vec-20220401

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 1, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36341

Vectrus, Inc.

(Exact name of registrant as specified in its charter)


Indiana		38-3924636
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2424 Garden of the Gods Road, Colorado Springs, Colorado 80919
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code:
(719)	591-3600

Securities Registered Under Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share	VEC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☑

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐

No ☑

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

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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	9
	Note 2. Recent Accounting Standards Update	10
	Note 3. Proposed Merger with Vertex Aerospace	10
	Note 4. Revenue	10
	Note 5. Receivables	13
	Note 6. Goodwill and Intangible Assets	13
	Note 7. Debt	14
	Note 8. Derivative Instruments	15
	Note 9. Leases	15
	Note 10. Commitments and Contingencies	17
	Note 11. Stock Based Compensation	18
	Note 12. Income Taxes	19
	Note 13. Earnings Per Share	20
	Note 14. Deferred Employee Compensation	20
	Note 15. Multi-employer Pension Plan	20
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	29
	PART II. OTHER INFORMATION	31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
	Signatures	32

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended
	April 1,		April 2,
(In thousands, except per share data)	2022		2021
Revenue	$	456,471	$	434,004
Cost of revenue	419,275		393,648
Selling, general, and administrative expenses	31,959		23,823

Operating income	5,237		16,533
Interest expense, net	(1,681)		(1,932)

Income from operations before income taxes	3,556		14,601
Income tax expense	701		2,553
Net income	$	2,855	$	12,048

Earnings per share
Basic	$	0.24	$	1.03
Diluted	$	0.24	$	1.02
Weighted average common shares outstanding - basic	11,759		11,648
Weighted average common shares outstanding - diluted	11,902		11,827

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

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VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended
	April 1,		April 2,
(In thousands)	2022		2021
Net income	$	2,855	$	12,048
Other comprehensive income (loss), net of tax
Changes in derivative instruments:
Net change in fair value of interest rate swaps	439		295
Net change in fair value of foreign currency forward contracts	30		(396)

Tax (expense) benefit	(95)		24
Net change in derivative instruments	374		(77)
Foreign currency translation adjustments, net of tax	(616)		(2,356)
Other comprehensive income (loss) net of tax	(242)		(2,433)
Total comprehensive income	$	2,613	$	9,615

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

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VECTRUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	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)
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.

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VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Three Months Ended
	April 1,		April 2,
(In thousands)	2022		2021
Operating activities
Net income	$	2,855	$	12,048
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	1,591		1,548
Amortization of intangible assets	2,301		2,450
(Gain) Loss on disposal of property, plant, and equipment	(16)		43
Stock-based compensation	2,558		2,622
Amortization of debt issuance costs	204		232
Changes in assets and liabilities:
Receivables	(29,898)		(46,544)
Prepaid expenses	(4,849)		(3,137)
Other assets	4,520		(648)
Accounts payable	22,693		42,054
Deferred taxes	—		2,716
Compensation and other employee benefits	(21,138)		(22,818)
Other liabilities	(7,202)		(12,295)
Net cash used in operating activities	(26,381)		(21,729)
Investing activities
Purchases of capital assets	(2,195)		(2,611)
Proceeds from the disposition of assets	17		—


Net cash used in investing activities	(2,178)		(2,611)
Financing activities

Repayments of long-term debt	(2,600)		(2,000)
Proceeds from revolver	217,000		110,000
Repayments of revolver	(200,000)		(110,000)
Proceeds from exercise of stock options	—		113
Payment of debt issuance costs	(458)		—


Payments of employee withholding taxes on share-based compensation	(1,626)		(2,184)
Net cash provided by (used in) financing activities	12,316		(4,071)
Exchange rate effect on cash	729		(191)
Net change in cash, cash equivalents and restricted cash	(15,514)		(28,602)
Cash, cash equivalents and restricted cash-beginning of year	38,513		68,727
Cash, cash equivalents and restricted cash-end of period	$	22,999	$	40,125

Supplemental disclosure of cash flow information:
Interest paid	$	1,513	$	1,371
Income taxes paid (refunded)	$	66	$	(97)

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

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

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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, 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

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

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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 one segment and provides the following services and offerings: facility and base operations, supply chain and logistics services, information technology mission support, and engineering and digital integration services.

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 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 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 40% shares, respectively, of income or losses from HDSS, J&J, and ServCore in selling, general and administrative expenses in the Condensed Consolidated Statements of Income. Our investment in 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 three months ended April 1, 2022, Vectrus received a $0.8 million distribution, representing a return on investment from our joint ventures. As of April 1, 2022 and December 31, 2021 our joint venture investment balance was $4.6 million and $5.4 million, respectively. Our proportionate share of income from the HDSS, J&J, and ServCore joint ventures was immaterial for the first 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 (April 1, 2022 for the first quarter of 2022 and April 2, 2021 for the first quarter of 2021), except for the last quarter of the fiscal year, which ends on December 31. For ease of presentation, the quarterly financial statements included herein are described as three months ended.

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, 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.

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NOTE 2

RECENT ACCOUNTING STANDARDS UPDATE

Accounting Standards Issued but Not Yet Effective

In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08). The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer had originated the contract. The amendment also provides certain practical expedients when applying the guidance. 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 2021-08 to 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 reference rate reform on financial reporting, the ASU provides companies with optional expedients and exceptions for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The Company adopted the standard during the first quarter of 2022. It did not have a material impact on the Company's financial statements.

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 LLC surviving 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

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order is exercised or awarded.

Contracts are often modified to account for changes in contract specifications and requirements. If the modification either creates new enforceable rights and obligations or changes the existing enforceable rights and obligations, the modification will be treated as a separate contract. Our contract modifications, except for those to exercise option years, have historically not been distinct from the existing contract and have been accounted for as if they were part of that existing contract.

The 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.

The Company's contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year or less option periods. The number of option periods varies by contract, and there is no guarantee that an option period will be exercised. The right to exercise an option period is at the sole discretion of the U.S. government when we are the prime contractor or of the prime contractor when we are a subcontractor. We expect to recognize a substantial portion of our performance obligations as revenue within the next 12 months. However, the U.S. government or the prime contractor may cancel any contract at any time through a termination for convenience or for cause. Substantially all of our contracts have terms that would permit us to recover all or a portion of our incurred costs and fees for work performed in the event of a termination for convenience.

Remaining performance obligations as of April 1, 2022 and December 31, 2021 are presented in the following table:

SEC Form 10-Q filed by Vectrus Inc.