The Company incurs restructuring and other charges in connection with management's decision to undertake certain actions to realign operating expenses through workforce reductions and the closure of certain Company facilities, businesses and product lines. The Company's adjustments reflected in restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post acquisition integration activities.
All of the restructuring and other charges are classified as Operating expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss)Loss and any remaining restructuring obligations are expected to be paid within the next twelve months. The restructuring liability is classified as Accrued expenses in the Consolidated Balance Sheets.
The following table presents the detail of charges included in the Company’s liability for restructuring and other charges:
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law which contained provisions that include a 15% corporate minimum tax effective for taxable years beginning after December 31, 2022 and a 1% excise tax on certain stock buybacks after December 31, 2022. The Company expects the impact of this legislation to be immaterial.12
Effective for tax years beginning after December 31, 2021, 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.
H.Debt
REVOLVING CREDIT FACILITY
On February 28, 2022, the Company amended the Revolverrevolving credit facility (the "Revolver") to increase and extend the borrowing capacity to a $1,100,000, 5-year revolving credit line, with the maturity extended to February 28, 2027. As of March 31,September 29, 2023, the Company's outstanding balance of unamortized deferred financing costs was $3,681,$3,211, which is being amortized to Other expense, net in the Consolidated Statements of Operations and Comprehensive Income (Loss)Loss on a straight line basis over the term of the Revolver.
As of March 31,September 29, 2023, the Company was in compliance with all covenants and conditions under the Revolver and there were outstanding borrowings of $511,500$576,500 against the Revolver, resulting in interest expense of $6,711 and $17,848$7,863 for the thirdfirst quarter and nine months ended March 31,September 29, 2023. The Company had a total of approximately $1,000,000 ofborrowing capacity as defined under the Revolver available as of March 31,September 29, 2023 is approximately $766,500, less outstanding borrowings of $511,500.$576,500. There were outstanding letters of creditcredit of $963 as$963 as of March 31,September 29, 2023.
J.I.Employee Benefit Plan
PENSION PLAN
The Company maintains a defined benefit pension plan (the “Plan”) for its Swiss employees, which is administered by an independent pension fund. The Plan is mandated by Swiss law and meets the criteria for a defined benefit plan under ASC 715, Compensation—Retirement Benefits (“ASC 715”), because participants of the Plan are entitled to a defined rate of return on contributions made. The independent pension fund is a multi-employer plan with unrestricted joint liability for all participating companies for which the Plan’s overfunding or underfunding is allocated to each participating company based on an allocation key determined by the Plan.
The Company recognizes a net asset or liability for the Plan equal to the difference between the projected benefit obligation of the Plan and the fair value of the Plan’s assets as required by ASC 715. The funded status may vary from year to year due to changes in the fair value of the Plan’s assets and variations on the underlying assumptions of the projected benefit obligation of the Plan. The Plan's funded status at March 31,September 29, 2023 was a net liability of $4,589,$4,073, which is recorded in Other non-current liabilities on the Consolidated Balance Sheet. The Company recorded a net gainloss of $46 and $142$56 in AOCI during the thirdfirst quarter and nine months ended March 31,September 29, 2023. The Company recorded a net gain of $48 and $144 in AOCI during the thirdfirst quarter and nine months April 1,ended September 30, 2022. The Company recognized net periodic benefit costs of $230 and $671$207 associated with the Plan for the thirdfirst quarter and nine months ended March 31, 2023, respectively.September 29, 2023. The Company recognized net periodic benefit costs of $267 and $805$221 associated with the Plan for the thirdfirst quarter and nine months ended April 1, 2022, respectively.September 30, 2022. The Company's total expected employer contributions to the Plan during fiscal 20232024 are $1,093.$1,125.
401(k) Plan
The Company maintains a qualified 401(k) plan (the “401(k) Plan”) for its U.S. employees. Effective in the first quarter of fiscal 2023, the Company increased the rate of its matching contributions from 3% to 6% ofemployees and matches participants' eligible annual compensation and changed the form of these contributions from cashup to 6% in Company stock. The Company may also make optional contributions to the plan for any plan year at its discretion. The Company had $1,868$2,501 and $2,705 of capitalized stock-based 401(k) matching compensation expense on the Consolidated Balance Sheet at March 31, 2023.September 29, 2023 and June 30, 2023, respectively. Stock-based 401(k) matching compensation cost is measured based on the value of the matching amount and is recognized as expense as incurred. During the thirdfirst quarter ended March 31,September 29, 2023, the Company recognized share-based matching contributions related to the 401(k) plan of $3,288$4,841 as compared to $2,145 of cash match$3,680 during the thirdfirst quarter ended April 1, 2022. During the nine months ended March 31, 2023, the Company recognized share-based matching contributions related to the 401(k) plan of $9,715 as compared to $5,966 of cash match during the nine months ended April 1,September 30, 2022.
K.Shareholders' Equity
STOCKHOLDER RIGHTS PLAN
On December 27, 2021, the Company's Board of Directors authorized and declared a dividend of one preferred share purchase right (a “Right”), payable on January 10, 2022, for each outstanding share of common stock par value $0.01 per share to the stockholders of record on that date. Each Right entitled the registered holder to purchase from the Company a unit of Series A Junior Preferred Stock, par value $0.01 per share, of the Company at a designated price per unit, subject to adjustment. The Rights initially trade with, and are inseparable from, the shares of common stock.
On June 24, 2022, the Company amended the Rights Agreement, dated as of December 27, 2021, to increase the ownership threshold for a person to be an “Acquiring Person” (as defined in the Rights Agreement) from 7.5% of common stock to 10% of common stock (10% of common stock to 20% of common stock in the case of a passive institutional investor).
Additional details about the Rights Agreement are contained in the Current Reports on Form 8-K filed by the Company with the SEC on December 29, 2021 and June 24, 2022.
On October 26, 2022 the Stockholder Rights Plan and the Rights thereunder expired.
L.J.Stock-Based Compensation
STOCK INCENTIVE PLANS
At March 31,September 29, 2023, the aggregate number of shares authorized for issuance under the Company’s Amended and Restated 2018 Stock Incentive Plan (the “2018 Plan”) is 7,862 shares, including 3,000 shares approved by the Company's shareholders on October 28, 2020 and 2,000 shares approved for future grant under the 2018 Plan by the Company's shareholders on October 26, 2022. On October 25, 2023, the Company's shareholders approved an additional 3,450 shares to be added to the 2018 plan. The 2018 Plan shares available for issuance also include 948 shares rolled into the 2018 Plan that were available for future grant under the Company’s 2005 Stock Incentive Plan, as amended and restated (the “2005 Plan”). The 2018 Plan replaced the 2005 Plan. The shares authorized for issuance under the 2018 Plan will continue to be increased by any future cancellations, forfeitures or terminations (other than by exercise) of awards under the 2005 Plan. The foregoing does not affect any outstanding awards under the 2005 Plan, which remain in full force and effect in accordance with their terms. The 2018 Plan provides for the grant of non-qualified and incentive stock options, restricted stock, stock appreciation rights and deferred stock awards to employees and non-employees. Stock options must be granted with an exercise price of not less than 100% of the fair value of the Company’s common stock on the date of grant and the options generally have a term of seven years. There were 2,690598 available shares for future grant under the 2018 Plan at March 31,September 29, 2023.
As part of the Company's ongoing annual equity grant program for employees, the Company grants performance-based restricted stock awards to certain executives and employees pursuant to the 2018 Plan. Performance awards vest based on the
requisite service period subject to the achievement of specific financial performance targets. Based on the performance targets, some of these awards require graded vesting which results in more rapid expense recognition compared to traditional time-based vesting over the same vesting period. The Company monitors the probability of achieving the performance targets on a quarterly basis and may adjust periodic stock compensation expense accordingly based on its determination of the likelihood for reaching targets. The performance targets generally include the achievement of internal performance targets in relation to a peer group of companies.
EMPLOYEE STOCK PURCHASE PLAN
At March 31,September 29, 2023, the aggregate number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is 2,300 shares, including 500 shares approved by the Company's shareholders on October 28, 2020. Under the ESPP, rights are granted to purchase shares of common stock at 85% of the lesser of the market value of such shares at either the beginning or the end of each six-month offering period. The ESPP permits employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee’s compensation as defined in the ESPP. There were 57 and 54no shares issued under the ESPP during the nine monthsfirst quarters ended March 31,September 29, 2023 and April 1,September 30, 2022, respectively. Shares available for future purchase under the ESPP totaled 256168 at March 31,September 29, 2023.
STOCK OPTION AND AWARD ACTIVITY
On August 15, 2023, the Company announced that William L. Ballhaus was appointed as the Company’s President and Chief Executive Officer. Mr. Ballhaus received an onboarding grant of premium-priced stock options ("New Hire Option") under the 2018 Plan. The Company and Mr. Ballhaus are parties to an employment agreement, which is included in exhibit 10.1 on Form 8-K filed by the Company with the SEC on August 15, 2023.
The New Hire Option is granted in four (4) tranches as follows: (w) 233,500 shares of the Company’s common stock with an exercise price equal to $42.00 (“Tranche 1”); (x) 233,500 shares of the Company’s common stock with an exercise price equal to $43.00 (“Tranche 2”); (y) 233,500 shares of the Company’s common stock with an exercise price equal to $46.00 (“Tranche 3”); and (z) 233,500 shares of the Company’s common stock with an exercise price equal to $49.00 (“Tranche 4”). Tranche 1 and Tranche 2 shall become vested and exercisable on the third anniversary of August 17, 2023 ("the Initial Grant Date") (subject to the Executive’s continued employment through such date) and shall expire on the fourth anniversary of the Initial Grant Date. Tranche 3 and Tranche 4 shall become vested and exercisable on the fourth anniversary of the Initial Grant Date (subject to the Executive’s continued employment through such date) and shall expire on the fifth anniversary of the Initial Grant Date.
The following table summarizes activity of the Company's stock option plans since June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value as of 9/29/23 |
Outstanding at June 30, 2023 | | — | | | $ | — | | | $ | — | | | — | | | — | |
Granted | | 934 | | | 12.71 | | | 45.00 | | | | | |
Exercised | | — | | | | | — | | | | | |
Canceled | | — | | | | | — | | | | | |
Outstanding at September 29, 2023 | | 934 | | | $ | 12.71 | | | $ | 45.00 | | | 3.42 | | — | |
Exercisable at September 29, 2023 | | — | | | $ | — | | | $ | — | | | — | | | — | |
There was no options vested or exercised during the first quarter ended September 29, 2023. Non-vested stock options are subject to the risk of forfeiture until the fulfillment of specified conditions. As of September 29, 2023, there was $11,351 of total unrecognized compensation cost related to non-vested options granted that is expected to be recognized over a weighted-average period 3.42 years from September 29, 2023.
The Company uses the Black-Scholes valuation model for estimating the fair value on the date of grant of stock options. The Company calculated the fair values of the options grants using the following weighted-average assumptions:
| | | | | | | | |
| | First Quarter Ended |
| | September 29, 2023 |
Expected volatility | | 45 | % |
Expected term | | 4 years |
Risk-free interest rate | | 4.44 | % |
Expected dividend yield | | — | % |
Weighted-average grant date fair value per share | | $ | 12.71 | |
The expected volatility of options granted has been determined using a weighted average of the historical volatility of the Company’s stock for a period equal to the expected life of the option. The expected life of options has been determined using the average of the contractual term and the weighted average vesting term of the options. The risk-free interest rate is based on a zero-coupon U.S. treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. The Company applied an estimated annual forfeiture rate based on historical averages in determining the expense recorded in each period. There was no stock options granted during fiscal year ended June 30, 2023.
The following table summarizes the status of the Company’s non-vested restricted stock awards and deferred stock awards since July 1, 2022:June 30, 2023:
| | | | | | | | | | | | | | |
| | Non-vested Restricted Stock Awards |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at June 30, 2023 | | 1,339 | | | $ | 54.45 | |
Granted | | 1,131 | | | 36.90 | |
Vested | | (187) | | | 64.43 | |
Forfeited | | (198) | | | 52.88 | |
Outstanding at September 29, 2023 | | 2,085 | | | $ | 44.28 | |
| | | | | | | | | | | | | | |
| | Non-vested Restricted Stock Awards |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at July 1, 2022 | | 2,305 | | | $ | 57.47 | |
Granted | | 269 | | | 54.52 | |
Vested | | (702) | | | 60.81 | |
Forfeited | | (214) | | | 55.74 | |
Outstanding at March 31, 2023 | | 1,658 | | | $ | 55.08 | |
STOCK-BASED COMPENSATION EXPENSE
The Company recognizes expense for its share-based payment plans in the Consolidated Statements of Operations and Comprehensive Income (Loss)Loss in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”). The Company had $1,893$1,188 and $1,229$1,215 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for the periods ended March 31,September 29, 2023 and July 1, 2022,June 30, 2023, respectively. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period, net of estimated forfeitures.
The following table presents share-based compensation expenses included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss):Loss:
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarters Ended | | Nine Months Ended |
| March 31, 2023 | | April 1, 2022 | | March 31, 2023 | | April 1, 2022 |
Cost of revenues | $ | 630 | | | $ | 467 | | | $ | 1,666 | | | $ | 1,348 | |
Selling, general and administrative | 7,577 | | | 6,845 | | | 20,732 | | | 20,438 | |
Research and development | 1,732 | | | 1,575 | | | 5,048 | | | 4,476 | |
Stock-based compensation expense before tax | 9,939 | | | 8,887 | | | 27,446 | | | 26,262 | |
Income taxes | (2,684) | | | (2,399) | | | (7,410) | | | (7,091) | |
Stock-based compensation expense, net of income taxes | $ | 7,255 | | | $ | 6,488 | | | $ | 20,036 | | | $ | 19,171 | |
| | | | | | | | | | | | |
| First Quarters Ended | |
| September 29, 2023 | | September 30, 2022 | |
Cost of revenues | $ | 816 | | | $ | 799 | | |
Selling, general and administrative | 1,761 | | | 4,878 | | |
Research and development | 1,540 | | | 1,572 | | |
Stock-based compensation expense before tax | 4,117 | | | 7,249 | | |
Income taxes | (1,112) | | | (1,957) | | |
Stock-based compensation expense, net of income taxes | $ | 3,005 | | | $ | 5,292 | | |
M.K.Operating Segment, Geographic Information and Significant Customers
Operating segments are defined as components of an enterprise evaluated regularly by the Company's chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. During the first quarter of fiscal 2022, the Company announced its 1MPACT value creation initiative to promote scale as the organization continues to grow.
The Company evaluated thisits internal reorganizationorganization under FASB ASC 280, Segment Reporting (“ASC 280”) to determine whether thisthere has been a change has impacted the Company'sto its conclusion of a single operating and reportable segment. The Company concluded this change hadthere has been no effectchanges given the CODM continues to evaluate and manage the Company on the basis of one operating and reportable segment. The Company utilized the management approach for determining its operating segment in accordance with ASC 280.
The geographic distribution of the Company’s revenues as determined by country in which the Company's legal subsidiary is domiciled is summarized as follows: | | | U.S. | | Europe | | Asia Pacific | | Eliminations | | Total | | U.S. | | Europe | | Asia Pacific | | Eliminations | | Total |
THIRD QUARTER ENDED MARCH 31, 2023 | | | | | | | | | | | |
FIRST QUARTER ENDED SEPTEMBER 29, 2023 | | FIRST QUARTER ENDED SEPTEMBER 29, 2023 | | | | | | | | | | |
Net revenues to unaffiliated customers | Net revenues to unaffiliated customers | | $ | 252,945 | | | $ | 10,525 | | | $ | 9 | | | $ | — | | | $ | 263,479 | | Net revenues to unaffiliated customers | | $ | 171,881 | | | $ | 9,104 | | | $ | 6 | | | $ | — | | | $ | 180,991 | |
Inter-geographic revenues | Inter-geographic revenues | | 1,794 | | | 26 | | | — | | | (1,820) | | | — | | Inter-geographic revenues | | 1,719 | | | 92 | | | — | | | (1,811) | | | — | |
Net revenues | Net revenues | | $ | 254,739 | | | $ | 10,551 | | | $ | 9 | | | $ | (1,820) | | | $ | 263,479 | | Net revenues | | $ | 173,600 | | | $ | 9,196 | | | $ | 6 | | | $ | (1,811) | | | $ | 180,991 | |
THIRD QUARTER ENDED APRIL 1, 2022 | | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 243,100 | | | $ | 9,216 | | | $ | 759 | | | $ | — | | | $ | 253,075 | | |
Inter-geographic revenues | | (729) | | | 824 | | | — | | | (95) | | | — | | |
Net revenues | | $ | 242,371 | | | $ | 10,040 | | | $ | 759 | | | $ | (95) | | | $ | 253,075 | | |
NINE MONTHS ENDED MARCH 31, 2023 | | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 690,922 | | | $ | 29,708 | | | $ | 16 | | | $ | — | | | $ | 720,646 | | |
Inter-geographic revenues | | 1,873 | | | 398 | | | — | | | (2,271) | | | — | | |
Net revenues | | $ | 692,795 | | | $ | 30,106 | | | $ | 16 | | | $ | (2,271) | | | $ | 720,646 | | |
NINE MONTHS ENDED APRIL 1, 2022 | | | | | | | | | | | |
FIRST QUARTER ENDED SEPTEMBER 30, 2022 | | FIRST QUARTER ENDED SEPTEMBER 30, 2022 | | | | | | | | | | |
Net revenues to unaffiliated customers | Net revenues to unaffiliated customers | | $ | 666,336 | | | $ | 31,211 | | | $ | 921 | | | $ | — | | | $ | 698,468 | | Net revenues to unaffiliated customers | | $ | 218,822 | | | $ | 8,752 | | | $ | 5 | | | $ | — | | | $ | 227,579 | |
Inter-geographic revenues | Inter-geographic revenues | | 2,418 | | | 2,152 | | | — | | | (4,570) | | | — | | Inter-geographic revenues | | 147 | | | 204 | | | — | | | (351) | | | — | |
Net revenues | Net revenues | | $ | 668,754 | | | $ | 33,363 | | | $ | 921 | | | $ | (4,570) | | | $ | 698,468 | | Net revenues | | $ | 218,969 | | | $ | 8,956 | | | $ | 5 | | | $ | (351) | | | $ | 227,579 | |
| |
The Company offers a broad family of products and processing solutions designed to meet the full range of requirements in compute-intensive, signal processing, image processing and command and control applications. To maintain a competitive advantage, the Company seeks to leverage technology investments across multiple product lines and product solutions.
The Company’s products are typically compute-intensive and require extremely high bandwidth and high throughput. These processing solutions often must also meet significant SWaPsize, weight and power ("SWaP") constraints for use in aircraft, unmanned aerial vehicles, ships and other platforms and be ruggedized for use in harsh environments. The Company's products transform the massive streams of digital data created in these applications into usable information in real time. The systems can scale from a few processors to thousands of processors.
In recent years, the Company completed a series of acquisitions that augmentedchanged its technological capabilities, applications and end markets. As these acquisitions and changes occurred, the Company's proportion of revenue derived from the sale of components in different technological areas, and modules, sub-assemblies and integrated subsystems which combine technologies into more complex diverse products has shifted. The following tables present revenue consistent with the Company's strategy of expanding its technological capabilities and program content. As additional information related to the Company’s products by end user, application, product grouping and/or platform is attained, the categorization of these products can vary over time. When this occurs, the Company reclassifies revenue by end user, application, product grouping and/or platform for prior periods. Such reclassifications typically do not materially change the underlying trends of results within each revenue category.
The following table presents the Company's net revenue by end user for the periods presented:
| | | | Third Quarters Ended | | Nine Months Ended | | | First Quarters Ended | |
| | | March 31, 2023 | | April 1, 2022 | | March 31, 2023 | | April 1, 2022 | | | September 29, 2023 | | September 30, 2022 | |
Domestic(1) | Domestic(1) | | $ | 238,159 | | | $ | 227,254 | | | $ | 648,948 | | | $ | 603,094 | | Domestic(1) | | $ | 146,467 | | | $ | 205,830 | | |
International/Foreign Military Sales(2) | International/Foreign Military Sales(2) | | 25,320 | | | 25,821 | | | 71,698 | | | 95,374 | | International/Foreign Military Sales(2) | | 34,524 | | | 21,749 | | |
Total Net Revenue | Total Net Revenue | | $ | 263,479 | | | $ | 253,075 | | | $ | 720,646 | | | $ | 698,468 | | Total Net Revenue | | $ | 180,991 | | | $ | 227,579 | | |
(1) Domestic revenues consist of sales where the end user is within the U.S., as well as sales to prime defense contractor customers where the ultimate end user location is not defined. (2) International/Foreign Military Sales consist of sales to U.S. prime defense contractor customers where the end user is outside the U.S., foreign military sales through the U.S. government, and direct sales to non-U.S. based customers intended for end use outside of the U.S.
The following table presents the Company's net revenue by end application for the periods presented: | | | Third Quarters Ended | | Nine Months Ended | | First Quarters Ended | |
| | | March 31, 2023 | | April 1, 2022 | | March 31, 2023 | | April 1, 2022 | | | September 29, 2023 | | September 30, 2022 | |
Radar(1) | Radar(1) | | $ | 83,853 | | | $ | 50,033 | | | $ | 180,968 | | | $ | 160,109 | | Radar(1) | | $ | 28,559 | | | $ | 53,408 | | |
Electronic Warfare(2) | Electronic Warfare(2) | | 35,939 | | | 44,010 | | | 104,746 | | | 110,320 | | Electronic Warfare(2) | | 28,141 | | | 35,089 | | |
Other Sensor & Effector(3) | Other Sensor & Effector(3) | | 20,143 | | | 23,768 | | | 70,679 | | | 77,374 | | Other Sensor & Effector(3) | | 21,166 | | | 21,203 | | |
Total Sensor & Effector | Total Sensor & Effector | | 139,935 | | | 117,811 | | | 356,393 | | | 347,803 | | Total Sensor & Effector | | 77,866 | | | 109,700 | | |
C4I(4) | C4I(4) | | 104,188 | | | 111,282 | | | 303,054 | | | 285,614 | | C4I(4) | | 91,204 | | | 104,041 | | |
Other(5) | Other(5) | | 19,356 | | | 23,982 | | | 61,199 | | | 65,051 | | Other(5) | | 11,921 | | | 13,838 | | |
Total Net Revenue | Total Net Revenue | | $ | 263,479 | | | $ | 253,075 | | | $ | 720,646 | | | $ | 698,468 | | Total Net Revenue | | $ | 180,991 | | | $ | 227,579 | | |
(1) Radar includes end-use applications where radio frequency signals are utilized to detect, track and identify objects.
(2) Electronic Warfare includes end-use applications comprising the offensive and defensive use of the electromagnetic spectrum.
(3) Other Sensor and Effector products include all Sensor and Effector end markets other than Radar and Electronic Warfare.
(4) C4I includes rugged secure rackmount servers that are designed to drive the most powerful military processing applications.
(5) Other products include all component and other sales where the end use is not specified.
The following table presents the Company's net revenue by product grouping for the periods presented: | | | Third Quarters Ended | | Nine Months Ended | | First Quarters Ended | |
| | | March 31, 2023 | | April 1, 2022 | | March 31, 2023 | | April 1, 2022 | | | September 29, 2023 | | September 30, 2022 | |
Components(1) | Components(1) | | $ | 53,187 | | | $ | 42,198 | | | $ | 130,263 | | | $ | 108,735 | | Components(1) | | $ | 37,509 | | | $ | 34,807 | | |
Modules and Sub-assemblies(2) | Modules and Sub-assemblies(2) | | 55,433 | | | 52,719 | | | 173,547 | | | 134,342 | | Modules and Sub-assemblies(2) | | 37,533 | | | 44,004 | | |
Integrated Subsystems(3) | Integrated Subsystems(3) | | 154,859 | | | 158,158 | | | 416,836 | | | 455,391 | | Integrated Subsystems(3) | | 105,949 | | | 148,768 | | |
Total Net Revenue | Total Net Revenue | | $ | 263,479 | | | $ | 253,075 | | | $ | 720,646 | | | $ | 698,468 | | Total Net Revenue | | $ | 180,991 | | | $ | 227,579 | | |
(1) Components represent the basic building blocks of an electronic system. They generally perform a single function such as switching, storing or converting electronic signals. Some examples include power amplifiers and limiters, switches, oscillators, filters, equalizers, digital and analog converters, chips, MMICs (monolithic microwave integrated circuits) and memory and storage devices.
(2) Modules and sub-assemblies combine multiple components to serve a range of complex functions, including processing, networking and graphics display. Typically delivered as computer boards or other packaging, modules and sub-assemblies are usually designed using open standards to provide interoperability when integrated in a subsystem. Examples of modules and sub-assemblies include embedded processing boards, switched fabrics and boards for high-speed input/output, digital receivers, graphics and video, along with multi-chip modules, integrated radio frequency and microwave multi-function assemblies and radio frequency tuners and transceivers.
(3) Integrated subsystems bring components, modules and/or sub-assemblies into one system, enabled with software. Subsystems are typically, but not always, integrated within an open standards-based chassis and often feature interconnect technologies to enable communication between disparate systems. Spares and replacement modules and sub-assemblies are provided for use with subsystems sold by the Company. The Company’s subsystems are deployed in sensor processing, aviation and mission computing and C4I applications.
The following table presents the Company's net revenue by platform for the periods presented: | | | Third Quarters Ended | | Nine Months Ended | | First Quarters Ended | |
| | March 31, 2023 | | April 1, 2022 | | March 31, 2023 | | April 1, 2022 | | September 29, 2023 | | September 30, 2022 | |
Airborne(1) | Airborne(1) | | $ | 126,674 | | | $ | 126,176 | | | $ | 364,968 | | | $ | 353,730 | | Airborne(1) | | $ | 107,734 | | | $ | 127,260 | | |
Land(2) | Land(2) | | 58,816 | | | 38,285 | | | 119,483 | | | 100,118 | | Land(2) | | 23,650 | | | 33,932 | | |
Naval(3) | Naval(3) | | 39,961 | | | 42,725 | | | 104,900 | | | 116,938 | | Naval(3) | | 26,675 | | | 33,735 | | |
Other(4) | Other(4) | | 38,028 | | | 45,889 | | | 131,295 | | | 127,682 | | Other(4) | | 22,932 | | | 32,652 | | |
Total Net Revenues | Total Net Revenues | | $ | 263,479 | | | $ | 253,075 | | | $ | 720,646 | | | $ | 698,468 | | Total Net Revenues | | $ | 180,991 | | | $ | 227,579 | | |
(1) Airborne platform includes products that relate to personnel, equipment or pieces of equipment designed for airborne applications.
(2) Land platform includes products that relate to fixed or mobile equipment, or pieces of equipment for personnel, weapon systems, vehicles and support elements operating on land.
(3) Naval platform includes products that relate to personnel, equipment or pieces of equipment designed for naval operations.
(4) All platforms other than Airborne, Land or Naval.
The geographic distribution of the Company’s identifiable long-lived assets is summarized as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | Asia Pacific | | Eliminations | | Total |
March 31, 2023 | | $ | 116,212 | | | $ | 3,270 | | | $ | — | | | $ | — | | | $ | 119,482 | |
July 1, 2022 | | $ | 122,712 | | | $ | 4,476 | | | $ | 3 | | | $ | — | | | $ | 127,191 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | | | | | Total |
September 29, 2023 | | $ | 114,041 | | | $ | 3,133 | | | | | | | $ | 117,174 | |
June 30, 2023 | | $ | 116,381 | | | $ | 3,173 | | | | | | | $ | 119,554 | |
Identifiable long-lived assets exclude right-of-use assets, goodwill, and intangible assets.
Customers comprising 10% or more of the Company’s revenues for the periods shown are as follows: | | | | Third Quarters Ended | | Nine Months Ended | | | First Quarters Ended | |
| | | March 31, 2023 | | April 1, 2022 | | March 31, 2023 | | April 1, 2022 | | | September 29, 2023 | | September 30, 2022 | |
Lockheed Martin Corporation | | Lockheed Martin Corporation | | 13 | % | | 16 | % | |
L3Harris | | L3Harris | | 12 | % | | * | |
Raytheon Technologies | Raytheon Technologies | | 18 | % | | 15 | % | | 14 | % | | 15 | % | Raytheon Technologies | | 11 | % | | 13 | % | |
Lockheed Martin Corporation | | 13 | % | | * | | 14 | % | | * | |
U.S. Navy | | U.S. Navy | | * | | 12 | % | |
Northrop Grumman | Northrop Grumman | | 11 | % | | * | | 11 | % | | * | Northrop Grumman | | * | | 10 | % | |
U.S. Navy | | * | | 14 | % | | 10 | % | | 15 | % | |
| | 42 | % | | 29 | % | | 49 | % | | 30 | % | |
| | | | 36 | % | | 51 | % | |
* Indicates that the amount is less than 10% of the Company's revenue for the respective period.
While the Company typically has customers from which it derives 10% or more of its revenue, the sales to each of these customers are spread across multiple programs and platforms. There were no programs comprising 10% or more of the Company's revenues for the thirdfirst quarters and nine months ended March 31,September 29, 2023 and April 1,September 30, 2022.
N.L.Commitments and Contingencies
LEGAL CLAIMS
The Company is subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of business. Although legal proceedings are inherently unpredictable, the Company believes that it has valid defenses with respect to any matters currently pending against the Company and intends to defend itself vigorously. The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on the Company's cash flows, results of operations, or financial position.
In June 2021, Embedded Reps of America, LLC (“ERA”), a former sales representative, and James Mazzola, a principal of ERA, filed for binding arbitration related to the termination of ERA’s sales representative agreement raising multiple claims that aggregate to approximately $9,000 in direct damages, with treble damages requested on a number of those claims. ERA was a sales representative of Themis Computer (“Themis”) when Themis was acquired by Mercury. The sales representative agreement provided for termination by either party upon 30 days written notice with ERA entitled to commissions for orders obtained by ERA with product shipment occurring prior to termination. The Company responded to the complaint in July 2021. An arbitration proceeding was held during September 2022, with final motions in October 2022 and oral arguments in November 2022. The arbitrator issued its final ruling in January 2023, awarding ERA $72 in damages and fees.
InOn December 7, 2021, counsel for National Technical Systems, Inc. (“NTS”) sent the Company an environmental demand letter pursuant to Massachusetts General Laws Chapter 21E, Section 4A, and CERCLA 42 U.S.C. Section 9601, related to a site that NTS formerly owned at 533 Main Street, Acton, Massachusetts. NTS received a Notice of Responsibility from the Massachusetts Department of Environmental Protection (“MassDEP”) alleging trichloroethene, freon and 1,4-dioxane contamination in the groundwater emanating from NTS’s former site. NTS alleges in its demand letter that the operations of a predecessor company to Mercury whichthe Company that was acquired in the Company’sCompany's acquisition of the Microsemi carve-out businessCarve-Out Business that once owned and operated a facility at 531 Main Street, Acton, Massachusetts contributed to the groundwater contamination. NTS is seeking payment byfrom the Company of NTS’s costs for any required environmental remediation. In April 2022, the Company engaged in a meet and confer session with NTS pursuant to Massachusetts General Laws Chapter 21E, Section 4A to discuss the status of the environmental review performed by NTS and its licensed site professional. In addition, in November 2021, the Company responded to a request for information from MassDEP regarding the detection of PFAS (per- and polyfluoroakyl substances) in the Acton, Massachusetts Water District’s Conant public water supply wells near the former facility at 531 Main Street, Acton, Massachusetts at a level above the standard that MassDEP published for PFAS in October 2020. The Company has not been contacted by NTS or MassDEP since the dates discussed above. It is too early to determine what responsibility, if any, the Company may have for these environmental matters.
On June 19, 2023, the Board of Directors received notice of the Company's former CEO’s resignation from the positions of President and Chief Executive Officer. The Board accepted the resignation effective June 24, 2023. In the notice, the former CEO claimed entitlement to certain benefits, including equity vesting, severance, and other benefits, under the change in control severance agreement (the “CIC Agreement”) because the former CEO had resigned with good reason during a potential change in control period. The Company disputes these claims and maintains that the former CEO resigned without good reason. On September 19, 2023, the former CEO filed for binding arbitration under the employment rules of the American Arbitration Association (“AAA”). The Company responded and asserted its counterclaims in a filing with the AAA on November 1, 2023. The response by the former CEO is due in mid-November 2023, with further proceedings to be scheduled during 2024. The Company intends to contest vigorously the claims under the CIC Agreement and believes that the Company has strong arguments that the former CEO’s claims lack merit. If the arbitrator rules in the Company's favor, the Company may still need to pay the former CEO’s reasonable legal fees and compensation during the dispute. If instead the arbitrator rules for the former CEO, the Company could be liable for up to approximately $12,900, based on the closing price of the Company's common stock on June 26, 2023, plus legal fees and expenses and compensation during dispute, for accelerated equity vesting, severance, and other benefits under the CIC Agreement. The Company categorically denies any wrongdoing or liability under the CIC Agreement, but the outcome of potential arbitration is inherently uncertain. Accordingly, it is reasonably possible that the Company will incur a liability in this matter, and the Company estimates the potential range of exposure from $0 to $12,900, plus costs and attorneys’ fees and compensation to our former CEO during the dispute.INDEMNIFICATION OBLIGATIONS
The Company’s standard product sales and license agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments the Company could be required to make under these indemnification provisions is, in some instances, unlimited.
PURCHASE COMMITMENTS
As of March 31,September 29, 2023, the Company has entered into non-cancelable purchase commitments for certain inventory components and services used in its normal operations. The purchase commitments covered by these agreements are for less than one year and aggregate to $142,698128,696.
OTHER
As part of the Company's strategy for growth, the Company continues 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.
The Company 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 or exercise of stock options. These transactions would be treated as a use of cash in financing activities in the Company's Consolidated Statements of Cash Flows.
O.M.Derivatives
The Company utilizes interest rate derivatives to mitigate interest rate exposure with respect to its financing arrangements. On September 7,29, 2022, the Company entered into an interest ratethe Swap (the “initial Swap”) with JP Morgan Chase Bank, N.A. (“JPMorgan”("JPMorgan") for a notional amount of $300,000 in order to fix the interest rate associated with a portion of the total $511,500 existing borrowings on the Revolver.Revolver at the time of the Swap. The initial Swap agreement was designated and qualified for hedge accounting treatment as a cash flow hedge. The initial Swap matures on February 28, 2027, coterminous with the maturity of the Revolver. The initial Swap established a fixed interest rate on the first $300,000 of the Company's outstanding borrowings against the Revolver obligation at 3.25%3.79%.
On September 29, 2022,28, 2023, the Company terminated the initial Swap. At the time of termination, the fair value of the initial Swap was an asset of $5,995.$7,403. The Company received the cash settlement of $5,995$7,403 and these proceeds are classified within Operating Activities of the Consolidated Statements of Cash Flows. During the third quarter and nine months ended March 31, 2023, the Company amortized $339 and $678, respectively, of the gain, which is included within Other comprehensive income (loss).
Following the termination of the initial Swap, the Company entered a newinto the September 2023 Swap agreement (“the Swap”) on September 29, 202228, 2023 with JPMorgan. The Swap fixesJPMorgan for a notional amount of $300,000 in order to fix the interest rate associated with a portion of the total $511,500$576,500 existing borrowings of outstanding borrowings under theon Company's Revolver at 4.66%. The September 2023 Swap agreement was designated and qualified for hedge accounting treatment as a ratecash flow hedge. The September 2023 Swap matures on February 28, 2027, coterminous with the maturity of 3.79%. the Revolver.
As of March 31,September 29, 2023, the fair value of the hedgeSeptember 2023 Swap was a liability of $3,244$1,548 and is included within Other non-current liabilities in the Company's Consolidated Balance Sheets.
During the first quarter ended September 29, 2023, the Company amortized $339 of the previous unrealized gain associated with an interest swap entered into on September 7, 2022 and terminated on September 29, 2022, which is included within Other comprehensive income.
The market risk associated with the Company’s derivative instrument is the result of interest rate movements that are expected to offset the market risk of the underlying arrangement. The counterparty to the September 2023 Swap is JPMorgan. Based on the credit ratings of the Company’s counterparty as of March 31,September 29, 2023, nonperformance is not perceived to be a material risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of the counterparty to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparty obligations under the contracts exceed the obligations of the Company to the counterparty. As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant.
P.N.Subsequent Events
The Company has evaluated subsequent events from the date of the Consolidated Balance Sheet through the date the consolidated financial statements were issuedissued.
Due to the uncertainty surrounding a government shutdown or prolonged continuing resolution and noted no items requiring adjustment of the financial statements or additional disclosures.potential impact on the second quarter and fiscal 2024 results, the Company has proactively executed an amendment to its 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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
From time to time, information provided, statements made by our employees or information included in our filings with the Securities and Exchange Commission (“SEC”) may contain statements that are not historical facts but that are “forward-looking statements,” which involve risks and uncertainties. You can identify these statements by the use of the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of epidemics and pandemics such as COVID, effects of any U.S. Federalfederal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, inflation, changes in technology and methods of marketing, delays in 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’sgovernment’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 performance 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 value creationexecution excellence initiatives such as 1MPACT, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, effects of shareholder activism, increases in interest rates, changes to industrial security and cyber-security regulations and requirements 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 enhancedimpacted by ourthe termination of the Company’s announced strategic review initiative, including a potential sale of the Company, unanticipated challenges with the transition of the Company'sCompany’s Chief Executive Officer and Chief Financial Officer role,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 July 1, 2022.June 30, 2023. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
OVERVIEW
Mercury Systems, Inc. is a technology company that delivers commercial innovation to rapidly transformprocessing power for the globalmost demanding aerospace and defense industry.missions. Headquartered in Andover, Massachusetts, our end-to-end processing platform enables a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments. Our Processing Platform includestechnologies that comprise our platform include signal solutions, display, software applications, networking, storage and secure processing. Our innovative solutions are mission-ready, trusted and secure, software-defined and open and modular to meetmeeting our customers’ most-pressing high-techcost and schedule needs including those specifictoday by allowing them to the aerospace and defense community.use or modify our products to suit their mission. Customers access our solutions via the Mercury platform,Processing Platform, which encompasses the broad scope of our investments in technologies, companies, products, services and the expertise of our people. Ultimately, we connect our customers to what matters most to them. We connect commercial technology to defense, people to data and partners to opportunities and the present to the future.opportunities. And, at the most human level, we connect what we do to our customers’ missions; supporting the people for whom safety, security and protecting freedom are of paramount importance.
As a leading manufacturer of essential components, products, modules and subsystems, we sell to defense prime contractors, the U.S. government and original equipment manufacturers (“OEM”) commercial aerospace companies. We haveMercury has built a trusted, contemporaryrobust portfolio of proven product solutions, leveraging the most advanced commercial silicon technologies and purpose-built for aerospace and defense that we believe meets and exceedsto 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 us.Mercury. Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers.
OurMercury’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.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. We are leading the development and adaptation of commercial
technology for aerospace and defense solutions. From chip-scale to system scale and from data, including radio frequency (“RF”) to digital to decision, we make mission-critical technologies safe, secure, affordable and relevant for our customers.
Our capabilities, technology, people and R&D investment strategy combine to differentiate usMercury in our industry. We maintain our technological edge by investing in critical capabilities and intellectual property (“IP” or “building blocks”) in processing, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as artificial intelligence (“AI”).
Our mission critical solutions are deployed by our customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”), electronic intelligence, mission computing avionics, electro-optical/infrared (“EO/IR”), electronic warfare, weapons and missile defense, hypersonics and radar.
Since we conduct much of our business with our defense customers via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter. Customers specify delivery date requirements that coincide with their need for our products. Because these customers may use our products in connection with a variety of defense programs or other projects of different sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends.
As of March 31,September 29, 2023, we had 2,5372,539 employees. We employ hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities to achieve our objectives to fully capitalize upon and maintain our technological leads in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications. Our talent attraction, engagement and retention is critical to execute on our long-term strategy. We invest in our culture and values to drive employee engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation. We believe that our success depends on our ability to embrace diversity company-wide and realize the benefits of a diverse workforce that includes a greater variety of solutions to problems, a broader collection of skills and experiences and an array of viewpoints to consider. We are strongly focused on providing an inclusive environment that respects the diversity of the world. We believe that the workforce required to grow our business and deliver creative solutions must be rich in diversity of thought, experience and culture. Our diversity and inclusion initiatives focus on building and maintaining the talent that will create cohesive and collaborative teams that drive innovation. We believe that these values will help our employees realize their full potentials at work to provide Innovation That Matters®.
Our consolidated revenues, net income,loss, diluted net earningsloss per share, adjusted earningsloss per share (“adjusted EPS”), and adjusted EBITDA for the thirdfirst quarter ended March 31,September 29, 2023 were $263.5$181.0 million, $5.2$36.7 million, $0.09, $0.40,$0.64, $0.24, and $43.5$2.0 million, respectively. Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the nine months ended March 31, 2023 were $720.6 million, $25.1 million, $(20.1) million, $(0.36), $0.89, and $110.3 million. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.
RESULTS OF OPERATIONS:
ResultsThere were 13-weeks included in the results of operations for the thirdfirst quarters ended March 31,September 29, 2023 and April 1,September 30, 2022, include full periodrespectively. The results from the acquisitions of Atlanta Micro, Inc (“Atlanta Micro”) and Avalex Technologies, LLC. (“Avalex”). Results of operations for the nine monthsfirst quarter ended March 31,September 29, 2023 and April 1, 2022 include only results from the acquisition date for Avalex and Atlanta Micro which were acquired on November 5, 2021 and November 29, 2021, respectively. Accordingly, the periods presented below are not directly comparable.necessarily indicative of the results to be expected for the full fiscal year.
The thirdfirst quarter ended March 31,September 29, 2023 compared to the thirdfirst quarter ended April 1,September 30, 2022
The following table sets forth, for the thirdfirst quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income (Loss):Loss: | (In thousands) | (In thousands) | | March 31, 2023 | | As a % of Total Net Revenue | | April 1, 2022 | | As a % of Total Net Revenue | (In thousands) | | September 29, 2023 | | As a % of Total Net Revenue | | September 30, 2022 | | As a % of Total Net Revenue |
Net revenues | Net revenues | | $ | 263,479 | | | 100.0 | % | | $ | 253,075 | | | 100.0 | % | Net revenues | | $ | 180,991 | | | 100.0 | % | | $ | 227,579 | | | 100.0 | % |
Cost of revenues | Cost of revenues | | 173,190 | | | 65.7 | | | 153,321 | | | 60.6 | | Cost of revenues | | 130,464 | | | 72.1 | | | 149,484 | | | 65.7 | |
Gross margin | Gross margin | | 90,289 | | | 34.3 | | | 99,754 | | | 39.4 | | Gross margin | | 50,527 | | | 27.9 | | | 78,095 | | | 34.3 | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Selling, general and administrative | Selling, general and administrative | | 44,626 | | | 16.9 | | | 39,261 | | | 15.5 | | Selling, general and administrative | | 35,794 | | | 19.8 | | | 38,943 | | | 17.1 | |
Research and development | Research and development | | 26,516 | | | 10.1 | | | 25,387 | | | 10.0 | | Research and development | | 31,872 | | | 17.6 | | | 27,766 | | | 12.2 | |
Amortization of intangible assets | Amortization of intangible assets | | 12,809 | | | 4.9 | | | 16,077 | | | 6.4 | | Amortization of intangible assets | | 12,547 | | | 6.9 | | | 14,574 | | | 6.4 | |
Restructuring and other charges | Restructuring and other charges | | 2,778 | | | 1.1 | | | 6,348 | | | 2.5 | | Restructuring and other charges | | 9,546 | | | 5.3 | | | 1,508 | | | 0.7 | |
| Acquisition costs and other related expenses | Acquisition costs and other related expenses | | 1,606 | | | 0.6 | | | 2,726 | | | 1.1 | | Acquisition costs and other related expenses | | 969 | | | 0.5 | | | 2,498 | | | 1.1 | |
Total operating expenses | Total operating expenses | | 88,335 | | | 33.6 | | | 89,799 | | | 35.5 | | Total operating expenses | | 90,728 | | | 50.1 | | | 85,289 | | | 37.5 | |
Income from operations | | 1,954 | | | 0.7 | | | 9,955 | | | 3.9 | | |
Loss from operations | | Loss from operations | | (40,201) | | | (22.2) | | | (7,194) | | | (3.2) | |
Interest income | Interest income | | 80 | | | — | | | 110 | | | — | | Interest income | | 103 | | | 0.1 | | | 29 | | | — | |
Interest expense | Interest expense | | (6,711) | | | (2.5) | | | (1,664) | | | (0.7) | | Interest expense | | (7,863) | | | (4.4) | | | (4,547) | | | (2.0) | |
Other expense, net | Other expense, net | | (613) | | | (0.2) | | | (2,160) | | | (0.8) | | Other expense, net | | (1,774) | | | (1.0) | | | (3,645) | | | (1.5) | |
(Loss) income before income taxes | | (5,290) | | | (2.0) | | | 6,241 | | | 2.4 | | |
Income tax (benefit) provision | | (10,446) | | | (4.0) | | | 2,102 | | | 0.8 | | |
Loss before income taxes | | Loss before income taxes | | (49,735) | | | (27.5) | | | (15,357) | | | (6.7) | |
Income tax benefit | | Income tax benefit | | (13,027) | | | (7.2) | | | (1,022) | | | (0.4) | |
| Net income | | $ | 5,156 | | | 2.0 | % | | $ | 4,139 | | | 1.6 | % | |
Net loss | | Net loss | | $ | (36,708) | | | (20.3) | % | | $ | (14,335) | | | (6.3) | % |
REVENUES
Total revenues increased $10.4decreased $46.6 million, or 4.1%20.5%, to $263.5$181.0 million during the thirdfirst quarter ended March 31,September 29, 2023, as compared to $253.1$227.6 million during the thirdfirst quarter ended April 1,September 30, 2022. These increasesThe decrease was driven by our pivot to enhanced execution, including prioritizing our resource allocation to the completion of our challenged programs, and cash-efficient operating model, which was evidenced by the decrease of approximately $38.7 million in revenue recognized over time which represented 58% of total revenues during the first quarter ended September 29, 2023, as compared to 63% of total revenues during the first quarter ended September 30, 2022.
Specifically, with regard to our challenged programs which are recognized over time, we have recognized a majority of the revenue and related cost as we acquired material and applied labor over the period of performance to progress these programs in prior periods. As we continue to resolve technical challenges and complete these programs, which consumes a significant amount of operational capacity, the remaining revenues on these challenged programs are recognized, however these revenues represent a very small proportion of the total contract value. In addition, as we improve our management systems and focus efforts to more properly balance working capital, we are transitioning to a cash-efficient operating model to better align the timing of material receipts to labor resource availability and hardware delivery needs across our programs now that we have seen less disruption in the supply chain. This transition creates a near-term revenue timing dynamic.
Product grouping decreases were driven by the componentssubsystems and modules and sub-assemblies product groupings which grew $11.0decreased $42.8 million and $2.7$6.5 million, respectively, partially offset by decreasesan increase to integrated subsystemscomponents grouping of $3.3$2.7 million. The increasedecrease in total revenue was primarily driven by an increasethe 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 radar end application of $33.8prior period; airborne, land and naval platforms decreased $19.5 million, partially offset by decreases to electronic warfare, C4I, other end applications and other sensor and effector end applications which decreased $8.1 million, $7.1 million, $4.6$10.3 million and $3.6$7.1 million, respectively. The increase was primarily within the land platform which grew $20.5 million, partially offset by decreases across the other and naval platforms of $7.9 million and $2.8 million, respectively, during the third quarter ended March 31, 2023. The largest program increasesdecreases were related to the LTAMDS, P-8 and a secure processing program F-16, a classified C4I program, and F-35 programs.when compared to the prior period. There were no programs comprising 10% or more of our revenues for the thirdfirst quarters ended March 31,September 29, 2023 or April 1,September 30, 2022.
GROSS MARGIN
Gross margin was 34.3%27.9% for the thirdfirst quarter ended March 31,September 29, 2023, a decrease of 510640 basis points from the 39.4%34.3% gross margin realized during the thirdfirst quarter ended April 1,September 30, 2022. The lower gross margin was primarily driven by program mix as well as product and program execution challenges.related cost growth especially with regard to our challenged programs. Program mix was more heavilyin 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,period. About $5.9 million of total cost growth impact in the quarter was attributable to the approximately 20 challenged programs, of which carry lower average gross margins as compared$4.7 million related to production programs. These programs warrant higher engineering labor for customized development, production and service activities. The nature of these efforts results in lower margin content, but serve as pre-cursors to higher margin production awards.one program. In addition, we experienced increased costs associated withhigher manufacturing variances primarily related to certain development programs in the final stages of execution resulting in higher than expected labor and material charges in the period.non-recurring cost adjustments as well as inventory reserves.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $5.3decreased $3.1 million, or 13.7%8.1%, to $44.6$35.8 million during the thirdfirst quarter ended March 31,September 29, 2023, as compared to $39.3$38.9 million in the thirdfirst quarter ended April 1,September 30, 2022. The increasedecrease was primarily related to an increasethe savings realized from the reduction in our 401(k) matching contributions from 3% to 6%, increased stockforce initiated on August 9, 2023, a decrease in share-based compensation expense of $0.7$3.1 million as well as an increase in headcount and salary rate increases.lower bonus accrual.
RESEARCH AND DEVELOPMENT
Research and development expenses increased $1.1$4.1 million, or 4.4%14.8%, to $26.5$31.9 million during the thirdfirst quarter ended March 31,September 29, 2023, as compared to $25.4$27.8 million during the thirdfirst quarter ended April 1,September 30, 2022. The increase during the thirdfirst quarter ended March 31,September 29, 2023 was primarily due toan increase in headcount as we returncompared to normalized resource levels following a periodthe first quarter ended September 30, 2022 of higher attrition in the prior year.approximately 30 positions. This increase was partially offset by increased CRADCustomer Funded Research and Development ("CRAD") of $4.2$3.1 million as a result of a higher mix of development programs execution during the thirdfirst quarter ended March 31, 2023.September 29, 2023 as compared to the prior period.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets decreased $3.3$2.0 million to $12.8$12.5 million during the thirdfirst quarter ended March 31,September 29, 2023, as compared to $16.1$14.6 million during the thirdfirst quarter ended April 1,September 30, 2022, primarily due to the backlog intangible from our Avalex and Atlanta Micro acquisitionsacquisition being fully amortized in fiscal 2023.
RESTRUCTURING AND OTHER CHARGES
During the thirdfirst quarter ended March 31,September 29, 2023, we incurred $2.8initiated several immediate cost savings measures that simplify our organizational structure, facilitate clearer accountability, and align our priorities, including: (i) embedding the 1MPACT value creation initiatives and execution into our operations; (ii) streamlining organizational structure and removing areas of redundancy between corporate and divisional organizations; and (iii) reducing selling, general, and administrative headcount and rebalancing discretionary and third party spending to better align with our priority areas. On July 20, 2023, we executed the plan to embed the 1MPACT value creation initiatives into operations, and on August 9, 2023, we approved and initiated a workforce reduction that, together with the 1MPACT related action, eliminated approximately 150 positions resulting in $9.5 million of restructuring and other charges, as compared to $6.3 million during the third quarter ended April 1, 2022.severance costs. Restructuring and other charges during the thirdfirst quarter ended March 31, 2023 includes $2.0 million related to severance costs and $0.8 million of costs related to facility optimization efforts associated with 1MPACT, including $0.5 million related to lease asset impairment. Restructuring and other charges during the third quarter ended April 1,September 30, 2022 primarily related to 1MPACT including $5.5$1.3 million of third party consulting costs $0.8 million of facility optimization costs and $0.1$0.2 million related to severance costs.
ACQUISITION COSTS AND OTHER RELATED EXPENSES
Acquisition costs and other related expenses were $1.6$1.0 million during the thirdfirst quarter ended March 31,September 29, 2023 as compared to $2.7$2.5 million during the thirdfirst quarter ended April 1,September 30, 2022. The acquisition costs and other related expenses during the thirdfirst quarter ended March 31,September 29, 2023 includes $1.3$0.3 million associated withrelated to the conclusion of the Board of Directors' review of strategic alternatives. We expect to continue to incur such acquisition costs and other related expensesalternatives, as well as $0.3 million for third-party advisory fees in the future as we continue to seek opportunities to enhance shareholder value.connection with engagements by activist investors.
INTEREST EXPENSE
We incurred $6.7$7.9 million of interest expense during the thirdfirst quarter ended March 31,September 29, 2023, as compared to $1.7$4.5 million during the thirdfirst quarter ended April 1,September 30, 2022. The increase was driven by an increase ina higher interest rate and higher averageadditional outstanding borrowings on our Revolver (the "Revolver"). As of the thirdfirst quarter ended March 31,September 29, 2023, we had total borrowings of $511.5$576.5 million on our Revolver as compared to $451.5$511.5 million of total borrowings as of the thirdfirst quarter ended April 1,September 30, 2022.
OTHER EXPENSE, NET
Other expense, net decreased to $0.6$1.8 million during the thirdfirst quarter ended March 31,September 29, 2023, as compared to $2.2$3.6 million during the thirdfirst quarter ended April 1,September 30, 2022. The thirdfirst quarter ended March 31,September 29, 2023 includes $0.6 million of financing costs, litigation and settlement expenses of $0.3 million, partially offset by net foreign currency translation gains of $0.3 million. The third quarter ended April 1, 2022 includes $0.9 million of financing costs, net foreign currency translation losses of $0.6$1.0 million, and $0.3$0.5 million of financing costs and litigation and settlement expenses.
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.INCOME TAXES
We recorded an income tax (benefit) provisionbenefit of $(10.4)$13.0 million and $2.1$1.0 million on a (loss) incomeloss before income taxes of $(5.3)$49.7 million and $6.2$15.4 million for the thirdfirst quarters ended March 31,September 29, 2023 and April 1,September 30, 2022, respectively.
For the thirdfirst quarter ended March 31,September 29, 2023, we calculated ourthe U.S. income tax benefit using the discrete method which assumesas though the nine monththree-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 tax benefit for the third quarter ended March 31, 2023 also includes a true-up to the prior quarters due to the change in methodology.
During the third quarter ended March 31, 2023, we concluded the income tax audit with the Internal Revenue Service for fiscal years 2016 through 2018 and recognized a tax benefit of $1.3 million related to a release of income tax reserves for unrecognized income tax benefits.
The effective tax rate for the third quartersfirst quarter ended March 31,September 29, 2023 differed from the federal statutory rate primarily due to federal and April 1,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. The effective tax rate for the third quarter ended March 31, 2023 also differed from the federal statutory rate due to the release for previously unrecognized income tax benefits.
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law which contained provisions that include a 15% corporate minimum tax effective for taxable years beginning after December 31, 2022 and a 1% excise tax on certain stock buybacks after December 31, 2022. We expect the impact of this legislation to be immaterial.
Effective for tax years beginning after December 31, 2021, 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. We estimate the cash impact from this provision to be approximately $30 million in fiscal 2023.
Nine months ended March 31, 2023 compared to the nine months ended April 1, 2022
The following table sets forth, for the nine month periods indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | March 31, 2023 | | As a % of Total Net Revenue | | April 1, 2022 | | As a % of Total Net Revenue |
Net revenues | | $ | 720,646 | | | 100.0 | % | | $ | 698,468 | | | 100.0 | % |
Cost of revenues | | 471,302 | | | 65.4 | | | 423,083 | | | 60.6 | |
Gross margin | | 249,344 | | | 34.6 | | | 275,385 | | | 39.4 | |
Operating expenses: | | | | | | | | |
Selling, general and administrative | | 128,626 | | | 17.8 | | | 113,027 | | | 16.2 | |
Research and development | | 81,188 | | | 11.3 | | | 82,604 | | | 11.8 | |
Amortization of intangible assets | | 40,919 | | | 5.7 | | | 45,813 | | | 6.6 | |
Restructuring and other charges | | 6,355 | | | 0.9 | | | 22,424 | | | 3.2 | |
| | | | | | | | |
Acquisition costs and other related expenses | | 5,043 | | | 0.7 | | | 7,524 | | | 1.1 | |
Total operating expenses | | 262,131 | | | 36.4 | | | 271,392 | | | 38.9 | |
(Loss) income from operations | | (12,787) | | | (1.8) | | | 3,993 | | | 0.5 | |
Interest income | | 329 | | | — | | | 124 | | | — | |
Interest expense | | (17,848) | | | (2.5) | | | (3,353) | | | (0.4) | |
Other expense, net | | (3,412) | | | (0.4) | | | (4,898) | | | (0.7) | |
Loss before income taxes | | (33,718) | | | (4.7) | | | (4,134) | | | (0.6) | |
Income tax (benefit) provision | | (13,619) | | | (1.9) | | | 1,506 | | | 0.2 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net loss | | $ | (20,099) | | | (2.8) | % | | $ | (5,640) | | | (0.8) | % |
REVENUES
Total revenues increased $22.2 million, or 3.2%, to $720.6 million during the nine months ended March 31, 2023, as compared to $698.5 million during the nine months ended April 1, 2022. The increase in total revenue was primarily due to
additional acquired and organic revenues of $19.0 million and $3.2 million, respectively. The increase was driven by higher demand for modules and sub-assemblies and components which increased $39.2 million and $21.5 million, respectively, and was partially offset by a decrease in integrated subsystems of $38.6 million during the nine months ended March 31, 2023. The increase in total revenue was primarily from the radar and C4I end applications which increased $20.9 million and $17.4 million, respectively, and was partially offset by decreases of $6.7 million, $5.6 million and $3.9 million from other sensor and effector, electronic warfare and other end applications, respectively. The increase was primarily across the land, airborne and other platforms which grew $19.4 million, $11.2 million and $3.6 million, respectively, partially offset by a decrease to the naval platform of $12.0 million during the nine months ended March 31, 2023. The largest program increases were related to the LTAMDS, F-35, a secure processing program, F-16 and NDSA programs. There were no programs comprising 10% or more of our revenues for the nine months ended March 31, 2023 or April 1, 2022. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.
GROSS MARGIN
Gross margin was 34.6% for the nine months ended March 31, 2023, a decrease of 480 basis points from the 39.4% gross margin realized during the nine months ended April 1, 2022. The lower gross margin was primarily driven by program mix as well as product and program execution challenges. Program mix was more heavily weighted towards development programs as compared to the prior period, which carry lower average gross margins as compared to production programs. These programs warrant higher engineering labor for customized development, production and service activities. The nature of these efforts results in lower margin content, but serve as pre-cursors to higher margin production awards. In addition, we experienced increased costs associated with certain development programs in the final stages of execution resulting in higher than expected labor and material charges in the period. Program mix was also impacted by a customer funding delay on a large FMS sale. In connection with our 1MPACT facility optimization efforts, we are exiting certain facilities prior to contractual lease terms and consolidating operations across other existing sites. In addition, as part of our assessment of future benefits of certain long-lived assets, we identified an immaterial correction of an error in the useful lives assigned to certain leasehold improvements resulting in a cumulative adjustment to depreciation expense, which was recorded during the second quarter ended December 30, 2022.
SELLING, GENERALAND ADMINISTRATIVE
Selling, general and administrative expenses increased $15.6 million, or 13.8%, to $128.6 million during the nine months ended March 31, 2023, as compared to $113.0 million during the nine months ended April 1, 2022. The increase was primarily related to a full period of the Avalex and Atlanta Micro acquisitions driving an incremental $1.9 million of expense, an increase in our 401(k) matching contributions from 3% to 6%, increased stock compensation expense of $0.3 million as well as an increase in headcount and salary rate increases.
RESEARCHAND DEVELOPMENT
Research and development expenses decreased $1.4 million, or 1.7%, to $81.2 million during the nine months ended March 31, 2023, as compared to $82.6 million during the nine months ended April 1, 2022. The decrease was primarily related to lower headcount as well as incremental CRAD of $9.4 million, partially offset by an increase in our 401(k) matching contributions from 3% to 6% during the nine months ended March 31, 2023.
RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges were $6.4 million during the nine months ended March 31, 2023, as compared to $22.4 million during the nine months ended April 1, 2022. Restructuring and other charges during the nine months ended March 31, 2023 primarily related to 1MPACT including $2.8 million of severance costs, $1.8 million of third party consulting costs, $1.8 million of costs for facility optimization efforts, including $1.3 million related to lease asset impairment. Restructuring and other charges during the nine months ended April 1, 2022 primarily related to $14.1 million of third party consulting costs associated with 1MPACT and $7.5 million of severance costs associated with the elimination of approximately 110 positions across manufacturing, SG&A and R&D based on ongoing talent and workforce optimization efforts. In addition, the nine months ended April 1, 2022 includes $0.8 million of costs for facilities optimization efforts associated with 1MPACT, including $0.5 million related to lease asset impairment.
ACQUISITION COSTSAND OTHER RELATED EXPENSES
Acquisition costs and other related expenses were $5.0 million during the nine months ended March 31, 2023, as compared to $7.5 million during the nine months ended April 1, 2022. The acquisition costs and other related expenses we incurred during the nine months ended March 31, 2023 were primarily related to $2.5 million for third party advisory fees in connection with engagements by activist investors and $1.3 million associated with the Board of Directors' review of strategic alternatives. Acquisition costs during the nine months ended April 1, 2022 were primarily related to the acquisitions of Avalex and Atlanta Micro as well as $2.7 million for third party advisory fees in connection with engagements by activist investors. We
expect to continue to incur such acquisition costs and other related expenses in the future as we continue to seek opportunities to enhance shareholder value.
INTEREST EXPENSE
We incurred $17.8 million of interest expense during the nine months ended March 31, 2023, as compared to $3.4 million during the nine months ended April 1, 2022. The increase was driven by an increase in interest rate and additional borrowings on our Revolver as compared to the nine months ended April 1, 2022. As of the nine months ended March 31, 2023, we had total borrowings of $511.5 million on our Revolver as compared to $451.5 million of total borrowings as of the nine months ended April 1, 2022.
OTHER EXPENSE, NET
Other expense, net decreased $1.5 million to $3.4 million during the nine months ended March 31, 2023 as compared to $4.9 million during the nine months ended April 1, 2022. There was $1.7 million of both financing costs and litigation and settlement costs, respectively, during the nine months ended March 31, 2023. There was $2.1 million of financing costs, $1.3 million of net foreign currency translation losses and $1.2 million of litigation and settlement expenses during the nine months ended April 1, 2022.
INCOME TAXES
We recorded an income tax (benefit) provision of $(13.6) million and $1.5 million on a loss before income taxes of $33.7 million and $4.1 million for the nine months ended March 31, 2023 and April 1, 2022, respectively.
For the nine months ended March 31, 2023, we calculated our U.S. income tax benefit using the discrete method which assumes the nine 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 ASC 740 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 tax benefit for the third quarter ended March 31, 2023 also includes a true-up to the prior quarters due to the change in methodology.
During the nine monthsfirst quarters ended March 31, 2023, we concluded our income tax audit with the Internal revenue service for fiscal years 2016 through 2018 and recognized a tax benefit of $3.7 million related to a release of income tax reserves for unrecognized income tax benefits. During the nine months ended March 31,September 29, 2023 and April 1,September 30, 2022, we recognized a tax provision of $1.7$1.2 million and $0.9$1.6 million related to stock compensation shortfalls, respectively.
The effective tax rate for the nine months ended March 31, 2023 and April 1, 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 nine months ended March 31, 2023 also differed from the federal statutory rate due to the release of income tax reserves for unrecognized income tax benefits.
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law which contained provisions that include a 15% corporate minimum tax effective for taxable years beginning after December 31, 2022 and a 1% excise tax on certain stock buybacks after December 31, 2022. We expect the impact of this legislation to be immaterial.
Effective for tax years beginning after December 31, 2021, 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. We estimate the cash outflow from this provision to be approximately $30 million in fiscal 2023.
LIQUIDITY AND CAPITAL RESOURCES
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 planhave experienced growth in our working capital balances and, in particular, related to continueunbilled 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 invest in improvementscash 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 facilities, continuous evaluation of potential acquisition opportunities and internal R&DRevolver allowing for a temporary increase in the Consolidated Total Net Leverage Ratio covenant requirement from 4.50 to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and trusted custom microelectronics.5.25 for the second quarter.
Based on our current plans and business conditions, we believe that existing cash and cash equivalents, our available Revolver, cash generated from operations and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.
Shelf Registration Statement
On September 14, 2020,October 4, 2023, we filed a shelf registration statement on Form S-3ASR with the SEC. The shelf registration statement, which was effective upon filing with the SEC, registered each of the following securities: debt securities, preferred stock, common stock, warrants and units. We intend to use the proceeds from financings using the shelf registration statement for general corporate purposes, which may include the following:
•the acquisition of other companies or businesses;
•the repayment and refinancing of debt;
•capital expenditures;
•working capital; and
•other purposes as described in the prospectus supplement.
We have an unlimited amount available under the shelf registration statement.
Revolving Credit Facilities
On February 28, 2022, we amended the Revolver to increase and extend the borrowing capacity to a $1.1 billion, 5-year revolving credit line, with the maturity extended to February 28, 2027. AsThe borrowing capacity as defined under the Revolver as of March 31,September 29, 2023 we had a total ofis approximately $1.0 billion available to us on the Revolver,$766.5 million, less outstanding borrowings of $511.5$576.5 million. See Note IH in the accompanying consolidated financial statements for further discussion of the Revolver.
Receivables Purchase Agreement
On September 27, 2022, we entered into an uncommitted receivables purchase agreement (“RPA”) with Bank of the West, as purchaser, pursuant to which we may offer to sell certain customer receivables, subject to the terms and conditions of the RPA. The RPA is an uncommitted arrangement such that we are not obligated to sell any receivables and Bank of the West has no obligation to purchase any receivables from us. Pursuant to the RPA, Bank of the West may purchase certain of our customer receivables at a discounted rate, subject to a limit that as of any date, the total amount of purchased receivables held by Bank of the West, less the amount of all collections received on such receivables, may not exceed $20.0 million. The RPA has an indefinite term and the agreement remains in effect until it is terminated by either party. On March 14, 2023, we amended the RPA to increase the capacity from $20.0 million to $30.6 million. On June 21, 2023, we further amended the RPA with BMO Harris Bank (as successor in interest to Bank of the West) to increase the capacity from $30.6 million to $60.0 million. We factored accounts receivable and incurred factoring fees of approximately $24.5$28.8 million and $0.3 million, respectively, for the nine monthsfirst quarter ended March 31,September 29, 2023. We did not factor any accounts receivable or incur any factoring fees for the nine monthsfirst quarter ended April 1,September 30, 2022.
CASH FLOWS | | | | As of and For the Nine Months Ended, | | | As of and For the First Quarters Ended, |
(In thousands) | (In thousands) | | March 31, 2023 | | April 1, 2022 | (In thousands) | | September 29, 2023 | | September 30, 2022 |
Net cash (used in) provided by operating activities | | $ | (33,864) | | | $ | 566 | | |
Net cash used in operating activities | | Net cash used in operating activities | | $ | (39,068) | | | $ | (66,039) | |
Net cash used in investing activities | Net cash used in investing activities | | $ | (29,800) | | | $ | (265,945) | | Net cash used in investing activities | | $ | (8,015) | | | $ | (7,278) | |
Net cash provided by financing activities | Net cash provided by financing activities | | $ | 62,330 | | | $ | 243,638 | | Net cash provided by financing activities | | $ | 65,000 | | | $ | 59,937 | |
Net decrease in cash and cash equivalents | | $ | (1,213) | | | $ | (22,145) | | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | $ | 17,806 | | | $ | (13,673) | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 64,441 | | | $ | 91,694 | | Cash and cash equivalents at end of period | | $ | 89,369 | | | $ | 51,981 | |
Our cash and cash equivalents decreasedincreased by $1.2$17.8 million from July 1, 2022June 30, 2023 to March 31,September 29, 2023, primarily as the result of $33.9$65.0 million of borrowings on our Revolver, partially offset by $39.1 million used in operating activities and $30.0$8.0 million invested in purchases of property and equipment, partially offset by $60.0 million of net borrowings on our Revolver and $2.4 million of proceeds from employee stock plans.equipment.
Operating Activities
During the nine monthsfirst quarter ended March 31,September 29, 2023, we had an outflow of $33.9$39.1 million in cash from operating activities compared to $0.6a $66.0 million generated in cash from operating activitiesoutflow during the nine monthsfirst quarter ended April 1,September 30, 2022. The decreaselower outflow during the first quarter ended September 29, 2023 was primarily due to higher outflows for inventory to support customer delivery schedules for existing and future awards. During the quarter, we experienced some stabilization of the supply chain with more timely receipts of material resulting in higher than expected outflows for inventory. The decrease was also driven by highera $27.0 million inflow from accounts receivable, unbilled receivables and costs in excess of billings as compared to a result$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 development program execution delaysinterest rate swap of $7.4 million, an incremental $1.4 million as well as certain long lead materials required to progress programscompared to the next billing milestone.prior period, and lower outflows of prepaid expenses and other current assets and accounts payable, accrued expenses, and accrued compensation. These decreasesincreases were partially offset by additionalhigher outflows in the current period for inventory and lower deferred revenues and customer advances. Cash paid for interest and income taxes and interest during the nine monthsfirst quarter ended March 31,September 29, 2023 also increased by $16.3$10.4 million and $6.9$2.7 million, respectively, as compared to the nine monthsfirst quarter ended April 1,September 30, 2022 further contributing to the decrease.
Investing Activities
During the nine monthsfirst quarter ended March 31,September 29, 2023, we invested $29.8$8.0 million, a decreasean increase of $236.1$0.7 million, as compared to $265.9$7.3 million during the nine monthsfirst quarter ended April 1,September 30, 2022 primarily driven by the acquisitions of Avalex and Atlanta Micro. The decrease was also driven by $3.4 million less other investing activities, partially offset by $10.5$0.7 million higher purchases of property and equipment as compared to the nine months ended April 1, 2022.equipment.
Financing Activities
During the nine monthsfirst quarter ended March 31,September 29, 2023, we had $60.0$65.0 million of net borrowings on our Revolver as compared to $251.5$60.0 million of net borrowings during the nine monthsfirst quarter ended April 1,September 30, 2022. We also had $0.1 million of cash payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with the annual vesting of restricted stock awards, as compared to $7.7 million in the nine months ended April 1, 2022. The decrease in the payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with vesting of restricted stock awards is due to a change in our incentive stock plan tax withholding methods.
COMMITMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
The following is a schedule of our commitments and contractual obligations outstanding at March 31,September 29, 2023: | (In thousands) | (In thousands) | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | (In thousands) | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
Purchase obligations | Purchase obligations | | $ | 142,698 | | | $ | 142,698 | | | $ | — | | | $ | — | | | $ | — | | Purchase obligations | | $ | 128,696 | | | $ | 128,696 | | | $ | — | | | $ | — | | | $ | — | |
Operating leases | Operating leases | | 94,441 | | | 14,013 | | | 26,914 | | | 23,818 | | | 29,696 | | Operating leases | | 89,184 | | | 14,178 | | | 26,723 | | | 23,492 | | | 24,791 | |
| | | $ | 237,139 | | | $ | 156,711 | | | $ | 26,914 | | | $ | 23,818 | | | $ | 29,696 | | | $ | 217,880 | | | $ | 142,874 | | | $ | 26,723 | | | $ | 23,492 | | | $ | 24,791 | |
Purchase obligations represent open non-cancelable purchase commitments for certain inventory components and services used in normal operations. The purchase commitments covered by these agreements are for less than one year and aggregated approximately $142.7$128.7 million at March 31,September 29, 2023.
We have a liability at March 31,September 29, 2023 of $4.9$5.2 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. We do not know the ultimate resolution on these uncertain tax positions and as such, do not know the ultimate timing of payments or amount, if any, related to this liability. Accordingly, these amounts are not included in the above table.
Our standard product sales and license agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which we indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred in connection with certain intellectual property infringement claims by any third party with respect to our products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments we could be required to make under these indemnification provisions is, in some instances, unlimited.
As part of our strategy for growth, we continue to explore acquisitions or strategic alliances. The associated acquisition costs incurred in the form of professional fees and services may be material to the future periods in which they occur, regardless of whether the acquisition is ultimately completed.
We may elect from time to time to purchase and subsequently retire shares of common stock in order to settle employees’ tax liabilities associated with vesting of a restricted stock award. These transactions would be treated as a use of cash in financing activities in our Consolidated Statements of Cash Flows.
OFF-BALANCE SHEET ARRANGEMENTS
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.
NON-GAAP FINANCIAL MEASURES
In our periodic communications, we discuss certain important measures that are not calculated according to U.S. generally accepted accounting principles (“GAAP”), including adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, organic revenue and acquired revenue.
Adjusted EBITDA is defined as net income before other non-operating adjustments, interest income and expense, income taxes, depreciation, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition, financing and other third party costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense. We use adjusted EBITDA as an important indicator of the operating performance of our business. We use adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our board of directors, determining the portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in our operations and allocating resources to various initiatives and operational requirements. We believe that adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary from period to period without any correlation to underlying operating performance. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in our adjusted EBITDA are valuable indicators of our operating performance.
Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring.
The following table reconciles our net income (loss),loss, the most directly comparable GAAP financial measure, to our adjusted EBITDA:
| | | | Third Quarters Ended | | Nine Months Ended | | | First Quarters Ended | |
(In thousands) | (In thousands) | | March 31, 2023 | | April 1, 2022 | | March 31, 2023 | | April 1, 2022 | (In thousands) | | September 29, 2023 | | September 30, 2022 | |
Net income (loss) | | $ | 5,156 | | | $ | 4,139 | | | $ | (20,099) | | | $ | (5,640) | | |
Net loss | | Net loss | | $ | (36,708) | | | $ | (14,335) | | |
Other non-operating adjustments, net | Other non-operating adjustments, net | | (337) | | | 938 | | | (3) | | | 1,581 | | Other non-operating adjustments, net | | 731 | | | 1,797 | | |
Interest expense, net | Interest expense, net | | 6,631 | | | 1,554 | | | 17,519 | | | 3,229 | | Interest expense, net | | 7,760 | | | 4,518 | | |
Income tax (benefit) provision | | (10,446) | | | 2,102 | | | (13,619) | | | 1,506 | | |
Income tax benefit | | Income tax benefit | | (13,027) | | | (1,022) | | |
Depreciation | Depreciation | | 11,084 | | | 8,388 | | | 33,908 | | | 24,208 | | Depreciation | | 10,145 | | | 9,127 | | |
Amortization of intangible assets | Amortization of intangible assets | | 12,809 | | | 16,077 | | | 40,919 | | | 45,813 | | Amortization of intangible assets | | 12,547 | | | 14,574 | | |
Restructuring and other charges | Restructuring and other charges | | 2,778 | | | 6,348 | | | 6,355 | | | 22,424 | | Restructuring and other charges | | 9,546 | | | 1,508 | | |
Impairment of long-lived assets | Impairment of long-lived assets | | — | | | — | | | — | | | — | | Impairment of long-lived assets | | — | | | — | | |
Acquisition, financing and other third party costs | Acquisition, financing and other third party costs | | 2,012 | | | 3,497 | | | 6,185 | | | 9,245 | | Acquisition, financing and other third party costs | | 1,332 | | | 2,864 | | |
Fair value adjustments from purchase accounting | Fair value adjustments from purchase accounting | | 178 | | | 16 | | | 179 | | | (1,715) | | Fair value adjustments from purchase accounting | | 177 | | | (176) | | |
Litigation and settlement expense, net | Litigation and settlement expense, net | | 366 | | | 320 | | | 1,741 | | | 1,202 | | Litigation and settlement expense, net | | 503 | | | 1,305 | | |
COVID related expenses | COVID related expenses | | 1 | | | 182 | | | 62 | | | 639 | | COVID related expenses | | — | | | 61 | | |
Stock-based and other non-cash compensation expense | Stock-based and other non-cash compensation expense | | 13,229 | | | 8,935 | | | 37,172 | | | 26,400 | | Stock-based and other non-cash compensation expense | | 8,951 | | | 10,940 | | |
Adjusted EBITDA | Adjusted EBITDA | | $ | 43,461 | | | $ | 52,496 | | | $ | 110,319 | | | $ | 128,892 | | Adjusted EBITDA | | $ | 1,957 | | | $ | 31,161 | | |
Adjusted income and adjusted EPS exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. We believe that exclusion of these items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We use these measures along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace. We define adjusted income as net income before other non-operating adjustments, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition, financing and other third party costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision. Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding.
Adjusted income and adjusted EPS are non-GAAP financial measures and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. We expect to continue to incur expenses similar to the adjusted income and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring.