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, 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. 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. 25 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 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 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. 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 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. 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 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. 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 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 the following major areas: organizational efficiency and scalability; procurement and supply chain; facilities optimization; R&D investment; and scalable common processes and systems. 26 RESULTS OF OPERATIONS: 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 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 Total Net Revenue April 2, 2021 As a % of Total Net Revenue Net revenues $ 253,075 100.0 % $ 256,857 100.0 % Cost of revenues 153,321 60.6 151,234 58.9 Gross margin 99,754 39.4 105,623 41.1 Operating expenses: Selling, general and administrative 39,261 15.5 38,250 14.9 Research and development 25,387 10.0 30,218 11.8 Amortization of intangible assets 16,077 6.4 12,717 5.0 Restructuring and other charges 6,348 2.5 (4) — Acquisition costs and other related expenses 2,726 1.1 2,730 1.0 Total operating expenses 89,799 35.5 83,911 32.7 Income from operations 9,955 3.9 21,712 8.5 Interest income 110 — 34 — Interest expense (1,664) (0.7) (549) (0.2) Other expense, net (2,160) (0.8) (200) (0.1) 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 % R EVENUES 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. 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. 27 G ROSS M ARGIN 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. 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, 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 $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 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 $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 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 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 $1.7 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. 28 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 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”). 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 Total Net Revenue April 2, 2021 As a % of Total Net Revenue Net revenues $ 698,468 100.0 % $ 673,154 100.0 % Cost of revenues 423,083 60.6 390,745 58.0 Gross margin 275,385 39.4 282,409 42.0 Operating expenses: Selling, general and administrative 113,027 16.2 102,750 15.3 Research and development 82,604 11.8 85,763 12.7 Amortization of intangible assets 45,813 6.6 28,091 4.2 Restructuring and other charges 22,424 3.2 2,244 0.3 Acquisition costs and other related expenses 7,524 1.1 4,966 0.7 Total operating expenses 271,392 38.9 223,814 33.2 Income from operations 3,993 0.5 58,595 8.8 Interest income 124 — 166 — Interest expense (3,353) (0.4) (622) (0.1) Other expense, net (4,898) (0.7) (2,027) (0.3) (Loss) income before income taxes (4,134) (0.6) 56,112 8.4 Income tax provision 1,506 0.2 11,993 1.8 Net (loss) income $ (5,640) (0.8) % $ 44,119 6.6 % R EVENUES 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 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 29 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 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 $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 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 $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 $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 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 $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. 30 O THER E XPENSE , N ET 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 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. 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 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. 31 C ASH F LOWS 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 Net cash used in investing activities $ (265,945) $ (338,433) Net cash provided by financing activities $ 243,638 $ 163,133 Net decrease in cash and cash equivalents $ (22,145) $ (104,895) Cash and cash equivalents at end of period $ 91,694 $ 121,943 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 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 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 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 April 1, 2022: (In thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Purchase obligations $ 187,927 $ 187,927 $ — $ — $ — Operating leases 101,507 15,376 26,961 21,914 37,256 $ 289,434 $ 203,303 $ 26,961 $ 21,914 $ 37,256 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 $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. 32 Our standard product sales and license agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred in connection with certain intellectual property infringement claims by any third party with respect to our products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments we could be required to make under these indemnification provisions is, in some instances, unlimited. 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. 33 The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to our adjusted EBITDA: 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, 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 Amortization of intangible assets 16,077 12,717 45,813 28,091 Restructuring and other charges 6,348 (4) 22,424 2,244 Impairment of long-lived assets — — — — Acquisition, financing and other third party costs 3,497 3,260 9,245 7,070 Fair value adjustments from purchase accounting 16 182 (1,715) 182 Litigation and settlement expense, net 320 312 1,202 750 COVID related expenses 182 2,745 639 8,373 Stock-based and other non-cash compensation expense 8,935 7,565 26,400 22,371 Adjusted EBITDA $ 52,496 $ 54,757 $ 128,892 $ 142,839 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. 34 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) Amortization of intangible assets 16,077 12,717 Restructuring and other charges 6,348 (4) Impairment of long-lived assets — — Acquisition, financing and other third party costs 3,497 3,260 Fair value adjustments from purchase accounting 16 182 Litigation and settlement expense, net 320 312 COVID related expenses 182 2,745 Stock-based and other non-cash compensation expense 8,935 7,565 Impact to income taxes (1) (8,248) (6,187) Adjusted income and adjusted earnings per share $ 32,204 $ 0.57 $ 35,450 $ 0.64 Diluted weighted-average shares outstanding 56,027 55,526 (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. 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 Other non-operating adjustments, net 1,581 (960) Amortization of intangible assets 45,813 28,091 Restructuring and other charges 22,424 2,244 Impairment of long-lived assets — — Acquisition, financing and other third party costs 9,245 7,070 Fair value adjustments from purchase accounting (1,715) 182 Litigation and settlement expense, net 1,202 750 COVID related expenses 639 8,373 Stock-based and other non-cash compensation expense 26,400 22,371 Impact to income taxes (1) (23,221) (18,486) Adjusted income and adjusted earnings per share $ 76,728 $ 1.38 $ 93,754 $ 1.69 Diluted weighted-average shares outstanding 55,780 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. 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. 35 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: 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) Free cash flow $ (10,324) $ 13,230 $ (18,910) $ 35,345 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 third quarters and nine months and ended April 1, 2022 and April 2, 2021, respectively: (In thousands) April 1, 2022 As a % of Total Net Revenue April 2, 2021 As a % of Total Net Revenue $ Change % Change Organic revenue $ 233,747 92 % $ 256,857 100 % $ (23,110) (9) % Acquired revenue 19,328 8 % — — % 19,328 100 % Total revenues $ 253,075 100 % $ 256,857 100 % $ (3,782) (1) % (In thousands) April 1, 2022 As a % of Total Net Revenue April 2, 2021 As a % of Total Net Revenue $ Change % Change Organic revenue $ 600,336 86 % $ 672,937 100 % $ (72,601) (11) % Acquired revenue 98,132 14 % 217 — % 97,915 100 % Total revenues $ 698,468 100 % $ 673,154 100 % $ 25,314 4 % 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"). 36 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 April 1, 2022.