UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended July 3, 2020

or

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

For the transition period from             to    

Commission File Number: 001-36341        

Vectrus, Inc.

(Exact name of registrant as specified in its charter)

Indiana			38-3924636
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
2424 Garden of the Gods Road,	Colorado Springs,	Colorado	80919
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code:
(719)	591-3600

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

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

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

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

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

Large accelerated filer	☐	Accelerated filer	☑	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

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

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

No  ☑

As of August 7, 2020, there were 11,620,091 shares of common stock ($0.01 par value per share) outstanding.

VECTRUS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page No.
	PART I. FINANCIAL INFORMATION	4
Item 1.	Financial Statements	4
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Cash Flows	7
	Condensed Consolidated Statements of Changes to Shareholders' Equity	8
	Note 1. Description of Business and Summary of Significant Accounting Policies	9
	Note 2. Recent Accounting Standards Update	11
	Note 3. Revenue	12
	Note 4. Income Taxes	15
	Note 5. Acquisitions	15
	Note 6. Goodwill and Intangible Assets	16
	Note 7. Earnings Per Share	17
	Note 8. Receivables	17
	Note 9. Debt	18
	Note 10. Derivative Instruments	19
	Note 11. Leases	20
	Note 12. Stock-based Compensation	21
	Note 13. Commitments and Contingencies	22
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	33
	PART II. OTHER INFORMATION	34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
	Signatures	36

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended				Six Months Ended
	July 3,		June 28,		July 3,		June 28,
(In thousands, except per share data)	2020		2019		2020		2019
Revenue	$	336,063	$	331,589	$	687,797	$	657,495
Cost of revenue	311,817		300,553		631,510		596,149
Selling, general, and administrative expenses	21,816		19,843		41,374		39,762
Operating income	2,430		11,193		14,913		21,584
Interest expense, net	(1,346)		(1,329)		(3,048)		(2,904)
Income from operations before income taxes	1,084		9,864		11,865		18,680
Income tax (benefit) expense	(27)		2,247		2,086		3,989
Net income	$	1,111	$	7,617	$	9,779	$	14,691
Earnings per share
Basic	$	0.10	$	0.66	$	0.84	$	1.29
Diluted	$	0.09	$	0.66	$	0.83	$	1.28
Weighted average common shares outstanding - basic	11,607		11,455		11,575		11,376
Weighted average common shares outstanding - diluted	11,745		11,605		11,742		11,512

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

4

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended				Six Months Ended
	July 3,		June 28,		July 3,		June 28,
(In thousands)	2020		2019		2020		2019
Net income	$	1,111	$	7,617	$	9,779	$	14,691
Other comprehensive income (loss), net of tax
Changes in derivative instruments:
Net change in fair value of interest rate swap	60		(963)		(1,325)		(1,324)
Net change in fair value of foreign currency forward contracts	395		183		134		85
Tax (expense) benefit	(98)		169		258		268
Net change in derivative instruments	357		(611)		(933)		(971)
Foreign currency translation adjustments, net of tax	2,470		547		536		(276)
Accounting Standards Update (ASU) 2018-02 reclassification of certain tax effects to Retained Earnings	—		—		—		(259)
Other comprehensive income (loss), net of tax	2,827		(64)		(397)		(1,506)
Total comprehensive income	$	3,938	$	7,553	9,382		$	13,185

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

5

VECTRUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	July 3,		December 31,
(In thousands, except share information)	2020		2019
Assets
Current assets
Cash	$	62,719	$	35,318
Receivables	260,295		269,144
Other current assets	21,980		16,154
Total current assets	344,994		320,616
Property, plant, and equipment, net	19,107		18,844
Goodwill	262,130		261,983
Intangible assets, net	12,905		14,926
Right-of-use assets	11,259		14,654
Other non-current assets	7,386		5,366
Total non-current assets	312,787		315,773
Total Assets	$	657,781	$	636,389
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	142,138	$	148,015
Compensation and other employee benefits	60,417		53,155
Short-term debt	7,500		6,500
Other accrued liabilities	45,655		37,409
Total current liabilities	255,710		245,079
Long-term debt, net	59,234		63,041
Deferred tax liability	46,473		49,407
Other non-current liabilities	26,929		19,997
Total non-current liabilities	132,636		132,445
Total liabilities	388,346		377,524
Commitments and contingencies (Note 13)
Shareholders' Equity
Preferred stock; $0.01 par value; 10,000,000 shares authorized; No shares issued and outstanding	—		—
Common stock; $0.01 par value; 100,000,000 shares authorized; 11,619,544 and 11,523,691 shares issued and outstanding as of July 3, 2020 and December 31, 2019, respectively	116		115
Additional paid in capital	79,944		78,757
Retained earnings	194,854		185,075
Accumulated other comprehensive loss	(5,479)		(5,082)
Total shareholders' equity	269,435		258,865
Total Liabilities and Shareholders' Equity	$	657,781	$	636,389

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

6

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended
	July 3,		June 28,
(In thousands)	2020		2019
Operating activities
Net income	$	9,779	$	14,691
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	1,971		1,538
Amortization of intangible assets	2,028		1,277
Loss on disposal of property, plant, and equipment	—		2
Stock-based compensation	5,411		4,031
Amortization of debt issuance costs	193		201
Changes in assets and liabilities:
Receivables	9,429		(224)
Other assets	(7,938)		(7,128)
Accounts payable	(6,021)		2,038
Deferred taxes	(2,735)		(2,579)
Compensation and other employee benefits	7,037		3,324
Other liabilities	15,252		(1,721)
Net cash provided by operating activities	34,406		15,450
Investing activities
Purchases of capital assets and intangibles	(2,246)		(11,739)
Net cash (used in) investing activities	(2,246)		(11,739)
Financing activities
Repayments of long-term debt	(3,000)		(2,000)
Proceeds from revolver	144,000		98,000
Repayments of revolver	(144,000)		(98,000)
Proceeds from exercise of stock options	59		3,467
Payments of employee withholding taxes on share-based compensation	(1,873)		(768)
Net cash (used in) provided by financing activities	(4,814)		699
Exchange rate effect on cash	55		(226)
Net change in cash	27,401		4,184
Cash-beginning of year	35,318		66,145
Cash-end of period	$	62,719	$	70,329
Supplemental disclosure of cash flow information:
Interest paid	$	2,527	$	2,818
Income taxes paid	$	70	$	4,198
Non-cash investing activities:
Purchase of capital assets on account	$	447	$	301

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

7

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES TO SHAREHOLDERS' EQUITY

	Common Stock Issued			Additional Paid-in Capital				Accumulated Other Comprehensive Loss		Total Shareholders' Equity
(In thousands)	Shares	Amount				Retained Earnings
Balance at December 31, 2018	11,267	$	113	$	71,729	$	151,640	$	(3,158)	$	220,324
Net income						7,074				7,074
Cumulative effects of adoption of ASU 2018-02 reclassification of certain tax effects from AOCI						259		(259)		—
Foreign currency translation adjustments								(823)		(823)
Unrealized loss on cash flow hedge								(360)		(360)
Employee stock awards and stock options	85	1		(82)						(81)
Stock-based compensation				1,117						1,117
Balance at March 29, 2019	11,352	$	114	72,764		158,973		(4,600)		227,251
Net income						7,617				7,617
Foreign currency translation adjustments								547		547
Unrealized loss on cash flow hedge								(611)		(611)
Employee stock awards and stock options	154	1		2,779						2,780
Stock-based compensation				1,099						1,099
Balance at June 28, 2019	11,506	$	115	$	76,642	$	166,590	$	(4,664)	$	238,683
Balance at December 31, 2019	11,524	$	115	$	78,757	$	185,075	$	(5,082)	$	258,865
Net income						8,668				8,668
Foreign currency translation adjustments								(1,934)		(1,934)
Unrealized loss on cash flow hedge								(1,290)		(1,290)
Employee stock awards and stock options	64	1		(1,787)						(1,786)
Stock-based compensation				1,720						1,720
Balance at April 3, 2020	11,588	116		78,690		193,743		(8,306)		264,243
Net income						1,111				1,111
Foreign currency translation adjustments								2,470		2,470
Unrealized gain on cash flow hedge								357		357
Employee stock awards and stock options	32	—		(28)						(28)
Stock-based compensation				1,282						1,282
Balance at July 3, 2020	11,620	$	116	$	79,944	$	194,854	$	(5,479)	$	269,435

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

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

Our Business

        Vectrus, Inc. is a leading provider of services to the United States Government (U.S. Government) worldwide. The Company operates as one segment and provides the following services and offerings: facility and logistics services, information technology and network communications services, and operational technologies and converged solutions.

        Vectrus was incorporated in the State of Indiana on February 4, 2014. On September 27, 2014, Exelis Inc. (Exelis) completed a spin-off (the Spin-off) of Vectrus, and Vectrus became an independent, publicly traded company. Unless the context otherwise requires, references in these notes to "Vectrus", "we," "us," "our," "the Company" and "our Company" refer to Vectrus, Inc. References in these notes to Exelis or "Former Parent" refer to Exelis Inc. and its consolidated subsidiaries (other than Vectrus).

