What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2023-02-07 · 150 added, 150 removed, 244 unchanged (55% 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 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.

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 and impacts from any cyber or insider threat events, 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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Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends.

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

As of March 31, 2023, we had 2,537 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 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.

Our consolidated revenues, net income, diluted net earnings per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the third quarter ended March 31, 2023 were $263.5 million, $5.2 million, $0.09, $0.40, and $43.5 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 nine months ended March 31, 2023 were $720.6 million, $25.1 million, $(20.1) million, $(0.36), $0.89, and $110.3 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 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.

Results of operations for the third quarters ended March 31, 2023 and April 1, 2022 include full period results from the acquisitions of Atlanta Micro, Inc (“Atlanta Micro”) and Avalex Technologies, LLC.

Results of operations for the nine months ended March 31, 2023 and April 1, 2022 include only results from the acquisition date for Avalex and Atlanta Micro which were acquired on November 5, 2021 and November 29, 2021, respectively.

Accordingly, the periods presented below are not directly comparable.

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

The third quarter ended March 31, 2023 compared to the third quarter ended April 1, 2022

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) March 31, 2023 As a % of

Revenue April 1, 2022 As a % of

Net revenues $ 263,479 100.0 % $ 253,075 100.0 %

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Total operating expenses 88,335 33.6 89,799 35.5

Loss from operations (7,547) (3.3) (387) (0.2)

Income from operations 1,954 0.7 9,955 3.9

Interest income 80 — 110 —

Interest expense (6,711) (2.5) (1,664) (0.7)

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

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

Income tax benefit (2,151) (0.9) (155) (0.1)

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

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 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.

Other expense, net (613) (0.2) (2,160) (0.8)

(Loss) income before income taxes (5,290) (2.0) 6,241 2.4

Income tax (benefit) provision (10,446) (4.0) 2,102 0.8

Net income $ 5,156 2.0 % $ 4,139 1.6 %

Total revenues increased $10.4 million, or 4.1%, to $263.5 million during the third quarter ended March 31, 2023, as compared to $253.1 million during the third quarter ended April 1, 2022.

These increases were driven by the components and modules and sub-assemblies product groupings which grew $11.0 million and $2.7 million, respectively, partially offset by decreases to integrated subsystems of $3.3 million.

The increase in total revenue was primarily driven by an increase to the radar end application of $33.8 million, partially offset by decreases to electronic warfare, C4I, other end applications and other sensor and effector end applications which decreased $8.1 million, $7.1 million, $4.6 million and $3.6 million, respectively.

The increase was primarily within the land platform which grew $20.5 million, partially offset by decreases across the other and naval platforms of $7.9 million and $2.8 million, respectively, during the third quarter ended March 31, 2023.

The largest program increases were related to the LTAMDS, a secure processing program, F-16, a classified C4I program, and F-35 programs.

There were no programs comprising 10% or more of our revenues for the third quarters ended March 31, 2023 or April 1, 2022.

G ROSS M ARGIN

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.

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.

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.

Gross margin was 34.3% for the third quarter ended March 31, 2023, a decrease of 510 basis points from the 39.4% gross margin realized during the third quarter ended April 1, 2022.

The lower gross margin was primarily driven by program mix as well as product and program execution challenges.

Program mix was more heavily weighted towards development programs as compared to the prior period, which carry lower average gross margins as compared to production programs.

These programs warrant higher engineering labor for customized development, production and service activities.

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

In addition, we experienced increased costs associated with certain development programs in the final stages of execution resulting in higher than expected labor and material charges in the period.

S ELLING , G ENERAL AND A DMINISTRATIVE

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.

Selling, general and administrative expenses increased $5.3 million, or 13.7%, to $44.6 million during the third quarter ended March 31, 2023, as compared to $39.3 million in the third quarter ended April 1, 2022.

The increase was primarily related to an increase in our 401(k) matching contributions from 3% to 6%, increased stock compensation expense of $0.7 million as well as an increase in headcount and salary rate increases.

R ESEARCH AND D EVELOPMENT

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.

Research and development expenses increased $1.1 million, or 4.4%, to $26.5 million during the third quarter ended March 31, 2023, as compared to $25.4 million during the third quarter ended April 1, 2022.

The increase during the third quarter ended March 31, 2023 was primarily due to headcount as we return to normalized resource levels following a period of higher attrition in the prior year.

This increase was partially offset by increased CRAD of $4.2 million as a result of a higher mix of development programs during the third quarter ended March 31, 2023.

A MORTIZATION OF I NTANGIBLE A SSETS

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.

Amortization of intangible assets decreased $3.3 million to $12.8 million during the third quarter ended March 31, 2023, as compared to $16.1 million during the third quarter ended April 1, 2022, primarily due to the backlog from our Avalex and Atlanta Micro acquisitions being fully amortized in fiscal 2023.

R ESTRUCTURING AND O THER C HARGES

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.

During the third quarter ended March 31, 2023, we incurred $2.8 million of restructuring and other charges, as compared to $6.3 million during the third quarter ended April 1, 2022.

Restructuring and other charges during the third quarter ended March 31, 2023 includes $2.0 million related to severance costs and $0.8 million of costs related to facility optimization efforts associated with 1MPACT, including $0.5 million related to lease asset impairment.

Restructuring and other charges during the third quarter ended April 1, 2022 primarily related to 1MPACT including $5.5 million of third party consulting costs, $0.8 million of facility optimization costs and $0.1 million related to severance costs.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

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.

Acquisition costs and other related expenses were $1.6 million during the third quarter ended March 31, 2023 as compared to $2.7 million during the third quarter ended April 1, 2022.

The acquisition costs and other related expenses during the third quarter ended March 31, 2023 includes $1.3 million associated with the Board of Directors' review of strategic alternatives.

We expect to continue to incur such acquisition costs and other related expenses in the future as we continue to seek opportunities to enhance shareholder value.

I NTEREST E XPENSE

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.

We incurred $6.7 million of interest expense during the third quarter ended March 31, 2023, as compared to $1.7 million during the third quarter ended April 1, 2022.

The increase was driven by an increase in interest rate and higher average borrowings on our Revolver (the "Revolver").

As of the third quarter ended March 31, 2023, we had total borrowings of $511.5 million on our Revolver as compared to $451.5 million of total borrowings as of the third quarter ended April 1, 2022.

O THER E XPENSE, N ET

Other expense, net decreased to $0.6 million during the third quarter ended March 31, 2023, as compared to $2.2 million during the third quarter ended April 1, 2022.

The third quarter ended March 31, 2023 includes $0.6 million of financing costs, litigation and settlement expenses of $0.3 million, partially offset by net foreign currency translation gains of $0.3 million.

The third quarter ended April 1, 2022 includes $0.9 million of financing costs, net foreign currency translation losses of $0.6 million and $0.3 million of litigation and settlement expenses.

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.

We recorded an income tax (benefit) provision of $(10.4) million and $2.1 million on a (loss) income before income taxes of $(5.3) million and $6.2 million for the third quarters ended March 31, 2023 and April 1, 2022, respectively.

For the third quarter ended March 31, 2023, we calculated our U.S.

income tax benefit using the discrete method which assumes the nine month period was the annual period as this was more appropriate given the facts and circumstances.

We determined that the application of the estimated annual effective tax rate (“AETR”) method generally required by ASC 740 is impractical given that normal deviations in the projected close to break-even pre-tax net income (loss) could result in a disproportionate and unreliable effective tax rate under the AETR method.

The tax benefit for the third quarter ended March 31, 2023 also includes a true-up to the prior quarters due to the change in methodology.

During the third quarter ended March 31, 2023, we concluded the income tax audit with the Internal Revenue Service for fiscal years 2016 through 2018 and recognized a tax benefit of $1.3 million related to a release of income tax reserves for unrecognized income tax benefits.

The effective tax rate for the third quarters ended March 31, 2023 and April 1, 2022 differed from the federal statutory rate primarily due to federal and state research and development credits, non-deductible compensation and state taxes.

The effective tax rate for the third quarter ended March 31, 2023 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.

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We estimate the cash impact from this provision to be approximately $30 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

Nine months ended March 31, 2023 compared to the nine months ended April 1, 2022

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

(In thousands) March 31, 2023 As a % of

Revenue April 1, 2022 As a % of

Net revenues $ 720,646 100.0 % $ 698,468 100.0 %

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Total operating expenses 262,131 36.4 271,392 38.9

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

(Loss) income from operations (12,787) (1.8) 3,993 0.5

Interest income 329 — 124 —

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Loss before income taxes (33,718) (4.7) (4,134) (0.6)

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

Income tax (benefit) provision (13,619) (1.9) 1,506 0.2

Net loss $ (20,099) (2.8) % $ (5,640) (0.8) %

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.

Total revenues increased $22.2 million, or 3.2%, to $720.6 million during the nine months ended March 31, 2023, as compared to $698.5 million during the nine months ended April 1, 2022.

The increase in total revenue was primarily due to

additional acquired and organic revenues of $19.0 million and $3.2 million, respectively.

The increase was driven by higher demand for modules and sub-assemblies and components which increased $39.2 million and $21.5 million, respectively, and was partially offset by a decrease in integrated subsystems of $38.6 million during the nine months ended March 31, 2023.

The increase in total revenue was primarily from the radar and C4I end applications which increased $20.9 million and $17.4 million, respectively, and was partially offset by decreases of $6.7 million, $5.6 million and $3.9 million from other sensor and effector, electronic warfare and other end applications, respectively.

The increase was primarily across the land, airborne and other platforms which grew $19.4 million, $11.2 million and $3.6 million, respectively, partially offset by a decrease to the naval platform of $12.0 million during the nine months ended March 31, 2023.

The largest program increases were related to the LTAMDS, F-35, a secure processing program, F-16 and NDSA programs.

There were no programs comprising 10% or more of our revenues for the nine months ended March 31, 2023 or April 1, 2022.

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.

Gross margin was 34.6% for the nine months ended March 31, 2023, a decrease of 480 basis points from the 39.4% gross margin realized during the nine months ended April 1, 2022.

The lower gross margin was primarily driven by program mix as well as product and program execution challenges.

Program mix was more heavily weighted towards development programs as compared to the prior period, which carry lower average gross margins as compared to production programs.

These programs warrant higher engineering labor for customized development, production and service activities.

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

In addition, we experienced increased costs associated with certain development programs in the final stages of execution resulting in higher than expected labor and material charges in the period.

Program mix was also impacted by a customer funding delay on a large FMS sale.

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.

In addition, 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, which was recorded during the second quarter ended December 30, 2022.

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.

Selling, general and administrative expenses increased $15.6 million, or 13.8%, to $128.6 million during the nine months ended March 31, 2023, as compared to $113.0 million during the nine months ended April 1, 2022.

The increase was primarily related to a full period of the Avalex and Atlanta Micro acquisitions driving an incremental $1.9 million of expense, an increase in our 401(k) matching contributions from 3% to 6%, increased stock compensation expense of $0.3 million as well as an increase in headcount and salary rate increases.

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.

Research and development expenses decreased $1.4 million, or 1.7%, to $81.2 million during the nine months ended March 31, 2023, as compared to $82.6 million during the nine months ended April 1, 2022.

The decrease was primarily related to lower headcount as well as incremental CRAD of $9.4 million, partially offset by an increase in our 401(k) matching contributions from 3% to 6% during the nine months ended March 31, 2023.

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.

Restructuring and other charges were $6.4 million during the nine months ended March 31, 2023, as compared to $22.4 million during the nine months ended April 1, 2022.

Restructuring and other charges during the nine months ended March 31, 2023 primarily related to 1MPACT including $2.8 million of severance costs, $1.8 million of third party consulting costs, $1.8 million of costs for facility optimization efforts, including $1.3 million related to lease asset impairment.

Restructuring and other charges during the nine months ended April 1, 2022 primarily related to $14.1 million of third party consulting costs associated with 1MPACT and $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.

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.

Acquisition costs and other related expenses were $5.0 million during the nine months ended March 31, 2023, as compared to $7.5 million during the nine months ended April 1, 2022.

The acquisition costs and other related expenses we incurred during the nine months ended March 31, 2023 were primarily related to $2.5 million for third party advisory fees in connection with engagements by activist investors and $1.3 million associated with the Board of Directors' review of strategic alternatives.

Acquisition costs 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.

expect to continue to incur such acquisition costs and other related expenses in the future as we continue to seek opportunities 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.

We incurred $17.8 million of interest expense during the nine months ended March 31, 2023, as compared to $3.4 million during the nine months ended April 1, 2022.

The increase was driven by an increase in interest rate and additional borrowings on our Revolver as compared to the nine months ended April 1, 2022.

As of the nine months ended March 31, 2023, we had total borrowings of $511.5 million on our Revolver as compared to $451.5 million of total borrowings as of the nine months ended April 1, 2022.

O THER E XPENSE , N ET

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.

Other expense, net decreased $1.5 million to $3.4 million during the nine months ended March 31, 2023 as compared to $4.9 million during the nine months ended April 1, 2022.

There was $1.7 million of both financing costs and litigation and settlement costs, respectively, during the nine months ended March 31, 2023.

There was $2.1 million of financing costs, $1.3 million of net foreign currency translation losses and $1.2 million of litigation and settlement expenses during the nine months ended April 1, 2022.

I NCOME T AXES

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 recorded an income tax (benefit) provision of $(13.6) million and $1.5 million on a loss before income taxes of $33.7 million and $4.1 million for the nine months ended March 31, 2023 and April 1, 2022, respectively.

For the nine months ended March 31, 2023, we calculated our U.S.

income tax benefit using the discrete method which assumes the nine month period was the annual period as this was more appropriate given the facts and circumstances.

The tax benefit for the third quarter ended March 31, 2023 also includes a true-up to the prior quarters due to the change in methodology.

During the nine months ended March 31, 2023, we concluded our income tax audit with the Internal revenue service for fiscal years 2016 through 2018 and recognized a tax benefit of $3.7 million related to a release of income tax reserves for unrecognized income tax benefits.

During the nine months ended March 31, 2023 and April 1, 2022, 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 nine months ended March 31, 2023 and April 1, 2022 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 nine months ended March 31, 2023 also differed from the federal statutory rate due to the release of income tax reserves for unrecognized income tax benefits.

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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.

We estimate the cash outflow from this provision to be approximately $30 million in fiscal 2023.

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

As of March 31, 2023, we had a total of approximately $1.0 billion available to us on the Revolver, less outstanding borrowings of $511.5 million.

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

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

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

On March 14, 2023, we amended the RPA to increase the capacity from $20.0 million to $30.6 million.

We factored accounts receivable and incurred factoring fees of approximately $24.5 million and $0.3 million, respectively, for the nine months ended March 31, 2023.

We did not factor any accounts receivable or incur any factoring fees for the nine months ended April 1, 2022.

As of and For the Nine Months Ended,

(In thousands) March 31, 2023 April 1, 2022

Net cash (used in) provided by operating activities $ (33,864) $ 566

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Net cash provided by financing activities $ 62,330 $ 243,638

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

Net decrease in cash and cash equivalents $ (1,213) $ (22,145)

Cash and cash equivalents at end of period $ 64,441 $ 91,694

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.

Our cash and cash equivalents decreased by $1.2 million from July 1, 2022 to March 31, 2023, primarily as the result of $33.9 million used in operating activities and $30.0 million invested in purchases of property and equipment, partially offset by $60.0 million of net borrowings on our Revolver and $2.4 million of proceeds from employee stock plans.

Operating Activities

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.

During the nine months ended March 31, 2023, we had an outflow of $33.9 million in cash from operating activities compared to $0.6 million generated in cash from operating activities during the nine months ended April 1, 2022.

The decrease was primarily due to higher outflows for inventory to support customer delivery schedules for existing and future awards.

During the quarter, we experienced some stabilization of the supply chain with more timely receipts of material resulting in higher than expected outflows for inventory.

The decrease was also driven by higher unbilled receivables and costs in excess of billings as a result of development program execution delays as well as certain long lead materials required to progress programs to the next billing milestone.

These decreases were partially offset by additional deferred revenues and customer advances.

Cash paid for interest and income taxes during the nine months ended March 31, 2023 also increased by $16.3 million and $6.9 million, respectively, as compared to the nine months ended April 1, 2022 further contributing to the decrease.

Investing Activities

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.

During the nine months ended March 31, 2023, we invested $29.8 million, a decrease of $236.1 million, as compared to $265.9 million during the nine months ended April 1, 2022 primarily driven by the acquisitions of Avalex and Atlanta Micro.

The decrease was also driven by $3.4 million less other investing activities, partially offset by $10.5 million higher purchases of property and equipment as compared to the nine months ended April 1, 2022.

Financing Activities

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.

During the nine months ended March 31, 2023, we had $60.0 million of net borrowings on our Revolver as compared to $251.5 million of net borrowings during the nine months ended April 1, 2022.

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 December 30, 2022:

The following is a schedule of our commitments and contractual obligations outstanding at March 31, 2023:

(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 $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.

The purchase commitments covered by these agreements are for less than one year and aggregated approxi mately $142.7 million at March 31, 2023.

We have a liability at March 31, 2023 of $4.9 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 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, the most directly comparable GAAP financial measure, to our adjusted EBITDA:

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)

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

Third Quarters Ended Nine Months Ended

(In thousands) March 31, 2023 April 1, 2022 March 31, 2023 April 1, 2022

Net income (loss) $ 5,156 $ 4,139 $ (20,099) $ (5,640)

Other non-operating adjustments, net (337) 938 (3) 1,581

Interest expense, net 6,631 1,554 17,519 3,229

Income tax benefit (2,151) (155) (3,173) (596)

Income tax (benefit) provision (10,446) 2,102 (13,619) 1,506

Depreciation 11,084 8,388 33,908 24,208

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We expect to continue to incur expenses similar to the adjusted income and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring.

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

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)

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) March 31, 2023 April 1, 2022

Net income and earnings per share $ 5,156 $ 0.09 $ 4,139 $ 0.07

Other non-operating adjustments, net (337) 938

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Adjusted income and adjusted earnings per share $ 22,555 $ 0.40 $ 32,204 $ 0.57

$ 14,742 $ 0.26 $ 21,964 $ 0.39

Diluted weighted-average shares outstanding 56,896 56,027

(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 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

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

The Company continues to calculate the adjusted income tax provision using the AETR method.

Nine Months Ended

(In thousands, except per share data) March 31, 2023 April 1, 2022

Net loss and loss per share $ (20,099) $ (0.36) $ (5,640) $ (0.10)

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

The Company continues to calculate the adjusted income tax provision using the AETR method.

(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.

There was no impact to the calculation of adjusted earnings per share as a result of this for the nine months ended March 31, 2023 and April 1, 2022, 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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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 used in operating activities, the most directly comparable GAAP financial measure, to free cash flow:

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

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

Third Quarters Ended Nine Months Ended

(In thousands) March 31, 2023 April 1, 2022 March 31, 2023 April 1, 2022

Net cash (used in) provided by operating activities $ (3,217) $ (4,252) $ (33,864) $ 566

Purchase of property and equipment (9,446) (6,072) (29,950) (19,476)

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

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the second quarters 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

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the third quarters and nine months ended March 31, 2023 and April 1, 2022, respectively:

(In thousands) March 31, 2023 As a % of

Revenue April 1, 2022 As a % of

Revenue $ Change % Change

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Total revenues $ 263,479 100 % $ 253,075 100 % $ 10,404 4 %

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

Revenue December 31, 2021 As a % of

(In thousands) March 31, 2023 As a % of

Revenue April 1, 2022 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 1, 2022 to December 30, 2022.

There were no material changes in our exposure to market risk from July 1, 2022 to March 31, 2023.

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