UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
| | | | |
x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2017For the quarterly period ended December 27, 2019
OR
|
| | | | |
¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TOFor the transition period from to
COMMISSION FILE NUMBER: 0-23599
MERCURY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
|
| | | | | | | | | | |
MASSACHUSETTSMassachusetts | | | 04-2741391 |
(State or other jurisdiction of incorporation or organization)
| |
| (I.R.S. Employer Identification No.)
|
| | | |
50 MINUTEMAN ROAD ANDOVER, MA
| | | 01810 |
ANDOVER | MA | | |
(Address of principal executive offices) | | | (Zip Code) |
978-256-1300
(Registrant’s telephone number, including area code)
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
Large Accelerated Filer | | x | | Accelerated filer | | ¨
|
| | | | | | |
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
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, par value $0.01 per share | MRCY | The Nasdaq Stock Market |
Shares of Common Stock outstanding as of January 31, 2018: 48,242,5902020 55,588,707 shares
MERCURY SYSTEMS, INC.
INDEX
| | | | | | | | |
| | PAGE NUMBER |
PART I. FINANCIAL INFORMATION | | |
| | |
| Item 1. | PAGE
NUMBER
|
PART I. FINANCIAL INFORMATION | |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
| | |
Item 3. | | |
| | |
Item 4. | | |
| | |
PART II. OTHER INFORMATION | | |
| | |
Item 1. | | |
| | |
Item 1A. | | |
| | |
Item 6. | | |
| | |
| | |
PART I. FINANCIAL INFORMATION
| |
ITEM 1. | FINANCIAL STATEMENTS |
ITEM 1. FINANCIAL STATEMENTS MERCURY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | | December 31, 2017 | | June 30, 2017 | | December 27, 2019 | | June 30, 2019 |
Assets | | | | Assets | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 32,035 |
| | $ | 41,637 |
| Cash and cash equivalents | $ | 182,037 | | | $ | 257,932 | |
Accounts receivable, net of allowance for doubtful accounts of $52 and $83 at December 31, 2017 and June 30, 2017, respectively | 87,315 |
| | 76,341 |
| |
Accounts receivable, net of allowance for doubtful accounts of $1,070 and $1,228 at December 27, 2019 and June 30, 2019, respectively | | Accounts receivable, net of allowance for doubtful accounts of $1,070 and $1,228 at December 27, 2019 and June 30, 2019, respectively | 132,072 | | | 118,832 | |
Unbilled receivables and costs in excess of billings | 35,655 |
| | 37,332 |
| Unbilled receivables and costs in excess of billings | 61,302 | | | 57,387 | |
Inventory | 105,912 |
| | 81,071 |
| Inventory | 153,642 | | | 137,112 | |
| Prepaid income taxes | 15 |
| | 1,434 |
| Prepaid income taxes | 5,454 | | | 90 | |
Prepaid expenses and other current assets | 7,970 |
| | 8,381 |
| Prepaid expenses and other current assets | 10,602 | | | 10,819 | |
| Total current assets | 268,902 |
| | 246,196 |
| Total current assets | 545,109 | | | 582,172 | |
| Property and equipment, net | 51,640 |
| | 51,643 |
| Property and equipment, net | 72,696 | | | 60,001 | |
Goodwill | 384,785 |
| | 380,846 |
| Goodwill | 614,648 | | | 562,146 | |
Intangible assets, net | 120,672 |
| | 129,037 |
| Intangible assets, net | 224,507 | | | 206,124 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 49,826 | | | — | |
Other non-current assets | 9,817 |
| | 8,023 |
| Other non-current assets | 5,834 | | | 6,534 | |
| Total assets | $ | 835,816 |
| | $ | 815,745 |
| Total assets | $ | 1,512,620 | | | $ | 1,416,977 | |
Liabilities and Shareholders’ Equity | | | | Liabilities and Shareholders’ Equity | | | |
Current liabilities: | | | | Current liabilities: | | |
Accounts payable | $ | 37,628 |
| | $ | 27,485 |
| Accounts payable | $ | 35,988 | | | $ | 39,030 | |
Accrued expenses | 10,427 |
| | 20,594 |
| Accrued expenses | 23,906 | | | 18,897 | |
Accrued compensation | 17,781 |
| | 18,406 |
| Accrued compensation | 31,372 | | | 28,814 | |
| Deferred revenues and customer advances | 8,440 |
| | 6,360 |
| Deferred revenues and customer advances | 16,618 | | | 11,291 | |
| Total current liabilities | 74,276 |
| | 72,845 |
| Total current liabilities | 107,884 | | | 98,032 | |
| Deferred income taxes | — |
| | 4,856 |
| Deferred income taxes | 18,406 | | | 17,814 | |
Income taxes payable | 855 |
| | 855 |
| Income taxes payable | 1,397 | | | 1,273 | |
| Operating lease liabilities | | Operating lease liabilities | 55,257 | | | — | |
Other non-current liabilities | 11,454 |
| | 11,772 |
| Other non-current liabilities | 12,620 | | | 15,119 | |
| Total liabilities | 86,585 |
| | 90,328 |
| Total liabilities | 195,564 | | | 132,238 | |
Commitments and contingencies (Note M) |
|
| |
|
| Commitments and contingencies (Note M) | | |
Shareholders’ equity: | | | | Shareholders’ equity: | | |
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding | — |
| | — |
| 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; 46,833,499 and 46,303,075 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively | 468 |
| | 463 |
| |
Common stock, $0.01 par value; 85,000,000 shares authorized; 54,557,551 and 54,247,532 shares issued and outstanding at December 27, 2019 and June 30, 2019, respectively | | Common stock, $0.01 par value; 85,000,000 shares authorized; 54,557,551 and 54,247,532 shares issued and outstanding at December 27, 2019 and June 30, 2019, respectively | 545 | | | 542 | |
Additional paid-in capital | 581,534 |
| | 584,795 |
| Additional paid-in capital | 1,056,238 | | | 1,058,745 | |
Retained earnings | 166,171 |
| | 139,085 |
| Retained earnings | 261,666 | | | 226,743 | |
Accumulated other comprehensive income | 1,058 |
| | 1,074 |
| |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (1,393) | | | (1,291) | |
Total shareholders’ equity | 749,231 |
| | 725,417 |
| Total shareholders’ equity | 1,317,056 | | | 1,284,739 | |
Total liabilities and shareholders’ equity | $ | 835,816 |
| | $ | 815,745 |
| Total liabilities and shareholders’ equity | $ | 1,512,620 | | | $ | 1,416,977 | |
The accompanying notes are an integral part of the consolidated financial statements.
MERCURY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
| | | | Three Months Ended December 31, | | Six Months Ended December 31, | | | | Second Quarters Ended | | | Six Months Ended | |
| | 2017 | | 2016 | | 2017 | | 2016 | | | | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 | |
Net revenues | | $ | 117,912 |
| | $ | 98,014 |
| | $ | 223,981 |
| | $ | 185,663 |
| | Net revenues | | $ | 193,913 | | | $ | 159,089 | | | $ | 371,217 | | | $ | 303,145 | | |
Cost of revenues | | 63,752 |
| | 50,625 |
| | 119,147 |
| | 98,830 |
| | Cost of revenues | | 105,407 | | | 88,202 | | | 204,311 | | | 170,675 | | |
Gross margin | | 54,160 |
| | 47,389 |
| | 104,834 |
| | 86,833 |
| | Gross margin | | 88,506 | | | 70,887 | | | 166,906 | | | 132,470 | | |
Operating expenses: | | | | | | | | | | Operating expenses: | | |
Selling, general and administrative | | 21,222 |
| | 19,320 |
| | 41,790 |
| | 36,864 |
| | Selling, general and administrative | | 32,804 | | | 27,819 | | | 62,774 | | | 52,560 | | |
Research and development | | 15,187 |
| | 13,156 |
| | 28,929 |
| | 25,994 |
| | Research and development | | 24,660 | | | 16,192 | | | 46,530 | | | 31,140 | | |
Amortization of intangible assets | | 5,827 |
| | 4,888 |
| | 11,464 |
| | 9,490 |
| | Amortization of intangible assets | | 7,992 | | | 6,939 | | | 15,011 | | | 14,120 | | |
Restructuring and other charges | | 313 |
| | 69 |
| | 408 |
| | 366 |
| | Restructuring and other charges | | 1,101 | | | 23 | | | 1,749 | | | 527 | | |
| Acquisition costs and other related expenses | | 723 |
| | 998 |
| | 984 |
| | 1,419 |
| | Acquisition costs and other related expenses | | 1,124 | | | 53 | | | 2,541 | | | 452 | | |
Total operating expenses | | 43,272 |
| | 38,431 |
| | 83,575 |
| | 74,133 |
| | Total operating expenses | | 67,681 | | | 51,026 | | | 128,605 | | | 98,799 | | |
Income from operations | | 10,888 |
| | 8,958 |
| | 21,259 |
| | 12,700 |
| | Income from operations | | 20,825 | | | 19,861 | | | 38,301 | | | 33,671 | | |
Interest income | | 3 |
| | 10 |
| | 22 |
| | 50 |
| | Interest income | | 312 | | | 71 | | | 1,499 | | | 137 | | |
Interest expense | | (107 | ) | | (1,898 | ) | | (110 | ) | | (3,720 | ) | | Interest expense | | — | | | (2,196) | | | — | | | (4,455) | | |
Other (expense) income, net | | (316 | ) | | (87 | ) | | (1,131 | ) | | 513 |
| | |
Other expense, net | | Other expense, net | | (351) | | | (870) | | | (1,785) | | | (1,879) | | |
Income before income taxes | | 10,468 |
| | 6,983 |
| | 20,040 |
| | 9,543 |
| | Income before income taxes | | 20,786 | | | 16,866 | | | 38,015 | | | 27,474 | | |
Tax provision (benefit) | | 1,335 |
| | 1,779 |
| | (7,046 | ) | | 520 |
| | |
Tax provision | | Tax provision | | 5,110 | | | 4,483 | | | 3,092 | | | 7,612 | | |
| Net income | | $ | 9,133 |
| | $ | 5,204 |
| | $ | 27,086 |
| | $ | 9,023 |
| | Net income | | $ | 15,676 | | | $ | 12,383 | | | $ | 34,923 | | | $ | 19,862 | | |
| Basic net earnings per share | | $ | 0.20 |
| | $ | 0.13 |
| | $ | 0.58 |
| | $ | 0.23 |
| | Basic net earnings per share | | $ | 0.29 | | | $ | 0.26 | | | $ | 0.64 | | | $ | 0.42 | | |
| Diluted net earnings per share | | $ | 0.19 |
| | $ | 0.13 |
| | $ | 0.57 |
| | $ | 0.23 |
| | Diluted net earnings per share | | $ | 0.29 | | | $ | 0.26 | | | $ | 0.63 | | | $ | 0.42 | | |
| | | | | | | | | | | | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | | | Weighted-average shares outstanding: | | |
Basic | | 46,752 |
| | 39,151 |
| | 46,701 |
| | 39,004 |
| | Basic | | 54,548 | | | 47,189 | | | 54,468 | | | 47,118 | | |
Diluted | | 47,447 |
| | 39,985 |
| | 47,538 |
| | 39,920 |
| | Diluted | | 55,001 | | | 47,705 | | | 55,037 | | | 47,696 | | |
| | | | | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | Comprehensive income: | | |
Net income | | $ | 9,133 |
| | $ | 5,204 |
| | $ | 27,086 |
| | $ | 9,023 |
| | Net income | | $ | 15,676 | | | $ | 12,383 | | | $ | 34,923 | | | $ | 19,862 | | |
| Foreign currency translation adjustments | | 22 |
| | (341 | ) | | (56 | ) | | (333 | ) | | Foreign currency translation adjustments | | (192) | | | 205 | | | (117) | | | (157) | | |
Pension benefit plan, net of tax | | 10 |
| | — |
| | 40 |
| | — |
| | Pension benefit plan, net of tax | | 8 | | | (15) | | | 15 | | | (30) | | |
Total other comprehensive income, net of tax | | 32 |
| | (341 | ) | | (16 | ) | | (333 | ) | | |
Total other comprehensive (loss) income, net of tax | | Total other comprehensive (loss) income, net of tax | | (184) | | | 190 | | | (102) | | | (187) | | |
Total comprehensive income | | $ | 9,165 |
| | $ | 4,863 |
| | $ | 27,070 |
| | $ | 8,690 |
| | Total comprehensive income | | $ | 15,492 | | | $ | 12,573 | | | $ | 34,821 | | | $ | 19,675 | | |
The accompanying notes are an integral part of the consolidated financial statements.
MERCURY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Second Quarter Ended December 27, 2019
| | | | | | | | | | |
| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at September 27, 2019 | 54,534 | | | $ | 545 | | | $ | 1,049,952 | | | $ | 245,990 | | | $ | (1,209) | | | $ | 1,295,278 | |
Issuance of common stock under employee stock incentive plans | 29 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Purchase and retirement of common stock | (5) | | | — | | | (375) | | | — | | | — | | | (375) | |
Stock-based compensation | — | | | — | | | 6,661 | | | — | | | — | | | 6,661 | |
Net income | — | | | — | | | — | | | 15,676 | | | — | | | 15,676 | |
| | | | | | | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (184) | | | (184) | |
| | | | | | | | | | | |
Balance at December 27, 2019 | 54,558 | | | $ | 545 | | | $ | 1,056,238 | | | $ | 261,666 | | | $ | (1,393) | | | $ | 1,317,056 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Second Quarter Ended December 31, 2018 | | | | | | | | | | |
| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Shareholders’ Equity |
| Shares | | Amount | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at September 30, 2018 | 47,169 | | | $ | 472 | | | $ | 587,788 | | | $ | 187,447 | | | $ | 914 | | | $ | 776,621 | |
Issuance of common stock under employee stock incentive plans | 32 | | | — | | | | — | | | | — | | | | — | | | | — | |
Issuance of common stock under employee stock purchase plan | 51 | | | 1 | | | | 1,676 | | | | — | | | | — | | | | 1,677 | |
Purchase and retirement of common stock | (3) | | | (1) | | | | (119) | | | | — | | | | — | | | | (120) | |
Stock-based compensation | — | | | — | | | | 5,325 | | | | — | | | | — | | | | 5,325 | |
Net income | — | | | — | | | | — | | | | 12,383 | | | | — | | | | 12,383 | |
| | | | | | | | | | | |
Other comprehensive income | — | | | — | | | | — | | | | — | | | | 190 | | | | 190 | |
| | | | | | | | | | | |
Balance at December 31, 2018 | 47,249 | | | $ | 472 | | | $ | 594,670 | | | $ | 199,830 | | | $ | 1,104 | | | $ | 796,076 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended December 27, 2019 | | | | | | | | | | |
| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | | | | | |
Balance at June 30, 2019 | 54,248 | | | $ | 542 | | | $ | 1,058,745 | | | $ | 226,743 | | | $ | (1,291) | | | $ | 1,284,739 | |
Issuance of common stock under employee stock incentive plans | 491 | | | 5 | | | (2) | | | — | | | — | | | 3 | |
| | | | | | | | | | | |
Purchase and retirement of common stock | (181) | | | (2) | | | (14,935) | | | — | | | — | | | (14,937) | |
Stock-based compensation | — | | | — | | | 12,430 | | | — | | | — | | | 12,430 | |
Net income | — | | | — | | | — | | | 34,923 | | | — | | | 34,923 | |
| | | | | | | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (102) | | | (102) | |
| | | | | | | | | | | |
Balance at December 27, 2019 | 54,558 | | | $ | 545 | | | $ | 1,056,238 | | | $ | 261,666 | | | $ | (1,393) | | | $ | 1,317,056 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended December 31, 2018 | | | | | | | | | | |
| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Shareholders’ Equity |
| Shares | | Amount | | | | | | | | |
Balance at June 30, 2018 | 46,924 | | | $ | 469 | | | $ | 590,163 | | | $ | 179,968 | | | $ | 1,291 | | | $ | 771,891 | |
Issuance of common stock under employee stock incentive plans | 414 | | | 4 | | | (4) | | | — | | | — | | | — | |
Issuance of common stock under employee stock purchase plan | 51 | | | 1 | | | 1,676 | | | — | | | — | | | 1,677 | |
Purchase and retirement of common stock | (140) | | | (2) | | | (6,930) | | | — | | | — | | | (6,932) | |
Stock-based compensation | — | | | — | | | 9,765 | | | — | | | — | | | 9,765 | |
Net income | — | | | — | | | — | | | 19,862 | | | — | | | 19,862 | |
| | | | | | | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (187) | | | (187) | |
| | | | | | | | | | | |
Balance at December 31, 2018 | 47,249 | | | $ | 472 | | | $ | 594,670 | | | $ | 199,830 | | | $ | 1,104 | | | $ | 796,076 | |
The accompanying notes are an integral part of the consolidated financial statements.
MERCURY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | Six Months Ended December 31, | | | Six Months Ended | |
| 2017 | | 2016 | | | December 27, 2019 | | December 31, 2018 |
Cash flows from operating activities: | | | | Cash flows from operating activities: | | | | |
Net income | $ | 27,086 |
| | $ | 9,023 |
| Net income | | $ | 34,923 | | | $ | 19,862 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization expense | 18,939 |
| | 15,176 |
| Depreciation and amortization expense | | 23,928 | | | 23,254 | |
Stock-based compensation expense | 9,448 |
| | 7,725 |
| Stock-based compensation expense | | 12,190 | | | 9,963 | |
Benefit for deferred income taxes | (4,833 | ) | | (1,002 | ) | |
Non-cash interest expense | — |
| | 935 |
| |
Provision (benefit) for deferred income taxes | | Provision (benefit) for deferred income taxes | | 593 | | | (1,943) | |
| Other non-cash items | 847 |
| | (341 | ) | Other non-cash items | | 1,255 | | | 2,144 | |
Changes in operating assets and liabilities, net of effects of businesses acquired: | | | | Changes in operating assets and liabilities, net of effects of businesses acquired: | |
Accounts receivable, unbilled receivables, and costs in excess of billings | (9,181 | ) | | 1,189 |
| Accounts receivable, unbilled receivables, and costs in excess of billings | | (13,512) | | | (20,845) | |
Inventory | (22,455 | ) | | (3,882 | ) | Inventory | | (5,371) | | | (9,422) | |
Prepaid income taxes | 1,414 |
| | (1,623 | ) | Prepaid income taxes | | (5,356) | | | 2,995 | |
Prepaid expenses and other current assets | (1,970 | ) | | 376 |
| Prepaid expenses and other current assets | | 1,137 | | | (340) | |
Other non-current assets | (2,507 | ) | | (97 | ) | Other non-current assets | | (63) | | | 118 | |
Accounts payable and accrued expenses | 11,597 |
| | (1,903 | ) | |
Accounts payable, accrued expenses, and accrued compensation | | Accounts payable, accrued expenses, and accrued compensation | | (425) | | | 7,215 | |
Deferred revenues and customer advances | 1,976 |
| | (1,310 | ) | Deferred revenues and customer advances | | 6,650 | | | 9,480 | |
Income taxes payable | (11,284 | ) | | 305 |
| Income taxes payable | | (2,803) | | | 1,872 | |
Other non-current liabilities | (2,270 | ) | | (50 | ) | Other non-current liabilities | | 3,230 | | | 977 | |
Net cash provided by operating activities | 16,807 |
| | 24,521 |
| Net cash provided by operating activities | | 56,376 | | | 45,330 | |
Cash flows from investing activities: | | | | Cash flows from investing activities: | | | | |
Acquisition of business, net of cash acquired | (5,798 | ) | | (38,764 | ) | Acquisition of business, net of cash acquired | | (96,502) | | | (45,029) | |
Purchases of property and equipment | (7,592 | ) | | (13,753 | ) | Purchases of property and equipment | | (20,919) | | | (10,802) | |
Other investing activities | (375 | ) | | (111 | ) | |
| Net cash used in investing activities | (13,765 | ) | | (52,628 | ) | Net cash used in investing activities | | (117,421) | | | (55,831) | |
Cash flows from financing activities: | | | | Cash flows from financing activities: | | | | |
Proceeds from employee stock plans | 2,049 |
| | 2,733 |
| Proceeds from employee stock plans | | 3�� | | | 1,677 | |
Payments for retirement of common stock | (14,909 | ) | | (7,560 | ) | |
Payments under credit facilities | (15,000 | ) | | (2,500 | ) | |
Purchase and retirement of common stock | | Purchase and retirement of common stock | | (14,937) | | | (6,932) | |
| Borrowings under credit facilities | 15,000 |
| | — |
| Borrowings under credit facilities | | — | | | 45,000 | |
Net cash used in financing activities | (12,860 | ) | | (7,327 | ) | |
Payments of deferred financing and offering costs | | Payments of deferred financing and offering costs | | — | | | (1,851) | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (14,934) | | | 37,894 | |
Effect of exchange rate changes on cash and cash equivalents | 216 |
| | (72 | ) | Effect of exchange rate changes on cash and cash equivalents | | 84 | | | (11) | |
Net decrease in cash and cash equivalents | (9,602 | ) | | (35,506 | ) | |
Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | | (75,895) | | | 27,382 | |
Cash and cash equivalents at beginning of period | 41,637 |
| | 81,691 |
| Cash and cash equivalents at beginning of period | | 257,932 | | | 66,521 | |
Cash and cash equivalents at end of period | $ | 32,035 |
| | $ | 46,185 |
| Cash and cash equivalents at end of period | | $ | 182,037 | | | $ | 93,903 | |
Cash paid during the period for: | | | | Cash paid during the period for: | | | | |
Interest | $ | 111 |
| | $ | 2,785 |
| Interest | | $ | — | | | $ | 5,648 | |
Income taxes | $ | 9,928 |
| | $ | 2,731 |
| Income taxes | | $ | 10,454 | | | $ | 4,308 | |
Supplemental disclosures—non-cash activities: | | | | |
Non-cash investing activity | $ | — |
| | $ | 1,816 |
| |
|
The accompanying notes are an integral part of the consolidated financial statements.
MERCURY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share data)
(Unaudited)
| |
A. | Description of Business |
A.Description of Business
Mercury Systems, Inc. (the “Company” or “Mercury”) is a leading commercial providerthe leader in making trusted, secure mission-critical technologies profoundly more accessible to aerospace and defense. Operating at the intersection of secure sensorhigh-tech and safety critical mission processing subsystems. Optimized for customerdefense, Mercury specializes in engineering, adapting and mission success, itsmanufacturing purpose-built solutions to meet current and emerging high-tech needs. Mercury’s innovative solutions power a wide variety of criticalmore than 300 mission-critical aerospace, commercial aviation, defense, security and intelligence programs. programs, including Aegis, Patriot, LTAMDS, SEWIP, F-35, JLTV, Global Hawk and Stormbreaker, delivering Innovation That Matters®.
Headquartered in Andover, Massachusetts, it is pioneeringMA, Mercury has pioneered a next-generationtransformational defense electronics business model specifically designed to meet the industry's currentprovide end-users with trusted and emergingsecure leading-edge technology, affordably and business needs. The Company delivers affordable innovative solutions, rapid time-to-valuewith significantly shorter lead times. Mercury’s relationships with key commercial processing technology providers, such as Intel, NVIDIA and service and support primarilyXilinx, coupled with its commitment to defense prime contractor customers. The Company's products and solutions have been deployed in more than 300 programs with over 25 different defense prime contractors. Key programs include Aegis, Patriot, Surface Electronic Warfare Improvement Program ("SEWIP"open standards architecture (“OSA”), Gorgon Stare, Predator, F-16 SABR, F-35, E2D Hawkeye, Reaper and Paveway. The Company's organizational structure allowsallow it to develop products that are optimized for customer success and upgradeability. A proven portfolio of advanced capability, a demonstrated model for accelerated development and a commitment to its cultures and values, uniquely position Mercury to deliver capabilitiesInnovation That Matters® from chip-scale to system-scale.
Investors and others should note that combine technology building blocksthe Company announces material financial information using its website (www.mrcy.com), SEC filings, press releases, public conference calls, webcasts, and deep domain expertisesocial 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 aerospaceinformation the Company posts on the social media and defense sector.other communication channels listed on its website.
| |
B. | Summary of Significant Accounting Policies |
B. Summary of Significant Accounting Policies
BASISOF PRESENTATION
The accompanying consolidated financial statements have been prepared by the Company in accordance with Generally Accepted Accounting Principles ("GAAP"(“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 June 30, 20172019 which are contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on August 18, 2017.15, 2019. The results for the threesecond quarter and six months ended December 31, 201727, 2019 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.
Effective July 1, 2019, the Company's fiscal year has changed to the 52-week or 53-week period ending on the Friday closest to the last day in June. All references to the second quarter of fiscal 2020 are to the quarter ending December 27, 2019. There were 13-weeks during the second quarters ended December 27, 2019 and December 31, 2018, respectively. There were approximately 26-weeks during the six months ended December 27, 2019 and December 31, 2018, respectively. There have been no reclassifications of prior comparable periods due to this change.
USEOF 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 FASB ASC 805, Business Combinations, (“FASB ASC 805”), for all transactions and events 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 FASB ASC 805 for the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in business combinations.
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) income (“AOCI”) in shareholders’ equity. Gains (losses) resulting from non-U.S. currency transactions are included in other income (expense),expense, net in the Consolidated Statements of Operations and Comprehensive Income and were immaterial for all periods presented.
LEASES
ACCOUNTS RECEIVABLE FACTORING
On December 21, 2017,Effective July 1, 2019, the Company executedadopted ASC 842, Leases, (“ASC 842”), which requires lessees to recognize a Master Receivables Purchase Agreement (the “Purchase Agreement”right-of-use (“ROU”) with Bank of America, N.A. (the “Bank”)asset and lease liability for the sale of certain eligible accounts receivable balances of the Company, up to a maximum of $30,000. Factoring under the Purchase Agreement is treated as a true sale of accounts receivable by the Company.most lease arrangements. The Company has adopted ASC 842 using the optional transition method and, as a continued involvementresult, there have been no reclassifications of prior comparable periods due to this adoption.
The Company has arrangements involving the lease of facilities, machinery and equipment. Under ASC 842, at inception of the arrangement, the Company determines whether the contract is or contains a lease and whether the lease should be classified as an operating or a financing lease. This determination, among other considerations, involves an assessment of whether the Company can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset.
The Company recognizes ROU assets and lease liabilities as of the lease commencement date based on the net present value of the future minimum lease payments over the lease term. ASC 842 requires lessees to use the rate implicit in servicing accounts receivable under the Purchase Agreement, butlease unless it is not readily determinable and then it may use its incremental borrowing rate (“IBR”) to discount the future minimum lease payments. Most of the Company's lease arrangements do not provide an implicit rate; therefore, the Company uses its IBR to discount the future minimum lease payments. The Company determines its IBR with its credit rating and current economic information available as of the commencement date, as well as the identified lease term. During the assessment of the lease term, the Company considers its renewal options and extensions within the arrangements and the Company includes these options when it is reasonably certain to extend the term of the lease.
The Company has no significant retained interests relatedlease arrangements with both lease and non-lease components. Consideration is allocated to lease and non-lease components based on estimated standalone prices. The Company has elected to exclude non-lease components from the calculation of its ROU assets and lease liabilities. In the Company's adoption of ASC 842, leases with an initial term of 12 months or less will not result in recognition of a ROU asset and a lease liability and will be expensed as incurred over the lease term. Leases of this nature were immaterial to the factored accounts receivable. Company’s consolidated financial statements.
Proceeds from amounts factoredThe Company has lease arrangements that contain incentives for tenant improvements as well as fixed rent escalation clauses. For contracts with tenant improvement incentives that are determined to be a leasehold improvement that will be owned by the lessee and the Company are recorded as an increaseis reasonably certain to cash andexercise, it records a reduction to accounts receivable outstandingthe lease liability and amortizes the incentive over the identified term of the lease as a reduction to rent expense. The Company records rental expense on a straight-line basis over the identified lease term on contracts with rent escalation clauses.
Finance leases are not material to the Company's consolidated financial statements and the Company is not a lessor in any material lease arrangements. There are no material restrictions, covenants, sale and leaseback transactions, variable lease payments or residual value guarantees in the consolidated balance sheets. Cash flows attributable to factoring are reflected as cash flows from operating activities in the Company’s consolidated statements of cash flows. Factoring fees are included as selling, general, and administrative expenses in the Company’s consolidated statements of operations and comprehensive income.
The Company factored accounts receivable and incurred factoring fees of $18,821 and $69, respectively, for the three and six months ended December 31, 2017.
REVENUE RECOGNITION
The Company relies upon FASB ASC 605, Revenue Recognition, to account for its revenue transactions. Revenue is recognized upon shipment provided that title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured, and customer acceptance criteria, if any, have been successfully demonstrated. Out-of-pocket expenses that are reimbursable by the customerCompany's lease arrangements. Operating leases are included in revenueOperating lease right-of-use assets, Accrued expenses, and costOperating lease liabilities in the Company's Consolidated Balance Sheets. The standard had no impact on the Company's Consolidated Statements of revenue.Operations and Comprehensive Income or Consolidated Statements of Cash Flows. See Note N to the consolidated financial statements for more information regarding the adoption of this standard.
Certain contracts with customers require the Company to perform tests of its products prior to shipment to ensure their performance complies with the Company’s published product specifications and, on occasion, with additional customer-requested specifications. In these cases, the Company conducts such tests and, if they are completed successfully, includes a written confirmation with each order shipped. As a result, at the time of each product shipment, the Company believes that no further customer testing requirements exist and that there is no uncertainty of acceptance by its customer.REVENUE RECOGNITION
The Company uses FASB Accounting Standards Update ("ASU") No. 2009-13 (“FASB ASU 2009-13”)recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, Multiple-Deliverable Revenue Arrangements(“ASC 606”). FASB ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence (“VSOE”) if available; (2) third-party evidence (“TPE”) if VSOE is not available; and (3) best estimated selling price (“BESP”), if neither VSOE nor TPE is available. Additionally, FASB ASU 2009-13 expands the disclosure requirements related to a vendor’s multiple-deliverable revenue arrangements.
The Company entersis a leading commercial provider of secure sensor and safety-critical mission processing subsystems. Revenues are derived from the sales of products that are grouped into multiple-deliverable arrangements that may include a combinationone of hardware components, related integration or other services. These arrangements generally do not include any performance-, cancellation-, termination- or refund-type provisions. Total revenue recognized under multiple-deliverable revenue arrangements was 37%the following three categories: (i) components; (ii) modules and 38% of total revenue in the threesub-assemblies; and six months ended December 31, 2017, respectively. Total revenue recognized under multiple-deliverable revenue arrangements was 23% and 29% of total revenues in the three and six months ended December 31, 2016, respectively.
In accordance with the provisions of FASB ASU 2009-13, the Company allocates arrangement consideration to each deliverable in an arrangement based on its relative selling price.(iii) integrated subsystems. The Company generally expects that it will not be able to establish VSOE or TPE due to limited single element transactionsalso generates revenues from the performance of services, including systems engineering support, consulting, maintenance and the nature of the markets in which the Company competes,other support, testing and as such, the Company typically determines its relative selling price using BESP. The objective of BESP is to determine the price at which the Company would transact if the productinstallation. Each promised good or service were sold by the Company onwithin a standalone basis.
The Company's determination of BESP involves the consideration of several factors based on the specific facts and circumstances of each arrangement. Specifically, the Company considers the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, the Company’s ongoing pricing strategy and policies (as evident from 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.
The Company analyzes the selling prices used in its allocation of arrangement consideration at a minimum on an annual basis. Selling prices will be analyzed on a more frequent basis if a significant change in the Company’s business necessitates a more timely analysis or if the Company experiences significant variances in its selling prices.
Each deliverable within the Company’s multiple-deliverable revenue arrangementscontract is accounted for as a separate unit of accountingseparately under the guidance of FASB ASU 2009-13ASC 606 if both of the following criteriathey are met: the delivered itemdistinct. Promised goods or items have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The Company's revenue arrangements generally do not include a general right of return relative to delivered products. The Company
considers a deliverable to have standalone value if the item is sold separately by the Company or another vendor or if the item could be resold by the customer.
Deliverablesservices not meeting the criteria for being a separate unit of accountingdistinct performance obligation are combined bundled into a single performance obligation
with a deliverableother goods or services that doestogether meet that criterion.the criteria for being distinct. The appropriate allocation of arrangement considerationthe transaction price and recognition of revenue is then determined for the combined unitbundled performance obligation.
Revenue recognized at a point in time generally relates to contracts that include a combination of accounting.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 79% and 76% of revenues for the second quarter and six months ended December 27, 2019, respectively. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 76% and 78% of revenues for the second quarter and six months ended December 31, 2018, respectively.
The Company also engages in long-term contracts for development, production and servicesservice activities which it accountsand recognizes revenue for consistent with FASB ASC 605-35, Accounting for Performanceperformance obligations over time. These long-term contracts involve the design, development, manufacture, or modification of Construction-Typecomplex modules and Certain Production-Type Contracts,sub-assemblies or integrated subsystems and other relevant revenue recognition accounting literature.related services. Long-term contracts include both fixed-price and cost reimbursable contracts. The Company considers the nature of theseCompany’s cost reimbursable contracts typically include cost-plus fixed fee and the types of products and services provided when determining the proper accounting for a particular contract. Generally for fixed-price contracts, other than service-type contracts, revenue is recognized primarily under the percentage of completion method or, for certain short-term contracts, by the completed contract method. Revenue from service-type fixed-price contracts is recognized ratably over the contract period or by other appropriate input or output methods to measure service provided, and contract costs are expensed as incurred. The Company establishes billing terms at the time project deliverables and milestones are agreed. The risk to the Company on a fixed-price contract is that if estimates to complete the contract change from one period to the next, profit levels will vary from period to period. For time and materialsmaterial contracts.
Total revenue recognized under long-term contracts over time was 21% and 24% of total revenues for the second quarter and six months ended December 27, 2019, respectively. Total revenue reflectsrecognized under long-term contracts over time was 24% and 22% of total revenues for 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 billable direct costs. For all types of contracts, the Company recognizes anticipated contract losses as soon as they become knownsecond quarter and estimable.six months ended and December 31, 2018, respectively.
The Company also considers whether contracts should be combined or segmented in accordance with the applicable criteria under GAAP. The Company combines closely related contracts when all the applicable criteria under GAAP 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 project, which should be combined to reflect an overall profit rate. Similarly, the Company may separate a project, which may consist of a single contract or group of contracts, with varying rates of profitability, only if the applicable criteria under GAAP are met. Judgment also is involved in determining whether a single contract or group of contracts may be segmented based on how the arrangement was negotiated and the performance criteria. 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.
The use of contract accounting requires significant judgment relative to estimating total contract revenues and costs, including assumptions relative to the length of time to complete the contract, the nature and complexity of the work to be performed, anticipated increases in wages and prices for subcontractor services and materials, and the availability of subcontractor services and materials. The Company’s estimates are based upon the professional knowledge and experience of its engineers, program managers and other personnel, who review each long-term 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.
Contract costs also may include estimated contract recoveries for matters such as contract changes and claims for unanticipated contract costs. The Company records revenue associated with these matters only when the amount of recovery can be estimated reliably and realization is probable.
The Company defines 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. Examples of the Company's service revenues include: analyst services and systems engineering support, consulting, maintenance and other support, testing and installation. The Company combines its product and service revenues into a single class as service revenues are less than 10 percent of total revenues.
The Companygenerally 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.goods over a period of 12 to 36 months. The Company accrues for anticipated warranty costs upon product shipment. RevenuesThe 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 product royalties12 to 36 months that are treated as separate performance obligations. The transaction price allocated to extended warranties is recognized upon invoice byover time in proportion to the Company. Additionally, allcosts 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 L 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 doubtful accounts 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 customers’ credit worthiness, 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.
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 $61,302 and $57,387 as of December 27, 2019 and June 30, 2019, respectively. The contract asset balance increased due to growth in revenue recognized under long-term contracts over time during the six months ended December 27, 2019. The contract liability balances were $19,388 and $12,362 as of December 27, 2019 and June 30, 2019, respectively. The increase was due to advanced billings across multiple programs.
Revenue recognized for the second quarter and six months ended December 27, 2019 that was previously included in the contract liability balance at June 30, 2019 was $2,898 and $8,274, respectively. Revenue recognized for the second quarter and six months ended December 31, 2018 that was included in the contract liability balance at June 30, 2018 was $1,617 and $8,983, 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 27, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $297,593. The Company expects to recognize approximately 77% 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:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | | Second Quarters Ended | | | | Six Months Ended | |
| 2017 | | 2016 | | 2017 | | 2016 | | | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
Basic weighted-average shares outstanding | 46,752 |
| | 39,151 |
| | 46,701 |
| | 39,004 |
| Basic weighted-average shares outstanding | | 54,548 | | | 47,189 | | | 54,468 | | | 47,118 | |
Effect of dilutive equity instruments | 695 |
| | 834 |
| | 837 |
| | 916 |
| Effect of dilutive equity instruments | | 453 | | | 516 | | | 569 | | | 578 | |
Diluted weighted-average shares outstanding | 47,447 |
| | 39,985 |
| | 47,538 |
| | 39,920 |
| Diluted weighted-average shares outstanding | | 55,001 | | | 47,705 | | | 55,037 | | | 47,696 | |
Equity instruments to purchase 23419 and 162297 shares of common stock were not included in the calculation of diluted net earnings per share for the threesecond quarter and six months ended December 31, 2017, respectively,27, 2019, because the equity instruments were anti-dilutive. Equity instruments to purchase 931 and 6481 shares of common stock were not included in the calculation of diluted net earnings per share for the threesecond quarter and six months ended and December 31, 2016, respectively,2018, because the equity instruments were anti-dilutive.
C. Acquisitions
RICHLAND TECHNOLOGIES AMERICAN PANEL CORPORATION ACQUISITION
On July 3, 2017, the Company entered into a membership interest purchase agreement with Richland Technologies, L.L.C. ("RTL"), pursuant to which,September 23, 2019, the Company acquired RTLAmerican Panel Corporation (“APC”). Based in Alpharetta, Georgia, APC is a leading innovator in large area display technology for the aerospace and defense market. APC's capabilities are deployed on a cash-free, debt-free basiswide range of next-generation platforms. The Company acquired APC for a totalan all cash purchase price of $5,798. RTL specializes in safety-critical and high integrity systems, software and hardware development as well as safety-certification services for mission-critical applications. The acquisition had an immaterial impact to the Company’s results of operations (contributed less than one percent of net revenue for the three and six months ended December 31, 2017), and accordingly the disclosures required per FASB ASC 805 have been excluded from the Form 10-Q filing. The Company recognized primarily intangible assets including customer relationships, developed technology and goodwill based on its preliminary purchase price allocation.
DELTA ACQUISITION
On April 3, 2017, the Company entered into a membership interest purchase agreement with Delta Microwave, LLC ("Delta"), pursuant to which the Company acquired Delta on a cash-free, debt-free basis for a total purchase price of $40,500, subject$100,000, prior to net working capital and net debt adjustments. Delta is a designer and manufacturer of high-value RF, microwave and millimeter wave sub-assemblies and components forThe Company funded the military, aerospace and space markets. The acquisition and transaction related expenses were funded with cash on hand.
The following table presents the net purchase price and the preliminary fair values of the assets and liabilities of Delta:APC on a preliminary basis:
|
| | | |
| Amounts |
Consideration transferred | |
Cash paid at closing | $ | 40,500 |
|
Net purchase price | $ | 40,500 |
|
| |
Estimated fair value of tangible assets acquired and liabilities assumed | |
Accounts receivable and cost in excess of billings | $ | 957 |
|
Inventory | 4,452 |
|
Fixed assets | 1,918 |
|
Other current and non-current assets | 67 |
|
Current liabilities | (2,055 | ) |
Estimated fair value of net tangible assets acquired | 5,339 |
|
Estimated fair value of identifiable intangible assets | 17,000 |
|
Estimated goodwill | 18,161 |
|
Estimated fair value of net assets acquired | 40,500 |
|
Net purchase price | $ | 40,500 |
|
| | | | | |
| Amounts |
Consideration transferred | |
Cash paid at closing | $ | 100,826 | |
Working capital and net debt adjustment | (5,952) | |
Liabilities assumed | 2,454 | |
Less cash acquired | (826) | |
Net purchase price | $ | 96,502 | |
| |
Estimated fair value of tangible assets acquired and liabilities assumed | |
Cash | $ | 826 | |
Accounts receivable | 3,726 | |
Inventory | 11,510 | |
Fixed assets | 690 | |
Other current and non-current assets | 3,494 | |
Accounts payable | (1,554) | |
Accrued expenses | (1,070) | |
Other current and non-current liabilities | (5,749) | |
Estimated fair value of net tangible assets acquired | 11,873 | |
Estimated fair value of identifiable intangible assets | 33,200 | |
Estimated goodwill | 52,255 | |
Estimated fair value of net assets acquired | 97,328 | |
Less cash acquired | (826) | |
Net purchase price | $ | 96,502 | |
The amounts above represent the preliminary fair value estimates as of December 31, 201727, 2019 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period.period and finalizes its fair value estimates. The preliminary identifiable intangible asset estimates includeestimate includes customer relationships of $8,000$20,400 with a useful life of 911 years, developedcompleted technology of $5,900 with a useful
life of 7 years and backlog of $3,100$10,400 with a useful life of 211 years and backlog of $2,400 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 goodwill of $18,161$52,255 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 Deltagoodwill from this acquisition expandsis reported under the scaleSensor and breadthMission Processing (“SMP”) reporting unit. Since APC was a qualified subchapter S subsidiary, the acquisition is treated as an asset purchase for tax purposes. The Company has estimated the tax value of the Company’s RF, microwaveintangible assets from this transaction and millimeter wave capabilities, providesis amortizing the amount over 15 years for tax purposes. As of December 27, 2019, the Company had $52,357 of goodwill deductible for tax purposes. The Company has not furnished pro forma information relating to APC because such information is not material to the Company's financial results.
The revenues and income before income taxes from APC included in the Company's consolidated results for the second quarter ended December 27, 2019 were $9,653 and $1,495, respectively. The revenues and income before income taxes from APC included in the Company's consolidated results for the six months ended December 27, 2019 were $10,596 and $1,802, respectively. The APC results include expenses resulting from purchase accounting which include amortization of intangible assets and inventory step-up.
THE ATHENA GROUP ACQUISITION
On April 18, 2019, the Company acquired The Athena Group, Inc. (“Athena”), a highlyprivately-held company based in Gainesville, Florida and a leading provider of cryptographic and countermeasure IP vital to securing defense computing systems. The Company acquired Athena for an all cash purchase price of $34,000, prior to net working capital and net debt adjustments, which was funded through the revolving credit facility (“the Revolver”).
The following table presents the net purchase price and the fair values of the assets and liabilities of Athena on a preliminary basis:
| | | | | |
| Amounts |
Consideration transferred | |
Cash paid at closing | $ | 34,049 | |
Working capital and net debt adjustment | (446) | |
Less cash acquired | (49) | |
Net purchase price | $ | 33,554 | |
| |
Estimated fair value of tangible assets acquired and liabilities assumed | |
Cash | $ | 49 | |
Accounts receivable | 726 | |
| |
Fixed assets | 74 | |
Other current and non-current assets | 260 | |
Accounts payable | (48) | |
Accrued expenses | (143) | |
Other current and non-current liabilities | (600) | |
Deferred tax liability | (6,414) | |
Estimated fair value of net tangible liabilities acquired | (6,096) | |
Estimated fair value of identifiable intangible assets | 23,700 | |
Estimated goodwill | 15,999 | |
Estimated fair value of net assets acquired | 33,603 | |
Less cash acquired | (49) | |
Net purchase price | $ | 33,554 | |
The amounts above represent the preliminary fair value estimates as of December 27, 2019 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 completed technology of $23,700 with a useful life of 11 years. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.
The goodwill of $15,999 largely reflects the potential synergies and expansion of the Company's offerings across product lines and markets complementary program portfolio in missilesto the Company's existing products and munitions, deepens market penetration in core radar, electronic warfare ("EW"), and precision-guided munitions markets and opens new growth opportunitiesis not tax deductible. The goodwill from this acquisition is reported under the Mercury Defense Systems (“MDS”) reporting unit. The Company has not furnished pro forma information relating to Athena because such information is not material to the Company's financial results.
SYNTONIC MICROWAVE LLC ACQUISITION
On April 18, 2019, the Company acquired Syntonic Microwave LLC (“Syntonic”), a privately held company based in space launch, GPS, satellite communicationsCampbell, California and datalinks.a leading provider of advanced synthesizers, wideband phase coherent tuners and microwave converters optimized for signals intelligence and electronic intelligence applications demanding frequency coverage up to 40 GHz with 2 GHz instantaneous bandwidth. The Company acquired Syntonic for an all cash purchase price of $12,000, prior to net working capital and net debt adjustments, which was funded through the Revolver.
The following table presents the net purchase price and the fair values of the assets and liabilities of Syntonic on a preliminary basis:
| | | | | |
| Amounts |
Consideration transferred | |
Cash paid at closing | $ | 13,118 | |
| |
Less cash acquired | (1,118) | |
Net purchase price | $ | 12,000 | |
| |
Estimated fair value of tangible assets acquired and liabilities assumed | |
Cash | $ | 1,118 | |
Accounts receivable | 281 | |
Inventory | 482 | |
Fixed assets | 31 | |
Other current and non-current assets | 6 | |
Accounts payable | (71) | |
Accrued expenses | (61) | |
| |
Estimated fair value of net tangible assets acquired | 1,786 | |
Estimated fair value of identifiable intangible assets | 7,100 | |
Estimated goodwill | 4,232 | |
Estimated fair value of net assets acquired | 13,118 | |
Less cash acquired | (1,118) | |
Net purchase price | $ | 12,000 | |
The amounts above represent the preliminary fair value estimates as of December 27, 2019 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 estimates include customer relationships of $4,200 with a useful life of 10 years, completed technology of $2,500 with a useful life of nine years and backlog of $400 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 $4,232 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 under the Advanced Microelectronic Solutions (“AMS”) reporting unit.
Since DeltaSyntonic was a limited liability company, the acquisition is treated as an asset purchase 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, 2017,27, 2019, the Company had $17,615$2,988 of goodwill deductible for tax purposes.
The revenues and income before income taxes from Delta included in the Company's consolidated results for the three months ended December 31, 2017 were $5,229 and $74, respectively. The revenues and income before income taxes from Delta included in the Company's consolidated results for the six months ended December 31, 2017 were $10,761 and $661, respectively. The Company has not furnished pro forma financial information relating to DeltaSyntonic because such information is not material to the Company's financial results.
CESGECO AVIONICS AQUISITION
On November 4, 2016,January 29, 2019, the Company announced that it had acquired GECO Avionics, LLC (“GECO”), a privately held company in Mesa, Arizona, with over twenty years of experience designing and the shareholders of CES entered into a Stock Purchase Agreement, pursuant to which, Mercurymanufacturing affordable safety-critical avionics and mission computing solutions. The Company acquired CESGECO for a totalan all cash purchase price of $39,123, subject to net working capital and net debt adjustments. The acquisition and associated transaction expenses were$36,500, which was funded with cash on hand. Based in Geneva, Switzerland, CES is a leading provider of embedded solutions for military and aerospace mission-critical computing applications. CES specializes inthrough the design, development and manufacture of safety-certifiable product and subsystems solutions including: primary flight control units, flight test computers, mission computers, command and control processors, graphics and video processing and avionics-certified Ethernet and IO. CES has decades of experience designing subsystems deployed in applications certified up to the highest levels of design assurance. CES products and solutions are used on platforms such as aerial refueling tankers and multi-mission aircraft, as well as the several types of unmanned platforms.Revolver.
The following table presents the net purchase price and the fair values of the assets and liabilities of CES:GECO on a preliminary basis:
| | | | | |
| Amounts |
Consideration transferred | |
Cash paid at closing | $ | 36,500 | |
| |
| |
Net purchase price | $ | 36,500 | |
| | |
Estimated fair value of tangible assets acquired and liabilities assumed | | |
| |
Accounts receivable | $ | 1,320 | |
Inventory | 1,454 | |
Fixed assets | 459 | |
| |
Accounts payable | (217) | |
Accrued expenses | (239) | |
| |
Estimated fair value of net tangible assets acquired | 2,777 | |
Estimated fair value of identifiable intangible assets | 12,700 | |
Estimated goodwill | 21,023 | |
Estimated fair value of net assets acquired
| 36,500 | |
| |
Net purchase price | $ | 36,500 | |
| |
|
| | | |
| Amounts |
Consideration transferred | |
|
Cash paid at closing | $ | 39,123 |
|
Working capital adjustment | (330 | ) |
Net purchase price | $ | 38,793 |
|
| |
|
Fair value of tangible assets acquired and liabilities assumed | |
|
Accounts receivable and cost in excess of billings | $ | 2,698 |
|
Inventory | 8,950 |
|
Fixed assets | 1,480 |
|
Other current and non-current assets | 748 |
|
Current liabilities | (3,154 | ) |
Non-current liabilities | (6,140 | ) |
Deferred tax liabilities | (1,148 | ) |
Fair value of net tangible assets acquired | 3,434 |
|
Fair value of identifiable intangible assets | 14,722 |
|
Goodwill | 20,637 |
|
Fair value of net assets acquired | 38,793 |
|
Net purchase price | $ | 38,793 |
|
On November 3, 2017,The amounts above represent the preliminary fair value estimates as of December 27, 2019 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period for CES expired.and finalizes its fair value estimates. The preliminary identifiable intangible assetsasset estimates include customer relationships of $9,060$6,900 with a useful life of 911 years, and developedcompleted technology of $5,662$4,800 with a useful life of 710 years and backlog of $1,000 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 goodwill of $20,637$21,023 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. CES provides the Company with capabilities in mission computing, safety-critical avionics and platform management that are in demand from its customers. These new capabilities will also substantially expand Mercury’s addressable market into commercial aerospace, defense platform management, command, control, communications, computers, and intelligence ("C4I") and mission computing markets that are aligned to Mercury’s existing market focus. The acquisition is directly aligned with the Company's strategy of expanding its capabilities, services and offerings along the sensor processing chain. The goodwill from this acquisition is reported under the SensorSMP reporting unit. Since GECO was a limited liability company, the acquisition is treated as an asset purchase for tax purposes. The Company has estimated the tax value of the intangible assets from this transaction and Mission Processing (“SMP”) reporting unit.
The revenues and income before income taxes from CES included inis amortizing the Company's consolidated resultsamount over 15 years for tax purposes. As of December 27, 2019, the three months ended December 31, 2017 were $7,000 and $2,445, respectively. The revenues and income before income taxes from CES included in the Company's consolidated resultsCompany had $20,300 of goodwill deductible for the six months ended December 31, 2017 were $13,319 and $2,093, respectively.tax purposes. The Company has not furnished pro forma financial information relating to CESGECO because such information is not material to the Company's financial results.
THEMIS COMPUTERGERMANE SYSTEMS AQUISITION
On July 31, 2018, the Company announced that it had entered into a membership interest purchase agreement (the “Purchase Agreement”) and acquired Germane Systems, LC (“Germane”) pursuant to the terms of the Purchase Agreement.
Based in Chantilly, Virginia, Germane is an industry leader in the design, development and manufacturing of rugged servers, computers and storage systems for command, control and intelligence (“C2I”) applications. The Company acquired Germane for an all cash purchase price of $45,000, prior to net working capital and net debt adjustments. The Company funded the acquisition with borrowings obtained under the Revolver. On December 21, 2017,12, 2018 the Company and Thunderbird Merger Sub, Inc., a newly formed, wholly-owned subsidiaryformer owners of Mercury (the “Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ceres Systems (“Ceres”), the holding company that owns Themis Computer (“Themis”, and together with Ceres, collectively the “Acquired Company”). Pursuant to the Merger Agreement, the Merger Sub will merge with and into Ceres with Ceres continuing as the surviving company and a wholly-owned subsidiary of Mercury (the “Merger”). By operation of the Merger, the Company acquired both Ceres and its wholly-owned subsidiary, Themis.
On February 1, 2018, the Company closed the transaction for an aggregate purchase price of $180,000, plus an estimated adjustment for acquired working capital and cash. The merger consideration is subjectGermane agreed to post-closing adjustments based ontotaling $1,244, which decreased the Company's net purchase price.
The following table presents the net purchase price and the fair values of the assets and liabilities of Germane:
| | | | | |
| Amounts |
Consideration transferred | | |
Cash paid at closing | $ | 47,166 | |
Working capital and net debt adjustment | (1,244) | |
Less cash acquired | (193) | |
Net purchase price | $ | 45,729 | |
| | |
Fair value of tangible assets acquired and liabilities assumed | | |
Cash | $ | 193 | |
Accounts receivable | 4,277 | |
Inventory | 8,575 | |
Fixed assets | 867 | |
Other current and non-current assets | 596 | |
Accounts payable | (3,146) | |
Accrued expenses | (1,394) | |
Other current and non-current liabilities | (514) | |
Fair value of net tangible assets acquired | 9,454 | |
Fair value of identifiable intangible assets | 12,910 | |
Goodwill | 23,558 | |
Fair value of net assets acquired | 45,922 | |
Less cash acquired
| (193) | |
Net purchase price | $ | 45,729 | |
On July 31, 2019, the measurement period for Germane expired. The identifiable intangible assets include customer relationships of $8,500 with a determinationuseful life of closing net working capital, transaction expenses11 years, completed technology of $4,200 with a useful life of eight years and net debt (all as defined inbacklog of $210 with a useful life of one year.
The goodwill of $23,558 largely reflects the Merger Agreement). See Note N "Subsequent Events"potential synergies and expansion of the Company's offerings across product lines and markets complementary to the consolidated financial statementsCompany's existing products and markets. The goodwill from this acquisition is reported under the MDS reporting unit. Since Germane was a limited liability company, the acquisition is treated as an asset purchase for further discussion.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 27, 2019, the Company had $21,763 of goodwill deductible for tax purposes.
D.Fair Value of Financial Instruments
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2017:27, 2019:
| | | | Fair Value Measurements | | | Fair Value Measurements | |
| | December 31, 2017 | | Level 1 | | Level 2 | | Level 3 | | | December 27, 2019 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | Assets: | | | | | | | | |
| Certificates of deposit | | $ | 1,048 |
| | $ | — |
| | $ | 1,048 |
| | $ | — |
| Certificates of deposit | | $ | 31,781 | | | $ | — | | | $ | 31,781 | | | $ | — | |
| Total | | $ | 1,048 |
| | $ | — |
| | $ | 1,048 |
| | $ | — |
| Total | | $ | 31,781 | | | $ | — | | | $ | 31,781 | | | $ | — | |
|
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 fair value of the Company’s certificates of deposit are determined through quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. The cost-method investment, which is presented within other non-current assets in the accompanying consolidated balance sheets, does not have a readily determinable fair value, as such the Company recorded the investment at cost and will continue to evaluate the asset for impairment on a quarterly basis.
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, history,historical usage, product mix and possible alternative uses. Inventory was comprised of the following:
| | | | | | | | | | | | | | |
| | December 27, 2019 | | June 30, 2019 |
Raw materials | | $ | 89,191 | | | $ | 84,561 | |
Work in process | | 48,465 | | | 38,525 | |
Finished goods | | 15,986 | | | 14,026 | |
Total | | $ | 153,642 | | | $ | 137,112 | |
F.Goodwill
|
| | | | | | | | |
| | December 31, 2017 | | June 30, 2017 |
Raw materials | | $ | 67,268 |
| | $ | 48,645 |
|
Work in process | | 25,977 |
| | 22,567 |
|
Finished goods | | 12,667 |
| | 9,859 |
|
Total | | $ | 105,912 |
| | $ | 81,071 |
|
There are no amounts in inventory relating to contracts having production cycles longer than one year.
The following table sets forth the changes in the carrying amount of goodwill by reporting unit for the six months ended December 31, 2017:27, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | SMP | | AMS | | MDS | | Total |
Balance at June 30, 2019 | | $ | 140,783 | | | $ | 222,379 | | | $ | 198,984 | | | $ | 562,146 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Goodwill adjustment for the Germane acquisition | | — | | | — | | | 447 | | | 447 | |
Goodwill adjustment for the GECO acquisition | | (200) | | | — | | | — | | | (200) | |
| | | | | | | | |
| | | | | | | | |
Goodwill arising from the APC acquisition | | 52,255 | | | — | | | — | | | 52,255 | |
Balance at December 27, 2019 | | $ | 192,838 | | | $ | 222,379 | | | $ | 199,431 | | | $ | 614,648 | |
|
| | | | | | | | | | | | | | | | |
| | SMP | | AMS | | MDS | | Total |
Balance at June 30, 2017 | | $ | 116,003 |
| | $ | 217,956 |
| | $ | 46,887 |
| | $ | 380,846 |
|
Goodwill adjustment for the CES acquisition | | 291 |
| | — |
| | — |
| | 291 |
|
Goodwill adjustment for the Delta acquisition | | — |
| | 201 |
| | — |
| | 201 |
|
Goodwill arising from the RTL acquisition | | 3,447 |
| | — |
| | — |
| | 3,447 |
|
Balance at December 31, 2017 | | $ | 119,741 |
| | $ | 218,157 |
| | $ | 46,887 |
| | $ | 384,785 |
|
In the six months ended December 31, 2017,27, 2019, there were no triggering events, as defined by FASB ASC 350, Intangibles - Goodwill and Other, which required an interim goodwill impairment test. The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year.
G.Restructuring
The following table presents the detail of activity for the Company’s restructuring plans:
| | | | | | | | | | Severance & Related | | Facilities & Other | | Total |
Restructuring liability at June 30, 2019 | | Restructuring liability at June 30, 2019 | | $ | 4 | | | $ | — | | | $ | 4 | |
Restructuring and other charges | | Restructuring and other charges | | 1,716 | | | 33 | | | 1,749 | |
| | Severance & Related | | Facilities & Other | | Total | |
Restructuring liability at June 30, 2017 | | $ | 1,365 |
| | $ | — |
| | $ | 1,365 |
| |
Restructuring and other charges | | 327 |
| | 81 |
| | 408 |
| |
Cash paid | | (575 | ) | | (81 | ) | | (656 | ) | Cash paid | | (700) | | | (33) | | | (733) | |
Restructuring liability at December 31, 2017 | | $ | 1,117 |
| | $ | — |
| | $ | 1,117 |
| |
| Restructuring liability at December 27, 2019 | | Restructuring liability at December 27, 2019 | | $ | 1,020 | | | $ | — | | | $ | 1,020 | |
During the six months ended December 31, 2017,27, 2019, the Company incurred net restructuring and other charges of $408.$1,749. Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.
All of the restructuring and other charges are classified as operating expenses in the consolidated statementsConsolidated Statements of operationsOperations and Comprehensive 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.Consolidated Balance Sheets.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted by the U.S. government. The Tax Act has impacted the U.S. statutory Federal tax rate that the Company will use going forward, which has been reduced to 21% from 35%. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory Federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years.
The Tax Act also includes items that the Company expects will increase its tax expense including, but not limited to, the elimination of the domestic manufacturing deduction and increased limitations on executive compensation. In addition, the actual effective tax rate may be materially different than the statutory Federal tax rate (including being higher) based on the availability and impact of various other adjustments including but not limited to state taxes, Federal research and development credits, discrete tax benefits related to stock compensation, and the inclusion or exclusion of various items in taxable income which may differ from GAAP income.
To transition to the reduced U.S. corporate tax rate, an adjustment is required to be made to our U.S. deferred tax assets and liabilities. For the three months ended December 31, 2017, the adjustment to the U.S. deferred tax assets and liabilities resulted in a tax benefit of $1,286. The Tax Act includes a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986, including historical tax information that is not yet available to management. The Company has not recorded any transition tax associated with its accumulated, undistributed foreign earnings given its current U.S. tax attributes, including the availability of foreign tax credits. For the three months ended December 31, 2017, the Company has recorded a provisional tax expense of $415 as it no longer expects to utilize certain foreign tax credits. The Company continues to evaluate its transition tax obligation and expects to finalize its conclusions by the end of fiscal 2018. The Company does not expect the final amounts to be materially different than those recorded within this period. For the three-months ended December 31, 2017, the Company has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018. In accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”), future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and finalized.H.Income Taxes
The Company recorded an income tax provision of $1,335$5,110 and $1,779$4,483 on income from operations before income taxes of $10,468$20,786 and $6,983$16,866 for the three monthssecond quarters ended December 27, 2019 and December 31, 2017 and 2016,2018, respectively. The Company recorded an income tax benefit of $7,046 and an income tax provision of $520$3,092 and $7,612 on income from operations before income taxes of $20,040$38,015 and $9,543$27,474 for the six months ended December 27, 2019 and December 31, 2017 and 2016,2018, respectively.
During the three monthssecond quarters ended December 27, 2019 and December 31, 2017 and 2016,2018, the Company recognized a discrete tax expense and benefit of $294$353 and $634,$67, respectively, related to excess tax benefits on stock-based compensation. The discrete tax expense for the three months ended December 31, 2017 included the enactment of the Tax Act which revalued the excess tax benefit previously recorded in the three months ended September 30, 2017. The excess tax benefit related to stock-based compensation is the result of an increase in value from the stock award between the grant date and the vest date. The effective tax rate for the three months
second quarters ended December 27, 2019 and December 31, 2017 and 20162018 differed from the Federal statutory rate primarily due to Federal research and development credits, domestic manufacturing deduction, excess tax benefits related to stock compensation, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.
During the six months ended December 27, 2019 and December 31, 2017 and 2016,2018, the Company recognized a discrete tax benefit of $7,579$6,480 and $2,817,$1,716, respectively, related to excess tax benefits on stock-based compensation. The discrete tax benefit for the six months ended December 31, 2017 included the enactment of the Tax Act which revalued the excess tax benefit previously recorded in the three months ended September 30, 2017. The benefit is the result of the increase in value from the stock award between the grant date and the vest date. The six months ended December 31, 2017 also included discrete tax benefits of $3,716, derived from new information obtained about net operating loss carry-forwards of the entities acquired from Microsemi Corporation in May 2016. The discrete items disclosed above for the six months ended December 31, 2017 included the effect of the Tax Act. The effective tax rate for the six months ended December 27, 2019 and December 31, 2017 and 20162018 differed from the Federal statutory rate primarily due to Federal research and development credits, domestic manufacturing deduction, excess tax benefits related to stock compensation, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.
NoDuring the second quarter ended December 27, 2019, there were no material changes inmade to the Company’s unrecognized tax positions occurred during the six months ended December 31, 2017.positions.
I.Debt
REVOLVING CREDIT FACILITY
On June 27, 2017,September 28, 2018, the Company amended its revolving credit facilitythe Revolver to increase and extend the borrowing capacity of its existing revolving credit facility intoto a $400,000,$750,000, 5-year revolving credit line, expiring in June 2022 (“with the Revolver”).maturity extended to September 28, 2023. As of December 31, 2017,27, 2019, the Company's outstanding balance of unamortized deferred financing costs was $5,991,$5,041, which is being amortized to other (expense) income,expense, net on a straight line basis over the new term of the Revolver. The Company drew $195,000 from the Revolver to facilitate the completion of the Merger Agreement for the acquisition of both Ceres and its wholly-owned subsidiary, Themis.
As of December 31, 2017,27, 2019, the Company was in compliance with all covenants and conditions under the Revolver and there were no outstanding borrowings against the revolver.Revolver. There were outstanding letters of credit of $2,760$1,106 as of December 31, 2017.
27, 2019.
| |
J. | Stock-Based Compensation |
STOCK OPTIONJ.Employee Benefit Plan
PLANSENSION 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 27, 2019 was a net liability of $9,343, which is recorded in other non-current liabilities on the Consolidated Balance Sheet. The Company recorded a net gain of $8 and $15 in AOCI during the second quarter and six months ended December 27, 2019, respectively. The Company recorded a net loss of $15 and $30 in AOCI during the second quarter and six months ended December 31, 2018, respectively. The Company recognized net periodic benefit costs of $296 and $592 associated with the Plan for the second quarter and six months ended December 27, 2019, respectively. The Company recognized net periodic benefit costs of $200 and $402 associated with the Plan for the second quarter and six months ended December 31, 2018, respectively. The Company's total expected employer contributions to the Plan during fiscal 2020 are $822.
K.Stock-Based Compensation
STOCK INCENTIVE PLANS
The aggregate number of shares authorized for issuance under the Company’s Amended and Restated 2018 Stock Incentive Plan (the “2018 Plan”) is 2,862 shares, with an additional 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”), is 15,252 at the time of shareholder approval of the 2018 Plan. The 2018 Plan replaced the 2005 Plan. On November 6, 2019, an additional 184 shares at December 31, 2017.from the 2005 Plan were rolled into the 2018 Plan as a result of forfeiture, cancellation, or termination (other than by exercise) of previously-made grants under 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. All stock options are granted with an exercise price of not less than 100% of the fair value of the Company’s common stock aton the date of grant and the options generally have a term of seven years. There were 1,4962,681 shares available for future grant under the 20052018 Plan at December 31, 2017.27, 2019.
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 20052018 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 include: (i) the achievement of internal performance targets only, and (ii)generally include the achievement of internal performance targets in relation to a peer group of companies.
EMPLOYEE STOCK PURCHASE PLAN
The aggregate number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is 1,800 shares. 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 39 and 50no shares issued under the ESPP during the six months ended December 27, 2019. There were 51 shares issued under the ESPP during the six months ended and December 31, 2017 and 2016, respectively.2018. Shares available for future purchase under the ESPP totaled 263118 at December 31, 2017.27, 2019.
STOCK OPTIONAND AWARD ACTIVITY
The following table summarizes activity of the Company’s stock option plans since June 30, 2017:2019:
| | | | | | | | | | Options Outstanding | |
| | Options Outstanding | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) |
| | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | |
Outstanding at June 30, 2017 | | 51 |
| | $ | 13.53 |
| | 0.60 | |
Outstanding at June 30, 2019 | | Outstanding at June 30, 2019 | | 4 | | | $ | 5.52 | | | 2.13 |
Granted | | — |
| | — |
| | Granted | | — | | | — | | |
Exercised | | (47 | ) | | 14.12 |
| | Exercised | | (1) | | | 5.52 | | |
Canceled | | — |
| | — |
| | Canceled | | — | | | — | | |
Outstanding at December 31, 2017 | | 4 |
| | $ | 5.52 |
| | 3.60 | |
Outstanding at December 27, 2019 | | Outstanding at December 27, 2019 | | 3 | | | $ | 5.52 | | | 1.63 |
The following table summarizes the status of the Company’s non-vested restricted stock awards and deferred stock awards since June 30, 2017:2019:
| | | | | | | | | | | | | | |
| | Non-vested Restricted Stock Awards | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at June 30, 2019 | | 1,046 | | | $ | 39.62 | |
Granted | | 474 | | | 81.52 | |
Vested | | (491) | | | 29.95 | |
Forfeited | | (26) | | | 50.05 | |
Outstanding at December 27, 2019 | | 1,003 | | | $ | 59.51 | |
|
| | | | | | | |
| | Non-vested Restricted Stock Awards |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Outstanding at June 30, 2017 | | 1,564 |
| | $ | 18.93 |
|
Granted | | 453 |
| | 47.46 |
|
Vested | | (758 | ) | | 17.02 |
|
Forfeited | | (42 | ) | | 26.28 |
|
Outstanding at December 31, 2017 | | 1,217 |
| | $ | 30.47 |
|
STOCK-BASED COMPENSATION EXPENSESTOCK-BASED COMPENSATION EXPENSE
The Company recognizes expense for its share-based payment plans in the consolidated statementsConsolidated Statements of operations for the six months ended December 31, 2017Operations and 2016Comprehensive Income in accordance with FASB ASC 718, Compensation - Stock Compensation(“ASC 718”). The Company had $265$481 and $177$241 of capitalized stock-based compensation expense on the consolidated balance sheets as ofConsolidated Balance Sheets for the periods ended December 31, 201727, 2019 and 2016,June 30, 2019, respectively. Under the fair value recognition provisions of FASB 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 statementsConsolidated Statements of operations:Operations and Comprehensive Income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarters Ended | | | | Six Months Ended | | |
| December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
Cost of revenues | $ | 200 | | | $ | 159 | | | $ | 341 | | | $ | 411 | |
Selling, general and administrative | 5,384 | | | 4,542 | | | 10,027 | | | 8,426 | |
Research and development | 947 | | | 583 | | | 1,822 | | | 1,126 | |
Stock-based compensation expense before tax | 6,531 | | | 5,284 | | | 12,190 | | | 9,963 | |
Income taxes | (1,698) | | | (1,427) | | | (3,169) | | | (2,690) | |
Stock-based compensation expense, net of income taxes | $ | 4,833 | | | $ | 3,857 | | | $ | 9,021 | | | $ | 7,273 | |
L.Operating Segment, Geographic Information and Significant Customers
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Cost of revenues | $ | 47 |
| | $ | 148 |
| | $ | 195 |
| | $ | 223 |
|
Selling, general and administrative | 4,270 |
| | 3,539 |
| | 8,246 |
| | 6,578 |
|
Research and development | 510 |
| | 406 |
| | 1,007 |
| | 924 |
|
Stock-based compensation expense before tax | 4,827 |
| | 4,093 |
| | 9,448 |
| | 7,725 |
|
Income taxes | (1,593 | ) | | (1,575 | ) | | (3,118 | ) | | (2,964 | ) |
Stock-based compensation expense, net of income taxes | $ | 3,234 |
| | $ | 2,518 |
| | $ | 6,330 |
| | $ | 4,761 |
|
PENSION PLAN
With the acquisition of CES on November 4, 2016, the Company assumed 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, 2017 was a net liability of $6,647, which is recorded in other non-current liabilities on the consolidated balance sheets. The Company recorded a net gain of $10 and $40 in accumulated other comprehensive income during the three and six months ended December 31, 2017, respectively. The Company recognized net periodic benefit costs of $201 and $407 associated with the Plan for the three and six months ended December 31, 2017, respectively. The Company's total expected employer contributions to the Plan during fiscal 2018 are $516.
| |
L. | Operating Segment, Geographic Information and Significant Customers |
Operating segments are defined as components of an enterprise evaluated regularly by the Company's chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company is comprised of one1 operating and reportable segment. The Company utilized the management approach for determining its operating segment in accordance with FASB ASC 280, Segment Reporting.
The geographic distribution of the Company’s revenues as determined by order origination based on the country in which the Company's legal subsidiary is domiciled is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | Asia Pacific | | Eliminations | | Total |
SECOND QUARTER ENDED DECEMBER 27, 2019 | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 181,381 | | | $ | 11,721 | | | $ | 811 | | | $ | — | | | $ | 193,913 | |
Inter-geographic revenues | | 654 | | | 817 | | | — | | | (1,471) | | | — | |
Net revenues | | $ | 182,035 | | | $ | 12,538 | | | $ | 811 | | | $ | (1,471) | | | $ | 193,913 | |
SECOND QUARTER ENDED DECEMBER 31, 2018 | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 145,669 | | | $ | 13,200 | | | $ | 220 | | | $ | — | | | $ | 159,089 | |
Inter-geographic revenues | | 803 | | | 345 | | | — | | | (1,148) | | | — | |
Net revenues | | $ | 146,472 | | | $ | 13,545 | | | $ | 220 | | | $ | (1,148) | | | $ | 159,089 | |
SIX MONTHS ENDED DECEMBER 27, 2019 | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 343,377 | | | $ | 26,161 | | | $ | 1,679 | | | $ | — | | | $ | 371,217 | |
Inter-geographic revenues | | 1,626 | | | 1,468 | | | — | | | (3,094) | | | — | |
Net revenues | | $ | 345,003 | | | $ | 27,629 | | | $ | 1,679 | | | $ | (3,094) | | | $ | 371,217 | |
SIX MONTHS ENDED DECEMBER 31, 2018 | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 277,018 | | | $ | 24,638 | | | $ | 1,489 | | | $ | — | | | $ | 303,145 | |
Inter-geographic revenues | | 2,450 | | | 703 | | | — | | | (3,153) | | | — | |
Net revenues | | $ | 279,468 | | | $ | 25,341 | | | $ | 1,489 | | | $ | (3,153) | | | $ | 303,145 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | Asia Pacific | | Eliminations | | Total |
THREE MONTHS ENDED DECEMBER 31, 2017 | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 105,687 |
| | $ | 9,417 |
| | $ | 2,808 |
| | $ | — |
| | $ | 117,912 |
|
Inter-geographic revenues | | 3,169 |
| | 43 |
| | — |
| | (3,212 | ) | | — |
|
Net revenues | | $ | 108,856 |
| | $ | 9,460 |
| | $ | 2,808 |
| | $ | (3,212 | ) | | $ | 117,912 |
|
THREE MONTHS ENDED DECEMBER 31, 2016 | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 91,407 |
| | $ | 5,809 |
| | $ | 798 |
| | $ | — |
| | $ | 98,014 |
|
Inter-geographic revenues | | 1,893 |
| | — |
| | — |
| | (1,893 | ) | | — |
|
Net revenues | | $ | 93,300 |
| | $ | 5,809 |
| | $ | 798 |
| | $ | (1,893 | ) | | $ | 98,014 |
|
SIX MONTHS ENDED DECEMBER 31, 2017 | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 203,402 |
| | $ | 16,895 |
| | $ | 3,684 |
| | $ | — |
| | $ | 223,981 |
|
Inter-geographic revenues | | 4,916 |
| | 65 |
| | — |
| | (4,981 | ) | | — |
|
Net revenues | | $ | 208,318 |
| | $ | 16,960 |
| | $ | 3,684 |
| | $ | (4,981 | ) | | $ | 223,981 |
|
SIX MONTHS ENDED DECEMBER 31, 2016 | | | | | | | | | | |
Net revenues to unaffiliated customers | | $ | 174,455 |
| | $ | 6,662 |
| | $ | 4,546 |
| | $ | — |
| | $ | 185,663 |
|
Inter-geographic revenues | | 5,180 |
| | 15 |
| | — |
| | (5,195 | ) | | — |
|
Net revenues | | $ | 179,635 |
| | $ | 6,677 |
| | $ | 4,546 |
| | $ | (5,195 | ) | | $ | 185,663 |
|
In recent years, the Company completed a series of acquisitions that changed its technological capabilities, applications and end markets. As these acquisitions and changes occurred, the Company increased the proportion of its revenue derived from the sale of components in different technological areas, and also increased the amount of revenue associated with combining technologies into more complex and diverse products including modules, sub-assemblies and integrated subsystems. The following tables present revenue consistent with the Company's strategy of expanding its technological capabilities and program content. As additional information related to the Company’s products by end user, application and/or product grouping is attained, the categorization of these products can vary over time. When this occurs, the Company reclassifies revenue by end user, application and/or product grouping for prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within, each revenue category.
The following table below presents the Company's net revenue by end user for the periods presented:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Domestic (1) | | $ | 89,969 |
| | $ | 83,052 |
| | $ | 179,647 |
| | $ | 156,578 |
|
International/Foreign Military Sales (2) | | 27,943 |
| | 14,962 |
| | 44,334 |
| | 29,085 |
|
Total Net Revenue | | $ | 117,912 |
| | $ | 98,014 |
| | $ | 223,981 |
| | $ | 185,663 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarters Ended | | | | | Six Months Ended | | | |
| | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
Domestic(1) | | $ | 171,624 | | | $ | 142,906 | | | $ | 329,099 | | | $ | 273,485 | |
International/Foreign Military Sales(2) | | 22,289 | | | 16,183 | | | 42,118 | | | 29,660 | |
Total Net Revenue | | $ | 193,913 | | | $ | 159,089 | | | $ | 371,217 | | | $ | 303,145 | |
(1) Domestic revenues consist of sales where the end user is within the U.S., as well as sales to prime defense contractor customers where the ultimate end user location is not defined.
(2) International/Foreign Military Sales consist of sales to U.S. prime defense contractor customers where the end user is known to be outside the U.S., foreign military sales through the U.S. government, and direct sales to non-U.S. based customers intended for end use outside of the U.S.
The following table below presents the Company's net revenue by end application for the periods presented: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Radar (1) | | $ | 44,678 |
| | $ | 44,803 |
| | $ | 81,218 |
| | $ | 82,292 |
|
Electronic Warfare (2) | | 29,411 |
| | 21,304 |
| | 57,419 |
| | 42,284 |
|
Other Sensor & Effector (3) | | 10,992 |
| | 4,661 |
| | 20,741 |
| | 9,307 |
|
Total Sensor & Effector | | 85,081 |
| | 70,768 |
| | 159,378 |
| | 133,883 |
|
C4I (4) | | 13,562 |
| | 6,613 |
| | 26,388 |
| | 10,953 |
|
Other (5) | | 19,269 |
| | 20,633 |
| | 38,215 |
| | 40,827 |
|
Total Net Revenue | | $ | 117,912 |
| | $ | 98,014 |
| | $ | 223,981 |
| | $ | 185,663 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarters Ended | | | | | Six Months Ended | | | |
| | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
Radar(1) | | $ | 48,328 | | | $ | 42,008 | | | $ | 86,247 | | | $ | 82,987 | |
Electronic Warfare(2) | | 36,139 | | | 25,697 | | | 72,196 | | | 49,751 | |
Other Sensor & Effector(3) | | 26,512 | | | 21,455 | | | 54,402 | | | 35,113 | |
Total Sensor & Effector | | 110,979 | | | 89,160 | | | 212,845 | | | 167,851 | |
C4I(4) | | 57,778 | | | 47,276 | | | 106,789 | | | 91,500 | |
Other(5) | | 25,156 | | | 22,653 | | | 51,583 | | | 43,794 | |
Total Net Revenue | | $ | 193,913 | | | $ | 159,089 | | | $ | 371,217 | | | $ | 303,145 | |
(1) Radar includes end-use applications where radio frequency signals are utilized to detect, track, and identify objects.
(2) Electronic Warfare includes end-use applications comprising the offensive and defensive use of the electromagnetic spectrum.
(3) Other Sensor & Effector products include all Sensor & Effector end markets other than Radar and Electronic Warfare.
(4) C4I includes rugged secure rackmount servers that are designed to drive the most powerful military processing applications.
(5) Other products include all component and other sales where the end use is not specified.
The following table below presents the Company's net revenue by product grouping for the periods presented:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Components (1) | | $ | 39,908 |
| | $ | 24,636 |
| | $ | 72,720 |
| | $ | 44,468 |
|
Modules and Sub-assemblies (2) | | 41,728 |
| | 38,560 |
| | 89,460 |
| | 75,152 |
|
Integrated Subsystems (3) | | 36,276 |
| | 34,818 |
| | 61,801 |
| | 66,043 |
|
Total Net Revenue | | $ | 117,912 |
| | $ | 98,014 |
| | $ | 223,981 |
| | $ | 185,663 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarters Ended | | | | | Six Months Ended | | | |
| | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
Components(1) | | $ | 60,381 | | | $ | 40,914 | | | $ | 113,800 | | | $ | 81,314 | |
Modules and Sub-assemblies(2) | | 56,427 | | | 42,397 | | | 102,514 | | | 93,989 | |
Integrated Subsystems(3) | | 77,105 | | | 75,778 | | | 154,903 | | | 127,842 | |
Total Net Revenue | | $ | 193,913 | | | $ | 159,089 | | | $ | 371,217 | | | $ | 303,145 | |
(1) Components include technology elements typically performing a single, discrete technological function, which when physically combined with other components may be used to create a module or sub-assembly. Examples include, but are not limited to, power amplifiers and limiters, switches, oscillators, filters, equalizers, digital and analog converters, chips, MMICs (monolithic microwave integrated circuits), and memory and storage devices.
(2) Modules and Sub-assemblies include combinations of multiple functional technology elements and/or components that work together to perform multiple functions but are typically resident on or within a single board or housing. Modules and sub-assemblies may in turn be combined to form an integrated subsystem. Examples of modules and sub-assemblies include, but are not limited to, embedded processing modules, embedded processing boards, switch fabric boards, high speed input/output boards, digital receiver boards, graphics and video processing and Ethernet and IO (input-output) boards, multi-chip modules, integrated radio frequency and microwave multi-function assemblies, tuners, and transceivers.
(3) Integrated Subsystems include multiple modules and/or subassembliessub-assemblies combined with a backplane or similar functional element and software to enable a solution. These are typically but not always integrated within a chassis and with cooling, power and other elements to address various requirements and are also often combined with additional technologies for interaction with other parts of a complete system or platform. Integrated subsystems also include spare and replacement modules and sub-assemblies sold as part of the same program for use in or with integrated subsystems sold by the Company.
The geographic distribution of the Company’s identifiable long-lived assets is summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | Asia Pacific | | Eliminations | | Total |
December 31, 2017 | | $ | 50,305 |
| | $ | 1,323 |
| | $ | 12 |
| | $ | — |
| | $ | 51,640 |
|
June 30, 2017 | | $ | 50,340 |
| | $ | 1,288 |
| | $ | 15 |
| | $ | — |
| | $ | 51,643 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. | | Europe | | Asia Pacific | | Eliminations | | Total |
December 27, 2019 | | $ | 67,493 | | | $ | 5,195 | | | $ | 8 | | | $ | — | | | $ | 72,696 | |
June 30, 2019 | | $ | 54,952 | | | $ | 5,037 | | | $ | 12 | | | $ | — | | | $ | 60,001 | |
Identifiable long-lived assets exclude ROU assets, goodwill, and intangible assets.
Customers comprising 10% or more of the Company’s revenues for the periods shown below are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarters Ended | | | | Six Months Ended | | |
| | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
Lockheed Martin Corporation
| | 16 | % | | 13 | % | | 17 | % | | | 11 | % |
Raytheon Company | | 16 | % | | 25 | % | | 15 | % | | 22 | % |
| | | | | | | | |
Northrop Grumman Corporation | | 10 | % | | * | | | 10 | % | | * | |
| | | | | | | | |
| | | | | | | | |
L3Harris Technologies | | * | | | * | | | 11 | % | | * | |
| | 42 | % | | 38 | % | | 53 | % | | 33 | % |
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Lockheed Martin Corporation
| | 20 | % | | 13 | % | | 19 | % | | 19 | % |
Raytheon Company | | 17 | % | | 22 | % | | 19 | % | | 19 | % |
Northrop Grumman Corporation | | 12 | % | | 10 | % | | 11 | % | | * |
|
| | 49 | % | | 45 | % | | 49 | % | | 38 | % |
* Indicates that the amount is less than 10% of the Company's revenue for the respective period. | |
* | Indicates that the amount is less than 10% of the Company’s revenues for the respective period. |
While the Company typically has customers from which it derives 10% or more of its revenue, the sales to each of these customers are spread across multiple programs and platforms. Programs comprising 10% or more of the Company’s revenuesCompany's revenue for the periods shown below are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarters Ended | | | | Six Months Ended | | |
| | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
F-35 | | * | | | 11 | % | | * | | | 11 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | — | % | | 11 | % | | — | % | | 11 | % |
* Indicates that the amount is less than 10% of the Company's revenue for the respective period.
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
F-35 | | * |
| | 11 | % | | * |
| | * |
|
Aegis | | * |
| | * |
| | * |
| | 10 | % |
| | — | % | | 11 | % | | — | % | | 10 | % |
M.Commitments and Contingencies | |
* | Indicates that the amount is less than 10% of the Company’s revenues for the respective period. |
| |
M. | Commitments and Contingencies |
LEGAL CLAIMS
The Company is subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of its business. Although legal proceedings are inherently unpredictable, the Company believes that it has valid defenses with respect to any matters currently pending against the Company and intends to defend itself vigorously. The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on the Company’s cash flows, results of operations, or financial position.
INDEMNIFICATION OBLIGATIONS
The Company’s standard product sales and license agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments the Company could be required to make under these indemnification provisions is, in some instances, unlimited.
PURCHASE COMMITMENTS
As of December 31, 2017,27, 2019, the Company has entered into non-cancelable purchase commitments for certain inventory components and services used in its normal operations. The purchase commitments covered by these agreements are for less than one year and aggregate to $50,653.$97,083.
OTHER
As part of the Company's strategy for growth, the Company continues 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.
The Company 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 or exercise of stock options. These transactions would be treated as a use of cash in financing activities in the Company's statementConsolidated Statements of cash flows.Cash Flows.
N.Leases
The Company enters into lease arrangements to facilitate its operations, including manufacturing, storage, as well as engineering, sales, marketing, and administration resources. As described in Note B to the consolidated financial statements, effective July 1, 2019, the Company adopted ASC 842 using the optional transition method and, as a result, did not recast prior period unaudited consolidated comparative financial statements. As such, all prior period amounts and disclosures are presented under ASC 840, Leases (Topic 840). Finance leases are not material to the Company's consolidated financial statements and therefore are excluded from the following disclosures.
SUPPLEMENTAL BALANCE SHEET INFORMATION
Supplemental operating lease balance sheet information is summarized as follows:
| | | | | | | | |
N. | Subsequent Events | As of |
| | December 27, 2019 |
Operating lease right-of-use assets | | $ | 49,826 | |
| | |
Accrued expenses(1) | | $ | 7,301 | |
Operating lease liabilities | | 55,257 | |
Total operating lease liabilities | | $ | 62,558 | |
THEMISCOMPUTERAQUISITION
On December 21, 2017, the Merger Sub, entered into the Merger Agreement with Ceres, the holding company that owns Themis. Pursuant to the Merger Agreement, the Merger Sub will merge with and into Ceres with Ceres continuing as the surviving company and a wholly-owned subsidiary of Mercury. By operation (1) The short term portion of the Merger,Operating lease liabilities is included within Accrued expenses on the Consolidated Balance Sheet.
OTHER SUPPLEMENTAL INFORMATION
Other supplemental operating lease information is summarized as follows:
| | | | | | | | |
| | Six Months Ended |
| | December 27, 2019 |
Cash paid for amounts included in the measurement of operating lease liabilities
| | $ | 3,524 | |
Right-of-use assets obtained in exchange for new lease liabilities (1)
| | $ | 5,606 | |
Weighted average remaining lease term | | 9.2 years |
Weighted average discount rate | | 4.84 | % |
MATURITIESOF LEASE COMMITMENTS
Maturities of operating lease commitments as of December 27, 2019 were as follows:
| | | | | | | | |
Fiscal Year | | Totals |
2020(1) | | $ | 5,231 | |
2021 | | 9,638 | |
2022 | | 8,989 | |
2023 | | 8,139 | |
2024 | | 7,153 | |
Thereafter | | 39,924 | |
Total lease payments | | 79,074 | |
Less: imputed interest | | (16,516) | |
| | |
Present value of operating lease liabilities | | $ | 62,558 | |
(1) Excludes the six months ended December 27, 2019.
As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2019, future minimum lease payments for non-cancelable operating leases were as follows:
| | | | | | | | |
Fiscal Year | | Totals |
2020 | | $ | 10,205 | |
2021 | | 8,949 | |
2022 | | 8,280 | |
2023 | | 7,414 | |
2024 | | 6,496 | |
Thereafter | | 28,286 | |
Total minimum lease payments | | $ | 69,630 | |
During the second quarter and six months ended December 27, 2019, the Company acquired both Ceresrecognized operating lease expense of $2,375 and its wholly-owned subsidiary, Themis.$4,991, respectively. There were no material restrictions, covenants, sale and leaseback transactions, variable lease payments or residual value guarantees imposed by the Company's leases at December 27, 2019.
Based in Fremont, California, Themis is a leading designer and manufacturer of commercial, SWaP-optimized rugged servers, computers, and storage systems for U.S. and international defense programs.
Under the terms of the Merger Agreement, the merger consideration (including payments with respect to outstanding stock options) consisted of an all cash purchase price of $180,000, without interest. The merger consideration is subject to post-closing
adjustments based on a determination of closing net working capital, transaction expenses and net debt (all as defined in the Merger Agreement). A related escrow agreement establishes an escrow amount of $1,500 in respect of post-closing adjustments owed to the Company and an escrow amount of $900 in respect of indemnification obligations to the Company.
On February 1, 2018, the Company closed the transaction for an aggregate purchase price of $180,000, plus an estimated adjustment for acquired working capital and cash. The Company drew $195,000 on the Revolver to facilitate the closing of the acquisition, with the higher amount reflecting an estimated adjustment for working capital, including cash, expected to be received with the Acquired Company at closing.
The Company has not completed its preliminary purchase price allocation for Ceres as not all information required for the analysis was available.
GENERALO.Subsequent Events
The Company has evaluated subsequent events from the date of the consolidated balance sheetConsolidated Balance Sheet through the date the consolidated financial statements were issued.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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"(“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 any U.S. Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in the U.S. Government’s interpretation of, federalFederal export control or procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, increases in interest rates, changes to interest rate swaps or other cash flow hedging arrangements, changes to industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as set forth under Part I-Item 1A (Risk Factors) in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2019. 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 leadingthe leader in making trusted, secure mission-critical technologies profoundly more accessible to aerospace and defense. Our innovative solutions power more than 300 aerospace, commercial provider of secure sensoraviation, defense, security and safety critical mission processing subsystems. Optimizedintelligence programs, configured and optimized for customer and mission success our solutions power a wide varietyin some of critical defensethe most challenging and intelligence programs.demanding environments. Headquartered in Andover, Massachusetts, we are pioneering a next-generation defense electronics business model designedMA, with manufacturing and design facilities around the world, Mercury specializes in engineering, adapting and manufacturing new solutions purpose-built to meet the industry’s current and emerging businesshigh-tech needs. We deliver affordable innovative solutions, rapid time-to-value and service and support primarily to defense prime contractor customers. Our products and solutions have been successfully deployed in more than 300 programs with over 25 different defense prime contractors. Key programs include Aegis, Patriot, Surface Electronic Warfare Improvement Program (“SEWIP”), Gorgon Stare, Predator, F-35, F-16 SABR, E2D Hawkeye, Reaper, and Paveway. Our organizational structure allows uscontractors, a testament to deliver capabilities that combine technology building blocks andour deep domain expertise and our commitment to Innovation that Matters®.
Our unique capabilities, technology and R&D investment strategy combine to differentiate Mercury in defense sector.
our industry. Our technologies and capabilities include secure embedded processing modules and subsystems, mission computers, secure and rugged rack-mount servers, safety-critical avionics, radio frequency (“RF”) components, multi-function assemblies and subsystems. We utilize leadingmaintain our technological edge high performance computing technologies architected by investing in critical capabilities and intellectual property (“IP” or “building blocks”) in processing and RF, leveraging open standards and open architectures to addressquickly adapt those building blocks into solutions for highly data-intensive applications that include data signal,for the sensor processing chain, all the way from the sensor to the network. This can encompass multiple sensor and imagemission processing while addressingfunctions - including emerging needs in artificial intelligence (“AI”). We leverage the Company’s building blocks to design, build and manufacture integrated sensor processing subsystems - often including classified application-specific software and IP - for the C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) and electronic warfare (“EW”) markets. These subsystems are deployed by our customers - defense and commercial aerospace companies, defense prime contractors and the U.S. Department of Defense (“DoD”) - in a variety of mission-critical applications. An important component of adapting these technologies and IP for these applications is our investment in specialized packaging, challenges, often referredruggedization and cooling to as “SWaP” (size,address size, weight and power), that are common in military applications. We havepower (“SWaP”) challenges. These investments, coupled with our domestic design, development, and manufacturing capabilities in mission computing, safety-critical avionics and platform management. In addition, we designmanagement solutions; and manufacture RF, microwave and millimeter wave components and subsystems to meet the needs of the radar, electronic warfare (“EW”), signals intelligence (“SIGINT”) and other high bandwidth communications requirements and applications.
We also provide significant capabilities relating to pre-integrated electronic warfare, electronic attack (“EA”) and electronic counter measure (“ECM”) subsystems, SIGINT and electro-optical/infrared (“EO/IR”) processing technologies, and radar environment test and simulation systems. We deploy these solutions on behalf of defense prime contractors and the Department of Defense (“DoD”), leveraging commercially available technologies and solutions (or “building blocks”) from our business and other commercial suppliers. We leverage this technology to design and build integrated sensor processing subsystems, often including classified application-specific software and intellectual property (“IP”) for the C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance), EW, and ECM markets. We bringbrings significant domain expertise to customers, drawing on over 25 years of experience in EW, SIGINT, and radar environment test and simulation.
our customers.
Since we conduct much of our business with our defense customers via commercial item sales,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 December 31, 2017,27, 2019, we had 1,2051,805 employees. Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted earnings per share ("(“adjusted EPS"EPS”), and adjusted EBITDA for the three monthssecond quarter ended December 31, 201727, 2019 were $117.9$193.9 million, $9.1$16.3 million, $0.19, $0.28,$15.7 million, $0.29, $0.54, and $26.9$42.8 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted earnings per share ("adjusted EPS"),EPS, and adjusted EBITDA for the six months ended December 31, 201727, 2019 were $224.0$371.2 million, $27.1$35.6 million, $0.57, $0.65,$34.9 million, $0.63, $0.98, and $51.9$79.5 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.
RESULTS OF OPERATIONS:
Results of operations for the threesecond quarter ended December 27, 2019 include full period results from the acquisitions of GECO Avionics, LLC (“GECO”), The Athena Group, Inc. (“Athena”), Syntonic Microwave LLC (“Syntonic”) and American Panel Corporation (“APC”). Results of operations for the six monthmonths ended December 27, 2019 include full period results from the acquisitions of Germane Systems, LC (“Germane”), GECO, Athena, Syntonic and only the results from acquisition date for APC which was acquired subsequent to June 30, 2019. Results of operations for six months ended December 31, 2016 do not2018, include only results from the acquisition date for Delta Microwave, LLC ("Delta") or Richland Technologies, L.L.C. ("RTL") since these businesses were acquired subsequent to December 31, 2016 and includes approximately two months results for CES Creative Electronic Systems, S.A. ("CES"), which was acquired on November 4, 2016.Germane. Accordingly, the periods presented below are not directly comparable.
Three monthsThe second quarter ended December 27, 2019 compared to the second quarter ended December 31, 2017 compared to the three months ended December 31, 20162018
The following tablestable set forth, for the three month periodssecond quarter ended indicated, financial data from the consolidated statementsConsolidated Statements of operations:Operations and Comprehensive Income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | December 27, 2019 | | As a % of Total Net Revenue | | December 31, 2018 | | As a % of Total Net Revenue |
Net revenues | | $ | 193,913 | | | 100.0 | % | | $ | 159,089 | | | 100.0 | % |
Cost of revenues | | 105,407 | | | 54.4 | | | 88,202 | | | 55.4 | |
Gross margin | | 88,506 | | | 45.6 | | | 70,887 | | | 44.6 | |
Operating expenses: | | | | | | | | |
Selling, general and administrative | | 32,804 | | | 16.9 | | | 27,819 | | | 17.5 | |
Research and development | | 24,660 | | | 12.7 | | | 16,192 | | | 10.2 | |
Amortization of intangible assets | | 7,992 | | | 4.1 | | | 6,939 | | | 4.4 | |
Restructuring and other charges | | 1,101 | | | 0.6 | | | 23 | | | — | |
| | | | | | | | |
Acquisition costs and other related expenses | | 1,124 | | | 0.6 | | | 53 | | | — | |
Total operating expenses | | 67,681 | | | 34.9 | | | 51,026 | | | 32.1 | |
Income from operations | | 20,825 | | | 10.7 | | | 19,861 | | | 12.5 | |
Interest income | | 312 | | | 0.2 | | | 71 | | | — | |
Interest expense | | — | | | — | | | (2,196) | | | (1.4) | |
Other expense, net | | (351) | | | (0.2) | | | (870) | | | (0.5) | |
Income before income taxes | | 20,786 | | | 10.7 | | | 16,866 | | | 10.6 | |
Tax provision | | 5,110 | | | 2.6 | | | 4,483 | | | 2.8 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net income | | $ | 15,676 | | | 8.1 | % | | $ | 12,383 | | | 7.8 | % |
|
| | | | | | | | | | | | | | |
(In thousands) | | December 31, 2017 | | As a % of Total Net Revenue | | December 31, 2016 | | As a % of Total Net Revenue |
Net revenues | | $ | 117,912 |
| | 100.0 | % | | $ | 98,014 |
| | 100.0 | % |
Cost of revenues | | 63,752 |
| | 54.1 |
| | 50,625 |
| | 51.7 |
|
Gross margin | | 54,160 |
| | 45.9 |
| | 47,389 |
| | 48.3 |
|
Operating expenses: | | | | | | | | |
Selling, general and administrative | | 21,222 |
| | 18.0 |
| | 19,320 |
| | 19.7 |
|
Research and development | | 15,187 |
| | 12.9 |
| | 13,156 |
| | 13.4 |
|
Amortization of intangible assets | | 5,827 |
| | 4.9 |
| | 4,888 |
| | 5.0 |
|
Restructuring and other charges | | 313 |
| | 0.3 |
| | 69 |
| | 0.1 |
|
Acquisition costs and other related expenses | | 723 |
| | 0.6 |
| | 998 |
| | 1.0 |
|
Total operating expenses | | 43,272 |
| | 36.7 |
| | 38,431 |
| | 39.2 |
|
Income from operations | | 10,888 |
| | 9.2 |
| | 8,958 |
| | 9.1 |
|
Interest income | | 3 |
| | — |
| | 10 |
| | — |
|
Interest expense | | (107 | ) | | (0.1 | ) | | (1,898 | ) | | (1.9 | ) |
Other expense, net | | (316 | ) | | (0.3 | ) | | (87 | ) | | (0.1 | ) |
Income before income taxes | | 10,468 |
| | 8.8 |
| | 6,983 |
| | 7.1 |
|
Tax provision | | 1,335 |
| | 1.1 |
| | 1,779 |
| | 1.8 |
|
Net income | | $ | 9,133 |
| | 7.7 | % | | $ | 5,204 |
| | 5.3 | % |
REVENUES
|
| | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | December 31, 2017 | | As a % of Total Net Revenue | | December 31, 2016 | | As a % of Total Net Revenue | | $ Change | | % Change |
Organic revenue | | $ | 104,957 |
| | 89 | % | | $ | 94,058 |
| | 96 | % | | $ | 10,899 |
| | 12 | % |
Acquired revenue | | 12,955 |
| | 11 | % | | 3,956 |
| | 4 | % | | 8,999 |
| | 227 | % |
Total revenues | | $ | 117,912 |
| | 100 | % | | $ | 98,014 |
| | 100 | % | | $ | 19,898 |
| | 20 | % |
Total revenues increased $19.9$34.8 million, or 20%21.9%, to $117.9 million duringfor the three monthssecond quarter ended December 31, 201727, 2019, as compared to the same period in fiscal 2017second quarter ended December 31, 2018 including "Acquired revenue"“acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full quarters or less (and excludes any intercompany transactions). After the completion of four fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods. The increase in total revenues iswas primarily attributeddue to the Falcon Edge, SEWIP and E2D Hawkeye programs and the increase of $9.0$18.5 million of Acquired revenue. These increasesadditional organic revenues which were predominantly driven by increased demand for components and modules and sub-assemblies across the radar and electronic warfare (“EW”) applications. The organic revenues increase were driven by the Filthy Badger, F16/SABR and P8 programs, which were partially offset by lower revenues from the F-35 program and a large ground based radar program.
International revenues, which consist of foreign military sales through the U.S. government, sales to prime defense contractor customers where the end user is known to be outside of the U.S., and direct sales to non-U.S. based customers, increased $12.9 million to $27.9 million during the three months ended December 31, 2017, compared to $15.0 milliondecreases in the same period in the prior fiscal year. International revenues represented 24% and 15% of total revenues during the three months ended December 31, 2017 and 2016, respectively.
Revenues from EW, C4I, and Other Sensor and Effector increased by $8.1 million, $6.9 million and $6.3 million, respectively, during the three months ended December 31, 2017 as compared to the same period in fiscal 2017. The EW increase was driven primarily by the SEWIP program, while the increase in C4I was driven by the F-35 program. The increase in Other Sensor and Effector was primarilyTotal revenues also increased $16.3 million from acquired revenues due to higher revenue from the Precision Guidance Kit ("PGK") program. Additionally, revenues from components, modules & sub-assemblies,GECO, Athena, Syntonic and integrated subsystems increased by $15.3 million, $3.2 million, and $1.4 million, respectively, during the three months endedAPC, which were all acquired following December 31, 2017 as compared2018. See the Non-GAAP Financial Measures section for a reconciliation to the same period in fiscal 2017. The components increase was driven primarily by the Falcon Edge program, while the increase in modules and sub-assemblies was driven primarily by the SEWIP program. The increase in integrated subsystems was primarily due to higher revenue from the E2D Hawkeye and Aegis programs.our most directly comparable GAAP financial measures.
GROSS MARGIN
Gross margin was 45.9%45.6% for the three monthssecond quarter ended December 31, 2017, a decrease27, 2019, an increase of 240100 basis points from the 48.3%44.6% gross margin achieved during the same period in fiscal 2017.second quarter ended December 31, 2018. The lowerhigher gross margin between years was primarily driven by program mix and operational efficiencies, as well as a large last-time component buy bydecrease in Customer Funded Research and Development (“CRAD”). The Athena and APC acquisitions also contributed to the increase in gross margin. CRAD primarily represents engineering labor associated with long-term contracts for customized development, production and service activities. Due to the nature of these efforts, they typically carry a customerlower margin. These products are predominately grouped within integrated subsystems and less F-35 royalty revenue. Lowerto a lesser extent modules and sub-assemblies. The gross margins for the three months ended December 31, 2017 weremargin improvement was partially offset by lower$0.6 million of inventory step-up amortization of $0.8 million as comparedrelated to the same period in fiscal 2017.APC acquisition for the second quarter ended December 27, 2019.
SELLING, GENERALAND ADMINISTRATIVE
Selling, general and administrative expenses increased $1.9$5.0 million, or 10%18.0%, to $21.2$32.8 million during the three monthssecond quarter ended December 27, 2019, as compared to $27.8 million in the second quarter ended December 31, 2017, compared to $19.3 million in the same period in fiscal 2017.2018. The increase was primarily related to higher compensation related costs due to addedadditional headcount from the acquisitions of Delta and RTL,organic growth, as well as the full period impactacquisitions of the CES acquisition.GECO, Athena, Syntonic and APC. Selling, general and administrative expenses decreased as a percentage of revenues decreased slightlyrevenue to 16.9% for the three monthssecond quarter ended December 27, 2019 from 17.5% for the second quarter ended December 31, 2017 as compared to the same period in fiscal 2017. The decrease was2018, primarily due to higher revenues in the three months ended December 31, 2017, as compared to the same period in fiscal 2017.improved operating leverage.
RESEARCHAND DEVELOPMENT
Research and development expenses increased approximately $2.0$8.5 million, or 15%52.5%, to $15.2$24.7 million during the three monthssecond quarter ended December 27, 2019, as compared to $16.2 million during the second quarter ended December 31, 2017, compared to $13.2 million during the same period in fiscal 2017.2018. The increase was primarily due to increased headcount from organic growth and our recent acquisitions. Research and development expenses accounted for 12.7% and 10.2% of our revenues for second quarter ended December 27, 2019 and second quarter ended December 31, 2018, respectively. The increase as a percentage of revenue was primarily driven by the acquisitionscontinued investment in the growth of CES, Delta and RTL driving higher compensation related costs, in addition to decreased customer funded development.the business for the second quarter ended December 27, 2019.
RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges increased $0.2 million to $0.3$1.1 million during the three monthssecond quarter ended December 27, 2019, as compared to the second quarter ended December 31, 2017, compared to $0.1 million during the same period in fiscal 2017.2018. Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.
ACQUISITION COSTSAND OTHER RELATED EXPENSES
We incurred $0.7$1.1 million of acquisition costs and other related expenses during the three monthssecond quarter ended December 27, 2019, as compared to $0.1 million during the second quarter ended December 31, 2017, compared to $1.0 million during the same period in fiscal 2017.2018. The second quarter ended December 27, 2019 included acquisition costs and other related expenses incurred during the three months ended December 31, 2017 relate to the acquisition of Ceres Systems, the holding company that owns Themis Computer (“Themis”, and together with Ceres, collectively the “Acquired Company”), while fiscal 2017 expenses related to the acquisition of CES.APC, as well as costs associated with our evaluation of other acquisition opportunities. We expect to incur acquisition costs and other related expenses periodically in the future as we continue to seek acquisition opportunities to expand our technological capabilities and new end marketsespecially within sensor and effector and C4I markets. Transaction costs incurred by the sensor processing chain.acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.
INTEREST EXPENSEINCOME
We incurred $0.1Interest income increased to $0.3 million in the second quarter ended December 27, 2019. This was driven by higher average balances of cash on hand during the second quarter ended December 27, 2019.
INTEREST EXPENSE
There was no interest expense incurred during the three monthssecond quarter ended December 27, 2019, as there were no outstanding borrowings on our revolving credit facility (“the Revolver”) during the period.
OTHER EXPENSE, NET
Other expense, net decreased $0.5 million for the second quarter ended December 27, 2019, as compared to the second quarter ended December 31, 2017 compared to $1.9 million during the same period in fiscal 2017.2018. The decrease was driven by $1.4 million cash interest expense andadditional foreign currency translation gain of $0.5 million of non-cash interest expense relatedfor the second quarter ended December 27, 2019, compared to the amortization of debt issuance costs related to our former term loan, which was repaid in the fourthsecond quarter of fiscal 2017.
OTHER EXPENSE, NET
Other expense, net decreased $0.2 million to $(0.3) million during the three months ended December 31, 2017, as compared to $(0.1)2018.
INCOME TAXES
We recorded an income tax provision of $5.1 million in the same period in fiscal 2017. The decrease was primarily due to $0.6and $4.5 million in financingon income before income taxes of $20.8 million and registration fees during the three months ended December 31, 2017 compared to $0.1$16.9 million for the same period in fiscal 2017. The decrease was also driven by a $0.3 million gain related to the amortization of the gain on the sale leaseback of our former headquarters in fiscal 2017, which was fully amortized in fiscal 2017. The decrease was partially offset by a less than $0.1 million foreign exchange
gain during the three monthssecond quarters ended December 27, 2019 and December 31, 2017, as compared to $0.2 million foreign exchange loss during the same period in fiscal 2017.
INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted by the U.S. government. The Tax Act has impacted the statutory Federal tax rate that the Company will use going forward, which has been reduced to 21% from 35%. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory Federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. In addition to the reduced corporate rate we also expect to benefit from the immediate deduction for certain new investments. The Tax Act also includes items that we expect will increase our tax expense including, but not limited to, the elimination of the domestic manufacturing deduction and increased limitations on executive compensation. In addition, the actual effective tax rate may be materially different than the statutory Federal tax rate (including being higher) based on the availability and impact of various other adjustments including but not limited to state taxes, Federal research and development credits, discrete tax benefits related to stock compensation, and the inclusion or exclusion of various items in taxable income which may differ from GAAP income.
respectively. During the three monthssecond
quarters ended December 27, 2019 and December 31, 2017 and 2016,2018, we recognized a discrete tax expense and benefit of $0.3$0.4 million and $0.6$0.1 million respectively, related to excess tax benefits on stock-based compensation. The discrete tax expense for the three months ended December 31, 2017 included the enactment of the Tax Act which revalued the excess tax benefit previously recorded in the three months ended September 30, 2017. The excess tax benefit related to stock-based compensation is the result of an increase in value from the stock award between the grant date and the vest date.
OurThe effective tax rate for the three monthssecond quarters ended December 27, 2019 and December 31, 20172018 differed from the Federal statutory tax rate of 28% primarily due to the one-time impact of the Tax Act, Federal research and development credits, domestic manufacturing deduction, excess tax benefits related to stock compensation, and state taxes. Our effective tax rate for the three months ended December 31, 2016 differed from the Federal statutory tax rate of 35%21% primarily due to Federal research and development credits, domestic manufacturing deduction, excess tax benefits related to stock compensation, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.
Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service the SEC, and the FASB. The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined. Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act could have a material impact on the Company’s future U.S. tax expense.
(“IRS”).
Six months ended December 31, 201727, 2019 compared to the six months ended December 31, 20162018
The following tables set forth, for the six monthsmonth periods indicated, financial data from the consolidated statementsConsolidated Statements of operations:Operations and Comprehensive Income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | December 27, 2019 | | As a % of Total Net Revenue | | December 31, 2018 | | As a % of Total Net Revenue |
Net revenues | | $ | 371,217 | | | 100.0 | % | | $ | 303,145 | | | 100.0 | % |
Cost of revenues | | 204,311 | | | 55.0 | | | 170,675 | | | 56.3 | |
Gross margin | | 166,906 | | | 45.0 | | | 132,470 | | | 43.7 | |
Operating expenses: | | | | | | | | |
Selling, general and administrative | | 62,774 | | | 16.9 | | | 52,560 | | | 17.3 | |
Research and development | | 46,530 | | | 12.5 | | | 31,140 | | | 10.3 | |
Amortization of intangible assets | | 15,011 | | | 4.0 | | | 14,120 | | | 4.7 | |
Restructuring and other charges | | 1,749 | | | 0.5 | | | 527 | | | 0.2 | |
| | | | | | | | |
Acquisition costs and other related expenses | | 2,541 | | | 0.8 | | | 452 | | | 0.1 | |
Total operating expenses | | 128,605 | | | 34.7 | | | 98,799 | | | 32.6 | |
Income from operations | | 38,301 | | | 10.3 | | | 33,671 | | | 11.1 | |
Interest income | | 1,499 | | | 0.4 | | | 137 | | | — | |
Interest expense | | — | | | — | | | (4,455) | | | (1.4) | |
Other expense, net | | (1,785) | | | (0.5) | | | (1,879) | | | (0.6) | |
Income before income taxes | | 38,015 | | | 10.2 | | | 27,474 | | | 9.1 | |
Tax provision | | 3,092 | | | 0.8 | | | 7,612 | | | 2.5 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net income | | $ | 34,923 | | | 9.4 | % | | $ | 19,862 | | | 6.6 | % |
|
| | | | | | | | | | | | | | |
(In thousands) | | December 31, 2017 | | As a % of Total Net Revenue | | December 31, 2016 | | As a % of Total Net Revenue |
Net revenues | | $ | 223,981 |
| | 100.0 | % | | $ | 185,663 |
| | 100.0 | % |
Cost of revenues | | 119,147 |
| | 53.2 |
| | 98,830 |
| | 53.2 |
|
Gross margin | | 104,834 |
| | 46.8 |
| | 86,833 |
| | 46.8 |
|
Operating expenses: | | | | | | | | |
Selling, general and administrative | | 41,790 |
| | 18.7 |
| | 36,864 |
| | 19.9 |
|
Research and development | | 28,929 |
| | 12.9 |
| | 25,994 |
| | 14.0 |
|
Amortization of intangible assets | | 11,464 |
| | 5.1 |
| | 9,490 |
| | 5.1 |
|
Restructuring and other charges | | 408 |
| | 0.2 |
| | 366 |
| | 0.2 |
|
Acquisition costs and other related expenses | | 984 |
| | 0.4 |
| | 1,419 |
| | 0.7 |
|
Total operating expenses | | 83,575 |
| | 37.3 |
| | 74,133 |
| | 39.9 |
|
Income from operations | | 21,259 |
| | 9.5 |
| | 12,700 |
| | 6.9 |
|
Interest income | | 22 |
| | — |
| | 50 |
| | — |
|
Interest expense | | (110 | ) | | — |
| | (3,720 | ) | | (2.0 | ) |
Other (expense) income, net | | (1,131 | ) | | (0.5 | ) | | 513 |
| | 0.3 |
|
Income before income taxes | | 20,040 |
| | 9.0 |
| | 9,543 |
| | 5.2 |
|
Tax (benefit) provision | | (7,046 | ) | | (3.1 | ) | | 520 |
| | 0.3 |
|
Net income | | $ | 27,086 |
| | 12.1 | % | | $ | 9,023 |
| | 4.9 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | December 31, 2017 | | As a % of Total Net Revenue | | December 31, 2016 | | As a % of Total Net Revenue | | $ Change | | % Change |
Organic revenue | | $ | 198,456 |
| | 89 | % | | $ | 181,707 |
| | 98 | % | | $ | 16,749 |
| | 9 | % |
Acquired revenue | | 25,525 |
| | 11 | % | | 3,956 |
| | 2 | % | | 21,569 |
| | 545 | % |
Total revenues | | $ | 223,981 |
| | 100 | % | | $ | 185,663 |
| | 100 | % | | $ | 38,318 |
| | 21 | % |
Total revenues increased $38.3$68.1 million, or 21%22.5%, for the six months ended December 27, 2019 compared to the six months ended December 31, 2018. The increase is primarily due to $41.5 million of additional organic revenues related to increased demand primarily for integrated subsystems and components across the EW, other sensor and effector and C4I applications. The increases in organic revenues were primarily driven by the SEWIP Block II and AIDEWS programs and a classified missile program, which were partially offset by decreases in the F-35 and WIN-T programs. Total revenues also increased due to $26.6 million of additional acquired revenues from the Germane, GECO, Athena, Syntonic and APC acquisitions. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.
GROSS MARGIN
Gross margin was 45.0% for the six months ended December 27, 2019, an increase of 130 basis points from the 43.7% gross margin achieved during the six months ended December 31, 2018. The higher gross margin was primarily driven by program mix, including lower CRAD, operational efficiencies and acquired businesses of Athena and APC. The six months ended December 27, 2019 and six months ended December 31, 2018, both include inventory step-up amortization of $0.6 million related to the APC and Germane acquisitions, respectively.
SELLING, GENERALAND ADMINISTRATIVE
Selling, general and administrative expenses increased $10.2 million or 19.4%, to $224.0$62.8 million during the six months ended December 31, 2017 as27, 2019, compared to the same period$52.6 million in fiscal 2017. The increase in total revenues is primarily attributed to $21.6 million of higher Acquired revenue during the six months ended December 31, 2017. The $16.7 million organic revenue increase was primarily attributed to the SEWIP, F-16 SABR and PGK programs, partially offset by lower revenues from a large ground based radar program and the Digital Electronic Warfare System ("DEWS") and PAC 3 programs.
International revenues, which consist of foreign military sales through the U.S. government, sales to prime defense contractor customers where the end user is known to be outside of the U.S., and direct sales to non-U.S. based customers, increased $15.2 million to $44.3 million during the six months ended December 31, 2017, compared to $29.1 million in the same period in the prior fiscal year. International revenues represented 20% and 16% of total revenues during the six months ended December 31, 2017 and 2016, respectively.
Revenues from C4I, EW, and Other Sensor and Effector increased by $15.4 million, $15.1 million, and $11.4 million, respectively, during the three months ended December 31, 2017 as compared to the same period in fiscal 2017. The C4I increase was driven primarily by the F-35 program, while the increase in EW was driven by the SEWIP program. The increase in Other Sensor and Effector was primarily due to higher revenue from the PGK program. Additionally, revenues from components and modules & sub-assemblies increased by $28.2 million and $14.3 million, respectively, offset by a $4.2 million reduction to integrated subsystems during the six months ended December 31, 2017 as compared to the same period in fiscal 2017. The components increase was driven primarily by the UAV T-Series and Falcon Edge programs, while the increase in modules and sub-assemblies was driven by the SEWIP program. The decrease in integrated subsystems was primarily due to lower revenues from a large ground based radar program.
GROSS MARGIN
Gross margin was 46.8% for the six months ended December 31, 2017 and 2016. The gross margin during the six months ended December 31, 2017 was impacted by lower margin product mix, which was offset by lower inventory step-up amortization of $2.3 million related to our acquired businesses compared to the same period in fiscal 2017.
SELLING, GENERALAND ADMINISTRATIVE
Selling, general and administrative expenses increased $4.9 million, or 13%, to $41.8 million during the six months ended December 31, 2017, compared to $36.9 million in the same period in fiscal 2017.2018. The increase was primarily due
related to higher compensation expense due to increasedadditional headcount from the acquisitions of Delta and RTL,organic growth as well as the full period impactacquisitions of CES.GECO, Athena, Syntonic and APC. Selling, general and administrative expenses decreased as a percentage of revenues to 18.7%16.9% during the six months ended December 27, 2019 from 17.3% during the six months ended December 31, 2017 from 19.9% during the same period in fiscal 2017. The decrease was2018, primarily due to higher revenues in the six months ended December 31, 2017, as compared to the same period in fiscal 2017.operating leverage.
RESEARCHAND DEVELOPMENT
Research and development expenses increased $2.9$15.4 million, or 11%49.5%, to $28.9$46.5 million during the six months ended December 27, 2019, compared to $31.1 million during the six months ended December 31, 2017, compared to $26.0 million during the same period in fiscal 2017.2018. The increase was primarily due to increased headcount from organic growth and our recent acquisitions. Research and development expenses increased as a percentage of revenues to 12.5% during the acquisitions of Delta and RTL,six months ended December 27, 2019 from 10.3% during the six months ended December 31, 2018. The increase was driven by continued investment in addition to the full period impactgrowth of the CES acquisition, driving higher compensation related costs in addition to increased prototype expenditures.business during the six months ended December 27, 2019.
RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges were $0.4$1.7 million for the six months ended December 27, 2019, compared to $0.5 million during the six months ended December 31, 2017 and 2016.2018. Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.
ACQUISITION COSTSAND OTHER RELATED EXPENSES
We incurred $1.0$2.5 million of acquisition costs and other related expenses during the six months ended December 31, 2017,27, 2019, compared to $1.4$0.5 million during the same period in fiscal 2017.six months ended December 31, 2018. The acquisition costs and other related expenses we incurred during the six months ended December 31, 2017 relate to the acquisitions of RTL and Themis, while fiscal 2017 expenses27, 2019 were related to the acquisition of CES.APC as well as costs associated with our evaluation of other acquisition opportunities. We expect to incur acquisition costs and other related expenses periodically in the future as we continue to seek acquisition opportunities to expand our capabilities and new end markets within the sensor processing chain. Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.
INTEREST EXPENSEINCOME
We incurred $0.1Interest income increased to $1.5 million of interest expense during the six months ended December 31, 2017 compared to $3.7 million in the same period in fiscal 2017. The decrease27, 2019. This was driven by $2.8 millionhigher average balances of cash on hand during the six months ended December 27, 2019.
INTEREST EXPENSE
There was no interest expense and $0.9 million of amortization of debt issuance costsincurred during the six months ended December 27, 2019, as there were no outstanding borrowings on the term loan, which was repaidRevolver during the fourth quarter of fiscal 2017.period.
OTHER (E EXPENSE) INCOME, NET
Other (expense) income,expense, net was $(1.1)$1.8 million during the six months ended December 27, 2019, compared to $1.9 million during the six months ended December 31, 2017,2018. The decrease in other expense, net was due to a $0.3 million foreign exchange gains during the six months ended December 27, 2019, compared to $0.5a $0.3 million during the same period in fiscal 2017. The decrease was primarily due to $1.2 million in financing and registration feesforeign exchange loss during the six months ended December 31, 2017 compared to2018. The increase in foreign exchange gains, was partially offset by an additional $0.2 million forof financing and registration fees and $0.3 million of litigation and settlement expenses during the same period in fiscal 2017. The six months ended December 31, 2016 included $0.6 million related to the amortization of the gain on the sale leaseback of our former corporate headquarters, partially offset by $0.2 million of foreign exchange losses.27, 2019, respectively.
INCOME TAXES
On December 22, 2017, the Tax Act was enacted by the U.S. government. The Tax Act has impacted the statutory Federal tax rate that the Company will use going forward, which has been reduced to 21% from 35%. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory Federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. In addition to the reduced corporate rate we also expect to benefit from the immediate deduction for certain new investments. The Tax Act also includes items that we expect will increase our tax expense including, but not limited to, the elimination of the domestic manufacturing deduction and increased limitations on executive compensation. In addition, the actual effective tax rate may be materially different than the statutory Federal tax rate (including being higher) based on the availability and impact of various other adjustments including but not limited to state taxes, Federal research and development credits, discrete tax benefits related to stock compensation, and the inclusion or exclusion of various items in taxable income which may differ from GAAP income.
We recorded an income tax benefitprovision of $7.0$3.1 million duringand $7.6 million on income from operations before income taxes of $38.0 million and $27.5 million for the six months ended December 27, 2019 and December 31, 2017 as compared to an income tax provision of $0.5 million for the same period in fiscal 2017.2018, respectively. During the six months ended December 27, 2019 and December 31, 2017 and
2016,2018, we recognized discrete tax benefits of $7.6$6.5 million and $2.8$1.7 million, respectively, related to excess tax benefits on stock-based compensation. The discrete tax benefit for the six months ended December 31, 2017 included the enactment of the Tax Act which revalued the excess tax benefit previously recorded in the three months ended September 30, 2017. The benefit is the result of the increase in value from the stock award between the grant date and the vest date. The six months ended December 31, 2017 also included a discrete tax benefit of $3.7 million derived from new information obtained about net operating loss carry-forwards of the entities acquired from Microsemi Corporation (the “Carve-Out Business”) in May 2016. The discrete items disclosed above for the six months ended December 31, 2017 included the effect of the Tax Act.
OurThe effective tax rate for the six months ended December 27, 2019 and December 31, 20172018 differed from the Federal statutory tax rate of 28% primarily due to the one-time impact of the Tax Act, Federal research and development credits, domestic manufacturing deduction, excess tax benefits related to stock compensation, and state taxes. Our effective tax rate for the six months ended December 31, 2016 differed from the Federal statutory tax rate of 35%21% primarily due to Federal research and development credits, domestic manufacturing deduction, excess tax benefits related to stockstock-based compensation, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.
Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, and the FASB. The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined. Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act could have a material impact on the Company’s future U.S. tax expense.IRS.
LIQUIDITYAND CAPITAL RESOURCES
Our primary sources of liquidity come from existing cash and cash generated from operations, including our accounts receivable factoring program, our revolving credit facilityRevolver 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 do not currently have any material commitments for capital expenditures.plan to invest in improvements to our facilities, including the expansion of our trusted custom microelectronics business during fiscal 2020.
Based on our current plans and business conditions, we believe that existing cash and cash equivalents, our available revolving credit facility,Revolver, cash generated from operations, and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.
Shelf Registration Statement
On August 28, 2017, 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 usingunder the shelf registration statement for general corporate purposes, which may include the following:
•the acquisition of other companies or businesses;
•the repayment and refinancing of debt;
•capital expenditures;
•working capital; and
•other purposes as described in the prospectus supplement.
We have an unlimited amount available under the shelf registration statement. Additionally, as part of the shelf registration statement, we have entered into an equity distribution agreement which allows us to sell an aggregate of up to $200.0 million of our common stock from time to time through our agents. The actual dollar amount and number of shares of common stock we sell pursuant to the equity distribution agreement will be dependent on, among other things, market conditions and our fund raising requirements. The agents may sell the common stock by any method deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation sales made directly on NASDAQ,Nasdaq, on any other existing trading market for the common stock or to or through a market maker. In addition, our common stock may be offered and sold by such other methods, including privately negotiated transactions, as we and the agents may agree.
Revolving Credit Facility
In June 2017,On September 28, 2018, we amended our revolving credit facility ("the Revolver"), increasingRevolver to increase and extendingextend the facility intoborrowing capacity to a $400.0$750.0 million, 5-year revolving credit line, expiring in June 2022. In connection with the amendment,maturity extended to September 2023. As of December 27, 2019, we repaidhad no outstanding borrowings on the remaining outstanding principal of and interest on our term loan using cash on hand. The Revolver had an outstanding balance of $0 at December 31, 2017, other than for outstanding letters of credit.Revolver. See Note I in the accompanying consolidated financial statements for further discussion of the Revolver.
On February 1, 2018, upon the terms and subject to the conditions set forth in a Merger Agreement, we completed the acquisition of Ceres, the holding company that owns Themis. Under the terms of the Merger Agreement, we paid an aggregate
CASH FLOWS
purchase price of $180.0 million, plus an estimated adjustment for acquired working capital and cash for the Acquired Company, subject to post-closing adjustments based on a determination of closing net working capital, transaction expenses and net debt (all as defined in the Merger Agreement). To facilitate the completion of the Merger Agreement, we drew $195.0 million from the Revolver, with the higher amount reflecting an estimated adjustment for working capital, including cash, expected to be received with the Acquired Company at closing.
CASH FLOWS
| | | | As of and For the Six Month Period Ended December 31, | | | As of and For the Six Months Ended, | |
(In thousands) | | 2017 | | 2016 | (In thousands) | | December 27, 2019 | | December 31, 2018 |
Net cash provided by operating activities | | $ | 16,807 |
| | $ | 24,521 |
| Net cash provided by operating activities | | $ | 56,376 | | | $ | 45,330 | |
Net cash used in investing activities | | $ | (13,765 | ) | | $ | (52,628 | ) | Net cash used in investing activities | | $ | (117,421) | | | $ | (55,831) | |
Net cash used in financing activities | | $ | (12,860 | ) | | $ | (7,327 | ) | |
Net decrease in cash and cash equivalents | | $ | (9,602 | ) | | $ | (35,506 | ) | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | $ | (14,934) | | | $ | 37,894 | |
Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | | $ | (75,895) | | | $ | 27,382 | |
Cash and cash equivalents at end of period | | $ | 32,035 |
| | $ | 46,185 |
| Cash and cash equivalents at end of period | | $ | 182,037 | | | $ | 93,903 | |
Our cash and cash equivalents decreased by $9.6$75.9 million from June 30, 20172019 to December 31, 2017,27, 2019, primarily as the result of $96.5 million of cash on hand used to fund the acquisition of APC, $20.9 million invested in purchases of property and equipment and $14.9 million used in the purchase and retirement of common stock used to settle individual employees' tax liabilities associated with vesting of restricted stock awards $7.6 million invested in purchases of property and equipment, and $5.8 million used in acquisition activities. These decreases were partially offset by $16.8$56.4 million provided by operating activities.
Operating Activities
During the six months ended December 31, 2017,27, 2019, we generated $16.8$56.4 million in cash from operating activities, a decreasean increase of $7.7$11.0 million when compared to the same period in fiscal 2017.six months ended December 31, 2018. The decreaseincrease in cash generated by operating activities was primarily athe result of $18.6 million higher comparable net income, higher cash collections on outstanding accounts receivable and lower inventory purchases, $11.6 million decrease inpurchases. These increases were partially offset by increased prepaid income taxes, decreased accounts payable, accrued expenses and income taxes payable and $10.4 million less collections from accounts receivables. The decrease in cash generated by operating activities was partially offset by generating$18.1 million of higher net incomedeferred revenue and $13.5 million more cash from the timing of payables. Our ability to generate cash from operations in future periods will depend in large part on profitability, cash flows attributable to factoring, the rate and timing of collections of accounts receivable, our inventory turns and our ability to manage other areas of working capital.customer advances.
Investing Activities
During the six months ended December 31, 2017,27, 2019, we used $13.8invested $117.4 million in investing activities compared to $52.6$55.8 million during the same period in fiscal 2017. The decrease was primarily driven by $5.8 million used in the acquisition of RTL for the six months ended December 31, 2017 compared to $38.8 million used in2018. The increase was driven by the acquisition of CESAPC during the six months ended December 27, 2019 and an additional $10.1 million invested in the same period of fiscal 2017. The decrease was also driven by $6.2 million in lower purchases of property and equipment, primarily related to the build out of our trusted custom microelectronics business during fiscalthe six months ended December 27, 2019, as compared to the six months ended December 31, 2018.
Financing Activities
During the six months ended December 31, 2017,27, 2019, we had $14.9 million in cash used $12.9 million in financing activities compared to $7.3$37.9 million in cash provided by financing activities during the same period in fiscal 2017.six months ended December 31, 2018. The $5.5$52.8 million increase in cash used by financing activitiesdecrease was primarily due to $14.9no borrowings on the Revolver and $8.0 million used inof additional payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with vesting of restricted stock awards during the six months ended December 27, 2019, as compared to $7.6 million used in the same period of fiscal 2017, primarily driven by the increase in our stock price as of the vesting date.six months ended December 31, 2018.
COMMITMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
The following is a schedule of our commitments and contractual obligations outstanding at December 31, 2017:27, 2019:
| | (In thousands) | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | (In thousands) | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
Purchase obligations | | $ | 50,653 |
| | $ | 50,653 |
| | $ | — |
| | $ | — |
| | $ | — |
| Purchase obligations | | $ | 97,083 | | | $ | 97,083 | | | $ | — | | | $ | — | | | $ | — | |
Operating leases | | 70,263 |
| | 6,875 |
| | 12,450 |
| | 9,425 |
| | 41,513 |
| Operating leases | | 79,051 | | | 10,074 | | | 25,509 | | | 20,007 | | | 23,461 | |
| | $ | 120,916 |
| | $ | 57,528 |
| | $ | 12,450 |
| | $ | 9,425 |
| | $ | 41,513 |
| |
| | | | $ | 176,134 | | | $ | 107,157 | | | $ | 25,509 | | | $ | 20,007 | | | $ | 23,461 | |
Purchase obligations represent open non-cancelable 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 aggregated approximately $50.7$97.1 million at December 31, 2017.
27, 2019.
We have a liability at December 31, 201727, 2019 of $0.8$1.4 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. We do not know the ultimate resolution on these uncertain tax positions and as such, do not know the ultimate timing of payments related to this liability. Accordingly, these amounts are not included in the above table.
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 or exercise of stock options. These transactions would be treated as a use of cash in financing activities in our statementConsolidated Statements of cash flows.Cash Flows.
OFF-BALANCE SHEET ARRANGEMENTS
Other than our lease commitments incurredcertain indemnification provisions in the normal course of business, and 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.
NON-GAAP-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 earnings per share ("adjusted EPS") andEPS, free cash flow.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 and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, 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 componentthe portion of bonus and equity compensation for executive officers and other key employees based on operating performance, and evaluating short-term and long-term operating trends in our operations.operations and allocating resources to various initiatives and operational requirements. We believe thethat adjusted EBITDA financial measure assists in providingpermits a more complete understandingcomparative assessment of our underlying operational measuresoperating performance, relative to manage our business, to evaluate our performance comparedbased on our GAAP results, while isolating the effects of charges that may vary from period to prior periods and the marketplace, andperiod without any correlation to establish operational goals.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.
The following table reconciles our net income, the most directly comparable GAAP financial measure, to our adjusted EBITDA:
| | | | Three Months Ended December 31, | | Six Months Ended December 31, | | | Second Quarters Ended | | | Six Months Ended | |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (In thousands) | | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
Net income | | $ | 9,133 |
| | $ | 5,204 |
| | $ | 27,086 |
| | $ | 9,023 |
| Net income | | $ | 15,676 | | | $ | 12,383 | | | $ | 34,923 | | | $ | 19,862 | |
Other non-operating adjustments, net | | Other non-operating adjustments, net | | (549) | | | (18) | | | (248) | | | 347 | |
Interest (income) expense, net | | 104 |
| | 1,888 |
| | 88 |
| | 3,670 |
| Interest (income) expense, net | | (312) | | | 2,125 | | | (1,499) | | | 4,318 | |
Income taxes | | 1,335 |
| | 1,779 |
| | (7,046 | ) | | 520 |
| |
Income tax provision | | Income tax provision | | 5,110 | | | 4,483 | | | 3,092 | | | 7,612 | |
Depreciation | | 3,775 |
| | 2,968 |
| | 7,475 |
| | 5,686 |
| Depreciation | | 4,555 | | | 4,769 | | | 8,917 | | | 9,134 | |
Amortization of intangible assets | | 5,827 |
| | 4,888 |
| | 11,464 |
| | 9,490 |
| Amortization of intangible assets | | 7,992 | | | 6,939 | | | 15,011 | | | 14,120 | |
Restructuring and other charges (1) | | 313 |
| | 69 |
| | 408 |
| | 366 |
| Restructuring and other charges(1) | | 1,101 | | | 23 | | | 1,749 | | | 527 | |
Impairment of long-lived assets | | — |
| | — |
| | — |
| | — |
| Impairment of long-lived assets | | — | | | — | | | — | | | — | |
Acquisition and financing costs | | 1,366 |
| | 1,114 |
| | 2,220 |
| | 1,667 |
| Acquisition and financing costs | | 1,882 | | | 762 | | | 4,118 | | | 1,805 | |
Fair value adjustments from purchase accounting (2) | | 84 |
| | 868 |
| | 593 |
| | 2,945 |
| Fair value adjustments from purchase accounting(2) | | 600 | | | — | | | 600 | | | 620 | |
Litigation and settlement expense (income), net | | — |
| | 100 |
| | — |
| | 100 |
| |
Litigation and settlement expense, net | | Litigation and settlement expense, net | | 142 | | | 179 | | | 455 | | | 179 | |
Stock-based and other non-cash compensation expense | | 4,941 |
| | 4,093 |
| | 9,637 |
| | 7,725 |
| Stock-based and other non-cash compensation expense | | 6,639 | | | 5,338 | | | 12,415 | | | 10,081 | |
Adjusted EBITDA | | $ | 26,878 |
| | $ | 22,971 |
| | $ | 51,925 |
| | $ | 41,192 |
| Adjusted EBITDA | | $ | 42,836 | | | $ | 36,983 | | | $ | 79,533 | | | $ | 68,605 | |
(1) Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. The Company believesWe believe these items are non-routine and may not be indicative of ongoing operating results.
(2) FairFor the second quarter and six months ended December 27, 2019, fair value adjustments from purchase accounting forrelate to APC inventory step-up amortization. For the three and six months ended December 31, 2017 relate to CES and Delta inventory step-up amortization. Fair2018, fair value adjustments from purchase accounting for the three and six months ended December 31, 2016 relate to the Carve-Out Business and CESGermane 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 amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value
adjustments from purchase accounting, litigation and settlement income and expense, 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. These non-GAAP financial measures 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 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.
The following table reconcilestables reconcile net income and diluted earnings per share, the most directly comparable GAAP measures, to adjusted income and adjusted EPS:
| | |
| Three Months Ended December 31, | | Second Quarters Ended | |
(In thousands, except per share data) | | 2017 | | 2016 | (In thousands, except per share data) | | December 27, 2019 | | | December 31, 2018 | |
Net income and diluted earnings per share | | $ | 9,133 |
| | $ | 0.19 |
| | $ | 5,204 |
| | $ | 0.13 |
| Net income and diluted earnings per share | | $ | 15,676 | | | $ | 0.29 | | | $ | 12,383 | | | $ | 0.26 | |
Amortization of intangible assets | | 5,827 |
| | | | 4,888 |
| | | Amortization of intangible assets | | 7,992 | | | 6,939 | | |
Restructuring and other charges (1) | | 313 |
| | | | 69 |
| | | Restructuring and other charges(1) | | 1,101 | | | 23 | | |
Impairment of long-lived assets | | — |
| | | | — |
| | | Impairment of long-lived assets | | — | | | — | | |
Acquisition and financing costs | | 1,366 |
| | | | 1,114 |
| | | Acquisition and financing costs | | 1,882 | | | 762 | | |
Fair value adjustments from purchase accounting (2) | | 84 |
| | | | 868 |
| | | Fair value adjustments from purchase accounting(2) | | 600 | | | — | | |
Litigation and settlement expenses (income), net | | — |
| | | | 100 |
| | | |
Litigation and settlement expense, net | | Litigation and settlement expense, net | | 142 | | | 179 | | |
Stock-based and other non-cash compensation expense | | 4,941 |
| | | | 4,093 |
| | | Stock-based and other non-cash compensation expense | | 6,639 | | | 5,338 | | |
Impact to income taxes (3) | | (8,615 | ) | | | | (4,439 | ) | | | Impact to income taxes(3) | | (4,504) | | | (3,009) | | |
Adjusted income and adjusted earnings per share | | $ | 13,049 |
| | $ | 0.28 |
| | $ | 11,897 |
| | $ | 0.30 |
| Adjusted income and adjusted earnings per share | | $ | 29,528 | | | $ | 0.54 | | | $ | 22,615 | | | $ | 0.47 | |
| | | | | | | | | | | | | | | | |
Diluted weighted-average shares outstanding | | | | 47,447 |
| | | | 39,985 |
| Diluted weighted-average shares outstanding | | 55,001 | | | 47,705 | |
(1) Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. The Company believesWe believe these items are non-routine and may not be indicative of ongoing operating results.
(2) FairFor the second quarter ended December 27, 2019, fair value adjustments from purchase accounting for the three months ended December 31, 2017 relate to CES inventory step-up amortization. Fair value adjustments from purchase accounting for the three months ended December 31, 2016 relate to the Carve-Out Business and CESAPC inventory step-up amortization.
(3) 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.
| | | | Six Months Ended December 31, | | Six Months Ended | | |
(In thousands, except per share data) | | 2017 | | 2016 | (In thousands, except per share data) | | December 27, 2019 | | | December 31, 2018 | |
Net income and diluted earnings per share | | $ | 27,086 |
| | $ | 0.57 |
| | $ | 9,023 |
| | $ | 0.23 |
| |
Net income and earnings per share | | Net income and earnings per share | | $ | 34,923 | | | $ | 0.63 | | | $ | 19,862 | | | $ | 0.42 | |
Amortization of intangible assets | | 11,464 |
| | | | 9,490 |
| | | Amortization of intangible assets | | 15,011 | | | 14,120 | | |
Restructuring and other charges (1) | | 408 |
| | | | 366 |
| | | Restructuring and other charges(1) | | 1,749 | | | 527 | | |
Impairment of long-lived assets | | — |
| | | | — |
| | | Impairment of long-lived assets | | — | | | — | | |
Acquisition and financing costs | | 2,220 |
| | | | 1,667 |
| | | Acquisition and financing costs | | 4,118 | | | 1,805 | | |
Fair value adjustments from purchase accounting (2) | | 593 |
| | | | 2,945 |
| | | Fair value adjustments from purchase accounting(2) | | 600 | | | 620 | | |
Litigation and settlement expenses (income), net | | — |
| | | | 100 |
| | | |
Litigation and settlement expense, net | | Litigation and settlement expense, net | | 455 | | | 179 | | |
Stock-based and other non-cash compensation expense | | 9,637 |
| | | | 7,725 |
| | | Stock-based and other non-cash compensation expense | | 12,415 | | | 10,081 | | |
Impact to income taxes (3) | | (20,566 | ) | | | | (10,524 | ) | | | Impact to income taxes(3) | | (15,353) | | | (6,082) | | |
Adjusted income and adjusted earnings per share | | $ | 30,842 |
| | $ | 0.65 |
| | $ | 20,792 |
| | $ | 0.52 |
| Adjusted income and adjusted earnings per share | | $ | 53,918 | | | $ | 0.98 | | | $ | 41,112 | | | $ | 0.86 | |
| | | | | | | | | | | | | | | | |
Diluted weighted-average shares outstanding | | | | 47,538 |
| | | | 39,920 |
| Diluted weighted-average shares outstanding | | 55,037 | | | 47,696 | |
| | | | | |
|
(1) Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. The Company believesWe believe these items are non-routine and may not be indicative of ongoing operating results.
(2) FairFor the six months ended December 27, 2019, fair value adjustments from purchase accounting forrelate to APC inventory step-up amortization. For the six months ended December 31, 2017 relate to CES and Delta inventory step-up amortization. Fair2018, fair value adjustments from purchase accounting for the six months ended December 31, 2016 relate to the Carve-Out Business and CESGermane inventory step-up amortization.
(3) 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarters Ended | | | | Six Months Ended | | |
(In thousands) | | December 27, 2019 | | December 31, 2018 | | December 27, 2019 | | December 31, 2018 |
Cash provided by operating activities | | $ | 32,066 | | | $ | 25,301 | | | $ | 56,376 | | | $ | 45,330 | |
Purchase of property and equipment | | (11,324) | | | (7,075) | | | (20,919) | | | (10,802) | |
Free cash flow | | $ | 20,742 | | | $ | 18,226 | | | $ | 35,457 | | | $ | 34,528 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Cash provided by operating activities | | $ | 8,779 |
| | $ | 14,238 |
| | $ | 16,807 |
| | $ | 24,521 |
|
Purchase of property and equipment | | (3,964 | ) | | (7,703 | ) | | (7,592 | ) | | (13,753 | ) |
Free cash flow | | $ | 4,815 |
| | $ | 6,535 |
| | $ | 9,215 |
| | $ | 10,768 |
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, RevenueOrganic 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 Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitledacquired companies for the transfer of promised goods or services to customers. The ASU will replace most existingfirst four full quarters since the entities’ acquisition date (which excludes intercompany transactions). Acquired revenue recognition guidance in GAAP when it becomes effective. The new standard is effectiverepresents revenue from acquired companies for the Company on July 1, 2018,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 we do not plancomparable historical periods.
The following table reconciles the most directly comparable GAAP financial measure to early adopt this ASU. The standard permits the use of either the retrospective or cumulative effect transition method. We currently intend to use the retrospective transition method upon adoption of the standard. We have made significant investments to date in our data reporting infrastructure, and continue to enhance this infrastructure in order to support the reporting and disclosure requirements of the new standard. In addition, we have extensively reviewed our current accounting policies and practices to evaluate the future impact that adoption of the standard will have on our consolidatednon-GAAP financial statements and notes. Based on our review procedures to date, the impact of adopting the new standard on our total sales and operating income is not expected to be material. The largest impact as a result of adoption will be to our disclosures relating to revenues, which will significantly expand under the new standard.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), an amendment of the FASB Accounting Standards Codification. This ASU requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effectivemeasure for the Company on July 1, 2019. second quarters ended December 27, 2019 and December 31, 2018, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | December 27, 2019 | | As a % of Total Net Revenue | | December 31, 2018 | | As a % of Total Net Revenue | | $ Change | | % Change |
Organic revenue | | $ | 177,583 | | | 92 | % | | $ | 159,089 | | | 100 | % | | $ | 18,494 | | | 12 | % |
Acquired revenue | | 16,330 | | | 8 | % | | — | | | — | % | | 16,330 | | | 100 | % |
Total revenues | | $ | 193,913 | | | 100 | % | | $ | 159,089 | | | 100 | % | | $ | 34,824 | | | 22 | % |
The standard mandates a modified retrospective transition methodfollowing table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure for all entitiesthe six monthsended December 27, 2019 and early adoption is permitted. We are currently evaluating our population of leases to determine the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.December 31, 2018, respectively:
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, an amendment of the FASB Accounting Standards Codification. This ASU will reduce diversity in practice for classifying cash payments and receipts in the statement of cash flows for a number of common transactions. It will also clarify when identifiable cash flows should be separated versus classified based on their predominant source or use. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are evaluating the effect that ASU 2016-15 will have on our consolidated financial statements and related disclosures. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | December 27, 2019 | | As a % of Total Net Revenue | | December 31, 2018 | | As a % of Total Net Revenue | | $ Change | | % Change |
Organic revenue | | $ | 335,637 | | | 90 | % | | $ | 294,151 | | | 97 | % | | $ | 41,486 | | | 14 | % |
Acquired revenue | | 35,580 | | | 10 | % | | 8,994 | | | 3 | % | | 26,586 | | | 296 | % |
Total revenues | | $ | 371,217 | | | 100 | % | | $ | 303,145 | | | 100 | % | | $ | 68,072 | | | 22 | % |
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, an amendment of the FASB Accounting Standards Codification. This ASU requires the seller and buyer to recognize at the transaction date the current and deferred income tax consequences of intercompany asset transfers (except transfers of inventory). Under current U.S. GAAP, the seller and buyer defer the consolidated tax consequences of an intercompany asset transfer from the period of the transfer to a future period when the asset is transferred out of the consolidated group, or otherwise affects consolidated earnings. This standard will cause volatility in companies’ effective tax rates, particularly for those that transfer intangible assets to foreign subsidiaries. For public entities, the new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017. An entity may early adopt the standard but only at the beginning of an annual period for which it has not issued or made available for issuance financial statements (interim or annual). We are evaluating the effect that ASU 2016-16 will have on our consolidated financial statements and related disclosures.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, an amendment of the FASB Accounting Standards Codification. This ASU eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (“the Step 2 test”) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. For public business entities, the new standard is effective for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The ASU requires prospective adoption and permits early adoption for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We doThe Company does not expect this guidance to have a material impact to ourits consolidated financial statements.
In March 2017,2018, the FASB issued ASU No. 2017-07, Compensation Retirement Benefits2018-02, Income Statement - Reporting Comprehensive Income (Topic 715): Improving the Presentation220) Reclassification of Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostCertain Tax Effects for Accumulated Other Comprehensive Income, an amendment of the FASB Accounting Standards Codification. This ASU requires employers that sponsor defined benefit pension and/or other post-retirement benefit planspermits a company to reportreclassify the service cost componentdisproportionate income tax effects of net benefit costthe Tax Cuts and Jobs Act of 2017 on items within AOCI to retained earnings. The amounts applicable for reclassification should include the effect of the change in the same line item as other compensation costs arising from services rendered byU.S. Federal corporate income tax rate on the pertinent employees duringgross deferred tax amounts and related valuation allowances, if any, at the period. Employers are requireddate of the enactment of the Tax Cuts and Jobs Act of 2017 related to present the other componentsitems remaining in AOCI. The effect of net benefit coststhe change in the U.S. Federal corporate income statement separately from the service cost component and outside a subtotal oftax rate on gross valuation allowances that were originally charged to income from operations. Additionally, onlycontinuing operations shall not be included. The Company has determined that there is no activity that falls within the service cost componentscope of net periodic pension cost will be eligiblethis ASU.
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715) Changes to the Disclosure Requirements for asset capitalization.Defined Benefit Plans, an amendment of the FASB Accounting Standards Codification. The amendments in this ASU remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. For public business entities, the new standard is effective for annual periodsfiscal years ending after December 15, 2020. The ASU requires retrospective adoption and permits early adoption for all entities. The Company does not expect this guidance to have a material impact to its consolidated financial statements or related disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), an amendment of the FASB Accounting Standards Codification. The ASU provides guidance to determine whether to
capitalize implementation costs of a cloud computing arrangement that is a service contract or expense as incurred. Costs of arrangements that do not include a software license should be accounted for as a service contract and expensed as incurred. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within that annual period. Early2019, with early adoption is permitted aspermitted. The ASU permits two methods of adoption: prospectively to all implementation costs incurred after the date of adoption, or retrospectively to each prior reporting period presented. The Company does not expect this guidance to have a material impact to its consolidated financial statements or related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an amendment of the beginningFASB 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 adds guidance whether a step-up in tax basis of an annual period for which financial statements (interimgoodwill relates to a business combination or annual) have not been issued or made available for issuance.a separate transaction. This ASU should be applied retrospectivelyis effective for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on andfiscal years beginning after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.December 15, 2020, with early adoption permitted. We are currently evaluating the effect that ASU 2017-072019-12 will have on our consolidated financial statements and related disclosures.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2017,2019, we adopted FASB issuedASC 842, Leases, (“ASC 842”), which requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. This ASU No. 2015-11, Simplifyingsupersedes existing lease guidance, including ASC 840, Leases (Topic 840). The standard mandates a modified retrospective transition method for all entities and early adoption is permitted. This ASU, among other things, allows companies to elect an optional transition method to apply the Measurementnew lease standard through a cumulative-effect adjustment in the period of Inventory, an amendmentadoption. We adopted ASC 842 using the optional transition method and, as a result, did not recast prior period unaudited consolidated comparative financial statements. All prior period amounts and disclosures remain presented under ASC 840. We elected the package of practical expedients which allows us to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. We also elected the hindsight practical expedient, permitting the use of hindsight when determining the lease term and assessing impairment of ROU assets. Adoption of the FASB Accounting Standards Codification. This ASU changesnew standard resulted in additional lease assets and lease liabilities on the measurement principle for inventory from the lower of cost or marketUnaudited Consolidated Balance Sheet with no cumulative impact to lower of costretained earnings and net realizable value for entities that do not measure inventory using the last-in, first-out or retail inventory method. The ASU also eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. Such adoption has not and willdid not have anya material impact toon our consolidated financial statements.Consolidated Statements of Operations and Comprehensive Income or Consolidated Statements of Cash Flows.
| |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our exposure to market risk from June 30, 20172019 to December 31, 2017.27, 2019.
| |
ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2017.27, 2019. We continue to review our disclosure controls and procedures and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our Company’s business. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
(b) Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13c-15(f)13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 201727, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, management is in the process of integrating the recently acquired DeltaAPC business into our overall internal control over financial reporting environment.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of our business. Although legal proceedings are inherently unpredictable, we believe that we have valid defenses with respect to those matters currently pending against us and intend to defend our self vigorously. The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on our cash flows, results of operations, or financial position.
ITEM 1A. RISK FACTORS
You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2019. There have been no material changes from the factors disclosed in our 20172019 Annual Report on Form 10-K filed on August 18, 2017,15, 2019, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission.
ITEM 6. EXHIBITS
The following Exhibits are filed or furnished, as applicable, herewith:
| | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
101 | | The following materials from the Company’s Quarterly Report on the Form 10-Q for the quarter ended December 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; and (iv) notes to the Consolidated Financial Statements
|
| |
+101.INS
| Furnished herewith. This certificate shall | eXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not be deemed “filed” for purposes of Section 18 ofappear in the Securities Exchange Act of 1934, or otherwise subject toInteractive Data File because its XBRL tags are embedded within the liability of that section, nor shall it be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.Inline XBRL document
|
| | |
101.SCH
| | XBRL Taxonomy Extension Schema Document
|
| | |
101.CAL
| | XBRL Taxonomy Extension Calculation Linkbase Document
|
| | |
101.DEF
| | XBRL Taxonomy Extension Definition Linkbase Document
|
| | |
101.LAB
| | XBRL Taxonomy Extension Label Linkbase Document
|
| | |
101.PRE
| | XBRL Taxonomy Extension Presentation Linkbase Document
|
+ Furnished herewith. This certificate shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
MERCURY SYSTEMS, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Andover, Massachusetts, on February 2, 2018.
| | | | | | | | |
MERCURY SYSTEMS, INC. | | |
| | |
MERCURY SYSTEMS, INC. |
By: | |
By: | | /S/ GERALD M. HAINES IIMICHAEL D. RUPPERT |
| | Gerald M. Haines IIMichael D. Ruppert |
| | Executive Vice President, |
| | Chief Financial Officer, and Treasurer |