Signal management

MERCURY SYSTEMS INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

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, inflation,
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,
changes in, or in the interpretation or enforcement of environmental rules and
regulations, market acceptance of the Company's products, shortages in or delays
in receiving components, production delays or unanticipated expenses due to
performance quality issues with outsourced components, inability to fully
realize the expected benefits from acquisitions, restructurings and value
creation initiatives such as 1MPACT, or delays in realizing such benefits,
challenges in integrating acquired businesses and achieving anticipated
synergies, effects of shareholder activism, increases in interest rates, changes
to industrial security and cyber-security regulations and requirements, changes
in tax rates or tax regulations, changes to interest rate swaps or other cash
flow hedging arrangements, 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 this
Annual Report on Form 10-K. 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 technology company that delivers commercial
innovation to rapidly transform the global aerospace and defense industry.
Headquartered in Andover, Massachusetts, our end-to-end processing platform
enables a broad range of aerospace and defense programs, optimized for mission
success in some of the most challenging and demanding environments. Processing
technologies that comprise our platform include signal solutions, display,
software applications, networking, storage and secure processing. Our innovative
solutions are mission-ready, trusted and secure, software-defined and open and
modular to meet our customers' most-pressing high-tech needs. Customers access
our solutions via the Mercury platform, which encompasses the broad scope of our
investments in technologies, companies, products, services and the expertise of
our people. Ultimately, we connect our customers to what matters most to them.
We connect commercial technology to defense, people to data, partners to
opportunities and the present to the future. And, at the most human level, we
connect what we do to our customers' missions; supporting the people for whom
safety, security and protecting freedom are of paramount importance.

As a leading manufacturer of essential components, products, modules and
subsystems, we sell to defense prime contractors, the U.S. government and
original equipment manufacturers ("OEM") commercial aerospace companies. Mercury
has built a trusted, contemporary portfolio of proven product solutions
purpose-built for aerospace and defense that it believes meets and exceeds the
performance needs of our defense and commercial customers. Customers add their
own applications and algorithms to our specialized, secure and innovative
products and pre-integrated solutions. This allows them to complete their full
system by integrating with their platform, the sensor technology and,
increasingly, 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 and other commercial
companies, coupled with our high level of research and development ("R&D")
investments on a percentage basis and industry-leading trusted and secure design
and manufacturing capabilities, are the foundational tenets of this highly
successful model. We are leading the development and adaptation of commercial
technology for aerospace and defense solutions. From chip-scale to system scale
and from data, including radio
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frequency (“RF”) to digital to decision-making, we make mission-critical technologies safe, secure, affordable and relevant to our customers.

Our capabilities, technology, people and R&D investment strategy combine to
differentiate Mercury in our industry. We maintain our technological edge by
investing in critical capabilities and intellectual property ("IP" or "building
blocks") in processing, 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 artificial intelligence
("AI").

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

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 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 July 1, 2022, we had 2,386 employees. Our consolidated revenues, acquired
revenues, net income, diluted EPS, adjusted EPS and adjusted EBITDA for fiscal
2022 were $988.2 million, $117.8 million, $11.3 million, $0.20, $2.19 and $200.5
million, respectively. Our consolidated revenues, acquired revenues, net income,
diluted EPS, adjusted EPS and adjusted EBITDA for fiscal 2021 were $924.0
million, $3.4 million, $62.0 million, $1.12, $2.42 and $201.9 million,
respectively. See the Non-GAAP Financial Measures section for a reconciliation
to our most directly comparable GAAP financial measures.

OUR RESPONSE TO COVID

We continue to monitor the COVID pandemic and adapt our policies and programs as
needed to protect the health, safety and livelihoods of our people. In September
2021, the White House announced that certain contractors would need to create
COVID-19 vaccination programs for their employees in order to work on certain
U.S. government contracts. We announced our COVID-19 U.S. Vaccination Policy in
October 2021 to comply with these federal requirements. In November and December
2021, federal judges temporarily blocked the government from enforcing their
vaccine mandate while lawsuits were being resolved. We suspended our vaccine
policy pending the resolutions of these lawsuits, similar to other contractors
in the aerospace and defense industry.

1MPACT

On August 3, 2021, we 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 our full growth, margin expansion and adjusted EBITDA
potential over the next five years. Since fiscal year 2014, we have completed 15
acquisitions, deploying $1.4 billion of capital and, as a result, dramatically
scaled and transformed the business. Over this time, we have extracted
substantial revenue and cost synergies from each of these individual
acquisitions. As we approach the milestone of $1 billion of revenue, we have
identified significant opportunity to realize further scale through
consolidating and streamlining our internal organizational structure which will
improve visibility, speed of decision making and accountability. 1MPACT is led
by our Chief Transformation Officer, Thomas Huber, and focuses on the following
major areas: organizational efficiency and scalability; procurement and supply
chain; facilities optimization; R&D investment; and scalable common processes
and systems.

BUSINESS DEVELOPMENTS:

FISCAL 2022

On February 28, 2022, we amended our existing revolving credit facility (the
"Revolver") to increase and extend the borrowing capacity to a $1.1 billion,
5-year revolving credit line, with the maturity extended to February 28, 2027.
As of July 1, 2022, there was $451.5 million of outstanding borrowings on the
Revolver. See Note M in the accompanying consolidated financial statements for
further discussion of the Revolver.

On November 29, 2021, we acquired Atlanta Micro, Inc. ("Atlanta Micro") for a
purchase price of $90.0 million, 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
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(“MMIC”) that are essential for high-speed data acquisition applications, including electronic warfare, radar, and weapons. We financed the acquisition with our Revolver.

On September 27, 2021, we signed a definitive agreement to acquire Avalex
Technologies ("Avalex") for a purchase price of $155.0 million, subject to net
working capital and net debt adjustments. On November 5, 2021, the transaction
closed and we 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.
We funded the acquisition with our Revolver.

FISCAL YEAR 2021

On May 27, 2021, we acquired Pentek Technologies, LLC and Pentek Systems, Inc.
(collectively, "Pentek") for a purchase price of $65.0 million, 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 ("COTS") 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 our Revolver.

On December 30, 2020, we acquired Physical Optics Corporation ("POC") for a
purchase price of $310.0 million, prior to net working capital and net debt
adjustments. Based in Torrance, California, POC more than doubled our global
avionics business and expanded its collective footprint in the platform and
mission management market. We funded the acquisition through a combination of
cash on hand and our Revolver.

RESULTS OF OPERATIONS:

FISCAL YEAR 2022 VS. FISCAL YEAR 2021

Results of operations for fiscal 2022 include full period results from the
acquisitions of POC and Pentek and only results from the acquisition dates for
Avalex and Atlanta Micro, which were acquired on November 5, 2021 and November
29, 2021, respectively. Results of operations for fiscal 2021 include only
results from the acquisition dates for POC and Pentek. Accordingly, the periods
presented below are not directly comparable. The Company has applied the FAST
Act Modernization and Simplification of Regulation S-K, which limits the
discussion to the two most recent fiscal years. Refer to Item 7 of the Company's
Form 10-K issued on August 17, 2021 for prior year discussion related to fiscal
2020.
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The following tables present, for the periods indicated, the financial data of the consolidated statements of income and comprehensive income:

                                                                         As a % of                                      As a % of
                                                                         Total Net                                      Total Net
(In thousands)                                   Fiscal 2022              Revenue               Fiscal 2021              Revenue
Net revenues                                   $    988,197                    100.0  %       $    923,996                    100.0  %
Cost of revenues                                    593,241                     60.0               538,808                     58.3
Gross margin                                        394,956                     40.0               385,188                     41.7
Operating expenses:
Selling, general and administrative                 157,044                     15.9               134,337                     14.5
Research and development                            107,169                     10.8               113,481                     12.3
Amortization of intangible assets                    60,267                      6.1                41,171                      4.5
Restructuring and other charges                      27,445                      2.8                 9,222                      1.0

Acquisition costs and other related expenses         11,421                      1.2                 5,976                      0.6

Total operating expenses                            363,346                     36.8               304,187                     32.9
Income from operations                               31,610                      3.2                81,001                      8.8
Interest income                                         143                        -                   179                        -
Interest expense                                     (5,806)                    (0.6)               (1,222)                    (0.1)
Other expense, net                                   (7,552)                    (0.8)               (2,785)                    (0.3)
Income before income taxes                           18,395                      1.9                77,173                      8.4
Income tax provision                                  7,120                      0.8                15,129                      1.7

Net income                                     $     11,275                      1.1  %       $     62,044                      6.7  %


REVENUES

Total revenues increased $64.2 million, or 7.0%, to $988.2 million during fiscal
2022, as compared to $924.0 million during fiscal 2021 including "acquired
revenue" which represents net revenue from acquired businesses that have been
part of Mercury for completion of four full fiscal quarters or less (and
excludes any intercompany transactions). After the completion of four full
fiscal quarters, acquired businesses will be treated as organic for current and
comparable historical periods. The increase in total revenue was primarily due
to $114.4 million of incremental acquired revenues partially offset by a $50.2
million decrease in organic revenues. The increase was driven by higher demand
for modules and sub-assemblies and integrated subsystems which increased $49.4
million or 31.5%, and $30.5 million or 5.2%, respectively, and was partially
offset by decreases to components of $15.7 million or 8.9% during fiscal 2022.
The increase in total revenue was primarily from C4I and EW applications which
increased $73.3 million and $18.5 million, respectively, and was partially
offset by a decrease of $38.0 million from the radar end application. The
increase in revenues spanned the airborne and other platforms which increased
$71.2 million and $48.5 million, respectively, and was offset by decreases in
the naval and land platforms of $31.6 million and $23.8 million, respectively.
The largest program increases were related to a classified C2 program, MH60, P8,
Aegis and ALR-56C. Acquired revenue in fiscal 2022 represents activity from the
Pentek, Avalex and Atlanta Micro acquired businesses as well as two fiscal
quarters from the POC acquired business. There were no programs comprising 10%
or more of our revenues for fiscal 2022 and 2021. See the Non-GAAP Financial
Measures section for a reconciliation to our most directly comparable GAAP
financial measures.

GROSS MARGIN

Gross margin was 40.0% for fiscal 2022, a decrease of 170 basis points from the
41.7% gross margin achieved during fiscal 2021. The lower gross margin was
primarily driven by program mix, heavily impacted by industry-wide award delays
and supply chain constraints as well as inflation. In addition, the decrease is
due to higher engineering content associated with programs in the period
evidenced by an increase of $28.5 million in Customer Funded Research and
Development ("CRAD") compared to the prior period. CRAD primarily represents
engineering labor associated with over time revenue contracts for customized
development, production and service activities. The nature of these efforts
result in lower margin content, but serve as pre-cursors to higher margin
production awards. These products are predominately grouped within integrated
subsystems and to a lesser extent modules and sub-assemblies.
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SELLING, GENERAL AND ADMINISTRATIVE FEES

Selling, general and administrative expenses increased $22.7 million, or 16.9%,
to $157.0 million during fiscal 2022 as compared to $134.3 million during fiscal
2021. The increase was primarily related to an incremental $8.9 million of
expenses related to the acquisitions of Pentek, Avalex and Atlanta Micro as well
as an $8.3 million increase to stock compensation expense for a higher volume of
equity awards to support the retention of our employees in a challenging labor
market. These increases were partially offset by savings from 1MPACT workforce
optimization efforts. Selling, general and administrative expenses increased as
a percentage of revenue to 15.9% during fiscal 2022 from 14.5% during fiscal
2021.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased $6.3 million, or 5.6%, to $107.2
million during fiscal 2022, as compared to $113.5 million for fiscal 2021. The
decrease was primarily related to 1MPACT workforce optimization efforts and
employee attrition. The decrease was also impacted by an incremental $28.5
million of CRAD during fiscal 2022. Research and development expenses accounted
for 10.8% and 12.3% of our revenues during fiscal 2022 and fiscal 2021,
respectively.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets increased $19.1 million to $60.3 million
during fiscal 2022, as compared to $41.2 million for fiscal 2021, primarily due
to the full period impact from the acquisitions of POC and Pentek, as well as
the acquisitions of Avalex and Atlanta Micro during fiscal 2022.

RESTRUCTURING AND OTHER CHARGES

Restructuring and other charges were $27.4 million during fiscal 2022, as
compared to $9.2 million during fiscal 2021. Restructuring and other charges
during fiscal 2022 primarily related to 1MPACT including $17.4 million of
third-party consulting costs, as well as $9.2 million of severance costs
associated with the elimination of approximately 135 positions across
manufacturing, SG&A and R&D based on ongoing talent and workforce optimization
efforts. In addition, fiscal 2022 includes $0.8 million of costs for facilities
optimization efforts associated with 1MPACT, including $0.5 million related to
lease asset impairment. During fiscal 2021, the Company incurred $9.2 million of
restructuring and other charges. Restructuring and other charges primarily
related to $4.8 million related to severance costs associated with the
elimination of approximately 90 positions throughout the period, across
manufacturing, SG&A and R&D. These charges are related to changing market and
business conditions as well as talent shifts and resource redundancy from the
Company's internal reorganization that was completed during fiscal 2021. The
remaining $4.5 million of restructuring and other charges related to third-party
consulting costs related to 1MPACT, which was initiated in the fourth quarter of
fiscal 2021.

ACQUISITION FEES AND OTHER RELATED CHARGES

Acquisition costs and other related expenses were $11.4 million during fiscal
2022, as compared to $6.0 million during fiscal 2021. The acquisition costs and
other related expenses incurred during fiscal 2022 were related to the
acquisitions of Avalex and Atlanta Micro, as well as $6.8 million for
third-party advisory fees and settlement costs in connection with engagements by
activist investors. The acquisition costs and other related expenses incurred
during fiscal 2021 were related to the acquisitions of POC and Pentek. Both
periods include costs associated with our evaluation of potential acquisition
opportunities. We expect to continue to incur such acquisition costs and other
related expenses in the future as we continue to seek acquisition opportunities
to expand our technological capabilities and especially within secure
processing, open mission systems, C3 and trusted microelectronics. Transaction
costs incurred by the acquiree prior to the consummation of an acquisition would
not be reflected in our historical results of operations.

INTEREST EXPENSES

Interest expense for fiscal 2022 increased to $5.8 million, as compared to $1.2
million in fiscal 2021. This increase is primarily related to the $451.5 million
of outstanding borrowings on our Revolver used to facilitate the acquisitions of
POC and Pentek, Avalex and Atlanta Micro during fiscal 2021 and 2022. This is an
increase from $200.0 million of outstanding borrowings on our Revolver for
fiscal 2021.

OTHER EXPENSES, NET

Other expense, net increased to $7.6 million during fiscal 2022, as compared to
$2.8 million of other expense, net in fiscal 2021. There were $2.4 million of
foreign currency translation losses during fiscal 2022 as compared to $1.2
million of foreign currency translation gains during fiscal 2021. In addition,
there was $1.3 million of incremental litigation and settlement expenses during
fiscal 2022 as compared to the prior comparable period.
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INCOME TAXES

We recorded an income tax provision of $7.1 million and $15.1 million on income
before income taxes of $18.4 million and $77.2 million for fiscal years 2022 and
2021, respectively. Within the $7.1 million income tax provision for fiscal year
2022, we recorded a provision to return adjustment of $2.3 million related to an
immaterial correction of an error over transfer pricing allocations.

The effective tax rate for fiscal 2022 differed from the Federal statutory rate
of 21% primarily due to Federal and state research and development tax credits,
non-deductible compensation, provision to return adjustments, state taxes and
excess tax provision related to stock compensation.

The effective tax rate for fiscal 2021 differed from the Federal statutory rate
of 21% primarily due to Federal and state research and development tax credits,
excess benefits related to stock compensation, non-deductible compensation and
state taxes.

CASH 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, continuous evaluation of potential acquisition opportunities and
internal R&D to promote future growth, including new opportunities in avionics
mission computers, secure processing, radar modernization and trusted custom
microelectronics. Our facilities improvements include expansion of our trusted
custom microelectronics and mission computing businesses during fiscal 2022.

Based on our current plans and economic conditions, we believe that existing cash and cash equivalents, our available revolver, cash generated from operations and our funding capabilities will be sufficient to meet our projected 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 using the shelf registration statement for general corporate
purposes, which may include the following:

•the acquisition of other companies or businesses;

•debt repayment and refinancing;

• capital expenditures;

•working capital; and

•for other purposes described in the Prospectus Supplement.

We have an unlimited amount available under the shelf registration statement.

Revolving credit facilities

On February 28, 2022, we amended the Revolver to increase and extend the
borrowing capacity to a $1.1 billion, 5-year revolving credit line, with the
maturity extended to February 28, 2027. As of July 1, 2022, we had
$451.5 million of outstanding borrowings against the Revolver. See Note M in the
accompanying consolidated financial statements for further discussion of the
Revolver.
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CASH FLOWS
                                                                        For the Fiscal Years Ended
(In thousands)                                          July 1, 2022           July 2, 2021           July 3, 2020

Net cash (used in) provided by operating activities ($18,869)

  $      97,247          $     115,184
Net cash used in investing activities                 $    (274,320)         $    (416,887)         $    (135,486)
Net cash provided by (used in) financing activities   $     245,754          $     206,229          $     (10,932)
Net decrease in cash and cash equivalents             $     (48,185)         $    (112,999)         $     (31,094)
Cash and cash equivalents at end of year              $      65,654         

$113,839 $226,838


Our cash and cash equivalents decreased by $48.2 million during fiscal 2022
primarily due to $243.5 million of acquisition activity, $27.7 million invested
in purchases of property and equipment, $18.9 million used in operating
activities and $8.2 million of share repurchase and retirement of common stock
used to settle employees' tax liabilities. These decreases were partially offset
by $251.5 million of borrowings on our Revolver to facilitate the acquisitions
of Avalex and Atlanta Micro.

Operating Activities

During fiscal 2022, we used $18.9 million in cash from operating activities, a
decrease of $116.1 million, as compared to $97.2 million provided by operating
activities during fiscal 2021. The decrease was primarily due to an increase in
unbilled receivables and costs in excess of billings driven by industry-wide
award delays and supply chain constraints impacting the timing of billing events
and cash conversion as well as higher outflows for inventory during fiscal 2022.
Operating activities also included cash outflows for restructuring and other
charges associated with 1MPACT as well as acquisition costs and other related
expenses related to third-party advisory fees in connection with engagements by
activist investors as well as the Avalex and Atlanta Micro acquisitions. These
decreases were partially offset by lower cash outflows for accounts payable,
accrued expenses and accrued compensation.

Investing activities

During fiscal 2022, we invested $274.3 million, a decrease of $142.6 million, as
compared to $416.9 million during fiscal 2021. During fiscal 2022, we invested
$243.5 million in the acquisitions of Avalex and Atlanta Micro, as well as $27.7
million in purchases of property and equipment. During fiscal 2021, we invested
$372.8 million in the acquisitions of POC and Pentek as well as $45.6 million in
purchases of property and equipment.

Fundraising activities

During fiscal 2022, we had $245.8 million in cash provided by financing
activities, as compared to $206.2 million during fiscal 2021. The $39.6 million
increase was driven by an additional $51.5 million of additional borrowings on
our Revolver to facilitate the acquisitions of Avalex and Atlanta Micro,
partially offset by $8.1 million of additional payments related to the purchase
and retirement of common stock used to settle employees' tax liabilities
associated with vesting of restricted stock awards and $2.9 million of payments
for deferred financing fees associated with the refinancing of our revolving
credit facility as compared to fiscal 2021.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Here is a table of our ongoing commitments and contractual obligations as of July 1, 2022:

                                       Less Than        1-3           3-5         More Than
(In thousands)            Total         1 Year         Years         Years         5 Years
Operating leases       $  97,504      $  14,757      $ 26,838      $ 21,594      $  34,315
Purchase obligations     153,729        153,729             -             -              -

                       $ 251,233      $ 168,486      $ 26,838      $ 21,594      $  34,315

See Note B and Note J to the consolidated financial statements for more information regarding our obligations under lease agreements.

Purchase obligations represent non-cancellable open purchase commitments for certain inventory components and services used in normal operations. The purchase commitments covered by these agreements are for less than one year and are cumulative $153.7 million at July 1, 2022.

We had a liability at July 1, 2022 of $9.1 million for uncertain tax positions
that have been taken or are expected to be taken in various income tax returns.
Our liability increased by an additional $1.6 million primarily due to tax
positions taken related to a prior period and during the current period. We do
not know the ultimate resolution of these uncertain tax positions
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and as such, do not know the ultimate timing of payments related to this liability. Therefore, these amounts are not included in the table above.

Our standard product sales and license agreements entered into in the ordinary
course of business typically contain an indemnification provision pursuant to
which we indemnify, hold harmless and agree to reimburse the indemnified party
for losses suffered or incurred in connection with certain intellectual property
infringement claims by any third party with respect to our products. Such
provisions generally survive termination or expiration of the agreements. The
potential amount of future payments we could be required to make under these
indemnification provisions is, in some instances, unlimited.

As part of our strategy for growth, we continue to explore acquisitions or
strategic alliances. The associated acquisition costs incurred in the form of
professional fees and services may be material to the future periods in which
they occur, regardless of whether the acquisition is ultimately completed.

We may elect from time to time to purchase and subsequently retire shares of
common stock in order to settle employees' tax liabilities associated with
vesting of a restricted stock award. These transactions would be treated as a
use of cash in financing activities in our Consolidated Statements of Cash
Flows.

OFF-BALANCE SHEET ARRANGEMENTS

Other than certain indemnification provisions, we do not have any off-balance
sheet financing arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets, or any obligation arising out of a
material variable interest in an unconsolidated entity. We do not have any
majority-owned subsidiaries that are not consolidated in the financial
statements. Additionally, we do not have an interest in, or relationships with,
any special purpose entities.

RELATED PARTY TRANSACTIONS

During fiscal 2022 and 2021, we did not enter into any related party transactions.

NON-GAAP FINANCIAL MEASURES

In our periodic communications, we discuss certain important measures that are
not calculated according to U.S. generally accepted accounting principles
("GAAP"), including adjusted EBITDA, adjusted income, adjusted EPS, free cash
flow, organic revenue and acquired revenue.

Adjusted EBITDA is defined as net income before other non-operating adjustments,
interest income and expense, income taxes, depreciation, amortization of
intangible assets, restructuring and other charges, impairment of long-lived
assets, acquisition financing and other third party costs, fair value
adjustments from purchase accounting, litigation and settlement income and
expense, COVID related expenses and stock-based and other non-cash compensation
expense. We use adjusted EBITDA as an important indicator of the operating
performance of our business. We use adjusted EBITDA in internal forecasts and
models when establishing internal operating budgets, supplementing the financial
results and forecasts reported to our board of directors, determining a portion
of bonus compensation for executive officers and other key employees based on
operating performance, evaluating short-term and long-term operating trends in
our operations and allocating resources to various initiatives and operational
requirements. We believe that adjusted EBITDA permits a comparative assessment
of our operating performance, relative to our performance based on our GAAP
results, while isolating the effects of charges that may vary from period to
period without any correlation to underlying operating performance. We believe
that these non-GAAP financial adjustments are useful to investors because they
allow investors to evaluate the effectiveness of the methodology and information
used by management in our financial and operational decision-making. We believe
that trends in our adjusted EBITDA are valuable indicators of our operating
performance.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered in
isolation or as a substitute for financial information provided in accordance
with GAAP. This non-GAAP financial measure may not be computed in the same
manner as similarly titled measures used by other companies. We expect to
continue to incur expenses similar to the adjusted EBITDA financial adjustments
described above, and investors should not infer from our presentation of this
non-GAAP financial measure that these costs are unusual, infrequent or
non-recurring.
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The following table reconciles our net income, the most directly comparable GAAP financial measure, to our adjusted EBITDA:

                                                                              For the Fiscal Years Ended
(In thousands)                                                July 1, 2022           July 2, 2021           July 3, 2020

Net income                                                  $      11,275          $      62,044          $      85,712
Other non-operating adjustments, net                                2,932                   (724)                (5,636)
Interest expense (income), net                                      5,663                  1,043                 (1,145)
Income tax provision                                                7,120                 15,129                  8,221
Depreciation                                                       33,150                 25,912                 18,770
Amortization of intangible assets                                  60,267                 41,171                 30,560
Restructuring and other charges(1)                                 27,445                  9,222                  1,805
Impairment of long-lived assets                                         -                      -                      -
Acquisition, financing and other third party costs(2)              13,608                  8,600                  5,645
Fair value adjustments from purchase accounting(3)                 (2,009)                  (290)                 1,801
Litigation and settlement expense, net                              1,908                    622                    944
COVID related expenses                                                689                  9,943                  2,593
Stock-based and other non-cash compensation expense                38,459                 29,224                 26,972
Adjusted EBITDA                                             $     200,507          $     201,896          $     176,242


(1) Restructuring and other charges for fiscal 2022 are related to management's
decision to undertake certain actions to realign operating expenses through
workforce reductions and the closure of certain facilities, businesses and
product lines. These charges are typically related to acquisitions and
organizational redesign programs initiated as part of discrete post-acquisition
integration activities. We believe these items are non-routine and may not be
indicative of ongoing operating results.
(2) Acquisition, financing and other third party costs for fiscal 2022 are
related to the acquisitions of Avalex and Atlanta Micro, third-party advisory
fees in connection with engagements by activist investors and costs associated
with our continuous evaluation of potential acquisition opportunities.
(3) Fair value adjustments from purchase accounting for fiscal year 2022 relate
to various adjustments arising from the Avalex and Atlanta Micro acquisitions.
Fair value adjustments from purchase accounting for fiscal year 2021 relate to
various adjustments arising from the POC acquisition. Fair value adjustments
from purchase accounting for fiscal year 2020 relate to APC inventory step-up
amortization.

Adjusted income and adjusted EPS exclude the impact of certain items and,
therefore, have not been calculated in accordance with GAAP. We believe that
exclusion of these items assists in providing a more complete understanding of
our underlying results and trends and allows for comparability with our peer
company index and industry. These non-GAAP financial measures may not be
computed in the same manner as similarly titled measures used by other
companies. We use these measures along with the corresponding GAAP financial
measures to manage our business and to evaluate our performance compared to
prior periods and the marketplace. We define adjusted income as net income
before other non-operating adjustments, amortization of intangible assets,
restructuring and other charges, impairment of long-lived assets, acquisition,
financing and other third party costs, fair value adjustments from purchase
accounting, litigation and settlement income and expense, COVID related expenses
and stock-based and other non-cash compensation expense. The impact to income
taxes includes the impact to the effective tax rate, current tax provision and
deferred tax provision. Adjusted EPS expresses adjusted income on a per share
basis using weighted average diluted shares outstanding.

Adjusted income and adjusted EPS are non-GAAP financial measures and should not
be considered in isolation or as a substitute for financial information provided
in accordance with GAAP. We expect to continue to incur expenses similar to the
adjusted income and adjusted EPS financial adjustments described above, and
investors should not infer from our presentation of these non-GAAP financial
measures that these costs are unusual, infrequent or non-recurring.


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The following table reconciles net earnings and diluted earnings per share, the most directly comparable GAAP financial measures, to adjusted earnings and adjusted EPS:

                                                                                 For the Fiscal Years Ended
(In thousands, except per share data)               July 1, 2022                        July 2, 2021                        July 3, 2020

Net earnings and diluted earnings per share $11,275 $0.20

    $  62,044          $  1.12          $  85,712          $  1.56
  Other non-operating adjustments, net          2,932                                (724)                             (5,636)
  Amortization of intangible assets            60,267                              41,171                              30,560
  Restructuring and other charges(1)           27,445                               9,222                               1,805
  Impairment of long-lived assets                   -                                   -                                   -
  Acquisition, financing and other third
party costs(2)                                 13,608                               8,600                               5,645
  Fair value adjustments from purchase
accounting(3)                                  (2,009)                               (290)                              1,801
  Litigation and settlement expense, net        1,908                                 622                                 944
  COVID related expenses                          689                               9,943                               2,593
  Stock-based and other non-cash
compensation expense                           38,459                              29,224                              26,972
  Impact to income taxes(4)                   (32,309)                            (25,697)                            (23,634)
Adjusted income and adjusted earnings per
share                                       $ 122,265          $  2.19      

$134,115 $2.42 $126,762 $2.30

Diluted weighted-average shares outstanding                     55,901                              55,474                              55,115


(1) Restructuring and other charges for fiscal 2022 are related to management's
decision to undertake certain actions to realign operating expenses through
workforce reductions and the closure of certain facilities, businesses and
product lines. These charges are typically related to acquisitions and
organizational redesign programs initiated as part of discrete post-acquisition
integration activities. We believe these items are non-routine and may not be
indicative of ongoing operating results.
(2) Acquisition, financing and other third party costs for fiscal 2022 are
related to the acquisitions of Avalex and Atlanta Micro, third-party advisory
fees in connection with engagements by activist investors and costs associated
with our continuous evaluation of potential acquisition opportunities.
(3) Fair value adjustments from purchase accounting for fiscal year 2022 relate
to various adjustments arising from the Avalex and Atlanta Micro acquisitions.
Fair value adjustments from purchase accounting for fiscal year 2021 relate to
various adjustments arising from the POC acquisition. Fair value adjustments
from purchase accounting for fiscal year 2020 relate to APC inventory step-up
amortization.
(4) Impact to income taxes is calculated by recasting income before income taxes
to include the add-backs involved in determining adjusted income and
recalculating the income tax provision using this adjusted income from
operations before income taxes. The impact to income taxes includes the impact
to the effective tax rate, current tax provision and deferred tax provision.

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash
provided by operating activities less capital expenditures for property and
equipment, which includes capitalized software development costs. We believe
free cash flow provides investors with an important perspective on cash
available for investments and acquisitions after making capital investments
required to support ongoing business operations and long-term value creation. We
believe that trends in our free cash flow can be valuable indicators of our
operating performance and liquidity.

Free cash flow is a non-GAAP financial measure and should not be considered in
isolation or as a substitute for financial information provided in accordance
with GAAP. This non-GAAP financial measure may not be computed in the same
manner as similarly titled measures used by other companies. We expect to
continue to incur expenditures similar to the free cash flow adjustment
described above, and investors should not infer from our presentation of this
non-GAAP financial measure that these expenditures reflect all of our
obligations which require cash.

The following table reconciles cash provided by operating activities, the most directly comparable GAAP financial measure, to free cash flow:

                                                                           For the Fiscal Years Ended
(In thousands)                                             July 1, 2022           July 2, 2021           July 3, 2020

Net cash (used in) provided by operating activities ($18,869)

     $      97,247          $     115,184
Purchase of property and equipment                             (27,656)               (45,599)               (43,294)
Free cash flow                                           $     (46,525)         $      51,648          $      71,890



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Organic revenue and acquired revenue are non-GAAP measures for reporting
financial performance of our business. We believe this information provides
investors with insight as to our ongoing business performance. Organic revenue
represents total company revenue excluding net revenue from acquired companies
for the first four full quarters since the entities' acquisition date (which
excludes intercompany transactions). Acquired revenue represents revenue from
acquired companies for the first four full quarters since the entities'
acquisition date (which excludes intercompany transactions). After the
completion of four full fiscal quarters, acquired revenue is treated as organic
for current and comparable historical periods.

The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure:

                                         As a % of                        As a % of
                                         Total Net                        Total Net
(In thousands)         Fiscal 2022        Revenue       Fiscal 2021       
Revenue       $ Change       % Change
Organic revenue       $    870,435            88  %    $    920,609           100  %    $ (50,174)          (5) %
Acquired revenue(1)        117,762            12  %           3,387             -  %      114,375          100  %
Total revenues        $    988,197           100  %    $    923,996           100  %    $  64,201            7  %

(1) Earned revenues for all prior periods presented have been restated for comparative purposes.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

We have identified the policies discussed below as critical to understanding our
business and our results of operations. The impact and any associated risks
related to these policies on our business operations are discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results. We believe the following critical accounting policies to be those most
important to the portrayal of our financial position and results of operations
and those that require the most subjective judgment.

REVENUE RECOGNITION

We recognize revenue at a point in time or over time as the performance
obligations are met. A performance obligation is a promise in a contract to
transfer a distinct good or service to the customer. Contracts with distinct
performance obligations recognized at a point in time, with or without an
allocation of the transaction price, totaled 45% and 58% of revenues for the
fiscal years ended July 1, 2022 and July 2, 2021, respectively. Total revenue
recognized under contracts over time was 55% and 42% of revenues for the fiscal
years ended July 1, 2022 and July 2, 2021, respectively.

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. Revenue is
recognized at a point in time for these products and services (versus over time
recognition) due to the following: (i) customers are only able to consume the
benefits provided by us upon completion of the product or service; (ii)
customers do not control the product or service prior to completion; and (iii)
we do not have an enforceable right to payment at all times for performance
completed to date. Accordingly, there is little judgment in determining when
control of the good or service transfers to the customer, and revenue is
recognized upon shipment (for goods) or completion (for services).

For contracts with multiple performance obligations, the transaction price is
allocated to each performance obligation using the standalone selling price of
each distinct good or service in the contract. Standalone selling prices of our
goods and services are generally not directly observable. Accordingly, the
primary method used to estimate standalone selling price is the expected cost
plus a margin approach, under which we forecast the expected costs of satisfying
a performance obligation and then add an appropriate margin for that distinct
good or service. The objective of the expected cost plus a margin approach is to
determine the price at which we would transact if the product or service were
sold by us on a standalone basis. Our determination of the expected cost plus a
margin approach involves the consideration of several factors based on the
specific facts and circumstances of each contract. Specifically, we consider the
cost to produce the deliverable, the anticipated margin on that deliverable, the
selling price and profit margin for similar parts, our ongoing pricing strategy
and policies, often based on the price list established and updated by
management on a regular basis, the value of any enhancements that have been
built into the deliverable and the characteristics of the varying markets in
which the deliverable is sold.

Revenue is recognized over time (versus point in time recognition) for long-term
contracts with development, production and service activities where the
performance obligations are satisfied over time. These over time contracts
involve the design, development, manufacture, or modification of complex modules
and sub-assemblies or integrated subsystems and related services. Revenue is
recognized over time, given: (i) our performance creates or enhances an asset
that the customer controls as the asset is created or enhanced; or (ii) our
performance creates an asset with no alternative use to us and (iii) we have an
enforceable right to payment for performance completed to date. We consider the
nature of these contracts and the types of products and services provided when
determining the proper accounting for a particular contract. These contracts
include both
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fixed-price and cost reimbursable contracts. Our cost reimbursable contracts
typically include cost-plus fixed fee and time and material ("T&M") contracts.
We consider whether contracts should be combined or segmented, and based on this
assessment, we combine closely related contracts when all the applicable
criteria are met. The combination of two or more contracts requires judgment in
determining whether the intent of entering into the contracts was effectively to
enter into a single contract, which should be combined to reflect an overall
profit rate. Similarly, we may separate an arrangement, which may consist of a
single contract or group of contracts, with varying rates of profitability, only
if the applicable criteria are met. Judgment also is involved in determining
whether a single contract or group of contracts may be segmented based on how
the arrangement and the related performance criteria were negotiated. The
decision to combine a group of contracts or segment a contract could change the
amount of revenue and gross profit recorded in a given period. For all types of
contracts, we recognize anticipated contract losses as soon as they become known
and estimable. These losses are recognized in advance of contract performance
and as of July 1, 2022, approximately $0.3 million of these costs were in
Accrued expenses on our Consolidated Balance Sheet.

For over time contracts, we typically leverage the input method, using a
cost-to-cost measure of progress. We believe that this method represents the
most faithful depiction of our performance because it directly measures value
transferred to the customer. Contract estimates and estimates of any variable
consideration are based on various assumptions to project the outcome of future
events that may span several years. These assumptions include: the amount of
time to complete the contract, including the assessment of the nature and
complexity of the work to be performed; the cost and availability of materials;
the availability of subcontractor services and materials; and the availability
and timing of funding from the customer. We bear the risk of changes in
estimates to complete on a fixed-price contract which may cause profit levels to
vary from period to period. For cost reimbursable contracts, we are reimbursed
periodically for allowable costs and are paid a portion of the fee based on
contract progress. In the limited instances where we enter into T&M contracts,
revenue recognized reflects the number of direct labor hours expended in the
performance of a contract multiplied by the contract billing rate, as well as
reimbursement of other direct billable costs. For T&M contracts, we elected to
use a practical expedient permitted by ASC 606 whereby revenue is recognized in
the amount for which we have a right to invoice the customer based on the
control transferred to the customer. For over time contracts, we recognize
anticipated contract losses as soon as they become known and estimable.

Accounting for over time contracts requires significant judgment relative to
estimating total contract revenues and costs, in particular, assumptions
relative to the amount of time to complete the contract, including the
assessment of the nature and complexity of the work to be performed. Our
estimates are based upon the professional knowledge and experience of our
engineers, program managers and other personnel, who review each over time
contract monthly to assess the contract's schedule, performance, technical
matters and estimated cost at completion. Changes in estimates are applied
retrospectively and when adjustments in estimated contract costs are identified,
such revisions may result in current period adjustments to earnings applicable
to performance in prior periods.

We generally do not provide our 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. We accrue for
anticipated warranty costs upon product shipment. We do not consider activities
related to such assurance warranties, if any, to be a separate performance
obligation. We 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.

On over time contracts, the portion of the payments retained by the customer is
not considered a significant financing component because most contracts have a
duration of less than one year and payment is received as progress is made. Many
of our over time contracts have milestone payments, which align the payment
schedule with the progress towards completion on the performance obligation. On
some contracts, we may be entitled to receive an advance payment, which is not
considered a significant financing component because it is used to facilitate
inventory demands at the onset of a contract and to safeguard us from the
failure of the other party to abide by some or all of their obligations under
the contract.

We define service revenues as revenue from activities that are not associated
with the design, development, production, or delivery of tangible assets,
software or specific capabilities sold by us. Examples of our service revenues
include: analyst services and systems engineering support, consulting,
maintenance and other support, testing and installation. We combine our product
and service revenues into a single class as services revenues are less than 10
percent of total revenues.

INVENTORY EVALUATION

We value our inventory at the lower of cost (first-in, first-out) or its net
realizable value. We write down inventory for excess and obsolescence based upon
assumptions about future demand, product mix and possible alternative uses.
Actual demand, product mix and alternative usage may be higher or lower
resulting in variations in on our gross margin.

INCOME TAXES

The determination of income tax expense requires us to make certain estimates
and judgments concerning the calculation of deferred tax assets and liabilities,
as well as the deductions and credits that are available to reduce taxable
income. We
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recognize deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in our consolidated financial
statements. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates for the year in which the
differences are expected to reverse.

In evaluating our ability to recover deferred tax assets, we consider all
available positive and negative evidence, including our past operating results,
our forecast of future earnings, future taxable income and tax planning
strategies. The assumptions utilized in determining future taxable income
require significant judgment. We record a valuation allowance against deferred
tax assets if, based upon the available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. If it becomes
more likely than not that a tax asset will be used for which a reserve has been
provided, we reverse the related valuation allowance. If our actual future
taxable income by tax jurisdiction differs from estimates, additional allowances
or reversals of reserves may be necessary.

We use a two-step approach to recognize and measure uncertain tax positions.
First, the tax position must be evaluated to determine the likelihood that it
will be sustained upon external examination. If the tax position is deemed
more-likely-than-not to be sustained, the tax position is then assessed to
determine the amount of benefit to recognize in the financial statements. The
amount of the benefit that may be recognized is the largest amount that has a
greater than 50% likelihood of being realized upon ultimate settlement. We
reevaluate our uncertain tax positions on a quarterly basis and any changes to
these positions as a result of tax audits, tax laws or other facts and
circumstances could result in additional charges to operations.

BUSINESS COMBINATIONS

We utilize the acquisition method of accounting for business combinations and
allocate the purchase price of an acquisition to the various tangible and
intangible assets acquired and liabilities assumed based on their estimated fair
values. We primarily establish fair value using the income approach based upon a
discounted cash flow model. The income approach requires the use of many
assumptions and estimates including future revenues and expenses, as well as
discount factors and income tax rates. Other estimates include:

•projected increases in fixed assets under open-ended contracts, lease rights and inventories;

•the estimated fair values ​​of intangible assets; and

•the estimated tax assets and liabilities assumed by the acquired company.

While we use our best estimates and assumptions as part of the purchase price
allocation process to accurately value assets acquired and liabilities assumed
at the business acquisition date, our estimates and assumptions are inherently
uncertain and subject to refinement. As a result, during the purchase price
allocation period, which is generally one year from the business acquisition
date, we record adjustments to the assets acquired and liabilities assumed, with
the corresponding offset to goodwill. For changes in the valuation of intangible
assets between preliminary and final purchase price allocation, the related
amortization is adjusted in the period it occurs. Subsequent to the purchase
price allocation period any adjustment to assets acquired or liabilities assumed
is included in operating results in the period in which the adjustment is
determined.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note B to the consolidated financial statements (under “Recently Issued Accounting Pronouncements”).

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

See Note B to the Consolidated Financial Statements (under “Recently Adopted Accounting Pronouncements”).

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