V2X, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q as well as the audited Consolidated Financial Statements and notes thereto and the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 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 any current or future government mandated COVID-19 precautions, including mandatory vaccination, and its impact on us, our operations, or our future financial or operational results. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements. Refer to "Forward-Looking Information" for further information regarding forward-looking statements. Amounts presented in and throughout this Item 2 are rounded and, as such, any rounding differences could occur in period over period changes and percentages reported. Overview Vectrus is a leading provider of global service solutions with a history in the services market that dates back more than 75 years. The company provides facility and base operations; supply chain and logistics services; information technology mission support; and engineering and digital technology services, including integration, security, maintenance, repair and overhaul, 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. Army. 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 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 $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., 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. During the performance of our contracts, we periodically review estimated final contract prices and costs and make revisions as required, which are recorded as changes in revenue and cost of revenue in the periods in which they are determined. Additionally, the fees under certain contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue when there is sufficient information to reasonably assess anticipated contract performance. Amounts representing contract change orders, claims, requests for equitable adjustment, or limitations in funding on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated. Changes in estimated revenue, cost of revenue and the related effect to operating income are recognized using cumulative catch-up adjustments, which recognize in the current period the cumulative effect of the changes on current and prior periods based on a contract's percentage of completion. Cumulative catch-up adjustments due to aggregate changes in contract estimates increased operating income by $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 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 Information regarding certain significant contracts is discussed in "Significant Contracts" below. 24 Table of Contents COVID-19 Impact The COVID-19 pandemic continues to present significant business challenges in 2021. 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. The extent of the ultimate impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our programs in the expected timeframe, will depend on future developments, including any potential subsequent waves of COVID-19 infection, the effectiveness, distribution and acceptance of COVID-19 vaccines, new government regulations for defense contractors and other related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which remain uncertain and cannot be predicted. For the three months ended 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. facilities have continued to operate in support of essential products and services required to meet our commitments to the U.S. government and the U.S. military; however, facility closures or work slowdowns or supply chain disruptions have affected our financial results and projections. In addition, other countries are responding to the pandemic differently which have affected our international operations and the operations of our suppliers and customers. However, any closures to date have not significantly impacted Vectrus' business. We continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19. We continue to assess possible implications to our business, supply chain and customers and to take actions in an effort to mitigate adverse consequences in order to support our customers' mission critical business and national security. For additional risks to the company related to the COVID-19 pandemic, see Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020. Significant Contracts 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 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% Revenue associated with a contract will fluctuate based on increases or decreases in the work being performed on the contract, award fee payment assumptions, and other contract modifications within the term of the contract resulting in changes to the total contract value. See "Backlog" below. The 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. 25 Table of Contents On December 29, 2020, the U.S. Army announced that Vectrus Systems Corporation (VSC), our wholly-owned subsidiary was awarded an $882.5 million cost-plus-fixed-fee contract to continue Operations, Maintenance, and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA). Work will be based in Kuwait with additional locations throughout Southeast Asia. On March 8, 2021, the U.S. government received a protest from a competitor, which was filed at the Government Accountability Office (GAO). The GAO decided the case and denied the protest on June 1, 2021. Subsequently, on July 13, 2021, the unsuccessful competitor filed a protest at the U.S. Court of Federal Claims (COFC). Performance is ongoing on the contract awarded to Vectrus as there is no "stay" of performance due to the filing of the protest. A hearing at the COFC is expected by the end of 2021. The estimated completion date of this contract is December 26, 2025. 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. Backlog Total backlog includes remaining performance obligations, consisting of both funded backlog (firm orders for which funding is contractually authorized and appropriated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer and unexercised contract options). Total backlog excludes potential orders under IDIQ contracts and contracts awarded to us that are being protested by competitors with the GAO or in the COFC. The value of the backlog is based on anticipated revenue levels over the anticipated life of the contract. Actual values may be greater or less than anticipated. Total backlog is converted into revenue as work is performed. The level of order activity related to programs can be affected by the timing of U.S. government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others. Our contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year (or less) option periods for the remaining contract period. The number of option periods vary by contract, and there is no guarantee that an option period will be exercised. The right to exercise an option period is at the sole discretion of the U.S. government when we are the prime contractor or of the prime contractor when we are a subcontractor. The U.S. government may also extend the term of a program by issuing extensions or bridge contracts, typically for periods of one year or less. We expect to recognize a substantial portion of our funded backlog as revenue within the next 12 months. However, the U.S. government or the prime contractor may cancel any contract at any time through a termination for convenience. 