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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 126 added, 114 removed, 226 unchanged (52% 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, Inc.

V2X, Inc., formerly known as Vectrus, Inc.

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

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

For the six months ended July 1, 2022 and July 2, 2021, we had total revenue of $954.5 million and $904.8 million, respectively, substantially all of which was derived from U.S.

government customers.

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.

For both the six months ended July 1, 2022 and July 2, 2021, we generated approximately 64% of our total revenue from the U.S.

Executive Summary

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.

Our revenue increased $27.2 million, or 5.8%, for the three months ended July 1, 2022 compared to the three months ended July 2, 2021.

Revenue from our Asia, U.S.

and Europe programs increased by $16.7 million, $12.2 million and $6.6 million, respectively, and revenue from our Middle East programs decreased by $8.3 million for the three months ended July 1, 2022 compared to the three months ended July 2, 2021.

Operating income decreased $7.6 million, or 33.5%, for the three months ended July 1, 2022, compared to the three months ended July 2, 2021.

The decrease was due to increased SG&A expenses related to mergers and acquisitions (M&A) and integration costs and lower margin rates associated with early phases of new program operations.

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 $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 due to aggregate changes in contract estimates increased operating income by $6.8 million and decreased operating income by $1.7 million for the three months ended July 1, 2022 and July 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 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

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

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

Merger with Vertex

Subsequent Event, in this Quarterly Report on Form 10-Q for a discussion of our Merger with Vertex and related debt and stock-based compensation obligations.

COVID-19 Impact

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

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.

During the first six 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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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.

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 or variants of COVID-19, 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 April 1, 2022, the impact of COVID-19 was immaterial to our financial results.

For the three and six months ended July 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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government and the U.S.

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.

however, facility closures, work slowdowns and supply chain disruptions have affected and may continue to affect our financial results and projections.

In addition, other countries are responding to the pandemic differently which has affected our international operations and the operations of our suppliers and customers.

However, any closures to date have not had a material adverse impact on V2X's business.

We continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19.

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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 three months ended April 1, 2022 and April 2, 2021:

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

% of Total Revenue

Three Months Ended

Contract Name April 1, 2022 April 2, 2021

Six Months Ended

Contract Name July 1, 2022 July 2, 2021

Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order 22.2% 3.1%

Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order 15.2% 6.9%

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) 1.7% 25.7%

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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 - Kuwait Task Order contributed $212.2 million and $28.3 million of revenue for the six months ended July 1, 2022 and July 2, 2021 , respectively.

The LOGCAP V - Iraq Task Order is currently exercised through June 21, 2023, 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 $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.

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 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 LOGCAP V - Iraq Task Order contributed $144.9 million and $62.6 million of revenue for the six months ended July 1, 2022 and July 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.

The K-BOSSS contract contributed $15.8 million and $232.9 million of revenue for the six months ended July 1, 2022 and July 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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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,

For the six months ended July 1, 2022, total backlog was $4.6 billion as compared to $5.0 billion at December 31, 2021.

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

July 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 $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.

We received funded orders of $1.1 billion during the six months ended July 1, 2022, which was a decrease of $121.3 million compared to the six months ended July 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.

government’s investment in services and capabilities in response to changing security challenges creates a complex and fluid business environment for V2X and other firms in this market.

However, the U.S.

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

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.

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

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

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

Subsequently, both the Senate Armed Services Committee and House Armed Services Committee have reported their versions of the FY 2023 National Defense Authorizations Act, which provide an additional $45 billion and $37 billion, respectively, for the DoD.

While final legislation has yet to be enacted and it is difficult to predict future defense budgets, final FY 2023 DoD funding is currently expected to be higher than the original request.

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.

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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

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

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

Selected financial highlights are presented in the following table:

Three Months Ended Change

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

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

Revenue $ 498,066 $ 470,845 $ 27,221 5.8 %

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Net Income $ 10,472 $ 15,934 $ (5,462) (34.3) %

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.

Revenue for the three months ended July 1, 2022 wa s $498.1 million, an increase of $27.2 million, or 5.8%, as compared to the three months ended July 2, 2021.

Revenue from our Asia, U.S and Europe programs increased by $16.7 million, $12.2 million, and $6.6 million, respectively, and revenue from our Middle East programs decreased by $8.3 million.

Cost of 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.

Cost of revenue as a percentage of revenue wa s 91.0% compared to 89.8% for the three months ended July 1, 2022 and July 2, 2021, respectively .

The increase in cost of revenue of $30.6 million, or 7.3%, for the three months ended July 1, 2022, as compared to the three months ended July 2, 2021, was primarily due to the volume fluctuations described above for revenue.

In addition, we realized lower margins associated with the early phases of new program operations during the three months ended July 1, 2022.

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

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.

For the three months ended July 1, 2022, SG&A expenses of $29.7 million increased by $4.1 million, or 16.1%, as compared to July 2, 2021.

The increase in SG&A expenses was due to M&A and integration costs of $5.9 million.

Operating Income

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 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 for the three months ended July 1, 2022 decreased by $7.6 million, or 33.5%, as compared to the three months ended July 2, 2021.

The decrease was due primarily to the fluctuations described for above SG&A expenses and lower margin rates associated with early phases of new program operations.

Operating income as a percentage of revenue was 3.0% for the three months ended July 1, 2022, compared to 4.8% for the three months ended July 2, 2021.

The decrease in operating income as a percent of revenue was the result of an increase in M&A and integration costs in SG&A expenses and lower margin rates associated with early phases of new program operations.

Aggregate cumulative catch-up adjustm ents increased operating income by $6.8 million and decreased operating income by $1.7 million for the three months ended July 1, 2022 and July 2, 2021, respectively.

The aggregate cumulative catch-up adjustments for the three months ended July 1, 2022 and July 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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Six months ended July 1, 2022, compared to six months ended July 2, 2021

Selected financial highlights are presented in the following table:

Six Months Ended Change

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

Revenue $ 954,537 $ 904,849 $ 49,688 5.5 %

Cost of revenue 872,581 816,308 56,273 6.9 %

% of revenue 91.4 % 90.2 %

Selling, general, and administrative expenses 61,699 49,427 12,272 24.8 %

% of revenue 6.5 % 5.5 %

Operating income 20,257 39,114 (18,857) (48.2) %

Operating margin 2.1 % 4.3 %

Interest expense, net (3,643) (4,186) 543 (13.0) %

Income from operations before income taxes 16,614 34,928 (18,314) (52.4) %

% of revenue 1.7 % 3.9 %

Income tax expense 3,287 6,946 (3,659) (52.7) %

Effective income tax rate 19.8 % 19.9 %

Net Income $ 13,327 $ 27,982 $ (14,655) (52.4) %

Revenue for the six months ended July 1, 2022 wa s $954.5 million, an increase of $49.7 million, or 5.5%, as compared to the six months ended July 2, 2021.

Revenue from our U.S., Asia and Europe programs increased by $29.1 million, $29.3 million, and $4.5 million, respectively, and revenue from our Middle East programs decreased by $13.2 million.

Cost of Revenue

Cost of revenue as a percentage of revenue for the six months ended July 1, 2022 was 91.4% compared to 90.2% for July 2, 2021, respectiv ely.

The increase in cost of revenue of $56.3 million, or 6.9%, for the six months ended July 1, 2022, as compared to the six months ended July 2, 2021, was primarily due to the volume fluctuations described above for revenue.

In addition, we realized lower margins associated with the early phases of new program operations during the six months ended July 1, 2022.

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

For the six months ended July 1, 2022, SG&A expenses of $61.7 million increased by $12.3 million, or 24.8%, as compared to the six months ended July 2, 2021.

The increase in SG&A expenses was due to M&A and integration costs of $14.9 million.

Operating Income

Operating income for the six months ended July 1, 202 2 decreased by $18.9 million, or 48.2%, a s compared to the six months ended July 2, 2021.

The decrease was due primarily to the fluctuations described above for SG&A expenses and lower margin rates associated with early phases of new program operations.

Operating income as a percentage of revenue was 2.1 % fo r the six months ended July 1, 2022, compared to 4.3% for the six months ended July 2, 2021.

The decrease in operating income was a result of an increase M&A and integration costs in SG&A expenses and lower margin rates associated with early phases of new program operations.

Aggregate cumulative catch-up adjustments in creased oper ating income by $7.4 million for the six months ended July 1, 2022 and de creased oper ating income by $3.0 million for the six months ended July 2, 2021, respectively.

The aggregate cumulative catch-up adjustments for the six months ended July 1, 2022 and July 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 ODCs purchases.

Interest (Expense) Income, Net

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

Three Months Ended Change Six Months Ended Change

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

Interest income $ 6 $ 8 $ (2) (25.0) % $ 50 $ 33 $ 17 51.5 %

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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 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.

Interest expense is directly related to borrowings under our senior secured credit facilities, with the amort ization of debt issuance costs, and derivative instruments used to hedge a portion of our exposure to interest rate risk.

The decrease in interest expense, net, of $0.5 million for the six months ended July 1, 2022, compared to the six months ended July 2, 2021 was due to increased 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 $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.

We recorded income tax expense o f $2.6 million and $4.4 million for the three months ended July 1, 2022 and July 2, 2021, respectively, representing effective income tax rates of 19.8% and 21.6%, respectively.

For the six months ended July 1, 2022 and July 2, 2021, we recorded income tax provisions of $3.3 million and $6.9 million, representing effective income tax rates of 19.8% and 19.9%, 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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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 January 24, 2022 and is collectively referred to as the Amended Agreement (See Note 7 in this Form 10-Q).

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 6.

Debt, in this Quarterly Report on Form 10-Q).

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

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.

At July 1, 2022, there were $40.0 million of outstanding borrowings under the Amended Revolver.

In addition, there were two le tters of credit outstanding in the aggregate amount of $3.2 million , which reduced our borrowing availability under the Amended Revolver to $226.8 million.

V2X had net de bt of $58.4 million as of July 1, 2022 and $66.9 million as of December 31, 2021.

The Company recognized $5.9 million and $ 14.9 million of M&A-related costs that were expensed as incurred during the three and six months ended July 1, 2022, respectively.

These costs increased cash outlays for Merger related payments by $5.8 million during the first and second quarters of 2022.

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

and international cash from wholly owned subsidiaries.

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.

Approximately $12.5 million of our tota l $31.8 million in unrestricted cash at July 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.

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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 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:

Three Months Ended

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

Our DSO was 67 and 75 days as of July 1, 2022 and December 31, 2021, respectively.

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

Six Months Ended

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

Operating activities $ 19,636 $ 14,026

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

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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Net cash used in operating activities for the six months ended July 1, 2022 consisted of cash inflows from net income of $13.3 million and non-cash net income items of $12.7 million, partially offset by cash outflows for other long-term assets and liabilities of $3.2 million and net working capital requirements of $3.2 million.

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

Net cash provided by operating activities for the six months ended July 1, 2021 consisted of inflows from net income of $28.0 million increased by non-cash items of $13.4 million partially offset by outflows of net working capital requirements of $20.2 million and other long-term assets and liabilities of $7.2 million.

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

Net cash used in investing activities for the six months ended July 1, 2022 consisted of $3.5 million of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations and $ 2.1 million for a joint venture contribution.

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

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

Net cash used in financing activities during the six months ended July 1, 2022 consisted of repayments of long-term debt of $5.2 million, payments of $1.7 million for employee withholding taxes on share-based compensation and payments $0.5 million for debt issuance costs.

During the six months ended July 1, 2022, we also borrowed and repaid $392.0 million and $402.0 million, respectively, on the Amended Revolver.

These cash outflows were partially offset by $0.4 million received from the exercise of stock options.

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

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

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

Capital Resources

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.

At July 1, 2022, we held unrestricted cash of $31.8 million, which included $12.5 million held by foreign subsidiaries, and had $226.8 million of available borrowing capacity under the Amended Revolver, which expires on November 15, 2023.

We believe that our cash at July 1, 2022, as supplemented by cash flows from operations and the Amended Revolver, will be sufficient to fund ou r 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 Securities and Exchange Commission (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.

Subsequent Event, in this Quarterly Report on Form 10-Q for a discussion of the debt incurred in connection with the Merger with Vertex.

Contractual Obligations

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

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

Payments Due by Period

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Total 143,599 27,701 98,872 9,242 7,784

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

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

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

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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, 2021.

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, 2021.

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.

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

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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

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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.

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:

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terms of our credit agreement;

interest rate risk;

inflation and interest rate risk;

subcontractor performance;

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changes in our tax provisions or exposure to additional income tax liabilities;

risks and uncertainties relating to the Spin-off;

risks and uncertainties relating to the Merger , risks and uncertainties relating to the Spin-off;

changes in GAAP;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis