What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-07 compared with 2022-11-08 · 189 added, 78 removed, 205 unchanged (57% of the section changed)

6 unchanged sentences

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, 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.

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 or manufacturing execution issues, the impact of the COVID pandemic and supply chain disruption, inflation and labor shortages, among other things, on program execution and the resulting effect on customer satisfaction, 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, which difficulties may be enhanced by our announced strategic review initiative, including a potential sale of the Company, unanticipated challenges with the transition of the Company's Chief Financial Officer role, 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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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.

Our Processing Platform includes 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, including those specific to the aerospace and defense community.

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.

21 unchanged sentences

Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends.

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

As of December 30, 2022, we had 2,486 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.

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We believe that these values will help our employees realize their full potentials at work to provide Innovation That Matters®.

Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the 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.

Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the second quarter ended December 30, 2022 were $229.6 million, $13.3 million, $(10.9) million, $(0.19), $0.26, and $35.7 million, respectively.

Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the six months ended December 30, 2022 were $457.2 million, $25.1 million, $(25.3) million, $(0.45), $0.50, and $66.9 million.

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

RESULTS OF OPERATIONS:

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.

Results of operations for the second quarter and six months ended December 30, 2022 includes full period results from the acquisitions of Atlanta Micro, Inc (“Atlanta Micro”) and Avalex Technologies, LLC.

Results of operations for the second quarter and six months ended December 31, 2021 include only results from the acquisition dates for Atlanta Micro and Avalex.

Accordingly, the periods presented below are not directly comparable.

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

The second quarter ended December 30, 2022 compared to the second quarter ended December 31, 2021

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

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

Revenue December 31, 2021 As a % of

Net revenues $ 229,588 100.0 % $ 220,380 100.0 %

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Interest expense (6,590) (2.9) (1,094) (0.5)

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

Other income (expense), net 846 0.4 (1,318) (0.6)

Loss before income taxes (13,071) (5.7) (2,794) (1.3)

1 unchanged sentence

Net loss $ (10,920) (4.8) % $ (2,639) (1.2) %

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).

Total revenues increased $9.2 million, or 4.2%, to $229.6 million during the second quarter ended December 30, 2022, as compared to $220.4 million during the second quarter ended December 31, 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.

The increase in total revenue was primarily due to an additional $7.2 million of acquired revenues from the Atlanta Micro and Avalex businesses and an additional $2.0 million of organic revenues.

These increases were driven by modules and sub-assemblies and components product groupings which increased $15.6 million and $13.7 million, respectively, partially offset by decreases to integrated subsystems of $20.1 million.

The increase in total revenue was primarily from C4I, other sensor and effector and electronic warfare end applications which increased $12.8 million, $7.2 million and $1.3 million, respectively, partially offset by decreases to radar end applications and other end applications of $7.5 million and $4.6 million, respectively.

The increase was primarily across the airborne and other platforms which grew $9.0 million and $2.5 million, respectively, partially offset by a decrease to the naval platform of $3.0 million during the second quarter ended December 30, 2022.

The largest program increases were related to the F-35, NDSA Tranche Tracking Layer, F-16, and LTAMDS programs.

There were no programs comprising 10% or more of our revenues for the second quarters ended December 30, 2022 or December 31, 2021.

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

G ROSS M ARGIN

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.

Gross margin was 35.3% for the second quarter ended December 30, 2022, a decrease of 430 basis points from the 39.6% gross margin realized during the second quarter ended December 31, 2021.

The lower gross margin was primarily driven by program mix, incremental depreciation expense.

Program mix was heavily impacted by a customer funding delay on a large FMS sale as well as a higher proportion of lower-margin development programs.

These programs generally include higher engineering content evidenced by an increase of $1.9 million in Customer Funded Research and Development (“CRAD”) compared to the second quarter ended December 31, 2021.

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

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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.

Incremental depreciation expense of $2.5 million was recorded in the second quarter ended December 30, 2022.

In connection with our 1MPACT facility optimization efforts, we are exiting certain facilities prior to contractual lease terms and consolidating operations across other existing sites.

As part of our assessment of future benefits of certain long-lived assets, we identified an immaterial correction of an error in the useful lives assigned to certain leasehold improvements resulting in a cumulative adjustment to depreciation expense.

S ELLING , G ENERAL AND A DMINISTRATIVE

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.

Selling, general and administrative expenses increased $8.3 million, or 22.4%, to $45.1 million during the second quarter ended December 30, 2022, as compared to $36.8 million in the second quarter ended December 31, 2021.

The increase was primarily related to increased stock compensation expense of $3.0 million related to share-based matching contributions as well as changes to our performance factors associated with performance-based restricted stock awards.

The increase was also driven by additional compensation costs and depreciation expense of $2.0 million and $1.9 million, respectively.

Full quarter results from our Avalex and Atlanta Micro acquisitions also contributed to the increase, driving $0.4 million of incremental expense.

R ESEARCH AND D EVELOPMENT

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.

Research and development expenses decreased $1.4 million, or 5.0%, to $26.9 million during the second quarter ended December 30, 2022, as compared to $28.3 million during the second quarter ended December 31, 2021.

The decrease was primarily related to an incremental $1.9 million of CRAD, partially offset by $0.7 million of incremental expense from our recent acquisitions of Avalex and Atlanta Micro during the second quarter ended December 30, 2022.

A MORTIZATION OF I NTANGIBLE A SSETS

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.

Amortization of intangible assets decreased $2.5 million to $13.5 million during the second quarter ended December 30, 2022, as compared to $16.0 million during the second quarter ended December 31, 2021, primarily due to the backlog from our Physical Optics Corporation ("POC") acquisition being fully amortized in fiscal 2022, partially offset by the amortization over intangible assets associated with the acquisitions of Avalex and Atlanta Micro.

R ESTRUCTURING AND O THER C HARGES

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.

During the second quarter ended December 30, 2022, the Company incurred $2.1 million of restructuring and other charges, as compared to $3.8 million during the second quarter ended December 31, 2021.

Restructuring and other charges includes $1.0 million of costs related to facility optimization efforts associated with 1MPACT, including $0.8 million related to lease asset impairment, as well as $0.6 million related to severance costs and the remaining $0.4 million related to third-party consulting costs associated with 1MPACT.

During the second quarter ended December 31, 2021, 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 $2.5 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.

Acquisition costs and other related expenses were $0.9 million during the second quarter ended December 30, 2022 as compared to $2.7 million during the second quarter ended December 31, 2021.

The acquisition costs and other related expenses during the second quarter ended December 30, 2022 were primarily related to $0.6 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.

Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.

We also expect to incur costs related to the Board of Directors' review of strategic alternatives to enhance shareholder value.

I NTEREST E XPENSE

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").

We incurred $6.6 million of interest expense during the second quarter ended December 30, 2022, related to the $511.5 million outstanding balance on our existing credit facility (the "Revolver") as compared to $1.1 million during the second quarter ended December 31, 2021 as a result of $451.5 million of total borrowings on our Revolver.

The increase in interest expense was primarily related to the timing and duration of borrowings on our Revolver.

O THER I NCOME ( E XPENSE), N ET

Other income (expense), net increased to $0.8 million during the second quarter ended December 30, 2022, as compared to $(1.3) million during the second quarter ended December 31, 2021.

The second quarter ended December 30, 2022 includes net foreign currency translation gains of $1.3 million, as compared to net foreign currency translation losses of $0.2 million during the second quarter ended December 31, 2021, and lower litigation and settlement expenses of $0.4 million, partially offset by an incremental $0.4 million of loss on disposal of fixed assets.

I NCOME T AXES

We recorded an income tax benefit of $2.2 million and $0.2 million on a loss before income taxes of $13.1 million and $2.8 million for the second quarters ended December 30, 2022 and December 31, 2021, respectively.

During the second quarter ended December 30, 2022, we recognized a tax benefit of $2.3 million related to a release of income tax reserves for unrecognized income tax benefits due to the expiration of the statute of limitations.

The effective tax rate for the second quarters ended December 30, 2022 and December 31, 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.

The effective tax rate for the second quarter ended December 30, 2022 also differed from the federal statutory rate due to the release for previously unrecognized income tax benefits.

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 taxable years beginning after December 31, 2022 and a 1% excise tax on certain stock buybacks after December 31, 2022.

We expect the impact of this legislation to be immaterial.

Effective for tax years beginning after December 31, 2021, the Tax Cuts and Jobs Act of 2017 requires companies to capitalize and 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 $36 million in fiscal 2023.

Six months ended December 30, 2022 compared to the six months ended December 31, 2021

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

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

Revenue December 31, 2021 As a % of

Net revenues $ 457,167 100.0 % $ 445,393 100.0 %

Cost of revenues 298,112 65.2 269,762 60.6

Gross margin 159,055 34.8 175,631 39.4

Operating expenses:

Selling, general and administrative 84,000 18.4 73,766 16.5

Research and development 54,672 12.0 57,217 12.8

Amortization of intangible assets 28,110 6.1 29,736 6.7

Restructuring and other charges 3,577 0.8 16,076 3.6

Acquisition costs and other related expenses 3,437 0.8 4,798 1.1

Total operating expenses 173,796 38.1 181,593 40.7

Loss from operations (14,741) (3.3) (5,962) (1.3)

Interest income 249 0.1 14 —

Interest expense (11,137) (2.4) (1,689) (0.4)

Other expense, net (2,799) (0.6) (2,738) (0.6)

Loss before income taxes (28,428) (6.2) (10,375) (2.3)

Income tax benefit (3,173) (0.7) (596) (0.1)

Net loss $ (25,255) (5.5) % $ (9,779) (2.2) %

Total revenues increased $11.8 million, or 2.6%, to $457.2 million during the six months ended December 30, 2022, as compared to $445.4 million during the six months ended December 31, 2021.

The increase in total revenue was primarily due to an additional $19.0 million of acquired revenues, partially offset by $7.3 million less organic revenues.

The increase was driven by higher demand for modules and sub-assemblies and components which increased $36.5 million and $10.5 million, respectively, and were partially offset by decreases in integrated subsystems of $35.3 million during the six months ended December 30, 2022.

The increase in total revenue was primarily from the C4I and electronic warfare end applications which increased $24.5 million and $2.5 million, respectively, and were partially offset by decreases of $13.0 million and $3.1 million from radar and other sensor and effector end applications, respectively.

The increase was primarily across the other and airborne platforms which grew $11.5 million and $10.7 million, respectively, partially offset by a decrease to the naval and land platforms which decreased $9.3 million and $1.2 million, respectively, during the six months ended December 30, 2022.

The largest program increases were related to the LTAMDS, F-35, F-16 and NDSA Tranche Tracking Layer programs.

There were no programs comprising 10% or more of our revenues for the six months ended December 30, 2022 or December 31, 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 34.8% for the six months ended December 30, 2022, a decrease of 460 basis points from the 39.4% gross margin realized during the six months ended December 31, 2021.

The lower gross margin was primarily driven by program mix, incremental depreciation expense.

Program mix was heavily impacted by a customer funding delay on a large FMS sale as well as a higher proportion of lower-margin development programs.

These programs generally include higher engineering content evidenced by an increase of $5.2 million in CRAD compared to six months ended December 31, 2021.

Incremental depreciation expense of $2.5 million was recorded in the six months ended December 30, 2022.

In connection with our 1MPACT facility optimization efforts, we are exiting certain facilities prior to contractual lease terms and consolidating operations across other existing sites.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses increased $10.2 million, or 13.9%, to $84.0 million during the six months ended December 30, 2022, as compared to $73.8 million during the six months ended December 31, 2021.

The increase was primarily related to a full period of the Avalex and Atlanta Micro acquisitions driving an incremental $1.9 million of expense during the six months ended December 30, 2022.

There was also $1.6 million of additional employee related stock compensation as well as changes to our performance factors associated with performance-based restricted stock awards during the six months ended December 30, 2022.

R ESEARCH AND D EVELOPMENT

Research and development expenses decreased $2.5 million, or 4.4%, to $54.7 million during the six months ended December 30, 2022, as compared to $57.2 million during the six months ended December 31, 2021.

The decrease was primarily related to incremental CRAD of $5.2 million, partially offset by $2.0 million of incremental expense from our recent acquisitions of Avalex and Atlanta Micro during the six months ended December 30, 2022.

R ESTRUCTURING A ND O THER C HARGES

Restructuring and other charges were $3.6 million during the six months ended December 30, 2022, as compared to $16.1 million during the six months ended December 31, 2021.

Restructuring and other charges during the six months ended December 30, 2022 primarily related to 1MPACT including $1.7 million of third-party consulting costs, $1.0 million of costs for facility optimization efforts, including $0.8 million related to lease asset impairment, as well as $0.8 million of severance costs associated with the elimination of approximately 10 positions.

Restructuring and other charges during the six months ended December 31, 2021 includes $8.7 million of third-party consulting costs associated with 1MPACT and $7.4 million of severance costs associated with the elimination of approximately 100 positions based on changes in the business environment and alignment with internal organization changes completed under 1MPACT.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

Acquisition costs and other related expenses were $3.4 million during the six months ended December 30, 2022, as compared to $4.8 million during the six months ended December 31, 2021.

The acquisition costs and other related expenses we incurred during the six months ended December 30, 2022 were primarily related to $2.5 million for third-party advisory fees in connection with engagements by activist investors and other acquisition related costs.

Acquisition costs during the six months ended December 31, 2021 were primarily related to the acquisitions of Avalex and Atlanta Micro.

Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.

We also expect to incur costs related to the Board of Directors' review of strategic alternatives to enhance shareholder value.

I NTEREST E XPENSE

We incurred $11.1 million of interest expense during the six months ended December 30, 2022, as compared to $1.7 million during the six months ended December 31, 2021.

The increase was driven by additional borrowings on our Revolver as well as an increase in interest rate as compared to the six months ended December 31, 2021.

O THER E XPENSE , N ET

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.

Other expense, net remained consistent during the six months ended December 30, 2022 and December 31, 2021.

There was $1.2 million of net foreign currency translation gains, partially offset by $0.6 million of litigation and settlement expenses and $0.3 million of amortization of a previous unrealized gain during the six months ended December 30, 2022.

There was $0.9 million of litigation and settlement expenses and $0.7 million of net foreign currency translation losses during the six months ended December 31, 2021.

Both the six months ended December 30, 2022 and December 31, 2021 include $1.2 million of financing costs.

I NCOME T AXES

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 recorded an income tax benefit of $3.2 million and $0.6 million on a loss before income taxes of $28.4 million and $10.4 million for the six months ended December 30, 2022 and December 31, 2021, respectively.

During the six months ended December 30, 2022, we recognized a tax benefit of $2.3 million related to a release of income tax reserves for unrecognized income tax benefits due to the expiration of the statute of limitations.

During the six months ended December 30, 2022 and December 31, 2021, we recognized a tax provision of $1.7 million and $0.9 million related to stock compensation shortfalls, respectively.

The effective tax rate for the six months ended December 30, 2022 and December 31, 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.

The effective tax rate for the six months ended December 30, 2022 also differed from the federal statutory rate due to the release of income tax reserves for previously unrecognized income tax benefits.

We expect the impact of this legislation to be immaterial.

We estimate the cash impact from this provision to be approximately $36 million in fiscal 2023.

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

L IQUIDITY AND C APITAL R ESOURCES

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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.

We also expect to incur costs related to the Board of Directors' review of strategic alternatives to enhance shareholder value.

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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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 September 30, 2022, we had $511.5 million of outstanding borrowings on the Revolver.

As of December 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.

4 unchanged sentences

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)

We factored accounts receivable and incurred factoring fees of approximately $20.0 million and $0.1 million, respectively, for the six months ended December 30, 2022.

We did not factor any accounts receivable or incur any factoring fees for the six months ended December 31, 2021.

As of and For the Six Months Ended,

(In thousands) December 30, 2022 December 31, 2021

Net cash (used in) provided by operating activities $ (30,647) $ 4,818

Net cash used in investing activities $ (20,402) $ (259,890)

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

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

Net cash provided by financing activities $ 62,330 $ 246,517

Net increase (decrease) in cash and cash equivalents $ 11,290 $ (8,670)

Cash and cash equivalents at end of period $ 76,944 $ 105,169

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.

Our cash and cash equivalents increased by $11.3 million from July 1, 2022 to December 30, 2022, primarily as the result of $60.0 million of net borrowings on our Revolver and $2.4 million of proceeds from employee stock plans.

These increases were partially offset by $30.6 million used in operating activities and $20.5 million invested in purchases of property and equipment.

Operating Activities

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.

During the six months ended December 30, 2022, we had an outflow of $30.6 million in cash from operating activities and we generated $4.8 million in cash from operating activities during the six months ended December 31, 2021.

The decrease was primarily due to higher outflows for inventory 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.

The decrease was also driven by net changes in benefit for deferred income taxes, prepaid income taxes and income taxes payable, as well as increases in accounts receivables, including unbilled receivables and costs in excess of billings, driven by contracting as well as supplier delays which impacted the timing of billing events and cash conversion.

Higher outflows of accounts payable, accrued expenses and accrued compensation also contributed to the decrease.

These decreases were partially offset by additional deferred revenues and customer advances as well as cash paid for income taxes.

Investing Activities

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.

During the six months ended December 30, 2022, we invested $20.4 million, a decrease of $239.5 million, as compared to the six months ended December 31, 2021 primarily driven by the acquisitions of Avalex and Atlanta Micro.

The decrease was also driven by $3.3 million less other investing activities partially offset by $7.1 million higher purchases of property and equipment as compared to the second quarter ended December 31, 2021.

Financing Activities

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.

During the six months ended December 30, 2022, we had $60.0 million of net borrowings on our Revolver as compared to $251.5 million of net borrowings during the six months ended December 31, 2021.

We also 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 $7.5 million in the second quarter ended December 31, 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 September 30, 2022:

The following is a schedule of our commitments and contractual obligations outstanding at December 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 $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.

The purchase commitments covered by these agreements are for less than one year and aggregated approxi mately $142.9 million at December 30, 2022.

We have a liability at December 30, 2022 of $6.2 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.

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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

Second Quarters Ended Six Months Ended

(In thousands) December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Net loss $ (10,920) $ (2,639) $ (25,255) $ (9,779)

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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)

Second Quarters Ended

(In thousands, except per share data) December 30, 2022 December 31, 2021

Net loss and loss per share $ (10,920) $ (0.19) $ (2,639) $ (0.05)

Other non-operating adjustments, net (1,463) 226

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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.

(2) Adjusted earnings per share is calculated using diluted shares whereas Net loss is calculated using basic shares.

There was no impact to the calculation of adjusted earnings per share as a result of this for the six months ended December 30, 2022 and December 31, 2021, respectively.

Six Months Ended

(In thousands, except per share data) December 30, 2022 December 31, 2021

Net loss and loss per share $ (25,255) $ (0.45) $ (9,779) $ (0.18)

Other non-operating adjustments, net 334 643

Amortization of intangible assets 28,110 29,736

Restructuring and other charges 3,577 16,076

Impairment of long-lived assets — —

Acquisition and financing costs 4,173 5,748

Fair value adjustments from purchase accounting 1 (1,731)

Litigation and settlement expense, net 1,375 882

COVID related expenses 61 457

Stock-based and other non-cash compensation expense 23,943 17,465

Impact to income taxes (1)

(8,230) (14,973)

Adjusted income and adjusted earnings per share (2)

$ 28,089 $ 0.50 $ 44,524 $ 0.80

Diluted weighted-average shares outstanding 56,445 55,653

(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 recalculation also adjusts for any discrete tax expense or benefit related to the items.

(2) Adjusted earnings per share is calculated using diluted shares whereas Net loss is calculated using basic shares.

There was no impact to the calculation of adjusted earnings per share as a result of this for the six months ended December 30, 2022 and December 31, 2021, respectively.

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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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)

Second Quarters Ended Six Months Ended

(In thousands) December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Net cash provided by (used in) operating activities $ 35,392 $ 6,824 $ (30,647) $ 4,818

Purchase of property and equipment (13,176) (8,027) (20,504) (13,404)

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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 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

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the second quarters and six months ended December 30, 2022 and December 31, 2021, respectively:

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

Revenue December 31, 2021 As a % of

Revenue $ Change % Change

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Total revenues $ 229,588 100 % $ 220,380 100 % $ 9,208 4 %

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

Revenue December 31, 2021 As a % of

Revenue $ Change % Change

Organic revenue $ 432,099 95 % $ 439,349 99 % $ (7,250) (2) %

Acquired revenue 25,068 5 % 6,044 1 % 19,024 100 %

Total revenues $ 457,167 100 % $ 445,393 100 % $ 11,774 3 %

R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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