What changed in this filing

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Item 1. Financial Statements

2022-11-08 compared with 2022-05-10 · 224 added, 337 removed, 411 unchanged (58% of the section changed)

3 unchanged sentences

(In thousands, except share and per share data)

April 1, 2022 July 2, 2021

September 30, 2022 July 1, 2022

Current assets:

Cash and cash equivalents $ 51,981 $ 65,654

Accounts receivable, net of allowance for credit losses of $ 1,813 and $ 1,720 at April 1, 2022 and July 2, 2021, respectively

Accounts receivable, net of allowance for credit losses of $ 2,058 and $ 2,074 at September 30, 2022 and July 1, 2022, respectively

164,210 144,494

7 unchanged sentences

Intangible assets, net 336,968 351,538

Operating lease right-of-use assets 68,970 66,373

Operating lease right-of-use assets, net 63,738 66,366

Other non-current assets 5,734 6,188

20 unchanged sentences

85,000,000 shares authorized;

55,594,940 and 55,241,120 shares issued and outstanding at April 1, 2022 and July 2, 2021, respectively

56,180,255 and 55,679,747 shares issued and outstanding at September 30, 2022 and July 1, 2022, respectively

Additional paid-in capital 1,156,501 1,145,323

Retained earnings 371,439 385,774

Accumulated other comprehensive income (loss) 12 ( 339 )

Accumulated other comprehensive income 10,428 5,531

Total shareholders’ equity 1,538,930 1,537,185

2 unchanged sentences

MERCURY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

Third Quarters Ended Nine Months Ended

April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data) (Unaudited)

First Quarters Ended

September 30, 2022 October 1, 2021

Net revenues $ 227,579 $ 225,013

8 unchanged sentences

Total operating expenses 85,289 93,984

Income from operations 9,955 21,712 3,993 58,595

Loss from operations ( 7,194 ) ( 5,575 )

Interest income 29 9

1 unchanged sentence

Other expense, net ( 3,645 ) ( 1,420 )

Income (loss) before income taxes 6,241 20,997 ( 4,134 ) 56,112

Income tax provision 2,102 5,362 1,506 11,993

Net income (loss) $ 4,139 $ 15,635 $ ( 5,640 ) $ 44,119

Basic net earnings (loss) per share $ 0.07 $ 0.28 $ ( 0.10 ) $ 0.80

Diluted net earnings (loss) per share $ 0.07 $ 0.28 $ ( 0.10 ) $ 0.80

Loss before income taxes ( 15,357 ) ( 7,581 )

Income tax benefit ( 1,022 ) ( 441 )

Net loss $ ( 14,335 ) $ ( 7,140 )

Basic net loss per share $ ( 0.26 ) $ ( 0.13 )

Diluted net loss per share $ ( 0.26 ) $ ( 0.13 )

Weighted-average shares outstanding:

1 unchanged sentence

Diluted 55,931 55,376

Comprehensive income (loss):

Net income (loss) $ 4,139 $ 15,635 $ ( 5,640 ) $ 44,119

Comprehensive loss:

Net loss $ ( 14,335 ) $ ( 7,140 )

Change in fair value of derivative instruments, net of tax 4,420 —

Foreign currency translation adjustments 429 244

Pension benefit plan, net of tax 48 48

Total other comprehensive income (loss), net of tax 280 248 351 ( 449 )

Total comprehensive income (loss) $ 4,419 $ 15,883 $ ( 5,289 ) $ 43,670

Total other comprehensive income, net of tax 4,897 292

Total comprehensive loss $ ( 9,438 ) $ ( 6,848 )

The accompanying notes are an integral part of the consolidated financial statements.

2 unchanged sentences

(In thousands)

For the Third Quarter Ended April 1, 2022

Common Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

(Loss) Income Total

Shareholders’

Shares Amount

Balance at December 31, 2021 55,583 $ 556 $ 1,122,113 $ 364,720 $ ( 268 ) $ 1,487,121

Issuance of common stock under employee stock incentive plans 16 — — — — —

Purchase and retirement of common stock ( 4 ) — ( 217 ) — — ( 217 )

Stock-based compensation — — 9,121 — — 9,121

Net income — — — 4,139 — 4,139

Other comprehensive income — — — — 280 280

Balance at April 1, 2022 55,595 $ 556 $ 1,131,017 $ 368,859 $ 12 $ 1,500,444

For the Third Quarter Ended April 2, 2021

Common Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

Shareholders’

Shares Amount

Balance at January 1, 2021 55,129 $ 551 $ 1,092,723 $ 340,939 $ ( 3,582 ) $ 1,430,631

Issuance of common stock under employee stock incentive plans 35 1 10 — — 11

Stock-based compensation — — 7,455 — — 7,455

Net income — — — 15,635 — 15,635

Other comprehensive income — — — — 248 248

Balance at April 2, 2021 55,164 $ 552 $ 1,100,188 $ 356,574 $ ( 3,334 ) $ 1,453,980

For the Nine Months Ended April 1, 2022

For the First Quarter Ended September 30, 2022

Common Stock Additional

2 unchanged sentences

Comprehensive

(Loss) Income Total

Shareholders’

2 unchanged sentences

Issuance of common stock under employee stock incentive plans 418 4 ( 4 ) — — —

Issuance of common stock under employee stock purchase plan 54 1 2,515 — — 2,516

Purchase and retirement of common stock ( 145 ) ( 1 ) ( 7,715 ) — — ( 7,716 )

Issuance of common stock under defined contribution plan 83 1 4,122 — — 4,123

Retirement of common stock ( 1 ) — ( 63 ) — — ( 63 )

Stock-based compensation — — 7,123 — — 7,123

1 unchanged sentence

Other comprehensive income — — — — 4,897 4,897

Balance at April 1, 2022 55,595 $ 556 $ 1,131,017 $ 368,859 $ 12 $ 1,500,444

For the Nine Months Ended April 2, 2021

Balance at September 30, 2022 56,180 $ 562 $ 1,156,501 $ 371,439 $ 10,428 $ 1,538,930

For the First Quarter Ended October 1, 2021

Common Stock Additional

6 unchanged sentences

Issuance of common stock under employee stock incentive plans 398 4 ( 4 ) — — —

Issuance of common stock under employee stock purchase plan 46 — 3,184 — — 3,184

Purchase and retirement of common stock ( 1 ) — ( 66 ) — — ( 66 )

Retirement of common stock ( 138 ) ( 1 ) ( 7,315 ) — — ( 7,316 )

Stock-based compensation — — 9,498 — — 9,498

Net income — — — 44,119 — 44,119

Other comprehensive loss — — — — ( 449 ) ( 449 )

Balance at April 2, 2021 55,164 $ 552 $ 1,100,188 $ 356,574 $ ( 3,334 ) $ 1,453,980

Net loss — — — ( 7,140 ) — ( 7,140 )

Other comprehensive income — — — — 292 292

Balance at October 1, 2021 55,501 $ 555 $ 1,111,613 $ 367,359 $ ( 47 ) $ 1,479,480

The accompanying notes are an integral part of the consolidated financial statements.

2 unchanged sentences

(In thousands)

Nine Months Ended

April 1, 2022 April 2, 2021

First Quarters Ended

September 30, 2022 October 1, 2021

Cash flows from operating activities:

Net (loss) income $ ( 5,640 ) $ 44,119

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Net loss $ ( 14,335 ) $ ( 7,140 )

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization expense 23,701 21,490

Stock-based compensation expense 7,249 9,527

Share-based matching contributions on defined contribution plan 3,680 —

Benefit for deferred income taxes ( 814 ) ( 2,171 )

Other non-cash items ( 1,301 ) ( 1,552 )

Cash settlement for termination of interest rate swap 5,995 —

Changes in operating assets and liabilities, net of effects of businesses acquired:

8 unchanged sentences

Other non-current liabilities ( 2,996 ) ( 315 )

Net cash provided by operating activities 566 70,053

Net cash used in operating activities ( 66,039 ) ( 2,006 )

Cash flows from investing activities:

Acquisition of businesses, net of cash acquired ( 243,255 ) ( 305,263 )

Purchases of property and equipment ( 7,328 ) ( 5,377 )

Other investing activities 50 ( 3,237 )

Proceeds from sale of investment — 1,538

Net cash used in investing activities ( 7,278 ) ( 8,614 )

Cash flows from financing activities:

Proceeds from employee stock plans 2,516 3,199

Borrowings under credit facilities 60,000 —

Purchase and retirement of common stock ( 63 ) ( 7,316 )

Payments of deferred financing and offering costs ( 2,662 ) —

Net cash provided by financing activities 243,638 163,133

Net cash provided by (used in) financing activities 59,937 ( 7,316 )

Effect of exchange rate changes on cash and cash equivalents ( 293 ) ( 99 )

13 unchanged sentences

Mercury Systems, Inc.

(the “Company” or “Mercury”) is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense.

Headquartered in Andover, Massachusetts, the Company delivers products and solutions that power a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments.

The Company envisions, creates and delivers 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.

is a technology company that delivers commercial innovation to rapidly transform the global aerospace and defense industry.

Headquartered in Andover, Massachusetts, the Company's end-to-end processing platform enables a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments.

Processing technologies that comprise the Company's platform include signal solutions, display, software applications, networking, storage and secure processing.

The Company's innovative solutions are mission-ready, trusted and secure, software-defined and open and modular (the Company's differentiators), to meet customers’ most-pressing high-tech needs, including those specific to the defense community.

Investors and others should note that the Company announces material financial information using its website ( www.mrcy.com ), Securities and Exchange Commission (“SEC”) filings, press releases, public conference calls, webcasts, and social media, including Twitter ( twitter.com/mrcy and twitter.com/mrcy_CEO ) and LinkedIn ( www.linkedin.com/company/mercury-systems ).

6 unchanged sentences

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended July 1, 2022 which are contained in the Company’s Annual Report on Form 10-K filed with the SEC on August 16, 2022.

The results for the third quarter and nine months ended April 1, 2022 are not necessarily indicative of the results to be expected for the full fiscal year.

The results for the first quarter ended September 30, 2022 are not necessarily indicative of the results to be expected for the full fiscal year.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation .

All references to the third quarter of fiscal 2022 are to the quarter ended April 1, 2022.

There were 13 weeks during the third quarters ended April 1, 2022 and April 2, 2021, respectively.

There were 39 weeks during the nine months ended April 1, 2022 and April 2, 2021, respectively.

All references to the first quarter of fiscal 2023 are to the quarter ended September 30, 2022.

There were 13 weeks during the first quarters ended September 30, 2022 and October 1, 2021, respectively.

U SE OF E STIMATES

7 unchanged sentences

The accounts of foreign subsidiaries are translated using exchange rates in effect at period-end for assets and liabilities and at average exchange rates during the period for results of operations.

The related translation adjustments are reported in Accumulated other comprehensive income (“AOCI”) in shareholders’ equity.

The related translation adjustments are reported in Accumulated other comprehensive income (loss) (“AOCI”) in shareholders’ equity.

Gains (losses) resulting from non-U.S.

currency transactions are included in Other expense, net in the Consolidated Statements of Operations and Comprehensive Income (Loss) and were immaterial for all periods presented.

currency transactions are included in Other expense, net in the Consolidated Statements of Operations and Comprehensive Loss and were immaterial for all periods presented.

The Company records the fair value of its derivative financial instruments in its condensed consolidated financial statements in other non-current assets, or other non-current liabilities depending on their net position, regardless of the purpose or intent for holding the derivative contract.

Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of Other comprehensive income (“OCI”).

Changes in the fair value of cash flow hedges that qualify for hedge accounting treatment are recorded in OCI and reclassified into earnings in the same line item on the Consolidated Statements of Operations and Comprehensive Income as the impact of the hedged transaction when the underlying contract matures and, for interest rate exposure derivatives, over the term of the corresponding debt instrument.

Changes in the fair values of derivatives not qualifying for hedge accounting are reported in earnings as they occur.

All derivatives for the Company qualified for hedge accounting as of September 30, 2022.

R EVENUE R ECOGNITION

9 unchanged sentences

Revenue recognized at a point in time generally relates to contracts that include a combination of components, modules and sub-assemblies, integrated subsystems and related system integration or other services.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 45 % and 48 % of revenues for the third quarter and nine months ended April 1, 2022, respectively.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 53 % and 59 % of revenues for the third quarter and nine months ended April 2, 2021, respectively.

The Company also engages in long-term contracts for development, production and service activities and recognizes revenue for performance obligations over time.

These long-term contracts involve the design, development, manufacture, or modification of complex modules and sub-assemblies or integrated subsystems and related services.

Long-term contracts include both fixed-price and cost reimbursable contracts.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 37 % and 47 % of revenues for the first quarters ended September 30, 2022 and October 1, 2021, respectively.

The Company also engages in over time contracts for development, production and service activities and recognizes revenue for performance obligations over time.

These over time contracts involve the design, development, manufacture, or modification of complex modules and sub-assemblies or integrated subsystems and related services.

Over time contracts include both fixed-price and cost reimbursable contracts.

The Company’s cost reimbursable contracts typically include cost-plus fixed fee and time and material contracts.

Total revenue recognized under long-term contracts over time was 55 % and 52 % of total revenues for the third quarter and nine months ended April 1, 2022, respectively.

Total revenue recognized under long-term contracts over time was 47 % and 41 % of total revenues for the third quarter and nine months ended April 2, 2021, respectively.

Total revenue recognized over time was 63 % and 53 % of total revenues for the first quarters ended September 30, 2022 and October 1, 2021, respectively.

The Company generally does not provide its customers with rights of product return other than those related to assurance warranty provisions that permit repair or replacement of defective goods over a period of 12 to 36 months.

3 unchanged sentences

The transaction price allocated to extended warranties is recognized over time in proportion to the costs expected to be incurred in satisfying the obligations under the contract.

The Company's contracts generally do not include significant financing components.

The Company's over time contracts may include milestone payments, which align the payment schedule with the progress towards completion on the performance obligation.

Otherwise, the Company's contracts are predicated on payment upon completion of the performance obligation.

On certain contracts, the Company may be entitled to receive an advance payment, which is not considered a significant financing component because most contracts have a duration of approximately two years on average and it is used to facilitate inventory demands at the onset of a contract and to safeguard the Company from the failure of the other party to abide by some or all of their obligations under the contract.

All revenues are reported net of government assessed taxes (e.g., sales taxes or value-added taxes).

9 unchanged sentences

C ONTRACT B ALANCES

Contract balances result from the timing of revenue recognized, billings and cash collections, and the generation of contract assets and liabilities.

Contract balances result from the timing of revenue recognized, billings and cash collections resulting in the generation of contract assets and liabilities.

Contract assets represent revenue recognized in excess of amounts invoiced to the customer and the right to payment is not subject to the passage of time.

Instead, while the Company has an enforceable right to payment as progress is made over performance obligations, billings to customers are generally predicated on (i) completion of defined milestones, (ii) monthly costs incurred or (iii) final delivery of goods or services.

Contract assets are presented as Unbilled receivables and costs in excess of billings on the Company’s Consolidated Balance Sheets.

4 unchanged sentences

Customer advances represent deposits received from customers on an order.

Contract liabilities are included in deferred revenue and the long-term portion of deferred revenue is included within other non-current liabilities on the Company’s Consolidated Balance Sheets.

Contract liabilities are included in deferred revenue as well as other non-current liabilities on the Company’s Consolidated Balance Sheets.

Contract balances are reported in a net position on a contract-by-contract basis.

The contract asset balances were $ 242,304 and $ 162,921 as of April 1, 2022 and July 2, 2021, respectively.

The contract asset balance increased due to growth in revenue recognized over time as well as timing of milestone billings under long-term contracts during the nine months ended April 1, 2022.

The contract liability balances were $ 20,802 and $ 35,201 as of April 1, 2022 and July 2, 2021, respectively.

The decrease was due to the recognition of revenue across multiple programs.

Revenue recognized for the third quarter and nine months ended April 1, 2022 that was included in the contract liability balance a t July 2, 2021 was $ 6,263 and $ 24,551 , respectively.

Revenue recognized for the third quarter and nine months ended April 2, 2021 that was included in the contract liability balance at July 3, 2020 was $ 2,133 and $ 15,499 , respectively.

The contract asset balances were $ 330,495 and $ 303,356 as of September 30, 2022 and July 1, 2022, respectively.

The contract asset balance increased due to growth in revenue recognized under over time contracts as well as industry-wide award delays and supply chain constraints impacting the timing of billing events and cash conversion during the first quarter ended September 30, 2022.

The contract liability balances were $ 23,778 and $ 15,966 as of September 30, 2022 and July 1, 2022, respectively.

The increase was due to the timing of milestone billing events across multiple programs.

Revenue recognized for the first quarter ended September 30, 2022 that was included in the contract liability balance at July 1, 2022 was $ 4,669 .

Revenue recognized for the first quarter ended October 1, 2021 that was included in the contract liability balance at July 2, 2021 was $ 13,137 .

R EMAINING P ERFORMANCE O BLIGATIONS

1 unchanged sentence

The definition of remaining performance obligations excludes contracts with original expected durations of less than one year, as well as those contracts that provide the customer with the right to cancel or terminate the order with no substantial penalty, even if the Company’s historical experience indicates the likelihood of cancellation or termination is remote.

As of April 1, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 453,850 .

As of September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 587,129 .

The Company expects to recognize approximately 63 % of its remaining performance obligations as revenue in the next 12 months and the balance thereafter.

1 unchanged sentence

Weighted-average shares were calculated as follows:

Third Quarters Ended Nine Months Ended

April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

First Quarters Ended

September 30, 2022 October 1, 2021

Basic weighted-average shares outstanding 55,931 55,376

1 unchanged sentence

Diluted weighted-average shares outstanding 55,931 55,376

Equity instruments to purchase 246 and 386 shares of common stock were not included in the calculation of diluted net earnings per share for the third quarter and nine months ended April 1, 2022, respectively, because the equity instruments were anti-dilutive.

Equity instruments to purchase 38 and 13 shares of common stock were not included in the calculation of diluted net earnings per share for the third quarter and nine months ended April 2, 2021, respectively, because the equity instruments were anti-dilutive.

Equity instruments to purchase 416 and 474 shares of common stock were not included in the calculation of diluted net earnings per share for the first quarters ended September 30, 2022 and October 1, 2021, respectively, because the equity instruments were anti-dilutive.

R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, an amendment of the FASB Accounting Standards Codification.

The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The amendments in this ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022.

The Company does not expect this adoption to have a material impact to the Company's consolidated financial statements or related disclosures.

In August 2020, the FASB issued ASU No.

2020-06, Debt - Debt with conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity's Own Equity , an amendment of the FASB Accounting Standards Codification.

The amendments in this ASU simplify the accounting for convertible debt securities.

The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted, including adoption in an interim period.

The Company does not expect this adoption to have a material impact to the Company's consolidated financial statements or related disclosures.

In October 2021, the FASB issued ASU No.

1 unchanged sentence

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , an amendment of the FASB Accounting Standards Codification.

The amendments in this ASU address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination and require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606 , Revenue from Contracts with Customers.

Under current U.S.

GAAP, an acquirer generally recognizes assets and liabilities assumed in a business combination, including contract assets and liabilities arising from revenue contracts with customers, at fair value on the acquisition date.

2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC 606 .

2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under Topic 606.

This ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted, including adoption in an interim period.

The Company is currently evaluating the effect that this standard may have on its consolidated financial statements and related disclosures.

The Company is currently evaluating the effect that this standard will have on its consolidated financial statements and related disclosures.

R ECENTLY A DOPTED A CCOUNTING P RONOUNCEMENTS

Effective July 2, 2022, the Company adopted ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, an amendment of the FASB Accounting Standards Codification.

The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions for intraperiod tax allocations and deferred tax liabilities for equity method investments and add guidance as to whether a step-up in tax basis of goodwill relates to a business combination or a separate transaction.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, an amendment of the FASB Accounting Standards Codification.

This adoption did not have a material impact to the Company's consolidated financial statements or related disclosures.

A TLANTA M ICRO A C QUISITION

Effective July 2, 2022, the Company adopted ASU No.

2020-06, Debt - Debt with conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity's Own Equity , an amendment of the FASB Accounting Standards Codification.

The amendments in this ASU simplify the accounting for convertible debt securities.

This adoption did not have a material impact to the Company's consolidated financial statements or related disclosures.

A TLANTA M ICRO A CQUISITION

On November 29, 2021, the Company acquired Atlanta Micro, Inc.

("Atlanta Micro") for a purchase price of $ 90,000 , subject to net working capital and net debt adjustments.

(“Atlanta Micro”) for a purchase price of $ 90,000 , prior to net working capital and net debt adjustments.

Based in Norcross, Georgia, Atlanta Micro is a leading designer and manufacturer of high-performance RF modules and components, including advanced monolithic microwave integrated circuits (“MMICs”) which are critical for high-speed data acquisition applications including electronic warfare, radar and weapons.

The Company funded the acquisition through the Company's existing revolving credit facility (the “Revolver”).

On March 28, 2022, the Company and former owners of Atlanta Micro agreed to post closing adjustments totaling $ 58 , which increased the Company's net purchase price.

The following table presents the net purchase price and the fair values of the assets and liabilities of Atlanta Micro on a preliminary basis:

4 unchanged sentences

Net purchase price $ 89,240

Fair value of tangible assets acquired and liabilities assumed

Estimated fair value of tangible assets acquired and liabilities assumed

Accounts receivable 1,568

5 unchanged sentences

Other current and non-current liabilities ( 11,084 )

Fair value of net tangible assets acquired ( 2,030 )

Fair value of identifiable intangible assets 34,980

Goodwill 58,014

Fair value of net assets acquired 90,964

Estimated fair value of net tangible assets acquired ( 2,063 )

Estimated fair value of identifiable intangible assets 34,980

Estimated goodwill 58,105

Estimated fair value of net assets acquired 91,022

Less cash acquired ( 1,782 )

Net purchase price $ 89,240

The amounts above represent the preliminary fair value estimates as of April 1, 2022 and are subject to subsequent adjustment as the Company obtains additional information during the measure ment period and finalizes its fair value estimates.

The preliminary identifiable intangible asset estimate includes customer relationships of $ 27,310 with a useful life of 20 years, completed technology of $ 7,260 with a useful life of 8 years and backlog of $ 410 with a useful life of 2 years.

The amounts above represent the preliminary fair value estimates as of September 30, 2022 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates.

Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.

1 unchanged sentence

The goodwill from this acquisition is reported in the Microelectronics reporting unit.

The revenues and loss before income taxes from Atlanta Micro included in the Company's consolidated results for the third quarter ended April 1, 2022 were $ 3,409 and $ 365 , respectively.

The revenues and loss before income taxes from Atlanta Micro included in the Company's consolidated results for the nine months ended April 1, 2022 were $ 5,026 and $ 585 , respectively.

A VALEX A CQUISITION

On September 27, 2021, the Company signed a definitive agreement to acquire Avalex Technologies (“Avalex”) for a purchase price of $ 155,000 , subject to net working capital and net debt adjustments.

On November 5, 2021, the transaction

closed and the Company acquired Avalex.

