What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-10 · 117 added, 100 removed, 256 unchanged (46% of the section changed)

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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, 2020.

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 its impact on us, our operations, or our future financial or operational results.

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.

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

For the six months ended July 2, 2021 and July 3, 2020, we had total revenue of $904.8 million and $687.8 million, respectively, substantially all of which was derived from U.S.

For the nine months ended October 1, 2021 and October 2, 2020, we had total revenue of $1,364.3 million and $1,040.2 million, respectively, substantially all of which was derived from U.S.

government customers.

For the six months ended July 2, 2021 and July 3, 2020, we generated approximately 63% and 69% of our total revenue from the U.S.

For the nine months ended October 1, 2021 and October 2, 2020, we generated approximately 64% and 68% of our total revenue from the U.S.

Army, respectively.

Executive Summary

Our revenue increased $134.8 million, or 40.1%, for the three months ended July 2, 2021 compared to the three months ended July 3, 2020.

Our revenue increased $107.0 million, or 30.4%, for the three months ended October 1, 2021 compared to the three months ended October 2, 2020.

The increase in revenue was attributable to a $45.8 million expansion on our existing contracts and $61.2 million from our acquisitions of Zenetex and HHB.

Revenue from our U.S., Europe, Asia and Middle East programs increased by $63.9 million, $0.6 million, $27.8 million and $42.5 million, respectively.

Operating income for the three months ended July 2, 2021, was $22.6 million, an increase of $20.2 million, or 829.2%, compared to the three months ended July 3, 2020.

Revenue from our U.S., Middle East, and Asia programs increased by $51.4 million, $39.7 million, and $19.1 million, respectively, and decreased from our Europe programs by $3.2 million.

Operating income for the three months ended October 1, 2021, was $12.9 million, a decrease of $1.9 million, or 13.1%, compared to the three months ended October 2, 2020.

The increase was due to improved operating performance and the impact of the acquisitions of Zenetex and HHB.

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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 $1.7 million and $1.5 million for the three months ended July 2, 2021 and July 3, 2020, respectively.

Cumulative catch-up adjustments due to aggregate changes in contract estimates increased operating income by $2.6 million and less than $0.1 million for the three months ended October 1, 2021 and October 2, 2020, 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 2, 2021, compared to the three and six months ended July 3, 2020, are contained in the "Discussion of Financial Results" section.

Further details related to our financial results for the three and nine months ended October 1, 2021, compared to the three and nine months ended October 2, 2020, are contained in the "Discussion of Financial Results" section.

Recent Developments

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The COVID-19 pandemic continues to present significant business challenges in 2021.

During the first six months of 2021, we continued to experience impacts related to COVID-19, including continued increased coronavirus-related costs, global supply chain disruptions, delays in supplier deliveries, impacts of travel restrictions, site access and quarantine restrictions, and the impacts of remote work and adjusted work schedules.

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, and related actions taken by the U.S.

During the first nine months of 2021, 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.

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 July 2, 2021, the impact of COVID-19 was immaterial to our financial results.

For the three months ended October 1, 2021, 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.

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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 2, 2021 and July 3, 2020:

The following table reflects contracts that accounted for more than 10% of our total revenue for the nine months ended October 1, 2021 and October 2, 2020:

% of Total Revenue

Six Months Ended

Contract Name July 2, 2021 July 3, 2020

Nine Months Ended

Contract Name October 1, 2021 October 2, 2020

Kuwait Base Operations and Security Support Services (K-BOSSS) 19.9% 33.3%

Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order 10.3% 0.1%

Operations, Maintenance and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA) 8.0% 15.2%

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See "Backlog" below.

The K-BOSSS contract currently is exercised through September 28, 2021.

K-BOSSS, our largest base operations support services contract, supports geographically-dispersed locations within the State of Kuwait, including several camps and a range training complex.

Components of the K-BOSSS contract were re-competed as a task order under the LOGCAP V contract vehicle, which was awarded to us on April 12, 2019.

The K-BOSSS contract contributed $233 million of revenue for both six month periods ended July 2, 2021 and July 3, 2020.

On December 29, 2020, the US 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).

The K-BOSSS contract is currently exercised through August 28, 2022 and is our largest base operations support services contract within the State of Kuwait.

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 $271.4 million and $346.8 million of revenue for nine months ended October 1, 2021 and October 2, 2020, 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 $141.2 million and $0.8 million of revenue for nine months ended October 1, 2021 and October 2, 2020, 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.

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Court of Federal Claims (COFC).

Performance is however ongoing on the awarded contract to Vectrus, as there is no "stay" of performance due to the filing of the protest.

A hearing at the COFC is likely in the fall of 2021.

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 is expected by the end of 2021.

The estimated completion date of this contract is December 26, 2025.

The OMDAC-SWACA contract contributed $81 million and $109 million of revenue for the six months ended July 2, 2021 and July 3, 2020 , respectively.

The OMDAC-SWACA contract contributed $109.2 million and $158.5 million of revenue for the nine months ended October 1, 2021 and October 2, 2020 , respectively.

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 U.S.

Court of Federal Claims.

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.

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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 2, 2021, total backlog was $199 million less than at 2020 year end.

The following is a summary of our backlog as of July 2, 2021 and December 31, 2020:

July 2, December 31,

For the nine months ended October 1, 2021, total backlog was $4.9 billion as compared to $5.1 billion at December 31, 2020.

The following is a summary of our backlog as of October 1, 2021 and December 31, 2020:

October 1, December 31,

(In millions) 2021 2020

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

We received funded orders of $1,265.9 million during the six months ended July 2, 2021, which was an increase of $125.4 million compared to the six months ended July 3, 2020.

We received funded orders of $1,718.4 million during the nine months ended October 1, 2021, which was an increase of $130.8 million compared to the nine months ended October 2, 2020.

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.

government's FY begins on October 1 and ends on September 30.

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

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

On January 1, 2021, the $741 billion National Defense Authorization Act became law.

government's fiscal year (FY) begins on October 1 and ends on September 30.

On April 9, 2021, the Biden Administration introduced the initial FY 2022 discretionary budget plan.

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While a proposal has been introduced, risks remain to FY 2022 as the budget has not yet been passed.

On September 30, 2021, the President signed a continuing resolution (CR) into law that provides continuing FY 2022 appropriations to federal agencies through the earlier of December 3, 2021, or the enactment of the applicable appropriations act.

The CR funds most programs and activities at the FY2021 levels with several exceptions.

Congress will have to pass a broader funding package or another short-term bill by December 3, 2021, to avoid a government shutdown.

There are risks associated with the timing and amount of future appropriations.

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government may operate under a CR, restricting new contract or program starts and additional government shutdowns, which might involve all government agencies, including the DoD, could arise.

Future CR’s and government shutdowns may lead to delays in procurement of services due to lack of funding, and those delays may adversely affect our revenue, results of operations and cash flow.

Future CR’s and government shutdowns may lead to delays in procurement of services due to lack of funding, and;

those delays may adversely affect our revenue, results of operations and cash flow.

Finally, there remains uncertainty surrounding future discretionary defense funding levels and priorities of the Administration and Congress, which could adversely impact demand for our services.

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Operating Income (Expense)

Three months ended July 2, 2021, compared to three months ended July 3, 2020

Three months ended October 1, 2021, compared to three months ended October 2, 2020

Selected financial highlights are presented in the following table:

Three Months Ended Change

(In thousands, except for percentages) July 2, 2021 July 3, 2020 $ %

(In thousands, except for percentages) October 1, 2021 October 2, 2020 $ %

Revenue $ 459,408 $ 352,415 $ 106,993 30.4 %

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Net Income $ 10,258 $ 10,391 $ (133) (1.3) %

Revenue for the three months ended July 2, 2021 was $470.8 million, an increase of $134.8 million, or 40.1%, as compared to the three months ended July 3, 2020.

Revenue for the three months ended October 1, 2021 was $459.4 million, an increase of $107.0 million, or 30.4%, as compared to the three months ended October 2, 2020.

The increase in revenue was attributable to a $45.8 million expansion on our existing contracts and $61.2 million from our acquisitions of Zenetex and HHB.

Revenue from our U.S., Europe, Asia and Middle East programs increased by $63.9 million, $0.6 million, $27.8 million, and $42.5 million, respectively.

Revenue from our U.S., Middle East, and Asia programs increased by $51.4 million, $39.7 million, and $19.1 million, respectively, and decreased from our Europe programs by $3.2 million.

Cost of Revenue

Cost of revenue as a percentage of revenue was 89.8% compared to 92.8% for the three months ended July 2, 2021 and July 3, 2020, respectively.

The increase in cost of revenue of $110.8 million, or 35.5%, for the three months ended July 2, 2021, as compared to the three months ended July 3, 2020, was primarily due to the volume fluctuations described for revenue.

Cost of revenue as a percentage of revenue was 91.2% compared to 90.9% for the three months ended October 1, 2021 and October 2, 2020, respectively.

The increase in cost of revenue of $98.7 million, or 30.8%, for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily due to the volume fluctuations described for revenue.

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

For the three months ended July 2, 2021, SG&A expenses of $25.6 million increased by $3.8 million, or 17.4%, as compared to the July 3, 2020.

The increase was primarily due to the addition of SG&A expenses from Zenetex and HHB.

For the three months ended October 1, 2021, SG&A expenses of $27.6 million increased by $10.3 million, or 59.2%, as compared to October 2, 2020.

The increase was due to the addition of SG&A expenses from Zenetex and HHB and an increase in M&A, integration and related costs.

Operating Income

Operating income for the three months ended July 2, 2021 increased by $20.2 million, or 829.2%, as compared to the three months ended July 3, 2020.

The increase was due to improved operating performance and the impact of the acquisitions of Zenetex and HHB.

Operating income as a percentage of revenue was 4.8% for the three months ended July 2, 2021, compared to 0.7% for the three months ended July 3, 2020.

Aggregate cumulative catch-up adjustments decreased operating income by $1.7 million and $1.5 million for the three months ended July 2, 2021 and July 3, 2020, respectively.

The aggregate cumulative catch-up adjustments for the three months ended July 2, 2021 and July 3, 2020 related to lower margins associated with contract staffing and increased Other Direct Costs (ODCs).

Six months ended July 2, 2021, compared to six months ended July 3, 2020

Operating income for the three months ended October 1, 2021 decreased by $1.9 million, or 13.1%, as compared to the three months ended October 2, 2020.

The decrease was due primarily to the fluctuations described for SG&A.

Operating income as a percentage of revenue was 2.8% for the three months ended October 1, 2021, compared to 4.2% for the three months ended October 2, 2020.

The decrease in operating income is a result of an increase in M&A integration and related costs.

Aggregate cumulative catch-up adjustments increased operating income by $2.6 million and less than $0.1 million for the three months ended October 1, 2021 and October 2, 2020, respectively.

The aggregate cumulative catch-up adjustments for the three months ended October 1, 2021 and October 2, 2020 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.

Nine months ended October 1, 2021, compared to nine months ended October 2, 2020

Selected financial highlights are presented in the following table:

Six Months Ended Change

(In thousands, except for percentages) July 2, 2021 July 3, 2020 $ %

Nine Months Ended Change

(In thousands, except for percentages) October 1, 2021 October 2, 2020 $ %

Revenue $ 1,364,257 $ 1,040,212 $ 324,045 31.2 %

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Net Income $ 38,240 $ 20,170 $ 18,070 89.6 %

Revenue for the six months ended July 2, 2021 was $904.8 million, an increase of $217.1 million, or 31.6%, as compared to the six months ended July 3, 2020.

Revenue for the nine months ended October 1, 2021 was $1,364.3 million, an increase of $324.0 million, or 31.2%, as compared to the nine months ended October 2, 2020.

The increase in revenue was attributable to a $129.6 million expansion on our existing contracts and $194.5 million from our acquisitions of Zenetex and HHB.

Revenue from our U.S., Europe, Asia and Middle East programs increased by $133.5 million, $8.6 million, $30.4 million, and $44.6 million, respectively.

Revenue from our U.S., Middle East, Asia and Europe programs increased by $184.8 million, $84.3 million, $49.5 million, and $5.4 million, respectively.

Cost of Revenue

Cost of revenue as a percentage of revenue was 90.2% compared to 91.8% for the six months ended July 2, 2021 and July 3, 2020, respectively.

The increase in cost of revenue of $184.8 million, or 29.3%, for the six months ended July 2, 2021, as compared to the six months ended July 3, 2020, was primarily due to the volume fluctuations described for revenue.

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

For the six months ended July 2, 2021, SG&A expenses of $49.4 million increased by $8.1 million, or 19.5%, as compared to the July 3, 2020.

Cost of revenue as a percentage of revenue was 90.5% compared to 91.5% for the nine months ended October 1, 2021 and October 2, 2020, respectively.

The increase in cost of revenue of $283.5 million, or 29.8%, for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily due to the volume fluctuations described for revenue.

Selling, General, & Administrative Expenses

For the nine months ended October 1, 2021, SG&A expenses of $77.0 million increased by $18.3 million, or 31.2%, as compared to October 2, 2020.

The increase was primarily due to the addition of SG&A expenses from Zenetex and HHB.

Operating Income

Operating income for the six months ended July 2, 2021 increased by $24.2 million, or 162.3%, as compared to the six months ended July 3, 2020.

Operating income for the nine months ended October 1, 2021 increased by $22.3 million, or 74.8%, as compared to the nine months ended October 2, 2020.

The increase was due to improved operating performance and the impact of the acquisitions of Zenetex and HHB.

Operating income as a percentage of revenue was 4.3% for the six months ended July 2, 2021, compared to 2.2% for the six months ended July 3, 2020.

Aggregate cumulative catch-up adjustments decreased operating income by $3.0 million and $3.8 million for the six months ended July 2, 2021 and July 3, 2020, respectively.

The aggregate cumulative catch-up adjustments for the six months ended July 2, 2021 and July 3, 2020 related to lower margins associated with contract staffing and increased Other Direct Costs.

Operating income as a percentage of revenue was 3.8% for the nine months ended October 1, 2021, compared to 2.9% for the nine months ended October 2, 2020.

Aggregate cumulative catch-up adjustments decreased operating income by $0.4 million a nd $3.8 million for the nine months ended October 1, 2021 and October 2, 2020, respectively.

The aggregate cumulative catch-up adjustments for the nine months ended October 1, 2021 and October 2, 2020 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.

Interest (Expense) Income, Net

Interest (expense) income, net for the three and six months ended July 2, 2021 and July 3, 2020 was as follows:

Three Months Ended Change Six Months Ended Change

(In thousands, except for percentages) July 2, 2021 July 3, 2020 $ % July 2, 2021 July 3, 2020 $ %

Interest (expense) income, net for the three and nine months ended October 1, 2021 and October 2, 2020 was as follows:

Three Months Ended Change Nine Months Ended Change

(In thousands, except for percentages) October 1, 2021 October 2, 2020 $ % October 1, 2021 October 2, 2020 $ %

Interest income $ 15 $ 27 $ (12) (42.7) % $ 48 $ 109 $ (61) (55.7) %

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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 $1.1 million for the six months ended July 2, 2021 compared to the six months ended July 3, 2020 was due to the use of our revolving credit facility in 2021 for the December 31, 2020 acquisitions of Zenetex and HHB.

The increase in interest expense, net of $2.2 million for the nine months ended October 1, 2021 compared to the nine months ended October 2, 2020 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 $4.4 million and an income tax benefit of less than $0.1 million, for the three months ended July 2, 2021 and July 3, 2020, respectively, representing effective income tax rates of 21.6% and (2.5)%, respectively.

For the six months ended July 2, 2021 and July 3, 2020, we recorded income tax expense of $6.9 million and $2.1 million, respectively, representing effective income tax rates of 19.9% and 17.6%, respectively.

We recorded income tax expense of $0.7 million and $3.5 million for the three months ended October 1, 2021 and October 2, 2020, respectively, representing effective income tax rates of 6.2% and 25.2%, respectively.

For the nine months ended October 1, 2021 and October 2, 2020, we recorded income tax expense of $7.6 million and $5.6 million, respectively, representing effective income tax rates of 16.6% and 21.7%, respectively.

The reduction in our effective tax rate is due to the utilization of tax credits on previously filed tax returns.

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

We have generated operating cash flow sufficient to fund our working capital, capital expenditures, and financing requirements.

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.

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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.

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.

To meet current and potential short-term working capital requirements and strengthen the Company's cash position in response to COVID-19 uncertainties, Vectrus drew $115 million from its revolving credit facility during the first quarter of 2020.

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

Vectrus had net debt of $105.2 million as of July 2, 2021 and $112.1 million as of December 31, 2020.

At July 2, 2021, there were $115.0 million of outstanding borrowings under the Amended Revolver that were used for the December 31, 2020 acquisitions of Zenetex and HHB.

Vectrus had net debt of $71.8 million as of October 1, 2021 and $112.1 million as of December 31, 2020.

At October 1, 2021, there were $70.0 million of outstanding borrowings under the Amended Revolver that were used for the December 31, 2020 acquisitions of Zenetex and HHB.

The CARES Act provides a deferral of payroll tax payments from which we have benefited by deferring cash outlays of $16.8 million in 2020.

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and international cash from wholly owned subsidiaries.

Approximately $21.9 million of our total $69.8 million in cash and cash equivalents at July 2, 2021 is held by our foreign subsidiaries and is not available to fund U.S.

Approximately $25.5 million of our total $56.2 million in cash and cash equivalents at October 1, 2021 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 do not currently expect that we will be required to repatriate undistributed earnings of foreign subsidiaries.

We expect our U.S.

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operating activities and cash commitments for financing activities.

At July 2, 2021, 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 $152.3 million.

At October 1, 2021, 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 $197.3 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 66 days as of July 2, 2021 and December 31, 2020.

Our DSO was 67 and 66 days as of October 1, 2021 and December 31, 2020, respectively.

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

Six Months Ended

(In thousands) July 2, 2021 July 3, 2020

Nine Months Ended

(In thousands) October 1, 2021 October 2, 2020

Operating activities $ 53,378 $ 37,655

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1 Impact on cash balances due to changes in foreign exchange rates.

Net cash provided by operating activities for the six months ended July 2, 2021 consisted of cash inflows from net income of $28.0 million increased by non-cash items of $13.4 million and partially offset by outflows for net working capital requirements of $20.2 million and other long-term assets and liabilities of $7.2 million.

The net working capital outflows were largely from increases in accounts receivable and accrued compensation partially offset by increases in accounts payable.

Net cash provided by operating activities during the six months ended July 3, 2020 consisted of net income of $9.8 million, favorable net changes to working capital of $11.7 million and a favorable increase in non-cash items of $9.6 million.

The net change in working capital was 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 expense.

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

Net cash provided by operating activities for the nine months ended October 1, 2021 consisted of cash inflows from net income of $38.2 million, the favorable impact of non-cash items of $20.0 million and a favorable net change in working capital requirements of $1.0 million.

This was partially offset by cash outflows for other long-term assets and liabilities of $5.8 million.

Net cash provided by operating activities during 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 used in investing activities for the six months ended July 2, 2021 consisted of $4.8 million of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations and $1.8 million for a joint venture contribution.

These outflows were partially offset by inflows from a business acquisition purchase price adjustment.

During the six months ended July 3, 2020 $2.2 million was used for the purchase of software and hardware, and vehicles and equipment.

Net cash used in financing activities during the six months ended July 2, 2021 consisted of repayments of long-term debt of $4.0 million and payments of $2.3 million for employee withholding taxes on share-based compensation.

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

During the six months ended July 2, 2021, we borrowed and repaid $215.0 million on the Amended Revolver.

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 in the amount of $1.9 million.

Net cash used in investing activities for the nine months ended October 1, 2021 consisted of $7.7 million of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations and $2.5 million for a joint venture contribution.

These outflows were partially offset by inflows from a $0.3 million business acquisition purchase price adjustment.

During the nine months ended October 2, 2020, $3.3 million was used for the purchase of software and hardware, and vehicles and equipment.

Net cash used in financing activities during the nine months ended October 1, 2021 consisted of repayments of long-term debt of $6.0 million and payments of $2.3 million for employee withholding taxes on share-based compensation.

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 on the Amended Revolver.

During the nine months ended October 1, 2021, we also borrowed and repaid $352.0 million and $397.0 million, respectively, on the Amended Revolver.

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 in the amount of $1.9 million.

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

The outstanding borrowings under the Amended Revolver were reduced by $45.0 million in the first nine months of 2021 from an outstanding balance of $115.0 million as of December 31, 2020.

Capital Resources

At July 2, 2021, we held cash and cash equivalents of $69.8 million, which included $21.9 million held by foreign subsidiaries, and had $152.3 million of available borrowing capacity under the Amended Revolver, which expires on November 15, 2022.

We believe that our cash at July 2, 2021, 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 1, 2021, we held cash and cash equivalents of $56.2 million, which included $25.5 million held by foreign subsidiaries, and had $197.3 million of available borrowing capacity under the Amended Revolver, which expires on November 15, 2022.

We believe that our cash at October 1, 2021, 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 2, 2021, we paid $4.0 million in quarterly installment payments on the Amended Term Loan.

During the nine months ended October 1, 2021, we paid $6.0 million in quarterly installment payments on the Amended Term Loan.

See Note 9, " Leases " in the notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional contractual obligation information.

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Our Amended Revolver permits borrowings up to $270.0 million, of which $25.0 million is available for the issuance of letters of credit.

At July 2, 2021, 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 $152.3 million The aforementioned arrangements have not had, and management does not believe it is likely that they will in the future, have a material effect on our liquidity, capital resources, operations or financial condition.

At October 1, 2021, 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 $197.3 million.

On September 30, 2021, Vectrus Systems Corporation, a wholly owned subsidiary of Vectrus, Inc.

(collectively, the “Company”) signed and delivered a guaranty of certain obligations (the “Guaranty”) in connection with a lease agreement entered into by an entity controlled by the Company in support of its contractual obligations under a task order issued under Logistics Civil Augmentation Program (LOGCAP) V support services contract in support of the U.S.

Military and the INDO-PACOM Setting the Theater Task Order and associated Performance Task Order (the “Lease”).

Under the terms of the Guaranty, the Company is required to guarantee the annual rent obligations under the Lease of $20 million per year for up to eight years and six months, subject to a market adjustment beginning in the sixth year, and additional rent obligations for certain operating expenses.

The Guaranty is limited to the failure to pay such annual rent and additional rent amounts under the Lease due to (i) offset, suspension or termination of payments by the U.S.

Government for the Company’s non-compliance or acts or omissions in connection with the lease or other contracts with the U.S.

Government, or (ii) termination of payments by the U.S.

Government due to the Company’s fraud, willful misconduct or material breach or similar bad acts.

The aforementioned arrangements have not had, and management does not believe it is likely that they will in the future, have a material effect on our liquidity, capital resources, operations or financial condition.

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.

are revised as additional information becomes available.

Management believes that the accounting estimates employed and the resulting balances are reasonable;

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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 continued impact of COVID-19 on the global economy;

the continued impact of COVID-19 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;

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our level of indebtedness;

and terms of our credit agreement;

terms of our credit agreement;

interest rate risk;

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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