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Item 2. Management’s Discussion and Analysis

2024-02-06 compared with 2023-11-07 · 216 added, 90 removed, 202 unchanged (60% of the section changed)

4 unchanged sentences

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.

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 our 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, capacity underutilization, increases in scrap or inventory write-offs, failure to achieve or maintain manufacturing quality certifications, such as AS9100, the impact of 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 operational efficiency 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, litigation, including the 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 are discussed in our filings with the U.S.

Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

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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 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

secure design and manufacturing capabilities, are the foundational tenets of this highly successful model.

Mercury’s 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.

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

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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.

As of December 29, 2023, we had 2,550 employees.

We employ hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities to achieve our objectives to fully capitalize upon and maintain our technological leads in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications.

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

Our consolidated revenues, 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.

Our consolidated revenues, net loss, diluted net loss per share, adjusted loss per share (“adjusted EPS”), and adjusted EBITDA for the second quarter ended December 29, 2023 were $197.5 million, ($45.6) million, ($0.79), ($0.42), and ($21.3) million, respectively.

Our consolidated revenues, net loss, diluted net loss per share, adjusted EPS, and adjusted EBITDA for the six months ended December 29, 2023 were $378.5 million, ($82.3) million, ($1.44), ($0.66), and ($19.4) million, respectively.

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

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

Revenue September 30, 2022 As a % of

There were 13 weeks included in the results of operations for the second quarters ended December 29, 2023 and December 30, 2022, respectively.

There were 26 weeks during the six months ended December 29, 2023 and December 30, 2022, respectively.

The results for the second quarter and six months ended December 29, 2023 are not necessarily indicative of the results to be expected for the full fiscal year.

The second quarter ended December 29, 2023 compared to the second quarter ended December 30, 2022

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

(In thousands) December 29, 2023 As a % of

Revenue December 30, 2022 As a % of

Net revenues $ 197,463 100.0 % $ 229,588 100.0 %

11 unchanged sentences

Interest expense (8,674) (4.4) (6,590) (2.9)

Other expense, net (1,774) (1.0) (3,645) (1.5)

Loss before income taxes (49,735) (27.5) (15,357) (6.7)

Other (expense) income, net (1,148) (0.5) 846 0.4

Loss before income tax benefit (63,722) (32.3) (13,071) (5.7)

Income tax benefit (18,141) (9.2) (2,151) (0.9)

Net loss $ (45,581) (23.1) % $ (10,920) (4.8) %

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.

Total revenues decreased $32.1 million, or 14.0%, to $197.5 million during the second quarter ended December 29, 2023, as compared to $229.6 million during the second quarter ended December 30, 2022.

Revenues decreased year over year as we continue to prioritize resources to execute our challenged programs, transition from our higher mix of development programs and aim to better align our operating cadence with prudent working capital management.

As a result, we are experiencing a temporary volume shift in our total revenue, especially our over time revenue which decreased by approximately $25.1 million.

We expect this trend to continue through the remainder of fiscal 2024.

Over time revenue represented 53% of total revenues during the second quarter ended December 29, 2023, as compared to 56% of total revenues during the second quarter ended December 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.

In addition, we adjusted our estimates at completion for incremental technical and execution costs in the quarter, especially as related to one of our challenged programs as well as certain other development and production programs resulting in a cumulative adjustment to reduce revenues in the second quarter.

In addition, as we transition our operating cadence with a goal of more properly balancing our material purchases with contract awards and resource availability to drive better working capital results, we are experiencing a near-term revenue timing dynamic.

We experienced decreases across each product grouping during the second quarter ended December 29, 2023 when compared to the prior period;

modules and sub-assemblies, components, and integrated subsystems, decreased $26.5 million, $3.7 million, and $1.9 million, respectively.

The decrease in total revenue was primarily driven by the radar, other sensor and

effector and electronic warfare end applications decreases of $30.5 million, $6.7 million, and $5.3 million, respectively, partially offset by increases to C4I end applications of $11.7 million.

The decrease in total revenue was also driven by lower Naval and Other platforms of $18.3 million and $17.9 million, respectively, partially offset by increases to airborne platforms of $4.9 million.

The largest program decreases were related to the AEGIS program, a secure processing program, and the THAAD program, partially offset by increases to a large C4I program and the F/A-18 program when compared to the prior period.

There were no programs comprising 10% or more of our revenues for the second quarters ended December 29, 2023 or December 30, 2022.

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.

Gross margin was 16.0% for the second quarter ended December 29, 2023, a decrease of 1930 basis points from the 35.3% gross margin realized during the second quarter ended December 30, 2022.

The lower gross margin was driven by cost growth impacts and higher manufacturing adjustments, primarily related to inventory reserves and scrap.

The growth in estimated costs to complete during fiscal 2024 has significantly reduced the overall margins recognized on the affected programs through completion.

Program cost growth of approximately $30.6 million was recorded in the quarter resulting in an incremental impact of approximately $23.3 million to gross margin, or 1230 basis points, when compared to the prior period.

Approximately $13.7 million of total cost growth impact in the quarter was attributable to the approximately 20 challenged programs, of which $12.6 million related to one program.

The remaining $16.9 million was incurred across certain other development and production programs based on facts and circumstances in the quarter.

The decrease in gross margin was also attributable to higher manufacturing adjustments of approximately $13.3 million related to inventory reserves and scrap.

The increase in inventory reserves was related to specifically identified excess and obsolete inventory primarily resulting from a shift in customer demand for our next generation product offering.

In addition, we are actively marketing and selling certain of our slow moving inventory with certain parts expected to be at a discount.

The increase in scrap was primarily a result of higher levels of discrepant material especially as related to the common processing architecture across several of our remaining challenged programs.

We have several initiatives underway to address more efficient and cost-effective producibility of these subsystems.

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.

Selling, general and administrative expenses decreased $0.6 million, or 1.3%, to $44.5 million during the second quarter ended December 29, 2023, as compared to $45.1 million in the second quarter ended December 30, 2022.

The decrease was primarily driven by the reduction in force initiated on August 9, 2023, resulting in lower compensation costs including $2.5 million of stock compensation expense, $1.3 million of bonus expense, as well as a reduction in controllable spend.

These decreases were partially offset by contract asset write-offs of $4.8 million as a result of negotiating settlement terms with our customers to reduce scope, or otherwise exit contracts, especially as related to certain challenged programs.

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.

Research and development expenses increased $1.6 million, or 5.8%, to $28.5 million during the second quarter ended December 29, 2023, as compared to $26.9 million during the second quarter ended December 30, 2022.

The increase during the second quarter ended December 29, 2023 was driven by higher compensation costs of $1.3 million and $1.2 million of incremental R&D spend on equipment and supplies and outside services, partially offset by lower bonus expense of $0.8 million as compared to the second quarter ended December 30, 2022.

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.

Amortization of intangible assets decreased $1.3 million to $12.3 million during the second quarter ended December 29, 2023, as compared to $13.5 million during the second quarter ended December 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:

There was an immaterial amount of restructuring and other charges during the second quarter ended December 29, 2023.

Restructuring and other charges during the second quarter ended December 30, 2022 included $1.0 million of costs related to facility optimization efforts associated with 1MPACT, including $0.8 million related to lease asset impairment, as well as $0.6 million related to severance costs and the remaining $0.4 million related to third party consulting costs associated with 1MPACT.

On January 12, 2024, we initiated and approved a workforce reduction that will eliminate approximately 100 positions, resulting in expected restructuring charges of approximately $10 - 12 million.

All of the restructuring and other charges will be classified as Operating expenses in the Consolidated Statements of Operations and Comprehensive Loss and any remaining restructuring obligations are expected to be paid within the next twelve months.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

There was an immaterial amount of acquisition costs and other related expenses during the second quarter ended December 29, 2023.

