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Item 2. Management’s Discussion and Analysis

2020-11-10 compared with 2020-08-11 · 115 added, 124 removed, 257 unchanged (48% of the section changed)

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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.

Vectrus is a leading provider of critical mission support services to the U.S.

Government worldwide.

We operate in one segment and offer facility and logistics services and information technology and network communications services.

Most of our work provides life support and maintenance services for enduring military bases and mission critical IT networks.

Vectrus is a leading provider of global service solutions with a history in the services market that dates back more than 70 years.

The company provides facility and base operations;

supply chain and logistics services;

information technology mission support;

and engineering and digital technology services primarily to U.S.

government customers around the world.

Vectrus is differentiated by operational excellence, superior program performance, a history of long-term customer relationships and a strong commitment to its clients’ mission success .

Our primary customer is the U.S.

Department of Defense (DoD), with a high concentration in the U.S.

For the six months ended July 3, 2020 and June 28, 2019, we had total revenue of $687.8 million and $657.5 million, respectively, substantially all of which was derived from U.S.

For the nine months ended October 2, 2020 and September 27, 2019, we had total revenue of $1,040.2 million and $1,017.4 million, respectively, substantially all of which was derived from U.S.

Government customers.

For both the six months ended July 3, 2020 and June 28, 2019, we generated approximately 69% of our total revenue from the U.S.

For the nine months ended October 2, 2020 and September 27, 2019, we generated approximately 68% and 69% of our total revenue from the U.S.

Army, respectively.

Executive Summary

Our revenue increased $4.5 million, or 1.3%, for the three months ended July 3, 2020 compared to the three months ended June 28, 2019.

The increase in revenue was attributable to $10.3 million from our acquisition of Advantor offset by a temporary decrease in our existing contracts due to the COVID-19 pandemic.

Revenue from our U.S.

programs increased by $11.4 million, partially offset by decreased revenue from our Middle East and European programs of $6.8 million and $0.1 million, respectively.

Operating income for the three months ended July 3, 2020, was $2.4 million, a decrease of $8.8 million, or 78.3%, compared to the three months ended June 28, 2019.

This decrease was due to a decrease of $6.6 million from our Middle East $2.1 million from our European programs and $0.1 million from our U.S.

Our revenue decreased $7.5 million, or 2.1%, for the three months ended October 2, 2020 compared to the three months ended September 27, 2019.

The decrease in revenue is due to a temporary decrease in revenue from our existing contracts due to the COVID-19 pandemic .

Revenue from our Middle East and European programs decreased by $19.2 million, and $0.4 million, respectively.

This was partially offset by an increase in revenue from our U.S.

programs of $12.1 million.

Operating income for the three months ended October 2, 2020, was $14.8 million, an increase of $2.4 million, or 19.5%, compared to the three months ended September 27, 2019.

This increase was due to an increase of $3.5 million from our European programs and $3.1 million from our U.S.

programs, partially offset by a decrease of $4.2 million from our Middle East programs.

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.

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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 decreased operating income by $1.5 million and increased operating income by $1.9 million for the three months ended July 3, 2020 and June 28, 2019, respectively.

Cumulative catch-up adjustments due to aggregate changes in contract estimates increased operating income by less than $0.1 million and $0.7 million for the three months ended October 2, 2020 and September 27, 2019, 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 and six months ended July 3, 2020, compared to the three and six months ended June 28, 2019, are contained in the "Discussion of Financial Results" section.

Further details related to our financial results for the three and nine months ended October 2, 2020, compared to the three and nine months ended September 27, 2019, are contained in the "Discussion of Financial Results" section.

Recent Developments

On April 12, 2019, the U.S.

Army Contracting Command-Rock Island (ACC-RI) awarded four IDIQ, Multiple Award Task Order Contracts (MATOC), for the Logistics Civil Augmentation Program (LOGCAP) V support services in support of the U.S.

military worldwide.

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Court of Federal Claims (the Court of Federal Claims).

On February 21, 2020, the Court of Federal Claims dismissed three of the four protests, and the remaining protest was dismissed on May 21, 2020 after the Army completed its corrective action review of the LOGCAP V Award and affirmed its initial decision.

On March 2, 2020, the Court of Federal Claims dismissed the remaining offeror's request for a temporary restraining order through March 11, 2020 and Vectrus received a notice to proceed with transition activities related to LOGCAP V on March 3, 2020.

One of the protestors filed a notice of appeal with the U.S.

Court of Appeals for the Federal Circuit (the Federal Circuit) and a statement of issues, which is currently pending.

A second protestor filed a notice of appeal, but subsequently withdrew its notice.

As of March 2, 2020, the Court of Federal Claims had dismissed all offerors' protests.

Vectrus received a notice to proceed with transition activities related to LOGCAP V on March 3, 2020.

One of the protestors filed an appeal with the U.S.

Court of Appeals for the Federal Circuit (the Federal Circuit) and all parties have filed their briefs with the court as of November 9, 2020.

A second protestor had filed a notice of appeal, but subsequently withdrew its notice.

No other protestors filed an appeal, and the deadline for filing such appeal has passed.

We filed our entry of appearance and certificate of interest with the Federal Circuit and continue to monitor the status of the appeal.

On February 28, 2020, Vectrus Systems Corporation (VSC), our wholly-owned subsidiary, received notice of a $121.8 million modification of the OMDAC-SWACA contract for enterprise network capabilities and services support of the U.S.

Central Command.

Work will be based in Kuwait with additional locations throughout Southwest Asia.

The estimated completion date is August 28, 2020.

On July 24, 2020, the Company received a notification of a $529.1 million modification to the Kuwait Base Operations and Security Support Services (K-BOSSS) contract.

Work will be performed in Camp Arifjan, Kuwait, and the estimated completion date is September 28, 2021.

The contract modification added an Undefinitized Contract Action which provided a Notice to Proceed for 50% of the ceiling price, resulting in $248.0 million obligated at the time of the award.

We continue to monitor the status of the appeal, but the pending appeal has not impacted our transition or performance activities under LOGCAP V.

Information regarding certain other significant contracts is discussed in "Significant Contracts" below.

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Government, state and local government officials, and international governments to prevent disease spread, all of which remain uncertain and cannot be predicted.

During the second quarter of 2020, it is estimated that COVID-19 caused a $22.3 million reduction in our revenue and a $0.14 reduction in our earnings per share.

For the six months ended July 3, 2020, the estimated impact was a $24.6 million reduction in revenue and a $0.16 reduction in earnings per share.

During the third quarter of 2020, it is estimated that COVID-19 caused a $12.9 million reduction in our revenue and a $0.14 reduction in our diluted earnings per share.

For the nine months ended October 2, 2020, the estimated impact was a $37.3 million reduction in revenue and a $0.30 reduction in earnings per share.

This impact was primarily due to certain government actions to restrict access to certain bases by Vectrus personnel and delays in supplier deliveries.

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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 impacted Vectrus' business materially.

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.

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Significant Contracts

The following table reflects contracts that accounted for more than 10% of our total revenue for the six months ended July 3, 2020 and June 28, 2019:

The following table reflects contracts that accounted for more than 10% of our total revenue for the nine months ended October 2, 2020 and September 27, 2019:

% of Total Revenue

Six Months Ended

Contract Name July 3, 2020 June 28, 2019

Nine Months Ended

Contract Name October 2, 2020 September 27, 2019

Kuwait Base Operations and Security Support Services (K-BOSSS) 33.3% 36.2%

Operations, Maintenance and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA) 15.2% 15.8%

Revenue associated with a contract will fluctuate based on increases or decreases in the work being performed on the contract, award fee payments, and other contract modifications within the term of the contract resulting in changes to the total contract value.

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.

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K-BOSSS supports geographically-dispersed locations within the State of Kuwait, including several camps and a range training complex.

The K-BOSSS contract was re-competed as a task order under the LOGCAP V contract vehicle, which was awarded April 12, 2019 (see "Recent Developments" above).

The K-BOSSS contract contributed $233 million and $241 million of revenue for the six months ended July 3, 2020 and June 28, 2019, respectively.

The OMDAC-SWACA contract is currently exercised through August 28, 2020.

The K-BOSSS contract was re-competed as a task order under the LOGCAP V contract vehicle, which was awarded April 12, 2019 (see "Recent

Developments" above).

