What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-05-11 · 118 added, 221 removed, 170 unchanged (67% 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 the Company's Annual Report on Form 10-K for the fiscal year ended July 2, 2021.

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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.

We have built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that we believe 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.

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.

This allows them to complete their full system by integrating with their platform, the sensor technology and, in some cases, the processing from Mercury.

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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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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.

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.

Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends.

As of April 2, 2021, we had 2,359 employees.

As of October 1, 2021, we had 2,239 employees.

We employ hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities to achieve our objectives to fully capitalize upon and maintain our technological leads in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications.

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We believe that these values will help our employees realize their full potentials at work to provide Innovation That Matters®.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the third quarter ended April 2, 2021 were $256.9 million, $38.5 million, $15.6 million, $0.28, $0.64, and $54.8 million, respectively.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted EPS, and adjusted EBITDA for the nine months ended April 2, 2021 were $673.2 million, $47.5 million, $44.1 million, $0.80, $1.69, and $142.8 million, respectively.

Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the first quarter ended October 1, 2021 were $225.0 million, $41.3 million, $(7.1) million, $(0.13), $0.41, and $38.3 million, respectively.

See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

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:

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.

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 was 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 facilities, and limiting non-essential site visits by internal and external visitors.

We will 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 continue to monitor the COVID pandemic and adapt our policies and programs as needed to protect the health, safety and livelihoods of our people.

On September 9, 2021, President Biden signed an executive order directing executive departments and agencies to ensure that certain contracts had COVID-19 health and safety provisions, which included requirements for vaccinated employees, masking and physical distancing, and workplace safety coordinators.

We are requiring all employees in the U.S.

to become fully vaccinated from COVID-19 except in limited circumstances as allowed under the mandate.

We are also complying with requirements for masking and physical distancing in the workplace and have maintained an internal task force to coordinate COVID-19 workplace safety efforts since the start of the pandemic.

On August 3, 2021, we announced a companywide effort, called 1MPACT, to lay the foundation for the next phase of the Company’s 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 and through the first quarter ended October 1, 2021, 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 each of these individual 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 internal organizational structure which will improve visibility, speed of decision making and accountability.

1MPACT is led by our new Chief Transformation Officer, Thomas Huber, and focuses 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.

RESULTS OF OPERATIONS:

Results of operations for the third quarter ended April 2, 2021 includes a full period of results from the acquisition of Physical Optics Corporation ("POC").

Results of operations for the nine months ended April 2, 2021 include only results from the acquisition date for POC which was acquired on December 30, 2020.

Results of operations for the third quarter ended March 27, 2020 include full period results from the acquisition of American Panel Corporation ("APC").

Results of operations for t he nine months ended March 27, 2020 include only results from the acquisition date for APC which was acquired on September 23, 2019.

Results of operations for the first quarter ended October 1, 2021 includes a full period of results from the acquisitions of Physical Optics Corporation ("POC") and Pentek Technologies, LLC and Pentek Systems, Inc.

(collectively, "Pentek").

Results of operations for the first quarter ended October 2, 2020 do not include results from POC or Pentek.

Accordingly, the periods presented below are not directly comparable.

The third quarter ended April 2, 2021 compared to the third quarter ended March 27, 2020

The following table sets forth, for the third quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income:

(In thousands) April 2, 2021 As a % of

Revenue March 27, 2020 As a % of

The first quarter ended October 1, 2021 compared to the first quarter ended October 2, 2020

The following table sets forth, for the first quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive (Loss) Income:

(In thousands) October 1, 2021 As a % of

Revenue October 2, 2020 As a % of

Net revenues $ 225,013 100.0 % $ 205,621 100.0 %

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Total operating expenses 93,984 41.8 69,349 33.7

Income from operations 21,712 8.5 26,342 12.7

(Loss) income from operations (5,575) (2.5) 18,770 9.1

Interest income 9 — 72 —

Interest expense (595) (0.3) — —

Other (expense) income, net (200) (0.1) 2,186 1.0

Income before income taxes 20,997 8.2 28,928 13.9

Income tax provision 5,362 2.1 5,363 2.6

Net income $ 15,635 6.1 % $ 23,565 11.3 %

Total revenues increased $48.8 million, or 23.5%, to $256.9 million during the third quarter ended April 2, 2021, as compared to $208.0 million during the third quarter ended March 27, 2020, 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 an additional $38.5 million and $10.3 million of acquired and organic revenues, respectively.

