FORWARD-LOOKING STATEMENTS From time to time, information provided, statements made by our employees or information included in our filings with theSecurities and Exchange Commission ("SEC") may contain statements that are not historical facts but that are "forward-looking statements," which involve risks and uncertainties. You can identify these statements by the use of the words "may," "will," "could," "should," "would," "plans," "expects," "anticipates," "continue," "estimate," "project," "intend," "likely," "forecast," "probable," "potential," and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company's markets, effects of epidemics and pandemics such as COVID, effects of anyU.S. Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in theU.S. Government's interpretation of, Federal export control or procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, increases in interest rates, changes to interest rate swaps or other cash flow hedging arrangements, changes to industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as set forth under Part I-Item 1A (Risk Factors) in the Company's Annual Report on Form 10-K for the fiscal year endedJuly 3, 2020 . We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. OVERVIEWMercury Systems, Inc. is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense. Headquartered inAndover, Massachusetts , we deliver solutions that power a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments. We envision, create and deliver innovative technology solutions purpose-built to meet our customers' most-pressing high-tech needs, including those specific to the defense community. As a leading manufacturer of essential components, modules and subsystems, we sell to defense prime contractors, theU.S. government and OEM commercial aerospace companies. We have built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that we believe meets and exceeds the performance needs of our defense and commercial customers. Customers add their own applications and algorithms to our specialized, secure and innovative pre-integrated solutions. This allows them to complete their full system by integrating with their platform the sensor technology and, in some cases, the processing from Mercury. 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 companies, coupled with our high level of R&D investments and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. Our capabilities, technology and R&D investment strategy combine to differentiate Mercury in our industry. Our technologies and capabilities include secure embedded processing modules and subsystems, mission computers, secure and rugged rack-mount servers, safety-critical avionics, RF components, multi-function assemblies, subsystems and custom microelectronics. We maintain our technological edge by investing in critical capabilities and IP in processing and RF, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as AI. Our mission critical solutions are deployed by our customers for a variety of applications including C4ISR, electronic intelligence, avionics, EO/IR, electronic warfare, weapons and missile defense, hypersonics and radar. Since we conduct much of our business with our defense customers via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter. Customers specify delivery date requirements that coincide with their need for our products. Because these customers may use our products in connection with a variety of defense programs or 19 -------------------------------------------------------------------------------- other projects of different sizes and durations, a customer's orders for one quarter generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends. As ofOctober 2, 2020 , we had 1,979 employees. Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted earnings per share ("adjusted EPS"), and adjusted EBITDA for the first quarter endedOctober 2, 2020 were$205.6 million ,$8.8 million ,$15.8 million ,$0.29 ,$0.51 , and$42.8 million , respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. OUR RESPONSE TO COVID The COVID pandemic continues to impact people and countries around the world. This is a time of extraordinary uncertainty. It is also a time when the work we do in support of strategic national priorities is recognized as critical. At Mercury, we remain focused on the four goals we established at the outset of the COVID crisis: to protect the health, safety, and livelihoods of our people; to mitigate or reduce operational and financial risks to the Company; to continue to deliver on our commitments to customers and shareholders; and to continue the mission-critical work Mercury does every day to support the ongoing security of our nation, our brave men and women in uniform, and the communities in which we all live. To protect the health, safety, and livelihoods of our employees, we took immediate action on several fronts, instituting a variety of new policies and programs including, but not limited to, additional sick leave for COVID-related circumstances, a work-from-home policy for all employees who can perform their duties remotely as well as increasing overtime pay for eligible employees. We also established a relief fund, with an initial$1 million budget, to assist eligible Mercury employees, including temporary agency employees, experiencing unexpected financial burdens as a result of the COVID crisis. The intent of theMercury COVID Relief Fund is to provide financial assistance to employees who may otherwise be unable to pay for basic necessities, unexpected care for immediate family members, or other urgent needs that promote their health and safety during the current COVID crisis. As we have been designated an "essential business" as a part of the defense industrial base, during the year, our facilities continued to operate while complying with social distancing requirements consistent withCenters for Disease Control and Prevention ("CDC") guidelines and requirements. We implemented numerous preventive measures to maximize the safety of our facilities, including but not limited to, establishing physical segregation areas, implementing environmental cleaning and disinfection protocols in compliance withCDC guidelines and requirements, temperature and COVID testing at our facilities, and limiting non-essential site visits by internal and external visitors. We will continue to monitor and assess our response to protect the health, safety and livelihoods of our people. RESULTS OF OPERATIONS: Results of operations for the first quarter endedOctober 2, 2020 includes full period results from the acquisition ofAmerican Panel Corporation ("APC"). Results of operations for the first quarter endedSeptember 27, 2019 , include only results from the acquisition date for APC. Accordingly, the periods presented below are not directly comparable. 20 -------------------------------------------------------------------------------- The first quarter endedOctober 2, 2020 compared to the first quarter endedSeptember 27, 2019 The following table sets forth, for the first quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income: As a % of As a % of Total Net September 27, Total Net (In thousands) October 2, 2020 Revenue 2019 Revenue Net revenues$ 205,621 100.0 %$ 177,304 100.0 % Cost of revenues 117,502 57.1 98,904 55.8 Gross margin 88,119 42.9 78,400 44.2 Operating expenses: Selling, general and administrative 32,904 16.0 29,970 16.9 Research and development 27,417 13.3 21,870 12.3 Amortization of intangible assets 7,731 3.8 7,019 4.0 Restructuring and other charges 1,297 0.6 648 0.4 Acquisition costs and other related expenses - - 1,417 0.8 Total operating expenses 69,349 33.7 60,924 34.4 Income from operations 18,770 9.1 17,476 9.8 Interest income 72 - 1,187 0.7 Other expense, net (846) (0.3) (1,434) (0.8) Income before income taxes 17,996 8.8 17,229 9.7 Tax provision (benefit) 2,198 1.1 (2,018) (1.2) Net income $ 15,798 7.7 %$ 19,247 10.9 % REVENUES Total revenues increased$28.3 million , or 16.0%, to$205.6 million during the first quarter endedOctober 2, 2020 , as compared to$177.3 million during the first quarter endedSeptember 27, 2019 including "acquired revenue" which represents net revenue from acquired businesses that have been part of Mercury for completion of four full quarters or less (and excludes any intercompany transactions). After the completion of four fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods. The increase was primarily due to$20.4 million of additional organic revenues which were predominantly driven by increased demand for integrated subsystems, across radar, electronic warfare and C4I applications, within land and naval platforms. The increases in demand for integrated subsystems were partially offset by decreases to modules and sub-assemblies and components. The organic revenues increase was driven by a classified radar program, as well as the Patriot, CDS, Galaxie and LTAMDS programs, which were partially offset by decreases in a classified missile program and the CPS program. Total revenues also increased$7.9 million from acquired revenue due to a full period of results for APC, which was acquired onSeptember 23, 2019 . See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. GROSS MARGIN Gross margin was 42.9% for the first quarter endedOctober 2, 2020 , a decrease of 130 basis points from the 44.2% gross margin achieved during the first quarter endedSeptember 27, 2019 . The lower gross margin was primarily driven by program mix, higherCustomer Funded Research and Development ("CRAD") and$1.8 million of COVID related expenses. CRAD primarily represents engineering labor associated with long-term contracts for customized development, production and service activities. Due to the nature of these efforts, they typically carry a lower margin. These products are predominately grouped within integrated subsystems and to a lesser extent modules and sub-assemblies. The gross margin decreases were partially offset by operational efficiencies. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased$2.9 million , or 9.8%, to$32.9 million during the first quarter endedOctober 2, 2020 , as compared to$30.0 million in the first quarter endedSeptember 27, 2019 . The increase was primarily related to additional headcount from organic growth and a full quarter of expenses related to the APC acquisition. Selling, general and administrative expenses decreased as a percentage of revenue to 16.0% for the first quarter endedOctober 2, 2020 from 16.9% for the first quarter endedSeptember 27, 2019 due to improved operating leverage. 21 -------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT Research and development expenses increased$5.5 million , or 25.4%, to$27.4 million during the first quarter endedOctober 2, 2020 , as compared to$21.9 million during the first quarter endedSeptember 27, 2019 . The increase was primarily due to additional headcount from organic growth and a full quarter of expenses related to the APC acquisition. Research and development expenses accounted for 13.3% and 12.3% of our revenues for the first quarters endedOctober 2, 2020 andSeptember 27, 2019 , respectively. The increase as a percentage of revenue during the first quarter endedOctober 2, 2020 was primarily driven by the continued investment in internal R&D to promote future growth, including new opportunities in avionics, secure processing, radar modernization and our trusted custom microelectronics business. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. Restructuring and other charges were$1.3 million , during the first quarter endedOctober 2, 2020 , as compared to$0.6 million during the first quarter endedSeptember 27, 2019 . Restructuring and other charges during the first quarter endedOctober 2, 2020 primarily related to severance costs associated with the elimination of 19 positions, predominantly in the manufacturing, sales and R&D functions. These charges related to talent shifts and resource redundancy resulting from the internal reorganization we completed in August which created better alignment with our market and brand strategy as well as promote scale as we continue to grow. ACQUISITION COSTS AND OTHER RELATED EXPENSES We did not incur any acquisition costs and other related expenses during the first quarter endedOctober 2, 2020 . The first quarter endedSeptember 27, 2019 included$1.4 million of acquisition and other related expenses related to the acquisition of APC. We expect to incur acquisition costs and other related expenses periodically in the future as we continue to seek acquisition opportunities to expand our technological capabilities, especially within the sensor and effector and C4I markets. Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations. INTEREST INCOME Interest income decreased to$0.1 million during the first quarter endedOctober 2, 2020 , as compared to$1.2 million for the first quarter endedSeptember 27, 2019 . This was driven by the lower rate earned on cash on hand during the first quarter endedOctober 2, 2020 , as compared to the prior year. OTHER EXPENSE, NET Other expense, net decreased to$0.8 million during the first quarter endedOctober 2, 2020 , as compared to$1.4 million for the first quarter endedSeptember 27, 2019 . The decrease was primarily driven by foreign currency translation gains of$0.3 million as compared to foreign currency translation losses of$0.3 million during the first quarters endedOctober 2, 2020 andSeptember 27, 2019 , respectively. Both periods include$0.8 million of financing and registration fees. INCOME TAXES We recorded an income tax provision of$2.2 million and an income tax benefit of$2.0 million on income before income taxes of$18.0 million and$17.2 million for the first quarters endedOctober 2, 2020 andSeptember 27, 2019 , respectively. During the first quarters endedOctober 2, 2020 andSeptember 27, 2019 , we recognized a discrete tax benefit of$2.5 million and$6.1 million , respectively, related to excess tax benefits on stock-based compensation. The Company also recognized a discrete tax benefit of$0.5 million related to foreign tax rate changes during the first quarter endedSeptember 27, 2019 . The effective tax rate for the first quarters endedOctober 2, 2020 andSeptember 27, 2019 differed from the Federal statutory rate primarily due to Federal and State research and development credits, excess tax benefits related to stock-based compensation, non-deductible compensation, and state taxes. Within the calculation of our annual effective tax rate, we have used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service ("IRS"). 22 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity come from existing cash and cash generated from operations, our Revolver and our ability to raise capital under our universal shelf registration statement. Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments. We plan to continue to invest in improvements to our facilities and internal R&D to promote future growth, including new opportunities in avionics, secure processing, radar modernization and our trusted custom microelectronics. Our facilities improvements include buildouts inAndover, Massachusetts ,Cypress, California andHudson, New Hampshire , along with the ongoing expansion of our trusted custom microelectronics business during fiscal 2021. Based on our current plans, business conditions, including the COVID pandemic, and essential business status, we believe that existing cash and cash equivalents, our available Revolver, cash generated from operations, and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. Shelf Registration Statement OnSeptember 14, 2020 , we filed a shelf registration statement on Form S-3ASR with theSEC . The shelf registration statement, which was effective upon filing with theSEC , registered each of the following securities: debt securities, preferred stock, common stock, warrants and units. We intend to use the proceeds from financings under the shelf registration statement for general corporate purposes, which may include the following: •the acquisition of other companies or businesses; •the repayment and refinancing of debt; •capital expenditures; •working capital; and •other purposes as described in the prospectus supplement. We have an unlimited amount available under the shelf registration statement. Additionally, as part of the shelf registration statement, we have entered into an equity distribution agreement which allows us to sell an aggregate of up to$200.0 million of our common stock from time to time through our agents. The actual dollar amount and number of shares of common stock we sell pursuant to the equity distribution agreement will be dependent on, among other things, market conditions and our fund raising requirements. The agents may sell the common stock by any method deemed to be an "at the market offering" as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation sales made directly on Nasdaq, on any other existing trading market for the common stock or to or through a market maker. In addition, our common stock may be offered and sold by such other methods, including privately negotiated transactions, as we and the agents may agree. Revolving Credit Facility OnSeptember 28, 2018 , we amended the Revolver to increase and extend the borrowing capacity to a$750.0 million , 5-year revolving credit line, with the maturity extended toSeptember 2023 . As ofOctober 2, 2020 , we had no outstanding borrowings on the Revolver. See Note I in the accompanying consolidated financial statements for further discussion of the Revolver. CASH FLOWS As of and For the First Quarters Ended, September 27, (In thousands) October 2, 2020 2019 Net cash provided by operating activities$ 22,929 $ 24,310 Net cash used in investing activities$ (10,978) $ (106,097) Net cash used in financing activities $ (64)$ (14,559) Net increase (decrease) in cash and cash equivalents$ 12,284 $ (96,633) Cash and cash equivalents at end of period $
239,122
Our cash and cash equivalents increased by$12.3 million fromJuly 3, 2020 toOctober 2, 2020 , primarily as the result of$22.9 million provided by operating activities, partially offset by$11.0 million invested in purchases of property and equipment. 23
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Operating Activities During the first quarter endedOctober 2, 2020 , we generated$22.9 million in cash from operating activities, a decrease of$1.4 million , as compared to the first quarter endedSeptember 27, 2019 . The decrease was primarily the result of higher inventory purchases intended to mitigate potential disruptions to the supply chain or unforeseen changes in customer behavior resulting from the COVID pandemic and to support growth of the business as well as lower comparable net income. This decrease was partially offset by higher accounts payable, accrued expenses, and accrued compensation, deferred revenues and customer advances. Investing Activities During the first quarter endedOctober 2, 2020 , we invested$11.0 million , a decrease of$95.1 million , as compared to the first quarter endedSeptember 27, 2019 . The decrease was driven by$96.5 million in cash used for the acquisition of APC during the first quarter endedSeptember 27, 2019 . This decrease in cash used in investing activities was partially offset by an additional$1.4 million invested in purchases of property and equipment during first quarter endedOctober 2, 2020 , primarily related to improvements to our facilities. Financing Activities During the first quarter endedOctober 2, 2020 , we had$0.1 million in cash used in financing activities, a decrease of$14.5 million , as compared to the first quarter endedSeptember 27, 2019 . During the first quarter endedSeptember 27, 2019 , we had$14.5 million of additional payments related to the purchase and retirement of common stock used to settle individual employees' tax liabilities associated with vesting of restricted stock awards, as compared to the three months endedOctober 2, 2020 . The decrease in the payments related to the purchase and retirement of common stock used to settle individual employees' tax liabilities associated with vesting of restricted stock awards is due to a change in our incentive stock plan tax withholding methods. COMMITMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENCIES The following is a schedule of our commitments and contractual obligations outstanding atOctober 2, 2020 :
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