The acquisition costs and other related expenses during the second quarter ended December 30, 2022 were primarily related to $0.6 million for third-party advisory fees in connection with engagements by activist investors and other acquisition related costs.

I NTEREST E XPENSE

We incurred $8.7 million of interest expense during the second quarter ended December 29, 2023, as compared to $6.6 million during the second quarter ended December 30, 2022.

The increase was driven by a higher interest rate and higher average outstanding borrowings during the period on our existing credit facility (the "Revolver").

O THER (E XPENSE ) I NCOME, N ET

Other expense, net was $1.1 million during the second quarter ended December 29, 2023, as compared to other income, net of $0.8 million during the second quarter ended December 30, 2022.

The second quarter ended December 29, 2023 includes litigation and settlement expenses of $1.4 million and $0.8 million of financing costs, partially offset by net foreign currency translation gains of $0.7 million and $0.4 million of other income.

The second quarter ended December 30, 2022 includes net foreign currency translation gains of $1.4 million offset by $0.5 million of financing costs.

I NCOME T AXES

We recorded an income tax benefit of $18.1 million and $2.2 million on a loss before income taxes of $63.7 million and $13.1 million for the second quarters ended December 29, 2023 and December 30, 2022, respectively.

During the second quarters ended December 29, 2023 and December 30, 2022, we recognized a tax provision of $0.4 million and $0.1 million related to stock compensation shortfalls, respectively.

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

The effective tax rate for the second quarters ended December 29, 2023 and December 30, 2022 differed from the federal statutory rate primarily due to federal and state research and development credits, non-deductible compensation, stock compensation shortfalls and state taxes.

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

The Tax Cuts and Jobs Act of 2017 requires companies to capitalize and amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes, effective for us beginning in the fiscal year ended June 30, 2023.

As a result, we have recorded a deferred tax asset through the second quarter ended December 29, 2023 of $88.9 million.

During the second quarter ended December 29, 2023, we have made $0.3 million of tax payments related to this requirement.

We will continue to monitor guidance and any proposed regulations and adjust the estimates as necessary.

Six months ended December 29, 2023 compared to the six months ended December 30, 2022

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

(In thousands) December 29, 2023 As a % of

Revenue December 30, 2022 As a % of

Net revenues $ 378,454 100.0 % $ 457,167 100.0 %

Cost of revenues 296,407 78.3 298,112 65.2

Gross margin 82,047 21.7 159,055 34.8

Operating expenses:

Selling, general and administrative 80,264 21.2 84,000 18.4

Research and development 60,348 15.9 54,672 12.0

Amortization of intangible assets 24,817 6.6 28,110 6.1

Restructuring and other charges 9,548 2.5 3,577 0.8

Acquisition costs and other related expenses 1,200 0.4 3,437 0.8

Total operating expenses 176,177 46.6 173,796 38.1

Loss from operations (94,130) (24.9) (14,741) (3.3)

Interest income 132 — 249 0.1

Interest expense (16,537) (4.4) (11,137) (2.4)

Other expense, net (2,922) (0.7) (2,799) (0.6)

Loss before income tax benefit (113,457) (30.0) (28,428) (6.2)

Income tax benefit (31,168) (8.2) (3,173) (0.7)

Net loss $ (82,289) (21.8) % $ (25,255) (5.5) %

Total revenues decreased $78.7 million, or 17.2%, to $378.5 million during the six months ended December 29, 2023, as compared to $457.2 million during the six months ended December 30, 2022.

As a result, we are observing a temporary volume shift in our total revenue, especially our over time revenue which decreased by approximately $63.8 million.

We expect this trend to continue through the remainder of fiscal 2024.

Over time revenue represented 55% of total revenues during the six months ended December 29, 2023, as compared to 60% of total revenues during the six months ended December 30, 2022.

We experienced product grouping decreases driven by modules and sub-assemblies and integrated subsystems, which decreased $44.7 million and $35.9 million, respectively, partially offset by an increase in the components product grouping of $1.9 million.

