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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-09 · 140 added, 132 removed, 220 unchanged (55% of the section changed)

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The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q as well as the audited Consolidated Financial Statements and notes thereto and the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 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.

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), any current or future government mandated COVID-19 precautions, including mandatory vaccination, and economic conditions including inflation and rising interest rates, and the 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.

Refer to "Forward-Looking Information" below 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.

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.

V2X, formerly known as Vectrus, is a leading provider of critical mission solutions and support to defense clients globally.

The Company operates as one segment and delivers a comprehensive suite of integrated solutions across the operations and logistics, aerospace, training and technology markets to national security, defense, civilian and international clients.

Our primary customer is the U.S.

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

Department of Defense (DoD).

For the nine months ended September 30, 2022 and October 1, 2021, we had revenue of $1,912.7 million and $1,364.3 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.

For both the nine months ended September 30, 2022 and October 1, 2021, we generated approximately 50% and 64% of our revenue from the U.S.

Army, respectively.

The decrease in revenue is primarily due to the change in revenue mix as a result of the Merger.

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.

Our revenue increased $498.7 million, or 108.6%, for the three months ended September 30, 2022 compared to the three months ended October 1, 2021.

Revenue from our U.S., Asia and Europe programs increased by $443.5 million, $28.8 million, and $27.8 million, respectively, and revenue from our Middle East programs decreased by $1.3 million for the three months ended September 30, 2022 compared to the three months ended October 1, 2021.

Operating income decreased $8.4 million, or 65.2%, for the three months ended September 30, 2022, compared to the three months ended October 1, 2021.

The decrease was due to increased SG&A expenses related to mergers and acquisitions (M&A) and integration costs, primarily due to the Merger.

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.

For a description of the cumulative adjustments to operating income, see Note 4, Revenue.

Cumulative catch-up adjustments due to aggregate changes in contract estimates decreased operating income by $1.5 million and increased operating income by $2.6 million for the three months ended September 30, 2022 and October 1, 2021, respectively.

Further details related to our financial results for the three and nine months ended September 30, 2022, compared to the three and nine months ended October 1, 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.

For a discussion of our Merger and related debt and stock-based compensation obligations, see Note 3, Merger ;

Note 7, Debt and Note 11, Stock Based Compensation .

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.

We are closely monitoring how the spread of COVID-19, including any resurgences or the emergence of new variants, is affecting our employees, business operations and financial results.

During the first nine 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.

We continued to take measures to protect the health and safety of our employees, including working with our customers to minimize potential disruptions and supporting our community in addressing the challenges posed by this global pandemic.

Furthermore, in September 2021, the Biden Administration issued an executive order mandating a COVID-19 vaccination requirement for federal contractors, except in certain limited circumstances.

Since then, multiple courts have enjoined the executive order’s implementation, although the court decisions are not uniform in their application or the states to which the injunction applies.

The federal government has indicated that it will not, for the time being, enforce the vaccination

However, our obligation to comply with the executive order could change in the future depending on the ultimate resolution of court challenges to that order.

If the federal vaccine mandate moves forward, we may experience constraints on our workforce and the workforce of our supply chain, which could require us to adapt our operations, and could have an adverse effect on our business.

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, the ultimate impact on financial markets and the global economy, new government regulations for defense contractors (including vaccination mandates) 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.

For the three and nine months ended September 30, 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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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:

The following table reflects contracts that accounted for more than 10% of our total revenue for the nine months ended September 30, 2022 and October 1, 2021:

% of Total Revenue

Six Months Ended

Contract Name July 1, 2022 July 2, 2021

Nine Months Ended

Contract Name September 30, 2022 October 1, 2021

Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order 17.5% 7.7%

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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 LOGCAP V - Kuwait/Arabian Peninsula Other (Kuwait/APO) Task Order is currently exercised through June 30, 2023, with three 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, and Arabian Peninsula region.

The LOGCAP V - Kuwait/Arabian Peninsula Other Task Order contributed $334.0 million and $105.0 million of revenue for the nine months ended September 30, 2022 and October 1, 2021 , respectively.

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

The LOGCAP V - Iraq Task Order contributed $209.6 million and $141.2 million of revenue for the nine months ended September 30, 2022 and October 1, 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 $15.8 million and $232.9 million of revenue for the six months ended July 1, 2022 and July 2, 2021, respectively.

