What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-08-17 compared with 2020-08-18 · 143 added, 153 removed, 329 unchanged (47% of the section changed)

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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.

Government’s interpretation of, Federal export control or procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, increases in interest rates, changes to interest rate swaps or other cash flow hedging arrangements, changes to industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, 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.

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, 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.

These risks and uncertainties also include such additional risk factors as set forth under Part I-Item 1A (Risk Factors) in this Annual Report on Form 10-K.

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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 solutions that power 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 purpose-built to meet our customers’ most-pressing high-tech needs, including those specific to the defense community.

As a leading manufacturer of essential components, modules and subsystems, we sell to defense prime contractors, the U.S.

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.

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.

Customers add their own applications and algorithms to our specialized, secure and innovative 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, with their platform.

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.

Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers.

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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.

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.

Our technologies and capabilities include secure embedded processing modules and subsystems, mission computers, secure and rugged rack-mount servers, safety-critical avionics, RF components, multi-function assemblies, subsystems and custom microelectronics.

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.

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.

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Since we conduct much of our business with our defense customers via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter.

Customers specify delivery date requirements that coincide with

their need for our products.

Customers specify delivery date requirements that coincide with their need for our products.

Because these customers may use our products in connection with a variety of defense programs or other projects of different sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future orders by that customer.

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As of July 2, 2021, we had 2,384 employees.

During fiscal 2018, the growth in our headcount resulted in us exceeding the threshold for qualifying as a “small business” for government contract purposes.

The revenues received as a result of small business set aside funding are not considered material.

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.

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OUR RESPONSE TO COVID

The COVID pandemic continues to impact people and countries around the world.

This is a time of extraordinary uncertainty.

It is also a time when the work we do in support of strategic national priorities is recognized as critical.

At Mercury, we remain focused on the four goals we established at the outset of the COVID crisis:

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.

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;

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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.

To protect the health, safety, and livelihoods of our employees, we took immediate action on several fronts, instituting a variety of new policies and programs including, but not limited to, additional sick leave for COVID-related circumstances, a work-from-home policy for all employees who can perform their duties remotely as well as increasing overtime pay for eligible employees.

We also established a relief fund, with an initial $1 million budget, to assist eligible Mercury employees, including temporary agency employees, experiencing unexpected financial burdens as a result of the COVID crisis.

The intent of the Mercury COVID Relief Fund is to provide financial assistance to employees who may otherwise be unable to pay for basic necessities, unexpected care for immediate family members, or other urgent needs that promote their health and safety during the current COVID crisis.

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.

We implemented numerous preventive measures to maximize the safety of our facilities, including but not limited to, establishing physical segregation areas, implementing environmental cleaning and disinfection protocols in compliance with CDC guidelines and requirements, temperature and COVID testing at our manufacturing facilities, and limiting non-essential site visits by internal and external visitors.

We will continue to monitor and assess our response to protect the health, safety and livelihoods of our people.

We implemented numerous preventive measures to maximize the safety of our facilities, including but not limited to, establishing physical segregation areas, implementing environmental cleaning and disinfection protocols in compliance with CDC guidelines and requirements, temperature and COVID testing at our facilities, and limiting non-essential site visits by internal and external visitors.

In fiscal 2021, we incurred $9.9 million of direct COVID-related expenses related to these preventative measures as well as certain enhanced compensation programs for our employees.

On August 3, 2021, we announced a companywide effort, called 1MPACT, to lay the foundation for the next phase of our value creation at scale.

The goal of 1MPACT is to achieve our full growth, margin expansion and adjusted EBITDA potential over the next five years.

Since fiscal year 2014, we have completed 13 acquisitions, deploying $1.2 billion of capital and, as a result, dramatically scaled and transformed the business.

Over this time, we have extracted substantial revenue and cost synergies from these acquisitions.

Now, as we approach the milestone of $1 billion of revenue, we believe there is significant opportunity to realize further scale through consolidating and streamlining our organizational structure which will improve visibility, speed of decision making and accountability.

1MPACT will be led by a new Chief Transformation Officer, and will focus on six major areas:

organization efficiency and scalability;

procurement and supply chain;

facilities optimization;

R&D investment;

capital and asset efficiency;

and scalable common processes and systems.

B USINESS D EVELOPMENTS :

During the third quarter ended March 27, 2020, we drew $200.0 million on our $750.0 million Revolver to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

On May 27, 2021, we acquired Pentek for a purchase price of $65.0 million, subject to net working capital and net debt adjustments.

Based in Upper Saddle River, New Jersey, Pentek is a leading designer and manufacturer of ruggedized, high-performance, commercial off-the-shelf ("COTS") software-defined radio and data acquisition boards, recording systems and subsystems for high-end commercial and defense applications.

The acquisition and associated transaction expenses were funded through a combination of cash on hand and our existing revolving credit facility (the "Revolver").

On December 30, 2020, we acquired POC for a purchase price of $310.0 million, prior to net working capital and net debt adjustments.

Based in Torrance, California, POC more than doubles our global avionics business and expands its collective footprint in the platform and mission management market.

We funded the acquisition through a combination of cash on hand and our existing Revolver.

During the third quarter ended March 27, 2020, we drew $200.0 million on our $750.0 million Revolver to provide access to capital and flexibility in managing operations during the COVID pandemic.

We paid down the $200.0 million draw during our fourth quarter ended July 3, 2020 based on reduced turbulence in the capital markets.

On September 23, 2019, we acquired American Panel Corporation (“APC”) on a cash-free, debt-free basis for a total purchase price of $100,000, prior to net working capital and net debt adjustments.

On September 23, 2019, we acquired American Panel Corporation (“APC”) on a cash-free, debt-free basis for a total purchase price of $100.0 million, prior to net working capital and net debt adjustments.

Based in Alpharetta, Georgia, APC is a leading innovator in large area display technology for the aerospace and defense market.

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All references to fiscal 2021 are to the 52-week period from July 4, 2020 to July 2, 2021.

All references to fiscal 2020 are to the 53-week period from July 1, 2019 to July 3, 2020.

All references to fiscal 2019 is to the 52-week period from July 1, 2018 to June 30, 2019.

There have been no reclassifications of prior comparable periods due to this change.

On May 20, 2019, we announced the commencement of an underwritten public offering of our common stock, par value $0.01 per share.

On May 31, 2019 we closed the offering, including the full over-allotment allocation, selling an aggregate of 6.9 million shares of common stock at a price to the public of $69.00 for total net proceeds of $454.3 million.

On April 18, 2019, we acquired The Athena Group, Inc.

(“Athena”) and Syntonic Microwave LLC (“Syntonic”).

Athena was a privately-held company based in Gainesville, Florida and a leading provider of cryptographic and countermeasure IP vital to securing defense computing systems.

Syntonic was a privately held company based in Campbell, California and a leading provider of advanced synthesizers, wideband phase coherent tuners and microwave converters optimized for signals intelligence and electronic intelligence applications demanding frequency coverage up to 40 GHz with 2 GHz instantaneous bandwidth.

The acquisition and transaction related expenses were funded with borrowings obtained under the Revolver.

On January 29, 2019, we acquired GECO Avionics, LLC (“GECO”).

Based in Mesa, Arizona, GECO has over twenty years of experience designing and manufacturing affordable safety-critical avionics and mission computing solutions.

The acquisition and transaction related expenses were funded with borrowings obtained under the Revolver.

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.

During fiscal 2019, we drew additional borrowings of $129.5 million to facilitate the acquisitions of Germane, GECO, Athena and Syntonic in the first, third and fourth quarters of fiscal 2019, respectively.

In conjunction with the net proceeds generated by our follow-on equity offering, we paid down the balance on the Revolver during the fourth quarter of fiscal 2019 and terminated our hedge facility.

On July 31, 2018, we acquired Germane Systems, LC (“Germane”).

Based in Chantilly, Virginia, Germane is an industry leader in the design, development and manufacturing of rugged servers, computers and storage systems for command, control and intelligence (“C2I”) applications.

The acquisition and transaction related expenses were funded with borrowings obtained under the Revolver.

RESULTS OF OPERATIONS:

F ISCAL 2021 V S .

Results of operations for fiscal 2020 include full period results from the acquisitions of Germane, GECO, Athena, Syntonic and only the results from acquisition date for APC, which was acquired subsequent to fiscal 2019.

Results of operations for fiscal 2019 include only results from the acquisition date for Germane, GECO, Athena and Syntonic.

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.

There was also an additional three days of operations in fiscal 2020 which did not have a material impact on our results of operations.

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.

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Interest expense (1,222) (0.1) (1,006) (0.1)

Other income (expense), net 1,726 0.2 (8,880) (1.3)

Other (expense) income, net (2,785) (0.3) 1,726 0.2

Income before income taxes 77,173 8.4 93,933 11.8

Tax provision 8,221 1.0 12,752 2.0

Income tax provision 15,129 1.7 8,221 1.0

Net income $ 62,044 6.7 % $ 85,712 10.8 %

Total revenues increased $141.9 million, or 22%, to $796.6 million during fiscal 2020 compared to $654.7 million during fiscal 2019 including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full quarters or less (and excludes any intercompany transactions).

After the completion of four fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods.

The increase in total revenue was primarily due to $91.4 million and $50.5 million of organic revenues and acquired revenues, respectively.

These increases were driven by higher demand throughout all product groupings, especially integrated subsystems, across all end applications and, in particular, radar, within the airborne, naval and land platforms.

The increase in total revenues is primarily attributed to higher revenues associated with the P8, SEWIP and AIDEWS programs.

Acquired revenue represents activity from the Germane, GECO, Athena, Syntonic and APC acquired businesses.

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).

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.

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.

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 increase spanned the land, naval and airborne platforms which increased $79.6 million, $20.3 million and $19.3 million, respectively.

The largest program increases were related to a classified radar program, LTAMDS, Abrams, CPS and E2D Hawkeye.

Acquired revenue in fiscal 2021 represents activity from the POC and Pentek acquired businesses and one fiscal quarter from the APC acquired business.

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.

International revenues, which consist of foreign military sales through the U.S.

government, sales to prime defense contractor customers where the end user is known to be outside of the U.S., and direct sales to non-U.S.

based customers, increased $18.1 million to $91.9 million during fiscal 2020 compared to $73.8 million during fiscal 2019.

International revenues represented 11.5% and 11.3% of total revenues during fiscal 2020 and 2019, respectively.

G ROSS M ARGIN

Gross margin was 44.8% for fiscal 2020, an increase of 110 basis points from 43.7% in fiscal 2019.

The higher gross margin was primarily driven by program mix, including a higher volume of secure processing programs, and operational efficiencies, including higher utilization.

These gross margin improvements were partially offset by a higher volume of Customer Funded Research and Development (“CRAD”), COVID related expenses and $1.1 million of additional inventory step-up amortization, as compared to fiscal 2019.

Gross margin was 41.7% for fiscal 2021, a decrease of 310 basis points from the 44.8% gross margin achieved during fiscal 2020.

The lower gross margin was primarily driven by the acquisition of POC which contributed to the increased Customer Funded Research and Development ("CRAD") of $28.6 million, program mix and incremental COVID related expenses of $7.2 million.

These gross margin decreases were partially offset by $0.3 million gross margin benefit from fair value adjustments from purchase accounting in fiscal 2021, as compared to $1.8 million of gross margin impact from fair value adjustments from purchase accounting during fiscal 2020.

CRAD primarily represents engineering labor associated with long-term contracts for customized development, production and service activities.

Due to the nature of these efforts, they typically carry a lower margin.

These products are predominately grouped within integrated subsystems and to a lesser extent modules and sub-assemblies.

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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.

The increase was primarily related to additional headcount from organic growth and our recent acquisitions as well as COVID related expenses.

Selling, general and administrative expenses decreased as a percentage of revenue to 16.6% during fiscal 2020 from 16.9% during fiscal 2019 evidencing improved operating leverage.

The increase was primarily related to our POC, Pentek and the full period impact of APC driving incremental $7.4 million of expense, partially offset by tighter control over operating expenses including savings from restructuring activities during the period.

Selling, general and administrative expenses decreased as a percentage of revenue to 14.5% during fiscal 2021 from 16.6% during fiscal 2020.

The acquisitions of POC and Pentek resulted in a 30-basis point reduction in selling, general and administrative expenses as a percentage of revenue for fiscal 2021.

R ESEARCH AND D EVELOPMENT

Research and development expenses increased $15.0 million, or 15.0%, to $113.5 million during fiscal 2021, as compared to $98.5 million for fiscal 2020.

The increase was primarily related to additional headcount from organic growth and our recent acquisitions as well as COVID related expenses, which was partially offset by a higher volume of CRAD.

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 as a percentage of revenue was primarily driven by the continued investment in internal R&D during fiscal 2020 to promote the future growth of the business.

The acquisitions of POC and Pentek resulted in an 80-basis point reduction in research and development expenses as a percentage of revenue for fiscal 2021.

The increase as a percentage of revenue, excluding acquisitions of POC and Pentek, was primarily driven by the continued investment in internal R&D to promote future growth, including new opportunities in avionics missions computers, secure processing, radar modernization and our trusted custom microelectronics business.

A MORTIZATION OF I NTANGIBLE A SSETS

Amortization of intangible assets increased $2.7 million to $30.6 million during fiscal 2020, as compared to $27.9 million for fiscal 2019, primarily due to the acquisition of APC and the full year impact of amortization from our fiscal 2019 acquisitions.

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.

R ESTRUCTURING AND O THER C HARGES

Restructuring and other charges were $1.8 million during fiscal 2020, as compared to $0.6 million in fiscal 2019.

The increase was primarily driven by severance costs for separation of 20 employees during fiscal 2020.

Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.

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.

These charges are related to changing market and business conditions as well as talent shifts and resource redundancy resulting from our internal reorganization that was completed during fiscal 2021.

The remaining $4.5 million of restructuring and other charges related to third-party consulting costs associated with 1MPACT, our value creation initiatives.

On August 2, 2021, we initiated a workforce reduction of approximately 90 employees based on changes in the business environment and to align with 1MPACT resulting in expected charges of $9.4 million in the fiscal quarter ending October 1, 2021.

These charges include $5.8 million of employee separation costs and $3.6 million of third-party consulting costs.

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.

The acquisition costs and other related expenses incurred during fiscal 2020 were related to the acquisition of APC, as well as costs associated with our evaluation of other acquisition opportunities.

The acquisition costs and other related expenses incurred during fiscal 2021 were related to the acquisitions of POC and Pentek, as well as costs associated with our evaluation of other acquisition opportunities.

We expect to incur acquisition costs and other related expenses periodically in the future as we continue to seek acquisition opportunities to expand our technological capabilities and especially within the sensor and effector and C4I markets.

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I NTEREST I NCOME

Interest income increased to $2.2 million in fiscal 2020 from $0.9 million in fiscal 2019, due to higher average balances of cash on hand, as compared to fiscal 2019.

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 2020 decreased $8.1 million to $1.0 million, as compared to $9.1 million in fiscal 2019.

We drew $200.0 million against the Revolver during the third quarter of fiscal 2020 to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

We paid down the $200.0 million draw during the fourth quarter of fiscal 2020 as a result of the reduced turbulence in capital markets.

Fiscal 2019 included interest expense related to borrowings on the Revolver from our acquisitions, prior to the pay down of the balance on the Revolver with the net proceeds generated by our follow-on equity offering during the fourth quarter of fiscal 2019.

O THER I NCOME ( E XPENSE), N ET

Other income (expense), net was $1.7 million of other income during fiscal 2020, as compared to $8.9 million of other expense in fiscal 2019.

The increase was primarily due to $6.4 million of other investment income partially offset by $0.6 million of additional litigation and settlement expenses.

Fiscal 2019 included $5.4 million in other expense associated with the termination of the interest rate swap in conjunction with the pay down of the balance on the Revolver with the net proceeds generated by our follow-on equity offering to during the fourth quarter of fiscal 2019.

