Mercury Systems, Inc. (NASDAQ:MRCY) Q2 2022 Earnings Conference Call February 1, 2022 5:00 PM ET Company Participants Mike Ruppert - CFO Mark Aslett - CEO Conference Call Participants Pete Skibitski - Alembic Global Advisors Seth Seifman - JPMorgan Sheila Kahyaoglu - Jefferies Peter Arment - Robert W. Baird Ken Herbert - RBC Capital Markets Michael Ciarmoli - Truist Securities Jonathan Ho - William Blair Austin Moeller - Canaccord Genuity Christopher Rieger - Berenberg Capital Management Ron Epstein - ...

| --- | --- | --- | |--------------------------------------------------------------------------------------------------|-------|-------| | | | | | | | | | | | | | | | | | SECOND QUARTER FISCAL YEAR 2022 FINANCIAL RESULTS | | | | Mark Aslett President and CEO Michael Ruppert | | | | Executive Vice President and CFO | | | | February 1, 2022, 5:00 pm ET | | | | Webcast login at www.mrcy.com/investor Webcast replay available by 7:00 p.m. ET February 1, 2022 | | | Forward-looking safe harbor statement This prese ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ________________________________________________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 1, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER: 0-23599 ________________________________________________________________ MER ...

Mercury Systems, Inc. (NASDAQ:MRCY) Q1 2022 Earnings Conference Call November 2, 2021 5:00 PM ET Company Participants Mike Ruppert - Executive Vice President & Chief Financial Officer Mark Aslett - President & Chief Executive Officer Conference Call Participants Peter Skibitski - Alembic Global Seth Seifman - JPMorgan Sheila Kahyaoglu - Jefferies Jonathan Ho - William Blair & Co. Michael Ciarmoli - Truist Securities Austin Moeller - Canaccord Genuity Noah Poponak - Goldman Sachs Pete Arment - Baird Equity R ...

| --- | --- | --- | --- | --- | |--------------------------------------------------------------------------------------------------|-------|-------|-------|-------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FIRST QUARTER FISCAL YEAR | | | | | | 2022 FINANCIAL RESULTS | | | | | | Mark Aslett President and CEO | | | | | | Michael Ruppert Executive Vice President and CFO | | | | | | November 2, 2021, 5:00 pm ET | | | | | | Webcast login at www.mrcy.com/investor Webcast replay av ...

Part I [Item 1. Business](index=3&type=section&id=Item%201.%20Business) Mercury Systems is a technology company providing secure, rugged components and subsystems to the aerospace and defense industry, reporting $924.0 million in fiscal 2021 revenues | Financial Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | | :--- | :--- | :--- | | **Consolidated Revenues** | $924.0 | $796.6 | | **Acquired Revenues** | $88.4 | $0.9 | | **Net Income** | $62.0 | $85.7 | | **Diluted EPS** | $1.12 | $1.56 | | **Adjusted EPS** | $2.42 | $2.30 | | **Adjusted EBITDA** | $201.9 | $176.2 | - The company's business model bridges the gap between commercial technology and aerospace/defense applications, focusing on secure, open-architecture solutions for C4ISR, electronic warfare, and radar systems[13](index=13&type=chunk)[15](index=15&type=chunk)[17](index=17&type=chunk) - Growth strategies are centered on organic investment, disciplined M&A, innovation in trusted and secure technologies, operational improvement, and talent retention[21](index=21&type=chunk)[22](index=22&type=chunk)[23](index=23&type=chunk) - In August 2021, Mercury launched "1MPACT," a company-wide initiative to drive growth and margin expansion over the next five years by focusing on organizational efficiency, supply chain optimization, and scalable processes[19](index=19&type=chunk) [Our Company and Business Strategy](index=3&type=section&id=Our%20Company%20and%20Business%20Strategy) Mercury positions itself as a leading technology provider for the aerospace and defense industry, specializing in adapting commercial technology for mission-critical applications - Mercury's products are deployed in over **300 programs** with more than **25 defense prime contractors** and commercial aviation customers[14](index=14&type=chunk) - The company's core growth strategies are: 1. Invest to grow organically. 2. Expand capabilities and market access through M&A. 3. Invest in trusted, secure innovation. 4. Continuously improve operational capability and scalability. 5. Attract and retain talent[21](index=21&type=chunk)[22](index=22&type=chunk)[23](index=23&type=chunk) - The 1MPACT initiative focuses on six areas: organization efficiency, procurement/supply chain, facilities optimization, R&D investment, capital efficiency, and scalable processes[19](index=19&type=chunk) [Our Solutions and Products](index=5&type=section&id=Our%20Solutions%20and%20Products) Mercury offers a wide range of products from discrete components to fully integrated subsystems, designed for compute-intensive applications - Product categories are defined as: - **Components:** Single-function elements like power amplifiers, converters, and chips. - **Modules and Subassemblies:** Combinations of components on a single board, such as embedded processing modules. - **Integrated Subsystems:** Multiple modules combined in a chassis with software to form a complete solution[41](index=41&type=chunk)[42](index=42&type=chunk)[43](index=43&type=chunk) - The company differentiates its offerings through six key capabilities: Silicon adaptation, Speed (high performance), SWaP optimization, open Software, built-in Security, and certifiable Safety[31](index=31&type=chunk)[32](index=32&type=chunk)[33](index=33&type=chunk) - Mercury partners with tech leaders like Intel®, Xilinx, and NVIDIA to deliver cutting-edge computing in rugged, field-deployable form factors[46](index=46&type=chunk) [Recent Acquisitions](index=8&type=section&id=Recent%20Acquisitions) Since July 2015, Mercury has completed **13 strategic acquisitions** to expand its capabilities in embedded security, microelectronics, mission computing, and rugged servers | Name of Acquired Entity | Date of Acquisition | | :--- | :--- | | Physical Optics Corporation | December 30, 2020 | | Pentek | May 27, 2021 | | American Panel Corporation | September 23, 2019 | - Acquisitions have added substantial capabilities, including embedded security (LIT, Athena), custom microelectronics (Microsemi Carve-Out, Pentek), mission computing (CES, GECO, POC), and rugged servers (Themis, Germane)[29](index=29&type=chunk)[55](index=55&type=chunk) [Our Market Opportunity](index=8&type=section&id=Our%20Market%20Opportunity) Mercury's market opportunity is driven by growing demand for secure, domestically produced sensor and mission processing capabilities in the aerospace and defense electronics market - The global aerospace and defense electronics market is estimated to be **$129 billion** in 2021, growing to **$148 billion** by 2025, with the U.S. defense electronics market estimated at **$72 billion** in 2021, growing to **$78 billion** by 2025[56](index=56&type=chunk) - Prime contractor outsourcing is identified as the largest secular growth opportunity, with the addressable U.S. Tier 2 embedded computing and RF market estimated at **$24 billion** in 2021[58](index=58&type=chunk) - The DoD has elevated microelectronics to its number one technology priority, creating opportunities for Mercury's capabilities in trusted, secure, and domestically produced silicon technologies[59](index=59&type=chunk) [Backlog, Customers, and Human Capital](index=14&type=section&id=Backlog%2C%20Customers%2C%20and%20Human%20Capital) As of July 2, 2021, Mercury's order backlog was **$909.6 million**, with Lockheed Martin and Raytheon Technologies as major customers | Metric | As of July 2, 2021 (Millions) | As of July 3, 2020 (Millions) | | :--- | :--- | :--- | | **Total Backlog** | $909.6 | $831.1 | | **Backlog Expected in Next 12 Months** | $530.0 | N/A | | Customer | % of FY21 Revenue | | :--- | :--- | | Raytheon Technologies | 19% | | Lockheed Martin Corporation | 15% | | United States Navy | 12% | - As of July 2, 2021, the company had **2,384 employees**, with **791** in R&D. Women and racially/ethnically diverse employees represented **30%** and **42%** of the workforce, respectively[82](index=82&type=chunk)[85](index=85&type=chunk) [Item 1A. Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant operational, strategic, regulatory, and IT risks, including defense program dependence and acquisition integration challenges - **Business Operations Risks:** Heavy dependence on defense programs (**98% of FY21 revenue**), which are subject to termination and funding delays. Loss of major customers like Raytheon (**19%**) or Lockheed Martin (**15%**) would materially harm the business[92](index=92&type=chunk)[95](index=95&type=chunk) - **Growth Strategy & M&A Risks:** The 1MPACT value creation plan may not be successful or could divert management attention. Acquisitions pose integration challenges, potential for unanticipated liabilities, and failure to achieve expected synergies[119](index=119&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk) - **Legal & Regulatory Risks:** Contracts are subject to termination for convenience by the government. The company must comply with complex regulations like FAR, CAS, and CMMC, with violations leading to fines or debarment[134](index=134&type=chunk) - **IT & IP Risks:** The business is subject to heightened risks of cyber intrusion, including ransomware and phishing. A data breach could lead to loss of sales, reputational damage, and loss of government contracts[141](index=141&type=chunk) - **COVID-19 Risks:** The pandemic poses risks of supply chain disruption, limitations on operations, and increased costs for health and safety measures[146](index=146&type=chunk) [Item 2. Properties](index=29&type=section&id=Item%202.%20Properties) The company leases all significant properties across the U.S. and Switzerland, with major facilities supporting manufacturing and engineering | Location | Size (Sq. Feet) | Commitment | | :--- | :--- | :--- | | Andover, MA | 145,262 | Leased, expiring 2032 | | Phoenix, AZ | 125,756 | Leased, expiring 2031 | | Hudson, NH | 121,553 | Leased, expiring 2030 | | Torrance, CA | 85,125 | Leased, expiring 2029 | [Item 3. Legal Proceedings](index=29&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in a binding arbitration case with a former sales representative seeking approximately $9 million in damages - On June 23, 2021, former sales representative ERA filed for binding arbitration seeking **~$9 million** in damages related to a terminated agreement[158](index=158&type=chunk) - The company believes the claims are without merit and intends to defend itself vigorously. The outcome is not expected to have a material impact[157](index=157&type=chunk)[158](index=158&type=chunk) [Item 4.1. Information About Our Executive Officers](index=29&type=section&id=Item%204.1.%20Information%20About%20Our%20Executive%20Officers) This section provides information on the company's executive officers, including the President and CEO, and EVP, CFO, and Treasurer - Mark Aslett has served as President and CEO since **2007**[161](index=161&type=chunk) - Michael D. Ruppert was appointed EVP, Chief Financial Officer and Treasurer in **2018**[164](index=164&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=31&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Mercury's common stock trades on Nasdaq under MRCY, with the company retaining earnings for growth and no cash dividends paid | Fiscal 2021 Quarter | High Price ($) | Low Price ($) | | :--- | :--- | :--- | | Fourth Quarter | $79.28 | $57.69 | | Third Quarter | $85.49 | $61.26 | | Second Quarter | $88.06 | $67.10 | | First Quarter | $79.89 | $66.65 | - The company has never declared or paid cash dividends and intends to retain earnings for future growth[170](index=170&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses fiscal 2021 financial results, including a **16.0%** revenue increase to **$924.0 million**, gross margin decline, and **$62.0 million** net income [Results of Operations: Fiscal 2021 vs. Fiscal 2020](index=34&type=section&id=Results%20of%20Operations%3A%20Fiscal%202021%20vs.%20Fiscal%202020) Fiscal 2021 revenues increased **16.0%** to **$924.0 million** due to acquisitions and organic growth, with gross margin declining and net income decreasing to **$62.0 million** | Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | Change | | :--- | :--- | :--- | :--- | | **Net Revenues** | $924.0 | $796.6 | +16.0% | | **Gross Margin** | $385.2 (41.7%) | $356.8 (44.8%) | -310 bps | | **Income from Operations** | $81.0 | $91.1 | -11.1% | | **Net Income** | $62.0 | $85.7 | -27.6% | - The increase in total revenue was driven by higher demand for integrated subsystems (**+$153.1 million**) and modules/sub-assemblies (**+$25.4 million**), partially offset by a decrease in components (**-$51.1 million**)[196](index=196&type=chunk) - Gross margin decline was primarily due to the acquisition of POC, which increased lower-margin Customer Funded R&D (CRAD), unfavorable program mix, and incremental COVID-related expenses of **$7.2 million**[197](index=197&type=chunk) - Restructuring and other charges increased significantly to **$9.2 million** in FY2021 from **$1.8 million** in FY2020, primarily due to severance costs and consulting fees for the 1MPACT initiative[202](index=202&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity sources include cash from operations and a **$750.0 million** revolving credit facility, with cash decreasing by **$113.0 million** due to acquisitions | Cash Flow Metric (FY 2021) | Amount (Millions) | | :--- | :--- | | Net cash provided by operating activities | $97.2 | | Net cash used in investing activities | ($416.9) | | Net cash provided by financing activities | $206.2 | | **Net decrease in cash** | **($113.0)** | - As of July 2, 2021, the company had **$200.0 million** in outstanding borrowings against its **$750.0 million** revolving credit facility, which matures in September **2023**[215](index=215&type=chunk)[216](index=216&type=chunk) - Total contractual obligations as of July 2, 2021, were **$247.6 million**, primarily consisting of **$147.6 million** in purchase obligations and **$100.0 million** in operating leases[221](index=221&type=chunk)[222](index=222&type=chunk) [Non-GAAP Financial Measures](index=39&type=section&id=Non-GAAP%20Financial%20Measures) The company uses non-GAAP measures like Adjusted EBITDA (**$201.9 million**) and Adjusted EPS (**$2.42**) to evaluate performance | Non-GAAP Metric | Fiscal 2021 (Millions) | Fiscal 2020 (Millions) | | :--- | :--- | :--- | | **Adjusted EBITDA** | $201.9 | $176.2 | | **Adjusted Income** | $134.1 | $126.8 | | **Adjusted EPS** | $2.42 | $2.30 | | **Free Cash Flow** | $51.6 | $71.9 | - Adjustments to derive non-GAAP figures primarily exclude amortization of intangibles, stock-based compensation, restructuring charges, acquisition costs, and COVID-related expenses[232](index=232&type=chunk)[236](index=236&type=chunk) [Critical Accounting Policies and Significant Judgments and Estimates](index=42&type=section&id=Critical%20Accounting%20Policies%20and%20Significant%20Judgments%20and%20Estimates) Management identifies critical accounting policies requiring significant judgment, including revenue recognition (**42%** of FY2021 revenue), goodwill impairment, and business combinations - **Revenue Recognition:** **42%** of FY2021 revenue was recognized over time for long-term contracts, requiring significant judgment in estimating total costs and progress[248](index=248&type=chunk)[251](index=251&type=chunk) - **Goodwill:** Goodwill is tested for impairment annually. In Q1 FY21, the company reorganized its reporting units into Processing, Microelectronics, and Mission. The annual test in Q4 FY21 indicated no impairment[259](index=259&type=chunk)[262](index=262&type=chunk)[400](index=400&type=chunk) - **Business Combinations:** The company uses the acquisition method, allocating purchase price to acquired assets and liabilities based on estimated fair values, which involves significant assumptions about future revenues, expenses, and discount rates[268](index=268&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures about Market Risk](index=45&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to market risks, including interest rate risk on **$200.0 million** in variable-rate borrowings, credit risk, and foreign currency risk - **Interest Rate Risk:** Exposure is primarily from the **$200.0 million** in variable-rate borrowings on the Revolver. A **100 basis point** increase in interest rates would change annual interest expense by approximately **$1.0 million** on **$100.0 million** of debt[273](index=273&type=chunk)[131](index=131&type=chunk) - **Concentration of Credit Risk:** As of July 2, 2021, **five customers** accounted for **60%** of the company's receivables, unbilled receivables, and costs in excess of billings[275](index=275&type=chunk) - **Foreign Currency Risk:** The company is subject to exposure from adverse movements in exchange rates due to its foreign subsidiaries, but has not entered into any hedging instruments[276](index=276&type=chunk)[277](index=277&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=47&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for fiscal year 2021 and KPMG LLP's unqualified audit opinion - The report includes the full set of audited consolidated financial statements for the three fiscal years ended July 2, 2021[297](index=297&type=chunk)[300](index=300&type=chunk)[303](index=303&type=chunk) - KPMG LLP issued an unqualified opinion on the financial statements and internal controls. The audit of internal controls excluded the recently acquired POC and Pentek businesses, which represented **22%** of total assets and **9%** of total revenues[281](index=281&type=chunk)[282](index=282&type=chunk) - Critical Audit Matters identified were: (1) the estimate of total contract costs for fixed-price contracts recognized over time, and (2) the valuation of customer relationship intangible assets from the POC acquisition[289](index=289&type=chunk)[290](index=290&type=chunk)[293](index=293&type=chunk) [Note C. Acquisitions](index=63&type=section&id=Note%20C.%20Acquisitions) This note details fiscal 2021 and 2020 acquisitions, including Pentek (**$65.0 million**) and POC (**$310.0 million**), with purchase price allocations | Acquisition | Date | Purchase Price (Millions) | Goodwill (Millions) | Intangible Assets (Millions) | | :--- | :--- | :--- | :--- | :--- | | **Pentek** | May 27, 2021 | $65.0 | $35.2 | $24.1 | | **Physical Optics Corp. (POC)** | Dec 30, 2020 | $310.0 | $155.3 | $116.0 | | **American Panel Corp. (APC)** | Sep 23, 2019 | $100.0 | $53.0 | $33.2 | - The POC acquisition added **$83.0 million** in customer relationships and **$25.0 million** in completed technology to intangible assets[384](index=384&type=chunk) - Goodwill from the acquisitions is attributed to potential synergies and expansion of product offerings in complementary markets[381](index=381&type=chunk)[385](index=385&type=chunk)[390](index=390&type=chunk) [Note G. Goodwill and H. Intangible Assets](index=67&type=section&id=Note%20G.%20Goodwill%20and%20H.%20Intangible%20Assets) As of July 2, 2021, the company reported **$804.9 million** in goodwill and **$307.6 million** in net intangible assets, with no impairment found | Asset | Balance at July 2, 2021 (Millions) | Balance at July 3, 2020 (Millions) | | :--- | :--- | :--- | | **Goodwill** | $804.9 | $614.1 | | **Net Intangible Assets** | $307.6 | $208.7 | - The company reorganized its internal reporting units in Q1 FY21, which qualified as a triggering event for impairment testing; no impairment was found before or after the reorganization[398](index=398&type=chunk)[400](index=400&type=chunk) - Estimated future amortization expense for existing intangible assets is **$49.7 million** for FY2022 and **$41.4 million** for FY2023[403](index=403&type=chunk) [Note M. Debt](index=74&type=section&id=Note%20M.%20Debt) The company's primary debt is a **$750.0 million** revolving credit facility maturing in September **2023**, with **$200.0 million** outstanding - The company has a **$750.0 million** revolving credit facility that matures on September **28, 2023**[429](index=429&type=chunk)[431](index=431&type=chunk) - As of July 2, 2021, **$200.0 million** was outstanding on the Revolver, drawn to facilitate recent acquisitions[429](index=429&type=chunk) - The company was in compliance with all financial covenants, including minimum interest coverage and maximum net leverage ratios, as of the balance sheet date[434](index=434&type=chunk)[435](index=435&type=chunk) [Note Q. Operating Segment, Geographic Information and Significant Customers](index=80&type=section&id=Note%20Q.%20Operating%20Segment%2C%20Geographic%20Information%20and%20Significant%20Customers) Mercury operates as a single segment, with **90%** of FY21 revenue from the U.S., and Raytheon, Lockheed Martin, and the U.S. Navy as significant customers - The company operates as a single reportable segment[460](index=460&type=chunk) | Revenue by Product Grouping (FY2021) | Amount (Millions) | | :--- | :--- | | Components | $176.2 | | Modules and Sub-assemblies | $156.6 | | Integrated Subsystems | $591.2 | | **Total** | **$924.0** | | Significant Customers (FY2021) | % of Revenue | | :--- | :--- | | Raytheon Technologies | 19% | | Lockheed Martin Corporation | 15% | | U.S. Navy | 12% | [Item 9A. Controls and Procedures](index=83&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of July 2, 2021 - Management concluded that disclosure controls and procedures were effective as of July 2, 2021[477](index=477&type=chunk) - The assessment of internal control over financial reporting excluded the recently acquired POC and Pentek businesses, which together represented **22%** of total assets and **9%** of total revenues for fiscal 2021[480](index=480&type=chunk) Part III Part III incorporates information on directors, executive officers, compensation, and governance by reference from the company's 2021 Proxy Statement [Items 10-14: Directors, Compensation, and Governance](index=84&type=section&id=Items%2010-14) Information for Items 10-14, covering directors, executive compensation, and governance, is incorporated by reference from the 2021 Proxy Statement - Information on Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees is incorporated by reference from the 2021 Proxy Statement[484](index=484&type=chunk)[485](index=485&type=chunk)[486](index=486&type=chunk) Part IV Part IV contains the list of financial statements, financial statement schedules, and the exhibit index, including Schedule II and various filed documents [Item 15. Exhibits and Financial Statement Schedules](index=85&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the report, including Schedule II and a comprehensive exhibit index - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K[491](index=491&type=chunk) | Schedule II - Allowance for Credit Losses | FY2021 (Thousands) | FY2020 (Thousands) | FY2019 (Thousands) | | :--- | :--- | :--- | :--- | | **Beginning Balance** | $1,451 | $1,228 | $359 | | **Ending Balance** | $1,720 | $1,451 | $1,228 | | Schedule II - Deferred Tax Asset Valuation Allowance | FY2021 (Thousands) | FY2020 (Thousands) | FY2019 (Thousands) | | :--- | :--- | :--- | :--- | | **Beginning Balance** | $11,264 | $16,666 | $16,992 | | **Ending Balance** | $15,257 | $11,264 | $16,666 |

Company Overview - Mercury Systems operates at the intersection of high tech and defense, serving defense primes and critical infrastructure providers[6] - The company's goal is to provide all processing solutions on every system requiring uncompromised computing[6] - Mercury Systems has a strong presence with deployment on over 300 programs[6] Financial Performance - FY21 Revenue reached $924 million, demonstrating a 28% Compound Annual Growth Rate (CAGR) from FY16-FY21[9] - FY21 Adjusted EBITDA was $202 million, resulting in a 22% margin[9] - The company experienced approximately 94% average organic growth from FY16-FY21[9] Strategic Initiatives - Mercury Systems is implementing a transformational business model, investing 4-5x the defense industry average in Research & Development (R&D)[9, 12] - The company is benefiting from outsourcing, supply chain delayering, and "re-shoring"[12] - 1MPACT is a 3-year effort to achieve full growth and EBITDA potential, expecting $30M-$50M incremental adjusted EBITDA by FY25[13] Growth Strategies - The company aims for high-single to low-double digit organic growth through alignment with DoD priorities, increased outsourcing, program content expansion, and increased market share[14] - Strategic Mergers and Acquisitions (M&A) supplement growth, with 13 transactions completed since FY14[9, 14]

Financial Data and Key Metrics Changes - Total revenue for Q4 increased by 15% year-over-year to $251 million, exceeding guidance [47] - For fiscal 2021, total revenue increased 16% year-over-year to a record $924 million, surpassing guidance [52] - Adjusted EBITDA for Q4 rose 19% to a record $59.1 million, with adjusted EBITDA margins at 23.5% [49] - Adjusted EBITDA for fiscal 2021 increased 15% to a record $201.9 million, with adjusted EBITDA margins at 21.9% [54] Business Line Data and Key Metrics Changes - The largest revenue programs in Q4 included SEWIP, CPS, F-35, Filthy Buzzard, and Aegis [14] - Design wins in fiscal 2021 totaled $1.5 billion in estimated lifetime value, with 74 design wins during the year [17] - The company diversified its business, participating in over 300 different programs, with no single program exceeding 5% of total revenue [15][16] Market Data and Key Metrics Changes - The backlog at the end of fiscal 2021 was over $900 million, growing 9% from fiscal 2020 [15] - Bookings for fiscal 2021 were $881 million, down 8% from fiscal 2020, with a book-to-bill ratio of 0.95 [51] - The company expects a rebound in bookings in fiscal 2022, with a positive book-to-bill ratio anticipated [27] Company Strategy and Development Direction - The company aims for high single-digit to low double-digit organic revenue growth averaging 10% over time, supplemented by M&A and margin expansion [10] - The launch of the 1MPACT initiative is intended to lay the foundation for future growth and margin expansion over the next five years [12][34] - The company has completed 13 acquisitions since fiscal 2014, significantly scaling and transforming the business [31] Management's Comments on Operating Environment and Future Outlook - Management noted that fiscal 2022 could be challenging, with expectations of flat organic growth but double-digit total growth [25] - The company anticipates significant growth in bookings and backlog in fiscal 2022, with a strong rebound expected in fiscal 2023 [42] - Management believes the current environment is transitory and expects to see signs of improvement, driven by increased customer activity and government budget clarity [28] Other Important Information - The company completed the acquisition of Pentek for $65 million, financed with cash and debt [55] - Free cash flow for Q4 was $16.3 million, representing 28% of adjusted EBITDA, with expectations for increased free cash flow conversion in fiscal 2022 [56] - The company is targeting $30 million to $50 million of incremental adjusted EBITDA by fiscal 2025 as a result of the 1MPACT initiative [38] Q&A Session Summary Question: Concerns about growth pace and impacts on sales - Management explained that delays in orders due to COVID, customer execution issues, and administration changes resulted in a reduction in organic growth [80] - Specific programs like F-35 and SEWIP experienced notable impacts, but management expects bookings to rebound in fiscal 2022 [85] Question: Broader aspects affecting growth forecast - Management highlighted that while no single program accounts for a significant portion of revenue, movements in top programs can impact overall growth [90] - The LTAMDS program's expected order has been moved to fiscal 2023, affecting fiscal 2022 projections [92] Question: Details on the 1MPACT program - The 1MPACT initiative aims to streamline operations and improve efficiency, focusing on organizational structure and procurement [99] - Management emphasized that 1MPACT is about laying the foundation for future growth and achieving full growth potential [101] Question: Concerns about organic growth and margin compression - Management expressed confidence in a rebound in growth due to expected accelerated bookings in fiscal 2022 and substantial growth in fiscal 2023 [105] - The profitability of the base business has not materially changed, and management is focused on improving margins through the 1MPACT initiative [112]

| --- | --- | --- | --- | --- | |------------------------------------------------------------------------------------------------|-------|-------|-------|-------| | | | | | | | | | | | | | | | | | | | | | | | | | FOURTH QUARTER AND FISCAL YEAR 2021 FINANCIAL RESULTS | | | | | | Mark Aslett | | | | | | President and CEO | | | | | | Michael Ruppert Executive Vice President and CFO | | | | | | August 3, 2021, 5:00 pm ET | | | | | | Webcast login at www.mrcy.com/investor Webcast replay available by 7:00 p.m. ET ...

PART I. [FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the Company's financial statements, management's discussion, market risks, and internal controls [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents unaudited consolidated financial statements, including balance sheets, income, equity, cash flows, and detailed accounting notes [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section presents the Company's consolidated balance sheets as of April 2, 2021, and July 3, 2020 Consolidated Balance Sheets | Metric | April 2, 2021 (in thousands) | July 3, 2020 (in thousands) | | :-------------------------------- | :--------------------------- | :-------------------------- | | Total assets | $1,903,320 | $1,610,720 | | Total liabilities | $449,340 | $225,936 | | Total shareholders' equity | $1,453,980 | $1,384,784 | - Total assets increased by **$292.6 million** (**18.17%**) from July 3, 2020, to April 2, 2021, primarily driven by increases in goodwill, intangible assets, and inventory[9](index=9&type=chunk) - Total liabilities increased significantly by **$223.4 million** (**98.88%**), mainly due to the addition of **$160.0 million** in long-term debt and increases in deferred income taxes and current liabilities[9](index=9&type=chunk) [Consolidated Statements of Operations and Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) This section presents consolidated statements of operations and comprehensive income for Q3 and nine months ended April 2, 2021 Consolidated Statements of Operations and Comprehensive Income | Metric (in thousands) | Q3 2021 (April 2, 2021) | Q3 2020 (March 27, 2020) | 9 Months 2021 (April 2, 2021) | 9 Months 2020 (March 27, 2020) | | :---------------------- | :---------------------- | :----------------------- | :---------------------------- | :----------------------------- | | Net revenues | $256,857 | $208,016 | $673,154 | $579,233 | | Gross margin | $105,623 | $93,325 | $282,409 | $260,231 | | Income from operations | $21,712 | $26,342 | $58,595 | $64,643 | | Net income | $15,635 | $23,565 | $44,119 | $58,488 | | Basic EPS | $0.28 | $0.43 | $0.80 | $1.07 | | Diluted EPS | $0.28 | $0.43 | $0.80 | $1.06 | - Net revenues increased by **23.5%** for Q3 2021 and **16.2%** for the nine months ended April 2, 2021, compared to the prior year periods[12](index=12&type=chunk) - Net income decreased by **33.7%** for Q3 2021 and **24.6%** for the nine months ended April 2, 2021, primarily due to higher operating expenses, interest expense, and income tax provision[12](index=12&type=chunk) [Consolidated Statements of Shareholders' Equity](index=5&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) This section presents consolidated statements of shareholders' equity as of April 2, 2021, and July 3, 2020 Consolidated Statements of Shareholders' Equity | Metric (in thousands) | April 2, 2021 | July 3, 2020 | | :---------------------- | :------------ | :----------- | | Common Stock | $552 | $547 | | Additional Paid-in Capital | $1,100,188 | $1,074,667 | | Retained Earnings | $356,574 | $312,455 | | Accumulated Other Comprehensive Loss | $(3,334) | $(2,885) | | Total Shareholders' Equity | $1,453,980 | $1,384,784 | - Total shareholders' equity increased by **$69.2 million** from July 3, 2020, to April 2, 2021, driven by net income, stock-based compensation, and issuance of common stock under employee plans[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents consolidated statements of cash flows for the nine months ended April 2, 2021, and March 27, 2020 Cash Flow Summary (in thousands, 9 Months Ended) | Activity | April 2, 2021 | March 27, 2020 | | :-------------------------------- | :------------ | :------------- | | Net cash provided by operating activities | $70,053 | $86,458 | | Net cash used in investing activities | $(338,433) | $(123,980) | | Net cash provided by financing activities | $163,133 | $186,713 | | Net (decrease) increase in cash and cash equivalents | $(104,895) | $149,214 | | Cash and cash equivalents at end of period | $121,943 | $407,146 | - Net cash provided by operating activities decreased by **$16.4 million**, primarily due to higher inventory purchases and lower net income[17](index=17&type=chunk)[156](index=156&type=chunk) - Net cash used in investing activities increased significantly by **$214.5 million**, mainly due to the acquisition of Physical Optics Corporation (POC) for **$305.3 million**[17](index=17&type=chunk)[157](index=157&type=chunk) - Net cash provided by financing activities decreased by **$23.6 million**, despite **$160.0 million** in borrowings for the POC acquisition, compared to **$200.0 million** borrowed in the prior period[17](index=17&type=chunk)[158](index=158&type=chunk) [A. Description of Business](index=7&type=section&id=A.%20Description%20of%20Business) This section describes Mercury Systems, Inc. as a technology company serving the aerospace and defense industry - Mercury Systems, Inc. is a leading technology company serving the aerospace and defense industry, providing solutions optimized for mission success in challenging environments[19](index=19&type=chunk)[104](index=104&type=chunk) - The Company manufactures essential components, modules, and subsystems, selling to defense prime contractors, the U.S. government, and OEM commercial aerospace companies[20](index=20&type=chunk)[105](index=105&type=chunk) - Key technologies include secure embedded processing, mission computers, rugged servers, safety-critical avionics, RF components, and custom microelectronics, with investments in AI and open architectures[22](index=22&type=chunk)[107](index=107&type=chunk) [B. Summary of Significant Accounting Policies](index=7&type=section&id=B.%20Summary%20of%20Significant%20Accounting%20Policies) This section outlines the significant accounting policies used in preparing the Company's financial statements - The financial statements are prepared in accordance with GAAP for interim financial information, with certain disclosures condensed or omitted[25](index=25&type=chunk) - Revenue recognition follows ASC 606, with **53%** of Q3 2021 revenues recognized at a point in time and **47%** recognized over time for long-term contracts[31](index=31&type=chunk)[32](index=32&type=chunk)[34](index=34&type=chunk) - Contract assets (unbilled receivables) increased to **$138.4 million** as of April 2, 2021, from **$90.3 million** as of July 3, 2020, due to growth in revenue recognized over time[39](index=39&type=chunk) - Recently adopted accounting pronouncements, including ASU No. 2016-13 (Credit Losses) and ASU No. 2017-04 (Goodwill Impairment), did not have a material impact on the financial statements[47](index=47&type=chunk)[48](index=48&type=chunk) [C. Acquisitions](index=12&type=section&id=C.%20Acquisitions) This section details the Company's acquisition of Physical Optics Corporation (POC) and its financial impact - On December 30, 2020, the Company acquired Physical Optics Corporation (POC) for a net purchase price of **$305.3 million**, funded by cash on hand and its revolving credit facility[52](index=52&type=chunk)[53](index=53&type=chunk) POC Acquisition (Preliminary Fair Values as of April 2, 2021) | Item | Amount (in thousands) | | :---------------------------------- | :-------------------- | | Net purchase price | $305,263 | | Estimated fair value of net tangible assets acquired | $25,884 | | Estimated fair value of identifiable intangible assets | $114,000 | | Estimated goodwill | $168,234 | - POC contributed **$38.5 million** in revenues and **$1.1 million** in income before income taxes for the third quarter ended April 2, 2021[55](index=55&type=chunk) - The goodwill from the POC acquisition, largely reflecting potential synergies and market expansion, is not deductible for tax purposes[54](index=54&type=chunk) [D. Fair Value of Financial Instruments](index=13&type=section&id=D.%20Fair%20Value%20of%20Financial%20Instruments) This section discusses the fair value measurements of the Company's financial instruments and related transactions - The Company sold a cost-method investment, receiving **$1.5 million** in gross proceeds and recording a loss of **$0.4 million** during the nine months ended April 2, 2021[59](index=59&type=chunk) - Carrying values of cash, accounts receivable/payable, and accrued liabilities approximate fair value due to short-term maturities. Long-term debt's carrying value also approximates fair value due to variable interest rates[60](index=60&type=chunk) [E. Inventory](index=14&type=section&id=E.%20Inventory) This section provides a breakdown of the Company's inventory composition and changes over time Inventory Composition (in thousands) | Category | April 2, 2021 | July 3, 2020 | | :--------------- | :------------ | :----------- | | Raw materials | $148,279 | $111,225 | | Work in process | $54,667 | $49,647 | | Finished goods | $23,894 | $17,221 | | **Total** | **$226,840** | **$178,093** | - Total inventory increased by **$48.7 million** (**27.3%**) from July 3, 2020, to April 2, 2021, with raw materials showing the largest increase[61](index=61&type=chunk) [F. Goodwill](index=14&type=section&id=F.%20Goodwill) This section details the changes in the Company's goodwill carrying amount, primarily due to acquisitions Goodwill Carrying Amount (in thousands) | Item | Amount | | :-------------------------------- | :------- | | Balance at July 3, 2020 | $614,076 | | Goodwill adjustment for the APC acquisition | $346 | | Goodwill arising from the POC acquisition | $168,234 | | **Balance at April 2, 2021** | **$782,656** | - Goodwill increased by **$168.6 million** during the nine months ended April 2, 2021, primarily due to the POC acquisition[62](index=62&type=chunk) [G. Restructuring](index=14&type=section&id=G.%20Restructuring) This section outlines the restructuring charges incurred by the Company due to business and market conditions - The Company incurred net restructuring and other charges of **$2.2 million** during the nine months ended April 2, 2021, mainly for severance costs related to the elimination of **42** positions[63](index=63&type=chunk)[141](index=141&type=chunk) - These charges were due to changing market and business conditions, including talent shifts and resource redundancy from an internal reorganization[63](index=63&type=chunk)[141](index=141&type=chunk) [H. Income Taxes](index=15&type=section&id=H.%20Income%20Taxes) This section presents the Company's income tax provision and explains the effective tax rate differences Income Tax Provision (in thousands) | Period | Income Before Taxes | Income Tax Provision | | :-------------------------------- | :------------------ | :------------------- | | Q3 Ended April 2, 2021 | $20,997 | $5,362 | | Q3 Ended March 27, 2020 | $28,928 | $5,363 | | 9 Months Ended April 2, 2021 | $56,112 | $11,993 | | 9 Months Ended March 27, 2020 | $66,943 | $8,455 | - The effective tax rate for Q3 and nine months ended April 2, 2021, differed from the Federal statutory rate due to R&D credits, excess tax benefits on stock-based compensation, non-deductible compensation, and state taxes[67](index=67&type=chunk)[132](index=132&type=chunk)[148](index=148&type=chunk) [I. Debt](index=15&type=section&id=I.%20Debt) This section details the Company's revolving credit facility and related interest expenses - The Company has a **$750.0 million** revolving credit facility (Revolver) maturing in September 2023[70](index=70&type=chunk)[154](index=154&type=chunk) - As of April 2, 2021, outstanding borrowings on the Revolver totaled **$160.0 million**, drawn to facilitate the POC acquisition[70](index=70&type=chunk)[71](index=71&type=chunk)[154](index=154&type=chunk) Interest Expense (in thousands) | Period | Amount | | :---------------------- | :----- | | Q3 Ended April 2, 2021 | $549 | | 9 Months Ended April 2, 2021 | $622 | [J. Employee Benefit Plan](index=15&type=section&id=J.%20Employee%20Benefit%20Plan) This section describes the Company's defined benefit pension plan for Swiss employees and associated costs - The Company maintains a defined benefit pension plan for its Swiss employees, with a net liability of **$12.3 million** as of April 2, 2021[72](index=72&type=chunk)[73](index=73&type=chunk) Pension Benefit Plan (in thousands) | Period | Net Periodic Benefit Costs | | :---------------------- | :----------------------- | | Q3 Ended April 2, 2021 | $420 | | 9 Months Ended April 2, 2021 | $1,253 | | Q3 Ended March 27, 2020 | $304 | | 9 Months Ended March 27, 2020 | $896 | [K. Stock-Based Compensation](index=16&type=section&id=K.%20Stock-Based%20Compensation) This section details the Company's stock incentive plan, award types, and related compensation expenses - The Company's 2018 Stock Incentive Plan authorized **6,782 thousand** shares, with **4,645 thousand** shares available for future grant as of April 2, 2021[74](index=74&type=chunk) - Performance-based restricted stock awards are granted to executives and employees, vesting based on service period and specific financial performance targets[75](index=75&type=chunk) Stock-Based Compensation Expense (in thousands) | Period | Before Tax | Net of Income Taxes | | :---------------------- | :--------- | :------------------ | | Q3 Ended April 2, 2021 | $7,411 | $5,484 | | Q3 Ended March 27, 2020 | $6,814 | $5,042 | | 9 Months Ended April 2, 2021 | $21,865 | $16,180 | | 9 Months Ended March 27, 2020 | $19,004 | $14,063 | [L. Operating Segment, Geographic Information and Significant Customers](index=17&type=section&id=L.%20Operating%20Segment%2C%20Geographic%20Information%20and%20Significant%20Customers) This section provides revenue breakdown by end-user, application, and significant customers, and geographic information - The Company operates as a single operating and reportable segment, despite internal reorganization[80](index=80&type=chunk) Net Revenues by End User (in thousands) | End User | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :----------------------------- | :------ | :------ | :------------ | :------------ | | Domestic | $217,255 | $187,560 | $577,093 | $516,659 | | International/Foreign Military Sales | $39,602 | $20,456 | $96,061 | $62,574 | | **Total Net Revenue** | **$256,857** | **$208,016** | **$673,154** | **$579,233** | Net Revenues by End Application (in thousands) | End Application | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :-------------------- | :------ | :------ | :------------ | :------------ | | Radar | $81,481 | $78,113 | $238,650 | $164,360 | | Electronic Warfare | $25,782 | $37,488 | $91,342 | $109,684 | | Other Sensor & Effector | $25,252 | $26,279 | $72,352 | $80,681 | | C4I | $107,144 | $47,351 | $219,284 | $154,140 | | Other | $17,198 | $18,785 | $51,526 | $70,368 | | **Total Net Revenue** | **$256,857** | **$208,016** | **$673,154** | **$579,233** | Significant Customers (10% or more of revenues) | Customer | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :---------------------- | :------ | :------ | :------------ | :------------ | | Raytheon Technologies | 18 % | 17 % | 22 % | 15 % | | U.S. Navy | 16 % | * | * | * | | Lockheed Martin Corporation | 14 % | 17 % | 15 % | 17 % | | L3Harris Technologies | * | * | * | 10 % | | **Total** | **48 %** | **34 %** | **37 %** | **42 %** | [M. Commitments and Contingencies](index=19&type=section&id=M.%20Commitments%20and%20Contingencies) This section outlines the Company's legal contingencies, purchase commitments, and indemnification obligations - The Company is subject to litigation, claims, investigations, and audits in the ordinary course of business, but does not expect a material impact on financial position[96](index=96&type=chunk)[186](index=186&type=chunk) - Non-cancelable purchase commitments for inventory components and services aggregated **$145.0 million** as of April 2, 2021, all due within one year[98](index=98&type=chunk)[159](index=159&type=chunk) - The Company has indemnification obligations for intellectual property infringement claims, with potential future payments being unlimited in some instances[97](index=97&type=chunk)[162](index=162&type=chunk) [N. Subsequent Events](index=20&type=section&id=N.%20Subsequent%20Events) This section confirms the evaluation of subsequent events with no material disclosures required - The Company evaluated subsequent events through the financial statements issuance date and found no material events requiring disclosure[101](index=101&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=21&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses financial condition and results for Q3 and nine months, covering operations, liquidity, capital resources, and non-GAAP measures [FORWARD-LOOKING STATEMENTS](index=21&type=section&id=FORWARD-LOOKING%20STATEMENTS) This section cautions readers about forward-looking statements, subject to various risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including continued defense program funding, economic conditions, geopolitical unrest, competition, and integration challenges from acquisitions[103](index=103&type=chunk) - Readers are cautioned not to place undue reliance on these statements, which speak only as of their date, and the Company undertakes no obligation to update them[103](index=103&type=chunk) [OVERVIEW](index=21&type=section&id=OVERVIEW) This section provides an overview of Mercury Systems, Inc.'s business model, market, and key financial highlights - Mercury Systems, Inc. is a technology company serving the aerospace and defense industry, providing mission-critical solutions for over **300** programs with more than **25** defense prime contractors[104](index=104&type=chunk)[105](index=105&type=chunk) - The Company's business model focuses on bridging commercial technology with aerospace and defense applications through R&D investments and secure design/manufacturing capabilities[106](index=106&type=chunk)[107](index=107&type=chunk) - Customer delivery requirements, rather than sequential trends, primarily drive revenue fluctuations due to the varied nature of defense programs[109](index=109&type=chunk)[110](index=110&type=chunk) Key Financial Highlights (in millions) | Metric | Q3 2021 | 9 Months 2021 | | :------------------- | :------ | :------------ | | Consolidated revenues | $256.9 | $673.2 | | Acquired revenues | $38.5 | $47.5 | | Net income | $15.6 | $44.1 | | Diluted net EPS | $0.28 | $0.80 | | Adjusted EPS (Non-GAAP) | $0.64 | $1.69 | | Adjusted EBITDA (Non-GAAP) | $54.8 | $142.8 | [OUR RESPONSE TO COVID](index=22&type=section&id=OUR%20RESPONSE%20TO%20COVID) This section details the Company's measures to protect employees and maintain operations during the COVID-19 pandemic - The Company's response to COVID-19 focused on protecting employee health and safety, mitigating operational/financial risks, and delivering on customer commitments[114](index=114&type=chunk) - Measures included additional sick leave, work-from-home policies, increased overtime pay, a **$1 million** COVID Relief Fund, and enhanced safety protocols at facilities[115](index=115&type=chunk)[116](index=116&type=chunk) - As an 'essential business' in the defense industrial base, facilities continued to operate with social distancing and disinfection protocols[116](index=116&type=chunk) [RESULTS OF OPERATIONS:](index=22&type=section&id=RESULTS%20OF%20OPERATIONS%3A) This section analyzes the Company's financial performance for the third quarter and nine months ended April 2, 2021 - Results for Q3 2021 include a full period from the POC acquisition, while nine-month results include POC from December 30, 2020, making direct comparisons challenging[118](index=118&type=chunk) [Q3 2021 vs. Q3 2020 Financial Performance](index=23&type=section&id=The%20third%20quarter%20ended%20April%202%2C%202021%20compared%20to%20the%20third%20quarter%20ended%20March%2027%2C%202020) This section compares the Company's financial performance for the third quarter ended April 2, 2021, against the prior year Q3 Financial Data (in thousands, as a % of Total Net Revenue) | Metric | April 2, 2021 | % Revenue | March 27, 2020 | % Revenue | | :-------------------------------- | :------------ | :-------- | :------------- | :-------- | | Net revenues | $256,857 | 100.0 % | $208,016 | 100.0 % | | Cost of revenues | $151,234 | 58.9 % | $114,691 | 55.1 % | | Gross margin | $105,623 | 41.1 % | $93,325 | 44.9 % | | Total operating expenses | $83,911 | 32.7 % | $66,983 | 32.2 % | | Income from operations | $21,712 | 8.5 % | $26,342 | 12.7 % | | Net income | $15,635 | 6.1 % | $23,565 | 11.3 % | - Net revenues increased by **$48.8 million** (**23.5%**), driven by **$38.5 million** in acquired revenue (POC) and **$10.3 million** in organic revenue, primarily from integrated subsystems and C4I end applications[120](index=120&type=chunk) - Gross margin decreased by **380 basis points** to **41.1%**, mainly due to increased Customer Funded Research and Development (CRAD) from the POC acquisition, incremental COVID-related expenses, and program mix[121](index=121&type=chunk) - Income from operations decreased by **$4.6 million** (**17.6%**), and net income decreased by **$7.9 million** (**33.7%**), largely due to higher operating expenses (amortization, acquisition costs) and interest expense[119](index=119&type=chunk)[124](index=124&type=chunk)[126](index=126&type=chunk)[128](index=128&type=chunk) [9 Months 2021 vs. 9 Months 2020 Financial Performance](index=26&type=section&id=Nine%20months%20ended%20April%202%2C%202021%20compared%20to%20the%20nine%20months%20ended%20March%2027%2C%202020) This section compares the Company's financial performance for the nine months ended April 2, 2021, against the prior year 9 Months Financial Data (in thousands, as a % of Total Net Revenue) | Metric | April 2, 2021 | % Revenue | March 27, 2020 | % Revenue | | :-------------------------------- | :------------ | :-------- | :------------- | :-------- | | Net revenues | $673,154 | 100.0 % | $579,233 | 100.0 % | | Cost of revenues | $390,745 | 58.0 % | $319,002 | 55.1 % | | Gross margin | $282,409 | 42.0 % | $260,231 | 44.9 % | | Total operating expenses | $223,814 | 33.2 % | $195,588 | 33.7 % | | Income from operations | $58,595 | 8.8 % | $64,643 | 11.2 % | | Net income | $44,119 | 6.6 % | $58,488 | 10.1 % | - Total revenues increased by **$93.9 million** (**16.2%**), with **$47.3 million** from organic growth and **$46.6 million** from acquired revenues, primarily in radar and C4I end applications and integrated subsystems[137](index=137&type=chunk) - Gross margin decreased by **290 basis points** to **42.0%**, attributed to increased CRAD from the POC acquisition, COVID-related expenses, and program mix[138](index=138&type=chunk) - Net income decreased by **$14.4 million** (**24.6%**), influenced by higher operating expenses (R&D, acquisition costs, restructuring) and interest expense[136](index=136&type=chunk)[140](index=140&type=chunk)[141](index=141&type=chunk)[142](index=142&type=chunk)[144](index=144&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=28&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section discusses the Company's liquidity sources, capital resources, cash flows, and contractual obligations - Primary liquidity sources include existing cash, cash from operations, the **$750.0 million** Revolver, and a universal shelf registration statement[151](index=151&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk) - The Company believes current liquidity is sufficient to meet anticipated cash requirements for at least the next twelve months, despite ongoing investments in facilities and R&D[151](index=151&type=chunk)[152](index=152&type=chunk) Cash Flow Summary (in thousands, 9 Months Ended) | Activity | April 2, 2021 | March 27, 2020 | | :-------------------------------- | :------------ | :------------- | | Net cash provided by operating activities | $70,053 | $86,458 | | Net cash used in investing activities | $(338,433) | $(123,980) | | Net cash provided by financing activities | $163,133 | $186,713 | | Net (decrease) increase in cash and cash equivalents | $(104,895) | $149,214 | | Cash and cash equivalents at end of period | $121,943 | $407,146 | - Cash and cash equivalents decreased by **$104.9 million**, primarily due to the **$305.3 million** POC acquisition and **$34.7 million** in capital expenditures, partially offset by **$160.0 million** in Revolver borrowings[155](index=155&type=chunk) Commitments and Contractual Obligations (in thousands, as of April 2, 2021) | Type | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :------------------ | :------ | :--------------- | :-------- | :-------- | :---------------- | | Purchase obligations | $145,019 | $145,019 | $0 | $0 | $0 | | Operating leases | $99,242 | $12,279 | $24,636 | $20,986 | $41,341 | | **Total** | **$244,261** | **$157,298** | **$24,636** | **$20,986** | **$41,341** | [NON-GAAP FINANCIAL MEASURES](index=30&type=section&id=NON-GAAP%20FINANCIAL%20MEASURES) This section presents and reconciles non-GAAP financial measures, including adjusted EBITDA, EPS, and free cash flow - The Company discusses non-GAAP measures like adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, organic revenue, and acquired revenue to provide a more complete understanding of underlying results[165](index=165&type=chunk) Adjusted EBITDA Reconciliation (in thousands) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :-------------------------------- | :------ | :------ | :------------ | :------------ | | Net income | $15,635 | $23,565 | $44,119 | $58,488 | | Adjustments (total) | $39,122 | $23,521 | $98,720 | $68,131 | | **Adjusted EBITDA** | **$54,757** | **$47,086** | **$142,839** | **$126,619** | Adjusted Income and EPS Reconciliation (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :-------------------------------- | :------ | :------ | :------------ | :------------ | | Net income | $15,635 | $23,565 | $44,119 | $58,488 | | Adjusted income | $35,450 | $33,272 | $93,754 | $87,002 | | Diluted EPS | $0.28 | $0.43 | $0.80 | $1.06 | | Adjusted EPS | $0.64 | $0.60 | $1.69 | $1.58 | Free Cash Flow Reconciliation (in thousands) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :-------------------------------- | :------ | :------ | :------------ | :------------ | | Cash provided by operating activities | $23,185 | $30,082 | $70,053 | $86,458 | | Purchase of property and equipment | $(9,955) | $(10,869) | $(34,708) | $(31,788) | | **Free cash flow** | **$13,230** | **$19,213** | **$35,345** | **$54,670** | Revenue Breakdown (in thousands) | Metric | Q3 2021 | % Revenue | Q3 2020 | % Revenue | 9 Months 2021 | % Revenue | 9 Months 2020 | % Revenue | | :-------------------------------- | :------ | :-------- | :------ | :-------- | :------------ | :-------- | :------------ | :-------- | | Organic revenue | $218,365 | 85 % | $208,016 | 100 % | $625,609 | 93 % | $578,290 | 100 % | | Acquired revenue | $38,492 | 15 % | $0 | 0 % | $47,545 | 7 % | $943 | 0 % | | **Total revenues** | **$256,857** | **100 %** | **$208,016** | **100 %** | **$673,154** | **100 %** | **$579,233** | **100 %** | [RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS](index=33&type=section&id=RECENTLY%20ISSUED%20ACCOUNTING%20PRONOUNCEMENTS) This section discusses recently issued accounting pronouncements and their expected non-material impact on financial statements - The Company does not expect ASU No. 2018-14 (Defined Benefit Plans), ASU No. 2019-12 (Income Taxes), or ASU No. 2021-03 (Goodwill Impairment) to have a material impact on its financial statements or disclosures[44](index=44&type=chunk)[45](index=45&type=chunk)[46](index=46&type=chunk)[178](index=178&type=chunk) [RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS](index=33&type=section&id=RECENTLY%20ADOPTED%20ACCOUNTING%20PRONOUNCEMENTS) This section details recently adopted accounting pronouncements and their non-material impact on the Company's financials - The Company adopted ASU No. 2016-13 (Credit Losses), ASU No. 2017-04 (Goodwill Impairment), and ASU No. 2018-15 (Internal-Use Software) effective July 4, 2020, with no material impact[47](index=47&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk)[179](index=179&type=chunk) - SEC Final Rule Release No. 33-10786 (Acquired and Disposed Businesses) was early adopted in conjunction with the POC acquisition, also without material impact[50](index=50&type=chunk)[179](index=179&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=34&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) No material changes in the Company's market risk exposure occurred between July 3, 2020, and April 2, 2021 - No material changes in market risk exposure occurred from July 3, 2020, to April 2, 2021[181](index=181&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=34&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management evaluated disclosure controls and internal control over financial reporting, concluding effectiveness and integrating the POC business - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of April 2, 2021[182](index=182&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter, but the recently acquired POC business is being integrated into the overall control environment[183](index=183&type=chunk) PART II. [OTHER INFORMATION](index=35&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, and exhibits related to the Company's operations [ITEM 1. LEGAL PROCEEDINGS](index=35&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The Company is involved in ordinary course legal proceedings, expecting no material impact on its financial position or results - The Company is involved in ordinary course legal proceedings but expects no material impact on its financial position or results[186](index=186&type=chunk) [ITEM 1A. RISK FACTORS](index=35&type=section&id=ITEM%201A.%20RISK%20FACTORS) No changes occurred in the risk factors disclosed in the Company's 2020 Annual Report on Form 10-K - No changes have occurred in the risk factors disclosed in the Company's 2020 Annual Report on Form 10-K[187](index=187&type=chunk) [ITEM 6. EXHIBITS](index=35&type=section&id=ITEM%206.%20EXHIBITS) This section lists exhibits filed with Form 10-Q, including CEO/CFO certifications and XBRL documents - Exhibits include CEO and CFO certifications (Sarbanes-Oxley Act Sections 302 and 906) and various XBRL documents for financial reporting[188](index=188&type=chunk) [Signatures](index=36&type=section&id=Signatures) This section contains the required signatures for the Form 10-Q, certifying its submission by the CFO and Treasurer - The report was signed by Michael D. Ruppert, Executive Vice President, Chief Financial Officer, and Treasurer, on May 11, 2021[190](index=190&type=chunk)[191](index=191&type=chunk)