Basis of Presentation

        Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (July 3, 2020 for the second quarter of 2020 and June 28, 2019 for the second quarter of 2019), except for the last quarter of the fiscal year, which ends on December 31. For ease of presentation, the quarterly financial statements included herein are described as three months ended.

        The unaudited interim Condensed Consolidated Financial Statements of Vectrus have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (GAAP) have been omitted. These unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

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

Immaterial Restatement of Prior Period Balances

        Subsequent to the issuance of our Annual Report on Form 10-K for the year ended December 31, 2019, we identified an error in our historical financial statements related to estimated contract costs for the year ended December 31, 2019 as well as an error in our historical financial statements related to overbilling for a separate contract dating back to 2013, prior to the Spin-off. In the first instance, management determined that additional subcontractor costs should have been included as part of estimated contract costs, resulting in a misstatement in other accrued liabilities and cost of revenue as well as revenue and accounts receivable to a lesser extent. In the second instance, management identified that certain contract costs were incorrectly included in customer billings for one contract, resulting in a misstatement in revenue and other accrued liabilities.

        The cumulative impact of the errors was a $2.5 million decrease in retained earnings as of December 31, 2019. The impact of the errors on net income for the year ended December 31, 2019 is $1.5 million. The impact on diluted earnings per share is a decrease of $0.13 for the year ended December 31, 2019. The impact to diluted earnings per share in the first, second, third, and fourth quarters of 2019 is a decrease of $0.00, $0.00, $0.13, and $0.00, respectively. The impact on diluted earnings per share is a decrease of $0.02 and $0.01 for the years ended December 31, 2018 and 2017, respectively. 

        Accordingly, the Company is restating the relevant financial statements and related footnotes for all applicable periods for these errors and related tax effect and will correct the respective financial statements as they appear in future filings. Management has evaluated the materiality of these misstatements and concluded they were not material to prior periods.

9

        The effects of the corrections to each of the individual affected line items in our Condensed Consolidated Statements of Income were as follows:

	Three Months Ended June 28, 2019						Six Months Ended June 28, 2019
(In thousands, except per share data)	As Previously Reported		Correction		As Corrected		As Previously Reported		Correction		As Corrected
Revenue	$	331,589	$	—	$	331,589	$	657,517	$	(22)	$	657,495
Operating income	11,193		—		11,193		21,606		(22)		21,584
Income from operations before income taxes	9,864		—		9,864		18,702		(22)		18,680
Income tax expense	2,247		—		2,247		3,994		(5)		3,989
Net income	$	7,617	$	—	$	7,617	$	14,708	$	(17)	$	14,691
Earnings per share
Basic	$	0.66	$	—	$	0.66	$	1.29	$	—	$	1.29
Diluted	$	0.66	$	—	$	0.66	$	1.28	$	—	$	1.28

        The effects of the corrections to each of the individual affected line items on our Condensed Consolidated Statements of Comprehensive Income were as follows:

	Three Months Ended June 28, 2019						Six Months Ended June 28, 2019
(In thousands)	As Previously Reported		Correction		As Corrected		As Previously Reported		Correction		As Corrected
Net income	$	7,617	$	—	$	7,617	$	14,708	$	(17)	$	14,691
Total comprehensive income	$	7,553	$	—	$	7,553	$	13,202	$	(17)	$	13,185

        The effects of the corrections to each of the individual affected line items on our Condensed Consolidated Balance Sheet were as follows:

	December 31, 2019
(In thousands)	As Previously Reported		Correction		As Corrected
Receivables	$	269,239	$	(95)	$	269,144
Total current assets	320,711		(95)		320,616
Total Assets	636,484		(95)		636,389
Other accrued liabilities	34,587		2,822		37,409
Total current liabilities	242,257		2,822		245,079
Deferred tax liability	49,808		(401)		49,407
Total non-current liabilities	132,846		(401)		132,445
Total Liabilities	375,103		2,421		377,524
Retained earnings	187,591		(2,516)		185,075
Total shareholders' equity	261,381		(2,516)		258,865
Total Liabilities and Shareholders' Equity	$	636,484	$	(95)	$	636,389

10

        The effects of the corrections to each of the individual affected line items on our Condensed Consolidated Statements of Cash Flows were as follows:

	Six Months Ended June 28, 2019
(In thousands)	As Previously Reported		Correction	As Corrected
Net income	$	14,708