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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2022
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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, Par Value $0.01 Per ShareVECNew 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 May 6, 2022, there were 11,826,663 shares of common stock ($0.01 par value per share) outstanding.



VECTRUS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page No.
Item 1.


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VECTRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
April 1,April 2,
(In thousands, except per share data)20222021
Revenue$456,471 $434,004 
Cost of revenue419,275 393,648 
Selling, general, and administrative expenses31,959 23,823 
Operating income5,237 16,533 
Interest expense, net(1,681)(1,932)
Income from operations before income taxes3,556 14,601 
Income tax expense701 2,553 
Net income$2,855 $12,048 
Earnings per share
Basic$0.24 $1.03 
Diluted$0.24 $1.02 
Weighted average common shares outstanding - basic11,759 11,648 
Weighted average common shares outstanding - diluted11,902 11,827 
The accompanying notes are an integral part of these financial statements.
4

VECTRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
April 1,April 2,
(In thousands)20222021
Net income$2,855 $12,048 
Other comprehensive income (loss), net of tax
  Changes in derivative instruments:
  Net change in fair value of interest rate swaps439 295 
  Net change in fair value of foreign currency forward contracts30 (396)
  Tax (expense) benefit(95)24 
  Net change in derivative instruments374 (77)
  Foreign currency translation adjustments, net of tax(616)(2,356)
Other comprehensive income (loss) net of tax(242)(2,433)
Total comprehensive income$2,613 $9,615 

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

5

VECTRUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
April 1,December 31,
(In thousands, except per share information)20222021
Assets
Current assets
Cash and cash equivalents$22,999 $38,513 
Receivables377,571 348,605 
Prepaid expenses25,923 21,160 
Other current assets11,083 15,062 
Total current assets437,576 423,340 
Property, plant, and equipment, net24,049 23,758 
Goodwill321,734 321,734 
Intangible assets, net64,281 66,582 
Right-of-use assets42,074 43,651 
Other non-current assets9,876 10,394 
Total non-current assets462,014 466,119 
Total Assets$899,590 $889,459 
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable$234,713 $212,533 
Compensation and other employee benefits59,059 80,284 
Short-term debt10,400 10,400 
Other accrued liabilities55,421 55,031 
Total current liabilities359,593 358,248 
Long-term debt, net108,392 94,246 
Deferred tax liability32,620 32,214 
Operating lease liability33,167 34,536 
Other non-current liabilities11,643 20,128 
Total non-current liabilities185,822 181,124 
Total liabilities545,415 539,372 
Commitments and contingencies (Note 10)
Shareholders' Equity
Preferred stock; $0.01 par value; 10,000 shares authorized; No shares issued and outstanding
  
Common stock; $0.01 par value; 100,000 shares authorized; 11,805 and 11,738 shares issued and outstanding as of April 1, 2022 and December 31, 2021, respectively
118 117 
Additional paid in capital89,590 88,116 
Retained earnings270,609 267,754 
Accumulated other comprehensive loss(6,142)(5,900)
Total shareholders' equity354,175 350,087 
Total Liabilities and Shareholders' Equity$899,590 $889,459 
The accompanying notes are an integral part of these financial statements.
6

VECTRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
April 1,April 2,
(In thousands)20222021
Operating activities
Net income$2,855 $12,048 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense1,591 1,548 
Amortization of intangible assets2,301 2,450 
(Gain) Loss on disposal of property, plant, and equipment(16)43 
Stock-based compensation2,558 2,622 
Amortization of debt issuance costs204 232 
Changes in assets and liabilities:
Receivables(29,898)(46,544)
Prepaid expenses(4,849)(3,137)
Other assets4,520 (648)
Accounts payable22,693 42,054 
Deferred taxes 2,716 
Compensation and other employee benefits(21,138)(22,818)
Other liabilities(7,202)(12,295)
Net cash used in operating activities(26,381)(21,729)
Investing activities
Purchases of capital assets(2,195)(2,611)
Proceeds from the disposition of assets17  
Net cash used in investing activities(2,178)(2,611)
Financing activities
Repayments of long-term debt(2,600)(2,000)
Proceeds from revolver217,000 110,000 
Repayments of revolver(200,000)(110,000)
Proceeds from exercise of stock options 113 
Payment of debt issuance costs(458) 
Payments of employee withholding taxes on share-based compensation(1,626)(2,184)
Net cash provided by (used in) financing activities12,316 (4,071)
Exchange rate effect on cash729 (191)
Net change in cash, cash equivalents and restricted cash(15,514)(28,602)
Cash, cash equivalents and restricted cash-beginning of year 38,513 68,727 
Cash, cash equivalents and restricted cash-end of period$22,999 $40,125 
Supplemental disclosure of cash flow information:
Interest paid$1,513 $1,371 
Income taxes paid (refunded)$66 $(97)
Purchase of capital assets on account$5 $(132)

The accompanying notes are an integral part of these financial statements.
7

VECTRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES TO SHAREHOLDERS' EQUITY (UNAUDITED)
Common Stock IssuedAdditional Paid-in CapitalAccumulated Other Comprehensive LossTotal Shareholders' Equity
(In thousands)SharesAmountRetained Earnings
Balance at December 31, 202011,625 $116 $82,823 $222,026 $(27)$304,938 
Net income12,048 12,048 
Foreign currency translation adjustments(2,356)(2,356)
Unrealized loss on cash flow hedge(77)(77)
Employee stock awards and stock options75 1 113 114 
Taxes withheld on restricted stock unit compensation awards(2,184)(2,184)
Stock-based compensation1,983 1,983 
Balance at April 2, 202111,700 $117 $82,735 $234,074 $(2,460)$314,466 
Balance at December 31, 202111,738 $117 $88,116 $267,754 $(5,900)$350,087 
Net income2,855 2,855 
Foreign currency translation adjustments(616)(616)
Unrealized gain on cash flow hedge374 374 
Employee stock awards and stock options67 1 — 1 
Taxes withheld on stock compensation awards(1,626)(1,626)
Stock-based compensation3,100 3,100 
Balance at April 1, 202211,805 $118 $89,590 $270,609 $(6,142)$354,175 

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 base operations, supply chain and logistics services, information technology mission support, and engineering and digital integration services.
Vectrus was incorporated in the State of Indiana in February 2014. On September 27, 2014, Exelis Inc. (Exelis) completed the spin-off (the Spin-off) of Vectrus, and Vectrus became an independent, publicly traded company. References in these notes to "Vectrus", "we," "us," "our," "the Company" and "our Company" refer to Vectrus, Inc. References in these notes to "Exelis" or "Former Parent" refer to Exelis Inc., an Indiana corporation, and its consolidated subsidiaries (other than Vectrus). Exelis was acquired by a predecessor entity of L3Harris Technologies, Inc. in May 2015.
Equity Investments
In 2011, we entered into a joint venture agreement with Shaw Environmental & Infrastructure, Inc., which is now APTIM Federal Services LLC. Pursuant to the joint venture agreement, High Desert Support Services, LLC (HDSS) was established to pursue and perform work on the Ft. Irwin Installation Support Services Contract, which was awarded to HDSS in October 2012. In 2018, we entered into a joint venture agreement with J&J Maintenance. Pursuant to the joint venture agreement, J&J Facilities Support, LLC (J&J) was established to pursue and perform work on various U.S. government contracts. In 2020, we entered into a joint venture agreement with Kuwait Resources House for Human Resources Management and Services Company (KRH). Pursuant to the joint venture agreement, ServCore Resources and Services Solutions, LLC. (ServCore) was established to operate and manage labor and life support services outside of the continental United States at designated locations serviced by Vectrus and others around the world.
We account for our investments in HDSS, J&J, and ServCore under the equity method as we have the ability to exercise significant influence, but do not hold a controlling interest. We record our proportionate 40%, 50%, and 40% shares, respectively, of income or losses from HDSS, J&J, and ServCore in selling, general and administrative expenses in the Condensed Consolidated Statements of Income. Our investment in these joint ventures is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.
When we receive cash distributions from our equity method investments, the cash distribution is compared to cumulative earnings and cumulative cash distributions. Cash distributions received are recorded as a return on investment in operating cash flows within the Condensed Consolidated Statements of Cash Flows to the extent cumulative cash distributions are less than cumulative earnings. Any cash distributions in excess of cumulative earnings are recorded as a return of investment in investing cash flows within the Condensed Consolidated Statements of Cash Flows. During the three months ended April 1, 2022, Vectrus received a $0.8 million distribution, representing a return on investment from our joint ventures. As of April 1, 2022 and December 31, 2021 our joint venture investment balance was $4.6 million and $5.4 million, respectively. Our proportionate share of income from the HDSS, J&J, and ServCore joint ventures was immaterial for the first quarters of 2022 and 2021.
Basis of Presentation
Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter (April 1, 2022 for the first quarter of 2022 and April 2, 2021 for the first quarter of 2021), except for the last quarter of the fiscal year, which ends on December 31. For ease of presentation, the quarterly financial statements included herein are described as three months ended.
The unaudited interim Condensed Consolidated Financial Statements of Vectrus have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the U.S. have been omitted. These unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position and operating results. Revenue and net income for any interim period are not necessarily indicative of future or annual results.
9

