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Item 1. Business

2023-08-15 compared with 2022-08-16 · 123 added, 153 removed, 375 unchanged (42% of the section changed)

Mercury Systems, Inc.

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

is a technology company that delivers processing power for the most demanding aerospace and defense missions.

Headquartered in Andover, Massachusetts, our 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 our platform include signal solutions, display, software applications, networking, storage and secure processing.

Our innovative solutions are mission-ready, software-defined and open and modular, to meet our customers’ high-tech needs.

Customers access our solutions via the Mercury platform, which encompasses the broad scope of our investments in technologies, companies, products, services and the expertise of our people.

Our innovative solutions are mission-ready, software-defined and open and modular, meeting our customers’ cost and schedule needs today by allowing them to use or modify our products to suit their mission.

Customers access our solutions via the Mercury Processing Platform, which encompasses the broad scope of our investments in technologies, companies, products, services and the expertise of our people.

Ultimately, we connect our customers to what matters most to them.

We connect commercial technology to defense, people to data, partners to opportunities and the present to the future.

We connect commercial technology to defense, people to data and partners to opportunities.

At the most human level, we connect what we do to our customers’ missions;

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government and original equipment manufacturers (“OEM”) commercial aerospace companies.

Mercury has built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that it believes meets and exceeds the performance needs of our defense and commercial customers.

Mercury has built a trusted, robust portfolio of proven product solutions, leveraging the most advanced commercial silicon technologies and purpose-built to exceed the performance needs of our defense and commercial customers.

Customers add their own applications and algorithms to our specialized, secure and innovative products and pre-integrated solutions.

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

Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications.

Our long-standing deep relationships with leading high-tech and other commercial companies, coupled with our high level of research and development (“R&D”) investments on a percentage basis and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model.

Our long-standing deep relationships with leading high-tech and other commercial companies, coupled with our high level of research and development (“R&D”) investments on a percentage basis of sales and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model.

We are leading the development and adaptation of commercial technology for aerospace and defense solutions.

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Our mission critical solutions are deployed by our customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”), electronic intelligence, mission computing avionics, electro-optical/infrared (“EO/IR”), electronic warfare, weapons and missile defense, hypersonics and radar.

Our consolidated revenues, acquired revenues, net income, diluted earnings per share (“EPS”), adjusted earnings per share (“adjusted EPS”) and adjusted EBITDA for fiscal 2022 were $988.2 million, $117.8 million, $11.3 million, $0.20, $2.19 and $200.5 million, respectively.

Our consolidated revenues, acquired revenues, net income, EPS, adjusted EPS and adjusted

EBITDA for fiscal 2021 were $924.0 million, $3.4 million, $62.0 million, $1.12, $2.42 and $201.9 million, respectively.

Our consolidated revenues, acquired revenues, net loss, diluted loss per share, adjusted earnings per share (“adjusted EPS”) and adjusted EBITDA for fiscal 2023 were $973.9 million, $25.1 million, $(28.3) million, $(0.50), $1.00 and $132.3 million, respectively.

Our consolidated revenues, acquired revenues, net income, earnings per share ("EPS"), adjusted EPS and adjusted EBITDA for fiscal 2022 were $988.2 million, $6.0 million, $11.3 million, $0.20, $2.19 and $200.5 million,

respectively.

See the Non-GAAP Financial Measures section of this annual report for a reconciliation of our acquired revenues, adjusted EPS and adjusted EBITDA to the most directly comparable GAAP measures.

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, adjusted EBITDA and free cash flow potential over the next five years.

Since fiscal year 2014, Mercury has completed 15 acquisitions, deploying $1.4 billion of capital and, as a result, dramatically scaled and transformed the business.

Over this time, the Company has extracted substantial revenue and cost synergies from each of these individual acquisitions.

As we approach the milestone of $1 billion of revenue, we have identified significant opportunity to realize further scale through consolidating and streamlining our internal organizational structure which will improve visibility, speed of decision making and accountability.

1MPACT is led by our Chief Transformation Officer, Thomas Huber, and focuses on the following major areas:

organizational efficiency and scalability;

procurement and supply chain;

facilities optimization;

R&D investment;

and scalable common processes and systems.

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

1MPACT was always intended to be a multi-year journey where Mercury builds on its operational competence until the behaviors and practices that came with 1MPACT simply become the way Mercury operates.

On July 18, 2023, Mercury executed the planned evolution of our 1MPACT value creation initiative, embedding the processes and execution of 1MPACT into our Execution Excellence organization.

The 1MPACT office has concluded its responsibilities, having successfully incorporated the principles behind 1MPACT into how Mercury thinks about continuous improvement at all levels of the organization.

Our Business Strategy

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Our strategy is built to meet the aerospace and defense market’s need for speed and affordability.

Our strategies for growth are as follows:

Invest to grow organically :

Mercury invests in our people, processes, systems and trusted manufacturing assets to support continued organic growth.

Expand capabilities, market access and penetration through mergers & acquisitions (“M&A”) :

We supplement our organic growth by expanding capabilities, market access and penetration through a disciplined M&A process and full acquisition integration to drive cost and revenue synergies.

Invest in trusted, secure Innovation that Matters®:

Mercury develops leading edge technologies, customized for aerospace and defense applications, through above-average industry investment on a percentage basis in R&D.

Continuously improve operational capability and scalability :

We drive transformational and sustainable business improvement and value creation across the enterprise.

Attract and retain top talent :

We strive to continuously improve operational capability and scalability by attracting, retaining and engaging top talent and supporting and promoting our culture and values.

Our ability to continue to improve our performance and deliver results demands we all align around the few actions that unlock the intrinsic value in the business.

As such, we will focus on four areas that unlock our capacity to create value and reinvest for growth:

Delivering Predictable Results – Continuous improvement in the performance of our programs, transition our challenged development programs into production and mature our management systems and processes.

Building a Thriving Organic Growth Engine – Create a growth engine that is consistently bidding and winning new contracts to drive industry leading organic growth.

Expanding Margins – Drive comprehensive cost management efforts corporate-wide including improvement in gross margins across all programs, facilitating clearer accountability and streamlining our structure and processes.

Driving Cash Release – Enhance our cash flow conversion, including improvements in delivery and collection.

Our strategies are built around our key strengths as a leading commercial technology company serving the aerospace and defense industry.

Our strategies include innovation and investment in scaling existing capabilities, as well as augmenting our capabilities through an acquisition strategy designed to focus on adjacent technologies.

We believe our investment in R&D is more than double that of our competitors on a percentage basis.

We believe our investment in R&D is more than double that of our competitors on a percentage of sales.

Our consistent strategies allow us to assist our customers, mostly defense prime contractors, to reduce program cost, minimize technical risk, stay on schedule and on budget and ensure trust and security in the supply chain.

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Our commercial business model positions us to be compensated for non-recurring engineering which supplements our own internal R&D investment.

We typically team concurrently with multiple defense prime contractors as they pursue new business with solutions they develop and market to the government, and engage with our customers early in the design cycle.

We typically team concurrently with multiple defense prime contractors as they pursue new

business with solutions they develop and market to the government, and engage with our customers early in the design cycle.

Our engagement model can lead to long-term production revenue that continues after the initial services are delivered.

We intend to add capabilities, through both M&A and investment in organic growth, both horizontally – in adjacent markets – and vertically – adding more content.

We have added capabilities, through both M&A and investment in organic growth, both horizontally – in adjacent markets – and vertically – adding more content.

• First, transition to pre-integrated subsystems:

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We believe we have built the most trusted, proven, contemporary portfolio of solutions and sub-systems that are purpose-built to meet or exceed our customers’ most pressing high-tech needs.

We are investing in mission-critical processing technologies embedded into our Processing Platform:

We are investing in mission-critical processing technologies embedded into the Mercury Processing Platform:

Industry-leading embedded security capabilities, secure supply chain, U.S.

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Smart, rugged, interactive, high-definition display technology optimized for the low-light, multi-angle viewing requirements of cockpits and armored vehicles.

The most advanced open middleware and software facilitates rapid application porting on top of open mission systems architecture.

Advanced open middleware and software facilitates rapid application porting on top of open mission systems architecture.

• Networking .

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A trusted supply chain, with products designed and manufactured onshore.

Advanced cryptography, secure boot and physical protection technologies like our BuiltSECURE technology can mitigate reverse

engineering, deliver cyber resiliency and safeguard confidential data and IP against adversarial threats, even when a system has been compromised.

Advanced cryptography, secure boot and physical protection technologies like our BuiltSECURE technology can mitigate reverse engineering, deliver cyber resiliency and safeguard confidential data and IP against adversarial threats, even when a system has been compromised.

We also design safety-certifiable BuiltSAFE processing systems up to the highest design assurance levels.

• Software-Defined :

Software enabled hardware for futureproofing, rapid scaling, ease of maintenance and affordability.

Software enabled hardware for future proofing, rapid scaling, ease of maintenance and affordability.

Flexible hardware architectures that are reconfigurable and upgradeable with software to extend the life of our systems and the platforms they are deployed on.

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Our 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 (“UAVs”), ships and other platforms and be ruggedized for use in harsh environments.

These systems often must also meet significant size, weight and power (“SWaP”) constraints for use in aircraft, unmanned aerial vehicles (“UAVs”), ships and other platforms and be ruggedized for use in harsh environments.

They are primarily used in both commercial aerospace applications, such as communications and ground radar air traffic control, as well as advanced defense and intelligence applications, including space-time adaptive processing, synthetic aperture radar, airborne early warning, command, control, communication and information systems, mission planning, image intelligence and signal intelligence systems.

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To address the current challenges facing the warfighter, our government and defense prime contractors, we have developed a new product architecture that supports a more dynamic, iterative, spiral development process by leveraging open architecture standards and leading-edge commercial technologies and products.

Our open architecture is carried throughout our entire embedded computing product line from the very small form-factor subsystems to the high-end, where ultimate processing power and reliability is of paramount importance to the mission.

Our open architecture is carried throughout our entire product line from the very small form-factor subsystems to the high-end, where ultimate processing power and reliability is of paramount importance to the mission.

Our commercially-developed product capabilities cover the entire intelligence, surveillance and reconnaissance (“ISR”) spectrum from acquisition and digitization of the signal, to processing of the signal, through the exploitation and dissemination of the information.

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We partner with global tech leaders to align technology roadmaps and deliver cutting-edge computing in scalable, field-deployable form factors that are fully configurable to each unique workload.

