Item 2. Management’s Discussion and Analysis
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 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 our 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 our products, shortages in or delays in receiving components, supply chain delays or volatility for critical components, production delays or unanticipated expenses including due to quality issues or manufacturing execution issues, adherence to required manufacturing standards, 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 28, 2024. 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 is a technology company that delivers mission-critical processing power to the edge - where signals and data are collected - to solve the most pressing aerospace and defense challenges. Mercury’s products and solutions are deployed in more than 300 programs and across 35 countries. The Company is headquartered in Andover, Massachusetts, and has over 20 locations worldwide.
The Mercury Processing Platform is the unique advantage we provide to our customers. It comprises the innovative technologies we’ve developed and acquired for more than 40 years that bring integrated, mission-critical processing capabilities to the edge. Our processing platform spans the full breadth of signal processing—from radio frequency (“RF”) front end to the human-machine interface—to rapidly convert meaningful data, gathered in the most remote and hostile environments, into critical decisions. It allows us to offer standard products and custom solutions from silicon to system scale, including components, modules, subsystems, and systems and it embodies the customer-centric approach we take to delivering capabilities that are mission-ready, trusted and secure, software-defined, and open and modular.
As a leading manufacturer of essential components, products, modules and subsystems, we sell to all of the top defense prime contractors, the U.S. government and original equipment manufacturers (“OEM”) commercial aerospace companies. Our mission-critical products and solutions are deployed by our customers for a variety of applications including sensor and radar processing, electronic warfare, avionics, weapons, and command, control, communications, and intelligence (“C4I”). Mercury has built a trusted, robust portfolio of proven capabilities, 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.
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Our deep, long-standing relationships with leading high-tech and other commercial companies, coupled with our targeted research and development (“R&D”) investments and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. We are leading the development and adaptation of commercial technology for aerospace and defense solutions. From chip-scale to system scale and from data, including 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”).
As of September 27, 2024, we had 2,369 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 earnings per share (“adjusted EPS”), and adjusted EBITDA for the first quarter ended September 27, 2024 were $204.4 million, ($17.5) million, ($0.30), $0.04, and $21.5 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.
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RESULTS OF OPERATIONS:
There were 13 weeks included in the results of operations for the first quarters ended September 27, 2024 and September 29, 2023, respectively. The results for the first quarter ended September 27, 2024 are not necessarily indicative of the results to be expected for the full fiscal year.
The first quarter ended September 27, 2024 compared to the first quarter ended September 29, 2023
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 27, 2024 As a % of
Total Net
Revenue September 29, 2023 As a % of
Total Net
Revenue
Net revenues $ 204,431 100.0 % $ 180,991 100.0 %
Cost of revenues 152,641 74.7 130,464 72.1
Gross margin 51,790 25.3 50,527 27.9
Operating expenses:
Selling, general and administrative 33,153 16.2 35,794 19.8
Research and development 18,383 9.0 31,872 17.6
Amortization of intangible assets 11,235 5.5 12,547 6.9
Restructuring and other charges 2,260 1.1 9,546 5.3
Acquisition costs and other related expenses 177 0.1 969 0.5
Total operating expenses 65,208 31.9 90,728 50.1
Loss from operations (13,418) (6.6) (40,201) (22.2)
Interest income 544 0.3 103 0.1
Interest expense (8,906) (4.4) (7,863) (4.4)
Other expense, net (1,339) (0.6) (1,774) (1.0)
Loss before income tax benefit (23,119) (11.3) (49,735) (27.5)
Income tax benefit (5,594) (2.7) (13,027) (7.2)
Net loss $ (17,525) (8.6) % $ (36,708) (20.3) %
R EVENUES
Total revenues increased $23.4 million, or 13.0%, to $204.4 million during the first quarter ended September 27, 2024, as compared to $181.0 million during the first quarter ended September 29, 2023. Revenues increased year over year as we pivoted our resources in fiscal 2024 to executing on our program base, including progress toward full rate production of our common processing architecture. As a result, we are experiencing a temporary volume shift in our total revenue, including our point in time revenue and over time revenue which increased by approximately $16.0 million and $7.4 million, respectively. Over time revenue represented 55% of total revenues during the first quarter ended September 27, 2024, as compared to 58% of total revenues during the first quarter ended September 29, 2023.
Revenue increases were driven by the modules and sub-assemblies, integrated solutions, and components product groupings which increased $8.3 million, $7.8 million and $7.4 million, respectively during the first quarter ended September 27, 2024 when compared to the prior period. The increase in total revenue was primarily driven by the other, radar, other sensor and effector, and electronic warfare end applications with increases of $14.3 million, $7.0 million, $5.2 million, and $1.9 million respectively, partially offset by a decrease to C4I end applications of $5.0 million. The increase in total revenue was also driven by higher Other, Space, and Land platforms of $20.2 million, $9.3 million and $8.6 million, respectively, partially offset by decreases to Airborne and Naval platforms of $14.2 million and $0.5 million, respectively. The largest program increases were related to a strategic weapons program, a secure processing program, and MH-60R/S, partially offset by decreases in the F-35, AARGM, and CH-53K programs when compared to the prior period. There were no programs comprising 10% or more of our revenues for the first quarters ended September 27, 2024 or September 29, 2023.
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G ROSS M ARGIN
Gross margin was 25.3% for the first quarter ended September 27, 2024, a decrease of 260 basis points from the 27.9% gross margin realized during the first quarter ended September 29, 2023. The lower gross margin was driven primarily by higher manufacturing adjustments and inventory reserves of $11.2 million, partially offset by net EAC change impact on our programs recognized over time of approximately $8.3 million recorded in the quarter, an incremental improvement of approximately $8.2 million, or 500 basis points, when compared to the prior period.
We had the following aggregate effects of favorable and unfavorable margin impacts as a result of changes in estimates across our portfolio for the period presented:
First Quarters Ended
(in thousands) September 27, 2024 September 29, 2023
Gross favorable $ 7,774 $ 6,335
Gross unfavorable (16,067) (22,798)
Net impact of changes in estimates $ (8,293) $ (16,463)
The changes in estimates are assessed based on historical results and cumulative adjustments are recorded to recognize revenue to date based on changes in estimated margin on programs, including impact of contract amendments factored for potential risks and opportunities. We utilize the latest and best information available when revising our estimates and apply consistent judgement across the full portfolio of programs.
S ELLING , G ENERAL AND A DMINISTRATIVE
Selling, general and administrative expenses decreased $2.6 million, or 7.4%, to $33.2 million during the first quarter ended September 27, 2024, as compared to $35.8 million in the first quarter ended September 29, 2023. The decrease was primarily driven by the savings from reductions in force initiated in fiscal 2024, resulting in lower compensation costs including $5.0 million of salary and benefit expense as well as lower software licensing fees of $1.2 million, and lower directors fees of $0.5 million. These decreases were partially offset by higher stock-based compensation of $2.9 million.
R ESEARCH AND D EVELOPMENT
Research and development expenses decreased $13.5 million, or 42.3%, to $18.4 million during the first quarter ended September 27, 2024, as compared to $31.9 million during the first quarter ended September 29, 2023. The decrease during the first quarter ended September 27, 2024 was primarily driven by the savings from reductions in force initiated in fiscal 2024, reducing headcount by approximately 130, resulting in lower expense of $10.0 million as well as decreased spend on equipment, supplies, and outside services of $3.8 million.
A MORTIZATION OF I NTANGIBLE A SSETS
Amortization of intangible assets decreased $1.3 million to $11.2 million during the first quarter ended September 27, 2024, as compared to $12.5 million during the first quarter ended September 29, 2023, primarily due to various developed technology and customer relationship intangibles being fully amortized in fiscal 2024.
R ESTRUCTURING AND O THER C HARGES
We incurred $2.3 million of restructuring and other charges during the first quarter ended September 27, 2024, as compared to $9.5 million during the first quarter ended September 29, 2023. Restructuring and other charges during the first quarter ended September 27, 2024 are primarily related to severance related charges. Restructuring and other charges during the first quarter ended September 29, 2023 includes $9.5 million of severance costs related to a workforce reduction that eliminated approximately 150 positions.
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 first quarter ended September 27, 2024. The acquisition costs and other related expenses during the first quarter ended September 29, 2023 includes $0.3 million related to the conclusion of t he 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.
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I NTEREST E XPENSE
We incurred $8.9 million of interest expense during the first quarter ended September 27, 2024, as compared to $7.9 million during the first quarter ended September 29, 2023. 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, N ET
Other expense, net was $1.3 million during the first quarter ended September 27, 2024, as compared to $1.8 million during the first quarter ended September 29, 2023. The first quarter ended September 27, 2024 includes $2.3 million of financing costs, $0.5 million of consulting costs, and $0.2 million securities class action expenses, partially offset by $1.5 million net foreign currency translation gains and $0.2 million of other income. The first quarter ended September 29, 2023 includes net foreign currency translation losses of $1.0 million, financing costs and litigation and settlement expenses of $0.5 million, partially offset by other income of $0.3 million.
I NCOME T AXES
We recorded an income tax benefit of $5.6 million and $13.0 million on a loss before income taxes of $23.1 million and $49.7 million for the first quarters ended September 27, 2024 and September 29, 2023, respectively.
During the first quarters ended September 27, 2024 and September 29, 2023, we recognized a tax provision of $0.2 million and $1.2 million related to stock compensation shortfalls, respectively.
The effective tax rate for the first quarters ended September 27, 2024 differed from the federal statutory rate primarily due to federal and state research and development credits, non-deductible compensation and state taxes. The effective tax rate for the 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.
We continue to maintain a valuation allowance on the majority of our foreign net operating loss carryforwards and state research and developmental tax credit carryforwards. Based on forecasted taxable income and the scheduled reversal of the remaining deferred tax assets, we believe it is more likely than not that all other deferred tax assets will be recognized.
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 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.
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.
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Revolving Credit Facilities
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 part of Amendment No. 5, the Company agreed to a temporary reduction of Revolver capacity to $750.0 million through the earlier of May 15, 2024 or the filing of the compliance certificate for the period ended March 29, 2024.
On August 13, 2024, we executed Amendment No. 6 to the Revolver, decreasing the permanent borrowing capacity to $900.0 million, with a temporary reduction in credit availability to $750.0 million until we meet a minimum consolidated EBITDA level of $75.0 million.
During the first quarter ended September 27, 2024, we did not have any additional borrowings or repayments. As of September 27, 2024, 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. The borrowing capacity as defined under the Revolver as of September 27, 2024 is approximately $750.0 million, less outstanding borrowings of $591.5 million.
Receivables Purchase Agreement
On September 27, 2022, we entered into an uncommitted receivables purchase agreement (“RPA”), 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 the party has no obligation to purchase any receivables from us. Pursuant to the RPA, the party 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 the party, 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 to increase the capacity from $30.6 million to $60.0 million. On August 13, 2024, we terminated the RPA in conjunction with entering into a new receivables purchase and service agreement.
On August 13, 2024, we entered into a $60.0 million committed receivables purchase and servicing agreement (“RPSA”) with a new party. The RPSA has an initial term of two years. Pursuant to the RPSA, the new party has committed to purchase receivables from a certain number of agreed upon customers, maintaining a balance of purchased receivables at or below $60.0 million. We factored accounts receivable and incurred factoring fees of approximately $43.7 million and $0.4 million, respectively, for the first quarter ended September 27, 2024. We received $18.8 million of factoring proceeds on the first business day of the second quarter that were outstanding as of September 27, 2024. The $18.8 million was included in Accounts receivable, net of allowance for credit losses on the Consolidated Balance Sheet as of September 27, 2024. 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.
C ASH F LOWS
As of and For the First Quarters Ended,
(In thousands) September 27, 2024 September 29, 2023
Net cash used in operating activities $ (14,660) $ (39,068)
Net cash used in investing activities $ (6,236) $ (8,015)
Net cash (used in) provided by financing activities $ (2,249) $ 65,000
Net (decrease) increase in cash and cash equivalents $ (22,398) $ 17,806
Cash and cash equivalents at end of period $ 158,123 $ 89,369
Our cash and cash equivalents decreased by $22.4 million from June 28, 2024 to September 27, 2024, as the result of $14.7 million of cash used in operating activities, $6.2 million invested in purchases of property and equipment, and $2.2 million of cash paid in deferred financing and offering costs.
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Operating Activities
During the first quarter ended September 27, 2024, we had an outflow of $14.7 million in cash from operating activities compared to a $39.1 million outflow during the first quarter ended September 29, 2023. The lower outflow during the first quarter ended September 27, 2024 was primarily due to a higher inflow from deferred revenues and customer advances of $19.5 million, a lower net loss of $19.2 million, an income tax refund received of $1.0 million as compared to income tax payments of $13.9 million during the first quarter ended September 29, 2023, and a $13.7 million reduced outflow of inventory. This activity was partially offset by a $6.1 million outflow from accounts receivable, unbilled receivables and costs in excess of billings as compared to a $27.0 million inflow during the first quarter ended September 29, 2023 and a $14.0 million higher outflow from accounts payable, accrued expenses, and accrued compensation. The first quarter ended September 29, 2023 also included a $7.4 million inflow from the cash settlement for the termination of the interest rate swap.
Investing Activities
During the first quarter ended September 27, 2024, we invested $6.2 million, a decrease of $1.8 million, as compared to $8.0 million during the first quarter ended September 29, 2023 due to lower purchases of property and equipment.
Financing Activities
During the first quarter ended September 27, 2024, we had no additional borrowings on our Revolver as compared to $65.0 million of borrowings during the first quarter ended September 29, 2023. The first quarter ended September 27, 2024, included $2.2 million of cash paid in deferred financing in conjunction with the amendment to our Revolver during the first quarter of fiscal 2025.
C OMMITMENTS, C ONTRACTUAL O BLIGATIONS AND C ONTINGENCIES
The following is a schedule of our commitments and contractual obligations outstanding at September 27, 2024:
(In thousands) Total Less Than
1 Year 1-3
Years 3-5
Years More Than
5 Years
Purchase obligations $ 120,574 $ 120,574 $ — $ — $ —
Operating leases 85,590 15,455 27,035 22,762 20,338
$ 206,164 $ 136,029 $ 27,035 $ 22,762 $ 20,338
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 $120.6 million at September 27, 2024.
We have a liability at September 27, 2024 of $7.7 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.
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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, and free cash flow.
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.
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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 27, 2024 September 29, 2023
Net loss $ (17,525) $ (36,708)
Other non-operating adjustments, net (1,735) 731
Interest expense, net 8,362 7,760
Income tax benefit (5,594) (13,027)
Depreciation 9,985 10,145
Amortization of intangible assets 11,235 12,547
Restructuring and other charges 2,260 9,546
Impairment of long-lived assets — —
Acquisition, financing and other third party costs 2,331 1,332
Fair value adjustments from purchase accounting 177 177
Litigation and settlement expense, net 1,394 503
Stock-based and other non-cash compensation expense 10,560 8,951
Adjusted EBITDA $ 21,450 $ 1,957
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, 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.
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The following table reconciles 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 27, 2024 September 29, 2023
Net loss and loss per share $ (17,525) $ (0.30) $ (36,708) $ (0.64)
Other non-operating adjustments, net (1,735) 731
Amortization of intangible assets 11,235 12,547
Restructuring and other charges 2,260 9,546
Impairment of long-lived assets — —
Acquisition, financing and other third party costs 2,331 1,332
Fair value adjustments from purchase accounting 177 177
Litigation and settlement expense, net 1,394 503
Stock-based and other non-cash compensation expense 10,560 8,951
Impact to income taxes (1)
(6,253) (10,758)
Adjusted income (loss) and adjusted earnings (loss) per share (2)
$ 2,444 $ 0.04 $ (13,679) $ (0.24)
Diluted weighted-average shares outstanding 58,585 57,105
(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 per share or Adjusted loss per share is calculated using basic shares. There was no impact to the calculation of adjusted earnings per share as a result of this for the first quarters ended September 27, 2024 and September 29, 2023.
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.
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 27, 2024 September 29, 2023
Net cash used in operating activities $ (14,660) $ (39,068)
Purchase of property and equipment (6,236) (8,015)
Free cash flow $ (20,896) $ (47,083)
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").
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our exposure to market risk from June 28, 2024 to September 27, 2024.