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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
________________________________________________________________

FORM 10-Q
________________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
COMMISSION FILE NUMBER: 0-23599
________________________________________________________________
MERCURY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________
Massachusetts 04-2741391
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
50 MINUTEMAN ROAD 01810
ANDOVERMA
(Address of principal executive offices) (Zip Code)
978-256-1300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per shareMRCYNasdaq Global Select Market
Preferred Stock Purchase RightsN/ANasdaq Global Select Market
____________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x  Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes      No  x
Shares of Common Stock outstanding as of January 31, 2022 56,753,766 shares
1


MERCURY SYSTEMS, INC.
INDEX
 
  PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 6.

2


PART I. FINANCIAL INFORMATION
 
ITEM 1.     FINANCIAL STATEMENTS
MERCURY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
December 31, 2021July 2, 2021
Assets
Current assets:
Cash and cash equivalents$105,169 $113,839 
Accounts receivable, net of allowance for credit losses of $1,833 and $1,720 at December 31, 2021 and July 2, 2021, respectively
126,325 128,807 
Unbilled receivables and costs in excess of billings193,803 162,921 
Inventory251,272 221,640 
Prepaid income taxes16,070 782 
Prepaid expenses and other current assets16,153 15,111 
Total current assets708,792 643,100 
Property and equipment, net127,385 128,524 
Goodwill942,346 804,906 
Intangible assets, net376,091 307,559 
Operating lease right-of-use assets71,974 66,373 
Other non-current assets4,186 4,675 
Total assets$2,230,774 $1,955,137 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable$59,389 $47,951 
Accrued expenses31,391 24,652 
Accrued compensation37,952 40,043 
Deferred revenues and customer advances34,940 38,177 
Total current liabilities163,672 150,823 
Deferred income taxes29,561 28,810 
Income taxes payable8,160 7,467 
Long-term debt451,500 200,000 
Operating lease liabilities75,108 71,508 
Other non-current liabilities15,652 12,383 
Total liabilities743,653 470,991 
Commitments and contingencies (Note N)
Shareholders’ equity:
Preferred stock, $0.01 par value; 1,000,000, shares authorized; no shares issued or outstanding
  
Common stock, $0.01 par value; 85,000,000 shares authorized; 55,583,012 and 55,241,120 shares issued and outstanding at December 31, 2021 and July 2, 2021, respectively
556 552 
Additional paid-in capital1,122,113 1,109,434 
Retained earnings364,720 374,499 
Accumulated other comprehensive loss(268)(339)
Total shareholders’ equity1,487,121 1,484,146 
Total liabilities and shareholders’ equity$2,230,774 $1,955,137 

The accompanying notes are an integral part of the consolidated financial statements.
3


MERCURY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(In thousands, except per share data)
(Unaudited)
 Second Quarters EndedSix Months Ended
 December 31, 2021January 1, 2021December 31, 2021January 1, 2021
Net revenues$220,380 $210,676 $445,393 $416,297 
Cost of revenues133,158 122,009 269,762 239,511 
Gross margin87,222 88,667 175,631 176,786 
Operating expenses:
Selling, general and administrative36,810 31,596 73,766 64,500 
Research and development28,335 28,128 57,217 55,545 
Amortization of intangible assets16,002 7,643 29,736 15,374 
Restructuring and other charges3,802 951 16,076 2,248 
Acquisition costs and other related expenses2,660 2,236 4,798 2,236 
Total operating expenses87,609 70,554 181,593 139,903 
(Loss) income from operations(387)18,113 (5,962)36,883 
Interest income5 60 14 132 
Interest expense(1,094)(73)(1,689)(73)
Other expense, net(1,318)(981)(2,738)(1,827)
(Loss) income before income taxes(2,794)17,119 (10,375)35,115 
Income tax (benefit) provision(155)4,433 (596)6,631 
Net (loss) income$(2,639)$12,686 $(9,779)$28,484 
Basic net (loss) earnings per share$(0.05)$0.23 $(0.18)$0.52 
Diluted net (loss) earnings per share$(0.05)$0.23 $(0.18)$0.51 
Weighted-average shares outstanding:
Basic55,520 55,070 55,448 54,976 
Diluted55,520 55,434 55,448 55,385 
Comprehensive (loss) income:
Net (loss) income$(2,639)$12,686 $(9,779)$28,484 
Foreign currency translation adjustments(269)(658)(25)(759)
Pension benefit plan, net of tax48 31 96 62 
Total other comprehensive (loss) income, net of tax(221)(627)71 (697)
Total comprehensive (loss) income$(2,860)$12,059 $(9,708)$27,787 
The accompanying notes are an integral part of the consolidated financial statements.
4


MERCURY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
For the Second Quarter Ended December 31, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
SharesAmount
Balance at October 1, 202155,501 $555 $1,111,613 $367,359 $(47)$1,479,480 
Issuance of common stock under employee stock incentive plans31 — — — —  
Issuance of common stock under employee stock purchase plan54 1 2,515 — — 2,516 
Purchase and retirement of common stock(3) (183)— — (183)
Stock-based compensation— — 8,168 — — 8,168 
Net loss— — — (2,639)— (2,639)
Other comprehensive loss— — — — (221)(221)
Balance at December 31, 202155,583 $556 $1,122,113 $364,720 $(268)$1,487,121 

