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, effects of shareholder activism, 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. 24 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 December 31, 2021, we had 2,316 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 second quarter ended December 31, 2021 were $220.4 million, $37.5 million, $(2.6) million, $(0.05), $0.39, and $38.1 million, respectively. Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the six months ended December 31, 2021 were $445.4 million, $78.8 million, $(9.8) million, $(0.18), $0.80, and $76.4 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. In September 2021, the White House announced that certain contractors would need to create COVID-19 vaccination programs for their employees in order to work on certain U.S. government contracts. We announced our COVID-19 U.S. Vaccination Policy in October 2021 to comply with these federal requirements. In December 2021, a federal judge temporarily blocked the government from enforcing their vaccine mandate while lawsuits were being resolved. We suspended our vaccine policy pending the resolutions of these lawsuits, similar to other contractors in the aerospace and defense industry. 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 second quarter ended December 31, 2021, we have completed 15 acquisitions, deploying $1.4 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. 25 RESULTS OF OPERATIONS: Results of operations for the second quarter and six months ended December 31, 2021 includes full period results from the acquisitions of Physical Optics Corporation ("POC") and Pentek Technologies, LLC and Pentek Systems, Inc. (collectively, "Pentek") and only results from the acquisition date for Avalex Technologies ("Avalex") and Atlanta Micro which were acquired on November 5, 2021 and November 29, 2021, respectively. Results of operations for the second quarter and six months ended January 1, 2021 includes only results from the December 30, 2020 acquisition date for POC and do not include results from Pentek, Avalex, or Atlanta Micro. Accordingly, the periods presented below are not directly comparable. The second quarter ended December 31, 2021 compared to the second quarter ended January 1, 2021 The following table sets forth, for the second quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive (Loss) Income: (In thousands) December 31, 2021 As a % of Total Net Revenue January 1, 2021 As a % of Total Net Revenue Net revenues $ 220,380 100.0 % $ 210,676 100.0 % Cost of revenues 133,158 60.4 122,009 57.9 Gross margin 87,222 39.6 88,667 42.1 Operating expenses: Selling, general and administrative 36,810 16.7 31,596 15.0 Research and development 28,335 12.9 28,128 13.4 Amortization of intangible assets 16,002 7.3 7,643 3.6 Restructuring and other charges 3,802 1.7 951 0.5 Acquisition costs and other related expenses 2,660 1.2 2,236 1.0 Total operating expenses 87,609 39.8 70,554 33.5 (Loss) income from operations (387) (0.2) 18,113 8.6 Interest income 5 — 60 — Interest expense (1,094) (0.5) (73) — Other expense, net (1,318) (0.6) (981) (0.5) (Loss) income before income taxes (2,794) (1.3) 17,119 8.1 Income tax (benefit) provision (155) (0.1) 4,433 2.1 Net (loss) income $ (2,639) (1.2) % $ 12,686 6.0 % R EVENUES Total revenues increased $9.7 million, or 4.6%, to $220.4 million during the second quarter ended December 31, 2021, as compared to $210.7 million during the second quarter ended January 1, 2021, 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 th e completion of four full fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods. T he in crease in total revenue was primarily due to an additional $37.3 million of acquired revenues primarily from the POC business, partially offset by $27.6 million less organic revenues. These increases were driven by modules and sub-assemblies, which increased $30.3 million which was partially offset by decreases in integrated subsystems of $11.5 million and components of $9.2 million. The increase in total revenue was primarily from the C4I and EW markets which increased $32.6 million and $3.7 million, respectively, and were partially offset by a decrease of $33.6 million from the radar application market. The increase was primarily across the airborne platform which grew $19.3 million during the second quart er ended December 31, 2021. The largest program increases were related t o a classified C2 program, MH-60, P8, CDS, AARGM and F-16. There were no pr ograms comprising 10% or more of our revenues for the second quarters ended December 31, 2021 or January 1, 2021. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. 26 G ROSS M ARGIN Gross margin was 39.6% for the second quarter ended December 31, 2021, a decrease of 250 basis points from the 42.1% gross margin achieved during the second quarter ended January 1, 2021. The lower gross margin was primarily driven by program mix, including the acquisition of POC, which carries lower margins than the organic business, and a higher volume of Customer Funded Research and Development (“CRAD”). CRAD, including POC, increased $5.6 million in the quarter. CRAD primarily represents engineering labor associated with long-term contracts for customized development, production and service activities. 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. In addition to this, these gross margin decreases were also driven by $0.4 million less net margin benefit from fair value adjustments from purchase accounting during the second quarter ended December 31, 2021. These gross margin decreases were partially offset by $2.9 million less direct COVID expenses during the second quarter ended December 31, 2021. S ELLING , G ENERAL AND A DMINISTRATIVE Selling, general and administrative expenses increased $5.2 million, or 16.5%, to $36.8 million during the second quarter ended December 31, 2021, as compared to $31.6 million in the second quarter ended January 1, 2021. The increase was primarily related to the recent acquisitions of POC, Pentek, Avalex, and Atlanta Micro which contributed $3.9 million of incremental cost. Selling, general and administrative expenses increased as a percentage of revenue to 16.7% for the second quarter ended December 31, 2021 from 15.0% for the second quarter ended January 1, 2021. R ESEARCH AND D EVELOPMENT Research and development expenses increased $0.2 million, or 0.7%, to $28.3 million during the second quarter ended December 31, 2021, as compared to $28.1 million during the second quarter ended January 1, 2021. The increase was primarily related to $1.9 million of incremental expenses from the recent acquisitions of POC, Pentek, Avalex, and Atlanta Micro as well as continued investment in internal R&D to promote future growth, including new opportunities in secure processing, trusted custom microelectronics and open mission systems. These increases were partially offset by greater CRAD of $5.6 million over the prior period. Research and development expenses accounted for 12.9% and 13.4% of our revenues for the second quarters ended December 31, 2021 and January 1, 2021, respectively. A MORTIZATION OF I NTANGIBLE A SSETS Amortization of intangible assets increased $8.4 million to $16.0 million during the second quarter ended December 31, 2021, as compared to $7.6 million during the second quarter ended January 1, 2021 due to the acquisitions of POC, Pentek, Avalex and Atlanta Micro. R ESTRUCTURING AND O THER C HARGES During the second quarter ended December 31, 2021, the Company incurred $3.8 million of restructuring and other charges, as compared to $1.0 million during the second quarter ended January 1, 2021. Restructuring and other charges during the second quarter ended December 31, 2021 related to third-party consulting costs associated with 1MPACT while costs during the second quarter ended January 1, 2021 primarily related to severance costs associated with the elimination of 23 positions, predominantly in the manufacturing, SG&A and R&D functions. The Company expects restructuring and other charges of $3.7 million related to 1MPACT during the third quarter of fiscal 2022. A CQUISITION C OSTS AND O THER R ELATED E XPENSES Acquisition costs and other related expenses were $2.7 million during the second quarter ended December 31, 2021, as compared to $2.2 million during the second quarter ended January 1, 2021. Acquisition costs and other related expenses during the second quarter ended December 31, 2021 primarily related to the acquisitions of Avalex and Atlanta Micro which closed during the second quarter. The second quarter ended January 1, 2021 included expenses related to the acquisition of POC which was completed on December 30, 2020. 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 E XPENSE We incurred $1.1 million of interest expense during the second quarter ended December 31, 2021 as a result of $451.5 million of total borrowings on our Revolver used to facilitate the acquisitions of POC, Pentek, Avalex, and Atlanta Micro during fiscal 2021 and 2022. 27 O THER E XPENSE , N ET Other expense, net increased to $1.3 million during the second quarter ended December 31, 2021, as compared to $1.0 million during the second quarter ended January 1, 2021. The second quarter ended December 31, 2021 includes net foreign currency translation losses of $0.2 million as well as additional litigation and settlement costs of $0.3 million. The second quarter ended January 1, 2021 includes loss on sale of a cost-method investment of $0.4 million. I NCOME T AXES We recorded an income tax (benefit) provision of $(0.2) million and $4.4 million on a (loss) income before income taxes of $(2.8) million and $17.1 million for the second quarters ended December 31, 2021 and January 1, 2021, respectively. During the second quarters ended December 31, 2021 and January 1, 2021, we recognized a discrete tax provision (benefit) of $0.2 million and $(0.1) million related to stock-based compensation shortfalls and windfalls, respectively. The effective tax rate for the second quarters ended December 31, 2021 and January 1, 2021 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 second quarter ended December 31, 2021, we had certain unbenefited deferred tax assets. During the second quarter ended December 31, 2021, we recorded an unrecognized tax benefit of $0.7 million related to acquired research and development carryforward credits. 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”). Six months ended December 31, 2021 compared to the six months ended January 1, 2021 The following tables set forth, for the six month periods indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income: (In thousands) December 31, 2021 As a % of Total Net Revenue January 1, 2021 As a % of Total Net Revenue Net revenues $ 445,393 100.0 % $ 416,297 100.0 % Cost of revenues 269,762 60.6 239,511 57.5 Gross margin 175,631 39.4 176,786 42.5 Operating expenses: Selling, general and administrative 73,766 16.5 64,500 15.5 Research and development 57,217 12.8 55,545 13.3 Amortization of intangible assets 29,736 6.7 15,374 3.7 Restructuring and other charges 16,076 3.6 2,248 0.6 Acquisition costs and other related expenses 4,798 1.1 2,236 0.5 Total operating expenses 181,593 40.7 139,903 33.6 (Loss) income from operations (5,962) (1.3) 36,883 8.9 Interest income 14 — 132 — Interest expense (1,689) (0.4) (73) — Other expense, net (2,738) (0.6) (1,827) (0.5) (Loss) income before income taxes (10,375) (2.3) 35,115 8.4 Income tax (benefit) provision (596) (0.1) 6,631 1.6 Net (loss) income $ (9,779) (2.2) % $ 28,484 6.8 % R EVENUES Total revenues increased $29.1 million, or 7.0%, to $445.4 million during the six months ended December 31, 2021, as compared to $416.3 million during the six months ended January 1, 2021. The increase in total revenue was primarily due to an additional $78.6 million of acquired revenues, partially offset by $49.5 million less organic revenues. These increases were driven by higher demand for modules and subassemblies of $71.9 million which was partially offset by decreases in components and integrated subsystems of $24.4 million and $18.4 million, respectively, during the six months ended December 31, 2021. The increase in total revenue was primarily from the C4I end applications which increased $62.2 million and was 28 partially offset by decreases of $47.1 million from the radar applications. The increase was primarily across the airborne and other platforms which grew $48.6 million and $22.8 million, respectively, and were partially offset by decreases to the land and naval platforms of $33.7 million and $8.6 million, respectively, during the six months ended December 31, 2021. The largest program increases were related to a classified C2 program, MH-60, P8, F-35 and F-18 programs. There were no programs comprising 10% or more of our revenues for the six months ended December 31, 2021 or January 1, 2021. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. G ROSS M ARGIN Gross margin was 39.4% for the six months ended December 31, 2021, a decrease of 310 basis points from the 42.5% gross margin achieved during the six months ended January 1, 2021. The lower gross margin was primarily driven by program mix, including the acquisition of POC, which carries lower margins than the organic business and increased CRAD of $19.2 million. These gross margin decreases were partially offset by $4.6 million less direct COVID expenses and a $1.4 million increased gross margin benefit associated with fair value adjustments from purchase accounting for recent acquisitions. S ELLING , G ENERAL AND A DMINISTRATIVE Selling, general and administrative expenses increased $9.3 million, or 14.4%, to $73.8 million during the six months ended December 31, 2021, as compared to $64.5 million during the six months ended January 1, 2021. The increase was primarily related to our acquisitions driving an incremental $7.4 million of expense during the six months ended December 31, 2021. These increases were partially offset by $0.5 million less direct COVID expenses. Selling, general and administrative expenses as a percentage of revenues increased to 16.5% for the six months ended December 31, 2021 from 15.5% for the six months ended January 1, 2021. R ESEARCH AND D EVELOPMENT Research and development expenses increased $1.7 million, or 3.1%, to $57.2 million during the six months ended December 31, 2021, as compared to $55.5 million during the six months ended January 1, 2021. The increase was primarily related to our acquisitions driving incremental $2.9 million of expense, partially offset by increased volume of CRAD of $19.2 million. Research and development expenses accounted for 12.8% and 13.3% of our revenues for the six months ended December 31, 2021 and January 1, 2021, respectively. R ESTRUCTURING A ND O THER C HARGES Restructuring and other charges were $16.1 million during the six months ended December 31, 2021, as compared to $2.2 million during the six months ended January 1, 2021. Restructuring and other charges during the six months ended December 31, 2021 primarily related to $8.7 million of third-party consulting costs associated with 1MPACT and $7.4 million of severance costs associated with the elimination of approximately 100 positions based on changes in the business environment and alignment with internal organization changes completed under 1MPACT. Charges during the second quarter ended January 1, 2021 primarily related to severance costs associated with the elimination of 23 positions, predominantly in the manufacturing, SG&A and R&D functions as well as additional talent shifts and resource redundancy resulting from the internal reorganization in August of fiscal 2021. The Company expects restructuring and other charges of $3.7 million related to 1MPACT during the third quarter of fiscal 2022. A CQUISITION C OSTS AND O THER R ELATED E XPENSES Acquisition costs and other related expenses were $4.8 million during the six months ended December 31, 2021, as compared to $2.2 million during the six months ended January 1, 2021. The acquisition costs and other related expenses we incurred during the six months ended December 31, 2021 were primarily related to the acquisitions of Avalex and Atlanta Micro, which closed during the quarter while those incurred during the six months ended January 1, 2021 were related to the acquisition of POC. Both periods include costs associated with our evaluation of potential acquisition opportunities. 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, 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 E XPENSE We incurred $1.7 million of interest expense during the six months ended December 31, 2021, related to the $451.5 million of total borrowings on our Revolver used to facilitate the acquisitions of POC, Pentek, Avalex and Atlanta Micro during fiscal 2021 and 2022. 29 O THER E XPENSE , N ET Other expense, net, increased to $2.7 million during the six months ended December 31, 2021 as compared to $1.8 million for the six months ended January 1, 2021. There were $0.7 million of foreign currency translation losses during the six months ended December 31, 2021 as compared to $0.6 million of foreign currency translation gains during the six months ended January 1, 2021. The six months ended January 1, 2021 also included a $0.4 million loss on the sale of a cost-method investment. I NCOME T AXES We recorded an income tax (benefit) provision of $(0.6) million and $6.6 million on a (loss) income before income taxes of $(10.4) million and $35.1 million for the six months ended December 31, 2021 and January 1, 2021, respectively. During the six months ended December 31, 2021 and January 1, 2021, we recognized a discrete tax provision (benefit) of $0.9 million and $(2.6) million related to stock-based compensation shortfalls and windfalls, respectively. The effective tax rate for the six months ended December 31, 2021 and January 1, 2021 differed from the Federal statutory rate primarily due to Federal and State research and development credits, stock-based compensation, non-deductible compensation, and state taxes. During the six months ended December 31, 2021, we recorded an unrecognized tax benefit of $0.7 million related to acquired research and development carryforward credits. 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 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 December 31, 2021, we had $451.5 million of outstanding borrowings on the Revolver. See Note I in the accompanying consolidated financial statements for further discussion of the Revolver. 30 C ASH F LOWS As of and For the Six Months Ended, (In thousands) December 31, 2021 January 1, 2021 Net cash provided by operating activities $ 4,818 $ 46,868 Net cash used in investing activities $ (259,890) $ (266,852) Net cash provided by financing activities $ 246,517 $ 163,122 Net decrease in cash and cash equivalents $ (8,670) $ (56,099) Cash and cash equivalents at end of period $ 105,169 $ 170,739 Our cash and cash equivalents decreased by $8.7 million to $105.2 million from July 2, 2021 to December 31, 2021, primarily due to acquisition activity, $13.4 million invested in purchases of property and equipment, and $7.5 million share repurchase and retirement of common stock used to settle individual tax liabilities, partially offset by $251.5 million of borrowings on our Revolver and $4.8 million generated from operating activities. Operating Activities During the six months ended December 31, 2021, we generated $4.8 million in cash from operating activities, as compared to $46.9 million of cash generated from operating activities for the six months ended January 1, 2021. The decrease was primarily due to the net loss of $9.8 million, including cash outflows for restructuring and other charges associated with 1MPACT as well as acquisition costs primarily associated with the Avalex and Atlanta Micro acquisitions. 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. As a result of the Company’s content expansion strategy, revenues associated with modules and sub-assemblies or integrated subsystems and related services has increased over the last several years and especially with the acquisition of POC on December 30, 2020. These revenues are typically recognized over time and can include milestone billing structures which drive higher unbilled balances. These decreases were partially offset by lower cash outflows for inventory and timing of payments for accounts payable, accrued expenses and accrued compensation. Investing Activities During the six months ended December 31, 2021, we invested $259.9 million, a decrease of $7.0 million, as compared to the six months ended January 1, 2021. The decrease was driven by $11.3 million lower purchases of property and equipment, partially offset by $4.8 million of other investing activities during the six months ended December 31, 2021. Financing Activities During the six months ended December 31, 2021, we had $246.5 million in cash provided by financing activities as compared to $163.1 million in the six months ended January 1, 2021. The $83.2 million increase was driven by $91.5 million of additional borrowings on our Revolver to facilitate the acquisitions of Avalex and Atlanta Micro, partially offset by $7.4 million of additional payments related to the purchase and retirement of common stock used to settle employees' tax liabilities associated with vesting of restricted stock awards as compared to the six months ended January 1, 2021. C OMMITMENTS, C ONTRACTUAL O BLIGATIONS AND C ONTINGENCIES The following is a schedule of our commitments and contractual obligations outstanding at December 31, 2021: (In thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Purchase obligations $ 183,942 $ 183,942 $ — $ — $ — Operating leases 105,212 15,529 27,313 22,648 39,722 $ 289,154 $ 199,471 $ 27,313 $ 22,648 $ 39,722 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 $183.9 million at December 31, 2021. We have a liability at December 31, 2021 of $8.2 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 31 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. 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, financing and other third party 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. 32 The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to our adjusted EBITDA: Second Quarters Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Net (loss) income $ (2,639) $ 12,686 $ (9,779) $ 28,484 Other non-operating adjustments, net 226 (3) 643 (185) Interest expense (income), net 1,089 13 1,675 (59) Income tax (benefit) provision (155) 4,433 (596) 6,631 Depreciation 8,064 5,641 15,820 10,907 Amortization of intangible assets 16,002 7,643 29,736 15,374 Restructuring and other charges 3,802 951 16,076 2,248 Impairment of long-lived assets — — — — Acquisition, financing and other third party costs 3,115 2,969 5,748 3,810 Fair value adjustments from purchase accounting (70) — (1,731) — Litigation and settlement expense, net 506 251 882 438 COVID related expenses 274 3,309 457 5,628 Stock-based and other non-cash compensation expense 7,892 7,439 17,465 14,806 Adjusted EBITDA $ 38,106 $ 45,332 $ 76,396 $ 88,082 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, financing and other third party 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. 33 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: Second Quarters Ended (In thousands, except per share data) December 31, 2021 January 1, 2021 Net (loss) income and diluted (loss) earnings per share $ (2,639) $ (0.05) $ 12,686 $ 0.23 Other non-operating adjustments, net 226 (3) Amortization of intangible assets 16,002 7,643 Restructuring and other charges 3,802 951 Impairment of long-lived assets — — Acquisition, financing and other third party costs 3,115 2,969 Fair value adjustments from purchase accounting (70) — Litigation and settlement expense, net 506 251 COVID related expenses 274 3,309 Stock-based and other non-cash compensation expense 7,892 7,439 Impact to income taxes (1) (7,144) (5,275) Adjusted income and adjusted earnings per share $ 21,964 $ 0.39 $ 29,970 $ 0.54 Diluted weighted-average shares outstanding 55,693 55,434 (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. Six Months Ended (In thousands, except per share data) December 31, 2021 January 1, 2021 Net (loss) income and diluted (loss) earnings per share $ (9,779) $ (0.18) $ 28,484 $ 0.51 Other non-operating adjustments, net 643 (185) Amortization of intangible assets 29,736 15,374 Restructuring and other charges 16,076 2,248 Impairment of long-lived assets — — Acquisition, financing and other third party costs 5,748 3,810 Fair value adjustments from purchase accounting (1,731) — Litigation and settlement expense, net 882 438 COVID related expenses 457 5,628 Stock-based and other non-cash compensation expense 17,465 14,806 Impact to income taxes (1) (14,973) (12,299) Adjusted income and adjusted earnings per share $ 44,524 $ 0.80 $ 58,304 $ 1.05 Diluted weighted-average shares outstanding 55,653 55,385 (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. 34 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. The following table reconciles cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow: Second Quarters Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Cash provided by operating activities $ 6,824 $ 23,939 $ 4,818 $ 46,868 Purchase of property and equipment (8,027) (13,775) (13,404) (24,753) Free cash flow $ (1,203) $ 10,164 $ (8,586) $ 22,115 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 second quarters six months and ended December 31, 2021 and January 1, 2021, respectively: (In thousands) December 31, 2021 As a % of Total Net Revenue January 1, 2021 As a % of Total Net Revenue $ Change % Change Organic revenue $ 182,857 83 % $ 210,459 100 % $ (27,602) (13) % Acquired revenue 37,523 17 % 217 — % 37,306 100 % Total revenues $ 220,380 100 % $ 210,676 100 % $ 9,704 5 % (In thousands) December 31, 2021 As a % of Total Net Revenue January 1, 2021 As a % of Total Net Revenue $ Change % Change Organic revenue $ 366,589 82 % $ 416,080 100 % $ (49,491) (12) % Acquired revenue 78,804 18 % 217 — % 78,587 100 % Total revenues $ 445,393 100 % $ 416,297 100 % $ 29,096 7 % 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"). 35 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 December 31, 2021.