The decrease in total revenue was primarily driven by the radar, electronic warfare and other end applications decreases of $55.3 million, $12.3 million, and $12.2 million, respectively, partially offset by increases to C4I end applications of $7.8 million.

We experienced decreases across each platform during the six months ended December 29, 2023 when compared to the prior period;

Other, Naval, Land and Airborne platforms decreased $36.6 million, $25.4 million, $11.0 million and $5.7 million, respectively.

The largest program decreases were related to the LTAMDS, AEGIS and P8 programs, partially offset by increases to a large C4I program and the F/A-18 program when compared to the prior period.

There were no programs comprising 10% or more of our revenues for the six months quarters ended December 29, 2023 or December 30, 2022.

G ROSS M ARGIN

Gross margin was 21.7% for the six months ended December 29, 2023, a decrease of 1310 basis points from the 34.8% gross margin realized during the six months ended December 30, 2022.

The lower gross margin was driven by cost growth impacts and higher manufacturing adjustments, primarily related to inventory reserves, scrap and certain other non-recurring cost adjustments.

The growth in estimated costs to complete during fiscal 2024 has significantly reduced the overall margins recognized on the affected programs through completion.

Program cost growth of approximately $48.0 million was recorded in the six months resulting in an incremental impact of approximately $27.9 million to gross margin, or 840 basis points, when compared to the prior period.

Approximately, $19.3 million of total cost growth impact in the six months was attributable to the approximately 20 challenged programs, of which a total of $17.7 million related to two programs.

The remaining $28.7 million was incurred across certain other development and production programs based on facts and circumstances in the quarter.

The decrease in gross margin was also attributable to higher manufacturing adjustments of approximately $18.1 million related to inventory reserves and scrap.

The increase in inventory reserves was related to specifically identified excess and obsolete inventory primarily resulting from a shift in customer demand for our next generation product offering.

In addition, we are actively marketing and selling certain of our slow moving inventory with certain parts expected to be at a discount.

The increase in scrap was primarily a result of higher levels of discrepant material especially as related to the common processing architecture across several of our remaining challenged programs.

We have several initiatives underway to address more efficient and cost-effective producibility of these subsystems.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses decreased $3.7 million, or 4.4%, to $80.3 million during the six months ended December 29, 2023, as compared to $84.0 million during the six months ended December 30, 2022.

The decrease was primarily driven by the reduction in force initiated on August 9, 2023, resulting in lower compensation costs including $5.7 million of lower stock compensation and $4.1 million of lower bonus expense.

R ESEARCH A ND D EVELOPMENT

Research and development expenses increased $5.7 million, or 10.4%, to $60.3 million during the six months ended December 29, 2023, as compared to $54.7 million during the six months ended December 30, 2022.

The increase was primarily due to an increase in compensation costs of $4.8 million, incremental R&D spend on equipment, supplies and outside services totaling $2.9 million, partially offset by lower bonus expense of $2.3 million as compared to the six months ended December 30, 2022.

R ESTRUCTURING A ND O THER C HARGES

Restructuring and other charges were $9.5 million during the six months ended December 29, 2023, as compared to $3.6 million during the six months ended December 30, 2022.

During the six months ended December 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;

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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.

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

On January 12, 2024, we initiated and approved a workforce reduction that will eliminate approximately 100 positions, resulting in expected restructuring charges of approximately $10 - 12 million.

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.

Acquisition costs and other related expenses were $1.2 million during the six months ended December 29, 2023, as compared to $3.4 million during the six months ended December 30, 2022.

The acquisition costs and other related expenses we incurred during the six months ended December 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.

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

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.

We incurred $16.5 million of interest expense during the six months ended December 29, 2023, as compared to $11.1 million during the six months ended December 30, 2022.

The increase was driven by an increase in interest rate and higher average borrowings outstanding on our Revolver as compared to the six months ended December 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.

Other expense, net increased $0.1 million to $2.9 million during the six months ended December 29, 2023 as compared to $2.8 million during the six months ended December 30, 2022.

There was $1.9 million of litigation and settlement costs, $1.4 million of financing costs and $0.3 million of net foreign currency translation losses, partially offset by other income of $0.7 million.

during the six months ended December 29, 2023.

There was $1.4 million of litigation and settlement costs, $1.1 million of financing costs and $0.4 million of net foreign currency translation losses during the six months ended December 30, 2022.

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.

We recorded an income tax benefit of $31.2 million and $3.2 million on a loss before income taxes of $113.5 million and $28.4 million for the six months ended December 29, 2023 and December 30, 2022, respectively.

During the six months quarters ended December 29, 2023 and December 30, 2022, we recognized a tax provision of $1.6 and $1.7 million related to stock compensation shortfalls, respectively.

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

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

As a result, we have recorded a deferred tax asset through the second quarter ended December 29, 2023 of $88.9 million.

During the six months ended December 29, 2023, we have made $15.3 million of tax payments related to this requirement.

We will continue to monitor guidance and any proposed regulations and adjust the estimates as necessary.

L IQUIDITY AND C APITAL R ESOURCES

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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.

As we complete our challenged programs and then receive follow-on production awards, we believe that both unbilled receivables and inventory is expected to convert to cash reducing our working capital balances.

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

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

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.

The borrowing capacity as defined under the Revolver as of December 29, 2023 is approximately $750.0 million, less outstanding borrowings of $616.5 million.

On November 7, 2023, 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 proactively executed Amendment No.

5 to the Revolver, as amended to date, with a syndicate of commercial banks and Bank of America, N.A acting as the administrative agent allowing for a temporary increase in the Consolidated Total Net Leverage Ratio covenant requirement from 4.50 to 5.25 for the second quarter ended December 29, 2023.

As of December 29, 2023, the Company was in compliance with all covenants and conditions under the Revolver and expects to be within our covenant and conditions for the remainder of the year.

Refer to exhibit 10.1 filed on Form 8-K filed by the Company with the SEC on November 7, 2023.

Receivables Purchase Agreement

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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.

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)

We factored accounts receivable and incurred factoring fees of approximately $48.2 million and $1.3 million, respectively, for the six months ended December 29, 2023.

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

As of and For the Six Months Ended,

(In thousands) December 29, 2023 December 30, 2022

Net cash provided by (used in) operating activities $ 6,426 $ (30,647)

Net cash used in investing activities $ (16,005) $ (20,402)

Net cash provided by financing activities $ 106,217 $ 62,330

Net increase (decrease) in cash and cash equivalents $ 17,806 $ (13,673)

Net increase in cash and cash equivalents $ 97,083 $ 11,290

Cash and cash equivalents at end of period $ 168,646 $ 76,944

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.

Our cash and cash equivalents increased by $97.1 million from June 30, 2023 to December 29, 2023, primarily as the result of $6.4 million of cash generated from operating activities and $105.0 million of borrowings on our Revolver, partially offset by $16.0 million invested in purchases of property and equipment.

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.

During the six months ended December 29, 2023, we had an inflow of $6.4 million in cash from operating activities compared to a $30.6 million outflow during the six months ended December 30, 2022.

The inflow during the six months ended December 29, 2023 was primarily due to a $69.7 million inflow from accounts receivable, unbilled receivables and costs in excess of billings as compared to a $30.9 million outflow during the six months ended December 30, 2022.

The six months ended December 29, 2023 also included lower outflows due to inventory, prepaid expenses and other current assets, and accounts payable, accrued expenses, and accrued compensation as compared to the six months ended December 30, 2022.

This activity was partially offset by outflows of $13.9 million, $5.8 million, and $2.7 million of income taxes payable, prepaid income taxes, and other non-current assets, respectively.

Cash paid for income taxes and interest during the six months ended December 29, 2023 also increased by $12.4 million and $4.9 million, respectively, as compared to the six months ended December 30, 2022, further offsetting the increase.

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.

During the six months ended December 29, 2023, we invested $16.0 million, a decrease of $4.4 million, as compared to $20.4 million during the six months ended December 30, 2022 primarily due to lower 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.

During the six months ended December 29, 2023, we had $105.0 million of borrowings on our Revolver as compared to $100.0 million of borrowings during the six months ended December 30, 2022.

During the six months ended December 30, 2022, the borrowings were partially offset by payments under credit facilities of $40.0 million while there were no such payments made during the six months ended December 29, 2023.

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:

The following is a schedule of our commitments and contractual obligations outstanding at December 29, 2023:

(In thousands) Total Less Than

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Purchase obligations represent open non-cancelable purchase commitments for certain inventory components and services used in normal operations.

The purchase commitments covered by these agreements are for less than one year and aggregated approxi mately $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.

The purchase commitments covered by these agreements are for less than one year and aggregated approxi mately $122.4 million at December 29, 2023.

We have a liability at December 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.

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

First Quarters Ended

(In thousands) September 29, 2023 September 30, 2022

Second Quarters Ended Six Months Ended

(In thousands) December 29, 2023 December 30, 2022 December 29, 2023 December 30, 2022

Net loss $ (45,581) $ (10,920) $ (82,289) $ (25,255)

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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

Second Quarters Ended

(In thousands, except per share data) December 29, 2023 December 30, 2022

Net loss and loss per share $ (45,581) $ (0.79) $ (10,920) $ (0.19)

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(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.

There was no impact to the calculation of adjusted earnings per share as a result of this for the second quarter ended December 30, 2022.

Six Months Ended

(In thousands, except per share data) December 29, 2023 December 30, 2022

Net loss and loss per share $ (82,289) $ (1.44) $ (25,255) $ (0.45)

Other non-operating adjustments, net (311) 334

Amortization of intangible assets 24,817 28,110

Restructuring and other charges 9,548 3,577

Impairment of long-lived assets — —

Acquisition and financing costs 2,192 4,173

Fair value adjustments from purchase accounting 355 1

Litigation and settlement expense, net 1,886 1,375

COVID related expenses — 61

Stock-based and other non-cash compensation expense 19,146 23,943

Impact to income taxes (1)

(13,204) (8,230)

Adjusted (loss) income and adjusted (loss) earnings per share (2)

$ (37,860) $ (0.66) $ 28,089 $ 0.50

Diluted weighted-average shares outstanding 57,314 56,445

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

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

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

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

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs.

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

First Quarters Ended

(In thousands) September 29, 2023 September 30, 2022

Net cash used in operating activities $ (39,068) $ (66,039)

Second Quarters Ended Six Months Ended

(In thousands) December 29, 2023 December 30, 2022 December 29, 2023 December 30, 2022

Net cash provided by (used in) operating activities $ 45,494 $ 35,392 $ 6,426 $ (30,647)

Purchase of property and equipment (7,990) (13,176) (16,005) (20,504)

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

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the first quarters and first quarters ended September 29, 2023 and September 30, 2022, respectively:

(In thousands) September 29, 2023 As a % of

Revenue September 30, 2022 As a % of

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the second quarters and six months ended December 29, 2023 and December 30, 2022, respectively:

(In thousands) December 29, 2023 As a % of

Revenue December 30, 2022 As a % of

Revenue $ Change % Change

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Total revenues $ 197,463 100 % $ 229,588 100 % $ (32,125) (14) %

(In thousands) December 29, 2023 As a % of

Revenue December 30, 2022 As a % of

Revenue $ Change % Change

Organic revenue $ 378,454 100 % $ 457,167 100 % $ (78,713) (17) %

Acquired revenue — — % — — % — — %

Total revenues $ 378,454 100 % $ 457,167 100 % $ (78,713) (17) %

R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in our exposure to market risk from June 30, 2023 to September 29, 2023.

There were no material changes in our exposure to market risk from June 30, 2023 to December 29, 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis