What changed in this filing

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Item 1A. Risk Factors

2022-08-16 compared with 2021-08-17 · 83 added, 46 removed, 370 unchanged (26% of the section changed)

3 unchanged sentences

Sales of our products and services, primarily as a subcontractor or team member with defense prime contractors, and in some cases directly, to the U.S.

government and its agencies, as well as foreign governments and agencies, accounted for approximately 98% of our total net revenues in fiscal 2021 and 95% in each of fiscal 2020 and 2019.

government and its agencies, as well as foreign governments and agencies, accounted for approximately 97%, 98% and 95% of our total net revenues in fiscal years 2022, 2021 and 2020, respectively.

Our products and services are incorporated into many different domestic and international defense programs.

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government programs is subject to Congressional appropriations.

Although multiple-year contracts may be planned in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue for many years.

Although multiple-year contracts may be planned in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a

program may continue for many years.

Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations and prime contracts receive such funding.

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government could reduce or terminate a prime contract under which we are a subcontractor or team member irrespective of the quality of our products or services.

The termination of a program or the reduction in or failure to commit additional funds to a program in which we are involved could

negatively impact our revenues and have a material adverse effect on our financial condition and results of operations.

The termination of a program or the reduction in or failure to commit additional funds to a program in which we are involved could negatively impact our revenues and have a material adverse effect on our financial condition and results of operations.

defense budget frequently operates under a continuing budget resolution, which increases revenue uncertainty and volatility.

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Economic conditions could adversely affect our business, results of operations and financial condition.

The world’s financial markets have, at times, experienced turmoil which could have material adverse impacts on our financial condition or our ability to achieve targeted results of operations due to:

World economic conditions and financial markets have, at times, experienced turmoil which could have material adverse impacts on our financial condition or our ability to achieve targeted results of operations due to:

• reduced and delayed demand for our products;

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We are unable to predict the likely duration and severity of adverse economic conditions in the United States and other countries, but the longer the duration or the greater the severity, the greater the risks we face in operating our business.

The near-term potential for recessionary economic conditions and possible stagflation (persistent high inflation and stagnant economic demand) presents increased risks to our business.

Price inflation for labor and materials, further exacerbated in energy and commodity markets by the Russian invasion of Ukraine, could adversely affect our business, results of operations and financial condition.

We experienced considerable price inflation in our costs for labor and materials during fiscal 2022, which adversely affected our business, results of operations and financial condition.

We may not be able to pass through inflationary cost increases under our existing firm fixed price commercial item contracts and we may only be able to recoup a portion of our increased costs under our reimbursement-type contracts.

Our ability to raise prices to reflect increased costs may be limited by competitive conditions in the market for our products and services.

Russia’s invasion of Ukraine, and prolonged conflict there, may continue to result in increased inflation, escalating energy and commodity prices and increasing costs of materials.

We continue to work to mitigate such pressures on our business operations as they develop.

To the extent the war in Ukraine adversely affects our business as discussed above, it may also have the effect of heightening many of the other risks described herein, such as those relating to cyber security, supply chain, volatility in prices and market conditions, any of which could negatively affect our business and financial condition.

The loss of one or more of our largest customers, programs, or applications could adversely affect our results of operations.

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A significant decrease in the sales to or loss of any of our major customers would have a material adverse effect on our business and results of operations.

In fiscal 2021, Raytheon Technologies accounted for 19% of our total net revenues, Lockheed Martin Corporation accounted for 15% of our total net revenues, and the US Navy accounted for 12% of our total net revenues.

In fiscal 2022, Raytheon Technologies accounted for 14% of our total net revenues, the U.S.

Navy accounted for 14% of our total net revenues and Lockheed Martin Corporation accounted for 10% of our total net revenues.

In fiscal 2021, Raytheon Technologies accounted for 19% of our total net revenues, Lockheed Martin Corporation accounted for 15% of our total net revenues and the U.S.

Navy accounted for 12% of our total net revenues.

In fiscal 2020, both Lockheed Martin Corporation and Raytheon Technologies accounted for 16% of our total net revenues.

In fiscal 2019, Raytheon Technologies accounted for 20% of our total net revenues and Lockheed Martin Corporation accounted for 17% of our total net revenues.

Customers in the defense market generally purchase our products in connection with government programs that have a limited duration, leading to fluctuating sales to any particular customer in this market from year to year.

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Additionally, on a limited number of programs the customer has co-manufacturing rights which could lead to a shift of production on such a program away from us which in turn could lead to lower revenues.

Going forward, we believe the SEWIP, Filthy Buzzard, F-35 and LTAMDS programs as well as a classified radar program could be a large portion of our future revenues in the coming years, and the loss or cancellation of these programs could adversely affect our future results.

Going forward, we believe F-35, Filthy Buzzard & Badger, F/A-18, LTAMDS, THAAD and Aegis programs could be a large portion of our future revenues in the coming years, and the loss or cancellation of these programs could adversely affect our future results.

Further, new programs may yield lower margins than legacy programs, which could result in an overall reduction in gross margins.

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Competitors may be able to offer more attractive pricing, develop products with performance features that are superior to our products, or offer higher quality or superior on time delivery, resulting in reduced demand for our products.

Recently, our on-time delivery has suffered due in part to supply chain volatility and unanticipated supplier decommits.

We may be unable to keep pace with competitors’ marketing and the lack of visibility in the marketplace may negatively impact design wins, bookings and revenues.

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If any of our sole-source suppliers limits or reduces the sale of these components, we may be unable to fulfill customer orders in a timely manner or at all.

If these or other component suppliers, some of which are small companies, experienced financial difficulties or other problems that prevented them from supplying us with the necessary components on a timely basis, we could experience a loss of revenues due to our inability to fulfill orders.

These sole-source and other suppliers are each subject to quality and performance issues, materials shortages, excess demand, reduction in capacity and other factors that may disrupt the flow of goods to us or to our customers, which would adversely affect our business and customer relationships.

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In addition, our industry, along with many others, is facing a significant shortage of semiconductors.

We are experiencing various levels of semiconductor impact.

A shortage of semiconductors or other key components can cause a significant disruption to our production schedule.

We have experienced and are experiencing meaningful levels of semiconductor impact.

The continuing shortage of semiconductors and other key components can cause a significant disruption to our production schedule.

Unprecedented material lead times and supplier decommits have increased volatility in our operating and financial results, including lower revenue and higher inventory and unbilled receivables, as well as decreased cash flow.

Carrying increased levels of inventory also increases our potential risk of future inventory obsolescence.

We may not be able to effectively manage our relationships with contract manufacturers.

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Contract manufacturers also build products for other companies, and they may not have sufficient quantities of inventory available or sufficient internal resources to fill our orders on a timely basis or at all.

In addition, there have been a number of major acquisitions within the contract manufacturing industry in recent years.

Future acquisitions could potentially have an adverse effect on our working relationships with contract manufacturers.

Moreover, we currently rely primarily on two contract manufacturers, Benchmark Electronics, Inc.

We currently rely primarily on two contract manufacturers, Benchmark Electronics, Inc.

and Omega Electronics Manufacturing Services.

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companies may be held liable for actions taken by strategic or local partners or representatives.

If we or our intermediaries fail to comply with the requirements of international applicable anti-corruption laws, governmental authorities in the United States or the countries in which we operate could seek to impose civil and criminal penalties, which could have a material adverse effect on our business, results of operations, financial conditions and cash flows.

If we or our intermediaries fail to comply with the requirements of international applicable anti-corruption laws, governmental authorities in the United States or the countries in which we operate could seek to impose civil and criminal penalties, or restrict or limit our ability to do business, which could have a material adverse effect on our business, results of operations, financial conditions and cash flows.

If we are unable to respond to technological developments and changing customer needs on a timely and cost-effective basis, our results of operations may be adversely affected.

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The design-in process is typically lengthy and expensive, and there can be no assurance that we will be able to continue to meet the product specifications of customers in a timely and adequate manner.

In addition, any failure to anticipate or respond adequately to changes in technology, customer preferences, and future order demands, or any significant delay in product developments, product introductions, or order volume, could negatively impact our financial condition and results of operations, including the risk of inventory obsolescence.

In addition, any failure to anticipate or respond adequately to changes in technology, customer preferences and future order demands, or any significant delay in product developments, product introductions, or order volume, could negatively impact our financial condition and results of

operations, including the risk of inventory obsolescence.

Because of the complexity of our products, we have experienced delays from time to time in completing products on a timely basis.

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• inability to scale quick reaction capability products due to low product volume;

• shortages and costs of components;

• shortages and increased costs of components;

• delays due to the implementation of new tariffs or other trade barriers;

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• declines in quarterly revenues from previous generations of products following announcement of replacement products containing more advanced technology;

• changes in estimates of completion on fixed price engagements.

• changes in estimates of completion on fixed price engagements, which represent a substantial percentage of our business.

In addition, from time to time, we have entered into contracts, referred to as development contracts, to engineer a specific solution based on modifications to standard products.

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We intend to continue to enter into development contracts and anticipate that the gross margins associated with development contract revenues will continue to be lower than gross margins from standard product sales.

Another factor contributing to fluctuations in our quarterly results is the fixed nature of expenditures on personnel, facilities, and marketing programs.

Another factor contributing to fluctuations in our quarterly results is the fixed nature of expenditures on personnel, facilities, information technology and marketing programs.

Expense levels for these programs are based, in significant part, on expectations of future revenues.

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Further, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

The percentage of our total revenue using over time revenue accounting has increased in recent years due to M&A transactions and the movement in our business toward subsystem development.

Over time revenue recognition is more reliant on estimates than the accounting for our component sales.

Actual results could differ from those estimates, and changes in estimates in subsequent periods could cause our results of operations to fluctuate.

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If we are not successful in hiring and retaining such employees, we may not be able to extend or maintain our engineering and operational expertise and our future product development efforts could be adversely affected.

Competition for hiring these employees is intense, especially individuals with specialized skills and security clearances required for our business, and we may be unable to hire and retain enough staff to implement our growth strategy.

Like our defense prime contractor customers, we face the potential for knowledge drain due to the impending retirement of the older members of our engineering and operations workforce in the coming years.

To the extent that we lose experienced personnel, it is critical that we develop other employees, hire new qualified personnel and successfully manage the short and long-term transfer of critical knowledge and skills.

We compete with commercial technology companies outside of the aerospace and defense industry for qualified technical positions as the number of qualified domestic engineers is decreasing and the number of available professionals is not keeping up with demand.

To the extent that these companies grow at a faster rate or face fewer cost and product pricing constraints, they may be able to offer more attractive compensation and other benefits to candidates, including in the recruitment of our existing employees.

In cases where the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting or training costs in order to attract and retain such employees.

We also must manage leadership development and succession planning throughout our business.

While we have processes in place for management transition and the transfer of knowledge and skills, the loss of key personnel, coupled with an inability to adequately train other personnel, hire new personnel, or transfer knowledge and skills, could significantly impact our ability to perform under our contracts and execute on new or growing programs.

Beginning with the pandemic, a significant portion of our workforce began working remotely and we expect a significant portion will continue to work a hybrid schedule.

We see many benefits to remote and hybrid work and have adopted new tools and processes to support the workforce.

However, if we are unable to effectively adapt to this hybrid work environment long term, then we may experience a less cohesive workforce, increased attrition, reduced program performance and less innovation.

During fiscal 2022, we experienced unusually high employee attrition and our costs to retain employees increased.

If we experience a disaster or other business continuity problem, we may not be able to recover successfully, which could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability.

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As we grow our operations, the potential for natural or man-made disasters, political, economic, or infrastructure instabilities, or other country- or region-specific business continuity risks increases.

We face various risks related to health pandemics such as COVID-19 .

We face adverse effects related to the COVID-19 pandemic, including disruptions in our supply chain, limitations on our operations and increased costs for health and safety measures.

We expect the COVID-19 pandemic to adversely affect our operations and financial position if significant portions of our workforce are unable to work effectively due to illness, quarantines, government actions, facility closures, or other restrictions.

To-date, our operations and production activities in the U.S.

and globally have remained operational during the COVID-19 pandemic.

Our facilities are considered essential activities and have been exempt from closure directives.

However, our manufacturing sites are subject to various local and national directives curtailing operations, requiring work from home and social distancing which otherwise could impact the efficiency of

our operations.

Such directives could change at any time.

We continue to monitor the situation, assessing possible implications on our operations, supply chain, liquidity and cash flow and will continue taking actions to mitigate adverse consequences.

Risks Related to Our Growth Strategy, Our 1MPACT Value Creation Plan and M&A

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1MPACT includes streamlining procurement and our supply chain, increasing the efficiency and effectiveness of R&D and manufacturing operations and further scaling through common processes and systems.

Our ability to enhance value through 1MPACT is subject to risks including:

Our ability to enhance value and to mitigate risk through 1MPACT is subject to risks including:

anticipated benefits not being realized or not at the levels anticipated;

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• potential loss of key employees;

• the impact of any assume legal proceedings;

• the impact of any assumed legal proceedings;

• adverse effects on our internal control over financial reporting before the acquiree's complete integration into our control environment.

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We may incur substantial indebtedness.

On September 28, 2018, we amended our existing revolving credit facility (“the Revolver”) to increase and extend the borrowing capacity to a $750.0 million, 5-year revolving credit line, with the maturity extended to September 28, 2023.

On February 28, 2022, we amended our existing revolving credit facility (“the Revolver”) to increase and extend the borrowing capacity to a $1.1 billion, 5-year revolving credit line, with the maturity extended to February 28, 2027.

As of July 1, 2022, we had $451.5 million of outstanding borrowings on the Revolver.

The Revolver accrues interest, at our option, at floating rates tied to LIBOR or the prime rate plus an applicable percentage.

The applicable percentage is set at LIBOR plus 1.25% and is established pursuant to a pricing grid based on our total net leverage ratio.

The Revolver accrues interest, at our option, at floating rates tied to Secured Overnight Financing Rate ("SOFR") or the prime rate plus an applicable percentage.

The applicable percentage is set at SOFR plus 1.25% and is established pursuant to a pricing grid based on our total net leverage ratio.

We may be exposed to the impact of interest rate changes primarily through our borrowing activities.

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We may also incur costs related to interest rate hedges, including the termination of any such hedges.

Our recent negative free cash flow, if not improved, could eventually lead to challenges in servicing our debt.

We have a significant amount of goodwill and intangible assets on our consolidated financial statements that are subject to impairment based upon future adverse changes in our business or prospects.

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Changes could be accelerated due to changes in our mix of business, in Federal regulations, or in the interpretation of Federal regulations, which may subject us to increased oversight by the Defense Contract Audit Agency (“DCAA”) for certain of our products or services.

Such changes could also trigger contract coverage under the Cost Accounting Standards (“CAS”), further impacting our commercial operating model and requiring compliance with a defined set of business systems criteria.

Such changes could also trigger contract coverage for a larger percentage of our contracts under the Cost Accounting Standards (“CAS”), further impacting our commercial operating model and requiring compliance with a defined set of business systems criteria.

Failure to comply with applicable CAS requirements could adversely impact our ability to win future CAS-type contracts.

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government and defense prime contractors.

Amendments to the CMMC may increase our costs or delay the award of contracts if we are unable to certify that we satisfy such cybersecurity requirements at our Company level and into our supply chain.

Inability to meet the qualifications to the CMMC and any amendments may increase our costs or delay the award of contracts if we are unable to certify that we satisfy such cybersecurity requirements at our Company level and into our supply chain.

government or a defense prime contractor customer could require us to relinquish data rights to a product in connection with performing work on a defense contract, which could lead to a loss of valuable technology and intellectual property in order to participate in a government program.

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government security protocols when accessing sensitive information.

Most of our facilities maintain a facility security clearance and many of our employees maintain a personal security clearance to access sensitive information necessary to the performance of our work on certain U.S.

Many of our facilities maintain a facility security clearance and many of our employees maintain a personal security clearance to access sensitive information necessary to the performance of our work on certain U.S.

government contracts and subcontracts.

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If we cannot obtain required government approvals under applicable regulations in a timely manner or at all, we could be delayed or prevented from selling our products in certain jurisdictions, which could adversely affect our business and financial results.

For example, If the US government continues to expand the scope of regulations intended to address civil-military fusion in China, certain commercial technologies which have historically been exportable to Hong Kong and China may be prohibited.

Our income tax provision and other tax liabilities may be insufficient if taxing authorities are successful in asserting tax positions that are contrary to our position.

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Although we believe our approach to determining the appropriate tax treatment is supportable and in accordance with relevant authoritative guidance it is possible that the final tax authority will take a tax position that is materially different than that which is reflected in our income tax provision.

Such differences could have an adverse effect on our income tax provision or benefit, in the reporting period in which such determination is made and, consequently, on our results of operations, financial position, and/or cash flows for such period.

Such differences could have an adverse effect on our income tax provision or benefit, in the

reporting period in which such determination is made and, consequently, on our results of operations, financial position and/or cash flows for such period.

Further, future increases in tax rates may adversely affect our financial results.

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We may be unsuccessful in protecting our intellectual property rights which could result in the loss of a competitive advantage.

If we become subject to intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products.

Our ability to compete effectively against other companies in our industry depends, in part, on our ability to protect our current and future proprietary technology under patent, copyright, trademark, trade secret and unfair competition laws.

We cannot assure you that our means of protecting our proprietary rights in the United States or abroad will be adequate, or that others will not develop technologies similar or superior to our technology or design around our proprietary rights.

We cannot assure you that our means of protecting our proprietary rights in the United States or abroad will be adequate, or that

others will not develop technologies similar or superior to our technology or design around our proprietary rights.

In addition, we may incur substantial costs in attempting to protect our proprietary rights.

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Further, with respect to our issued patents and patent applications, we cannot assure you that any patents from any pending patent applications (or from any future patent applications) will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of our patents will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents (and patent applications) and other proprietary rights held by us.

If we become subject to intellectual property infringement claims, we could incur significant expenses and could be prevented from selling specific products.

We may become subject to claims that we infringe the intellectual property rights of others.

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Any judgment against us could require substantial payment in damages and could also include an injunction or other court order that could prevent us from offering certain products.

Risks Related to the COVID-19 Pandemic

We face various risks related to health pandemics such as COVID-19 .

We face adverse effects related to the COVID-19 pandemic, including disruptions in our supply chain, limitations on our operations, and increased costs for health and safety measures.

To-date, our operations and production activities in the U.S.

and globally have remained operational during the COVID-19 pandemic.

Our facilities are considered essential activities and have been exempt from closure directives.

Such directives could change at any time.

We continue to monitor the situation, assessing possible implications on our operations, supply chain, liquidity, and cash flow, and will continue taking actions to mitigate adverse consequences.

Risks Related to Our Common Stock

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The market price of our common stock may decline as a result of our merger and acquisition activity if, among other things, we are unable to achieve the expected growth in revenue and earnings, or if the operational cost savings estimates in connection with the integration of acquired businesses are not realized.

The market price of our common stock also may decline if we do not achieve the perceived benefits of the acquisitions as rapidly or to the extent anticipated by financial or industry

analysts or if the effect of the acquisitions on our financial results is not consistent with the expectations of financial or industry analysts.

The market price of our common stock also may decline if we do not achieve the perceived benefits of the acquisitions as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the acquisitions on our financial results is not consistent with the expectations of financial or industry analysts.

We have never paid cash dividends on our common stock and we do not anticipate paying any dividends in the foreseeable future.

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We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

If we fail to raise additional funds, we may need to sell debt or additional equity securities or to reduce our growth to a level that can be supported by our cash flow.

If we fail to

raise additional funds, we may need to sell debt or additional equity securities or to reduce our growth to a level that can be supported by our cash flow.

Provisions in our organizational documents and Massachusetts law and other actions we have taken could make it more difficult for a third party to acquire us.

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These provisions include a classified board of directors, advance notice to our board of directors of shareholder proposals and director nominations, and limitations on the ability of shareholders to remove directors and to call shareholder meetings.

In addition, we may issue shares of any class or series of preferred stock in the future without shareholder approval upon such terms as our board of directors may determine.

In addition, we may issue shares of any class or series of preferred stock in the future without shareholder approval upon such terms as our board of directors may determine, such as those underlying the shareholder rights agreement we adopted in December 2021.

On December 27, 2021, the board of directors of the Company adopted a Shareholder Rights Plan which, as amended, will expire on the date of the Annual Meeting in October 2022.

The rights of holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any such class or series of preferred stock that may be issued.

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In determining what the director of a Massachusetts corporation reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation's employees, suppliers, creditors, and customers, the economy of the state, the region, and the nation, community and societal considerations and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.

Shareholder activism could cause us to incur significant expense, disrupt our business, result in a proxy contest or litigation and impact our stock price.

We have been subject to shareholder activism and may be subject to such activism in the future, which could result in substantial costs and divert management’s and our Board’s attention and resources from our business.

Such shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with our employees, customers, or suppliers and make it more difficult to attract and retain qualified personnel.

We may be required to incur significant fees and other expenses related to activist shareholder matters, including for third-party advisors.

We may be subjected to a proxy contest or to litigation by activist investors, including litigation related to any shareholder rights agreement or “poison pill” that our Board adopts, such as the Shareholder Rights Plan adopted on December 27, 2021.

Our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any shareholder activism.

JANA Partners LLC filed a Schedule 13D on December 23, 2021, and Starboard Value LP filed a Schedule 13D on January 13, 2022.

Both JANA and Starboard indicated that they intended to engage with Mercury’s management.

Starboard also wrote an open letter to Mercury’s Board of Directors dated January 13, 2022, requesting that the limited duration rights agreement be withdrawn or amended.

On June 23, 2022, we entered into settlement agreements with each of JANA and Starboard that covered the appointment of two directors to our Board and an amendment to our shareholder rights plan.

The settlement agreements also contain customary standstill provisions that end approximately 30 days prior to the expiration of the advance notice period for the nomination of directors at our 2023 annual meeting of shareholders.

UNRESOLVED STAFF COMMENTS

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 1A. Risk Factors