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What changed in MERCURY SYSTEMS INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of MERCURY SYSTEMS INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+424 added−403 removedSource: 10-K (2023-08-15) vs 10-K (2021-08-17)

Top changes in MERCURY SYSTEMS INC's 2023 10-K

424 paragraphs added · 403 removed · 272 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

115 edited+41 added−43 removed66 unchanged
Biggest changeOur Geneva, Switzerland facility, the headquarters of Mercury's European operations, provides electronic design and manufacturing, maintenance and support services and is AS9001 and EASA Part 145 quality systems-certified. Our Silchester, England facility provides engineering, development and integration services and is AS9100 quality systems-certified. We rely on both vertical integration and subcontracting to contract manufacturers to meet our manufacturing needs.
Biggest changeOur Silchester, England facility provides engineering, development and integration services and is AS9100 quality systems-certified. We rely on both vertical integration and subcontracting to contract manufacturers to meet our manufacturing needs. Our USMO and Geneva facilities have the manufacturing capabilities to complete the assembly and testing for certain of our embedded multi-computing products.
We are committed to continued investment and innovation in advanced new products and solutions development to maintain our competitive advantage, including in the fields of RF, analog-to-digital and digital-to-analog conversion, advanced multi- and many-core sensor processing systems including graphics processing units (“GPUs”), safety-critical design and engineering, processing for AI, embedded security, digital storage, and digital radio frequency memory (“DRFM”) solutions, software defined communications capabilities, and advanced security technologies and capabilities.
We are committed to continued investment and innovation in advanced new products and solutions development to maintain our competitive advantage, including in the fields of RF, analog-to-digital and digital-to-analog conversion, advanced multi- and many-core sensor processing systems including graphics processing units (“GPUs”), safety-critical design and engineering, processing for AI, embedded security, digital storage, digital radio frequency memory (“DRFM”) solutions, software-defined communications capabilities and advanced security technologies and capabilities.
Our acquisitions of the Carve-Out Business, LIT and Athena also added to our portfolio of sophisticated firmware and software specifically designed to secure microelectronic devices that can be leveraged across our product portfolio. • We are pioneering a next generation business model . The DoD and the defense industrial base is currently undergoing a major transformation.
Our acquisitions of the Carve-Out Business, LIT and Athena also added to our portfolio of sophisticated firmware and software specifically designed to secure microelectronic devices that can be leveraged across our product portfolio. • We are pioneering a next generation defense business model . The DoD and the defense industrial base is currently undergoing a major transformation.
Our security solutions, combined with our next-generation secure Intel® server-class product line, together with increasingly frequent mandates from the government to secure electronic systems for domestic and foreign military sales, position us well to capitalize on DoD program protection security requirements. Finally, our built-in security framework creates higher product differentiation, and drives greater program velocity, while lowering risk.
These security solutions, combined with our next-generation secure Intel® server-class product line, together with increasingly frequent mandates from the government to secure electronic systems for domestic and foreign military sales, position us well to capitalize on DoD program protection security requirements. Finally, our built-in security framework creates higher product differentiation, and drives greater program velocity, while lowering risk.
Our AMCs in Hudson, New Hampshire, West Caldwell, New Jersey, Oxnard, California, Huntsville, Alabama and Phoenix, Arizona are strategically located near key customers and are purpose-built for the design, build and test of RF components and subsystems in support of a variety of key customer programs. Our USMO is built around scalable, repeatable, secure, affordable and predictable manufacturing.
Our AMCs in Hudson, New Hampshire, West Caldwell, New Jersey, Oxnard, California, Huntsville, Alabama, Phoenix, Arizona and Torrance, California are strategically located near key customers and are purpose-built for the design, build and test of RF components and subsystems in support of a variety of key customer programs. Our USMO is built around scalable, repeatable, secure, affordable and predictable manufacturing.
Our solutions are specifically designed for flexibility and interoperability, allowing our products to be easily integrated into larger system-level solutions. Our ability to integrate subsystem-level capabilities allows us to provide solutions that most effectively address the mission-critical challenges within the C4ISR market, including multi-intelligence data fusion and AI processing onboard the platform.
Our solutions are specifically designed for flexibility and interoperability, allowing our products to be easily integrated into larger system-level solutions. Our ability to integrate subsystem-level capabilities allows us to provide solutions that effectively address the mission-critical challenges within the C4ISR market, including multi-intelligence data fusion and AI processing onboard the platform.
We maintain our technological edge by investing in critical capabilities and intellectual property (“IP” or “building blocks”) in processing and RF, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as artificial intelligence (“AI”).
We maintain our technological edge by investing in critical capabilities and intellectual property (“IP” or “building blocks”) in processing, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as artificial intelligence (“AI”).
For example: • First, transition to pre-integrated subsystems: Mercury has expanded capabilities, particularly in integrated subsystems related to defense threats and increased system complexity, which in turn has driven greater outsourcing to us from our prime defense contractor and OEM customers. • Second, expansion into new submarkets: Within the major markets Mercury serves we have moved, for example, into electronic warfare, weapons systems, acoustics submarkets and C4I. • Third, vertical expansion: As we continue to add content, we seek to apply technology to all computers on aerospace and defense platforms that require trusted, safe and secure processing. • Fourth, microelectronics: Our investment domestically in next-generation chiplet technology, from chip-scale to system scale.
For example: • First, transition to pre-integrated subsystems: Mercury has expanded capabilities, particularly in integrated subsystems related to defense threats and increased system complexity, which in turn has driven greater outsourcing to us from our prime defense contractor and OEM customers. • Second, expansion into new submarkets: Within the major markets Mercury serves we have moved, for example, into electronic warfare, weapons systems, acoustics submarkets, C4I and mission computing. • Third, vertical expansion: As we continue to add content, we seek to apply technology to all computers on aerospace and defense platforms that require trusted, safe and secure processing. • Fourth, microelectronics: Our investment domestically in next-generation chiplet technology, from chip-scale to system scale.
Our organic investments as well as the acquisitions of LIT, the Carve-Out Business, and Athena added to our portfolio of embedded security products that can be leveraged across our business. Finally, our CES addition, due to its location in Geneva, is helping to open more opportunities in international markets.
Our organic investments as well as the acquisitions of LIT, the Carve-Out Business and Athena added to our portfolio of embedded security products that can be leveraged across our business. Finally, our CES addition, due to its location in Geneva, Switzerland is helping to open more opportunities in international markets.
In addition, we consistently leverage our technology and capabilities across multiple programs, providing significant operating leverage and cost savings. Our recent acquisitions allow us to participate in a broader array of programs, many with key strategic customers of ours. • We are a leading technology company serving the aerospace and defense industry.
In addition, we consistently leverage our technology and capabilities across multiple programs, providing significant operating leverage and cost savings. Our acquisitions allow us to participate in a broader array of programs, many with key strategic customers of ours. • We are a leading technology company serving the aerospace and defense industry.
Our employees are afforded opportunities to cultivate diversity, equity and inclusion both within Mercury and our industry. For example, Mercury sponsors, and our leaders participate in, the annual Simmons Women’s Leadership Conference which has the goal of preparing the next generation of female leaders and furthering equality in the workplace .
Our employees are afforded opportunities to cultivate diversity, equity and inclusion both within Mercury and our industry. For example, Mercury sponsors, and our leaders participate in, the annual Simmons Leadership Conference which has the goal of preparing the next generation of female leaders and furthering equality in the workplace .
Our mission critical solutions are deployed by our customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”), electronic intelligence, avionics, electro-optical/infrared (“EO/IR”), electronic warfare, weapons and missile defense, hypersonics and radar.
Our mission critical solutions are deployed by our customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”), electronic intelligence, mission computing avionics, electro-optical/infrared (“EO/IR”), electronic warfare, weapons and missile defense, hypersonics and radar.
The CES, RTL, GECO, APC, and POC acquisitions provided us new capabilities that substantially expanded our addressable market into defense platform management, mission computing and commercial aerospace markets that are aligned to our existing market focus. The additions of Themis and Germane provided us with new capabilities and positioned us with a significant footprint within the C2I rugged server business.
The CES, RTL, GECO, APC, POC and Avalex acquisitions provided us new capabilities that substantially expanded our addressable market into defense platform management, mission computing and commercial aerospace markets that are aligned to our existing market focus. The additions of Themis and Germane provided us with new capabilities and positioned us with a significant footprint within the rugged server business.
See the Non-GAAP Financial Measures section of this annual report for a reconciliation of our acquired revenues, adjusted EPS and adjusted EBITDA to the most directly comparable GAAP measures. 3 Table of Contents 1MPACT On August 3, 2021, Mercury announced a companywide effort, called 1MPACT, to lay the foundation for the next phase of the Company’s value creation at scale.
See the Non-GAAP Financial Measures section of this annual report for a reconciliation of our acquired revenues, adjusted EPS and adjusted EBITDA to the most directly comparable GAAP measures. 1MPACT On August 3, 2021, Mercury announced a companywide effort, called 1MPACT, to lay the foundation for the next phase of the Company’s value creation at scale.
Since July 1, 2015 we have acquired 13 businesses, which are strategically aligned with Mercury, successfully completing integration of the earlier acquired businesses with the integration of the more recent acquisitions progressing well. We have established an internal team that brings decades of experience across more than 100 transactions.
Since July 1, 2015 we have acquired 15 businesses, which are strategically aligned with Mercury, successfully completing integration of the earlier acquired businesses with the integration of the more recent acquisitions progressing well. We have established an internal team that brings decades of experience across more than 100 transactions.
We believe there are a number of evolving trends that are reshaping our target markets and accordingly provide us with attractive growth opportunities. These trends include: • The aerospace and defense electronics market is expected to grow in 2021 and beyond.
We believe there are a number of evolving trends that are reshaping our target markets and accordingly provide us with attractive growth opportunities. These trends include: • The aerospace and defense electronics market is expected to grow in 2023 and beyond.
The USMO is a DMEA certified secure trusted site, certified to AS9100 quality standards and it utilizes Lean Six Sigma methodologies throughout manufacturing. The USMO is designed for efficient manufacturing, enabling our customers to access the best proven technology and high performing, secure processing solutions.
The USMO is a IPC1791 certified secure trusted site, certified to AS9100 quality standards and it utilizes Lean Six Sigma methodologies throughout manufacturing. The USMO is designed for efficient manufacturing, enabling our customers to access the best proven technology and high performing, secure processing solutions.
We expect to continue our above industry-average growth. • The rapidly expanding demand for tactical ISR is leading to significant growth in sensor data being generated, leading to even greater demand for the capability of our products to securely store and process data onboard platforms .
We expect to return to our above industry-average growth. • The rapidly expanding demand for tactical ISR is leading to significant growth in sensor data being generated, leading to even greater demand for the capability of our products to securely store and process data onboard platforms .
The acquisitions of the Carve-Out Business, Delta, Syntonic and Pentek further improved our ability to compete successfully in these market segments by allowing us to offer an even more comprehensive set of closely related capabilities.
The acquisitions of the Carve-Out Business, Delta, Syntonic, Pentek and Atlanta Micro further improved our ability to compete successfully in these market segments by allowing us to offer an even more comprehensive set of closely related capabilities.
With thirty-five years of technology leadership within the high-performance embedded computing industry, we have pioneered or contributed to the development of many of the defense industry’s current and emerging open standards, including standards such as RACEway, RapidIO, VXS, VPX, REDI and notably OpenVPX. These open standards allow system integrators to benefit from the interoperability of modules produced by multiple vendors.
With forty years of technology leadership within the high-performance embedded computing industry, we have pioneered or contributed to the development of many of the defense industry’s current and emerging open standards, including standards such as RACEway, RapidIO, VXS, VPX, REDI and notably OpenVPX. These open standards allow system integrators to benefit from the interoperability of modules produced by multiple vendors.
For example, to deal with the heat build-up involved in small subsystems, we introduced a key technology called Air Flow-By™ that enables previously unattainable levels of processing power within a small footprint by effectively removing heat so the server-class processors can perform at maximum designed power limits.
For example, to deal with the heat build-up involved in fanless compact rugged subsystems, we introduced a key technology called Air Flow-By™ that enables previously unattainable levels of processing power within a small footprint by effectively removing heat so server-class processors can perform at maximum designed power limits.
Our open architecture is carried throughout our entire embedded computing product line from the very small form-factor subsystems to the high-end, where ultimate processing power and reliability is of paramount importance to the mission.
Our open architecture is carried throughout our entire product line from the very small form-factor subsystems to the high-end, where ultimate processing power and reliability is of paramount importance to the mission.
As a member of the VMEbus International Trade Association (“VITA”), the Sensor Open Systems Architecture (“SOSA”) initiative, the Future Airborne Capability Environment (“FACE”) consortium, and the Vehicular Integration for C4ISR/EW Interoperability (“VICTORY”) consortium, among other standards bodies, Mercury is helping to guide the aerospace and defense industry toward greater openness and vendor interoperability, consistent with the DoD’s focus on using modular open systems architectures (“MOSA”) in major programs.
As a member of the VMEbus International Trade Association (“VITA”), the Sensor Open Systems Architecture (“SOSA”) initiative, the Future Airborne Capability Environment (“FACE”) consortium and the Vehicular Integration for C4ISR/EW Interoperability (“VICTORY”) consortium, among other standards bodies, Mercury is helping to guide the aerospace and defense industry toward greater openness and vendor interoperability, consistent with the DoD’s focus on using MOSA in major programs.
These factors have created a unique opportunity for us to expand beyond sensor processing into the provision of technologies ranging from advanced secure processing subsystems to miniaturized custom microelectronics devices and capabilities for other on board critical computing applications designed, developed, manufactured and supported in the U.S.A.
These factors have created a unique opportunity for us to expand beyond sensor processing into the provision of technologies ranging from advanced secure processing subsystems to miniaturized custom microelectronics devices and capabilities for other onboard critical computing applications designed, developed, manufactured and supported in the U.S.A.
There are competitors in the different market segments and application types in which we participate. Some of these competitors are larger and have greater resources than us. Some of these competitors compete against us at purely a component or board-level, others at a subsystem level. We also compete with in-house design teams at our customers.
There are competitors in the different market segments and application types in which we participate. Some of these competitors are larger and have greater resources than us. Some of these competitors compete against us at purely a 12 Table of Contents component or board-level, others at a subsystem level. We also compete with in-house design teams at our customers.
This allows them to complete their full system by integrating with their platform, the sensor technology and, in some cases, the processing from Mercury. Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers.
This allows them to complete their full system by integrating with their platform, the sensor technology and, increasingly, the processing from Mercury. Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers.
The requirement to add security comes at a time when the commercial technology world continues to offshore more of the design, development, manufacturing 9 Table of Contents and support of such capabilities, making it more difficult to protect against embedded vulnerabilities, tampering, reverse engineering and other undesired activities.
The requirement to add security comes at a time when the commercial technology world continues to offshore more of the design, development, manufacturing and support of such capabilities, making it more difficult to protect against embedded vulnerabilities, tampering, reverse engineering and other undesired activities.
In addition, we have a 30-year legacy of system management and system integration expertise that allows us to reduce technical risk, while 10 Table of Contents improving affordability and interoperability. Our system integration expertise is a cornerstone in helping us support our customers in deploying pre-integrated, OSA subsystems.
In addition, we have a 30-year legacy of system management and system integration expertise that allows us to reduce technical risk, while improving affordability and interoperability. Our system integration expertise is a cornerstone in helping us support our customers in deploying pre-integrated, OSA subsystems.
The USMO is also designed for efficient showcasing to customers who at any point wish to access the best proven technology and 13 Table of Contents high performing, secure electronics and processing manufacturing solutions within a broader product company such as Mercury. Proximity and interaction with our internal engineering organization is a significant benefit.
The USMO is also designed for efficient showcasing to customers who at any point wish to access the best proven technology and high performing, secure electronics and processing manufacturing solutions within a broader product company such as Mercury. Proximity and interaction with our internal engineering organization is a significant benefit.
Within the context of the overall U.S. defense budget and spending for defense electronics specifically, we believe the C4ISR, electronic warfare, guided missiles and precision munitions, and ballistic missile defense market segments have a high priority for future DoD spending.
Within the context of the overall U.S. defense budget and spending for defense electronics specifically, we believe the C4ISR, EW, guided missiles and precision munitions and ballistic missile defense market segments have a high priority for future DoD spending.
In addition to the consolidation of facilities into scalable engineering and manufacturing centers of excellence, we have made the necessary investments to outfit these facilities with modern, scalable and redundant tools and equipment to promote quality, efficiency, throughput and redundancy.
In addition to the consolidation of 11 Table of Contents facilities into scalable engineering and manufacturing centers of excellence, we have made the necessary investments to outfit these facilities with modern, scalable and redundant tools and equipment to promote quality, efficiency, throughput and redundancy.
Our operations in this environment also help us identify emerging needs and opportunities to influence our future product development, so that critical future needs can be met in a timely manner with commercially-developed products and solutions. 11 Table of Contents • We have invested in advanced, domestic design and manufacturing capabilities.
Our operations in this environment also help us identify emerging needs and opportunities to influence our future product development, so that critical future needs can be met in a timely manner with commercially-developed products and solutions. • We have invested in advanced, domestic design and manufacturing capabilities.
Over the past several years we have prioritized investments to build our internal capabilities and capacity for defense electronics design and manufacturing in the U.S. These investments include the consolidation of a number of sub-scale microelectronics manufacturing facilities into our modern AMCs as well as the establishment of our USMO in Phoenix, Arizona.
We have prioritized investments to build our internal capabilities and capacity for defense electronics design and manufacturing in the U.S. These investments include the consolidation of a number of sub-scale microelectronics manufacturing facilities into our modern AMCs as well as the establishment of our USMO in Phoenix, Arizona.
The Hudson, New Hampshire, West Caldwell, New Jersey, and Oxnard, California facilities are specifically aimed at providing scalable manufacturing within our critical businesses. We leverage best practices in design, development, manufacturing and materials handling at these production and subsystems integration facilities.
The Hudson, New Hampshire, West Caldwell, New Jersey and Oxnard, California facilities are specifically aimed at providing scalable manufacturing within our critical businesses. We leverage best practices in design, development, 13 Table of Contents manufacturing and materials handling at these production and subsystems integration facilities.
On a global basis the Tier 2 embedded computing and RF market in 2021 is estimated by RSA to be $42 billion. The U.S. government is intensely focused on making systems more affordable and shortening their development time. In addition, the U.S. government is challenging defense prime contractors to leverage commercial technology wherever possible.
On a global basis the Tier 2 embedded computing and RF market in 2023 was estimated by RSA to be $48 billion. The U.S. government is intensely focused on making systems more affordable and shortening their development time. In addition, the U.S. government is challenging defense prime contractors to leverage commercial technology wherever possible.
These facilities include the design, build and test of both RF and microwave components and subsystems in support of a variety of key customer programs. Our Alpharetta, Georgia facility offers active matrix liquid crystal display systems which enhances the highly sophisticated man/machine interface. Our recent acquisition of POC in Torrance, CA is an AS9100 facility that offers Avionics Safety-Certifiable subsystems.
These facilities include the design, build and test of both RF and microwave components and subsystems in support of a variety of key customer programs. Our Alpharetta, Georgia facility offers active matrix liquid crystal display systems which enhances the highly sophisticated man/machine interface. Our facility in Torrance, California is an AS9100 and AS9110C facility that offers Avionics Safety-Certifiable subsystems.
As more commercial technology companies move the design, development, manufacturing and support of their technologies offshore, the DoD is looking to domestic technology providers to develop a sustainable, U.S.-based trusted supply chain. Over several years we have been building out our capacity for domestic manufacturing through our Advanced Microelectronics Centers (“AMCs”).
As commercial technology companies have moved the design, development, manufacturing and support of their technologies offshore, the DoD is looking to domestic technology providers to develop a sustainable, U.S.-based trusted supply chain. Over several years we have been building out our capacity for domestic manufacturing through our Advanced 10 Table of Contents Microelectronics Centers (“AMCs”).
Our primary operations are in the U.S. with 2,175 employees and we operate offices in 11 states. Mercury also has operations in Europe, Asia and Canada.
Our primary operations are in the U.S. with 2,456 employees and we operate offices in 11 states. Mercury also has operations in Europe and Canada.
We have developed the internal processes and capability to integrate acquired businesses to deliver value through revenue and cost synergies. We leverage our common cultures and values as well as common processes, business systems, tools, channels and manufacturing infrastructure to accelerate growth and improve profitability in our acquired businesses.
We have developed the internal processes and capability to integrate acquired businesses to deliver value through revenue and cost synergies. Overseen by our Execution Excellence organization, we leverage our common cultures and values as well as common processes, business systems, tools, channels and manufacturing infrastructure to accelerate growth and improve profitability in our acquired businesses.
(“Athena”), Delta Microwave, LLC (“Delta”), Syntonic Microwave LLC (“Syntonic”), and Pentek Technologies, LLC and Pentek Systems, Inc. (collectively, "Pentek"); mission computing, safety-critical avionics and platform management, and large area display technology with the CES Creative Electronic Systems, S.A. (“CES”), Richland Technologies, L.L.C.
(“Athena”), Delta Microwave, LLC (“Delta”), Syntonic Microwave LLC (“Syntonic”), Pentek Technologies, LLC and Pentek Systems, Inc. (collectively, “Pentek”) and Atlanta Micro, Inc. (“Atlanta Micro”); mission computing, safety-critical avionics and platform management and large area display technology with the CES Creative Electronic Systems, S.A. (“CES”), Richland Technologies, L.L.C.
An increase in the prevalence and resolution of ISR sensors is generating significant growth in the associated data that needs to be stored and turned into information for the warfighter in a timely manner.
An 8 Table of Contents increase in the prevalence and resolution of ISR is generating significant growth in the associated data that needs to be stored and turned into information for the warfighter in a timely manner.
In addition, Mercury offers employees less traditional benefits to support employee well-being such as access to fitness and meditation apps, as well as an online platform through which employees participate in health living challenges and earn financial rewards. • Health and Safety: On our Website, we disclose quality and safety information, including OSHA injury data.
In addition, we offer employees less traditional benefits to support employee well-being such as access to fitness and meditation apps, as well as an online platform through which employees participate in healthy living challenges and earn financial rewards. • Environmental, Health and Safety: On our Website, we disclose environmental stewardship, quality and safety information, including OSHA injury data.
No employees are covered by any collective bargaining or similar agreements. • Culture and Employee Engagement: We believe our workplace culture drives engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation. Our investment in our employees extends to our workplaces.
No employees are covered by any collective bargaining or similar agreements. • Culture and Employee Engagement: We believe our workplace culture drives engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation.
In addition, advanced systems sold to foreign military buyers also require protection so that the technologies, techniques and data associated with them do not become more widely available, which further enhances our market opportunity. • Mercury is well-positioned to help address the need for DoD to access the latest commercial silicon, combined with the desire to ensure a trusted domestic supply of silicon technologies .
In addition, advanced systems sold to foreign military buyers also require protection so that the technologies, techniques and data associated with them do not proliferate, which further enhances our market opportunity. 9 Table of Contents • Mercury is well-positioned to help address the need for DoD to access the latest commercial silicon, combined with the desire to ensure a trusted domestic supply of silicon technologies .
RSA estimates that in 2021 the U.S. defense Tier 2 embedded computing and RF market addressable by suppliers such as Mercury is approximately $24 billion. RSA estimates that the U.S. defense prime contractors currently outsource only a small percentage of their work.
RSA estimates that in 2023 the U.S. defense Tier 2 embedded computing and RF market addressable by suppliers such as Mercury was approximately $25 billion. RSA estimates that the U.S. defense prime contractors currently outsource only a small percentage of their work.
(“RTL”), GECO Avionics, LLC (“GECO”), American Panel Corporation (“APC”) and Physical Optics Corporation ("POC") acquisitions; and rugged servers, computers and storage systems with the acquisitions of Themis Computer (“Themis”) and Germane Systems, LC (“Germane”).
(“RTL”), GECO Avionics, LLC (“GECO”), American Panel Corporation (“APC”), Physical Optics Corporation (“POC”) and Avalex Technologies, LLC. (“Avalex”) acquisitions; and rugged servers, computers and storage systems with the acquisitions of Themis Computer (“Themis”) and Germane Systems, LC (“Germane”).
Mercury partners with global tech leaders to align technology roadmaps and deliver cutting-edge computing in scalable, field-deployable form factors that are fully configurable to each unique workload. We use the latest Intel® server-class processing products, Xilinx Field Programmable Gate Arrays (“FPGA”), as well as NVIDIA GPU products in our embedded high-performance processing technologies.
We partner with global tech leaders to align technology roadmaps and deliver cutting-edge computing in scalable, field-deployable form factors that are fully configurable to each unique workload. We use the latest Intel® server-class processing 6 Table of Contents products, AMD Field Programmable Gate Arrays (“FPGA”), as well as NVIDIA GPU products in our embedded high-performance processing technologies.
Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications.
Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications on time constraints that matter.
These systems often must also meet significant SWaP constraints for use in aircraft, unmanned aerial vehicles (“UAVs”), ships and other platforms and be ruggedized for use in harsh environments.
These systems often must also meet significant size, weight and power (“SWaP”) constraints for use in aircraft, unmanned aerial vehicles (“UAVs”), ships and other platforms and be ruggedized for use in harsh environments.
Our products transform the massive streams of digital data created in these applications into usable information in real time. The systems can scale from a few processors to thousands of processors. We group our products into the following categories: • Components .
Our products transform the massive streams of digital data created in these applications into usable information in real time. The systems can scale from a few processors to thousands of processors. We group our products into the following categories: • Components . Components represent the basic building blocks of an electronic system.
As a result we have successfully penetrated strategic programs including Aegis, Patriot, Lower Tier Air & Missile Defense Sensor ("LTAMDS"), Surface Electronic Warfare Improvement Program (“SEWIP”), Gorgon Stare, Predator, F-35, Reaper, F-16 SABR, E2-D Hawkeye, Paveway, Filthy Buzzard, PGK, P-8, Advanced Integrated Defensive Electronic Warfare Suite (“AIDEWS”), Common Display System (“CDS”) and WIN-T.
As a result, we have successfully penetrated strategic programs including Aegis, Patriot, Lower Tier Air & Missile Defense Sensor ("LTAMDS"), Surface Electronic Warfare Improvement Program (“SEWIP”), Terminal High Altitude Area Defense ("THAAD"), Predator, F-35, Reaper, F-18, F-16 SABR, E2-D Hawkeye, Paveway, Filthy Buzzard, PGK, P-8, Advanced Integrated Defensive Electronic Warfare Suite (“AIDEWS”), Common Display System (“CDS”), Aviation Mission Common Server ("AMCS") and WIN-T.
Our customers include Airbus, BAE Systems, Boeing, General Atomics, General Dynamics, L3Harris Technologies, Leonardo, Lockheed Martin Corporation, Northrop Grumman Corporation, and Raytheon Technologies. Over this period, we have become recognized for our ability to develop new technologies and meet stringent program requirements.
Our top customers include Airbus, BAE Systems, Boeing, General Atomics, General Dynamics, L3Harris Technologies, Leonardo, Lockheed Martin Corporation, Northrop Grumman Corporation, RTX Corporation (formerly known as Raytheon Technologies) and the U.S. Navy. Over this period, we have become recognized for our ability to develop new technologies and meet stringent program requirements.
Mercury also offers a variety of well-being programs to support our employees and their families with healthy living. These programs include paid time off, paid parental leave, health insurance coverage, company contributions to retirement savings and employee assistance and work-life programs.
We also offer a variety of well-being programs to support our employees and their families with healthy living. These programs include paid time off, paid parental leave, health insurance coverage, voluntary benefits (including pet insurance and caregiver support), company contributions to retirement savings and employee assistance and work-life programs.
We intend to add capabilities, through both M&A and investment in organic growth, both horizontally – in adjacent markets – and vertically – adding more content.
We have added capabilities, through both M&A and investment in organic growth, both horizontally – in adjacent markets – and vertically – adding more content.
Our primary market positioning is centered on making commercially available technologies profoundly more accessible to the aerospace and defense sector, specifically C4I systems, sensor processing and electronic warfare systems; and commercial markets, which include commercial aerospace communications and other commercial computing applications.
Our primary market positioning is centered on making commercially available technologies profoundly more accessible to the aerospace and defense sector, specifically as it relates to C4I systems, sensors and EW; and commercial markets, which include aerospace communications and other computing applications.
Our R&D goal is to fully exploit and maintain our technological lead in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications. Expenditures for research and development amounted to $113.5 million, $98.5 million and $68.9 million in fiscal years 2021, 2020 and 2019, respectively.
Our R&D goal is to fully exploit and maintain our technological lead in the high-performance, real-time sensor processing industry and in mission computing, microelectronics, platform management and other safety-critical applications. Total expenditures for research and development amounted to $108.8 million, $107.2 million and $113.5 million in fiscal years 2023, 2022 and 2021, respectively.
Within the global Tier 2 C4I market in which we participate, RSA estimates the market for 2021 to be $6.7 billion for platform and mission management, $8.3 billion for C2I, and $8.9 billion for dedicated communications.
Within the global Tier 2 C4I market in which we participate, RSA estimated the market for 2023 to be $7.7 billion for platform and mission management, $9.7 billion for C2I and $10.2 billion for dedicated communications.
Our approach is built around a few key pillars: • We continue to leverage our expertise in building pre-integrated subsystems in support of critical defense programs, driving out procurement costs by lowering integration expenses of our customers. • We have been a pioneer in driving OSA for both embedded computing and RF. • The DoD has asked defense industry participants to invest their own resources into R&D.
Our approach is built around a few key pillars: • The mission-ready products in our portfolio can be incorporated into aerospace and defense platforms in their standard commercial forms or customized to meet unique program requirements. • We continue to leverage our expertise in building pre-integrated subsystems in support of critical defense programs, driving out procurement costs by lowering integration expenses of our customers. • We have been a pioneer in driving OSA for both embedded computing and RF. • The DoD has asked defense industry participants to invest their own resources into R&D.
While this multi-computing and embedded processing technology is one of our core skills, the SWaP constraints that are encountered in connection with the high-performance embedded processing applications create unique challenges.
While this multi-computing and embedded processing technology is one of our core capabilities, the SWaP constraints inherent in high-performance embedded processing applications create unique challenges.
For the fiscal years ended 2021, 2020 and 2019, we had no single program that represented 10% or more of our revenues. Corporate Headquarters and Incorporation Our corporate headquarters is located in Andover, Massachusetts. Mercury Systems, Inc. was incorporated in Massachusetts in 1981.
For the fiscal years ended 2023, 2022 and 2021, we had no single program that represented 10% or more of our revenues. Corporate Headquarters and Incorporation Our corporate headquarters is located in Andover, Massachusetts.
RSA estimates the compound annual growth rate (“CAGR”) from 2021-2025 for these markets to be 6.6% for platform and mission management, 3.8% for C2I, and 3.3% for dedicated communications.
RSA estimates the compound annual growth rate (“CAGR”) from 2023-2028 for these markets to be 5.9% for platform and mission management, 6.6% for C2I and 6.9% for dedicated communications.
Within the global Tier 2 sensor and effector mission systems market in which we participate, RSA estimates the market for 2021 to be $5.7 billion for electronic warfare, $5.8 billion for radar, $2.0 billion for EO/IR, $1.2 billion for acoustics, and $3.4 billion for weapons systems.
Within the global Tier 2 sensor and effector mission systems market in which we participate, RSA estimated the market for 2023 to be $6.0 billion for EW, $6.6 billion for radar, $2.7 billion for EO/IR, $1.4 billion for acoustics and $3.9 billion for weapons systems.
We are investing in digital transformation, insider trust, cybersecurity, supply chain management and trusted microelectronics, all integral to our commitment to being a leader in delivering uncompromised solutions to our customers. 7 Table of Contents Recent Acquisitions Since 2011 we have successfully acquired 16 businesses, successfully completing integration of the earlier acquired businesses with the integration of the more recent acquisitions progressing well.
We are investing in digital transformation, insider trust, cybersecurity, supply chain management and trusted microelectronics, all integral to our commitment to being a leader in delivering uncompromised solutions to our customers. 7 Table of Contents Recent Acquisitions Since 2015 we have acquired and integrated 15 businesses.
Our long-standing deep relationships with leading high-tech companies, coupled with our high level of research and development (“R&D”) investments and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. We are leading the development and adaptation of commercial technology for aerospace and defense solutions.
Our long-standing deep relationships with leading high-tech and other commercial companies, coupled with our high level of research and development (“R&D”) investments on a percentage basis of sales and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model.
As of July 2, 2021, we had 791 employees, including hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities.
As of June 30, 2023, we had 918 employees, including hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities.
We help drive subsystem development and deployment in both classified and unclassified environments. 12 Table of Contents The principal competitive factors in our market are price/performance value proposition, available new products at the time of design win engagement, services and systems integration capability, effective marketing and sales efforts and reputation in the market.
The principal competitive factors in our market are price/performance value proposition, available new products at the time of design win engagement, services and systems integration capability, effective marketing and sales efforts and reputation in the market.
From chip-scale to system scale and from radio frequency (“RF”) to digital, we make mission-critical technologies safe, secure, affordable and relevant for our customers. Our capabilities, technology and R&D investment strategy combine to differentiate Mercury in our industry.
We are leading the development and adaptation of commercial technology for aerospace and defense solutions. From chip-scale to system scale and from data, including radio frequency (“RF”) to digital to decision, we make mission-critical technologies safe, secure, affordable and relevant for our customers. Our capabilities, technology, people and R&D investment strategy combine to differentiate Mercury in our industry.
In seeking to limit access to sensitive information to the greatest practical extent, we routinely enter into confidentiality and assignment of invention agreements with each of our employees and consultants and nondisclosure agreements with our key customers and vendors.
In seeking to limit access to sensitive information to the greatest practical extent, we routinely enter into confidentiality and assignment of invention agreements with each of our employees and consultants and nondisclosure agreements with our customers and vendors. We have licensed in the past, and expect that we may license in the future, certain of our rights to other parties.
The current scope of delivered hardware products includes commercial and industrial class printed circuit board assemblies (modules), complex chassis subsystems, rugged display system and servers and RF and microwave components and subsystems. Our Phoenix, Arizona AMC manufactures our custom microelectronics products in an AS9100 quality system-certified facility.
The current scope of delivered hardware products includes commercial and industrial class printed circuit board assemblies (modules), complex chassis subsystems, rugged display system and servers and RF and microwave components and subsystems.
Mercury has built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that it believes meets and exceeds the performance needs of our defense and commercial customers. Customers add their own applications and algorithms to our specialized, secure and innovative products and pre-integrated solutions.
Mercury has built a trusted, robust portfolio of proven product solutions, leveraging the most advanced commercial silicon technologies and purpose-built to exceed the performance needs of our defense and commercial customers. Customers add their own applications and algorithms to our specialized, secure and innovative products and pre-integrated solutions.
We perform most post sales service obligations (both warranty and other lifecycle support) in-house through a dedicated service and repair operation. We periodically review our contract manufacturing capabilities to ensure we are optimized for the right mix of quality, affordability, performance and on-time delivery. Our AMC in Phoenix, Arizona is built around scalable, repeatable, secure, affordable, and predictable manufacturing.
We periodically review our contract manufacturing capabilities to ensure we are optimized for the right mix of quality, affordability, performance and on-time delivery. Our AMC in Phoenix, Arizona is built around scalable, repeatable, secure, affordable and predictable manufacturing.
Financial Information about Geographic Scope Information about revenue we receive within and outside the U.S. can be found in Note Q - Operating Segment, Geographic Information and Significant Customers - to the accompanying Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. WEBSITE We maintain a website at www.mrcy.com .
Mercury Systems, Inc. was incorporated in Massachusetts in 1981. 15 Table of Contents Financial Information about Geographic Scope Information about revenue we receive within and outside the U.S. can be found in Note Q - Operating Segment, Geographic Information and Significant Customers - to the accompanying Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
We believe our investment in R&D is more than double that of our competitors on a percentage basis. Our consistent strategies allow us to assist our customers, mostly defense prime contractors, to reduce program cost, minimize technical risk, stay on schedule and on budget, and ensure trust and security in the supply chain.
Our consistent strategies allow us to assist our customers, mostly defense prime contractors, to reduce program cost, minimize technical risk, stay on schedule and on budget and ensure trust and security in the supply chain.
We believe we have built the most trusted, proven, contemporary portfolio of solutions and sub-systems that are purpose-built to meet or exceed our customers’ most pressing high-tech needs. We are investing in six highly differentiated capabilities embedded into our pre-integrated subsystem solutions and products. • Silicon .
We believe we have built the most trusted, proven, contemporary portfolio of solutions and sub-systems that are purpose-built to meet or exceed our customers’ most pressing high-tech needs. We are investing in mission-critical processing technologies embedded into the Mercury Processing Platform: • Security .
Development of a diverse talent pipeline is a 15 Table of Contents business imperative at Mercury and critical to our ability to drive innovation and improve long-term results. We have established relationships with job networks and educational institutions to proactively attract a diverse pool of talent.
As of June 30, 2023, women and racially/ethnically diverse employees represented 29% and 43%, respectively, of Mercury’s workforce. Development of a diverse talent pipeline is a business imperative at Mercury and critical to our ability to drive innovation and improve long-term results. We have established relationships with job networks and educational institutions to proactively attract a diverse pool of talent.
We cannot assure the timely replacement of canceled, delayed or reduced orders. 14 Table of Contents Employees At July 2, 2021, we employed a total of 2,384 people excluding contractors, including 791 in research and development, 135 in sales and marketing, 891 in manufacturing and customer support and 567 in general and administrative functions.
We cannot assure the timely replacement of canceled, delayed or reduced orders. Employees At June 30, 2023, we employed a total of 2,596 people excluding contractors, including 918 in research and development, 154 in sales and marketing, 1,158 in manufacturing and customer support and 366 in general and administrative functions.
This allows us to provide our customers the latest technologies in our pre-integrated subsystems faster than they can typically do it themselves. We believe this is a better business and technology model to operate within, as it continues to provide value and benefits to us and our customers over time.
We believe this is a better business and technology model to operate within, as it continues to provide value and benefits to us and our customers over time.
Our Board of Directors provides oversight of our people practices, including regularly reviewing workforce metrics, including the metrics described below. Additional data related to these metrics can be found on our website at www.mrcy.com under the Company – Environmental, Social and Governance tab (our “Website”). • Employee Overview: As of July 2, 2021, we had 2,384 employees around the globe.
Additional data related to these metrics can be found on our website at www.mrcy.com under the Company – Environmental, Social and Governance tab (our “Website”). 14 Table of Contents • Employee Overview: As of June 30, 2023, we had 2,596 employees around the globe.
ITEM 1. BUSINESS Our Company Mercury Systems, Inc. is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense. Headquartered in Andover, Massachusetts, we deliver products and solutions that enable a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments.
ITEM 1. BUSINESS Our Company Mercury Systems, Inc. is a technology company that delivers processing power for the most demanding aerospace and defense missions. Headquartered in Andover, Massachusetts, our end-to-end processing platform enables a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments.
The United States Navy comprised 12% of our revenues in fiscal year 2021. While sales to each of these customers comprise 10% or more of our annual revenue, the sales to these customers are spread across multiple programs and platforms.
Northrop Grumman accounted for 11% of our revenues in fiscal 2023 and less than 10% in fiscal years 2022 and 2021, respectively. While sales to each of these customers comprise 10% or more of our annual revenue, the sales to these customers are spread across multiple programs and platforms.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAcquisitions may pose risks to our business, including: • problems and increased costs in connection with the integration of the personnel, operations, technologies, or products of the acquired businesses; • layering of integration activity due to multiple overlapping acquisitions; • unanticipated issues, expenses, charges, or liabilities related to the acquisitions; • failure to implement our business plan for the combined business or to achieve anticipated increases in revenues and profitability; • diversion of management’s attention from our organic business; • adverse effects on business relationships with suppliers and customers, including the failure to retain key customers; • acquired assets becoming impaired as a result of technical advancements or worse-than-expected performance by the acquired company; • failure to rationalize supply chain, manufacturing capacity, locations, logistics, and operating models to achieve anticipated economies of scale, or disruptions to supply chain, manufacturing, or product design operations during the combination of facilities; • failure to rationalize business, information, and communication systems and to expand the IT infrastructure and security protocols throughout the enterprise; • volatility associated with accounting for earn-outs in a given transaction; • entering markets in which we have no, or limited, prior experience; • environmental liabilities at current or previous sites of the acquired business; • poor compliance programs pre-acquisition at acquired companies, which may lead to liabilities for violations, or impact the business acquired when placed under our compliance programs; • unanticipated changes in applicable laws or regulations; • potential loss of key employees; • the impact of any assume legal proceedings; and • adverse effects on our internal control over financial reporting before the acquiree's complete integration into our control environment. 22 Table of Contents In addition, in connection with any acquisitions or investments we could: • issue stock that would dilute our existing shareholders’ ownership percentages; • incur debt and assume liabilities; • obtain financing on unfavorable terms, or not be able to obtain financing on any terms at all; • incur amortization expenses related to acquired intangible assets or incur large and immediate write-offs; • incur large expenditures related to office closures of the acquired companies, including costs relating to the termination of employees and facility and leasehold improvement charges resulting from our having to vacate the acquired companies’ premises; and • reduce the cash that would otherwise be available to fund operations or for other purposes.
Biggest changeAcquisitions may pose risks to our business, including: • problems and increased costs in connection with the integration of the personnel, operations, technologies, or products of the acquired businesses; • layering of integration activity due to multiple overlapping acquisitions; • unanticipated issues, expenses, charges, or liabilities related to the acquisitions; • failure to implement our business plan for the combined business or to achieve anticipated increases in revenues and profitability; • diversion of management’s attention from our organic business; • adverse effects on business relationships with suppliers and customers, including the failure to retain key customers; • acquired assets becoming impaired as a result of technical advancements or worse-than-expected performance by the acquired company; • failure to rationalize supply chain, manufacturing capacity, locations, logistics and operating models to achieve anticipated economies of scale, or disruptions to supply chain, manufacturing, or product design operations during the combination of facilities; • failure to rationalize business, information and communication systems and to expand the IT infrastructure and security protocols throughout the enterprise; • volatility associated with accounting for earn-outs in a given transaction; • entering markets in which we have no, or limited, prior experience; • environmental liabilities at current or previous sites of the acquired business; • poor compliance programs pre-acquisition at acquired companies, which may lead to liabilities for violations, or impact the business acquired when placed under our compliance programs; • unanticipated changes in applicable laws or regulations; • potential loss of key employees; • the impact of any assumed legal proceedings; and • adverse effects on our internal control over financial reporting before the acquiree's complete integration into our control environment.
With continued microprocessor evolution, low-end systems could become adequate to meet the requirements of an increased number of the lesser-demanding applications within our target markets. Commercial server manufacturers and other low-end single-board computer, or new competitors, may attempt to penetrate the high-performance market for defense electronics systems.
With continued microprocessor evolution, low-end systems could become adequate to meet the requirements of an increased number of the lesser-demanding applications within our target markets. Commercial server manufacturers and other low-end single-board computer, or new competitors, may attempt to penetrate the high-performance market for aerospace and defense electronics systems.
When the market price of a stock has been volatile, holders of that stock will sometimes file securities class action litigation against the company that issued the stock. If any shareholders were to file a lawsuit, we could incur substantial costs defending the lawsuit. Also, the lawsuit could divert the time and attention of management.
When the market price of a stock has been volatile, holders of that stock will sometimes file securities class action litigation against the company that issued the stock. If any shareholders were to file a lawsuit, we could incur substantial costs defending the lawsuit, which could also divert the time and attention of management.
As a result of the need to maintain or increase spending levels in this area and the difficulty in reducing costs associated with R&D, our operating results could be materially harmed if our R&D efforts fail to result in new products or if revenues fall below expectations.
As a result of the need to maintain spending levels in this area and the difficulty in reducing costs associated with R&D, our operating results could be materially harmed if our R&D efforts fail to result in new products or if revenues fall below expectations.
If we experience a data security breach from an external source or from an insider threat, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures, either of which could adversely affect our business and financial results.
If we experience a data security breach from an external source or a data exfiltration from an insider threat, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures, either of which could adversely affect our business and financial results.
Risks Related to Information Technology and Intellectual Property We may need to invest in new information technology systems and infrastructure to scale our operations. We may need to adopt new information technology systems and infrastructure to scale our business and obtain the synergies from prior and future acquisitions as well as organic growth.
Risks Related to Information Technology and Intellectual Property We may need to invest in new information technology systems and infrastructure to scale our operations. We may need to adopt new information technology systems and infrastructure to scale our business and obtain the synergies from prior acquisitions as well as organic growth.
We may be subject to multiple rebid requirements over the life of a defense program in order to continue to participate in such program, which can result in the loss of the program or significantly reduce our revenue or margin.
We may be subject to multiple rebid requirements over the life of a defense program to continue to participate in such program, which can result in the loss of the program or significantly reduce our revenue or margin.
Most of our facilities maintain a facility security clearance and many of our employees maintain a personal security clearance to access sensitive information necessary to the performance of our work on certain U.S. government contracts and subcontracts.
Many of our facilities maintain a facility security clearance and many of our employees maintain a personal security clearance to access sensitive information necessary to the performance of our work on certain U.S. government contracts and subcontracts.
In order to participate in the design of new defense electronics systems, we must demonstrate the ability to deliver superior technological performance on a timely and cost-effective basis.
To participate in the design of new defense electronics systems, we must demonstrate the ability to deliver superior technological performance on a timely and cost-effective basis.
For fiscal 2022 and beyond, the potential for gridlock in Congress, a continuing budget resolution, budget sequestration, a U.S. government shutdown, or the crowding out of defense funding due to historically high budget deficits or changes in national spending priorities toward non-defense budget items could adversely impact our revenues and increase uncertainty in our business and financial planning.
For fiscal 2024 and beyond, the potential for gridlock in Congress, a continuing budget resolution, budget sequestration, a U.S. government shutdown, or the crowding out of defense funding due to historically high budget deficits or changes in national spending priorities toward non-defense budget items could adversely impact our revenues and increase uncertainty in our business and financial planning.
Factors that may increase the acceptability of commodity-type products in some defense platforms that we serve include improvements in the physical properties and durability of such alternative products, combined with the relaxation of physical and ruggedness requirements by the military due to either a reevaluation of those requirements or the installation of products in a more highly environmentally isolated setting.
Factors that may increase the acceptability of commodity-type products in some aerospace and defense platforms include improvements in the physical properties and durability of such alternative products, combined with the relaxation of physical and ruggedness requirements by the military due to either a reevaluation of those requirements or the installation of products in a more highly environmentally isolated setting.
Our ability to compete in new markets will depend upon a number of factors including, among others: • our ability to create demand for products in new markets; • our ability to respond to changes in our customers’ businesses by updating existing products and introducing, in a timely fashion, new products which meet the needs of our customers; • our ability to increase our market visibility and penetration with prime defense contractors, government agencies, and government funded laboratories; 21 Table of Contents • the quality of our new products; • our ability to respond rapidly to technological changes; • our ability to increase our in-house manufacturing capacity and utilization as well as our ability to deliver on schedule and on budget; and • our ability to successfully integrate acquisitions and achieve revenue and cost synergies and economies of scale.
Our ability to compete in new markets will depend upon several factors including, among others: • our ability to create demand for products in new markets; • our ability to respond to changes in our customers’ businesses by updating existing products and introducing, in a timely fashion, new products which meet the needs of our customers; • our ability to increase our market visibility and penetration with prime defense contractors, government agencies and government funded laboratories; • the quality of our new products; • our ability to respond rapidly to technological changes; • our ability to increase our in-house manufacturing capacity and utilization as well as our ability to deliver on schedule and on budget; and • our ability to successfully integrate acquisitions and achieve revenue and cost synergies and economies of scale.
For example: • Our contracts with the U.S. and foreign governments and their defense prime contractors and subcontractors are subject to termination either upon default by us or at the convenience of the government or contractor if, among other reasons, the program itself has been terminated.
For example: 24 Table of Contents • Our contracts with the U.S. and foreign governments and their defense prime contractors and subcontractors are subject to termination either upon default by us or at the convenience of the government or contractor if, among other reasons, the program itself has been terminated.
Like our defense prime contractor customers, we face the potential for knowledge drain due to the impending retirement of the older members of our engineering and operations workforce in the coming years.
Like our defense prime contractor customers, we face the potential for knowledge drain due to the continuing retirement of the older members of our engineering and operations workforce in the coming years.
Failure to comply with the NISPOM or other security requirements may subject us to civil or criminal penalties, loss of access to sensitive information, loss of a U.S. government contract or subcontract, or potentially debarment as a government contractor. • We may need to invest additional capital to build out higher level security infrastructure at certain of our facilities to capture new design wins on defense programs with higher level security requirements.
Failure to comply with such security requirements may subject us to civil or criminal penalties, loss of access to sensitive information, loss of a U.S. government contract or subcontract, or potentially debarment as a government contractor. • We may need to invest additional capital to build out higher level security infrastructure at certain of our facilities to capture new design wins on defense programs with higher level security requirements.
Amendments to the CMMC may increase our costs or delay the award of contracts if we are unable to certify that we satisfy such cybersecurity requirements at our Company level and into our supply chain. • The U.S. government or a defense prime contractor customer could require us to relinquish data rights to a product in connection with performing work on a defense contract, which could lead to a loss of valuable technology and intellectual property in order to participate in a government program. 24 Table of Contents • The U.S. government or a defense prime contractor customer could require us to enter into cost reimbursable contracts that could offset our cost efficiency initiatives. • We anticipate that sales to our U.S. prime defense contractor customers as part of foreign military sales (“FMS”) programs will be an increasing part of our business going forward.
Inability to meet the qualifications to the CMMC and any amendments may increase our costs or delay the award of contracts if we are unable to certify that we satisfy such cybersecurity requirements at our Company level and into our supply chain. • The U.S. government or a defense prime contractor customer could require us to relinquish data rights to a product in connection with performing work on a defense contract, which could lead to a loss of valuable technology and intellectual property in order to participate in a government program. • The U.S. government or a defense prime contractor customer could require us to enter into cost reimbursable contracts that could offset our cost efficiency initiatives. • We anticipate that sales to our U.S. prime defense contractor customers as part of foreign military sales (“FMS”) programs will be an increasing part of our business going forward.
As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future. We may need additional capital and may not be able to raise funds on acceptable terms, if at all.
As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future. 27 Table of Contents We may need additional capital and may not be able to raise funds on acceptable terms, if at all.
Risks Related to Our Common Stock The trading price of our common stock may continue to be volatile, which may adversely affect our business, and investors in our common stock may experience substantial losses. Our stock price, like that of other technology and aerospace and defense companies, can be volatile.
Risks Related to Our Common Stock The trading price of our common stock may continue to be volatile, which may adversely affect our business, and investors in our common stock may experience substantial losses. Our stock price, like that of other technology and aerospace and defense companies, has been and may continue to be volatile.
These FMS sales combine several different types of risks and uncertainties highlighted above, including risks related to government contracts, risks related to defense contracts, timing and budgeting of foreign governments, and approval from the U.S. and foreign governments related to the programs, all of which may be impacted by macroeconomic and geopolitical factors outside of our control. • We must comply with security requirements pursuant to the National Industrial Security Program Operating Manual, or NISPOM, and other U.S. government security protocols when accessing sensitive information.
These FMS sales combine several different types of risks and uncertainties highlighted above, including risks related to government contracts, risks related to defense contracts, timing and budgeting of foreign governments and approval from the U.S. and foreign governments related to the programs, all of which may be impacted by macroeconomic and geopolitical factors outside of our control. • We must comply with security requirements pursuant to 32 CFR Part 117, formerly known as the National Industrial Security Program Operating Manual, or NISPOM, and other U.S. government security protocols when accessing sensitive information.
Perceptions of Mercury as a high-cost provider could cause us to lose existing customers or fail to win new business. Further, our lack of strong engagements with important government-funded laboratories (e.g.
Perceptions of Mercury as a high-cost provider or for late deliveries could cause us to lose existing customers or programs or fail to win new business. Further, our lack of strong engagements with important government-funded laboratories (e.g.
Such changes could also trigger contract coverage under the Cost Accounting Standards (“CAS”), further impacting our commercial operating model and requiring compliance with a defined set of business systems criteria.
Such changes could also trigger contract coverage for a larger percentage of our contracts under the Cost Accounting Standards (“CAS”), further impacting our commercial operating model and requiring compliance with a defined set of business systems criteria.
Similarly, a breach that involves loss of customer-provided data could subject us to loss of a customer, loss of a contract, litigation costs and legal damages, and reputational harm. 26 Table of Contents We may be unsuccessful in protecting our intellectual property rights which could result in the loss of a competitive advantage.
Similarly, a breach that involves loss of customer-provided data could subject us to loss of a customer, loss of a program or contract, litigation costs and legal damages and reputational harm. We may be unsuccessful in protecting our intellectual property rights which could result in the loss of a competitive advantage.
The Revolver accrues interest, at our option, at floating rates tied to LIBOR or the prime rate plus an applicable percentage. The applicable percentage is set at LIBOR plus 1.25% and is established pursuant to a pricing grid based on our total net leverage ratio.
The Revolver accrues interest, at our option, at floating rates tied to Secured Overnight Financing Rate ("SOFR") or the prime rate plus an applicable percentage. The applicable percentage is set at SOFR plus 1.25% and is established pursuant to a pricing grid based on our total net leverage ratio.
In addition, our competitors could try to emulate our acquisition strategy, leading to greater competition for acquisition targets which could lead to larger competitors if they succeed in emulating our strategy, We may incur substantial indebtedness.
In addition, our competitors could try to emulate our strategy, leading to greater competition for acquisition targets which could lead to larger competitors if they succeed in emulating our strategy. 23 Table of Contents We may incur substantial indebtedness.
Due to the rapidly changing nature of technology, we may not become aware in advance of the emergence of new competitors into our markets. The emergence of new competitors into markets targeted by us could result in the loss of existing customers and may have a negative impact on our ability to win future business opportunities.
Due to the rapidly changing nature of technology, we may not become aware in advance of the emergence of new competitors into our markets. The emergence of new competitors in our markets could result in the loss of existing customers or programs and may have a negative impact on our ability to win future business.
Competition for hiring these employees is intense, especially individuals with specialized skills and security clearances required for our business, and we may be unable to hire and retain enough staff to implement our growth strategy.
Competition for hiring these employees is intense, especially individuals with specialized skills and security clearances required for our business, and we may be unable to hire and retain enough staff to implement our growth strategy or to perform on our existing commitments.
The stock market in general and technology companies in particular may continue to experience volatility. The stock prices for companies in the aerospace and defense industry may continue to remain volatile given uncertainty and timing of funding for defense programs. This volatility may or may not be related to our operating performance.
The stock prices for companies in the aerospace and defense industry may continue to remain volatile given uncertainty and timing of funding for defense programs. This volatility may or may not be related to our operating performance.
While we expect our acquisitions to result in synergies and other financial and operational benefits, we may be unable to realize these synergies or other benefits in the timeframe that we expect or at all. The integration process may be complex, costly, and time consuming.
While we expect any acquisitions to result in synergies and other financial and operational 22 Table of Contents benefits, we may be unable to realize these synergies or other benefits in the timeframe that we expect or at all. The integration process may be complex, costly and time consuming.
GAAP requires an employer to recognize the funded status of the defined benefit plan on the balance sheet, which we have presented in other long-term liabilities on our Consolidated Balance Sheets at July 2, 2021.
GAAP requires an employer to recognize the funded status of the defined benefit plan on the balance sheet, which we have presented in other long-term liabilities on our Consolidated Balance Sheets at June 30, 2023.
As of July 2, 2021, we had a liability of $9.8 million in Other non-current liabilities representing the net under-funded status of the Plan. In addition, we must comply with the Foreign Corrupt Practices Act, or the FCPA, and the anti-corruption laws of the countries in which we operate.
As of June 30, 2023, we had a liability of $4.2 million in Other non-current liabilities representing the net under-funded status of the Plan. In addition, we must comply with the Foreign Corrupt Practices Act, or the FCPA, and the anti-corruption laws of the countries in which we operate.
Such differences could have an adverse effect on our income tax provision or benefit, in the reporting period in which such determination is made and, consequently, on our results of operations, financial position, and/or cash flows for such period.
Such differences could have an adverse effect on our income tax provision or benefit, in the reporting period in which such determination is made and, consequently, on our results of operations, financial position and/or cash flows for such period. Further, future increases in tax rates may adversely affect our financial results.
Our quarterly results may be subject to fluctuations resulting from other factors, including: • delays in completion of internal product development projects; • delays in shipping hardware and software; • delays in acceptance testing by customers; • a change in the mix of products sold; • changes in customer or program order patterns; • production delays due to quality problems; • inability to scale quick reaction capability products due to low product volume; 20 Table of Contents • shortages and costs of components; • delays due to the implementation of new tariffs or other trade barriers; • the timing of product line transitions; • declines in quarterly revenues from previous generations of products following announcement of replacement products containing more advanced technology; and • changes in estimates of completion on fixed price engagements.
Our quarterly results may be subject to fluctuations resulting from other factors, including: • delays in completion of internal product development projects; • delays in shipping hardware and software or licensing design intellectual property; • delays in acceptance testing by customers; • a change in the mix of products sold; 20 Table of Contents • changes in customer or program order patterns; • production delays due to quality problems; • failure to achieve or maintain quality certifications, such as AS9100; • inability to scale quick reaction capability products due to low product volume; • shortages and increased costs of components; • delays due to the implementation of new tariffs or other trade barriers; • the timing of product line transitions; • declines in quarterly revenues from previous generations of products following announcement of replacement products containing more advanced technology; and • changes in estimates of completion on fixed price engagements, which represent a substantial and increasing percentage of our business.
Sales of our products and services, primarily as a subcontractor or team member with defense prime contractors, and in some cases directly, to the U.S. government and its agencies, as well as foreign governments and agencies, accounted for approximately 98% of our total net revenues in fiscal 2021 and 95% in each of fiscal 2020 and 2019.
Sales of our products and services, primarily as a subcontractor or team member with defense prime contractors, and in some cases directly, to the U.S. government and its agencies, as well as foreign governments and agencies, accounted for approximately 98%, 97% and 98% of our total net revenues in fiscal years 2023, 2022, and 2021, respectively.
Our products may contain undetected errors when first introduced or as we introduce product upgrades. The pressures we face to be the first to market new products or functionality and the elapsed time before our products are integrated into our customer's systems increases the possibility that we will offer products in which we or our customers later discover problems.
The pressures we face to be the first to market new products or functionality and the elapsed time before our products are integrated into our customer's systems increases the possibility that we will offer products in which we or our customers later discover problems.
Going forward, we believe the SEWIP, Filthy Buzzard, F-35 and LTAMDS programs as well as a classified radar program could be a large portion of our future revenues in the coming years, and the loss or cancellation of these programs could adversely affect our future results.
Going forward, we believe the F-35, Filthy Buzzard & Badger, F/A-18, LTAMDS, THAAD and Aegis programs could be a large portion of our future revenues in the coming years, and the loss or cancellation of these programs could adversely affect our future results.
At July 2, 2021, the carrying values of goodwill and identifiable intangible assets on our balance sheet were $804.9 million and $307.6 million, respectively. We evaluate indefinite lived intangible assets and goodwill for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
At June 30, 2023, the carrying values of goodwill and identifiable intangible assets on our balance sheet were $938.1 million and $298.1 million, respectively. We evaluate indefinite lived intangible assets and goodwill for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
If we experience a disaster or other business continuity problem, we may not be able to recover successfully, which could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability.
The decline in our stock price during 2023 may also increase employee retention risks. If we experience a disaster or other business continuity problem, we may not be able to recover successfully, which could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability.
Competitors may be able to offer more attractive pricing, develop products with performance features that are superior to our products, or offer higher quality or superior on time delivery, resulting in reduced demand for our products.
Competitors may be able to offer more attractive pricing, develop products with performance features that are superior to our products, or offer higher quality or superior on time delivery, resulting in reduced demand for our products. Recently, our on-time delivery has suffered due in part to supply chain volatility and unanticipated supplier decommits.
Assuming that we had $100.0 million of floating rate debt outstanding, our annual interest expense would change by approximately $1.0 million for each 100 basis point increase in interest rates.
Assuming that we had $100.0 million of floating rate debt outstanding, our annual interest expense would change by approximately $1.0 million for each 100 basis point increase in interest rates. We may also incur costs related to interest rate hedges, including the termination of any such hedges.
If we underestimate requirements, the contract manufacturers may have inadequate inventory, which could interrupt manufacturing of our products and result in delays in shipment to customers and revenue recognition.
If we overestimate requirements, the contract manufacturers may assess cancellation penalties or we may be left with excess inventory, which may negatively impact our earnings. If we underestimate requirements, the contract manufacturers may have inadequate inventory, which could interrupt manufacturing of our products and result in delays in shipment to customers and revenue recognition.
We market and sell products in international markets, have sales offices and subsidiaries in the United Kingdom, Japan, and France and we have manufacturing and/or engineering facilities and subsidiaries in Switzerland, Spain and Canada. Revenues from international operations accounted for 5%, 7%, and 8%, of our total net revenues in fiscal 2021, 2020, and 2019, respectively.
We market and sell products in international markets and have sales offices and manufacturing and/or engineering facilities and subsidiaries in Switzerland, Spain, the United Kingdom and Canada. Revenues from international operations accounted for 5%, 4% and 5%, of our total net revenues in fiscal 2023, 2022 and 2021, respectively. We also ship directly from our U.S. operations to international customers.
If we or our intermediaries fail to comply with the requirements of international applicable anti-corruption laws, governmental authorities in the United States or the countries in which we operate could seek to impose civil and criminal penalties, which could have a material adverse effect on our business, results of operations, financial conditions and cash flows. 19 Table of Contents If we are unable to respond to technological developments and changing customer needs on a timely and cost-effective basis, our results of operations may be adversely affected.
If we or our intermediaries fail to comply with the requirements of international applicable anti-corruption laws, governmental 19 Table of Contents authorities in the United States or the countries in which we operate could seek to impose civil and criminal penalties, or restrict or limit our ability to do business, which could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
On September 28, 2018, we amended our existing revolving credit facility (“the Revolver”) to increase and extend the borrowing capacity to a $750.0 million, 5-year revolving credit line, with the maturity extended to September 28, 2023. As of July 2, 2021, we had $200.0 million of outstanding borrowings on the Revolver.
On February 28, 2022, we amended our existing revolving credit facility (“the Revolver”) to increase and extend the borrowing capacity to a $1.1 billion, 5-year revolving credit line, with the maturity extended to February 28, 2027. As of June 30, 2023, we had $511.5 million of outstanding borrowings on the Revolver.
The termination of a program or the reduction in or failure to commit additional funds to a program in which we are involved could 16 Table of Contents negatively impact our revenues and have a material adverse effect on our financial condition and results of operations.
The termination of a program or the reduction in or failure to commit additional funds to a program in which we are involved could negatively impact our revenues and have a material adverse effect on our financial condition and results of operations. The U.S. defense budget frequently operates under a continuing budget resolution, which increases revenue uncertainty and volatility.
In addition, our revenues are largely dependent upon the ability of customers to develop and sell products that incorporate our products. No assurance can be given that our customers will not experience financial, technical or other difficulties that could adversely affect their operations and, in turn, our results of operations.
No assurance can be given that our customers will not experience financial, technical or other difficulties that could adversely affect their operations and, in turn, our results of operations.
The world’s financial markets have, at times, experienced turmoil which could have material adverse impacts on our financial condition or our ability to achieve targeted results of operations due to: • reduced and delayed demand for our products; • increased risk of order cancellations or delays; • downward pressure on the prices of our products; • greater difficulty in collecting accounts receivable; and • risks to our liquidity, including the possibility that we might not have access to our cash and short-term investments or to our line of credit when needed.
World economic conditions and financial markets have, at times, experienced turmoil which could have material adverse impacts on our financial condition or our ability to achieve targeted results of operations due to: • reduced and delayed demand for our products; • increased risk of order cancellations or delays; • downward pressure on the prices of our products; • greater difficulty in collecting accounts receivable; and • risks to our liquidity, including the possibility that we might not have access to our cash and short-term investments or to our line of credit when needed. 16 Table of Contents Further, the funding of the defense programs that incorporate our products and services is subject to the overall U.S. government budget and appropriation decisions and processes, which are driven by numerous factors beyond our control, including geo-political, macroeconomic, public health and political conditions.
In fiscal 2021, Raytheon Technologies accounted for 19% of our total net revenues, Lockheed Martin Corporation accounted for 15% of our total net revenues, and the US Navy accounted for 12% of our total net revenues. In fiscal 2020, both Lockheed Martin Corporation and Raytheon Technologies accounted for 16% of our total net revenues.
Navy accounted for 14% of our total net revenues and Lockheed Martin Corporation accounted for 10% of our total net revenues. In fiscal 2021, RTX Corporation accounted for 19% of our total net revenues, Lockheed Martin Corporation accounted for 15% of our total net revenues and the U.S. Navy accounted for 12% of our total net revenues.
Expense levels for these programs are based, in significant part, on expectations of future revenues. If actual quarterly revenues are below management’s expectations, our results of operations could be adversely affected.
Another factor contributing to fluctuations in our quarterly results is the fixed nature of expenditures on personnel, facilities, information technology and marketing programs. Expense levels for these programs are based, in significant part, on expectations of future revenues. If actual quarterly revenues are below management’s expectations, our results of operations could be adversely affected.
If we are unable to continue to obtain U.S. government authorization regarding the export of our products, or if current or future export laws limit or otherwise restrict our business, we could be prohibited from shipping our products to certain countries, which would harm our ability to generate revenue.
In addition, we may need to invest in additional secure laboratory space to integrate efficiently subsystem level solutions and maintain quality assurance on current and future programs. 25 Table of Contents If we are unable to continue to obtain U.S. government authorization regarding the export of our products, or if current or future export laws limit or otherwise restrict our business, we could be prohibited from shipping our products to certain countries, which would harm our ability to generate revenue.
We are also targeted by spear phishing attacks in which an email directed at a specific individual or department is disguised to appear to be from a trusted source to obtain sensitive information. Like all DoD contractors that process, store, or transmit controlled unclassified information, we must meet minimum security standards or risk losing our DoD contracts.
We are also targeted by spear phishing attacks in which an email directed at a specific individual or department is disguised to appear to be from a trusted source to obtain sensitive information.
Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid and could distract management from other business. Any judgment against us could require substantial payment in damages and could also include an injunction or other court order that could prevent us from offering certain products.
Any judgment against us could require substantial payment in damages and could also include an injunction or other court order that could prevent us from offering certain products.
Our ability to compete effectively against other companies in our industry depends, in part, on our ability to protect our current and future proprietary technology under patent, copyright, trademark, trade secret, and unfair competition laws.
If we become subject to intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products. Our ability to compete effectively against other companies in our industry depends, in part, on our ability to protect our current and future proprietary technology under patent, copyright, trademark, trade secret and unfair competition laws.
In fiscal 2019, Raytheon Technologies accounted for 20% of our total net revenues and Lockheed Martin Corporation accounted for 17% of our total net revenues. Customers in the defense market generally purchase our products in connection with government programs that have a limited duration, leading to fluctuating sales to any particular customer in this market from year to year.
Customers in the defense market generally purchase our products in connection with government programs that have a limited duration, leading to fluctuating sales to any particular customer in this market from year to year. In addition, our revenues are largely dependent upon the ability of customers to develop and sell products that incorporate our products.
If we become subject to intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products. We may become subject to claims that we infringe the intellectual property rights of others. We cannot assure you that, if made, these claims will not be successful.
We may become subject to claims that we infringe the intellectual property rights of others. We cannot assure you that, if made, these claims will not be successful. Any claim of infringement could cause us to incur substantial costs defending against the claim even if the claim is invalid and could distract management from other business.
Contract manufacturers also build products for other companies, and they may not have sufficient quantities of inventory available or sufficient internal resources to fill our orders on a timely basis or at all. 18 Table of Contents In addition, there have been a number of major acquisitions within the contract manufacturing industry in recent years.
Contract manufacturers also build products for other companies, and they may not have sufficient quantities of inventory available or sufficient internal resources to fill our orders on a timely basis or at all. We currently rely primarily on two contract manufacturers, Benchmark Electronics, Inc. and Omega Electronics Manufacturing Services.
In addition, our industry, along with many others, is facing a significant shortage of semiconductors. We are experiencing various levels of semiconductor impact. A shortage of semiconductors or other key components can cause a significant disruption to our production schedule. We may not be able to effectively manage our relationships with contract manufacturers.
In addition, our industry, along with many others, is continuing to face a shortage of semiconductors as well as extended lead times. We have experienced and are experiencing meaningful levels of semiconductor impact. The continuing shortage of semiconductors and other key components can cause a significant disruption to our production schedule.
In addition, there is a risk that 1MPACT will divert management’s attention from ongoing organic business operations and M&A opportunities. Acquisitions may adversely affect our financial condition. As part of our strategy for growth, we expect to continue to explore acquisitions or strategic alliances, which ultimately may not be completed or be beneficial to us.
Acquisitions may adversely affect our financial condition. As part of our strategy for growth, we may explore acquisitions or strategic alliances, which ultimately may not be completed or be beneficial to us.
Further, future increases in tax rates may adversely affect our financial results. 25 Table of Contents Our products are complex, and undetected defects may increase our costs, harm our reputation with customers or lead to costly litigation. Our products are extremely complex and must operate successfully with complex products of our customers and their other vendors.
Our products are complex, and undetected defects may increase our costs, harm our reputation with customers or lead to costly litigation. Our products are extremely complex and must operate successfully with complex products of our customers and their other vendors. Our products may contain undetected errors when first introduced or as we introduce product upgrades.
We continue to monitor the situation, assessing possible implications on our operations, supply chain, liquidity, and cash flow, and will continue taking actions to mitigate adverse consequences.
We continue to monitor the situation, assessing possible implications on our operations, supply chain, liquidity and cash flow and will continue taking actions to mitigate adverse consequences. Risks Related to M&A and Acquisition Integration Implementation of our growth strategy may not be successful, which could affect our ability to increase revenues and profits.
As we grow our operations, the potential for natural or man-made disasters, political, economic, or infrastructure instabilities, or other country- or region-specific business continuity risks increases.
As we grow our operations, the potential for natural or man-made disasters, political, economic, or infrastructure instabilities, or other country- or region-specific business continuity risks increases. We face various risks related to health pandemics such as COVID . We face secondary and tertiary effects related to the pandemic, including disruptions in our supply chain, particularly for long lead time semiconductors.
We intend to continue to enter into development contracts and anticipate that the gross margins associated with development contract revenues will continue to be lower than gross margins from standard product sales. Another factor contributing to fluctuations in our quarterly results is the fixed nature of expenditures on personnel, facilities, and marketing programs.
We intend to continue to enter into development contracts and anticipate that the gross margins associated with development contract revenues will continue to be lower than gross margins from standard product sales. Many of our contracts require that our facilities remain certified at the AS91000 or ISO9001 level in order to ship products from the relevant facility.
We may also incur costs related to interest rate hedges, including the termination of any such hedges, 23 Table of Contents We have a significant amount of goodwill and intangible assets on our consolidated financial statements that are subject to impairment based upon future adverse changes in our business or prospects.
Our recent negative free cash flow, if not improved, could eventually lead to challenges in servicing our debt. We have a significant amount of goodwill and intangible assets on our consolidated financial statements that are subject to impairment based upon future adverse changes in our business or prospects.
We may not be able to effectively manage our relationship with contract manufacturers, and the contract manufacturers may not meet future requirements for timely delivery. We rely on contract manufacturers to build hardware sub-assemblies for certain of our products in accordance with our specifications.
We rely on contract manufacturers to build hardware sub-assemblies for certain of our products in accordance with our specifications. During the normal course of business, we may provide demand forecasts to contract manufacturers several months prior to scheduled delivery of our products to customers.
Removed
The U.S. defense budget frequently operates under a continuing budget resolution, which increases revenue uncertainty and volatility.
Added
The near-term potential for recessionary economic conditions and possible stagflation (persistent high inflation and stagnant economic demand) presents increased risks to our business. Price inflation for labor and materials, further exacerbated in energy and commodity markets by the Russian invasion of Ukraine, could adversely affect our business, results of operations and financial condition.
Removed
Further, the funding of the defense programs that incorporate our products and services is subject to the overall U.S. government budget and appropriation decisions and processes, which are driven by numerous factors beyond our control, including geo-political, macroeconomic, public health, and political conditions.
Added
We have experienced considerable price inflation in our costs for labor and materials during recent years, which adversely affected our business, results of operations and financial condition.
Removed
If these or other component suppliers, some of which are small companies, experienced financial difficulties or other problems that prevented them from supplying us with the necessary components on a timely basis, we could experience a loss of revenues due to our inability to fulfill orders.
Added
We may not be able to pass through inflationary cost increases under our existing firm fixed price commercial item contracts and we may only be able to recoup a portion of our increased costs under our reimbursement-type contracts.
Removed
During the normal course of business, we may provide demand forecasts to contract manufacturers several months prior to scheduled delivery of our products to customers. If we overestimate requirements, the contract manufacturers may assess cancellation penalties or we may be left with excess inventory, which may negatively impact our earnings.
Added
Our ability to raise prices to reflect increased costs may be limited by competitive conditions in the market for our products and services. Russia’s invasion of Ukraine, and prolonged conflict there, may continue to result in increased inflation, escalating energy and commodity prices and increasing costs of materials.
Removed
Future acquisitions could potentially have an adverse effect on our working relationships with contract manufacturers. Moreover, we currently rely primarily on two contract manufacturers, Benchmark Electronics, Inc. and Omega Electronics Manufacturing Services.
Added
We continue to work to mitigate such pressures on our business operations as they develop.
Removed
We also ship directly from our U.S. operations to international customers.
Added
To the extent the war in Ukraine continues to adversely affect our business as discussed above, it may also have the effect of heightening many of the other risks described herein, such as those relating to cyber security, supply chain, volatility in prices and market conditions, any of which could negatively affect our business and financial condition.
Removed
Risks Related to Our Growth Strategy, Our 1MPACT Value Creation Plan, and M&A Implementation of our growth strategy and 1MPACT value creation plan may not be successful, which could affect our ability to increase revenues and profits.
Added
In fiscal 2023, RTX Corporation accounted for 14% of our total net revenues, Lockheed Martin Corporation accounted for 13% of our total net revenues, and Northrop Grumman accounted for 11% of our total net revenues. In fiscal 2022, RTX Corporation accounted for 14% of our total net revenues, the U.S.
Removed
Our 1MPACT value creation plan is designed to enable us to achieve our full growth and value creation potential, both organically and through M&A, to position us to scale beyond our cumulative acquisitions over recent years. 1MPACT includes streamlining procurement and our supply chain, increasing the efficiency and effectiveness of R&D and manufacturing operations, and further scaling through common processes and systems.
Added
Unprecedented material lead times and supplier decommits have increased volatility in our operating and financial results, including lower revenue and higher inventory and unbilled receivables, as well as decreased cash flow.
Removed
Our ability to enhance value through 1MPACT is subject to risks including: anticipated benefits not being realized or not at the levels anticipated; that implementation will be materially delayed or will be more difficult than expected; challenges of hiring and retaining key employees to drive the value creation plan; and initiatives being more expensive to complete than anticipated, including as a result of unexpected factors or events.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeFeet 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 Oxnard, CA 72,673 Leased, expiring 2025 Fremont, CA 53,713 Leased, expiring 2023 Torrance, CA 49,250 Leased, expiring 2025 Cypress, CA 42,770 Leased, expiring 2028 Upper Saddle River, NJ 36,223 Leased, expiring 2029 Torrance, CA 36,220 Leased, expiring 2025 Alpharetta, GA 35,005 Leased, expiring 2028 Mesa, AZ 34,320 Leased, expiring 2022 Chantilly, VA 32,789 Leased, expiring 2025 Geneva, CH 27,287 Leased, expiring 2027 We actively manage our facilities and are in pursuit of lease extensions or alternative locations for facilities with expiration dates in 2021 and 2022.
Biggest changeFeet Commitment Andover, MA 145,262 Leased, expiring 2032 Phoenix, AZ 125,756 Leased, expiring 2031 Hudson, NH 121,553 Leased, expiring 2030 Oxnard, CA 72,673 Leased, expiring 2025 Torrance, CA 58,405 Leased, expiring 2029 Gulf Breeze, FL 51,061 Leased, expiring 2031 Torrance, CA 49,250 Leased, expiring 2025 Cypress, CA 42,770 Leased, expiring 2028 Upper Saddle River, NJ 36,223 Leased, expiring 2027 Alpharetta, GA 35,005 Leased, expiring 2028 Chantilly, VA 32,789 Leased, expiring 2025 Torrance, CA 31,505 Leased, expiring 2023 Geneva, CH 27,287 Leased, expiring 2027 We actively manage our facilities and are in pursuit of lease extensions or alternative locations for facilities with expiration dates in the next one to two years.
ITEM 2. PROPERTIES The following table sets forth our significant properties as of July 2, 2021: Location Size in Sq.
ITEM 2. PROPERTIES The following table sets forth our significant properties as of June 30, 2023: Location Size in Sq.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

2 edited+12 added−1 removed2 unchanged
Biggest changeITEM 3. LEGAL PROCEEDINGS We are subject to litigation, claims, investigations, and audits arising from time to time in the ordinary course of our business. Although legal proceedings are inherently unpredictable, we believe that we have valid defenses with respect to those matters currently pending against us and intend to defend our self vigorously.
Biggest changeITEM 3. LEGAL PROCEEDINGS We are subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of our business. Although legal proceedings are inherently unpredictable, we believe that we have valid defenses with respect to those matters currently pending against us and intend to defend ourself vigorously.
ERA was a sales representative of Themis when Themis was acquired by Mercury. The sales representative agreement provided for termination by either party upon 30 days written notice with ERA entitled to commissions for orders obtained by ERA product shipment occurring prior to termination. We responded to the complaint on July 28, 2021.
ERA was a sales representative of Themis when Themis was acquired by Mercury. The sales representative agreement provided for termination by either party upon 30 days written notice with ERA entitled to commissions for orders obtained by ERA with product shipment occurring prior to termination. We responded to the complaint in July 2021.
Removed
We believe the claims in the complaint are without merit and we intend to defend ourselves vigorously. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable.
Added
An arbitration proceeding was held during September 2022, with final motions in October 2022, and oral arguments in November 2022. The arbitrator issued its final ruling in January 2023, awarding ERA less than $0.1 million in damages and fees. On December 7, 2021, counsel for National Technical Systems, Inc.
Added
(“NTS”) sent us an environmental demand letter pursuant to Massachusetts General Laws Chapter 21E, Section 4A, and CERCLA 42 U.S.C. Section 9601, related to a site that NTS formerly owned at 533 Main Street, Acton, MA.
Added
NTS received a Notice of Responsibility from the Massachusetts Department of Environmental Protection (“MassDEP”) alleging trichloroethene, freon and 1,4-dioxane contamination in the groundwater emanating from NTS’s former site.
Added
NTS alleges in its demand letter that the operations of a predecessor company to Mercury that was acquired in our acquisition of the Microsemi Carve-Out Business that once owned and operated a facility at 531 Main Street, Acton, Massachusetts contributed to the groundwater contamination. NTS is seeking payment from us of NTS’s costs for any required environmental remediation.
Added
In April 2022, we engaged in a meet and confer session with NTS pursuant to Massachusetts General Laws Chapter 21E, Section 4A to discuss the status of the environmental review performed by NTS and its licensed site professional.
Added
In addition, in November 2021, we responded to a request for information from MassDEP regarding the detection of PFAS (per- and polyfluoroakyl substances) in the Acton, Massachusetts Water District’s Conant public water supply wells near the former facility at 531 Main Street, Acton, Massachusetts at a level above the 29 Table of Contents standard that MassDEP published for PFAS in October 2020.
Added
We have not been contacted by NTS or MassDEP since the dates discussed above. It is too early to determine what responsibility, if any, we may have for these environmental matters. On June 19, 2023, our Board of Directors received notice of our former CEO's resignation from his positions of President and Chief Executive Officer.
Added
The Board accepted his resignation effective June 24, 2023. In his notice, the former CEO claimed he was entitled to certain benefits, including equity vesting, severance, and other benefits, under his change in control severance agreement (the "CIC Agreement") because he had resigned with good reason during a potential change in control period.
Added
We dispute these claims and maintain that he resigned without good reason. The parties must submit any dispute under the CIC Agreement to binding arbitration. We intend to contest vigorously any claims under the CIC Agreement and believe that we have strong arguments that our former CEO's claims lack merit.
Added
If the arbitrator rules in our favor, we may still need to pay the former CEO's reasonable legal fees.
Added
If instead the arbitrator rules for the former CEO, we could be liable for up to approximately $12.9 million, based on the closing price of our common stock on June 26, 2023, plus legal fees and expenses, for accelerated equity vesting, severance, and other benefits under the CIC Agreement.
Added
We categorically deny any wrongdoing or liability under the CIC Agreement, but the outcome of potential arbitration is inherently uncertain. Accordingly, it is reasonably possible that we will incur a liability in this matter and we estimate the potential range of exposure from $0 to $12.9 million, plus costs and attorneys' fees. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

3 edited+15 added−8 removed3 unchanged
Biggest changeMr. Perry was appointed as an executive officer as of August 3, 2021. Mr. Thibaud, our Executive Vice President, Chief Operating Officer (COO), is retiring as COO effective as of August 26, 2021. Information regarding our executive officers as of the date of filing of this Annual Report on Form 10-K is presented below.
Biggest changeInformation regarding our executive officers as of the date of filing of this Annual Report on Form 10-K is presented below. William L.
Cambria was an Associate with Fried, Frank, Harris, Shriver & Jacobson and Cravath, Swaine & Moore. Brian E. Perry , age 54, joined Mercury in 2008 and has served as our Executive Vice President, President, Processing division since August 2021. He served as Senior Vice President of our Processing division starting in July 2020.
Cambria was an Associate with Fried, Frank, Harris, Shriver & Jacobson and Cravath, Swaine & Moore. Allen Couture, age 55, joined Mercury in October 2022 as Senior Vice President, Execution Excellence and became Executive Vice President, Execution Excellence in July 2023. Mr.
Aslett has also held positions at GEC Plessey Telecommunications, as well as other telecommunications-related technology firms. 29 Table of Contents Christopher C. Cambria , age 63, joined Mercury in 2016 as Senior Vice President, General Counsel, and Secretary and was appointed Executive Vice President, General Counsel, and Secretary in 2017.
Ballhaus has also held senior leadership positions at BAE Systems, Boeing, and Hughes, where he led global government and commercial technology businesses particularly focused on software and IT. Christopher C. Cambria , age 65, joined Mercury in 2016 as Senior Vice President, General Counsel and Secretary and was appointed Executive Vice President, General Counsel and Secretary in 2017.
Removed
Mark Aslett , age 53, joined Mercury in 2007 and has served as the President and Chief Executive Officer and as a member of the Board since 2007.
Added
Ballhaus , age 56, joined the Company’s Board of Directors as a non-employee director in June 2022, was appointed interim President and Chief Executive Officer on June 24, 2023, and was appointed President and CEO effective August 15, 2023. As previously announced, Mr. Ballhaus will become the Company’s Chairman of the Board effective with the 2023 annual meeting of shareholders.
Removed
Prior to joining Mercury, he was Chief Operating Officer and Chief Executive Officer of Enterasys Networks from 2003 to 2006, and held various positions with Marconi plc and its affiliated companies, including Executive Vice President of Marketing, Vice President of Portfolio Management, and President of Marconi Communications- North America, from 1998 to 2002. Mr.
Added
Mr. Ballhaus has significant experience in the aerospace, defense, and technology industries, including multiple CEO roles, as well as experience in operational transformations and delivering strong results. He previously served as Chairman and CEO of Blackboard, Inc., a leading EdTech company, from 2016 until its merger with Anthology in 2021.
Removed
Prior to that, he was President of our Mercury Defense Systems business unit starting in 2014 and Vice President and General Manager of our Services and Systems Integration group from 2011 to 2014. Prior to joining Mercury, Mr.
Added
Prior to that, he served as CEO and President of SRA International, Inc., a provider of information technology services, from 2011 until the creation of CSRA Inc. from SRA International Inc.’s and CSC’s U.S. public sector business. Before that, Mr. Ballhaus served as CEO and President of government contractor DynCorp International from 2008 to 2010. Mr.
Removed
Perry was the General Manager for Suntron Corporation’s Northeast Express and served in various roles with Lockheed Martin and General Electric Aircraft Engines. Michael D. Ruppert , age 47, joined Mercury in 2014 as Senior Vice President, Strategy and Corporate Development and in 2017 was named Executive Vice President, Strategy and Corporate Development. In 2018, Mr.
Added
Couture joined Mercury from Raytheon Technologies, where he spent 10 years in leadership roles, most recently serving as Vice President of Operations & Security at Raytheon Missiles & Defense. Earlier in his career, Mr. Couture held senior manufacturing and operations roles with Hawker Beechcraft, including Vice President of Program Management and Vice President of Engineering & Product Development.
Removed
Ruppert was appointed the Company’s Executive Vice President, Chief Financial Officer and Treasurer. Prior to joining Mercury, from 2013 to 2014, Mr. Ruppert was Co-Founder and Managing Partner of RS Partners, LLC, a boutique advisory firm focused on the aerospace & defense industries.
Added
He spent 15 years in the Canadian Armed Forces Infantry Reserves. David E. Farnsworth , age 63, joined Mercury in July 2023 as Executive Vice President, Chief Financial Officer, and Treasurer. Mr. Farnsworth was the Chief Financial Officer of HawkEye 360, a radio frequency data analytics company from 2020 to 2023. Before joining HawkEye 360, Mr.
Removed
Prior to that, he was a Managing Director at UBS Investment Bank where he led the defense investment banking practice from 2011 to 2013. Mr. Ruppert also held positions in the investment banking divisions at Lazard Freres & Co from 2008 to 2011 and at Lehman Brothers from 2000 to 2008. Didier M.C.
Added
Farnsworth was Vice President and Chief Financial Officer for Integrated Defense Systems of Raytheon Company from 2018 to 2020. Before that, he was CFO for the Intelligence, Information and Services segment of Raytheon. 30 Table of Contents Christine F. Harbison , age 57, joined Mercury in March 2023 as Executive Vice President, Chief Growth Officer. Ms.
Removed
Thibaud , age 60, joined Mercury in 1995, and has served as our Executive Vice President, Chief Operating Officer since 2016. He served as the President of our Mercury Commercial Electronics business unit from 2012 to 2016 and the President of our Advanced Computing Solutions business unit from 2007 to 2012.
Added
Harbison joined Mercury from Northrop Grumman’s Defense Systems sector, where she served as Vice President and General Manager of the Combat Systems and Mission Readiness division from 2021 to 2023.
Removed
Prior to that, he was Senior Vice President, Defense & Commercial Businesses from 2005 to 2007 and Vice President and General Manager, Imaging and Visualization Solutions Group, from 2000 to 2005 and served in various capacities in sales and marketing from 1995 to 2000. 30 Table of Contents PART II
Added
Prior to that, she was Vice President of Northrop’s C4MB business from 2020 to 2021 and Vice President of Northrop’s Advanced Ground Sensors business from 2018 to 2019 and held roles of increasing importance at Raytheon Company. James M.
Added
Stevison , age 57, joined Mercury in October 2021 as Executive Vice President and Chief Growth Officer and became Executive Vice President and President of Mercury’s Mission Systems Division in October 2022. Dr. Stevison has more than 18 years of global experience in the aerospace and defense industry including technology development, operations management, mergers, acquisitions, and business growth.
Added
Prior to joining Mercury, he was Vice President of Strategy for Raytheon Missiles & Defense from 2020 to 2021.
Added
He also served as Vice President and General Manager of Strategic and Naval Systems at Raytheon Missiles Systems from 2019 to 2020 as well as Vice President and General Manager for Air and Missile Defense Systems at Raytheon Missile Systems from 2015 to 2019.
Added
Prior to that, he was the senior director of the SM-3® program, where he was responsible for all variants of the SM-3® missile portfolio, both domestically and internationally. Dr. Stevison has previously held senior leadership roles at Lockheed Martin and at Miltec Systems, a Ducommun Company. A U.S. Army veteran, Dr.
Added
Stevison retired from the Army in 2005, following an accomplished 20-year military career that included leadership roles with the Missile Defense Agency and the U.S. Army Aviation and Missile Command. Charles R. Wells, IV , age 51, joined the Company in November 2021 as its Executive Vice President and President of Mercury’s Microelectronics Division. Mr.
Added
Wells has more than 25 years’ experience across multiple disciplines including engineering, business development, program management and executive management. Previously, he served as Vice President and General Manager for the Unmanned & Integrated Solutions Business Unit of Teledyne FLIR from 2018 to 2021 with full P&L responsibility while ensuring high levels of product quality and customer satisfaction.
Added
Earlier in his career, he worked as a DoD civilian supporting the development and fielding of world-wide C4ISR networks and information systems. He also held positions in Northrop Grumman and ICX Technologies and served as a private consultant for large aerospace and defense companies. 31 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeNet Share Settlement Plans The following table includes information with respect to net share settlements we made of our common stock during the fiscal year ended July 2, 2021: Period of Net Share Settlement Total Number of Shares Net Settled (1) Average Price Per Share July 3, 2020 - October 2, 2020 1 $ 74.74 October 3, 2020 - January 1, 2021 — $ — January 2, 2021 - April 2, 2021 — $ — April 3, 2021 - July 2, 2021 — $ — Total 1 (1) Represents shares we net settled in connection with the surrender of shares to cover the minimum taxes on vesting of restricted stock.
Biggest changeNet Share Settlement Plans The following table includes information with respect to net share settlements we made of our common stock during the fiscal year ended June 30, 2023: Period of Net Share Settlement Total Number of Shares Net Settled (1) Average Price Per Share July 2, 2022 - September 30, 2022 1 $ 62.52 October 1, 2022 - December 30, 2022 — $ — December 31, 2022 - March 31, 2023 — $ — April 1, 2023 - June 30, 2023 — $ — Total 1 (1) Represents shares we net settled in connection with the surrender of shares to cover the minimum taxes on vesting of restricted stock.
Presented in thousands. Share Repurchase Plans During fiscal 2021, we had no active share repurchase programs. Equity Compensation Plans The information required by this item is incorporated by reference to our Proxy Statement for the Shareholders Meeting.
Presented in thousands. Share Repurchase Plans During fiscal 2023, we had no active share repurchase programs. Equity Compensation Plans The information required by this item is incorporated by reference to our Proxy Statement for the Shareholders Meeting.
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High Low 2021 Fourth quarter $ 79.28 $ 57.69 Third quarter $ 85.49 $ 61.26 Second quarter $ 88.06 $ 67.10 First quarter $ 79.89 $ 66.65 2020 Fourth quarter $ 92.80 $ 68.26 Third quarter $ 86.47 $ 57.10 Second quarter $ 81.17 $ 68.41 First quarter $ 88.75 $ 68.31 As of July 31, 2021, we had 639 record shareholders and 44,888 nominee holders.
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High Low 2023 Fourth quarter $ 52.36 $ 31.50 Third quarter $ 56.19 $ 44.56 Second quarter $ 53.58 $ 41.78 First quarter $ 63.66 $ 40.60 2022 Fourth quarter $ 66.04 $ 54.24 Third quarter $ 69.81 $ 51.11 Second quarter $ 55.92 $ 46.71 First quarter $ 66.78 $ 45.31 As of June 30, 2023, we had 710 record shareholders and 24,235 nominee holders.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

68 edited+51 added−51 removed73 unchanged
Biggest changeGovernment’s interpretation of, federal export control or procurement rules and regulations, changes in, or in the interpretation or enforcement of environmental rules and regulations, market acceptance of the Company's products, shortages in or delays in receiving components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions, restructurings and value creation initiatives such as 1MPACT, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, increases in interest rates, changes to industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to interest rate swaps or other cash flow hedging arrangements, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control.
Biggest changeSuch risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of any U.S. federal government shutdown or extended continuing resolution, effects of geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in or cost increases related to completing development, engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in the U.S. government’s interpretation of, federal export control or procurement rules and regulations, changes in, or in the interpretation or enforcement of, environmental rules and regulations, market acceptance of the Company's products, shortages in or delays in receiving components, supply chain delays or volatility for critical components such as semiconductors, production delays or unanticipated expenses including due to quality issues or manufacturing execution issues, failure to achieve or maintain manufacturing quality certifications, such as AS9100, the impact of the COVID pandemic and supply chain disruption, inflation and labor shortages, among other things, on program execution and the resulting effect on customer satisfaction, inability to fully realize the expected benefits from acquisitions, restructurings, and execution excellence initiatives or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, effects of shareholder activism, increases in interest rates, changes to industrial security and cyber-security regulations and requirements and impacts from any cyber or insider threat events, changes in tax rates or tax regulations, such as the deductibility of internal research and development, changes to interest rate swaps or other cash flow hedging arrangements, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, which difficulties may be impacted by the termination of the Company’s announced strategic review initiative, unanticipated challenges with the transition of the Company’s Chief Executive Officer and Chief Financial Officer roles, including any dispute arising with the former CEO over his resignation, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control.
Revenue is recognized over time (versus point in time recognition) for long-term contracts with development, production and service activities where the performance obligations are satisfied over time. These long-term contracts involve the design, development, manufacture, or modification of complex modules and sub-assemblies or integrated subsystems and related services.
Revenue is recognized over time (versus point in time recognition) for long-term contracts with development, production and service activities where the performance obligations are satisfied over time. These over time contracts involve the design, development, manufacture, or modification of complex modules and sub-assemblies or integrated subsystems and related services.
We use adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our board of directors, determining the portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in our operations and allocating resources to various initiatives and operational requirements.
We use adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our board of directors, determining a portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in our operations and allocating resources to various initiatives and operational requirements.
Accordingly, there is little judgment in determining when control of the good or service transfers to the customer, and revenue is generally recognized upon shipment (for goods) or completion (for services). For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation using the standalone selling price of each distinct good or service in the contract.
Accordingly, there is little judgment in determining when control of the good or service transfers to the customer, and revenue is recognized upon shipment (for goods) or completion (for services). For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation using the standalone selling price of each distinct good or service in the contract.
Actual demand, product mix and alternative usage may be higher or lower resulting in variations in on our gross margin. 43 Table of Contents G OODWILL , I NTANGIBLE A SSETS AND L ONG - LIVED A SSETS We evaluate our goodwill for impairment annually in the fourth quarter and in any interim period in which events or circumstances arise that indicate our goodwill may be impaired.
Actual demand, product mix and alternative usage may be higher or lower resulting in variations in on our gross margin. 44 Table of Contents G OODWILL , I NTANGIBLE A SSETS AND L ONG - LIVED A SSETS We evaluate our goodwill for impairment annually in the fourth quarter and in any interim period in which events or circumstances arise that indicate our goodwill may be impaired.
If our actual future taxable income by tax jurisdiction differs from estimates, additional allowances or reversals of reserves may be necessary. 44 Table of Contents We use a two-step approach to recognize and measure uncertain tax positions. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination.
If our actual future taxable income by tax jurisdiction differs from estimates, additional allowances or reversals of reserves may be necessary. 45 Table of Contents We use a two-step approach to recognize and measure uncertain tax positions. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination.
You can identify these statements by the use of the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.
You can identify these statements by the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.
Adjusted EBITDA is defined as net income before other non-operating adjustments, interest income and expense, income taxes, depreciation, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense.
Adjusted EBITDA is defined as net income before other non-operating adjustments, interest income and expense, income taxes, depreciation, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition, financing and other third party costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense.
We define adjusted income as net income before other non-operating adjustments, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense.
We define adjusted income as net income before other non-operating adjustments, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition, financing and other third party costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense.
We consider the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract. These contracts 42 Table of Contents include both fixed-price and cost reimbursable contracts. Our cost reimbursable contracts typically include cost-plus fixed fee and time and material (“T&M”) contracts.
We consider the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract. These contracts include both 43 Table of Contents fixed-price and cost reimbursable contracts. Our cost reimbursable contracts typically include cost-plus fixed fee and time and material (“T&M”) contracts.
(3) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision.
(4) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision.
O FF -B ALANCE S HEET A RRANGEMENTS Other than certain indemnification provisions, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity.
O FF -B ALANCE S HEET A RRANGEMENTS Other than certain indemnification provisions, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable 39 Table of Contents interest in an unconsolidated entity.
Revenue is recognized over time, due to the fact that: (i) our performance creates or enhances an asset that the customer controls as the asset is created or enhanced; and (ii) our performance creates an asset with no alternative use to us and we have an enforceable right to payment for performance completed to date.
Revenue is recognized over time, given: (i) our performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (ii) our performance creates an asset with no alternative use to us and (iii) we have an enforceable right to payment for performance completed to date.
We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities. RELATED PARTY TRANSACTIONS During fiscal 2021 and 2020, we did not engage in any related party transactions.
We do not have any majority-owned subsidiaries that are not consolidated in the financial statements. Additionally, we do not have an interest in, or relationships with, any special purpose entities. RELATED PARTY TRANSACTIONS During fiscal 2023 and 2022, we did not engage in any related party transactions.
Our estimates are based upon the professional knowledge and experience of our engineers, program managers and other personnel, who review each long-term contract monthly to assess the contract’s schedule, performance, technical matters and estimated cost at completion.
Our estimates are based upon the professional knowledge and experience of our engineers, program managers and other personnel, who review each over time contract monthly to assess the contract’s schedule, performance, technical matters and estimated cost at completion.
Accounting for long-term contracts requires significant judgment relative to estimating total contract revenues and costs, in particular, assumptions relative to the amount of time to complete the contract, including the assessment of the nature and complexity of the work to be performed.
Accounting for contracts recognized over time requires significant judgment relative to estimating total contract revenues and costs, in particular, assumptions relative to the amount of time to complete the contract, including the assessment of the nature and complexity of the work to be performed.
A reporting unit is considered to be an operating segment or one level below an operating segment also known as a component. Component level financial information is reviewed by management across three divisions: Processing, Microelectronics, and Mission. Accordingly, these were determined to be the Company's new reporting units.
A reporting unit is considered to be an operating segment or one level below an operating segment also known as a component. Component level financial information is reviewed by management across two divisions: Microelectronics, and Mission Systems. Accordingly, these were determined to be the Company's reporting units.
Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers. Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications.
Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers. 33 Table of Contents Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications on time constraints that matter.
LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity come from existing cash and cash generated from operations, our Revolver and our ability to raise capital under our universal shelf registration statement. Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments, and restructuring and other expenses associated with our 1MPACT initiative.
LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity come from existing cash and cash generated from operations, our Revolver, our ability to raise capital under our universal shelf registration statement and our ability to factor our receivables. Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments.
Our long-standing deep relationships with leading high-tech companies, coupled with our high level of R&D investments and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. We are leading the development and adaptation of commercial technology for aerospace and defense solutions.
Our long-standing deep relationships with leading high-tech and other commercial companies, coupled with our high level of research and development (“R&D”) investments on a percentage basis and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. We are leading the development and adaptation of commercial technology for aerospace and defense solutions.
From chip-scale to system scale and from RF to digital, we make mission-critical technologies safe, secure, affordable and relevant for our customers. Our capabilities, technology and R&D investment strategy combine to differentiate Mercury in our industry.
From chip-scale to system scale and from data, including radio frequency (“RF”) to digital to decision, we make mission-critical technologies safe, secure, affordable and relevant for our customers. Our capabilities, technology, people and R&D investment strategy combine to differentiate Mercury in our industry.
The effective tax rate for fiscal 2021 and 2020 differed from the Federal statutory rate of 21% primarily due to Federal and state research and development tax credits, excess tax benefits related to stock compensation, non-deductible compensation, and state taxes.
The effective tax rate for fiscal 2022 differed from the federal statutory rate of 21% primarily due to federal and state research and development tax credits, non-deductible compensation, provision to return adjustments, state taxes and excess tax provisions related to stock compensation.
Purchase obligations represent open non-cancelable purchase commitments for certain inventory components and services used in normal operations. The purchase commitments covered by these agreements are for less than one year and aggregated $147.6 million at July 2, 2021.
Purchase obligations represent open non-cancelable purchase commitments for certain inventory components and services used in normal operations. The purchase commitments covered by these agreements are for less than one year and aggregated $127.1 million at June 30, 2023.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 58% and 73% of revenues for the fiscal years ended July 2, 2021 and July 3, 2020, respectively.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 44% and 45% of revenues for the fiscal years ended June 30, 2023 and July 1, 2022, respectively.
The discount rates for Processing, Microelectronics and Mission were 7.5%, 7.5%, and 7.8%, respectively. The annual testing indicated that the fair values of our Processing, Microelectronics and Mission reporting units significantly exceeded their carrying values, and thus no further testing was required.
The discount rates for Microelectronics and Mission Systems were 11.25%, and 12.0%, respectively. The annual testing indicated that the fair values of our Microelectronics and Mission Systems reporting units exceeded their carrying values, and thus no further testing was required.
There were no programs comprising 10% or more of our revenues for fiscal 2021 and 2020. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. G ROSS M ARGIN Gross margin was 41.7% for fiscal 2021, a decrease of 310 basis points from the 44.8% gross margin achieved during fiscal 2020.
There were no individual programs comprising 10% or more of our revenues for fiscal 2023 and 2022. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. G ROSS M ARGIN Gross margin was 32.5% for fiscal 2023, a decrease of 750 basis points from the 40.0% gross margin achieved during fiscal 2022.
Total revenue recognized under long-term contracts over time was 42% and 27% of revenues for the fiscal years ended July 2, 2021 and July 3, 2020, respectively. Revenue recognized at a point in time generally relates to contracts that include a combination of components, modules and sub-assemblies, integrated subsystems and related system integration or other services.
Total revenue recognized under contracts over time was 56% and 55% of revenues for the fiscal years ended June 30, 2023 and July 1, 2022, respectively. Revenue recognized at a point in time generally relates to contracts that include a combination of components, modules and sub-assemblies, integrated subsystems and related system integration or other services.
These losses are recognized in advance of contract performance and as of July 2, 2021, approximately $1.4 million of these costs were in Accrued expenses on our Consolidated Balance Sheet. For long-term contracts, we typically leverage the input method, using a cost-to-cost measure of progress.
These losses are recognized in advance of contract performance and as of June 30, 2023, approximately $6.0 million of these costs were in Accrued expenses on our Consolidated Balance Sheet. For over time contracts, we typically leverage the input method, using a cost-to-cost measure of progress.
A CQUISITION C OSTS AND O THER R ELATED E XPENSES Acquisition costs and other related expenses were $6.0 million during fiscal 2021, as compared to $2.7 million during fiscal 2020.
A CQUISITION C OSTS AND O THER R ELATED E XPENSES Acquisition costs and other related expenses were $8.4 million during fiscal 2023, as compared to $11.4 million during fiscal 2022.
After the completion of four full fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods. The increase in total revenue was primarily due to $87.4 million and $40.0 million of additional acquired revenues and organic revenues, respectively.
After the completion of four full fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods. The 35 Table of Contents decrease in total revenue was primarily due to $33.3 million less organic revenues, partially offset by $19.0 million of additional acquired revenues.
Revolving Credit Facilities On September 28, 2018, we amended the Revolver to increase and extend the borrowing capacity to a $750.0 million, 5-year revolving credit line, with the maturity extended to September 2023.
Revolving Credit Facilities On February 28, 2022, we amended the Revolver to increase and extend the borrowing capacity to a $1.1 billion, 5-year revolving credit line, with the maturity extended to February 28, 2027.
These charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. We believe these items are non-routine and may not be indicative of ongoing operating results. (2) Fair value adjustments from purchase accounting for fiscal year 2021 relate to various adjustments arising from the POC acquisition.
These charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. We believe these items are non-routine and may not be indicative of ongoing operating results.
These charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. We believe these items are non-routine and may not be indicative of ongoing operating results. (2) Fair value adjustments from purchase accounting for fiscal year 2021 relate to various adjustments arising from the POC acquisition.
These charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. We believe these items are non-routine and may not be indicative of ongoing operating results.
On long-term contracts, the portion of the payments retained by the customer is not considered a significant financing component because most contracts have a duration of less than one year and payment is received as progress is made. Many of our long-term contracts have milestone payments, which align the payment schedule with the progress towards completion on the performance obligation.
On over time contracts, the portion of the payments retained by the customer is not considered a significant financing component because most contracts have a duration of less than one year and payment is received as progress is made.
We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. OVERVIEW Mercury Systems, Inc. is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense.
We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. OVERVIEW Mercury Systems, Inc. is a technology company that delivers processing power for the most demanding aerospace and defense missions.
Our consolidated revenues, acquired revenues, net income, EPS, adjusted EPS and adjusted EBITDA for fiscal 2020 were $796.6 million, $0.9 million, $85.7 million, $1.56, $2.30 and $176.2 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.
Our consolidated revenues, acquired revenues, net income, EPS, adjusted EPS and adjusted EBITDA for fiscal 2022 were $988.2 million, $6.0 million, $11.3 million, $0.20, $2.19 and $200.5 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.
The increase in total revenue was primarily from the C4I and radar end applications which increased $101.0 million and $55.2 million, respectively, and were partially offset by decreases of $17.5 million and $7.1 million from EW and other sensor and effector end applications.
The decrease in total revenue was primarily from the radar, EW, and other end applications which decreased $21.7 million, $13.1 million, and $2.4 million, respectively, and were partially offset by increases to the C4I and other sensor and effector end applications which increased $14.3 million and $8.5 million, respectively.
The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. Other estimates include: • estimated step-ups for the overt-time contracts fixed assets, leasehold interests and inventory; • estimated fair values of intangible assets; and • estimated income tax assets and liabilities assumed from the acquiree.
Other estimates include: • estimated step-ups for the over time contracts fixed assets, leasehold interests and inventory; • estimated fair values of intangible assets; and • estimated income tax assets and liabilities assumed from the acquiree.
Based on our current plans, business conditions, including the COVID pandemic, and essential business status, we believe that existing cash and cash equivalents, our available Revolver, cash generated from operations, and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.
Based on our current plans and business conditions, we believe that existing cash and cash equivalents, our available Revolver, cash generated from operations and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. 37 Table of Contents Shelf Registration Statement On September 14, 2020, we filed a shelf registration statement on Form S-3ASR with the SEC.
The following table reconciles cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow: For the Fiscal Years Ended (In thousands) July 2, 2021 July 3, 2020 June 30, 2019 Cash provided by operating activities $ 97,247 $ 115,184 $ 97,517 Purchase of property and equipment (45,599) (43,294) (26,691) Free cash flow $ 51,648 $ 71,890 $ 70,826 41 Table of Contents Organic revenue and acquired revenue are non-GAAP measures for reporting financial performance of our business.
The following table reconciles cash (used in) provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow: For the Fiscal Years Ended (In thousands) June 30, 2023 July 1, 2022 July 2, 2021 Net cash (used in) provided by operating activities $ (21,254) $ (18,869) $ 97,247 Purchase of property and equipment (38,796) (27,656) (45,599) Free cash flow $ (60,050) $ (46,525) $ 51,648 42 Table of Contents Organic revenue and acquired revenue are non-GAAP measures for reporting financial performance of our business.
The Company has applied the FAST Act Modernization and Simplification of Regulation S-K, which limits the discussion to the two most recent fiscal years.
The Company has applied the FAST Act Modernization and Simplification of Regulation S-K, which limits the discussion to the two most recent fiscal years. Refer to Item 7 of the Company's Form 10-K issued on August 16, 2022 for prior year discussion related to fiscal 2022.
F ISCAL 2020 Results of operations for fiscal 2021 include full period results from the acquisition of APC and only the results from acquisition date for POC and Pentek, which were acquired subsequent to fiscal 2020. Results of operations for fiscal 2020 include only results from the acquisition date for APC. Accordingly, the periods presented below are not directly comparable.
F ISCAL 2022 Results of operations for fiscal 2023 include full period results from the acquisitions of Avalex and Atlanta Micro. Results of operations for fiscal 2022 include only results from the acquisition dates for Avalex and Atlanta Micro, which were acquired on November 5, 2021 and November 29, 2021, respectively. Accordingly, the periods presented below are not directly comparable.
We use these measures along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace.
These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We use these measures along with the corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace.
We had a liability at July 2, 2021 of $7.5 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns.
We had a liability at June 30, 2023 of $5.2 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. We do not know the ultimate resolution of these uncertain tax positions and as such, do not know the ultimate timing of payments related to this liability.
I NCOME T AXES We recorded an income tax provision of $15.1 million and $8.2 million on income before income taxes of $77.2 million and $93.9 million for fiscal years 2021 and 2020, respectively.
I NCOME T AXES We recorded an income tax (benefit) provision of $(20.2) million and $7.1 million on (loss) income before income taxes of $(48.5) million and $18.4 million for fiscal years 2023 and 2022, respectively.
C OMMITMENTS AND C ONTRACTUAL O BLIGATIONS The following is a schedule of our commitments and contractual obligations outstanding at July 2, 2021: (In thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Operating leases $ 100,030 $ 13,626 $ 25,134 $ 21,253 $ 40,017 Purchase obligations 147,591 147,591 — — — $ 247,621 $ 161,217 $ 25,134 $ 21,253 $ 40,017 See Note B and Note J to the consolidated financial statements for more information regarding our obligations under leases.
C OMMITMENTS AND C ONTRACTUAL O BLIGATIONS The following is a schedule of our commitments and contractual obligations outstanding at June 30, 2023: (In thousands) Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years Operating leases $ 92,653 $ 14,195 $ 27,094 $ 24,016 $ 27,348 Purchase obligations 127,134 127,134 — — — $ 219,787 $ 141,329 $ 27,094 $ 24,016 $ 27,348 See Note B and Note J to the consolidated financial statements for more information regarding our obligations under leases.
We believe that exclusion of these items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies.
Adjusted income and adjusted EPS exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. We believe that exclusion of these items assists in providing a more complete understanding of our underlying results and trends and allows for comparability with our peer company index and industry.
We maintain our technological edge by investing in critical capabilities and IP in processing and RF, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as AI. 32 Table of Contents Our mission critical solutions are deployed by our customers for a variety of applications including C4ISR, electronic intelligence, avionics, EO/IR, electronic warfare, weapons and missile defense, hypersonics and radar.
We maintain our technological edge by investing in critical capabilities and intellectual property (“IP” or “building blocks”) in processing, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as artificial intelligence (“AI”).
Customers add their own applications and algorithms to our specialized, secure and innovative products and pre-integrated solutions. This allows them to complete their full system by integrating with their platform, the sensor technology and, in some cases, the processing from Mercury.
This allows them to complete their full system by integrating with their platform, the sensor technology and, increasingly, the processing from Mercury.
We expect to continue to incur expenses similar to the adjusted income and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring. 40 Table of Contents The following table reconcile net income and diluted earnings per share, the most directly comparable GAAP financial measures, to adjusted income and adjusted EPS: For the Fiscal Years Ended (In thousands, except per share data) July 2, 2021 July 3, 2020 June 30, 2019 Net income and diluted earnings per share $ 62,044 $ 1.12 $ 85,712 $ 1.56 $ 46,775 $ 0.96 Other non-operating adjustments, net (724) (5,636) 364 Amortization of intangible assets 41,171 30,560 27,914 Restructuring and other charges (1) 9,222 1,805 560 Impairment of long-lived assets — — — Acquisition and financing costs 8,600 5,645 9,628 Fair value adjustments from purchase accounting (2) (290) 1,801 713 Litigation and settlement expense, net 622 944 344 COVID related expenses 9,943 2,593 — Stock-based and other non-cash compensation expense 29,224 26,972 19,621 Impact to income taxes (3) (25,697) (23,634) (16,630) Adjusted income and adjusted earnings per share $ 134,115 $ 2.42 $ 126,762 $ 2.30 $ 89,289 $ 1.84 Diluted weighted-average shares outstanding 55,474 55,115 48,500 (1) Restructuring and other charges for fiscal 2021 are related to changing market and business conditions including talent shifts and resource redundancy resulting from internal reorganization and organization structure evaluation the Company completed, as well as third party consulting costs.
We expect to continue to incur expenses similar to the adjusted income and adjusted EPS financial adjustments described above, and investors should not infer from our presentation of these non-GAAP financial measures that these costs are unusual, infrequent or non-recurring. 41 Table of Contents The following table reconciles net (loss) income and diluted (loss) earnings per share, the most directly comparable GAAP financial measures, to adjusted income and adjusted EPS: For the Fiscal Years Ended (In thousands, except per share data) June 30, 2023 July 1, 2022 July 2, 2021 Net (loss) income and diluted (loss) earnings per share $ (28,335) $ (0.50) $ 11,275 $ 0.20 $ 62,044 $ 1.12 Other non-operating adjustments, net (1,589) 2,932 (724) Amortization of intangible assets 53,552 60,267 41,171 Restructuring and other charges (1) 6,981 27,445 9,222 Impairment of long-lived assets — — — Acquisition, financing and other third party costs (2) 10,019 13,608 8,600 Fair value adjustments from purchase accounting 356 (2,009) (290) Litigation and settlement expense, net 495 1,908 622 COVID related expenses 67 689 9,943 Stock-based and other non-cash compensation expense (3) 43,031 38,459 29,224 Impact to income taxes (4) (27,776) (32,309) (25,697) Adjusted income and adjusted earnings per share $ 56,801 $ 1.00 $ 122,265 $ 2.19 $ 134,115 $ 2.42 Diluted weighted-average shares outstanding 56,874 55,901 55,474 (1) Restructuring and other charges for fiscal 2023 are related to management's decision to undertake certain actions to realign operating expenses through workforce reductions and the closure of certain facilities, businesses and product lines.
Fiscal 2020 included $6.4 million of other investment income partially offset by $0.6 million of litigation and settlement expenses and $0.7 million of net foreign currency translation losses.
Fiscal 2023 includes $2.3 million of financing and registration fees and $2.1 million of litigation and settlement expenses, partially offset by net foreign currency translation gains of $1.6 million. Fiscal 2022 includes $2.7 million of financing and registration fees, $2.4 million of net foreign currency translation losses, and $1.9 million of litigation and settlement expenses.
We expect to continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring. 39 Table of Contents The following table reconciles our net income, the most directly comparable GAAP financial measure, to our adjusted EBITDA: For the Fiscal Years Ended (In thousands) July 2, 2021 July 3, 2020 June 30, 2019 Net income $ 62,044 $ 85,712 $ 46,775 Other non-operating adjustments, net (724) (5,636) 364 Interest expense (income), net 1,043 (1,145) 8,177 Income tax provision 15,129 8,221 12,752 Depreciation 25,912 18,770 18,478 Amortization of intangible assets 41,171 30,560 27,914 Restructuring and other charges (1) 9,222 1,805 560 Impairment of long-lived assets — — — Acquisition and financing costs 8,600 5,645 9,628 Fair value adjustments from purchase accounting (2) (290) 1,801 713 Litigation and settlement expense, net 622 944 344 COVID related expenses 9,943 2,593 — Stock-based and other non-cash compensation expense 29,224 26,972 19,621 Adjusted EBITDA $ 201,896 $ 176,242 $ 145,326 (1) Restructuring and other charges for fiscal 2021 are related to changing market and business conditions including talent shifts and resource redundancy resulting from internal reorganization and organization structure evaluation the Company completed, as well as third party consulting costs.
We expect to continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and investors should not infer from our presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring. 40 Table of Contents The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to our adjusted EBITDA: For the Fiscal Years Ended (In thousands) June 30, 2023 July 1, 2022 July 2, 2021 Net (loss) income $ (28,335) $ 11,275 $ 62,044 Other non-operating adjustments, net (1,589) 2,932 (724) Interest expense, net 24,106 5,663 1,043 Income tax (benefit) provision (20,207) 7,120 15,129 Depreciation 43,777 33,150 25,912 Amortization of intangible assets 53,552 60,267 41,171 Restructuring and other charges (1) 6,981 27,445 9,222 Impairment of long-lived assets — — — Acquisition, financing and other third party costs (2) 10,019 13,608 8,600 Fair value adjustments from purchase accounting 356 (2,009) (290) Litigation and settlement expense, net 495 1,908 622 COVID related expenses 67 689 9,943 Stock-based and other non-cash compensation expense (3) 43,031 38,459 29,224 Adjusted EBITDA $ 132,253 $ 200,507 $ 201,896 (1) Restructuring and other charges for fiscal 2023 are related to management's decision to undertake certain actions to realign operating expenses through workforce reductions and the closure of certain facilities, businesses and product lines.
I NTEREST I NCOME Interest income decreased to $0.2 million in fiscal 2021 from $2.2 million in fiscal 2020. This was driven by lower cash on hand and lower interest rates during fiscal 2021 as compared to fiscal 2020. I NTEREST E XPENSE Interest expense for fiscal 2021 increased to $1.2 million, as compared to $1.0 million in fiscal 2020.
This was driven by higher interest rates during fiscal 2023 as compared to fiscal 2022. I NTEREST E XPENSE Interest expense for fiscal 2023 increased to $25.2 million, as compared to $5.8 million in fiscal 2022. The increase was driven by an increase in interest rate and additional borrowings on our Revolver.
As of July 2, 2021, we had 2,384 employees. Our consolidated revenues, acquired revenues, net income, EPS, adjusted EPS, and adjusted EBITDA for fiscal 2021 were $924.0 million, $88.4 million, $62.0 million, $1.12, $2.42 and $201.9 million, respectively.
As of June 30, 2023, we had 2,596 employees. Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted EPS, and adjusted EBITDA for fiscal 2023 were $973.9 million, $25.1 million, $(28.3) million, $(0.50), $1.00 and $132.3 million, respectively.
R ESTRUCTURING AND O THER C HARGES During 2021, the Company incurred $9.2 million of restructuring and other charges, as compared to $1.8 million in fiscal 2020. Restructuring and other charges of $4.8 million related to severance costs associated with the elimination of approximately 90 positions throughout the period, predominantly in manufacturing, SG&A and R&D.
R ESTRUCTURING AND O THER C HARGES During fiscal 2023, the Company incurred $7.0 million of restructuring and other charges, as compared to $27.4 million in fiscal 2022.
These products are predominately grouped within integrated subsystems and to a lesser extent modules and sub-assemblies. 35 Table of Contents S ELLING , G ENERAL AND A DMINISTRATIVE Selling, general and administrative expenses increased $2.0 million, or 1.5%, to $134.3 million during fiscal 2021 as compared to $132.3 million during fiscal 2020.
S ELLING , G ENERAL AND A DMINISTRATIVE Selling, general and administrative expenses increased $3.6 million, or 2.3%, to $160.6 million during fiscal 2023 as compared to $157.0 million during fiscal 2022.
CASH FLOWS For the Fiscal Years Ended (In thousands) July 2, 2021 July 3, 2020 June 30, 2019 Net cash provided by operating activities $ 97,247 $ 115,184 $ 97,517 Net cash used in investing activities $ (416,887) $ (135,486) $ (153,774) Net cash provided by (used in) financing activities $ 206,229 $ (10,932) $ 247,765 Net (decrease) increase in cash and cash equivalents $ (112,999) $ (31,094) $ 191,411 Cash and cash equivalents at end of year $ 113,839 $ 226,838 $ 257,932 Our cash and cash equivalents decreased by $113.0 million during fiscal 2021 primarily as the result of investing activities including $372.8 million used in the acquisitions of POC and Pentek and $45.6 million invested in purchases of property and equipment.
CASH FLOWS For the Fiscal Years Ended (In thousands) June 30, 2023 July 1, 2022 July 2, 2021 Net cash (used in) provided by operating activities $ (21,254) $ (18,869) $ 97,247 Net cash used in investing activities $ (38,561) $ (274,320) $ (416,887) Net cash provided by financing activities $ 65,429 $ 245,754 $ 206,229 Net increase (decrease) in cash and cash equivalents $ 5,909 $ (48,185) $ (112,999) Cash and cash equivalents at end of year $ 71,563 $ 65,654 $ 113,839 Our cash and cash equivalents increased by $5.9 million during fiscal 2023 primarily as the result of $65.4 million provided by financing activities, partially offset by $38.8 million purchases of property and equipment and $21.3 million used in operating activities. 38 Table of Contents Operating Activities During fiscal 2023, we had an outflow of $21.3 million in cash from operating activities, an increase of $2.4 million, as compared to $18.9 million during fiscal 2022.
Refer to Item 7 of the Company's Form 10-K issued on August 18, 2020 for prior year discussion related to fiscal 2019. 34 Table of Contents The following tables set forth, for the periods indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income: (In thousands) Fiscal 2021 As a % of Total Net Revenue Fiscal 2020 As a % of Total Net Revenue Net revenues $ 923,996 100.0 % $ 796,610 100.0 % Cost of revenues 538,808 58.3 439,766 55.2 Gross margin 385,188 41.7 356,844 44.8 Operating expenses: Selling, general and administrative 134,337 14.5 132,253 16.6 Research and development 113,481 12.3 98,485 12.4 Amortization of intangible assets 41,171 4.5 30,560 3.8 Restructuring and other charges 9,222 1.0 1,805 0.2 Acquisition costs and other related expenses 5,976 0.6 2,679 0.4 Total operating expenses 304,187 32.9 265,782 33.4 Income from operations 81,001 8.8 91,062 11.4 Interest income 179 — 2,151 0.3 Interest expense (1,222) (0.1) (1,006) (0.1) Other (expense) income, net (2,785) (0.3) 1,726 0.2 Income before income taxes 77,173 8.4 93,933 11.8 Income tax provision 15,129 1.7 8,221 1.0 Net income $ 62,044 6.7 % $ 85,712 10.8 % R EVENUES Total revenues increased $127.4 million, or 16.0%, to $924.0 million during fiscal 2021, as compared to $796.6 million during fiscal 2020 including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full fiscal quarters or less (and excludes any intercompany transactions).
The following tables set forth, for the periods indicated, financial data from the Consolidated Statements of Operations and Comprehensive (Loss) Income: (In thousands) Fiscal 2023 As a % of Total Net Revenue Fiscal 2022 As a % of Total Net Revenue Net revenues $ 973,882 100.0 % $ 988,197 100.0 % Cost of revenues 657,154 67.5 593,241 60.0 Gross margin 316,728 32.5 394,956 40.0 Operating expenses: Selling, general and administrative 160,637 16.5 157,044 15.9 Research and development 108,799 11.2 107,169 10.8 Amortization of intangible assets 53,552 5.5 60,267 6.1 Restructuring and other charges 6,981 0.7 27,445 2.8 Acquisition costs and other related expenses 8,444 0.8 11,421 1.2 Total operating expenses 338,413 34.7 363,346 36.8 (Loss) income from operations (21,685) (2.2) 31,610 3.2 Interest income 1,053 0.1 143 — Interest expense (25,159) (2.6) (5,806) (0.6) Other expense, net (2,751) (0.3) (7,552) (0.8) (Loss) income before income taxes (48,542) (5.0) 18,395 1.9 Income tax (benefit) provision (20,207) (2.1) 7,120 0.8 Net (loss) income $ (28,335) (2.9) % $ 11,275 1.1 % R EVENUES Total revenues decreased $14.3 million, or 1.4%, to $973.9 million during fiscal 2023, as compared to $988.2 million during fiscal 2022 including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full fiscal quarters or less (and excludes any intercompany transactions).
The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure: (In thousands) Fiscal 2021 As a % of Total Net Revenue Fiscal 2020 As a % of Total Net Revenue $ Change % Change Organic revenue $ 835,620 90 % $ 795,667 100 % $ 39,953 5 % Acquired revenue (1) 88,376 10 % 943 — % 87,433 9,272 % Total revenues $ 923,996 100 % $ 796,610 100 % $ 127,386 16 % (1) Acquired revenue for all preceding periods presented has been recast for comparative purposes.
The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure: (In thousands) Fiscal 2023 As a % of Total Net Revenue Fiscal 2022 As a % of Total Net Revenue $ Change % Change Organic revenue $ 948,814 97 % $ 982,153 99 % $ (33,339) (3) % Acquired revenue (1) 25,068 3 % 6,044 1 % 19,024 100 % Total revenues $ 973,882 100 % $ 988,197 100 % $ (14,315) (1) % (1) Acquired revenue for all preceding periods presented has been recast for comparative purposes.
O THER ( E XPENSE) I NCOME, N ET Other (expense) income, net was $2.8 million of other expense, net during fiscal 2021, as compared to $1.7 million of other income, net in fiscal 2020. Both periods include $2.9 million of financing and registration fees.
Borrowings under our revolver were $511.5 million in fiscal 2023 as compared to $451.5 million in fiscal 2022. O THER E XPENSE, N ET Other expense, net was $2.8 million during fiscal 2023, as compared to $7.6 million in fiscal 2022.
A MORTIZATION OF I NTANGIBLE A SSETS Amortization of intangible assets increased $10.6 million to $41.2 million during fiscal 2021, as compared to $30.6 million for fiscal 2020, primarily due to the acquisitions of POC and Pentek as well as the full year impact of amortization from the acquisition of APC.
A MORTIZATION OF I NTANGIBLE A SSETS Amortization of intangible assets decreased $6.7 million to $53.6 million during fiscal 2023, as compared to $60.3 million for fiscal 2022, primarily due to the backlog from our Avalex and Atlanta Micro acquisitions being fully amortized in fiscal 2023.
These charges include $5.8 million of employee separation costs and $3.6 million of third-party consulting costs. These costs will be classified as restructuring and other charges within the Company’s statement of operations and other comprehensive income for the fiscal quarter ending October 1, 2021.
These charges are for employee separation costs and will be classified as restructuring and other charges within our Statement of Operations and Other Comprehensive Income for the fiscal quarter ending September 29, 2023. We expect approximately $15 million - $17 million of net savings from these actions for our fiscal year ending June 36 Table of Contents 28, 2024.
Headquartered in Andover, Massachusetts, we deliver products and solutions that enable a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments. We envision, create and deliver innovative technology solutions that are open, purpose-built and uncompromised to meet our customers’ most-pressing high-tech needs, including those specific to the defense community.
Headquartered in Andover, Massachusetts, our end-to-end processing platform enables a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments. Processing technologies that comprise our platform include signal solutions, display, software applications, networking, storage and secure processing.
These increases were driven by higher demand for integrated subsystems and modules and sub-assemblies which increased $153.1 million or 35.0% and $25.4 million or 19.3%, respectively, partially offset by a decrease to components of $51.1 million or 22.5% during fiscal 2021.
Revenues from integrated subsystems decreased $77.2 million or 11.8%, partially offset by increases to modules and sub-assemblies and components which increased $33.0 million or 19.8% and $29.8 million or 17.8%, respectively, during fiscal 2023.
See Note M in the accompanying consolidated financial statements for further discussion of the Revolver.
The current borrowing capacity as defined under the Revolver as of June 30, 2023 is approximately $865.0 million, of which we had borrowings against of $511.5 million. See Note M in the accompanying consolidated financial statements for further discussion of the Revolver.
As a leading manufacturer of essential components, products, modules and subsystems, we sell to defense prime contractors, the U.S. government and OEM commercial aerospace companies. Mercury has built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that it believes meets and exceeds the performance needs of our defense and commercial customers.
And, at the most human level, we connect what we do to our customers’ missions; supporting the people for whom safety, security and protecting freedom are of paramount importance. As a leading manufacturer of essential components, products, modules and subsystems, we sell to defense prime contractors, the U.S. government and original equipment manufacturers (“OEM”) commercial aerospace companies.
On August 2, 2021, the Company initiated a workforce reduction of approximately 90 employees based on changes in the business environment and to align with 1MPACT, the Company’s value creation initiative, resulting in expected charges of $9.4 million in the fiscal quarter ending October 1, 2021.
On July 20, 2023, we executed the plan to embed the 1MPACT value creation initiatives into operations, and on August 9, 2023, we approved and initiated a workforce reduction that, together with the 1MPACT related action, eliminates approximately 150 positions, resulting in expected restructuring charges of approximately $9.0 million.
The increase was primarily related to our recent acquisitions of POC, Pentek and the full period impact of APC driving an incremental $3.9 million of expense. These increases were partially offset by increased CRAD of $28.6 million. Research and development expenses accounted for 12.3% and 12.4% of our revenues during fiscal 2021 and fiscal 2020, respectively.
The increase was primarily related to an increase in our 401(k) matching contributions from 3% to 6%, a full period of the Avalex and Atlanta Micro acquisitions driving an incremental $4.0 million of expense, and an increase in headcount and salary rate increases, partially offset by forfeitures of our former CEO's stock-based compensation of $6.8 million.
Removed
Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of epidemics and pandemics such as COVID, effects of any U.S.
Added
Our innovative solutions are mission-ready, trusted and secure, software-defined and open and modular meeting our customers’ cost and schedule needs today by allowing them to use or modify our products to suit their mission.
Removed
Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in the U.S.
Added
Customers access our solutions via the Mercury Processing Platform, which encompasses the broad scope of our investments in technologies, companies, products, services and the expertise of our people. Ultimately, we connect our customers to what matters most to them. We connect commercial technology to defense, people to data and partners to opportunities.
Removed
Our technologies and capabilities include secure embedded processing modules and subsystems, mission computers, secure and rugged rack-mount servers, safety-critical avionics, components, multi-function assemblies, subsystems and custom microelectronics.
Added
Mercury has built a trusted, robust portfolio of proven product solutions, leveraging the most advanced commercial silicon technologies and purpose-built to exceed the performance needs of our defense and commercial customers. Customers add their own applications and algorithms to our specialized, secure and innovative products and pre-integrated solutions.
Removed
OUR RESPONSE TO COVID We continue to monitor the COVID pandemic and adapt our policies and programs as needed to protect the health, safety and livelihoods of our people.
Added
Our mission critical solutions are deployed by our customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”), electronic intelligence, mission computing avionics, electro-optical/infrared (“EO/IR”), electronic warfare, weapons and missile defense, hypersonics and radar.
Removed
We remain focused on the four goals we established at the outset of the COVID crisis: to protect the health, safety, and livelihoods of our people; to mitigate or reduce operational and financial risks to the Company; to continue to deliver on our commitments to customers and shareholders; and to continue the mission-critical work Mercury does every day to support the ongoing security of our nation, our brave men and women in uniform, and the communities in which we all live.
Added
B USINESS D EVELOPMENTS : F ISCAL 2023 Beginning in January 2023, the Board of Directors (the “Board”) engaged in a proactive and rigorous process to evaluate strategic alternatives, focused on a potential sale of Mercury.
Removed
As we have been designated an “essential business” as a part of the defense industrial base, during the year, our facilities continued to operate while complying with social distancing requirements consistent with Centers for Disease Control and Prevention (“CDC”) guidelines and requirements.
Added
As part of the review, the Board authorized its financial advisors to contact and hold discussions with more than 40 potential bidders, including a wide range of strategic parties and financial sponsors. The Board executed confidentiality agreements with 20 parties. The two proposals ultimately received did not yield options for a sale that would reflect the intrinsic value of Mercury.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

17 edited+0 added−10 removed18 unchanged
Biggest changeCritical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.
Biggest changeAlso, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 48 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.
We identified the evaluation of total contract costs to be incurred for fixed price contract revenue recognized over time as a critical audit matter given the complex nature of the Company’s products sold under such contracts.
We identified the evaluation of total contract costs to be incurred for certain fixed price contract revenue recognized over time as a critical audit matter given the complex nature of the Company’s products sold under such contracts.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the 47 Table of Contents company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
This included controls related to the estimated amount of time to complete the contracts, including the assessment of the nature and complexity of the work to be performed. We considered factors, including the value and stage of completion, to select certain customer contracts to evaluate the Company’s assumptions underlying the estimate of total contract costs to be incurred.
This included controls related to the estimated amount of time to complete the contracts, including the assessment of the nature and complexity of the work to be performed. We considered factors, including the value and stage of completion, to select certain customers’ contracts to evaluate the Company’s assumptions underlying the estimate of total contract costs to be incurred.
We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future. 46 Table of Contents R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM To the Shareholders and Board of Directors Mercury Systems, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Mercury Systems, Inc. and subsidiaries (the Company) as of July 2, 2021 and July 3, 2020, the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended July 2, 2021, and the related notes and financial statement schedule II (collectively, the consolidated financial statements).
We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future. 47 Table of Contents R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM To the Shareholders and Board of Directors Mercury Systems, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Mercury Systems, Inc. and subsidiaries (the Company) as of June 30, 2023 and July 1, 2022, the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended June 30, 2023, and the related notes and financial statement schedule II (collectively, the consolidated financial statements).
As of July 3, 2020, five customers accounted for 52% of our receivables, unbilled receivables and costs in excess of billings. 45 Table of Contents F OREIGN C URRENCY R ISK We operate primarily in the United States; however, we conduct business outside the United States through our foreign subsidiaries in Switzerland, the United Kingdom, France, Japan, Spain and Canada where business is largely transacted in non-U.S. dollar currencies.
As of July 1, 2022, five customers accounted for 45% of our receivables, unbilled receivables and costs in excess of billings. 46 Table of Contents F OREIGN C URRENCY R ISK We operate primarily in the United States; however, we conduct business outside the United States through our foreign subsidiaries in Switzerland, the United Kingdom, Spain, and Canada where business is largely transacted in non-U.S. dollar currencies.
For those fixed price contracts recognized over time, the Company recognizes revenue based on the ratio of (1) actual contract costs incurred to date to (2) the Company’s estimate of total contract costs to be incurred.
For contracts where revenue is recognized over time under fixed price arrangements, the Company recognizes revenue based on the ratio of (1) actual contract costs incurred to date to (2) the Company’s estimate of total contract costs to be incurred .
The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
We also have audited the Company’s internal control over financial reporting as of July 2, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited the Company’s internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 2, 2021 and July 3, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended July 2, 2021, in conformity with U.S. generally accepted accounting principles.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and July 1, 2022, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended June 30, 2023, in conformity with U.S. generally accepted accounting principles.
We utilize interest rate derivatives to mitigate interest rate exposure with respect to our financing arrangements. There were $200.0 million of outstanding borrowings against the Revolver at July 2, 2021. C ONCENTRATION O F C REDIT R ISK Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable.
We utilize interest rate derivatives to mitigate interest rate exposure with respect to our financing arrangements. There were $511.5 million of outstanding borrowings against the Revolver at June 30, 2023. C ONCENTRATION O F C REDIT R ISK Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable.
We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary. As of July 2, 2021, five customers accounted for 60% of our receivables, unbilled receivables and costs in excess of billings.
We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary. As of June 30, 2023, five customers accounted for 48% of our receivables, unbilled receivables and costs in excess of billings.
Estimate of total contract costs to be incurred for fixed price contract revenue recognized over time As discussed in Note B to the consolidated financial statements, fixed price contract revenue recognized over time for the year ended July 2, 2021 represented 42% of total revenues.
Estimate of total contract costs to be incurred for certain fixed price contract revenue recognized over time As discussed in Note B to the consolidated financial statements, revenue recognized over time for the year ended June 30, 2023 represented 56% of total revenues.
We place our cash and cash equivalents with financial institutions with high credit quality. As of July 2, 2021 and July 3, 2020, we had $113.8 million and $226.8 million, respectively, of cash and cash equivalents on deposit or invested with our financial and lending institutions. We provide credit to customers in the normal course of business.
We place our cash and cash equivalents with financial institutions with high credit quality. As of June 30, 2023 and July 1, 2022, we had $71.6 million and $65.7 million, respectively, of cash and cash equivalents on deposit or invested with our financial and lending institutions. We provide credit to customers in the normal course of business.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 2, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company acquired Physical Optics Corporation (“POC”), Pentek Technologies, LLC and Pentek Systems, Inc.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We inspected correspondence, if any, between the Company and the customer for the selected contracts as part of our evaluation of contract progress.
We inspected correspondence, if any, between the Company and the customers for the selected contracts as part of our evaluation of contract progress. /s/ KPMG LLP We have served as the Company’s auditor since 2006. Boston, Massachusetts August 15, 2023 49 Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Removed
(collectively, “Pentek”) during fiscal year 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of July 2, 2021, POC’s and Pentek’s internal control over financial reporting associated with 22 percent of total consolidated assets (of which 16 percent represented goodwill and intangible assets included within the scope of the assessment) and 9 percent of total consolidated revenues included in the consolidated financial statements of the Company as of and for the fiscal year ended July 2, 2021.
Removed
Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of POC and Pentek.
Removed
Evaluation of the fair value of customer relationship intangible assets acquired in the Physical Optics Corporation business combination As discussed in Note C to the consolidated financial statements, on December 30, 2020, the Company acquired Physical Optics Corporation. As a result of the transaction, the Company acquired customer relationship intangible assets.
Removed
The acquisition-date preliminary fair value for the customer relationship intangible assets were $83.0 million. We identified the evaluation of the fair value of a certain customer relationship intangible asset acquired in the Physical Optics Corporation transaction as a critical audit matter.
Removed
A high degree of subjectivity was required in evaluating certain inputs in the discounted cash flow model used to determine the fair value of such asset. The key assumptions used within the discounted cash flow model included expected future revenue growth and the discount rate.
Removed
Changes in these assumptions could have a significant impact on the fair value of the customer relationship intangible asset. The following are the primary procedures we performed to address this critical audit matter.
Removed
We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s acquisition-date valuation process, including controls over the development of the expected future revenue growth and discount rate used in the discounted cash flow model to value the customer relationship intangible assets.
Removed
We evaluated the expected future revenue growth used by the Company by comparing the assumptions used to the historical performance of the acquired Company, as well as considering defense industry data.
Removed
We also involved valuation professionals with specialized skills and knowledge who assisted in: • evaluating the Company’s discount rate by comparing the rate against a discount rate range that was independently developed using publicly available market data for comparable entities • developing a fair value estimate of the customer relationship intangible assets using the Company’s cash flow projections and independently developed range of discount rates and comparing it to the Company’s estimate. 48 Table of Contents /s/ KPMG LLP We have served as the Company’s auditor since 2006.
Removed
Boston, Massachusetts August 17, 2021 49 Table of Contents

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