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)

| --- | --- | --- | --- | |---------------------------------------------------------------------------------------------|-------|-------|-------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | THIRD QUARTER FISCAL YEAR 2021 FINANCIAL RESULTS | | | | | | | | | | Mark Aslett President and CEO | | | | | Michael Ruppert Executive Vice President and CFO | | | | | May 4, 2021, 5:00 pm ET | | | | | Webcast login at www.mrcy.com/investor Webcast replay available by 7:00 p.m. ET May 4, 2021 | | | | Fo ...

Mercury Systems, Inc. (NASDAQ:MRCY) Q1 2021 Earnings Conference Call May 4, 2021 5:00 PM ET Company Participants Mike Ruppert ??? Executive Vice President and Chief Financial Officer Mark Aslett ??? President and Chief Executive Officer Conference Call Participants Peter Arment ??? Baird Equity Research Sheila Kahyaoglu ??? Jefferies Pete Skibitski ??? Alembic Global Seth Seifman ??? JPMorgan Michael Ciarmoli ??? Truist Cap Securities Jonathan Ho ??? William Blair & Company Noah Poponak ??? Goldman Sachs Au ...

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 January 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 ...