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Item 7. Management’s Discussion and Analysis

2023-08-15 compared with 2022-08-16 · 161 added, 139 removed, 299 unchanged (50% of the section changed)

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From time to time, information provided, statements made by our employees or information included in our filings with the Securities and Exchange Commission (“SEC”) may contain statements that are not historical facts but that are “forward-looking statements,” which involve risks and uncertainties.

You can identify these statements by the use of the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions.

You can identify these statements by the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.

Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of epidemics and pandemics such as COVID, effects of any U.S.

Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, inflation, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in the U.S.

Government’s interpretation of, federal export control or procurement rules and regulations, changes in, or in the interpretation or enforcement of environmental rules and regulations, market acceptance of the Company's products, shortages in or delays in receiving components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions, restructurings and value creation initiatives such as 1MPACT, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, effects of shareholder activism, increases in interest rates, changes to industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to interest rate swaps or other cash flow hedging arrangements, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control.

federal government shutdown or extended continuing resolution, effects of geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in or cost increases related to completing development, 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 quality issues or manufacturing execution issues, failure to achieve or maintain manufacturing quality certifications, such as AS9100, 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 execution excellence initiatives 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 impacted by the termination of the Company’s announced strategic review initiative, unanticipated challenges with the transition of the Company’s Chief Executive Officer and Chief Financial Officer roles, including any dispute arising with the former CEO over his resignation, 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 this Annual Report on Form 10-K.

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Mercury Systems, Inc.

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

is a technology company that delivers processing power for the most demanding aerospace and defense missions.

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

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

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

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

Our innovative solutions are mission-ready, trusted and secure, software-defined and open and modular meeting our customers’ cost and schedule needs today by allowing them to use or modify our products to suit their mission.

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

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

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

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

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

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

Mercury has built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that it believes meets and exceeds the performance needs of our defense and commercial customers.

Mercury has built a trusted, robust portfolio of proven product solutions, leveraging the most advanced commercial silicon technologies and purpose-built to exceed the performance needs of our defense and commercial customers.

Customers add their own applications and algorithms to our specialized, secure and innovative products and pre-integrated solutions.

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Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers.

Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications.

Our long-standing deep relationships with leading high-tech and other commercial companies, coupled with our high level of research and development (“R&D”) investments on a percentage basis and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model.

We are leading the development and adaptation of commercial technology for aerospace and defense solutions.

From chip-scale to system scale and from data, including radio

frequency (“RF”) to digital to decision, we make mission-critical technologies safe, secure, affordable and relevant for our customers.

From chip-scale to system scale and from data, including radio frequency (“RF”) to digital to decision, we make mission-critical technologies safe, secure, affordable and relevant for our customers.

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

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

As of July 1, 2022, we had 2,386 employees.

Our consolidated revenues, acquired revenues, net income, diluted EPS, adjusted EPS and adjusted EBITDA for fiscal 2022 were $988.2 million, $117.8 million, $11.3 million, $0.20, $2.19 and $200.5 million, respectively.

Our consolidated revenues, acquired revenues, net income, diluted EPS, adjusted EPS and adjusted EBITDA for fiscal 2021 were $924.0 million, $3.4 million, $62.0 million, $1.12, $2.42 and $201.9 million, respectively.

As of June 30, 2023, we had 2,596 employees.

Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted EPS, and adjusted EBITDA for fiscal 2023 were $973.9 million, $25.1 million, $(28.3) million, $(0.50), $1.00 and $132.3 million, respectively.

Our consolidated revenues, acquired revenues, net income, EPS, adjusted EPS and adjusted EBITDA for fiscal 2022 were $988.2 million, $6.0 million, $11.3 million, $0.20, $2.19 and $200.5 million, respectively.

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

OUR RESPONSE TO COVID

We continue to monitor the COVID pandemic and adapt our policies and programs as needed to protect the health, safety and livelihoods of our people.

In September 2021, the White House announced that certain contractors would need to create COVID-19 vaccination programs for their employees in order to work on certain U.S.

government contracts.

We announced our COVID-19 U.S.

Vaccination Policy in October 2021 to comply with these federal requirements.

In November and December 2021, federal judges temporarily blocked the government from enforcing their vaccine mandate while lawsuits were being resolved.

We suspended our vaccine policy pending the resolutions of these lawsuits, similar to other contractors in the aerospace and defense industry.

On August 3, 2021, we announced a companywide effort, called 1MPACT, to lay the foundation for the next phase of the Company’s value creation at scale.

The goal of 1MPACT is to achieve our full growth, margin expansion and adjusted EBITDA potential over the next five years.

Since fiscal year 2014, we have completed 15 acquisitions, deploying $1.4 billion of capital and, as a result, dramatically scaled and transformed the business.

Over this time, we have extracted substantial revenue and cost synergies from each of these individual acquisitions.

As we approach the milestone of $1 billion of revenue, we have identified significant opportunity to realize further scale through consolidating and streamlining our internal organizational structure which will improve visibility, speed of decision making and accountability.

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

organizational efficiency and scalability;

procurement and supply chain;

facilities optimization;

R&D investment;

and scalable common processes and systems.

B USINESS D EVELOPMENTS :

Beginning in January 2023, the Board of Directors (the “Board”) engaged in a proactive and rigorous process to evaluate strategic alternatives, focused on a potential sale of Mercury.

As part of the review, the Board authorized its financial advisors to contact and hold discussions with more than 40 potential bidders, including a wide range of strategic parties and financial sponsors.

The Board executed confidentiality agreements with 20 parties.

The two proposals ultimately received did not yield options for a sale that would reflect the intrinsic value of Mercury.

Accordingly, in a press release dated June 23, 2023, we announced, among other things, that the independent members of the Board unanimously determined to conclude the sale process and instead focus on all potential opportunities to create value, including through the enhanced execution of our strategic plan under refreshed leadership.

On June 19, 2023, the Company’s former President and Chief Executive Officer, delivered a letter to the Board resigning from his positions of President and Chief Executive Officer and the Board has accepted his resignation effective as of June 24, 2023.

On June 23, 2023, we announced the Board has appointed William L.

Ballhaus as the Company’s interim President and Chief Executive Officer, effective as of June 24, 2023.

On June 29, 2023, we announced that David E.

Farnsworth will be joining the Company as Executive Vice President, Chief Financial Officer, and Treasurer, on July 17, 2023.

On July 18, 2023, we executed the planned evolution of our 1MPACT value creation initiative, embedding the processes and execution of 1MPACT into our Execution Excellence organization.

The 1MPACT office in its current form has concluded its responsibilities, having successfully incorporated the principles behind 1MPACT into how we think about continuous improvement at all levels of the Company.

On August 15, 2023, we announced William L.

Ballhaus has been appointed President and Chief Executive Officer.

On February 28, 2022, we amended our existing revolving credit facility (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 July 1, 2022, there was $451.5 million of outstanding borrowings on the Revolver.

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

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(“Atlanta Micro”) for a purchase price of $90.0 million, subject to net working capital and net debt adjustments.

Based in Norcross, Georgia, Atlanta Micro is a leading designer and manufacturer of high-performance RF modules and components, including advanced monolithic microwave integrated circuits

("MMICs") which are critical for high-speed data acquisition applications including electronic warfare, radar and weapons.

Based in Norcross, Georgia, Atlanta Micro is a leading designer and manufacturer of high-performance RF modules and components, including advanced monolithic microwave integrated circuits which are critical for high-speed data acquisition applications including electronic warfare, radar and weapons.

We funded the acquisition through our Revolver.

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We funded the acquisition with our Revolver.

On May 27, 2021, we acquired Pentek Technologies, LLC and Pentek Systems, Inc.

(collectively, "Pentek") for a purchase price of $65.0 million, subject to net working capital and net debt adjustments.

Based in Upper Saddle River, New Jersey, Pentek is a leading designer and manufacturer of ruggedized, high-performance, commercial off-the-shelf ("COTS") software-defined radio and data acquisition boards, recording systems and subsystems for high-end commercial and defense applications.

The acquisition and associated transaction expenses were funded through a combination of cash on hand and our Revolver.

On December 30, 2020, we acquired Physical Optics Corporation ("POC") for a purchase price of $310.0 million, prior to net working capital and net debt adjustments.

Based in Torrance, California, POC more than doubled our global avionics business and expanded its collective footprint in the platform and mission management market.

We funded the acquisition through a combination of cash on hand and our Revolver.

RESULTS OF OPERATIONS:

F ISCAL 2023 V S .

Results of operations for fiscal 2022 include full period results from the acquisitions of POC and Pentek and only results from the acquisition dates for Avalex and Atlanta Micro, which were acquired on November 5, 2021 and November 29, 2021, respectively.

Results of operations for fiscal 2021 include only results from the acquisition dates for POC and Pentek.

Results of operations for fiscal 2023 include full period results from the acquisitions of Avalex and Atlanta Micro.

Results of operations for fiscal 2022 include only results from the acquisition dates 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.

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Refer to Item 7 of the Company's Form 10-K issued on August 16, 2022 for prior year discussion related to fiscal 2022.

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

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

(In thousands) Fiscal 2023 As a % of

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Total operating expenses 338,413 34.7 363,346 36.8

Income from operations 31,610 3.2 81,001 8.8

(Loss) income from operations (21,685) (2.2) 31,610 3.2

Interest income 1,053 0.1 143 —

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Other expense, net (2,751) (0.3) (7,552) (0.8)

Income before income taxes 18,395 1.9 77,173 8.4

Income tax provision 7,120 0.8 15,129 1.7

Net income $ 11,275 1.1 % $ 62,044 6.7 %

Total revenues increased $64.2 million, or 7.0%, to $988.2 million during fiscal 2022, as compared to $924.0 million during fiscal 2021 including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full fiscal quarters or less (and excludes any intercompany transactions).

(Loss) income before income taxes (48,542) (5.0) 18,395 1.9

Income tax (benefit) provision (20,207) (2.1) 7,120 0.8

Net (loss) income $ (28,335) (2.9) % $ 11,275 1.1 %

Total revenues decreased $14.3 million, or 1.4%, to $973.9 million during fiscal 2023, as compared to $988.2 million during fiscal 2022 including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full fiscal 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 $114.4 million of incremental acquired revenues partially offset by a $50.2 million decrease in organic revenues.

The increase was driven by higher demand for modules and sub-assemblies and integrated subsystems which increased $49.4 million or 31.5%, and $30.5 million or 5.2%, respectively, and was partially offset by decreases to components of $15.7 million or 8.9% during fiscal 2022.

The increase in total revenue was primarily from C4I and EW applications which increased $73.3 million and $18.5 million, respectively, and was partially offset by a decrease of $38.0 million from the radar end application.

The increase in revenues spanned the airborne and other platforms which increased $71.2 million and $48.5 million, respectively, and was offset by decreases in the naval and land platforms of $31.6 million and $23.8 million, respectively.

The largest program increases were related to a classified C2 program, MH60, P8, Aegis and ALR-56C.

Acquired revenue in fiscal 2022 represents activity from the Pentek, Avalex and Atlanta Micro acquired businesses as well as two fiscal quarters from the POC acquired business.

There were no programs comprising 10% or more of our revenues for fiscal 2022 and 2021.

decrease in total revenue was primarily due to $33.3 million less organic revenues, partially offset by $19.0 million of additional acquired revenues.

These decreases predominantly resulted from program execution delays, especially as related to approximately 20 challenged programs, primarily development in nature, for which completion is a precursor to follow-on production awards.

In addition, incremental cost growth on these challenged programs delayed progress, and, therefore, revenue recognition in the fiscal year.

Revenues from integrated subsystems decreased $77.2 million or 11.8%, partially offset by increases to modules and sub-assemblies and components which increased $33.0 million or 19.8% and $29.8 million or 17.8%, respectively, during fiscal 2023.

The decrease in total revenue was primarily from the radar, EW, and other end applications which decreased $21.7 million, $13.1 million, and $2.4 million, respectively, and were partially offset by increases to the C4I and other sensor and effector end applications which increased $14.3 million and $8.5 million, respectively.

The decrease was predominately in naval platforms which decreased $18.6 million and was partially offset by an increase of $5.9 million in other platforms during fiscal 2023.

The largest program decreases were related to the MH-60, Filthy Buzzard, CPS, THAAD, and a classified C2 program.

There were no individual programs comprising 10% or more of our revenues for fiscal 2023 and 2022.

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

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Gross margin was 32.5% for fiscal 2023, a decrease of 750 basis points from the 40.0% gross margin achieved during fiscal 2022.

The lower gross margin was primarily driven by program mix, heavily impacted by industry-wide award delays and supply chain constraints as well as inflation.

In addition, the decrease is due to higher engineering content associated with programs in the period evidenced by an increase of $28.5 million in Customer Funded Research and Development ("CRAD") compared to the prior period.

CRAD primarily represents engineering labor associated with over time revenue 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 predominately grouped within integrated subsystems and to a lesser extent modules and sub-assemblies.

The lower gross margin was primarily driven by approximately $56 million of impact as a result of execution challenges across approximately 20 programs, primarily development in nature.

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.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses increased $3.6 million, or 2.3%, to $160.6 million during fiscal 2023 as compared to $157.0 million during fiscal 2022.

The increase was primarily related to an incremental $8.9 million of expenses related to the acquisitions of Pentek, Avalex and Atlanta Micro as well as an $8.3 million increase to stock compensation expense for a higher volume of equity awards to support the retention of our employees in a challenging labor market.

These increases were partially offset by savings from 1MPACT workforce optimization efforts.

Selling, general and administrative expenses increased as a percentage of revenue to 15.9% during fiscal 2022 from 14.5% during fiscal 2021.

The increase was primarily related to an increase in our 401(k) matching contributions from 3% to 6%, a full period of the Avalex and Atlanta Micro acquisitions driving an incremental $4.0 million of expense, and an increase in headcount and salary rate increases, partially offset by forfeitures of our former CEO's stock-based compensation of $6.8 million.

R ESEARCH AND D EVELOPMENT

Research and development expenses decreased $6.3 million, or 5.6%, to $107.2 million during fiscal 2022, as compared to $113.5 million for fiscal 2021.

The decrease was primarily related to 1MPACT workforce optimization efforts and employee attrition.

The decrease was also impacted by an incremental $28.5 million of CRAD during fiscal 2022.

Research and development expenses accounted for 10.8% and 12.3% of our revenues during fiscal 2022 and fiscal 2021, respectively.

Research and development expenses increased $1.6 million, or 1.5%, to $108.8 million during fiscal 2023, as compared to $107.2 million for fiscal 2022.

The increase was primarily related to an increase in our 401(k) matching contributions from 3% to 6%.

A MORTIZATION OF I NTANGIBLE A SSETS

Amortization of intangible assets increased $19.1 million to $60.3 million during fiscal 2022, as compared to $41.2 million for fiscal 2021, primarily due to the full period impact from the acquisitions of POC and Pentek, as well as the acquisitions of Avalex and Atlanta Micro during fiscal 2022.

Amortization of intangible assets decreased $6.7 million to $53.6 million during fiscal 2023, as compared to $60.3 million for fiscal 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

Restructuring and other charges were $27.4 million during fiscal 2022, as compared to $9.2 million during fiscal 2021.

During fiscal 2023, the Company incurred $7.0 million of restructuring and other charges, as compared to $27.4 million in fiscal 2022.

Restructuring and other charges during fiscal 2023 primarily related to $3.4 million of severance costs, $1.8 million of costs for facility optimization efforts, including $1.3 million related to lease asset impairment, and $1.8 million of third party consulting costs.

Restructuring and other charges during fiscal 2022 primarily related to 1MPACT including $17.4 million of third party consulting costs, as well as $9.2 million of severance costs associated with the elimination of approximately 135 positions across manufacturing, SG&A and R&D based on ongoing talent and workforce optimization efforts.

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

During fiscal 2021, the Company incurred $9.2 million of restructuring and other charges.

Restructuring and other charges primarily related to $4.8 million related to severance costs associated with the elimination of approximately 90 positions throughout the period, across manufacturing, SG&A and R&D.

These charges are related to changing market and business conditions as well as talent shifts and resource redundancy from the Company's internal reorganization that was completed during fiscal 2021.

The remaining $4.5 million of restructuring and other charges related to third-party consulting costs related to 1MPACT, which was initiated in the fourth quarter of fiscal 2021.

In the first quarter of 2024, we have initiated several immediate cost savings measures that simplify our organizational structure, facilitate clearer accountability, and align to our priorities, including:

(i) embedding the 1MPACT value creation initiatives and execution into our operations;

(ii) streamlining organizational structure and removing areas of redundancy between corporate and divisional organizations;

and (iii) reduce selling, general, and administrative headcount and rebalancing discretionary and third party spending to better align with our priority areas.

On July 20, 2023, we executed the plan to embed the 1MPACT value creation initiatives into operations, and on August 9, 2023, we approved and initiated a workforce reduction that, together with the 1MPACT related action, eliminates approximately 150 positions, resulting in expected restructuring charges of approximately $9.0 million.

These charges are for employee separation costs and will be classified as restructuring and other charges within our Statement of Operations and Other Comprehensive Income for the fiscal quarter ending September 29, 2023.

We expect approximately $15 million - $17 million of net savings from these actions for our fiscal year ending June

The headcount savings, combined with other non-headcount savings, including discretionary and third party spend primarily within SG&A, are expected to yield a total fiscal year 2024 net savings of approximately $20 million -22 million and annualized net savings of approximately $24 million.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

Acquisition costs and other related expenses were $8.4 million during fiscal 2023, as compared to $11.4 million during fiscal 2022.

The acquisition costs and other related expenses incurred during fiscal 2023 were primarily related to $3.7 million associated with the Board's review of strategic alternatives and $3.5 million for third party advisory fees in connection with engagements by activist investors.

The acquisition costs and other related expenses incurred during fiscal 2022 were related to the acquisitions of Avalex and Atlanta Micro, as well as $6.8 million for third party advisory fees and settlement costs in connection with engagements by activist investors.

The acquisition costs and other related expenses incurred during fiscal 2021 were related to the acquisitions of POC and Pentek.

Both periods include costs associated with our evaluation of potential acquisition opportunities.

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

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

I NTEREST I NCOME

Interest income increased to $1.1 million in fiscal 2023 from $0.1 million in fiscal 2022.

This was driven by higher interest rates during fiscal 2023 as compared to fiscal 2022.

I NTEREST E XPENSE

Interest expense for fiscal 2023 increased to $25.2 million, as compared to $5.8 million in fiscal 2022.

This increase is primarily related to the $451.5 million of outstanding borrowings on our Revolver used to facilitate the acquisitions of POC and Pentek, Avalex and Atlanta Micro during fiscal 2021 and 2022.

This is an increase from $200.0 million of outstanding borrowings on our Revolver for fiscal 2021.

The increase was driven by an increase in interest rate and additional borrowings on our Revolver.

Borrowings under our revolver were $511.5 million in fiscal 2023 as compared to $451.5 million in fiscal 2022.

O THER E XPENSE, N ET

Other expense, net increased to $7.6 million during fiscal 2022, as compared to $2.8 million of other expense, net in fiscal 2021.

There were $2.4 million of foreign currency translation losses during fiscal 2022 as compared to $1.2 million of foreign currency translation gains during fiscal 2021.

In addition, there was $1.3 million of incremental litigation and settlement expenses during fiscal 2022 as compared to the prior comparable period.

Other expense, net was $2.8 million during fiscal 2023, as compared to $7.6 million in fiscal 2022.

Fiscal 2023 includes $2.3 million of financing and registration fees and $2.1 million of litigation and settlement expenses, partially offset by net foreign currency translation gains of $1.6 million.

Fiscal 2022 includes $2.7 million of financing and registration fees, $2.4 million of net foreign currency translation losses, and $1.9 million of litigation and settlement expenses.

I NCOME T AXES

We recorded an income tax provision of $7.1 million and $15.1 million on income before income taxes of $18.4 million and $77.2 million for fiscal years 2022 and 2021, respectively.

Within the $7.1 million income tax provision for fiscal year 2022, we recorded a provision to return adjustment of $2.3 million related to an immaterial correction of an error over transfer pricing allocations.

The effective tax rate for fiscal 2022 differed from the Federal statutory rate of 21% primarily due to Federal and state research and development tax credits, non-deductible compensation, provision to return adjustments, state taxes and excess tax provision related to stock compensation.

The effective tax rate for fiscal 2021 differed from the Federal statutory rate of 21% primarily due to Federal and state research and development tax credits, excess benefits related to stock compensation, non-deductible compensation and state taxes.

We recorded an income tax (benefit) provision of $(20.2) million and $7.1 million on (loss) income before income taxes of $(48.5) million and $18.4 million for fiscal years 2023 and 2022, respectively.

Fiscal 2023 includes the impact of the Tax Cuts and Jobs Act of 2017 ("TCJA"), which 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.

The cash outflow from the TJCA provision was $26 million in fiscal 2023.

The effective tax rate for fiscal 2023 differed from the federal statutory rate of 21% primarily due to federal and state research and development tax credits, releases to reserves for unrecognized income tax benefits, state taxes, valuation allowances recorded and excess tax provisions related to stock compensation.

The effective tax rate for fiscal 2022 differed from the federal statutory rate of 21% primarily due to federal and state research and development tax credits, non-deductible compensation, provision to return adjustments, state taxes and excess tax provisions related to stock compensation.

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.

LIQUIDITY AND CAPITAL RESOURCES

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

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

Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments.

We plan to continue to invest in improvements to our facilities, continuous evaluation of potential acquisition opportunities and internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and trusted custom microelectronics.

Our facilities improvements include expansion of our trusted custom microelectronics and mission computing businesses during fiscal 2022.

Based on our current plans and business conditions, we believe that existing cash and cash equivalents, our available Revolver, cash generated from operations and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.

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

We intend to file a renewal of the S-3ASR in September 2023 upon the expiration of the three-year term of the current shelf registration statement.

Revolving Credit Facilities

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

As of July 1, 2022, we had $451.5 million of outstanding borrowings against the Revolver.

The current borrowing capacity as defined under the Revolver as of June 30, 2023 is approximately $865.0 million, of which we had borrowings against of $511.5 million.

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

Receivables Purchase Agreement

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

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

Pursuant to the RPA, Bank of the West may purchase certain of our customer receivables at a discounted rate, subject to a limit that as of any date, the total amount of purchased receivables held by Bank of the West, less the amount of all collections received on such receivables, may not exceed $20.0 million.

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

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

On June 21, 2023, we upsized the capacity from $30.6 million to $60.0 million.

We factored accounts receivable and incurred factoring fees of approximately $30.5 million and $0.6 million, respectively, for the twelve months ended June 30, 2023.

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

For the Fiscal Years Ended

(In thousands) July 1, 2022 July 2, 2021 July 3, 2020

(In thousands) June 30, 2023 July 1, 2022 July 2, 2021

Net cash (used in) provided by operating activities $ (21,254) $ (18,869) $ 97,247

Net cash used in investing activities $ (38,561) $ (274,320) $ (416,887)

Net cash provided by (used in) financing activities $ 245,754 $ 206,229 $ (10,932)

Net decrease in cash and cash equivalents $ (48,185) $ (112,999) $ (31,094)

Net cash provided by financing activities $ 65,429 $ 245,754 $ 206,229

Net increase (decrease) in cash and cash equivalents $ 5,909 $ (48,185) $ (112,999)

Cash and cash equivalents at end of year $ 71,563 $ 65,654 $ 113,839

Our cash and cash equivalents decreased by $48.2 million during fiscal 2022 primarily due to $243.5 million of acquisition activity, $27.7 million invested in purchases of property and equipment, $18.9 million used in operating activities and $8.2 million of share repurchase and retirement of common stock used to settle employees' tax liabilities.

These decreases were partially offset by $251.5 million of borrowings on our Revolver to facilitate the acquisitions of Avalex and Atlanta Micro.

Our cash and cash equivalents increased by $5.9 million during fiscal 2023 primarily as the result of $65.4 million provided by financing activities, partially offset by $38.8 million purchases of property and equipment and $21.3 million used in operating activities.

Operating Activities

During fiscal 2022, we used $18.9 million in cash from operating activities, a decrease of $116.1 million, as compared to $97.2 million provided by operating activities during fiscal 2021.

The decrease was primarily due to an increase in unbilled receivables and costs in excess of billings driven by industry-wide award delays and supply chain constraints impacting the timing of billing events and cash conversion as well as higher outflows for inventory during fiscal 2022.

Operating activities also included cash outflows for 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 as well as the Avalex and Atlanta Micro acquisitions.

These decreases were partially offset by lower cash outflows for accounts payable, accrued expenses and accrued compensation.

During fiscal 2023, we had an outflow of $21.3 million in cash from operating activities, an increase of $2.4 million, as compared to $18.9 million during fiscal 2022.

The increase was primarily due to higher outflows for inventory to support customer delivery schedules for existing and future awards as well as accounts payable, accrued expenses and accrued compensation.

Cash paid for interest and income taxes during fiscal 2023 increased by $21.8 million and $10.1 million, respectively, as compared to fiscal 2022 further contributing to the decrease.

The decrease was partially offset by lower outflows from unbilled receivables and costs in excess of billings, additional deferred revenues and customer advances, the change from a cash based 401(k) match to a stock based 401(k) match during fiscal 2023 and a $6.0 million cash receipt for the termination of an interest rate swap.

Investing Activities

During fiscal 2022, we invested $274.3 million, a decrease of $142.6 million, as compared to $416.9 million during fiscal 2021.

During fiscal 2022, we invested $243.5 million in the acquisitions of Avalex and Atlanta Micro, as well as $27.7 million in purchases of property and equipment.

During fiscal 2021, we invested $372.8 million in the acquisitions of POC and Pentek as well as $45.6 million in purchases of property and equipment.

During fiscal 2023, we invested $38.6 million, a decrease of $235.7 million, as compared to $274.3 million during fiscal 2022 primarily driven by the acquisitions of Avalex and Atlanta Micro, in the previous year.

The decrease was also driven by $3.4 million less other investing activities, partially offset by $11.1 million higher purchases of property and equipment as compared to fiscal 2022.

Financing Activities

During fiscal 2023, we had $65.4 million in cash provided by financing activities, as compared to $245.8 million during fiscal 2022.

The $39.6 million increase was driven by an additional $51.5 million of additional borrowings on our Revolver to facilitate the acquisitions of Avalex and Atlanta Micro, partially offset by $8.1 million of additional payments related to the purchase and retirement of common stock used to settle employees' tax liabilities associated with vesting of restricted stock awards and $2.9 million of payments for deferred financing fees associated with the refinancing of our revolving credit facility as compared to fiscal 2021.

During fiscal 2023, we had $60.0 million of net borrowings on our Revolver as compared to $251.5 million of net borrowings during fiscal 2022.

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 $8.2 million in fiscal 2022.

C OMMITMENTS AND C ONTRACTUAL O BLIGATIONS

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

The following is a schedule of our commitments and contractual obligations outstanding at June 30, 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 $153.7 million at July 1, 2022.

We had a liability at July 1, 2022 of $9.1 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns.

Our liability increased by an additional $1.6 million primarily due to tax positions taken related to a prior period and during the current period.

We do not know the ultimate resolution of these uncertain tax positions

and as such, do not know the ultimate timing of payments related to this liability.

The purchase commitments covered by these agreements are for less than one year and aggregated $127.1 million at June 30, 2023.

We had a liability at June 30, 2023 of $5.2 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 of these uncertain tax positions and as such, do not know the ultimate timing of payments related to this liability.

Accordingly, these amounts are not included in the above table.

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O FF -B ALANCE S HEET A RRANGEMENTS

Other than certain indemnification provisions, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity.

interest in an unconsolidated entity.

We do not have any majority-owned subsidiaries that are not consolidated in the financial statements.

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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 income, the most directly comparable GAAP financial measure, to our adjusted EBITDA:

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

For the Fiscal Years Ended

(In thousands) July 1, 2022 July 2, 2021 July 3, 2020

Net income $ 11,275 $ 62,044 $ 85,712

(In thousands) June 30, 2023 July 1, 2022 July 2, 2021

Net (loss) income $ (28,335) $ 11,275 $ 62,044

Other non-operating adjustments, net (1,589) 2,932 (724)

Interest expense (income), net 5,663 1,043 (1,145)

Income tax provision 7,120 15,129 8,221

Interest expense, net 24,106 5,663 1,043

Income tax (benefit) provision (20,207) 7,120 15,129

Depreciation 43,777 33,150 25,912

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Fair value adjustments from purchase accounting 356 (2,009) (290)

(2,009) (290) 1,801

Litigation and settlement expense, net 495 1,908 622

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Stock-based and other non-cash compensation expense (3)

43,031 38,459 29,224

Adjusted EBITDA $ 132,253 $ 200,507 $ 201,896

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We believe these items are non-routine and may not be indicative of ongoing operating results.

(2) Acquisition, financing and other third party costs for fiscal 2022 are related to the acquisitions of Avalex and Atlanta Micro, third-party advisory fees in connection with engagements by activist investors and costs associated with our continuous evaluation of potential acquisition opportunities.

(3) Fair value adjustments from purchase accounting for fiscal year 2022 relate to various adjustments arising from the Avalex and Atlanta Micro acquisitions.

Fair value adjustments from purchase accounting for fiscal year 2021 relate to various adjustments arising from the POC acquisition.

Fair value adjustments from purchase accounting for fiscal year 2020 relate to APC inventory step-up amortization.

(2) Acquisition, financing and other third party costs for fiscal 2023 are related to third party advisory fees in connection with engagements by activist investors and costs associated with the Board's review of strategic alternatives.

(3) Effective in the first quarter of fiscal 2023, the Company increased the rate of its matching contributions from 3% to 6% of participants' eligible annual compensation and changed the form of these contributions from cash to company stock.

Fiscal 2023 also includes forfeitures of $6.8 million of stock-based compensation from the Company's former CEO's resignation.

Adjusted income and adjusted EPS exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP.

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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 table reconciles net income and diluted earnings per share, the most directly comparable GAAP financial measures, to adjusted income and adjusted EPS:

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

For the Fiscal Years Ended

(In thousands, except per share data) July 1, 2022 July 2, 2021 July 3, 2020

Net income and diluted earnings per share $ 11,275 $ 0.20 $ 62,044 $ 1.12 $ 85,712 $ 1.56

(In thousands, except per share data) June 30, 2023 July 1, 2022 July 2, 2021

Net (loss) income and diluted (loss) earnings per share $ (28,335) $ (0.50) $ 11,275 $ 0.20 $ 62,044 $ 1.12

Other non-operating adjustments, net (1,589) 2,932 (724)

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Fair value adjustments from purchase accounting 356 (2,009) (290)

(2,009) (290) 1,801

Litigation and settlement expense, net 495 1,908 622

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Stock-based and other non-cash compensation expense (3)

43,031 38,459 29,224

Impact to income taxes (4)

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We believe these items are non-routine and may not be indicative of ongoing operating results.

(3) Fair value adjustments from purchase accounting for fiscal year 2022 relate to various adjustments arising from the Avalex and Atlanta Micro acquisitions.

Fair value adjustments from purchase accounting for fiscal year 2021 relate to various adjustments arising from the POC acquisition.

Fair value adjustments from purchase accounting for fiscal year 2020 relate to APC inventory step-up amortization.

Fiscal 2023 also includes forfeitures of $6.8 million of stock-based compensation from the Company's former CEO's resignation.

(4) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes.

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We expect to continue to incur expenditures similar to the free cash flow adjustment described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash.

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

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

For the Fiscal Years Ended

(In thousands) July 1, 2022 July 2, 2021 July 3, 2020

(In thousands) June 30, 2023 July 1, 2022 July 2, 2021

Net cash (used in) provided by operating activities $ (21,254) $ (18,869) $ 97,247

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A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 45% and 58% of revenues for the fiscal years ended July 1, 2022 and July 2, 2021, respectively.

Total revenue recognized under contracts over time was 55% and 42% of revenues for the fiscal years ended July 1, 2022 and July 2, 2021, respectively.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 44% and 45% of revenues for the fiscal years ended June 30, 2023 and July 1, 2022, respectively.

Total revenue recognized under contracts over time was 56% and 55% of revenues for the fiscal years ended June 30, 2023 and July 1, 2022, respectively.

Revenue recognized at a point in time generally relates to contracts that include a combination of components, modules and sub-assemblies, integrated subsystems and related system integration or other services.

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For all types of contracts, we recognize anticipated contract losses as soon as they become known and estimable.

These losses are recognized in advance of contract performance and as of July 1, 2022, approximately $0.3 million of these costs were in Accrued expenses on our Consolidated Balance Sheet.

These losses are recognized in advance of contract performance and as of June 30, 2023, approximately $6.0 million of these costs were in Accrued expenses on our Consolidated Balance Sheet.

For over time contracts, we typically leverage the input method, using a cost-to-cost measure of progress.

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For over time contracts, we recognize anticipated contract losses as soon as they become known and estimable.

Accounting for over time contracts requires significant judgment relative to estimating total contract revenues and costs, in particular, assumptions relative to the amount of time to complete the contract, including the assessment of the nature and complexity of the work to be performed.

Accounting for contracts recognized over time requires significant judgment relative to estimating total contract revenues and costs, in particular, assumptions relative to the amount of time to complete the contract, including the assessment of the nature and complexity of the work to be performed.

Our estimates are based upon the professional knowledge and experience of our engineers, program managers and other personnel, who review each over time contract monthly to assess the contract’s schedule, performance, technical matters and estimated cost at completion.

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Actual demand, product mix and alternative usage may be higher or lower resulting in variations in on our gross margin.

G OODWILL , I NTANGIBLE A SSETS AND L ONG - LIVED A SSETS

We evaluate our goodwill for impairment annually in the fourth quarter and in any interim period in which events or circumstances arise that indicate our goodwill may be impaired.

Indicators of impairment include, but are not limited to, a significant deterioration in overall economic conditions, a decline in our market capitalization, the loss of significant business, significant decreases in funding for our contracts, or other significant adverse changes in industry or market conditions.

We test goodwill for impairment at the reporting unit level.

Goodwill impairment guidance provides entities an option to perform a qualitative assessment (commonly known as “step zero”) to determine whether further impairment testing is necessary before performing the two-step test.

The qualitative assessment requires significant judgments by management about macro-economic conditions including our operating environment, industry and other market considerations, entity-specific events related to financial performance or loss of key personnel, and other events that could impact the reporting unit.

If we conclude that further testing is required, the impairment test involves a two-step process.

Step one compares the fair value of the reporting unit with its carrying value, including goodwill.

If the carrying amount exceeds the fair value of the reporting unit, step two is required to determine if there is an impairment of the goodwill.

Step two compares the implied fair value of the reporting unit's goodwill to the carrying amount of the goodwill.

We estimate the fair value of our reporting units using the income approach based upon a discounted cash flow model.

The income approach requires the use of many assumptions and estimates including future revenues, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates.

In addition, we use the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar businesses, to support the conclusions of the income approach.

During the first quarter of fiscal 2021, the Company reorganized its internal reporting unit structure to align with the Company's market and brand strategy as well as promote scale as the organization continues to grow.

The Company evaluated this reorganization under ASC 280 to determine whether this change has impacted the Company's single operating and reportable segment.

The Company concluded this change had no effect given the CODM continues to evaluate and manage the Company on the basis of one operating and reportable segment.

The Company utilized the management approach for determining its operating segment in accordance with ASC 280.

There has been no changes to the Company's conclusion of one operating and reportable segment in fiscal 2023.

In accordance with FASB ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company determines its reporting units based upon whether discrete financial information is available, if management regularly reviews the operating results of the component, the nature of the products offered to customers and the market characteristics of each reporting unit.

A reporting unit is considered to be an operating segment or one level below an operating segment also known as a component.

Component level financial information is reviewed by management across two divisions:

Microelectronics, and Mission Systems.

Accordingly, these were determined to be the Company's reporting units.

As part of our annual goodwill impairment testing, we utilized a discount rate for each of our reporting units, as defined by ASC 350, that we believe represents the risks that our businesses face, considering their sizes, the current economic environment, and other industry data we believe is appropriate.

The discount rates for Microelectronics and Mission Systems were 11.25%, and 12.0%, respectively.

The annual testing indicated that the fair values of our Microelectronics and Mission Systems reporting units exceeded their carrying values, and thus no further testing was required.

We also review finite-lived intangible assets and long-lived assets when indications of potential impairment exist, such as a significant reduction in undiscounted cash flows associated with the assets.

Should the fair value of our finite-lived intangible assets or long-lived assets decline because of reduced operating performance, market declines, or other indicators of impairment, a charge to operations for impairment may be necessary.

I NCOME T AXES

The determination of income tax expense requires us to make certain estimates and judgments concerning the calculation of deferred tax assets and liabilities, as well as the deductions and credits that are available to reduce taxable income.

recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements.

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements.

Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates for the year in which the differences are expected to reverse.

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Other estimates include:

• estimated step-ups for the overt-time contracts fixed assets, leasehold interests and inventory;

• estimated step-ups for the over time contracts fixed assets, leasehold interests and inventory;

• estimated fair values of intangible assets;

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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-K

Item 7. Management’s Discussion and Analysis