Interest expense for fiscal 2021 increased to $1.2 million, as compared to $1.0 million in fiscal 2020.

We drew $160.0 million and $40.0 million during the second quarter and fourth quarters of fiscal 2021, respectively, on our Revolver to facilitate the acquisitions of POC and Pentek.

We drew $200.0 million on the Revolver during the third quarter of fiscal 2020 to provide access to capital and flexibility in managing operations during the COVID pandemic, which was subsequently paid down during the fourth quarter of fiscal 2020.

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.

Fiscal 2021 includes net

foreign currency translation gains of $1.2 million, which were partially offset by $0.6 million of litigation and settlement expenses and a $0.3 million loss on sale of investment.

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.

I NCOME T AXES

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We recognized a discrete tax benefit of $2.8 million and $7.3 million related to excess tax benefits on stock-based compensation for fiscal years 2021 and 2020, respectively.

We also recognized a tax benefit of $6.3 million and a tax reserve of $2.2 million related to research and development tax credits claimed on prior year Federal and state tax returns and recognized a tax benefit for other favorable provision to return adjustments of $2.9 million.

The effective tax rate for fiscal 2020 and 2019 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, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.

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.

Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service.

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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.

We plan to continue to invest in the modernization of our facilities, including the expansion of our trusted custom microelectronics business during fiscal 2021.

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.

We plan to continue to invest in improvements to our facilities, continuous evaluation of potential acquisition opportunities and internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and trusted custom microelectronics.

Our facilities improvements include buildouts in Andover, Massachusetts, and Hudson, New Hampshire, along with the ongoing expansion of our trusted custom microelectronics business during fiscal 2022.

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.

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Shelf Registration Statement

On August 28, 2017, we filed a shelf registration statement on Form S-3ASR with the SEC.

On September 14, 2020, we filed a shelf registration statement on Form S-3ASR with the SEC.

The shelf registration statement, which was effective upon filing with the SEC, registered each of the following securities:

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As of July 2, 2021, we have not sold any stock using our at the market offering feature.

We intend to file a new shelf registration statement to replace the current registration that is expiring at the end of August 2020.

Follow-on Equity Offerings

On May 20, 2019, we announced the commencement of an underwritten public offering of our common stock, par value $0.01 per share.

On May 28, 2019, we closed the offering, selling an aggregate of 6.0 million shares of common stock at a price to the public of $69.00.

On May 29, 2019, the underwriters executed their over-allotment option.

At the closing of the over-allotment, we issued 0.9 million additional shares of common stock.

Total net proceeds, including the over-allotment, from the offering of 6.9 million shares were $454.3 million.

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.

We paid down the $200.0 million draw during the fourth quarter of fiscal 2020 as a result of reduced turbulence in the capital markets.

As of July 3, 2020, we had no outstanding balance on the Revolver.

We drew $160.0 million and $40.0 million during the second and fourth quarters of fiscal 2021, respectively, on the Revolver to facilitate the acquisitions of POC and Pentek.

July 2, 2021, we had $200.0 million of outstanding borrowings against the Revolver.

See Note M in the accompanying consolidated financial statements for further discussion of the Revolver.

For the Fiscal Years Ended

(In thousands) July 3, 2020 June 30, 2019 June 30, 2018

(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 (used in) provided by financing activities $ (10,932) $ 247,765 $ 182,937

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 $31.1 million during fiscal 2020 primarily as the result of $96.5 million of cash on hand used to fund the acquisition of APC, $43.3 million invested in purchases of property and equipment, and $16.2 million used in the retirement of common stock used to settle individual employees' tax liabilities associated with vesting of restricted stock awards.

These decreases were partially offset by $115.2 million provided by operating activities.

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.

These decreases were partially offset by $200.0 million of borrowings on our Revolver to facilitate the acquisitions of POC and Pentek and $97.2 million provided by operating activities.

Operating Activities

During fiscal 2020, we generated $115.2 million in cash from operating activities, an increase of $17.7 million, as compared to fiscal 2019.

