MERCURY SYSTEMS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS From time to time, information provided, statements made by our employees or information included in our filings with the Securities and Exchange Commission (“SEC”) may contain statements that are not historical facts but that are “forward-looking statements,” which involve risks and uncertainties. You can identify these statements by the use of the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of any U.S. 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 the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2023. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. OVERVIEW Mercury Systems, Inc. is a 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 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 and partners to opportunities. And, at the most human level, we connect what we do to our customers’ missions; supporting the people for whom safety, security and protecting freedom are of paramount importance. As a leading manufacturer of essential components, products, modules and subsystems, we sell to defense prime contractors, the U.S. government and original equipment manufacturers (“OEM”) commercial aerospace companies. 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. This allows them to complete their full system by integrating with their platform, the sensor technology and, increasingly, the processing from Mercury. Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers. Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications on time constraints that matter. 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 21 secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. We are leading the development and adaptation of commercial technology for aerospace and defense solutions. From chip-scale to system scale and from data, including radio frequency (“RF”) to digital to decision, we make mission-critical technologies safe, secure, affordable and relevant for our customers. Our capabilities, technology, people and R&D investment strategy combine to differentiate Mercury in our industry. We maintain our technological edge by investing in critical capabilities and intellectual property (“IP” or “building blocks”) in processing, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as artificial intelligence (“AI”). Our mission critical solutions are deployed by our customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”), electronic intelligence, mission computing avionics, electro-optical/infrared (“EO/IR”), electronic warfare, weapons and missile defense, hypersonics and radar. Since we conduct much of our business with our defense customers via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter. Customers specify delivery date requirements that coincide with their need for our products. Because these customers may use our products in connection with a variety of defense programs or other projects of different sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends. As of September 29, 2023, we had 2,539 employees. We employ hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities to achieve our objectives to fully capitalize upon and maintain our technological leads in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications. Our talent attraction, engagement and retention is critical to execute on our long-term strategy. We invest in our culture and values to drive employee engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation. We believe that our success depends on our ability to embrace diversity company-wide and realize the benefits of a diverse workforce that includes a greater variety of solutions to problems, a broader collection of skills and experiences and an array of viewpoints to consider. We are strongly focused on providing an inclusive environment that respects the diversity of the world. We believe that the workforce required to grow our business and deliver creative solutions must be rich in diversity of thought, experience and culture. Our diversity and inclusion initiatives focus on building and maintaining the talent that will create cohesive and collaborative teams that drive innovation. We believe that these values will help our employees realize their full potentials at work to provide Innovation That Matters®. Our consolidated revenues, net loss, diluted net loss per share, adjusted loss per share (“adjusted EPS”), and adjusted EBITDA for the first quarter ended September 29, 2023 were $181.0 million, $36.7 million, $0.64, $0.24, and $2.0 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. 22 RESULTS OF OPERATIONS: There were 13-weeks included in the results of operations for the first quarters ended September 29, 2023 and September 30, 2022, respectively. The results for the first quarter ended September 29, 2023 are not necessarily indicative of the results to be expected for the full fiscal year. The first quarter ended September 29, 2023 compared to the first quarter ended September 30, 2022 The following table sets forth, for the first quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Loss: (In thousands) September 29, 2023 As a % of Total Net Revenue September 30, 2022 As a % of Total Net Revenue Net revenues $ 180,991 100.0 % $ 227,579 100.0 % Cost of revenues 130,464 72.1 149,484 65.7 Gross margin 50,527 27.9 78,095 34.3 Operating expenses: Selling, general and administrative 35,794 19.8 38,943 17.1 Research and development 31,872 17.6 27,766 12.2 Amortization of intangible assets 12,547 6.9 14,574 6.4 Restructuring and other charges 9,546 5.3 1,508 0.7 Acquisition costs and other related expenses 969 0.5 2,498 1.1 Total operating expenses 90,728 50.1 85,289 37.5 Loss from operations (40,201) (22.2) (7,194) (3.2) Interest income 103 0.1 29 — Interest expense (7,863) (4.4) (4,547) (2.0) Other expense, net (1,774) (1.0) (3,645) (1.5) Loss before income taxes (49,735) (27.5) (15,357) (6.7) Income tax benefit (13,027) (7.2) (1,022) (0.4) Net loss $ (36,708) (20.3) % $ (14,335) (6.3) % R EVENUES Total revenues decreased $46.6 million, or 20.5%, to $181.0 million during the first quarter ended September 29, 2023, as compared to $227.6 million during the first quarter ended September 30, 2022. The decrease was driven by our pivot to enhanced execution, including prioritizing our resource allocation to the completion of our challenged programs, and cash-efficient operating model, which was evidenced by the decrease of approximately $38.7 million in revenue recognized over time which represented 58% of total revenues during the first quarter ended September 29, 2023, as compared to 63% of total revenues during the first quarter ended September 30, 2022. Specifically, with regard to our challenged programs which are recognized over time, we have recognized a majority of the revenue and related cost as we acquired material and applied labor over the period of performance to progress these programs in prior periods. As we continue to resolve technical challenges and complete these programs, which consumes a significant amount of operational capacity, the remaining revenues on these challenged programs are recognized, however these revenues represent a very small proportion of the total contract value. In addition, as we improve our management systems and focus efforts to more properly balance working capital, we are transitioning to a cash-efficient operating model to better align the timing of material receipts to labor resource availability and hardware delivery needs across our programs now that we have seen less disruption in the supply chain. This transition creates a near-term revenue timing dynamic. Product grouping decreases were driven by the subsystems and modules and sub-assemblies product groupings which decreased $42.8 million and $6.5 million, respectively, partially offset by an increase to components grouping of $2.7 million. The decrease in total revenue was primarily driven by the radar, C4I and electronic warfare end applications decreases of $24.8 million, $12.8 million and $6.9 million, respectively. We experienced decreases across each platform during the first quarter ended September 29, 2023 when compared to the prior period; airborne, land and naval platforms decreased $19.5 million, $10.3 million and $7.1 million, respectively. The largest program decreases were related to the LTAMDS, P-8 and a secure processing program when compared to the prior period. There were no programs comprising 10% or more of our revenues for the first quarters ended September 29, 2023 or September 30, 2022. 23 G ROSS M ARGIN Gross margin was 27.9% for the first quarter ended September 29, 2023, a decrease of 640 basis points from the 34.3% gross margin realized during the first quarter ended September 30, 2022. The lower gross margin was primarily driven by program mix and related cost growth especially with regard to our challenged programs. Program mix in the first quarter ended September 29, 2023 continued to be weighted towards the execution of our challenged programs, most of which are development in nature, and carry lower gross margins. Certain of our challenged programs trend lower than average on gross margin as a result of costs associated with technical issues. The growth in estimated costs to complete since the prior year has significantly reduced the overall margins recognized on these programs through completion. Program cost growth resulted in an incremental impact of approximately $4.9 million to gross margin, or 410 basis points, when compared to the prior period. About $5.9 million of total cost growth impact in the quarter was attributable to the approximately 20 challenged programs, of which $4.7 million related to one program. In addition, we experienced higher manufacturing variances primarily related to certain non-recurring cost adjustments as well as inventory reserves. S ELLING , G ENERAL AND A DMINISTRATIVE Selling, general and administrative expenses decreased $3.1 million, or 8.1%, to $35.8 million during the first quarter ended September 29, 2023, as compared to $38.9 million in the first quarter ended September 30, 2022. The decrease was primarily related to the savings realized from the reduction in force initiated on August 9, 2023, a decrease in share-based compensation expense of $3.1 million and lower bonus accrual. R ESEARCH AND D EVELOPMENT Research and development expenses increased $4.1 million, or 14.8%, to $31.9 million during the first quarter ended September 29, 2023, as compared to $27.8 million during the first quarter ended September 30, 2022. The increase during the first quarter ended September 29, 2023 was primarily due an increase in headcount as compared to the first quarter ended September 30, 2022 of approximately 30 positions. This increase was partially offset by increased Customer Funded Research and Development ("CRAD") of $3.1 million as a result of a higher mix of development programs execution during the first quarter ended September 29, 2023 as compared to the prior period. A MORTIZATION OF I NTANGIBLE A SSETS Amortization of intangible assets decreased $2.0 million to $12.5 million during the first quarter ended September 29, 2023, as compared to $14.6 million during the first quarter ended September 30, 2022, primarily due to the backlog intangible from our Avalex acquisition being fully amortized in fiscal 2023. R ESTRUCTURING AND O THER C HARGES During the first quarter ended September 29, 2023, we initiated several immediate cost savings measures that simplify our organizational structure, facilitate clearer accountability, and align 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) reducing 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, eliminated approximately 150 positions resulting in $9.5 million of severance costs. Restructuring and other charges during the first quarter ended September 30, 2022 primarily related to 1MPACT including $1.3 million of third party consulting costs and $0.2 million related to severance costs. A CQUISITION C OSTS AND O THER R ELATED E XPENSES Acquisition costs and other related expenses were $1.0 million during the first quarter ended September 29, 2023 as compared to $2.5 million during the first quarter ended September 30, 2022. The acquisition costs and other related expenses during the first quarter ended September 29, 2023 includes $0.3 million related to the conclusion of the Board of Directors' review of strategic alternatives, as well as $0.3 million for third-party advisory fees in connection with engagements by activist investors. 24 I NTEREST E XPENSE We incurred $7.9 million of interest expense during the first quarter ended September 29, 2023, as compared to $4.5 million during the first quarter ended September 30, 2022. The increase was driven by a higher interest rate and additional outstanding borrowings on our Revolver (the "Revolver"). As of the first quarter ended September 29, 2023, we had total borrowings of $576.5 million on our Revolver as compared to $511.5 million of total borrowings as of the first quarter ended September 30, 2022. O THER E XPENSE, N ET Other expense, net decreased to $1.8 million during the first quarter ended September 29, 2023, as compared to $3.6 million during the first quarter ended September 30, 2022. The first quarter ended September 29, 2023 includes net foreign currency translation losses of $1.0 million, $0.5 million of financing costs and litigation and settlement expenses of $0.5 million, partially offset by other income of $0.3 million. The first quarter ended September 30, 2022 includes net foreign currency translation losses of $1.8 million, $0.5 million of financing costs, and litigation and settlement expenses of $1.3 million. I NCOME T AXES We recorded an income tax benefit of $13.0 million and $1.0 million on a loss before income taxes of $49.7 million and $15.4 million for the first quarters ended September 29, 2023 and September 30, 2022, respectively. For the first quarter ended September 29, 2023, we calculated the U.S. income tax benefit using the discrete method as though the three-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 FASB ASC 740, Income Taxes 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 effective tax rate for the first quarter ended September 29, 2023 differed from the federal statutory rate primarily due to federal and state research and development credits and state taxes. The effective tax rate for the first quarter ended September 30, 2022 differed from the federal statutory rate primarily due to federal and state research and development credits, non-deductible compensation and state taxes. During the first quarters ended September 29, 2023 and September 30, 2022, we recognized a tax provision of $1.2 million and $1.6 million related to stock compensation shortfalls, respectively. L IQUIDITY AND C APITAL R ESOURCES 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 have experienced growth in our working capital balances and, in particular, related to unbilled receivables and inventory over the last several years. As we complete our challenged programs and then receive follow-on production awards, both unbilled receivables and inventory will convert to cash reducing our working capital balances to more appropriate operating levels. Due to the uncertainty surrounding a government shutdown or prolonged continuing resolution and the potential impact on the second quarter and fiscal 2024 results, we have proactively executed an amendment to our Revolver allowing for a temporary increase in the Consolidated Total Net Leverage Ratio covenant requirement from 4.50 to 5.25 for the second quarter. 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. 25 Shelf Registration Statement On October 4, 2023, we filed a shelf registration statement on Form S-3ASR with the SEC. The shelf registration statement, which was effective upon filing with the SEC, registered each of the following securities: debt securities, preferred stock, common stock, warrants and units. We intend to use the proceeds from financings using the shelf registration statement for general corporate purposes, which may include the following: • the acquisition of other companies or businesses; • the repayment and refinancing of debt; • capital expenditures; • working capital; and • other purposes as described in the prospectus supplement. We have an unlimited amount available under the shelf registration statement. Revolving Credit 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. The borrowing capacity as defined under the Revolver as of September 29, 2023 is approximately $766.5 million, less outstanding borrowings of $576.5 million. See Note H 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 further amended the RPA with BMO Harris Bank (as successor in interest to Bank of the West) to increase the capacity from $30.6 million to $60.0 million. We factored accounts receivable and incurred factoring fees of approximately $28.8 million and $0.3 million, respectively, for the first quarter ended September 29, 2023. We did not factor any accounts receivable or incur any factoring fees for the first quarter ended September 30, 2022. C ASH F LOWS As of and For the First Quarters Ended, (In thousands) September 29, 2023 September 30, 2022 Net cash used in operating activities $ (39,068) $ (66,039) Net cash used in investing activities $ (8,015) $ (7,278) Net cash provided by financing activities $ 65,000 $ 59,937 Net increase (decrease) in cash and cash equivalents $ 17,806 $ (13,673) Cash and cash equivalents at end of period $ 89,369 $ 51,981 Our cash and cash equivalents increased by $17.8 million from June 30, 2023 to September 29, 2023, primarily as the result of $65.0 million of borrowings on our Revolver, partially offset by $39.1 million used in operating activities and $8.0 million invested in purchases of property and equipment. 26 Operating Activities During the first quarter ended September 29, 2023, we had an outflow of $39.1 million in cash from operating activities compared to a $66.0 million outflow during the first quarter ended September 30, 2022. The lower outflow during the first quarter ended September 29, 2023 was primarily due to a $27.0 million inflow from accounts receivable, unbilled receivables and costs in excess of billings as compared to a $47.3 million outflow during the first quarter ended September 30, 2022. The first quarter ended September 29, 2023 also included cash settlement for termination of interest rate swap of $7.4 million, an incremental $1.4 million as compared to the prior period, and lower outflows of prepaid expenses and other current assets and accounts payable, accrued expenses, and accrued compensation. These increases were partially offset by higher outflows in the current period for inventory and lower deferred revenues and customer advances. Cash paid for income taxes and interest during the first quarter ended September 29, 2023 also increased by $10.4 million and $2.7 million, respectively, as compared to the first quarter ended September 30, 2022 further contributing to the decrease. Investing Activities During the first quarter ended September 29, 2023, we invested $8.0 million, an increase of $0.7 million, as compared to $7.3 million during the first quarter ended September 30, 2022 driven by $0.7 million higher purchases of property and equipment. Financing Activities During the first quarter ended September 29, 2023, we had $65.0 million of borrowings on our Revolver as compared to $60.0 million of net borrowings during the first quarter ended September 30, 2022. C OMMITMENTS, C ONTRACTUAL O BLIGATIONS AND C ONTINGENCIES The following is a schedule of our commitments and contractual obligations outstanding at September 29, 2023: (In thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Purchase obligations $ 128,696 $ 128,696 $ — $ — $ — Operating leases 89,184 14,178 26,723 23,492 24,791 $ 217,880 $ 142,874 $ 26,723 $ 23,492 $ 24,791 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 $128.7 million at September 29, 2023. We have a liability at September 29, 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 on these uncertain tax positions and as such, do not know the ultimate timing of payments or amount, if any, related to this liability. Accordingly, these amounts are not included in the above table. Our standard product sales and license agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which we indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred in connection with certain intellectual property infringement claims by any third party with respect to our products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments we could be required to make under these indemnification provisions is, in some instances, unlimited. As part of our strategy for growth, we continue to explore acquisitions or strategic alliances. The associated acquisition costs incurred in the form of professional fees and services may be material to the future periods in which they occur, regardless of whether the acquisition is ultimately completed. We may elect from time to time to purchase and subsequently retire shares of common stock in order to settle employees’ tax liabilities associated with vesting of a restricted stock award. These transactions would be treated as a use of cash in financing activities in our Consolidated Statements of Cash Flows. O FF - BALANCE S HEET A RRANGEMENTS Other than certain indemnification provisions in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities. 27 N ON -G AAP F INANCIAL M EASURES In our periodic communications, we discuss certain important measures that are not calculated according to U.S. generally accepted accounting principles (“GAAP”), including adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, organic revenue and acquired revenue. Adjusted EBITDA is defined as net income before other non-operating adjustments, interest income and expense, income taxes, depreciation, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition, financing and other third party costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense. We use adjusted EBITDA as an important indicator of the operating performance of our business. We use adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our board of directors, determining the portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in our operations and allocating resources to various initiatives and operational requirements. We believe that adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary from period to period without any correlation to underlying operating performance. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in our adjusted EBITDA are valuable indicators of our operating performance. Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring. 28 The following table reconciles our net loss, the most directly comparable GAAP financial measure, to our adjusted EBITDA: First Quarters Ended (In thousands) September 29, 2023 September 30, 2022 Net loss $ (36,708) $ (14,335) Other non-operating adjustments, net 731 1,797 Interest expense, net 7,760 4,518 Income tax benefit (13,027) (1,022) Depreciation 10,145 9,127 Amortization of intangible assets 12,547 14,574 Restructuring and other charges 9,546 1,508 Impairment of long-lived assets — — Acquisition, financing and other third party costs 1,332 2,864 Fair value adjustments from purchase accounting 177 (176) Litigation and settlement expense, net 503 1,305 COVID related expenses — 61 Stock-based and other non-cash compensation expense 8,951 10,940 Adjusted EBITDA $ 1,957 $ 31,161 Adjusted income and adjusted EPS exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. We believe that exclusion of these items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We use these measures along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace. We define adjusted income as net income before other non-operating adjustments, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition, financing and other third party costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision. Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding. Adjusted income and adjusted EPS are non-GAAP financial measures and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. We expect to continue to incur expenses similar to the adjusted income and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring. 29 The following tables reconcile net loss and diluted loss per share, the most directly comparable GAAP measures, to adjusted (loss) income and adjusted EPS: First Quarters Ended (In thousands, except per share data) September 29, 2023 September 30, 2022 Net loss and loss per share $ (36,708) $ (0.64) $ (14,335) $ (0.26) Other non-operating adjustments, net 731 1,797 Amortization of intangible assets 12,547 14,574 Restructuring and other charges 9,546 1,508 Impairment of long-lived assets — — Acquisition, financing and other third party costs 1,332 2,864 Fair value adjustments from purchase accounting 177 (176) Litigation and settlement expense, net 503 1,305 COVID related expenses — 61 Stock-based and other non-cash compensation expense 8,951 10,940 Impact to income taxes (1) (10,758) (5,191) Adjusted (loss) income and adjusted (loss) earnings per share (2) $ (13,679) $ (0.24) $ 13,347 $ 0.24 Diluted weighted-average shares outstanding 57,105 56,347 (1) Impact to income taxes is calculated by recasting income before income taxes to include the items involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the items. (2) Loss per share and adjusted loss per share is calculated using basic shares whereas earnings per share and adjusted earnings per share is calculated using diluted shares. There was a $0.01 impact to the calculation of adjusted earnings per share as a result of this for the first quarter ended September 30, 2022. Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs. We believe free cash flow provides investors with an important perspective on cash available for investments and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. We believe that trends in our free cash flow can be valuable indicators of our operating performance and liquidity. Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenditures similar to the free cash flow adjustment described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash. 30 The following table reconciles cash used in operating activities, the most directly comparable GAAP financial measure, to free cash flow: First Quarters Ended (In thousands) September 29, 2023 September 30, 2022 Net cash used in operating activities $ (39,068) $ (66,039) Purchase of property and equipment (8,015) (7,328) Free cash flow $ (47,083) $ (73,367) Organic revenue and acquired revenue are non-GAAP measures for reporting the financial performance of our business. We believe this information provides investors with insight as to our ongoing business performance. Organic revenue represents total company revenue excluding net revenue from acquired companies for the first four full quarters since the entities’ acquisition date (which excludes intercompany transactions). Acquired revenue represents revenue from acquired companies for the first four full quarters since the entities' acquisition date (which excludes intercompany transactions). After the completion of four full fiscal quarters, acquired revenue is treated as organic for current and comparable historical periods. The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the first quarters and first quarters ended September 29, 2023 and September 30, 2022, respectively: (In thousands) September 29, 2023 As a % of Total Net Revenue September 30, 2022 As a % of Total Net Revenue $ Change % Change Organic revenue $ 180,991 100 % $ 227,579 100 % $ (46,588) (20) % Acquired revenue — — % — — % — — % Total revenues $ 180,991 100 % $ 227,579 100 % $ (46,588) (20) % R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS See Note B to our consolidated financial statements (under the caption "Recently Issued Accounting Pronouncements"). R ECENTLY A DOPTED A CCOUNTING P RONOUNCEMENTS See Note B to our consolidated financial statements (under the caption "Recently Adopted Accounting Pronouncements"). 31 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes in our exposure to market risk from June 30, 2023 to September 29, 2023.