Mercury Systems(MRCY) - 2025 Q4 - Annual Report

Part I Business Mercury Systems delivers mission-critical processing solutions for the aerospace and defense industry, focusing on secure, open, and modular platforms - Mercury Systems is a technology company providing mission-critical processing solutions for the aerospace and defense sectors, with products deployed in over 300 programs across 35 countries[12] Fiscal Year 2025 vs. 2024 Key Financials | Metric | Fiscal 2025 | Fiscal 2024 | | :--- | :--- | :--- | | Consolidated Revenues | $912.0 million | $835.3 million | | Net Loss | $(37.9) million | $(137.6) million | | Diluted Loss Per Share | $(0.65) | $(2.38) | | Adjusted EPS | $0.64 | $(0.69) | | Adjusted EBITDA | $119.4 million | $9.4 million | - The company's business strategy focuses on four key areas: Performance Excellence, Thriving Growth Engine, Margin Expansion, and Cash Release[20][21] - As of June 27, 2025, the company's order backlog was approximately $1.4 billion, an increase from $1.3 billion as of June 28, 2024, with $807.8 million expected as revenue within the next twelve months[68] Revenue Concentration by Major Customer | Customer | FY2025 Revenue % | FY2024 Revenue % | FY2023 Revenue % | | :--- | :--- | :--- | :--- | | RTX Corporation | 13% | 10% | 14% | | Lockheed Martin | 10% | 11% | 13% | | United States Navy | 10% | <10% | <10% | | L3Harris | <10% | 12% | <10% | | Northrop Grumman | <10% | <10% | 11% | Risk Factors The company faces risks from defense program dependence, customer concentration, intense competition, supply chain disruptions, and M&A integration - The company is heavily dependent on defense electronics programs, with sales to the U.S. government and its prime contractors accounting for approximately 97% of total net revenues in fiscal 2025[82] - A small number of customers, including RTX Corporation (13%), Lockheed Martin (10%), and the U.S. Navy (10%), accounted for a significant portion of total net revenues in fiscal 2025[86] - The company operates in highly competitive markets with rapid technological changes, and failure to innovate or operational challenges could lead to customer loss[88][94] - As of June 27, 2025, the company had $591.5 million of outstanding borrowings, which could limit operational flexibility and increase vulnerability to interest rate changes[125][126] - The company faces risks from cybersecurity threats, which could lead to financial loss and reputational damage[141] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[151] Cybersecurity Cybersecurity risk is managed through an enterprise risk management process overseen by the CIO and Board of Directors - Cybersecurity risk is managed through an enterprise risk management (ERM) process, overseen by the CIO and the Board of Directors' management Compliance Committee[152][157] - The company actively collaborates with government agencies like the DoD, NSA, and FBI to share real-time threat information and best practices[154] - To date, no cybersecurity incidents have had a material effect on the company's financial position, results of operations, or cash flows[160] Properties The company's significant properties are leased facilities primarily in the United States, with major sites in Andover, Phoenix, and Hudson Significant Leased Properties (as of June 27, 2025) | Location | Size (Sq. Feet) | Lease Expiration | | :--- | :--- | :--- | | Andover, MA | 145,262 | 2032 | | Phoenix, AZ | 125,756 | 2033 | | Hudson, NH | 121,553 | 2030 | | Torrance, CA | 58,405 | 2029 | | Oxnard, CA | 47,774 | 2027 | Legal Proceedings The company is subject to various legal proceedings but does not expect a material impact on its financial condition - The company is subject to litigation, claims, and investigations in the ordinary course of business but believes the outcomes will not have a material impact on its financial position[162] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[163] Information About Our Executive Officers This section provides biographical information for the company's executive officers, including the President, CEO, CFO, and Chief Legal Officer - William L. Ballhaus was appointed President and CEO effective August 15, 2023, and became Chairman of the Board in October 2023[165] - David E. Farnsworth joined as Executive Vice President and Chief Financial Officer in July 2023[167] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, has never paid cash dividends, and had no active share repurchase programs in fiscal 2025 - The company's common stock (MRCY) is listed on the Nasdaq Global Select Market[172] - The company has never paid cash dividends and does not plan to in the foreseeable future, retaining earnings for growth[174] - There were no active share repurchase programs during fiscal 2025[176] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2025, revenues increased 9.2% to $912.0 million, gross margin improved to 27.9%, and net loss significantly decreased to $(37.9) million Results of Operations: Fiscal 2025 vs. Fiscal 2024 (in thousands) | Line Item | Fiscal 2025 | Fiscal 2024 | | :--- | :--- | :--- | | Net revenues | $912,020 | $835,275 | | Gross margin | $254,494 (27.9%) | $195,901 (23.5%) | | Loss from operations | $(19,627) | $(147,754) | | Net loss | $(37,904) | $(137,640) | - Total revenues increased by 9.2% in fiscal 2025, driven by a pivot to executing on production programs after prioritizing challenged programs in fiscal 2024[197][198] - Gross margin increased by 440 basis points to 27.9% in fiscal 2025, primarily due to a significantly smaller negative net impact from changes in estimates on contracts[200][201] - Research and development expenses decreased by 33.3% to $67.6 million in fiscal 2025, mainly due to savings from headcount reductions[203] - The company executed a workforce reduction in January 2025, eliminating approximately 145 positions and incurring $4.9 million in restructuring charges, with expected annualized savings of $15 million[187] Cash Flow Summary: Fiscal 2025 vs. Fiscal 2024 (in thousands) | Cash Flow Activity | Fiscal 2025 | Fiscal 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $138,851 | $60,382 | | Net cash used in investing activities | $(13,500) | $(34,291) | | Net cash provided by financing activities | $1,412 | $82,680 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks include interest rates, credit concentration, and foreign currency exposure - The company is exposed to interest rate risk through its variable-rate borrowings, partially mitigated by an interest rate swap fixing the rate on $300.0 million of its $591.5 million outstanding borrowings[281][130] - Significant credit risk concentration exists, with five customers accounting for 48% of total receivables, unbilled receivables, and costs in excess of billings as of June 27, 2025[283] - The company is subject to foreign currency risk from its subsidiaries in Switzerland, the United Kingdom, and Spain, but does not currently use derivative instruments to hedge this exposure[284][285] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2025 and 2024, including balance sheets and statements of operations Consolidated Balance Sheet Highlights (in thousands) | Account | June 27, 2025 | June 28, 2024 | | :--- | :--- | :--- | | Total Current Assets | $1,058,178 | $953,784 | | Goodwill | $938,093 | $938,093 | | Total Assets | $2,434,764 | $2,378,905 | | Total Current Liabilities | $300,377 | $234,416 | | Long-term Debt | $591,500 | $591,500 | | Total Liabilities | $961,303 | $906,130 | | Total Shareholders' Equity | $1,473,461 | $1,472,775 | Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2025 | FY 2024 | FY 2023 | | :--- | :--- | :--- | :--- | | Net Revenues | $912,020 | $835,275 | $973,882 | | Gross Margin | $254,494 | $195,901 | $316,728 | | Loss from Operations | $(19,627) | $(147,754) | $(21,685) | | Net Loss | $(37,904) | $(137,640) | $(28,335) | | Diluted Net Loss Per Share | $(0.65) | $(2.38) | $(0.50) | - Revenue recognized at a point in time was 53% of total revenues in fiscal 2025, up from 45% in fiscal 2024, reflecting a shift from development to production contracts[253] - The company's goodwill of $938.1 million was tested for impairment in the fourth quarter of fiscal 2025 and was concluded not to be impaired[389][390] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[489] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of June 27, 2025 - Management concluded that disclosure controls and procedures were effective as of June 27, 2025[490] - Management's assessment concluded that internal control over financial reporting was effective as of June 27, 2025, which was audited by KPMG LLP[492] Other Information No directors or executive officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement in the fourth quarter of fiscal 2025 - No directors or executive officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement in the fourth quarter of fiscal 2025[494] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[495] Part III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's 2025 Proxy Statement - Information required by this item is incorporated by reference from the company's 2025 Proxy Statement[497] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2025 Proxy Statement - Information required by this item is incorporated by reference from the company's 2025 Proxy Statement[498] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2025 Proxy Statement - Information required by this item is incorporated by reference from the company's 2025 Proxy Statement[499] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's 2025 Proxy Statement - Information required by this item is incorporated by reference from the company's 2025 Proxy Statement[500] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2025 Proxy Statement - Information required by this item is incorporated by reference from the company's 2025 Proxy Statement. The independent auditor is KPMG LLP[501] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits included in or incorporated by reference into the Form 10-K - This section lists all financial statements, schedules, and exhibits included in or incorporated by reference into the Form 10-K[503] Form 10-K Summary No Form 10-K summary is provided - None[504]