DOCUMENTS INCORPORATED BY REFERENCE
INDEX TO ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
| Page No. | |||||||||||
| PART I | |||||||||||
| Item 1. | Business | ||||||||||
| Item 1A. | Risk Factors | ||||||||||
| Item 1B. | Unresolved Staff Comments | ||||||||||
| Item 2. | Properties | ||||||||||
| Item 3. | Legal Proceedings | ||||||||||
| Item 4. | Mine Safety Disclosures | ||||||||||
| PART II | |||||||||||
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | ||||||||||
| Item 6. | Selected Financial Data | ||||||||||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | ||||||||||
| Item 8. | Financial Statements and Supplementary Data | ||||||||||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||||||||||
| Item 9A. | Controls and Procedures | ||||||||||
| Item 9B. | Other Information | ||||||||||
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | ||||||||||
| PART III | |||||||||||
| Item 10. | Directors, Executive Officers and Corporate Governance | ||||||||||
| Item 11. | Executive Compensation | ||||||||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||||||||||
| Item 13. | Certain Relationships and Related Transactions and Director Independence | ||||||||||
| Item 14. | Principal Accountant Fees and Services | ||||||||||
| PART IV | |||||||||||
| Item 15. | Exhibit and Financial Statement Schedules | ||||||||||
| Item 16. | Form 10-K Summary | ||||||||||
| Signatures | |||||||||||
PART I
ITEM 1. BUSINESS
Overview
Vectrus was incorporated as in the State of Indiana in February 2014. On September 27, 2014, Exelis Inc, an Indiana corporation in February 2014 as part of a spin , spun-off (the Spin-Off) from Exelis, Inc. in September 2014, resulting in off) Vectrus becoming and Vectrus became an independent, publicly traded company. References in this Annual Report on Form 10-K herein to "Exelis" or "Former Parent" refer to Exelis Inc. and its consolidated subsidiaries (other than Vectrus). Subsequent to the Spin-Off, Exelis was acquired by a predecessor entity of L3Harris Technologies, Inc. in May 2015.
On July 5, 2022 (the Closing Date), Vectrus completed its merger (Merger) with Vertex Aerospace Services Holding Corp., a Delaware corporation (Vertex), thereby forming V2X. The fair value of the consideration transferred with respect to the Merger totaled $634.0 million as of the Closing Date. For a description of the Merger, see Note 3, Merger and Acquisitions. The Merger created a larger and more diversified company with the ability to compete for more integrated business opportunities and generate revenue across geographies, clients, and contract-types. We continue to operate under one reportable business segment post-Merger.
Unless the context otherwise requires or unless stated otherwise, references to "V2X", "we," "us," "our," “combined company”, "the Company" and "our Company" refer to V2X and all of its consolidated subsidiaries (including, subsequent to the Merger, Vertex and its consolidated subsidiaries), taken together as a whole.
Significant Acquisitions
On December 31, 2020, Vectrus we acquired Zenetex, LLC (Zenetex) and Higgins, Hermansen, Banikas, LLC (HHB). Zenetex is a leading provider of technical and strategic solutions focused on enabling mission readiness, performance, and enhanced protection for defense and national security clients globally and HHB delivers intelligence community solutions. These solutions are primarily were integrated into our existing Vectrus business as additional services. The purchase prices for the Zenetex and HHB acquisitions of $117.6 million and $15.5 million, respectively, were funded with cash on hand and borrowings under our revolving credit facility.
Our Business Strategy
We seek to drive growth and deliver value through our strategic framework, which consists of the following three strategies: Enhance the Foundation, Expand the Portfolio, and Add More Value. Base, Capture New Markets, Deliver with Excellence, and Enhance Culture. Key components of these strategies, and our progress in executing these strategies, include:
•Enhance Expand the Foundation Base. We strive to enhance our business by strengthening our methods and approaches to deliver higher value, high-impact services to our clients, while growing in and around, our strong foundation in our four core capabilities: facility and base operations; supply chain and logistics services; information technology mission support; and engineering and digital integration services. The development and across the mission lifecycle. The expansion of scope on existing business, execution of growth campaigns to increase our organic revenue generation with both existing our solution sell-through model, and new customers is a client engagement initiatives are key component to components of this strategy.
•Expand the Portfolio. Capture New Markets. We are focused on creating a higher-value, technology-enabled and differentiated platform by strengthening our Information Technology (IT) technology competencies and fusing the physical and digital aspects of our clients' facility and logistics missions. We package our missions. This strategy focuses on capturing new markets, organically and inorganically, introducing new clients, new capabilities, by leveraging and new products / solutions, as well as international client expansion and targeted growth campaigns that leverage our strong foundation in facility and base operations; supply chain and logistics services; information technology mission support; and engineering and digital integration services. In addition aerospace solutions, advanced technology, and global mission training and sustainment. Additionally, we seek plan to partner with highly innovative third parties. We expect the result will be a more technology-enabled, differentiated, higher value portfolio. build off of V2X’s enhanced capability set that includes rapid prototyping, platform modernization, 5G, predictive maintenance, software development, cyber asset hardening, and virtual reality training solutions to access new business opportunities, funding streams, and markets that are expected to drive incremental growth.
•Add More Value Deliver with Excellence. The convergence of our clients' physical and digital infrastructure and supply chains represents an opportunity Our initiatives focused on delivery excellence are designed to improve the outcomes of our clients' missions while creating a higher value, growth-oriented platform. Our long-term strategy seeks to shape our future and purpose by building our capabilities to offer innovative, integrated solutions to customers. This approach includes creating more predictive, agile and responsive infrastructures and supply chains as well as standardizing, improving, and automating our core operational capabilities to create a differentiated, growth-oriented business. client relationships and improve business performance. As part of this strategy, we are standardizing, improving,
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and automating our core operational capabilities through enterprise systems excellence, as well as technology insertion and enablement. For example, we are leveraging our enhanced scale and footprint to further enable global supply chain as a core competency. This core competency is expected to drive efficiencies to both external clients and our core internal operations. Additionally, we incorporate continuous improvement and delivery excellence processes throughout all aspects of our business. Our initiatives, processes, and technology within Delivery Excellence also integrate into our Expand the Base, Capture New Markets, and Enhance Culture strategies, which further drives value creation and differentiation.
•Enhance Culture. Our culture is foundational in our ability to connect people, technology, and capabilities globally across the mission lifecycle. Our ethical culture and people serve as the foundation for providing long-term value to our stakeholders. We strive to support our people to ensure they can bring their best selves to work. We will continue to build and leverage an inclusive business environment by developing leadership competency, increasing employee engagement, and building organizational capacity. For details on how we are striving to enhance our culture, see our Human Capital Management disclosure.
Our Service Offerings
We focus offer on six core service offerings and solutions in support of the U.S. government: facility and base operations, supply chain and logistics services, information technology mission support, engineering digital integration services, security services. and MRO. We offer our services around the globe, including the Asia-Pacific region, Europe our customers around the world a broad suite of technology and services capabilities to support national security readiness and modernization initiatives. We deliver a comprehensive set of integrated solutions and critical service offerings across the operations and logistics, aerospace, training and technology markets to national security, defense, civilian and international customers. Effective January 1, 2023, the Company is organized across three core business areas to provide multiple service offerings and solutions.
Aerospace Solutions: We provide the engineering, facilities, and skilled employees required to sustain systems and platforms from cradle to grave. We discriminate ourselves through vertically integrated organic engineering, supply chain management, manufacturing, rapid prototyping and dedicated facilities including – 500,000 square feet of hangar space, 4 FAA Part 145 Repair Stations, and over 900,000 square feet of engineering, lab, manufacturing and repair and overhaul space at our Indianapolis facility. Comprehensive in-house testing capabilities including cyber, E3, environmental, AR/VR and development labs reside under one roof at our Indianapolis, Indiana facility. Our teams deliver full spectrum (flight line to depot), safe, high-quality maintenance in support of over 1,200 aircraft deployed around the world that fly more than 300,000 flight hours annually. More than 400 multi-disciplined engineers provide critical development, integration, production, the Middle East, and the U.S repair and overhaul and sustainment expertise to contracts ranging from situational awareness products to production of missile launchers to repair and overhaul of tactical aircraft radar systems and components. Key critical mission support programs include aircraft maintenance and mission planning personnel who embark on aircraft carriers in support of naval aviator training and qualification, and operation and sustainment of the Joint Mission Planning System. Our Neutral Buoyancy Lab (NBL) Operations Contract team operates and sustains NASA’s NBL that supports human space flight training and operations.
Global Mission Training and Sustainment: Our capabilities provide government clients with a full life cycle capability across the spectrum of innovative training solutions and support for logistics, infrastructure sustainment and contingency operations, wherever needed. We differentiate ourselves through a holistic approach that packages solutions to deliver high consequence training, infrastructure sustainment and integrated logistics that ensures readiness while at home station and mission or contingency support while deployed. We provide infrastructure operations and sustainment for fixed facilities worldwide that focuses on preventative, predictive and reliability-centered maintenance to provide integrated solutions that increase reliability, lower cost of ownership, improve quality of life, and, most important, ensure operational readiness.
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Customers
Our strong relationship with the DoD Department of Defense (DoD) is attributable to our dedication to program performance, global responsiveness and operational excellence, as well as to the execution of our core values of Integrity, Respect integrity, respect, responsibility and Responsibility professionalism. We treat sales to our U.S. government customers as sales within the U.S. regardless of where the services are performed.
Revenue by , primarily from U.S. government customer customers, for the periods presented below was as follows:
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Army | $ | 1,342,406 | $ | 1,134,849 | $ | 965,558 | ||||||||||||||
| Navy | 713,732 | 224,407 | 68,748 | |||||||||||||||||
| Air Force | 459,849 | 266,291 | 299,272 | |||||||||||||||||
| Other | 374,873 | 158,118 | 61,951 | |||||||||||||||||
| Total revenue | $ | 2,890,860 | $ | 1,783,665 | $ | 1,395,529 | ||||||||||||||
Key customer services contracts include the following:
•Kuwait Base Operations and Security Support Services in Kuwait (K-BOSSS). Our largest base operations support services contract supports geographically dispersed primary operating locations within the State of Kuwait, including several camps and a range training complex. K-BOSSS provides critical base operations support and security support services. The Logistics Civil Augmentation Program V (LOGCAP V) indefinite delivery and indefinite quantity (IDIQ) contract for base operations support and sustainment services to the Army. LOGCAP V provides each Army Service Component Command Commander a dedicated regional sustainment capability with a 72-hour response time, and scalability and flexibility that aligns with the military operational tempo. LOGCAP V augments theater sustainment, engineering, and base operations support forces with a capability that can rapidly respond to multiple global contingency and non-contingency missions across the entire continuum of military operations. V2X is one of four award recipients of the basic IDIQ contract and supports two geographic combatant commands, CENTCOM and INDOPACOM. All Army contingency tasks associated with both CENTCOM and INDOPACOM will be performed by V2X for the first five years of LOGCAP V.
The Company's major task orders under the LOGCAP V program are:
▪Kuwait Task Order – V2X supports all base operations on multiple bases in Kuwait in support of power projections and reception operations.
▪Iraq Task Order – V2X supports all base operations on multiple bases in Iraq in support of counter-ISIS operations.
▪INDOPACOM Task Order– V2X supports base operations and contingency sustainment in multiple countries throughout the INDOPACOM region.
•Cobra Dane Radar Maintenance Operation (COBRA DANE). We operate, maintain and upgrade the AN/FPS-108 radar and associated systems in support of the Strategic Warning and Surveillance Systems Division COBRA DANE Program Office located in Shemya, Alaska.
•Operations, Maintenance and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA). We provide the operations, maintenance and defense of the Army’s communications network across multiple locations in the Middle East and Central Asia.
•Maxwell Air Force Base Operations Support in Montgomery, Alabama (MAXWELL T-45 Contractor Logistics Support. We provide Organizational, Intermediate and Depot level maintenance for the Navy’s fleet of 193 T-45 that are used to train jet, strike pilot and naval flight officers.
•Naval Test Wing Atlantic (NTWL). The NTWL contractor logistics support contract provides maintenance in support of the Navy’s test and evaluation aircraft primarily located at NAS Patuxent River, Maryland.
•Fleet Systems Engineering Team (FSET II). We operate and maintain the key facilities at the Air University, which provide on-site technical and end-to-end systems engineering support for C4I systems for the U.S. Navy. FSET II assures effective operations for all afloat and ashore C4I systems throughout the deployment cycle and provides the full spectrum of Air Force education, from pre-commissioning to the highest levels of professional military education such as the Air War College systems engineering and technical support for rapid introduction of new capabilities into the fleet.
•Advanced Helicopter Training System. We provide all levels of maintenance, to include organizational flight line maintenance and depot level maintenance, for the Navy’s fleet of TH-57 and TH-73 training helicopters.
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•Fort Bragg Logistics Support Services. The Fort Bragg Logistics Readiness Center serves as the primary logistics provider for maintenance, supply and services, and transportation support to the installation.
•Thule Air Force Base Operations Support in Greenland (THULE). We provide base operations and maintenance services under extreme weather conditions to the Thule Air Base (AB) in Greenland. The THULE AB is home to the 821st Air Base Group and host to both the Early Warning Radar (EWR) 12th Space Warning Squadron and the Air Force Satellite Control Network Detachment 1 Polar Orbiting Geophysical Observatory (DET1/POGO) 23rd Space Operations Squadron. EWR is one of many worldwide sensors reporting missile warning and space surveillance information to the North American Aerospace Defense command center in Cheyenne Mountain Air Station. DET 1/POGO
•U.S. Marine Corps Secondary Repairables (SECREPS). We provide the remanufacture, overhaul or repair and/or is one of the 50th Space Wing’s remote satellite stations. tear down and evaluation of Marine Corps Ground Equipment SECREP items turned in at designated Government locations worldwide.
•Transportation Security Administration Checked Baggage - Screening Equipment Deployment Services (CB-SEDS). We provide installation, on-site coordination and oversight support to CB-SEDS at federalized airports nationwide.
•Maxwell Air Force Base Operations Support in Montgomery, Alabama. We operate and maintain the key facilities at the Air University, which provides the full spectrum of Air Force education, from pre-commissioning to the highest levels of professional military education such as the Air War College.
•Operations, Maintenance, and Supply - Europe (OPMAS-E) . We provide IT support and services for the 2nd Signal Brigade G-6 mission within the U.S. Army Europe, U.S. European Command and U.S. Africa Command areas of operation.
•Fleet Systems Engineering Team (FSET II Air Force Global Strike Command (AFGSC). We provide on-site technical and end-to-end systems engineering support for C4I systems This contract provides maintenance for the U.S. Navy. FSET II assures effective operations for all afloat and ashore C4I systems throughout the deployment cycle and provides systems engineering and technical support for rapid introduction of new capabilities into the fleet.
Competition
Our competition varies depending on our service offerings. In Facility and Base Operations, our primary Our principal competitors are AMENTUM, PAE Facilities Management (PAE), KBR Inc., IAP World Services, and Fluor Corporation (Government group) in Aerospace Solutions include Amentum, IAP Worldwide Services, AAR, M-1 Support Services, Jacobs Technology, Marvin Engineering, divisions of Leidos Holdings, divisions of Northrop Grumman Services, and Akima Logistics Services, among others. Our principal competitors in Information Advanced Technology Mission Support include divisions of Leidos Holdings, Inc., Science Applications International Corporation (SAIC), Peraton, and General Dynamics (GD) Technologies Segment. In Engineering Within our Global Mission Training and Digital Integration, there Sustainment service offering, we are see fewer direct many of the same competitors given such the current lifecycle stage as Amentum, Leidos, SAIC, of GD this market in addition to KBR, Valiant Integrated Services, PULAU Corporation and Lockheed Martin, Rotary and Missions Systems Segment. There are typically fewer competitors in the overseas market for each of our services capabilities and they vary from region to region.
The U.S. government has implemented policies designed to protect small businesses and under-represented minority contractors. From time to time, certain U.S. government work in the U.S. has been restricted to small businesses, including
Competitive bids for the work that Vectrus V2X pursues are based on technical qualifications and corporate experience in performing contracts of similar size and scope and can be highly price sensitive. While not every contract is procured via selection of the lowest priced bidder, customers are sensitive to cost based on their budget allocations. Acquisition cycles are long (generally 12 to 24 months), and contracts are typically multi-year contracts that include an initial period of one-year or less with annual one-year (or less) option periods for the remaining contract period.
Some U.S. government customers have shown a strong preference for multiple award IDIQ contracts. These contracts offer awards to a pool of contractors, followed by competition within the pool for individual programs via task orders under each IDIQ over the period of performance. The period of performance under IDIQ contracts follows a traditional three-to-ten-year performance cycle. The governing IDIQ contracts often have multi-billion-dollar ceiling values.
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Seasonality
We do not consider any material portion of our business to be seasonal. However, various factors can affect the distribution of our revenue between accounting periods, including the timing of awards, product deliveries, customer acceptance of products and services, contract phase-in durations, contract completions, world events and the availability of customer funding. Weather and natural phenomena can also temporarily affect the performance of our services.
The U.S. government's fiscal year ends on September 30 of each year. U.S. government agencies may award extra tasks or complete other contract actions in the time frame timeframe leading up to the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds, which may favorably impact our third fiscal quarter.
Regulatory Environment
The U.S. government markets in which we serve are highly regulated. When working with U.S. agencies and entities, we are subject to laws and regulations relating to the creation, administration and performance of contracts. Among other things, these laws and regulations:
•Require compliance with government standards for contract administration, accounting and management internal control systems;
•Define allowable and unallowable costs and otherwise govern our right to reimbursement under various flexibly priced U.S. government contracts;
•Require certification and disclosure of all cost and pricing data in connection with certain contract negotiations;
•Require us not to compete for, or to divest ourselves of, work if an organizational conflict of interest exists related to such work that cannot be appropriately mitigated; and
•Restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
U.S. government contracts generally are subject to the Federal Acquisition Regulation (FAR), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. government, agency-specific regulations that implement or supplement FAR, such as the DoD’s Defense Federal Acquisition Regulation Supplement (DFARS), and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various rules regarding procurement, import and export, security, contract pricing and cost, allowable costs, contract performance, contract termination and adjustment, audits, and IT system security and privacy controls. In addition, as government contractors, we are subject to routine audits and investigations by U.S. government agencies, such as the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA). These agencies review our performance, cost structure, incurred costs, forward pricing rates and compliance with applicable laws, regulations and standards under our contracts. The DCAA also reviews the adequacy of and our compliance with our internal control systems and policies, including our accounting, purchasing, government property, estimating, and related government business systems.
The U.S. government may revise its procurement practices or adopt new or revised contract rules and regulations at any time. To help ensure compliance with these complex laws and regulations, all of our employees are required to complete ethics and other compliance training relevant to their respective positions.
We are subject to other U.S. government laws, regulations and policies, including the International Traffic in Arms Regulations, the Export Administration Regulations, the Foreign Corrupt Practices Act and the False Claims Act. When working overseas, we must comply not only with applicable U.S. laws and regulations, but also with foreign government laws, regulations and procurement policies and practices, which may differ from U.S. laws, including regulations relating to import-export control, foreign tax considerations, data privacy, foreign labor and environmental law, and anti-corruption.
Contracts
U.S. government programs generally are implemented by the award of individual contracts to a prime contractor, which may utilize one or more subcontractors. Our company Company usually is a prime contractor on long-term contracts that are of a finite duration of generally between three and ten years. We were the prime contractor on contracts representing 93%, 95 93% and 95% of our revenue for the three years ended December 31, 2021 2022, 2020 2021, and 2019 2020, respectively. In other contracts, we team with the prime contractor as a subcontractor. The U.S. Congress usually appropriates funds on a fiscal year basis even though a program may extend across several fiscal years. Consequently, programs are often only partially funded initially, and additional funds are committed only as the U.S. Congress approves further appropriations. Prior to the expiration of a contract, if the customer requires further services of the type provided by the contract, it typically begins a competitive rebidding or recompete process. The contracts and subcontracts under a program generally are subject to termination for convenience or adjustment if appropriations for such programs are not available or if they change. The U.S. government is required to equitably adjust a contract for additions to or reductions in scope or other changes, including price, which it directs.
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Generally, the sales price elements for our contracts are cost-plus, cost-reimbursable, time-and-materials 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 program. Typically, these costs do not bear fees.
On a time-and-materials type contract, we are reimbursed for labor at fixed hourly rates and generally reimbursed separately for allowable materials, costs and expenses at cost. For this contract type, we bear the risk that our labor costs and allocable indirect expenses are greater than the fixed hourly rate defined within the contract.
A firm-fixed-price type contract typically offers higher profit margin potential and due to a greater level of risk than a cost -plus type contract. On a firm-fixed-price type contract, we agree to perform the contractual statement of work for a predetermined contract price. 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 percentage of our total revenue generated from each contract type for the periods presented was as follows:
| Year Ended December 31, | ||||||||||||||||||||
| Contract type | 2022 | 2021 | 2020 | |||||||||||||||||
| Cost-plus and cost-reimbursable | 56 | % | 71 | % | 68 | % | ||||||||||||||
| Firm-fixed-price | 40 | % | 25 | % | 29 | % | ||||||||||||||
| Time-and-materials | 4 | % | 4 | % | 3 | % | ||||||||||||||
| Total revenue | 100 | % | 100 | % | 100 | % | ||||||||||||||
Backlog
For a discussion of our backlog, see “ Management’s Discussion and Analysis of Financial Condition and Results of Operations - Backlog” in Item 7 of Part II of this Annual Report on Form 10-K.
Environmental, Health and Safety
We are subject to federal, state, local, and foreign environmental protection laws and regulations, including those governing the management and disposal of hazardous substances, the cleanup of contaminated sites, and the maintenance of a safe and healthy workplace for our employees, contractors, and visitors. Environmental, health and safety laws and regulations are subject to change, the nature of which is inherently unpredictable, and the timing of potential changes is
Human Capital Management
We believe our employees are among our most important resources and are critical to our continued success. We focus continue making significant attention on investments in attracting and retaining talented and experienced individuals to manage and support our operations, and our management team routinely reviews employee turnover rates at various levels of the organization. Management also reviews to help understand and resolve barriers to retention.
V2X routinely conducts annual employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety surveys. The results of those surveys are anonymized and shared with V2X employees and with management. Additionally, the results of the surveys are scored to form a benchmark
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against which the results of future surveys will be evaluated. In 2022, V2X engaged our larger, and recently merged, global workforce through structured surveys using a third-party platform to better understand concerns and expectations regarding Ethics, and Diversity, Equity & Inclusion (DE&I). Responses to the 2022 employee engagement surveys indicated that V2X employees generally find the company culture to be inclusive, a great place to work, and that managers’ behaviors were consistent with the V2X Code of issues. We pay our employees competitively and offer a broad range of company-paid benefits, which we believe are competitive with others in our industry. Conduct.
Employment Benefits
We pay our employees competitively and offer a broad range of company-paid benefits, which we believe are competitive with others in our industry. Our employment benefits program includes a comprehensive benefits package, such as:
•flexible work options;
•education benefits, including tuition reimbursement program to select employees;
•wellness program;
•paid parental leave program;
•employee assistance program; and
•retirement savings plan.
Diversity, Equity, and Inclusion
Our DE&I Executive Council, composed of the Company’s Chief Executive Officer and other senior leaders that sponsor our Employee Resource Groups (ERGs), oversee our DE&I strategy and philosophy against our business practices. Our five ERGs are: Allies of Pride, Diverse Abilities, People of Color, Women at V2X and V2X Veterans.
In 2022, our five ERGs developed goals in three focus areas to foster awareness, respect, and inclusion:
•Business development and outreach;
•Employee engagement and retention and professional development; and
•Recruitment.
Annually, ERGs evaluate their performance against these goals and report them to the DE&I Executive Council, which in turn reports at least annually to our Board of Directors.
We are a leading employer of veterans and veteran spouses with more than 39 42% of our U.S employees voluntarily reporting a military background, and we have been recognized numerous times in recent years by veteran-focused organizations as a military-friendly employer,
In setting 2022, the stage for 2022, our five Employee Resource Groups (ERGs) developed goals in three focus areas to foster awareness, respect, and inclusion:
Learning and Development
We continue to emphasize employee development and training and provide a range of development programs and opportunities, skills, and resources needed to have provide learning and development opportunities to our employees to support a successful career with Vectrus at V2X. Our on-line Vectrus V2X University gives employees access to more than 1 2,600 000 virtual courses that address such topics as leadership/management and information technology skills, along with the standard required compliance courses of required for a defense contractor company. We are committed to identifying and developing the talents of our next generation of leaders by providing knowledge to help early-in-career employees develop the skills needed to move up advance within the organization, providing a . We also provide training program programs to keep our supervisors current on best practices and ensure they focus on the success of their people. and encouraging nominations into our programs that consist of Also, we offer additional development opportunities to select employees to attend training and mentoring opportunities sessions.
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and are led by our Vice President and Chief Executive Growth & Client Service Officer, Chief Human Resource Officer, and Senior Vice Presidents.
Health and Safety
Our health and safety management system aligns with the ISO 45001 standard and includes the following elements:
•Setting annual program-level goals and objectives;
•Monitoring relevant legal and customer-specific requirements;
•Providing training to employees and contractors on health and safety provisions;
•Assessing environmental, health, and safety risks company-wide;
•Engaging with the workforce to identify health and safety risks and opportunities; and
•Conducting internal audits to evaluate compliance with the employee health and safety (EHS) Plan, legal and other requirements, and best practices.
We track workforce safety metrics including Total Recordable Incident Rate, Days Away Restricted or Transferred Rate as well as Near Miss Frequency Rate. We initiated annual reporting of these metrics in 2021. Our robust EHS program promotes a safe and healthy workplace for all employees and subcontractors.
In response to the COVID-19 pandemic, we continued implemented public health and safety protocols including updated infectious disease procedures to protect our employees, our subcontractors, and our customers. These protocols include complying with social distancing and other health and safety standards as required by federal, state, and local government agencies, taking into consideration guidelines of our clients, the Centers for Disease Control and Prevention, the
Ethics and Compliance
All employees must adhere to the Vectrus V2X Code of Conduct (COC) that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination, unethical behaviors, and unacceptable conduct. With employees living The V2X Code of Conduct, and working on five continents the standards of business conduct and in 205 locations, Vectrus ethics incorporated in the Code, apply to all employees, officers, and directors of V2X. V2X requires each employee to complete the Vectrus Code of Conduct training annually Code of Conduct training annually. Our COC was updated in 2022 for the combined entity post-Merger. We also sponsored our first Annual Corporate Compliance Ethics Week Program in 2022, which was open to all V2X employees, and was designed to shine a spotlight on Corporate Ethics by highlighting our Core Values, educating employees on our “Speak Up” culture and providing best practices resources for leaders in addressing employees’ concerns.
Combating Trafficking in Persons (CTIP) and Other Country National ( OCN) Compliance
Information about our Executive Officers
The following table sets forth certain information as of January 31, 2022 regarding our executive officers, including a five-year employment history and any directorships held in public companies.
2023 regarding our executive officers, including a five-year employment history and any directorships held in public companies.
| Name | Age | Current Title(s) | Business Experience | |||||||||||||||||
| Charles L. Prow | 63 | President and Chief Executive Officer (CEO), Director | Mr. Prow has served as President, CEO and director of the Company since December 2016. Mr. Prow has over thirty years of information technology and federal services experience, including leadership positions at IBM Corporation, PricewaterhouseCoopers, and Coopers & Lybrand. During his career, he has run large global government services organizations, delivering solutions to a wide array of DoD and other government customers. Mr. Prow's roles at IBM Corporation include: (i) from 2014 to 2015 as General Manager, Global Government Industry in connection with IBM’s technology and services competencies, where he had responsibility for global revenues exceeding $9 billion, (ii) from 2012 to 2013 as General Manager, Global Business Services, with strategic, profit and loss and operational responsibility for IBM’s more than $4 billion North America consulting services unit, and (iii) from 2007 to 2012 as General Manager, Global Business Services, with strategic, profit and loss and operational responsibility for IBM’s more than $2.4 billion U.S. Public Sector business unit. He currently serves on the board of directors for the Professional Services Council, Christian Brothers High School - St. Louis Missouri, and International Research and Exchange Board. | |||||||||||||||||
| Susan D. Lynch | 61 | Senior Vice President and Chief Financial Officer (CFO) | Ms. Lynch has served as Senior Vice President and Chief Financial Officer since August 2019. From April 2016 until August 2019, Ms. Lynch served as Chief Financial Officer and Executive Vice President of Sungard Availability Services Capital Inc., a $1.1 billion private equity backed, global enterprise providing cloud, disaster recovery, managed private and shared hosting and colocation IT services. From 2007 to 2015, Ms. Lynch served as Executive Vice President and Chief Financial Officer of Hitachi Vantara (formerly known as Hitachi Data Systems), a more than $4 billion division of Hitachi, Ltd. and provider of global data storage infrastructure solutions, software, and professional services. From 2005 to 2007, Ms. Lynch was VP & CFO for Raytheon Technical Services Company, a $2 billion segment of Raytheon Company. From 1984 to 2005, Ms. Lynch held various financial leadership positions with Honeywell International, Inc. Her last position with Honeywell was Assistant Corporate Controller. Ms. Lynch left Honeywell International temporarily and was CFO of Geonex Corporation from 1993 to 1994. Susan is a Certified Public Accountant. In November 2021, Ms. Lynch was elected to the Board of Directors of Allegro Microsystems (NASDAQ: ALGM) and currently serves on the Audit committee. | |||||||||||||||||
| William W. Beard | 63 | Senior Vice President, Aerospace Solutions | Mr. Beard has served as Senior Vice President, Aerospace Solutions since January 2023. From 2020 to January 2023, Mr. Beard served as the operations and strategy executive responsible for growth, strategy and operational efficiency at Vertex. Previously, he served as the lead consultant and proprietor from 2016 to 2019 for Allegiant Professional Services, providing operations, strategy, and new business development services to aerospace and defense clients. From 2013 to 2016, he served as Vice President and General Manager of GKN Aerospace, where he oversaw factories manufacturing flight critical components and assemblies for The Boeing Company, Honda Aircraft Company, and Honeywell Aerospace. Prior to joining GKN Aerospace, he led operations for DRS Technologies C3 and Aviation Group for four years. Before that, Mr. Beard served as Vice President of Operations at L-3 Vertex Aerospace. Before joining L-3 Vertex Aerospace, he held multiple positions at L-3 Communications Integrated Systems, including Senior Director for Federal Programs. Mr. Beard’s early career includes 20 years in active duty with the United States Navy, holding roles in a variety of intelligence, surveillance, and reconnaissance and special mission aircraft organizations. Mr. Beard earned Air Medals for missions flown during Operation Desert Storm in Kuwait, and in Bosnia during the Balkans conflict. Mr. Beard received a bachelor’s degree from New Hampshire College and an MBA from Baylor University. He is also a graduate of an Executive Leadership Program taught at the Imperial College of London Center for Creative Leadership. | |||||||||||||||||
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| Kevin T. Boyle | 53 | Senior Vice President, Chief Legal Officer, General Counsel and Corporate Secretary | Mr. Boyle has served as Senior Vice President, Chief Legal Officer, General Counsel and Corporate Secretary since October 2018. Prior to joining V2X, he served as senior vice president, general counsel and secretary of Vencore Holding Corp, a provider of information solutions, cyber security, engineering and analytics for the U.S. government and intelligence community, from March 2017 until June 2018. He led Vencore through a strategic transaction process, resulting in the merger of Vencore with two other companies to create Perspecta, Inc. Mr. Boyle was senior vice president, general counsel and secretary from January 2014 until January 2016 with Alion Science and Technology Corporation, a global engineering and technology solutions company providing services to federal and international customers. Earlier in his career, he held senior executive positions with public and private technology services and product companies, including MCR, LLC, Vangent, Inc., General Dynamics Information Technology, Anteon International Corporation and InterWorld Corporation. Mr. Boyle currently serves on the Board of the Wolf Trap Foundation. | |||||||||||||||||
| Susan L. Deagle | 54 | Senior Vice President and Chief Growth & Client Service Officer | Ms. Deagle has served as Senior Vice President and Chief Growth & Client Service Officer since January 2023. From May 2017 to January 2023, Ms. Deagle served as Senior Vice President and Chief Growth Officer. She is responsible for the Company's top and bottom line organic and inorganic growth. From 2015 to 2017, Ms. Deagle served as Vice President and Integration Executive for an acquisition aligned with the inception of IBM Corporation's Watson Health business unit. From 2013 to 2015, Ms. Deagle served as Vice President for sales and distribution strategy for IBM's U.S. Federal and Government Industries, where she drove cross-brand and cross-sell opportunities to increase market penetration, expanding IBM's base business. From 2011 to 2012, Ms. Deagle served as Director of Sales and Distribution Strategy and Planning for IBM's global public sector. While at IBM, she also created and ran the federal government wide Acquisition Contract Center. | |||||||||||||||||
| Corinne L. Minton-Package | 50 | Senior Vice President, Advance Technology | Ms. Minton-Package has served as Senior Vice President, Advanced Technology since January 2023. From January 2021 through January 2023, Ms. Minton-Package was the Senior Vice President of Systems and Technology. From October 2020 to January 2021, Ms. Minton-Package was Senior Vice President, Operational Technology and Enterprise. She is responsible for leading the technology business unit at V2X, growing around applications, network and cyber for military customers. This portfolio is also responsible for building repeatable sensor driven solutions, including tolling, screening, identity management and security. From 2018 to 2020, Ms. Minton-Package was Vice President of Operational Technology, and was responsible for program execution and growth of the portfolio of engineering, perimeter security and intrusion detection, and the internet of things sensor capabilities as in addition to solution and alliances. From 2017 to 2018, she held the role of Vice President of Solutions and Alliances, and was responsible for creating partnership that would support our strategy for converged infrastructure. Prior to joining V2X, for more than 20 years Ms. Minton-Package held various positions at IBM Global Business Services, and most recently, from 2014 to 2017, as a partner in the commercial healthcare practice. | |||||||||||||||||
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| Kenneth W. Shreves | 60 | Senior Vice President, Global Mission Training & Sustainment | Mr. Shreves has served as the Senior Vice President, Global Mission Training & Sustainment since July 2022. In this role, Mr. Shreves is responsible for base operations, logistics, high consequence training and the national security program businesses. From November 2021 to July 2022, he was Senior Vice President, Organic Growth, Operational Enablement and Supply Chain. Prior to this role, Mr. Shreves was Vice President of Business Development/Capture, where he worked to build and execute the Company's organic growth strategy. He joined V2X in October 2017 from SOSi, where he was Vice President of Business Development. Prior to SOSi, he was at DynCorp International where he held multiple leadership positions in the fields of national security and business development. Prior to his commercial career, Ken served in the United States Army as a Logistics Officer, retiring after twenty-eight years, having commanded at every level through Brigade Command and culminating as the Army Chair at the National War College in Washington DC. Mr. Shreves earned a B.S. in Business Administration – Finance from the University of Florida, an M.S. in Administration from Central Michigan University and an M.S. in National Security Studies from the National War College, Fort McNair, Washington DC. | |||||||||||||||||
| Michael J. Smith | 42 | Vice President of Treasury, Corporate Development, and Investor Relations | Mr. Smith has served as the Company’s Vice President of Treasury, Corporate Development, and Investor Relations since 2014. Prior to joining V2X in 2014, he was co-founder and managing director of The Silverline Group, a strategic consulting and advisory services firm that focuses on the aerospace and defense, intelligence, government services, homeland security, and federal civilian markets from 2012 to 2014. While at Silverline, Mr. Smith was responsible for providing advice and counsel on mergers and acquisitions and for generating market studies, assessments, company positioning, valuation studies, and competitive intelligence for clients. Additionally, he helped clients formulate and execute investment decisions, including stock purchases, acquisitions, and divestitures. Prior to co-founding The Silverline Group, Mr. Smith was a senior equity research associate at Lazard Capital Markets, covering the aerospace and defense, federal government information technology services, and defense technology sectors. He also spent five years with BB&T Capital Markets covering defense and government services and seven years with Raymond James & Associates in various capacities, including senior equity research liaison. Mr. Smith is a CFA® charterholder and earned a bachelor’s degree with a major in finance and a minor in economics from the University of South Florida. | |||||||||||||||||
| Richard Mendoza | 58 | Senior Vice President and Chief People Officer | Mr. Mendoza has served as Senior Vice President and Chief People Officer since July 2022. From 2016 to July 2022, Mr. Mendoza served in multiple roles at Vertex, including as the Senior People Leader since 2017, responsible for the tactical execution and strategic direction of all aspects of Human Resources, Security, Communications, Payroll, Labor Relations, and Learning & Development. From 2016 to 2017, Mr. Mendoza was the Director of Human Resources at Vertex, where he oversaw “People Operations,” comprised of the HR Business Partner, Employee Relations, Talent Management, and Compliance functions. Prior to joining Vertex in 2016, Mr. Mendoza held multiple positions at L3 Technologies Platform Integration, a division of 1,700 employees with expertise in aircraft design, system integration, flight sciences engineering, and major structural modification. He joined L3 Technologies Platform Integration in 2004 as the Talent Acquisition Lead and HR Business Partner and later became the Senior Manager of Human Resources. Before that, he served in the United States Air Force from 1982 to 2003, including in leadership roles in Forward Air Control radar operations and the Air Force Recruiting Service. He holds a Senior Professional Human Resources (SPHR) certification from the Human Resources Certification Institute. | |||||||||||||||||
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Available Information
Our principal executive offices are located at 2424 Garden of the Gods Road, Colorado Springs, CO 7901 Jones Branch Drive, McLean, Virginia, 80919. Our telephone number is (719 22102. Our telephone number is (571) 591 481-3600 and our website address is www.vectrus 2000 and our website address is www.goV2X.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports are available on our website as soon as reasonably practicable after electronically filed with the Securities and Exchange Commission (SEC). Throughout this Form 10-K, we incorporate by reference information from parts of other documents filed with the U.S. Securities and Exchange Commission (SEC). The SEC allows us to disclose important information by referring to it in this manner SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference, unless such information is otherwise specifically referenced elsewhere in this report. Our reports filed with the SEC also may be found on the SEC's website at www.sec.gov.
ITEM 1A. RISK FACTORS
Also, tShould any of the following he risks and uncertainties develop into actual events, described below are those that we have identified as material but are not the only risks and uncertainties we face. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may materially harm our business, financial condition or results of operations could be materially and adversely affected, the trading price operating results and result in a decline in our stock price.
Summary of Risk Factors
Risks Related to Our Business
•Our profitability or performance could suffer if we are unable to recruit and retain qualified personnel or if we are unable to maintain adequate staffing levels for our contracts.
•A significant portion of our workforce is represented by labor unions, and our business could be harmed in the event of a prolonged work stoppage.
•Competition within our markets may reduce our revenue and market share.
•We may not be successful in winning new contracts or recompeting our existing contracts, which could have an adverse impact on our business and prospects.
•Our earnings and margins may vary based on the mix of our common stock could decline contracts, our performance, and you could lose all or part of your investment our ability to control costs.
•A significant portion of our revenue is derived from a few large contracts, and the loss or material reduction of any of these contracts could have a material adverse effect on our results of operations and cash flows.
•Uncertainties in the U.S. government defense budget, changes in spending or budgetary priorities or delays in contract awards may significantly and adversely affect our future revenue and limit our growth prospects.
•Business disruptions caused by natural disasters, pandemics, global hostilities and other crises could adversely affect our profitability and our overall financial position.
•Our contract sites are inherently dangerous workplaces. Failure to maintain safe work sites and equipment or effectively respond to the impacts of COVID-19 to our workplaces could result in environmental disasters, employee deaths or injuries, reduced profitability, the loss of projects or customers and possible exposure to litigation.
•We work in international locations where there are high security risks, which could result in harm to our employees and contractors and the incurrence of substantial costs.
•We are subject to legal and regulatory compliance risks associated with operating internationally.
•We conduct a portion of our operations through joint ventures, exposing us to certain risks and is being transitioned under LOGCAP V and retained by us. Performance on the Kuwait Task Order began uncertainties, many of which are outside of our control.
•Our business could be adversely affected by bid protests.
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•We are dependent on the U.S. government and, if in July 2021, our reputation or relationship with the U.S. government was harmed, our revenue and performance on the growth prospects could Iraq Task Order began in June 2021. The awards are approximately $766.3 million and $820.9 million, respectively with estimated period of performance completion in December 2026. The OMDAC-SWACA contract was re-awarded on December 29, 2020, and performance on the contract began on July 16, 2021. The new award is an approximately $859.7 million cost-plus-fixed-fee contract with an estimated period of performance completion in April 2026 be adversely affected.
•Our earnings and margins depend, in part, on subcontractor performance.
•We rely on internal and external information technology systems to conduct our business, and disruption or failure of these systems could adversely affect our business and results of operations.
•We rely on our information and communications systems in our operations. Security breaches and other disruptions could adversely affect our business and results of operations.
•We are subject to certain data privacy regulations, which expose us to certain risks if we do not comply with these requirements.
•We may not realize the anticipated benefits and cost savings of the Merger and integrating the two companies may be more difficult, costly or time-consuming than expected.
•We may pursue acquisitions and other investments that involve numerous risks and uncertainties.
•We use estimates in accounting for many of our programs, and changes in our estimates could adversely affect our future financial results.
•We may be required to contribute additional funds to meet any present or future underfunded benefit obligations associated with multiemployer pension plans in which we participate.
•Our insurance may be insufficient to protect us from claims or losses.
•There is a rapidly evolving awareness and focus from stakeholders with respect to environmental, social and governance practices, which could affect our business.
Risks Related to Governmental Regulations and Laws
•Environmental, health and safety issues could have a material adverse effect on our business, financial position or results of operations.
•As a U.S. government contractor, we are subject to a number of procurement laws and regulations and could be adversely affected by changes in regulations or our failure to comply with these regulations.
•Our business is subject to audits, reviews, cost adjustments, and investigations by the U.S. government, which, if resolved unfavorably to us, could adversely affect our profitability, cash position or growth prospects.
•The DoD continues to modify its business practices, which could have a material effect on its overall procurement processes and adversely impact our current programs and potential new awards.
•Our business depends upon obtaining and maintaining required facility security clearance and individual security clearances.
•Our business may be negatively impacted if we are unable to adequately protect our intellectual property rights.
Risks Related to Our Indebtedness, Financial Condition and Markets
•In connection with the Merger, we assumed significantly more indebtedness than V2X's prior indebtedness. Our level of indebtedness and our ability to make payments on or service our indebtedness could adversely affect our business, financial condition, results of operations, cash flow and liquidity.
•Our variable rate indebtedness may expose us to interest rate risks, which could cause our debt costs to increase significantly.
•Our debt agreements contain covenants with which we must comply or risk default, or that impose restrictions on us and certain of our subsidiaries that may affect our ability to operate our businesses.
•The effects of changes in worldwide economic and capital markets conditions may significantly affect our ability to maintain liquidity or procure capital.
•We may not realize as revenue the full amounts reflected in our backlog, which could adversely affect our future revenue and growth.
•Goodwill represents a significant portion of our assets and any impairment of these assets could negatively impact our results of operations.
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Risks Related to Our Securities
•We meet the requirements to be a “controlled company” within the meaning of the rules of the New York Stock Exchange (NYSE) and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance standards, which limit the presence of independent directors on its Board of Directors or Board committees.
•If our significant shareholders who received shares of our common stock in the Merger sell their shares of our common stock after such shares are no longer subject to resale restrictions, our common stock price could be materially affected.
•Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a change in control.
RISKS RELATED TO OUR BUSINESS
Our profitability or performance could suffer if we are unable to recruit and retain qualified personnel or if we are unable to maintain adequate staffing levels for our contracts.
Due to the specialized nature of our business, our future performance and rate of growth is highly dependent upon the continued services of our personnel and executive officers, the development of additional management personnel and the hiring of new qualified technical, marketing, sales, and management personnel for our operations. Recruitment of qualified personnel is highly competitive, and we may not be successful in attracting or retaining qualified personnel. In recent years, the industry-wide market for qualified employees became even more competitive than in previous years. We also must manage leadership development and succession planning throughout our business. The loss of key employees, coupled with an inability to attract new, qualified employees or adequately train employees, or the delay in hiring key personnel could significantly impact our ability to perform under our contracts and could have an adverse effect on our business, results of operations and financial condition.
In addition, our profitability is affected by how efficiently we utilize our workforce, including our ability to transition employees from completed contracts to new assignments; to hire and assimilate new employees; to hire personnel in or timely deploy expatriates to foreign countries; to manage attrition and a subcontractor workforce; and to devote time and resources to training, business development, professional development and other non-chargeable activities. Further, continued visa and other travel restrictions related to the ongoing COVID-19 pandemic may also impact our ability to properly perform on our contracts. See the risk factor below, “We face various risks related to health epidemics, pandemics and similar outbreaks, particularly COVID-19, which may have material adverse effects on our business, financial position, results of operations and/or cash flows.”
A significant portion of our workforce is represented by labor unions, and our business could be harmed in the event of a prolonged work stoppage.
On December 31, 2022, approximately 5,400 of our employees, or approximately 35% of our employee base were unionized. We have 54 collective bargaining agreements with labor unions. We cannot predict how stable our union relationships will be or whether we will be able to successfully negotiate successor agreements without impacting our financial condition. In addition, the presence of unions may limit our flexibility in managing our workforce. Work stoppages by our union employees or implementation of a work stoppage contingency plan could negatively impact our ability to provide services to our customers on a timely basis, which could in turn negatively impact our results of operations and financial condition.
Competition within our markets may reduce our revenue and market share.
Our business is highly competitive, and we compete with larger companies that have greater name recognition, greater financial resources, and larger technical staff, as well as companies with a competitive advantage due to a small business designation. Within our industry, companies have engaged in mergers and acquisitions to increase their competitive position. Our competitors may provide our customers with different or greater capabilities or better contract terms than we can provide, including past contract experience, geographic presence, price, and the availability of qualified professional personnel. In addition, our competitors may consolidate or establish teaming or other relationships among themselves or with third parties to increase their ability to address customers’ needs.
Even if we are qualified to work on a government contract, we may not be awarded the contract because of existing government policies designed to assist small businesses and other designated classifications of business, such as under-represented minority contractors. Accordingly, larger or new competitors, alliances among competitors, or competitors designated as small business contractors may emerge that may adversely affect our ability to compete. If we are unable to compete successfully against our current or future competitors, we may experience declines in revenue and market share, which could negatively impact our financial position, results of operations, or cash flows.
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We may not be successful in winning new contracts or recompeting our existing contracts, which could have an adverse impact on our business and prospects.
•We may bid on programs for which the work activities, deliverables, and timelines are vague or for which the solicitation incompletely describes the actual work, which may result in inaccurate pricing assumptions;
•We may incur substantial costs and spend a significant amount of managerial time and effort preparing bids and proposals; and
•We may realize the lost opportunity cost of not bidding on and winning other contracts that we may have pursued otherwise.
If we are unable to win a particular new contract, we may be prevented from providing the customer the services that are purchased under that contract for a number of years.
In addition, we face rigorous competition and pricing pressures for any additional contract awards from the U.S. government. Some of our existing contracts must be recompeted when their original period of performance ends. Recompetes represent opportunities for competitors to take market share away from us. Recompetes also represent opportunities for our customers to obtain more favorable terms and discounts from us. We may be required to qualify or continue to qualify under
Our earnings and margins may vary based on the mix of our contracts, our performance, and our ability to control costs.
We generate revenue under various types of contracts, which include cost-plus, cost-reimbursable (including non-fee-bearing costs) and firm-fixed-price. Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenue derived from each type of contract, the nature of services provided, as well as the achievement of performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined. Cost-reimbursable contracts generally have lower profitability than firm-fixed-price contracts. Our profitability is adversely affected when we incur contract costs that we cannot bill to our customers. Profitability also may be adversely affected during the start of a new contract due to initial spending necessary to successfully complete phase-in requirements. For example, as we continue the phase-in process for LOGCAP V, we are required to outlay certain amounts of capital to be able to perform under the contract, which amounts we may or may not recoup from the U.S. government. To varying degrees, each of our contract types involves some risk that we could underestimate the costs and resources necessary to fulfill the contract. While firm-fixed-price contracts allow us to benefit from cost savings, these contracts also increase our exposure to the risk of cost overruns. Revenue derived from firm-fixed-price contracts represented approximately 25% of our total revenue for the year ended December 31, 2021. When making proposals on firm-fixed-price contracts, we rely heavily on our estimates of costs and timing for completing the associated projects, as well as assumptions regarding technical issues. In each case, our failure to accurately estimate costs or the resources needed to perform our contracts or to effectively manage and control our costs during the performance of our work could result in reduced profits or in losses. If we incur costs in excess of initial estimates or funding on a contract, we generally seek reimbursement for those costs through requests for equitable adjustments (REA’s) or claims to the Armed Services Board of Contracting Appeals (ASBCA), and we have made assumptions on what we expect to recover in our financial statements, but we may not be able to negotiate full recovery for these costs. In addition, pursuit of these REAs and claims can require significant time and incur additional costs, including legal fees and expenses, and there is no guarantee that such actions would ultimately be successful.
In addition, our failure to satisfy customer expectations or contract requirements may result in reduced fees or claims made against us by our customers and may affect our financial performance in that period . Under each type of contract, if we are unable to control costs, our operating results could be adversely affected, particularly if we are unable to justify an increase in contract value to our customers. Cost overruns or the failure to perform on existing programs also may adversely affect our ability to retain existing programs and win future contract awards.
Because many fixed-price contracts are long-term and may also involve new technologies, unforeseen events, such as technological difficulties, cost fluctuations, significant inflation, problems with suppliers, and cost overruns can result in the contractual price becoming less favorable or even unprofitable to us. Revenue derived from firm-fixed-price contracts represented approximately 40% of our total revenue for the year ended December 31, 2022. When making proposals on firm-fixed-price contracts, we rely heavily on our estimates of costs and timing for completing the associated projects, as well as assumptions regarding technical issues. In each case, our failure to accurately estimate costs or the resources needed to perform our contracts or to effectively manage and control our costs could result in reduced profits or losses. If we incur costs in excess of initial estimates or funding on a contract, we generally seek reimbursement for those costs through requests for equitable adjustments (REAs) or claims to the Contracting Officer, the denial of additional management personnel and which may be appealed to the hiring Armed Services Board of new qualified technical, marketing, sales Contracting Appeals, and management personnel for our operations. Recruitment make assumptions on what we expect to recover in our financial statements, but we may not be able to negotiate full recovery for these costs. In addition, pursuit of qualified these REAs and claims can require significant time and additional costs, including legal fees and expenses, and there is no guarantee that such actions would ultimately be successful.
Aggregate revenue from our four largest contracts amounted to approximately $0.9 billion, or 31.0% of our revenue for the year ended December 31, 2022. As of December 31, 2022, our four largest contracts were the Kuwait and Iraq Task Orders under the LOGCAP V contract vehicle, the Kuwait Base Operations and Security Support Services in Kuwait (K-BOSSS) contract, and the OMDAC-SWACA contract. The Kuwait Task Order was previously part of the U.S. Army's K-BOSSS contract, which was exercised through August 28, 2023, and is being transitioned under LOGCAP V and retained by us. Performance on the Kuwait Task Order began in July 2021, and performance on the Iraq Task Order began in June 2021. The awards are approximately $1,078.6 million and $992.8 million, respectively, with estimated period of performance completion in December 2026. The OMDAC-SWACA contract was re-awarded on December 29, 2020, and performance on the contract began on July 16, 2021. The new award is an approximately $673.1 million cost-plus-fixed-fee contract with an estimated period of performance completion in April 2026.
The Kuwait and Iraq Task orders under LOGCAP V each accounted for more than 10% of our revenue for the year ended December 31, 2022, and we expect these contracts will continue to have a significant contribution to our revenue. The loss or material reduction of any of these contracts could have a material adverse effect on our revenue, results of operations and cash flows. See "Significant Contracts" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
The U.S. government services marketplace is characterized by contracts of shorter duration as compared to large production and systems integration programs. U.S. government services contracts generally are of a finite duration of five years and usually range between three and ten years. The U.S. Congress usually appropriates funds on a fiscal year basis even though a program may extend across several fiscal years. Consequently, programs are often only partially funded initially, and additional funds are committed only as the U.S. Congress approves further appropriations. The termination or reduction termination, expiration or non-renewal of funding for a our existing U.S. government program would contracts could result in a loss of anticipated future revenue attributable to that program, which could have an adverse impact on our operations. In addition, the termination of a program or the failure to commit additional funds to a program that already has been started could result in lost revenue and increase our overall costs of doing business .
The U.S. government may terminate any of our government contracts, in whole or in part, at any time at its convenience with little or no notice. The U.S. government may also terminate our contracts for default if we fail to meet our obligations under a contract. If any of our contracts were terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were terminated for default, generally the customer would pay us only for the work that has been accepted; moreover . Moreover, the customer can require us to pay the difference between the original contract price and the cost to re-procure the contract deliverables, net of the work accepted from the original contract. In addition, the U.S. government can also hold us liable for damages resulting from the default.
The expiration, non-renewal or termination of any of our government contracts, whether for convenience or default, would adversely affect our current programs and reduce our revenue, earnings and cash flows. A termination for default may also negatively affect our reputation, performance ratings and our ability to win new contracts, particularly for contracts covering the same or similar types of services.
Uncertainties in the U.S. government defense budget, changes in spending or budgetary priorities or delays in contract awards may significantly and adversely affect our future revenue and limit our growth prospects.
Our contracts and revenue primarily depend upon the U.S. DoD budget, which is subject to the congressional budget authorization and appropriations process and is difficult to predict. The U.S. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract periods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, and additional monies are committed to the contract by the procuring agency only as appropriations are made by Congress in future fiscal years. DoD budgets are a function of a number of factors beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, the federal debt ceiling, current and future economic conditions, presidential administration and congressional priorities, government shutdowns, continuing resolutions, changing national security and defense requirements, geopolitical developments and actual fiscal year congressional appropriations for defense budgets. Any of these factors could result in a significant redirection of current and future DoD budgets and impact our future operations and cash flows. Such factors may have direct bearing on our new business opportunities as well as on whether the U.S. government will exercise its options for services under existing contracts, thus affecting the timing and volume of our business.
The U.S. government also conducts periodic reviews of U.S. defense strategies and priorities, which may shift DoD budgetary priorities, reduce DoD spending or delay contract or task order awards for defense related programs. A reduction in
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U.S. government defense spending, changing defense spending priorities or delays in contract or task order awards could potentially reduce our future revenue, earnings and cash flow and have a material impact on our business.
Business disruptions caused by natural disasters, pandemics, global hostilities and other crises could adversely affect our profitability and our overall financial position.
We have operations located in regions of the U.S. and internationally that may be exposed to natural disasters, such as hurricanes, tornadoes, blizzards, flooding, wildfires or earthquakes. Our business could also be disrupted by pandemics, including as a result of COVID-19, and other national or international crises, such as the war in Ukraine. Although preventative measures may help mitigate the damage from such occurrences, impacts on our supply chain and the damage and disruption to our business resulting from any of these events may be significant. If our insurance and other risk mitigation mechanisms are not sufficient to recover all costs, including loss of revenue from sales to customers, we could experience a material adverse effect on our financial position and results of operations.
There is also an increasing concern over the risks of climate change and related environmental sustainability matters. In addition to physical risks, climate change risk includes longer-term shifts in climate patterns, such as extreme heat, sea level rise, and more frequent and prolonged drought. Such events could disrupt our operations or those of our customers or third parties on which we rely, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility.
We face various risks related to health epidemics, pandemics and similar outbreaks, particularly COVID-19, which may have material adverse effects on our business, financial position, results of operations and/or cash flows.
COVID-19 was declared a pandemic by or other pandemics have in the World Health Organization past and a national emergency by the U.S. government in March 2020. COVID-19 has may in the future negatively affected, and continues to impact, affect the U.S. and global economy, disrupted disrupt global supply chains, resulted result in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created and create significant disruption in the global financial markets. The outbreak To date, COVID-19 has not had a substantial material adverse impact on our operating results and our business for the fiscal year ended 2021 . However, the extent of the continued impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our programs in the expected time-frame timeframe, will depend on future developments, including the duration and spread of the pandemic and any potential subsequent waves or variants of COVID-19. The ultimate impact on financial markets and the global economy, 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, and the development and wide-spread distribution of a vaccine and subsequent booster vaccines, all of which remain uncertain and cannot be predicted. Further, if significant portions of our workforce are unable to work effectively because of illness, quarantine, government actions, facility closures, travel restrictions, disruptions related to increased teleworking policies, social distancing or other restrictions related to COVID-19, our operations, efficiency and effectiveness may be impacted in the future remain uncertain and cannot be predicted.
It is also possible that the continued spread of COVID-19 could continue to delay or limit the ability of the U.S. government and other customers to perform on its contractual obligations, including making timely payments to us. Essentially all of our revenue is derived from services ultimately sold to the U.S. government, and we cannot predict the effect COVID-19 or other pandemics may have on our customers’ spending and mission priorities. The COVID-19 pandemic or other pandemics could delay the announcement of new contract awards and/or the timing of start-up or transition of our major contracts, including, but not limited to, LOGCAP V. Any prolonged interruptions in payment or transition activities on our large contracts may disrupt our cash flows, and these uncertainties could adversely affect both our operations and financial position.
The spread of COVID-19 has caused us to significantly modify our business practices (including limiting employee and contractor presence at our work locations), and we may take further actions as may be required by government authorities or our customers or that we determine are in the best interests of our employees, contractors, customers, suppliers, and communities. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely impacted.
Due to the many uncertainties and the rapidly changing business environment, the impacts from the COVID-19 pandemic may have a material adverse effect on our business, financial position, results of operations and/or cash flows in the future. The ongoing pandemic may also have the effect of heightening many of the other risks identified in this Annual Report on Form 10-K for the year ended December 31, 2021 31, 2022.
Our contract sites are inherently dangerous workplaces. Failure to maintain safe work sites and equipment or effectively respond to the impacts of COVID-19 to our workplaces could result in environmental disasters, employee deaths or injuries, reduced profitability, the loss of projects or customers and possible exposure to litigation.
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injuries, reduced profitability, or the loss of projects or customers, any of which could have a material adverse impact on our business, financial condition, results of operations and reputation.
We work in international locations where there are high security risks, which could result in harm to our employees and contractors and the incurrence of substantial costs.
Some of our services, including those using subcontractors, are performed in high-risk locations, including but not limited to, Iraq, certain parts of Africa, and the Middle East, where the country, region or surrounding area areas may have unstable governments, or in areas of military conflict, or hostile and unstable environments, including war zones, or at military installations. These operations increase the risk of an incident resulting in damage or destruction to our work or living sites or resulting in injury or loss of life to our employees, subcontractors or other third parties. We maintain insurance to mitigate risk and potential liabilities related to our international operations, but our insurance coverage may not be adequate to cover these claims and
Our insurance coverage may not be adequate to cover these claims and liabilities and we may be forced to bear substantial costs arising from those claims. The impact of these factors is difficult to predict, but any one or more of them could adversely affect our financial position, results of operations or cash flows.
We are dependent on the U.S. government and, if our reputation or relationship with the U.S. government was harmed, our revenue and growth prospects could be adversely affected.
Our U.S. government contracts operating internationally represented approximately 67 48% of total revenue for the year ended December 31, 2021 2022. We are subject to a variety of U.S. and foreign laws and regulations, including, without limitation, business compliance, tax and anti-corruption laws, including the U.S. Foreign Corrupt Practices Act. We also employ international personnel and engage with foreign subcontractors and labor brokers, which requires compliance with numerous foreign laws and regulations related to labor, benefits, taxes, insurance and reporting requirements, among others, such as the European Union (EU) General Data Protection Regulation (GDPR). Failure by us or our subcontractors or vendors to comply with these laws and regulations could result in administrative, civil, or criminal liabilities, suspension or debarment from government contracts, any of which could have a material adverse effect on us.
Our business operations are also subject to additional risks associated with conducting business internationally, including, without limitation:
•Political instability in foreign countries;
•Terrorist activity by various groups in the areas in which we operate;
•Imposition of inconsistent foreign laws, regulations or policies or changes in or interpretations of such laws, regulations or policies;
•Currency exchange controls, fluctuations of currency and foreign exchange rates, and currency revaluations;
•Conducting business in places where laws, business practices and customs are unfamiliar or unknown; and
•Imposition of limitations on or increases in withholding and other taxes on payments by foreign operations.
Our failure to adapt to or mitigate these risks could affect our ability to conduct our business internationally and adversely affect our financial position, results of operations or cash flows.
We conduct a portion of our operations through joint ventures, exposing us to certain risks and uncertainties, many of which are outside of our control.
We conduct a portion of our operations through joint ventures where control may be shared with unaffiliated third parties. In addition, as with any joint venture arrangement, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major issues. We also cannot control the actions of our joint venture partners, including any failure to comply with applicable laws or regulations, nonperformance, default or bankruptcy of our joint venture partners. If our partners do not meet their contractual obligations, the joint venture may be unable to adequately perform and deliver its contracted services, requiring us to make additional investments or perform additional services to ensure the adequate performance and delivery of services to the customer. We could be liable for both our obligations and those of our partners, which may result in reduced profits or, in some cases, significant losses on the project. Additionally, these factors could have a material adverse effect on the business operations of the joint venture and, in turn, our business operations and reputation.
Further, operating through joint ventures in which we have a minority interest could result in us having limited control over many decisions made with respect to projects and internal controls relating to projects. These joint ventures may not be subject to the same requirements regarding internal controls as we are. As a result, internal control issues may arise, which could have a material adverse effect on our financial condition and results of operations.
Our business could be adversely affected by bid protests.
We may experience additional costs and delays if our competitors protest or challenge awards of contracts to us in competitive bidding. Any such protest or challenge could result in the resubmission of bids on modified specifications, or in the termination, reduction or modification of the awarded contract. It can take a significant amount of time to resolve contract
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protests and, in the interim, the contracting U.S. federal agency may suspend our performance under the contract pending the outcome of the protest. We cannot predict the timing or outcome of protests.
In addition, we may protest the contract awards of our competitors when we believe it is prudent to do so to protect our rights and interest in the competition. This process requires the time, effort and attention of our management and employees and incurs additional costs.
We are dependent on the U.S. government and, if our reputation or relationship with the U.S. government was harmed, our revenue and growth prospects could be adversely affected.
We derive all or most of our revenue from work performed under U.S. government contracts, primarily the DoD, either as a prime contractor or as a subcontractor to other contractors engaged in work for the U.S. government. For the year ended December 31, 2022, we generated approximately 46% of our total revenue from the U.S. Army. Our reputation and relationship with the U.S. government, and in particular with the branches and agencies of the DoD, are key factors in maintaining and growing this revenue. Negative press reports or publicity, which could pertain to employee or subcontractor misconduct, alleged violations of labor trafficking laws, conflicts of interest, termination of a contract or task order, poor contract performance, deficiencies in services, reports or other deliverables, information security breaches, business system disapprovals, or other aspects of our business, regardless of accuracy, could harm our reputation. If our reputation is negatively affected, we may lose our ability to conduct business in a foreign country (e.g., loss of business license), lose a required security clearance, or are suspended or debarred from contracting with government agencies or any branch of the DoD, our revenue and growth prospects could be adversely impacted.
Misconduct of our employees, subcontractors, agents, prime contractors or business partners could cause us to lose customers and could have a material adverse impact on our business and reputation, adversely affecting our ability to obtain new contracts.
Misconduct, fraud or other improper activities by our employees, subcontractors, agents, prime contractors or business partners could have a material adverse impact on our business and reputation. Such misconduct could include the failure to comply with federal, state, local or foreign government procurement regulations, regulations regarding the protection of classified or personal information, legislation regarding the pricing of labor and other costs in government contracts, laws and regulations relating to environmental matters, bribery of foreign government officials, lobbying or similar activities, boycotts, antitrust and any other applicable laws or regulations. Misconduct involving data security lapses or inadequate cybersecurity protections resulting in the compromise of personal information or the improper use of our customer’s sensitive or classified information could result in remediation costs, regulatory sanctions against us and serious harm to our reputation. Although we have implemented policies, procedures and controls and training that are designed to prevent and detect these activities, these precautions may not prevent all misconduct and as a result, we could face unknown risks or losses. Misconduct by any of our employees, subcontractors, agents, prime contractors or business partners or our failure to comply with applicable laws or regulations could subject us to fines and penalties, loss of security clearance, loss of current and future customer contracts and suspension or debarment from contracting with federal, state or local government agencies, any of which would adversely affect our business, our reputation and our future financial results.
Our earnings and margins depend, in part, on subcontractor performance.
We rely on third-party subcontractors to perform some of the services that we provide to our customers. Disruptions or performance problems caused by our subcontractors could have an adverse effect on our ability as a prime contractor or higher tier subcontractor to meet our commitments to customers.
We may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, proper invoicing, cost reasonableness, allocability, allowability, adjustments to the scope of the subcontractor’s work, or the subcontractor’s failure to comply with applicable law or regulations. Uncertain economic conditions heighten the risk of financial stress of our subcontractors, which could adversely impact their ability to meet their contractual requirements to us. If any of our subcontractors fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations may be jeopardized. Significant losses could arise in future periods and subcontractor performance deficiencies could result in our termination for default.
We rely on internal and external information technology systems to conduct our business, and disruption or failure of these systems could adversely affect our business and results of operations.
We utilize, develop, install and maintain a number of information technology systems both for us and for our customers. Additionally, we utilize and rely on external systems maintained by our service providers. These activities may involve substantial risks to our ongoing business processes including, but not limited to, accurate and timely customer invoicing, employee payroll processing, supplier and vendor payment processing, supply chain management and financial reporting. If these implementation activities are not executed successfully or if we encounter significant delays in our implementation efforts, we could experience interruptions to our business processes. Under certain contracts with the U.S.
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government, the adequacy of our business processes and related systems could be called into question. The occurrence of such events could have a material adverse impact on our business, financial condition, results of operations and cash flows.
We rely on our information and communications systems in our operations. Security breaches and other disruptions could adversely affect our business and results of operations.
As a U.S. defense contractor, various privacy and security laws require us to protect sensitive and confidential information from disclosure both for us and others. However, we have faced and may continue to face certain security threats, including cybersecurity threats to our information technology infrastructure, attempts to gain access to proprietary or classified information, and threats to physical security. As a government contractor, we and our suppliers face a heightened risk of a security breach or disruption resulting from an attack by computer hackers, foreign governments, and cyber terrorists. In connection with the information technology and network communications services that we provide to our customers, we also may encounter cybersecurity threats at customer sites that we operate. We face an added risk of a security breach or other significant disruption of our information technology systems and related systems that we develop, install, operate and maintain for certain of our customers, which may involve managing and protecting information relating to national security and other sensitive government functions or personally identifiable or protected health information. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusions, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
Cybersecurity threats are significant and evolving and include, among others, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. In addition to security threats, we are also subject to other systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, natural disasters, power shortages, terrorist attacks or other events.
Our systems are decentralized, which presents various risks, including the risk that we may be slower or less able to identify or react to problems affecting a business function than we would be in a more centralized environment. In addition, “company-wide” business initiatives, such as the integration of information technology systems, carry a higher risk of failure. Depending on the nature of the initiative, such failure could result in loss of revenues, product development delays, compromise, corruption or loss of confidential, proprietary or sensitive information (including personal information or technical business information), remediation costs, indemnity obligations and other potential liabilities, regulatory or government action, breach of contract claims, contract termination, class action or individual lawsuits from affected parties, negative media attention, reputational damage, and loss of confidence from our government clients. Any of the foregoing could materially adversely affect our business, financial condition or results of operations, and our insurance and other risk mitigation mechanisms may not be sufficient to recover the costs.
We continue to update and replace many of our systems and network infrastructure to protect our computing environment, to stay current on vendor supported products, to improve the effectiveness of our systems, strengthen cybersecurity requirements and improve the efficiency of our systems. The implementation of new systems and information technology could adversely impact our operations by imposing substantial capital expenditures or difficulties in transitioning to new systems. In addition, our systems implementations may not result in productivity improvements at the levels anticipated. Systems implementation disruption and any other information technology disruption could have a material adverse effect on our business.
Many of the systems and networks that we develop, install and maintain for our customers involve managing and protecting personal information and information relating to national security and other sensitive government functions. If a system or network that we develop, install or maintain were to fail or experience a security breach or service interruption, we may experience loss of revenue, remediation costs or face claims for damages or contract termination. Any such event could prevent us from having access to or being eligible for further work on such systems and networks and cause serious harm to our business and reputation. Our liability insurance may be inadequate to compensate us for all of the damages that we may incur and, as a result, our future results could be adversely affected.
We are subject to certain data privacy regulations, which expose us to certain risks if we do not comply with these requirements.
As a U.S. entity operating in multiple European countries, we are also subject to regulatory compliance requirements under the EU GDPR that require our business to comply with security and privacy controls to protect personal data and privacy of EU citizens for transactions that occur within EU member states. A failure to comply with these requirements could negatively impact our business and financial condition. In addition, similar regulations regarding data protection and privacy rights are emerging in the U.S. and have the potential to negatively impact our business and financial condition.
As a U.S. government contractor, we are also subject to regulatory compliance requirements under the DFARS and other federal regulations that require our IT systems to comply with the security and privacy controls in National Institute of Standards and Technology Special Publication 800-171 (NIST 800-171). We may also be responsible if our subcontractors do
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not comply with these requirements. A failure to comply with these requirements could negatively impact our business and financial condition.
We may not realize the anticipated benefits and cost savings of the Merger and integrating the two companies may be more difficult, costly or time-consuming than expected.
The success of the Merger, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully combine and integrate our business with Vertex’s. We may not realize the benefits of the Merger, including, among other things: (i) the expectation that combining Vectrus and Vertex would create a larger, stronger company with (a) an enhanced ability to compete for more integrated business opportunities, (b) a more diversified revenue base across geographies, clients and contract types in supporting missions for the DoD and other government agencies, and (c) a combined contract portfolio that will be more balanced across the government agencies served or (ii) the expectation that Vectrus will be able to use free cash flow to reduce its indebtedness.
The Merger involves the integration of Vertex’s business with our legacy business, which is a complex, costly and time-consuming process. Furthermore, Vertex’s current process of integrating its Defense Training and Mission Critical Services business, which still relies on certain operating and support services from Raytheon Company, could further increase the complexity and costs of integrating Vertex’s businesses following the Merger. It is possible that the integration process could result in material challenges, including, without limitation:
• the diversion of management’s attention from ongoing business concerns and performance shortfalls at one or both of the companies as a result of the devotion of management’s attention to the Merger;
• managing a larger combined company;
• the creation of a new executive management team;
• maintaining employee morale and retaining key management and other employees;
• the possibility of faulty assumptions underlying expectations regarding the integration process;
• retaining existing business and operational relationships and attracting new business and operational relationships;
• consolidating corporate and administrative infrastructures and eliminating duplicative operations and inconsistencies in standards, controls, procedures and policies;
• integrating the companies’ financial reporting and internal control systems, including the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated thereunder by the SEC;
• coordinating geographically separate organizations;
• maintaining and protecting the competitive advantages of each of Vectrus and Vertex, including the trade secrets, know-how and intellectual property related to its processes;
• unanticipated issues in integrating information technology, communications and other systems; and
• unforeseen expenses or delays associated with the Merger.
Many of these factors will be outside of the Company’s control, and any one of them could result in delays, increased costs, decreases in revenues and diversion of management’s time and energy, which could materially affect the Company’s financial position, results of operations and cash flows.
If we experience difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on us for an undetermined period after completion of the Merger. In addition, the actual cost savings of the Merger could be less than anticipated.
Our future results may be adversely impacted if the Company does not effectively manage its expanded operations.
Following the completion of the Merger, the size of the Company’s business is significantly larger than the previous size of either Vectrus’ or Vertex’s respective businesses. Our ability to successfully manage this expanded business will depend, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of two discrete companies, but also the increased scale and scope of the combined business with its associated costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Merger.
We may pursue acquisitions and other investments that involve numerous risks and uncertainties.
We have and may in the future selectively pursue strategic acquisitions and other investments. These transactions require significant investment of time and resources and may disrupt our business and distract our management from other responsibilities. Even if successful, these transactions could affect our operating results for a number of reasons, including the amortization of intangible assets, impairment charges, acquired operations that are not yet profitable or the payment of additional consideration under earn-out arrangements if an acquisition performs better than expected. If we engage in such
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transactions, we may incur significant transaction and integration costs and have difficulty integrating personnel, operations, products or technologies or otherwise realizing synergies or other benefits from the transactions. The integration process could result in the loss of key employees, loss of key customers, loss of key vendors, decreases in revenue and increases in operating costs. In addition, we may assume material liabilities in an acquisition, including liabilities that are unknown as of the time of the acquisition. Such transactions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses, perform poorly, subject us to liabilities, and increase our risk of litigation, all of which could harm our business.
We depend on our teaming arrangements and relationships with other contractors. If we are not able to maintain these relationships, or if these parties fail to satisfy their obligations to us or the customer, our revenue, profitability and growth prospects could be adversely affected.
We rely on our teaming relationships and other arrangements with other prime contractors or subcontractors in order to submit bids for large procurements or other opportunities where we believe the combination of services provided by us and the other companies will help us to win and perform the contract. Our future revenue and growth prospects could be adversely affected if other contractors eliminate or reduce their contract relationships with us, or if the U.S. government terminates or reduces these other contractors' programs, does not award them new contracts or refuses to pay under a contract.
We may be required to contribute additional funds to meet any present or future underfunded benefit obligations associated with multiemployer pension plans in which we participate.
A multiemployer pension plan is typically established under a collective bargaining agreement with a union to represent workers of various unrelated companies. Certain collective bargaining agreements require us to contribute to their various multiemployer pension plans. For the year ended December 31, 2021 2022, we contributed $6.3 million$1.1 million to multiemployer pension plans. Under the Employee Retirement Income Security Act (ERISA), an employer who contributes to a multiemployer pension plan, absent an applicable exemption or other mitigating circumstance, may also be liable, upon termination or withdrawal from the plan, for its proportionate share of the multiemployer pension plan’s unfunded vested benefit. If we terminate or withdraw from a multiemployer plan, absent an applicable exemption or other mitigating circumstance, we could be required to contribute a significant amount of cash to fund the multiemployer plan’s unfunded vested benefit, which could materially and adversely affect our financial results.
Legal disputes could require us to pay potentially large damage awards and could be costly to defend, which would adversely affect our cash balances and profitability, and could damage our reputation.
We are subject to a number of lawsuits and claims as described under Part I, Item 3, "Legal Proceedings," in this report Annual Report on Form 10-K. We are also subject to, and may become a party to, a variety of other litigation or claims and suits that arise from time to time in the ordinary course of our business. Adverse judgments or settlements in some or all of these legal disputes may result in significant monetary damages or injunctive relief against us. Any claims or litigation could be costly to defend, and even if we are successful or if fully indemnified or insured, such claims or litigation could damage our reputation and make it more difficult to compete effectively or obtain adequate insurance in the future. In addition, any securities litigation that we could encounter as a publicly traded company could cost substantial amounts and be costly, divert management’s attention and resources from our business and could require us to make substantial payments to settle those proceedings or satisfy any judgments that may be reached against us. Litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future.
We maintain insurance coverage with third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. However, not every risk or liability is or can be protected by insurance, and, for those risks we insure, the limits of coverage we purchase or that are reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. If any of our third-party insurers fail, cancel our coverage or otherwise are unable to provide us with adequate insurance coverage, then our overall risk
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exposure and our operational expenses would increase, and the management of our business operations would be disrupted. Our insurance may be insufficient to protect us from significant warranty and other liability claims or losses. Moreover, there is a risk that commercially available liability insurance will not continue to be available to us at a reasonable cost, if at all. If liability claims or losses exceed our current or available insurance coverage, our business and prospects may be harmed. We are also subject to the requirements of the Defense Base Act (DBA), which generally requires insurance coverage to be provided to persons employed at U.S. military bases outside of the U.S. Failure to obtain DBA insurance may result in fines or other sanctions, including the loss of a particular contract.
There is a rapidly evolving awareness and focus from stakeholders with respect to environmental, social and governance practices, which could affect our business.
Stakeholder expectations with respect to environmental, social and governance matters have been rapidly evolving and increasing. We risk damage to our reputation if we do not act responsibly in key areas including diversity and inclusion, environmental stewardship, support for local communities and corporate governance. A failure to maintain appropriate environmental, social, governance practices may result in loss of business, and an inability to attract and retain customers and talented personnel, and which could have a negative impact on our business, results of operations and financial condition, and potentially on the price of our common stock and cost of capital.
RISKS RELATED TO GOVERNMENTAL REGULATIONS AND LAWS
Environmental, health and safety issues could have a material adverse effect on our business, financial position or results of operations.
We are subject to federal, state, local, and foreign environmental, health and safety laws and regulations, including those governing: air emissions; discharges to water; the management, storage, transportation and disposal of hazardous wastes, petroleum, and other regulated substances; the investigation and cleanup of contaminated property; and the maintenance of a safe and healthy workplace for our employees, contractors, and visitors. These laws and their implementing regulations can impose certain operational controls for minimization of pollution, permitting, training, recordkeeping, monitoring and reporting requirements or other operational or siting constraints on our business, result in costs to remediate releases of regulated substances into the environment, result in facility shutdowns to address violations, or require costs to remediate sites to which we sent regulated substances for disposal. Violations of these laws and regulations can cause significant delays and add additional costs to a project. We have incurred and will continue to incur operating, maintenance and other expenditures as a result of environmental, health and safety laws and regulations.
Any new developments such as the adoption of new environmental, health and safety laws and regulations could result in material costs and liabilities that we currently do not anticipate and could increase our expenditures and also materially adversely affect our business, financial position or results of operations.
As a U.S. government contractor, we are subject to a number of procurement laws and regulations and could be adversely affected by changes in regulations or our failure to comply with these regulations.
We operate in a highly regulated environment and must comply with many significant procurement regulations and other requirements. These regulations and requirements, although customary in government contracts, increase our performance and compliance costs. If any such regulations or procurement requirements change, our costs of complying with them could increase and therefore reduce our margins. Some significant statutes and regulations that affect us include:
•The FAR and department or agency-specific regulations that implement or supplement the FAR, such as the DoD’s DFARS, which regulate the formation, administration and performance of U.S. government contracts;
•The Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with certain contract negotiations;
•The Procurement Integrity Act, which regulates access to competitor bid and proposal information and government source selection information, and our ability to provide compensation to certain former government officials;
•The Civil False Claims Act, which provides for substantial civil penalties, including claims for treble damages, for violations, including for submission of a false or fraudulent claim to the U.S. government for payment or approval;
•The Combating Trafficking in Persons ( CTIP) Act, which ensures that government contractors and others are fully trained to combat human trafficking in persons pursuant to the National Security Presidential Directive (NSPD) 22; and
•The U.S. Government Cost Accounting Standards (CAS), which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. government contracts.
If we are found to have violated any of these or other laws or regulations, or are found not to have acted responsibly as defined by them, we may be subject to reductions of the value of contracts; contract modifications or terminations; the assessment of penalties and fines, compensatory damages or treble damages; or suspension or debarment from government contracting or subcontracting, any of which could have a material adverse effect on our financial position, results of operations, or cash flows.
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Our business is subject to audits, reviews, cost adjustments, and investigations by the U.S. government, which, if resolved unfavorably to us, could adversely affect our profitability, cash position or growth prospects.
U.S. government agencies, including the DCAA, the DCMA and others, routinely audit and review our performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws,
regulations and standards. They also review the adequacy of our compliance with government standards for our business systems, including our accounting, purchasing, government property, estimating, and related business systems.
Recently, these audits and reviews have become more rigorous and the standards to which we are held are being more strictly interpreted and applied, increasing the likelihood of an audit or review resulting in an adverse outcome. Although customary in government contracts, these audits and reviews increase our performance and compliance costs.
Government audits or other reviews could result in adjustments to contract costs, the disallowance of or adjustment to costs allocated to certain contracts, mandatory customer refunds, or decreased billings to our U.S. government customers until the deficiencies identified in the audits or reviews are corrected and our corrections are accepted by DCMA. Such adjustments could be applied retroactively, which could result in significant customer refunds. A determination of non-compliance with applicable contracting and procurement laws, regulations and standards could result in the U.S. government imposing penalties and sanctions against us, including withholding of payments, suspension of payments and increased government scrutiny that could delay or adversely affect our ability to invoice and receive timely payment on contracts, perform contracts or compete for contracts. Non-compliance by us could result in our being placed on the “Excluded Parties List” maintained by the General Services Administration, and we could become ineligible to receive certain contracts, subcontracts and other benefits from the U.S. government or to perform work under a government contract or subcontract until the basis for the listing has been appropriately addressed, which would materially adversely affect our ability to do business.
In addition, if a review or investigation identifies improper or illegal activities, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of contracts, forfeiture of profits, the triggering of price reduction clauses, suspension of payments, fines and suspension or debarment from doing business with governmental agencies. Civil penalties and sanctions are not uncommon in our industry. If we incur a material penalty or administrative sanction, our reputation, business, results of operations, and future business could be adversely affected.
The DoD continues to modify its business practices, which could have a material effect on its overall procurement processes and adversely impact our current programs and potential new awards.
The DoD continues to pursue various initiatives designed to gain efficiencies and to focus and enhance business practices. These initiatives and resulting changes, such as increased usage of firm-fixed-price contracts, where we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses, multiple award IDIQ contracts and small and disadvantaged business set-aside contracts, are having have an impact on the contracting environment in which we do business. Any of these changes could impact our ability to obtain new contracts or renew our existing contracts when those contracts are recompeted. These initiatives, such as IDIQ contracts, continue to evolve, and the full impact to our business remains uncertain and subject to the way the DoD implements them. As a result of these initiatives, our profit margins on future contracts may be reduced and may require us to make sustained efforts to reduce costs in order to realize revenue and
profits under our contracts. If we are not successful in reducing the amount of costs we incur, our profitability on our contracts will be negatively impacted. Any new contracting requirements or procurement methods could be costly or administratively difficult for us to implement and could adversely affect our future revenue, profitability and prospects.
Our business may be negatively impacted if we are unable to adequately protect depends upon obtaining and maintaining required facility security clearance and individual security clearances.
Many of our federal government contracts require our employees to maintain various levels of security clearances complying with U.S. government requirements. Obtaining and maintaining security clearances for employees involves a lengthy process and it can be difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances or if our employees who hold security clearances terminate employment with us, our ability to perform the work under the contract may be negatively affected, and the customer whose work requires cleared employees could terminate the contract or decide not to renew it upon its expiration. In addition, many of the contracts on which we bid require us to maintain a facility security clearance. To the extent we are not able to maintain a facility security clearance, we may not be able to bid on or win new contracts, or effectively re-bid on expiring contracts.
Our business may be negatively impacted if we are unable to adequately protect our intellectual property rights.
Our success is dependent, in part, on our ability to utilize technology to differentiate our services from our competitors. We rely on a combination of patents, confidentiality agreements and other contractual arrangements, as well as copyright, trademark, patent and trade secret laws, to protect our intellectual property rights and interests. However, these methods only provide a limited amount of protection and may not adequately protect our intellectual property rights and interests. Our employees, contractors and joint venture partners are subject to confidentiality obligations, but this protection may be inadequate to deter or prevent misappropriation of our confidential information and/or infringement of our intellectual property
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rights. Further, we may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to adequately protect, maintain or enforce our intellectual property rights may adversely limit our competitive position.
We cannot provide assurances that others will not independently develop technology substantially similar to our protected technology or that we can successfully preserve our intellectual property rights in the future. Our intellectual property rights could be invalidated, circumvented, challenged, misappropriated or infringed upon. Any infringement, misappropriation or related claims, whether meritorious or not, are time consuming, divert technical and management personnel, are expensive to resolve, and the outcome is unpredictable. As a result of any such dispute, we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease utilizing certain products or services or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us. If we are unable to prevail in the litigation or retain or obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely or cost-efficient basis, our business and operating results may be adversely affected.
In addition, our clients or other third parties may also provide us with their technology and intellectual property. There is a risk that we may not sufficiently protect our or their information from improper use or dissemination and, as a result, could be subject to claims and litigation and resulting liabilities, loss of contracts or other consequences that could have an adverse impact on our business, financial condition and results of operation.
We also hold licenses from third parties which may be utilized in our business operations. If we are no longer able to license such technology on commercially reasonable terms or otherwise, our business and financial performance could be adversely affected.
Government withholding regulations could adversely affect our operating performance.
A DFARS rule allows withholding of a percentage of payments when a contractor’s business system has one or more significant deficiencies. The DFARS rule applies to CAS-covered contracts that have the DFARS clause in the contract terms and conditions. Contracting officers may withhold 5% of contract payments for one or more significant deficiencies in any single contractor business system or up to 10% of contract payments for significant deficiencies in multiple contractor business systems. A significant deficiency as defined by the DoD is a “shortcoming in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes.” If we have significant deficiencies and contract payments are withheld, our revenue and financial position may be adversely affected.
RISKS RELATED TO GOVERNMENTAL OUR INDEBTEDNESS, FINANCIAL CONDITION AND MARKETS
As of December 31, 2021 2022, we had approximately $105 1,336.4 8 million of aggregate debt outstanding, which consists of a the term loan and a revolving credit facility (See Note 10, "Debt," First Lien Term Facility, the Second Lien Term Facility and the ABL Facility (See Note 10, Debt, in the Notes to the Consolidated Financial Statements included
The amount of cash required to pay interest on our increased indebtedness levels following completion of the Merger, and thus the demands on our cash resources, is expected to any outstanding letters be greater than the amount of credit. There were two letters of credit totaling $2.7 million at December 31, 2021. Our ability to make payments on and to refinance our indebtedness, as well as any future debt that cash flows required to service our indebtedness prior to the Merger. The increased levels of indebtedness following completion of the Merger could also reduce funds available for working capital, capital expenditures, acquisitions, the repayment or refinancing of our indebtedness as it becomes due and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we may incur, will depend on do not achieve the expected benefits and cost savings from the Merger, or if our financial performance does not meet current expectations, then our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to our performance and service our indebtedness may to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control be adversely impacted.
If we are not able to repay or refinance our debt as it becomes due, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt or equity on terms that may be onerous or highly dilutive, if we can obtain it at all. If we raise equity through the issuance of preferred stock, the terms of the preferred stock may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. We may not be able to engage in any Our ability to arrange additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. We cannot assure you that we will be able to obtain additional financing or refinancing on terms acceptable to us or at all.
The secured credit facilities include fallback language providing for a mechanism to convert to a new reference when the London Interbank Offered Rate (LIBOR) ceases to exist. In certain circumstances, such transition may also occur at the
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election of Vertex and the administrative agent under the respective credit facility. This could materially and adversely affect our results of operations, cash flows and liquidity. The methodology for calculating these reference rates differs in a number of these activities or engage in these activities on desirable terms, which could result respects from the methodology for calculating LIBOR, and they are not expected to be the economic equivalent of LIBOR. As a result of such differences in methodology, among other factors, it is possible that these rates will perform differently from LIBOR in future periods and may be more volatile. Additionally, there can be no assurance that the new reference rates will attain market acceptance as replacements of LIBOR. These interest rates will fluctuate with changing market conditions and, if they increase, our interest expense will also increase. The market transition away from LIBOR to alternative reference rates is complex and could have a range of material adverse effects on our business, financial condition and results of operations.
Our variable rate indebtedness may expose us to interest rate risks, which could cause in our a default on our debt obligations. debt costs to increase significantly.
Borrowing under the secured credit facilities are at variable rates of interest and will expose us to interest rate risk. As of December 31, 2022, we had approximately $1,336.8 million of aggregate debt outstanding under our secured credit facility. Given the current rising interest rate environment, if interest rates continue to increase, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed would remain the same, and our ability to generate cash from operations and other cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
We may in the future enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce future interest rate volatility of our variable rate indebtedness. However, due to risks for hedging gains and losses and cash settlement costs, we may not elect to maintain such interest rate swaps, and any swaps may not fully mitigate our interest rate risk.
Our credit agreement contains debt agreements contain covenants with which we must comply or risk default, or that impose restrictions on us and certain of our subsidiaries that may affect our ability to operate our businesses.
Unanticipated changes in our tax provisions or exposure to additional U.S. and foreign tax liabilities could affect our profitability.
We are subject to various taxes, including but not limited to income, gross receipts and payroll withholding taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision or benefit for taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in domestic or foreign tax laws and regulations, or their interpretation and enforcement, could result in higher or lower taxes assessed or changes in the taxability of certain revenue or the deductibility of certain expenses, thereby affecting our tax expense and profitability. See Note 13, “Income Taxes,” Income Taxes, in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information. In addition, we regularly are under audit by tax authorities. The final determination of tax audits and any related litigation could be materially different from our historical tax provisions and accruals. Additionally, changes in the geographic mix of our revenue, including certain additional foreign taxes resulting from the Merger, could also impact our tax liabilities and affect our overall tax expense and profitability.
The effects of changes in worldwide economic and capital markets conditions may significantly affect our ability to maintain liquidity or procure capital.
Our business may be adversely affected by factors in the U.S. and other countries that are beyond our control, such as disruptions in financial markets or downturns in economic activity in specific countries or regions, or in the various industries in which our company operates; social, political or labor conditions in specific countries or regions; geopolitical conflict or hostilities; or adverse changes in the availability and cost of capital, inflation, interest rates, foreign currency exchange rates, tax rates, or regulations in the jurisdictions in which our company operates. If we lose access to our revolving credit facility, or if we are required to raise additional capital, we may be unable to do so in the current credit and stock market environment, or we may be able to do so only on unfavorable terms.
Adverse changes to financial conditions also could jeopardize certain counterparty obligations, including those of our insurers and financial institutions and other third parties.
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We may not realize as revenue the full amounts reflected in our backlog, which could adversely affect our future revenue and growth.
As of December 31, 2021 2022, our total backlog was $5 12.0 3 billion, which included $1 2.0 6 billion in funded backlog. We may not realize the full amount of our backlog as revenue, particularly unfunded backlog and future services where the customer has an option to decline our continued services under a contract. In addition, there can be no assurance that our backlog will result in actual revenue in any particular period. Our receipt of revenue, and the timing and amount of revenue under contracts included in our backlog are subject to various contingencies, many of which are beyond our control, including congressional appropriations. In particular, delays in the completion of the U.S. government’s budgeting process and the use of continuing resolutions could adversely affect our ability to recognize revenue timely under the contracts included in our backlog. Furthermore, the actual receipt of revenue from contracts included in our backlog may never occur or may be delayed because:
•a program schedule could change, or the program could be canceled; a contract’s funding or scope could be reduced, modified, delayed, or terminated early, including as a result of a lack of appropriated funds or as a result of cost cutting initiatives and other efforts to reduce U.S. government spending or the automatic federal defense spending cuts required by sequestration;
•in the case of funded backlog, the period of performance for the contract has expired; or
•in the case of unfunded backlog, funding may not be available; or, in the case of priced options, our clients may not exercise their options.
Goodwill represents a significant portion of our assets and any impairment of these assets could negatively impact our results of operations.
At December 31, 2021 2022, our goodwill was approximately $321 1.7 million billion, which represented approximately 36 51.2% of our total assets. We test goodwill for impairment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. (For additional information on our goodwill impairment testing, see Note 1, " Description of Business and Summary of Significant Accounting Policies," Policies, in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K). Because of the significance of our goodwill, any future impairment of this asset could have a material adverse effect on our results of operations.
We meet the requirements to be a “controlled company” within the meaning of the rules of the NYSE and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance standards, which limit the presence of independent directors on its Board of Directors or Board committees.
Following the Merger, approximately 62.25% of the outstanding shares of the common stock of the Company is held by holders of the equity interests of Vertex, on a fully diluted basis, and approximately 37.75% is held by the holders of the common stock of Vectrus, on a fully diluted basis. Vertex Aerospace Holdco LLC, a Delaware limited liability company (Vertex Holdco), an affiliate of American Industrial Partners Capital Fund VI, L.P., a Delaware limited partnership and private equity fund affiliated with American Industrial Partners, owns approximately 62.25% of the fully diluted shares of the common stock of the Company.
As a result, we are a “controlled company” for purposes of Section 303A of the NYSE Listed Company Manual and are exempt from certain governance requirements otherwise required by the NYSE. Under Section 303A, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and is exempt from certain corporate governance requirements, including requirements that (1) a majority of the board of directors consist of independent directors, (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and (3) director nominees be selected or recommended for selection by a majority of the independent directors or by a nominating/corporate governance committee composed solely of independent directors. Following the consummation of the Merger, we continue to have an audit committee that is composed entirely of independent directors.
In addition, the procedures for approving significant corporate decisions could be determined by directors who have a direct or indirect interest in such decisions, and our shareholders will not have the same protections afforded to shareholders of other companies that are required to comply with the independence rules of the NYSE.
Our stock price may be volatile.
The market price of our common stock has been, and is likely to continue to be, highly volatile due to a number of factors, including the volatility of the stock market in general and uncertainty related to major contract awards, such as our LOGCAP V Award. The trading price of our stock varied from a low of $41 29.24 81 to a high of $59 48.87 04 in 2021 2022. Because of this volatility, investors in our stock may experience a decline in the value of their investment or may not be able to sell their common stock at or above the price paid for the shares.
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Any future offerings of debt securities, including debt or preferred stock, which would be senior to our common stock upon liquidation , or other equity securities may materially and adversely affect us or our shareholders, including the per share trading price of our common stock.
If our significant shareholders who received shares of our common stock in the Merger sell their shares, the price of our common stock could be materially affected.
If our significant shareholders who received shares of our common stock in connection with the Merger choose to sell a significant number of our shares, such sales could have a material impact on the market price for our common stock.
The restrictions on sales contained in the Shareholders Agreement, dated as of July 5, 2022, among the Company and certain of its shareholders (the Shareholders Agreement) have expired, and all of the shares of our common stock issued in connection with the completion of the Merger are available for resale in the public market, including pursuant to an effective registration statement that the Company filed for these shareholders. As of the date of this Form 10-K, approximately 60.1% of the outstanding shares of our common stock are held by the shareholders party to the Shareholders Agreement.
Such shareholders may decide not to hold the shares of our common stock they received upon completion of the Merger. In addition, certain of such shareholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of our common stock that they received upon completion of the Merger.
The impact on our stock price of sales of shares by such shareholders could be positive or negative, whether in the immediate term or in the future, and could be material. The effect and magnitude would depend on various factors, including market conditions, public float, trading volume and liquidity, shareholder composition and ownership, market perception, the number of shares sold and analyst coverage. In addition, future events and conditions could further increase the dilution from sales of these shares, including adverse changes in market conditions, additional transaction and integration related costs and other factors such as the failure to realize some or all of the benefits anticipated in the Merger. Any dilution of, or delay of any accretion to, our earnings per share could cause the price of shares of our common stock to decline or grow at a reduced rate. These sales may also make it more difficult for us to sell equity or equity-linked securities in the future at a time and at a price that we deem appropriate to raise funds through future offerings.
We do not currently plan to pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock in the future.
We do not currently plan to pay dividends on our common stock. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will be subject to our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and to the discretion of our Board of Directors. Our Board of Directors may consider 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. Further, pursuant to the Shareholders Agreement, for so long as the Former Vertex Stockholders (as defined in the Shareholders Agreement) collectively beneficially own 34% or more of the outstanding shares of the Company’s common stock, the Company will not, without the requisite consent of the Former Vertex Stockholders declare or pay any dividend or distribution (a) on a non-pro-rata basis or (b) in excess of $25.0 million in the aggregate during any fiscal year.
Additionally, our indebtedness could have important consequences for holders of our common stock. If we cannot generate sufficient cash flow from operations to meet our debt payment obligations, then our ability to pay dividends, if so determined by the Board of Directors, will be impaired. In addition, the terms of the agreements governing our current debt limit the payment of dividends and debt that we may incur in the future may also limit the payment of dividends.
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Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a change in control.
Certain provisions of our amended and restated articles of incorporation and our second amended and restated by-laws may delay or prevent a merger or acquisition that a shareholder may consider favorable. For example, the amended and restated articles of incorporation and the second amended and restated by-laws, among other things, provide for a classified board and , do not permit shareholders to convene special meetings or to remove our directors other than for cause, limit our shareholders' ability to fill vacancies on our Board of Directors and impose advance notice requirements for shareholder proposals and nominations of Directors to be considered at meetings of shareholders. In addition, the amended and restated articles of incorporation authorize our Board of Directors to issue one or more series of preferred stock without further action by our shareholders. These provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. Indiana law also imposes some restrictions on mergers and other business combinations between any beneficial holder of 10% or more of our outstanding common stock and us as well as certain restrictions on the voting rights of “control shares” of an “issuing public corporation.” .
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We have 205 343 locations in 28 45 countries and territories on five six continents. Our contract performance typically occurs on the government customer’s facility. Our material locations are the corporate headquarters office located at 7901 Jones Branch Drive, McLean, Virginia, an operations office located at 2424 Garden of the Gods Road, Colorado Springs, Colorado, and an operations office located at 7901 Jones Branch 555 Industrial Drive, McLean, Virginia Madison, Mississippi. These properties are used by our sole operating segment. Our McLean, Colorado Springs and McLean Madison offices are leased and have approximately 24,400, 65,000 and 24 164,400 000 square feet, respectively. The leases for our McLean, Colorado Springs and McLean Madison offices expire in 2032, 2028 and 2032 2030, respectively. We consider the properties that we lease to be in good condition and generally suitable for the purposes for which they are used.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in party to various investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings that including government investigations and claims, which are incidental to the operation of our business. Some of these proceedings seek remedies relating to employment matters, matters in connection with our contracts and matters arising under laws relating to the protection of the environment.
investigations relating to our operations, including claims for fines, penalties, and repayments, compensatory or treble damages. We believe the outcome of such ongoing government audits and investigations will not have a material impact on our results of operations, financial condition or cash flows. 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 or cash flows.
See Note 15, " Commitments and Contingencies" in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further information.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK – MARKET INFORMATION, HOLDERS AND DIVIDENDS
Our common stock is traded on the New York Stock Exchange ( NYSE) under the symbol “VEC VVX". Our common stock started trading on the NYSE in September 2014. As of February 25 28, 2022 2023, there were approximately 3,899 4,158 stockholders of record and 11.7 million 30.9 million outstanding shares of common stock.
To date, we have not declared or paid any dividends on our common stock. The declaration and payment of dividends by us are subject to the discretion of our Board of Directors and depend on many factors including our financial condition, earnings, capital requirements, covenants associated with our debt obligations, legal requirements, regulatory constraints and other factors deemed relevant by the Board of Directors. Therefore, there can be no assurance as to what level of dividends, if any, will be paid in the future. 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, debt levels and requirements, income tax consequences, applicable law and such other factors as our Board of Directors may deem relevant. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in this Annual Report on Form 10-K. For a discussion of restrictions on the payment of dividends under our credit agreement, see Note 10, "Debt" Debt, in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
EQUITY COMPENSATION PLAN INFORMATION
For a discussion of the securities authorized under our equity compensation plans, see Item 12 of this Annual Report on Form 10-K, which incorporates by reference the information to be disclosed in our definitive proxy statement for our 2022 2023 Annual Meeting of Shareholders.
RECENT SALES OF UNREGISTERED SECURITIES
None
ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any of our equity securities for the year ended December 31, 2021 2022.
STOCK PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total shareholder return of our common stock to the returns of the Russell 2000 Index and the S&P Aerospace & Defense Select Industry Index from December 31, 2014 through December 31, 2021 2022 with data points as of December 31 for the years shown. The graph is not, and is not intended to be, indicative of future performance of our common stock. This graph is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act) and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 as amended (Securities Act), or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The graph assumes that $100 had been invested in Vectrus V2X common stock, the Russell 2000 Index and the S&P Aerospace & Defense Select Industry Index on December 31, 2014 2017 and that all dividends were reinvested.
ITEM 6. SELECTED FINANCIAL DATA
Reserved
ITEM 7. 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 audited Consolidated Financial Statements and notes thereto in this Annual Report on Form 10-K as well as the discussion in Item 1 of this Annual Report on Form 10-K entitled "Business." This Annual Report provides additional information regarding the Company, our services, industry outlook and forward-looking statements that involve risks and uncertainties. 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. See "Forward-Looking Statement Information" for further information regarding forward-looking statements. Amounts presented in and throughout this Item 7 are rounded and, as such, rounding differences could occur in period over period changes and percentages reported.
Forward-Looking Statement Information
This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Exchange Act, and Section 27A of 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,”
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“expect,” “intend,” “estimate,” “anticipate,” “believe,” “could,” “potential,” “continue” or similar terminology. These statements are based on the beliefs and assumptions of our management 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.
The forward-looking statements included or incorporated by reference in this report are subject to additional risks and uncertainties further discussed under Item 1A. “Risk Factors” and are based on information available to us on the filing date of this report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us.
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; 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; our recent acquisitions of HHB and Zenetex and their integration into our business ; 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 and ; terms of our credit agreement; inflation and 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 and ; 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 Merger; risks and uncertainties relating to the Spin-off; changes in U.S. generally accepted accounting principles (GAAP); and other factors described in Item 1A, “Risk Factors,” and elsewhere in this report and described from time to time in our future reports filed with the SEC.
Overview
V2X, formerly known as Vectrus, is a leading provider of global service critical mission solutions primarily to the U.S. government worldwide. We operate defense clients globally. The Company operates as one segment and offer facility and base delivers a comprehensive suite of integrated solutions across the operations, supply chain and logistics services, information , aerospace, training and technology mission support, markets to national security, defense, civilian and engineering and digital integration services. international clients.
Our primary customer is the U.S. Department of Defense, with a high concentration in the U.S. Army . For the years ended December 31, 2021 2022, 2020 2021 and 2019 2020, we had total revenue of $1 2.8 9 billion, $1.4 8 billion and $1.4 billion, respectively, substantially all of which was derived from U.S. government customers. For the years ended December 31, 2021 2022, 2020 2021 and 2019 2020, we generated approximately 64 46%, 69 64% and 69%, respectively, of our total revenue from the U.S. Army.
