What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-09 · 132 added, 165 removed, 208 unchanged (59% 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 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 .

Vectrus, Inc.

is a leading provider of services to the United States Government (U.S.

government) worldwide.

The Company operates as one segment and provides the following services and offerings:

facility and base operations, supply chain and logistics services, information technology mission support, and engineering and digital integration services.

Our primary customer is the U.S.

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

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.

For the three months ended April 1, 2022 and April 2, 2021, we had total revenue of $456.5 million and $434.0 million, respectively, substantially all of which was derived from U.S.

government customers.

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

For the three months ended April 1, 2022 and April 2, 2021, we generated approximately 61% and 59% of our total revenue from the U.S.

Army, respectively.

Executive Summary

Our revenue increased $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.

Our revenue increased $22.5 million, or 5.2%, for the three months ended April 1, 2022 compared to the three months ended April 2, 2021.

Revenue from our U.S.

and Asia programs increased by $18.2 million and $12.6 million, respectively, and decreased from our Middle East and Europe programs by $4.3 million and $4.1 million, respectively.

Operating income for the three months ended April 1, 2022, was $5.2 million, a decrease of $11.3 million, or 68.3%, compared to the three months ended April 2, 2021.

The decrease was due to an increase in SG&A expenses related to M&A and integration costs.

During the performance of our contracts, we periodically review estimated final contract prices and costs and make revisions as required, which are recorded as changes in revenue and cost of revenue in the periods in which they are determined.

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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 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 due to aggregate changes in contract estimates increased operating income by $0.6 million and decreased operating income by $1.3 million for the three months ended April 1, 2022 and April 2, 2021, respectively.

Cumulative catch-up adjustments are driven by changes in contract terms, program performance, customer scope changes and changes to estimates in the reported period.

These changes can increase or decrease operating income depending on the dynamics of each contract.

Further details related to our financial results for the three 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.

Further details related to our financial results for the three months ended April 1, 2022, compared to the three months ended April 2, 2021, are contained in the "Discussion of Financial Results" section.

Proposed Merger with Vertex Aerospace

On March 7, 2022, the Company, including its newly incorporated subsidiaries Andor Merger Sub LLC (Merger Sub LLC) and Andor Merger Sub Inc.

(Merger Sub Inc.), and Vertex Aerospace Services Holding Corp.

(Vertex), entered into an agreement and plan of merger (the Merger Agreement) proposing that Merger Sub Inc.

merge with and into Vertex (the First Merger), and immediately thereafter, Vertex, as the surviving company of the First Merger, merge with and into Merger Sub LLC (the Second Merger), with Merger Sub LLC surviving the Second Merger as a direct, wholly owned subsidiary of the Company (the Proposed Transaction).

The Proposed Transaction is structured so that the existing stockholders of Vertex will own approximately 62.25% of the issued and outstanding Company common shares following the consummation of the Proposed Transaction, and the existing shareholders of the Company will own approximately 37.75%.

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The consummation of the Proposed Transaction is subject to the satisfaction of certain conditions, including, among others, the expiration or termination of antitrust waiting periods and receipt of certain other regulatory approvals, absence of injunctions or restraints prohibiting consummation of the Proposed Transaction, the Vectrus shareholder approval being obtained, the shares issued to Vertex being approved for listing on the New York Stock Exchange and the execution and delivery of a shareholder rights and registration rights agreements.

The obligation of each party to consummate the Proposed Transaction is also conditioned on the other party’s representations and warranties being true and correct, the other party having performed in all material respects its obligations under the Merger Agreement, and the absence of any material adverse effect after the date of the Merger Agreement.

The Merger Agreement provides certain termination rights for both the Company and Vertex, and further provides that a termination fee equal to $16.6 million will be payable by the Company to Vertex upon termination of the Merger Agreement under certain circumstances, including, among others, (i) as a result of the termination of the Merger Agreement by the Company to accept a Parent Superior Proposal (as defined in the Merger Agreement), (ii) the Company having Willfully Breached (as defined in the Merger Agreement) any of its obligations under the no solicitation provisions of the Merger Agreement, or (iii) the Board having changed its recommendation to shareholders.

Recent Developments

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The COVID-19 pandemic continues to present significant business challenges in 2022.

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.

During the first three months of 2022, we continued to experience impacts related to COVID-19, including continued increased coronavirus-related costs, global supply chain disruptions, local immigration regulations limiting the ability to deploy personnel, delays in supplier deliveries, impacts of travel restrictions, site access and quarantine restrictions, and the impacts of remote work and adjusted work schedules.

In addition, President Biden announced new vaccine mandates on September 9, 2021 for government contractors and subcontractors.

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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.

For the three months ended October 1, 2021, the impact of COVID-19 was immaterial to our financial results.

For the three months ended April 1, 2022, the impact of COVID-19 was immaterial to our financial results.

In accordance with the DoD guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, our U.S.

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For additional risks to the company related to the COVID-19 pandemic, see Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021.

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Significant Contracts

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

The following table reflects contracts that accounted for more than 10% of our total revenue for the three months ended April 1, 2022 and April 2, 2021:

% of Total Revenue

Nine Months Ended

Contract Name October 1, 2021 October 2, 2020

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

Three Months Ended

Contract Name April 1, 2022 April 2, 2021

Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order 21.6% 2.0%

Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order 15.7% 2.3%

Operations, Maintenance and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA) 6.6% 10.8%

Kuwait Base Operations and Security Support Services (K-BOSSS) 2.2% 27.0%

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

See "Backlog" below.

The 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 - Kuwait Task Order is currently exercised through June 30, 2022, with four additional twelve-month options and one six-month option through December 31, 2026.

The task order provides services to support the Geographical Combatant Commands and Army Service Component Commands throughout the full range of military operations in the Kuwait region.

The LOGCAP V - Kuwait Task Order contributed $98.4 million and $8.6 million of revenue for the three months ended April 1, 2022 and April 2, 2021 , respectively.

The LOGCAP V - Iraq Task Order is currently exercised through June 21, 2022, with four additional twelve-month options and one six-month option through December 21, 2026.

The task order provides services to support the Geographical Combatant Commands and Army Service Component Commands throughout the full range of military operations in the Iraq region.

The LOGCAP V - Iraq Task Order contributed $141.2 million and $0.8 million of revenue for nine months ended October 1, 2021 and October 2, 2020, respectively.

The LOGCAP V - Iraq Task Order contributed $71.5 million and $10.1 million of revenue for the three months ended April 1, 2022 and April 2, 2021 , respectively.

On December 29, 2020, the U.S.

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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.

A hearing at the COFC took place January 11, 2022.

On March 28, 2022, COFC issued its decision denying all but one of the unsuccessful competitor's grounds and ordered additional briefings to address the applicable relief that should be granted.

The parties submitted their briefs on April 11, 2022, and the court's decision remains pending.

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

The OMDAC-SWACA contract contributed $30.3 million and $46.9 million of revenue for the three months ended April 1, 2022 and April 2, 2021 , respectively.

The K-BOSSS contract is currently exercised through August 28, 2022.

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

The K-BOSSS contract contributed $10.2 million and $117.0 million of revenue for three months ended April 1, 2022 and April 2, 2021, respectively.

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).

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government may also extend the term of a program by issuing extensions or bridge contracts, typically for periods of one year or less.

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We expect to recognize a substantial portion of our funded backlog as revenue within the next 12 months.

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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,

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

For the three months ended April 1, 2022, total backlog was $4.5 billion as compared to $5.0 billion at December 31, 2021.

The following is a summary of our backlog as of April 1, 2022 and December 31, 2021:

April 1, December 31,

(In millions) 2022 2021

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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 $1,718.4 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.

We received funded orders of $249.9 million during the three months ended April 1, 2022, which was a decrease of $177.6 million compared to the three months ended April 2, 2021.

Economic Opportunities, Challenges and Risks

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.

government’s investment in services and capabilities in response to changing security challenges creates a complex and fluid business environment for Vectrus and other firms in this market.

However, the U.S.

continues to face substantial fiscal and economic challenges in addition to a varying political environment which could affect funding.

The pace and depth of U.S.

government acquisition reform and cost savings initiatives, combined with increased industry competitiveness to win long-term positions on key programs, could add pressure to revenue levels and profit margins 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.

government will continue to place a high priority on national security and will continue to invest in affordable solutions.

We believe that our capabilities, particularly in base operations support, supply chain and logistics, IT mission support, engineering and digital integration, security, or maintenance, repair, and overhaul, should help our clients increase efficiency, reduce costs, improve readiness, and strengthen national security and, as a result, continue to allow for long-term profitable growth in our business.

Further, the DoD budget remains the largest in the world and manag ement believes our addressable portion of the DoD budget offers substantial opportunity for growth.

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.

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.

On March 15, 2022, the Consolidated Appropriations Act of 2022 was signed into law by the President and provides funding through the end of FY 2022 - September 30, 2022.

The bill provides $782 billion in total national defense spending, including $742 billion for the DoD.

On March 28, 2022, the U.S.

government submitted the FY 2023 Federal budget, which requests $813 billion for total national defense spending including $773 billion for the DoD.

We believe spending on maintaining, operating, and hardening national security defense assets, as well as civilian agency infrastructure and equipment, will continue to be a U.S.

government priority.

Our focus is on sustaining 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.

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

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

Many of the core functions we perform are mission-essential.

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(i) keeping communications networks operational;

(ii) maintaining airfields;

and (iii) providing emergency services.

(ii) maintaining airfields and aircraft;

(iii) providing emergency services;

(iv) guarding our nation’s military bases, and other critical resources with integrated electronic security systems;

and (v) supporting rapid response contingency efforts.

While customers may reduce the level of services required from us, we do not currently anticipate the complete elimination of these services.

The information provided above does not represent a complete list of trends and uncertainties that could impact our business in either the near or long-term and should be considered along with the risk factors identified under the caption “Risk Factors” identified in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2020 and the matters identified under the caption “Forward-Looking Statement Information" herein.

The information provided above does not represent a complete list of trends and unc ertainties that could impact our business in either the near or long-term and should be considered along with the risk factors identified under the caption “Risk Factors” identified in Part 1, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021 and the matters identified under the caption “Forward-Looking Statement Information" herein.

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DISCUSSION OF FINANCIAL RESULTS

Operating Income (Expense)

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

Three months ended April 1, 2022, compared to three months ended April 2, 2021

Selected financial highlights are presented in the following table:

Three Months Ended Change

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

(In thousands, except for percentages) April 1, 2022 April 2, 2021 $ %

Revenue $ 456,471 $ 434,004 $ 22,467 5.2 %

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Net Income $ 2,855 $ 12,048 $ (9,193) (76.3) %

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.

Revenue for the three months ended April 1, 2022 was $456.5 million, an increase of $22.5 million, or 5.2%, as compared to the three months ended April 2, 2021.

Revenue from our U.S.

and Asia programs increased by $18.2 million, and $12.6 million, respectively, and decreased from our Middle East and Europe programs by $4.3 million and $4.1 million, respectively.

Cost of Revenue

Cost of revenue as a percentage of revenue was 91.2% 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.

Cost of revenue as a percentage of revenue was 91.9% compared to 90.7% for the three months ended April 1, 2022 and April 2, 2021, respectively.

The increase in cost of revenue of $25.6 million, or 6.5%, for the three months ended April 1, 2022, as compared to the three months ended April 2, 2021, was primarily due to the volume fluctuations described for revenue.

In addition, the three months ended April 1, 2022 had increased material and pass through content which carries a lower gross margin.

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

For the three months ended 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.

For the three months ended April 1, 2022, SG&A expenses of $32.0 million increased by $8.1 million, or 34.2%, as compared to April 2, 2021.

The increase in SG&A expenses was due to M&A and integration costs.

Operating Income

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

Operating income for the three months ended April 1, 2022 decreased by $11.3 million, or 68.3%, as compared to the three months ended April 2, 2021.

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

Operating income as a percentage of revenue was 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 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.

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 as a percentage of revenue was 1.1% for the three months ended April 1, 2022, compared to 3.8% for the three months ended April 2, 2021.

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

Aggregate cumulative catch-up adjustments increased operating income by $0.6 million and decreased operating income by $1.3 million for the three months ended April 1, 2022 and April 2, 2021, respectively.

The aggregate cumulative catch-up adjustments for the three months ended April 1, 2022 and April 2, 2021 related to changes in contract terms, program performance, customer scope changes and changes to estimates in the reported period.

Operating income is also impacted by labor mix and the cost differential between internal resources and subcontractors as well as the volume of Other Direct Cost (ODCs) purchases.

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Interest (Expense) Income, Net

Interest (expense) income, net for the three 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 (expense) income, net for the three months ended April 1, 2022 and April 2, 2021 was as follows:

Three Months Ended Change

(In thousands, except for percentages) April 1, 2022 April 2, 2021 $ %

Interest income $ 43 $ 25 $ 18 72.0 %

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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, 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.

The decrease in interest expense, net of $0.3 million for the three months ended April 1, 2022 compared to the three months ended April 2, 2021 was due to the use of our revolving credit facility in 2021 for the December 31, 2020 acquisitions of Zenetex and HHB.

Income Tax Expense

We recorded income tax expense of $0.7 million and $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.

We recorded income tax expense of $0.7 million and $2.6 million for the three months ended April 1, 2022 and April 2, 2021, respectively, representing effective income tax rates of 19.7% and 17.5%, respectively.

The effective income tax rates vary from the federal statutory rate of 21.0% due to state and foreign taxes, required tax income exclusions, nondeductible expenses, available deductions not reflected in book income , and income tax credits.

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We cannot provide assurance that such financing will be available to us on acceptable terms or that such financing will be available at all.

To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources.

However, the continued spread of COVID-19 has also led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.

The CARES Act, signed into law in March 2020 in response to the COVID-19 pandemic, provided a deferral of payroll tax payments from which we benefited by deferring cash outlays of $16.8 million in 2020.

This had the effect of increasing cash outlays for payroll taxes by $8.1 m illion during the first quarter of 2022.

In September 2014, we and our wholly-owned subsidiary, VSC, entered into a credit agreement.

The credit agreement was subsequently amended, with the most recent amendment occurring December 24, 2020 and is collectively referred to as the Amended Agreement.

The credit agreement was subsequently amended, with the most recent amendment occurring January 24, 2022 and is collectively referred to as the Amended Agreement (See Note 7 in this Form 10-Q).

The Amended Agreement consists of a term loan (Amended Term Loan) and a $270.0 million revolving credit facility (Amended Revolver).

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.

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.

At April 1, 2022, there were $67.0 million of outstanding borrowings under the Amended Revolver.

In addition there were two letters of credit outstanding in the aggregate amount of $2.7 million, which reduced our borrowing availability under the Amended Revolver to $200.3 million.

Vectrus had net debt of $96.8 million as of April 1, 2022 and $66.9 million as of December 31, 2021.

The cash presented on our Condensed Consolidated Balance Sheets consists of U.S.

and international cash from wholly owned subsidiaries.

Approximately $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.

Approximately $16.6 million of our total $23.0 million in cash and cash equivalents at April 1, 2022 is held by our foreign subsidiaries and is not available to fund U.S.

operations unless repatriated.

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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.

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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 October 1, 2021 and December 31, 2020, respectively.

Our DSO was 74 and 75 days as of April 1, 2022 and December 31, 2021, respectively.

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

Nine Months Ended

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

Three Months Ended

(In thousands) April 1, 2022 April 2, 2021

Operating activities $ (26,381) $ (21,729)

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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.

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.

Net cash used in operating activities for the three months ended April 1, 2022 consisted of cash outflows for working capital requirements of $29.4 million and other long-term assets and liabilities of $6.5 million.

This was partially offset by cash inflows from net income of $2.9 million and the favorable impact of non-cash net income items of $6.6 million.

The net working capital outflows were largely from increases in accounts receivable and decreases in accrued compensation, which included an $8.1 million payment of deferred CARES Act payroll taxes, partially offset by increases in accounts payable.

Net cash used in operating activities for the three months ended April 2, 2021 consisted of outflows for net working capital requirements of $35.7 million and other long-term assets and liabilities of $4.9 million, partially offset by cash inflows from net income of $12.0 million and non-cash items of $6.9 million.

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

Net cash used in investing activities for the three months ended April 1, 2022 and April 2, 2021 consisted of $2.2 million and $2.6 million, respectively, of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations.

Net cash used in financing activities during the three months ended April 1, 2022 consisted of repayments of long-term debt of $2.6 million, payments of $1.6 million for employee withholding taxes on share-based compensation and payments $0.5 million for debt issuance costs.

During the three months ended April 1, 2022, we also borrowed and repaid $217.0 million and $200.0 million, respectively, on the Amended Revolver.

Net cash used in financing activities during the nine months ended April 2, 2021 consisted of payments related to employee withholding taxes on share-based compensation in the amount of $2.2 million and repayments of long-term debt of $2.0 million During the three months ended April 2, 2021, we also borrowed and repaid $110.0 million on the Amended Revolver.

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Capital Resources

At 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.

At April 1, 2022, we held cash and cash equivalents of $23.0 million, which included $16.6 million held by foreign subsidiaries, and had $200.3 million of available borrowing capacity under the Amended Revolver, which expires on November 15, 2023.

We believe that our cash at April 1, 2022, as supplemented by cash flows from operations and the Amended Revolver, will be sufficient to fund our anticipated operating costs, capital expenditures, and current debt repayment obligations for at least the next 12 months.

We have a shelf registration statement with the SEC that became effective in January 2020 under which we may issue, from time to time, up to $250 million of common stock, preferred stock, depository shares, warrants, rights and debt securities.

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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.

As of April 1, 2022, our commitments to make future payments under long-term contractual obligations were as follows:

Payments Due by Period

Less than 1 year More than 5 Years

(In thousands) Total 1 - 3 Years 3 - 5 Years

Operating leases 50,504 13,122 19,588 8,146 9,648

Principal payments on Amended Term Loan 52,800 10,400 42,400 — —

Principal payments on Amended Revolver 67,000 — 67,000 — —

Interest on Term Loan and Amended Revolver ¹ 5,589 3,518 2,071 — —

Total 175,893 27,040 131,059 8,146 9,648

¹ Includes unused funds fee and is based on the April 1, 2022 interest rate and outstanding Amended Revolver balance

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

are revised as additional information becomes available.

Estimates 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

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uncertainties that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections.

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

the continued impact of COVID-19 on the global economy and any current or future government mandated COVID-19 precautions, including mandatory vaccination;

the continued impact of COVID-19 and any variant strains thereof on the global economy and any current or future government mandated COVID-19 precautions, including mandatory vaccination;

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

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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.

and other factors described in Item 1A, “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2021 and described from time to time in our future reports filed with the SEC.

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