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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-08 · 116 added, 187 removed, 173 unchanged (64% 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, 2022.

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.

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 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.

Refer to "Forward-Looking Information" for further information regarding forward-looking statements.

Amounts presented in and throughout this Item 2 are rounded and, as such, any rounding differences could occur in period over period changes and percentages reported.

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.

is a leading provider of critical mission solutions primarily to defense clients globally.

The Company operates as one segment and provides 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.

For the three months ended March 31, 2023 and April 1, 2022, we had total revenue of $943.5 million and $456.5 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.

For the three months ended March 31, 2023 and April 1, 2022, we generated approximately 41% and 61%, respectively, of our total revenue from the U.S.

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.

Our revenue increased $487.0 million, or 106.7%, for the three months ended March 31, 2023 compared to the three months ended April 1, 2022.

Revenue increased $412.5 million due to the Merger and the remaining increase was from organic growth for legacy programs.

Revenue from our U.S., Asia, Middle East and Europe programs increased by $380.8 million, $48.1 million, $45.4 million and $12.7 million, respectively.

Operating income for the three months ended March 31, 2023, was $30.6 million, an increase of $25.3 million, or 483.9%, compared to the three months ended April 1, 2022.

The increase was due to the Merger and improved performance of legacy programs.

During the performance of our long-term 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 or limitations in funding on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated.

Changes in estimated revenue, cost of revenue and the related effect to operating income are recognized using cumulative 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 adjustments are driven by changes in contract terms, program performance, customer scope changes and changes to estimates in the reported period.

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

Further details related to our financial results for the three months ended March 31, 2023, compared to the three months ended April 1, 2022, are contained in the "Discussion of Financial Results" section.

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

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.

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.

For a discussion of our Merger and related debt and stock-based compensation obligations, see Note 3, Merger , Note 6, Debt, and Note 9, Stock-Based Compensation, in the Notes to Condensed Consolidated Financial Statements.

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:

The following table reflects contracts that accounted for more than 10% of our total revenue for the three months ended March 31, 2023 or April 1, 2022:

% of Total Revenue

Nine Months Ended

Contract Name September 30, 2022 October 1, 2021

Three Months Ended

Contract Name March 31, 2023 April 1, 2022

Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order 13.6% 21.6%

Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order 8.1% 15.7%

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 - Kuwait 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 region.

The LOGCAP V - Kuwait Task Order contributed $127.9 million and $98.4 million of revenue for the three months ended March 31, 2023 and April 1, 2022 , 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.

The LOGCAP V - Iraq Task Order contributed $76.5 million and $71.5 million of revenue for the three months ended March 31, 2023 and April 1, 2022 , 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 General Accounting Office or in the Court of Federal Claims.

Total backlog excludes potential orders under IDIQ contracts and contracts awarded to us that are being protested by competitors with the GAO or in the COFC.

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

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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 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,

For the three months ended March 31, 2023, total backlog was $11.8 billion as compared to $12.3 billion at December 31, 2022.

The following is a summary of our backlog as of March 31, 2023 and December 31, 2022:

March 31, December 31,

(In millions) 2023 2022

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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 $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.

We received funded orders of $982.0 million during the three months ended March 31, 2023, which was an increase of $732.1 million compared to the three months ended April 1, 2022.

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 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.

We believe that our capabilities, particularly in operations and logistics, aerospace, training and technology, 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 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.

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.

On December 29, 2022, the FY 2023 Omnibus Appropriations Act was signed into law by the President, providing $817 billion to the Defense Department.

This reflects a $44 billion increase over the President’s FY 2023 budget request.

The Fiscal 2024 budget request was submitted to the U.S.

Congress on March 9, 2023, and requested $842 billion for the Department of Defense.

Past congressional actions have suspended and increased the debt ceiling at various times but in January 2023, the current statutory debt ceiling limit of $31.4 trillion was reached.

As a result, the Treasury Department began taking accounting measures to continue financing the U.S.

government while avoiding a breach.

However, it is expected the U.S.

government will exhaust these measures and that statutory action will be needed to increase or suspend the debt ceiling.

There could be a material disruption to discretionary budgets and programs if the debt ceiling is not raised as the U.S.

government may not be able to satisfy its funding obligations.

If this scenario materializes, the effect on individual programs or the Company cannot be predicted at this time.

The debt ceiling as well as the overall federal budget are expected to remain major focus points for debate by the U.S.

While it is difficult to predict the specific course of future defense budgets, we believe many of the core functions we perform are mission-essential and that spending to maintain readiness, improve performance, increase service life, lower cost, and modernize digital and physical environments will continue to be a U.S.

government priority.

Our focus is on sustaining and protecting infrastructures, equipment, and IT networks, while utilizing operational technologies and converged solutions to improve

efficiency and the outcomes of our clients' missions.

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

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

The following are examples of a few of these core functions:

(i) keeping communications networks operational;

(ii) maintaining airfields and aircraft;

(iii) providing emergency services;

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

and (v) supporting rapid response contingency efforts.

Our focus is on providing integrated solutions across the mission lifecycle that encompass (i) high consequence training;

(ii) readiness/logistics/deployment;

(iii) mission and infrastructure support, including rapid response contingency efforts;

(iv) battlefield connectivity and communications;

(v) maintenance, modification, repair, and overhaul of assets and aircraft;

(vi) and upgrades and modernization across digital and physical environments.

We develop and insert operational technologies across our solutions to improve efficiency and the outcomes of our clients' missions.

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

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.

However, 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.

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DISCUSSION OF FINANCIAL RESULTS

Three months ended September 30, 2022, compared to three months ended October 1, 2021

Three months ended March 31, 2023, compared to three months ended April 1, 2022

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 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.

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 $ %

(In thousands, except for percentages) March 31, 2023 April 1, 2022 $ %

Revenue $ 943,460 $ 456,471 $ 486,989 106.7 %

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Operating margin 3.2 % 1.1 %

Loss on extinguishment of debt (22,052) — (22,052) *

Interest expense, net (31,744) (1,681) (30,063) 1,788.4 %

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Net (loss) income $ (17,480) $ 2,855 $ (20,335) (712.3) %

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.

*Percentage change is not meaningful.

Revenue increased $487.0 million, or 106.7%, for the three months ended March 31, 2023 as compared to the three months ended April 1, 2022.

Revenue increased $412.5 million due to the Merger and the remaining increase was from organic growth for legacy programs.

Revenue from our U.S., Asia, Middle East and Europe programs increased by $380.8 million, $48.1 million, $45.4 million and $12.7 million, respectively.

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.

Cost of revenue increased $445.4 million, or 106.2%, for the three months ended March 31, 2023 as compared to the three months ended April 1, 2022, primarily due to the increased revenue from the Merger and increased amortization of intangible assets.

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.

SG&A expenses increased $16.3 million, or 51.0%, for the three months ended March 31, 2023 as compared to the three months ended April 1, 2022, primarily due to the Merger.

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.

Operating income increased $25.3 million, or 483.9%, for the three months ended March 31, 2023 as compared to the three months ended April 1, 2022.

Operating income as a percentage of revenue was 3.2% for the three months ended March 31, 2023, compared to 1.1% for the three months ended April 1, 2022.

The increase was due to the Merger and improved performance of legacy programs.

Aggregate cumulative catch-up adjustments increased operating income by $13.1 million and $0.6 million for the three months ended March 31, 2023 and April 1, 2022, respectively.

The aggregate cumulative catch-up adjustments for the three months ended March 31, 2023 and April 1, 2022 related to changes in contract terms, program performance, customer changes in scope of work and changes to estimates in the reported period.

Operating income was also impacted by labor mix and the cost differential between internal resources and subcontractors as well as the volume of other direct cost purchases.

Loss on Extinguishment of Debt

The Company recorded a $22.1 million loss on extinguishment of debt for the three months ended March 31, 2023.

For a discussion of the loss on extinguishment see Note 6, Debt, in the Notes to Condensed Consolidated Financial Statements.

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 (expense) income, net for the three months ended March 31, 2023 and April 1, 2022 was as follows:

Three Months Ended Change

(In thousands, except for percentages) March 31, 2023 April 1, 2022 $ %

Interest income $ 208 $ 43 $ 165 383.7 %

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Interest expense, net $ (31,744) $ (1,681) $ (30,063) 1,788.4 %

$ (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.

Interest income is directly related to interest earned on our cash and cash equivalents.

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

Interest expense, net increased $30.1 million for the three months ended March 31, 2023 compared to the three months ended April 1, 2022 due to increased debt assumed with the Merger.

Income Tax (Benefit) Provision

We recorded income tax benefit of $5.7 million and provision of $0.7 million for the three months ended March 31, 2023 and April 1, 2022, respectively, representing effective income tax rates of 24.7% and 19.7%, respectively.

The effective income tax rates vary from the federal statutory rate of 21.0% mainly due to state and foreign taxes, disallowed compensation deduction under Internal Revenue Code Section 162(m), available deductions not reflected in book income, and income tax credits.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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.

As of March 31, 2023, there were $185.0 million of outstanding borrowings and $14.9 million of outstanding letters of credit under the 2023 Revolver.

Unamortized deferred financing costs related to the 2023 Revolver of $4.9 million are included in other non-current assets in the Condensed Consolidated Balance Sheets.

As of March 31, 2023, the fair value of the 2023 Revolver approximated the carrying value because the debt bears a floating interest rate.

As of March 31, 2023, the carrying value of the Term Loan portion of the 2023 Credit Agreement was $250.0 million, excluding unamortized deferred financing costs of $2.5 million.

The estimated fair value of the Term Loan portion of the 2023 Credit Agreement as of March 31, 2023 was $246.3 million.

The fair value is based on observable inputs of interest rates that are currently available to us for debt with similar terms and maturities for non-public debt.

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.

Approximately $25.4 million of our total $62.1 million in cash and cash equivalents at March 31, 2023 is held by our foreign subsidiaries and is not available to fund U.S.

operations unless repatriated.

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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.

Accounts receivable balances can vary significantly over time and are impacted by revenue levels and the timing of payments received from 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

Our DSO was 70 and 68 days as of March 31, 2023 and December 31, 2022, respectively.

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

Three Months Ended

(In thousands) March 31, 2023 April 1, 2022

Operating activities $ (38,492) $ (26,381)

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Foreign exchange 1

(11,877) (2,784)

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

Net change in cash and cash equivalents $ (53,922) $ (15,514)

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

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.

Net cash used in operating activities increased for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, primarily due to net cash outflows in working capital accounts of $68.7 million, other long-term assets and liabilities of $17.8 million, and a net operating loss of $17.5 million, partially offset by cash inflows from non-cash net income items of $65.5 million.

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

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

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

Net cash used in investing activities for the three months ended March 31, 2023 and April 1, 2022 consisted of $9.1 million and $2.2 million, respectively, of capital expenditures for the purchase of software and hardware, vehicles and equipment related to ongoing operations.

Net cash used in financing activities during the three months ended March 31, 2023 consisted of repayments of long-term debt of $421.0 million, revolver repayments of $163.8 million, payments for employee withholding taxes on share-based compensation of $12.8 million, and payments for debt issuance costs of $7.5 million, partially offset by proceeds from long term debt and the revolver of $250.0 million and $348.7 million, respectively.

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

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

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.

At March 31, 2023, we held cash and cash equivalents of $62.1 million, which included $25.4 million held by foreign subsidiaries, and had $300.1 million of available borrowing capacity under the 2023 Revolver, which expires on February 25, 2028.

We believe that our cash and cash equivalents at March 31, 2023, as supplemented by cash flows from operations and the 2023 Revolver, will be sufficient to fund our anticipated operating costs, capital expenditures, and current debt repayment obligations for at least the next 12 months.

Contractual Obligations

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

As of March 31, 2023, our commitments to make future payments under long-term contractual obligations were as follows:

Payments Due by Period

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Operating leases $ 61,125 $ 18,431 $ 20,710 $ 12,930 $ 9,054

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

Principal payments on Vertex First Lien Credit Agreement¹ 915,750 9,250 18,500 18,500 869,500

Principal payments on 2023 Credit Agreement¹ 435,000 6,250 18,750 410,000 —

Interest on Vertex First Lien and 2023 Credit Agreements 608,378 115,739 226,134 216,382 50,123

Total $ 2,020,253 $ 149,670 $ 284,094 $ 657,812 $ 928,677

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

¹ Includes unused funds fee and is based on the March 31, 2023 interest rate and outstanding Credit Agreement balance

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

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New Accounting Pronouncements

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

Refer to Part I, Item 1, Note 2 , Recent Accounting Standards Update in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding accounting pronouncements and accounting standards updates.

FORWARD-LOOKING INFORMATION

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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;

the continued impact of COVID-19 and any variant strains thereof on the global economy;

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

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our success in expanding our geographic footprint or broadening our customer base;

our ability to realize the full amounts reflected in our backlog;

our ability to realize the full amounts

reflected in our backlog;

impairment of goodwill;

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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.

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, 2022 and described from time to time in our future reports filed with the SEC.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis