MERCURY SYSTEMS INC

Previous wording

As of December 29, 2023, we had 2,550 employees. We employ hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities to achieve our objectives to fully capitalize upon and maintain our technological leads in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications. 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®.

Current wording

As of March 29, 2024, we had 2,457 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®.

Previous wording

Our consolidated revenues, net loss, diluted net loss per share, adjusted loss per share (“adjusted EPS”), and adjusted EBITDA for the second quarter ended December 29, 2023 were $197.5 million, ($45.6) million, ($0.79), ($0.42), and ($21.3) million, respectively. Our consolidated revenues, net loss, diluted net loss per share, adjusted EPS, and adjusted EBITDA for the six months ended December 29, 2023 were $378.5 million, ($82.3) million, ($1.44), ($0.66), and ($19.4) million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

Current wording

Our consolidated revenues, net loss, diluted net loss per share, adjusted loss per share (“adjusted EPS”), and adjusted EBITDA for the third quarter ended March 29, 2024 were $208.3 million, ($44.6) million, ($0.77), ($0.26), and ($2.4) million, respectively. Our consolidated revenues, net loss, diluted net loss per share, adjusted EPS, and adjusted EBITDA for the nine months ended March 29, 2024 were $586.7 million, ($126.9) million, ($2.20), ($0.92), and ($21.7) million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

Previous wording

There were 13 weeks included in the results of operations for the second quarters ended December 29, 2023 and December 30, 2022, respectively. There were 26 weeks during thesix months ended December 29, 2023 and December 30, 2022, respectively. The results for the second quarter and six months ended December 29, 2023 are not necessarily indicative of the results to be expected for the full fiscal year.

Current wording

There were 13 weeks included in the results of operations for the third quarters ended March 29, 2024 and March 31, 2023, respectively. There were 39 weeks during thenine months ended March 29, 2024 and March 31, 2023, respectively. The results for the third quarter and nine months ended March 29, 2024 are not necessarily indicative of the results to be expected for the full fiscal year.

Previous wording

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

Current wording

The third quarter ended March 29, 2024 compared to the third quarter ended March 31, 2023

Previous wording

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

Current wording

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

Previous wording

Total revenues decreased $32.1 million, or 14.0%, to $197.5 million during the second quarter ended December 29, 2023, as compared to $229.6 million during the second quarter ended December 30, 2022. Revenues decreased year over year as we continue to prioritize resources to execute our challenged programs, transition from our higher mix of development programs and aim to better align our operating cadence with prudent working capital management. As a result, we are experiencing a temporary volume shift in our total revenue, especially our over time revenue which decreased by approximately $25.1 million. We expect this trend to continue through the remainder of fiscal 2024. Over time revenue represented 53% of total revenues during the second quarter ended December 29, 2023, as compared to 56% of total revenues during the second quarter ended December 30, 2022.

Current wording

Total revenues decreased $55.2 million, or 20.9%, to $208.3 million during the third quarter ended March 29, 2024, as compared to $263.5 million during the third quarter ended March 31, 2023. Revenues decreased year over year as we continue to prioritize resources to execute on our challenged programs. As a result, we are experiencing a temporary volume shift in our total revenue, including our point in time revenue and over time revenue which decreased by approximately $39.5 million and $15.7 million, respectively. Over time revenue represented 58% of total revenues during the third quarter ended March 29, 2024, as compared to 52% of total revenues during the third quarter ended March 31, 2023.

Previous wording

We experienced decreases across each product grouping during the second quarter ended December 29, 2023 when compared to the prior period; modules and sub-assemblies, components, and integrated subsystems, decreased $26.5 million, $3.7 million, and $1.9 million, respectively. The decrease in total revenue was primarily driven by the radar, other sensor and effector and electronic warfare end applications decreases of $30.5 million, $6.7 million, and $5.3 million, respectively, partially offset by increases to C4I end applications of $11.7 million. The decrease in total revenue was also driven by lower Naval and Other platforms of $18.3 million and $17.9 million, respectively, partially offset by increases to airborne platforms of $4.9 million. The largest program decreases were related to the AEGIS program, a secure processing program, and the THAAD program, partially offset by increases to a large C4I program and the F/A-18 program when compared to the prior period. There were no programs comprising 10% or more of our revenues for the second quarters ended December 29, 2023 or December 30, 2022.

Current wording

Revenue decreases were driven by the integrated subsystems and modules and sub-assemblies product groupings which decreased $52.8 million and $6.6 million, respectively, partially offset by an increase to the components grouping of $4.1 million during the third quarter ended March 29, 2024 when compared to the prior period. The decrease in total revenue was primarily driven by the radar, C4I and electronic warfare end applications with decreases of $57.2 million, $19.6 million and $9.9 million, respectively, partially offset by increases to other sensor and effector end applications of $27.5 million. The decrease in total revenue was also driven by lower Land, Airborne and Naval platforms of $37.8 million, $29.6 million and $11.3 million, respectively, partially offset by increases to Other platforms of $23.4 million. The largest program decreases were related to secure processing programs, LTAMDS and Aegis, partially offset by increases to the MK21A program and the

Previous wording

Gross margin was 16.0% for the second quarter ended December 29, 2023, a decrease of 1930 basis points from the 35.3% gross margin realized during the second quarter ended December 30, 2022. The lower gross margin was driven by cost growth impacts and higher manufacturing adjustments, primarily related to inventory reserves and scrap. The growth in estimated costs to complete during fiscal 2024 has significantly reduced the overall margins recognized on the affected programs through completion. Program cost growth of approximately $30.6 million was recorded in the quarter resulting in an incremental impact of approximately $23.3 million to gross margin, or 1230 basis points, when compared to the prior period. Approximately $13.7 million of total cost growth impact in the quarter was attributable to the approximately 20 challenged programs, of which $12.6 million related to one program. The remaining $16.9 million was incurred across certain other development and production programs based on facts and circumstances in the quarter. The decrease in gross margin was also attributable to higher manufacturing adjustments of approximately $13.3 million related to inventory reserves and scrap. The increase in inventory reserves was related to specifically identified excess and obsolete inventory primarily resulting from a shift in customer demand for our next generation product offering. In addition, we are actively marketing and selling certain of our slow moving inventory with certain parts expected to be at a discount. The increase in scrap was primarily a result of higher levels of discrepant material especially as related to the common processing architecture across several of our remaining challenged programs. We have several initiatives underway to address more efficient and cost-effective producibility of these subsystems.

Current wording

Gross margin was 19.5% for the third quarter ended March 29, 2024, a decrease of 1480 basis points from the 34.3% gross margin realized during the third quarter ended March 31, 2023. The lower gross margin was driven by cost growth impacts to revenue programs recognized over time and higher manufacturing adjustments, including $11.1 million related to inventory reserves and scrap, as well as $4.9 million incremental warranty expense. The increase in inventory reserves was primarily related to programs with end of life components, where design changes have occurred, as well as configuration changes necessary to drive efficient production in the common processing architecture. The increase in scrap was primarily a result of higher levels of discrepant material especially as related to the common processing architecture across several of our remaining challenged programs. We have several initiatives underway to address more efficient and cost-effective producibility of these subsystems.

Previous wording

Selling, general and administrative expenses decreased $0.6 million, or 1.3%, to $44.5 million during the second quarter ended December 29, 2023, as compared to $45.1 million in the second quarter ended December 30, 2022. The decrease was primarily driven by the reduction in force initiated on August 9, 2023, resulting in lower compensation costs including $2.5 million of stock compensation expense, $1.3 million of bonus expense, as well as a reduction in controllable spend. These decreases were partially offset by contract asset write-offs of $4.8 million as a result of negotiating settlement terms with our customers to reduce scope, or otherwise exit contracts, especially as related to certain challenged programs.

Current wording

Selling, general and administrative expenses decreased $1.4 million, or 3.2%, to $43.2 million during the third quarter ended March 29, 2024, as compared to $44.6 million in the third quarter ended March 31, 2023. The decrease was primarily driven by the reduction in force initiated on January 12, 2024, resulting in lower compensation costs including $3.5 million of stock compensation expense, and $3.9 million of bonus, salary, and benefit expense. These decreases were partially offset by contract asset reserves of $6.3 million as a result of ongoing negotiations of settlement terms with our customers to reduce scope, or otherwise exit contracts.

Previous wording

Research and development expenses increased $1.6 million, or 5.8%, to $28.5 million during the second quarter ended December 29, 2023, as compared to $26.9 million during the second quarter ended December 30, 2022. The increase during the second quarter ended December 29, 2023 was driven by higher compensation costs of $1.3 million and $1.2 million of incremental R&D spend on equipment and supplies and outside services, partially offset by lower bonus expense of $0.8 million as compared to the second quarter ended December 30, 2022.

Current wording

Research and development expenses decreased $4.9 million, or 18.5%, to $21.6 million during the third quarter ended March 29, 2024, as compared to $26.5 million during the third quarter ended March 31, 2023. The decrease during the third quarter ended March 29, 2024 was primarily driven by increased Customer Funded Research and Development ("CRAD") of $2.6 million as a result of a higher mix of development programs execution, as well as the reduction in force initiated on January 12, 2024, resulting in lower compensation costs including $2.7 million of salary, bonus, benefits and stock compensation expense. Decreases were partially offset by $0.7 million of incremental R&D spend on on equipment, supplies and outside services as compared to the third quarter ended March 31, 2023.

Previous wording

Amortization of intangible assets decreased $1.3 million to $12.3 million during the second quarter ended December 29, 2023, as compared to $13.5 million during the second quarter ended December 30, 2022, primarily due to the backlog intangible from our Avalex acquisition being fully amortized in fiscal 2023.

Current wording

Amortization of intangible assets decreased $1.3 million to $11.5 million during the third quarter ended March 29, 2024, as compared to $12.8 million during the third quarter ended March 31, 2023, primarily due to various developed technology intangibles being fully amortized in fiscal 2023.

Previous wording

There was an immaterial amount of restructuring and other charges during the second quarter ended December 29, 2023. Restructuring and other charges during the second quarter ended December 30, 2022 included $1.0 million of costs related to facility optimization efforts associated with 1MPACT, including $0.8 million related to lease asset impairment, as well as $0.6 million related to severance costs and the remaining $0.4 million related to third party consulting costs associated with 1MPACT.

Current wording

We incurred $9.8 million of restructuring and other charges during the third quarter ended March 29, 2024, as compared to $2.8 million during the third quarter ended March 31, 2023. Restructuring and other charges during the third quarter ended March 29, 2024 includes $9.8 million for separation costs related to the reduction in workforce initiated January 12, 2024 impacting approximately 100 positions. Restructuring and other charges during the third 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.

Previous wording

There was an immaterial amount of acquisition costs and other related expenses during the second quarter ended December 29, 2023. The acquisition costs and other related expenses during the second quarter ended December 30, 2022 were primarily related to $0.6 million for third-party advisory fees in connection with engagements by activist investors and other acquisition related costs.

Current wording

There was an immaterial amount of acquisition costs and other related expenses during the third quarter ended March 29, 2024. The acquisition costs and other related expenses during the third quarter ended March 31, 2023 includes $1.3 million associated with the Board of Directors' review of strategic alternatives.

Previous wording

We incurred $8.7 million of interest expense during the second quarter ended December 29, 2023, as compared to $6.6 million during the second quarter ended December 30, 2022. The increase was driven by a higher interest rate and higher average outstanding borrowings during the period on our existing credit facility (the "Revolver").

Current wording

We incurred $9.3 million of interest expense during the third quarter ended March 29, 2024, as compared to $6.7 million during the third quarter ended March 31, 2023. The increase was driven by a higher interest rate and higher average outstanding borrowings during the period on our existing credit facility (the "Revolver").

Previous wording

Other expense, net was $1.1 million during the second quarter ended December 29, 2023, as compared to other income, net of $0.8 million during the second quarter ended December 30, 2022. The second quarter ended December 29, 2023 includes litigation and settlement expenses of $1.4 million and $0.8 million of financing costs, partially offset by net foreign currency translation gains of $0.7 million and $0.4 million of other income. The second quarter ended December 30, 2022 includes net foreign currency translation gains of $1.4 million offset by $0.5 million of financing costs.

