FORWARD-LOOKING STATEMENTS
From time to time, information provided, statements made by our employees or
information included in our filings with the Securities 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
any U.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 the U.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 ended July 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.
OVERVIEW
Mercury Systems, Inc. is a leading technology company serving the aerospace and
defense industry, positioned at the intersection of high-tech and defense.
Headquartered in Andover, 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, the U.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
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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 of October 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 ended
October 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 the
Mercury 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 with Centers 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 with CDC 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 ended October 2, 2020 includes full
period results from the acquisition of American Panel Corporation ("APC").
Results of operations for the first quarter ended September 27, 2019, include
only results from the acquisition date for APC. Accordingly, the periods
presented below are not directly comparable.
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The first quarter ended October 2, 2020 compared to the first quarter ended
September 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 ended October 2, 2020, as compared to $177.3 million during the
first quarter ended September 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 on September 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 ended October 2, 2020, a decrease
of 130 basis points from the 44.2% gross margin achieved during the first
quarter ended September 27, 2019. The lower gross margin was primarily driven by
program mix, higher Customer 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 ended October 2, 2020, as compared to
$30.0 million in the first quarter ended September 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
ended October 2, 2020 from 16.9% for the first quarter ended September 27, 2019
due to improved operating leverage.
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RESEARCH AND DEVELOPMENT
Research and development expenses increased $5.5 million, or 25.4%, to $27.4
million during the first quarter ended October 2, 2020, as compared to $21.9
million during the first quarter ended September 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 ended
October 2, 2020 and September 27, 2019, respectively. The increase as a
percentage of revenue during the first quarter ended October 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 ended October 2, 2020, as compared to $0.6 million
during the first quarter ended September 27, 2019. Restructuring and other
charges during the first quarter ended October 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 ended October 2, 2020. The first quarter ended September 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 ended October
2, 2020, as compared to $1.2 million for the first quarter ended September 27,
2019. This was driven by the lower rate earned on cash on hand during the first
quarter ended October 2, 2020, as compared to the prior year.
OTHER EXPENSE, NET
Other expense, net decreased to $0.8 million during the first quarter ended
October 2, 2020, as compared to $1.4 million for the first quarter ended
September 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 ended October 2, 2020 and
September 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 ended October 2, 2020 and September 27, 2019,
respectively.
During the first quarters ended October 2, 2020 and September 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 ended September 27, 2019.
The effective tax rate for the first quarters ended October 2, 2020 and
September 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").
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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
in Andover, Massachusetts, Cypress, California and Hudson, 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
On September 14, 2020, we filed a shelf registration statement on Form S-3ASR
with the SEC. The shelf registration statement, which was effective upon filing
with the SEC, 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
On September 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 to September 2023. As of October 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 $ 161,299




Our cash and cash equivalents increased by $12.3 million from July 3, 2020 to
October 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.
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Operating Activities
During the first quarter ended October 2, 2020, we generated $22.9 million in
cash from operating activities, a decrease of $1.4 million, as compared to the
first quarter ended September 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 ended October 2, 2020, we invested $11.0 million, a
decrease of $95.1 million, as compared to the first quarter ended September 27,
2019. The decrease was driven by $96.5 million in cash used for the acquisition
of APC during the first quarter ended September 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 ended
October 2, 2020, primarily related to improvements to our facilities.
Financing Activities
During the first quarter ended October 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 ended September 27, 2019. During the first quarter ended September 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 ended October 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 at October 2, 2020:

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