Revenue Performance - Total revenues for the third quarter ended April 1, 2022, decreased by $3.8 million, or 1.5%, to $253.1 million compared to $256.9 million for the same period in 2021[134] - Organic revenues decreased by $23.1 million, partially offset by $19.3 million of acquired revenues from Pentek, Avalex, and Atlanta Micro[134] - Total revenues increased by $25.3 million, or 3.8%, to $698.5 million for the nine months ended April 1, 2022, driven by $97.9 million of acquired revenues[147] - Organic revenue for the third quarter ended April 1, 2022, was $233,747,000, representing 92% of total net revenue, a decrease of 9% from $256,857,000 in the same quarter of 2021[185] - Total revenues for the nine months ended April 1, 2022, increased to $698,468,000, up 4% from $673,154,000 in the same period of 2021, driven by acquired revenue growth[185] - Acquired revenue for the third quarter ended April 1, 2022, was $19,328,000, contributing 8% to total net revenue, marking a 100% increase as it was not present in the same quarter of the previous year[185] Profitability and Income - The company reported a net income of $4.1 million for the third quarter, down from $15.6 million in the same quarter of the previous year[133] - The company reported a net loss of $5.6 million for the nine months ended April 1, 2022, compared to a net income of $44.1 million for the same period in 2021[164] - Adjusted income for the nine months ended April 1, 2022, was $32.2 million, with adjusted EPS of $0.57, compared to $35.5 million and $0.64 in the prior year[180] - For the nine months ended April 1, 2022, the company reported a net loss of $5,640,000, compared to a net income of $44,119,000 for the same period in 2021, resulting in a diluted loss per share of $0.10 versus earnings per share of $0.80[181] - Adjusted income for the nine months ended April 1, 2022, was $76,728,000, with adjusted earnings per share of $1.38, compared to $93,754,000 and $1.69 for the same period in 2021[181] Expenses and Costs - Gross margin for the third quarter was 39.4%, a decrease of 170 basis points from 41.1% in the prior year, primarily due to program mix and supply chain disruptions[135] - Selling, general and administrative expenses increased by $1.0 million, or 2.6%, to $39.3 million, with expenses as a percentage of revenue rising to 15.5% from 14.9%[136] - Research and development expenses were $25.4 million, representing 10.0% of total revenues, down from 11.8% in the prior year[133] - Research and development expenses decreased by $4.8 million, or 16.0%, to $25.4 million for the third quarter ended April 1, 2022, compared to $30.2 million for the same period in 2021, accounting for 10.0% of revenues[137] - Selling, general and administrative expenses increased by $10.3 million, or 10.0%, to $113.0 million for the nine months ended April 1, 2022, influenced by recent acquisitions[150] - Research and development expenses decreased by $3.2 million, or 3.7%, to $82.6 million for the nine months ended April 1, 2022, accounting for 11.8% of revenues[151] - Amortization of intangible assets increased by $3.4 million to $16.1 million during the third quarter ended April 1, 2022, due to acquisitions[138] - The company incurred $243.3 million in acquisition costs related to Avalex and Atlanta Micro during the nine months ended April 1, 2022[165] - Acquisition costs and other related expenses were $7.5 million during the nine months ended April 1, 2022, compared to $5.0 million in the same period of 2021[153] Cash Flow and Financing - The company generated $566,000 in net cash from operating activities for the nine months ended April 1, 2022, a significant decrease from $70.1 million for the same period in 2021[163] - The company reported a cash used in operating activities of $(4,252,000) for the third quarter ended April 1, 2022, compared to cash provided of $23,185,000 in the same quarter of 2021[184] - Net cash used in investing activities was $265.9 million, a decrease of $72.5 million compared to $338.4 million in the prior year, primarily due to $243.3 million spent on acquisitions[165] - Financing activities provided $243.6 million in cash, an increase of $80.5 million from $163.1 million in the previous year, driven by $91.5 million in additional borrowings[166] - Interest expense increased to $3.4 million for the nine months ended April 1, 2022, related to $451.5 million of outstanding borrowings[154] - Cash and cash equivalents decreased by $22.1 million to $91.7 million from July 2, 2021, primarily due to acquisition activities and capital expenditures[163] - The company amended its revolving credit facility to increase borrowing capacity to $1.1 billion, maturing on February 28, 2027[162] Strategic Initiatives - The company has completed 15 acquisitions since fiscal year 2014, deploying $1.4 billion of capital, which has significantly scaled and transformed the business[130] - The 1MPACT initiative aims to achieve full growth, margin expansion, and adjusted EBITDA potential over the next five years[130] - Restructuring and other charges amounted to $6.3 million in the third quarter ended April 1, 2022, compared to less than $0.1 million in the same quarter of 2021, primarily related to 1MPACT[139] - Restructuring and other charges totaled $22.4 million for the nine months ended April 1, 2022, compared to $2.2 million in the same period of 2021, mainly due to 1MPACT[152] - The company expects to continue incurring expenditures similar to those reflected in the free cash flow adjustment, indicating ongoing investment needs for future growth[183] Workforce and Operations - As of April 1, 2022, the company had 2,294 employees, focusing on engineering and research to maintain technological leadership[127] - The company’s products are deployed in over 300 programs with more than 25 different defense prime contractors and commercial aviation customers[122]

Financial Data and Key Metrics Changes - Mercury's total revenue for Q3 was $253 million, down 1.5% year-over-year, reflecting supply chain and labor market challenges [15][35] - Adjusted EPS for Q3 was $0.57, while adjusted EBITDA was $52.5 million, with adjusted EBITDA margins at 20.7% [38][54] - Free cash flow for Q3 was an outflow of $10.3 million, impacted by supply chain delays and labor shortages [39][48] Business Line Data and Key Metrics Changes - Bookings increased 41% year-over-year and 25% sequentially, with a book-to-bill ratio of 1.17 [10][34] - Design wins in Q3 totaled over $360 million in estimated lifetime value, with year-to-date design wins up 14% from the previous year [16] - Acquired revenue from recent acquisitions was $19.3 million, contributing to overall revenue [36] Market Data and Key Metrics Changes - The FY 2022 Defense Appropriations Bill was 6% higher than the initial request, with the FY 2023 budget expected to be revised upwards [29][31] - Increased defense spending is anticipated due to geopolitical tensions, particularly from the war in Ukraine [9][31] Company Strategy and Development Direction - Mercury's five-year plan targets high single-digit to low double-digit organic revenue growth, alongside margin expansion and M&A [9][24] - The 1MPACT program aims to achieve full growth potential and improve operational efficiency, with expected benefits of $30 million to $50 million in adjusted EBITDA by fiscal 2025 [24][27] - The company is focusing on larger and faster-growing parts of the defense market, participating in over 300 programs [28] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in returning to organic growth in fiscal 2023, despite current macro challenges [33][61] - The company anticipates increased bid and proposal activity leading to higher bookings in the mid-term due to rising defense spending [9][32] - Management acknowledged ongoing supply chain constraints but remains optimistic about mitigating impacts and improving cash flow in fiscal 2023 [48][49] Other Important Information - The company ended Q3 with a record backlog of $996 million, up 4% compared to Q2 [34] - Gross margins for Q3 were 39.4%, down from 41.1% in the previous year, primarily due to program mix [36] - The company has increased its revolving credit facility from $750 million to $1.1 billion, enhancing financial flexibility [40] Q&A Session Summary Question: Free cash flow outlook and working capital build - Management indicated that unbilled receivables would remain a cash use in Q4 due to supply chain delays, but expect normalization in fiscal 2023 [71][73] Question: Return to high single-digit or low double-digit growth - Management remains optimistic about achieving growth targets, citing strong bookings momentum and backlog [78] Question: Gross margin expectations - Management expects gross margins to improve in Q4 and fiscal 2023 as more programs transition to production [85] Question: Pricing pass-through capabilities - Management noted that fixed-price contracts limit the ability to pass on costs, but shorter production cycles may allow for more frequent adjustments [93][94] Question: 1MPACT program progress and future opportunities - Management expressed satisfaction with the progress of the 1MPACT program and its potential to drive margin expansion [99][101]

| --- | --- | --- | --- | |---------------------------------------------------------------------------------------------|-------|-------|-------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | THIRD QUARTER FISCAL YEAR 2022 FINANCIAL RESULTS | | | | | | | | | | Mark Aslett President and CEO | | | | | Michael Ruppert Executive Vice President and CFO | | | | | May 3, 2022, 5:00 pm ET | | | | | Webcast login at www.mrcy.com/investor Webcast replay available by 7:00 p.m. ET May 3, 2022 | | | | Fo ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ☐ 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 ________________________________________________________________ MERCURY SYSTEMS, INC. FORM 10-Q ________________________________________________________________ (Exact name of registrant as specified in its charter) ________________________________________________________________ ☒ ...

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 |