Current wording

Other expense, net was $2.8 million during the third quarter ended March 29, 2024, as compared to $0.6 million during the third quarter ended March 31, 2023. The third quarter ended March 29, 2024 includes litigation and settlement expenses of $2.1 million, $0.8 million of financing costs and $0.2 million net foreign currency translation losses, partially offset by other income of $0.3 million. The third quarter ended March 31, 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.

Previous wording

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

Current wording

We recorded an income tax benefit of $12.6 million and $10.4 million on a loss before income taxes of $57.2 million and $5.3 million for the third quarters ended March 29, 2024 and March 31, 2023, respectively.

Previous wording

During the second quarters ended December 29, 2023 and December 30, 2022, we recognized a tax provision of $0.4 million and $0.1 million related to stock compensation shortfalls, respectively. During the second quarter ended December 30, 2022, we recognized a tax benefit of $2.3 million related to a release of income tax reserves for unrecognized income tax benefits due to the expiration of the statute of limitations.

Current wording

During the third quarters ended March 29, 2024 and March 31, 2023, we recognized a tax provision (benefit) of $0.8 million and $(0.1) million related to stock compensation shortfalls (windfalls), respectively. During the third quarter ended March 31, 2023, we concluded our income tax audit with the Internal Revenue Service for fiscal years 2016 through 2018 and subsequently recognized a tax benefit of $1.3 million related to a release of income tax reserves for unrecognized income tax benefits.

Previous wording

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

Current wording

The effective tax rate for the third quarters ended March 29, 2024 and March 31, 2023 differed from the federal statutory rate primarily due to federal and state research and development credits, non-deductible compensation, stock compensation shortfalls and state taxes. The effective tax rate for the third quarter ended March 31, 2023 also differed from the federal statutory rate due to the release of unrecognized income tax benefits.

Previous wording

The Tax Cuts and Jobs Act of 2017 requires companies to capitalize and amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes, effective for us beginning in the fiscal year ended June 30, 2023. As a result, we have recorded a deferred tax asset through the second quarter ended December 29, 2023 of $88.9 million. During the second quarter ended December 29, 2023, we have made $0.3 million of tax payments related to this requirement. We will continue to monitor guidance and any proposed regulations and adjust the estimates as necessary.

Current wording

The Tax Cuts and Jobs Act of 2017 requires companies to capitalize and amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes, effective for us beginning in the fiscal year ended June 30, 2023. Based on guidance issued during the year, we refined the amount of research and development expenditures capitalized and recorded certain current and deferred tax adjustments in the third quarter ended March 29, 2024. We will continue to monitor guidance and any proposed regulations and adjust the estimates as necessary.

Previous wording

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

Current wording

Nine months ended March 29, 2024 compared to the nine months ended March 31, 2023

Previous wording

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

Current wording

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

Previous wording

Total revenues decreased $78.7 million, or 17.2%, to $378.5 million during the six months ended December 29, 2023, as compared to $457.2 million during the six months ended December 30, 2022. Revenues decreased year over year as we continue to prioritize resources to execute our challenged programs, transition from our higher mix of development programs and aim to better align our operating cadence with prudent working capital management. As a result, we are observing a temporary volume shift in our total revenue, especially our over time revenue which decreased by approximately $63.8 million. We expect this trend to continue through the remainder of fiscal 2024. Over time revenue represented 55% of total revenues during the six months ended December 29, 2023, as compared to 60% of total revenues during the six months ended December 30, 2022.

Current wording

Total revenues decreased $133.9 million, or 18.6%, to $586.7 million during the nine months ended March 29, 2024, as compared to $720.6 million during the nine months ended March 31, 2023. Revenues decreased year over year as we continue to prioritize resources to execute our challenged programs, transition from our higher mix of development programs and aim to better align our operating cadence with prudent working capital management. As a result, we are observing a temporary volume shift in our total revenue, including our point in time revenue and over time revenue which decreased by approximately $54.5 million and $79.4 million, respectively. We expect this trend to continue through the remainder of fiscal 2024. Over time revenue represented 56% of total revenues during the nine months ended March 29, 2024, as compared to 57% of total revenues during the nine months ended March 31, 2023.

Previous wording

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, we adjusted our estimates at completion for incremental technical and execution costs in the quarter, especially as related to one of our challenged programs as well as certain other development and production programs resulting in a cumulative adjustment to reduce revenues in the six months ended. In addition, as we transition our operating cadence with a goal of more properly balancing our material purchases with contract awards and resource availability to drive better working capital results, we are experiencing a near-term revenue timing dynamic.

Current wording

During the nine months ended March 29, 2024, we experienced incremental cost growth across various programs with revenue recognized over time, including our challenged programs. For the 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, we adjusted our estimates at completion for incremental technical and execution costs in the quarter, especially as related to one of our challenged programs as well as certain other development and production programs resulting in a cumulative adjustment to reduce revenues in the nine months ended March 29, 2024. Despite the cost growth we experienced on our programs, the trend in the cost growth of these programs has reduced significantly as we proactively retire risk across the portfolio. In addition, as we transition our operating cadence with a goal of more properly balancing our material purchases with contract awards and resource availability to drive better working capital results, we are experiencing a near-term revenue timing dynamic.

Previous wording

We experienced product grouping decreases driven by modules and sub-assemblies and integrated subsystems, which decreased $44.7 million and $35.9 million, respectively, partially offset by an increase in the components product grouping of $1.9 million. The decrease in total revenue was primarily driven by the radar, electronic warfare and other end applications decreases of $55.3 million, $12.3 million, and $12.2 million, respectively, partially offset by increases to C4I end applications of $7.8 million. We experienced decreases across each platform during the six months ended December 29, 2023 when compared to the prior period; Other, Naval, Land and Airborne platforms decreased $36.6 million, $25.4 million, $11.0 million and $5.7 million, respectively. The largest program decreases were related to the LTAMDS, AEGIS and P8 programs, partially offset by increases to a large C4I program and the F/A-18 program when compared to the prior period. There were no programs comprising 10% or more of our revenues for the six months quarters ended December 29, 2023 or December 30, 2022.

Current wording

We experienced revenue decreases across all product grouping, integrated subsystems, modules and sub-assemblies and components which decreased $106.5 million, $26.2 million and $1.3 million, respectively. The decrease in total revenue was primarily driven by the radar, electronic warfare and C4I end applications decreases of $112.5 million, $22.2 million, and $20.7 million, respectively, partially offset by increases to other sensor and effector end applications of $20.8 million. We experienced decreases across each platform during the nine months ended March 29, 2024 when compared to the prior period; Land, Airborne, Naval and Other platforms decreased $48.9 million, $44.2 million, $36.6 million, and $4.2 million, respectively. The largest program decreases were related to the LTAMDS, Aegis and THAAD programs, partially offset by increases to the SCAR and MK21A programs when compared to the prior period. There were no programs comprising 10% or more of our revenues for the nine months ended March 29, 2024 or March 31, 2023.

Previous wording

Gross margin was 21.7% for the six months ended December 29, 2023, a decrease of 1310 basis points from the 34.8% gross margin realized during the six months ended December 30, 2022. The lower gross margin was driven by cost growth impacts and higher manufacturing adjustments, primarily related to inventory reserves, scrap and certain other non-recurring cost adjustments. The growth in estimated costs to complete during fiscal 2024 has significantly reduced the overall margins recognized on the affected programs through completion. Program cost growth of approximately $48.0 million was recorded in the six months resulting in an incremental impact of approximately $27.9 million to gross margin, or 840 basis points, when compared to the prior period. Approximately, $19.3 million of total cost growth impact in the six months was attributable to the approximately 20 challenged programs, of which a total of $17.7 million related to two programs. The remaining $28.7 million was incurred across certain other development and production programs based on facts and circumstances in the quarter. The decrease in gross margin was also attributable to higher manufacturing adjustments of approximately $18.1 million related to inventory reserves and scrap. The increase in inventory reserves was related to specifically identified excess and obsolete inventory primarily resulting from a shift in customer demand for our next generation product offering. In addition, we are actively marketing and selling certain of our slow moving inventory with certain parts expected to be at a discount. The increase in scrap was primarily a result of higher levels of discrepant material especially as related to the common processing architecture across several of our remaining challenged programs. We have several initiatives underway to address more efficient and cost-effective producibility of these subsystems.

Current wording

Gross margin was 20.9% for the nine months ended March 29, 2024, a decrease of 1370 basis points from the 34.6% gross margin realized during the nine months ended March 31, 2023. The lower gross margin was driven by cost growth impacts to revenue programs recognized over time and higher manufacturing adjustments, including $29.2 million related to inventory reserves and scrap, certain other non-recurring cost adjustments, as well as, $4.9 million warranty expense. The increase in inventory reserves was primarily related to programs with end of life components, where design changes have occurred, as well as configuration changes necessary to drive efficient production in the common processing architecture. The increase in scrap was primarily a result of higher levels of discrepant material especially as related to the common processing architecture across several of our remaining challenged programs. We have several initiatives underway to address more efficient and cost-effective producibility of these subsystems.

Previous wording

Selling, general and administrative expenses decreased $3.7 million, or 4.4%, to $80.3 million during the six months ended December 29, 2023, as compared to $84.0 million during the six months ended December 30, 2022. The decrease was primarily driven by the reduction in force initiated on August 9, 2023, resulting in lower compensation costs including $5.7 million of lower stock compensation and $4.1 million of lower bonus expense. These decreases were partially offset by contract asset write-offs of $4.8 million as a result of negotiating settlement terms with our customers to reduce scope, or otherwise exit contracts, especially as related to certain challenged programs.

Current wording

Selling, general and administrative expenses decreased $5.2 million, or 4.0%, to $123.4 million during the nine months ended March 29, 2024, as compared to $128.6 million during the nine months ended March 31, 2023. The decrease was primarily driven by the reduction in force initiated on August 9, 2023 and on January 12, 2024, resulting in lower compensation costs of $16.3 million including stock compensation, bonus, benefits and salary expense. These decreases were partially offset by contract asset write-offs and reserves of $11.1 million as a result of ongoing negotiations of settlement terms with our customers to reduce scope, or otherwise exit contracts, especially as related to certain challenged programs.

Previous wording

Research and development expenses increased $5.7 million, or 10.4%, to $60.3 million during the six months ended December 29, 2023, as compared to $54.7 million during the six months ended December 30, 2022. The increase was primarily due to an increase in compensation costs of $4.8 million, incremental R&D spend on equipment, supplies and outside services totaling $2.9 million, partially offset by lower bonus expense of $2.3 million as compared to the six months ended December 30, 2022.

Current wording

Research and development expenses increased $0.7 million, or 0.9%, to $81.9 million during the nine months ended March 29, 2024, as compared to $81.2 million during the nine months ended March 31, 2023. The increase was primarily due to incremental R&D spend on equipment, supplies and outside services totaling $4.7 million, partially offset by increased CRAD of $3.9 million as a result of a higher mix of development programs execution compared to the nine months ended March 31, 2023.

Previous wording

Restructuring and other charges were $9.5 million during the six months ended December 29, 2023, as compared to $3.6 million during the six months ended December 30, 2022. During the six months ended December 29, 2023 we initiated several immediate cost savings measures that simplify our organizational structure, facilitate clearer accountability, and align our priorities, including: (i) embedding the 1MPACT value creation initiatives and execution into our operations; (ii) streamlining organizational structure and removing areas of redundancy between corporate and divisional organizations; and (iii) reducing selling, general, and administrative headcount and rebalancing discretionary and third party spending to better align with our priority areas. On July 20, 2023, we executed the plan to embed the 1MPACT value creation initiatives into operations, and on August 9, 2023, we approved and initiated a workforce reduction that, together with the 1MPACT related action, eliminated approximately 150 positions resulting in $9.5 million of severance costs. Restructuring and other charges during the six months ended December 30, 2022 primarily related to 1MPACT including $1.7 million of third party consulting costs, $1.0 million of costs for facility optimization efforts including $0.8 million related to lease asset impairment, as well as $0.8 million of severance costs associated with the elimination of approximately 10 positions.

Current wording

Restructuring and other charges were $19.4 million during the nine months ended March 29, 2024, as compared to $6.4 million during the nine months ended March 31, 2023. During the nine months ended March 29, 2024 we initiated several immediate cost savings measures that simplify our organizational structure, facilitate clearer accountability, and align our priorities, including: (i) embedding the 1MPACT value creation initiatives and execution into our operations; (ii) streamlining organizational structure and removing areas of redundancy between corporate and divisional organizations; and (iii) reducing selling, general, and administrative headcount and rebalancing discretionary and third party spending to better align with our priority areas. On July 20, 2023, we executed the plan to embed the 1MPACT value creation initiatives into operations, and on August 9, 2023, we approved and initiated a workforce reduction that, together with the 1MPACT related action, eliminated approximately 150 positions resulting in $9.5 million of severance costs. On January 12, 2024, we initiated and approved a workforce reduction that eliminated approximately 100 positions resulting in $9.8 million of severance costs. 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.

Previous wording

On January 12, 2024, we initiated and approved a workforce reduction that will eliminate approximately 100 positions, resulting in expected restructuring charges of approximately $10 - 12 million. All of the restructuring and other charges will be classified as Operating expenses in the Consolidated Statements of Operations and Comprehensive Loss and any remaining restructuring obligations are expected to be paid within the next twelve months.

Current wording

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

Previous wording

Acquisition costs and other related expenses were $1.2 million during the six months ended December 29, 2023, as compared to $3.4 million during the six months ended December 30, 2022. The acquisition costs and other related expenses we incurred during the six months ended December 29, 2023 includes $0.3 million related to the conclusion of the Board of Directors' review of strategic alternatives, as well as $0.3 million for third-party advisory fees in connection with engagements by activist investors. Acquisition costs during the six months ended December 30, 2022 were primarily related to $2.5 million for third party advisory fees in connection with engagements by activist investors and other acquisition related costs.

Current wording

Acquisition costs and other related expenses were $1.4 million during the nine months ended March 29, 2024, as compared to $5.0 million during the nine months ended March 31, 2023. The acquisition costs and other related expenses we incurred during the nine months ended March 29, 2024 includes $0.5 million related to run-rate amortization of fair value adjustments from purchase accounting, $0.3 million related to the conclusion of the Board of Directors' review of strategic alternatives, as well as $0.3 million for third-party advisory fees in connection with engagements by activist investors. Acquisition costs 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.

Previous wording

We incurred $16.5 million of interest expense during the six months ended December 29, 2023, as compared to $11.1 million during the six months ended December 30, 2022. The increase was driven by an increase in interest rate and higher average borrowings outstanding on our Revolver as compared to the six months ended December 30, 2022.

Current wording

We incurred $25.9 million of interest expense during the nine months ended March 29, 2024, as compared to $17.8 million during the nine months ended March 31, 2023. The increase was driven by a higher interest rate and higher average borrowings outstanding on our Revolver as compared to the nine months ended March 31, 2023.

Previous wording

Other expense, net increased $0.1 million to $2.9 million during the six months ended December 29, 2023 as compared to $2.8 million during the six months ended December 30, 2022. There was $1.9 million of litigation and settlement costs, $1.4 million of financing costs and $0.3 million of net foreign currency translation losses, partially offset by other income of $0.7 million. during the six months ended December 29, 2023. There was $1.4 million of litigation and settlement costs, $1.1 million of financing costs and $0.4 million of net foreign currency translation losses during the six months ended December 30, 2022.

Current wording

Other expense, net increased $2.3 million to $5.7 million during the nine months ended March 29, 2024 as compared to $3.4 million during the nine months ended March 31, 2023. There was $4.0 million of litigation and settlement costs, $2.1 million of financing costs and $0.5 million of net foreign currency translation losses, partially offset by other income of $0.9 million during the nine months ended March 29, 2024. There was $1.7 million of both financing costs and litigation and settlement costs, respectively, during the nine months ended March 31, 2023.

Previous wording

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

Current wording

We recorded an income tax benefit of $43.8 million and $13.6 million on a loss before income taxes of $170.7 million and $33.7 million for the nine months ended March 29, 2024 and March 31, 2023, respectively.

Previous wording

During the six months quarters ended December 29, 2023 and December 30, 2022, we recognized a tax provision of $1.6 and $1.7 million related to stock compensation shortfalls, respectively. During the six months ended December 30, 2022, we recognized a tax benefit of $2.3 million related to a release of income tax reserves for unrecognized income tax benefits due to the expiration of the statute of limitations.