These increases were driven by higher demand for integrated subsystems which increased $69.3 million or 55.3% which was partially offset by decreases in components and modules and sub-assemblies of $16.4 million and $4.1 million, respectively.

The increase in total revenue was primarily from the C4I end application which increased $59.8 million and was partially offset by an $11.6 million decrease to electronic warfare ("EW").

The increase was across all platforms and, in particular, land which grew $28.3 million during the third quarter ended April 2, 2021.

The largest program increases were related to a classified radar program, as well as the E2D Hawkeye, Abrams and CPS programs.

There were no programs comprising 10% or more of our revenues for the third quarters ended April 2, 2021 or March 27, 2020.

Other expense, net (1,420) (0.6) (846) (0.3)

(Loss) income before income taxes (7,581) (3.4) 17,996 8.8

Income tax (benefit) provision (441) (0.2) 2,198 1.1

Net (loss) income $ (7,140) (3.2) % $ 15,798 7.7 %

Total revenues increased $19.4 million, or 9.4%, to $225.0 million during the first quarter ended October 1, 2021, as compared to $205.6 million during the first quarter ended October 2, 2020, 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 full fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods.

The in crease in total revenue was primarily due to an additional $41.3 million of acquired revenues from the POC and Pentek businesses, partially offset by $21.9 million less organic revenues.

These increases were driven by modules and sub-assemblies which increased $41.6 million or 238% which was partially offset by decreases in components and integrated subsystems of $15.2 million and $7.0 million, respectively.

The increase in total revenue was primarily from the C4I and other sensor and effector end applications which increased $29.6 million and $8.3 million, respectively and were partially offset by a $13.5 million decrease to radar application.

The increase was primarily across the airborne platform which grew $29.3 million during the first quarter ended October 1, 2021.

The largest program increases were related t o the MH-60 program, a classified C2 program and a classified radar program.

There were no programs comprising 10% or more of our revenues for the first quarters ended October 1, 2021 or October 2, 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 41.1% for the third quarter ended April 2, 2021, a decrease of 380 basis points from the 44.9% gross margin achieved during the third quarter ended March 27, 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 $12.7 million in the quarter, as well as incremental COVID related expenses of $2.3 million and program mix.

These gross margin decreases were partially offset by operational efficiencies and $0.6 million lower margin associated with fair value adjustments from purchase accounting for recent acquisitions.

Gross margin was 39.3% for the first quarter ended October 1, 2021, a decrease of 360 basis points from the 42.9% gross margin achieved during the first quarter ended October 2, 2020.

The lower gross margin was primarily driven by program mix, including the acquisition of POC, which carries lower margins than the organic business, and higher volume of Customer Funded Research and Development (“CRAD”).

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.

CRAD, including POC, increased $14.5 million in the quarter.

Due to the nature of these efforts, they typically carry a lower margin but serve as a precursor to higher margin production orders over time.

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

These gross margin decreases were partially offset by $1.8 million gross margin benefit from fair value adjustments from purchase accounting and $1.7 million less COVID expenses.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses increased $4.3 million, or 12.5%, to $38.3 million during the third quarter ended April 2, 2021, as compared to $34.0 million in the third quarter ended March 27, 2020.

The increase was primarily related to the recent acquisition of POC of $4.3 million.

Selling, general and administrative expenses decreased as a percentage of revenue to 14.9% for the third quarter ended April 2, 2021 from 16.3% for the third quarter ended March 27, 2020 due to improved operating leverage.

The acquisition of POC resulted in a 66 basis point reduction in selling, general and administrative expenses as a percentage of revenue for the third quarter ended April 2, 2021.

Selling, general and administrative expenses increased $4.1 million, or 12.3%, to $37.0 million during the first quarter ended October 1, 2021, as compared to $32.9 million in the first quarter ended October 2, 2020.

The increase was primarily related to the recent acquisitions of POC and Pentek, which contributed $3.3 million of incremental cost.

Selling, general and administrative expenses increased as a percentage of revenue to 16.4% for the first quarter ended October 1, 2021 from 16.0% for the first quarter ended October 2, 2020 as a result of lower overall operating leverage in the quarter.

R ESEARCH AND D EVELOPMENT

Research and development expenses increased $5.2 million, or 21.0%, to $30.2 million during the third quarter ended April 2, 2021, as compared to $25.0 million during the third quarter ended March 27, 2020.

The increase was primarily related to $4.3 million of additional employee related compensation from organic growth and the recent acquisition of POC.

The increase during the third quarter ended April 2, 2021 was primarily driven by the continued investment in internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and our trusted custom microelectronics business.

Research and development expenses accounted for 11.8% and 12.0% of our revenues for the third quarters ended April 2, 2021 and March 27, 2020, respectively.

The acquisition of POC resulted in a 140 basis point reduction in research and development expenses as a percentage of revenue for the third quarter ended April 2, 2021.

Research and development expenses increased $1.5 million, or 5.3%, to $28.9 million during the first quarter ended October 1, 2021, as compared to $27.4 million during the first quarter ended October 2, 2020.

The increase was primarily related to $1.0 million of incremental expenses from the recent acquisitions of POC and Pentek as well as continued investment in internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and our trusted custom microelectronics business.

Research and development expenses accounted for 12.8% and 13.3% of our revenues for the first quarters ended October 1, 2021 and October 2, 2020, respectively.

A MORTIZATION OF I NTANGIBLE A SSETS

Amortization of intangible assets increased $4.9 million to $12.7 million during the third quarter ended April 2, 2021, as compared to $7.8 million to the third quarter ended March 27, 2020, due to the acquisition of POC.

Amortization of intangible assets increased $6.0 million to $13.7 million during the first quarter ended October 1, 2021, as compared to $7.7 million during the first quarter ended October 2, 2020, primarily due to the acquisitions of POC and Pentek.

R ESTRUCTURING AND O THER C HARGES

We did not incur restructuring and other charges during the third quarter ended April 2, 2021, as compared to $0.1 million during the third quarter ended March 27, 2020.

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

During the first quarter ended October 1, 2021, the Company incurred $12.3 million of restructuring and other charges, as compared to $1.3 million during the first quarter ended October 2, 2020.

Restructuring and other charges of $7.3 million related to severance costs associated with the elimination of 100 employees based on changes in the business environment and alignment with the internal organizational changes completed under 1MPACT.

The remaining $4.9 million of restructuring and other charges related to third-party consulting costs associated with 1MPACT.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

Acquisition costs and other related expenses were $2.7 million during the third quarter ended April 2, 2021, as compared to $0.1 million during the third quarter ended March 27, 2020.

The acquisition costs and other related expenses during the third quarter ended April 2, 2021 were primarily related to costs associated with our continuous evaluation of potential 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, especially within the sensor and effector and C4I markets.

Acquisition costs and other related expenses were $2.1 million during the first quarter ended October 1, 2021.

The acquisition costs and other related expenses during the first quarter ended October 1, 2021 were primarily related to costs associated with signing a definitive agreement to acquire Avalex Technologies Corporation ("Avalex") and other M&A activities.

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.

Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.

I NTEREST I NCOME

Interest income decreased to less than $0.1 million during the third quarter ended April 2, 2021, as compared to $0.5 million for the third quarter ended March 27, 2020.

This was driven by lower cash on hand during the third quarter ended April 2, 2021, as compared to the prior year.

Interest income decreased to less than $0.1 million during the first quarter ended October 1, 2021, as compared to $0.1 million for the first quarter ended October 2, 2020.

This was driven by lower cash on hand during the first quarter ended October 1, 2021, as compared to the prior year.

I NTEREST E XPENSE

We incurred $0.5 million of interest expense during the third quarter ended April 2, 2021, related to the $160.0 million balance on our Revolver to facilitate the acquisition of POC during the second quarter ended January 1, 2021, compared to $0.1 million interest expense during the third quarter ended March 27, 2020.

O THER ( E XPENSE) I NCOME , N ET

Other (expense) income, net decreased to $0.2 million of Other expense during the third quarter ended April 2, 2021, as compared to $2.2 million of Other income for the third quarter ended March 27, 2020.

The third quarter ended April 2, 2021 includes net foreign currency translation gains of $0.7 million, which were partially offset by $0.6 million of financing costs and $0.3 million of litigation and settlement costs.

The third quarter ended March 27, 2020 includes a $3.8 million gain on the sale of a cost-method investment, partially offset by foreign currency translation losses of $1.2 million.

We incurred $0.6 million of interest expense during the first quarter ended October 1, 2021, related to the $200.0 million balance on our Revolver to facilitate the acquisitions of POC and Pentek during fiscal 2021.

O THER E XPENSE , N ET

Other expense, net increased to $1.4 million during the first quarter ended October 1, 2021, as compared to $0.8 million during the first quarter ended October 2, 2020.

The first quarter ended October 1, 2021 includes net foreign currency translation losses of $0.5 million and $0.2 million less of financing and registration costs, partially offset by $0.2 million of additional litigation and settlement costs.

The first quarter ended October 2, 2020 includes net foreign currency translation gains of $0.2 million.

I NCOME T AXES

We recorded an income tax provision of $5.4 million and $5.4 million on income before income taxes of $21.0 million and $28.9 million for the third quarters ended April 2, 2021 and March 27, 2020, respectively.

During each of the third quarters ended April 2, 2021 and March 27, 2020, we recognized a discrete tax benefit of $0.2 million, related to excess tax benefits on stock-based compensation.

We also recognized a discrete tax benefit of $1.0 million, net of a $0.3 million tax reserve, related to research and development credits and a $0.8 million discrete tax benefit from releasing a valuation allowance on a capital loss carryforward during the third quarter ended March 27, 2020.

The effective tax rate for the third quarter ended April 2, 2021 differed from the Federal statutory rate primarily due to Federal and State research and development credits, excess tax benefits related to stock-based compensation, non-deductible compensation, and state taxes.

The effective tax rate for the third quarter ended March 27, 2020 differed from the Federal statutory rate primarily due to Federal research and development credits, excess tax benefits related to stock-based compensation, a release of a valuation allowance on a capital loss carryforward, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.

We recorded an income tax (benefit) provision of $(0.4) million and $2.2 million on a (loss) income before income taxes of $(7.6) million and $18.0 million for the first quarters ended October 1, 2021 and October 2, 2020, respectively.

During the first quarters ended October 1, 2021 and October 2, 2020, we recognized a discrete tax provision of $0.7 million related to stock-based compensation shortfalls and a discrete tax benefit of $2.5 million related to excess benefits on stock-based compensation, respectively.

The effective tax rate for the first quarters ended October 1, 2021 and October 2, 2020 differed from the Federal statutory rate primarily due to Federal and State research and development credits, non-deductible compensation, stock-based compensation, and state taxes.

In addition, during the first quarter ended October 1, 2021, we had certain unbenefited deferred tax assets.

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 (“IRS”).

Nine months ended April 2, 2021 compared to the nine months ended March 27, 2020

The following tables set forth, for the nine month periods indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income:

(In thousands) April 2, 2021 As a % of

Revenue March 27, 2020 As a % of

Net revenues $ 673,154 100.0 % $ 579,233 100.0 %

Cost of revenues 390,745 58.0 319,002 55.1

Gross margin 282,409 42.0 260,231 44.9

Operating expenses:

Selling, general and administrative 102,750 15.3 96,765 16.7

Research and development 85,763 12.7 71,497 12.3

Amortization of intangible assets 28,091 4.2 22,859 3.9

Restructuring and other charges 2,244 0.3 1,815 0.3

Acquisition costs and other related expenses 4,966 0.7 2,652 0.5

Total operating expenses 223,814 33.2 195,588 33.7

Income from operations 58,595 8.8 64,643 11.2

Interest income 166 — 1,957 0.3

Interest expense (622) (0.1) (58) —

Other (expense) income, net (2,027) (0.3) 401 0.1

Income before income taxes 56,112 8.4 66,943 11.6

Income tax provision 11,993 1.8 8,455 1.5

Net income $ 44,119 6.6 % $ 58,488 10.1 %

Total revenues increased $93.9 million, or 16.2%, to $673.2 million during the nine months ended April 2, 2021, as compared to $579.2 million during the nine months ended March 27, 2020.