NOTE 2
RECENT ACCOUNTING STANDARDS UPDATE
Accounting Standards Issued but Not Yet Effective     
In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08). The amendment requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer had originated the contract. The amendment also provides certain practical expedients when applying the guidance. ASU No. 2021-08 is effective for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2021-08 to its consolidated financial statements and expects to early adopt ASU 2021-08 during 2022 in conjunction with the proposed merger discussed below.
Accounting Standards That Were Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04). To ease the burden in accounting for reference rate reform on financial reporting, the ASU provides companies with optional expedients and exceptions for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The Company adopted the standard during the first quarter of 2022. It did not have a material impact on the Company's financial statements.
NOTE 3
PROPOSED MERGER WITH VERTEX AEROSPACE
On March 7, 2022, the Company, including its newly incorporated subsidiaries Andor Merger Sub LLC (Merger Sub LLC) and Andor Merger Sub Inc. (Merger Sub Inc.), and Vertex Aerospace Services Holding Corp. (Vertex), entered into an agreement and plan of merger (the Merger Agreement) proposing that Merger Sub Inc. merge with and into Vertex (the First Merger), and immediately thereafter, Vertex, as the surviving company of the First Merger, merge with and into Merger Sub LLC (the Second Merger), with Merger Sub LLC surviving the Second Merger as a direct, wholly owned subsidiary of the Company (the Proposed Transaction).
The Proposed Transaction is structured so that the existing stockholders of Vertex will own approximately 62.25% of the issued and outstanding Company common shares following the consummation of the Proposed Transaction, and the existing shareholders of the Company will own approximately 37.75%.
The consummation of the Proposed Transaction is subject to the satisfaction of certain conditions, including, among others, the expiration or termination of antitrust waiting periods and receipt of certain other regulatory approvals, absence of injunctions or restraints prohibiting consummation of the Proposed Transaction, the Vectrus shareholder approval being obtained, the shares issued to Vertex being approved for listing on the New York Stock Exchange and the execution and delivery of a shareholder rights and registration rights agreements. The obligation of each party to consummate the Proposed Transaction is also conditioned on the other party’s representations and warranties being true and correct, the other party having performed in all material respects its obligations under the Merger Agreement, and the absence of any material adverse effect after the date of the Merger Agreement.
The Merger Agreement provides certain termination rights for both the Company and Vertex, and further provides that a termination fee equal to $16.6 million will be payable by the Company to Vertex upon termination of the Merger Agreement under certain circumstances, including, among others, (i) as a result of the termination of the Merger Agreement by the Company to accept a Parent Superior Proposal (as defined in the Merger Agreement), (ii) the Company having Willfully Breached (as defined in the Merger Agreement) any of its obligations under the no solicitation provisions of the Merger Agreement, or (iii) the Board having changed its recommendation to shareholders.
NOTE 4
REVENUE
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. To determine the proper revenue recognition method, consideration is given as to whether a single contract should be accounted for as more than one performance obligation. For most of our contracts, the customer contracts with us to perform an integrated set of tasks and deliverables as a single service solution, whereby each service is not separately identifiable from other promises in the contract and therefore is not distinct. As a result, when this integrated set of tasks exists, the contract is accounted for as one performance obligation. The vast majority of our contracts have a single performance obligation. Unexercised contract options and indefinite delivery and indefinite quantity (IDIQ) contracts are considered to be separate performance obligations when the option or IDIQ task
10

order is exercised or awarded.
Contracts are often modified to account for changes in contract specifications and requirements. If the modification either creates new enforceable rights and obligations or changes the existing enforceable rights and obligations, the modification will be treated as a separate contract. Our contract modifications, except for those to exercise option years, have historically not been distinct from the existing contract and have been accounted for as if they were part of that existing contract.
The Company's performance obligations are satisfied over time as services are provided throughout the contract term. We recognize revenue over time using the input method (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Our over time recognition is reinforced by the fact that our customers simultaneously receive and consume the benefits of our services as they are performed. For most U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. This continuous transfer of control requires that we track progress towards completion of performance obligations in order to measure and recognize revenue.
The Company's contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year or less option periods. The number of option periods varies by contract, and there is no guarantee that an option period will be exercised. The right to exercise an option period is at the sole discretion of the U.S. government when we are the prime contractor or of the prime contractor when we are a subcontractor. We expect to recognize a substantial portion of our performance obligations as revenue within the next 12 months. However, the U.S. government or the prime contractor may cancel any contract at any time through a termination for convenience or for cause. Substantially all of our contracts have terms that would permit us to recover all or a portion of our incurred costs and fees for work performed in the event of a termination for convenience.
Remaining performance obligations as of April 1, 2022 and December 31, 2021 are presented in the following table:
April 1,December 31,
(In millions)20222021
Performance Obligations$1,288 $1,398 
We expect to recognize approximately 64% of the remaining performance obligations as of April 1, 2022 as revenue in 2022 and the remaining 36% during 2023.
Contract Estimates
Accounting for contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include labor productivity and availability; the complexity of the services being performed; the cost and availability of materials; the performance of subcontractors; and negotiations with the 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 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 months ended April 1, 2022 and April 2, 2021 increased operating income by $0.6 million and decreased operating income by $1.3 million, respectively.
For the three months ended April 1, 2022 and April 2, 2021, the cumulative catch-up adjustments to operating income increased revenue by $0.6 million and decreased revenue by $1.9 million, respectively.
Revenue by Category
Generally, the sales price elements for our contracts are cost-plus, cost-reimbursable or firm-fixed-price. We commonly have elements of cost-plus, cost-reimbursable and firm-fixed-price contracts on a single contract. On a cost-plus type contract, we are paid our allowable incurred costs plus a profit, which can be fixed or variable depending on the contract’s fee arrangement, up to funding levels predetermined by our customers. On cost-plus type contracts, we do not bear the risks of unexpected cost overruns, provided that we do not incur costs that exceed the predetermined funded amounts. Most of our cost-plus contracts also contain a firm-fixed price element. Cost-plus type contracts with award and incentive fee provisions are our primary variable contract fee arrangement. Award fees provide for a fee based on actual performance relative to contractually specified performance criteria. Incentive fees provide for a fee based on the relationship between total allowable and target cost. On most of our contracts, a cost-reimbursable element captures consumable materials required for the contract. Typically, these costs do not bear fees.
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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 months ended April 1, 2022 and April 2, 2021 is as follows:
Three Months Ended
April 1,April 2,%
(In thousands)20222021Change
Cost-plus and cost-reimbursable$311,094 $290,230 7.2 %
Firm-fixed-price128,004 128,757 (0.6)%
Time and material17,373 15,017 15.7 %
Total revenue$456,471 $434,004 
Revenue by geographic region in which the contract is performed for the three months ended April 1, 2022 and April 2, 2021 is as follows:
Three Months Ended
April 1,April 2,%
(In thousands)20222021Change
Middle East$235,754 $240,013 (1.8)%
United States167,980 149,811 12.1 %
Europe36,531 40,623 (10.1)%
Asia16,206 3,557 355.6 %
Total revenue$456,471 $434,004 

Revenue by contract relationship for the three months ended April 1, 2022 and April 2, 2021 is as follows:
Three Months Ended
April 1,April 2,%
(In thousands)20222021Change
Prime contractor$427,093 $403,262 5.9 %
Subcontractor29,378 30,742 (4.4)%
Total revenue$456,471 $434,004 

Revenue by customer for the three months ended April 1, 2022 and April 2, 2021 is as follows:
Three Months Ended
April 1,April 2,%
(In thousands)20222021Change
Army$280,113 $257,349 8.8 %
Air Force61,474 78,170 (21.4)%
Navy75,217 56,427 33.3 %
Other39,667 42,058 (5.7)%
Total revenue$456,471 $434,004 
Contract Balances
The timing of revenue recognition, billings, and cash collections results in billed and unbilled accounts receivable (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms at periodic intervals (e.g., biweekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we may
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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 Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.
As of April 1, 2022 and December 31, 2021, we had contract assets of $235.3 million and $240.0 million, respectively. Contract assets primarily consist of unbilled receivables which represent rights to consideration for work completed but not billed as of the reporting date. The balance of unbilled receivables consists of costs and fees that are: (i) billable immediately; (ii) billable on contract completion; or (iii) billable upon other specified events, such as the resolution of a request for equitable adjustment. Refer to Note 5, "Receivables" for additional information regarding the composition of our receivable balances. As of both April 1, 2022 and December 31, 2021, our contract liabilities were insignificant.
NOTE 5
RECEIVABLES
Receivables were comprised of the following:
(In thousands)April 1, 2022December 31, 2021
Billed receivables$136,287 $104,074 
Unbilled receivables (contract assets)235,341 239,979 
Other 5,943 4,552 
Total receivables$377,571 $348,605 
As of April 1, 2022 and December 31, 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 April 1, 2022 contract assets during 2022. Changes in the balance of receivables are primarily due to the timing differences between our performance and customers' payments.
NOTE 6
GOODWILL AND INTANGIBLE ASSETS
As of April 1, 2022 and December 31, 2021 the carrying amount of goodwill was $321.7 million.
The Company tests goodwill for impairment on the first day of the Company's fourth fiscal quarter each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Identifiable intangible assets consist of the following:
April 1, 2022December 31, 2021
(In thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Contract backlogs and recompetes$77,300 $(16,868)$60,432 $77,300 $(14,988)$62,312 
Customer contracts7,200 (3,932)3,268 7,200 (3,572)3,628 
Trade names and other1,249 (668)581 1,249 (607)642 
Balance$85,749 $(21,468)$64,281 $85,749 $(19,167)$66,582 
Identifiable intangible asset amortization expense was $2.3 million and $2.5 million for the three months ended April 1, 2022 and April 2, 2021, respectively. As of April 1, 2022, the remaining average intangible asset amortization period was 9.2 years.
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Future estimated amortization expense is as follows (in thousands):
PeriodAmortization
2022 (remainder of the year) $6,365 
2023$8,486 
2024$7,379 
2025$6,582 
2026$6,112 
After 2026$29,357 
NOTE 7
DEBT
Senior Secured Credit Facilities
Term Loan and Revolver. In September 2014, we and our wholly-owned subsidiary, Vectrus Systems Corporation (VSC), entered into a credit agreement. The credit agreement was subsequently amended on December 24, 2020 and January 24, 2022 and is collectively referred to as the Amended Agreement. The credit agreement consists of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver) as of April 1, 2022.
The Amendment Agreement includes an accordion feature that allows the Company to draw up to an additional $100.0 million, subject to the lender's consent on the same terms and conditions as the existing commitments. The Amendment Agreement also permits the Company to borrow up to $75.0 million in unsecured debt as long as the aggregated sum of both the unsecured debt and the accordion does not exceed $100.0 million.
The Amended Term Loan amortizes in an amount equal to $2.6 million for the fiscal quarters ending July 1, 2022 through September 30, 2023, with the balance of $37.2 million due on November 15, 2023. Amounts borrowed under the Amended Term Loan that are repaid or prepaid may not be re-borrowed. Any unpaid amounts must be repaid by the maturity dates. As of April 1, 2022, the balance outstanding under the Amended Term Loan was $52.8 million.
The Amended Revolver is available for working capital, capital expenditures and other general corporate purposes. There were $67.0 million of outstanding borrowings under the Amended Revolver at April 1, 2022. Up to $25.0 million of the Amended Revolver is available for the issuance of letters of credit. As of April 1, 2022, there were two letters of credit outstanding in the aggregate amount of $2.7 million which reduced our borrowing availability under the Amended Revolver to $200.3 million. At December 31, 2021, there were $50.0 million of outstanding borrowings under the Amended Revolver. The Amended Revolver will mature and the commitments thereunder will terminate on November 15, 2023.
The aggregate scheduled maturities of the Amended Term Loan and Amended Revolver as of April 1, 2022, are as follows:
(In thousands)Payments due
2022 (remainder of the year)$7,800 
2023112,000 
Total$119,800 
Guarantees and Collateral. The indebtedness and other obligations under the Amended Agreement are unconditionally guaranteed jointly and severally on a senior secured basis by us and certain of our restricted subsidiaries and are secured, subject to permitted liens and other exceptions, by a first-priority lien on substantially all of our tangible assets and those of each domestic guarantor.
Voluntary Prepayments. We may voluntarily prepay the Amended Term Loan in whole or in part at any time without premium or penalty, subject to the payment of customary breakage costs under certain conditions. Voluntary prepayments of the Amended Term Loan will be applied to the remaining installments thereof as directed by us. We may reduce commitments under the Amended Revolver in whole or in part at any time without premium or penalty.
Covenants. The Amended Agreement contain customary covenants, including covenants that, under certain circumstances and subject to certain qualifications and exceptions: limit or restrict our ability to incur additional indebtedness; merge, dissolve, liquidate or consolidate; make acquisitions, investments, advances or loans; dispose of or transfer assets; pay dividends; redeem or repurchase certain debt; and enter into certain restrictive agreements.
In addition, we are required to comply with (a) a maximum ratio of total consolidated indebtedness to consolidated earnings before interest, tax, depreciation and amortization (EBITDA) of 3.00 to 1.00 (3.50 to 1.00 for the 12 months following a qualified acquisition), and (b) a minimum ratio of consolidated EBITDA to consolidated interest expense (net of cash interest
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income) of 4.50 to 1.00. As of April 1, 2022, we had a ratio of total consolidated indebtedness to EBITDA of 1.40 to 1.00 and a ratio of consolidated EBITDA to consolidated interest expense of 12.32 to 1.00. We were in compliance with all covenants related to the Amended Credit Facilities as of April 1, 2022.
Interest Rates and Fees. Outstanding borrowings under the Amended Agreement accrue interest, at our option, at a per annum rate of (i) SOFR plus the applicable margin, which ranges from 1.85% to 2.60% depending on the leverage ratio, or (ii) a base rate plus the applicable margin, which ranges from 0.75% to 1.50% depending on the leverage ratio. The interest rate under the Amended Credit Facilities at April 1, 2022 was 2.41%. We pay a commitment fee on the undrawn portion of the Amended Revolver ranging from 0.30% to 0.45%, depending on the leverage ratio.
Carrying Value and Fair Value. As of April 1, 2022 and December 31, 2021, the fair value of the Amended Credit Facilities approximated the carrying value because the debt bears interest at a floating rate of interest. The fair value is based on observable inputs of interest rates that are currently available to us for debt with similar terms and maturities for non-public debt.
NOTE 8
DERIVATIVE INSTRUMENTS
During the periods covered by this report, we have made no changes to our policies or strategies for the use of derivative instruments and there has been no change in our related accounting methods. For our derivative instruments, which are designated as cash flow hedges, gains and losses are initially reported as a component of accumulated other comprehensive loss and subsequently recognized in earnings with the corresponding hedged item.
Interest Rate Derivative Instruments
Our interest rate swaps are designated and qualify as effective cash flow hedges. The contracts, with expiration dates through November 2022 and notional amounts totaling $39.8 million at April 1, 2022, are recorded at fair value.
The following table summarizes the amount at fair value and location of the derivative instruments in our balance sheet for our interest rate hedges in the Condensed Consolidated Balance Sheets as of April 1, 2022:
(In thousands)Fair Value
Balance sheet captionAmount
Interest rate swap designated as cash flow hedgeOther accrued liabilities$227 
The following table summarizes the amount at fair value and location of the derivative instruments used for our interest rate hedges in the Condensed Consolidated Balance Sheets as of December 31, 2021:
(In thousands)Fair Value
Balance sheet captionAmount
Interest rate swap designated as cash flow hedgeOther accrued liabilities$666 
We regularly assess the creditworthiness of the counterparty. As of April 1, 2022, the counterparty to the interest rate swaps had performed in accordance with its contractual obligations. Both the counterparty credit risk and our credit risk were considered in the fair value determination.
Net interest rate derivative losses of $0.2 million and $0.3 million were recognized in interest expense, net, in our Condensed Consolidated Statements of Income during the first three months of 2022 and 2021, respectively. We expect $0.2 million of existing interest rate swap losses reported in accumulated other comprehensive loss as of April 1, 2022 to be recognized in earnings within the next 12 months.
Foreign Currency Derivative Instruments
The Company had no outstanding foreign currency forward contracts at April 1, 2022 and outstanding forward contracts with a current liability value of less than $0.1 million at December 31, 2021.
Net foreign currency derivative gains and losses recognized in selling, general and administrative expenses during the first three months of 2022 and 2021 were immaterial.
NOTE 9
LEASES
We determine whether an arrangement contains a lease at inception. We have operating leases for office space, apartments, vehicles, and machinery and equipment. Our operating leases have lease terms of less than one year to ten years.
We do not separate lease components from non-lease components (e.g., common area maintenance, property taxes and insurance) but account for both components in a contract as a single lease component.
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The components of lease expense are as follows:
Three Months Ended
(In thousands)April 1, 2022April 2, 2021
Operating lease expense$3,673 $1,825 
Variable lease expense130 203 
Short-term lease expense13,669 13,448 
Total lease expense$17,472 $15,476 
Supplemental balance sheet information related to our operating leases is as follows:
(In thousands)April 1, 2022December 31, 2021
Right-of-use assets$42,074 $43,651 
Current lease liabilities (recorded in Other accrued liabilities)$11,979 $11,983 
Long-term lease liabilities (recorded in Operating lease liability)33,167 34,536 
Total operating lease liabilities$45,146 $46,519 
Additional right-of-use assets of $1.9 million were recognized as non-cash asset additions that resulted from new operating lease liabilities during the first three months of 2022.
The weighted average remaining lease term and discount rate for our operating leases at April 1, 2022 was 5.2 years and 3.7%, respectively.
Maturities of lease liabilities at April 1, 2022 were as follows:
(In thousands)Payments due
2022 (remainder of the year)$9,842 
202313,121 
20248,607 
20254,565 
20263,889 
After 202610,480 
Total minimum lease payments50,504 
Less: Imputed interest(5,358)
Total operating lease liabilities$45,146 