We use the latest Intel® server-class processing products, Xilinx Field Programmable Gate Arrays (“FPGA”), as well as NVIDIA GPU products in our embedded high-performance processing technologies.

While this multi-computing and embedded processing technology is one of our core skills, the SWaP constraints that are encountered in connection with the high-performance embedded processing applications create unique challenges.

For example, to deal with the heat build-up involved in small subsystems, we introduced a key technology called Air Flow-By™ that enables previously unattainable levels of processing power within a small footprint by effectively removing heat so the server-class processors can perform at maximum designed power limits.

In rugged environments where air is limited, such as high-altitude operations, our Liquid-Flow-By™ technology has been successfully customer tested allowing maximum server-class processor performance.

We use the latest Intel® server-class processing

products, AMD Field Programmable Gate Arrays (“FPGA”), as well as NVIDIA GPU products in our embedded high-performance processing technologies.

While this multi-computing and embedded processing technology is one of our core capabilities, the SWaP constraints inherent in high-performance embedded processing applications create unique challenges.

For example, to deal with the heat build-up involved in fanless compact rugged subsystems, we introduced a key technology called Air Flow-By™ that enables previously unattainable levels of processing power within a small footprint by effectively removing heat so server-class processors can perform at maximum designed power limits.

In environments where air is limited, such as high-altitude operations, our Liquid-Flow-By™ technology allows maximum server-class processor performance.

These innovative cooling techniques allow full performance server-class processing in rugged environments enabling new and advanced modes of operation that enhance the multi-intelligence, situational awareness and electronic warfare capabilities in military platforms.

Embedded systems security has become a requirement for new and emerging military programs and our security solutions are a critical differentiator from our traditional competition.

Our security solutions, combined with our next-generation secure Intel® server-class product line, together with increasingly frequent mandates from the government to secure electronic systems for domestic and foreign military sales, position us well to capitalize on DoD program protection security requirements.

These security solutions, combined with our next-generation secure Intel® server-class product line, together with increasingly frequent mandates from the government to secure electronic systems for domestic and foreign military sales, position us well to capitalize on DoD program protection security requirements.

Finally, our built-in security framework creates higher product differentiation, and drives greater program velocity, while lowering risk.

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Recent Acquisitions

Since 2011 we have successfully acquired 18 businesses, successfully completing integration of the earlier acquired businesses with the integration of the more recent acquisitions progressing well.

The 15 acquisitions completed since July 1, 2015 are shown below.

Since 2015 we have acquired and integrated 15 businesses.

These acquisitions have expanded Mercury’s technology portfolio with capabilities such as digital signal processing products, high-performance RF modules and components, rugged avionics and electronics, and safety-certifiable subsystems.

The five acquisitions completed since July 1, 2019 are shown below.

Name of Acquired Entities Date of Acquisition

Lewis Innovative Technologies, Inc.

December 16, 2015

Microsemi Carve-Out Business May 2, 2016

CES Creative Electronic Systems S.A.

November 3, 2016

Delta Microwave, LLC April 3, 2017

Richland Technologies L.L.C.

Themis Computer February 1, 2018

Germane Systems, LC July 31, 2018

GECO Avionics, LLC January 29, 2019

The Athena Group, Inc.

April 18, 2019

Syntonic Microwave LLC April 18, 2019

American Panel Corporation September 23, 2019

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Our market opportunity is defined by the growing demand for domestically designed, sourced and manufactured electronics for critical aerospace, defense and intelligence applications.

Our primary market positioning is centered on making commercially available technologies profoundly more accessible to the aerospace and defense sector, specifically as it relates to command, control, communications, computers and intelligence (C4I) systems, sensors and electronic warfare (EW);

and commercial markets, which include aerospace communications and other computing applications.

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Our organic investments as well as the acquisitions of LIT, the Carve-Out Business and Athena added to our portfolio of embedded security products that can be leveraged across our business.

Finally, our CES addition, due to its location in Geneva, is helping to open more opportunities in international markets.

Finally, our CES addition, due to its location in Geneva, Switzerland is helping to open more opportunities in international markets.

We believe there are a number of evolving trends that are reshaping our target markets and accordingly provide us with attractive growth opportunities.

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• The aerospace and defense electronics market is expected to grow in 2023 and beyond.

According to Renaissance Strategic Advisors (“RSA”), as of September 2021, the global aerospace and defense electronics market is estimated to be $130 billion in 2021, growing to $155 billion by 2026.

According to Renaissance Strategic Advisors (“RSA”), as of June 2023, the global aerospace and defense electronics market is estimated to be $148 billion in 2023, growing to $199 billion by 2028.

Within this global market, RSA estimates that the total Tier 2 defense electronics market, which Mercury participates in, was approximately $48 billion in 2023, and will grow to $67 billion in 2028.

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RSA estimates the compound annual growth rate (“CAGR”) from 2023-2028 for these markets to be 5.9% for platform and mission management, 6.6% for C2I and 6.9% for dedicated communications.

Within the global Tier 2 sensor and effector mission systems market in which we

participate, RSA estimated the market for 2021 to be $5.8 billion for EW, $5.8 billion for radar, $2.1 billion for EO/IR, $1.2 billion for acoustics and $3.4 billion for weapons systems.

RSA estimates the 2021-2026 CAGR for these markets to be 2.6% for electronic warfare, 2.6% for radar, 3.4% for EO/IR, 3.7% for acoustics and 4.1% for weapons systems.

Within the global Tier 2 sensor and effector mission systems market in which we participate, RSA estimated the market for 2023 to be $6.0 billion for EW, $6.6 billion for radar, $2.7 billion for EO/IR, $1.4 billion for acoustics and $3.9 billion for weapons systems.

RSA estimates the 2023-2028 CAGR for these markets to be 6.7% for EW, 6.5% for radar, 7.6% for EO/IR, 6.8% for acoustics and 8.4% for weapons systems.

Within the context of the overall U.S.

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We continue to build on our strengths in the design and development of performance optimized electronic subsystems for these markets, and often team with multiple defense prime contractors as they bid for projects, thereby increasing our chance of a successful outcome.

We expect to continue our above industry-average growth.

We expect to return to our above industry-average growth.

• The rapidly expanding demand for tactical ISR is leading to significant growth in sensor data being generated, leading to even greater demand for the capability of our products to securely store and process data onboard platforms .

An increase in the prevalence and resolution of ISR is generating significant growth in the associated data that needs to be stored and turned into information for the warfighter in a timely manner.

increase in the prevalence and resolution of ISR is generating significant growth in the associated data that needs to be stored and turned into information for the warfighter in a timely manner.

In addition, several factors are driving the defense and intelligence industries to demand greater capability to collect, store and process data onboard the aircraft, UAVs, ships and other vehicles, which we refer to collectively as platforms.

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• A greater percentage of the value associated with future defense platforms will be driven by electronic systems content, and upgrades to existing platforms will focus on sensors, signal processing, sensor algorithms, multi-intelligence fusion and exploitation and computing and communications capability – all areas where Mercury participates.

These trends remain favorable in our view and the demand environment is improving due to urgent needs for warfighting capability at a more rapid pace than traditional defense prime contractors can easily react to, as demonstrated by our strong bookings and design wins, both in fiscal 2022.

We believe that our addressable market continues to increase, driven in large part by our strategic move into mission systems and potential to deliver innovative processing solutions at chip scale, and that primes will increasingly seek out our high-performance, cost-effective open architecture products.

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government is focused on ensuring that the U.S.

military protects its defense electronic systems and the information held within them from nefarious activities such as tampering,

reverse engineering and other forms of advanced attacks, including cyber.

military protects its defense electronic systems and the information held within them from nefarious activities such as tampering, reverse engineering and other forms of advanced attacks, including cyber.

The requirement to add security comes at a time when the commercial technology world continues to offshore more of the design, development, manufacturing and support of such capabilities, making it more difficult to protect against embedded vulnerabilities, tampering, reverse engineering and other undesired activities.

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• Mercury is well-positioned to help address the need for DoD to access the latest commercial silicon, combined with the desire to ensure a trusted domestic supply of silicon technologies .

In February 2022, DoD’s Research & Engineering (R&E) organization listed microelectronics among its top technology investment priorities and reiterated its need for secure microelectronics sources which leverage state-of-the-art commercial development and production.

DoD’s FY23 budget requested $989 million in funding for basic research in microelectronics – the largest increase among R&E’s investment priorities and 40% of the total basic research budget.

In May 2023, DoD’s National Defense Science and Technology Strategy listed microelectronics among its critical technology areas for investment.

DoD’s FY23 budget requested $3.3 billion to fund microelectronics research and development initiatives, a historically large increase in funding.

Congress’ passage of the Creating Helpful Incentives to Produce Semiconductors (“CHIPS”) act in August 2022, which will provide $2 billion for defense microelectronics, further amplifies the U.S.

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In addition, we consistently leverage our technology and capabilities across multiple programs, providing significant operating leverage and cost savings.

Our recent acquisitions allow us to participate in a broader array of programs, many with key strategic customers of ours.

Our acquisitions allow us to participate in a broader array of programs, many with key strategic customers of ours.

• We are a leading technology company serving the aerospace and defense industry.

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Our pre-integrated subsystems improve affordability by substantially reducing customer system integration costs and time-to-market for our solutions.

System integration costs are one of the more substantial costs our customers bear in developing and deploying

technologies in defense programs and platforms.

System integration costs are one of the more substantial costs our customers bear in developing and deploying technologies in defense programs and platforms.

Our pre-integrated solutions approach allows for more rapid and affordable modernization of existing platforms and faster deployment of new platforms.

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As commercial technology companies have moved the design, development, manufacturing and support of their technologies offshore, the DoD is looking to domestic technology providers to develop a sustainable, U.S.-based trusted supply chain.

Over several years we have been building out our capacity for domestic manufacturing through our Advanced Microelectronics Centers (“AMCs”).

Over several years we have been building out our capacity for domestic manufacturing through our Advanced

Microelectronics Centers (“AMCs”).

These facilities provide significant scale and capacity for our defense prime customers, who have been increasingly willing to outsource to partners with the scale needed to meet large program production requirements.

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Our acquisitions of the Carve-Out Business, LIT and Athena also added to our portfolio of sophisticated firmware and software specifically designed to secure microelectronic devices that can be leveraged across our product portfolio.

• We are pioneering a next generation business model .

• We are pioneering a next generation defense business model .

The DoD and the defense industrial base is currently undergoing a major transformation.

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Our approach is built around a few key pillars:

• The mission-ready products in our portfolio can be incorporated into aerospace and defense platforms in their standard commercial forms or customized to meet unique program requirements.

• We continue to leverage our expertise in building pre-integrated subsystems in support of critical defense programs, driving out procurement costs by lowering integration expenses of our customers.

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We believe our integration work provides us with critical insights as we implement and incorporate key classified government intellectual property, including critical intelligence and signal processing algorithms, into advanced systems.

This integration work provides us the opportunity to combine directly and integrate our technology building blocks along with our intellectual property into

our existing embedded processing products and solutions, enabling us to deliver more affordable, platform-ready integrated ISR subsystems that leverage our OSA and address key government technology and procurement concerns.

This integration work provides us the opportunity to combine directly and integrate our technology building blocks along with our intellectual property into our existing embedded processing products and solutions, enabling us to deliver more affordable, platform-ready integrated ISR subsystems that leverage our OSA and address key government technology and procurement concerns.

Our operations in this environment also help us identify emerging needs and opportunities to influence our future product development, so that critical future needs can be met in a timely manner with commercially-developed products and solutions.

• We have invested in advanced, domestic design and manufacturing capabilities.

Over the past several years we have prioritized investments to build our internal capabilities and capacity for defense electronics design and manufacturing in the U.S.

We have prioritized investments to build our internal capabilities and capacity for defense electronics design and manufacturing in the U.S.

These investments include the consolidation of a number of sub-scale microelectronics manufacturing facilities into our modern AMCs as well as the establishment of our USMO in Phoenix, Arizona.

In addition to the consolidation of facilities into scalable engineering and manufacturing centers of excellence, we have made the necessary investments to outfit these facilities with modern, scalable and redundant tools and equipment to promote quality, efficiency, throughput and redundancy.

In addition to the consolidation of

facilities into scalable engineering and manufacturing centers of excellence, we have made the necessary investments to outfit these facilities with modern, scalable and redundant tools and equipment to promote quality, efficiency, throughput and redundancy.

In addition we invested in our information technology (“IT”) infrastructure and business systems to meet Defense Federal Acquisition Regulation Supplement (“DFARS”) requirements for cybersecurity.

These investments taken together are intended to demonstrate our commitment to meeting DoD expectations for a trusted and secure defense industrial base.

Our AMCs in Hudson, New Hampshire, West Caldwell, New Jersey, Oxnard, California, Huntsville, Alabama and Phoenix, Arizona are strategically located near key customers and are purpose-built for the design, build and test of RF components and subsystems in support of a variety of key customer programs.

Our AMCs in Hudson, New Hampshire, West Caldwell, New Jersey, Oxnard, California, Huntsville, Alabama, Phoenix, Arizona and Torrance, California are strategically located near key customers and are purpose-built for the design, build and test of RF components and subsystems in support of a variety of key customer programs.

Our USMO is built around scalable, repeatable, secure, affordable and predictable manufacturing.

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government and other key organizations in the defense industry over our 30 years in the defense electronics industry.

Our top customers include Airbus, BAE Systems, Boeing, General Atomics, General Dynamics, L3Harris Technologies, Leonardo, Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Technologies and the U.S.

Over this period, we have become recognized for our ability to develop new technologies and meet stringent program requirements.

We believe we are well-positioned to maintain these high-level customer engagements and enhance them through the additional relationships that our recently acquired businesses have with many of the same customers.

• Proven Management Team .

Our senior management team has developed a long-term compelling strategy for the aerospace and defense markets.

Our senior management team has a history of identifying and evaluating successful business acquisition opportunities, performing in-depth due diligence, negotiating with owners and management, structuring, financing and closing transactions and then integrating the acquired business resulting in the creation of synergies and enhanced overall returns.

Having completed these critical steps with a senior management team with significant experience in growing, scaling and acquiring businesses, we believe that we have demonstrated our operational capabilities and we are well-positioned to continue growing and scaling our business.

• Leading M&A Origination and Execution Capability .

• Operational Execution Experience .

The members of our leadership team possess extensive expertise within the aerospace, defense, and technology industries.

Their collective history of building management systems and processes has consistently proven to successfully scale and grow a business to enhance overall returns.

They also bring experience in effectively implementing operational transformations that deliver strong results and drive long-term value creation.

Our leadership team is focused on operational execution, including setting clear priorities, developing the appropriate processes and systems, and delivering results.

We are focused on four priorities to unlock capacity to create value and reinvest for growth.

They include:

delivering predictable results, build a thriving growth engine, expanding margins, and driving cash release.

We are confident that we have assembled the necessary expertise to continue to grow and scale our business.

• Mature M&A Origination and Execution Capability .

We have a strong track-record of identifying and executing strategic acquisitions.

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We have developed internal processes to identify and source strategic acquisitions on a proprietary basis and negotiated directly with owners on a number of acquisitions.

In addition, we have developed relationships with a number of investment banks and other sell-side advisors, as well as a reputation as a preferred acquirer, which allow us access to targeted or widely-marketed M&A processes.

Our internal capabilities include financial, legal and other transaction diligence, deal valuation and deal negotiations.

Where appropriate, we leverage third party advisors to supplement our internal diligence.

We have a proven ability to execute numerous transactions simultaneously effectively and efficiently.

• 1MPACT Value Creation Plan .

Our 1MPACT effort is designed to lay the foundation for the next phase of our value creation at scale.

Led by our Chief Transformation Officer, 1MPACT focuses on the following major areas:

organizational efficiency and scalability;

procurement and supply chain;

facilities optimization;

R&D investment;

and scalable common processes and systems.

• Proven M&A Integration Capability.

We have developed the internal processes and capability, enhanced by 1MPACT, to integrate acquired businesses to deliver value through revenue and cost synergies.

We leverage our common cultures and values as well as common processes, business systems, tools, channels and manufacturing infrastructure to accelerate growth and improve profitability in our acquired businesses.

We have developed the internal processes and capability to integrate acquired businesses to deliver value through revenue and cost synergies.

Overseen by our Execution Excellence organization, we leverage our common cultures and values as well as common processes, business systems, tools, channels and manufacturing infrastructure to accelerate growth and improve profitability in our acquired businesses.

We operate in a highly competitive marketplace characterized by rapidly changing technology, frequent product performance improvements, increasing speed of deployment to align with warfighters’ needs and evolving industry standards and requirements coming from our customers or the DoD.

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Some of these competitors are larger and have greater resources than us.

Some of these competitors compete against us at purely a component or board-level, others at a subsystem level.

Some of these competitors compete against us at purely a

component or board-level, others at a subsystem level.

We also compete with in-house design teams at our customers.

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Our R&D efforts are focused on developing new products and subsystems as well as enhancing existing hardware and software products in mission, signal and image processing.

Our R&D goal is to fully exploit and maintain our technological lead in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications.

Our R&D goal is to fully exploit and maintain our technological lead in the high-performance, real-time sensor processing industry and in mission computing, microelectronics, platform management and other safety-critical applications.

Total expenditures for research and development amounted to $108.8 million, $107.2 million and $113.5 million in fiscal years 2023, 2022 and 2021, respectively.

As of July 1, 2022, we had 853 employees, including systems engineers, hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities.

As of June 30, 2023, we had 918 employees, including hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities.

These individuals, in conjunction with our sales team, also devote a portion of their time to assisting customers in utilizing our products, developing new uses for these products and anticipating customer requirements for new products.

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The current scope of delivered hardware products includes commercial and industrial class printed circuit board assemblies (modules), complex chassis subsystems, rugged display system and servers and RF and microwave components and subsystems.

Our Phoenix, Arizona AMC manufactures our custom microelectronics products in an AS9100 quality system-certified facility.

Our Phoenix, Arizona facility also contains our USMO, which is an IPC1791 certified and DMEA-certified trusted manufacturing facility and is primarily focused on advanced secure system-on-chip design, assembly, packaging and test.

Our Oxnard, California facility manufactures radio frequency and microwave products in an AS9100 quality system-certified facility.

Our Cypress, California, West Lafayette, Indiana, Huntsville, Alabama and Mesa, Arizona facilities are AS9100 quality systems-certified facilities as well.

Our Phoenix, Arizona facility manufactures our custom microelectronics products in an AS9100 quality system-certified facility while our USMO facility is an IPC1791 certified and DMEA-certified trusted manufacturing facility and is primarily focused on advanced secure system-on-chip design, assembly, packaging and test.

Our Cypress, California, West Lafayette, Indiana, and Huntsville, Alabama facilities are AS9100 quality systems-certified facilities as well.

Our Fremont, California and Alpharetta, Georgia facilities are ISO 9001:2015 quality systems-certified.

Our Chantilly, Virginia facility is an IPC1791 and AS9100 quality systems-certified facility.

Our Hudson, New Hampshire and Chantilly, Virginia locations are IPC1791 and AS9100 quality systems-certified facility.

Our Andover, Massachusetts and Hudson, New Hampshire facilities design and assemble our processing products and are AS9100 quality systems-certified facilities.

Our Andover, Massachusetts facility is also a DMEA-certified trusted design facility and is primarily focused on advanced security features for the processing product line.

Our Hudson, New Hampshire facility is also IPC1791 certified.

Our Geneva, Switzerland facility, the headquarters of Mercury's European operations, provides electronic design and manufacturing, maintenance and support services and is AS9100 and EASA Part 145 quality systems-certified.

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We manage supplier performance and capability through quality audits and stringent source, incoming and/or first article inspection processes.

We have a comprehensive quality and process control plan for each of our products, which include a supply chain management

program and the use of automated inspection and test equipment to assure the quality and reliability of our products.

We have a comprehensive quality and process control plan for each of our products, which include a supply chain management program and the use of automated inspection and test equipment to assure the quality and reliability of our products.

We perform most post sales service obligations (both warranty and other lifecycle support) in-house through a dedicated service and repair operation.

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The Hudson, New Hampshire, West Caldwell, New Jersey and Oxnard, California facilities are specifically aimed at providing scalable manufacturing within our critical businesses.

We leverage best practices in design, development, manufacturing and materials handling at these production and subsystems integration facilities.

We leverage best practices in design, development,

manufacturing and materials handling at these production and subsystems integration facilities.

These facilities include the design, build and test of both RF and microwave components and subsystems in support of a variety of key customer programs.

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Our facility in Torrance, California is an AS9100 and AS9110C facility that offers Avionics Safety-Certifiable subsystems.

Our recently acquired facility in Upper Saddle River, New Jersey is AS9100 certified and offers digital signal processing products.

Our recently acquired facility in Gulf Breeze, Florida is AS9100 certified and offers rugged avionics and electronics.

Our recently acquired facility in Norcross, Georgia is AS9100 certified and offers RF and microwave products.

Our facility in Upper Saddle River, New Jersey is ISO 9001:2015 certified and offers digital signal processing products.

Our facility in Gulf Breeze, Florida is AS9100 certified and offers rugged avionics and electronics.

Our facility in Norcross, Georgia is AS9100 certified and offers RF and microwave products.

Although we generally use standard parts and components for our products, certain components, including custom designed ASICs, static random access memory, FPGAs, microprocessors and other third party chassis peripherals (single board computers, power supplies, blowers, etc.), are currently available only from a single source or from limited sources.

Prior to the global COVID-19 pandemic, we launched efforts to increase our spend under long-term procurement agreements.

This has proven beneficial during the severe supply constraints we have faced, which have driven significant price increases across the industry.

We have recently experienced challenges obtaining adequate supplies of components in a timely manner from current vendors or, when necessary to meet production needs, from alternate vendors.

We believe that, in most cases, alternate vendors can be identified if current vendors are unable to fulfill needs.

We also design, develop and manufacture DRFM units for a variety of modern electronic warfare applications, as well as radar environment simulation and test systems for defense and intelligence applications.

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Intellectual Property and Proprietary Rights

As of July 1, 2022, we held 185 patents of varying duration issued in the United States.

patent applications and, where appropriate, foreign patent applications.

We also file continuations to cover both new and improved designs and products.

At present, we have several U.S.

and foreign patent applications in process.

We hold a broad collection of intellectual property rights to protect our proprietary technology and our brand.

This includes patents, designs, copyrights, trademarks and trade secrets in the U.S.

and various foreign countries.

Although we believe the ownership of such intellectual property rights is an important factor in differentiating our business and that our success depends in part on such ownership, we rely primarily on the innovation skills and technical expertise of our employees.

We regularly file patent and trademark applications and continuations to protect innovations arising from our research and development.

We also rely on a combination of trade secret, copyright and trademark laws, as well as contractual agreements, to safeguard our proprietary rights in technology and products.

In seeking to limit access to sensitive information to the greatest practical extent, we routinely enter into confidentiality and assignment of invention agreements with each of our employees and consultants and nondisclosure agreements with our key customers and vendors.

Mercury Systems, Innovation that Matters, Armor, ASSURE-Stor, EchoCore, Echotek, Ensemble, MultiCore Plus, NanoATR, NanoPAK, NanoSWITCH, PowerBlock, PowerStream, RACE, RACE Series, Race++ Series, Themis, TRRUST-Stor and TRRUST-Purge are registered trademarks;

and Air Flow-By, BuiltSAFE, BuiltSECURE, CANGuard, CodeSEAL, EnforcIT-S, EnsembleSeries, EnterpriseSeries, Liquid Flow-By, OpenRFM, POET, SecureBootFPGA, SpectrumSeries and WhiteboxCRYPTO are trademarks of Mercury Systems, Inc.

OpenVPX is a trademark of the VMEbus International Trade Association.

All other trademarks and registered trademarks are the property of their respective holders, and are hereby acknowledged.

As of July 1, 2022, we had a backlog of orders aggregating approximately $1,037.7 million, of which $646.7 million is expected to be delivered within the next twelve months.

We have licensed in the past, and expect that we may license in the future, certain of our rights to other parties.

Some of our products are designed to include intellectual property owned by third parties.

It may be necessary in the future to seek or renew licenses to various aspects of our products, processes and services.

Over time, we have accumulated a meaningful portfolio of issued and registered intellectual property rights.

No single intellectual property right is solely responsible for protecting our products, processes and services.

We believe the duration of our intellectual property rights is adequate relative to the expected lives of our products, processes and services.

As of June 30, 2023, we had a backlog of orders aggregating approximately $1,139.8 million, of which $716.4 million is expected to be recognized as revenue within the next twelve months.

As of July 1, 2022, backlog was approximately $1,037.7 million.

We include in our backlog customer orders for products and services for which we have accepted signed purchase orders, as long as that order is scheduled to ship or invoice in whole, or in part, within the next 24 months.

Our backlog is comprised of accepted purchase orders for which a majority are fully funded.

Orders included in backlog may be canceled or rescheduled by customers, although the customer may incur cancellation penalties depending on the timing of the cancellation.

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We cannot assure the timely replacement of canceled, delayed or reduced orders.

At July 1, 2022, we employed a total of 2,386 people excluding contractors, including 853 in research and development, 149 in sales and marketing, 1,026 in manufacturing and customer support and 358 in general and administrative functions.

We have 145 employees located in Europe, seven located in Canada, one located in Japan and 2,233 located in the United States.

At June 30, 2023, we employed a total of 2,596 people excluding contractors, including 918 in research and development, 154 in sales and marketing, 1,158 in manufacturing and customer support and 366 in general and administrative functions.

We have 140 employees located in Europe and 2,456 located in the United States.

We also use contractors on an as-needed basis.

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• Employee Overview:

As of July 1, 2022, we had 2,386 employees around the globe.

As of June 30, 2023, we had 2,596 employees around the globe.

Our primary operations are in the U.S.

with 2,456 employees and we operate offices in 11 states.

Mercury also has operations in Europe, Asia and Canada.

Mercury also has operations in Europe and Canada.

No employees are covered by any collective bargaining or similar agreements.

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We believe our workplace culture drives engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation.

During the past fiscal year, five of our products were recognized among the most innovative solutions in aerospace and defense products and systems by the judges of the 2021 Military & Aerospace Electronics Innovators Awards program, marking the sixth consecutive year in which we have been recognized.

During the past fiscal year, four of our products were recognized among the most innovative solutions in aerospace and defense products and systems by the judges of the 2022 Military & Aerospace Electronics Innovators Awards program, marking the seventh consecutive year in which we have been recognized.

Our investment in our employees extends to our workplaces.

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Life-long learning is encouraged at Mercury through our offering of LinkedIn Learning, tuition reimbursement and other employee development opportunities.

We are deeply invested in building the next generation of engineers and scientists, with our internship and co-op programs, as well as through our partnership with Udacity which fosters upskilling in the areas of AI, machine learning and data science.

We are deeply invested in building the next generation of engineers and scientists, with our internship and co-op programs.

We offer a two-year engineering rotational program to recent graduates in electrical, firmware, software, RF and systems engineering disciplines.

During the program, employees gain insight and experience rotating through multiple business units and engineering disciplines and upon program completion are matched with a position.

Mercury also has formal programs to further develop our leaders, at various levels:

Leadership Edge (director and above);

Mercury Managers Matter (for manger-level employees);

and Managing at Mercury (supervisors, team leaders and new managers).

Mentor Programs, Mercury Managers Matter (for manager- and director-level employees);

and Managing at Mercury (for supervisors, team leaders and new managers)

• Pay and Benefits:

We seek competitiveness and fairness in total compensation with reference to peer comparisons and internal equity.

We seek competitiveness and fairness in total compensation with reference to external pay data and internal equity.

We also offer a variety of well-being programs to support our employees and their families with healthy living.

These programs include paid time off, paid parental leave, health insurance coverage, company contributions to retirement savings and employee assistance and work-life programs.

These programs include paid time off, paid parental leave, health insurance coverage, voluntary benefits (including pet insurance and caregiver support), company contributions to retirement savings and employee assistance and work-life programs.

In addition, we offer employees less traditional benefits to support employee well-being such as access to fitness and meditation apps, as well as an online platform through which employees participate in healthy living challenges and earn financial rewards.

• Health and Safety:

On our Website, we disclose quality and safety information, including OSHA injury data.

During the pandemic, we expended $10.6 million for COVID testing, sick pay and other efforts to keep our employees and their families, as well as our facilities, safe during the global pandemic.

Our CEO has also been recognized by Glassdoor as a top-rated CEO in the U.S.

for his leadership during the pandemic.

• Environmental, Health and Safety:

On our Website, we disclose environmental stewardship, quality and safety information, including OSHA injury data.

We received a AAA MSCI ESG during 2021 and 2022, placing us in the top 3% of their ratings group for aerospace and defense.

• Diversity, Equity & Inclusion:

Our Website discloses detailed workplace data surrounding our gender diversity, racial/ethnic diversity and turnover data.

As of July 1, 2022, women and racially/ethnically diverse employees represented 29% and 42%, respectively, of Mercury’s workforce.

As of June 30, 2023, women and racially/ethnically diverse employees represented 29% and 43%, respectively, of Mercury’s workforce.

Development of a diverse talent pipeline is a business imperative at Mercury and critical to our ability to drive innovation and improve long-term results.

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Our employees are afforded opportunities to cultivate diversity, equity and inclusion both within Mercury and our industry.

For example, Mercury sponsors, and our leaders participate in, the annual Simmons Women’s Leadership Conference which has the goal of preparing the next generation of female leaders and furthering equality in the workplace .

Mercury has also conducted pay equity assessments and made adjustments to pay levels for protected classes, as appropriate, as a result of such assessments.

Lockheed Martin Corporation and Raytheon Technologies comprised an aggregate of 24%, 34% and 32% of our revenues in each of the fiscal years 2022, 2021 and 2020, respectively.

The United States Navy comprised 14% and 12% of our revenues in fiscal years 2022 and 2021, respectively.

For example, Mercury sponsors, and our leaders participate in, the annual Simmons Leadership Conference which has the goal of preparing the next generation of female leaders and furthering equality in the workplace .

Mercury has conducted pay equity assessments and made adjustments to pay levels for employees in protected classes, as appropriate, as a result of such assessments.

RTX Corporation comprised 14%, 14%, and 19% of our revenues in each of the fiscal years 2023, 2022 and 2021, respectively.

Lockheed Martin comprised 13%, 10%, and 15% of our revenues in each of the fiscal years 2023, 2022 and 2021, respectively.

The United States Navy comprised less than 10%, 14% and 12% of our revenues in fiscal years 2023, 2022 and 2021, respectively.

Northrop Grumman accounted for 11% of our revenues in fiscal 2023 and less than 10% in fiscal years 2022 and 2021, respectively.

While sales to each of these customers comprise 10% or more of our annual revenue, the sales to these customers are spread across multiple programs and platforms.

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

What changed 10-K

Item 1. Business