For the Second Quarter Ended January 1, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
SharesAmount
Balance at October 2, 202055,045 $550 $1,082,044 $328,253 $(2,955)$1,407,892 
Issuance of common stock under employee stock incentive plans38 1 1 — — 2 
Issuance of common stock under employee stock purchase plan46 — 3,184 — — 3,184 
Stock-based compensation— — 7,494 — — 7,494 
Net income— — — 12,686 — 12,686 
Other comprehensive loss— — — — (627)(627)
Balance at January 1, 202155,129 $551 $1,092,723 $340,939 $(3,582)$1,430,631 

For the Six Months Ended December 31, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
SharesAmount
Balance at July 2, 202155,241 $552 $1,109,434 $374,499 $(339)$1,484,146 
Issuance of common stock under employee stock incentive plans429 4 (4)— —  
Issuance of common stock under employee stock purchase plan54 1 2,515 — — 2,516 
Purchase and retirement of common stock(141)(1)(7,498)— — (7,499)
Stock-based compensation— — 17,666 — — 17,666 
Net loss— — — (9,779)— (9,779)
Other comprehensive income— — — — 71 71 
Balance at December 31, 202155,583 $556 $1,122,113 $364,720 $(268)$1,487,121 

For the Six Months Ended January 1, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
SharesAmount
Balance at July 3, 202054,702 $547 $1,074,667 $312,455 $(2,885)$1,384,784 
Issuance of common stock under employee stock incentive plans382 4 — — — 4 
Issuance of common stock under employee stock purchase plan46 — 3,184 — — 3,184 
Purchase and retirement of common stock(1)— (66)— — (66)
Stock-based compensation— — 14,938 — — 14,938 
Net income— — — 28,484 — 28,484 
Other comprehensive loss— — — — (697)(697)
Balance at January 1, 202155,129 $551 $1,092,723 $340,939 $(3,582)$1,430,631 
The accompanying notes are an integral part of the consolidated financial statements.
5


MERCURY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months Ended
 December 31, 2021January 1, 2021
Cash flows from operating activities:
Net (loss) income$(9,779)$28,484 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense45,556 26,281 
Stock-based compensation expense17,375 14,454 
Benefit for deferred income taxes(4,206)(3,773)
Other non-cash items(1,604)2,217 
Changes in operating assets and liabilities, net of effects of businesses acquired:
Accounts receivable, unbilled receivables, and costs in excess of billings(17,937)(6,802)
Inventory(20,425)(29,121)
Prepaid income taxes (13,572)1,809 
Prepaid expenses and other current assets(245)1,052 
Other non-current assets1,004 698 
Accounts payable, accrued expenses, and accrued compensation13,294 (1,924)
Deferred revenues and customer advances(1,148)13,719 
Income taxes payable(9)(131)
Other non-current liabilities(3,486)(95)
Net cash provided by operating activities4,818 46,868 
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired(243,255)(243,637)
Purchases of property and equipment(13,404)(24,753)
Other investing activities(3,231) 
Proceeds from sale of investment 1,538 
Net cash used in investing activities(259,890)(266,852)
Cash flows from financing activities:
Proceeds from employee stock plans2,516 3,188 
Borrowings under credit facilities251,500 160,000 
Purchase and retirement of common stock(7,499)(66)
Net cash provided by financing activities246,517 163,122 
Effect of exchange rate changes on cash and cash equivalents(115)763 
Net decrease in cash and cash equivalents(8,670)(56,099)
Cash and cash equivalents at beginning of period113,839 226,838 
Cash and cash equivalents at end of period$105,169 $170,739 
Cash paid during the period for:
Interest$890 $ 
Income taxes$17,808 $7,942 
Supplemental disclosures—non-cash activities:
Non-cash investing activity$3,230 $427 
The accompanying notes are an integral part of the consolidated financial statements.
6


