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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2022-02-08 · 141 added, 136 removed, 250 unchanged (53% of the section changed)

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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.

Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, inflation, 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.

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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.

As of April 1, 2022, we had 2,294 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.

Our talent attraction, engagement and retention are 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.

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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.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the third quarter ended April 1, 2022 were $253.1 million, $19.3 million, $4.1 million, $0.07, $0.57, and $52.5 million, respectively.

Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted EPS, and adjusted EBITDA for the nine months ended April 1, 2022 were $698.5 million, $98.1 million, $(5.6) million, $(0.10), $1.38, and $128.9 million, respectively.

See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

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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.

In November and December 2021, federal judges 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.

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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.

Since fiscal year 2014 and through the third quarter ended April 1, 2022, 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;

1MPACT is led by our new Chief Transformation Officer, Thomas Huber, and focuses on the following major areas:

organizational efficiency and scalability;

procurement and supply chain;

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R&D investment;

capital and asset efficiency;

and scalable common processes and systems.

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.

Results of operations for the third quarter and nine months ended April 1, 2022 include 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 Inc.

("Atlanta Micro") which were acquired on November 5, 2021 and November 29, 2021, respectively.

Results of operations for the third quarter ended April 2, 2021 include a full period of results from the acquisition of POC.

Results of operations for the nine months ended April 2, 2021 include only results from the acquisition date for POC, which was acquired on December 30, 2020 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

Revenue January 1, 2021 As a % of

The third quarter ended April 1, 2022 compared to the third quarter ended April 2, 2021

The following table sets forth, for the third quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income (Loss):

(In thousands) April 1, 2022 As a % of

Revenue April 2, 2021 As a % of

Net revenues $ 253,075 100.0 % $ 256,857 100.0 %

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Total operating expenses 89,799 35.5 83,911 32.7

(Loss) income from operations (387) (0.2) 18,113 8.6

Income from operations 9,955 3.9 21,712 8.5

Interest income 110 — 34 —

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Other expense, net (2,160) (0.8) (200) (0.1)

(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 %

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).

Income before income taxes 6,241 2.4 20,997 8.2

Income tax provision 2,102 0.8 5,362 2.1

Net income $ 4,139 1.6 % $ 15,635 6.1 %

Total revenues decreased $3.8 million, or (1.5)%, to $253.1 million during the third quarter ended April 1, 2022, as compared to $256.9 million during the third quarter ended April 2, 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.

The decrease in total revenue was primarily due to $23.1 million less organic revenues, partially offset by $19.3 million of acquired revenues from the Pentek, Avalex and Atlanta Micro businesses.

These decreases were driven by integrated subsystems, which decreased $20.6 million which was partially offset by increases in modules and sub-assemblies, which increased $15.2 million and components which increased by $1.6 million.

The decrease in total revenue was primarily a result of the radar application market, which decreased by $31.4 million and was partially offset by increases of EW, other and C4I markets which increased $18.2 million, $6.8 million and $4.1 million, respectively.

The decrease was primarily across the land and naval platforms which decreased $16.1 million and $5.1 million, respectively and were partially offset by an increase in other and airborne platforms which grew $11.8 million and $5.5 million, respectively, during the third quarter ended April 1, 2022.

The largest program increases were related to a classified C2 program, CDS and V22.

There were no pr ograms comprising 10% or more of our revenues for the third quarters ended April 1, 2022 or April 2, 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 39.6% 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.

Gross margin was 39.4% for the third quarter ended April 1, 2022, a decrease of 170 basis points from the 41.1% gross margin achieved during the third quarter ended April 2, 2021.

The lower gross margin was primarily driven by program mix, and was impacted by industry-wide supply chain disruptions, as well as higher engineering content associated with programs in the quarter, while Customer Funded Research and Development (“CRAD”) increased $1.2 million in the quarter.

CRAD primarily represents engineering labor associated with long-term contracts for customized development, production and service activities.

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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.

In addition, these gross margin decreases were also driven by $0.2 million less net margin benefit from fair value adjustments from purchase accounting during the third quarter ended April 1, 2022.

These gross margin decreases were partially offset by $2.5 million less direct COVID expenses during the third quarter ended April 1, 2022.

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.

Selling, general and administrative expenses increased $1.0 million, or 2.6%, to $39.3 million during the third quarter ended April 1, 2022, as compared to $38.3 million in the third quarter ended April 2, 2021.

The increase was primarily related to the recent acquisitions of Pentek, Avalex, and Atlanta Micro which contributed $2.6 million of incremental expenses as well as $0.8 million of incremental stock-based compensation expense related to our equity retention plan.

These increases were partially offset by savings from workforce optimization efforts.

Selling, general and administrative expenses increased as a percentage of revenue to 15.5% for the third quarter ended April 1, 2022 from 14.9% for the third quarter ended April 2, 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.

Research and development expenses decreased $4.8 million, or 16.0%, to $25.4 million during the third quarter ended April 1, 2022, as compared to $30.2 million during the third quarter ended April 2, 2021.

The decrease was primarily related to the direct allocation of engineering resources to customer funded programs as well as labor attrition.

This resulted in $1.2 million of incremental CRAD during the third quarter ended April 1, 2022 as compared to the prior period.

Research and development expenses accounted for 10.0% and 11.8% of our revenues for the third quarters ended April 1, 2022 and April 2, 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.

Amortization of intangible assets increased $3.4 million to $16.1 million during the third quarter ended April 1, 2022, as compared to $12.7 million during the third quarter ended April 2, 2021 due to the acquisitions of 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.

During the third quarter ended April 1, 2022, we incurred $6.3 million of restructuring and other charges, as compared to less than $0.1 million during the third quarter ended April 2, 2021.

Restructuring and other charges during the third quarter ended April 1, 2022 related to 1MPACT including $5.5 million of third-party consulting costs, $0.8 million of facility optimization costs and $0.1 million of severance costs associated with the elimination of approximately 10 positions during the period based on ongoing talent and workforce optimization efforts.

The $0.8 million of costs for facility optimization efforts includes $0.5 million related to lease asset impairment.

The Company expects restructuring and other charges of $3.3 million related to third-party consulting costs associated with 1MPACT during the fourth 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.

Acquisition costs and other related expenses were $2.7 million during the third quarters ended April 1, 2022 and April 2, 2021 primarily related to third-party advisory fees in connection with engagements by activist investors in the third quarter ended April 1, 2022 .

In addition, the third quarters ended April 1, 2022 and April 2, 2021 included costs associated with our continuous evaluation of potential acquisition opportunities.

We expect to continue to incur such acquisition costs and other related expenses in the future as we continue to seek acquisition opportunities to expand our technological capabilities and especially within secure processing, open mission systems, C3 and trusted microelectronics.

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.

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.

We incurred $1.7 million of interest expense during the third quarter ended April 1, 2022 as a result of $451.5 million of outstanding borrowings on our Revolver used to facilitate the acquisitions of POC, Pentek, Avalex, and Atlanta Micro during fiscal 2021 and 2022.

We incurred $0.6 million of interest expense during the third quarter ended April 2, 2021 as a result of $160.0 million of outstanding borrowings on our Revolver used to facilitate the acquisition of POC.

O THER E XPENSE, NET

Other expense, net increased to $2.2 million during the third quarter ended April 1, 2022, as compared to $0.2 million during the third quarter ended April 2, 2021.

The third quarter ended April 1, 2022 includes net foreign currency translation losses of $0.6 million as well as incremental financing costs of $0.3 million.

The third quarter ended April 2, 2021 includes net foreign currency translation gains of $0.7 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.

We recorded an income tax provision of $2.1 million and $5.4 million on income before income taxes of $6.2 million and $21.0 million for the third quarters ended April 1, 2022 and April 2, 2021, respectively.

During the third quarters ended April 1, 2022 and April 2, 2021, we recognized a discrete tax provision of less than $0.1 million related to stock-based compensation shortfalls and a discrete tax benefit of $0.2 million related to excess benefits on stock-based compensation, respectively.

The effective tax rate for the third quarters ended April 1, 2022 and April 2, 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 third quarter ended April 1, 2022, 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”).

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

Revenue January 1, 2021 As a % of

Nine months ended April 1, 2022 compared to the nine months ended April 2, 2021

The following tables set forth, for the nine month periods indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income (Loss):

(In thousands) April 1, 2022 As a % of

Revenue April 2, 2021 As a % of

Net revenues $ 698,468 100.0 % $ 673,154 100.0 %

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Total operating expenses 271,392 38.9 223,814 33.2

(Loss) income from operations (5,962) (1.3) 36,883 8.9

Income from operations 3,993 0.5 58,595 8.8

Interest income 124 — 166 —

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(Loss) income before income taxes (4,134) (0.6) 56,112 8.4

Income tax (benefit) provision (596) (0.1) 6,631 1.6

Income tax provision 1,506 0.2 11,993 1.8

Net (loss) income $ (5,640) (0.8) % $ 44,119 6.6 %

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.

Total revenues increased $25.3 million, or 3.8%, to $698.5 million during the nine months ended April 1, 2022, as compared to $673.2 million during the nine months ended April 2, 2021.

The increase in total revenue was primarily due to an additional $97.9 million of acquired revenues, partially offset by $72.6 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

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.

These increases were driven by higher demand for modules and subassemblies and integrated subsystems which increased $34.6 million and $13.4 million, respectively, and were partially offset by decreases in components of $22.8 million during the nine months ended April 1, 2022.

The increase in total revenue was primarily from the C4I and EW end applications which increased $66.3 million and $19.0 million, respectively, and was partially offset by decreases of $78.5 million from the radar applications.

The increase was primarily across the airborne and other platforms which grew $54.2 million and $34.6 million, respectively, and were partially offset by decreases to the land and naval platforms of $49.8 million and $13.7 million, respectively, during the nine months

ended April 1, 2022.

The largest program increases were related to a classified C2 program, MH-60 and F-16 programs.

There were no programs comprising 10% or more of our revenues for the nine months ended April 1, 2022 or April 2, 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.

Gross margin was 39.4% for the nine months ended April 1, 2022, a decrease of 260 basis points from the 42.0% gross margin achieved during the nine months ended April 2, 2021.

The lower gross margin was primarily driven by program mix, and was impacted by industry-wide supply chain disruptions, as well as higher engineering content associated with programs, while CRAD increased $29.1 million as compared to the prior period.

These gross margin decreases were partially offset by $7.0 million less direct COVID expenses, and a $2.3 million net 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.

Selling, general and administrative expenses increased $10.3 million, or 10.0%, to $113.0 million during the nine months ended April 1, 2022, as compared to $102.8 million during the nine months ended April 2, 2021.

The increase was primarily related to the acquisitions of Pentek, Avalex and Atlanta Micro which contributed $7.2 million of incremental expenses during the nine months ended April 1, 2022 and $2.8 million increase to stock compensation expense primarily related to increased volume of awards associated with the retention of our employees.

These increases were partially offset by $0.8 million less direct COVID expenses and savings from workforce optimization efforts.

Selling, general and administrative expenses as a percentage of revenues increased to 16.2% for the nine months ended April 1, 2022 from 15.3% for the nine months ended April 2, 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.

Research and development expenses decreased $3.2 million, or 3.7%, to $82.6 million during the nine months ended April 1, 2022, as compared to $85.8 million during the nine months ended April 2, 2021.

The decrease was primarily related to employee attrition and restructuring activities associated with 1MPACT.

We incurred $7.7 million of incremental CRAD during the nine months ended April 1, 2022.

These decreases were partially offset by incremental $3.6 million from recent acquisitions.

Research and development expenses accounted for 11.8% and 12.7% of our revenues for the nine months ended April 1, 2022 and April 2, 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.

Restructuring and other charges were $22.4 million during the nine months ended April 1, 2022, as compared to $2.2 million during the nine months ended April 2, 2021.

Restructuring and other charges during the nine months ended April 1, 2022 primarily related to 1MPACT including $14.1 million of third-party consulting costs, as well as $7.5 million of severance costs associated with the elimination of approximately 110 positions across manufacturing, SG&A and R&D based on ongoing talent and workforce optimization efforts.

In addition, the nine months ended April 1, 2022 includes $0.8 million of costs for facilities optimization efforts associated with 1MPACT, including $0.5 million related to lease asset impairment.

Charges during the nine months ended April 2, 2021 primarily related to severance costs associated with the elimination of 42 positions.

The Company expects restructuring and other charges of $3.3 million related to third-party consulting costs associated with 1MPACT during the fourth 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.

Acquisition costs and other related expenses were $7.5 million during the nine months ended April 1, 2022, as compared to $5.0 million during the nine months ended April 2, 2021.

The acquisition costs and other related expenses we incurred during the nine months ended April 1, 2022 were primarily related to the acquisitions of Avalex and Atlanta Micro, as well as $2.7 million for third-party advisory fees in connection with engagements by activist investors.

The acquisition costs and other related expenses incurred during the nine months ended April 2, 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.

We expect to continue to incur such acquisition costs and other related expenses in the future as we continue to seek acquisition opportunities to expand our technological capabilities, especially within secure processing, open mission systems, C3 and trusted microelectronics.

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.

We incurred $3.4 million of interest expense during the nine months ended April 1, 2022, related to the $451.5 million of outstanding borrowings on our Revolver used to facilitate the acquisitions of POC, Pentek, Avalex and Atlanta Micro during fiscal 2021 and 2022.

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.

Other expense, net, increased to $4.9 million during the nine months ended April 1, 2022 as compared to $2.0 million for the nine months ended April 2, 2021.

There were $1.3 million of foreign currency translation losses during the nine months ended April 1, 2022 and $1.3 million of foreign currency translation gains during the nine months ended April 2, 2021.

There were $0.5 million of incremental litigation and settlement expenses during the nine months ended April 1, 2022 as compared to the prior comparable period.

The nine months ended April 2, 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.

We recorded an income tax provision of $1.5 million and $12.0 million on (loss) income before income taxes of $(4.1) million and $56.1 million for the nine months ended April 1, 2022 and April 2, 2021, respectively.

During the nine months ended April 1, 2022 and April 2, 2021, we recognized a discrete tax provision of $0.9 million related to stock-based compensation shortfalls and a discrete tax benefit of $2.8 million related to excess benefits on stock-based compensation, respectively.

The effective tax rate for the nine months ended April 1, 2022 and April 2, 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 nine months ended April 1, 2022, 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 IRS.

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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.

On February 28, 2022, we amended the Revolver to increase and extend the borrowing capacity to a $1.1 billion, 5-year revolving credit line, with the maturity extended to February 28, 2027.

As of April 1, 2022, there was $451.5 million of outstanding borrowings on the Revolver.

See Note I in the accompanying consolidated financial statements for further discussion of the Revolver.

As of and For the Six Months Ended,

(In thousands) December 31, 2021 January 1, 2021

As of and For the Nine Months Ended,

(In thousands) April 1, 2022 April 2, 2021

Net cash provided by operating activities $ 566 $ 70,053

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Cash and cash equivalents at end of period $ 91,694 $ 121,943

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.

Our cash and cash equivalents decreased by $22.1 million to $91.7 million from July 2, 2021 to April 1, 2022, primarily due to $243.3 million of acquisitions activity, $19.5 million of purchases of property and equipment, and $7.7 million of 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 $0.6 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.

During the nine months ended April 1, 2022, we generated $0.6 million in cash from operating activities, as compared to $70.1 million of cash generated from operating activities for the nine months ended April 2, 2021.

The decrease was primarily due to the net loss of $5.6 million as well as an increase in unbilled receivables and costs in excess of billings driven by supply chain disruptions which delayed delivery milestones and cash collections.

Operating activities also included cash outflows for restructuring and other charges associated with 1MPACT as well as acquisition costs related to third-party advisory fees in connection with engagements by activist investors and the Avalex and Atlanta Micro acquisitions.

In addition, the decrease was due to lower deferred revenue and customer advances and income tax payments.

These decreases were partially offset by lower cash outflows for inventory and 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.

During the nine months ended April 1, 2022, we invested $265.9 million, a decrease of $72.5 million, as compared to the nine months ended April 2, 2021.

The decrease was primarily driven by $243.3 million used for the acquisitions of Avalex and Atlanta Micro during the nine months ended April 1, 2022 as compared to $305.3 million for the acquisition of POC during the nine months ended April 2, 2021.

In addition, we invested $15.2 million less in purchases of property and equipment during the nine months ended April 1, 2022.

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.

During the nine months ended April 1, 2022, we had $243.6 million in cash provided by financing activities as compared to $163.1 million in the nine months ended April 2, 2021.

The $80.5 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 $7.6 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 and $2.7 million payments of deferred financing fees associated with the refinancing of our revolving credit facility as compared to the nine months ended April 2, 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:

The following is a schedule of our commitments and contractual obligations outstanding at April 1, 2022:

(In thousands) Total Less Than

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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.

The purchase commitments covered by these agreements are for less than one year and aggregated approxi mately $187.9 million at April 1, 2022.

We have a liability at April 1, 2022 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.

losses suffered or incurred in connection with certain intellectual property infringement claims by any third party with respect to our products.

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.

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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

Third Quarters Ended Nine Months Ended

(In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

Net income (loss) $ 4,139 $ 15,635 $ (5,640) $ 44,119

Other non-operating adjustments, net 938 (775) 1,581 (960)

Interest expense (income), net 1,089 13 1,675 (59)

Income tax (benefit) provision (155) 4,433 (596) 6,631

Interest expense, net 1,554 515 3,229 456

Income tax provision 2,102 5,362 1,506 11,993

Depreciation 8,388 7,243 24,208 18,150

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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.

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

The following tables reconcile net income (loss) and diluted earnings (loss) per share, the most directly comparable GAAP measures, to adjusted income and adjusted EPS:

Third Quarters Ended

(In thousands, except per share data) April 1, 2022 April 2, 2021

Net income and diluted earnings per share $ 4,139 $ 0.07 $ 15,635 $ 0.28

Other non-operating adjustments, net 938 (775)

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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

Nine Months Ended

(In thousands, except per share data) April 1, 2022 April 2, 2021

Net (loss) income and diluted (loss) earnings per share $ (5,640) $ (0.10) $ 44,119 $ 0.80

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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

Third Quarters Ended Nine Months Ended

(In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

Cash (used in) provided by operating activities $ (4,252) $ 23,185 $ 566 $ 70,053

Purchase of property and equipment (6,072) (9,955) (19,476) (34,708)

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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

Revenue January 1, 2021 As a % of

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the third quarters and nine months and ended April 1, 2022 and April 2, 2021, respectively:

(In thousands) April 1, 2022 As a % of

Revenue April 2, 2021 As a % of

Revenue $ Change % Change

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Total revenues $ 253,075 100 % $ 256,857 100 % $ (3,782) (1) %

(In thousands) December 31, 2021 As a % of

Revenue January 1, 2021 As a % of

(In thousands) April 1, 2022 As a % of

Revenue April 2, 2021 As a % of

Revenue $ Change % Change

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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.

There were no material changes in our exposure to market risk from July 2, 2021 to April 1, 2022.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis