MERCURY SYSTEMS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS From time to time, information provided, statements made by our employees or information included in our filings with the Securities and Exchange Commission (“SEC”) may contain statements that are not historical facts but that are “forward-looking statements,” which involve risks and uncertainties. You can identify these statements by the 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, including tariffs, 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. 24 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 December 27, 2024, we had 2,374 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 foster a company-wide culture that values a broad range of solutions to problems, a wide array of skills and experiences, and multiple perspectives. We are committed to providing an inclusive environment that respects the varied backgrounds and viewpoints of our employees. We believe that the workforce required to grow our business and deliver creative solutions must be rich in diverse thought; and experience. Our initiatives focus on building and maintaining the talent that will create cohesive and collaborative teams that drive innovation. By adhering to these values, it will help our employees to realize their full potential 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 second quarter ended December 27, 2024 were $223.1 million, ($17.6) million, ($0.30), $0.07, and $22.0 million, respectively. Our consolidated revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the six months ended December 27, 2024 were $427.6 million, ($35.1) million, ($0.60), $0.11, and $43.5 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. 25 RESULTS OF OPERATIONS: There were 13 weeks included in the results of operations for the second quarters ended December 27, 2024 and December 29, 2023, respectively. The results for the second quarter ended December 27, 2024 are not necessarily indicative of the results to be expected for the full fiscal year. The second quarter ended December 27, 2024 compared to the second quarter ended December 29, 2023 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 27, 2024 As a % of Total Net Revenue December 29, 2023 As a % of Total Net Revenue Net revenues $ 223,125 100.0 % $ 197,463 100.0 % Cost of revenues 162,299 72.7 165,943 84.0 Gross margin 60,826 27.3 31,520 16.0 Operating expenses: Selling, general and administrative 40,501 18.2 44,470 22.5 Research and development 21,368 9.6 28,476 14.4 Amortization of intangible assets 11,154 5.0 12,270 6.3 Restructuring and other charges 40 — 2 — Acquisition costs and other related expenses 178 0.1 231 0.1 Total operating expenses 73,241 32.9 85,449 43.3 Loss from operations (12,415) (5.6) (53,929) (27.3) Interest income 406 0.2 29 — Interest expense (8,430) (3.8) (8,674) (4.4) Other expense, net (3,865) (1.7) (1,148) (0.5) Loss before income tax benefit (24,304) (10.9) (63,722) (32.3) Income tax benefit (6,725) (3.0) (18,141) (9.2) Net Loss $ (17,579) (7.9) % $ (45,581) (23.1) % R EVENUES Total revenues increased $25.7 million, or 13.0%, to $223.1 million during the second quarter ended December 27, 2024, as compared to $197.5 million during the second quarter ended December 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. Point in time revenue and over time revenue represented 55% and 45% of total revenues during the second quarter ended December 27, 2024, an increase of $29.1 million and decrease of $3.4 million, respectively. Point in time revenue and over time revenue represented 47% and 53% respectively, of total revenues during the second quarter ended December 29, 2023. Revenue increases by product grouping were driven by the integrated solutions, components, and modules and sub-assemblies which increased $18.3 million, $3.9 million, and $3.4 million, respectively during the second quarter ended December 27, 2024 when compared to the prior period. The increase in total revenue by end application was primarily driven by the radar and other end applications with increases of $36.0 million and $14.8 million respectively, partially offset by decreases to C4I and electronic warfare of $22.5 million and $2.2 million, respectively. The increase in total revenue by platform was also driven by higher Land, Naval, Other, and Space of $16.7 million, $13.5 million, $10.1 million, and $7.3 million, respectively, partially offset by a decrease to Airborne of $21.9 million. The largest program increases were related to LTAMDS, Aegis, and MH-60R/S, partially offset by decreases in the SCAR and F/A-18 programs when compared to the prior period. There were no programs comprising 10% or more of our revenues for the second quarters ended December 27, 2024 or December 29, 2023. 26 G ROSS M ARGIN Gross margin was 27.3% for the second quarter ended December 27, 2024, an increase of 1,130 basis points from the 16.0% gross margin realized during the second quarter ended December 29, 2023. The higher gross margin was driven primarily by net EAC change impact on our programs recognized over time of approximately $4.4 million recorded in the quarter, an incremental improvement of approximately $26.2 million, or 1,355 basis points, when compared to the prior period as well as lower inventory reserves of $12.4 million. The increase in inventory reserves in fiscal 2024 related to specifically identified excess and obsolete inventory primarily resulting from a shift in customer demand for our next generation product offering. These improvements in gross margin were partially offset by higher manufacturing adjustments of $4.1 million. 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: Second Quarters Ended (in thousands) December 27, 2024 December 29, 2023 Gross favorable $ 7,040 $ 5,455 Gross unfavorable (11,448) (36,106) Net impact of changes in estimates $ (4,408) $ (30,651) 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 $4.0 million, or 8.9%, to $40.5 million during the second quarter ended December 27, 2024, as compared to $44.5 million in the second quarter ended December 29, 2023. The decrease was primarily driven by lower bad debt expense of $5.0 million as well as the savings from reductions in force initiated in fiscal 2024, resulting in lower compensation costs of $4.0 million. These decreases were partially offset by higher bonus expense of $2.4 million as well as legal and consulting costs of $3.0 million. R ESEARCH AND D EVELOPMENT Research and development expenses decreased $7.1 million, or 25.0%, to $21.4 million during the second quarter ended December 27, 2024, as compared to $28.5 million during the second quarter ended December 29, 2023. The decrease during the second quarter ended December 27, 2024 was primarily driven by the savings from headcount reductions of 111 employees, initiated in fiscal 2024, resulting in lower expense of $7.7 million as well as decreased spend on outside services of $2.1 million. These decreases were partially offset by higher bonus expense of $3.1 million. A MORTIZATION OF I NTANGIBLE A SSETS Amortization of intangible assets decreased $1.1 million to $11.2 million during the second quarter ended December 27, 2024, as compared to $12.3 million during the second quarter ended December 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 There was an immaterial amount of restructuring and other charges during the second quarters ended December 27, 2024 and December 29, 2023. On January 29, 2025, we executed a workforce reduction that will eliminate approximately 145 positions, resulting in expected restructuring charges of approximately $5.0 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 quarters ended December 27, 2024 and December 29, 2023. I NTEREST I NCOME We recognized $0.4 million of interest income during the second quarter ended December 27, 2024, as compared to an immaterial amount during the second quarter ended December 29, 2023. The increase was driven by higher average cash and cash equivalents during the period. 27 I NTEREST E XPENSE We incurred $8.4 million of interest expense during the second quarter ended December 27, 2024, as compared to $8.7 million during the second quarter ended December 29, 2023. The decrease was driven by lower average outstanding borrowings during the period on our existing credit facility (the "Revolver"). O THER E XPENSE, N ET Other expense, net was $3.9 million during the second quarter ended December 27, 2024, as compared to $1.1 million during the second quarter ended December 29, 2023. The second quarter ended December 27, 2024 includes $2.4 million net foreign currency translation losses, $1.1 million of financing costs, $0.1 million of consulting costs, and $0.1 million of securities class action expense. 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. I NCOME T AXES We recorded an income tax benefit of $6.7 million and $18.1 million on a loss before income taxes of $24.3 million and $63.7 million for the second quarters ended December 27, 2024 and December 29, 2023, respectively. During the second quarters ended December 27, 2024 and December 29, 2023, we recognized a tax provision of $0.1 million and $0.4 million related to stock compensation shortfalls, respectively. The effective tax rate for the second quarter ended December 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 second quarter ended December 29, 2023 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. 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. 28 Six months ended December 27, 2024 compared to the six months ended December 29, 2023 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 27, 2024 As a % of Total Net Revenue December 29, 2023 As a % of Total Net Revenue Net revenues $ 427,556 100.0 % $ 378,454 100.0 % Cost of revenues 314,940 73.7 296,407 78.3 Gross margin 112,616 26.3 82,047 21.7 Operating expenses: Selling, general and administrative 73,654 17.2 80,264 21.2 Research and development 39,751 9.3 60,348 15.9 Amortization of intangible assets 22,389 5.2 24,817 6.6 Restructuring and other charges 2,300 0.5 9,548 2.5 Acquisition costs and other related expenses 355 0.1 1,200 0.4 Total operating expenses 138,449 32.3 176,177 46.6 Loss from operations (25,833) (6.0) (94,130) (24.9) Interest income 950 0.2 132 — Interest expense (17,336) (4.1) (16,537) (4.4) Other expense, net (5,204) (1.2) (2,922) (0.7) Loss before income tax benefit (47,423) (11.1) (113,457) (30.0) Income tax benefit (12,319) (2.9) (31,168) (8.2) Net Loss $ (35,104) (8.2) % $ (82,289) (21.8) % R EVENUES Total revenues increased $49.1 million, or 13.0%, to $427.6 million during the six months ended December 27, 2024, as compared to $378.5 million during the six months ended December 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. Point in time revenue and over time revenue each represented 50% of total revenues during the six months ended December 27, 2024, an increase of $45.0 million and $4.1 million, respectively. Point and time revenue and over time revenue represented 45% and 55% respectively, of total revenue during the six months ended December 29, 2023. Revenue increases by product groupings were driven by the integrated solutions, modules and sub-assemblies and components which increased $26.1 million, $11.7 million and $11.3 million, respectively. The increase in total revenue by end application was primarily driven by the radar, other, and other sensor and effector increases of $43.1 million, $29.1 million, and $4.7 million respectively, partially offset by decreases to C4I and electronic warfare of $27.4 million and $0.3 million, respectively. The increase in total revenue by platform was also driven by higher Other, Land, Space and Naval of $30.3 million, $25.3 million, $16.6 million, and $13.0 million, respectively, partially offset by a decrease to Airborne of $36.1 million. The largest program increases were related to the LTAMDS, Aegis and MH-60R/S programs, partially offset by decreases to the SCAR and AARGM programs when compared to the prior period. There were no programs comprising 10% or more of our revenues for the six months ended December 27, 2024 or December 29, 2023. G ROSS M ARGIN Gross margin was 26.3% for the six months ended December 27, 2024, an increase of 460 basis points from the 21.7% gross margin realized during the six months ended December 29, 2023. The higher gross margin was driven primarily by net EAC change impact on our programs recognized over time of approximately $12.7 million recorded in the period, an incremental improvement of approximately $35.2 million, or 969 basis points, when compared to the prior period as well as lower inventory reserves of $9.4 million, partially offset by higher manufacturing adjustments of $12.3 million. 29 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: Six Months Ended (in thousands) December 27, 2024 December 29, 2023 Gross favorable $ 14,814 $ 11,790 Gross unfavorable (27,515) (59,704) Net impact of changes in estimates $ (12,701) $ (47,914) 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, 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 $6.6 million, or 8.2%, to $73.7 million during the six months ended December 27, 2024, as compared to $80.3 million during the six months ended December 29, 2023. The decrease was primarily driven by the reduction in force initiated in fiscal 2024, resulting in lower costs of $8.6 million, lower bad debt expense of $4.8 million, lower software licensing fees of $2.2 million, lower directors fees of $0.6 million, and lower facilities expense of $0.5 million. These decreases were partially offset by higher stock-based compensation of $3.5 million, higher bonus expense of $3.1 million, as well as higher legal and consulting costs of $3.7 million. R ESEARCH A ND D EVELOPMENT Research and development expenses decreased $20.6 million, or 34.1%, to $39.8 million during the six months ended December 27, 2024, as compared to $60.3 million during the six months ended December 29, 2023. The decrease was primarily driven by the savings from headcount reductions of 111 employees, initiated in fiscal 2024, resulting in lower expense of $18.1 million, as well as decreased spend on outside services, supplies, and consulting services of $6.5 million. These decreases were partially offset by higher bonus expense of $3.7 million. R ESTRUCTURING A ND O THER C HARGES Restructuring and other charges were $2.3 million during the six months ended December 27, 2024, as compared to $9.5 million during the six months ended December 29, 2023. Restructuring and other charges during the six months ended December 27, 2024 are primarily related to severance related charges. Restructuring and other charges during the six months ended December 29, 2023 include $9.5 million of severance costs related to a workforce reduction that eliminated approximately 150 positions. On January 29, 2025, we executed a workforce reduction that will eliminate approximately 145 positions, resulting in expected restructuring charges of approximately $5.0 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 Acquisition costs and other related expenses were $0.4 million during the six months ended December 27, 2024, as compared to $1.2 million during the six months ended December 29, 2023. The acquisition costs and other related expenses we incurred during the six months ended December 27, 2024 includes $0.4 million related to run-rate amortization of fair value adjustments from purchase accounting. Acquisition costs and other related expenses during the six months ended December 29, 2023 includes $0.4 million related to run-rate amortization of fair value adjustments from purchase accounting, $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. I NTEREST I NCOME We recognized $1.0 million of interest income during the six months ended December 27, 2024, as compared to $0.1 million during the six months ended December 29, 2023. The increase was driven by higher average cash and cash equivalents during the period. 30 I NTEREST E XPENSE We incurred $17.3 million of interest expense during the six months ended December 27, 2024, as compared to $16.5 million during the six months ended December 29, 2023. The increase was higher average outstanding borrowings during the period on our existing credit facility (the "Revolver"). O THER E XPENSE , N ET Other expense, net increased $2.3 million to $5.2 million during the six months ended December 27, 2024 as compared to $2.9 million during the six months ended December 29, 2023. There were $3.4 million of financing costs, $0.9 million of net foreign currency translation losses, $0.7 million of consulting costs, and $0.3 million of securities class action expense, partially offset by other income of $0.2 million during the six months ended December 27, 2024. 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. I NCOME T AXES We recorded an income tax benefit of $12.3 million and $31.2 million on a loss before income taxes of $47.4 million and $113.5 million for the six months ended December 27, 2024 and December 29, 2023, respectively. During the six months ended December 27, 2024 and December 29, 2023, we recognized a tax provision of $0.4 and $1.6 million related to stock compensation shortfalls, respectively. The effective tax rate for the six months ended December 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 six months ended December 29, 2023 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. 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. 31 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 second quarter and six months ended December 27, 2024, we did not have any additional borrowings or repayments. As of December 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 December 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 was an uncommitted arrangement such that we were not obligated to sell any receivables and the party had 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 had an indefinite term, with the agreement remaining in effect until termination 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 $58.1 million and $0.8 million, respectively, for the six months ended December 27, 2024. 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. C ASH F LOWS As of and For the Six Months Ended, (In thousands) December 27, 2024 December 29, 2023 Net cash provided by operating activities $ 70,802 $ 6,426 Net cash used in investing activities $ (7,891) $ (16,005) Net cash (used in) provided by financing activities $ (757) $ 106,217 Net increase in cash and cash equivalents $ 62,044 $ 97,083 Cash and cash equivalents at end of period $ 242,565 $ 168,646 Our cash and cash equivalents increased by $62.0 million from June 28, 2024 to December 27, 2024, as the result of $70.8 million of cash provided by operating activities, $1.9 million other investing activities, and $1.5 million proceeds from employee stock plans, partially offset by $9.8 million invested in purchases of property and equipment, and $2.2 million of cash paid in deferred financing and offering costs. 32 Operating Activities During the six months ended December 27, 2024, we had an inflow of $70.8 million in cash from operating activities compared to a $6.4 million inflow during the six months ended December 29, 2023. The higher inflow during the six months ended December 27, 2024 was primarily due to a lower net loss of $47.2 million, higher inflow from deferred revenues and customer advances of $38.1 million, lower benefit for deferred income taxes of $15.3 million, and an income tax refund received of $0.2 million as compared to income tax payments of $13.9 million during the six months ended December 29, 2023. This activity was partially offset by a lower inflow from accounts receivable, unbilled receivables and costs in excess of billings of $38.2 million and a $4.8 million lower provision for bad debt. The six months ended December 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 six months ended December 27, 2024, we invested $7.9 million, a decrease of $8.1 million, as compared to $16.0 million during the six months ended December 29, 2023 primarily due to $6.2 million lower purchases of property and equipment and an inflow of $1.9 million due to other investing activities. Financing Activities During the six months ended December 27, 2024, we had no additional borrowings on our Revolver as compared to $105.0 million of borrowings during the six months ended December 29, 2023. The six months ended December 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, partially offset by $1.5 million proceeds from employee stock plans. C OMMITMENTS, C ONTRACTUAL O BLIGATIONS AND C ONTINGENCIES The following is a schedule of our commitments and contractual obligations outstanding at December 27, 2024: (In thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Purchase obligations $ 124,422 $ 124,422 $ — $ — $ — Operating leases 82,783 14,386 27,705 21,826 18,866 $ 207,205 $ 138,808 $ 27,705 $ 21,826 $ 18,866 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 $124.4 million at December 27, 2024. We have a liability at December 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. 33 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. 34 The following table reconciles our net loss, the most directly comparable GAAP financial measure, to our adjusted EBITDA: Second Quarters Ended Six Months Ended (In thousands) December 27, 2024 December 29, 2023 December 27, 2024 December 29, 2023 Net loss $ (17,579) $ (45,581) $ (35,104) $ (82,289) Other non-operating adjustments, net 2,549 (1,042) 814 (311) Interest expense, net 8,024 8,645 16,386 16,405 Income tax benefit (6,725) (18,141) (12,319) (31,168) Depreciation 9,768 9,923 19,753 20,068 Amortization of intangible assets 11,154 12,270 22,389 24,817 Restructuring and other charges 40 2 2,300 9,548 Impairment of long-lived assets — — — — Acquisition, financing and other third party costs 1,109 860 3,440 2,192 Fair value adjustments from purchase accounting 178 178 355 355 Litigation and settlement expense, net 2,087 1,383 3,481 1,886 Stock-based and other non-cash compensation expense 11,424 10,195 21,984 19,146 Adjusted EBITDA $ 22,029 $ (21,308) $ 43,479 $ (19,351) 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. 35 The following tables reconcile net loss and diluted loss per share, the most directly comparable GAAP measures, to adjusted income (loss) and adjusted EPS: Second Quarters Ended (In thousands, except per share data) December 27, 2024 December 29, 2023 Net loss and loss per share $ (17,579) $ (0.30) $ (45,581) $ (0.79) Other non-operating adjustments, net 2,549 (1,042) Amortization of intangible assets 11,154 12,270 Restructuring and other charges 40 2 Impairment of long-lived assets — — Acquisition, financing and other third party costs 1,109 860 Fair value adjustments from purchase accounting 178 178 Litigation and settlement expense, net 2,087 1,383 Stock-based and other non-cash compensation expense 11,424 10,195 Impact to income taxes (1) (7,022) (2,446) Adjusted income (loss) and adjusted earnings (loss) per share (2) $ 3,940 $ 0.07 $ (24,181) $ (0.42) Diluted weighted-average shares outstanding 58,843 57,424 (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 were no impact to the calculation of adjusted earnings per share as a result of this for the second quarters ended December 27, 2024 and December 29, 2023. Six Months Ended (In thousands, except per share data) December 27, 2024 December 29, 2023 Net loss and loss per share $ (35,104) $ (0.60) $ (82,289) $ (1.44) Other non-operating adjustments, net 814 (311) Amortization of intangible assets 22,389 24,817 Restructuring and other charges 2,300 9,548 Impairment of long-lived assets — — Acquisition and financing costs 3,440 2,192 Fair value adjustments from purchase accounting 355 355 Litigation and settlement expense, net 3,481 1,886 Stock-based and other non-cash compensation expense 21,984 19,146 Impact to income taxes (1) (13,275) (13,204) Adjusted income (loss) and adjusted earnings (loss) per share (2) $ 6,384 $ 0.11 $ (37,860) $ (0.66) Diluted weighted-average shares outstanding 58,752 57,314 (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 is calculated using basic shares. There were no impact to the calculation of adjusted earnings per share as a result of this for the six months ended December 27, 2024 and December 29, 2023. 36 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: Second Quarters Ended Six Months Ended (In thousands) December 27, 2024 December 29, 2023 December 27, 2024 December 29, 2023 Net cash provided by operating activities $ 85,462 $ 45,494 $ 70,802 $ 6,426 Purchase of property and equipment (3,555) (7,990) (9,791) (16,005) Free cash flow $ 81,907 $ 37,504 $ 61,011 $ (9,579) 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"). 37 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 December 27, 2024.