What changed in this filing

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Item 1. Financial Statements

2023-02-07 compared with 2022-11-08 · 215 added, 128 removed, 507 unchanged (40% of the section changed)

3 unchanged sentences

(In thousands, except share and per share data)

September 30, 2022 July 1, 2022

December 30, 2022 July 1, 2022

Current assets:

Cash and cash equivalents $ 76,944 $ 65,654

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

Accounts receivable, net of allowance for credit losses of $ 2,070 and $ 2,074 at December 30, 2022 and July 1, 2022, respectively

145,855 144,494

15 unchanged sentences

Accrued compensation 30,456 44,813

Income taxes payable 13,421 —

Deferred revenues and customer advances 39,274 15,487

13 unchanged sentences

85,000,000 shares authorized;

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

56,365,078 and 55,679,747 shares issued and outstanding at December 30, 2022 and July 1, 2022, respectively

Additional paid-in capital 1,173,026 1,145,323

6 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

First Quarters Ended

September 30, 2022 October 1, 2021

(In thousands, except per share data)

Second Quarters Ended Six Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Net revenues $ 229,588 $ 220,380 $ 457,167 $ 445,393

11 unchanged sentences

Interest expense ( 6,590 ) ( 1,094 ) ( 11,137 ) ( 1,689 )

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

Other income (expense), net 846 ( 1,318 ) ( 2,799 ) ( 2,738 )

Loss before income taxes ( 13,071 ) ( 2,794 ) ( 28,428 ) ( 10,375 )

11 unchanged sentences

Pension benefit plan, net of tax 48 48 96 96

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

Total other comprehensive (loss) income, net of tax ( 445 ) ( 221 ) 4,452 71

Total comprehensive loss $ ( 11,365 ) $ ( 2,860 ) $ ( 20,803 ) $ ( 9,708 )

3 unchanged sentences

(In thousands)

For the First Quarter Ended September 30, 2022

For the Second Quarter Ended December 30, 2022

Common Stock Additional

4 unchanged sentences

Shares Amount

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

Issuance of common stock under employee stock incentive plans 59 1 ( 1 ) — — —

Issuance of common stock under employee stock purchase plan 57 1 2,392 — — 2,393

Issuance of common stock under defined contribution plan 69 — 3,269 — — 3,269

Retirement of common stock — — — — — —

Stock-based compensation — — 10,865 — — 10,865

Net loss — — — ( 10,920 ) — ( 10,920 )

Other comprehensive loss — — — — ( 445 ) ( 445 )

Balance at December 30, 2022 56,365 $ 564 $ 1,173,026 $ 360,519 $ 9,983 $ 1,544,092

For the Second Quarter Ended December 31, 2021

Common Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

Shareholders’

Shares Amount

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

Issuance of common stock under employee stock incentive plans 31 — — — — —

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

Retirement of common stock ( 3 ) — ( 183 ) — — ( 183 )

Stock-based compensation — — 8,168 — — 8,168

Net loss — — — ( 2,639 ) — ( 2,639 )

Other comprehensive loss — — — — ( 221 ) ( 221 )

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

For the Six Months Ended December 30, 2022

Common Stock Additional

Capital Retained

Earnings Accumulated

Comprehensive

Shareholders’

Shares Amount

Balance at July 1, 2022 55,680 $ 557 $ 1,145,323 $ 385,774 $ 5,531 $ 1,537,185

Issuance of common stock under employee stock incentive plans 477 5 ( 5 ) — — —

Issuance of common stock under employee stock purchase plan 57 1 2,392 — — 2,393

Issuance of common stock under defined contribution plan 152 1 7,391 — — 7,392

3 unchanged sentences

Other comprehensive income — — — — 4,452 4,452

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

Balance at December 30, 2022 56,365 $ 564 $ 1,173,026 $ 360,519 $ 9,983 $ 1,544,092

For the Six Months Ended December 31, 2021

Common Stock Additional

6 unchanged sentences

Issuance of common stock under employee stock incentive plans 429 4 ( 4 ) — — —

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

Retirement of common stock ( 141 ) ( 1 ) ( 7,498 ) — — ( 7,499 )

2 unchanged sentences

Other comprehensive income — — — — 71 71

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

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

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

2 unchanged sentences

(In thousands)

First Quarters Ended

September 30, 2022 October 1, 2021

Six Months Ended

December 30, 2022 December 31, 2021

Cash flows from operating activities:

Net loss $ ( 25,255 ) $ ( 9,779 )

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

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

Depreciation and amortization expense 50,934 45,556

14 unchanged sentences

Other non-current liabilities ( 6,706 ) ( 3,486 )

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

Net cash (used in) provided by operating activities ( 30,647 ) 4,818

Cash flows from investing activities:

Acquisition of business, net of cash acquired — ( 243,255 )

Purchases of property and equipment ( 20,504 ) ( 13,404 )

2 unchanged sentences

Cash flows from financing activities:

Proceeds from employee stock plans 2,393 2,516

Borrowings under credit facilities 100,000 251,500

Payments under credit facilities ( 40,000 ) —

Purchase and retirement of common stock ( 63 ) ( 7,499 )

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

Net cash provided by financing activities 62,330 246,517

Effect of exchange rate changes on cash and cash equivalents 9 ( 115 )

Net decrease in cash and cash equivalents ( 13,673 ) ( 18,035 )

Net increase (decrease) in cash and cash equivalents 11,290 ( 8,670 )

Cash and cash equivalents at beginning of period 65,654 113,839

13 unchanged sentences

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.

Mercury's Processing Platform includes signal solutions, display, software applications, networking, storage and secure processing.

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 ).

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

The results for the second quarter and six months ended December 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 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.

All references to the second quarter of fiscal 2023 are to the quarter ended December 30, 2022.

There were 13 weeks during the second quarters ended December 30, 2022 and December 31, 2021, respectively.

There were 26 weeks during the six months ended December 30, 2022 and December 31, 2021, respectively.

U SE OF E STIMATES

5 unchanged sentences

F OREIGN C URRENCY

Local currencies are the functional currency for the Company’s subsidiaries in Switzerland, the United Kingdom, France, Japan, Spain and Canada.

Local currencies are the functional currency for the Company’s subsidiaries in Switzerland, the United Kingdom, France, Spain and Canada.

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.

2 unchanged sentences

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

A CCOUNTS R ECEIVABLE

Accounts receivable, net, represents amounts that have been billed and are currently due from customers.

The Company maintains an allowance for credit losses to provide for the estimated amount of receivables that will not be collected.

The Company provides credit to customers in the normal course of business.

The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended as necessary.

The allowance is based upon an assessment of the customer's credit worthiness, reasonable forecasts about the future, history with the customer, and the age of the receivable balance.

The Company typically invoices a customer upon shipment of the product (or completion of a service) for contracts where revenue is recognized at a point in time.

For contracts where revenue is recognized over time, the invoicing events are typically based on specified performance obligation deliverables or milestone events, or quantifiable measures of performance.

A CCOUNTS R ECEIVABLES F ACTORING

On September 27, 2022, the Company executed an uncommitted receivables purchase agreement (“RPA”) with Bank of the West, as purchaser, pursuant to which the Company may offer to sell certain customer receivables, subject to the terms and conditions of the RPA.

The RPA is an uncommitted arrangement such that the Company is not obligated to sell any receivables and Bank of the West has no obligation to purchase any receivables from the Company.

Pursuant to the RPA, Bank of the West may purchase certain of the Company's customer receivables at a discounted rate, subject to a limit that as of any date, the total amount of purchased receivables held by Bank of the West, less the amount of all collections received on such receivables, may not exceed $20,000.

The RPA has an indefinite term and the agreement remains in effect until it is terminated by either party.

Factoring under the RPA Agreement is treated as a true sale of accounts receivable by the Company.

The Company has continued involvement in servicing accounts receivable under the Purchase Agreement, but no retained interests related to the factored accounts receivable.

Proceeds for amounts factored by the Company are recorded as an increase to cash and a reduction to accounts receivable outstanding in the Consolidated Balance Sheets.

Cash Flows attributable to factoring are reflected as cash flows from operating activities in the Company's Consolidated Statements of Cash Flows.

Factoring fees are included as selling, general and administrative expenses in the Company's Consolidated Statements of Operations and Comprehensive Loss.

The Company factored accounts receivables and incurred factoring fees of approximately $ 20,000 and $138, respectively for the second quarter and six months ended December 30, 2022.

The Company did not factor any accounts receivable or incur any factoring fees for the second quarter and six months ended December 31, 2021.

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.

2 unchanged sentences

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.

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

R EVENUE R ECOGNITION

6 unchanged sentences

Each promised good or service within a contract is accounted for separately under the guidance of ASC 606 if they are distinct.

Promised goods or services not meeting the criteria for being a distinct performance obligation are bundled into a single performance obligation with other goods or services that together meet the criteria for being distinct.

Promised goods or services not meeting the criteria for being a distinct performance obligation are bundled into a single

performance obligation with other goods or services that together meet the criteria for being distinct.

The appropriate allocation of the transaction price and recognition of revenue is then determined for the bundled performance obligation.

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 37 % and 47 % of revenues for the first quarters ended September 30, 2022 and October 1, 2021, respectively.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 44 % and 40 % of revenues for the second quarter and six months ended December 30, 2022, respectively.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 52 % and 49 % for the second quarter and six months ended December 31, 2021, respectively.

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

2 unchanged sentences

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

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.

Total revenue recognized over time was 56 % and 60 % of total revenues for the second quarters and six months ended December 30, 2022, respectively.

Total revenue recognized over time was 48 % and 51 % of total revenues for the second quarter and six months ended December 31, 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.

9 unchanged sentences

Refer to Note M for disaggregation of revenue for the period.

A CCOUNTS R ECEIVABLE

Accounts receivable, net, represents amounts that have been billed and are currently due from customers.

The Company maintains an allowance for credit losses to provide for the estimated amount of receivables that will not be collected.

The Company provides credit to customers in the normal course of business.

The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended as necessary.

The allowance is based upon an assessment of the customer's credit worthiness, reasonable forecasts about the future, history with the customer, and the age of the receivable balance.

The Company typically invoices a customer upon shipment of the product (or completion of a service) for contracts where revenue is recognized at a point in time.

C ONTRACT B ALANCES

10 unchanged sentences

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

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 .

The contract asset balances were $ 333,491 and $ 303,356 as of December 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 the timing of program milestone billings during the second quarter ended December 30, 2022.

The contract liability balances were $ 39,888 and $ 15,966 as of December 30, 2022 and July 1, 2022, respectively.

The increase was due to a higher volume of advance milestone billing events as well as timing of revenue conversion across multiple programs.

Revenue recognized for the second quarter and six months ended December 30, 2022 that was included in the contract liability balance at July 1, 2022 was $ 3,068 and $ 7,737 , respectively.

Revenue recognized for the second quarter and six months ended December 31, 2021 that was included in the contract liability balance at July 2, 2021 was $ 5,151 and $ 18,288 , respectively.

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

As of December 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 580,318 .

The Company expects to recognize approximately 64 % of its remaining performance obligations as revenue in the next 12 months and the balance thereafter.

L ONG -L IVED A SSETS

Long-lived assets primarily include property and equipment, intangible assets and ROU assets.

The Company regularly evaluates its long-lived assets for events and circumstances that indicate a potential impairment in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”).

The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.

Each impairment test is based on a comparison of the estimated undiscounted cash flows of the asset as compared to the recorded value of the asset.

If impairment is indicated, the asset is written down to its estimated fair value.

As part of the Company's assessment over the future benefit of certain long-lived assets in the second quarter ended December 30, 2022, the Company identified an immaterial correction of an error in the useful lives assigned to certain leasehold improvements resulting in a cumulative adjustment to depreciation expense of $ 3.1 million recorded during the second quarter and six months ended December 30, 2022.

W EIGHTED -A VERAGE S HARES

Weighted-average shares were calculated as follows:

First Quarters Ended

September 30, 2022 October 1, 2021

Second Quarters Ended Six Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Basic weighted-average shares outstanding 56,252 55,520 56,126 55,448

1 unchanged sentence

Diluted weighted-average shares outstanding 56,252 55,520 56,126 55,448

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.

Equity instruments to purchase 511 and 300 shares of common stock were not included in the calculation of diluted net earnings per share for the second quarter and six months ended December 30, 2022, respectively, because the equity instruments were anti-dilutive.

Equity instruments to purchase 408 and 434 shares of common stock were not included in the calculation of diluted net earnings per share for the second quarter and six months ended December 31, 2021, respectively, because the equity instruments were anti-dilutive.

R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS

20 unchanged sentences

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

Effective December 1, 2022, the Company adopted ASU No.

2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848, an amendment of the FASB Accounting Standards Codification.

The amendments in this ASU extend the sunset date under Topic 848 from December 31, 2022 to December 31, 2024 to align the temporary accounting relief guidance with the expected LIBOR cessation date of June 30, 2023.

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

A TLANTA M ICRO A CQUISITION

4 unchanged sentences

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:

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

Consideration transferred

3 unchanged sentences

Net purchase price $ 89,240

Estimated fair value of tangible assets acquired and liabilities assumed

Fair value of tangible assets acquired and liabilities assumed

Accounts receivable 1,568

5 unchanged sentences

Other current and non-current liabilities ( 11,174 )

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

Fair value of net tangible assets acquired ( 2,210 )

Fair value of identifiable intangible assets 34,980

Goodwill 58,252

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 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.

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 two years .

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

The estimated goodwill of $ 58,105 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.

On November 29, 2022, the measurement period for Atlanta Micro expired.

The identifiable intangible assets include 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 two years .

The goodwill of $ 58,252 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 goodwill from this acquisition is reported in the Microelectronics reporting unit.

6 unchanged sentences

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:

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

Consideration transferred

3 unchanged sentences

Net purchase price $ 154,145

Estimated fair value of tangible assets acquired and liabilities assumed

Fair value of tangible assets acquired and liabilities assumed

Accounts receivable 5,363

5 unchanged sentences

Other current and non-current liabilities ( 4,788 )

Estimated fair value of net tangible assets acquired 13,264

Estimated fair value of identifiable intangible assets 61,360

Fair value of net tangible assets acquired 13,201

Fair value of identifiable intangible assets 61,360

Goodwill 81,772

Estimated fair value of net assets acquired 156,333

Fair value of net assets acquired 156,333

Less cash acquired ( 2,188 )

Net purchase price $ 154,145

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 $ 81,709 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.

On November 5, 2022, the measurement period for Avalex expired.

The identifiable intangible assets include 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 .

The goodwill of $ 81,772 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 Mission Systems reporting unit, formerly referred to as 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.

As of December 30, 2022, the Compan y had $ 77,459 of goodwill deductible for tax purposes.

Fair Value of Financial Instruments

Fair Value Measurements

September 30, 2022 Level 1 Level 2 Level 3

December 30, 2022 Level 1 Level 2 Level 3

Interest rate swap $ 220 $ — $ 220 $ —

4 unchanged sentences

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.

The 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 December 30, 2022, the fair value of the Swap was a liability of $ 220 and is included within Other non-current liabilities 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.

4 unchanged sentences

Inventory was comprised of the following:

September 30, 2022 July 1, 2022

December 30, 2022 July 1, 2022

Raw materials $ 199,710 $ 178,410

5 unchanged sentences

Component level financial information is reviewed by management across two divisions:

Processing and Microelectronics.

Mission Systems and Microelectronics.

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 :

The following table sets forth the changes in the carrying amount of goodw ill for the six months ended December 30, 2022 :

Balance at July 1, 2022 $ 937,880

Goodwill adjustment for the Avalex acquisition 66

Balance at September 30, 2022 $ 937,884

Goodwill adjustment for the Atlanta Micro acquisition 147

Balance at December 30, 2022 $ 938,093

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

Restructuring

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

During the second quarter ended and six months ended December 30, 2022, the Company incurred $ 2,069 and $ 3,577 of restructuring and other charges, respectively.

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.

1 unchanged sentence

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.

Since the inception of 1MPACT, 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.

Restructuring and other charges for the second quarter ended December 30, 2022 primarily related to 1MPACT including $ 1,039 of costs for facility optimization efforts, including $ 783 related to lease asset impairment, $ 595 of severance costs, as well as $ 435 of third-party consulting costs.

Restructuring and other charges for the six months ended December 30, 2022 primarily related to 1MPACT including $ 1,739 of third-party consulting costs, $ 1,039 of costs for facility optimization efforts, including $ 783 related to lease asset impairment, as well as $ 799 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.

1 unchanged sentence

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

Severance & Related

Severance & Related Facilities

& Other Total

Balance at July 1, 2022 $ 4,722 $ — $ 4,722

1 unchanged sentence

Cash paid ( 4,336 ) ( 194 ) ( 4,530 )

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.

Balance at December 30, 2022 $ 1,185 $ 62 $ 1,247

The Company recorded an income tax benefit of $ 2,151 and $ 155 on a loss before income taxes of $ 13,071 and $ 2,794 for the second quarters ended December 30, 2022 and December 31, 2021, respectively.

The Company recorded an income tax benefit of $ 3,173 and $ 596 on a loss before income taxes of $ 28,428 and $ 10,375 for the six months ended December 30, 2022 and December 31, 2021, respectively.

During the second quarter ended December 30, 2022, the Company recognized a tax benefit of $ 2,348 related to a release of income tax reserves for unrecognized income tax benefits due to the expiration of the statute of limitations.

During the six months ended December 30, 2022 and December 31, 2021, the Company recognized a tax provision of $ 1,745 and $ 878 related to stock compensation shortfalls, respectively.

The effective tax rate for the second quarters ended December 30, 2022 and December 31, 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.

The effective tax rate for the second quarter ended December 30, 2022 also differed from the federal statutory rate due to the release of income tax reserves for previously unrecognized income tax benefits.

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 taxable years beginning after December 31, 2022 and a 1% excise tax on certain stock buybacks after December 31, 2022.

The Company expects the impact of this legislation to be immaterial.

Effective for tax years beginning after December 31, 2021, the Tax Cuts and Jobs Act of 2017 requires companies to capitalize and amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes.

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 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.

As of December 30, 2022, the Company's outstanding balance of unamortized deferred financing costs was $ 3,994 , which is being amortized to Other expense, net in the Consolidated Statements of Operations and Comprehensi ve Loss on a straight line basis over the term of the Revolver.

During the second quarter ended December 30, 2022, the Company borrowed $ 40,000 against the Revolver, which was subsequently repaid within the quarter.

As of December 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 $ 6,590 and $ 11,137 fo r the second quarter and six months ended December 30, 2022.

There were outstanding letters of cre dit of $ 963 a s of December 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 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 Plan's funded status at December 30, 2022 was a net liability of $ 4,647 , which is recorded in Other non-current liabilities on the Consolidated Balance Sheet.

The Company recorded a net gain of $ 48 and $ 96 in AOCI during the second quarter and six months ended December 30, 2022.

The Company recorded a net gain of $ 48 and $ 96 in AOCL during the second quarter and six months December 31, 2021.

The Company recognized net periodic benefit costs of $ 220 and $ 441 associated with the Plan for the second quarter and six months ended December 30, 2022, respectively.

The Company recognized net periodic benefit costs of $ 269 and $ 538 associated with the Plan for the second quarter and six months ended December 31, 2021, respectively.

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

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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.

The Company had $ 965 of capitalized stock-based 401(k) matching compensation expense on the Consolidated Balance Sheet at December 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.

During the second quarter ended December 30, 2022, the Company recognized share-based matching contributions related to the 401(k) plan of $ 2,748 as compared to $ 1,711 of cash match during the second quarter ended December 31, 2021.

During the six months ended December 30, 2022, the Company recognized share-based matching contributions related to the 401(k) plan of $ 6,427 as compared to $ 3,822 of cash match during the six months ended December 31, 2021.

Shareholders' Equity

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S TOCK I NCENTIVE P LANS

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.

At December 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”).

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

There were 2,054 available shares for future grant under the 2018 Plan at December 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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E MPLOYEE S TOCK P URCHASE P LAN

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.

At December 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 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.

There were 57 and 54 shares issued under the ESPP during the six months quarters ended December 30, 2022 and December 31, 2021, respectively.

Shares available for future purchase under the ESPP totaled 256 at December 30, 2022.

S TOCK A WARD A CTIVITY

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Forfeited ( 94 ) 57.68

Outstanding at September 30, 2022 1,913 $ 55.80

S TOCK - BASED C OMPENSATION E XPENSE

Outstanding at December 30, 2022 1,947 $ 55.52

S TOCK -B ASED C OMPENSATION E XPENSE

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.

The Company had $ 1,710 and $ 1,229 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for the periods ended December 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 Loss:

First Quarters Ended

September 30, 2022 October 1, 2021

Second Quarters Ended Six Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Cost of revenues $ 237 $ 322 $ 1,036 $ 881

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Europe Asia Pacific Eliminations Total

FIRST QUARTER ENDED SEPTEMBER 30, 2022

SECOND QUARTER ENDED DECEMBER 30, 2022

Net revenues to unaffiliated customers $ 219,155 $ 10,431 $ 2 $ — $ 229,588

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Net revenues $ 219,087 $ 10,599 $ 2 $ ( 100 ) $ 229,588

FIRST QUARTER ENDED OCTOBER 1, 2021

SECOND QUARTER ENDED DECEMBER 31, 2021

Net revenues to unaffiliated customers $ 209,495 $ 10,808 $ 77 $ — $ 220,380

1 unchanged sentence

Net revenues $ 211,083 $ 11,407 $ 77 $ ( 2,187 ) $ 220,380

The Company offers a broad family of products designed to meet the full range of requirements in compute-intensive, signal processing, image processing and command and control applications.

SIX MONTHS ENDED DECEMBER 30, 2022

Net revenues to unaffiliated customers $ 437,977 $ 19,183 $ 7 $ — $ 457,167

Inter-geographic revenues 79 372 — ( 451 ) —

Net revenues $ 438,056 $ 19,555 $ 7 $ ( 451 ) $ 457,167

SIX MONTHS ENDED DECEMBER 31, 2021

Net revenues to unaffiliated customers $ 423,236 $ 21,995 $ 162 $ — $ 445,393

Inter-geographic revenues 3,147 1,328 — ( 4,475 ) —

Net revenues $ 426,383 $ 23,323 $ 162 $ ( 4,475 ) $ 445,393

The Company offers a broad family of products and processing solutions designed to meet the full range of requirements in compute-intensive, signal processing, image processing and command and control applications.

To maintain a competitive advantage, the Company seeks to leverage technology investments across multiple product lines and product solutions.

The Company’s products are typically compute-intensive and require extremely high bandwidth and high throughput.

These systems often must also meet significant SWaP constraints for use in aircraft, unmanned aerial vehicles, ships and other platforms and be ruggedized for use in harsh environments.

These processing solutions often must also meet significant SWaP constraints for use in aircraft, unmanned aerial vehicles, ships and other platforms and be ruggedized for use in harsh environments.

The Company's products transform the massive streams of digital data created in these applications into usable information in real time.

The systems can scale from a few processors to thousands of processors.

In recent years, the Company completed a series of acquisitions that changed its technological capabilities, applications and end markets.

In recent years, the Company completed a series of acquisitions that augmented its technological capabilities, applications and end markets.

As these acquisitions and changes occurred, the Company's proportion of revenue derived from the sale of components in different technological areas, and modules, sub-assemblies and integrated subsystems which combine technologies into more complex diverse products has shifted.

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

First Quarters Ended

September 30, 2022 October 1, 2021

Second Quarters Ended Six Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

$ 204,959 $ 186,592 $ 410,789 $ 375,840

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

First Quarters Ended

September 30, 2022 October 1, 2021

Second Quarters Ended Six Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

$ 43,707 $ 51,172 $ 97,115 $ 110,076

13 unchanged sentences

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

First Quarters Ended

September 30, 2022 October 1, 2021

Second Quarters Ended Six Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Components (1)

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

First Quarters Ended

September 30, 2022 October 1, 2021

Second Quarters Ended Six Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

$ 119,944 $ 110,990 $ 238,294 $ 227,554

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Europe Asia Pacific Eliminations Total

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

December 30, 2022 $ 118,299 $ 3,690 $ — $ — $ 121,989

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

1 unchanged sentence

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

First Quarters Ended

September 30, 2022 October 1, 2021

Second Quarters Ended Six Months Ended

December 30, 2022 December 31, 2021 December 30, 2022 December 31, 2021

Lockheed Martin Corporation 12 % * 14 % 10 %

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Northrop Grumman 11 % 10 % 10 % *

46 % 39 % 47 % 40 %

* 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 first quarters ended September 30, 2022 and October 1, 2021.

There were no programs comprising 10% or more of the Company's revenues for the second quarters and six months ended December 30, 2022 and December 31, 2021.

Commitments and Contingencies

6 unchanged sentences

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 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.

The Company responded to the complaint in July 2021.

An arbitration proceeding was held during September 2022, with final motions in October 2022 and oral arguments in November 2022.

The arbitrator issued its final ruling in January 2023, awarding ERA $72 in damages and fees.

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

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P URCHASE C OMMITMENTS

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.

As of December 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 $ 142,932 .

14 unchanged sentences

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.

As of December 30, 2022, the fair value of the hedge was a liability of $ 220 and is included within Other non-current liabilities in the Company's Consolidated Balance Sheets.

During the second quarter ended December 30, 2022, the Company amortized $ 339 of the previous unrealized gain, which is included within Other comprehensive loss.

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.

Based on the credit ratings of the Company’s counterparty as of December 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.

3 unchanged sentences

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 and noted no items requiring adjustment of the financial statements or additional disclosures.

On January 31, 2023, the Company announced that Michael Ruppert, Executive Vice President, Chief Financial Officer, and Treasurer, will step down from the Company, effective February 17, 2023.

Michelle McCarthy, Senior Vice President, Chief Accounting Officer, will serve as Mercury's interim Chief Financial Officer.

On January 31, 2023, the Board of Directors announced the decision to initiate a review of strategic alternatives to enhance shareholder value, including a potential sale of the Company.

There can be no assurance that any transaction will be approved or consummated.

Additional details are contained in the Current Report on Form 8-K filed by the Company with the SEC on January 31, 2023.

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