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), 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" 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. Overview 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). 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 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 $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. 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 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 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 27 Table of Contents mandate. 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 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. 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 nine months ended September 30, 2022 and October 1, 2021: % of Total Revenue Nine Months Ended Contract Name September 30, 2022 October 1, 2021 Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order 17.5% 7.7% Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order 11.0% 10.3% Kuwait Base Operations and Security Support Services (K-BOSSS) 0.9% 19.9% 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/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 $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 $17.5 million and $271.4 million of revenue for the nine months ended September 30, 2022 and October 1, 2021, respectively. 28 Table of Contents 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 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. 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 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 Funded backlog $ 2,943 $ 1,033 Unfunded backlog 9,762 3,972 Total backlog $ 12,705 $ 5,005 Funded orders (different from funded backlog) represent orders for which funding was received during the period. 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 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 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. The U.S. government's fiscal year (FY) begins on October 1 and ends on September 30. 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. The U.S. 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. 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 29 Table of Contents 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. 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. 30 Table of Contents DISCUSSION OF FINANCIAL RESULTS 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) September 30, 2022 October 1, 2021 $ % Revenue $ 958,156 $ 459,408 $ 498,748 108.6 % Cost of revenue 861,073 418,900 442,173 105.6 % % of revenue 89.9 % 91.2 % Selling, general, and administrative expenses 92,596 27,618 64,978 235.3 % % of revenue 9.7 % 6.0 % Operating income 4,487 12,890 (8,403) (65.2) % Operating margin 0.5 % 2.8 % Interest expense, net (27,265) (1,955) 25,310 1,294.6 % (Loss) Income from operations before income taxes (22,778) 10,935 (33,713) (308.3) % % of revenue (2.4) % 2.4 % Income tax (benefit) expense (5,739) 677 (6,416) (947.7) % Effective income tax rate 25.2 % 6.2 % Net (loss) income $ (17,039) $ 10,258 $ (27,297) (266.1) % Revenue 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 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 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 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. 31 Table of Contents Nine months ended September 30, 2022, compared to Nine months ended October 1, 2021 Selected financial highlights are presented in the following table: 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 % Cost of revenue 1,733,654 1,235,209 498,445 40.4 % % of revenue 90.6 % 90.5 % Selling, general, and administrative expenses 154,295 77,045 77,250 100.3 % % of revenue 8.1 % 5.6 % Operating income 24,744 52,003 (27,259) (52.4) % Operating margin 1.3 % 3.8 % Interest expense, net (30,908) (6,140) (24,768) 403.4 % (Loss) Income from operations before income taxes (6,164) 45,863 (52,027) (113.4) % % of revenue (0.3) % 3.4 % Income tax (benefit) expense (2,453) 7,623 (10,076) (132.2) % Effective income tax rate 39.8 % 16.6 % Net (loss) income $ (3,711) $ 38,240 $ (41,951) (109.7) % Revenue 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 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 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 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. 32 Table of Contents Interest (Expense) Income, Net 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) % Interest expense (27,281) (1,970) 25,311 1,284.8 % (30,974) (6,188) 24,786 400.5 % Interest (expense), net $ (27,265) $ (1,955) $ 25,310 1,294.6 % $ (30,908) $ (6,140) $ 24,768 403.4 % 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 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 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 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. 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. 33 Table of Contents The cash presented on our Condensed Consolidated Balance Sheets consists of U.S. and international cash from wholly owned subsidiaries. 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. 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 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: Nine Months Ended (In thousands) September 30, 2022 October 1, 2021 Operating activities $ 99,768 $ 53,378 Investing activities 186,220 (9,868) Financing activities (165,251) (53,220) 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 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 34 Table of Contents 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 nine months ended October 1, 2021 consisted of repayments of long-term debt of $6.0 million and payments of $2.3 million for employee withholding taxes on share-based compensation. This was partially offset by $0.1 million received from the exercise of stock options. During the nine months ended October 1, 2021, we also borrowed and repaid $352.0 million and $397.0 million, respectively, on the Amended Revolver. Capital Resources 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. 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. For a discussion of the debt incurred in connection with the Merger, see Note 7, Debt. Contractual Obligations As of September 30, 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 $ 62,253 $ 17,008 $ 18,372 $ 13,115 $ 13,758 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 September 30, 2022 interest rates. 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 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 For information regarding accounting pronouncements and accounting standards updates, see Part I, Item 1, Note 2, Recent Accounting Standards Update . 35 Table of Contents 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 other filings with the SEC.