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 October 2, 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 November 6, 2020, there were 11,624,568 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	10
	Note 2. Recent Accounting Standards Update	12
	Note 3. Revenue	13
	Note 4. Income Taxes	16
	Note 5. Acquisitions	16
	Note 6. Goodwill and Intangible Assets	17
	Note 7. Earnings Per Share	18
	Note 8. Receivables	18
	Note 9. Debt	19
	Note 10. Derivative Instruments	20
	Note 11. Leases	21
	Note 12. Stock-based Compensation	22
	Note 13. Commitments and Contingencies	23
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
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	35

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended				Nine Months Ended
	October 2,		September 27,		October 2,		September 27,
(In thousands, except per share data)	2020		2019		2020		2019
Revenue	$	352,415	$	359,873	$	1,040,212	$	1,017,368
Cost of revenue	320,234		327,523		951,743		923,671
Selling, general, and administrative expenses	17,344		19,934		58,718		59,697
Operating income	14,837		12,416		29,751		34,000
Interest expense, net	(939)		(1,907)		(3,988)		(4,811)
Income from operations before income taxes	13,898		10,509		25,763		29,189
Income tax expense	3,507		2,668		5,593		6,657
Net income	$	10,391	$	7,841	$	20,170	$	22,532
Earnings per share
Basic	$	0.89	$	0.68	$	1.74	$	1.97
Diluted	$	0.88	$	0.67	$	1.72	$	1.95
Weighted average common shares outstanding - basic	11,621		11,506		11,590		11,420
Weighted average common shares outstanding - diluted	11,751		11,678		11,743		11,566

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

4

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended				Nine Months Ended
	October 2,		September 27,		October 2,		September 27,
(In thousands)	2020		2019		2020		2019
Net income	$	10,391	$	7,841	$	20,170	$	22,532
Other comprehensive income (loss), net of tax
Changes in derivative instruments:
Net change in fair value of interest rate swap	290		(194)		(1,035)		(1,570)
Net change in fair value of foreign currency forward contracts	204		(207)		338		(123)
Net (loss) gain reclassified to interest expense	—		(8)		—		43
Tax (expense) benefit	(202)		88		56		357
Net change in derivative instruments	292		(321)		(641)		(1,293)
Foreign currency translation adjustments, net of tax	2,042		(1,526)		2,578		(1,801)
Accounting Standards Update (ASU) 2018-02 reclassification of certain tax effects to Retained Earnings	—		—		—		(259)
Other comprehensive income (loss), net of tax	2,334		(1,847)		1,937		(3,353)
Total comprehensive income	$	12,725	$	5,994	$	22,107	$	19,179

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

5

VECTRUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	October 2,		December 31,
(In thousands, except share information)	2020		2019
Assets
Current assets
Cash	$	63,734	$	35,318
Receivables	268,143		269,144
Other current assets	24,537		16,154
Total current assets	356,414		320,616
Property, plant, and equipment, net	19,256		18,844
Goodwill	262,130		261,983
Intangible assets, net	11,902		14,926
Right-of-use assets	9,970		14,654
Other non-current assets	6,256		5,366
Total non-current assets	309,514		315,773
Total Assets	$	665,928	$	636,389
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$	146,458	$	148,015
Compensation and other employee benefits	54,216		53,155
Short-term debt	8,000		6,500
Other accrued liabilities	38,572		37,409
Total current liabilities	247,246		245,079
Long-term debt, net	57,326		63,041
Deferred tax liability	41,734		49,407
Other non-current liabilities	35,817		19,997
Total non-current liabilities	134,877		132,445
Total liabilities	382,123		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; 11,621,709 and 11,523,691 shares issued and outstanding as of October 2, 2020 and December 31, 2019, respectively	116		115
Additional paid in capital	81,589		78,757
Retained earnings	205,245		185,075
Accumulated other comprehensive loss	(3,145)		(5,082)
Total shareholders' equity	283,805		258,865
Total Liabilities and Shareholders' Equity	$	665,928	$	636,389

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

6

VECTRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
	October 2,		September 27,
(In thousands)	2020		2019
Operating activities
Net income	$	20,170	$	22,532
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	3,001		2,395
Amortization of intangible assets	3,031		2,103
Loss on disposal of property, plant, and equipment	63		2
Stock-based compensation	6,499		5,952
Amortization of debt issuance costs	286		301
Changes in assets and liabilities:
Receivables	3,584		(7,540)
Other assets	(8,826)		(5,820)
Accounts payable	(1,988)		(14,458)
Deferred taxes	(7,575)		(4,670)
Compensation and other employee benefits	813		17,863
Other liabilities	18,597		9,788
Net cash provided by operating activities	37,655		28,448
Investing activities
Purchases of capital assets and intangibles	(3,348)		(14,440)
Proceeds from the disposition of assets	—		5,400
Acquisition of business, net of cash acquired	—		(43,963)
Net cash (used in) investing activities	(3,348)		(53,003)
Financing activities
Repayments of long-term debt	(4,500)		(2,000)
Proceeds from revolver	151,000		226,000
Repayments of revolver	(151,000)		(226,000)
Proceeds from exercise of stock options	59		3,467
Payments of employee withholding taxes on share-based compensation	(1,918)		(768)
Net cash (used in) provided by financing activities	(6,359)		699
Exchange rate effect on cash	468		(1,239)
Net change in cash	28,416		(25,095)
Cash-beginning of year	35,318		66,145
Cash-end of period	$	63,734	$	41,050
Supplemental disclosure of cash flow information:
Interest paid	$	3,030	$	4,363
Income taxes paid	$	12,570	$	5,076
Non-cash investing activities:
Purchase of capital assets on account	$	373	$	394

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

7

VECTRUS, INC.

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

	Common Stock Issued			Additional Paid-in Capital				Accumulated Other Comprehensive Loss		Total Shareholders' Equity
(In thousands)	Shares	Amount				Retained Earnings
Balance at December 31, 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		601						602
Taxes withheld on restricted stock unit compensation awards				(683)						(683)
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		2,864						2,865
Taxes withheld on restricted stock unit compensation awards				(85)						(85)
Stock-based compensation				1,099						1,099
Balance at June 28, 2019	11,506	$	115	$	76,642	$	166,590	$	(4,664)	$	238,683
Net income						7,841				7,841
Foreign currency translation adjustments								(1,526)		(1,526)
Unrealized loss on cash flow hedge								(321)		(321)
Stock-based compensation				1,124						1,124
Balance at September 27, 2019	11,506	$	115	$	77,766	$	174,431	$	(6,511)	$	245,801
Balance at December 31, 2019	11,524	$	115	$	78,757	$	185,075	$	(5,082)	$	258,865
Net income						8,668				8,668
Foreign currency translation adjustments								(1,934)		(1,934)
Unrealized loss on cash flow hedge								(1,290)		(1,290)
Employee stock awards and stock options	64	1		—						1
Taxes withheld on stock compensation awards				(1,787)						(1,787)
Stock-based compensation				1,720						1,720
Balance at April 3, 2020	11,588	$	116	$	78,690	$	193,743	$	(8,306)	$	264,243
Net income						1,111				1,111
Foreign currency translation adjustments								2,470		2,470
Unrealized gain on cash flow hedge								357		357

8

Employee stock awards and stock options	32	—		58						58
Taxes withheld on restricted stock unit compensation awards				(86)						(86)
Stock-based compensation				1,282						1,282
Balance at July 3, 2020	11,620	$	116	$	79,944	$	194,854	$	(5,479)	$	269,435
Net income						10,391				10,391
Foreign currency translation adjustments								2,042		2,042
Unrealized gain on cash flow hedge								292		292
Employee stock awards and stock options	2	—		—						—
Conversion of liability-based stock compensation awards to equity-based stock compensation awards				405						405
Taxes withheld on restricted stock unit compensation awards				(44)						(44)
Stock-based compensation				1,284						1,284
Balance at October 2, 2020	11,622	$	116	$	81,589	$	205,245	$	(3,145)	$	283,805

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

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

Our Business

    Vectrus, Inc. is a leading provider of services to the United States Government (U.S. Government) worldwide. The Company operates as one segment and provides the following services and offerings: facility and base operations; supply chain and logistics services; information technology mission support; and engineering and digital technology services.

    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) or successor entities.

Basis of Presentation

    Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (October 2, 2020 for the third quarter of 2020 and September 27, 2019 for the third 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, individually or in aggregate.

10

    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 September 27, 2019						Nine Months Ended September 27, 2019
(In thousands, except per share data)	As Previously Reported		Correction		As Corrected		As Previously Reported		Correction		As Corrected
Revenue	$	359,854	$	19	$	359,873	$	1,017,371	$	(3)	$	1,017,368
Cost of revenue	325,537		1,986		327,523		921,685		1,986		923,671
Operating income	14,383		(1,967)		12,416		35,989		(1,989)		34,000
Income from operations before income taxes	12,476		(1,967)		10,509		31,178		(1,989)		29,189
Income tax expense	3,094		(426)		2,668		7,088		(431)		6,657
Net income	$	9,382	$	(1,541)	$	7,841	$	24,090	$	(1,558)	$	22,532
Earnings per share
Basic	$	0.82	$	(0.14)	$	0.68	$	2.11	$	(0.14)	$	1.97
Diluted	$	0.80	$	(0.13)	$	0.67	$	2.08	$	(0.13)	$	1.95

    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 September 27, 2019						Nine Months Ended September 27, 2019
(In thousands)	As Previously Reported		Correction		As Corrected		As Previously Reported		Correction		As Corrected
Net income	$	9,382	$	(1,541)	$	7,841	$	24,090	$	(1,558)	$	22,532
Total comprehensive income	$	7,535	$	(1,541)	$	5,994	$	20,737	$	(1,558)	$	19,179

    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

11

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

	Nine Months Ended September 27, 2019
(In thousands)	As Previously Reported		Correction		As Corrected
Net income	$	24,090	$	(1,558)	$	22,532
Changes in receivables	(7,521)		(19)		(7,540)
Changes in deferred taxes	(4,240)		(430)		(4,670)
Changes in other liabilities	7,781		2,007		9,788
Net cash provided in operating activities	$	28,448	$	—	$	28,448

    The effects of the corrections to each of the individual affected line items on our Condensed Consolidated Statements of Changes in Shareholders' Equity were as follows:

	Retained Earnings						Total Shareholders' Equity
(In thousands)	As Previously Reported		Correction		As Corrected		As Previously Reported		Correction		As Corrected
Balance at December 31, 2018	$	152,616	$	(976)	$	151,640	$	221,300	$	(976)	$	220,324
Net income	7,091		(17)		7,074		7,091		(17)		7,074
Balance at March 29, 2019	159,966		(993)		158,973		228,244		(993)		227,251
Net income	7,617		—		7,617		7,617		—		7,617
Balance at June 28, 2019	167,583		(993)		166,590		239,676		(993)		238,683
Net income	9,382		(1,541)		7,841		9,382		(1,541)		7,841
Balance at September 27, 2019	$	176,965	$	(2,534)	$	174,431	$	248,335	$	(2,534)	$	245,801

NOTE 2

RECENT ACCOUNTING STANDARDS UPDATE

Accounting Standards Issued but Not Yet Effective

    In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (ASU 2019-12). The objectives of ASU 2019-12 are (i) to simplify the accounting for income taxes by removing certain exceptions, (ii) to update certain requirements to simplify the accounting for income taxes, and (iii) to make minor codification improvements for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on the Company’s financial statements.

Accounting Standards That Were Adopted

    In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) (ASU 2018-15). The objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments can be applied either retrospectively or prospectively. We adopted ASU 2018-15 on January 1, 2020 using the retrospective method. As a result of the adoption, $0.3 million was reclassified from 2019 year-end property, plant and equipment, net, to other non-current assets on our Condensed Consolidated Balance Sheet. In addition, $0.3 million of cash outflows from investing activities incurred during the third and fourth quarters of 2019 was reclassified to cash outflows from operating activities.

    In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04). The objective of ASU 2017-04 is to simplify the subsequent measurement of goodwill by entities performing their annual goodwill impairment tests by comparing the fair value of a reporting unit, including income tax effects from any tax-deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds fair value. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2017-04 should be applied on a prospective basis. We adopted ASU 2017-04 on January 1, 2020.  The adoption of the standard did not have a material impact on our financial statements.    

    In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASU 2016-13). The objective of ASU 2016-13 is to provide financial statement users with more useful information about the expected credit losses

12

on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. We adopted the standard on January 1, 2020. The adoption of the standard did not have a material impact on our financial statements.

NOTE 3

REVENUE

Performance Obligations

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

    Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and therefore, are accounted for as part of the existing contract. Modifications to exercise option years create new enforceable rights and obligations and therefore are treated as separate performance obligations.

    The Company's performance obligations are typically 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. This continuous transfer of control requires that we track progress towards completion of performance obligations in order to measure and recognize revenue. Determining progress on performance obligations requires us to make judgments that affect the timing of revenue recognition. Remaining performance obligations represent firm orders by the customer and excludes potential orders under IDIQ contracts, unexercised contract options, and contracts awarded to us that are being protested by competitors with the U.S. Government Accountability Office (GAO) or in the U.S. Court of Federal Claims. The level of order activity related to contracts can be affected by the timing of government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others.

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

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    Remaining performance obligations increased by $306.4 million as of October 2, 2020 as compared to December 31, 2019. We expect to recognize approximately 30% of the remaining performance obligations as of October 2, 2020 as revenue in 2020, and the remaining 70% during 2021. Remaining performance obligations as of October 2, 2020 and December 31, 2019 are presented in the following table:

	October 2,		December 31,
(In thousands)	2020		2019
Performance Obligations	$	1,155,742	$	849,389

Contract Estimates

    Accounting for contracts involves the use of various techniques to estimate total contract revenue and costs. We estimate the profit on our contracts 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 the availability and timing of funding from the customer.

    The impact of adjustments in contract estimates on our operating income can be reflected in either revenue or cost of revenue. Cumulative catch-up adjustments for the three and nine months ended October 2, 2020 were favorable to operating income by less than $0.1 million and unfavorable to operating income by $3.8 million, respectively. For the three and nine months ended September 27, 2019, the net favorable adjustments to operating income were $0.7 million and $1.5 million, respectively.

    For the three and nine months ended October 2, 2020 the cumulative catch-up adjustments to operating income decreased revenue by $1.1 million and $0.5 million, respectively. For the three and nine months ended September 27, 2019, the cumulative catch-up adjustments to operating income increased revenue by $4.0 million and $4.2 million, respectively.

Revenue by Category

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

    On a firm-fixed-price type contract, we agree to perform the contractual statement of work for a predetermined contract price. A firm-fixed-price type contract typically offers higher profit margin potential than a cost-plus type contract, which is commensurate with the greater levels of risk we assume on a firm-fixed-price type contract. Although a firm-fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract. Although the overall scope of work required under the contract may not change, profit may be adjusted as experience is gained and as efficiencies are realized or costs are incurred.

    The following tables present our revenue disaggregated by several categories. Revenue by contract type for the three and nine months ended October 2, 2020 and September 27, 2019 is as follows:

	Three Months Ended						Nine Months Ended
	October 2,		September 27,		%		October 2,		September 27,		%
(In thousands)	2020		2019		Change		2020		2019		Change
Cost-plus and cost-reimbursable ¹	$	249,484	$	272,810	(8.6)	%	$	748,543	$	781,024	(4.2)	%
Firm-fixed-price	102,931		87,063		18.2	%	291,669		236,344		23.4	%
Total revenue	$	352,415	$	359,873			$	1,040,212	$	1,017,368
¹ Includes time and material contracts

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    Revenue by geographic region in which the contract is performed for the three and nine months ended October 2, 2020 and September 27, 2019 is as follows:

	Three Months Ended						Nine Months Ended
	October 2,		September 27,		%		October 2,		September 27,		%
(In thousands)	2020		2019		Change		2020		2019		Change
Middle East	$	224,934	$	244,142	(7.9)	%	$	679,633	$	695,626	(2.3)	%
United States	89,400		77,228		15.8	%	254,640		219,512		16.0	%
Europe	38,081		38,503		(1.1)	%	105,939		102,230		3.6	%
Total revenue	$	352,415	$	359,873			$	1,040,212	$	1,017,368

    Revenue by contract relationship for the three and nine months ended October 2, 2020 and September 27, 2019 is as follows:

	Three Months Ended						Nine Months Ended
	October 2,		September 27,		%		October 2,		September 27,		%
(In thousands)	2020		2019		Change		2020		2019		Change
Prime contractor	$	332,564	$	334,402	(0.5)	%	$	980,301	$	954,191	2.7	%
Subcontractor	19,851		25,471		(22.1)	%	59,911		63,177		(5.2)	%
Total revenue	$	352,415	$	359,873			$	1,040,212	$	1,017,368

    Revenue by customer for the three and nine months ended October 2, 2020 and September 27, 2019 is as follows:

	Three Months Ended						Nine Months Ended
	October 2.		September 27,		%		October 2.		September 27,		%
(In thousands)	2020		2019		Change		2020		2019		Change
Army	$	236,267	$	245,817	(3.9)	%	$	711,173	$	698,377	1.8	%
Air Force	79,425		86,576		(8.3)	%	231,088		227,100		1.8	%
Navy	18,785		13,344		40.8	%	48,564		45,227		7.4	%
Other	17,938		14,136		26.9	%	49,387		46,664		5.8	%
Total revenue	$	352,415	$	359,873			$	1,040,212	$	1,017,368

Contract Balances

    The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. These advance billings and payments are not considered significant financing components because they are frequently intended to ensure that both parties are in conformance with the primary contract terms. These assets and liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.

    As of October 2, 2020 and December 31, 2019, we had contract assets of $199.3 million and $186.4 million, respectively. Refer to Note 8, "Receivables" for additional information regarding the composition of our receivable balances. As of both October 2, 2020 and December 31, 2019, our contract liabilities were insignificant.

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NOTE 4

INCOME TAXES

Effective Tax Rate

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

    For the quarters ended October 2, 2020 and September 27, 2019, we recorded an income tax provision of $3.5 million and $2.7 million, respectively, representing effective income tax rates of 25.2% and 25.4%. For the nine months ended October 2, 2020 and September 27, 2019, we recorded income tax provisions of $5.6 million and $6.7 million, representing effective income tax rates of 21.7% and 22.8%, respectively. The effective income tax rates vary from the federal statutory rate of 21.0% due to state and foreign taxes, required tax income exclusions, nondeductible expenses and available deductions not reflected in book income.

Uncertain Tax Provisions

    As of October 2, 2020, and December 31, 2019, unrecognized tax benefits from uncertain tax positions were $12.5 million and $7.9 million, respectively. The increase in the uncertain tax positions was principally the result of the additional Foreign Derived Intangible Income (FDII) deduction.

NOTE 5

ACQUISITIONS

Advantor

    On July 8, 2019, we acquired Advantor from Infrasafe Holding, Inc. and Infrasafe, LLC (collectively, Infrasafe). Advantor is a leading provider of integrated electronic security systems to the U.S. Government. In accordance with ASC Topic 805, Business Combinations, we accounted for this transaction using the acquisition method. We conducted valuations of certain acquired assets and liabilities for inclusion in our Condensed Consolidated Balance Sheets as of the date of acquisition. Assets that normally would not be recorded in ordinary operations (i.e. 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.

    The total net consideration paid for the acquisition was $45.1 million, consisting of the purchase price of $44.0 million, net of cash acquired, and $1.1 million for working capital in excess of the working capital requirement agreed upon in the stock purchase agreement. The acquisition was funded by utilizing cash on hand and available capacity from our Amended Revolver (as defined in Note 9, “Debt”).

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

(In thousands)	Allocation of Purchase Price
Receivables	$	11,388
Other current assets	2,719
Property, plant and equipment	155
Goodwill