V2X, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q as well as the audited Consolidated Financial Statements and notes thereto and the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2021. This Quarterly Report provides additional information regarding the Company, our services, industry outlook and forward-looking statements that involve risks and uncertainties, including those related to the potential impact of the coronavirus pandemic (COVID-19), and any current or future government mandated COVID-19 precautions, including mandatory vaccination, and its impact on us, our operations, or our future financial or operational results. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements. Refer to "Forward-Looking Information" for further information regarding forward-looking statements. Amounts presented in and throughout this Item 2 are rounded and, as such, any rounding differences could occur in period over period changes and percentages reported. Overview V2X, Inc., formerly known as 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. Army. 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 both the six months ended July 1, 2022 and July 2, 2021, we generated approximately 64% of our total revenue from the U.S. Army . Executive Summary 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. Additionally, the fees under certain contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue when there is sufficient information to reasonably assess anticipated contract performance. Amounts representing contract change orders, claims, requests for equitable adjustment, or limitations in funding on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated. Changes in estimated revenue, cost of revenue and the related effect to operating income are recognized using cumulative catch-up adjustments, which recognize in the current period the cumulative effect of the changes on current and prior periods based on a contract's percentage of completion. Cumulative catch-up adjustments due to aggregate changes in contract estimates increased operating income by $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 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 See Note 15. 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. 23 Table of Contents COVID-19 Impact The COVID-19 pandemic continues to present significant business challenges in 2022. 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. If these mandates are implemented, the extent of the regulatory impact is unclear and could have a material adverse impact on the Company's operations. As new variants of the virus emerge, we remain cautious as many factors remain unpredictable. We continue to take measures to protect the health and safety of our employees, including measures to facilitate the provision of vaccines to our employees in line with state and local guidelines, to work with our customers to minimize ultimate potential disruptions, and to support our community in addressing the challenges posed by this global pandemic. The extent of the ultimate impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our programs in the expected timeframe, will depend on future developments, including any potential subsequent waves 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 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. facilities have continued to operate in support of essential products and services required to meet our commitments to the U.S. government and the U.S. military; however, facility closures, 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. We continue to assess possible implications to our business, supply chain and customers and to take actions in an effort to mitigate adverse consequences in order to support our customers' mission critical business and national security. For additional risks to the Company related to the COVID-19 pandemic, see Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021. Significant Contracts 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 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% Kuwait Base Operations and Security Support Services (K-BOSSS) 1.7% 25.7% 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 LOGCAP V - Kuwait Task Order is currently exercised through June 30, 2023, 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 $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 $144.9 million and $62.6 million of revenue for the six months ended July 1, 2022 and July 2, 2021 , respectively. 24 Table of Contents 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 $15.8 million and $232.9 million of revenue for the six months ended July 1, 2022 and July 2, 2021, respectively. Backlog Total backlog includes remaining performance obligations, consisting of both funded backlog (firm orders for which funding is contractually authorized and appropriated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer and unexercised contract options). Total backlog excludes potential orders under IDIQ contracts and contracts awarded to us that are being protested by competitors with the GAO or in the COFC. The value of the backlog is based on anticipated revenue levels over the anticipated life of the contract. Actual values may be greater or less than anticipated. Total backlog is converted into revenue as work is performed. The level of order activity related to programs can be affected by the timing of U.S. government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others. Our contracts are multi-year contracts and typically include an initial period of one year or less with annual one-year or less option periods for the remaining contract period. The number of option periods vary by contract, and there is no guarantee that an option period will be exercised. The right to exercise an option period is at the sole discretion of the U.S. government when we are the prime contractor or of the prime contractor when we are a subcontractor. The U.S. government may also extend the term of a program by issuing extensions or bridge contracts, typically for periods of one year or less. We expect to recognize a substantial portion of our funded backlog as revenue within the next 12 months. However, the U.S. government or the prime contractor may cancel any contract at any time through a termination for convenience. 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 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 Funded backlog $ 1,283 $ 1,033 Unfunded backlog 3,332 3,972 Total backlog $ 4,615 $ 5,005 Funded orders (different from funded backlog) represent orders for which funding was received during the period. 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 The U.S. 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. 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. 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. 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. The U.S. 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 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. 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. 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. 25 Table of Contents 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 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. The following are examples of a few of these core functions: (i) keeping communications networks operational; (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 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. DISCUSSION OF FINANCIAL RESULTS 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) July 1, 2022 July 2, 2021 $ % Revenue $ 498,066 $ 470,845 $ 27,221 5.8 % Cost of revenue 453,305 422,660 30,645 7.3 % % of revenue 91.0 % 89.8 % Selling, general, and administrative expenses 29,740 25,605 4,135 16.1 % % of revenue 6.0 % 5.4 % Operating income 15,021 22,580 (7,559) (33.5) % Operating margin 3.0 % 4.8 % Interest expense, net (1,963) (2,253) (290) (12.9) % Income from operations before income taxes 13,058 20,327 (7,269) (35.8) % % of revenue 2.6 % 4.3 % Income tax expense 2,586 4,393 (1,807) (41.1) % Effective income tax rate 19.8 % 21.6 % Net Income $ 10,472 $ 15,934 $ (5,462) (34.3) % Revenue 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 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 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. 26 Table of Contents Operating Income 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. 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 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. 27 Table of Contents 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 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 % Interest expense $ (1,969) (2,261) (292) (12.9) % (3,693) (4,219) (526) (12.5) % Interest expense, net $ (1,963) $ (2,253) $ (290) (12.9) % $ (3,643) $ (4,186) $ (543) (13.0) % Interest income is directly related to interest earned on our cash. Interest expense is directly related to borrowings under our senior secured credit facilities, with the 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 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. LIQUIDITY AND CAPITAL RESOURCES Liquidity We have generated operating cash flows sufficient to fund our working capital, capital expenditures, and financing requirements. We expect to fund our ongoing working capital, capital expenditure and financing requirements and pursue additional growth through new business development and potential acquisition opportunities by using cash flows from operations, cash on hand, our credit facilities, and access to capital markets. When necessary, we will utilize our revolving credit facility to satisfy short-term working capital requirements. If our cash flows from operations are less than what we expect, we may need to access the long-term or short-term capital markets. Although we believe that our current financing arrangements will permit us to finance our operations on acceptable terms and conditions, our access to and the availability of financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy. We cannot provide assurance that such financing will be available to us on acceptable terms or that such financing will be available at all. 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. 28 Table of Contents 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 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 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 $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. We do not currently expect that we will be required to repatriate undistributed earnings of foreign subsidiaries. We expect our U.S. domestic cash resources will be sufficient to fund our U.S. operating activities and cash commitments for financing activities. Dividends We do not currently plan to pay a regular dividend on our common stock. The declaration of any future cash dividends and the amount of any such dividends, if declared, will depend upon our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and the discretion of our Board of Directors. In deciding whether to pay future dividends on our common stock, our Board of Directors may take into account such matters as general business conditions, industry practice, our financial condition and performance, our future prospects, our cash needs and capital investment plans, income tax consequences, applicable law and such other factors as our Board of Directors may deem relevant. Sources and Uses of Liquidity Cash, accounts receivable, unbilled receivables, and accounts payable are the principal components of our working capital and are generally driven by our level of revenue with other short-term fluctuations related to payment practices by our customers and the timing of our billings. Our receivables reflect amounts billed to our customers, as well as the revenue that was recognized in the preceding month, which is normally billed the month following each balance sheet date. The total amount of our accounts receivable can vary significantly over time and is sensitive to revenue levels and the timing of payments received from our customers. Days sales outstanding (DSO) is a metric used to monitor accounts receivable levels. The Company determines its DSO by calculating the number of days necessary to exhaust its ending accounts receivable balance based on its most recent historical revenue. Our DSO was 67 and 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 Investing activities (5,587) (6,401) Financing activities (16,984) (6,176) Foreign exchange 1 (507) (373) Net change in cash, cash equivalents and restricted cash $ (3,442) $ 1,076 1 Impact on cash balances due to changes in foreign exchange rates. 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. 29 Table of Contents 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 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. See Note 15. 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 July 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 48,001 13,312 17,663 9,242 7,784 Principal payments on Amended Term Loan 50,200 10,400 39,800 — — Principal payments on Amended Revolver 40,000 — 40,000 — — Interest on Term Loan and Amended Revolver ¹ 5,398 3,989 1,409 — — Total 143,599 27,701 98,872 9,242 7,784 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 The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from management's estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with revenue recognition, business combinations, goodwill and other intangible assets, and income taxes have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates. There have been no material changes in our critical 30 Table of Contents 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. FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the Securities Act of 1933, as amended (the Securities Act), and the Private Securities Litigation Reform Act of 1995 and, as such, may involve risks and uncertainties. All statements included or incorporated by reference in this report, other than statements that are purely historical, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “could,” “potential,” “continue” or similar terminology. These statements are based on the beliefs and assumptions of the management of the Company based on information currently available to management. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to: the continued impact of COVID-19 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; our ability to retain and renew our existing contracts; our ability to compete with other companies in our market; security breaches and other disruptions to our information technology and operation; our mix of cost-plus, cost-reimbursable, and firm-fixed-price contracts; maintaining our reputation and relationship with the U.S. government; protests of new awards; economic, political and social conditions in the countries in which we conduct our businesses; changes in U.S. or international government defense budgets; government regulations and compliance therewith, including changes to the DoD procurement process; changes in technology; intellectual property matters; governmental investigations, reviews, audits and cost adjustments; contingencies related to actual or alleged environmental contamination, claims and concerns; delays in completion of the U.S. government's budget; our success in extending, deepening, and enhancing our technical capabilities; our success in expanding our geographic footprint or broadening our customer base; our ability to realize the full amounts reflected in our backlog; impairment of goodwill; misconduct of our employees, subcontractors, agents, prime contractors and business partners; our ability to control costs; our level of indebtedness; terms of our credit agreement; inflation and interest rate risk; subcontractor performance; economic and capital markets conditions; our ability to maintain safe work sites and equipment; our ability to retain and recruit qualified personnel; our ability to maintain good relationships with our workforce; our teaming relationships with other contractors; changes in our accounting estimates; the adequacy of our insurance coverage; volatility in our stock price; changes in our tax provisions or exposure to additional income tax liabilities; risks and uncertainties relating to the Merger , risks and uncertainties relating to the Spin-off; changes in GAAP; 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.