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Related Party Transactions and Parent Company Equity
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Dec. 31, 2014
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| Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Related Party Transactions and Parent Company Equity | RELATED PARTY TRANSACTIONS AND PARENT COMPANY EQUITY The Consolidated and Combined Financial Statements have been prepared on a stand-alone basis. However, prior to September 27, 2014, they were derived from the consolidated and combined financial statements and accounting records of Exelis. Allocation of General Corporate Expenses Prior to September 27, 2014 these Consolidated and Combined Financial Statements included expense allocations for certain functions provided by Exelis as well as other Exelis employees not solely dedicated to the Company, including, but not limited to, general corporate expenses related to finance, legal, information technology, human resources, communications, ethics and compliance, shared services, employee benefits and incentives and stock-based compensation. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenue, headcount or other measures. We were allocated $23.3 million, $33.4 million and $36.4 million for the nine months ended September 27, 2014 and the years ended December 31, 2013 and 2012, respectively, of general corporate expenses incurred by Exelis which are primarily included within Selling, general and administrative expenses in the Consolidated and Combined Statements of Income. The expense allocations from Exelis discussed above include costs associated with defined benefit pension and other post-retirement benefit plans (the “Shared Plans”) sponsored by Exelis in which some of our employees participate. We accounted for such Shared Plans as multiemployer benefit plans. Accordingly, we did not record an asset or liability to recognize the funded status of the Shared Plans. Subsequent to September 27, 2014, the date the employees' benefits were frozen in the plans, we did not incur further costs for the Shared Plans and all assets and liabilities related to the Shared Plans remain with Exelis. The expense allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided or the benefit received by us during the periods presented. The allocations may not, however, reflect the expense we would have incurred as an independent, publicly-traded company for the periods presented. Actual costs that may have been incurred if we had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, functions outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure. Distribution Agreement We entered into a Distribution Agreement with Exelis which sets forth our agreements with Exelis regarding the principal actions needed to be taken in connection with our Spin-off. It also set forth other agreements that govern certain aspects of our relationship with Exelis following the Spin-off including, but not limited to, transfer of assets and assumption of liabilities, indemnification, and release of claims. Pursuant to the terms of the Distribution Agreement, (i) Vectrus and Exelis effected certain transfers of assets and assumed certain liabilities so that Vectrus and Exelis retained both the assets of and liabilities associated with their respective businesses, (ii) subject to certain exceptions, all agreements, arrangements, commitments and undertakings, including all intercompany accounts payable or accounts receivable, including intercompany indebtedness were terminated, novated or otherwise satisfied, effective no later than the Distribution Date, and (iii) Vectrus effected a pro rata distribution of our common stock to Exelis shareholders. Employee Matters Agreement We entered into an Employee Matters Agreement with Exelis that governs the respective rights, responsibilities and obligations of Exelis and us after the Spin-off with respect to employee-related liabilities and among other things, our respective retirement plans, nonqualified deferred compensation plans, health and welfare benefit plans, and equity-based compensation plans (including the treatment of outstanding awards granted thereunder). Tax Matters Agreement We entered into a Tax Matters Agreement with Exelis that governs the respective rights, responsibilities and obligations of Exelis and us after the Spin-off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign income taxes, other tax matters and related tax returns. We have several liabilities with Exelis to the IRS for the consolidated U.S. Federal income taxes of the Exelis consolidated group relating to the taxable periods in which we were part of that group. However, the Tax Matters Agreement specifies the portion, if any, of this tax liability for which we bear responsibility, and Exelis agrees to indemnify us against any amounts for which we are not responsible. The Tax Matters Agreement also provides special rules for allocating tax liabilities in the event that the Spin-off is determined not to be tax-free. The Tax Matters Agreement provides for certain covenants that may restrict our ability to pursue strategic or other transactions that otherwise could maximize the value of our business and may discourage or delay a change of control. For example, unless we (or Exelis, as applicable) were to receive a supplemental private letter ruling from the IRS or an unqualified opinion from a nationally recognized tax advisor, or Exelis were to grant us a waiver, we would be restricted until two years after the Spin-off is consummated from entering into transactions which would result in an ownership shift in the Company of more than 35% (measured by vote or value) or divestitures of certain businesses or entities which could impact the tax-free nature of the Spin-off. Under the Tax Matters Agreement we agree to indemnify Exelis for any tax resulting from any such transactions, whether or not Exelis consented to such transactions or we were otherwise permitted to enter into such transactions under the Tax Matters Agreement. Though valid as between the parties, the Tax Matters Agreement is not binding on the IRS. Transition Services Agreement We entered into a Master Transition Services Agreement with Exelis, under which Exelis or its respective affiliates provides us with certain services, and we provide Exelis certain services, including information technology, financial, procurement, human resource, benefits support and other specified services from Exelis and including information technology, human resources and other specified services to Exelis. We expect these services will be initially provided at a base amount with scheduled, escalating increases up to the base amount plus 10% subject to adjustments for inflation and these services are planned to extend for a period of 3 to 24 months in most circumstances. Intellectual Property License Agreement We entered into a Transitional Trademark License Agreement with Exelis pursuant to which we will license on a non-exclusive basis the right to use the Exelis name and trademark in our business for a transitional period while we phase out the use of such trademark in the operation of our business. We also entered into a Technology License Agreement with Exelis pursuant to which we will license on a non-exclusive basis certain of our intellectual property (excluding trademarks) existing as of the Distribution Date to Exelis and its affiliates and in turn, Exelis and its affiliates will grant reciprocal licenses to us, each for use in our respective businesses. Working Capital Adjustment We entered into a Contribution Agreement with Exelis containing a two-way adjustment mechanism relating to the working capital and cash levels of Vectrus prior to the Spin-off. Pursuant to that agreement, payments were made by the applicable entity to the other, reflecting the difference between the actual level of working capital (including cash) of Vectrus prior to the Spin-off, adjusted for the indemnification of a receivable by Exelis, as compared to the target working capital (including cash) of $64.4 million. As a result, Vectrus received an initial payment of $17.0 million from Exelis on September 26, 2014. The final payment of $2.6 million was made to Vectrus by Exelis during the quarter ended December 31, 2014. In addition, the contribution agreement states any cash collected on the indemnified receivable by the Company will be remitted to Exelis. Parent Company Equity Net transfers (to)/from the parent are included within parent company investment on the Consolidated and Combined Statements of Shareholders' and Parent Company Equity prior to September 27, 2014 and the years ended 2013 and 2012. The components of the net transfers (to)/from parent are as follows:
The components of net assets and liabilities transferred between Exelis and the Company in connection with the Spin-off were as follows:
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