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 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 Funded backlog $ 1,197 $ 843 Unfunded backlog 3,713 4,221 Total backlog $ 4,910 $ 5,064 Funded orders (different from funded backlog) represent orders for which funding was received during the period. 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 The U.S. government’s investment in services and capabilities in response to changing security challenges creates a complex and fluid business environment for Vectrus and other firms in this market segment. The pace and depth of U.S. government acquisition reform and cost savings initiatives, combined with increased industry competitiveness to win long-term positions on key programs, could add pressure to revenue levels and profit margins going forward. However, we expect the U.S. government will continue to place a high priority on national security and will continue to invest in affordable solutions for its facilities, logistics, equipment, operational technology, and communication needs, which aligns with our services and strengths. Further, the DoD budget remains the largest in the world and management believes our addressable portion of the DoD budget offers substantial opportunity for growth. The U.S. government's fiscal year (FY) begins on October 1 and ends on September 30. On April 9, 2021, the Biden Administration introduced the initial FY 2022 discretionary budget plan. The proposal requests $753 billion in discretionary funding for national defense and includes $715 billion for the DoD. The $715 billion DoD request compares to the FY 2021 enacted amount of $704 billion. 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. 26 Table of Contents There are risks associated with the timing and amount of future appropriations. If annual appropriations bills are not enacted, the U.S. 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. 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. 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. We believe this aligns with our customers' intent to utilize existing equipment and infrastructure rather than executing new purchases. Many of the core functions we perform are mission-essential. The following are examples of a few of these core functions: (i) keeping communications networks operational; (ii) maintaining airfields; and (iii) providing emergency services. While customers may reduce the level of services required from us, we do not currently anticipate the complete elimination of these services. The information provided above does not represent a complete list of trends and uncertainties that could impact our business in either the near or long-term and should be considered along with the risk factors identified under the caption “Risk Factors” identified in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2020 and the matters identified under the caption “Forward-Looking Statement Information" herein. DISCUSSION OF FINANCIAL RESULTS Operating Income (Expense) 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) October 1, 2021 October 2, 2020 $ % Revenue $ 459,408 $ 352,415 $ 106,993 30.4 % Cost of revenue 418,900 320,234 98,666 30.8 % % of revenue 91.2 % 90.9 % Selling, general, and administrative expenses 27,618 17,344 10,274 59.2 % % of revenue 6.0 % 4.9 % Operating income 12,890 14,837 (1,947) (13.1) % Operating margin 2.8 % 4.2 % Interest expense, net (1,955) (939) 1,016 108.2 % Income from operations before income taxes 10,935 13,898 (2,963) (21.3) % % of revenue 2.4 % 3.9 % Income tax expense 677 3,507 (2,830) (80.7) % Effective income tax rate 6.2 % 25.2 % Net Income $ 10,258 $ 10,391 $ (133) (1.3) % Revenue 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., 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 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. 27 Table of Contents Selling, General, & Administrative (SG&A) Expenses 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 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: 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 % Cost of revenue 1,235,209 951,743 283,466 29.8 % % of revenue 90.5 % 91.5 % Selling, general, and administrative expenses 77,045 58,718 18,327 31.2 % % of revenue 5.6 % 5.6 % Operating income 52,003 29,751 22,252 74.8 % Operating margin 3.8 % 2.9 % Interest expense, net (6,140) (3,988) (2,152) 54.0 % Income from operations before income taxes 45,863 25,763 20,100 78.0 % % of revenue 3.4 % 2.5 % Income tax expense 7,623 5,593 2,030 36.3 % Effective income tax rate 16.6 % 21.7 % Net Income $ 38,240 $ 20,170 $ 18,070 89.6 % Revenue 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., 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 90.5% 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. 28 Table of Contents Operating Income 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 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 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) % Interest expense (1,970) (966) 1,004 103.9 % (6,188) (4,097) 2,091 51.0 % Interest expense, net $ (1,955) $ (939) $ 1,016 108.1 % $ (6,140) $ (3,988) $ 2,152 54.0 % Interest income is directly related to interest earned on our cash. Interest expense is directly related to borrowings under our senior secured credit facilities, with the amortization of debt issuance costs, and derivative instruments used to hedge a portion of our exposure to interest rate risk. The 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 $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 Liquidity We have generated operating cash flows sufficient to fund our working capital, capital expenditures, and financing requirements. We expect to fund our ongoing working capital, capital expenditure and financing requirements and pursue additional growth through new business development and potential acquisition opportunities by using cash flows from operations, cash on hand, our credit facilities, and access to capital markets. When necessary, we will utilize our revolving credit facility to satisfy short-term working capital requirements. If our cash flows from operations are less than what we expect, we may need to access the long-term or short-term capital markets. Although we believe that our current financing arrangements will permit us to finance our operations on acceptable terms and conditions, our access to and the availability of financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. We cannot provide assurance that such financing will be available to us on acceptable terms or that such financing will be available at all. In September 2014, we and our wholly-owned subsidiary, VSC, entered into a credit agreement. The credit agreement was subsequently amended, with the most recent amendment occurring December 24, 2020 and is collectively referred to as the Amended Agreement. The Amended Agreement consists of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver). 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 29 Table of Contents 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 $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. This will have the effect of increasing cash outlays for payroll taxes during the first quarter of 2022 and 2023. On March 11, 2021, the President signed the American Rescue Plan Act of 2021 into law. The legislation provides additional relief to address the continued impact of COVID-19 on the economy, public health, state and local governments, individuals, and businesses. It extends Section 3610 of the CARES Act through September 2021, which gives DoD and federal agencies discretion to reimburse contractors for paid leave, including sick leave, a contractor provides during the pandemic to keep its employees in a ready state. We continue to refine the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued and assess the potential impacts on our liquidity and capital resources. The cash presented on our Condensed Consolidated Balance Sheets consists of U.S. and international cash from wholly owned subsidiaries. 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 expect our U.S. domestic cash resources will be sufficient to fund our U.S. operating activities and cash commitments for financing activities. 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. Dividends We do not currently plan to pay a regular dividend on our common stock. The declaration of any future cash dividends and the amount of any such dividends, if declared, will depend upon our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and the discretion of our Board of Directors. In deciding whether to pay future dividends on our common stock, our Board of Directors may take into account such matters as general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and capital investment plans, income tax consequences, applicable law and such other factors as our Board of Directors may deem relevant. Sources and Uses of Liquidity Cash, accounts receivable, unbilled receivables, and accounts payable are the principal components of our working capital and are generally driven by our level of revenue with other short-term fluctuations related to payment practices by our customers and the timing of our billings. Our receivables reflect amounts billed to our customers, as well as the revenue that was recognized in the preceding month, which is normally billed the month following each balance sheet date. The total amount of our accounts receivable can vary significantly over time and is sensitive to revenue levels and the timing of payments received from our customers. Days sales outstanding (DSO) is a metric used to monitor accounts receivable levels. The Company determines its DSO by calculating the number of days necessary to exhaust its ending accounts receivable balance based on its most recent historical revenue. Our DSO was 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: Nine Months Ended (In thousands) October 1, 2021 October 2, 2020 Operating activities $ 53,378 $ 37,655 Investing activities (9,868) (3,348) Financing activities (53,221) (6,359) Foreign exchange 1 (2,784) 468 Net change in cash, cash equivalents and restricted cash $ (12,495) $ 28,416 1 Impact on cash balances due to changes in foreign exchange rates. 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. 30 Table of Contents 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 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 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 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. If necessary, we may seek to obtain additional term loans or issue debt or equity under the registration statement to supplement our working capital and investing requirements or to fund acquisitions. A financing transaction may not be available on terms acceptable to us, or at all, and a financing transaction may be dilutive to our current stockholders. Contractual Obligations 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. Off-Balance Sheet Arrangements We have obligations relating to operating leases and letters of credit outstanding. 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 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 31 Table of Contents are revised as additional information becomes available. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from management's estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with revenue recognition, business combinations, goodwill and other intangible assets, and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes in our critical accounting policies and estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020. New Accounting Pronouncements Refer to Part I, Item 1, Note 2 "Recent Accounting Standards Update" in the notes to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding accounting pronouncements and accounting standards updates. FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the Securities Act of 1933, as amended (the Securities Act), and the Private Securities Litigation Reform Act of 1995 and, as such, may involve risks and uncertainties. All statements included or incorporated by reference in this report, other than statements that are purely historical, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “could,” “potential,” “continue” or similar terminology. These statements are based on the beliefs and assumptions of the management of the Company based on information currently available to management. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and 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 and any current or future government mandated COVID-19 precautions, including mandatory vaccination; our ability to submit proposals for and/or win all potential opportunities in our pipeline; our ability to retain and renew our existing contracts; our ability to compete with other companies in our market; security breaches and other disruptions to our information technology and operation; our mix of cost-plus, cost-reimbursable, and firm-fixed-price contracts; maintaining our reputation and relationship with the U.S. government; protests of new awards; economic, political and social conditions in the countries in which we conduct our businesses; changes in U.S. or international government defense budgets; government regulations and compliance therewith, including changes to the DoD procurement process; changes in technology; intellectual property matters; governmental investigations, reviews, audits and cost adjustments; contingencies related to actual or alleged environmental contamination, claims and concerns; delays in completion of the U.S. government's budget; our success in extending, deepening, and enhancing our technical capabilities; our success in expanding our geographic footprint or broadening our customer base; our ability to realize the full amounts reflected in our backlog; impairment of goodwill; misconduct of our employees, subcontractors, agents, prime contractors and business partners; our ability to control costs; our level of indebtedness; terms of our credit agreement; interest rate risk; subcontractor performance; economic and capital markets conditions; our ability to maintain safe work sites and equipment; our ability to retain and recruit qualified personnel; our ability to maintain good relationships with our workforce; our teaming relationships with other contractors; changes in our accounting estimates; the adequacy of our insurance coverage; volatility in our stock price; changes in our tax provisions or exposure to additional income tax liabilities; risks and uncertainties relating to the Spin-off; changes in GAAP; and other factors contained below under Part II, Item 1A, “Risk Factors,” and described in Item 1A, “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2020 and described from time to time in our future reports filed with the SEC.