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NOTE 10
COMMITMENTS AND CONTINGENCIES
General
From time to time, we are involved in legal proceedings that are incidental to the operation of our business. Some of these proceedings seek remedies relating to employment matters, matters in connection with our contracts and matters arising under laws relating to the protection of the environment. Additionally, U.S. government customers periodically advise the Company of claims and penalties concerning certain potential disallowed costs. When such findings are presented, Vectrus and the U.S. government representatives engage in discussions to enable Vectrus to evaluate the merits of these claims as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect probable losses related to the matters raised by the U.S. government representatives. Such assessments, along with any assessments regarding provisions for legal proceedings, are reviewed on a quarterly basis for sufficiency based on the most recent information available to us. We have estimated and accrued $9.8 million and $9.6 million as of April 1, 2022 and December 31, 2021, respectively, in "Other accrued liabilities" in the Condensed Consolidated Balance Sheets for legal proceedings and for claims with respect to our U.S. government contracts as discussed below, including years where the U.S. government has not completed its incurred cost audits. Although the ultimate outcome of any legal matter or claim cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that any asserted or unasserted legal or contractual claims or proceedings, individually or in the aggregate, including the lawsuit discussed below, will have a material adverse effect on our cash flow, results of operations or financial condition.
U.S. Government Contracts, Investigations and Claims
We have U.S. government contracts that are funded incrementally on a year-to-year basis. Changes in U.S. government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could have a material adverse effect on our financial condition or results of operations. Furthermore, our contracts with the U.S. government may be terminated or suspended by the U.S. government at any time, with or without cause. Such contract suspensions or terminations could result in unreimbursable expenses or charges or otherwise adversely affect our financial condition and results of operations.
Departments and agencies of the U.S. government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages. U.S. government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. government contracts or the loss of export privileges for a company or an operating division or subdivision. Suspension or debarment could have a material adverse effect on the Company because of its reliance on U.S. government contracts.
U.S. government agencies, including the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency (DCMA) and others, routinely audit and review our performance on U.S. government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. Accordingly, costs billed or billable to U.S. government customers are subject to potential adjustment upon audit by such agencies. The U.S. government agencies also review the adequacy of our compliance with U.S. government standards for our business systems, including our accounting, earned value management, estimating, materials management and accounting, purchasing, and property management systems.
As a result of final indirect rate negotiations between the U.S. government and our Former Parent, we may be subject to adjustments to costs previously allocated by our Former Parent to our business, which was formerly Exelis’ Mission Systems Business, from 2007 through 2014. We are in discussions with our Former Parent and the U.S. government regarding these cost adjustments from 2007 through 2014 and believe that our potential cumulative liability for these years is insignificant. Between June 2019 and March 2021, the U.S. government provided us with three Contracting Officers Final Decisions (COFD) for the years from 2007 through 2014 related to Former Parent costs. We filed appeals of the COFDs with the Armed Services Board of Contract Appeals (ASBCA), which have been consolidated. The ASBCA has granted Vectrus’ and the U.S. government’s joint requests to stay proceedings in the appeal, most recently through May 23, 2022, to enable ongoing discussions regarding the matter between the parties. The U.S. government subsequently offered a settlement to reduce the costs to an insignificant amount to address errors and costs related to contracts novated to our Former Parent, which we are currently reviewing. We believe we are fully indemnified under our Distribution Agreement with our Former Parent and have notified our Former Parent of our appeal of the U.S. government's decision in this matter.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization designated the outbreak of COVID-19 as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, social distancing guidelines, and restrictions on employees going to work. Uncertainty with respect to the economic impacts of the pandemic has introduced significant volatility in the financial markets. The Company has observed, and continues to experience, some
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disruptions on its operations due to government and supply chain delays related to the global pandemic. While the extent to which COVID-19 ultimately impacts the Company’s future results will depend on future developments, the pandemic and associated economic impacts, particularly with respect to newly issued vaccine mandates for government contractors and subcontractors, could result in a material impact to the Company’s future financial condition, results of operations and cash flows.
Contractual Commitment
On September 30, 2021, the Company signed a forward-starting agreement for warehouse space in support of its contractual obligations under a task order issued under the Logistics Civil Augmentation Program (LOGCAP) V support services contract in support of the U.S. Military. The agreement commencement date, which is anticipated in the second quarter 2022, is subject to the completion of certain documents and the receipt of related government regulatory and other third-party approvals. The term of the agreement consists of eight one-year extension options and one additional six-month option period, consistent with our LOGCAP V contract with the U.S. Military. The annual obligations are $20 million per year, subject to a market adjustment beginning in the sixth year, and additional obligations for certain operating expenses.
NOTE 11
STOCK-BASED COMPENSATION
The Company maintains an equity incentive plan, the 2014 Omnibus Incentive Plan, as amended and restated effective as of May 13, 2016 (the 2014 Omnibus Plan), to govern awards granted to Vectrus employees and directors, including nonqualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards and other awards. We account for NQOs and stock-settled RSUs as equity-based compensation awards. TSR awards, described below, and cash-settled RSUs are accounted for as liability-based compensation awards.
Stock-based compensation expense and the associated tax benefits impacting our Condensed Consolidated Statements of Income were as follows:
Three Months Ended
(In thousands)April 1, 2022April 2, 2021
Compensation costs for equity-based awards$3,100 $1,983 
Compensation costs for liability-based awards(542)639 
Total compensation costs, pre-tax$2,558 $2,622 
Future tax benefit$555 $569 
Liability-based awards are revalued at the end of each reporting period to reflect changes in fair value.
As of April 1, 2022, total unrecognized compensation costs related to equity-based awards and liability-based awards were $9.3 million and $2.6 million, respectively, which are expected to be recognized ratably over a weighted average period of 2.25 years and 2.36 years, respectively.
The following table provides a summary of the activities for NQOs and RSUs for the three months ended April 1, 2022:
NQOsRSUs
(In thousands, except per share data)SharesWeighted Average Exercise Price Per ShareSharesWeighted Average Grant Date Fair Value Per Share
Outstanding at January 1, 202259 $23.19 245 $51.18 
Granted— $— 208 $36.09 
Exercised— $— — $— 
Vested— $— (101)$45.90 
Forfeited or expired— $— (10)$43.13 
Outstanding at April 1, 202259 $23.19 342 $43.44 

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For employee RSUs, one-third of the award vests on each of the three anniversary dates following the grant date. Director RSUs are granted on the date of an annual meeting of shareholders and vest on the business day immediately prior to the next annual meeting. The fair value of each RSU grant was determined based on the closing price of Vectrus common stock on the date of grant. Stock compensation expense will be recognized ratably over the vesting period of the awards.
Total Shareholder Return Awards
TSR awards are performance-based cash awards that are subject to a three-year performance period. Any payments earned are made in cash following completion of the performance period according to the achievement of specified performance goals. During the three months ended April 1, 2022, we granted TSR awards with an outstanding aggregate target TSR value of $2.8 million. The fair value of TSR awards is measured quarterly and is based on the Company’s performance relative to the performance of the Aerospace and Defense Companies in the S&P 1500 Index. Depending on the Company’s performance during the three-year performance period, payments can range from 0% to 200% of the target value.
NOTE 12
INCOME TAXES
Effective Tax Rate
Income tax expense during interim periods is based on an estimated annual effective income tax rate, plus discrete items that may occur in any given interim periods. The computation of the estimated effective income tax rate at each interim period requires certain estimates and judgment including, but not limited to, forecasted operating income for the year, projections of the income earned and taxed in various jurisdictions, newly enacted tax rate and legislative changes, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.
For the three months ended April 1, 2022 and April 2, 2021, we recorded an income tax provision of $0.7 million and $2.6 million, representing effective income tax rates of 19.7% and 17.5%, 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, available deductions not reflected in book income, and income tax credits.
Uncertain Tax Provisions
As of April 1, 2022 and December 31, 2021, unrecognized tax benefits from uncertain tax positions were $9.5 million and $9.3 million, respectively. The increase in the uncertain tax positions was principally the result of the additional Foreign Derived Intangible Income (FDII) deduction as the Company reserves a portion of the FDII benefit claimed or expected to be claimed on its income tax return filings.
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NOTE 13
EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects potential dilution that could occur if securities to issue common stock were exercised or converted into common stock. Diluted EPS includes the dilutive effect of stock-based compensation outstanding after application of the treasury stock method.
Three Months Ended
April 1,April 2,
(In thousands, except per share data)20222021
Net income $2,855 $12,048 
Weighted average common shares outstanding11,759 11,648 
Add: Dilutive impact of stock options27 43 
Add: Dilutive impact of restricted stock units116 136 
Diluted weighted average common shares outstanding11,902 11,827 
Earnings per share
Basic$0.24 $1.03 
Diluted$0.24 $1.02 
The following table summarizes the weighted average of anti-dilutive securities excluded from the diluted earnings per share calculation.
Three Months Ended
April 1,April 2,
(In thousands)20222021
Anti-dilutive restricted stock units5 1 
NOTE 14
DEFERRED EMPLOYEE COMPENSATION
During the first quarter of 2021, the Company established a non-qualified deferred compensation plan under which participants are eligible to defer a portion of their compensation on a tax deferred basis. The assets in the plan are held in a Rabbi trust. Plan investments and obligations were recorded in other non-current assets and other non-current liabilities, respectively, in the consolidated balance sheets, representing the fair value related to the deferred compensation plan. Adjustments to the fair value of the plan investments and obligations are recorded in selling, general, and administrative expenses. The plan assets and liabilities were $0.8 million and $0.5 million as of April 1, 2022 and December 31, 2021, respectively.
NOTE 15
MULTI-EMPLOYER PENSION PLAN
Certain Company employees who perform work on contracts within the continental United States participate in a multiemployer pension plan of which the Company is not the sponsor. Expense recognized for this plan was $0.2 million for the three months ended April 1, 2022 and the three months ended April 2, 2021.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q as well as the audited Consolidated Financial Statements and notes thereto and the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2021. This Quarterly Report provides additional information regarding the Company, our services, industry outlook and forward-looking statements that involve risks and uncertainties, including those related to the potential impact of the coronavirus pandemic (COVID-19), and any current or future government mandated COVID-19 precautions, including mandatory vaccination, and its impact on us, our operations, or our future financial or operational results. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements. Refer to "Forward-Looking Information" for further information regarding forward-looking statements. Amounts presented in and throughout this Item 2 are rounded and, as such, any rounding differences could occur in period over period changes and percentages reported.
Overview
Vectrus, Inc. is a leading provider of services to the United States Government (U.S. government) worldwide. The Company operates as one segment and provides the following services and offerings: facility and base operations, supply chain and logistics services, information technology mission support, and engineering and digital integration services.
Our primary customer is the U.S. Department of Defense (DoD), with a high concentration in the U.S. Army. For the three months ended April 1, 2022 and April 2, 2021, we had total revenue of $456.5 million and $434.0 million, respectively, substantially all of which was derived from U.S. government customers. For the three months ended April 1, 2022 and April 2, 2021, we generated approximately 61% and 59% of our total revenue from the U.S. Army, respectively.
Executive Summary
Our revenue increased $22.5 million, or 5.2%, for the three months ended April 1, 2022 compared to the three months ended April 2, 2021. Revenue from our U.S. and Asia programs increased by $18.2 million and $12.6 million, respectively, and decreased from our Middle East and Europe programs by $4.3 million and $4.1 million, respectively.
Operating income for the three months ended April 1, 2022, was $5.2 million, a decrease of $11.3 million, or 68.3%, compared to the three months ended April 2, 2021. The decrease was due to an increase in SG&A expenses related to M&A and integration costs.
During the performance of our contracts, we periodically review estimated final contract prices and costs and make revisions as required, which are recorded as changes in revenue and cost of revenue in the periods in which they are determined. Additionally, the fees under certain contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue when there is sufficient information to reasonably assess anticipated contract performance. Amounts representing contract change orders, claims, requests for equitable adjustment, or limitations in funding on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated. Changes in estimated revenue, cost of revenue and the related effect to operating income are recognized using cumulative catch-up adjustments, which recognize in the current period the cumulative effect of the changes on current and prior periods based on a contract's percentage of completion. Cumulative catch-up adjustments due to aggregate changes in contract estimates increased operating income by $0.6 million and decreased operating income by $1.3 million for the three months ended April 1, 2022 and April 2, 2021, respectively. Cumulative catch-up adjustments are driven by changes in contract terms, program performance, customer scope changes and changes to estimates in the reported period. These changes can increase or decrease operating income depending on the dynamics of each contract.
Further details related to our financial results for the three months ended April 1, 2022, compared to the three months ended April 2, 2021, are contained in the "Discussion of Financial Results" section.
Proposed Merger with Vertex Aerospace
On March 7, 2022, the Company, including its newly incorporated subsidiaries Andor Merger Sub LLC (Merger Sub LLC) and Andor Merger Sub Inc. (Merger Sub Inc.), and Vertex Aerospace Services Holding Corp. (Vertex), entered into an agreement and plan of merger (the Merger Agreement) proposing that Merger Sub Inc. merge with and into Vertex (the First Merger), and immediately thereafter, Vertex, as the surviving company of the First Merger, merge with and into Merger Sub LLC (the Second Merger), with Merger Sub LLC surviving the Second Merger as a direct, wholly owned subsidiary of the Company (the Proposed Transaction).
The Proposed Transaction is structured so that the existing stockholders of Vertex will own approximately 62.25% of the issued and outstanding Company common shares following the consummation of the Proposed Transaction, and the existing shareholders of the Company will own approximately 37.75%.
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The consummation of the Proposed Transaction is subject to the satisfaction of certain conditions, including, among others, the expiration or termination of antitrust waiting periods and receipt of certain other regulatory approvals, absence of injunctions or restraints prohibiting consummation of the Proposed Transaction, the Vectrus shareholder approval being obtained, the shares issued to Vertex being approved for listing on the New York Stock Exchange and the execution and delivery of a shareholder rights and registration rights agreements. The obligation of each party to consummate the Proposed Transaction is also conditioned on the other party’s representations and warranties being true and correct, the other party having performed in all material respects its obligations under the Merger Agreement, and the absence of any material adverse effect after the date of the Merger Agreement.
The Merger Agreement provides certain termination rights for both the Company and Vertex, and further provides that a termination fee equal to $16.6 million will be payable by the Company to Vertex upon termination of the Merger Agreement under certain circumstances, including, among others, (i) as a result of the termination of the Merger Agreement by the Company to accept a Parent Superior Proposal (as defined in the Merger Agreement), (ii) the Company having Willfully Breached (as defined in the Merger Agreement) any of its obligations under the no solicitation provisions of the Merger Agreement, or (iii) the Board having changed its recommendation to shareholders.
Recent Developments
Information regarding certain significant contracts is discussed in "Significant Contracts" below.
COVID-19 Impact
The COVID-19 pandemic continues to present significant business challenges in 2022. During the first three months of 2022, we continued to experience impacts related to COVID-19, including continued increased coronavirus-related costs, global supply chain disruptions, local immigration regulations limiting the ability to deploy personnel, delays in supplier deliveries, impacts of travel restrictions, site access and quarantine restrictions, and the impacts of remote work and adjusted work schedules. In addition, President Biden announced new vaccine mandates on September 9, 2021 for government contractors and subcontractors. If these mandates are implemented, the extent of the regulatory impact is unclear and could have a material adverse impact on the Company's operations. As new variants of the virus emerge, we remain cautious as many factors remain unpredictable. We continue to take measures to protect the health and safety of our employees, including measures to facilitate the provision of vaccines to our employees in line with state and local guidelines, to work with our customers to minimize ultimate potential disruptions, and to support our community in addressing the challenges posed by this global pandemic.
The extent of the ultimate impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our programs in the expected timeframe, will depend on future developments, including any potential subsequent waves of COVID-19 infection, the effectiveness, distribution and acceptance of COVID-19 vaccines, new government regulations for defense contractors and other related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which remain uncertain and cannot be predicted.
For the three months ended April 1, 2022, the impact of COVID-19 was immaterial to our financial results.
In accordance with the DoD guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, our U.S. facilities have continued to operate in support of essential products and services required to meet our commitments to the U.S. government and the U.S. military; however, facility closures or work slowdowns or supply chain disruptions have affected our financial results and projections. In addition, other countries are responding to the pandemic differently which have affected our international operations and the operations of our suppliers and customers. However, any closures to date have not significantly impacted Vectrus' business.
We continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19. We continue to assess possible implications to our business, supply chain and customers and to take actions in an effort to mitigate adverse consequences in order to support our customers' mission critical business and national security.
For additional risks to the company related to the COVID-19 pandemic, see Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021.
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Significant Contracts
The following table reflects contracts that accounted for more than 10% of our total revenue for the three months ended April 1, 2022 and April 2, 2021:
% of Total Revenue
Three Months Ended
Contract NameApril 1, 2022April 2, 2021
Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order21.6%2.0%
Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order15.7%2.3%
Operations, Maintenance and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA)6.6%10.8%
Kuwait Base Operations and Security Support Services (K-BOSSS)2.2%27.0%
Revenue associated with a contract will fluctuate based on increases or decreases in the work being performed on the contract, award fee payment assumptions, and other contract modifications within the term of the contract resulting in changes to the total contract value. See "Backlog" below.
The LOGCAP V - Kuwait Task Order is currently exercised through June 30, 2022, with four 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 $98.4 million and $8.6 million of revenue for the three months ended April 1, 2022 and April 2, 2021, respectively.
The LOGCAP V - Iraq Task Order is currently exercised through June 21, 2022, with four additional twelve-month options and one six-month option through December 21, 2026. The task order provides services to support the Geographical Combatant Commands and Army Service Component Commands throughout the full range of military operations in the Iraq region. The LOGCAP V - Iraq Task Order contributed $71.5 million and $10.1 million of revenue for the three months ended April 1, 2022 and April 2, 2021, respectively.
On December 29, 2020, the U.S. Army announced that Vectrus Systems Corporation (VSC), our wholly-owned subsidiary was awarded an $882.5 million cost-plus-fixed-fee contract to continue Operations, Maintenance, and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA). Work will be based in Kuwait with additional locations throughout Southeast Asia. On March 8, 2021, the U.S. government received a protest from a competitor, which was filed at the Government Accountability Office (GAO). The GAO decided the case and denied the protest on June 1, 2021. Subsequently, on July 13, 2021, the unsuccessful competitor filed a protest at the U.S. Court of Federal Claims (COFC). Performance is ongoing on the contract awarded to Vectrus as there is no "stay" of performance due to the filing of the protest. A hearing at the COFC took place January 11, 2022. On March 28, 2022, COFC issued its decision denying all but one of the unsuccessful competitor's grounds and ordered additional briefings to address the applicable relief that should be granted. The parties submitted their briefs on April 11, 2022, and the court's decision remains pending. The estimated completion date of this contract is December 26, 2025. The OMDAC-SWACA contract contributed $30.3 million and $46.9 million of revenue for the three months ended April 1, 2022 and April 2, 2021, respectively.
The K-BOSSS contract is currently exercised through August 28, 2022. Components of the K-BOSSS contract were re-competed as a task order under the LOGCAP V contract vehicle and were awarded to us on April 12, 2019. The K-BOSSS contract contributed $10.2 million and $117.0 million of revenue for three months ended April 1, 2022 and April 2, 2021, respectively.
Backlog
Total backlog includes remaining performance obligations, consisting of both funded backlog (firm orders for which funding is contractually authorized and appropriated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer and unexercised contract options). Total backlog excludes potential orders under IDIQ contracts and contracts awarded to us that are being protested by competitors with the GAO or in the COFC. The value of the backlog is based on anticipated revenue levels over the anticipated life of the contract. Actual values may be greater or less than anticipated. Total backlog is converted into revenue as work is performed. The level of order activity related to programs can be affected by the timing of U.S. government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others.
Our contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year or less option periods for the remaining contract period. The number of option periods vary by contract, and there is no guarantee that an option period will be exercised. The right to exercise an option period is at the sole discretion of the U.S. government when we are the prime contractor or of the prime contractor when we are a subcontractor. The U.S. government may also extend the term of a program by issuing extensions or bridge contracts, typically for periods of one year or less.
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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. Substantially all of our contracts have terms that would permit us to recover all or a portion of our incurred costs and fees for work performed in the event of a termination for convenience.
For the three months ended April 1, 2022, total backlog was $4.5 billion as compared to $5.0 billion at December 31, 2021. The following is a summary of our backlog as of April 1, 2022 and December 31, 2021:
April 1,December 31,
(In millions)20222021
Funded backlog$818 $1,033 
Unfunded backlog3,676 3,972 
Total backlog$4,494 $5,005 
    
Funded orders (different from funded backlog) represent orders for which funding was received during the period. We received funded orders of $249.9 million during the three months ended April 1, 2022, which was a decrease of $177.6 million compared to the three months ended April 2, 2021.
Economic Opportunities, Challenges and Risks
The U.S. government’s investment in services and capabilities in response to changing security challenges creates a complex and fluid business environment for Vectrus and other firms in this market. 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, 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 March 15, 2022, the Consolidated Appropriations Act of 2022 was signed into law by the President and provides funding through the end of FY 2022 - September 30, 2022. The bill provides $782 billion in total national defense spending, including $742 billion for the DoD.
On March 28, 2022, the U.S. government submitted the FY 2023 Federal budget, which requests $813 billion for total national defense spending including $773 billion for the DoD.
We believe spending on maintaining, operating, and hardening national security defense assets, as well as civilian agency infrastructure and equipment, will continue to be a U.S. government priority. Our focus is on sustaining and protecting infrastructures, equipment, and IT networks, while utilizing operational technologies and converged solutions to improve efficiency and the outcomes of our clients' missions. We believe this aligns with our customers' intent to utilize and harden existing equipment and infrastructure rather than executing new purchases. Many of the core functions we perform are mission-essential. The following are examples of a few of these core functions: (i) keeping communications networks operational; (ii) maintaining airfields and aircraft; (iii) providing emergency services; (iv) guarding our nation’s military bases, and other critical resources with integrated electronic security systems; and (v) supporting rapid response contingency efforts. While customers may reduce the level of services required from us, we do not currently anticipate the complete elimination of these services.
The information provided above does not represent a complete list of trends and uncertainties that could impact our business in either the near or long-term and should be considered along with the risk factors identified under the caption “Risk Factors” identified in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021 and the matters identified under the caption “Forward-Looking Statement Information" herein.
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DISCUSSION OF FINANCIAL RESULTS
Three months ended April 1, 2022, compared to three months ended April 2, 2021
Selected financial highlights are presented in the following table:
Three Months EndedChange
(In thousands, except for percentages)April 1, 2022April 2, 2021$%
Revenue $456,471 $434,004 $22,467 5.2 %
Cost of revenue 419,275 393,648 25,627 6.5 %
% of revenue 91.9 %90.7 %
Selling, general, and administrative expenses31,959 23,823 8,136 34.2 %
% of revenue 7.0 %5.5 %
Operating income 5,237 16,533 (11,296)(68.3)%
Operating margin 1.1 %3.8 %
Interest expense, net(1,681)(1,932)(251)(13.0)%
Income from operations before income taxes3,556 14,601 (11,045)(75.6)%
% of revenue0.8 %3.4 %
Income tax expense701 2,553 (1,852)(72.5)%
Effective income tax rate 19.7 %17.5 %
Net Income $2,855 $12,048 $(9,193)(76.3)%
Revenue
Revenue for the three months ended April 1, 2022 was $456.5 million, an increase of $22.5 million, or 5.2%, as compared to the three months ended April 2, 2021. Revenue from our U.S. and Asia programs increased by $18.2 million, and $12.6 million, respectively, and decreased from our Middle East and Europe programs by $4.3 million and $4.1 million, respectively.
Cost of Revenue
Cost of revenue as a percentage of revenue was 91.9% compared to 90.7% for the three months ended April 1, 2022 and April 2, 2021, respectively. The increase in cost of revenue of $25.6 million, or 6.5%, for the three months ended April 1, 2022, as compared to the three months ended April 2, 2021, was primarily due to the volume fluctuations described for revenue. In addition, the three months ended April 1, 2022 had increased material and pass through content which carries a lower gross margin.
Selling, General, & Administrative (SG&A) Expenses
For the three months ended April 1, 2022, SG&A expenses of $32.0 million increased by $8.1 million, or 34.2%, as compared to April 2, 2021. The increase in SG&A expenses was due to M&A and integration costs.
Operating Income
Operating income for the three months ended April 1, 2022 decreased by $11.3 million, or 68.3%, as compared to the three months ended April 2, 2021. The decrease was due primarily to the fluctuations described for SG&A.
Operating income as a percentage of revenue was 1.1% for the three months ended April 1, 2022, compared to 3.8% for the three months ended April 2, 2021. The decrease in operating income is a result of an increase in M&A and integration costs.
Aggregate cumulative catch-up adjustments increased operating income by $0.6 million and decreased operating income by $1.3 million for the three months ended April 1, 2022 and April 2, 2021, respectively. The aggregate cumulative catch-up adjustments for the three months ended April 1, 2022 and April 2, 2021 related to changes in contract terms, program performance, customer scope changes and changes to estimates in the reported period. Operating income is also impacted by labor mix and the cost differential between internal resources and subcontractors as well as the volume of Other Direct Cost (ODCs) purchases.
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Interest (Expense) Income, Net
Interest (expense) income, net for the three months ended April 1, 2022 and April 2, 2021 was as follows:
Three Months EndedChange
(In thousands, except for percentages)April 1, 2022April 2, 2021$%
Interest income$43 $25 $18 72.0 %
Interest expense(1,724)(1,957)(233)(11.9)%
Interest expense, net
$(1,681)$(1,932)$(251)(13.0)%
Interest income is directly related to interest earned on our cash. Interest expense is directly related to borrowings under our senior secured credit facilities, with the amortization of debt issuance costs, and derivative instruments used to hedge a portion of our exposure to interest rate risk. The decrease in interest expense, net of $0.3 million for the three months ended April 1, 2022 compared to the three months ended April 2, 2021 was due to the use of our revolving credit facility in 2021 for the December 31, 2020 acquisitions of Zenetex and HHB.
Income Tax Expense
We recorded income tax expense of $0.7 million and $2.6 million for the three months ended April 1, 2022 and April 2, 2021, respectively, representing effective income tax rates of 19.7% and 17.5%, 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, available deductions not reflected in book income, and income tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We have generated operating cash flows sufficient to fund our working capital, capital expenditures, and financing requirements. We expect to fund our ongoing working capital, capital expenditure and financing requirements and pursue additional growth through new business development and potential acquisition opportunities by using cash flows from operations, cash on hand, our credit facilities, and access to capital markets. When necessary, we will utilize our revolving credit facility to satisfy short-term working capital requirements.
If our cash flows from operations are less than what we expect, we may need to access the long-term or short-term capital markets. Although we believe that our current financing arrangements will permit us to finance our operations on acceptable terms and conditions, our access to and the availability of financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. We cannot provide assurance that such financing will be available to us on acceptable terms or that such financing will be available at all.
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has also led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.
The CARES Act, signed into law in March 2020 in response to the COVID-19 pandemic, provided a deferral of payroll tax payments from which we benefited by deferring cash outlays of $16.8 million in 2020. This had the effect of increasing cash outlays for payroll taxes by $8.1 million during the first quarter of 2022.
In September 2014, we and our wholly-owned subsidiary, VSC, entered into a credit agreement. The credit agreement was subsequently amended, with the most recent amendment occurring January 24, 2022 and is collectively referred to as the Amended Agreement (See Note 7 in this Form 10-Q). The Amended Agreement consists of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver).
At April 1, 2022, there were $67.0 million of outstanding borrowings under the Amended Revolver. In addition there were two letters of credit outstanding in the aggregate amount of $2.7 million, which reduced our borrowing availability under the Amended Revolver to $200.3 million. Vectrus had net debt of $96.8 million as of April 1, 2022 and $66.9 million as of December 31, 2021.
The cash presented on our Condensed Consolidated Balance Sheets consists of U.S. and international cash from wholly owned subsidiaries. Approximately $16.6 million of our total $23.0 million in cash and cash equivalents at April 1, 2022 is held by our foreign subsidiaries and is not available to fund U.S. operations unless repatriated. We do not currently expect that we will be required to repatriate undistributed earnings of foreign subsidiaries. We expect our U.S. domestic cash resources will be sufficient to fund our U.S. operating activities and cash commitments for financing activities.

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Dividends
We do not currently plan to pay a regular dividend on our common stock. The declaration of any future cash dividends and the amount of any such dividends, if declared, will depend upon our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and the discretion of our Board of Directors. In deciding whether to pay future dividends on our common stock, our Board of Directors may take into account such matters as general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and capital investment plans, income tax consequences, applicable law and such other factors as our Board of Directors may deem relevant.
Sources and Uses of Liquidity
Cash, accounts receivable, unbilled receivables, and accounts payable are the principal components of our working capital and are generally driven by our level of revenue with other short-term fluctuations related to payment practices by our customers and the timing of our billings. Our receivables reflect amounts billed to our customers, as well as the revenue that was recognized in the preceding month, which is normally billed the month following each balance sheet date.
The total amount of our accounts receivable can vary significantly over time and is sensitive to revenue levels and the timing of payments received from our customers. Days sales outstanding (DSO) is a metric used to monitor accounts receivable levels. The Company determines its DSO by calculating the number of days necessary to exhaust its ending accounts receivable balance based on its most recent historical revenue. Our DSO was 74 and 75 days as of April 1, 2022 and December 31, 2021, respectively.
The following table sets forth net cash used in operating activities, investing activities and financing activities:
Three Months Ended
(In thousands)April 1, 2022April 2, 2021
Operating activities$(26,381)$(21,729)
Investing activities(2,178)(2,611)
Financing activities12,316 (4,071)
Foreign exchange1
729 (191)
Net change in cash, cash equivalents and restricted cash$(15,514)$(28,602)
1 Impact on cash balances due to changes in foreign exchange rates.
Net cash used in operating activities for the three months ended April 1, 2022 consisted of cash outflows for working capital requirements of $29.4 million and other long-term assets and liabilities of $6.5 million. This was partially offset by cash inflows from net income of $2.9 million and the favorable impact of non-cash net income items of $6.6 million. The net working capital outflows were largely from increases in accounts receivable and decreases in accrued compensation, which included an $8.1 million payment of deferred CARES Act payroll taxes, partially offset by increases in accounts payable.
Net cash used in operating activities for the three months ended April 2, 2021 consisted of outflows for net working capital requirements of $35.7 million and other long-term assets and liabilities of $4.9 million, partially offset by cash inflows from net income of $12.0 million and non-cash items of $6.9 million. The net working capital outflows were largely from increases in accounts receivable and decreases in accrued compensation partially offset by increases in accounts payable. .
Net cash used in investing activities for the three months ended April 1, 2022 and April 2, 2021 consisted of $2.2 million and $2.6 million, respectively, of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations.
Net cash used in financing activities during the three months ended April 1, 2022 consisted of repayments of long-term debt of $2.6 million, payments of $1.6 million for employee withholding taxes on share-based compensation and payments $0.5 million for debt issuance costs. During the three months ended April 1, 2022, we also borrowed and repaid $217.0 million and $200.0 million, respectively, on the Amended Revolver.
Net cash used in financing activities during the nine months ended April 2, 2021 consisted of payments related to employee withholding taxes on share-based compensation in the amount of $2.2 million and repayments of long-term debt of $2.0 million During the three months ended April 2, 2021, we also borrowed and repaid $110.0 million on the Amended Revolver.
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Capital Resources
At April 1, 2022, we held cash and cash equivalents of $23.0 million, which included $16.6 million held by foreign subsidiaries, and had $200.3 million of available borrowing capacity under the Amended Revolver, which expires on November 15, 2023. We believe that our cash at April 1, 2022, as supplemented by cash flows from operations and the Amended Revolver, will be sufficient to fund our anticipated operating costs, capital expenditures, and current debt repayment obligations for at least the next 12 months.
We have a shelf registration statement with the SEC that became effective in January 2020 under which we may issue, from time to time, up to $250 million of common stock, preferred stock, depository shares, warrants, rights and debt securities. If necessary, we may seek to obtain additional term loans or issue debt or equity under the registration statement to supplement our working capital and investing requirements or to fund acquisitions. A financing transaction may not be available on terms acceptable to us, or at all, and a financing transaction may be dilutive to our current stockholders.
Contractual Obligations
As of April 1, 2022, our commitments to make future payments under long-term contractual obligations were as follows:
Payments Due by Period
Less than 1 yearMore than 5 Years
(In thousands)Total1 - 3 Years3 - 5 Years
Operating leases50,504 13,122 19,588 8,146 9,648 
Principal payments on Amended Term Loan52,800 10,400 42,400 — — 
Principal payments on Amended Revolver67,000 — 67,000 — — 
Interest on Term Loan and Amended Revolver ¹5,589 3,518 2,071 — — 
Total175,893 27,040 131,059 8,146 9,648 
¹ Includes unused funds fee and is based on the April 1, 2022 interest rate and outstanding Amended Revolver balance
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from management's estimates under different assumptions or conditions.
We believe that the assumptions and estimates associated with revenue recognition, business combinations, goodwill and other intangible assets, and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes in our critical accounting policies and estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.
New Accounting Pronouncements
Refer to Part I, Item 1, Note 2 "Recent Accounting Standards Update" in the notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding accounting pronouncements and accounting standards updates.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the Securities Act of 1933, as amended (the Securities Act), and the Private Securities Litigation Reform Act of 1995 and, as such, may involve risks and uncertainties. All statements included or incorporated by reference in this report, other than statements that are purely historical, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “could,” “potential,” “continue” or similar terminology. These statements are based on the beliefs and assumptions of the management of the Company based on information currently available to management. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements.
We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and
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uncertainties that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to: the continued impact of COVID-19 and any variant strains thereof on the global economy and any current or future government mandated COVID-19 precautions, including mandatory vaccination; our ability to submit proposals for and/or win all potential opportunities in our pipeline; our ability to retain and renew our existing contracts; our ability to compete with other companies in our market; security breaches and other disruptions to our information technology and operation; our mix of cost-plus, cost-reimbursable, and firm-fixed-price contracts; maintaining our reputation and relationship with the U.S. government; protests of new awards; economic, political and social conditions in the countries in which we conduct our businesses; changes in U.S. or international government defense budgets; government regulations and compliance therewith, including changes to the DoD procurement process; changes in technology; intellectual property matters; governmental investigations, reviews, audits and cost adjustments; contingencies related to actual or alleged environmental contamination, claims and concerns; delays in completion of the U.S. government's budget; our success in extending, deepening, and enhancing our technical capabilities; our success in expanding our geographic footprint or broadening our customer base; our ability to realize the full amounts reflected in our backlog; impairment of goodwill; misconduct of our employees, subcontractors, agents, prime contractors and business partners; our ability to control costs; our level of indebtedness; terms of our credit agreement; interest rate risk; subcontractor performance; economic and capital markets conditions; our ability to maintain safe work sites and equipment; our ability to retain and recruit qualified personnel; our ability to maintain good relationships with our workforce; our teaming relationships with other contractors; changes in our accounting estimates; the adequacy of our insurance coverage; volatility in our stock price; changes in our tax provisions or exposure to additional income tax liabilities; risks and uncertainties relating to the Spin-off; changes in GAAP; and other factors described in Item 1A, “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2021 and described from time to time in our future reports filed with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings, cash flows and financial position are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates. All of the potential changes noted below are based on information available at April 1, 2022.
Interest Rate Risk
Each one percentage point change associated with the variable rate Amended Term Loan would result in a $0.1 million change in our annual cash interest expenses, net of interest rate swaps in place as of April 1, 2022 to hedge a portion of this risk
Assuming our Amended Revolver was fully drawn to a principal amount equal to $270.0 million, each one percentage point change in interest rates would result in a $2.7 million change in our annual cash interest expense.
As of April 1, 2022, the notional value of our interest rate swap agreements totaled $39.8 million. The difference to be paid or received under the terms of the interest rate swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense for the related debt in the period incurred. Changes in the variable interest rates to be paid pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows. Refer to Note 8, "Derivative Instruments" in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding our interest rate swaps.
Foreign Currency Exchange Risk
The majority of our business is conducted in U.S. dollars. However, we are required to transact in foreign currencies for some of our contracts, resulting in some assets and liabilities denominated in foreign currencies. As a result, our earnings may experience some volatility related to movements in foreign currency exchange rates. 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. The impact of the related contracts on our Condensed Consolidated Statements of Income and our Condensed Consolidated Balance Sheets was immaterial and related hedging was discontinued. Our last forward contracts expired in January 2021 and no such contracts are outstanding as of April 1, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of April 1, 2022. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of April 1, 2022, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to management to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
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Changes in Internal Control over Financial Reporting