The increase in cash generated by operating activities was primarily the result of higher comparable net income, deferred revenues and customer advances partially offset by higher inventory purchases intended to mitigate potential disruptions to the supply chain resulting from the COVID pandemic and support the growth of the business, unbilled receivables and additional cash paid for income taxes.

During fiscal 2021, we generated $97.2 million in cash from operating activities, a decrease of $18.0 million, as compared to $115.2 million during fiscal 2020.

The decrease in cash generated by operating activities was primarily the result of lower sources of cash from receivables, higher inventory purchases driven by an increase in demand, especially for larger, more complex integrated subsystems and the advanced purchase of inventory intended to mitigate disruptions to the supply chain or unforeseen changes in customer behavior resulting from the COVID pandemic.

These decreases were partially offset by higher sources of cash from deferred revenues and customer advances, other non-current assets and income taxes payable.

Investing Activities

During fiscal 2020, we invested $135.5 million, a decrease of $18.3 million, as compared to $153.8 million during fiscal 2019.

The decrease was primarily driven by lower cash used for acquisitions, partially offset by a $16.6 million increase in purchases of property and equipment.

During fiscal 2020, we used $96.5 million of cash on hand to fund the acquisition of APC, as compared to $127.1 million used for the acquisitions of Germane, GECO, Athena and Syntonic during fiscal 2019.

During fiscal 2021, we invested $416.9 million, an increase of $281.4 million, as compared to $135.5 million during fiscal 2020.

The increase was primarily driven by $372.8 million used in the acquisitions of POC and Pentek, as well as an incremental $2.3 million invested in purchases of property and equipment during fiscal 2021.

During fiscal 2020, we invested $96.5 million in the acquisition of APC, which was partially offset by $4.3 million of proceeds from the sale of an investment.

Financing Activities

During fiscal 2020, we used $10.9 million of cash in financing activities, as compared to $247.8 million in cash provided by financing activities during fiscal 2019.

The $258.7 million decrease was primarily due to $454.3 million provided by our follow-on equity offering during fiscal 2019, which was used to pay down the Revolver balance of $324.5 million subsequent

to the additional $129.5 million of borrowings during the year used to fund the acquisitions completed during fiscal 2019.

During fiscal 2020 we drew $200.0 million against the Revolver during the third quarter of fiscal 2020 to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

We paid down the $200.0 million draw during the fourth quarter of fiscal 2020 as a result of reduced turbulence in the capital markets.

Fiscal 2020 also includes $16.2 million of payments related to the retirement of common stock used to settle individual employees' tax liabilities associated with the vesting of restricted stock awards, an increase of $8.2 million from fiscal 2019.

During fiscal 2021, we had $206.2 million in cash provided by financing activities, as compared to $10.9 million used in financing activities during fiscal 2020.

During fiscal 2021, we borrowed a total of $200.0 million on our Revolver to facilitate the acquisitions of POC and Pentek.

During fiscal 2020, we drew and repaid $200.0 million on our Revolver to provide access to capital and flexibility in managing operations during the COVID pandemic.

Fiscal 2021 had a decrease of $16.2 million in cash used for payments for the retirement of common stock due to a change in our incentive stock plan tax withholding method.

C OMMITMENTS AND C ONTRACTUAL O BLIGATIONS

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$ 247,621 $ 161,217 $ 25,134 $ 21,253 $ 40,017

Effective July 1, 2019, the Company adopted ASC 842.

We adopted ASC 842 using the optional transition method and, as a result, there have been no reclassifications of prior comparable periods due to this adoption.

See Note B and Note J to the consolidated financial statements for more information regarding our obligations under leases and the adoption of this standard.

See Note B and Note J to the consolidated financial statements for more information regarding our obligations under leases.

Purchase obligations represent open non-cancelable purchase commitments for certain inventory components and services used in normal operations.

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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.

Our liability increased by an additional $2.2 million reserve related to research and development credits claimed on amended Federal and state returns during the fiscal year ended July 3, 2020.

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.

Our liability increased by an additional $3.4 million primarily due to a tax position previously taken on a tax return of an acquired company during the fiscal year ended July 2, 2021.

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.

Accordingly, these amounts are not included in the above table.

