~the addition of SG&A expenses from Zenetex and HHB and an increase in~~ M&A ~~integration~~ and ~~related~~integration costs.

Operating Income

Operating income for the three months ended ~~October~~April 1, ~~2021~~2022 decreased by ~~$1.9~~$11.3 million, or ~~13.1%~~68.3%, as compared to the three months ended ~~October~~April 2, ~~2020.~~2021. The decrease was due primarily to the fluctuations described for SG&A.

Operating income as a percentage of revenue was ~~2.8%~~1.1% for the three months ended ~~October~~April 1, ~~2021,~~2022, compared to ~~4.2%~~3.8% for the three months ended ~~October~~April 2, ~~2020.~~2021. The decrease in operating income is a result of an increase in M&A ~~integration~~ and ~~related~~integration costs.

Aggregate cumulative catch-up adjustments increased operating income by ~~$2.6~~$0.6 million and ~~less than $0.1~~decreased operating income by $1.3 million for the three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~2021, respectively. The aggregate cumulative catch-up adjustments for the three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020~~2021 related to changes in contract terms, program performance, customer scope changes and changes to estimates in the reported period. Operating income is also impacted by labor mix and the cost differential between internal resources and subcontractors as well as the volume of Other Direct Cost (ODCs) purchases.

~~Nine months ended October 1, 2021, compared to nine months ended October 2, 2020~~

~~Selected financial highlights are presented in the following table:~~

Nine Months Ended Change
(In thousands, except for percentages) October 1, 2021 October 2, 2020 $ %
Revenue $ 1,364,257 $ 1,040,212 $ 324,045 31.2 %
Cost of revenue 1,235,209 951,743 283,466 29.8 %
% of revenue 90.5 % 91.5 %
Selling, general, and administrative expenses 77,045 58,718 18,327 31.2 %
% of revenue 5.6 % 5.6 %
Operating income 52,003 29,751 22,252 74.8 %
Operating margin 3.8 % 2.9 %
Interest expense, net (6,140) (3,988) (2,152) 54.0 %
Income from operations before income taxes 45,863 25,763 20,100 78.0 %
% of revenue 3.4 % 2.5 %
Income tax expense 7,623 5,593 2,030 36.3 %
Effective income tax rate 16.6 % 21.7 %
Net Income $ 38,240 $ 20,170 $ 18,070 89.6 %

~~Revenue~~

Revenue for the nine months ended October 1, 2021 was $1,364.3 million, an increase of $324.0 million, or 31.2%, as compared to the nine months ended October 2, 2020. The increase in revenue was attributable to a $129.6 million expansion on our existing contracts and $194.5 million from our acquisitions of Zenetex and HHB. Revenue from our U.S., Middle East, Asia and Europe programs~~increased~~by~~$184.8 million, $84.3 million, $49.5 million, and$5.4 million,respectively.~~

~~Cost of Revenue~~

Cost of revenue as a percentage of revenue was 90.5% compared to 91.5% for the nine months ended October 1, 2021 and October 2, 2020, respectively. The increase in cost of revenue of $283.5 million, or 29.8%, for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily due to the volume fluctuations described for revenue.

~~Selling, General, & Administrative Expenses~~

For the nine months ended October 1, 2021, SG&A expenses of $77.0 million increased by $18.3 million, or 31.2%, as compared to October 2, 2020. The increase was primarily due to the addition of SG&A expenses from Zenetex and HHB.

2825

~~Operating Income~~

Operating income for the nine months ended October 1, 2021 increased by $22.3 million, or 74.8%, as compared to the nine months ended October 2, 2020. The increase was due to improved operating performance and the impact of the acquisitions of Zenetex and HHB.

~~Operating income as a percentage of revenue was 3.8% for the nine months ended October 1, 2021, compared to 2.9% for the nine months ended October 2, 2020.~~

~~Aggregate cumulative catch-up adjustments decreased operating income by~~ ~~$0.4 million a~~nd $3.8 million for the nine months ended October 1, 2021 and October 2, 2020, respectively. The aggregate cumulative catch-up adjustments for the nine months ended October 1, 2021 and October 2, 2020 related to changes in contract terms, program performance, customer scope changes and changes to estimates in the reported period. Operating income is also impacted by labor mix and the cost differential between internal resources and subcontractors as well as the volume of Other Direct Cost (ODCs) purchases.

Interest (Expense) Income, Net

Interest (expense) income, net for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020~~2021 was as follows:


		Three Months Ended				Change				Nine Months Ended				Change					Three Months Ended				Change
(In thousands, except for percentages)	(In thousands, except for percentages)	October 1, 2021		October 2, 2020		$		%		October 1, 2021		October 2, 2020		$		%		(In thousands, except for percentages)	April 1, 2022		April 2, 2021		$		%
Interest income	Interest income	$	15	$	27	$	(12)	(42.7)	%	$	48	$	109	$	(61)	(55.7)	%	Interest income	$	43	$	25	$	18	72.0	%
Interest expense	Interest expense	(1,970)		(966)		1,004		103.9	%	(6,188)		(4,097)		2,091		51.0	%	Interest expense	(1,724)		(1,957)		(233)		(11.9)	%
Interest expense, net	Interest expense, net	$	(1,955)	$	(939)	$	1,016	108.1	%	$	(6,140)	$	(3,988)	$	2,152	54.0	%	Interest expense, net	$	(1,681)	$	(1,932)	$	(251)	(13.0)	%

Interest income is directly related to interest earned on our cash. Interest expense is directly related to borrowings under our senior secured credit facilities, with the amortization of debt issuance costs, and derivative instruments used to hedge a portion of our exposure to interest rate risk. The ~~increase~~decrease in interest expense, net of ~~$2.2~~$0.3 million for the ~~nine~~three months ended ~~October~~April 1, ~~2021~~2022 compared to the ~~nine~~three months ended ~~October~~April 2, ~~2020~~2021 was due to the use of our revolving credit facility in 2021 for the December 31, 2020 acquisitions of Zenetex and HHB.

Income Tax Expense

We recorded income tax expense of $0.7 million and ~~$3.5~~$2.6 million for the three months ended ~~October~~April 1, ~~2021~~2022 and ~~October~~April 2, ~~2020,~~2021, respectively, representing effective income tax rates of ~~6.2%~~19.7% and ~~25.2%~~17.5%, respectively. For the nine months ended October 1, 2021 and October 2, 2020, we recorded income tax expense of $7.6 million and $5.6 million, respectively, representing effective income tax rates of 16.6% and 21.7%, respectively. The reduction in our effective tax rate is due to the utilization of tax credits on previously filed tax returns. The effective income tax rates vary from the federal statutory rate of 21.0% due to state and foreign taxes, required tax income exclusions, nondeductible expenses, available deductions not reflected in book income, and income tax credits.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We have generated operating cash flows sufficient to fund our working capital, capital expenditures, and financing requirements. We expect to fund our ongoing working capital, capital expenditure and financing requirements and pursue additional growth through new business development and potential acquisition opportunities by using cash flows from operations, cash on hand, our credit facilities, and access to capital markets. When necessary, we will utilize our revolving credit facility to satisfy short-term working capital requirements.

If our cash flows from operations are less than what we expect, we may need to access the long-term or short-term capital markets. Although we believe that our current financing arrangements will permit us to finance our operations on acceptable terms and conditions, our access to and the availability of financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. We cannot provide assurance that such financing will be available to us on acceptable terms or that such financing will be available at all.

In September 2014, we and our wholly-owned subsidiary, VSC, entered into a credit agreement. The credit agreement was subsequently amended, with the most recent amendment occurring December 24, 2020 and is collectively referred to as the Amended Agreement. The Amended Agreement consists of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver).

To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has also led to disruption and volatility in the global capital markets, which, depending on

Table of ~~credit outstanding in the aggregate amount of~~ Content s

future developments, could impact our capital resources and liquidity in the future. ~~To meet current and potential short-term working capital requirements and strengthen the Company's cash position~~

The CARES Act, signed into law in March 2020 in response to the COVID-19 uncertainties, Vectrus drew $115 million from its revolving credit facility during the first quarter of 2020. This amount was repaid in full during the second quarter of 2020. Vectrus had net debt of $71.8 million as of October 1, 2021 and $112.1 million as of December 31, 2020. At October 1, 2021, there were $70.0 million of outstanding borrowings under the Amended Revolver that were used for the December 31, 2020 acquisitions of Zenetex and HHB.

~~The CARES Act provides~~pandemic, provided a deferral of payroll tax payments from which we ~~have~~ benefited by deferring cash outlays of $16.8 million in 2020. This ~~will have~~had the effect of increasing cash outlays for payroll taxes by $8.1 million during the first quarter of 2022.

In September 2014, we and our wholly-owned subsidiary, VSC, entered into a credit agreement. The credit agreement was subsequently amended, with the most recent amendment occurring January 24, 2022 and ~~2023. On March 11, 2021,~~is collectively referred to as the ~~President signed~~Amended Agreement (See Note 7 in this Form 10-Q). The Amended Agreement consists of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver).

At April 1, 2022, there were $67.0 million of outstanding borrowings under the ~~American Rescue Plan Act~~Amended Revolver. In addition there were two letters of ~~2021 into law. The legislation provides additional relief~~credit outstanding in the aggregate amount of $2.7 million, which reduced our borrowing availability under the Amended Revolver to ~~address the continued impact~~$200.3 million. Vectrus had net debt of ~~COVID-19 on the economy, public health, state~~$96.8 million as of April 1, 2022 and ~~local governments, individuals, and businesses. It extends Section 3610~~$66.9 million as of the CARES Act through September 2021, which gives DoD and federal agencies discretion to reimburse contractors for paid leave, including sick leave, a contractor provides during the pandemic to keep its employees in a ready state. We continue to refine the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued and assess the potential impacts on our liquidity and capital resources.December 31, 2021.

The cash presented on our Condensed Consolidated Balance Sheets consists of U.S. and international cash from wholly owned subsidiaries. Approximately ~~$25.5~~$16.6 million of our total ~~$56.2~~$23.0 million in cash and cash equivalents at ~~October~~April 1, ~~2021~~2022 is held by our foreign subsidiaries and is not available to fund U.S. operations unless repatriated. We do not currently expect that we will be required to repatriate undistributed earnings of foreign subsidiaries. We expect our U.S. domestic cash resources will be sufficient to fund our U.S. operating activities and cash commitments for financing activities.

~~At October 1, 2021, there were two letters~~

~~$2.7~~
~~million, which reduced our borrowing availability under the Amended Revolver to $197.3 million.~~

Dividends

We do not currently plan to pay a regular dividend on our common stock. The declaration of any future cash dividends and the amount of any such dividends, if declared, will depend upon our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and the discretion of our Board of Directors. In deciding whether to pay future dividends on our common stock, our Board of Directors may take into account such matters as general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and capital investment plans, income tax consequences, applicable law and such other factors as our Board of Directors may deem relevant.

Sources and Uses of Liquidity

Cash, accounts receivable, unbilled receivables, and accounts payable are the principal components of our working capital and are generally driven by our level of revenue with other short-term fluctuations related to payment practices by our customers and the timing of our billings. Our receivables reflect amounts billed to our customers, as well as the revenue that was recognized in the preceding month, which is normally billed the month following each balance sheet date.

The total amount of our accounts receivable can vary significantly over time and is sensitive to revenue levels and the timing of payments received from our customers. Days sales outstanding (DSO) is a metric used to monitor accounts receivable levels. The Company determines its DSO by calculating the number of days necessary to exhaust its ending accounts receivable balance based on its most recent historical revenue. Our DSO was 6774 and 6675 days as of ~~October~~April 1, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The following table sets forth net cash used in operating activities, investing activities and financing activities:


		Nine Months Ended					Three Months Ended
(In thousands)	(In thousands)	October 1, 2021		October 2, 2020		(In thousands)	April 1, 2022		April 2, 2021
Operating activities	Operating activities	$	53,378	$	37,655	Operating activities	$	(26,381)	$	(21,729)
Investing activities	Investing activities	(9,868)		(3,348)		Investing activities	(2,178)		(2,611)
Financing activities	Financing activities	(53,221)		(6,359)		Financing activities	12,316		(4,071)
Foreign exchange1	Foreign exchange1	(2,784)		468		Foreign exchange1	729		(191)
Net change in cash, cash equivalents and restricted cash	Net change in cash, cash equivalents and restricted cash	$	(12,495)	$	28,416	Net change in cash, cash equivalents and restricted cash	$	(15,514)	$	(28,602)
1 Impact on cash balances due to changes in foreign exchange rates.	1 Impact on cash balances due to changes in foreign exchange rates.					1 Impact on cash balances due to changes in foreign exchange rates.

Net cash ~~provided by~~used in operating activities for the ~~nine~~three months ended ~~October~~April 1, ~~2021~~2022 consisted of cash ~~inflows from net income of $38.2 million, the favorable impact of non-cash items of $20.0 million and a favorable net change in~~outflows for working capital requirements of ~~$1.0~~$29.4 million and other long-term assets and liabilities of $6.5 million. This was partially offset by cash inflows from net income of $2.9 million and the favorable impact of non-cash net income items of $6.6 million. The net working capital outflows were largely from increases in accounts receivable and decreases in accrued compensation, which included an $8.1 million payment of deferred CARES Act payroll taxes, partially offset by increases in accounts payable.

Net cash used in operating activities for the three months ended April 2, 2021 consisted of outflows for net working capital requirements of $35.7 million and other long-term assets and liabilities of ~~$5.8 million.~~

Table of ~~2021 from an outstanding balance of $115.0 million as of December 31, 2020.~~Content s

Net cash provided by operating activities during the nine months ended October 2, 2020 consisted of net income of $20.2 million, the favorable impact of non-cash items of $12.9 million and favorable net changes in other long-term assets and liabilities of $9.3$4.9 million, partially offset by ~~an increase in~~cash inflows from net income of $12.0 million and non-cash items of $6.9 million. The net working capital ~~requirements of $4.7 million. Tax deferrals related to the CARES Act contributed $9.9 million to our cash flows~~outflows were largely from ~~operating activities.~~increases in accounts receivable and decreases in accrued compensation partially offset by increases in accounts payable. .

Net cash used in investing activities for the ~~nine~~three months ended ~~October~~April 1, 2022 and April 2, 2021 consisted of ~~$7.7~~$2.2 million and $2.6 million, respectively, of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations and $2.5 million for a joint venture contribution. These outflows were partially offset by inflows from a $0.3 million business acquisition purchase price adjustment. During the nine months ended October 2, 2020, $3.3 million was used for the purchase of software and hardware, and vehicles and equipment.operations.

Net cash used in financing activities during the ~~nine~~three months ended ~~October~~April 1, ~~2021~~2022 consisted of repayments of long-term debt of ~~$6.0~~$2.6 million, ~~and~~ payments of ~~$2.3~~$1.6 million for employee withholding taxes on share-based ~~compensation. This was partially offset by $0.1~~compensation and payments $0.5 million ~~received from the exercise of stock options.~~for debt issuance costs. During the ~~nine~~three months ended ~~October~~April 1, ~~2021,~~2022, we also borrowed and repaid ~~$352.0~~$217.0 million and ~~$397.0~~$200.0 million, respectively, on the Amended Revolver.

Net cash used in financing activities during the nine months ended ~~October~~April 2, ~~2020~~2021 consisted of ~~repayments of long-term debt of $4.5 million and~~ payments related to employee withholding taxes on share-based compensation in the amount of ~~$1.9 million.~~$2.2 million and repayments of long-term debt of $2.0 million During the ~~nine~~three months ended ~~October~~April 2, ~~2020,~~2021, we also borrowed and repaid ~~$151.0~~$110.0 million on the Amended Revolver. ~~The outstanding borrowings under the Amended Revolver were reduced by $45.0 million in the first nine months~~

Capital Resources

At ~~October~~April 1, ~~2021,~~2022, we held cash and cash equivalents of ~~$56.2~~$23.0 million, which included ~~$25.5~~$16.6 million held by foreign subsidiaries, and had ~~$197.3~~$200.3 million of available borrowing capacity under the Amended Revolver, which expires on November 15, ~~2022.~~2023. We believe that our cash at ~~October~~April 1, ~~2021,~~2022, as supplemented by cash flows from operations and the Amended Revolver, will be sufficient to fund our anticipated operating costs, capital expenditures, and current debt repayment obligations for at least the next 12 months.

We have a shelf registration statement with the SEC that became effective in January 2020 under which we may issue, from time to time, up to $250 million of common stock, preferred stock, depository shares, warrants, rights and debt securities. If necessary, we may seek to obtain additional term loans or issue debt or equity under the registration statement to supplement our working capital and investing requirements or to fund acquisitions. A financing transaction may not be available on terms acceptable to us, or at all, and a financing transaction may be dilutive to our current stockholders.

Contractual Obligations

~~During the nine months ended October~~As of April 1, ~~2021, we paid $6.0 million in quarterly installment~~2022, our commitments to make future payments ~~on the Amended Term Loan. See Note 9,~~ "~~Leases~~" ~~in the notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional contractual obligation information.~~

~~Off-Balance Sheet Arrangements~~

We have obligations relating to operating leases and letters of credit outstanding. Our Amended Revolver permits borrowings up to $270.0 million, of which $25.0 million is available for the issuance of letters of credit. At October 1, 2021, there were two letters of credit outstanding in the aggregate amount of $2.7 million, which reduced our borrowing availability under ~~the Amended Revolver to $197.3 million.~~

On September 30, 2021, Vectrus Systems Corporation, a wholly owned subsidiary of Vectrus, Inc. (collectively, the “Company”) signed and delivered a guaranty of certain obligations (the “Guaranty”) in connection with a lease agreement entered into by an entity controlled by the Company in support of itslong-term contractual obligations under a task order issued under Logistics Civil Augmentation Program (LOGCAP) V support services contract in support of the U.S. Military and the INDO-PACOM Setting the Theater Task Order and associated Performance Task Order (the “Lease”). Under the terms of the Guaranty, the Company is required to guarantee the annual rent obligations under the Lease of $20 million per year for up to eight years and six months, subject to a market adjustment beginning in the sixth year, and additional rent obligations for certain operating expenses. The Guaranty is limited to the failure to pay such annual rent and additional rent amounts under the Lease due to (i) offset, suspension or termination of payments by the U.S. Government for the Company’s non-compliance or acts or omissions in connection with the lease or other contracts with the U.S. Government, or (ii) termination of payments by the U.S. Government due to the Company’s fraud, willful misconduct or material breach or similar bad acts.were as follows:

The aforementioned arrangements have not had, and management does not believe it is likely that they will in the future, have a material effect on our liquidity, capital resources, operations or financial condition.


	Payments Due by Period
		Less than 1 year			More than 5 Years
(In thousands)	Total		1 - 3 Years	3 - 5 Years
Operating leases	50,504	13,122	19,588	8,146	9,648
Principal payments on Amended Term Loan	52,800	10,400	42,400	—	—
Principal payments on Amended Revolver	67,000	—	67,000	—	—
Interest on Term Loan and Amended Revolver ¹	5,589	3,518	2,071	—	—
Total	175,893	27,040	131,059	8,146	9,648
¹ Includes unused funds fee and is based on the April 1, 2022 interest rate and outstanding Amended Revolver balance

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

The preparation of financial statements in conformity with 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. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from management's estimates under different assumptions or conditions.

We believe that the assumptions and estimates associated with revenue recognition, business combinations, goodwill and other intangible assets, and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes in our critical accounting policies and estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

New Accounting Pronouncements

Refer to Part I, Item 1, Note 2 "Recent Accounting Standards Update" in the notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding accounting pronouncements and accounting standards updates.

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the Securities Act of 1933, as amended (the Securities Act), and the Private Securities Litigation Reform Act of 1995 and, as such, may involve risks and uncertainties. All statements included or incorporated by reference in this report, other than statements that are purely historical, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “could,” “potential,” “continue” or similar terminology. These statements are based on the beliefs and assumptions of the management of the Company based on information currently available to management. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements.

We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and

uncertainties that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to: the continued impact of COVID-19 and any variant strains thereof on the global economy and any current or future government mandated COVID-19 precautions, including mandatory vaccination; our ability to submit proposals for and/or win all potential opportunities in our pipeline; our ability to retain and renew our existing contracts; our ability to compete with other companies in our market; security breaches and other disruptions to our information technology and operation; our mix of cost-plus, cost-reimbursable, and firm-fixed-price contracts; maintaining our reputation and relationship with the U.S. government; protests of new awards; economic, political and social conditions in the countries in which we conduct our businesses; changes in U.S. or international government defense budgets; government regulations and compliance therewith, including changes to the DoD procurement process; changes in technology; intellectual property matters; governmental investigations, reviews, audits and cost adjustments; contingencies related to actual or alleged environmental contamination, claims and concerns; delays in completion of the U.S. government's budget; our success in extending, deepening, and enhancing our technical capabilities; our success in expanding our geographic footprint or broadening our customer base; our ability to realize the full amounts reflected in our backlog; impairment of goodwill; misconduct of our employees, subcontractors, agents, prime contractors and business partners; our ability to control costs; our level of indebtedness; terms of our credit agreement; interest rate risk; subcontractor performance; economic and capital markets conditions; our ability to maintain safe work sites and equipment; our ability to retain and recruit qualified personnel; our ability to maintain good relationships with our workforce; our teaming relationships with other contractors; changes in our accounting estimates; the adequacy of our insurance coverage; volatility in our stock price; changes in our tax provisions or exposure to additional income tax liabilities; risks and uncertainties relating to the Spin-off; changes in GAAP; and other factors ~~contained below under~~ ~~Part II, Item 1A, “Risk Factors,”~~ ~~and~~ described in Item 1A, “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 and described from time to time in our future reports filed with the SEC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our earnings, cash flows and financial position are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates. All of the potential changes noted below are based on information available at ~~October~~April 1, ~~2021.~~2022.

Interest Rate Risk

Each one percentage point change associated with the variable rate Amended Term Loan would result in a $0.1 million change in our annual cash interest expenses, net of interest rate swaps in place as of ~~October~~April 1, ~~2021~~2022 to hedge a portion of this risk

Assuming our Amended Revolver was fully drawn to a principal amount equal to $270.0 million, each one percentage point change in interest rates would result in a $2.7 million change in our annual cash interest expense.

As of ~~October~~April 1, ~~2021,~~2022, the notional value of our interest rate swap agreements totaled ~~$43.7~~$39.8 million. The difference to be paid or received under the terms of the interest rate swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense for the related debt in the period incurred. Changes in the variable interest rates to be paid pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows. Refer to Note 8, "Derivative Instruments" in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding our interest rate swaps.

Foreign Currency Exchange Risk

The majority of our business is conducted in U.S. dollars. However, we are required to transact in foreign currencies for some of our contracts, resulting in some assets and liabilities denominated in foreign currencies. ~~Therefore,~~As a result, our earnings may experience some volatility related to movements in foreign currency exchange rates. ~~We enter~~In the past, we entered into forward foreign exchange contracts to buy or sell various foreign currencies to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities. ~~Changes in~~The impact of the ~~fair value~~related contracts on our Condensed Consolidated Statements of ~~these~~Income and our Condensed Consolidated Balance Sheets was immaterial and related hedging was discontinued. Our last forward contracts expired in January 2021 and no such contracts are ~~recognized in earnings. As~~outstanding as of ~~October~~April 1, ~~2021, the U.S. dollar notional value of our outstanding foreign currency forward contracts was approximately $3.4 million.~~

~~We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair~~ values of our foreign currency forward contracts. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. dollar. As of October 1, 2021, a 5% appreciation in the value of the U.S. dollar would result in a net decrease in the fair value of our derivative portfolio of approximately $0.2 million.2022.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~October~~April 1, ~~2021.~~2022. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of ~~October~~April 1, ~~2021,~~2022, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to management to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Changes in Internal Control over Financial Reporting

On December 31, 2020, we completed our acquisitions of HHB and Zenetex. We are in the process of integrating Zenetex's financial reporting processes and procedures and internal controls over financial reporting into our financial reporting processes, procedures and internal controls. In the course of integrating Zenetex's financial reporting processes and procedures with ours, we may implementThere were no changes to financial reporting processes and procedures and internal controls over financial reporting and will disclose any such changes, if material, as required by the rules of the SEC. We have integrated HHB into our financial reporting processes, procedures and internal controls. Management's assessment of the Company's effectiveness of internal control over financial reporting as of December 31, 2021 is expected to be inclusive of the acquired businesses.

We substantially completed the implementation of our new Enterprise Resource Planning (ERP) system during our fiscal quarter ended April 2, 2021. The implementation of that ERP system is expected to, among other things, improve user access security and automate a number of accounting, back office and reporting processes and activities, thereby decreasing the amount of manual processes previously required.

~~Except for the matters noted above, there was no change~~ in our internal control over financial reporting that occurred during the ~~period~~quarter ended ~~October~~April 1, ~~2021,~~2022, that have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

Refer to Note 10 "Commitments and Contingencies" in the notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further information.

ITEM 1A. RISK FACTORS

New regulations including Executive Order 14042 concerning mandatory COVID-19 vaccination of employees of government contractors and subcontractors could have a material adverse impact on our business and results of operations.

On September 9, 2021, President Biden announced proposed new rules, including Executive Order 14042, requiring COVID-19 vaccinations for all US-based federal government contractor and subcontractor employees (subject to medical and religious exemptions), regardless of company size, with a deadline for compliance of December 8, 2021. On September 24, 2021, the SAFER Federal Workforce Task Force issued guidance, protocols, and frequently asked questions governing implementation of the Executive Order. As a result, on October 14, 2021 we announced that we will implement the COVID-19 vaccinate requirement to comply with Executive Order 14042 and the SAFER Federal Workforce Task Force, and require all U.S.-based Company employees, suppliers, and contractors to be fully vaccinated (subject to medical and religious exemptions), if and when, the requirement is applied to our individual contracts through contractual modification. Further, for our global employees based outside of the U.S., we will comply with both contractual and/or host nation requirements as it relates to the vaccine.

It is currently not possible to predict with certainty the exact impact the new regulations will have on us. As a government contractor, any requirement to mandate COVID-19 vaccination of our workforce or require our unvaccinated employees to be tested weekly (if there are enough testing kits available) could be difficult. Compliance with these new regulations could result in increased costs, employee attrition and difficulty securing future labor needs, which may have a material adverse effect on our business, revenues and results of operation. In addition, any requirement to impose mandatory vaccination obligations on our suppliers and subcontractors could impact the price and continuity of supply of materials or labor and our results of operations and financial condition could be further adversely affected. We continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees and our customers.None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

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