On September 27, 2021, the Company signed a definitive agreement to acquire Avalex Technologies, LLC.

(“Avalex”) for a purchase price of $ 155,000 , prior to net working capital and net debt adjustments.

On November 5, 2021, the transaction closed and the Company acquired Avalex.

Based in Gulf Breeze, Florida, Avalex is a provider of mission-critical avionics, including rugged displays, integrated communications management systems, digital video recorders and warning systems.

The Company funded the acquisition with the Company's Revolver.

The Company funded the acquisition with the Revolver.

On March 17, 2022, the Company and former owner of Avalex agreed to post closing adjustments totaling $ 151 , which increased the Company's net purchase price.

The following table presents the net purchase price and the fair values of the assets and liabilities of Avalex on a preliminary basis:

4 unchanged sentences

Net purchase price $ 154,145

Fair value of tangible assets acquired and liabilities assumed

Accounts receivable and unbilled receivables 5,317

Inventory 7,141

Fixed assets 1,245

Other current and non-current assets 5,195

Accounts payable ( 1,700 )

Accrued expenses ( 1,445 )

Other current and non-current liabilities ( 4,787 )

Fair value of net tangible assets acquired 13,154

Fair value of identifiable intangible assets 61,360

Goodwill 81,668

Fair value of net assets acquired 156,182

Less cash acquired ( 2,188 )

Net purchase price $ 153,994

T he amounts above represent the preliminary fair value estimates as of April 1, 2022 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates.

The preliminary identifiable intangible asset estimate includes customer relationships of $ 41,880 with a useful life of 9 years, completed technology of $ 14,430 with a useful life of 7 years and backlog of $ 5,050 with a useful life of one year .

Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.

The estimated goodwill of $ 81,668 largely reflects the potential synergies and expansion of the Company’s offerings across product lines and markets complementary to the Company’s existing products and markets.

The goodwill from this acquisition is reported in the Processing reporting unit.

The Company has estimated the tax value of the intangible assets from this transaction and is amortizing the amount over 15 years for tax purposes.

As of April 1, 2022, the Company had $ 80,786 of goodwill deductible for tax purposes.

The revenues and income before income taxes from Avalex included in the Company's consolidated results for the third quarter and ended April 1, 2022 were $ 8,908 and $ 726 , respectively.

The revenues and loss before income taxes from Avalex included in the Company's consolidated results for the nine months ended April 1, 2022 were $ 13,335 and $ 370 , respectively.

P ENTEK A CQUISITION

On May 27, 2021, the C ompany acquired Pentek Technologies, LLC and Pentek Systems, Inc.

(collectively, "Pentek").

for a purchase price of $ 65,000 , subject to net working capital and net debt adjustments.

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

The acquisition and associated transaction expenses were funded through a combination of cash on hand and the Company's Revolver.

On October 13, 2021, the Company and former owners of Pentek agreed to post closing adjustments totaling $ 79 , which increased the Company's net purchase price.

The following table presents the net purchase price and the fair values of the assets and liabilities of Pentek on a preliminary basis:

Consideration transferred

Cash paid at closing $ 65,668

Working capital and net debt adjustment 79

Less cash acquired ( 746 )

Net purchase price $ 65,001

Estimated fair value of tangible assets acquired and liabilities assumed

8 unchanged sentences

Estimated fair value of identifiable intangible assets 61,360

Estimated goodwill 35,383

Goodwill 81,709

Estimated fair value of net assets acquired 156,333

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Net purchase price $ 154,145

The amounts above represent the preliminary fair value estimates as of April 1, 2022 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates.

Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.

The goodwill of $ 35,383 largely reflects the potential synergies and expansion of the Company's offerings across product lines and markets complementary to the Company's existing products and markets.

The goodwill from this acquisition is included in the Microelectronics reporting unit.

The transaction was a combination of asset and stock, with the asset portion of goodwill being deductible for tax purposes.

The Company has estimated the tax value of the intangible assets from this transaction and is amortizing the amount over 15 years for tax purposes.

As of April 1, 2022, the Company ha d $ 28,893 of goodwill deductible for tax purposes.

P HYSICAL O PTICS C ORPORATION A CQUISITION

On December 7, 2020, the Company signed a definitive agreement to acquire Physical Optics Corporation ("POC") for a purchase price of $ 310,000 , subject to net working capital and net debt adjustments.

On December 30, 2020, the transaction closed and the Company acquired POC.

Based in Torrance, California, POC expands the Company's global avionics business and its collective footprint in the platform and mission management market.

The Company funded the acquisition through a combination of cash on hand and the Company's Revolver.

On May 28, 2021, the Company and representative of the former owners of POC agreed to post closing-adjustments totaling $ 2,641 , which increased the Company’s net purchase price.

The following table presents the net purchase price and the fair values of the assets and liabilities of POC:

Consideration transferred

Cash paid at closing $ 251,229

Cash paid post closing 61,626

Working capital and net debt adjustment ( 2,096 )

Less cash acquired ( 2,855 )

Net purchase price $ 307,904

Fair value of tangible assets acquired and liabilities assumed

Accounts receivable and unbilled receivables 31,255

Inventory 11,125

Fixed assets 23,236

Other current and non-current assets 18,173

Accounts payable ( 3,777 )

Accrued expenses ( 6,266 )

Other current and non-current liabilities ( 30,107 )

Fair value of net tangible assets acquired 46,494

Fair value of identifiable intangible assets 116,000

Goodwill 148,265

Fair value of net assets acquired 310,759

Less cash acquired ( 2,855 )

Net purchase price $ 307,904

On December 30, 2021, the measurement period for POC expired.

The identifiable intangible assets include customer relationships of $ 83,000 with a useful life of 11 years, completed technology of $ 25,000 with a useful life of 9 years and backlog of $ 8,000 with a useful life of one year .

The goodwill of $ 148,265 largely reflects the potential synergies and expansion of the Company’s offerings across product lines and markets complementary to the Company’s existing products and markets and is not deductible for tax purposes.

The estimated goodwill of $ 81,709 largely reflects the potential synergies and expansion of the Company’s offerings across product lines and markets complementary to the Company’s existing products and markets.

The goodwill from this acquisition is reported in the Processing reporting unit.

The Company is amortizing the amount over 15 years for tax purposes.

As of September 30, 2022, the Company had $ 78,717 of goodwill deductible for tax purposes.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, including money market funds, restricted cash, accounts receivable and payable, and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.

Fair Value Measurements

September 30, 2022 Level 1 Level 2 Level 3

Interest rate swap $ 69 $ — $ 69 $ —

Total $ 69 $ — $ 69 $ —

The carrying values of cash and cash equivalents, including money market funds, restricted cash, accounts receivable and payable, contract assets and liabilities and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.

The Company determined the carrying value of long-term debt approximated fair value due to variable interest rates charged on the borrowings, which reprice frequently.

As of April 1, 2022, the Company had no material financial instruments required to be measured at fair value.

During the first quarter ended September 30, 2022, the Company entered into an interest rate hedging agreement (the “Swap”).

Refer to Note O for further information regarding the Swap.

T he fair value of the Swap is estimated using a discounted cash flow analysis based on the contractual terms of the derivative, leveraging observable inputs other than quoted prices, such as interest rates.

As of September 30, 2022 the fair value of the Swap was an asset of $ 69 and is included within other non-current assets in the Company's Consolidated Balance Sheets.

Inventory is stated at the lower of cost (first-in, first-out) or net realizable value, and consists of materials, labor and overhead.

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Inventory was comprised of the following:

April 1, 2022 July 2, 2021

September 30, 2022 July 1, 2022

Raw materials $ 189,139 $ 178,410

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Total $ 287,578 $ 270,339

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

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

In connection with 1MPACT, the Company realigned its internal organizational structure in the first quarter of fiscal 2022 shifting to two divisions, Processing and Microelectronics.

The Mission division has now merged under the Processing division.

There was no change to the Microelectronics division.

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

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Processing and Microelectronics.

Accordingly, these were determined to be the Company's new reporting units.

The internal reorganization and change in reporting units qualified as a triggering event and required goodwill to be tested for impairment.

As required by ASC 350, the Company tested goodwill for impairment immediately before and after the reorganization.

As a result of these analyses, it was determined that goodwill was not impaired before or after the reorganization.

In the first quarter ended October 1, 2021, the Company assigned goodwill to the new reporting units based on the relative fair value of transferred operations.

The following table sets forth the changes in the carrying amount of goodw ill for the nine months ended April 1, 2022 :

Accordingly, these were determined to be the Company's reporting units.

The following table sets forth the changes in the carrying amount of goodw ill for the first quarter ended September 30, 2022 :

Balance at July 1, 2022 $ 937,880

Goodwill adjustment for the POC acquisition ( 6,994 )

Goodwill adjustment for the Pentek acquisition 158

Goodwill arising from the Avalex acquisition 81,668

Goodwill arising from the Atlanta Micro acquisition 58,014

Balance at April 1, 2022 $ 937,752

Goodwill adjustment for the Avalex acquisition 4

Balance at September 30, 2022 $ 937,884

The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year.

Restructuring and Other Charges

During the nine months ended April 1, 2022, the Company incurred $ 22,424 of restructuring and other charges.

Restructuring and other charges during the nine months ended April 1, 2022 primarily related to 1MPACT including $ 14,149 of third-party consulting costs, as well as $ 7,515 of severance costs associated with the elimination of approximately 110 positions across manufacturing, SG&A and R&D based on ongoing talent and workforce optimization efforts.

In addition, the nine months ended April 1, 2022 includes $ 760 of costs for facility optimization efforts associated with 1MPACT, including $ 544 related to lease asset impairment.

All of the restructuring and other charges are classified as Operating expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) and any remaining severance obligations are expected to be paid within the next twelve months.

Restructuring

During the first quarter ended September 30, 2022, the Company incurred $ 1,508 of restructuring and other charges.

The Company incurs restructuring and other charges in connection with management's decision to undertake certain actions to realign operating expenses through workforce reductions and the closure of certain Company facilities, businesses and product lines.

The Company's adjustments reflected in restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post acquisition integration activities.

Consistent with the Company's definition of restructuring and other charges, 1MPACT is an organizational redesign program initiated on the heels of a series of acquisitions since 2014 rather than a single, discrete acquisition.

Since its inception, the Company has selectively engaged with leading consultants to accelerate solution design and implementation for the highest value workstreams.

These costs are associated with this discrete transformation initiative and are non-routine and may not be indicative of ongoing results.

Restructuring and other charges primarily related to 1MPACT including $ 1,304 of third-party consulting costs, as well as $ 204 of severance costs.

All of the restructuring and other charges are classified as Operating expenses in the Consolidated Statements of Operations and Comprehensive Loss and any remaining severance obligations are expected to be paid within the next twelve months.

The restructuring liability is classified as Accrued expenses in the Consolidated Balance Sheets.

The following table presents the detail of activity for the Company’s liability for restructuring and other charges:

Severance Facilities

& Other Total

The following table presents the detail of charges included in the Company’s liability for restructuring and other charges :

Severance & Related

Balance at July 1, 2022 $ 4,722

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Cash paid ( 3,853 )

Balance at April 1, 2022 $ 3,833 $ 216 $ 4,049

The Company recorded an income tax provision of $ 2,102 and $ 5,362 on income before income taxes of $ 6,241 and $ 20,997 for the third quarters ended April 1, 2022 and April 2, 2021, respectively.

The Company recorded an income tax provision of $ 1,506 and $ 11,993 on (loss) income before income taxes of $( 4,134 ) and $ 56,112 for the nine months ended April 1, 2022 and April 2, 2021, respectively.

During the third quarters ended April 1, 2022 and April 2, 2021, the Company recognized a discrete tax provision (benefit) of $ 28 and $( 175 ) related to stock-based compensation shortfalls and windfalls, respectively.

During the nine months ended April 1, 2022 and April 2, 2021, the Company recognized a discrete tax provision (benefit) of $ 906 and $( 2,785 ) related to stock-based compensation shortfalls and windfalls, respectively.

The effective tax rate for the third quarters and nine months ended April 1, 2022 and April 2, 2021 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 third quarter ended April 1, 2022, the Company had certain unbenefited deferred tax assets.

During the third quarter ended April 1, 2022, there were no material changes to the Company's unrecognized tax positions.

Within the calculation of the Company's annual effective tax rate, the Company has used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service (“IRS”).

Balance at September 30, 2022 $ 1,073

The Company recorded an income tax benefit of $ 1,022 and $ 441 on a loss before income taxes of $ 15,357 and $ 7,581 for the first quarters ended September 30, 2022 and October 1, 2021, respectively.

During the first quarters ended September 30, 2022 and October 1, 2021, the Company recognized a discrete tax provision of $ 1,611 and $ 715 related to stock compensation shortfalls.

The effective tax rate for the first quarters ended September 30, 2022 and October 1, 2021 differed from the Federal statutory rate primarily due to Federal and state research and development credits, non-deductible compensation, stock compensation shortfalls and state taxes.

During the first quarter ended September 30, 2022, the Company released $ 521 of reserves for unrecognized tax positions as a result of an income tax audit.

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law which contained provisions that include a 15% corporate minimum tax effective for the Company in fiscal 2024 and a 1% excise tax on stock buybacks effective January 1, 2023.

The Company expects the impact of these provisions to be immaterial.

R EVOLVING C REDIT F ACILITY

On February 28, 2022, the Company amended the Revolver to increase and extend the borrowing capacity to a $ 1,100,000 , 5 -year revolving credit line, with the maturity extended to February 28, 2027.

As of April 1, 2022, the Company's outstanding balance of unamortized deferred financing costs was $ 4,629 , which is being amortized to Other expense, net in the Consolidated Statements of Operations and Comprehensive Income (Loss) on a straight line basis over the term of the Revolver.

The Revolver has a 5-year maturity and will mature on February 28, 2027.

Interest Rates and Fees

Borrowings under the Revolver bear interest, at the Company’s option, at floating rates tied to Secured Overnight Financing Rate ("SOFR") or the prime rate plus an applicable percentage in the case of dollar denominated loans or, in the case of certain other currencies, such alternative floating rates as agreed.

The interest rate applicable to outstanding loans has initially been set at SOFR plus 1.250 % and in future fiscal quarters will be established pursuant to a pricing grid based on the Company’s total net leverage ratio.

In addition to interest on the aggregate outstanding principal amounts of any borrowings, the Company will also pay a quarterly commitment fee on the unutilized commitments under the Revolver, which fee has initially been set at 0.20 % per annum and in future fiscal quarters will be established pursuant to a pricing grid based on the Company’s total net leverage ratio.

The Company will also pay customary letter of credit and agency fees.

Covenants and Events of Default

The Revolver provides for customary negative covenants, including, among other things and subject to certain significant exceptions, restrictions on the incurrence of debt or guarantees, the creation of liens, the making of certain investments, loans and acquisitions, mergers and dissolutions, the sale of assets including capital stock of subsidiaries, the payment of dividends, the repayment or amending of junior debt, altering the business conducted, engaging in transactions with affiliates and entering into agreements limiting subsidiary dividends and distributions.

The Revolver also requires the Company to comply with certain financial covenants, including a quarterly minimum consolidated cash interest charge ratio test and a quarterly maximum consolidated total net leverage ratio test.

The Revolver also provides for customary representations and warranties, affirmative covenants and events of default (including, among others, the failure to make required payments of principal and interest, certain insolvency events, and an event of default upon a change of control).

If an event of default occurs, the lenders under the Revolver will be entitled to take various actions, including the termination of unutilized commitments, the acceleration of amounts outstanding under the Revolver and all actions permitted to be taken by a secured creditor.

Guarantees and Security

The Company’s obligations under the Revolver are guaranteed by certain of the Company’s material domestic wholly-owned restricted subsidiaries (the “Guarantors”).

The obligations of both the Company and the Guarantors are secured by a perfected security interest in substantially all of the assets of the Company and the Guarantors, in each case, now owned or later acquired, including a pledge of all of the capital stock of substantially all of the Company’s domestic wholly-owned restricted subsidiaries and 65 % of the capital stock of certain of its foreign restricted subsidiaries, subject in each case to the exclusion of certain assets and additional exceptions.

As of April 1, 2022, the Company was in compliance with all covenants and conditions under the Revolver and there were outstanding borrowings of $ 451,500 against the Revolver, resulting in interest expense of $ 1,664 and $ 3,353 for the third quarter and nine months ended April 1, 2022, respectively.

There were outstanding letters of credit of $ 963 as of April 1, 2022.

As of September 30, 2022, the Company's outstanding balance of unamortized deferred financing costs was $ 4,229 , which is being amortized to Other expense, net in the Consolidated Statements of Operations and Comprehensive Loss on a straight line basis over the term of the Revolver.

As of September 30, 2022, the Company was in compliance with all covenants and conditions under the Revolver and there were outstanding borrowings of $ 511,500 against the Revolver, resulting in interest expense of $ 4,547 for the first quarter ended September 30, 2022.

There were outstanding letters of credit of $ 963 as of September 30, 2022.

Employee Benefit Plan

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The funded status may vary from year to year due to changes in the fair value of the Plan’s assets and variations on the underlying assumptions of the projected benefit obligation of the Plan.

The Plan's funded status at April 1, 2022 was a net liability of $ 9,661 , which is recorded in Other non-current liabilities on the Consolidated Balance Sheet.

The Company recorded a net gain of $ 48 and $ 144 in AOCI during the third quarter and nine months ended April 1, 2022.

The Company recorded a net gain of $ 30 and $ 92 in AOCI during the third quarter and nine months ended April 2, 2021.

The Company recognized net periodic benefit costs of $ 267 and $ 805 associated with the Plan for the third quarter and nine months ended April 1, 2022.

The Company recognized net periodic benefit costs of $ 420 and $ 1,253 associated with the Plan for the third quarter and nine months ended April 2, 2021, respectively.

The Plan's funded status at September 30, 2022 was a net liability of $ 4,476 , which is recorded in Other non-current liabilities on the Consolidated Balance Sheet.

The Company recorded a net gain of $ 48 in AOCL during the first quarter ended September 30, 2022 and October 1, 2021.

The Company recognized net periodic benefit costs of $ 221 and $ 269 associated with the Plan for the first quarters ended September 30, 2022 and October 1, 2021, respectively.

The Company's total expected employer contributions to the Plan during fiscal 2023 are $ 1,093 .

The Company maintains a qualified 401(k) plan (the “401(k) Plan”) for its U.S.

Effective in the first quarter of fiscal 2023, the Company increased the rate of its matching contributions from 3 % to 6 % of participants' eligible annual compensation and changed the form of these contributions from cash to Company stock.

The Company may also make optional contributions to the plan for any plan year at its discretion.

The Company had $ 443 of capitalized stock-based 401(k) matching compensation expense on the Consolidated Balance Sheet for the period ended September 30, 2022.

Stock-based 401(k) matching compensation cost is measured based on the value of the matching amount and is recognized as expense as incurred.

During the first quarter ended September 30, 2022, the Company recognized share-based matching contributions related to the 401(k) plan of $ 3,680 as compared to $ 2,111 of cash match during the first quarter ended October 1, 2021.

Shareholders' Equity

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The Rights will initially trade with, and will be inseparable from, the shares of common stock.

The Rights will generally become exercisable if any person or group, other than certain exempt persons, acquires beneficial ownership of 7.5 % (or 10 % in the case of certain passive investors) or more of common stock outstanding (an “Acquiring Person”).

If a person or group becomes an Acquiring Person, then each Right, other than those held by the Acquiring Person, will entitle its holder to purchase units of Series A Junior Preferred Stock (or, in certain circumstances, cash, assets or other securities of the Company) having a market value equal to twice the then-current market price per unit of Preferred Stock.

In certain other circumstances including consolidation or merger with the Company, each Right, other than those held by the Acquiring Person, will entitle its holder to receive common stock of the person acquiring the Company or its ultimate parent entity, as applicable, having a value equal to two times then-current market price per share of common stock.

Each Unit of Preferred Stock, if issued:

• will entitle holders to certain dividend and liquidation payments;

• will not be redeemable;

• will entitle holders to one vote, voting together with shares of common stock;

• will entitle holders, if shares of common stock are exchanged via merger, consolidation, or a similar transaction, to a per share payment equal to the payment made on one share of Company Common Stock;

• will be protected by customary anti-dilution provisions with respect to dividends, liquidation and voting rights, and in the event of mergers and consolidations.

The Rights Agreement will continue in effect until December 26, 2022, or unless earlier redeemed or terminated by the Company's Board of Directors, as provided in the Rights Agreement.

The Board of Directors shall have the right to adjust, among other things, the exercise price, as well as the number of Units of Preferred Stock issuable, and the number of outstanding Rights to prevent dilution that may occur from a share dividend, a share split, or a reclassification of the Preferred Stock.

The Rights have no voting or dividend privileges, and, unless and until they become exercisable, have no dilutive effect on the earnings of the Company.

Additional details about the Rights Agreement are contained in the Current Report on Form 8-K filed by the Company with the SEC on December 29, 2021.

On June 24, 2022, the Company amended the Rights Agreement, dated as of December 27, 2021, to increase the ownership threshold for a person to be an “Acquiring Person” (as defined in the Rights Agreement) from 7.5 % of common stock to 10 % of common stock ( 10 % of common stock to 20 % of common stock in the case of a passive institutional investor).

Additional details about the Rights Agreement are contained in the Current Reports on Form 8-K filed by the Company with the SEC on December 29, 2021 and June 24, 2022.

On October 26, 2022 the Stockholder Rights Plan expired.

Stock-Based Compensation

S TOCK I NCENTIVE P LANS

At April 1, 2022, the aggregate number of shares authorized for issuance under the Company’s Amended and Restated 2018 Stock Incentive Plan (the “2018 Plan”) is 6,782 shares, including 710 shares rolled into the 2018 Plan that were available for future grant under the Company’s 2005 Stock Incentive Plan, as amended and restated (the “2005 Plan”) and 3,000 shares approved by the Company's shareholders on October 28, 2020.

At September 30, 2022, the aggregate number of shares authorized for issuance under the Company’s Amended and Restated 2018 Stock Incentive Plan (the “2018 Plan”) is 7,862 shares, including 3,000 shares approved by the Company's shareholders on October 28, 2020 and 2,000 shares approved for future grant under the 2018 Plan by the Company's shareholders on October 26, 2022.

The 2018 Plan shares available for issuance also include 948 shares rolled into the 2018 Plan that were available for future grant under the Company’s 2005 Stock Incentive Plan, as amended and restated (the “2005 Plan”).

The 2018 Plan replaced the 2005 Plan.

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Stock options must be granted with an exercise price of not less than 100% of the fair value of the Company’s common stock on the date of grant and the options generally have a term of seven years .

There were 366 shares available for future grant under the 2018 Plan at April 1, 2022.

There were 281 available shares for future grant under the 2018 Plan at September 30, 2022.

As part of the Company's ongoing annual equity grant program for employees, the Company grants performance-based restricted stock awards to certain executives and employees pursuant to the 2018 Plan.

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The performance targets generally include the achievement of internal performance targets in relation to a peer group of companies.

On February 7, 2022, the Company’s Board of Directors approved an equity retention plan at the recommendation of the Company’s Human Capital and Compensation Committee, after consultation with its independent compensation consultant.

Employees participating in the equity retention plan were granted their annual equity awards for fiscal 2023 on February 15, 2022, which is approximately six months earlier than the Company’s typical annual cycle for such grants.

On February 15, 2022, the Human Capital and Compensation Committee expanded the scope of the equity retention plan by approving a pool of restricted stock unit awards for non-executive employees.

These awards were intended to recognize the recipients’ substantial contributions, to retain and motivate the recipients in the current challenging industry environment and labor market, and to reinforce the alignment of the recipients’ interests with the Company’s shareholders.

The vesting of such awards was conditioned on shareholder approval of sufficient additional shares for the 2018 Plan for the Company to deliver the shares to satisfy the awards, and with awards expiring on the seventh anniversary of the grant date if shareholder approval is not obtained prior to such date.

E MPLOYEE S TOCK P URCHASE P LAN

At April 1, 2022, the aggregate number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is 2,300 shares, including 500 shares approved by the Company's shareholders on October 28, 2020.

At September 30, 2022, the aggregate number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is 2,300 shares, including 500 shares approved by the Company's shareholders on October 28, 2020.

Under the ESPP, rights are granted to purchase shares of common stock at 85 % of the lesser of the market value of such shares at either the beginning or the end of each six-month offering period.

The ESPP permits employees to purchase common stock through payroll deductions, which may not exceed 10 % of an employee’s compensation as defined in the ESPP.

There were 54 and 46 shares issued under the ESPP during the nine months ended April 1, 2022 and April 2, 2021, respectively.

Shares available for future purchase under the ESPP totaled 374 at April 1, 2022.

There were no shares issued under the ESPP during the first quarters ended September 30, 2022 and October 1, 2021, respectively.

Shares available for future purchase under the ESPP totaled 313 at September 30, 2022.

S TOCK A WARD A CTIVITY

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Forfeited ( 43 ) 57.66

Outstanding at April 1, 2022 2,297 $ 57.59

Outstanding at September 30, 2022 1,913 $ 55.80

S TOCK - BASED C OMPENSATION E XPENSE

The Company recognizes expense for its share-based payment plans in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”).

The Company had $ 1,318 and $ 796 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for the periods ended April 1, 2022 and July 2, 2021, respectively.

The Company recognizes expense for its share-based payment plans in the Consolidated Statements of Operations and Comprehensive Loss in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”).

The Company had $ 1,104 and $ 1,229 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for the periods ended September 30, 2022 and July 1, 2022, respectively.

Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period, net of estimated forfeitures.

The following table presents share-based compensation expenses included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) :

Third Quarters Ended Nine Months Ended

April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

The following table presents share-based compensation expenses included in the Company’s Consolidated Statements of Operations and Comprehensive Loss:

First Quarters Ended

September 30, 2022 October 1, 2021

Cost of revenues $ 799 $ 559

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Europe Asia Pacific Eliminations Total

THIRD QUARTER ENDED APRIL 1, 2022

Net revenues to unaffiliated customers $ 243,100 $ 9,216 $ 759 $ — $ 253,075

Inter-geographic revenues ( 729 ) 824 — ( 95 ) —

Net revenues $ 242,371 $ 10,040 $ 759 $ ( 95 ) $ 253,075

THIRD QUARTER ENDED APRIL 2, 2021

Net revenues to unaffiliated customers $ 246,231 $ 10,482 $ 144 $ — $ 256,857

Inter-geographic revenues 51 734 — ( 785 ) —

Net revenues $ 246,282 $ 11,216 $ 144 $ ( 785 ) $ 256,857

NINE MONTHS ENDED APRIL 1, 2022

FIRST QUARTER ENDED SEPTEMBER 30, 2022

Net revenues to unaffiliated customers $ 218,822 $ 8,752 $ 5 $ — $ 227,579

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Net revenues $ 218,969 $ 8,956 $ 5 $ ( 351 ) $ 227,579

NINE MONTHS ENDED APRIL 2, 2021

FIRST QUARTER ENDED OCTOBER 1, 2021

Net revenues to unaffiliated customers $ 213,741 $ 11,187 $ 85 $ — $ 225,013

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The following table presents the Company's net revenue by end user for the periods presented:

Third Quarters Ended Nine Months Ended

April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

First Quarters Ended

September 30, 2022 October 1, 2021

$ 205,830 $ 189,248

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(2) International/Foreign Military Sales consist of sales to U.S.

prime defense contractor customers where the end user is known to be outside the U.S., foreign military sales through the U.S.

prime defense contractor customers where the end user is outside the U.S., foreign military sales through the U.S.

government and direct sales to non-U.S.

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The following table presents the Company's net revenue by end application for the periods presented:

Third Quarters Ended Nine Months Ended

April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

First Quarters Ended

September 30, 2022 October 1, 2021

$ 53,408 $ 58,904

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(2) Electronic Warfare includes end-use applications comprising the offensive and defensive use of the electromagnetic spectrum.

(3) Other Sensor & Effector products include all Sensor & Effector end markets other than Radar and Electronic Warfare.

(3) Other Sensor and Effector products include all Sensor and Effector end markets other than Radar and Electronic Warfare.

(4) C4I includes rugged secure rackmount servers that are designed to drive the most powerful military processing applications.

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The following table presents the Company's net revenue by product grouping for the periods presented:

Third Quarters Ended Nine Months Ended

April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

First Quarters Ended

September 30, 2022 October 1, 2021

Components (1)

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Total Net Revenue $ 227,579 $ 225,013

(1) Components include technology elements typically performing a single, discrete technological function, which when physically combined with other components may be used to create a module or sub-assembly.

Examples include, but are not limited to, power amplifiers and limiters, switches, oscillators, filters, equalizers, digital and analog converters, chips, MMICs (monolithic microwave integrated circuits), and memory and storage devices.

(2) Modules and Sub-assemblies include combinations of multiple functional technology elements and/or components that work together to perform multiple functions but are typically resident on or within a single board or housing.

Modules and sub-assemblies may in turn be combined to form an integrated subsystem.

Examples of modules and sub-assemblies include, but are not limited to, embedded processing modules, embedded processing boards, switch fabric boards, high speed input/output boards, digital receiver boards, graphics and video processing and Ethernet and IO (input-output) boards, multi-chip modules, integrated radio frequency and microwave multi-function assemblies, tuners and transceivers.

(3) Integrated Subsystems include multiple modules and/or sub-assemblies combined with a backplane or similar functional element and software to enable a solution.

These are typically but not always integrated within a chassis and with cooling, power and other elements to address various requirements and are also often combined with additional technologies for interaction with other parts of a complete system or platform.

Integrated subsystems also include spare and replacement modules and sub-assemblies sold as part of the same program for use in or with integrated subsystems sold by the Company.

(1) Components represent the basic building blocks of an electronic system.

They generally perform a single function such as switching, storing or converting electronic signals.

Some examples include power amplifiers and limiters, switches, oscillators, filters, equalizers, digital and analog converters, chips, MMICs (monolithic microwave integrated circuits) and memory and storage devices.

(2) Modules and sub-assemblies combine multiple components to serve a range of complex functions, including processing, networking and graphics display.

Typically delivered as computer boards or other packaging, modules and sub-assemblies are usually designed using open standards to provide interoperability when integrated in a subsystem.

Examples of modules and sub-assemblies include embedded processing boards, switched fabrics and boards for high-speed input/output, digital receivers, graphics and video, along with multi-chip modules, integrated radio frequency and microwave multi-function assemblies and radio frequency tuners and transceivers.

(3) Integrated subsystems bring components, modules and/or sub-assemblies into one system, enabled with software.

Subsystems are typically, but not always, integrated within an open standards-based chassis and often feature interconnect technologies to enable communication between disparate systems.

Spares and replacement modules and sub-assemblies are provided for use with subsystems sold by the Company.

The Company’s subsystems are deployed in sensor processing, aviation and mission computing and C4I applications.

The following table presents the Company's net revenue by platform for the periods presented:

Third Quarters Ended Nine Months Ended

April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

First Quarters Ended

September 30, 2022 October 1, 2021

$ 118,350 $ 116,564

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Europe Asia Pacific Eliminations Total

April 1, 2022 $ 121,294 $ 4,412 $ 3 $ — $ 125,709

September 30, 2022 $ 121,636 $ 4,277 $ — $ — $ 125,913

July 1, 2022 $ 122,712 $ 4,476 $ 3 $ — $ 127,191

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Customers comprising 10% or more of the Company’s revenues for the periods shown are as follows:

Third Quarters Ended Nine Months Ended

April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021

Raytheon Technologies 15 % 18 % 15 % 22 %

First Quarters Ended

September 30, 2022 October 1, 2021

Lockheed Martin Corporation 16 % 13 %

* 14 % * 15 %

Raytheon Technologies 13 % 14 %

Navy 12 % 17 %

29 % 48 % 30 % 37 %

Northrop Grumman 10 % *

* Indicates that the amount is less than 10% of the Company's revenue for the respective period.

While the Company typically has customers from which it derives 10% or more of its revenue, the sales to each of these customers are spread across multiple programs and platforms.

There were no programs comprising 10% or more of the Company's revenues for the third quarter and nine months ended April 1, 2022 and April 2, 2021.

There were no programs comprising 10% or more of the Company's revenues for the first quarters ended September 30, 2022 and October 1, 2021.

Commitments and Contingencies

L EGAL C LAIMS

The Company is subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of its business.

The Company is subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of business.

Although legal proceedings are inherently unpredictable, the Company believes that it has valid defenses with respect to any matters currently pending against the Company and intends to defend itself vigorously.

The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on the Company's cash flows, results of operations, or financial position.

On June 23, 2021, Embedded Reps of America, LLC (“ERA”), a former sales representative, and James Mazzola, a principal of ERA, filed for binding arbitration related to the termination of ERA’s sales representative agreement raising multiple claims that aggregate to approximately $ 9,000 in direct damages, with treble damages requested on a number of those claims.

ERA was a sales representative of Themis when Themis was acquired by Mercury.

In June 2021, Embedded Reps of America, LLC (“ERA”), a former sales representative, and James Mazzola, a principal of ERA, filed for binding arbitration related to the termination of ERA’s sales representative agreement raising multiple claims that aggregate to approximately $ 9,000 in direct damages, with treble damages requested on a number of those claims.

ERA was a sales representative of Themis Computer (“Themis”) when Themis was acquired by Mercury.

The sales representative agreement provided for termination by either party upon 30 days written notice with ERA entitled to commissions for orders obtained by ERA with product shipment occurring prior to termination.

The Company responded to the complaint in July 2021 and the arbitration proceeding has been scheduled for September 2022.

The Company believes the claims in the complaint are without merit and we intend to defend ourselves vigorously.

On December 7, 2021, counsel for National Technical Systems, Inc.

The Company responded to the complaint in July 2021, and an arbitration proceeding was scheduled for September 2022.

Final motions in the arbitration proceeding were submitted in late October 2022 and oral arguments are scheduled for early November 2022.

The Company anticipates that the arbitrator will make a ruling within 30 to 60 days of the oral arguments.

The Company believes the claims in the complaint are without merit and intends to continue to defend itself vigorously.

In December 2021, counsel for National Technical Systems, Inc.

(“NTS”) sent the Company an environmental demand letter pursuant to Massachusetts General Laws Chapter 21E, Section 4A, and CERCLA 42 U.S.C.

Section 9601, related to a site that NTS formerly owned at 533 Main Street, Acton, MA.

Section 9601, related to a site that NTS formerly owned at 533 Main Street, Acton, Massachusetts.

NTS received a Notice of Responsibility from the Massachusetts Department of Environmental Protection (“MassDEP”) alleging trichloroethene, freon and 1,4-dioxane contamination in the groundwater emanating from NTS’s former site.

NTS alleges in its demand letter that the operations of a predecessor company to Mercury that was acquired in the Company’s acquisition of the Microsemi carve-out business that once owned and operated a facility at 531 Main Street, Acton, MA contributed to the groundwater contamination.

NTS is seeking payment by the Company of NTS’s costs for any required environmental remediation.

In April 2022, the Company engaged in a meet and confer session with NTS pursuant to Massachusetts General Laws Chapter 21E, Section 4A to discuss the status of the environmental review performed by NTS and its licensed site professional.

In addition in November 2021, the Company responded to a request for information from MassDEP regarding the detection of PFAS (per- and polyfluoroakyl substances) in the Acton, MA Water District’s Conant public water supply wells near the former facility at 531 Main Street, Acton, MA at a level above the standard that MassDEP published for PFAS in October 2020.

In addition, in November 2021, the Company responded to a request for information from MassDEP regarding the detection of PFAS (per- and polyfluoroakyl substances) in the Acton, Massachusetts Water District’s Conant public water supply wells near the former facility at 531 Main Street, Acton, Massachusetts at a level above the standard that MassDEP published for PFAS in October 2020.

It is too early to determine what responsibility, if any, the Company may have for these matters.

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P URCHASE C OMMITMENTS

As of April 1, 2022, the Company has entered into non-cancelable purchase commitments for certain inventory components and services used in its normal operations.

As of September 30, 2022, the Company has entered into non-cancelable purchase commitments for certain inventory components and services used in its normal operations.

The purchase commitments covered by these agreements are for less than one year and aggregate to $ 150,032 .

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These transactions would be treated as a use of cash in financing activities in the Company's Consolidated Statements of Cash Flows.

The Company utilizes interest rate derivatives to mitigate interest rate exposure with respect to its financing arrangements.

On September 7, 2022, the Company entered into an interest rate Swap (the “initial Swap”) with JP Morgan Chase Bank, N.A.

(“JPMorgan”) for a notional amount of $ 300,000 in order to fix the interest rate associated with a portion of the total $ 511,500 existing borrowings on the Revolver.

The initial Swap agreement was designated and qualified for hedge accounting treatment as a cash flow hedge.

The initial Swap matures on February 28, 2027, coterminous with the maturity of the Revolver.

The initial Swap established a fixed interest rate on the first $ 300,000 of the Company's outstanding borrowings against the Revolver obligation at 3.25 %.

On September 29, 2022, the Company terminated the initial Swap.

At the time of termination, the fair value of the initial Swap was an asset of $ 5,995 .

The Company received the cash settlement of $ 5,995 and these proceeds are classified within Operating Activities of the Consolidated Statements of Cash Flows.

Following the termination of the initial Swap the Company entered a new Swap agreement (“the Swap”) on September 29, 2022 with JPMorgan.

The Swap fixes $ 300,000 of the total $ 511,500 existing borrowings of outstanding borrowings under the Revolver at a rate of 3.79 %.

As of September 30, 2022, the fair value of the hedge was an asset of $ 69 and is included within Other non-current assets in the Company's Consolidated Balance Sheets.

The market risk associated with the Company’s derivative instrument is the result of interest rate movements that are expected to offset the market risk of the underlying arrangement.

The counterparty to the Swap is JPMorgan.

Based on the credit ratings of the Company’s counterparty as of September 30, 2022, nonperformance is not perceived to be a material risk.

Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency.

While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk.

The amounts potentially subject to credit risk (arising from the possible inability of the counterparty to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparty obligations under the contracts exceed the obligations of the Company to the counterparty.

As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant.

Subsequent Events

The Company has evaluated subsequent events from the date of the Consolidated Balance Sheet through the date the consolidated financial statements were issued.

The Company has evaluated subsequent events from the date of the Consolidated Balance Sheet through the date the consolidated financial statements were issued and noted no items requiring adjustment of the financial statements or additional disclosures.

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 1. Financial Statements