MERCURY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share data)
(Unaudited)
A.Description of Business
Mercury Systems, Inc. (the “Company” or “Mercury”) is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense. Headquartered in Andover, Massachusetts, the Company delivers products and solutions that power a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments. The Company envisions, creates and delivers innovative technology solutions that are open, purpose-built and uncompromised to meet our customers’ most-pressing high-tech needs, including those specific to the defense community.
Investors and others should note that the Company announces material financial information using its website (www.mrcy.com), Securities and Exchange Commission (“SEC”) filings, press releases, public conference calls, webcasts, and social media, including Twitter (twitter.com/mrcy and twitter.com/mrcy_CEO) and LinkedIn (www.linkedin.com/company/mercury-systems). Therefore, the Company encourages investors and others interested in Mercury to review the information the Company posts on the social media and other communication channels listed on its website.
B.Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by the Company in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States of America for interim financial information and with the instructions to the Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual consolidated financial statements have been condensed or omitted pursuant to those rules and regulations; however, in the opinion of management the financial information reflects all adjustments, consisting of adjustments of a normal recurring nature, necessary for fair presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended July 2, 2021 which are contained in the Company’s Annual Report on Form 10-K filed with the SEC on August 17, 2021. The results for the second quarter and six months ended December 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
All references to the second quarter of fiscal 2022 are to the quarter ended December 31, 2021. There were 13 weeks during the second quarters ended December 31, 2021 and January 1, 2021, respectively. There were 26 weeks during the six months ended December 31, 2021 and January 1, 2021, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
BUSINESS COMBINATIONS
The Company utilizes the acquisition method of accounting under ASC 805, Business Combinations, (“ASC 805”), for all transactions and events in which it obtains control over one or more other businesses, to recognize the fair value of all assets and liabilities acquired, even if less than one hundred percent ownership is acquired, and in establishing the acquisition date fair value as the measurement date for all assets and liabilities assumed. The Company also utilizes ASC 805 for the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in business combinations.
7


FOREIGN CURRENCY
Local currencies are the functional currency for the Company’s subsidiaries in Switzerland, the United Kingdom, France, Japan, Spain and Canada. The accounts of foreign subsidiaries are translated using exchange rates in effect at period-end for assets and liabilities and at average exchange rates during the period for results of operations. The related translation adjustments are reported in Accumulated other comprehensive loss (“AOCL”) in shareholders’ equity. Gains (losses) resulting from non-U.S. currency transactions are included in Other expense, net in the Consolidated Statements of Operations and Comprehensive (Loss) Income and were immaterial for all periods presented.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, (“ASC 606”). Revenues are derived from the sales of products that are grouped into one of the following three categories: (i) components; (ii) modules and sub-assemblies; and (iii) integrated subsystems. The Company also generates revenues from the performance of services, including systems engineering support, consulting, maintenance and other support, testing and installation. Each promised good or service within a contract is accounted for separately under the guidance of ASC 606 if they are distinct. Promised goods or services not meeting the criteria for being a distinct performance obligation are bundled into a single performance obligation with other goods or services that together meet the criteria for being distinct. The appropriate allocation of the transaction price and recognition of revenue is then determined for the bundled performance obligation.
Revenue recognized at a point in time generally relates to contracts that include a combination of components, modules and sub-assemblies, integrated subsystems and related system integration or other services. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 52% and 49% of revenues for the second quarter and six months ended December 31, 2021, respectively. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 61% and 62% of revenues for the second quarter and six months ended January 1, 2021, respectively.
The Company also engages in long-term contracts for development, production and service activities and recognizes revenue for performance obligations over time. These long-term contracts involve the design, development, manufacture, or modification of complex modules and sub-assemblies or integrated subsystems and related services. Long-term contracts include both fixed-price and cost reimbursable contracts. The Company’s cost reimbursable contracts typically include cost-plus fixed fee and time and material contracts.
Total revenue recognized under long-term contracts over time was 48% and 51% of total revenues for the second quarter and six months ended December 31, 2021, respectively. Total revenue recognized under long-term contracts over time was 39% and 38% of total revenues for the second quarter and six months ended January 1, 2021, respectively.
The Company generally does not provide its customers with rights of product return other than those related to assurance warranty provisions that permit repair or replacement of defective goods over a period of 12 to 36 months. The Company accrues for anticipated warranty costs upon product shipment. The Company does not consider activities related to such assurance warranties, if any, to be a separate performance obligation. The Company does offer separately priced extended warranties which generally range from 12 to 36 months that are treated as separate performance obligations. The transaction price allocated to extended warranties is recognized over time in proportion to the costs expected to be incurred in satisfying the obligations under the contract.
All revenues are reported net of government assessed taxes (e.g., sales taxes or value-added taxes). Refer to Note M for disaggregation of revenue for the period.
ACCOUNTS RECEIVABLE
Accounts receivable, net, represents amounts that have been billed and are currently due from customers. The Company maintains an allowance for credit losses to provide for the estimated amount of receivables that will not be collected. The Company provides credit to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended as necessary. The allowance is based upon an assessment of the customer's credit worthiness, reasonable forecasts about the future, history with the customer, and the age of the receivable balance. The Company typically invoices a customer upon shipment of the product (or completion of a service) for contracts where revenue is recognized at a point in time. For contracts where revenue is recognized over time, the invoicing events are typically based on specified performance obligation deliverables or milestone events, or quantifiable measures of performance.
8


CONTRACT BALANCES    
Contract balances result from the timing of revenue recognized, billings and cash collections, and the generation of contract assets and liabilities. Contract assets represent revenue recognized in excess of amounts invoiced to the customer and the right to payment is not subject to the passage of time. Contract assets are presented as unbilled receivables and costs in excess of billings on the Company’s Consolidated Balance Sheets. Contract liabilities consist of deferred product revenue, billings in excess of revenues, deferred service revenue, and customer advances. Deferred product revenue represents amounts that have been invoiced to customers, but are not yet recognizable as revenue because the Company has not satisfied its performance obligations under the contract. Billings in excess of revenues represents milestone billing contracts where the billings of the contract exceed recognized revenues. Deferred service revenue primarily represents amounts invoiced to customers for annual maintenance contracts or extended warranty contracts, which are recognized over time in proportion to the costs expected to be incurred in satisfying the obligations under the contract. Customer advances represent deposits received from customers on an order. Contract liabilities are included in deferred revenue and the long-term portion of deferred revenue is included within other non-current liabilities on the Company’s Consolidated Balance Sheets. Contract balances are reported in a net position on a contract-by-contract basis.
The contract asset balances were $193,803 and $162,921 as of December 31, 2021 and July 2, 2021, respectively. The contract asset balance increased due to growth in revenue recognized over time and timing of milestone billings under long-term contracts during the six months ended December 31, 2021. The contract liability balances were $34,410 and $35,201 as of December 31, 2021 and July 2, 2021, respectively. The decrease was due to timing of milestone billings across multiple programs.
Revenue recognized for the second quarter and six months ended December 31, 2021 that was included in the contract liability balance at July 2, 2021 was $5,151 and $18,288, respectively. Revenue recognized for the second quarter and six months ended January 1, 2021 that was included in the contract liability balance at July 3, 2020 was $4,336 and $13,366, respectively.
REMAINING PERFORMANCE OBLIGATIONS
The Company includes in its computation of remaining performance obligations customer orders for which it has accepted signed sales orders. The definition of remaining performance obligations excludes contracts with original expected durations of less than one year, as well as those contracts that provide the customer with the right to cancel or terminate the order with no substantial penalty, even if the Company’s historical experience indicates the likelihood of cancellation or termination is remote. As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $441,675. The Company expects to recognize approximately 59% of its remaining performance obligations as revenue in the next 12 months and the balance thereafter.
WEIGHTED-AVERAGE SHARES
Weighted-average shares were calculated as follows:
Second Quarters EndedSix Months Ended
December 31, 2021January 1, 2021December 31, 2021January 1, 2021
Basic weighted-average shares outstanding55,520 55,070 55,448 54,976 
Effect of dilutive equity instruments 364  409 
Diluted weighted-average shares outstanding55,520 55,434 55,448 55,385 
Equity instruments to purchase 408 and 434 shares of common stock were not included in the calculation of diluted net earnings per share for the second quarter and six months ended December 31, 2021, respectively, because the equity instruments were anti-dilutive. Equity instruments to purchase 114 and 2 shares of common stock were not included in the calculation of diluted net earnings per share for the second quarter and six months ended January 1, 2021, respectively, because the equity instruments were anti-dilutive.
9


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, an amendment of the FASB Accounting Standards Codification. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect this adoption to have a material impact to the Company's consolidated financial statements or related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, an amendment of the FASB Accounting Standards Codification. The amendments in this ASU simplify the accounting for convertible debt securities. The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted, including adoption in an interim period. The Company does not expect this adoption to have a material impact to the Company's consolidated financial statements or related disclosures.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, an amendment of the FASB Accounting Standards Codification. The amendments in this ASU address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination and require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. Under current U.S. GAAP, an acquirer generally recognizes assets and liabilities assumed in a business combination, including contract assets and liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC 606. This ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted, including adoption in an interim period. The Company is currently evaluating the effect that this standard may have on its consolidated financial statements and related disclosures.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective July 3, 2021 the Company adopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an amendment of the FASB Accounting Standards Codification. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions for intraperiod tax allocations and deferred tax liabilities for equity method investments and add guidance as to whether a step-up in tax basis of goodwill relates to a business combination or a separate transaction. This adoption did not have a material impact to the Company's consolidated financial statements or related disclosures.
10


C. Acquisitions
ATLANTA MICRO ACQUISITION
On November 29, 2021, the Company acquired Atlanta Micro, Inc. ("Atlanta Micro") for a purchase price of $90,000, subject to net working capital and net debt adjustments. Based in Norcross, Georgia, Atlanta Micro is a leading designer and manufacturer of high-performance RF modules and components, including advanced monolithic microwave integrated circuits (MMICs) which are critical for high-speed data acquisition applications including electronic warfare, radar and weapons. The Company funded the acquisition through the Company's existing revolving credit facility (the "Revolver").
The following table presents the net purchase price and the fair values of the assets and liabilities of Atlanta Micro on a preliminary basis:
Amounts
Consideration transferred
Cash paid at closing$91,438 
Working capital and net debt adjustment(474)
Less cash acquired(1,782)
Net purchase price$89,182 
Fair value of tangible assets acquired and liabilities assumed
Cash $1,782 
Accounts receivable1,568 
Inventory4,044 
Fixed assets547 
Other current and non-current assets2,043 
Accounts payable(529)
Accrued expenses(661)
Other current and non-current liabilities(9,733)
Fair value of net tangible assets acquired(939)
Fair value of identifiable intangible assets30,263 
Goodwill61,640 
Fair value of net assets acquired90,964 
Less cash acquired(1,782)
Net purchase price$89,182 

The amounts above represent the preliminary fair value estimates as of December 31, 2021 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates. The preliminary identifiable intangible asset estimate includes customer relationships of $18,450 with a useful life of 11 years, completed technology of $9,450 with a useful life of 10 years and backlog of $2,363 with a useful life of two years. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.
The estimated goodwill of $61,640 largely reflects the potential synergies and expansion of the Company’s offerings across product lines and markets complementary to the Company’s existing products and markets and is not deductible for tax purposes. The goodwill from this acquisition is reported in the Microelectronics reporting unit. The revenues and loss before income taxes from Atlanta Micro included in the Company's consolidated results for the second quarter ended December 31, 2021 were $1,617 and $(220), respectively.

11


AVALEX ACQUISITION
On September 27, 2021, the Company signed a definitive agreement to acquire Avalex Technologies (“Avalex”) for a purchase price of $155,000, subject to net working capital and net debt adjustments. On November 5, 2021, the transaction closed and the Company acquired Avalex. Based in Gulf Breeze, Florida, Avalex is a provider of mission-critical avionics, including rugged displays, integrated communications management systems, digital video recorders, and warning systems. The Company funded the acquisition with the Company's Revolver.
The following table presents the net purchase price and the fair values of the assets and liabilities of Avalex on a preliminary basis:
Amounts
Consideration transferred
Cash paid at closing$157,367 
Working capital and net debt adjustment(1,185)
Less cash acquired(2,188)
Net purchase price$153,994 
Fair value of tangible assets acquired and liabilities assumed
Cash $2,188 
Accounts receivable and unbilled receivables5,317 
Inventory6,055 
Fixed assets1,245 
Other current and non-current assets5,195 
Accounts payable(1,700)
Accrued expenses(1,147)
Other current and non-current liabilities(4,787)
Fair value of net tangible assets acquired12,366 
Fair value of identifiable intangible assets61,360 
Goodwill82,456 
Fair value of net assets acquired156,182 
Less cash acquired(2,188)
Net purchase price$153,994 

The amounts above represent the preliminary fair value estimates as of December 31, 2021 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates. The preliminary identifiable intangible asset estimate includes customer relationships of $41,880 with a useful life of 9 years, completed technology of $14,430 with a useful life of 7 years and backlog of $5,050 with a useful life of one year. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.
The estimated goodwill of $82,456 largely reflects the potential synergies and expansion of the Company’s offerings across product lines and markets complementary to the Company’s existing products and markets. The goodwill from this acquisition is reported in the Processing reporting unit. The Company has estimated the tax value of the intangible assets from this transaction and is amortizing the amount over 15 years for tax purposes. As of December 31, 2021, the Company had $82,700 of goodwill deductible for tax purposes. The revenues and loss before income taxes from Avalex included in the Company's consolidated results for the second quarter ended December 31, 2021 were $4,427 and $(1,097), respectively.

12


PENTEK ACQUISITION
On May 27, 2021, the Company acquired Pentek Technologies, LLC and Pentek Systems, Inc. (collectively, "Pentek"). for a purchase price of $65,000, subject to net working capital and net debt adjustments. Based in Upper Saddle River, New Jersey, Pentek is a leading designer and manufacturer of ruggedized, high-performance, commercial off-the-shelf software-defined radio and data acquisition boards, recording systems and subsystems for high-end commercial and defense applications. The acquisition and associated transaction expenses were funded through a combination of cash on hand and the Company's Revolver. On October 13, 2021, the Company and former owners of Pentek agreed to post closing adjustments totaling $79, which increased the Company's net purchase price.
The following table presents the net purchase price and the fair values of the assets and liabilities of Pentek on a preliminary basis:
Amounts
Consideration transferred
Cash paid at closing$65,668 
Working capital and net debt adjustment79 
Less cash acquired(746)
Net purchase price$65,001 
Estimated fair value of tangible assets acquired and liabilities assumed
Cash$746 
Accounts receivable1,370 
Inventory6,575 
Fixed assets152 
Other current and non-current assets2,864 
Accounts payable(1,016)
Accrued expenses(520)
Other current and non-current liabilities(4,097)
Estimated fair value of net tangible assets acquired6,074 
Estimated fair value of identifiable intangible assets24,110 
Estimated goodwill35,563 
Estimated fair value of net assets acquired65,747 
Less cash acquired(746)
Net purchase price$65,001 
The amounts above represent the preliminary fair value estimates as of December 31, 2021 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates. The preliminary identifiable intangible asset estimate includes customer relationships of $15,560 with a useful life of 21 years, completed technology of $6,340 with a useful life of seven years and backlog of $2,210 with a useful life of one year. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.
The goodwill of $35,563 largely reflects the potential synergies and expansion of the Company's offerings across product lines and markets complementary to the Company's existing products and markets. The goodwill from this acquisition is included in the Microelectronics reporting unit. The transaction was a combination of asset and stock, with the asset portion of goodwill being deductible for tax purposes. The Company has estimated the tax value of the intangible assets from this transaction and is amortizing the amount over 15 years for tax purposes. As of December 31, 2021, the Company had $29,216 of goodwill deductible for tax purposes.
13


PHYSICAL OPTICS CORPORATION ACQUISITION
On December 7, 2020, the Company signed a definitive agreement to acquire Physical Optics Corporation ("POC") for a purchase price of $310,000, subject to net working capital and net debt adjustments. On December 30, 2020, the transaction closed and the Company acquired POC. Based in Torrance, California, POC expands the Company's global avionics business and its collective footprint in the platform and mission management market. The Company funded the acquisition through a combination of cash on hand and the Company's Revolver. On May 28, 2021, the Company and representative of the former owners of POC agreed to post closing-adjustments totaling $2,641, which increased the Company’s net purchase price.
The following table presents the net purchase price and the fair values of the assets and liabilities of POC:
Amounts
Consideration transferred
Cash paid at closing$251,229 
Cash paid post closing61,626 
Working capital and net debt adjustment(2,096)
Less cash acquired(2,855)
Net purchase price$307,904 
Fair value of tangible assets acquired and liabilities assumed
Cash $2,855 
Accounts receivable and unbilled receivables31,255 
Inventory11,125 
Fixed assets23,236 
Other current and non-current assets18,173 
Accounts payable(3,777)
Accrued expenses(6,266)
Other current and non-current liabilities(30,107)
Fair value of net tangible assets acquired46,494 
Fair value of identifiable intangible assets116,000 
Goodwill148,265 
Fair value of net assets acquired310,759 
Less cash acquired(2,855)
Net purchase price$307,904 

On December 30, 2021, the measurement period for POC expired. The identifiable intangible assets include customer relationships of $83,000 with a useful life of 11 years, completed technology of $25,000 with a useful life of 9 years and backlog of $8,000 with a useful life of one year.
The goodwill of $148,265 largely reflects the potential synergies and expansion of the Company’s offerings across product lines and markets complementary to the Company’s existing products and markets and is not deductible for tax purposes. The goodwill from this acquisition is reported in the Processing reporting unit.
D.Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, including money market funds, restricted cash, accounts receivable and payable, and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The Company determined the carrying value of long-term debt approximated fair value due to variable interest rates charged on the borrowings, which reprice frequently. As of December 31, 2021, the Company had no material financial instruments required to be measured at fair value.
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E. Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value, and consists of materials, labor and overhead. On a quarterly basis, the Company uses consistent methodologies to evaluate inventory for net realizable value. Once an item is written down, the value becomes the new inventory cost basis. The Company reduces the value of inventory for excess and obsolete inventory, consisting of on-hand inventory in excess of estimated usage. The excess and obsolete inventory evaluation is based upon assumptions about future demand, historical usage, product mix and possible alternative uses. Inventory was comprised of the following:
As of
December 31, 2021July 2, 2021
Raw materials$159,780 $141,774 
Work in process64,706 58,087 
Finished goods26,786 21,779 
Total$251,272 $221,640 
F.Goodwill
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 and adjusted EBITDA potential over the next five years. In connection with 1MPACT, the Company realigned its internal organizational structure in the first quarter of fiscal 2022 shifting to two divisions, Processing and Microelectronics. The Mission division has now merged under the Processing division. There was no change to the Microelectronics division.
In accordance with FASB ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company determines its reporting units based upon whether discrete financial information is available, if management regularly reviews the operating results of the component, the nature of the products offered to customers and the market characteristics of each reporting unit. A reporting unit is considered to be an operating segment or one level below an operating segment also known as a component. Component level financial information is reviewed by management across two divisions: Processing and Microelectronics. Accordingly, these were determined to be the Company's new reporting units.
The internal reorganization and change in reporting units qualified as a triggering event and required goodwill to be tested for impairment. As required by ASC 350, the Company tested goodwill for impairment immediately before and after the reorganization. As a result of these analyses, it was determined that goodwill was not impaired before or after the reorganization.
In the first quarter ended October 1, 2021, the Company assigned goodwill to the new reporting units based on the relative fair value of transferred operations.
The following table sets forth the changes in the carrying amount of goodwill for the six months ended December 31, 2021:
Total
Balance at July 2, 2021$804,906 
Goodwill adjustment for the POC acquisition(6,994)
Goodwill adjustment for the Pentek acquisition338 
Goodwill arising from the Avalex acquisition82,456 
Goodwill arising from the Atlanta Micro acquisition61,640 
Balance at December 31, 2021$942,346 
The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year.
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G.Restructuring
During the six months ended December 31, 2021, the Company incurred $16,076 of restructuring and other charges. Restructuring and other charges of $8,667 related to third-party consulting costs associated with 1MPACT. The remaining $7,409 related to severance costs associated with the elimination of approximately 100 employees in manufacturing, SG&A and R&D based on changes in the business environment and to align with the internal organizational changes completed under 1MPACT.
All of the restructuring and other charges are classified as Operating expenses in the Consolidated Statements of Operations and Comprehensive (Loss) Income and any remaining severance obligations are expected to be paid within the next twelve months. The restructuring liability is classified as Accrued expenses in the Consolidated Balance Sheets.
The following table presents the detail of activity for the Company’s restructuring plans:
Severance &
Related
Balance at July 2, 2021$1,006 
Restructuring charges7,409 
Cash paid(2,710)
Balance at December 31, 2021$5,705 
H.Income Taxes
The Company recorded an income tax (benefit) provision of $(155) and $4,433 on a (loss) income before income taxes of $(2,794) and $17,119 for the second quarters ended December 31, 2021 and January 1, 2021, respectively. The Company recorded an income tax (benefit) provision of $(596) and $6,631 on (loss) income before income taxes of $(10,375) and $35,115 for the six months ended December 31, 2021 and January 1, 2021, respectively.
During the second quarters ended December 31, 2021 and January 1, 2021, the Company recognized a discrete tax provision (benefit) of $163 and $(130) related to stock-based compensation shortfalls and windfalls, respectively. During the six months ended December 31, 2021 and January 1, 2021, the Company recognized a discrete tax provision (benefit) of $878 and $(2,610) related to stock-based compensation shortfalls and windfalls, respectively.
The effective tax rate for the second quarters and six months ended December 31, 2021 and January 1, 2021 differed from the Federal statutory rate primarily due to Federal and State research and development credits, non-deductible compensation, stock-based compensation, and state taxes. In addition, during the second quarter ended December 31, 2021, the Company had certain unbenefited deferred tax assets.
During the second quarter ended December 31, 2021, the Company recorded an unrecognized tax benefit of $693 related to acquired research and development carryforward credits.
Within the calculation of the Company's annual effective tax rate, the Company has used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service (“IRS”).
I.Debt
REVOLVING CREDIT FACILITY
On September 28, 2018, the Company amended the Revolver to increase and extend the borrowing capacity to a $750,000, 5-year revolving credit line, with the maturity extended to September 28, 2023. As of December 31, 2021, the Company's outstanding balance of unamortized deferred financing costs was $2,353, which is being amortized to Other expense, net in the Consolidated Statements of Operations and Comprehensive (Loss) Income on a straight line basis over the term of the Revolver.
As of December 31, 2021, the Company was in compliance with all covenants and conditions under the Revolver and there were outstanding borrowings of $451,500 against the Revolver, resulting in interest expense of $1,094 and $1,689 for the second quarter and six months ended December 31, 2021, respectively. There were outstanding letters of credit of $963 as of December 31, 2021.
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J.Employee Benefit Plan
PENSION PLAN
The Company maintains a defined benefit pension plan (the “Plan”) for its Swiss employees, which is administered by an independent pension fund. The Plan is mandated by Swiss law and meets the criteria for a defined benefit plan under ASC 715, Compensation—Retirement Benefits (“ASC 715”), because participants of the Plan are entitled to a defined rate of return on contributions made. The independent pension fund is a multi-employer plan with unrestricted joint liability for all participating companies for which the Plan’s overfunding or underfunding is allocated to each participating company based on an allocation key determined by the Plan.
The Company recognizes a net asset or liability for the Plan equal to the difference between the projected benefit obligation of the Plan and the fair value of the Plan’s assets as required by ASC 715. The funded status may vary from year to year due to changes in the fair value of the Plan’s assets and variations on the underlying assumptions of the projected benefit obligation of the Plan. The Plan's funded status at December 31, 2021 was a net liability of $9,833, which is recorded in Other non-current liabilities on the Consolidated Balance Sheet. The Company recorded a net gain of $48 and $96 in AOCL during the second quarter and six months ended December 31, 2021. The Company recorded a net gain of $31 and $62 in AOCL during the second quarter and six months ended January 1, 2021. The Company recognized net periodic benefit costs of $269 and $538 associated with the Plan for the second quarter and six months ended December 31, 2021. The Company recognized net periodic benefit costs of $420 and $833 associated with the Plan for the second quarter and six months ended January 1, 2021, respectively. The Company's total expected employer contributions to the Plan during fiscal 2022 are $1,165.
K.     Shareholders' Equity
STOCKHOLDER RIGHTS PLAN
On December 27, 2021, the Company's Board of Directors authorized and declared a dividend of one preferred share purchase right (a “Right”), payable on January 10, 2022, for each outstanding share of common stock par value $0.01 per share to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company a unit of Series A Junior Preferred Stock, par value $0.01 per share, of the Company at a designated price per unit, subject to adjustment. The Rights will initially trade with, and will be inseparable from, the shares of common stock.
The Rights will generally become exercisable if any person or group, other than certain exempt persons, acquires beneficial ownership of 7.5% (or 10% in the case of certain passive investors) or more of common stock outstanding (an “Acquiring Person”). If a person or group becomes an Acquiring Person, then each Right, other than those held by the Acquiring Person, will entitle its holder to purchase units of Series A Junior Preferred Stock (or, in certain circumstances, cash, assets or other securities of the Company) having a market value equal to twice the then-current market price per unit of Preferred Stock. In certain other circumstances including consolidation or merger with the Company, each Right, other than those held by the Acquiring Person, will entitle its holder to receive common stock of the person acquiring the Company or its ultimate parent entity, as applicable, having a value equal to two times then-current market price per share of common stock.
Each Unit of Preferred Stock, if issued:
• will entitle holders to certain dividend and liquidation payments;
• will not be redeemable;
• will entitle holders to one vote, voting together with shares of common stock;
• will entitle holders, if shares of common stock are exchanged via merger, consolidation, or a similar transaction, to a per share payment equal to the payment made on one share of Company Common Stock; and
• will be protected by customary anti-dilution provisions with respect to dividends, liquidation and voting rights, and in the event of mergers and consolidations.
The Rights Agreement will continue in effect until December 26, 2022, or unless earlier redeemed or terminated by the Company's Board of Directors, as provided in the Rights Agreement. The Board of Directors shall have the right to adjust, among other things, the exercise price, as well as the number of Units of Preferred Stock issuable, and the number of outstanding Rights to prevent dilution that may occur from a share dividend, a share split, or a reclassification of the Preferred Stock. The Rights have no voting or dividend privileges, and, unless and until they become exercisable, have no dilutive effect on the earnings of the Company.
Additional details about the Rights Agreement are contained in the Current Report on Form 8-K filed by the Company with the SEC on December 29, 2021.
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L.Stock-Based Compensation
STOCK INCENTIVE PLANS
At December 31, 2021, the aggregate number of shares authorized for issuance under the Company’s Amended and Restated 2018 Stock Incentive Plan (the “2018 Plan”) is 6,782 shares, including 710 shares rolled into the 2018 Plan that were available for future grant under the Company’s 2005 Stock Incentive Plan, as amended and restated (the “2005 Plan”) and 3,000 shares approved by the Company's shareholders on October 28, 2020. The 2018 Plan replaced the 2005 Plan. The shares authorized for issuance under the 2018 Plan will continue to be increased by any future cancellations, forfeitures or terminations (other than by exercise) of awards under the 2005 Plan. The foregoing does not affect any outstanding awards under the 2005 Plan, which remain in full force and effect in accordance with their terms. The 2018 Plan provides for the grant of non-qualified and incentive stock options, restricted stock, stock appreciation rights and deferred stock awards to employees and non-employees. Stock options must be granted with an exercise price of not less than 100% of the fair value of the Company’s common stock on the date of grant and the options generally have a term of seven years. There were 3,380 shares available for future grant under the 2018 Plan at December 31, 2021.
As part of the Company's ongoing annual equity grant program for employees, the Company grants performance-based restricted stock awards to certain executives and employees pursuant to the 2018 Plan. Performance awards vest based on the requisite service period subject to the achievement of specific financial performance targets. Based on the performance targets, some of these awards require graded vesting which results in more rapid expense recognition compared to traditional time-based vesting over the same vesting period. The Company monitors the probability of achieving the performance targets on a quarterly basis and may adjust periodic stock compensation expense accordingly based on its determination of the likelihood for reaching targets. The performance targets generally include the achievement of internal performance targets in relation to a peer group of companies.
EMPLOYEE STOCK PURCHASE PLAN
At December 31, 2021, the aggregate number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is 2,300 shares, including 500 shares approved by the Company's shareholders on October 28, 2020. Under the ESPP, rights are granted to purchase shares of common stock at 85% of the lesser of the market value of such shares at either the beginning or the end of each six-month offering period. The ESPP permits employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee’s compensation as defined in the ESPP. There were 54 and 46 shares issued under the ESPP during the six months ended December 31, 2021 and January 1, 2021, respectively. Shares available for future purchase under the ESPP totaled 374 at December 31, 2021.
STOCK AWARD ACTIVITY
The following table summarizes the status of the Company’s non-vested restricted stock awards and deferred stock awards since July 2, 2021:

 Non-vested Restricted Stock Awards
 Number of
Shares
Weighted Average
Grant Date
Fair Value
Outstanding at July 2, 20211,013 $70.77 
Granted828 51.37 
Vested(429)52.91 
Forfeited(157)68.62 
Outstanding at December 31, 20211,255 $64.31 
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STOCK-BASED COMPENSATION EXPENSE
The Company recognizes expense for its share-based payment plans in the Consolidated Statements of Operations and Comprehensive (Loss) Income in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”). The Company had $1,087 and $796 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for the periods ended December 31, 2021 and July 2, 2021, respectively. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period, net of estimated forfeitures.
The following table presents share-based compensation expenses included in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income:
 Second Quarters EndedSix Months Ended
 December 31, 2021January 1, 2021December 31, 2021January 1, 2021