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The associated acquisition costs incurred in the form of professional fees and services may be material to the future periods in which they occur, regardless of whether the acquisition is ultimately completed.

We may elect from time to time to purchase and subsequently retire shares of common stock in order to settle employees’ tax liabilities associated with vesting of a restricted stock award or exercise of stock options.

We may elect from time to time to purchase and subsequently retire shares of common stock in order to settle employees’ tax liabilities associated with vesting of a restricted stock award.

These transactions would be treated as a use of cash in financing activities in our Consolidated Statements of Cash Flows.

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.

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.

O FF -B ALANCE S HEET A RRANGEMENTS

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generally accepted accounting principles (“GAAP”), including adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, organic revenue and acquired revenue.

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.

We use adjusted EBITDA as an important indicator of the operating performance of our business.

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For the Fiscal Years Ended

(In thousands) July 3, 2020 June 30, 2019 June 30, 2018

(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

(5,636) 364 (795)

Interest (income) expense, net (1,145) 8,177 2,818

Tax provision 8,221 12,752 1,690

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

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Acquisition and financing costs 8,600 5,645 9,628

5,645 9,628 4,928

Fair value adjustments from purchase accounting (2)

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Adjusted EBITDA $ 201,896 $ 176,242 $ 145,326

(1) As of July 1, 2018, we revised our definition of adjusted EBITDA to incorporate other non-operating adjustments, net, which includes gains or losses on foreign currency remeasurement, investments and fixed asset sales or disposals among other adjustments.

Adjusted EBITDA for prior periods has been recast for comparative purposes.

Other non-operating adjustments for fiscal 2020 includes $6.4 million of other non-operating investment income.

(2)Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.

(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.

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.

(3) Acquisition and financing costs includes $5.4 million associated with the termination of the interest rate swap for fiscal year 2019.

(2) Fair value adjustments from purchase accounting for fiscal year 2021 relate to various adjustments arising from the POC acquisition.

Fair value adjustments from purchase accounting for fiscal year 2020 relate to APC inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2019 relate to Germane and GECO inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2018 relate to Themis, CES and Delta inventory step-up amortization.

(5) Effective as of the third quarter of fiscal 2020, the Company has added back incremental COVID related expenses, which relate primarily to enhanced compensation and benefits for employees as well as incremental supplies and services to support social distancing and mitigate the spread of COVID.

Adjusted income and adjusted EPS exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP.

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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.

The impact to income taxes includes the

impact to the effective tax rate, current tax provision and deferred tax provision.

The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision.

Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding.

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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.

The following tables reconcile net income and diluted earnings per share, the most directly comparable GAAP financial measures, to adjusted income and adjusted EPS:

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 3, 2020 June 30, 2019 June 30, 2018

(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

(5,636) 364 (795)

Amortization of intangible assets 41,171 30,560 27,914

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Acquisition and financing costs 8,600 5,645 9,628

5,645 9,628 4,928

Fair value adjustments from purchase accounting (2)

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Diluted weighted-average shares outstanding 55,474 55,115 48,500

(1) Effective as of the third quarter of fiscal 2020, the Company has revised its definition of adjusted income and adjusted earnings per share to incorporate other non-operating adjustments, net, which includes gains or losses on foreign currency remeasurement, investments and fixed asset sales or disposals among other adjustments.

Adjusted EPS for prior periods has been recast for comparative purposes.

Other non-operating adjustments for fiscal 2020 includes $6.4 million of other non-operating investment income.

(2) Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.

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.

(3) Acquisition and financing costs includes $5.4 million associated with the termination of the interest rate swap for fiscal year 2019.

(2) Fair value adjustments from purchase accounting for fiscal year 2021 relate to various adjustments arising from the POC acquisition.

Fair value adjustments from purchase accounting for fiscal year 2020 relate to APC inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2019 relate to Germane and GECO inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2018 relate to Themis, CES and Delta inventory step-up amortization.

(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.

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For the Fiscal Years Ended

(In thousands) July 3, 2020 June 30, 2019 June 30, 2018

(In thousands) July 2, 2021 July 3, 2020 June 30, 2019

Cash provided by operating activities $ 97,247 $ 115,184 $ 97,517

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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 73% and 77% of revenues for the fiscal years ended July 3, 2020 and June 30, 2019, respectively.

Total revenue recognized under long-term contracts over time was 27% and 23% of revenues for the fiscal years ended July 3, 2020 and June 30, 2019, respectively.

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.

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.

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Our determination of the expected cost plus a margin approach involves the consideration of several factors based on the specific facts and circumstances of each contract.

on the price list established and updated by management on a regular basis, the value of any enhancements that have been built into the deliverable and the characteristics of the varying markets in which the deliverable is sold.

Specifically, we consider the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, our ongoing pricing strategy and policies, often based on the price list established and updated by management on a regular basis, the value of any enhancements that have been built into the deliverable and the characteristics of the varying markets in which the deliverable is sold.

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.

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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 fixed-price and cost reimbursable contracts.

These contracts

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.

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For all types of contracts, we recognize anticipated contract losses as soon as they become known and estimable.

These losses are recognized in advance of contract performance and as of July 3, 2020, approximately $0.8 million of these costs were in accrued expenses on our balance sheet.

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.

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Examples of our service revenues include:

services and systems engineering support, consulting, maintenance and other support, testing and installation.

analyst services and systems engineering support, consulting, maintenance and other support, testing and installation.

We combine our product and service revenues into a single class as services revenues are less than 10 percent of total revenues.

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We write down inventory for excess and obsolescence based upon assumptions about future demand, product mix and possible alternative uses.

Actual demand, product mix and alternative usage may be lower than those that we project and this difference could have a material adverse effect on our gross margin if inventory write-downs beyond those initially recorded become necessary.

Alternatively, if actual demand, product mix and alternative usage are more favorable than those we estimated at the time of such a write-down, our gross margin could be favorably impacted in future periods.

Actual demand, product mix and alternative usage may be higher or lower resulting in variations in on our gross margin.

G OODWILL , I NTANGIBLE A SSETS AND L ONG - LIVED A SSETS

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In addition, we use the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar businesses, to support the conclusions of the income approach.

As part of our annual goodwill impairment testing, we utilized a discount rate for each of our reporting units, as defined by ASC 350, Intangibles-Goodwill and Other , that we believe represents the risks that our businesses face, considering their sizes, the current economic environment, and other industry data we believe is appropriate.

The discount rates for Sensor and Mission Processing (“SMP”), Advanced Microelectronic Solutions (“AMS”) and Mercury Defense Systems (“MDS”) were 7.0%, 6.5%, and 7.0%, respectively.

The annual testing indicated that the fair values of our SMP, AMS, and MDS reporting units significantly exceeded their carrying values, and thus no further testing was required.

During the first quarter of fiscal 2021, the Company reorganized its internal reporting unit structure to align with the Company's market and brand strategy as well as promote scale as the organization continues to grow.

The Company evaluated this reorganization under ASC 280 to determine whether this change has impacted the Company's single operating and reportable segment.

The Company concluded this change had no effect given the CODM continues to evaluate and manage the Company on the basis of one operating and reportable segment.

The Company utilized the management approach for determining its operating segment in accordance with ASC 280.

In accordance with FASB ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company determines its reporting units based upon whether discrete financial information is available, if management regularly reviews the operating results of the component, the nature of the products offered to customers and the market characteristics of each reporting unit.

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.

As part of our annual goodwill impairment testing, we utilized a discount rate for each of our reporting units, as defined by ASC 350, that we believe represents the risks that our businesses face, considering their sizes, the current economic environment, and other industry data we believe is appropriate.

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.

We also review finite-lived intangible assets and long-lived assets when indications of potential impairment exist, such as a significant reduction in undiscounted cash flows associated with the assets.

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First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination.

If the tax position is deemed more-likely-than-not

to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements.

If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements.

The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

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Other estimates include:

• estimated step-ups for the fixed assets and inventory;

• estimated step-ups for the overt-time contracts fixed assets, leasehold interests and inventory;

• estimated fair values of intangible assets;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis