What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-05-10 · 118 added, 226 removed, 165 unchanged (68% of the section changed)

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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.

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, supply chain delays or volatility for critical components such as semiconductors, production delays or unanticipated expenses including 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, such as the deductibility of internal research and development, 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 1, 2022.

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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.

is a technology company that delivers commercial innovation to rapidly transform the global aerospace and defense industry.

Headquartered in Andover, Massachusetts, our end-to-end processing platform enables a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments.

Processing technologies that comprise our platform include signal solutions, display, software applications, networking, storage and secure processing.

Our innovative solutions are mission-ready, trusted and secure, software-defined and open and modular to meet our customers’ most-pressing high-tech needs.

Customers access our solutions via the Mercury platform, which encompasses the broad scope of our investments in technologies, companies, products, services and the expertise of our people.

Ultimately, we connect our customers to what matters most to them.

We connect commercial technology to defense, people to data, partners to opportunities and the present to the future.

And, at the most human level, we connect what we do to our customers’ missions;

supporting the people for whom safety, security and protecting freedom are of paramount importance.

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.

government and original equipment manufacturers (“OEM”) commercial aerospace companies.

We have built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that we believe 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.

This allows them to complete their full system by integrating with their platform, the sensor technology and, increasingly, the processing from us.

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.

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.

Our 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 and other commercial companies, coupled with our high level of research and development (“R&D”) investments on a percentage basis 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 data, including radio frequency (“RF”) to digital to decision, we make mission-critical technologies safe, secure, affordable and relevant for our customers.

Our capabilities, technology, people and R&D investment strategy combine to differentiate us in our industry.

We maintain our technological edge by investing in critical capabilities and intellectual property (“IP” or “building blocks”) in processing, 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 artificial intelligence (“AI”).

Our mission critical solutions are deployed by our customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”), electronic intelligence, mission computing avionics, electro-optical/infrared (“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.

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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.

As of September 30, 2022, we had 2,424 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.

Our talent attraction, engagement and retention is critical to execute on our long-term strategy.

We invest in our culture and values to drive employee engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation.

We believe that our success depends on our ability to embrace diversity company-wide and realize the benefits of a diverse workforce that includes a greater variety of solutions to problems, a broader collection of skills and experiences and an array of viewpoints to consider.

Mercury is strongly focused on providing an inclusive environment that respects the diversity of the world.

We are 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.

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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 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.

Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the first quarter ended September 30, 2022 were $227.6 million, $11.8 million, $(14.3) million, $(0.26), $0.24, and $31.2 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.

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.

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.

Results of operations for the first quarter ended September 30, 2022 includes results from the acquisitions of Atlanta Micro, Inc (“Atlanta M icro”) and Avalex Technologies, LLC.

Results of operations for the first quarter ended October 1, 2021 do not include results from Atlanta Micro or Avalex.

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

Revenue April 2, 2021 As a % of

The first quarter ended September 30, 2022 compared to the first quarter ended October 1, 2021

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

(In thousands) September 30, 2022 As a % of

Revenue October 1, 2021 As a % of

Net revenues $ 227,579 100.0 % $ 225,013 100.0 %

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Total operating expenses 85,289 37.5 93,984 41.8

Income from operations 9,955 3.9 21,712 8.5

Loss from operations (7,194) (3.2) (5,575) (2.5)

Interest income 29 — 9 —

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Other expense, net (3,645) (1.5) (1,420) (0.6)

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.

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.

Loss before income taxes (15,357) (6.7) (7,581) (3.4)

Income tax benefit (1,022) (0.4) (441) (0.2)

Net loss $ (14,335) (6.3) % $ (7,140) (3.2) %

Total revenues increase d $2.6 million, or 1.1%, to $227.6 million during the first quarter ended September 30, 2022, as compared to $225.0 million during the first quarter ended October 1, 2021, including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full quarters or less (and excludes any intercompany transactions).

After the completion of four full fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods.

The in crease in total revenue was primarily due to an additional $11.8 million of acquired revenues from the Atlanta Micro and Avalex businesses, partially offset by $9.2 million less organic revenues.

These decreases were driven by modules and sub-assemblies, which increased $20.9 million or 60%, partially offset by decreases in integrated subsystems and components product groupings of $15.2 million and $3.1 million, respectively.

The increase in total revenue was primarily from C4I and electronic warfare end applications which increased $11.7 million and $1.1 million, respectively, partially offset by decreases to other sensor and effector and radar end applications of $10.2 million and $5.5 million, respectively.

The increase was primarily across the other and airborne platforms which grew $8.9 million and $1.8 million, respectively, partially offset by a decrease to naval platforms of $6.2 million during the first quarter ended September 30, 2022.

Th e largest program increases were rela ted to the LTAMDS, a secure processing program, F-35, SEWIP and P8 programs.

Th ere were no programs comprising 10% or more of our revenues for the first quarters ended September 30, 2022 or October 1, 2021.

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

G ROSS M ARGIN

Gross margin was 39.4% for the 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.

Gross margin was 34.3% for the first quarter ended September 30, 2022, a decrease of 500 basis points from the 39.3% gross margin achieved during the first quarter ended October 1, 2021.

The lower gross margin was primarily driven by program mix, as well as material and labor inflation.

Program mix was heavily impacted by industry-wide award delays and supply chain constraints resulting in a lower proportion of high margin programs when compared to the prior period.

This included higher engineering content associated with programs in the period evidenced by an increase of $3.3 million in Customer Funded Research and Development (“CRAD”) compared to the first quarter ended October 1, 2021.

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.

The nature of these efforts result in lower margin content, but serve as pre-cursors to higher margin production awards.

These products are predominantly grouped within integrated subsystems and to a lesser extent modules and sub-assemblies.

Finally, the first quarter ended September 30, 2022 included $0.4 million of favorable fair market value adjustments from purchase accounting as compared to $1.8 million for the first quarter ended October 1, 2021.

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.

Selling, general and administrative expenses increased $1.9 million, or 5.4%, to $38.9 million during the first quarter ended September 30, 2022, as compared to $37.0 million in the first quarter ended October 1, 2021.

The increase was primarily related to the recent acquisitions of Avalex and Atlanta Micro which contributed $1.6 million of incremental cost, partially offset by lower share-based compensation expense.

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.

Research and development expenses decreased $1.1 million, or 3.9%, to $27.8 million during the first quarter ended September 30, 2022, as compared to $28.9 million during the first quarter ended October 1, 2021.

The decrease was primarily related to timing of R&D investment and an incremental $3.3 million of CRAD during the first quarter ended September 30, 2022, partially offset by $1.3 million of incremental expense from our recent acquisitions of Avalex and Atlanta Micro.

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.

Amortization of intangible assets increased $0.9 million to $14.6 million during the first quarter ended September 30, 2022, as compared to $13.7 million during the first quarter ended October 1, 2021, primarily due to the acquisitions of 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.

During the first quarter ended September 30, 2022, the Company incurred $1.5 million of restructuring and other charges, as compared to $12.3 million during the first quarter ended October 1, 2021.

Restructuring and other charges of $1.3 million related to third-party consulting costs associated with 1MPACT and the remaining $0.2 million related to severance costs.

During the first quarter ended October 1, 2021, restructuring and other charges of $7.3 million related to severance costs associated with the elimination of 100 employees based on changes in the business environment and alignment with the internal organizational changes completed under 1MPACT and the remaining $4.9 million of restructuring and other charges related to third-party consulting costs associated with 1MPACT.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

Acquisition costs and other related expenses were $2.7 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.

Acquisition costs and other related expenses were $2.5 million during the first quarter ended September 30, 2022.

The acquisition costs and other related expenses during the first quarter ended September 30, 2022 were primarily related to $2.1 million for third-party advisory fees in connection with engagements by activist investors and other acquisition related costs.

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.

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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.

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

Revenue April 2, 2021 As a % of

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 %

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

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.

We incurred $4.5 million of interest expense during the first quarter ended September 30, 2022, related to the $511.5 million outstanding balance on our existing credit facility (the "Revolver").

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.

Other expense, net increased to $3.6 million during the first quarter ended September 30, 2022, as compared to $1.4 million during the first quarter ended October 1, 2021.

The first quarter ended September 30, 2022 includes incremental net foreign currency translation losses of $1.4 million and litigation and settlement expenses of $0.9 million.

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.

We recorded an income tax benefit of $1.0 million and $0.4 million on a loss before income taxes of $15.4 million and $7.6 million for the first quarters ended September 30, 2022 and October 1, 2021, respectively.

During the first quarters ended September 30, 2022 and October 1, 2021, we recognized a discrete tax provision of $1.6 million and $0.7 million related to stock compensation shortfalls, respectively.

The effective tax rate for the first quarters ended September 30, 2022 and October 1, 2021 differed from the Federal statutory rate primarily due to Federal and state research and development credits, non-deductible compensation, stock compensation shortfalls and state taxes.

During the first quarter ended September 30, 2022, we released $0.5 million of reserves for unrecognized tax positions as a result of an income tax audit.

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law which contained provisions that include a 15% corporate minimum tax effective for the Company in fiscal 2024 and a 1% excise tax on stock buybacks effective January 1, 2023.

We expect the impact of these provisions to be immaterial.

The Tax Cuts and Jobs Act of 2017 requires companies to amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes.

We estimate the cash impact from this provision to be approximately $40 million in fiscal 2023.

We will continue to monitor any potential delay or repeal of this provision.

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 primary sources of liquidity come from existing cash and cash generated from operations, our Revolver, our ability to raise capital under our universal shelf registration statement and our ability to factor our receivables.

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.

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We have an unlimited amount available under the shelf registration statement.

Revolving Credit Facility

Revolving Credit Facilities

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.

As of September 30, 2022, we had $511.5 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 Nine Months Ended,

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

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

Receivables Purchase Agreement

On September 27, 2022, we entered into an uncommitted receivables purchase agreement (“RPA”) with Bank of the West, as purchaser, pursuant to which we may offer to sell certain customer receivables, subject to the terms and conditions of the RPA.

The RPA is an uncommitted arrangement such that we are not obligated to sell any receivables and Bank of the West has no obligation to purchase any receivables from us.

Pursuant to the RPA, Bank of the West may purchase certain of our customer receivables at a discounted rate, subject to a limit that as of any date, the total amount of purchased receivables held by Bank of the West, less the amount of all collections received on such receivables, may not exceed $20 million.

The RPA has an indefinite term and the agreement remains in effect until it is terminated by either party.

We did not sell any receivables during the quarter ended September 30, 2022.

As of and For the First Quarters Ended,

(In thousands) September 30, 2022 October 1, 2021

Net cash used in operating activities $ (66,039) $ (2,006)

Net cash used in investing activities $ (7,278) $ (8,614)

Net cash provided by financing activities $ 243,638 $ 163,133

Net cash provided by (used in) financing activities $ 59,937 $ (7,316)

Net decrease in cash and cash equivalents $ (13,673) $ (18,035)

Cash and cash equivalents at end of period $ 51,981 $ 95,804

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.

Our cash and cash equivalents decreased by $13.7 million from July 1, 2022 to September 30, 2022, primarily as the result of $66.0 million used in operating activities, $7.3 million invested in purchases of property and equipment, partially offset by $60.0 million of borrowings on our Revolver.

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.

During the first quarters ended September 30, 2022 and October 1, 2021, we had an outflow of $66.0 million and $2.0 million in cash from operating activities, respectively.

The decrease was primarily due to an increase in accounts receivables, including unbilled receivables and costs in excess of billings, driven by contracting delays which impacted the timing of billing events and cash conversion as well as delayed payment behavior across our customer base.

In addition, we had higher outflows for inventory as compared to the first quarter ended October 1, 2021 as we continue to accelerate raw material purchases to support customer delivery schedules and mitigate supply chain risk in future quarters, particularly in light of the long lead times for semiconductors.

Operating activities also included cash outflows for our fiscal 2022 bonus payout, restructuring and other charges associated with 1MPACT as well as acquisition costs and other related expenses related to third-party advisory fees in connection with engagements by activist investors.

These decreases were partially offset by proceeds from a cash settlement for the termination of an interest rate swap, additional deferred revenues and customer advances as well as cash paid for income taxes.

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.

During the first quarter ended September 30, 2022, we invested $7.3 million, a decrease of $1.3 million, as compared to the first quarter ended October 1, 2021.

The decrease was driven by $3.2 million less other investing activities partially offset by $2.0 million higher purchases of property and equipment as compared to the first quarter ended October 1, 2021.

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.

During the first quarter ended September 30, 2022, we borrowed $60.0 million on our Revolver and had $0.1 million of cash payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with the annual vesting of restricted stock awards, as compared to $7.3 million in the first quarter ended October 1, 2021.

The decrease in the payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with vesting of restricted stock awards is due to a change in our incentive stock plan tax withholding methods.

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:

The following is a schedule of our commitments and contractual obligations outstanding at September 30, 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 $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.

The purchase commitments covered by these agreements are for less than one year and aggregated approxi mately $150.0 million at September 30, 2022.

We have a liability at September 30, 2022 of $8.6 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.

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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.

These transactions would be treated as a use of cash in financing activities in our Consolidated Statements of Cash Flows.

O FF - BALANCE S HEET A RRANGEMENTS

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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.

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

The following table reconciles our net loss, the most directly comparable GAAP financial measure, to our adjusted EBITDA:

First Quarters Ended

(In thousands) September 30, 2022 October 1, 2021

Net loss $ (14,335) $ (7,140)

Other non-operating adjustments, net 1,797 417

Interest expense, net 4,518 586

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

Income tax benefit (1,022) (441)

Depreciation 9,127 7,756

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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 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

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

First Quarters Ended

(In thousands, except per share data) September 30, 2022 October 1, 2021

Net loss and diluted loss per share $ (14,335) $ (0.26) $ (7,140) $ (0.13)

Other non-operating adjustments, net 1,797 417

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Adjusted income and adjusted earnings per share (2)

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)

$ 13,347 $ 0.24 $ 22,560 $ 0.41

Adjusted income and adjusted earnings per share $ 76,728 $ 1.38 $ 93,754 $ 1.69

Diluted weighted-average shares outstanding 56,347 55,613

(1) Impact to income taxes is calculated by recasting income before income taxes to include the items 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.

(2) Adjusted earnings per share for the first quarter ended September 30, 2022 includes an impact of $0.01 resulting from the increase in diluted shares used relative to basic shares used in the calculation of Net loss per share.

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.

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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

The following table reconciles cash used in operating activities, the most directly comparable GAAP financial measure, to free cash flow:

First Quarters Ended

(In thousands) September 30, 2022 October 1, 2021

Net cash used in operating activities $ (66,039) $ (2,006)

Purchase of property and equipment (7,328) (5,377)

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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 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

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

Revenue April 2, 2021 As a % of

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the first quarters ended September 30, 2022 and October 1, 2021, respectively:

(In thousands) September 30, 2022 As a % of

Revenue October 1, 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 April 1, 2022.

There were no material changes in our exposure to market risk from July 1, 2022 to September 30, 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