The K-BOSSS contract contributed $17.5 million and $271.4 million of revenue for the nine months ended September 30, 2022 and October 1, 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).

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.

Total backlog excludes potential orders under IDIQ contracts and contracts awarded to us that are being protested by competitors with the General Accounting Office or in the Court of Federal Claims.

The value of the backlog is based on anticipated revenue levels over the anticipated life of the contract.

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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 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,

For the nine months ended September 30, 2022 , total backlog was $12.7 billion as compared to $5.0 billion at December 31, 2021.

The following is a summary of our backlog as of September 30, 2022 and December 31, 2021:

September 30, 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 $1.1 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.

We received funded orders of $2.0 billion during the nine months ended September 30, 2022, which was a decrease of $247.9 million compared to the nine months ended October 1, 2021.

Economic Opportunities, Challenges and Risks

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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.

We believe that our capabilities, particularly in supply chain and logistics, IT mission support, engineering and digital integration, security, or maintenance, repair, and overhaul, and base operations support 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 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.

Government has not yet enacted an annual budget for FY 2023.

As such, on September 30, 2022, a continuing resolution (CR) funding measure was enacted to avert a government shutdown.

The current CR finances U.S.

Government activities through December 16, 2022.

The CR provides partial-year funding at amounts consistent with appropriated levels for FY 2022, subject to certain restrictions.

Under the CR, new spending initiatives are not authorized.

Despite the current CR funding measure, our key contracts and programs continue to be funded and supported.

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.

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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.

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.

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

Additionally, business conditions have become more challenging due to macroeconomic conditions, including inflation and rising interest rates.

Given the current pace of inflation and other geopolitical factors, we are monitoring the impact of rising costs on our active and future contracts.

To date, we have not experienced broad-based increases due to inflation in the costs of our fixed-price and time and materials contracts that are material to the business as a whole;

however, if we begin to experience greater than expected inflation in our supply chain and labor costs, our profit margins, and in particular, our profit margin from fixed-price and time and materials contracts, which represent a substantial portion of our contracts, could be adversely affected.

See Item 1A, "Risk Factors".

On August 16, 2022, the U.S.

government enacted the Inflation Reduction Act of 2022, which includes, among other provisions, changes to the U.S.

corporate income tax system.

While we do not currently anticipate any impact on our business, we are continuing to evaluate the Inflation Reduction Act of 2022 and its requirements, as well as any potential impact on our business in future.

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

Three months ended September 30, 2022, compared to three months ended October 1, 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 $ %

(In thousands, except for percentages) September 30, 2022 October 1, 2021 $ %

Revenue $ 958,156 $ 459,408 $ 498,748 108.6 %

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Interest expense, net (27,265) (1,955) 25,310 1,294.6 %

Income from operations before income taxes 13,058 20,327 (7,269) (35.8) %

(Loss) Income from operations before income taxes (22,778) 10,935 (33,713) (308.3) %

% of revenue (2.4) % 2.4 %

Income tax expense 2,586 4,393 (1,807) (41.1) %

Income tax (benefit) expense (5,739) 677 (6,416) (947.7) %

Effective income tax rate 25.2 % 6.2 %

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

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.

Net (loss) income $ (17,039) $ 10,258 $ (27,297) (266.1) %

Revenue for the three months ended September 30, 2022 wa s $958.2 million, an increase of $498.7 million, or 108.6%, as compared to the three months ended October 1, 2021.

Revenue increased $451.6 m illion due to the Merger and the remaining increase was from organic growth for legacy programs.

Revenue from our U.S., Asia and Europe programs increased by $443.5 million, $28.8 million, and $27.8 million, respectively, and revenue from our Middle East programs decreased by $1.3 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.

Cost of revenue as a percentage of revenue decreased to 89.9% compared to 91.2% for the three months ended September 30, 2022 and October 1, 2021, respectively .

The increase in cost of revenue of $442.2 million, or 105.6%, for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily due to increased revenue from the Merger.

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.

For the three months ended September 30, 2022, SG&A expenses of $92.6 million increased by $65.0 million, or 235.3%, as compared to the three months ended October 1, 2021.

The increase in SG&A expenses was due to the Merger, including M&A and integration costs of $44.9 million.

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 for the three months ended September 30, 2022 decreased by $8.4 million, or 65.2%, as compared to the three months ended October 1, 2021.

Operating income as a percentage of revenue was 0.5% for the three months ended September 30, 2022, compared to 2.8% for the three months ended October 1, 2021.

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

Aggregate cumulative catch-up adjustm ents decreased operating income by $1.5 million and increased operating income by $2.6 million for the three months ended September 30, 2022 and October 1, 2021, respectively.

The aggregate cumulative catch-up adjustments for the three months ended September 30, 2022 and October 1, 2021 related to changes in contract terms, program performance, customer changes in scope of work 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

Nine months ended September 30, 2022, compared to Nine months ended October 1, 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 $ %

Nine Months Ended Change

(In thousands, except for percentages) September 30, 2022 October 1, 2021 $ %

Revenue $ 1,912,693 $ 1,364,257 $ 548,436 40.2 %

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Interest expense, net (30,908) (6,140) (24,768) 403.4 %

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

(Loss) Income from operations before income taxes (6,164) 45,863 (52,027) (113.4) %

% of revenue (0.3) % 3.4 %

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

Income tax (benefit) expense (2,453) 7,623 (10,076) (132.2) %

Effective income tax rate 39.8 % 16.6 %

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.

Net (loss) income $ (3,711) $ 38,240 $ (41,951) (109.7) %

Revenue for the nine months ended September 30, 2022 wa s $1,912.7 million, an increase of $548.4 million, or 40.2%, as compared to the nine months ended October 1, 2021.

Revenue increased $451.6 m illion due to the Merger.

Revenue from our U.S., Asia and Europe programs increased by $472.6 million, $58.1 million, and $32.2 million, respectively, and revenue from our Middle East programs decreased by $14.4 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.

Cost of revenue as a percentage of revenue was 90.6% for the nine months ended September 30, 2022 and 90.5% for the nine months ended October 1, 2021.

The increase in cost of revenue of $498.4 million, or 40.4%, for the nine months ended September 30, 2022 , as compared to the nine months ended October 1, 2021, was primarily due to the increase in revenue described above.

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.

For the nine months ended September 30, 2022, SG&A expenses of $154.3 million increased by $77.3 million, or 100.3%, as compared to the nine months ended October 1, 2021.

The increase in SG&A expenses was due to the Merger including M&A and integration costs of $ 59.9 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 for the nine months ended September 30, 2022 decreased by $27.3 million, or 52.4%, a s compared to the nine months ended October 1, 2021.

Operating in come as a percentage of revenue was 1.3% for the nine months ended September 30, 2022, compared to 3.8% for the nine months ended October 1, 2021.

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

Aggregate cumulative catch-up adjustments in creased oper ating income by $5.9 million for the nine months ended September 30, 2022 and de creased oper ating income by $0.4 million for the nine months ended October 1, 2021, respectively.

The aggregate cumulative catch-up adjustments for the nine months ended September 30, 2022 and October 1, 2021 related to changes in contract terms, program performance, customer changes in scope of work 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 (expense) income, net for the three and nine months ended September 30, 2022 and October 1, 2021 was as follows:

Three Months Ended Change Nine Months Ended Change

(In thousands, except for percentages) September 30, 2022 October 1, 2021 $ % September 30, 2022 October 1, 2021 $ %

Interest income $ 16 $ 15 $ 1 (6.7) % $ 66 $ 48 $ 18 (37.5) %

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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.

The increase in interest expense, net, of $24.8 million for the nine months ended September 30, 2022, compared to the nine months ended October 1, 2021, was due to increased debt assumed with the Merger.

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.

For the three months ended September 30, 2022, we recorded an income tax benefit of $5.7 million and for the three months ended October 1, 2021 an income tax provision of $0.7 million, representing effective income tax rates of 25.2% and 6.2%, respectively.

For the nine months ended September 30, 2022, we recorded an income tax benefit of $2.5 million and for the nine months ended October 1, 2021 an income tax provision of $7.6 million, representing effective income tax rates of 39.8% and 16.6%, respectively.

The effective income tax rates vary from the federal statutory rate of 21% mainly due to state and foreign taxes, non-deductibility of transaction costs from the recent Merger, disallowed compensation deduction under Internal Revenue Code Section 162(m), and available deductions not reflected in book income and income tax credits.

LIQUIDITY AND CAPITAL RESOURCES

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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 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.

On the Closing Date, the outstanding debt from the Amended Term Loan and the Amended Revolver, $50.2 million and $40.0 million, respectively, was repaid, with proceeds from the First Lien Incremental Term Tranche credit facility, and related guarantees and liens were discharged and released.

For additional discussion of the Company’s indebtedness, see Note 7, Debt .

In conjunction with the Merger, V2X assumed first and second lien debt of $1,182.7 million and $185.0 million respectively.

In addition, an ABL Credit Agreement was assumed that provides for the ABL Facility of up to an aggregate amount of $200.0 million in the ABL Loans.

The Vertex ABL Credit Agreement also provides for (i) a $30.0 million sublimit of availability for letters of credit, and (ii) a $10.0 million sublimit for short-term borrowings on a swingline basis.

For additional discussion of the Company’s indebtedness, see Note 7, Debt .

The Company recognized $28.1 million and $41.3 million of M&A-related costs that were expensed as incurred during the three and nine months ended September 30, 2022, respectively.

These costs increased cash outlays for Merger related payments by $45.8 million during the first three quarters 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.

Approximately $30.8 million o f our tota l $144.1 million in unrestricted cash at September 30, 2022 is held by our foreign subsidiaries and is not available to fund U.S.

operations unless repatriated.

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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 75 days as of July 1, 2022 and December 31, 2021, respectively.

Our DSO was 65 and 75 days as of September 30, 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

Nine Months Ended

(In thousands) September 30, 2022 October 1, 2021

Operating activities $ 99,768 $ 53,378

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Foreign exchange 1

(11,877) (2,784)

Net change in cash, cash equivalents and restricted cash $ 108,860 $ (12,494)

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.

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.

Net cash provided by operating activities for the nine months ended September 30, 2022 consisted of cash inflows from non-cash net income items of $60.0 million, a decrease in net working capital requirements of $55.4 million partially offset by cash outflows for other long-term assets and liabilities of $11.9 million and a net loss of $3.7 million.

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

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 investing activities for the nine months ended September 30, 2022 consisted of $194.4 million of net cash acquired in the Merger.

This was partially offset by $8.2 million of capital expenditures for the purchase of software and hardware, and vehicles and equipment related to ongoing operations.

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

Net cash used in financing activities during the nine months ended September 30, 2022 consisted of repayments of long-term debt of $58.4 million, payments of $1.9 million for employee withholding taxes on share-based compensation and payments of $2.3 million for debt issuance costs.

During the nine months ended September 30, 2022 , we also borrowed and

repaid $392.0 million and $495.0 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.

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

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

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

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

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.

At September 30, 2022, we held unrestricted cash of $144.1 million, which included $30.8 million held by foreign subsidiaries, and had $184.9 million of available borrowing capacity under the ABL Facility, which expires on June 29, 2026.

We believe that our cash at September 30, 2022, as supplemented by cash flows from operations and the ABL Facility, 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.

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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.

For a discussion of the debt incurred in connection with the Merger, see Note 7, Debt.

Contractual Obligations

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

As of September 30, 2022, our commitments to make future payments under long-term contractual obligations were as follows:

Payments Due by Period

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Operating leases $ 62,253 $ 17,008 $ 18,372 $ 13,115 $ 13,758

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 — —

Principal payments on Vertex First and Second Lien Credit Agreements 1,364,725 11,850 23,700 23,700 1,305,475

Interest on Vertex First and Second Lien Credit Agreements ¹ 638,440 103,682 206,648 206,777 121,333

Total $ 2,065,418 $ 132,540 $ 248,720 $ 243,592 $ 1,440,566

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

¹ Includes unused funds fee and is based on the September 30, 2022 interest rates.

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.

For information regarding accounting pronouncements and accounting standards updates, see Part I, Item 1, Note 2, Recent Accounting Standards Update .

FORWARD-LOOKING INFORMATION

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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;

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.

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 other filings 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