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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 172 added, 141 removed, 148 unchanged (68% of the section changed)

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, 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 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.

The following discussion of the Company's 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

This Quarterly Report provides additional information regarding the Company, its services, industry outlook and forward-looking statements that involve risks and uncertainties, including those related to economic conditions such as inflation and rising interest rates, and the impact on the Company, its operations or 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 the Company's industry, business and future financial results.

Actual results could differ materially from the results contemplated by these forward-looking statements.

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

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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.

The Company's primary customer is the U.S.

Department of Defense (DoD).

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.

For the six months ended June 30, 2023 and July 1, 2022, the Company had total revenue of $1,921.3 million and $954.5 million, respectively, substantially all of which was derived from U.S.

government customers.

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.

For the six months ended June 30, 2023 and July 1, 2022, the Company generated approximately 41% and 64%, respectively, of its total revenue from the U.S.

Executive Summary

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 $479.8 million, or 96.3%, for the three months ended June 30, 2023 compared to the three months ended July 1, 2022.

Revenue increased $442.6 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.

Revenue from programs in the U.S., Middle East, Asia and Europe increased by $419.8 million, $28.9 million, $19.1 million and $12.0 million, respectively.

Operating income for the three months ended June 30, 2023, was $34.3 million, an increase of $19.2 million, or 128.1%, compared to the three months ended July 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.

During the performance of long-term contracts, estimated final contract prices and costs are reviewed periodically, and revisions are made 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.

These incentive fees 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 a 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.

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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.

Further details related to consolidated financial results for the three and six months ended June 30, 2023, compared to the three and six months ended July 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 6, Debt, and Note 9, Stock-Based Compensation, in the Notes to Condensed Consolidated Financial Statements.

For a discussion of the 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 three months ended March 31, 2023 or April 1, 2022:

The following table reflects contracts that accounted for more than 10% of total revenue:

% of Total Revenue

Three Months Ended

Contract Name March 31, 2023 April 1, 2022

Six Months Ended

Contract Name June 30, 2023 July 1, 2022

Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order 13.4% 22.2%

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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.

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 LOGCAP V - Kuwait Task Order is currently exercised through June 30, 2024, with two additional twelve-month options and one six-month option through December 31, 2026.

The task ord er 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 $257.1 million a nd $212.2 million of revenue for the six months ended June 30, 2023 and July 1, 2022 , respectively.

The LOGCAP V - Iraq Task Order is currently exercised through June 21, 2024, with two 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 $76.5 million and $71.5 million of revenue for the three months ended March 31, 2023 and April 1, 2022 , respectively.

The LOGCAP V - Iraq Task Order contributed $150.5 million and $144.9 million of revenue for the six months ended June 30, 2023 and July 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).

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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 Company's 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.

government when the Company is the prime contractor or of the prime contractor when the Company is a subcontractor.

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.

The Company expects to recognize a substantial portion of its 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 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,

Substantially all of the Company's contracts have terms that would permit recovery of all or a portion of incurred costs and fees for work performed in the event of a termination for convenience.

As of June 30, 2023, total backlog was $13.0 billion as compared to $12.3 billion at December 31, 2022.

The following is a summary of funded and unfunded backlog:

June 30, 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 $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.

The Company received funded orders of $2.4 billion during the six months ended June 30, 2023, which was an increase of $1.3 billion compared to the six months ended July 1, 2022.

Economic Opportunities, Challenges and Risks

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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.

However, the Company expects 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 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.

V2X believes that its capabilities, particularly in operations and logistics, aerospace, training and technology, should help its clients increase efficiency, reduce costs, improve readiness, and strengthen national security and, as a result, continue to allow for long-term profitable growth in the business.

Further, the DoD budget remains the largest in the world and management believes the Company's 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 December 29, 2022, the FY 2023 Omnibus Appropriations Act was signed into law by the President, providing $817 billion to the Defense Department.

On December 29, 2022, the FY 2023 Omnibus Appropriations Act was signed into law by the President, providing $817 billion to the Defense Department (and $886 billion for National Defense).

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

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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.

In January 2023, the statutory debt ceiling limit of $31.4 trillion was reached and on June 3, 2023, the President signed “The Fiscal Responsibility Act” (FRA) into law, which suspends the debt ceiling until January 1, 2025.

The FRA places caps on defense and non-defense discretionary spending in FY 2024 and FY 2025.

The FRA cap on discretionary spending for National Defense in FY 2024 and FY 2025 is $886 billion and $895 billion, respectively.

Additionally, the FRA mandates cuts to discretionary spending by one percent below the current-year level if a continuing resolution is in place on January 1, 2024 or 2025.

While it is difficult to predict the specific course of future defense budgets, V2X believes the core functions the Company performs are mission-essential and 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 providing integrated solutions across the mission lifecycle that encompass (i) high consequence training;

The Company's focus is on providing integrated solutions across the mission lifecycle that encompass (i) high consequence training;

(ii) readiness/logistics/deployment;

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(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.

The Company develops and inserts operational technologies across its solutions to improve efficiency and the outcomes of its clients' missions.

The Company believes this aligns with its 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, the Company does not currently anticipate the complete elimination of these services.

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.

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.

Given the current pace of inflation and other geopolitical factors, the Company is monitoring the impact of rising costs on its active and future contracts.

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

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

See Item 1A, "Risk Factors".

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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, 2022 and the matters identified under the caption “Forward-Looking Statement Information" herein.

While the Company does not currently anticipate any impact on its business, evaluation of the Inflation Reduction Act of 2022 and its requirements continues, as well as any potential impact on its business in the future.

The information provided above does not represent a complete list of trends and unc ertainties that could impact the Company's 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and the matters identified under the caption “Forward-Looking Statement Information" herein.

DISCUSSION OF FINANCIAL RESULTS

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

Three months ended June 30, 2023, compared to three months ended July 1, 2022

Selected financial highlights are presented in the following table:

Three Months Ended Change

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

(In thousands, except for percentages) June 30, 2023 July 1, 2022 $ %

Revenue $ 977,852 $ 498,066 $ 479,786 96.3 %

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Operating margin 3.5 % 3.0 %

Interest expense, net (31,950) (1,963) (29,987) 1,527.6 %

Other expense, net (311) — (311) *

Income (loss) from operations before income taxes 2,009 13,058 (11,049) (84.6) %

% of revenue 0.2 % 2.6 %

Income tax expense (benefit) 210 2,586 (2,376) (91.9) %

Effective income tax rate 10.5 % 19.8 %

Net income (loss) $ 1,799 $ 10,472 $ (8,673) (82.8) %

*Percentage change is not meaningful.

Revenue increased $479.8 million, or 96.3%, for the three months ended June 30, 2023 as compared to the three months ended July 1, 2022.

Revenue increased $442.6 million due to the Merger and the remaining increase was from organic growth for legacy programs.

Revenue from programs located in the U.S., Middle East, Asia and Europe increased by $419.8 million, $28.9 million, $19.1 million and $12.0 million, respectively.

Cost of Revenue

Cost of revenue increased $437.1 million, or 96.4%, for the three months ended June 30, 2023 as compared to the three months ended July 1, 2022, primarily due to the increased revenue from the Merger and increased amortization of intangible assets.

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

SG&A expenses increased $23.4 million, or 78.6%, for the three months ended June 30, 2023 as compared to the three months ended July 1, 2022, primarily due to the Merger.

Operating Income

Operating income increased $19.2 million, or 128.1%, for the three months ended June 30, 2023 as compared to the three months ended July 1, 2022.

Operating income as a percentage of revenue was 3.5% for the three months ended June 30, 2023, compared to 3.0% for the three months ended July 1, 2022.

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

Aggregate cumulative catch-up adjustments increased operating income by $9.1 million and $6.8 million for the three months ended June 30, 2023 and July 1, 2022, respectively.

The aggregate cumulative catch-up adjustments for the three months ended June 30, 2023 and July 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 the mix of labor and cost differential between internal resources and subcontractors as well as the volume of other direct cost purchases.

Six months ended June 30, 2023, compared to six months ended July 1, 2022

Selected financial highlights are presented in the following table:

Six Months Ended Change

(In thousands, except for percentages) June 30, 2023 July 1, 2022 $ %

Revenue $ 1,921,312 $ 954,537 $ 966,775 101.3 %

Cost of revenue 1,755,082 872,581 882,501 101.1 %

% of revenue 91.3 % 91.4 %

Selling, general, and administrative expenses 101,381 61,699 39,682 64.3 %

% of revenue 5.3 % 6.5 %

Operating income 64,849 20,257 44,592 220.1 %

Operating margin 3.4 % 2.1 %

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

Interest expense, net (63,694) (3,643) (60,051) 1,648.4 %

(Loss) income from operations before income taxes (23,217) 3,556 (26,773) (752.9) %

Other expense, net (311) — (311) *

Income (loss) from operations before income taxes (21,208) 16,614 (37,822) (227.7) %

% of revenue (1.1) % 1.7 %

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*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 $966.8 million, or 101.3%, for the six months ended June 30, 2023 as compared to the six months ended July 1, 2022.

Revenue increased $855.1 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.

Revenue from programs located in the U.S., Middle East, Asia and Europe increased by $801.8 million, $74.9 million, $67.3 million and $22.8 million, respectively.

Cost of Revenue

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.

Cost of revenue increased $882.5 million, or 101.1%, for the six months ended June 30, 2023 as compared to the six months ended July 1, 2022, primarily due to the increased revenue from the Merger and increased amortization of intangible assets.

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

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.

SG&A expenses increased $39.7 million, or 64.3%, for the six months ended June 30, 2023 as compared to the six months ended July 1, 2022, primarily due to the Merger.

Operating Income

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.

Operating income increased $44.6 million, or 220.1%, for the six months ended June 30, 2023 as compared to the six months ended July 1, 2022.

Operating income as a percentage of revenue was 3.4% for the six months ended June 30, 2023, compared to 2.1% for the six months ended July 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.

Aggregate cumulative catch-up adjustments increased operating income by $22.2 million and $7.4 million for the six months ended June 30, 2023 and July 1, 2022, respectively.

The aggregate cumulative catch-up adjustments for the six months ended June 30, 2023 and July 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 the mix of labor and 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.

The Company recorded a $22.1 million loss on extinguishment of debt for the six months ended June 30, 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 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 (expense) income, net for the three and six months ended June 30, 2023 and July 1, 2022 was as follows:

Three Months Ended Change Six Months Ended Change

(In thousands, except for percentages) June 30, 2023 July 1, 2022 $ % June 30, 2023 July 1, 2022 $ %

Interest income $ 141 $ 6 $ 135 2,250 % $ 349 $ 50 $ 299 598 %

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Interest expense, net $ (31,950) $ (1,963) $ (29,987) 1,528 % $ (63,694) $ (3,643) $ (60,051) 1,648 %

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.

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

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

Interest expense, net increased $60.1 million for the six months ended June 30, 2023 compared to the six months ended July 1, 2022 due to increased debt assumed with the Merger.

Other expense, net

During the three months and six months ended June 30, 2023, the Company incurred purchase discount fees and other expenses of $0.2 million and $0.1 million, respectively, related to the sale of accounts receivable through the MARPA Facility.

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 Company recorded income tax provisions of $0.2 million and $2.6 million for the three months ended June 30, 2023 and July 1, 2022, respectively, representing effective income tax rates of 10.5% and 19.8%, respectively.

For the six months ended June 30, 2023 and July 1, 2022, the Company recorded income tax benefit of $5.5 million and provision of $3.3 million, representing effective income tax rates of 26.1% and 19.8%, 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

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.

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.

The Company has generated operating cash flows sufficient to fund its working capital, capital expenditures, and financing requirements.

The Company expects to fund its 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, its credit facilities, and access to capital markets.

When necessary, the 2023 Revolver and MARPA Facility are available to satisfy short-term working capital requirements.

If cash flows from operations are less than expected, the Company may need to access the long-term or short-term capital markets.

Although the Company believes its current financing arrangements will permit financing of its operations on acceptable terms and conditions, access to and the availability of financing on acceptable terms and conditions in the future will be impacted by many factors, including:

(i) its credit ratings, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy.

The Company cannot provide assurance that such financing will be available on acceptable terms or that such financing will be available at all.

As of June 30, 2023, there were $85.0 million of outstanding borrowings and $16.1 million of outstanding letters of credit under the 2023 Revolver.

Unamortized deferred financing costs related to the 2023 Revolver of $4.7 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.

As of June 30, 2023, the fair value of the 2023 Revolver approximated the carrying value because the debt bears a floating interest rate.

As of June 30, 2023, the carrying value of the Term Loan portion of the 2023 Credit Agreement was $248.4 million, excluding unamortized deferred financing costs of $2.3 million.

The estimated fair value of the Term Loan portion of the 2023 Credit Agreement as of June 30, 2023 was $248.1 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.

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

and international cash from wholly owned subsidiaries.

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.

Approximately $26.7 million of the Company's $70.3 million in cash and cash equivalents at June 30, 2023 is held by 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.

The Company does not currently expect to repatriate undistributed earnings of foreign subsidiaries.

The Company expects its U.S.

domestic cash resources will be sufficient to fund its U.S.

operating activities and cash commitments for financing activities.

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.

The Company does not currently plan to pay a regular dividend on its common stock.

The declaration of any future cash dividends and the amount of any such dividends, if declared, will depend upon the Company's financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and the discretion of its Board of Directors.

In deciding whether to pay future dividends on common stock, the Board of Directors may take into account such matters as general business conditions, industry practice, the Company's financial condition and performance, its future prospects, cash needs and capital investment plans, income tax consequences, applicable law and such other factors as the 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.

Cash, accounts receivable, unbilled receivables, and accounts payable are the principal components of the Company's working capital and are generally driven by revenue with other short-term fluctuations related to payment practices by customers, sales of accounts receivable through the MARPA Facility and the timing of billings.

The Company's receivables reflect amounts billed to customers, as well as the revenue that was recognized in the preceding month, which is normally billed the month following each balance sheet date.

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

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The Company determines its DSO by calculating the number of days necessary to exhaust its ending accounts receivable balance based on its most recent historical revenue.

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

DSO wa s 68 d ays as of June 30, 2023 and December 31, 2022.

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

Six Months Ended

(In thousands) June 30, 2023 July 1, 2022

Operating activities $ 78,140 $ 19,636

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

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.

Net cash provided by operating activities for the six months ended June 30, 2023, primarily consisted of cash inflows from non-cash net income items of $104.3 million and sales of accounts receivable through the MARPA Facility of $113.0 million, partially offset by net cash outflows in working capital accounts of $123.5 million and a net loss of $15.7 million.

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

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

Net cash used in investing activities for the six months ended June 30, 2023 consisted of $11.5 million of capital expenditures for the purchase of software and hardware, vehicles and equipment related to ongoing operations.

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

Net cash used in financing activities during the six months ended June 30, 2023 consisted of repayments of long-term debt of $424.9 million, revolver repayments of $467.8 million, payments for employee withholding taxes on share-based compensation of $14.6 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 $552.8 million, respectively.

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

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

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

Capital Resources

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.

At June 30, 2023, the Company held cash and cash equivalents of $70.3 million, which included $26.7 million held by foreign subsidiaries, and had $398.9 million of available borrowing capacity under the 2023 Revolver, which expires on February 25, 2028.

The Company believes that its cash and cash equivalents at June 30, 2023, as supplemented by cash flows from operations, the 2023 Revolver, and the MARPA Facility will be sufficient to fund its anticipated operating costs, capital expenditures, and current debt repayment obligations for at least the next 12 months.

Contractual Obligations

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

As of June 30, 2023, commitments to make future payments under long-term contractual obligations were as follows:

Payments Due by Period

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Total $ 1,900,948 $ 146,667 $ 287,043 $ 557,171 $ 910,067

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

¹ Includes unused funds fee and is based on the June 30, 2023 interest rate and outstanding balance.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

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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, 2022.

The Company believes 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 its financial statements.

Therefore, the Company considers these to be its critical accounting policies and estimates.

There have been no material changes in the critical accounting policies and estimates from those discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

New Accounting Pronouncements

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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.

The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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;

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.

the Company's ability to submit proposals for and/or win all potential opportunities in the pipeline;

the Company's ability to retain and renew existing contracts;

the Company's ability to compete with other companies in the market;

security breaches and other disruptions to information technology and operation;

the mix of cost-plus, cost-reimbursable, and firm-fixed-price contracts;

maintaining the Company's reputation and relationship with the U.S.

protests of new awards;

economic, political and social conditions in the countries in which we conduct our businesses;

economic, political and social conditions in the countries in which the Company conducts business;

changes in U.S.

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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;

government budget;

the Company's success in extending, deepening, and enhancing its technical capabilities;

success in expanding the Company's geographic footprint or broadening its customer base;

the Company's ability to realize the full amounts reflected in the Company's 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;

misconduct of employees, subcontractors, agents, prime contractors and business partners;

the Company's ability to control costs;

level of indebtedness;

terms of credit agreements;

inflation and interest rate risk;

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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;

the Company's ability to maintain safe work sites and equipment;

the Company's ability to retain and recruit qualified personnel;

the Company's ability to maintain good relationships with employees and contractors;

teaming relationships with other contractors;

changes in accounting estimates;

the adequacy of the Company's insurance coverage;

volatility in the Company's stock price;

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

risks and uncertainties relating to the Merger;

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

and other factors described in Item 1A, “Risk Factors” and elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and described from time to time in 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