What changed in this filing

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Item 1A. Risk Factors

2024-08-13 compared with 2023-08-15 · 48 added, 80 removed, 362 unchanged (26% of the section changed)

6 unchanged sentences

Over the lifetime of a defense program, the award of many different individual contracts and subcontracts may impact our products’ requirements.

The funding of U.S.

funding of U.S.

government programs is subject to Congressional appropriations.

4 unchanged sentences

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

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

defense budget frequently operates under a continuing budget resolution, which increases revenue uncertainty and volatility, and 2024 being a Presidential election year increases the likelihood of operating under a continuing budget resolution.

For fiscal 2025 and beyond, the potential for gridlock in Congress, a continuing budget resolution, budget sequestration, a U.S.

11 unchanged sentences

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

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

Price inflation for labor and materials could adversely affect our business, results of operations and financial condition.

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

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

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

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

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

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

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

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

1 unchanged sentence

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

In fiscal 2023, RTX Corporation accounted for 14% of our total net revenues, Lockheed Martin Corporation accounted for 13% of our total net revenues, and Northrop Grumman accounted for 11% of our total net revenues.

In fiscal 2024, L3Harris accounted for 12% of our total net revenues, Lockheed Martin accounted for 11% of our total net revenues, and RTX Corporation accounted for 10% of our total net revenues.

In fiscal 2023, RTX Corporation accounted for 14% of our total net revenues, Lockheed Martin accounted for 13% of our total net revenues, and Northrop Grumman accounted for 11% of our total net revenues.

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

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

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

Navy accounted for 12% of our total net revenues.

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

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

2 unchanged sentences

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

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

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

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

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

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

Recently, our on-time delivery has suffered due in part to operational challenges.

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

25 unchanged sentences

Several components used in our products are currently obtained from sole-source suppliers.

We are dependent on key vendors such as Xilinx, Inc., Intel Corporation and Microsemi for Field Programmable Gate Arrays (“FPGA”), on NXP Semiconductor for Application-Specific Integrated Circuits (“ASICs”), Intel Corporation and NXP Semiconductor for processors, Micron Technology, Inc.

for specific memory products and in general any sole-source microelectronics suppliers.

We are dependent on a limited number of key vendors for certain critical components such as FPGAs, ASICS, processors, memory products and specialty glass.

Generally, suppliers may terminate their contracts with us without cause upon 30 days’ notice and may cease offering their products upon 180 days’ notice.

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

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

These sole-source and other suppliers are each subject

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

There can be no assurance that these suppliers will continue to meet our requirements.

1 unchanged sentence

We may incur significant set-up costs and delays in manufacturing should it become necessary to replace any key vendors due to work stoppages, shipping delays, financial difficulties, natural or manmade disasters or other factors.

In addition, our industry, along with many others, is continuing to face a shortage of semiconductors as well as extended lead times.

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

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

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

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

In addition, given the current political environment in the United States and Europe, the imposition of tariffs on the import of components from other countries, including China, could directly or, because of their effect on the prices of other components or suppliers themselves, indirectly raise the same risks described above.

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

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

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

and Omega Electronics Manufacturing Services.

The failure of these contract manufacturers to fill our orders on a timely basis or in accordance with our customers’ specifications could result in a loss of revenues and damage to our reputation.

We are exposed to risks associated with international operations and markets.

25 unchanged sentences

Those laws generally prohibit the giving of anything of value to win business.

The FCPA also generally requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company and prohibits U.S.

companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment.

Under these anti-corruption laws, U.S.

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

If we or our intermediaries fail to comply with the requirements of international applicable anti-corruption laws, governmental

authorities in the United States or the countries in which we operate could seek to impose civil and criminal penalties, or restrict or limit our ability to do business, which could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

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

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

Our future success will depend in part on our ability to enhance current products and to develop new products on a timely and cost-effective basis to respond to technological developments and changing customer needs.

Defense customers demand frequent technological improvements as a means of gaining military advantage.

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

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

If we build inventory ahead of the associated customer contractual demand, we may face write downs of such inventory.

This risk is further enhanced if we purchase end of life material to support a product line or program prior to receiving a customer commitment to pay for such material.

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

For example, during our fiscal year ended June 28, 2024, we stopped production for several months on multiple programs utilizing a common processing architecture in our secure computing product line while we conducted a root cause corrective analysis on the product design and manufacturing process.

This delay and the associated costs had a material impact on our financial condition and results of operations for the fiscal year and negatively impacted our reputation with the customers for such products.

Our need for continued or increased investment in R&D may increase expenses and reduce our profitability.

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Increased inventory balances tie up additional capital, limiting our operational flexibility.

Some of our customers may have become conditioned to wait until the end of a quarter to place orders in the expectation of receiving a discount.

Some of our customers may have become conditioned to wait until the end of a quarter to place orders in the

expectation of receiving a discount.

Customers conditioned to seek quarter-end discounts increase risk and uncertainty in our financial forecasting and decrease our margins and profitability.

7 unchanged sentences

• failure to achieve or maintain quality certifications, such as AS9100;

• nonconformity with contractual or other requirements, including the need to respond to corrective action requests;

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

3 unchanged sentences

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

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

• changes in estimates of completion (EAC) on fixed price engagements, which represent a substantial and increasing percentage of our business.

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

15 unchanged sentences

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

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

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

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

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

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

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

While we have processes in place for management transition and the transfer of knowledge and skills, the loss of key personnel,

coupled with an inability to adequately train other personnel, hire new personnel, or transfer knowledge and skills, could significantly impact our ability to perform under our contracts and execute on new or growing programs.

Beginning with the pandemic, a significant portion of our workforce began working remotely and we expect a significant portion will continue to work a hybrid schedule even as we transition more employees back to onsite work over time.

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

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

In recent years, we have experienced unusually high employee attrition and our costs to retain employees increased.

Our challenges in retaining key employees may be impacted by the termination of the Company’s announced strategic review initiative in June 2023 and any unanticipated challenges with the transition of the Company’s Chief Executive Officer and Chief Financial Officer roles, as we have recently appointed a new President and Chief Executive Officer and our new Chief Financial Officer joined us in mid July 2023.

The decline in our stock price during 2023 may also increase employee retention risks.

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

1 unchanged sentence

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

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

We face secondary and tertiary effects related to the pandemic, including disruptions in our supply chain, particularly for long lead time semiconductors.

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

Risks Related to M&A and Acquisition Integration

7 unchanged sentences

• our ability to respond rapidly to technological changes;

• our ability to increase our in-house manufacturing capacity and utilization as well as our ability to deliver on schedule and on budget;

• our ability to increase utilization of our manufacturing capacity as well as our ability to deliver on schedule and on budget;

• our ability to successfully integrate acquisitions and achieve revenue and cost synergies and economies of scale.

3 unchanged sentences

As part of our strategy for growth, we may explore acquisitions or strategic alliances, which ultimately may not be completed or be beneficial to us.

While we expect any acquisitions to result in synergies and other financial and operational

benefits, we may be unable to realize these synergies or other benefits in the timeframe that we expect or at all.

While we expect any acquisitions to result in synergies and other financial and operational benefits, we may be unable to realize these synergies or other benefits in the timeframe that we expect or at all.

The integration process may be complex, costly and time consuming.

Acquisitions may pose risks to our business, including:

• problems and increased costs in connection with the integration of the personnel, operations, technologies, or products of the acquired businesses;

• problems and increased costs in connection with the integration of the personnel, business systems, operations, technologies, or products of the acquired businesses;

• layering of integration activity due to multiple overlapping acquisitions;

2 unchanged sentences

• diversion of management’s attention from our organic business;

• adverse effects on business relationships with suppliers and customers, including the failure to retain key customers;

• adverse effects on business relationships with suppliers and customers, including the failure to retain key customers and programs;

• acquired assets becoming impaired as a result of technical advancements or worse-than-expected performance by the acquired company;

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As of June 28, 2024, we had $591.5 million of outstanding borrowings on the Revolver.

On August 13, 2024, we further amended our Revolver, permanently decreased borrowing capacity to $900 million, with a temporary reduction in credit availability to $750.0 million until we meet a minimum consolidated EBITDA level of $75.0 million excluding (a) adjustments for cost savings, operating expense reductions and synergies, (b) estimate at completion (“EAC”) charges and other non-cash expenses, charges, and losses addbacks and (c) deducts to reverse EAC charges previously added back, in each case for a last twelve-month period.

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

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

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

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

Subject to the limits contained in the Revolver, we may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes.

6 unchanged sentences

• increasing our vulnerability to general adverse economic and industry conditions;

• exposing us to the risk of increased interest rates as certain of our borrowings may have variable interest rates, which could increase the cost of servicing our financial instruments and could materially reduce our profitability and cash flows;

• exposing us to the risk of increased interest rates as certain of our borrowings have variable interest rates, which could increase the cost of servicing our financial instruments and could materially reduce our profitability and cash flows;

• limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

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The movement of interest rates would affect the value of such swap agreement.

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

Limited or negative free cash flow as we have recently experienced, if not improved, could eventually lead to a challenge in servicing our debt.

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

1 unchanged sentence

We evaluate indefinite lived intangible assets and goodwill for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

During the quarter ended March 29, 2024, we assessed potential triggering events for goodwill impairment and concluded that there was a triggering event for the Mission Systems reporting unit.

Based on the quantitative evaluation during the quarter ended March 29, 2024 we determined that the Mission Systems reporting unit had an estimated fair value in excess of carrying value.

During the quarter ended March 29, 2024, we assessed potential triggering events for goodwill impairment and concluded that there was a triggering event for the Mission Systems reporting unit.

Based on the quantitative evaluation during the quarter ended March 29, 2024 we determined that the Mission Systems reporting unit had an estimated fair value in excess of carrying value.

Indefinite lived intangible assets are impaired and goodwill impairment is indicated when their book value exceeds fair value.

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In the event we are awarded a contract, we are subject to protests by losing bidders of contract awards that can result in the reopening of the bidding process and changes in governmental policies or regulations and other political factors.

We may be subject to multiple rebid requirements over the life of a defense program to continue to participate in such program, which can result in the loss of the program or significantly reduce our revenue or margin.

subject to multiple rebid requirements over the life of a defense program to continue to participate in such program, which can result in the loss of the program or significantly reduce our revenue or margin.

Requirements for more frequent technology refreshes on defense programs may lead to increased costs and lower long-term revenues.

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

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

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

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

We may also need to implement or enhance our processes and information systems to support certified cost and pricing and earned value management systems.

• We are subject to the Department of Defense Cybersecurity Maturity Model Certification (“CMMC”) in connection with our defense work for the U.S.

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

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

Increases in tax rates could impact our financial performance.

From time to time, we are audited by various federal, state, local and foreign authorities regarding income tax matters.

Significant judgment is required to determine our provision for income taxes and our liabilities for other taxes.

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

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

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

Our products are complex, and undetected defects may increase our costs, harm our reputation with customers or lead to costly litigation.

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We are also targeted by spear phishing attacks in which an email directed at a specific individual or department is disguised to appear to be from a trusted source to obtain sensitive information.

Like all DoD contractors that process, store, or transmit controlled unclassified

information, we must meet minimum security standards or risk losing our DoD contracts.

Like all DoD contractors that process, store, or transmit controlled unclassified information, we must meet minimum security standards or risk losing our DoD contracts.

A breach, whether physical, electronic or otherwise, of the systems on which this sensitive data is stored could lead to damage or piracy of our products or to the shutdown of business systems.

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Similarly, a breach that involves loss of customer-provided data could subject us to loss of a customer, loss of a program or contract, litigation costs and legal damages and reputational harm.

Like other defense contractors, from time to time we have

experienced the loss of proprietary data due to employees retaining proprietary information in violation of company policies and applicable regulations, resulting in investigation and remediation expenses as well as the other risks outlined above.

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

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

Also, despite the steps taken by us to protect our proprietary rights, it may be possible for unauthorized third parties to copy or reverse-engineer aspects of our products, develop similar technology independently, or otherwise obtain and use information from our supply chain that we regard as proprietary, and we may be unable to successfully identify or prosecute unauthorized uses of our technology.

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

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

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The trading price of our common stock may continue to be volatile, which may adversely affect our business, and investors in our common stock may experience substantial losses.

Our stock price, like that of other technology and aerospace and defense companies, has been and may continue to be volatile.

The stock prices for companies in the aerospace and defense industry may continue to remain volatile given uncertainty and timing of funding for defense programs.

Our stock price has been and may continue to be volatile.

This volatility may or may not be related to our operating performance.

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If any shareholders were to file a lawsuit, we could incur substantial costs defending the lawsuit, which could also divert the time and attention of management.

During fiscal 2023, we experienced stock price declines following our earnings releases in August 2022 and May 2023 as well as after the announcement that the Board of Directors had concluded its review of strategic alternatives in June 2023, in each case with law firms announcing investigations after the event.

During fiscal 2023 and 2024, we experienced significant stock price declines following some of our earnings releases as well as after the announcement that the Board of Directors had concluded its review of strategic alternatives in June 2023, in each case with law firms announcing investigations after the event.

On December 13, 2023, a securities class action complaint was filed against us in the U.S.

District Court for the District of Massachusetts.

The complaint alleged that our public disclosures in SEC filings and on earnings calls were false and/or misleading .

While the Court dismissed the case without prejudice on July 24, 2024, it permitted the plaintiffs 30 days to file an amended complaint.

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

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

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

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

On June 23, 2022, we entered into settlement agreements with each of JANA and Starboard that covered the appointment of two directors to our Board and an amendment to our shareholder rights plan, which has since expired as of our 2022 annual meeting of shareholders.

The JANA and Starboard settlement agreements contained customary standstill provisions that expired in June 2023.

On June 15, 2023, Starboard filed an amended Schedule 13D indicating that it owned approximately 4.6% of our outstanding shares.

On July 6, 2023, JANA filed a new Schedule 13D indicating that it owned approximately 8% of our outstanding shares, and we announced that Scott Ostfeld, a managing partner at JANA, was being appointed to our Board of Directors.

UNRESOLVED STAFF COMMENTS

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

What changed 10-K

Item 1A. Risk Factors