The K-BOSSS contract contributed $347 million and $368 million of revenue for the nine months ended October 2, 2020 and September 27, 2019, respectively.

The OMDAC-SWACA contract is currently exercised through February 28, 2021.

The contract provides for enterprise network capabilities and services support of the U.S.

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Vectrus has been the incumbent on OMDAC-SWACA since May 2013.

The OMDAC-SWACA contract contributed $109 million and $104 million of revenue for the six months ended July 3, 2020 and June 28, 2019 , respectively.

The OMDAC-SWACA contract contributed $158 million and $161 million of revenue for the nine months ended October 2, 2020 and September 27, 2019 , respectively.

Total backlog includes remaining performance obligations, consisting of funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer, and unexercised contract options).

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Most of our contracts have terms that would permit us to recover all or a portion of our incurred costs and fees for work performed in the event of a termination for convenience.

For the six months ended July 3, 2020, total backlog increased by $1,051 million.

As of July 3, 2020, total backlog (funded and unfunded) was $3.8 billion which is set forth in the following table:

July 3, December 31,

For the nine months ended October 2, 2020, total backlog increased by $991 million.

As of October 2, 2020, total backlog (funded and unfunded) was $3.7 billion which is set forth in the following table:

October 2, December 31,

(In millions) 2020 2019

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Total backlog $ 3,742 $ 2,751

Subsequent to the quarter ended July 3, 2020 and as a result, not reflected in the table above, on July 24, 2020 the Company received a notification of a $529.1 million modification to the K-BOSSS contract.

Work will be performed in Camp Arifjan, Kuwait, and the estimated completion date is September 28, 2021.

The contract modification added an Undefinitized Contract Action, which provided a Notice to Proceed for 50% of the ceiling price, resulting in $248.0 million obligated at the time of the award.

In addition, on August 5, 2020 the Company received notice from a prime contractor of its intent to decline to exercise all remaining future option periods of our subcontract, which will result in an unfavorable adjustment to backlog of approximately $398.5 million.

Funded orders (different from funded backlog) represent orders for which funding was received during the period.

We received funded orders of $1,140.5 million during the six months ended July 3, 2020, which was an increase of $328.4 million compared to the six months ended June 28, 2019.

We received funded orders of $1,587.6 million during the nine months ended October 2, 2020, which was an increase of $576.0 million compared to the nine months ended September 27, 2019.

Economic Opportunities, Challenges and Risks

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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.

On December 20, 2019, the President signed the annual FY 2020 appropriations bill, which provides $738 billion in discretionary funding for national defense and includes $667 billion in base funding and $71 billion in overseas contingency operations funding.

The approved funding is in accordance with the Bipartisan Budget Act of 2019.

On February 10, 2020, the President submitted the FY 2021 budget request, which requests $741 billion in discretionary funding for national defense and includes $672 billion in base funding and $69 billion in overseas contingency operations funding.

The Government Fiscal Year begins on October 1 and ends on September 30.

The FY 2021 budget has not yet been passed by Congress and on September 30, 2020, a continuing resolution (CR) was signed into law, providing funding for federal agencies at FY 2020 spending levels through December 11, 2020.

Additionally, under the CR, Section 3610 of the CARES Act, which provides authorization for federal contractors to continue to support government initiatives despite COVID-19 disruption, was also extended through December 11, 2020.

If new appropriations are not passed prior to the expiration of the current CR, U.S.

Government agencies may be subject to a government shutdown.

We believe spending on operation and maintenance of defense assets, as well as civilian agency infrastructure and equipment, will continue to be a U.S.

Government priority.

Our focus is on sustaining facilities, equipment, and IT networks, while utilizing operational technologies and converged solutions to improve efficiency and the outcomes of our clients' missions.

Our focus is on sustaining facilities, equipment, and IT networks,

while utilizing operational technologies and converged solutions to improve efficiency and the outcomes of our clients' missions.

We believe this focus aligns with our customers' intent to utilize existing equipment and infrastructure rather than executing new purchases.

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As an essential business and operator of critical infrastructures primarily for the DoD and the intelligence communities, we have continued to conduct our operations to support client missions while implementing measures to protect the health and safety of our employees.

However, the recent COVID-19 or other outbreaks have negatively impacted our business, results of operations and financial condition in the first half of 2020.

However, the recent COVID-19 or other outbreaks have negatively impacted our business, results of operations and financial condition in the first nine months of 2020.

The continued impact to our business is currently unknown due to the uncertainty around the duration of the pandemic and its broader impact on the global economy, our clients, and employees.

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Operating Income (Expense)

Three months ended July 3, 2020, compared to three months ended June 28, 2019

Three months ended October 2, 2020, compared to three months ended September 27, 2019

Selected financial highlights are presented in the following table:

Three Months Ended Change

(In thousands, except for percentages) July 3, 2020 June 28, 2019 $ %

(In thousands, except for percentages) October 2, 2020 September 27, 2019 $ %

Revenue $ 352,415 $ 359,873 $ (7,458) (2.1) %

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% of revenue 3.9 % 2.9 %

Income tax (benefit) expense (27) 2,247 (2,274) (101.2) %

Income tax expense 3,507 2,668 839 31.4 %

Effective income tax rate 25.2 % 25.4 %

Net Income $ 10,391 $ 7,841 $ 2,550 32.5 %

Revenue for the three months ended July 3, 2020 was $336.1, an increase of $4.5 million, or 1.3%, as compared to the three months ended June 28, 2019.

The increase in revenue was attributable to $10.3 million from our acquisition of Advantor offset by a temporary decrease in our existing contracts due to the COVID-19 pandemic.

Revenue from our U.S.

programs increased by $11.4 million, partially offset by decreased revenue from our Middle East and European programs of $6.8 million, and $0.1 million, respectively.

Revenue for the three months ended October 2, 2020 was $352.4 million, a decrease of $7.5 million, or 2.1%, as compared to the three months ended September 27, 2019.

The decrease in revenue was attributable to a temporary decrease in revenue from our existing contracts due to the COVID-19 pandemic.

Revenue from our Middle East and European programs decreased by $19.2 million, and $0.4 million, respectively.

This was partially offset by an increase in revenue from our U.S.

programs of $12.1 million.

Cost of Revenue

Cost of revenue as a percentage of revenue was 92.8% compared to 90.6% for the three months ended July 3, 2020 and June 28, 2019, respectively.

The increase in cost of revenue of $11.3 million, or 3.7%, for the three months ended July 3, 2020, as compared to the three months ended June 28, 2019, was primarily due to a contract adjustment to one of our European programs and increased revenue as described above.

Cost of revenue as a percentage of revenue was 90.9% compared to 91.0% for the three months ended October 2, 2020 and September 27, 2019, respectively.

The decrease in cost of revenue of $7.3 million, or 2.2%, for the three months ended October 2, 2020, as compared to the three months ended September 27, 2019, was primarily due to the volume fluctuations described for revenue.

Selling, General, & Administrative (SG&A) Expenses

For the three months ended July 3, 2020, SG&A expenses of $21.8 million increased by $2.0 million, or 9.9%, as compared to the three months ended June 28, 2019.

The increase was due primarily to an increase in business acquisition expense of $1.5 million and an increase in various miscellaneous expenses of $0.5 million.

For the three months ended October 2, 2020, SG&A expenses of $17.3 million decreased by $2.6 million, or 13.0%, as compared to the three months ended September 27, 2019.

The decrease was due primarily to a decrease in business acquisition expense of $0.3 million and a decrease in various miscellaneous expenses of $2.3 million.

Operating Income

Operating income for the three months ended July 3, 2020 decreased by $8.8 million, or 78.3%, as compared to the three months ended June 28, 2019.

This decrease was primarily due to lower operating income of $6.6 million from our Middle East programs, $2.1 million from our European programs and $0.1 million from our U.S.

Operating income as a percentage of revenue was 0.7% for the three months ended July 3, 2020, compared to 3.4% for the three months ended June 28, 2019.

Aggregate cumulative catch-up adjustments decreased operating income by $1.5 million and increased operating income by $1.9 million for the three months ended July 3, 2020 and June 28, 2019, respectively.

The aggregate cumulative catch-up adjustments for the three months ended July 3, 2020 related to lower margins associated with contract staffing and increased Other Direct Costs (ODCs).

The aggregate cumulative catch-up adjustments for the three months ended June 28, 2019 related to higher margins associated with operational efficiencies related to labor and management of contract staffing.

Six months ended July 3, 2020, compared to six months ended June 28, 2019

Operating income for the three months ended October 2, 2020 increased by $2.4 million, or 19.5%, as compared to the three months ended September 27, 2019.

This increase was primarily due to increased operating income of $3.5 million and $3.1 million for our European and U.S programs, respectively, partially offset by a $4.2 million decrease in operating income from our Middle East programs.

Operating income as a percentage of revenue was 4.2% for the three months ended October 2, 2020, compared to 3.5% for the three months ended September 27, 2019.

Aggregate cumulative catch-up adjustments increased operating income by less than $0.1 million and $0.7 million for the three months ended October 2, 2020 and September 27, 2019, respectively.

The aggregate cumulative catch-up adjustments for the three months ended October 2, 2020 related to lower margins associated with contract staffing and increased Other Direct Costs (ODCs) offset be a contract closeout adjustment.

The aggregate cumulative catch-up adjustments for the three months ended September 27, 2019 related to higher margins associated with operational efficiencies related to labor and management of contract staffing and contract close-out activities.

Nine months ended October 2, 2020, compared to nine months ended September 27, 2019

Selected financial highlights are presented in the following table:

Six Months Ended Change

(In thousands, except for percentages) July 3, 2020 June 28, 2019 $ %

Nine Months Ended Change

(In thousands, except for percentages) October 2, 2020 September 27, 2019 $ %

Revenue $ 1,040,212 $ 1,017,368 $ 22,844 2.2 %

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Net Income $ 20,170 $ 22,532 $ (2,362) (10.5) %

Revenue for the six months ended July 3, 2020 was $687.8 million, an increase of $30.3 million, or 4.6%, as compared to the six months ended June 28, 2019.

The increase in revenue was attributable to a $21.5 million increase from our acquisition of Advantor and an $8.8 million expansion of our existing contracts.

Revenue for the nine months ended October 2, 2020 was $1,040.2 million, an increase of $22.8 million, or 2.2%, as compared to the nine months ended September 27, 2019.

The increase in revenue was attributable to the expansion of our existing contracts.

Revenue increased by $35.1 million from our U.S.

programs, $4.7 million from our Middle East programs and $4.1 million from our European programs.

programs and $3.7 million from our European programs, partially offset by a decrease of $16.0 million from our Middle East programs.

Cost of Revenue

Cost of revenue as a percentage of revenue was 91.8% compared to 90.7% for the six months ended July 3, 2020 and June 28, 2019, respectively.

The increase in cost of revenue of $35.4 million, or 5.9%, for the six months ended July 3, 2020, as compared to the six months ended June 28, 2019, was primarily due to a contract adjustment to one of our European program and increased revenue as described above.

Cost of revenue as a percentage of revenue was 91.5% compared to 90.8% for the nine months ended October 2, 2020 and September 27, 2019, respectively.

The increase in cost of revenue of $28.1 million, or 3.0%, for the nine months ended October 2, 2020, as compared to the nine months ended September 27, 2019, was primarily due to the volume fluctuations described for revenue.

Selling, General, & Administrative (SG&A) Expenses

For the six months ended July 3, 2020, SG&A expenses of $41.4 million increased by $1.6 million, or 4.1%, as compared to the June 28, 2019 due primarily to the increase in business acquisition expense of $0.5 million and an increase in various miscellaneous expenses of $1.1 million.

For the nine months ended October 2, 2020, SG&A expenses of $58.7 million decreased by $1.0 million, or 1.6%, as compared to the September 27, 2019 due primarily to a decrease in various miscellaneous expenses.

Operating Income

Operating income for the six months ended July 3, 2020 decreased by $6.7 million, or 30.9%, as compared to the six months ended June 28, 2019.

This decrease was primarily due to lower operating income of $4.9 million from our European programs, $1.5 million from our U.S.

programs and $0.3 million from our Middle East programs.

Operating income as a percentage of revenue was 2.2% for the six months ended July 3, 2020, compared to 3.3% for the three months ended June 28, 2019.

Aggregate cumulative catch-up adjustments decreased operating income by $3.8 million and increased operating income $0.8 million for the six months ended July 3, 2020 and June 28, 2019, respectively.

The aggregate cumulative catch-up adjustments for the six months ended July 3, 2020 related to lower margins associated with contract staffing and increased Other Direct Costs (ODCs).

The aggregate cumulative catch-up adjustments for the six months ended July 3, 2020 related to higher margins associated with operational efficiencies related to labor and management of contract staffing.

Operating income for the nine months ended October 2, 2020 decreased by $4.2 million, or 12.5%, as compared to the nine months ended September 27, 2019.

This decrease was primarily due to lower operating income of $4.4 million from our Middle East programs and $1.5 million from our European programs, partially offset by an increase to operating income of $1.7 million from our U.S.

Operating income as a percentage of revenue was 2.9% for the nine months ended October 2, 2020, compared to 3.3% for the nine months ended September 27, 2019.

Aggregate cumulative catch-up adjustments decreased operating income by $3.8 million and increased operating income $1.5 million for the nine months ended October 2, 2020 and September 27, 2019, respectively.

The aggregate cumulative catch-up adjustments for the nine months ended October 2, 2020 related to lower margins associated with contract staffing and increased Other Direct Costs (ODCs).

The aggregate cumulative catch-up adjustments for the nine months ended September 27, 2019 related to higher margins associated with operational efficiencies related to labor and management of contract staffing and contract close-out activities.

Non-operating Income (Expense)

Interest (Expense) Income, Net

Interest (expense) income, net for the three and six months ended July 3, 2020 and June 28, 2019 was as follows:

Three Months Ended Change Six Months Ended Change

(In thousands, except for percentages) July 3, 2020 June 28, 2019 $ % July 3, 2020 June 28, 2019 $ %

Interest (expense) income, net for the three and nine months ended October 2, 2020 and September 27, 2019 was as follows:

Three Months Ended Change Nine Months Ended Change

(In thousands, except for percentages) October 2, 2020 September 27, 2019 $ % October 2, 2020 September 27, 2019 $ %

Interest income $ 27 $ 61 $ (34) (55.7) % $ 109 $ 169 $ (60) (35.5) %

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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 increase in interest expense of $0.1 million for the six months ended July 3, 2020 compared to the six months ended June 28, 2019 was due to increased use of our revolving credit facility during the first quarter of 2020 primarily to mitigate potential liquidity risk in the financial markets due to COVID-19.

The decrease in interest expense of $0.8 million for the nine months ended October 2, 2020 compared to the nine months ended September 27, 2019 was due to greater use of our revolving credit facility in 2019 to finance short-term working capital requirements and the acquisition of Advantor.

Income Tax Expense

We recorded an income tax benefit of less than $0.1 million and an income tax expense of $2.2 million for the three months ended July 3, 2020 and June 28, 2019, respectively, representing effective income tax rates of (2.5)% and 22.8%.

For the six months ended July 3, 2020 and June 28, 2019, respectively, we recorded income tax expense of $2.1 million and $4.0 million, respectively, representing effective income tax rates of 17.6% and 21.4%, respectively.

The difference in the tax rates between the two periods is due to the resolution of a foreign tax matter in the current quarter.

We recorded income tax expense of $3.5 million and $2.7 million for the three months ended October 2, 2020 and September 27, 2019, respectively, representing effective income tax rates of 25.2% and 25.4%.

For the nine months ended October 2, 2020 and September 27, 2019, respectively, we recorded income tax expense of $5.6 million and $6.7 million, respectively, representing effective income tax rates of 21.7% and 22.8%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

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Although we believe that our current financing arrangements will permit us to finance our operations on acceptable terms and conditions, our access to and the availability of financing on acceptable terms and conditions in the future will be impacted by many factors, including:

(i) our credit ratings or absence of a credit rating, (ii) the liquidity of the overall capital markets and (iii) the current state of the economy.

(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.

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This amount was repaid in full during the second quarter of 2020.

Vectrus had net debt of $35.2 million as of December 31, 2019 and $4.8 million as of July 3, 2020.

Vectrus had net debt of $35.2 million as of December 31, 2019 and $2.3 million as of October 2, 2020.

In addition, on March 27, 2020, in response to the COVID-19 pandemic, President Trump signed into law the CARES Act, which provides for the deferral of certain tax payments.

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and international cash from wholly owned subsidiaries.

Approximately $12.3 million of our total $62.7 million in cash at July 3, 2020 is held by our foreign subsidiaries and is not available to fund U.S.

Approximately $17.6 million of our total $63.7 million in cash at October 2, 2020 is held by our foreign subsidiaries and is not available to fund U.S.

operations unless repatriated.

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as administrative agent.

The credit agreement was amended as of April 19, 2016, to modify certain financial and negative covenants (as so amended, the Credit Agreement).

On November 15, 2017, we and VSC entered into an Amendment and Restatement Agreement (the Amendment Agreement) with a group of lenders,

including JPMorgan Chase Bank, N.A., as administrative agent, which provides for the amendment and restatement of the Credit Agreement.

The credit agreement was subsequently amended in November 2017 by the Amendment and Restatement Agreement (the Amendment Agreement) with a group of lenders, including JPMorgan Chase Bank, N.A., as administrative agent.

The Amendment Agreement provides for $200.0 million in senior secured financing, consisting of a $80.0 million five-year term loan facility (the Amended Term Loan) and a $120.0 million five-year senior secured revolving credit facility (the Amended Revolver, and together with the Amended Term Loan, the Amended Credit Facilities).

We used $74.6 million from the Amended Term Loan to repay principal and accrued but unpaid interest on the Credit Agreement.

There were no outstanding borrowings under the Amended Revolver at July 3, 2020.

At July 3, 2020, there were two letters of credit outstanding in the aggregate amount of $2.4 million, which reduced our borrowing availability under the Amended Revolver to $117.6 million.

There were no outstanding borrowings under the Amended Revolver at October 2, 2020.

At October 2, 2020, there were two letters of credit outstanding in the aggregate amount of $2.4 million, which reduced our borrowing availability under the Amended Revolver to $117.6 million.

We do not currently plan to pay a regular dividend on our common stock.

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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 67 and 66 days as of July 3, 2020 and December 31, 2019, respectively.

Our DSO was 67 and 66 days as of October 2, 2020 and December 31, 2019, respectively.

The following table sets forth net cash used in operating activities, investing activities and financing activities:

Six Months Ended

(In thousands) July 3, 2020 June 28, 2019

Nine Months Ended

(In thousands) October 2, 2020 September 27, 2019

Operating activities $ 37,655 $ 28,448

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Trends in our operating cash flows tend to follow trends in operating income, excluding non-cash charges.

Net cash provided by operating activities for the six months ended July 3, 2020 consisted of net income of $9.8 million, the favorable impact of non-cash items of $9.6 million and favorable net changes to working capital of $11.7 million, are primarily due to increased collections of accounts receivable, and the timing of payments for accrued compensation and other current liabilities;

partially offset by increased payments for accounts payable and prepaid expenses.

Favorable net changes in other long-term liabilities and assets contributed an additional $3.3 million to operating cash flows.

Net cash provided by operating activities for the nine months ended October 2, 2020 consisted of net income of $20.2 million, the favorable impact of non-cash items of $12.9 million and favorable net changes in other long-term assets and liabilities of $9.3 million partially offset by an increase in net working capital requirements of $4.7 million.

Tax deferrals related to the CARES Act contributed $9.9 million to our cash flows from operating activities

Net cash provided by operating activities during the six months ended June 28, 2019 consisted of net income of $14.7 million, increased by non-cash items of $7.0 million and offset by unfavorable net changes working capital changes of $1.9 million primarily due to the timing of cash payments as reflected in an increase in other assets.

Unfavorable net changes in other long-term assets and liabilities contributed an additional $4.3 million to operating cash outflows.

Net cash used in investing activities for the six months ended July 3, 2020 consisted of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations.

Net cash used in investing activities during the six months ended June 28, 2019 consisted of capital expenditures for the purchase of intangible assets, software and hardware, leasehold improvements, and vehicles and equipment related to ongoing operations.

Net cash used in financing activities during the six months ended July 3, 2020 consisted of repayments of long-term debt of $3.0 million and payments related to employee withholding taxes on share-based compensation of $1.9 million.

This was partially offset by $0.1 million received from the exercise of stock options.

During the six months ended July 3, 2020, we borrowed and repaid $144.0 million on the Amended Revolver.

Net cash provided by financing activities during the six months ended June 28, 2019 consisted of $3.5 million in cash received from the exercise of stock options offset by repayments of long-term debt of $2.0 million and payments related to employee withholding taxes on share-based compensation in the amount of $0.8 million.

During the six months ended June 28, 2019, we borrowed and repaid a total of $98.0 million from the Amended Revolver to meet short-term working capital requirements.

Net cash provided by operating activities during the nine months ended September 27, 2019 consisted of net income of $22.5 million, increased by non-cash items of $10.7 million and favorable net changes in other long-term assets and liabilities of $2.5 million, offset by unfavorable net changes working capital of $7.3 million.

Net cash used in investing activities for the nine months ended October 2, 2020 consisted of $3.3 million of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations.

Net cash used in investing activities during the nine months ended September 27, 2019 consisted of $44.0 million for the acquisition of Advantor and $14.4 million of capital expenditures for the purchase of intangible assets, software and hardware, leasehold improvements, and vehicles and equipment related to ongoing operations.

During the third quarter of 2019, $5.4 million was received from the seller of a contract acquired by the Company in the first quarter of 2019 due to the inability to have the contract novated to the Company.

Net cash used in financing activities during the nine months ended October 2, 2020 consisted of repayments of long-term debt of $4.5 million and payments related to employee withholding taxes on share-based compensation of $1.9 million.

During the nine months ended October 2, 2020, we borrowed and repaid $151.0 million on the Amended Revolver.

Net cash provided by financing activities during the nine months ended September 27, 2019 consisted of $3.5 million in cash received from the exercise of stock options offset by repayments of long-term debt of $2.0 million and payments related to employee withholding taxes on share-based compensation in the amount of $0.8 million.

During the nine months ended September 27, 2019, we borrowed and repaid a total of $226.0 million from the Amended Revolver to meet short-term working capital requirements.

Capital Resources

At July 3, 2020, we held cash of $62.7 million, which included $12.3 million held by foreign subsidiaries, and had $117.6 million of available borrowing capacity under the Amended Revolver, which expires on November 15, 2022.

We believe that our cash at July 3, 2020, 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.

At October 2, 2020, we held cash of $63.7 million, which included $17.6 million held by foreign subsidiaries, and had $117.6 million of available borrowing capacity under the Amended Revolver, which expires on November 15, 2022.

We believe that our cash at October 2, 2020, 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.

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Contractual Obligations

During the six months ended July 3, 2020, we paid $3.0 million in quarterly installment payments on the Amended Term Loan.

During the nine months ended October 2, 2020, we paid $4.5 million in quarterly installment payments on the Amended Term Loan.

See Note 11, " Leases " for additional contractual obligation information.

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Up to $25.0 million of the Amended Revolver is available for the issuance of letters of credit.

As of June 3, 2020, there were no outstanding borrowings under the Amended Revolver and two letters of credit outstanding in the aggregate amount of $2.4 million.

As of October 2, 2020, there were no outstanding borrowings under the Amended Revolver and two letters of credit outstanding in the aggregate amount of $2.4 million.

Both reduced our borrowing availability to $117.6 million under the Amended Revolver.

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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, goodwill impairment assessments and income taxes have the greatest potential impact on our financial statements.

We believe that the assumptions and estimates associated with revenue recognition, goodwill impairment assessments, 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.

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We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and our present

expectations or projections.

In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections.

These risks and uncertainties include, but are not limited to:

the impact of COVID-19 on the global economy;

the continued impact of COVID-19 on the global economy;

our ability to submit proposals for and/or win all potential opportunities in our pipeline;

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protests of new awards;

our acquisition of Advantor and its integration into our business;

economic, political and social conditions in the countries in which we conduct our businesses;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis