MERCURY SYSTEMS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS From time to time, information provided, statements made by our employees or information included in our filings with the Securities and Exchange Commission (“SEC”) may contain statements that are not historical facts but that are “forward-looking statements,” which involve risks and uncertainties. You can identify these statements by the use of the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of epidemics and pandemics such as COVID, effects of any U.S. Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in the U.S. Government’s interpretation of, federal export control or procurement rules and regulations, changes in, or in the interpretation or enforcement of environmental rules and regulations, market acceptance of the Company's products, shortages in or delays in receiving components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions, restructurings and value creation initiatives such as 1MPACT, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, increases in interest rates, changes to industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to interest rate swaps or other cash flow hedging arrangements, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as set forth under Part I-Item 1A (Risk Factors) in the Company's Annual Report on Form 10-K for the fiscal year ended July 2, 2021. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. OVERVIEW Mercury Systems, Inc. is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense. Headquartered in Andover, Massachusetts, we deliver products and solutions that enable a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments. We envision, create and deliver innovative technology solutions that are open, purpose-built and uncompromised to meet our customers’ most-pressing high-tech needs, including those specific to the defense community. As a leading manufacturer of essential components, products, modules and subsystems, we sell to defense prime contractors, the U.S. government and OEM commercial aerospace companies. Mercury has built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that it believes meets and exceeds the performance needs of our defense and commercial customers. Customers add their own applications and algorithms to our specialized, secure and innovative products and pre-integrated solutions. This allows them to complete their full system by integrating with their platform, the sensor technology and, in some cases, the processing from Mercury. Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers. Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications. Our long-standing deep relationships with leading high-tech companies, coupled with our high level of R&D investments and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. We are leading the development and adaptation of commercial technology for aerospace and defense solutions. From chip-scale to system scale and from RF to digital, we make mission-critical technologies safe, secure, affordable and relevant for our customers. Our capabilities, technology and R&D investment strategy combine to differentiate Mercury in our industry. Our technologies and capabilities include secure embedded processing modules and subsystems, mission computers, secure and rugged rack-mount servers, safety-critical avionics, components, multi-function assemblies, subsystems and custom microelectronics. We maintain our technological edge by investing in critical capabilities and IP in processing and RF, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as AI. 22 Our mission critical solutions are deployed by our customers for a variety of applications including C4ISR, electronic intelligence, avionics, EO/IR, electronic warfare, weapons and missile defense, hypersonics and radar. Since we conduct much of our business with our defense customers via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter. Customers specify delivery date requirements that coincide with their need for our products. Because these customers may use our products in connection with a variety of defense programs or other projects of different sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends. As of October 1, 2021, we had 2,239 employees. We employ hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities to achieve our objectives to fully capitalize upon and maintain our technological leads in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications. Our talent attraction, engagement and retention is critical to execute on our long-term strategy. We invest in our culture and values to drive employee engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation. We believe that our success depends on our ability to embrace diversity company-wide and realize the benefits of a diverse workforce that includes a greater variety of solutions to problems, a broader collection of skills and experiences and an array of viewpoints to consider. Mercury is strongly focused on providing an inclusive environment that respects the diversity of the world. We believe that the workforce required to grow our business and deliver creative solutions must be rich in diversity of thought, experience and culture. Our diversity and inclusion initiatives focus on building and maintaining the talent that will create cohesive and collaborative teams that drive innovation. We believe that these values will help our employees realize their full potentials at work to provide Innovation That Matters®. Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the first quarter ended October 1, 2021 were $225.0 million, $41.3 million, $(7.1) million, $(0.13), $0.41, and $38.3 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. OUR RESPONSE TO COVID We continue to monitor the COVID pandemic and adapt our policies and programs as needed to protect the health, safety and livelihoods of our people. On September 9, 2021, President Biden signed an executive order directing executive departments and agencies to ensure that certain contracts had COVID-19 health and safety provisions, which included requirements for vaccinated employees, masking and physical distancing, and workplace safety coordinators. We are requiring all employees in the U.S. to become fully vaccinated from COVID-19 except in limited circumstances as allowed under the mandate. We are also complying with requirements for masking and physical distancing in the workplace and have maintained an internal task force to coordinate COVID-19 workplace safety efforts since the start of the pandemic. 1MPACT On August 3, 2021, we announced a companywide effort, called 1MPACT, to lay the foundation for the next phase of the Company’s value creation at scale. The goal of 1MPACT is to achieve our full growth, margin expansion and adjusted EBITDA potential over the next five years. Since fiscal year 2014 and through the first quarter ended October 1, 2021, we have completed 13 acquisitions, deploying $1.2 billion of capital and, as a result, dramatically scaled and transformed the business. Over this time, we have extracted substantial revenue and cost synergies from each of these individual acquisitions. Now, as we approach the milestone of $1 billion of revenue, we believe there is significant opportunity to realize further scale through consolidating and streamlining our internal organizational structure which will improve visibility, speed of decision making and accountability. 1MPACT is led by our new Chief Transformation Officer, Thomas Huber, and focuses on six major areas: organization efficiency and scalability; procurement and supply chain; facilities optimization; R&D investment; capital and asset efficiency; and scalable common processes and systems. 23 RESULTS OF OPERATIONS: Results of operations for the first quarter ended October 1, 2021 includes a full period of results from the acquisitions of Physical Optics Corporation ("POC") and Pentek Technologies, LLC and Pentek Systems, Inc. (collectively, "Pentek"). Results of operations for the first quarter ended October 2, 2020 do not include results from POC or Pentek. Accordingly, the periods presented below are not directly comparable. The first quarter ended October 1, 2021 compared to the first quarter ended October 2, 2020 The following table sets forth, for the first quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive (Loss) Income: (In thousands) October 1, 2021 As a % of Total Net Revenue October 2, 2020 As a % of Total Net Revenue Net revenues $ 225,013 100.0 % $ 205,621 100.0 % Cost of revenues 136,604 60.7 117,502 57.1 Gross margin 88,409 39.3 88,119 42.9 Operating expenses: Selling, general and administrative 36,956 16.4 32,904 16.0 Research and development 28,882 12.8 27,417 13.3 Amortization of intangible assets 13,734 6.1 7,731 3.8 Restructuring and other charges 12,274 5.5 1,297 0.6 Acquisition costs and other related expenses 2,138 1.0 — — Total operating expenses 93,984 41.8 69,349 33.7 (Loss) income from operations (5,575) (2.5) 18,770 9.1 Interest income 9 — 72 — Interest expense (595) (0.3) — — Other expense, net (1,420) (0.6) (846) (0.3) (Loss) income before income taxes (7,581) (3.4) 17,996 8.8 Income tax (benefit) provision (441) (0.2) 2,198 1.1 Net (loss) income $ (7,140) (3.2) % $ 15,798 7.7 % R EVENUES Total revenues increased $19.4 million, or 9.4%, to $225.0 million during the first quarter ended October 1, 2021, as compared to $205.6 million during the first quarter ended October 2, 2020, including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full quarters or less (and excludes any intercompany transactions). After the completion of four full fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods. The in crease in total revenue was primarily due to an additional $41.3 million of acquired revenues from the POC and Pentek businesses, partially offset by $21.9 million less organic revenues. These increases were driven by modules and sub-assemblies which increased $41.6 million or 238% which was partially offset by decreases in components and integrated subsystems of $15.2 million and $7.0 million, respectively. The increase in total revenue was primarily from the C4I and other sensor and effector end applications which increased $29.6 million and $8.3 million, respectively and were partially offset by a $13.5 million decrease to radar application. The increase was primarily across the airborne platform which grew $29.3 million during the first quarter ended October 1, 2021. The largest program increases were related t o the MH-60 program, a classified C2 program and a classified radar program. There were no programs comprising 10% or more of our revenues for the first quarters ended October 1, 2021 or October 2, 2020. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. 24 G ROSS M ARGIN Gross margin was 39.3% for the first quarter ended October 1, 2021, a decrease of 360 basis points from the 42.9% gross margin achieved during the first quarter ended October 2, 2020. The lower gross margin was primarily driven by program mix, including the acquisition of POC, which carries lower margins than the organic business, and higher volume of Customer Funded Research and Development (“CRAD”). CRAD primarily represents engineering labor associated with long-term contracts for customized development, production and service activities. CRAD, including POC, increased $14.5 million in the quarter. Due to the nature of these efforts, they typically carry a lower margin but serve as a precursor to higher margin production orders over time. These products are predominately grouped within integrated subsystems and to a lesser extent modules and sub-assemblies. These gross margin decreases were partially offset by $1.8 million gross margin benefit from fair value adjustments from purchase accounting and $1.7 million less COVID expenses. S ELLING , G ENERAL AND A DMINISTRATIVE Selling, general and administrative expenses increased $4.1 million, or 12.3%, to $37.0 million during the first quarter ended October 1, 2021, as compared to $32.9 million in the first quarter ended October 2, 2020. The increase was primarily related to the recent acquisitions of POC and Pentek, which contributed $3.3 million of incremental cost. Selling, general and administrative expenses increased as a percentage of revenue to 16.4% for the first quarter ended October 1, 2021 from 16.0% for the first quarter ended October 2, 2020 as a result of lower overall operating leverage in the quarter. R ESEARCH AND D EVELOPMENT Research and development expenses increased $1.5 million, or 5.3%, to $28.9 million during the first quarter ended October 1, 2021, as compared to $27.4 million during the first quarter ended October 2, 2020. The increase was primarily related to $1.0 million of incremental expenses from the recent acquisitions of POC and Pentek as well as continued investment in internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and our trusted custom microelectronics business. Research and development expenses accounted for 12.8% and 13.3% of our revenues for the first quarters ended October 1, 2021 and October 2, 2020, respectively. A MORTIZATION OF I NTANGIBLE A SSETS Amortization of intangible assets increased $6.0 million to $13.7 million during the first quarter ended October 1, 2021, as compared to $7.7 million during the first quarter ended October 2, 2020, primarily due to the acquisitions of POC and Pentek. R ESTRUCTURING AND O THER C HARGES During the first quarter ended October 1, 2021, the Company incurred $12.3 million of restructuring and other charges, as compared to $1.3 million during the first quarter ended October 2, 2020. Restructuring and other charges of $7.3 million related to severance costs associated with the elimination of 100 employees based on changes in the business environment and alignment with the internal organizational changes completed under 1MPACT. The remaining $4.9 million of restructuring and other charges related to third-party consulting costs associated with 1MPACT. A CQUISITION C OSTS AND O THER R ELATED E XPENSES Acquisition costs and other related expenses were $2.1 million during the first quarter ended October 1, 2021. The acquisition costs and other related expenses during the first quarter ended October 1, 2021 were primarily related to costs associated with signing a definitive agreement to acquire Avalex Technologies Corporation ("Avalex") and other M&A activities. We expect to incur acquisition costs and other related expenses periodically in the future as we continue to seek acquisition opportunities to expand our technological capabilities and especially within the sensor and effector and C4I markets. Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations. I NTEREST I NCOME Interest income decreased to less than $0.1 million during the first quarter ended October 1, 2021, as compared to $0.1 million for the first quarter ended October 2, 2020. This was driven by lower cash on hand during the first quarter ended October 1, 2021, as compared to the prior year. I NTEREST E XPENSE We incurred $0.6 million of interest expense during the first quarter ended October 1, 2021, related to the $200.0 million balance on our Revolver to facilitate the acquisitions of POC and Pentek during fiscal 2021. 25 O THER E XPENSE , N ET Other expense, net increased to $1.4 million during the first quarter ended October 1, 2021, as compared to $0.8 million during the first quarter ended October 2, 2020. The first quarter ended October 1, 2021 includes net foreign currency translation losses of $0.5 million and $0.2 million less of financing and registration costs, partially offset by $0.2 million of additional litigation and settlement costs. The first quarter ended October 2, 2020 includes net foreign currency translation gains of $0.2 million. I NCOME T AXES We recorded an income tax (benefit) provision of $(0.4) million and $2.2 million on a (loss) income before income taxes of $(7.6) million and $18.0 million for the first quarters ended October 1, 2021 and October 2, 2020, respectively. During the first quarters ended October 1, 2021 and October 2, 2020, we recognized a discrete tax provision of $0.7 million related to stock-based compensation shortfalls and a discrete tax benefit of $2.5 million related to excess benefits on stock-based compensation, respectively. The effective tax rate for the first quarters ended October 1, 2021 and October 2, 2020 differed from the Federal statutory rate primarily due to Federal and State research and development credits, non-deductible compensation, stock-based compensation, and state taxes. In addition, during the first quarter ended October 1, 2021, we had certain unbenefited deferred tax assets. Within the calculation of our annual effective tax rate, we have used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service (“IRS”). L IQUIDITY AND C APITAL R ESOURCES Our primary sources of liquidity come from existing cash and cash generated from operations, our Revolver and our ability to raise capital under our universal shelf registration statement. Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments. We plan to continue to invest in improvements to our facilities, continuous evaluation of potential acquisition opportunities and internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and trusted custom microelectronics. Our facilities improvements include expansion of our trusted custom microelectronics and mission computing businesses during fiscal 2022. Based on our current plans and business conditions, we believe that existing cash and cash equivalents, our available Revolver, cash generated from operations, and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. Shelf Registration Statement On September 14, 2020, we filed a shelf registration statement on Form S-3ASR with the SEC. The shelf registration statement, which was effective upon filing with the SEC, registered each of the following securities: debt securities, preferred stock, common stock, warrants and units. We intend to use the proceeds from financings using the shelf registration statement for general corporate purposes, which may include the following: • the acquisition of other companies or businesses; • the repayment and refinancing of debt; • capital expenditures; • working capital; and • other purposes as described in the prospectus supplement. We have an unlimited amount available under the shelf registration statement. Revolving Credit Facility On September 28, 2018, we amended the Revolver to increase and extend the borrowing capacity to a $750.0 million, 5-year revolving credit line, with the maturity extended to September 2023. As of October 1, 2021, we had $200.0 million of outstanding borrowings on the Revolver. See Note I in the accompanying consolidated financial statements for further discussion of the Revolver. 26 C ASH F LOWS As of and For the First Quarters Ended, (In thousands) October 1, 2021 October 2, 2020 Net cash (used in) provided by operating activities $ (2,006) $ 22,929 Net cash used in investing activities $ (8,614) $ (10,978) Net cash used in financing activities $ (7,316) $ (64) Net (decrease) increase in cash and cash equivalents $ (18,035) $ 12,284 Cash and cash equivalents at end of period $ 95,804 $ 239,122 Our cash and cash equivalents decreased by $18.0 million from July 2, 2021 to October 1, 2021, primarily as the result of the $7.3 million share repurchase and retirement of common stock used to settle individual tax liabilities, $5.4 million invested in purchases of property and equipment and $3.2 million of other investing activities. Operating Activities During the first quarter ended October 1, 2021, we had an outflow of $2.0 million in cash from operating activities, as compared to $22.9 million of cash generated from operating activities for the first quarter ended October 2, 2020. The decrease was primarily due to the net loss of $7.1 million, including cash outflows for restructuring and other charges associated with 1MPACT as well as acquisition costs primarily associated with the Avalex acquisition. In addition, the decrease was due to lower deferred revenue and customer advances, higher unbilled receivables and costs in excess of billings as well as income tax payments. These decreases were partially offset by lower cash outflows for accounts payable, accrued expenses and accrued compensation. Investing Activities During the first quarter ended October 1, 2021, we invested $8.6 million, a decrease of $2.4 million, as compared to the first quarter ended October 2, 2020. The decrease was driven by $5.6 million lower purchases of property and equipment, partially offset by $3.2 million of other investing activity during the first quarter ended October 1, 2021. Financing Activities During the first quarter ended October 1, 2021, we used $7.3 million of cash payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with the annual vesting of restricted stock awards, as compared to $0.1 million in the first quarter ended October 2, 2020. C OMMITMENTS, C ONTRACTUAL O BLIGATIONS AND C ONTINGENCIES The following is a schedule of our commitments and contractual obligations outstanding at October 1, 2021: (In thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Purchase obligations $ 154,689 $ 154,689 $ — $ — $ — Operating leases 100,950 14,478 25,875 21,374 39,223 $ 255,639 $ 169,167 $ 25,875 $ 21,374 $ 39,223 Purchase obligations represent open non-cancelable purchase commitments for certain inventory components and services used in normal operations. The purchase commitments covered by these agreements are for less than one year and aggregated approxi mately $154.7 million at October 1, 2021. We have a liability at October 1, 2021 of $7.5 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. We do not know the ultimate resolution on these uncertain tax positions and as such, do not know the ultimate timing of payments or amount, if any, related to this liability. Accordingly, these amounts are not included in the above table. Our standard product sales and license agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred in connection with certain intellectual property infringement claims by any third party with respect to our products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments we could be required to make under these indemnification provisions is, in some instances, unlimited. 27 As part of our strategy for growth, we continue to explore acquisitions or strategic alliances. The associated acquisition costs incurred in the form of professional fees and services may be material to the future periods in which they occur, regardless of whether the acquisition is ultimately completed. We may elect from time to time to purchase and subsequently retire shares of common stock in order to settle employees' tax liabilities associated with vesting of a restricted stock award. These transactions are treated as a use of cash in financing activities in our Consolidated Statements of Cash Flows. O FF - BALANCE S HEET A RRANGEMENTS Other than certain indemnification provisions in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities. N ON -G AAP F INANCIAL M EASURES In our periodic communications, we discuss certain important measures that are not calculated according to U.S. generally accepted accounting principles (“GAAP”), including adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, organic revenue and acquired revenue. Adjusted EBITDA is defined as net income before other non-operating adjustments, interest income and expense, income taxes, depreciation, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense. We use adjusted EBITDA as an important indicator of the operating performance of our business. We use adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our board of directors, determining the portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in our operations and allocating resources to various initiatives and operational requirements. We believe that adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary from period to period without any correlation to underlying operating performance. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in our adjusted EBITDA are valuable indicators of our operating performance. Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring. 28 The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to our adjusted EBITDA: First Quarters Ended (In thousands) October 1, 2021 October 2, 2020 Net (loss) income $ (7,140) $ 15,798 Other non-operating adjustments, net 417 (182) Interest expense (income), net 586 (72) Income tax (benefit) provision (441) 2,198 Depreciation 7,756 5,266 Amortization of intangible assets 13,734 7,731 Restructuring and other charges 12,274 1,297 Impairment of long-lived assets — — Acquisition and financing costs 2,633 841 Fair value adjustments from purchase accounting (1,661) — Litigation and settlement expense, net 376 187 COVID related expenses 183 2,319 Stock-based and other non-cash compensation expense 9,573 7,367 Adjusted EBITDA $ 38,290 $ 42,750 Adjusted income and adjusted EPS exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. We believe that exclusion of these items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We use these measures along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace. We define adjusted income as net income before other non-operating adjustments, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision. Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding. Adjusted income and adjusted EPS are non-GAAP financial measures and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. We expect to continue to incur expenses similar to the adjusted income and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring. 29 The following tables reconcile net (loss) income and diluted (loss) earnings per share, the most directly comparable GAAP measures, to adjusted income and adjusted EPS: First Quarters Ended (In thousands, except per share data) October 1, 2021 October 2, 2020 Net (loss) income and diluted (loss) earnings per share $ (7,140) $ (0.13) $ 15,798 $ 0.29 Other non-operating adjustments, net 417 (182) Amortization of intangible assets 13,734 7,731 Restructuring and other charges 12,274 1,297 Impairment of long-lived assets — — Acquisition and financing costs 2,633 841 Fair value adjustments from purchase accounting (1,661) — Litigation and settlement expense, net 376 187 COVID related expenses 183 2,319 Stock-based and other non-cash compensation expense 9,573 7,367 Impact to income taxes (1) (7,829) (7,024) Adjusted income and adjusted earnings per share $ 22,560 $ 0.41 $ 28,334 $ 0.51 Diluted weighted-average shares outstanding 55,376 55,339 (1) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision. Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs. We believe free cash flow provides investors with an important perspective on cash available for investments and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. We believe that trends in our free cash flow can be valuable indicators of our operating performance and liquidity. Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenditures similar to the free cash flow adjustment described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash. 30 The following table reconciles cash (used in) provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow: First Quarters Ended (In thousands) October 1, 2021 October 2, 2020 Cash (used in) provided by operating activities $ (2,006) $ 22,929 Purchase of property and equipment (5,377) (10,978) Free cash flow $ (7,383) $ 11,951 Organic revenue and acquired revenue are non-GAAP measures for reporting the financial performance of our business. We believe this information provides investors with insight as to our ongoing business performance. Organic revenue represents total company revenue excluding net revenue from acquired companies for the first four full quarters since the entities’ acquisition date (which excludes intercompany transactions). Acquired revenue represents revenue from acquired companies for the first four full quarters since the entities' acquisition date (which excludes intercompany transactions). After the completion of four full fiscal quarters, acquired revenue is treated as organic for current and comparable historical periods. The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the first quarters ended October 1, 2021 and October 2, 2020, respectively: (In thousands) October 1, 2021 As a % of Total Net Revenue October 2, 2020 As a % of Total Net Revenue $ Change % Change Organic revenue $ 183,732 82 % $ 205,621 100 % $ (21,889) (11) % Acquired revenue 41,281 18 % — — % 41,281 100 % Total revenues $ 225,013 100 % $ 205,621 100 % $ 19,392 9 % R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS See Note B to our consolidated financial statements (under the caption "Recently Issued Accounting Pronouncements"). R ECENTLY A DOPTED A CCOUNTING P RONOUNCEMENTS See Note B to our consolidated financial statements (under the caption "Recently Adopted Accounting Pronouncements"). 31 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes in our exposure to market risk from July 2, 2021 to October 1, 2021.