Executive Summary
Our revenue increased by $388 1,107.1 2 million, or 27 62.8 1%, for the year ended December 31, 2021 2022 compared to the year ended December 31, 2020. The increase in revenue 2021. Revenue increased $908.4 million due to the Merger and the remaining increase was attributable mainly to increases from our U.S. programs of $250.0 million (which includes $254.4 million from our 2020 acquisitions of Zenetex and HHB), our from organic growth for legacy programs. Revenue from our U.S, Asia, Europe and Middle East programs of $98.7 million and our Asia programs of $52 increased by $916.0 million, partially offset by a $105.7 million, $12 61.6 7 million, decrease in our Middle East programs and $23.8 million, respectively.
Operating income for the year ended December 31, 2021 2022 was $62 55.0 8 million, an increase a decrease of $18 6.5 2 million or 42 10.7 1%, compared to the year ended December 31, 2020 2021. This increase decrease was primarily due to increases amortization of $7.5 million from our Asia programs, $5.2 million from our Europe programs, $5.0 million from our U.S. programs, and $0.8 million from our Middle East programs intangible assets, and acquisition-related costs associated with the Merger.
During the performance of our long-term 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 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 adjustments, which recognize in the current period the cumulative effect of the changes on current and prior periods based on a contract's
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percentage of completion. Cumulative 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.
We recorded an income tax expense of $8.3 2 million and $1 8.7 3 million for the years ended December 31, 2021 2022 and 2020 2021, respectively, which represent effective income tax rates of 15 (134.4 6)% and 15.4.5 %, respectively. See Note 13, “Income Taxes,” Income Taxes, in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further information.
Further details related to our financial performance for the year ended December 31, 2021 2022, compared to the year ended December 31, 2020 2021, are contained in the Discussion of Financial Results section. Details related to our financial performance for the year ended December 31, 2020 2021, compared to the year ended December 31, 2019 2020 may be found are included in the Discussion of Financial Results section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 2021, electronically filed with the SEC on EDGAR on March 2, 2021 7, 2022.
Merger with Vertex
For a discussion of our Merger and related debt and stock-based compensation obligations, see Note 3, Merger and Acquisitions, Note 10, Debt and Note 16, Stock Based Compensation, in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
COVID-19 Impact
The extent of the ultimate impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our programs in the expected timeframe, will depend on future developments, including any potential subsequent waves or variants of COVID-19 infection , the effectiveness, distribution and acceptance of COVID-19 vaccines, the ultimate impact on financial markets and the global economy, new government regulations for defense contractors (including vaccination mandates) and other related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which remain uncertain and cannot be predicted.
For the twelve months years ended December 31, 2022 and 2021, the impact of COVID-19 was immaterial to our financial results. For the twelve months year ended December 31, 2020, it is estimated that COVID-19 caused a $63.1 million reduction in our revenue and a $0.39 reduction in our diluted earnings per share. This impact was primarily due to certain government actions to restrict access to certain bases by Vectrus personnel and delays in supplier deliveries.
Significant Contracts
The following table reflects contracts that accounted for more than 10% of our total revenue for one or more of the years ended December 31, 2021 2022, 2020 2021 and 2019 2020:
| % of Total Revenue | ||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| Contract Name | 2022 | 2021 | 2020 | |||||||||||||||||
| LOGCAP V - Kuwait Task Order | 16.4% | 11.8% | —% | |||||||||||||||||
| LOGCAP V - Iraq Task Order | 9.8% | 11.7% | —% | |||||||||||||||||
| OMDAC-SWACA | 4.2% | 7.8% | 14.2% | |||||||||||||||||
| K-BOSSS | 0.7% | 15.8% | 34.1% | |||||||||||||||||
Revenue associated with a contract will fluctuate based on increases or decreases in the work being performed on the contract, award fee payments, and other contract modifications within the term of the contract resulting in changes to the total contract value.
U.S. government contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year (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 by the U.S. government. The right to exercise an option period is at the sole discretion of the U.S. government. 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.
The LOGCAP V - Kuwait Task Order is currently exercised through June 30, 2022 2023, with four three additional twelve-month options and one six-month option through December 31, 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 Kuwait region. The LOGCAP V - Kuwait Task Order contributed $211 472.9 million and $210.8 million of revenue for the year years ended December 31, 2021, and no revenue for the year ended December 31, 2020 31, 2022 and 2021, respectively.
The LOGCAP V - Iraq Task Order is currently exercised through June 21, 2022 2023, with four three 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 $282.5 million and $209.0 million of revenue for the year years ended December 31, 2021, and no revenue for the year ended December 31, 2020 31, 2022 and 2021, respectively.
On December 29, 2020, the U.S. Army announced that Vectrus Systems Corporation (VSC), our wholly-owned subsidiary was awarded an $859.7 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 took place on January 11, 2022 and a decision is expected by the end of the first quarter of 2022. The On August 15, 2022, the COFC dismissed the protest with prejudice. The estimated completion date of this contract is December 26, 2025. The OMDAC-SWACA contract contributed $140 122.7 million and $198 139.5 million of revenue for the years ended December 31, 2021 and 2020 2022 and 2021, respectively.
The K-BOSSS contract currently is exercised through August 28, 2023. 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 $18.9 million and $282.2 million of revenue for the years ended December 31, 2022 and 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 U.S. Court of Federal Claims 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 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) 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 of 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 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.
Total backlog decreased increased by $0 7.1 3 billion in the year ended December 31, 2021 2022 primarily due to the Merger. As of December 31, 2021 2022, total backlog (funded and unfunded) was $5 12.0 3 billion as set forth in the following table:
| As of December 31, | ||||||||||||||
| (In millions) | 2022 | 2021 | ||||||||||||
| Funded backlog | $ | 2,567 | $ | 1,033 | ||||||||||
| Unfunded backlog | 9,695 | 3,972 | ||||||||||||
| Total backlog | $ | 12,262 | $ | 5,005 | ||||||||||
Funded orders (different from funded backlog) represent orders for which funding was received during the period. We received funded orders of $1 2.8 6 billion during the year ended December 31, 2021 2022, which was an increase of $27 771.7 3 million compared to the year ended December 31, 2020.
2021.
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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 V2X and other firms in this 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. 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. 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 aerospace, training and technology, should help our clients increase efficiency, reduce costs, improve readiness, and strengthen national security and, as a result, continue to allow for long-term profitable growth in our business. Further, the DoD budget remains the largest in the world and management believes 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 May 28 December 29, 2021, the Administration submitted FY 2022 budget, which requests $753 billion for total national defense spending including $715 billion for the DoD, representing a 1.6% increase above the FY 2021 enacted amounts for 2022, the FY 2023 Omnibus Appropriations Act both total national defense and the DoD. On December 27, 2021, was signed into law by the President signed , providing $817 billion to the FY 2022 National Defense Authorization Act (NDAA), which authorizes approximately $25 Department. This reflects a $44 billion more than the original FY 2022 budget request. increase over the President’s FY 2023 budget request. The Fiscal 2024 budget request is expected to be submitted by the President in March 2023.
While it is difficult 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 predict the specific course of future defense funding levels and priorities budgets, we believe many of the Administration and Congress, which could adversely impact demand for our services.
However, business conditions have become more challenging due to macroeconomic conditions, including inflation and rising interest rates. Given the current pace of inflation and other geopolitical factors, we are monitoring the impact of rising costs on our active and future contracts. To date, we have not experienced broad-based increases due to inflation in the costs of our fixed-price and time and materials contracts that are material to the business as a whole; however, if we begin to experience greater than expected inflation in our supply chain and labor costs, our profit margins, and in particular, our profit margin from fixed-price and time and materials contracts, which represent a substantial portion of our contracts, could be adversely affected. See Item 1A, "Risk Factors".
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022, which includes, among other provisions, changes to the U.S. corporate income tax system. While we do not currently anticipate any impact on our business, we are continuing to evaluate the Inflation Reduction Act of 2022 and its requirements, as well as any potential impact on our business in future.
The information provided above does not represent a complete list of trends and 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, 2021 2022 and the matters identified under the caption “Forward-Looking Statement Information" herein.
DISCUSSION OF FINANCIAL RESULTS
Year ended December 31, 2021 2022, compared to Year ended December 31, 2020 2021
Selected financial highlights are presented in the table below:
| Year Ended December 31, | Change | |||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||
| Revenue | $ | 2,890,860 | $ | 1,783,665 | $ | 1,107,195 | 62.1 | % | ||||||||||||||||||
| Cost of revenue | 2,595,848 | 1,623,245 | 972,603 | 59.9 | % | |||||||||||||||||||||
| % of revenue | 89.8 | % | 91.0 | % | ||||||||||||||||||||||
| Selling, general and administrative expenses | 239,241 | 98,400 | 140,841 | 143.1 | % | |||||||||||||||||||||
| % of revenue | 8.3 | % | 5.5 | % | ||||||||||||||||||||||
| Operating income | 55,771 | 62,020 | (6,249) | (10.1) | % | |||||||||||||||||||||
| Operating margin | 1.9 | % | 3.5 | % | ||||||||||||||||||||||
| Interest expense, net | (61,879) | (7,985) | (53,894) | 674.9 | % | |||||||||||||||||||||
| (Loss) income before taxes | (6,108) | 54,035 | (60,143) | (111.3) | % | |||||||||||||||||||||
| % of revenue | (0.2) | % | 3.0 | % | ||||||||||||||||||||||
| Income tax expense | 8,222 | 8,307 | (85) | (1.0) | % | |||||||||||||||||||||
| Effective income tax rate | (134.6) | % | 15.4 | % | ||||||||||||||||||||||
| Net (loss) income | $ | (14,330) | $ | 45,728 | $ | (60,058) | (131.3) | % | ||||||||||||||||||
Revenue
Our revenue increased by $388 1,107.1 2 million, or 27 62.8 1%, for the year ended December 31, 2021 2022 compared to the year ended December 31, 2020. The increase in revenue 2021. Revenue increased $908.4 million due to the Merger and the remaining increase was attributable mainly to increases from our U.S. programs of $250.0 million (which includes $254.4 million from our 2020 acquisitions of Zenetex and HHB), from organic growth for legacy programs. Revenue from our U.S, Asia, Europe and Middle East programs of $98.7 million and Asia programs of $52 increased by $916.0 million, partially offset by a decrease from our Europe programs of $12 $105.7 million, $61.6 7 million, and $23.8 million, respectively.
Cost of Revenue
Selling, General & Administrative (SG&A) Expenses
Operating Income
2021. Operating income as a percentage of revenue was 1.9% for the year ended December 31, 2022, compared to 3.5% for the year ended December 31, 2021, compared to 3.1% . The decrease in operating income was primarily due to amortization of intangible assets and acquisition-related costs associated with the Merger.
Aggregate cumulative adjustments increased operating income by $13.3 million for the year ended December 31, 2020. The increase was due to improved operating performance and the higher volume of revenue as described above.
Interest (Expense) Income, Net
Interest (expense) income, net for the years ended December 31, 2021 2022 and 2020 2021 was as follows:
| Year Ended December 31, | Change | |||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||
| Interest income | $ | 165 | $ | 161 | $ | 4 | 2.5 | % | ||||||||||||||||||
| Interest expense | (62,044) | (8,146) | (53,898) | (661.6) | % | |||||||||||||||||||||
Interest expense, net | $ | (61,879) | $ | (7,985) | $ | (53,894) | (674.9) | % | ||||||||||||||||||
Interest income is directly related to interest earned on our cash. Interest expense is directly related to borrowings under our senior secured credit facilities, the amortization of debt issuance costs, and derivative instruments used to hedge a portion of our exposure to interest rate risk. The increase in interest expense of $3 53.2 9 million for the year ended December 31, 2021 2022 compared to the year ended December 31, 2020 2021 was due primarily to increased use of our revolving credit facility in 2021 to finance short-term working capital requirements and the acquisitions of Zenetex and HHB debt assumed with the Merger.
Income Tax Expense
We recorded income tax expense of $8.3 2 million and $1 8.7 3 million for the years ended December 31, 2021 2022 and 2020 2021, respectively, which represented effective income tax expense rates of 15 (134.4 6)% and 15.4.5 %, for the respective years. The increase in the effective income tax rate for the year ended December 31, 2021 2022 compared to the year ended December 31, 2020 2021 was due to the year ended December 31, 2020 release of the increased non-deductible compensation, non-deductible transaction costs, foreign tax expenses, and state income tax expense which were partially offset by the release of prior year uncertain tax position balance of $7.1 million relating to the and current year Foreign Derived Intangible Income (FDII) Deduction for the years 2018 through 2020 .
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Historically, we have generated operating cash flow 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 the issuance of equity and/or debt securities as appropriate given market conditions. Our future cash needs are expected to include cash for operating activities, working capital requirements , capital expenditures, strategic investments, and periodic principal and interest payments on our debt.
If our cash flows from operations are less than 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 or absence of a credit rating, (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.
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 and global supply chain, which, depending on future developments, could impact our capital resources and liquidity in the future.
In conjunction with the January 2022 amendment.) Merger, V2X assumed first and is collectively referred to as the Amended Agreement. The Amended Agreement consists of a term loan (Amended Term Loan) second lien debt of $1,182.7 million and a $270 185.0 million revolving credit facility (Amended Revolver) as of December 31, 2021.
The Amendment Agreement includes an accordion feature that allows the Company to draw up Company recognized $39.9 million of M&A-related costs that were expensed as incurred during 2022. These costs increased cash outlays for Merger related payments by $45.8 million during the year.
The cash presented on to an additional $100 our Consolidated Balance Sheets consists of U.S. and international cash from wholly-owned subsidiaries. Approximately $25.0 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 5 million of our total $116.0 1 million in unsecured debt as long as the aggregated sum of both the unsecured debt unrestricted cash as of December 31, 2022 is held by our foreign subsidiaries and the accordion does is not exceed $100.0 million. available to fund U.S. operations unless repatriated. We do not currently expect that we will
On February 28, 2023, Vertex Aerospace Services Corp. (the “Borrower”), an indirect, wholly owned subsidiary of the Company, entered into a credit agreement (the “Credit Agreement”) among the lenders identified therein and Bank of America, N.A., as administrative agent, collateral agent, swingline lender and letter of credit issuer. The Credit Agreement provides for $750 million in senior secured financing, with a first lien on substantially all the Borrower’s assets, consisting of a $500 million five-year Revolving Credit Facility and if declared, the a five-year $250 million Term Loan. The proceeds of these Credit Facilities were used to, among other things, (i) repay a portion of the First Lien Credit Agreement, (ii) repay the entire outstanding amount of any the such dividends, will depend upon our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and Second Lien Credit Agreement, and (iii) repay 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 entire outstanding ABL Credit Facility.
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 75 68 and 66 75 as of December 31, 2021 2022 and 2020 2021, respectively.
The following table sets forth net cash provided by (used in) provided by operating activities, investing and financing activities.
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Operating activities | $ | 93,495 | $ | 61,339 | $ | 64,081 | ||||||||||||||
| Investing activities | 175,958 | (12,643) | (138,025) | |||||||||||||||||
| Financing activities | (193,236) | (75,585) | 105,774 | |||||||||||||||||
| Foreign exchange | 1,337 | (3,325) | 1,579 | |||||||||||||||||
| Net change in cash | $ | 77,554 | $ | (30,214) | $ | 33,409 | ||||||||||||||
Trends in our operating cash flows tend to follow trends in operating income, excluding non-cash charges and tax law changes such as the CARES Act. Net cash provided by operating activities was down slightly increased for the year ended December 31, 2021 2022, as compared to the year ended December 31, 2020, due primarily to the $13 2021, due primarily to the Merger.
Net cash provided by operating activities for the year ended December 31, 2022 consisted of cash inflows from non-cash income items of $100.2 6 million benefit of the CARES Act deferral in 2020 and a decrease in net working capital requirements of $47.7 million, partially offset by a net loss of $14.3 million and cash outflows for other non-current assets and liabilities of $40.5 million.
Net cash provided by operating activities for the year ended December 31, 2021, consisted of net income of $45.7 million, and non-cash items of $25.9 million and a favorable net changes decrease in net working capital requirements of $3.1 million, partially offset by net changes in cash outflows deferred taxes of $7.3 million and other non-current liabilities assets and non-current assets liabilities of approximately $6.1 million.
Net cash provided by operating activities for the year ended December 31, 2020, consisted of net income of $37.0 million and non-cash items of $17.9 million, favorable net changes in net working capital of $5.8 million, and favorable changes in other long-term assets of approximately $3.4 million. Tax Deferrals related to the CARES Act contributed $13.2 million to our cash flows from operating activities.
Net cash used in investing activities for the year ended December 31, 2021 consisted of $9.8 million of net capital expenditures for the purchase of computer hardware and software, intangible assets, and equipment and $3.1 million for a joint venture contribution. These outflows were partially offset by inflows from a $0.3 million business acquisition purchase price adjustment. Net cash used in investing
Net cash used in financing activities for during the year ended December 31, 2020, 2022 consisted of $133.6 repayments of long-term debt of $108.4 million, payment of debt issuance costs of $2.3 million and payments of $2.0 million for the acquisition of Zenetex and HHB and $4.4 million of net capital expenditures for employee withholding taxes on share-based compensation. During 2022, we also borrowed and repaid $392.0 million and $472.9 million, respectively, on the Amended Revolver. These cash outflows were partially offset by $0.4 million received from the purchase exercise of computer hardware and software, intangible assets, and equipment stock options.
Net cash used by in financing activities during the year ended December 31, 2021, consisted of net repayments on the Amended Revolver of $65.0 million, long-term debt payments of $8.6 million, and payments of $2.4 million for employee million, long-term debt payments of $8.6 million, and payments of $2.4 million for employee
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withholding taxes on share-based compensation. This was partially offset by $0.4 million received from the exercise of stock options.
Capital Resources
Contractual Obligations
Our commitments to make future payments under long-term contractual obligations were as follows, as of December 31, 2021 2022:
| Payments Due in Period | ||||||||||||||||||||||||||||||||
| (In thousands) | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | |||||||||||||||||||||||||||
| Operating leases | $ | 65,603 | $ | 19,588 | $ | 22,313 | $ | 12,437 | $ | 11,265 | ||||||||||||||||||||||
| Principal payments on Vertex First Lien Credit Agreements¹ | 1,176,763 | 11,850 | 23,700 | 23,700 | 1,117,513 | |||||||||||||||||||||||||||
| Principal payments on Vertex Second Lien Credit Agreement¹ | 160,000 | — | — | — | 160,000 | |||||||||||||||||||||||||||
| Interest on Vertex First and Second Lien Credit Agreements | 688,689 | 115,603 | 228,636 | 222,872 | 121,578 | |||||||||||||||||||||||||||
| Total | $ | 2,091,055 | $ | 147,041 | $ | 274,649 | $ | 259,009 | $ | 1,410,356 | ||||||||||||||||||||||
| ¹ Includes unused funds fee and is based on the December 31, 2022 interest rate and outstanding Credit Agreement balance | ||||||||||||||||||||||||||||||||
CRITICAL ACCOUNTING ESTIMATES
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.
Significant accounting policies used in the preparation of the Consolidated Financial Statements are discussed in Note 1, " Description of Business and Summary of Significant Accounting Policies," , in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. We believe that the assumptions and estimates associated with revenue recognition, business combinations, goodwill impairment assessments , intangible assets and income taxes have the greatest potential impact on our financial statements because they are inherently uncertain, involve significant judgments, and include areas where different estimates reasonably could materially impact the financial statements. These We discuss below significant critical accounting policies are discussed in this section . 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.
Revenue Recognition
We account for revenue following the guidance in Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606). As a defense contractor engaging in long-term contracts, substantially all of our revenue is derived from long-term service contracts. The unit of account for revenue in ASC Topic 606 is a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. To determine the proper revenue recognition method, consideration is given as to whether a single contract should be accounted for as more than one performance obligation. For most of our contracts, the customer contracts with us to perform an integrated set of tasks and deliverables as a single service solution, whereby each service is not separately identifiable from other promises in the contract and therefore is not distinct. As a result, when this an integrated set of tasks exists, the contract is accounted for as one performance obligation. Unexercised contract options and IDIQ contracts are considered to be separate performance obligations when the option or IDIQ task order is exercised or awarded. Our performance obligations are satisfied over time as services are provided throughout the contract term. We recognize revenue
over time using the input method (e.g., costs incurred to date relative to total estimated costs at completion) to measure
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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.
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. When the estimates of total costs to be incurred on a contract exceed total estimates of the transaction price total revenue to be earned on the contract, a provision for the entire loss is determined at the contract level and recognized in the period in which the loss was determined.
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 the availability and timing of funding from the customer.
The nature of our contracts gives rise to several types of variable consideration, including award and incentive fees, inspection of supplies and services, undefinitized change orders, and fluctuation in allowable indirect reimbursable costs. We include award or incentive fees in the estimated transaction price when there is certainty and a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. The inspection of supplies and services is a factor because the U.S. government can reduce the transaction price if we do not perform the services in compliance with contract requirements. Variable consideration associated with undefinitized change orders is included to the extent that related estimated costs have been included in the expected costs to complete a contract. The fluctuation of allowable indirect reimbursable costs is a factor because the U.S. government has the right to review our accounting records and retroactively adjust the reimbursable rate. Any prior adjustments are reflected in the U.S. government reserve amounts recorded in our financial statements. We estimate variable consideration at the most likely amount that we expect to be entitled to receive. Refer to Note 15, " Commitments and Contingencies" , in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding U.S. government reserve amounts.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract estimates regularly. We recognize adjustments in estimated profit on executed contracts cumulatively. The impact of the adjustments on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
Contracts are often modified to account for changes in contract specifications and requirements. If the modification either creates new enforceable rights and obligations or changes the existing enforceable rights and obligations, the modification will be treated as a separate contract. Our contract modifications, except for those to exercise option years, have historically not been distinct from the existing contract and have been accounted for as if they were part of that existing contract.
The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. These advance billings and payments are not considered significant financing components because they are frequently intended to fund current operating expenses under the contract. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.
See Note 1, " Description of Business and Summary of Significant Accounting Policies" and Note 4, “Revenue” , and Note 4, Revenue, in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion.
Business Combinations, Goodwill and Other Intangible Assets
The purchase price of an acquired business is allocated to the tangible assets, financial assets and separately recognized intangible assets acquired less liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires significant judgment, which includes, among other factors, analysis of historical performance and estimates of future performance. These factors may cause final amounts to differ materially from original estimates. In some cases, we use discounted cash flow analyses, which are based on our best estimate of future revenue, earnings and cash flows as well as our discount rate adjusted for risk.
Goodwill is not amortized, but instead is tested for impairment annually (or more frequently if impairment indicators arise, such as changes to the reporting unit structure or significant adverse changes in the business climate). We conduct our annual impairment testing as of the beginning of the fourth fiscal quarter. In reviewing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If
we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we then perform a
42
quantitative impairment test as described below. Otherwise, no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
For the quantitative impairment test we compare the estimated fair value of a reporting unit to its carrying value, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of the reporting unit, including goodwill, exceeds its estimated fair value, a goodwill impairment loss is recognized in an amount equal to that excess limited to the total amount of goodwill allocated to that reporting unit while taking into consideration the related income tax effect from any tax-deductible goodwill.
For 2021 2022 and 2020 2021, we used the qualitative approach to assess goodwill for impairment. No impairment charges related to goodwill were recorded during 2021 2022 and 2020 2021.
We recognize acquired intangible assets apart from goodwill whenever the intangible assets arise from contractual or other legal rights, or whenever they can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their estimated useful lives unless the estimated useful life is determined to be indefinite. Amortizable intangible assets are being amortized over useful lives of four to eight years. The straight-line method of amortization is used as it has been determined to approximate the use pattern of the assets.
Income Taxes
We determine the provision or benefit for income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse. Based on the evaluation of available evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that we believe it is more likely than not we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes to our estimate of the amount we are more likely than not to realize in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive income (loss), as appropriate.
Our effective tax rate reflects the impact of certain undistributed foreign earnings for which we have not recognized U.S. taxes because we plan to reinvest such earnings indefinitely outside the U.S. We plan foreign earnings remittance amounts based on projected cash flow needs, as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Based on these assumptions, we estimate the amount we will distribute to the U.S. and recognize the U.S. federal taxes due only on these amounts. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact our actual remittance amounts and, accordingly, our effective tax rate.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Furthermore, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
We adjust our liability for unrecognized tax benefits in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional tax expense would result. If a payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary to be provided.
New Accounting Standards Updates
See Part II, Item 8, Note 2, " Recent Accounting Standards Updates" , in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding accounting standards updates.
ITEM 7A. 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 as of December 31, 2021 2022.
Interest Rate Risk
Each one percentage point change associated with the variable rate Amended Term Loan Vertex First Lien Credit Agreement and Vertex Second Lien Credit Agreement would result in a $0 $13.1 million 4 million change in our related annual cash interest expenses, net of the interest rate swaps in place as of December 31, 2021, to hedge a portion of this risk. .
43
Assuming our Amended Revolver ABL Facility was fully drawn to a principal amount equal to $ 270 million to $200.0 million, each one percentage point change in interest rates would result in a $2.7 $2.0 million change in our annual cash interest expense.
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. As of December 31, 2021, the U.S. dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $0.5 million . The net fair value of these contracts at December 31, 2021 was a liability of less than $0.1 million .
For additional information on our interest rate and foreign currency hedge contracts, refer to Note 11, “ Derivative Instruments,” in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and the 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 December 31, 2021 2022. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 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.
Changes in Internal Control over Financial Reporting
Other than the items discussed above, there were no changes in our ICFR that occurred during the quarter year ended December 31, 2021 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting ICFR.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting ICFR, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal
Based on this evaluation, management concluded that our internal control over financial reporting ICFR was effective as of December 31, 2021 2022. Management reviewed the results of its assessment with our Audit Committee.
44
The effectiveness of the Company’s internal control over financial reporting ICFR as of December 31, 2021 2022 was audited by Deloitte & Touche RSM US LLP, an independent registered public accounting firm, as stated in their report included herein.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there may be resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
To the shareholders Shareholders and the Board of Directors of Vectrus V2X, Inc.
Opinion on the Internal Control over Over Financial Reporting
We have audited V2X, Inc.'s (the Company) internal control over financial reporting of Vectrus, Inc. and subsidiaries (the “Company”) as of December 31, 2021 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021 of the Company and our report dated March 7, 2022, expressed an unqualified opinion on those financial statements. balance sheet of the Company as of December 31, 2022, the related consolidated statements of (loss) income, comprehensive (loss) income, changes in shareholders’ equity and cash flows for the year ended December 31, 2022, and the related notes to the consolidated financial statements of the Company and our report dated March 2, 2023, expressed an unqualified opinion.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Vertex Aerospace Services Holding Corp. from its assessment of internal control over financial reporting as of December 31, 2022, because it was acquired by the Company in a purchase business combination in the third quarter of 2022. We have also excluded Vertex Aerospace Services Holding Corp. from our audit of internal control over financial reporting. Vertex Aerospace Services Holding Corp. is a wholly owned subsidiary whose total assets, excluding goodwill and intangible assets, and revenues represent approximately 45.1% and 31.4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and . Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Over Financial Reporting
A company’ 's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’ 's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’ 's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche RSM US LLP
March 7 2, 2022 2023
ITEM 9B. OTHER INFORMATION
NoneThe foregoing summary of the Amended Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Plan, attached hereto as Exhibit 10.27 and incorporated herein by reference .
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by Item 10 is incorporated herein by reference to the definitive proxy statement for the Company’s 2022 2023 Annual Meeting of Shareholders (the 2023 Proxy Statement) to be filed within 120 days after the Company's fiscal year ended December 31, 2021 2022 pursuant to Regulation 14A of the Exchange Act, except that the information called for by Item 10 with respect to executive officers is set forth in Part I, Item 1, "Business" in this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to the definitive proxy statement referred to in Item 10. 2023 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by Item 12 is incorporated herein by reference to the definitive proxy statement referred to in Item 10. 2023 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information called for by Item 13 is incorporated herein by reference to the definitive proxy statement referred to in Item 10 2023 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 regarding our principal accountant, Deloitte & Touche LLP (PCAOB ID No. 34 ), is incorporated herein by reference to the definitive proxy statement referred to in Item 10. is incorporated herein by reference to the 2023 Proxy Statement.
PART IV
ITEM 15. EXHIBITS EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)Documents filed as a part of this report:
1.See Index to Consolidated Financial Statements appearing on page F-1 for a list of the financial statements filed as a part of this report.
2.Exhibits
| 101 | The following materials from V2X, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, formatted in Inline Extensible Business Reporting Language ("Inline XBRL"): (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements.# | ||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) # | ||||
* Indicates management contract or compensatory plan or arrangement.
+ Indicates this document is filed as an exhibit herewith.
# Submitted electronically with this report.
The Company’s Commission File Number for Reports on Form 10-K, Form 10-Q and Form 8-K is 001-36341.
(b)Financial Statement Schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements filed as part of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
| Page No. | ||||||||
Report of Independent Registered Public Accounting Firm (PCAOB: ID | F-2 | |||||||
Report of Independent Registered Public Accounting Firm (PCAOB: ID | F-4 | |||||||
| Consolidated Statements of (Loss) Income | F-5 | |||||||
| Consolidated Statements of Comprehensive (Loss) Income | F-6 | |||||||
| Consolidated Balance Sheets | F-7 | |||||||
| Consolidated Statements of Cash Flows | F-8 | |||||||
| Consolidated Statements of Shareholders' Equity | F-9 | |||||||
| Note 1. Description of Business and Summary of Significant Accounting Policies | F-10 | |||||||
| Note 2. Recent Accounting Standards Updates | F-15 | |||||||
| Note 3. Merger and Acquisitions | F-15 | |||||||
| Note 4. Revenue | F-18 | |||||||
| Note 5. Receivables | F-20 | |||||||
| Note 6. (Loss) Earnings Per Share | F-21 | |||||||
| Note 7. Property, Plant and Equipment, Net | F-21 | |||||||
| Note 8. Goodwill and Intangible Assets | F-21 | |||||||
| Note 9. Composition of Certain Financial Statement Captions | F-22 | |||||||
| Note 10. Debt | F-23 | |||||||
| Note 11. Derivative Instruments | F-27 | |||||||
| Note 12. Leases | F-27 | |||||||
| Note 13. Income Taxes | F-28 | |||||||
| Note 14. Post-Employment Benefit Plans | F-31 | |||||||
| Note 15. Commitments and Contingencies | F-32 | |||||||
| Note 16. Stock-Based Compensation | F-33 | |||||||
| Note 17. Shareholders' Equity | F-35 | |||||||
| Note 18. Subsequent Events | F-36 | |||||||
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of V2X, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of V2X, Inc. and subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of (loss) income, comprehensive (loss) income, shareholders’ equity and cash flows, for the year then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 2, 2023 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
As described in Notes 1, 4 and 5 of the consolidated financial statements, the Company recognizes revenue derived from contracts over time. For the year ended December 31, 2022, revenue was $2,890.9 million. Accounting for contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For contracts, management estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit over the life of the contract. Contract estimates are based on assumptions to project the outcome of future events. These assumptions include labor productivity and availability, the complexity of the services being performed, the cost and availability of materials, the performance of subcontractors, and negotiations with the customer on contract modifications.
We have identified the assessment of the total estimated costs to complete a contract in order to accurately recognize the associated revenue on contracts in process as a critical audit matter because of the significant assumptions management makes in determining the costs and revenues related to the performance obligations. Auditing management’s judgments related to Company’s contracts involves a high degree of auditor judgment and increased audit effort due to the volume and complexity of contracts and the assumptions related to total revenue and costs.
Our audit procedures related to management’s estimates of total revenue and costs for the performance obligations used to recognize revenue included the following, among others:
•We obtained an understanding of the relevant controls related to revenue recognition and costs and tested such controls for design and operating effectiveness, including management’s controls over the estimation of total contract costs to be incurred to complete uncompleted contracts.
F-2
•We selected a sample of contracts and performed the following for each contract:
◦Evaluated whether the contract was properly included in management’s calculation based on the terms and conditions, including whether the customers simultaneously receive and consume the benefits of the Company’s services.
◦Evaluated the Company’s identification of performance obligations by evaluating whether the services to be performed under the contract were capable of being distinct or an integrated set of tasks and deliverables as a single solution.
◦Compared the transaction prices to the consideration expected to be received under the contract, including all executed contract modifications that were agreed upon with the customers.
◦Evaluated the estimates of total revenue and costs for the performance obligations as follows:
▪Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation.
▪Evaluated performance obligations and the associated estimate of profitability at completion as prepared by management and compared it to the recorded cost and revenue.
▪Evaluated management’s ability to estimate total costs and revenue accurately by comparing actual costs and profits to management’s historical estimates for performance obligations that have been fulfilled.
▪Evaluated performance obligation results occurring after the measurement period and, when applicable, understood changes to the estimate and impacts on the measurement period.
•We performed analytical procedures over contract margins by comparing the current year results to prior results and to post-close results.
Fair Value Estimation of Certain Customer-Related and Contractual Intangible Assets Acquired in Business Combination
As described in the Note 3 to the consolidated financial statements, on July 5, 2022, Vectrus, Inc. merged with Vertex Aerospace Services Corp forming V2X for total consideration of $634.0 million. The Company conducted valuations of certain intangible assets as of the date of acquisition, including customer-related and contractual intangible assets of $480 million. The Company used an income approach in its valuation of intangible assets, which is a method of using discounted cash flows. The model requires management to make significant assumptions, which include revenue growth rates and the selection of an appropriate discount rate.
We identified the fair value determination of certain customer-related and contractual intangible assets as a critical audit matter due to the high degree of auditor judgment and subjectivity in applying audit procedures relating to the fair value measurement of the intangible assets acquired. Increased audit effort was required in performing procedures and evaluating the significant assumptions relating to the estimate, including the use of valuation specialists.
Our audit procedures related to management’s estimates for the fair value of customer-related intangible assets acquired in business combination included the following, among others:
•We obtained an understanding of the relevant controls related to the valuation of customer-related and contractual intangible assets and tested design and operating effectiveness, including management’s controls for identifying the intangible assets, determining forecasts of future cash flows and selecting the discount rate.
•We tested the completeness and accuracy of the underlying data used in the fair value models which included inspecting contractual documents and comparing projected cash flows to both historical actual results and industry data.
•With the assistance of our valuation specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation.
•We performed sensitivity analyses over assumptions used in the fair value calculations, to evaluate the risk associated with a change in assumptions to the recorded fair value of the customer-related intangible assets.
•We evaluated the adequacy of the Company’s financial statement disclosures related to the acquisition.
/s/ RSM US LLP
We have served as the Company's auditor since 2022.
March 2, 2023
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Vectrus V2X, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of V2X, Inc. (formerly Vectrus, Inc.) and subsidiaries (the "Company") as of December 31, 2021 and 2020 , the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three two years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020 and the results of its operations and its cash flows for each of the three two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
March 7, 2022
We have served began serving as the Company' ’s auditor since 2013.
in 2013. In 2022 we became the predecessor auditor.
F-4
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands, except per share data) | 2022 | 2021 | 2020 | |||||||||||||||||
| Revenue | $ | $ | $ | |||||||||||||||||
| Cost of revenue | ||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||
| Operating income | ||||||||||||||||||||
| Interest expense, net | ( | ( | ( | |||||||||||||||||
| (Loss) income from operations before income taxes | ( | |||||||||||||||||||
| Income tax expense | ||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ||||||||||||||||
| (Loss) earnings per share | ||||||||||||||||||||
| Basic | $ | ( | $ | $ | ||||||||||||||||
| Diluted | $ | ( | $ | $ | ||||||||||||||||
| Weighted average common shares outstanding – basic | ||||||||||||||||||||
| Weighted average common shares outstanding – diluted | ||||||||||||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ||||||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||||||
| Changes in derivative instrument: | ||||||||||||||||||||
| Net change in fair value of interest rate swaps | ( | |||||||||||||||||||
| Net change in fair value of foreign currency forwards | ( | |||||||||||||||||||
| Tax benefit | ||||||||||||||||||||
| Net change in derivative instrument | ( | |||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | |||||||||||||||||||
| Total comprehensive (loss) income | $ | ( | $ | $ | ||||||||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-6
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||||||||
| (In thousands, except per share data) | 2022 | 2021 | ||||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Receivables | ||||||||||||||
| Prepaid expenses | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant, and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Right-of-use assets | ||||||||||||||
| Other non-current assets | ||||||||||||||
| Total non-current assets | ||||||||||||||
| Total Assets | $ | $ | ||||||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Compensation and other employee benefits | ||||||||||||||
| Short-term debt | ||||||||||||||
| Other accrued liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, net | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Other non-current liabilities | ||||||||||||||
| Total non-current liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 15) | ||||||||||||||
| Shareholders' Equity | ||||||||||||||
Preferred stock; $ | ||||||||||||||
Common stock; $ | ||||||||||||||
| Additional paid in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total shareholders' equity | ||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Operating activities | ||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ||||||||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation expense | ||||||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||||||
| Loss (gain) on disposal of property, plant, and equipment | ( | |||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Amortization of debt issuance costs | ||||||||||||||||||||
| Gain on disposition of business | ( | |||||||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||||||
| Receivables | ( | ( | ||||||||||||||||||
| Prepaid expenses | ( | ( | ( | |||||||||||||||||
| Other assets | ( | ( | ||||||||||||||||||
| Accounts payable | ( | |||||||||||||||||||
| Deferred taxes | ( | ( | ( | |||||||||||||||||
| Compensation and other employee benefits | ||||||||||||||||||||
| Other liabilities | ( | ( | ||||||||||||||||||
| Net cash provided by operating activities | ||||||||||||||||||||
| Investing activities | ||||||||||||||||||||
| Purchases of capital assets and intangibles | ( | ( | ( | |||||||||||||||||
| Proceeds from the disposition of assets | ||||||||||||||||||||
| Acquisition of business, net of cash acquired | ( | |||||||||||||||||||
| Disposition of business | ( | |||||||||||||||||||
| Distributions from (contributions to) joint venture | ( | |||||||||||||||||||
| Net cash provided by (used in) investing activities | ( | ( | ||||||||||||||||||
| Financing activities | ||||||||||||||||||||
| Repayments of long-term debt | ( | ( | ( | |||||||||||||||||
| Proceeds from revolver | ||||||||||||||||||||
| Repayments of revolver | ( | ( | ( | |||||||||||||||||
| Proceeds from exercise of stock options | ||||||||||||||||||||
| Payment of debt issuance costs | ( | ( | ( | |||||||||||||||||
| Payments of employee withholding taxes on share-based compensation | ( | ( | ( | |||||||||||||||||
| Net cash (used in) provided by financing activities | ( | ( | ||||||||||||||||||
| Exchange rate effect on cash | ( | |||||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | ( | |||||||||||||||||||
| Cash, cash equivalents and restricted cash – beginning of year | ||||||||||||||||||||
| Cash, cash equivalents and restricted cash – end of year | $ | $ | $ | |||||||||||||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||||||||||||||
| Interest paid | $ | $ | $ | |||||||||||||||||
| Income taxes paid | $ | $ | $ | |||||||||||||||||
| Non-cash investing activities: | ||||||||||||||||||||
| Purchase of capital assets on account | $ | $ | $ | |||||||||||||||||
| Common stock issued for business acquisition | $ | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-8
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| Common Stock Issued | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||
| (In thousands) | Shares | Amount | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedge | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Employee stock awards and stock options | — | — | ||||||||||||||||||||||||||||||||||||
| Conversion of liability-based stock compensation awards to equity-based stock compensation awards | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Taxes withheld on stock compensation awards | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Unrealized loss on cash flow hedge | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Employee stock awards and stock options | — | — | ||||||||||||||||||||||||||||||||||||
| Taxes withheld on stock compensation awards | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Unrealized loss on cash flow hedge | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Employee stock awards and stock options | — | — | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with a business combination | — | — | ||||||||||||||||||||||||||||||||||||
| Taxes withheld on stock compensation awards | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
Our Business
V2X, Inc., an Indiana Corporation, formerly known as Vectrus, Inc. (Vectrus), is a leading provider of global service critical mission solutions and support to the U.S. government worldwide defense clients globally. The Company operates as one segment and provides the following services and offerings: facility and base delivers a comprehensive suite of integrated solutions across the operations, supply chain and logistics services, information , aerospace, training and technology mission support, markets to national security, defense, civilian and engineering and digital integration services international clients.
On March 7, 2022, Vectrus entered into an Agreement and Plan of Merger (the Merger Agreement) with Vertex Aerospace Services Holding Corp., a Delaware corporation (Vertex), Andor Merger Sub Inc., a Delaware corporation and Andor Merger Sub LLC, a Delaware limited liability company. On July 5, 2022 (the Closing Date), Vectrus completed its merger (Merger) thereby forming V2X, Inc. For a description of the Merger, see Note 3, Merger and Acquisitions.
Unless the context otherwise requires or unless stated otherwise, references in these notes to "V2X", "we," "us," "our," “combined company”, "the Company" and "our Company" refer to V2X, Inc. and all of its consolidated subsidiaries (including, subsequent to the Merger, Vertex and its consolidated subsidiaries), taken together as a whole.
Equity Investment
In 2011, we entered into a joint venture agreement with Shaw Environmental & Infrastructure, Inc., which is now APTIM Federal Services LLC. Pursuant to the joint venture agreement, High Desert Support Services, LLC (HDSS) was established to pursue and perform work on the Ft. Irwin Installation Support Services Contract, which was awarded to HDSS in October 2012. In 2018, we entered into a joint venture agreement with J&J Maintenance. Pursuant to the joint venture agreement, J&J Facilities Support, LLC (J&J) was established to pursue and perform work on various U.S. government contracts. In 2020, we entered into a joint venture agreement with Kuwait Resources House for Human Resources Management and Services Company (KRH). Pursuant to the joint venture agreement, ServCore Resources and Services Solutions, LLC. (ServCore) was established to operate and manage labor and life support services outside of the continental United States at designated locations serviced by Vectrus V2X and others around the world.
We account for our investments in HDSS, J&J and ServCore under the equity method as we have the ability to exercise significant influence, but do not hold a controlling interest. We record our proportionate 40 2550 % and 40 % shares, respectively, of income or losses from HDSS, J&J and ServCore in selling, general and administrative expenses in the Consolidated Statements of Income. Our investment in these joint ventures is recorded in other non-current assets in the Consolidated Balance Sheets.
When we receive cash distributions from our equity method investments, the cash distribution is compared to cumulative earnings and cumulative cash distributions. Cash distributions received are recorded as a return on investment in operating cash flows within the Consolidated Statements of Cash Flows to the extent cumulative cash distributions are less than cumulative earnings. Any cash distributions in excess of cumulative earnings are recorded as a return of investment in investing cash flows within the Consolidated Statements of Cash Flows. As of December 31, 2021 2022 and December 31, 2020 2021, our combined investment balance in these joint ventures was $5 7.4 01 5.42.8 million, $1.9 million, and $0.6 million, and $ 1.0 million for the years ended December 31 million for the years ended December 31, 2022, 2021, 2020, and 2019, respectively.
F-10
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, revenue recognition, ; income taxes, ; fair value and impairment of goodwill and intangible assets and ; valuation of assets and certain contingent liabilities. Actual results could differ from these estimates.
Revenue Recognition
As a defense contractor engaging in long-term contracts, substantially all of our revenue is derived from long-term service contracts. The unit of account for revenue in Accounting Standards Codification (ASC) ASC Topic 606, Revenue from Contracts with Customers (Topic 606) is a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. To determine the proper revenue recognition method, consideration is given as to whether a single contract should be accounted for as more than one performance obligation. For most of our contracts, the customer contracts with us to perform an integrated set of tasks and deliverables as a single service solution, whereby each service is not separately identifiable from other promises in the contract and therefore is not distinct. As a result, when this integrated set of tasks exists, the contract is accounted for as one performance obligation. The vast majority of our contracts have a single performance obligation. Unexercised contract options and indefinite delivery and indefinite quantity (IDIQ) IDIQ contracts are considered to be separate performance obligations when the option or IDIQ task order is exercised or awarded. Our performance obligations are satisfied over time as services are provided throughout the contract term. We recognize revenue over time using the input method (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Our over time recognition is reinforced by the fact that our customers simultaneously receive and consume the benefits of our services as they are performed. For most U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. This continuous transfer of control requires that we track progress towards completion of performance obligations in order to measure and recognize revenue.
Accounting for contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include labor productivity and availability; the complexity of the services being performed; the cost and availability of materials; the performance of subcontractors; and negotiations with the customer on contract modifications. When the estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at a contract level and is recognized in the period in which the loss was determined.
The nature of our contracts gives rise to several types of variable consideration, including award and incentive fees, inspection of supplies and services, undefinitized change orders, and fluctuation in allowable indirect reimbursable costs. We include award or incentive fees in the estimated transaction price when there is certainty and a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. The inspection of supplies and services is a factor because the U.S. government can reduce the transaction price if we do not perform the services in compliance with contract requirements. Variable consideration associated with undefinitized change orders is included to the extent related estimated costs have been included in the expected costs to complete a contract. The fluctuation of allowable indirect reimbursable costs is a factor because the U.S. government has the right to review our accounting records and retroactively adjust the reimbursable rate. Any prior adjustments are reflected in the U.S. government reserve amounts recorded in our financial statements. We estimate variable consideration at the most likely amount that we expect to be entitled to receive, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. Refer to Note 15, "
F-11
the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. Refer to Note 15, Commitments and Contingencies" , for additional information regarding U.S. government reserve amounts.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract estimates regularly. We recognize adjustments in estimated profit on executed contracts cumulatively. The impact of the adjustments on profit recorded to date is recognized in the period the adjustment is identified. Revenue and
profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
Contracts are often modified to account for changes in contract specifications and requirements. If the modification either creates new enforceable rights and obligations or changes the existing enforceable rights and obligations, the modification will be treated as a separate contract. Our contract modifications, except for those to exercise option years, have historically not been distinct from the existing contract and have been accounted for as if they were part of that existing contract.
The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. These advance billings and payments are not considered significant financing components because they are frequently intended to fund current operating expenses under the contract. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.
(Loss) Earnings Per Share
We compute (loss) earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods.
Property, Plant and Equipment, Net
Property, plant and equipment, net are stated at cost less accumulated depreciation. Major improvements are capitalized at cost while expenditures for maintenance, repairs and minor improvements are expensed. For asset sales or retirements, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in operating income.
F-12
Depreciation and amortization are generally computed using either an accelerated or straight-line method and is based on estimated useful lives or lease terms as follows:
| Years | ||||||||
| Buildings and improvements | ||||||||
| Machinery, equipment and vehicles | ||||||||
| Office furniture and equipment, computers and software | ||||||||
Long-Lived Asset Impairment
Long-lived assets are tested for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable. We assess the recoverability of long-lived assets based on the undiscounted future cash flow the assets are expected to generate. When carrying value exceeds the undiscounted future cash flow, an impairment is recorded when the carrying value of the asset exceeds its estimated fair value based on a discounted cash flow approach or, when available and appropriate, comparable market values.
Goodwill
Goodwill represents purchase consideration paid in a business combination that exceeds the fair values assigned to the net assets of acquired businesses. Goodwill is not amortized, but instead is tested for impairment annually (or more frequently if impairment indicators arise, such as changes to the reporting unit structure or significant adverse changes in the business climate). We conduct our annual impairment testing on the first day of the Company's fourth fiscal quarter. In reviewing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we then perform a quantitative impairment test as described below. Otherwise, no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
Leases
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Because most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate as of January 1, 2019 was applied to operating leases in effect as of that date. The lease ROU assets also include any prepaid lease payments and exclude lease incentives. Many of our leases include one one or more options to renew or terminate the lease, solely at our discretion. Such options are factored into the lease term when it is reasonably certain that we will exercise the option. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.
As allowed under ASC Topic 842, the Company elected the package of practical expedients permitted under the transition guidance which allowed the Company to carry forward the historical lease classification, assessment of whether a contract was or contained a lease and assessment of initial direct costs. In addition, we have made policy elections to apply the short-term leases practical expedient, whereby leases with a term of 12 months or less are not recorded on our balance
F-13
Commitments and Contingencies
We record accruals for commitments and loss contingencies when they are probable of occurrence and the amounts can be reasonably estimated. In addition, legal fees are accrued for cases where a loss is probable and the related fees can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount of loss. We review these accruals quarterly and adjust the accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information.
Derivative Instruments
Derivative instruments are recognized as either an asset or liability at fair value in our Consolidated Balance Sheets and are classified as current or long-term based on the scheduled maturity of the instrument. Our derivative instruments have been formally designated and qualify as part of a cash flow hedging relationship under applicable accounting standards.
The interest rate derivative instruments are adjusted to fair value through accumulated other comprehensive income (loss). If we were to determine that a derivative was no longer highly effective as a hedge, we would discontinue the hedge accounting prospectively. Gains or losses would be immediately reclassified from accumulated other comprehensive income (loss) to earnings relating to hedged forecasted transactions that are no longer probable of occurring. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions would still be probable of occurring would be deferred and recognized consistent with the income or loss recognition of the underlying hedged item.
F-14
NOTE 2
RECENT ACCOUNTING STANDARDS UPDATES
Accounting Standards Updates Issued but Not Yet Adopted
There were no accounting standards issued during 2021 2022 that are expected to have a material impact on the Company's financial statements.
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. Early adoption is to be applied to all business combinations that occur during the fiscal year that the amendment is adopted. We adopted this standard in the third quarter of 2022 and applied the guidance to our Merger.
NOTE 3
In accordance with ASC Topic 805, Business Combinations, we accounted for the below transactions using the acquisition method. We conducted valuations of certain acquired assets and liabilities for inclusion in our Consolidated Balance Sheets as of the date of the acquisitions. Assets that normally would not be recorded in ordinary operations, such as intangibles related to contractual relationships, were recorded at their estimated fair values. The excess purchase price over the estimated fair value of the net assets acquired was recorded as goodwill.
MERGER
On July 5, 2022, the Closing Date, Vectrus completed its previously announced Merger with Vertex, forming V2X by acquiring all of the outstanding shares of Vertex. On the Closing Date, Vertex and its consolidated subsidiaries became wholly-owned subsidiaries of the Company.
The combined V2X entity from the Merger is a larger and more diversified Company with the ability to compete for more integrated business opportunities and generate revenue across geographies, clients, and contract types in supporting the mission of our customers.
The operating results of Vertex subsequent to the Closing Date are included in the Company's consolidated results of operations. Vertex and its consolidated subsidiaries recognized revenue of $908.4 million and net loss of $39.9 million for the period from the Closing Date until December 31, 2022.
The Company recognized $39.9 million of acquisition-related costs that were expensed as incurred during the year ended December 31, 2022. These costs are included in selling, general and administrative expenses in the Consolidated Statements of Income.
Purchase Price Allocation
The Merger is accounted for as a business combination. As such, the assets acquired and liabilities assumed are accounted for at fair value, with the excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed recorded as goodwill.
F-15
The Closing Date fair value of the consideration transferred totaled $634.0 million, which was comprised of the following:
| ($ in thousands, except share and per share amounts) | Purchase Price | |||||||
| Shares of V2X common stock issued | ||||||||
| Market price per share of V2X as of Closing Date | $ | |||||||
| Fair value of common shares issued | $ | |||||||
| Fair value of cash consideration | ||||||||
| Total consideration transferred | $ | |||||||
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the Merger as of the Closing Date. The estimated fair value of Vertex’s assets acquired and liabilities assumed at the acquisition date are determined based on preliminary valuations and analyses. As of December 31, 2022, we considered these amounts to be preliminary because we are still in the process of gathering and reviewing information to support the valuations of certain contractual and operational factors underlying the customer related intangible assets, details surrounding tax matters and assumptions underlying certain existing or potential reserves, such as those for workers compensation and loss and below market contracts which are included in current and non-current liabilities below. The final determination could result in material adjustments.
| (In thousands) | Preliminary Fair Value | |||||||
| Cash and cash equivalents | $ | |||||||
| Receivables | ||||||||
| Prepaid expenses | ||||||||
| Property, plant, and equipment | ||||||||
| Intangible assets | ||||||||
| Other non-current assets | ||||||||
| Right-of-use assets | ||||||||
| Accounts payable | ( | |||||||
| Debt | ( | |||||||
| Compensation and other employee benefits | ( | |||||||
| Other current and non-current liabilities | ( | |||||||
| Total identifiable net assets | ( | |||||||
| Goodwill | ||||||||
| Total purchase consideration | $ | |||||||
As a result of the Merger, the Company recognized $1,332.1 million of goodwill. The goodwill recognized is attributable to operational and general and administrative cost synergies, expanded market opportunities and other benefits that do not qualify for separate recognition. None of the goodwill is expected to be deductible for tax purposes. In addition, we recognized two intangible assets related to backlog and customer contracts arising from the Merger. The fair value of backlog was $316.0 million, and the fair value of the customer contracts was $164.0 million with amortization periods of 4.5 years and 14.0 years, respectively. The receivables of $334.7 million represent fair value and are considered fully collectible as of December 31, 2022.
As part of the Merger, V2X acquired certain contracts, including a Transition Services Agreement (TSA) with Crestview Aerospace LLC (Crestview), which was previously divested to American Industrial Partners Capital Fund VI, L.P. (AIP). As of December 31, 2022, the Company recorded $2.3 million of income related to the TSA with Crestview, which was recorded as a reduction in cost of sales. AIP currently holds approximately 60.1 % of V2X common stock.
The following unaudited pro forma information shows the combined results of our operations for the years ended December 31, 2022 and 2021 as if the Merger had occurred on January 1, 2021. The unaudited pro forma information reflects the effects of applying our accounting policies and certain pro forma adjustments to the combined historical financial information of Vertex. The pro forma adjustments include: a) incremental amortization expense associated with identified intangible assets; b) incremental interest expense resulting from fair value adjustments applied to the Vertex debt that we
F-16
assumed; and c) a reduction of revenues and operating expenses associated with fair value adjustments made to acquire assets and assumed liabilities, such as contract cost assets and contract liabilities.
This unaudited pro forma information is presented for informational purposes only and may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations.
| Year Ended December 31, | ||||||||||||||
| (Unaudited, in thousands) | 2022 | 2021 | ||||||||||||
| Pro forma revenue | $ | $ | ||||||||||||
| Pro forma net (loss) income | $ | ( | $ | |||||||||||
Zenetex
On December 31, 2020, we acquired Zenetex, a leading provider of technical and strategic solutions focused on enabling mission readiness, performance, and enhancement of protection for defense and national security clients globally.
The total net consideration paid for the acquisition was approximately $117.6 million, consisting of the purchase price of $122.8 million, net of cash acquired, less $5.2 million for a working capital shortfall compared with the working capital requirement agreed upon in the stock purchase agreement. The acquisition was funded by utilizing available capacity from our Amended Revolver (as defined in Note 10, “Debt”) and cash on hand.
Debt) and cash on hand.
| (In thousands) | Allocation of Purchase Price | |||||||
| Receivables | $ | |||||||
| Deferred taxes | ||||||||
| Other current assets | ||||||||
| Property, plant and equipment | ||||||||
| Goodwill | ||||||||
| Intangible assets | ||||||||
| Right-of-use assets | ||||||||
| Accounts payable | ( | |||||||
| Other current liabilities | ( | |||||||
| Accrued compensation | ( | |||||||
| Lease liabilities | ( | |||||||
| Other non-current liabilities | ( | |||||||
| Purchase price, net of cash acquired | $ | |||||||
We finalized our determination of the fair values of the assets acquired and liabilities assumed during the fourth quarter of 2021. Based on additional information obtained during the measurement period, we refined our initial assessment of fair value and recognized the following significant adjustments to our preliminary purchase price allocation: Intangible assets increased $ 23.9 million, Other current liabilities increased $ 14.2 million, Accounts payable decreased $ 3.1 million, and Goodwill decreased $ 13.4 million.
The Company recognized customer related intangible assets arising from the acquisition. The related fair value was $57.1 million with an amortization period of 11.8 years. Fair value of intangible assets was based upon a cash flow analysis using management's best estimate of future revenue, earnings and cash flows, as well as analysis of historic performance of Zenetex. The cash flow analysis were was discounted to adjust for risks in these estimates.
Additionally, the Company recognized goodwill of $53.5 million arising from the acquisition, which relates primarily to acquired product and services strengthening our position as a leading fully-integrated provider in the converged infrastructure
market, as well as extending our operations and maintenance services to increase content and scope at client installations. Goodwill also includes other intangibles that do not qualify for separate recognition. The goodwill recognized for the Zenetex acquisition is fully deductible for income tax purposes.
Zenetex results of operations have been included in our Consolidated Statements of Income for the periods subsequent to acquisition on December 31, 2020. On a proforma basis, the acquired business would have recognized revenue of $238.0 million and $ 208.8 million for the years for the year ended December 31, 2020 and December 31, 2019, respectively , and an insignificant amount of income before taxes after proforma adjustments.
F-17
HHB
On December 31, 2020, we acquired Higgins, Hermansen, Banikas, LLC (HHB). HHB is HHB, a leading provider of high-end solutions for facilities management, logistics, engineering, enterprise operations and asset management solutions for supporting intelligence community projects. The total net consideration paid for the acquisition was approximately $15.5 million. The acquisition was funded by utilizing available capacity from our Amended Revolver and cash on hand.
We finalized our determination of the fair values of the assets acquired and liabilities assumed during the fourth quarter of 2021. Based on additional information obtained during the measurement period, we refined our initial assessment of fair value and recognized the following significant adjustments to our preliminary purchase price allocation: Intangible assets increased $ 4.6 million and Goodwill decreased $ 4.5 million.
The Company recognized a customer related intangible assets arising from the acquisition. The fair value was $8.6 million with an amortization period of 7.4 years. Fair value of the intangible assets was based upon a cash flow analysis using management's best estimate of future revenue, earnings and cash flows, as well as analysis of historic performance of HHB. The cash flow analysis were was discounted to adjust for risks in these estimates.
Additionally, the Company recognized goodwill of $6.1 million arising from the acquisition, which relates primarily to growth opportunities in the intelligence community as a converged infrastructure provider. Goodwill also includes other intangibles that do not qualify for separate recognition. The goodwill recognized for the HHB acquisition is fully deductible for income tax purposes.
The remainder of the purchase price was allocated primarily to working capital.
NOTE 4
REVENUE
Remaining Performance Obligations
Remaining performance obligations represent firm orders by the customer and excludes potential orders under IDIQ contracts, unexercised contract options and contracts awarded to us that are being protested by competitors with the U.S. Government Accountability Office (GAO) GAO or in the U.S. Court of Federal Claims COFC. The level of order activity related to programs can be affected by the timing of government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others.
Remaining performance obligations increased by $ 404.6 million to $ 1,398 million as of December 31, 2021 as compared to $ 993 million as of December 31, 2020. as of December 31, 2022 and December 31, 2021 are presented in the following table:
| Year Ended December 31, | ||||||||||||||
| (In millions) | 2022 | 2021 | ||||||||||||
| Performance Obligations | $ | $ | ||||||||||||
We expect to recognize approximately 77 722021 2022 as revenue in 2022. Remaining performance obligations as of December 31, 2021 and December 31, 2020 are presented in the following table:
Contract Estimates
The impact of adjustments in contract estimates on our operating income can be reflected in either revenue or cost of revenue. Cumulative adjustments for the years ended December year ended December 31, 2022 were favorable by $13.3 million, and for the years ended December 31, 2021 and 2020 were unfavorable by $1.3 million and $3.7 million, respectively, and for the year ended December 31, 2019 were favorable by $ 3.1 million .
For the years ended December 31, 2021, 2020, 2022 and 2019, the net adjustments to operating income increased revenue by 2021, the net adjustments to operating income increased revenue by $7.5 million and $0.4 million, million, respectively. For the year ended December 31, 2020, the net adjustments to operating income decreased revenue by $1.8 million and increased revenue by $ 4.4 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 , time-and-materials and firm-fixed-price contracts on a single
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contract. On a cost-plus contract, we are paid our allowable incurred costs plus a profit, which can be fixed or variable depending on the contract’s fee arrangement, up to funding levels predetermined by our customers. On cost-plus type
On cost-plus contracts, we do not bear the risks of unexpected cost overruns, provided that we do not incur costs that exceed the predetermined funded amounts. Most of our cost-plus contracts also contain a firm-fixed-price element. Cost-plus type contracts with award and incentive fee provisions are our primary variable contract fee arrangement. Award fees provide for a fee based on actual performance relative to contractually specified performance criteria. Incentive fees provide for a fee based on the relationship between total allowable and target cost.
On most of our contracts, a cost-reimbursable element captures consumable materials required for the program. Typically, these costs do not bear fees.
On a time-and-materials contract, we are reimbursed for labor at fixed hourly rates and generally reimbursed separately for allowable materials, costs and expenses at cost. For this contract type, we bear the risk that our labor costs and allocable indirect expenses are greater than the fixed hourly rate defined within the contract.
The following tables present our revenue disaggregated by different categories. Revenue by contract type for the years 2021 2022, 2020 2021 and 2019 2020 are as follows:
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Cost-plus and cost-reimbursable | $ | $ | $ | |||||||||||||||||
| Firm-fixed-price | ||||||||||||||||||||
| Time-and-materials | ||||||||||||||||||||
| Total revenue | $ | $ | $ | |||||||||||||||||
Revenue by geographic region in which the contract is performed for the years 2021 2022, 2020 2021 and 2019 2020 are as follows:
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| United States | $ | $ | $ | |||||||||||||||||
| Middle East | ||||||||||||||||||||
| Europe | ||||||||||||||||||||
| Asia | ||||||||||||||||||||
| Total revenue | $ | $ | $ | |||||||||||||||||
Revenue by contract relationship for the years 2021 2022, 2020 2021 and 2019 2020 are as follows:
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Prime contractor | $ | $ | $ | |||||||||||||||||
| Subcontractor | ||||||||||||||||||||
| Total revenue | $ | $ | $ | |||||||||||||||||
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Revenue by customer for the years 2021 2022, 2020 2021 and 2019 2020 are as follows:
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Army | $ | $ | $ | |||||||||||||||||
| Navy | ||||||||||||||||||||
| Air Force | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total revenue | $ | $ | $ | |||||||||||||||||
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. These advance billings and payments are not considered significant financing components because they are frequently intended to ensure that both
parties are in conformance with the primary contract terms. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.
NOTE 5
RECEIVABLES
Receivables were comprised of the following:
| December 31, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Billed receivables | $ | $ | ||||||||||||
| Unbilled receivables (contract assets) | ||||||||||||||
| Other | ||||||||||||||
| Total Receivables | $ | $ | ||||||||||||
As of December 31, 2021 2022 and 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 December 31, 2021 2022 contract assets during 2022 2023. Changes in the balance of receivables are primarily due to the timing differences between our performance and customer payments.
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NOTE 6
(LOSS) EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects potential dilution that could occur if securities to issue common stock were exercised or converted into common stock. Diluted EPS includes the dilutive effect of share-based compensation outstanding after application of the treasury stock method.
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands, except per share data) | 2022 | 2021 | 2020 | |||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||||||
| Add: Dilutive impact of stock options | ||||||||||||||||||||
| Add: Dilutive impact of restricted stock units | ||||||||||||||||||||
| Diluted weighted average common shares outstanding | ||||||||||||||||||||
| (Loss) earnings per share | ||||||||||||||||||||
| Basic | $ | ( | $ | $ | ||||||||||||||||
| Diluted | $ | ( | $ | $ | ||||||||||||||||
The following table below summarizes the weighted average of anti-dilutive securities excluded from the diluted earnings per share calculation.
| Year Ended December 31, | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Anti-dilutive restricted stock units | ||||||||||||||||||||
NOTE 7
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following at December 31:
| (In thousands) | 2022 | 2021 | ||||||||||||
| Buildings and improvements | $ | $ | ||||||||||||
| Machinery, equipment and vehicles | ||||||||||||||
| Office furniture and equipment, computers and software | ||||||||||||||
| Property, plant and equipment, gross | ||||||||||||||
| Less: accumulated depreciation and amortization | ( | ( | ||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
Depreciation expense of property, plant and equipment was $6.5 million, 13.5 million, $6.5 million and $4.1 million and $ 3.4 million in 2021, 2020, in 2022, 2021, and 2019 2020, respectively.
NOTE 8
GOODWILL AND INTANGIBLE ASSETS
The Company tests goodwill for impairment on the first day of the Company's fourth fiscal quarter each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual qualitative assessment tests performed in the three years ended December 31, 2021 resulted in 2022 indicated there was no of goodwill.
.F-21
The change in the net carrying amount of goodwill for 2020 2021 and 2021 2022 is as follows (in thousands):
| Balance at December 31, 2020 | $ | ||||
| Adjustments to preliminary purchase price allocation of Zenetex | ( | ||||
| Adjustments to preliminary purchase price allocation of HHB | ( | ||||
| Balance at December 31, 2021 | $ | ||||
| Acquisition of Vertex | |||||
| Balance at December 31, 2022 | $ | ||||
Other identifiable intangible assets consist of the following:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||
| Contract backlogs and recompetes | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Customer contracts | ( | ( | ||||||||||||||||||||||||||||||||||||
| Trade names and other | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
Intangible amortization expense was approximately $10 48.0 64 10.0 million for years ended 2021 2022 and 2020 2021, respectively. As of December 31, 2021 2022, the weighted-average intangible asset amortization period was 9 7.5 6
The estimated amortization expense for intangible assets for the next five years is as follows (in thousands):
| Period | Amortization | ||||||||||
| 2023 | $ | ||||||||||
| 2024 | $ | ||||||||||
| 2025 | $ | ||||||||||
| 2026 | $ | ||||||||||
| 2027 | $ | ||||||||||
| After 2027 | $ | ||||||||||
NOTE 9
COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
The following tables present financial information underlying certain balance sheet captions.
Compensation and other employee benefits
Compensation and other employee benefits are affected by short-term fluctuations in the timing of payments and were comprised of the following at December 31:
| (In thousands) | 2022 | 2021 | ||||||||||||
| Accrued salaries and wages | $ | $ | ||||||||||||
| Accrued bonus | ||||||||||||||
| Accrued employee benefits | ||||||||||||||
| Total | $ | $ | ||||||||||||
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Other accrued liabilities
Other accrued liabilities were comprised of the following at December 31:
| (In thousands) | 2022 | 2021 | ||||||||||||
| Contract related reserves | $ | $ | ||||||||||||
| Current operating lease liabilities | ||||||||||||||
| Accrued non-payroll taxes | ||||||||||||||
| Workers' compensation, auto and general liability reserve | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
Other non-current liabilities
Other non-current liabilities were comprised of the following at December 31:
| (In thousands) | 2022 | 2021 | ||||||||||||
| Long-term contract-related reserves | $ | $ | ||||||||||||
| Income taxes payable | ||||||||||||||
| CARES Act payroll tax deferral | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
NOTE 10
DEBT
Senior Secured Credit Facilities
Term Loan and Revolver. In September 2014, we and our wholly -owned subsidiary, VSC, entered into a credit agreement. The credit agreement was subsequently amended on December 24, 2020 and January 24, 2022 (see Note 18 Subsequent Events) and is collectively referred to as the Amended Prior Credit Agreement. The credit agreement consists consisted of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver) as of December 31, 2021. .
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Vertex First Lien Credit Agreement
The Vertex First Lien Credit Agreement provides for senior secured first lien term loans in an aggregate principal amount of $1,185.0 million, consisting of a $925.0 million term loan “B” tranche, (the First Lien Initial Term Tranche) and a $260.0 million incremental term loan “B” tranche (the First Lien Incremental Term Tranche and, together with the First Lien Initial Term Tranche, collectively, the First Lien Term Facility). The entire amount of the proceeds from the (i) First Lien Initial Term Tranche were previously used to finance the acquisition of certain subsidiaries of Raytheon Company, a Delaware corporation, and related transaction costs (the Sky Acquisition in December 2021). As provided in the Merger Agreement, the proceeds of the First Lien Incremental Term Tranche were used by the Vertex Borrower to redeem all of the shares of previously issued preferred stock on the Closing Date (but prior to the Merger). The remaining First Lien Incremental Term Tranche proceeds were used to repay in full all outstanding indebtedness under the Prior Credit Agreement at December 31, 2021 was 2.11 % . We pay a commitment fee on , and other transaction costs. Approximately $54.0 million of cash remained after funding the undrawn portion preferred stock redemption, repayment of the Amended Revolver ranging from Prior Credit Agreement and other transaction costs. The loans under the First Lien Term Facility will be payable in full on December 6, 2028.
The First Lien Term Facility amortizes in an amount equal to approximately $3.0 million per quarter for the fiscal quarters ending September 30, 2022, through September 30, 2028, with the balance of $1,108.6 million due on December 6, 2028.
The Vertex Borrower’s obligations under the First Lien Term Facility, which were assumed in the Merger, are guaranteed by Vertex Holdings and Vertex Borrower’s wholly-owned domestic subsidiaries (including the Company Guarantor Subsidiaries, collectively, the First Lien Guarantors), subject to customary exceptions and limitations. The Vertex Borrower’s obligations under the First Lien Term Facility and the First Lien Guarantors’ obligations under the related guarantees are secured by (i) a first priority-lien on substantially all of the Vertex Borrower’s and the First Lien Guarantors’ assets other than the ABL Priority Collateral, as defined below (subject to customary exceptions and limitations), and (ii) a second-priority lien on substantially all of the Vertex Borrower’s and the First Lien Guarantors’ accounts receivable, inventory and certain other assets arising therefrom or related thereto (collectively, the ABL Priority Collateral) (subject to customary exceptions and limitations).
The borrowings under the First Lien Initial Term Tranche bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the federal funds rate, plus a margin of 0 2.30 500 3.45 %, depending on the leverage ratio.
The Vertex First Lien Credit Agreement contains customary representations and warranties and affirmative covenants. The Vertex First Lien Credit Agreement also includes negative covenants that limit, among other things, additional indebtedness, additional liens, sales of assets, dividends, investments and advances, prepayments of debt and mergers and acquisitions.
The Vertex First Lien Credit Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the First Lien Term Facility to be in full force and effect, and a change of control. If an event of default occurs and is continuing, the Vertex Borrower may be required immediately to repay all amounts outstanding under the Vertex First Lien Credit Agreement.
As of December 31, 2022, the carrying value of the First Lien Credit Agreement was $1,176.8 million, excluding deferred discount and unamortized deferred financing costs of $54.6 million. The estimated fair value of the First Lien Credit Agreement as of December 31, 2022 was $1,157.6 million. The fair value is based on observable inputs of interest rates that are currently available to us for debt with similar terms and maturities for non-public debt.
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Vertex Second Lien Credit Agreement
The Vertex Second Lien Credit Agreement provides for senior secured second lien term loans in an aggregate principal amount of $185.0 million (the Second Lien Term Facility). The entire amount of the proceeds from the Second Lien Term Facility were previously used to finance the Sky Acquisition in December 2021. The Company voluntarily prepaid $25.0 million of the Second Lien Term Facility on December 30, 2022. Under the terms of the Vertex Second Lien Credit Agreement, the Vertex Borrower was required to remit a prepayment premium of $0.3 million with the voluntary prepayment. The remaining balance of loans under the Second Lien Term Facility will be payable in full on December 6, 2029.
The Vertex Borrower’s obligations under the Second Lien Term Facility are guaranteed by Vertex Holdings and the Vertex Borrower’s wholly-owned domestic subsidiaries (including the Company Guarantor Subsidiaries, collectively, the Second Lien Guarantors), subject to customary exceptions and limitations. The Vertex Borrower’s obligations under the Second Lien Term Facility and the Second Lien Guarantors’ obligations under the related guarantees are secured by (i) a second priority-lien on substantially all of the Vertex Borrower’s and Second Lien Guarantors’ assets other than the ABL Priority Collateral (subject to customary exceptions and limitations), and (b) a third-priority lien on substantially all of the Vertex Borrower’s and Second Lien Guarantors’ assets ABL Priority Collateral (subject to customary exceptions and limitations).
The borrowings under the Second Lien Term Facility bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the federal funds rate, plus a margin of 6.50 % per annum, or a Eurodollar rate, determined by reference to LIBOR, plus a margin of 7.50 % per annum. As of December 31, 2022, the effective interest rate for Second Lien Term Facility was 12.55 %.
The Vertex Second Lien Credit Agreement contains customary representations and warranties and affirmative covenants. The Vertex Second Lien Credit Agreement also includes negative covenants that limit, among other things, additional indebtedness, additional liens, sales of assets, dividends, investments and advances, prepayments of debt and mergers and acquisitions.
The Vertex Second Lien Credit Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the First Lien Term Facility to be in full force and effect, and a change of control. If an event of default occurs and is continuing, the Vertex Borrower may be required immediately to repay all amounts outstanding under the Vertex Second Lien Credit Agreement.
As of December 31, 2022, the carrying value of the Second Lien Credit Agreement was $160.0 million, excluding a deferred discount of $7.5 million. The estimated fair value of the Second Lien Credit Agreement as of December 31, 2022 was $152.0 million. The fair value is based on observable inputs of interest rates that are currently available to us for debt with similar terms and maturities for non-public debt (Level 2).
Vertex ABL Credit Agreement
The Vertex ABL Credit Agreement provides for a senior secured revolving loan facility (the ABL Facility) of up to an aggregate amount of $200.0 million (the loans thereunder, the ABL Loans). The Vertex ABL Credit Agreement also provides for (i) a $30.0 million sublimit of availability for letters of credit, and (ii) a $10.0 million sublimit for short-term borrowings on a swingline basis. The commitments under the ABL Facility expire on June 29, 2026, and any ABL Loans then outstanding will be payable in full at that time.
Availability under the ABL Facility is subject to a borrowing base (the Borrowing Base), which is based on 85 % of eligible accounts receivable, eligible government account receivable and eligible government subcontract accounts receivable, plus 50 % of eligible unbilled accounts receivable, plus the lesser of (x) 65 % of the book value of eligible inventory, and (y) 85 % of the net orderly liquidation value of eligible inventory of the Vertex Borrower, Vertex Holdings and most of the Vertex Borrower’s wholly-owned domestic subsidiaries (including the Company Guarantor Subsidiaries, collectively, the ABL Guarantors), after adjusting for customary reserves that are subject to the ABL Agent’s discretion. The aggregate amount of the ABL Loans made and letters of credit issued under the ABL Facility shall at no time exceed the lesser of the aggregate commitments under the ABL Facility (currently $200.0 million) or the Borrowing Base. To the extent that the Vertex Borrower’s and ABL Guarantors’ eligible accounts receivable, eligible government account receivable, eligible government subcontract accounts receivable, eligible unbilled accounts receivable, and eligible inventory, decline, the Borrowing Base will decrease, and the availability under the ABL Facility may decrease below $200.0 million. Any ABL Loans requested are subject to a number of customary conditions, including accuracy of representations and warranties and no default. The proceeds from the ABL Loans may be used to finance the working capital needs and general corporate purposes of the Vertex Borrower and its subsidiaries.
The Vertex Borrower’s obligations under the ABL Facility are guaranteed by the ABL Guarantors, subject to customary exceptions and limitations. The Vertex Borrower’s obligations under the ABL Facility and the ABL Subsidiary Guarantors’ obligations under the related guarantees are secured by (a) a first priority-lien on substantially all of the Vertex Borrower’s and
F-25
the ABL Guarantors’ ABL Priority Collateral (subject to customary exceptions and limitations), and (b) a third priority-lien on substantially all of the Vertex Borrower’s and the ABL Guarantors’ assets other than the ABL Priority Collateral (subject to customary exceptions and limitations).
The borrowings under the ABL Facility bear interest at rates that, at the Vertex Borrower’s option, can be either a base rate, determined by reference to the federal funds rate, plus a margin of 0.75 % to 1.25 % per annum, or a term benchmark rate, determined by reference to SOFR, plus a margin of 1.75 % to 2.25 % per annum, in each case, depending on the aggregate availability under the ABL Facility.
Unutilized commitments under the ABL Facility are subject to a per annum fee of (x) 0.375 % if the total outstandings were equal to or less than 50 % of the aggregate commitments, or (y) 0.25 % if such total outstandings were more than 50 % of the aggregate commitments.
The Vertex Borrower is also required to pay a letter of credit fronting fee to each letter of credit issuer equal to 0.125 % per annum of the amount available to be drawn under each such letter of credit (or such other amount as may be mutually agreed by the Vertex Borrowers and the applicable letter of credit issuer), as well as a fee to all lenders equal to the applicable margin to SOFR of ABL Loans times the average daily amount available to be drawn under all outstanding letters of credit.
The Vertex ABL Credit Agreement contains customary representations and warranties, which must be accurate for the Vertex Borrower to borrow under the ABL Facility, and affirmative covenants. The Vertex ABL Credit Agreement also includes negative covenants that limit, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions. The Vertex ABL Credit Agreement also includes a financial covenant that requires the fixed charge coverage ratio to be at least 1.00 to 1.00 as of the end of any period of four fiscal quarters while aggregate availability is less than the greater of (i) $10.0 million and (ii) 10 % of the aggregate borrowing base.
The Vertex ABL Credit Agreement contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the ABL Facility to be in full force and effect, and a change of control. If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the Vertex ABL Credit Agreement.
As of December 31, 2022, there was no outstanding balance under the ABL Facility and $14.9 million outstanding for letters of credit. Availability under the ABL Facility was $184.4 million as of December 31, 2022. Unamortized deferred financing fees related to the ABL Credit Agreement of $1.6 million are included in Other Non-Current Assets in the Consolidated Balance Sheets. As of December 31, 2022, the fair value of the ABL Credit Agreement approximated the carrying value because the debt bears a floating interest rate.
The Company's aggregate scheduled maturities at December 31, 2022 are as follows:
| (In thousands) | Payments due | |||||||
| 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
Voluntary Prepayments. We may voluntarily prepay the First Lien Facility or Second Lien Facility in whole or in part at any time, subject to the payment of customary breakage costs under certain conditions. Voluntary prepayments of the Second Lien Facility prior to December 6, 2023 require payment of a 1 % prepayment premium. Voluntary prepayments of the First Lien Facility will be applied to the remaining installments thereof as directed by us. We may reduce the commitments under the ABL Facility in whole or in part at any time without premium or penalty.
As of December 31, 2022, we were in compliance with all covenants related to the First Lien Term Facility, the Second Lien Term Facility and the ABL Facility.
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NOTE 11
DERIVATIVE INSTRUMENTS
Interest Rate Derivative Instruments
The Company is exposed to the risk that our earnings and cash flows could be adversely impacted due to fluctuations in interest rates. To manage this risk, the Company has periodically enters entered into interest rate swaps in which we agree to exchange, at specified intervals, the difference between variable and fixed interest amounts calculated by reference to an agreed-upon notional amount. Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities, . and our Our outstanding derivative instruments do have not contain contained credit risk related contingent features. Collateral nor is collateral generally not required.
The interest rate swaps are measured at fair value on a recurring basis and are determined using the income approach based on a discounted cash flow model to determine the present value of future cash flows over the remaining term of the contract incorporating observable market inputs such as prevailing interest rates as of the reporting date (Level 2). Changes in fair value of the interest rate swap are recorded, net of tax, as a component of accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets. We reclassify the effective gain or loss from accumulated other comprehensive loss, net of tax, to interest expense on the Consolidated Statements of Income as the interest expense is recognized on the related debt. The ineffective portion of the change in fair value of the interest rate swap, if any, is recognized directly in earnings in interest expense.
The following table summarizes the amount at fair value and location of the derivative instruments in the Consolidated Balance Sheet as of December 31, 2021:
| Fair Value | ||||||||||||||
| (In thousands) | Balance sheet caption | Amount | ||||||||||||
| Interest rate swap designated as cash flow hedge | Other accrued liabilities | $ | ||||||||||||
Net interest rate derivative losses of $1 0.0 41.0.9 million, and less than $0.1 9 million were reclassified from accumulated other comprehensive loss to interest expense in our Consolidated Statements of Income during 2021 2022, 2020 2021, and 2019, respectively. We expect $ 0.7 million of existing interest rate swap losses reported in accumulated other comprehensive loss as of December 31, 2021, to be reclassified into earnings within the next 12 months. 2020, respectively.
Foreign Currency Derivative Instrument
We transact business in various foreign countries and are therefore exposed to foreign currency exchange rate risk that impacts the reported U.S. dollar amounts of revenues, costs, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in cash flows and earnings caused
Net foreign currency derivative gains of less than $ 0.1 million and losses of $ 0.1 million, and $ 0.6 million were recognized in selling, general and administrative expense, and losses recognized in selling, general and administrative expense during 2021 2022, 2020, 2021 and 2019, respectively. We expect less than $ 0.1 million of existing foreign currency forward contract losses reported in accumulated other comprehensive loss as of December 31, 2021, to be reclassified into earnings within the next 12 months.
NOTE 12
LEASES
We determine whether an arrangement contains a lease at inception. We have operating leases for office space, apartments, vehicles, and machinery and equipment. Our operating leases have lease terms of less than one year to ten years .
We do not separate lease components from non-lease components (e.g., common area maintenance, property taxes, and insurance) but account for both components in a contract as a single lease component.
F-24 27
The components of lease expense are as follows:
| Year Ended | ||||||||||||||
| (In thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Operating lease expense | $ | $ | ||||||||||||
| Variable lease expense | ||||||||||||||
| Short-term lease expense | ||||||||||||||
| Total lease expense | $ | $ | ||||||||||||
Supplemental balance sheet information related to our operating leases is as follows:
| Year Ended | ||||||||||||||
| (In thousands) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Right-of-use assets | $ | $ | ||||||||||||
| $ | $ | |||||||||||||
| Long-term operating lease liabilities | ||||||||||||||
| Total operating lease liabilities | $ | $ | ||||||||||||
The weighted average remaining lease term and discount rate for our operating leases at December 31, 2021 2022 were 5.2 1 years and 3 4.7 1
Maturities of lease liabilities at December 31, 2021 2022 were as follows:
| (In thousands) | Payments due | |||||||
| 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| After 2027 | ||||||||
| Total minimum lease payments | $ | |||||||
| Less: Imputed interest | ( | |||||||
| Total operating lease liabilities | $ | |||||||
NOTE 13
INCOME TAXES
We determine the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates. For the year ended December 31, 2021 2022, we did not establish or release an additional valuation allowance.
F-25 28
The sources of pre-tax income and the components of income tax expense for the years ended December 31, 2021 2022, 2020 2021 and 2019 2020, respectively, are as follows:
| (in thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Income Components | ||||||||||||||||||||
| United States | $ | ( | $ | $ | ||||||||||||||||
| Foreign | ||||||||||||||||||||
| Total pre-tax (loss) income | $ | ( | $ | $ | ||||||||||||||||
| Income tax expense components | ||||||||||||||||||||
| Current income tax provision | ||||||||||||||||||||
| United States-Federal | $ | $ | $ | |||||||||||||||||
| United States-State and local | ||||||||||||||||||||
| Foreign | ||||||||||||||||||||
| Total current income tax provision | ||||||||||||||||||||
| Deferred income tax provision (benefit) | ||||||||||||||||||||
| United States-Federal | ( | ( | ( | |||||||||||||||||
| United States-State and local | ( | ( | ||||||||||||||||||
| Foreign | ( | ( | ( | |||||||||||||||||
| Total deferred income tax provision (benefit) | ( | ( | ||||||||||||||||||
| Total income tax expense | $ | $ | $ | |||||||||||||||||
| Effective income tax rate | ( | % | % | % | ||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Tax provision at U.S. statutory rate | % | % | % | |||||||||||||||||
| State and local income tax, net of federal benefit | ( | % | % | % | ||||||||||||||||
| Foreign taxes | ( | % | % | % | ||||||||||||||||
| Uncertain tax positions | % | % | ( | % | ||||||||||||||||
| Return to provision true-ups | % | ( | % | % | ||||||||||||||||
| Foreign derived intangible income deduction | % | ( | % | ( | % | |||||||||||||||
| Non-deductible compensation expense | ( | % | % | % | ||||||||||||||||
| Non-deductible transaction expense | ( | % | % | % | ||||||||||||||||
| Tax credits | % | ( | % | ( | % | |||||||||||||||
| Other | ( | % | % | ( | % | |||||||||||||||
| Effective income tax rate | ( | % | % | % | ||||||||||||||||
F-26 29
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse. Deferred tax assets and liabilities include the following:
| (in thousands) | 2022 | 2021 | ||||||||||||
| Deferred tax assets | ||||||||||||||
| Compensation and benefits | $ | $ | ||||||||||||
| Reserves | ||||||||||||||
| Lease liability | ||||||||||||||
| Social security deferral | ||||||||||||||
| Research expenditures | ||||||||||||||
| Tax credits | ||||||||||||||
| Disallowed interest | ||||||||||||||
| Net operating losses | ||||||||||||||
| Other | ||||||||||||||
| Total deferred tax assets | $ | $ | ||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Goodwill and intangibles | $ | ( | $ | ( | ||||||||||
| Property, plant and equipment, net | ( | ( | ||||||||||||
| Right-of-use assets | ( | ( | ||||||||||||
| Other liabilities | ( | ( | ||||||||||||
| Total deferred tax liabilities | ( | ( | ||||||||||||
| Net deferred tax liabilities | $ | ( | $ | ( | ||||||||||
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31, 2021 2022, 2020 2021 and 2019 2020 is as follows:
| (in thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
| Unrecognized tax benefits-January 1, | $ | $ | $ | |||||||||||||||||
| Additions for: | ||||||||||||||||||||
| Current year tax positions | ||||||||||||||||||||
| Prior year tax positions | ||||||||||||||||||||
| Reductions for: | ||||||||||||||||||||
| Lapse of statute of limitations | ( | ( | ||||||||||||||||||
| Prior year tax positions | ( | |||||||||||||||||||
| Unrecognized tax benefits-December 31, | $ | $ | $ | |||||||||||||||||
As of December 31, 2021 2022, 2020 2021, and 2019 2020, unrecognized tax benefits from uncertain tax positions were $9 8.3 67 9.4 37.9 4 million, respectively. It is reasonably possible that the Company's total unrecognized tax benefits will decrease by approximately $1 2.7 5maters matters which may be resolved. The total amount of unrecognized benefit that, if recognized, would affect the effective tax rate was $9 8.37 9.1 37.5 1 million as of December 31, 2021 2022, 2020 2021, and 2019 2020, respectively, excluding the interest and penalties.
During the quarter ended December 31, 2020, the Company undertook a profit split transfer pricing analysis to determine if any potential Foreign Derived Intangible Income (FDII) deduction could be derived for financial reporting purposes. Vectrus V2X performed a functional analysis focusing on the U.S. and non-U.S. roles and support activities relating to the Vectrus V2X programs for services being provided to U.S military bases that are located in foreign countries. Based on this further analysis, it was determined that the Company could support $7.1 million of federal and state FDII benefit over the three-year period from 2018 to 2020, with $2.6 million, $2.5 million, and $2.0 million related to December 31, 2020, 2019, and 2018, respectively. During the quarter ended December 31, 2021 2022, the Company updated the profit split analysis for 2021 2022 to account for changes in the Vectrus V2X programs. Based on the updated analysis, the Company provided for a FDII benefit of $1 0.8 million. The Company continues 4 million. During the quarter ended December 31, 2022, the Company released the 2018 unrecognized tax benefit from uncertain positions of $1.7 million as the statute of limitations for the 2018 tax year expired at the end of 2022. The Company continues
F-30
to reserve a portion of the FDII benefit on an annual basis and continues to monitor further guidance and potential U.S. Tax Reform which could make changes to the mechanics around the way FDII is calculated.
We classify interest relating to tax matters as a component of interest expense and tax penalties as a component of income tax expense in our Consolidated and Combined Statements of Income. The Company recognized net interest related to tax matters of $0.2 million, $0.0 2 million, and $0.2 0 million during the years ended December 31, 2021 2022, 2020 2021 and 2019 2020, respectively. The Company has accrued $0.4 8 million and $0.2 4 million for the payment of of net interest and penalties as of December 31, 2021, 2022 and 2020 2021, respectively.
The Company has not recorded a deferred tax liability for undistributed earnings of certain foreign subsidiaries, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed, the Company may be subject to federal income and foreign withholding taxes.
The Company files income tax returns in the United States and in various foreign jurisdictions. The Company is no longer subject to U.S. federal or state income tax examinations for years prior to 2018.
Under U.S. GAAP, we are allowed to make an accounting policy choice of either (i) treating taxes due on future U.S. inclusions in taxable income related to global intangible low taxed income (GILTI) as a current-period expense when incurred (the “period cost method”) or (ii) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). We have chosen to account for GILTI under the period cost method as an accounting policy, and therefore the anticipated future expense associated with GILTI is not reflected in our financial statements.
NOTE 14
POST -EMPLOYMENT BENEFIT PLANS
We sponsor two defined contribution savings plans, which allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. The Company matches a percentage of eligible employee contributions up to certain limits of employee base pay. Our portion of the matching contributions charged to income amounted to $17.4 million, $8.7 million and $6.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. The increase in 2022 was due primarily to the Merger.
The Company participates in multiemployer pension plans for certain employees in the United States covered by collective bargaining agreements. Contributions are based on specified hourly rates for eligible hours. Company expenses related to these plans were $1.1 million, 6.3 million, $1.1 million and $3.0 million and $ 4.9 million during 2021, 2020, during 2022, 2021, and 2019 2020, respectively. The increase in 2022 from 2021 was due to the Merger and the decrease in the 2021 expense is was attributable to the completion of a subcontract in September 2020. At the time the subcontract was completed, the individuals ceased being Company employees and the Company was relieved of its contractual obligation to fund the related multiemployer pension plans on the former employee's behalf. The Company is unaware of any significant future obligations or funding requirements related to these plans other than the ongoing contributions that are paid as hours are worked by plan participants. None of these multiemployer pension plans are individually significant to the Company.
On September 11, 2014, our Board of Directors adopted and approved the Vectrus Systems Corporation Excess Savings Plan (the Excess Savings Plan). Since federal law limits the amount of compensation that can be used to determine employee and employer contribution amounts to our tax-qualified plans, we established the Excess Savings Plan to allow for Company contributions based on an eligible employee's base salary in excess of these limits. No employee contributions are permitted. All balances under the Excess Savings Plan are maintained on the books of the Company and credits and deductions are made to the accumulated savings under the plan based on the earnings or losses attributable to a stable value fund as defined in the Excess Savings Plan. Benefits will be paid in a lump sum generally in the seventh month following the date on which the employee's separation from service occurs. Employees are 100 % vested at all times in any amounts credited to their accounts. Although the plan did not end, excess savings were paid out due to the Merger. As of December 31, 2021, 2022 and 2020, December 31, 2021 we had accrued $0.2 1 million and $0.1 2 million, respectively, million of contributions under the Excess Savings Plan.
F-31
NOTE 15
COMMITMENTS AND CONTINGENCIES
General
From time to time, we are involved in party to various investigations, lawsuits, arbitration, claims, enforcement actions and other legal proceedings including government investigations and claims 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 V2X and the U.S. government representatives engage in discussions to enable Vectrus V2X to evaluate the merits of these claims as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect probable losses related to the matters raised by the U.S. government representatives. Such assessments, along with any assessments regarding provisions for legal proceedings, are reviewed on a quarterly basis for sufficiency based on the most recent information available to us. We have estimated and accrued $9 27.611 9.7 62021 2022 and 2020 2021, respectively, in other accrued liabilities in the Consolidated Balance Sheets for legal proceedings and for claims with respect to our 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, 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 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 non-reimbursable 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) DCMA and others, routinely audit and review our performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. Accordingly, costs
billed or billable to U.S. government customers are subject to potential adjustment upon audit by such agencies. The U.S. government agencies also review the adequacy of our compliance with government standards for our business systems, including our accounting, earned value management, estimating, materials management and accounting, purchasing, and property management systems.
In the performance of our contracts, we routinely request contract modifications that require additional funding from U.S. government customers. Most often, these requests are due to customer-directed changes in the scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our U.S. government customer may be protracted. Based on the circumstances, we periodically file REAs that are sometimes converted into claims. In some cases, these requests are disputed by our U.S. government customer. We believe our outstanding modifications, REAs and other claims will be resolved without material adverse impact to our results of operations, financial condition or cash flows.
As a result of final indirect rate negotiations between the U.S. government and our Former Parent, we were subject to adjustments to costs previously allocated by our Former Parent to our business from 2007 through 2014. On July 7, 2022, we accepted an offer by the U.S. government to settle this legal matter involving our payment of an insignificant amount, thereby bringing closure to the matter. With respect to our Former Parent, we believe we are fully indemnified under our distribution agreement and have notified our Former Parent of the closure of our appeal of the U.S. government's decision in this matter.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization designated the outbreak of COVID-19 as a global pandemic. Governments and businesses around COVID-19 has negatively impacted public health and 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 global economy, disrupted global supply chains, and created volatility in financial markets. The Company has observed, and continues to experience, some disruptions on its operations due to government and supply chain delays related to Furthermore, in September 2021, the Biden Administration issued an executive order mandating a COVID-19
F-32
vaccination requirement for federal contractors, except in certain limited circumstances. Since then, multiple courts have enjoined the global pandemic. While the extent to which COVID-19 ultimately impacts the Company’s future results executive order’s implementation, although the court decisions are not uniform in their application or the states to which the injunction applies. The federal government has indicated that it will not, for the time being, enforce the vaccination mandate.
The extent of the ultimate impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our programs in the expected timeframe, will depend on future developments, the pandemic and associated economic impacts, particularly with respect to newly issued vaccine mandates for government contractors and subcontractors, could result in a material impact to the Company’s future financial condition, results of operations and cash flows.
For the year ended December 31, 2022, the impact of COVID-19 was immaterial to our financial results.
NOTE 16
STOCK-BASED COMPENSATION
The Company maintains an equity incentive plan, the 2014 Omnibus Incentive Plan, as amended and restated effective as of May 13 October 27, 2016 2022 (the 2014 Omnibus Plan), to govern awards granted to Vectrus V2X employees and directors, including nonqualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards and other awards. We account for NQOs and stock-settled RSUs as equity-based compensation awards. TSR awards, described below, and cash-settled RSUs are accounted for as liability-based compensation awards.
Stock-based compensation expense and the associated tax benefits impacting our Consolidated Statements of Income were as follows:
| Year Ended December 31, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Compensation costs for equity-based awards | $ | $ | ||||||||||||
| Compensation costs for liability-based awards | ||||||||||||||
| Total compensation costs, pre-tax | $ | $ | ||||||||||||
| Future tax benefit | $ | $ | ||||||||||||
Liability-based awards are revalued at the end of each reporting period to reflect changes in fair value. The Company paid were revalued at the end of each reporting period to reflect changes in fair value. For 2022, in concurrence with the Merger, fair value was measured as of the Closing Date and the aggregate future award payouts were fixed at $4.6 million. The Company paid $2.5 9 million and $2.4 5 million related to liability-based compensation awards during the years ended December 31, 2021 2022 and 2020 2021, respectively.
At December 31, 2021 2022, total unrecognized compensation costs related to equity-based awards and liability-based awards were $5 26.3 42.1.6 million, respectively, which are expected to be recognized ratably over a weighted average period of 1.76 53 years and 1.63 81 years, respectively.
Non-Qualified Stock Options
NQOs vest in one-third increments on the first, second and third anniversaries of the grant date and expire 10 years from the date of grant.
F-30 33
A summary of the status of our NQOs as of December 31, 2021 2022, 2020 2021 and 2019 2020 and changes during the years then ended is presented below:
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Shares | Weighted Average Exercise Price Per Share | Shares | Weighted Average Exercise Price Per Share | Shares | Weighted Average Exercise Price Per Share | ||||||||||||||||||||||||||||||||
| Outstanding at January 1, | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Granted | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Exercised | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Forfeited, canceled or expired | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Outstanding and exercisable at December 31, | $ | $ | $ | |||||||||||||||||||||||||||||||||||
All outstanding NQOs are exercisable. The following table summarizes information about NQOs outstanding and exercisable as of December 31, 2021 2022:
| (In thousands, except per share data) | Options Outstanding and Exercisable | ||||||||||||||||||||||||||||
| Range of Exercise Prices Per Share | Number | Weighted Average Remaining Contractual Life (In Years) | Weighted Average Exercise Price Per Share | Aggregate Intrinsic Value | |||||||||||||||||||||||||
$ | $ | $ | |||||||||||||||||||||||||||
$ | |||||||||||||||||||||||||||||
| Total options and aggregate intrinsic value | $ | $ | |||||||||||||||||||||||||||
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $45 41.77 292021 2022, which would have been received by the option holders if all option holders had exercised their options as of that date. There were no exercisable options "out of the money" as of December 31, 2021 2022. The aggregate intrinsic value of options exercised during the years ended December 31, 2022, 2021, and 2020 and 2019 was was $0.2 million, $0.4 million, $ 0.1 million and $2 0.1
Restricted Stock Units
The fair value of RSUs is determined based on the closing price of Vectrus V2X common stock on the date of the grant. In general, under the 2014 Omnibus Plan, for employee RSUs granted in 2014 and after, one-third of the award vests on each of the three anniversary dates following the grant date. Director RSUs are granted on the date of typically granted annually and vest approximately one year after the grant date. 2022 grants for three directors vested over an abbreviated service term which ended on the July 5, 2022, the annual meeting and vest the business day immediately prior to the next annual meeting. RSUs have no voting rights. If an employee leaves the Company prior to vesting, whether through resignation or termination for cause, the RSUs are forfeited. If an employee retires or is terminated by the Company other than for cause, all or a pro rata portion of the RSUs may vest.
On July 5, 2022, pursuant to the terms of the Merger Agreement, the Company issued an additional 1,346,089 RSUs, with a grant date fair value of $33.92 per share, to certain employees of Vertex (Replacement Awards). The Replacement Awards will be settled in shares of the Company's common stock, with 517,918 Replacement Awards vesting on the six-month anniversary following the grant date and a quarter of the remaining 828,171 Replacement Awards vesting on each of four six-month anniversary dates following the grant date.
F-34
The table below provides a roll-forward of outstanding RSUs for the years ended December 31, 2021 2022, 2020, 2021 and 2019 2020.
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Shares | Weighted Average Grant Date Fair Value Per Share | Shares | Weighted Average Grant Date Fair Value Per Share | Shares | Weighted Average Grant Date Fair Value Per Share | ||||||||||||||||||||||||||||||||
| Outstanding at January 1, | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Granted | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Replacement awards | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Vested | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Issued in exchange | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Cancelled in exchange | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Forfeited or canceled | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Outstanding at December 31, | $ | $ | $ | |||||||||||||||||||||||||||||||||||
The total grant date fair value of RSUs that vested during the years ended December 31, 2021 2022, 2020 2021 and 2019 2020 was $5 7.5 74 5.6 54.1 6 million, respectively.
On August 11, 2020, our total outstanding 15,839 CRSUs liability-based cash-settled restricted stock unit compensation awards (CRSUs) were exchanged for 15,839 RSUs. As of the exchange date, both the CRSUs and RSUs had the same vesting conditions, fair value of $52.28 , and unrecognized compensation expense of $0.4 million.
Total Shareholder Return Awards
NOTE 17
SHAREHOLDERS' EQUITY
As of December 31, 2021 2022, our authorized capital was comprised of 100.0 million shares of common stock and 10.0 million shares of preferred stock. At December 31, 2021 2022, there were 11 30.7 5 million shares of common stock issued and outstanding. No 2021 2022 and 2020 2021.
F-35
SUBSEQUENT EVENTS
DEBT
Senior Secured Credit Facilities
On February 28, 2023, Vertex Aerospace Services Corp. (the “Borrower”), an indirect, wholly owned subsidiary of the Company, entered into a credit agreement (the “Amendment Credit Agreement”) by and among the Company, Vectrus Systems Corporation, as borrower (“VSC”), certain other wholly-owned domestic subsidiaries of the Company, as guarantors party thereto (collectively, the “Subsidiary Guarantors”), the lenders and issuing banks party thereto, among the lenders identified therein and JPMorgan Chase Bank Bank of America, N.A., as Administrative Agent (“JPMorgan”), which provides for the amendment of the Credit Agreement dated as of September 17, 2014 (as amended by that certain Amendment No. 1, dated as of April 19, 2016, as further amended and restated by that certain Amendment and Restatement Agreement, dated as of November 15, 2017, as further amended by that certain Amendment No. 1, dated as of December 24, 2020, and as further amended, restated, amended and restated, supplemented or otherwise modified prior to the Closing Date, the “Original Credit Agreement”; the Original Credit Agreement as amended by the Amendment Agreement is referred to herein as the “Amended Credit Agreement”), among the Company, VSC, the lenders and issuing banks party thereto and JPMorgan.
F-33 36
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
V2X, INC. | |||||
| /s/ William B. Noon | |||||
By: William B. Noon | |||||
Chief Accounting Officer | |||||
(Principal Accounting Officer) | |||||
| Date: March 2, 2023 | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and the dates indicated.
| SIGNATURE | TITLE | DATE | ||||||
/s/ Charles L. Prow Charles L. Prow | President and Chief Executive Officer, Director | March | ||||||
/s/ Susan D. Lynch Susan D. Lynch | March | |||||||
/s/ William B. Noon William B. Noon | March | |||||||
/s/ Mary L. Howell Mary L. Howell | Chair and Director | March | ||||||
/s/ | Director | March | ||||||
/s/ Dino M. Cusumano Dino M. Cusumano | Director | March 2, 2023 | ||||||
/s/ Lee E. Evangelakos Lee E. Evangelakos | Director | March 2, 2023 | ||||||
/s/ Melvin F. Parker Melvin F. Parker | Director | March | ||||||
/s/ Eric M. Pillmore Eric M. Pillmore | Director | March | ||||||
/s/ Joel M. Rotroff Joel M. Rotroff | Director | March 2, 2023 | ||||||
/s/ Neil D. Snyder Neil D. Snyder | Director | March 2, 2023 | ||||||
/s/ Stephen L. Waechter Stephen L. Waechter | Director | March | ||||||
/s/ Phillip C. Widman Phillip C. Widman | Director | March | ||||||