The increase in total revenue was primarily due to an additional $47.3 million and $46.6 million of organic and acquired revenues, respectively.

These increases were driven by higher demand for integrated subsystems which increased $149.5 million or 47% which was partially offset by decreases in components and modules and sub-assemblies of $39.2 million and $16.4 million, respectively, during the nine months ended April 2, 2021.

The increase in total revenue was primarily from the radar and C4I end applications which increased $74.3 million and $65.1 million and were partially offset by decreases of $18.8 million and $18.3 million from other end applications and EW, respectively.

The increase was primarily across the land and naval platforms which grew $83.4 million and $13.8 million during the nine months ended April 2, 2021.

The largest program increases were related to a classified radar program, as well as the LTAMDS, Patriot and Abrams programs.

There were no programs comprising 10% or more of our revenues for the nine months ended April 2, 2021 or March 27, 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 42.0% for the nine months ended April 2, 2021, a decrease of 290 basis points from the 44.9% gross margin achieved during the nine months ended March 27, 2020.

The lower gross margin was primarily due to the acquisition of POC which contributed to the increase in CRAD of $17.5 million, as well as incremental COVID related expenses of $7.9 million and program mix.

These gross margin decreases were partially offset by operational efficiencies and $1.2 million lower margin associated with fair value adjustments from purchase accounting for recent acquisitions.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses increased $6.0 million, or 6.2%, to $102.8 million during the nine months ended April 2, 2021, as compared to $96.8 million during the nine months ended March 27, 2020.

The increase was primarily related to $7.9 million of additional employee related compensation from organic growth and our recent acquisitions as well as incremental COVID related expenses of $0.8 million.

Selling, general and administrative expenses as a percentage of revenues decreased to 15.3% for the nine months ended April 2, 2021 from 16.7% for the nine months ended March 27, 2020 due to improved operating leverage.

The acquisition of POC resulted in a 20 basis point reduction in selling, general and administrative expenses as a percentage of revenue for the nine months ended April 2, 2021.

R ESEARCH AND D EVELOPMENT

Research and development expenses increased $14.3 million, or 20.0%, to $85.8 million during the nine months ended April 2, 2021, as compared to $71.5 million during the nine months ended March 27, 2020.

The increase was primarily related to $10.9 million of additional employee related compensation from organic growth and our recent acquisition of POC.

The increase during the third quarter ended April 2, 2021 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.

Research and development expenses accounted for 12.7% and 12.3% of our revenues for the nine months ended April 2, 2021 and March 27, 2020, respectively.

The acquisition of POC resulted in a 60 basis point reduction in research and development expenses as a percentage of revenue for the nine months ended April 2, 2021.

R ESTRUCTURING A ND O THER C HARGES

Restructuring and other charges were $2.2 million during the nine months ended April 2, 2021, as compared to $1.8 million during the nine months ended March 27, 2020.

Restructuring and other charges during the nine months ended April 2, 2021 primarily related to severance costs associated with the elimination of 42 positions, predominantly in the manufacturing, SG&A and R&D functions.

These charges related to changing market and business conditions including talent shifts and resource redundancy resulting from the internal reorganization the Company completed in the first quarter.

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

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

Acquisition costs and other related expenses were $5.0 million during the nine months ended April 2, 2021, as compared to $2.7 million during the nine months ended March 27, 2020.

The acquisition costs and other related expenses we incurred during the nine months ended April 2, 2021 were primarily related to our continuous evaluation of potential acquisition opportunities and the acquisition of POC which was completed on December 30, 2020 while those incurred during the nine months ended March 27, 2020 were related to the acquisition of APC as well as costs associated with our evaluation of potential acquisition opportunities.

Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.

I NTEREST I NCOME

Interest income decreased to $0.2 million during the nine months ended April 2, 2021, as compared to $2.0 million during the nine months ended March 27, 2020.

The decrease was driven by lower cash on hand during the nine months ended April 2, 2021 compared to the prior period.

I NTEREST E XPENSE

We incurred $0.6 million of interest expense during the nine months ended April 2, 2021, related to the $160.0 million draw on our Revolver to facilitate the acquisition of POC, compared to less than $0.1 million of interest expense during the nine months ended March 27, 2020.

O THER (E XPENSE) I NCOME , N ET

Other (expense) income, net decreased to $2.0 million of Other expense during the nine months ended April 2, 2021 as compared to $0.4 million of Other Income for the nine months ended March 27, 2020.

There were $2.3 million and $2.4 million of financial and registration fees, respectively, for the nine months ended April 2, 2021 and March 27, 2020.

The nine months ended April 2, 2021 includes $0.8 million in litigation and settlement expenses and a $0.4 million loss on the sale of a cost-method investment which were partially offset by net foreign currency translation gains of $1.3 million.

The nine months ended March 27, 2020 includes a $3.8 million gain on sale of a cost-method investment, partially offset by $0.8 million net foreign currency translation losses during the nine months ended March 27, 2020.

I NCOME T AXES

We recorded an income tax provision of $12.0 million and $8.5 million on income before income taxes of $56.1 million and $66.9 million for the nine months ended April 2, 2021 and March 27, 2020, respectively.

During the nine months ended April 2, 2021 and March 27, 2020, we recognized a discrete tax benefit of $2.8 million and $6.6 million, respectively, related to excess tax benefits on stock-based compensation.

The effective tax rate for the nine months ended April 2, 2021 differed from the Federal statutory rate primarily due to Federal and State research and development credits, excess tax benefits related to stock-based compensation, non-deductible compensation, and state taxes.

The effective tax rate for the nine months ended March 27, 2020 differed from the Federal statutory rate primarily due to Federal research and development credits, excess tax benefits related to stock-based compensation, a release of a valuation allowance on a capital loss carryforward, a modified territorial tax system and a minimum tax on certain foreign earnings, 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 IRS.

L IQUIDITY AND C APITAL R ESOURCES

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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, Cypress, California and Hudson, New Hampshire, along with the ongoing expansion of our trusted custom microelectronics business during fiscal 2021.

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.

Our facilities improvements include expansion of our trusted custom microelectronics and mission computing businesses during fiscal 2022.

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.

Shelf Registration Statement

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debt securities, preferred stock, common stock, warrants and units.

We intend to use the proceeds from financings under the shelf registration statement for general corporate purposes, which may include the following:

We intend to use the proceeds from financings using the shelf registration statement for general corporate purposes, which may include the following:

• the acquisition of other companies or businesses;

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We have an unlimited amount available under the shelf registration statement.

Additionally, as part of the shelf registration statement, we have entered into an equity distribution agreement which allows us to sell an aggregate of up to $200.0 million of our common stock from time to time through our agents.

The actual dollar amount and number of shares of common stock we sell pursuant to the equity distribution agreement will be dependent on, among other things, market conditions and our fund raising requirements.

The agents may sell the common stock by any method deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation sales made directly on Nasdaq, on any other existing trading market for the common stock or to or through a market maker.

In addition, our common stock may be offered and sold by such other methods, including privately negotiated transactions, as we and the agents may agree.

Revolving Credit Facility

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.

As of April 2, 2021, we had $160.0 million of outstanding borrowings on the Revolver.

As of October 1, 2021, we had $200.0 million of outstanding borrowings on the Revolver.

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

As of and For the Nine Months Ended,

(In thousands) April 2, 2021 March 27, 2020

Net cash provided by operating activities $ 70,053 $ 86,458

As of and For the First Quarters Ended,

(In thousands) October 1, 2021 October 2, 2020

Net cash (used in) provided by operating activities $ (2,006) $ 22,929

Net cash used in investing activities $ (8,614) $ (10,978)

Net cash provided by financing activities $ 163,133 $ 186,713

Net cash used in financing activities $ (7,316) $ (64)

Net (decrease) increase in cash and cash equivalents $ (18,035) $ 12,284

Cash and cash equivalents at end of period $ 95,804 $ 239,122

Our cash, cash equivalents and restricted cash decreased by $104.9 million from July 3, 2020 to April 2, 2021, primarily as the result of $305.3 million used for the acquisition of POC and $34.7 million invested in purchases of property and equipment, partially offset by $160.0 million of borrowings on our Revolver to facilitate the acquisition of POC and $70.1 million provided by operating activities.

Our cash and cash equivalents decreased by $18.0 million from July 2, 2021 to October 1, 2021, primarily as the result of the $7.3 million share repurchase and retirement of common stock used to settle individual tax liabilities, $5.4 million invested in purchases of property and equipment and $3.2 million of other investing activities.

Operating Activities

During the nine months ended April 2, 2021, we generated $70.1 million in cash from operating activities, a decrease of $16.4 million, as compared to the nine months ended March 27, 2020.

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

In addition, the decrease was also attributable to lower comparable net income.

These decreases were partially offset by higher sources of cash from deferred revenues and customer advances and prepaid income taxes as well as lower uses of cash from accounts receivable, unbilled receivables, and costs in excess of billings.

During the first quarter ended October 1, 2021, we had an outflow of $2.0 million in cash from operating activities, as compared to $22.9 million of cash generated from operating activities for the first quarter ended October 2, 2020.

The decrease was primarily due to the net loss of $7.1 million, including cash outflows for restructuring and other charges associated with 1MPACT as well as acquisition costs primarily associated with the Avalex acquisition.

In addition, the decrease was due to lower deferred revenue and customer advances, higher unbilled receivables and costs in excess of billings as well as income tax payments.

These decreases were partially offset by lower cash outflows for accounts payable, accrued expenses and accrued compensation.

Investing Activities

During the nine months ended April 2, 2021, we invested $338.4 million, an increase of $214.5 million, as compared to the nine months ended March 27, 2020.

The increase was driven by $305.3 million in cash used for the acquisition of POC and an additional $2.9 million invested in purchases of property and equipment, primarily related to our facilities, during the nine months ended April 2, 2021.

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 during the nine months ended March 27, 2020.

During the first quarter ended October 1, 2021, we invested $8.6 million, a decrease of $2.4 million, as compared to the first quarter ended October 2, 2020.

The decrease was driven by $5.6 million lower purchases of property and equipment, partially offset by $3.2 million of other investing activity during the first quarter ended October 1, 2021.

Financing Activities

During the nine months ended April 2, 2021, we had $163.1 million in cash provided by financing activities, a decrease of $23.6 million as compared to the nine months ended March 27, 2020.

During the nine months ended April 2, 2021, we borrowed $160.0 million on our Revolver to facilitate the acquisition of POC.

During the nine months ended March 27, 2020, we had borrowings under the Revolver of $200.0 million, which was drawn to provide access to capital and flexibility in managing operations through the COVID pandemic.

Our decrease of $15.6 million in cash used during the nine months ended April 2, 2021 for payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with vesting of restricted stock awards is due to a change in our incentive stock plan tax withholding methods.

During the first quarter ended October 1, 2021, we used $7.3 million of cash payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with the annual vesting of restricted stock awards, as compared to $0.1 million in the first quarter ended October 2, 2020.

C OMMITMENTS, C ONTRACTUAL O BLIGATIONS AND C ONTINGENCIES

The following is a schedule of our commitments and contractual obligations outstanding at April 2, 2021:

The following is a schedule of our commitments and contractual obligations outstanding at October 1, 2021:

(In thousands) Total Less Than

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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 approximately $145.0 million at April 2, 2021.

We have a liability at April 2, 2021 of $4.1 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 on these uncertain tax positions and as such, do not

know the ultimate timing of payments or amount, if any, related to this liability.

The purchase commitments covered by these agreements are for less than one year and aggregated approxi mately $154.7 million at October 1, 2021.

We have a liability at October 1, 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 do not know the ultimate resolution on these uncertain tax positions and as such, do not know the ultimate timing of payments or amount, if any, 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.

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

O FF - BALANCE S HEET A RRANGEMENTS

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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.

The following table reconciles our net income, the most directly comparable GAAP financial measure, to our adjusted EBITDA:

Third Quarters Ended Nine Months Ended

(In thousands) April 2, 2021 March 27, 2020 April 2, 2021 March 27, 2020

Net income $ 15,635 $ 23,565 $ 44,119 $ 58,488

The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to our adjusted EBITDA:

First Quarters Ended

(In thousands) October 1, 2021 October 2, 2020

Net (loss) income $ (7,140) $ 15,798

Other non-operating adjustments, net 417 (182)

Interest expense (income), net 586 (72)

Income tax provision 5,362 5,363 11,993 8,455

Income tax (benefit) provision (441) 2,198

Depreciation 7,756 5,266

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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 measures, to adjusted income and adjusted EPS:

Third Quarters Ended

(In thousands, except per share data) April 2, 2021 March 27, 2020

Net income and diluted earnings per share $ 15,635 $ 0.28 $ 23,565 $ 0.43

Other non-operating adjustments, net (775) (3,138)

Amortization of intangible assets 12,717 7,848

Restructuring and other charges (4) 66

Impairment of long-lived assets — —

Acquisition and financing costs 3,260 891

Fair value adjustments from purchase accounting 182 600

Litigation and settlement expense, net 312 174

COVID related expenses 2,745 397

Stock-based and other non-cash compensation expense 7,565 6,917

Impact to income taxes (1)

(6,187) (4,048)

Adjusted income and adjusted earnings per share $ 35,450 $ 0.64 $ 33,272 $ 0.60

Diluted weighted-average shares outstanding 55,526 55,127

(1) 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.

Nine Months Ended

(In thousands, except per share data) April 2, 2021 March 27, 2020

Net income and earnings per share $ 44,119 $ 0.80 $ 58,488 $ 1.06

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

First Quarters Ended

(In thousands, except per share data) October 1, 2021 October 2, 2020

Net (loss) income and diluted (loss) earnings per share $ (7,140) $ (0.13) $ 15,798 $ 0.29

Other non-operating adjustments, net 417 (182)

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This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.

We expect to continue to incur expenditures similar to the free

cash flow adjustment described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash.

The following table reconciles cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow:

Third Quarters Ended Nine Months Ended

(In thousands) April 2, 2021 March 27, 2020 April 2, 2021 March 27, 2020

Cash provided by operating activities $ 23,185 $ 30,082 $ 70,053 $ 86,458

We expect to continue to incur expenditures similar to the free cash flow adjustment described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash.

The following table reconciles cash (used in) provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow:

First Quarters Ended

(In thousands) October 1, 2021 October 2, 2020

Cash (used in) provided by operating activities $ (2,006) $ 22,929

Purchase of property and equipment (5,377) (10,978)

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After the completion of four full fiscal quarters, acquired revenue is treated as organic for current and comparable historical periods.

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the third quarters and nine months ended April 2, 2021 and March 27, 2020, respectively:

(In thousands) April 2, 2021 As a % of

Revenue March 27, 2020 As a % of

Revenue $ Change % Change

Organic revenue $ 218,365 85 % $ 208,016 100 % $ 10,349 5 %

Acquired revenue 38,492 15 % — — % 38,492 100 %

Total revenues $ 256,857 100 % $ 208,016 100 % $ 48,841 23 %

(In thousands) April 2, 2021 As a % of

Revenue March 27, 2020 As a % of

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the first quarters ended October 1, 2021 and October 2, 2020, respectively:

(In thousands) October 1, 2021 As a % of

Revenue October 2, 2020 As a % of

Revenue $ Change % Change

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in our exposure to market risk from July 3, 2020 to April 2, 2021.

There were no material changes in our exposure to market risk from July 2, 2021 to October 1, 2021.

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-Q

Item 2. Management’s Discussion and Analysis