V2X, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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. Amounts presented in and throughout this Item 2 are rounded and, as such, any rounding differences could occur in period over period changes and percentages reported. Overview V2X 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. The Company's primary customer is the U.S. Department of Defense (DoD). For the nine months ended September 29, 2023 and September 30, 2022, the Company had total revenue of $2,922.8 million and $1,912.7 million, respectively, substantially all of which was derived from U.S. government customers. For the nine months ended September 29, 2023 and September 30, 2022, the Company generated approximately 41% and 50%, respectively, of its total revenue from the U.S. Army. Executive Summary Revenue increased $43.4 million, or 4.5%, for the three months ended September 29, 2023 as compared to the three months ended September 30, 2022. Revenue increased due to organic growth for legacy programs. Revenue increased by $43.9 million from programs in the Middle East and $12.6 million from programs in Asia, partially offset by decreases of $11.4 million and $1.7 million in revenue from programs in the U.S. and Europe, respectively. Operating income for the three months ended September 29, 2023, was $21.0 million, an increase of $16.6 million, or 368.9%, compared to the three months ended September 30, 2022. The increase was due to the improved performance of legacy programs. 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. 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. 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 consolidated financial results for the three and nine months ended September 29, 2023, compared to the three and nine months ended September 30, 2022, are contained in the "Discussion of Financial Results" section. 25 Table of Contents Significant Contracts The following table reflects contracts that accounted for more than 10% of total revenue: % of Total Revenue Nine Months Ended September 29, September 30, Contract Name 2023 2022 Logistics Civil Augmentation Program (LOGCAP) V - Kuwait Task Order 12.3% 17.5% Logistics Civil Augmentation Program (LOGCAP) V - Iraq Task Order 7.7% 11.0% 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, 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 $360.5 million a nd $334.0 million of revenue for the nine months ended September 29, 2023 and September 30, 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 $224.0 million and $209.6 million of revenue for the nine months ended September 29, 2023 and September 30, 2022 , respectively. Backlog Total backlog includes remaining performance obligations, consisting of both funded backlog (firm orders for which funding is contractually authorized and appropriated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer and unexercised contract options). Total backlog excludes potential orders under IDIQ contracts and contracts awarded to us that are being protested by competitors with the GAO or in the COFC. The value of the backlog is based on anticipated revenue levels over the anticipated life of the contract. Actual values may be greater or less than anticipated. Total backlog is converted into revenue as work is performed. The level of order activity related to programs can be affected by the timing of U.S. government funding authorizations and their project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others. 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 the Company is the prime contractor or of the prime contractor when the Company is a subcontractor. The U.S. government may also extend the term of a program by issuing extensions or bridge contracts, typically for periods of one year or less. 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 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. The following is a summary of funded and unfunded backlog: September 29, December 31, (In millions) 2023 2022 Funded backlog $ 3,151 $ 2,567 Unfunded backlog 10,113 9,695 Total backlog $ 13,264 $ 12,262 Funded orders (different from funded backlog) represent orders for which funding was received during the period. The Company received funded orders of $3.5 billion during the nine months ended September 29, 2023, which was an increase of $1.5 billion compared to the nine months ended September 30, 2022. 26 Table of Contents Economic Opportunities, Challenges and Risks The U.S. government’s investment in services and capabilities in response to changing security challenges creates a complex and fluid business environment for V2X and other firms in this market. However, the U.S. continues to face substantial fiscal and economic challenges in addition to a varying political environment which could affect funding. The pace and depth of U.S. government acquisition reform and cost savings initiatives, combined with increased industry competitiveness to win long-term positions on key programs, could add pressure to revenue levels and profit margins. However, 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. 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. The U.S. government's Fiscal Year (FY) begins on October 1 and ends on September 30. The Fiscal 2024 budget request was submitted to the U.S. Congress on March 9, 2023, and requested $886 billion for National Defense, with $842 billion of the total allocated to the Department of Defense. 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 (CR) is in place on January 1, 2024 or 2025. On September 30, 2023, the President signed a CR which funds the U.S government at FY 2023 levels through November 17, 2023, or until FY 2024 appropriations bills are passed. Under a CR, funding is generally consistent with FY 2023 appropriated levels, however, new program and contract starts are not authorized. If FY 2024 appropriations or an additional CR is not passed before November 17, 2023, the U.S. government is expected to enter a shutdown and cease certain non-essential operations. Depending on the length and nature of a potential shutdown, companies that are reliant on U.S. government funding, could be significantly impacted. 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. The Company's 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. 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, and the Company continues to focus on contract expansion and capturing new business opportunities. However, business conditions have become more challenging and uncertain due to macroeconomic conditions, including inflation and rising interest rates, as well as recent international events. For example, global hostilities, including most recently in Israel and the Gaza Strip, could create additional demand for our products and services, however, any such demand, and the timing and extent of any incremental contract activity resulting from that demand, remains uncertain. Further, given the current level of inflation and geopolitical factors, the Company is monitoring the impact of rising costs on its active and future contracts and its financial results, and actively evaluating opportunities for cost reductions and deleveraging. For the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, our contract mix has changed with cost-plus and cost-reimbursable contracts increasing as a percentage of the total mix. The Company’s earnings and profitability may vary materially depending on the total mix of contracts. To date, the Company has not experienced broad-based increases from inflation or geopolitical hostilities in the costs of its fixed-price and time and materials contracts that are material to the business. However, if the geopolitical conditions worsen or if the Company experiences greater than expected inflation in its supply chain and labor costs, then profit margins, and in particular, the profit margin from fixed-price and time and materials contracts, which represent a substantial portion of its contracts, could be adversely affected. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022, which includes, among other provisions, changes to the U.S. corporate income tax system. While 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. 27 Table of Contents 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 updated, as necessary, on subsequent quarterly reports on Form 10-Q, and the matters identified under the caption “Forward-Looking Statement Information" herein. DISCUSSION OF FINANCIAL RESULTS Three months ended September 29, 2023, compared to three months ended September 30, 2022 Selected financial highlights are presented in the following table: Three Months Ended Change September 29, September 30, (In thousands, except for percentages) 2023 2022 $ % Revenue $ 1,001,507 $ 958,156 $ 43,351 4.5 % Cost of revenue 930,828 861,073 69,755 8.1 % % of revenue 92.9 % 89.9 % Selling, general, and administrative expenses 49,640 92,596 (42,956) (46.4) % % of revenue 5.0 % 9.7 % Operating income 21,039 4,487 16,552 368.9 % Operating margin 2.1 % 0.5 % Interest expense, net (30,252) (27,265) (2,987) 11.0 % Other expense, net (2,024) — (2,024) * Loss from operations before income taxes (11,237) (22,778) 11,541 (50.7) % % of revenue (1.1) % (2.4) % Income tax benefit (4,837) (5,739) 902 (15.7) % Effective income tax rate 43.0 % 25.2 % Net loss $ (6,400) $ (17,039) $ 10,639 (62.4) % *Percentage change is not meaningful. Revenue Revenue increased $43.4 million, or 4.5%, for the three months ended September 29, 2023 as compared to the three months ended September 30, 2022. Revenue increased due to organic growth for legacy programs. Revenue increased by $43.9 million from programs in the Middle East and $12.6 million from programs in Asia, partially offset by decreases of $11.4 million and $1.7 million in revenue from programs in the U.S. and Europe, respectively. Cost of Revenue Cost of revenue increased $69.8 million, or 8.1%, for the three months ended September 29, 2023 as compared to the three months ended September 30, 2022, primarily driven by increases in revenue. Cost of revenue as a percent of revenue increased to 92.9% for the three months ended September 29, 2023 as compared to 89.9% for the three months ended September 30, 2022, due to changes in contract mix and recognition of non-recurring deliverables. Selling, General, & Administrative (SG&A) Expenses SG&A expenses decreased $43.0 million, or 46.4%, for the three months ended September 29, 2023 as compared to the three months ended September 30, 2022, primarily due to M&A and integration costs of $44.9 million incurred in connection with the Merger during the third quarter of 2022. Operating Income Operating income increased $16.6 million, or 368.9%, for the three months ended September 29, 2023 as compared to the three months ended September 30, 2022. Operating income as a percentage of revenue was 2.1% for the three months ended September 29, 2023, compared to 0.5% for the three months ended September 30, 2022. The increase was due to lower SG&A spending. 28 Table of Contents Aggregate cumulative catch-up adjustments increased operating income by $5.0 million and decreased operating income by $1.5 million for the three months ended September 29, 2023 and September 30, 2022, respectively. The aggregate cumulative catch-up adjustments for the three months ended September 29, 2023 and September 30, 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. Nine months ended September 29, 2023, compared to nine months ended September 30, 2022 Selected financial highlights are presented in the following table: Nine Months Ended Change September 29, September 30, (In thousands, except for percentages) 2023 2022 $ % Revenue $ 2,922,819 $ 1,912,693 $ 1,010,126 52.8 % Cost of revenue 2,685,910 1,733,654 952,256 54.9 % % of revenue 91.9 % 90.6 % Selling, general, and administrative expenses 151,021 154,295 (3,274) (2.1) % % of revenue 5.2 % 8.1 % Operating income 85,888 24,744 61,144 247.1 % Operating margin 2.9 % 1.3 % Loss on extinguishment of debt (22,052) — (22,052) * Interest expense, net (93,946) (30,908) (63,038) 204.0 % Other expense, net (2,335) — (2,335) * Loss from operations before income taxes (32,445) (6,164) (26,281) 426.4 % % of revenue (1.1) % (0.3) % Income tax benefit (10,364) (2,453) (7,911) 322.5 % Effective income tax rate 31.9 % 39.8 % Net loss $ (22,081) $ (3,711) $ (18,370) 495.0 % *Percentage change is not meaningful. Revenue Revenue increased $1,010.1 million, or 52.8%, for the nine months ended September 29, 2023 as compared to the nine months ended September 30, 2022. Revenue increased $855.1 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 $790.4 million, $118.8 million, $79.8 million and $21.1 million, respectively. Cost of Revenue Cost of revenue increased $952.3 million, or 54.9%, for the nine months ended September 29, 2023 as compared to the nine months ended September 30, 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 decreased $3.3 million, or 2.1%, for the nine months ended September 29, 2023 as compared to the nine months ended September 30, 2022 primarily due to a decrease in M&A, integration and related expenses. Operating Income Operating income increased $61.1 million, or 247.1%, for the nine months ended September 29, 2023 as compared to the nine months ended September 30, 2022. Operating income as a percentage of revenue was 2.9% for the nine months ended September 29, 2023, compared to 1.3% for the nine months ended September 30, 2022. The increase was due to the Merger and improved performance of legacy programs. Aggregate cumulative catch-up adjustments increased operating income by $27.2 million and $5.9 million for the nine months ended September 29, 2023 and September 30, 2022, respectively. The aggregate cumulative catch-up adjustments for the nine months ended September 29, 2023 and September 30, 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. 29 Table of Contents Loss on Extinguishment of Debt The Company recorded a $22.1 million loss on extinguishment of debt for the nine months ended September 29, 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 29, 2023 and September 30, 2022 was as follows: Three Months Ended Change Nine Months Ended Change September 29, September 30, September 29, September 30, (In thousands, except for percentages) 2023 2022 $ % 2023 2022 $ % Interest income $ 334 $ 16 $ 318 1,988 % $ 683 $ 66 $ 617 935 % Interest expense (30,586) (27,281) (3,305) 12 % (94,629) (30,974) (63,655) 206 % Interest expense, net $ (30,252) $ (27,265) $ (2,987) 11 % $ (93,946) $ (30,908) $ (63,038) 204 % Interest income is related to interest earned on cash and cash equivalents. Interest expense is 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 $63.0 million for the nine months ended September 29, 2023 compared to the nine months ended September 30, 2022 due to increased debt assumed with the Merger. Other Expense, Net During the three and nine months ended September 29, 2023, the Company incurred purchase discount fees and other expenses of $2.0 million and $2.1 million, respectively, related to the sale of accounts receivable through the MARPA Facility. Income Tax (Benefit) Provision The Company recorded income tax benefits of $4.8 million and $5.7 million for the three months ended September 29, 2023 and September 30, 2022, respectively, representing effective income tax rates of 43.0% and 25.2%, respectively. For the nine months ended September 29, 2023 and September 30, 2022, the Company recorded income tax benefits of $10.4 million and $2.5 million, representing effective income tax rates of 31.9% and 39.8%, 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), offset by available deductions not reflected in book income, and income tax credits. LIQUIDITY AND CAPITAL RESOURCES Liquidity The Company is not aware of any known trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, a material decrease in our liquidity. In addition, other than items discussed, there are no known material trends, favorable or unfavorable, in our capital resources and no expected material changes in the mix of such resources. Our major source of funding for 2023 and beyond will be our operating cash flow, our existing balances of cash and cash equivalents and proceeds from any issuances of debt. We believe we have sufficient liquidity to fund operations, acquisitions, capital expenditures and scheduled debt repayments. 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 30 Table of Contents 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 September 29, 2023, there were $50.0 million of outstanding borrowings and $15.9 million of outstanding letters of credit under the 2023 Revolver. Unamortized deferred financing costs related to the 2023 Revolver of $4.4 million are included in other non-current assets in the Condensed Consolidated Balance Sheets. As of September 29, 2023, the fair value of the 2023 Revolver approximated the carrying value because the debt bears a floating interest rate. As of September 29, 2023, the carrying value of the Term Loan portion of the 2023 Credit Agreement was $246.9 million, excluding unamortized deferred financing costs of $2.2 million. The estimated fair value of the Term Loan portion of the 2023 Credit Agreement as of September 29, 2023 was $246.9 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 the Condensed Consolidated Balance Sheets consists of U.S. and international cash from wholly owned subsidiaries. Approximately $42.8 million of the Company's $78.3 million in cash, cash equivalents and restricted cash as of September 29, 2023 is held by foreign subsidiaries and is not available to fund U.S. operations unless repatriated. 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. Debt Refinancing On October 3, 2023, Vertex Aerospace Intermediate LLC, a Delaware limited liability company, and Vertex Aerospace Services Corp., a Delaware corporation and an indirect, wholly owned subsidiary of V2X, Inc., entered into Amendment No. 3 to the First Lien Initial Term Tranche, dated as of October 3, 2023 (the “Amendment”), with Royal Bank of Canada. The Amendment provides for a new tranche of term loans under the First Lien Initial Term Tranche in an aggregate original principal amount of $911.1 million (the “New Term Loans”), in which the New Term Loans replace or refinance in full all the existing term loans outstanding under the First Lien Initial Term Tranche and these loans mature on December 6, 2028. Dividends 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 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. 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. DSO wa s 62 and 68 d ays as of September 29, 2023 and December 31, 2022, respectively. The following table sets forth net cash (used in) provided by operating activities, investing activities and financing activities: Nine Months Ended September 29, September 30, (in thousands) 2023 2022 Operating activities $ 135,175 $ 91,559 Investing activities (15,709) 186,220 Financing activities (155,734) (165,251) Foreign exchange 1 (1,540) (3,668) Net change in cash, cash equivalents and restricted cash $ (37,808) $ 108,860 1 Impact on cash balances due to changes in foreign exchange rates. 31 Table of Contents Net cash provided by operating activities for the nine months ended September 29, 2023, primarily consisted of cash inflows from non-cash net income items of $140.7 million and net cash inflows in working capital accounts of $44.6 million, partially offset by a liability of $20.9 million for MARPA sales and a net loss of $22.1 million. 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 used in investing activities for the nine months ended September 29, 2023 consisted of $16.6 million of capital expenditures for the purchase of software and hardware, vehicles and equipment related to ongoing operations. 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 financing activities during the nine months ended September 29, 2023 consisted of repayments of long-term debt of $428.8 million, revolver repayments of $669.8 million, payments for employee withholding taxes on share-based compensation of $17.9 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 $719.8 million, respectively. 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 , the Company 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. Capital Resources As of September 29, 2023, the Company held cash, cash equivalents and restricted cash of $78.3 million, which included $42.8 million held by foreign subsidiaries, and had $434.1 million of available borrowing capacity under the 2023 Revolver, which expires on February 25, 2028. The Company believes that its cash, cash equivalents and restricted cash as of September 29, 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 September 29, 2023, commitments to make future payments under long-term contractual obligations were as follows: Payments Due by Period Less than 1 year More than 5 Years (In thousands) Total 1 - 3 Years 3 - 5 Years Operating leases $ 57,077 $ 16,295 $ 20,123 $ 17,645 $ 3,014 Principal payments on Vertex First Lien Credit Agreement¹ 911,125 9,250 18,500 18,500 864,875 Principal payments on 2023 Credit Agreement¹ 296,875 6,250 21,875 268,750 — Interest on Vertex First Lien and 2023 Credit Agreements 528,144 109,195 212,661 192,126 14,162 Total $ 1,793,221 $ 140,990 $ 273,159 $ 497,021 $ 882,051 ¹ Includes unused funds fee and is based on the September 29, 2023 interest rate and outstanding balance. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. Management believes that the accounting estimates employed, and the resulting balances, are reasonable; however, actual results in these areas could differ from management's estimates under different assumptions or conditions. 32 Table of Contents 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 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 This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the Securities Act of 1933, as amended (the Securities Act), and the Private Securities Litigation Reform Act of 1995 and, as such, may involve risks and uncertainties. All statements included or incorporated by reference in this report, other than statements that are purely historical, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “could,” “potential,” “continue” or similar terminology. These statements are based on the beliefs and assumptions of the management of the Company based on information currently available to management. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. 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. 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 its present expectations or projections. These risks and uncertainties include, but are not limited to: 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. government; protests of new awards; economic, political and social conditions in the countries in which the Company conducts business; changes in U.S. or international government defense budgets; government regulations and compliance therewith, including changes to the DoD procurement process; changes in technology; intellectual property matters; governmental investigations, reviews, audits and cost adjustments; contingencies related to actual or alleged environmental contamination, claims and concerns; delays in completion of the U.S. government 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 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; geopolitical risk, including as a result of recent international events; subcontractor performance; economic and capital markets conditions; 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; changes in GAAP; 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.