Current wording

During the nine months ended March 29, 2024 and March 31, 2023, we recognized a tax provision of $2.4 and $1.7 million related to stock compensation shortfalls, respectively. During the nine months ended March 31, 2023, we concluded our income tax audit with the Internal Revenue Service for fiscal years 2016 through 2018 and subsequently recognized a tax benefit of $1.3 million related to a release of income tax reserves for unrecognized income tax benefits.

Previous wording

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

Current wording

The effective tax rate for the nine months ended March 29, 2024 and March 31, 2023 differed from the federal statutory rate primarily due to federal and state research and development credits, non-deductible compensation, stock compensation shortfalls and state taxes. The effective tax rate for the nine months ended March 31, 2023 also differed from the federal statutory rate due to the release of unrecognized income tax benefits.

Previous wording

The Tax Cuts and Jobs Act of 2017 requires companies to capitalize and amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes, effective for us beginning in the fiscal year ended June 30, 2023. As a result, we have recorded a deferred tax asset through the second quarter ended December 29, 2023 of $88.9 million. During the six months ended December 29, 2023, we have made $15.3 million of tax payments related to this requirement. We will continue to monitor guidance and any proposed regulations and adjust the estimates as necessary.

Current wording

The Tax Cuts and Jobs Act of 2017 requires companies to capitalize and amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes, effective for us beginning in the fiscal year ended June 30, 2023. As a result, we have recorded a deferred tax asset through the nine months ended March 29, 2024 of $58.3 million. Based on some guidance issued during the year, we refined the amount of research and development expenditures capitalized and recorded certain current and deferred tax adjustments in the third quarter ended March 29, 2024. We will continue to monitor guidance and any proposed regulations and adjust the estimates as necessary.

Previous wording

On November 7, 2023, due to the uncertainty surrounding a government shutdown or prolonged continuing resolution and the potential impact on the second quarter and fiscal 2024 results, we proactively executed Amendment No. 5 to the Revolver, as amended to date, with a syndicate of commercial banks and Bank of America, N.A acting as the administrative agent allowing for a temporary increase in the Consolidated Total Net Leverage Ratio covenant requirement from 4.50 to 5.25 for the second quarter ended December 29, 2023.

Current wording

On November 7, 2023, due to the uncertainty surrounding a government shutdown or prolonged continuing resolution and the potential impact on the second quarter and fiscal 2024 results, we proactively executed Amendment No. 5 to the Revolver, as amended to date, with a syndicate of commercial banks and Bank of America, N.A acting as the administrative agent allowing for a temporary increase in the Consolidated Total Net Leverage Ratio covenant requirement from 4.50 to 5.25 for the second quarter ended December 29, 2023. As part of Amendment No. 5, the Company agreed to a temporary reduction of Revolver capacity to $750.0 million through the earlier of May 15, 2024 or the filing of the compliance certificate for the period ended March 29, 2024.

Previous wording

As of December 29, 2023, the Company was in compliance with all covenants and conditions under the Revolver and expects to be within our covenant and conditions for the remainder of the year. Refer to exhibit 10.1 filed on Form 8-K filed by the Company with the SEC on November 7, 2023.

Current wording

During the third quarter ended March 29, 2024, we did not have any additional borrowings. During the nine months ended March 29, 2024, we borrowed $105.0 million. As of March 29, 2024, the Company was in compliance with all covenants and conditions under the Revolver and expects to be within our covenant and conditions for the remainder of the year.

Previous wording

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 $48.2 million and $1.3 million, respectively, for the six months ended December 29, 2023. We factored accounts receivable and incurred factoring fees of approximately $20.0 million and $0.1 million respectively, for the six months ended December 30, 2022.

Current wording

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 $44.2 million and $1.6 million, respectively, for the nine months ended March 29, 2024. We factored accounts receivable and incurred factoring fees of approximately $24.5 million and $0.3 million respectively, for the nine months ended March 31, 2023.

Previous wording

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

Current wording

Our cash and cash equivalents increased by $71.1 million from June 30, 2023 to March 29, 2024, primarily as the result of $105.0 million of borrowings on our Revolver, offset by $23.9 million invested in purchases of property and equipment and $11.4 million of cash used in operating activities.