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 ~~March 31,~~December 27, 2019



¨☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER: 0-23599

MERCURY SYSTEMS, ~~INC~~INC.

(Exact name of registrant as specified in its charter)

~~MASSACHUSETTS~~Massachusetts

04-2741391

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

50 MINUTEMAN ROAD

~~ANDOVER, MA~~

01810

ANDOVER

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated filer

~~Large accelerated filer~~

~~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 ~~(Nasdaq Global Select Market)~~

Shares of Common Stock outstanding as of ~~April 30, 2019: 48,448,701~~January 31, 2020 55,588,707 shares

MERCURY SYSTEMS, INC.

INDEX


					PAGE NUMBER
PART I. FINANCIAL INFORMATION

			Item 1.	~~PAGE~~Financial Statements (unaudited)		~~NUMBER~~3
~~PART I. FINANCIAL INFORMATION~~

~~Item 1.~~	~~Financial Statements (unaudited)~~			3

	Consolidated Balance Sheets as of ~~March 31,~~December 27, 2019 and June 30, ~~2018~~2019	3

			Consolidated Statements of Operations and Comprehensive Income for the ~~three~~second quarters and ~~nine~~six months ended ~~March 31,~~December 27, 2019 and December 31, 2018		4

			Consolidated Statements of Shareholders’ Equity for the ~~three~~second quarters and ~~nine~~six months ended ~~March 31,~~December 27, 2019 and December 31, 2018		5

			Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~March 31,~~December 27, 2019 and December 31, 2018		6

			Notes to Consolidated Financial Statements		7

Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations		2324

Item 3.			Quantitative and Qualitative Disclosures about Market Risk		3736

Item 4.			Controls and Procedures		3736

PART II. OTHER INFORMATION

Item 1.			Legal Proceedings		3837

Item 1A.			Risk Factors		3837

Item 6.			Exhibits		3937

			Signatures		4038

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)

(Unaudited)


	March 31, 2019			June 30, 2018			December 27, 2019		June 30, 2019
Assets						Assets
Current assets:						Current assets:
Cash and cash equivalents	$	112,515		$	66,521	Cash and cash equivalents	$	182,037	$	257,932
Accounts receivable, net of allowance for doubtful accounts of $822 and $359 at March 31, 2019 and June 30, 2018, respectively	114,806			104,040
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	55,941			39,774		Unbilled receivables and costs in excess of billings	61,302		57,387
Inventory	131,655			108,585		Inventory	153,642		137,112

Prepaid income taxes	—			3,761		Prepaid income taxes	5,454		90
Prepaid expenses and other current assets	10,253			9,062		Prepaid expenses and other current assets	10,602		10,819

Total current assets	425,170			331,743		Total current assets	545,109		582,172

Property and equipment, net	55,857			50,980		Property and equipment, net	72,696		60,001
Goodwill	543,515			497,442		Goodwill	614,648		562,146
Intangible assets, net	180,828			177,904		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	7,011			6,411		Other non-current assets	5,834		6,534

Total assets	$	1,212,381		$	1,064,480	Total assets	$	1,512,620	$	1,416,977
Liabilities and Shareholders’ Equity						Liabilities and Shareholders’ Equity
Current liabilities:						Current liabilities:
Accounts payable	$	35,220		$	21,323	Accounts payable	$	35,988	$	39,030
Accrued expenses	20,342			16,386		Accrued expenses	23,906		18,897
Accrued compensation	27,500			21,375		Accrued compensation	31,372		28,814

Deferred revenues and customer advances	10,728			12,596		Deferred revenues and customer advances	16,618		11,291

Total current liabilities	93,790			71,680		Total current liabilities	107,884		98,032

Deferred income taxes	11,811			13,635		Deferred income taxes	18,406		17,814
Income taxes payable	2,880			998		Income taxes payable	1,397		1,273
Long-term debt	276,500			195,000

Operating lease liabilities						Operating lease liabilities	55,257		—
Other non-current liabilities	15,018			11,276		Other non-current liabilities	12,620		15,119

Total liabilities	399,999			292,589		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; 47,265,355 and 46,924,238 shares issued and outstanding at March 31, 2019 and June 30, 2018, respectively	473			469
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	599,238			590,163		Additional paid-in capital	1,056,238		1,058,745
Retained earnings	213,939			179,968		Retained earnings	261,666		226,743
Accumulated other comprehensive (loss) income	(1,268		)	1,291
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(1,393)		(1,291)
Total shareholders’ equity	812,382			771,891		Total shareholders’ equity	1,317,056		1,284,739
Total liabilities and shareholders’ equity	$	1,212,381		$	1,064,480	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 March 31,						Nine Months Ended March 31,							Second Quarters Ended						Six Months Ended
	2019			2018			2019			2018				December 27, 2019		December 31, 2018		December 27, 2019		December 31, 2018
Net revenues	$	174,636		$	116,336		$	477,781		$	340,317		Net revenues	$	193,913	$	159,089	$	371,217	$	303,145
Cost of revenues	100,789			63,570			271,464			182,717			Cost of revenues	105,407		88,202		204,311		170,675
Gross margin	73,847			52,766			206,317			157,600			Gross margin	88,506		70,887		166,906		132,470
Operating expenses:													Operating expenses:
Selling, general and administrative	27,411			21,138			79,971			62,928			Selling, general and administrative	32,804		27,819		62,774		52,560
Research and development	17,439			15,021			48,579			43,950			Research and development	24,660		16,192		46,530		31,140
Amortization of intangible assets	6,786			7,104			20,906			18,568			Amortization of intangible assets	7,992		6,939		15,011		14,120
Restructuring and other charges	46			1,384			573			1,792			Restructuring and other charges	1,101		23		1,749		527

Acquisition costs and other related expenses	103			1,281			555			2,265			Acquisition costs and other related expenses	1,124		53		2,541		452
Total operating expenses	51,785			45,928			150,584			129,503			Total operating expenses	67,681		51,026		128,605		98,799
Income from operations	22,062			6,838			55,733			28,097			Income from operations	20,825		19,861		38,301		33,671
Interest income	205			—			342			14			Interest income	312		71		1,499		137
Interest expense	(2,473		)	(999		)	(6,928		)	(1,101		)	Interest expense	—		(2,196)		—		(4,455)
Other (expense) income, net	(328		)	66			(2,207		)	(1,065		)
Other expense, net													Other expense, net	(351)		(870)		(1,785)		(1,879)
Income before income taxes	19,466			5,905			46,940			25,945			Income before income taxes	20,786		16,866		38,015		27,474
Tax provision (benefit)	5,357			2,209			12,969			(4,837		)
Tax provision													Tax provision	5,110		4,483		3,092		7,612

Net income	$	14,109		$	3,696		$	33,971		$	30,782		Net income	$	15,676	$	12,383	$	34,923	$	19,862

Basic net earnings per share	$	0.30		$	0.08		$	0.72		$	0.66		Basic net earnings per share	$	0.29	$	0.26	$	0.64	$	0.42

Diluted net earnings per share	$	0.29		$	0.08		$	0.71		$	0.65		Diluted net earnings per share	$	0.29	$	0.26	$	0.63	$	0.42

Weighted-average shares outstanding:													Weighted-average shares outstanding:
Basic	47,258			46,844			47,164			46,685			Basic	54,548		47,189		54,468		47,118
Diluted	47,958			47,532			47,783			47,473			Diluted	55,001		47,705		55,037		47,696

Comprehensive income:													Comprehensive income:
Net income	$	14,109		$	3,696		$	33,971		$	30,782		Net income	$	15,676	$	12,383	$	34,923	$	19,862
Change in fair value of derivative instruments, net of tax	(2,147		)	—			(2,147		)	—

Foreign currency translation adjustments	(210		)	(457		)	(367		)	(513		)	Foreign currency translation adjustments	(192)		205		(117)		(157)
Pension benefit plan, net of tax	(15		)	5			(45		)	45			Pension benefit plan, net of tax	8		(15)		15		(30)
Total other comprehensive loss, net of tax	(2,372		)	(452		)	(2,559		)	(468		)
Total other comprehensive (loss) income, net of tax													Total other comprehensive (loss) income, net of tax	(184)		190		(102)		(187)
Total comprehensive income	$	11,737		$	3,244		$	31,412		$	30,314		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
	For the Three Months Ended March 31, 2019																Common Stock							Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss				Total Shareholders’ Equity
	Common Stock				Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity					Shares			Amount
	Shares		Amount
Balance at December 31, 2018	47,249		$	472	$	594,670		$	199,830	$	1,104		$	796,076

Balance at September 27, 2019																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	25		1		—			—		—			1			Issuance of common stock under employee stock incentive plans	29		—			—		—		—		—
Retirement of common stock	(9	)	—		(501		)	—		—			(501		)

Purchase and retirement of common stock																Purchase and retirement of common stock	(5)		—			(375)		—		—		(375)
Stock-based compensation	—		—		5,069			—		—			5,069			Stock-based compensation	—		—			6,661		—		—		6,661
Net income	—		—		—			14,109		—			14,109			Net income	—		—			—		15,676		—		15,676

Other comprehensive loss	—		—		—			—		(2,372		)	(2,372		)	Other comprehensive loss	—		—			—		—		(184)		(184)
Balance at March 31, 2019	47,265		$	473	$	599,238		$	213,939	$	(1,268	)	$	812,382

Balance at December 27, 2019																Balance at December 27, 2019	54,558		$	545		$	1,056,238	$	261,666	$	(1,393)	$	1,317,056

For the Three Months Ended March 31, 2018
Common Stock
Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Total
Shareholders’
Equity
Shares Amount
Balance at December 31, 2017 46,834
$ 468
$ 581,534
$ 166,171
$ 1,058
$ 749,231
Issuance of common stock under employee stock incentive plans 11
1
—
—
—
1
Retirement of common stock (4 ) (1 ) (208 ) —
—
(209 )
Stock-based compensation —
—
3,529
—
—
3,529
Net income —
—
—
3,696
—
3,696
Other comprehensive loss —
—
—
—
(452 ) (452 )
Balance at March 31, 2018 46,841
$ 468
$ 584,855
$ 169,867
$ 606
$ 755,796


	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 Nine Months Ended March 31, 2019
Common Stock
Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

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 439
5
(5 ) —
—
—
Issuance of common stock under employee stock purchase plan 51
1
1,676
—
—
1,677
Retirement of common stock (149 ) (2 ) (7,432 ) —
—
(7,434 )
Stock-based compensation —
—
14,836
—
—
14,836
Net income —
—
—
33,971
—
33,971
Other comprehensive loss —
—
—
—
(2,559 ) (2,559 )
Balance at March 31, 2019 47,265
$ 473
$ 599,238
$ 213,939
$ (1,268 ) $ 812,382


	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 Nine Months Ended March 31, 2018
Common Stock
Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Total
Shareholders’
Equity
Shares Amount
Balance at June 30, 2017 46,303
$ 463
$ 584,795
$ 139,085
$ 1,074
$ 725,417
Issuance of common stock under employee stock incentive plans 816
8
(8 ) —
—
—
Issuance of common stock under employee stock purchase plan 39
—
2,049
—
—
2,049
Retirement of common stock (317 ) (3 ) (15,115 ) —
—
(15,118 )
Stock-based compensation —
—
13,134
—
—
13,134
Net income —
—
—
30,782
—
30,782
Other comprehensive loss —
—
—
—
(468 ) (468 )
Balance at March 31, 2018 46,841
$ 468
$ 584,855
$ 169,867
$ 606
$ 755,796


	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)


	Nine Months Ended March 31,							Six Months Ended
	2019			2018				December 27, 2019		December 31, 2018
Cash flows from operating activities:							Cash flows from operating activities:
Net income	$	33,971		$	30,782		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	34,830			30,320			Depreciation and amortization expense	23,928		23,254
Stock-based compensation expense	14,836			13,045			Stock-based compensation expense	12,190		9,963
Benefit for deferred income taxes	(1,054		)	(5,482		)
Provision (benefit) for deferred income taxes							Provision (benefit) for deferred income taxes	593		(1,943)

Other non-cash items	2,715			1,243			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	(22,081		)	(19,827		)	Accounts receivable, unbilled receivables, and costs in excess of billings	(13,512)		(20,845)
Inventory	(13,770		)	(24,931		)	Inventory	(5,371)		(9,422)
Prepaid income taxes	3,761			(1,060		)	Prepaid income taxes	(5,356)		2,995
Prepaid expenses and other current assets	(724		)	944			Prepaid expenses and other current assets	1,137		(340)
Other non-current assets	137			277			Other non-current assets	(63)		118
Accounts payable, accrued expenses, and accrued compensation	15,610			2,943			Accounts payable, accrued expenses, and accrued compensation	(425)		7,215
Deferred revenues and customer advances	(2,065		)	2,758			Deferred revenues and customer advances	6,650		9,480
Income taxes payable	4,795			(11,286		)	Income taxes payable	(2,803)		1,872
Other non-current liabilities	587			(2,046		)	Other non-current liabilities	3,230		977
Net cash provided by operating activities	71,548			17,680			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	(81,529		)	(185,396		)	Acquisition of business, net of cash acquired	(96,502)		(45,029)
Purchases of property and equipment	(17,862		)	(11,067		)	Purchases of property and equipment	(20,919)		(10,802)
Other investing activities	—			(375		)

Net cash used in investing activities	(99,391		)	(196,838		)	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	1,677			2,049			Proceeds from employee stock plans	3��		1,677
Purchase and retirement of common stock							Purchase and retirement of common stock	(14,937)		(6,932)

Borrowings under credit facilities	81,500			210,000			Borrowings under credit facilities	—		45,000
Payments under credit facilities	—			(15,000		)
Payments for retirement of common stock	(7,434		)	(15,118		)
Payments of deferred financing and offering costs	(1,851		)	—			Payments of deferred financing and offering costs	—		(1,851)
Net cash provided by financing activities	73,892			181,931

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	(55		)	(193		)	Effect of exchange rate changes on cash and cash equivalents	84		(11)
Net increase in cash and cash equivalents	45,994			2,580
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	66,521			41,637			Cash and cash equivalents at beginning of period	257,932		66,521
Cash and cash equivalents at end of period	$	112,515		$	44,217		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	$	8,163		$	1,101		Interest	$	—	$	5,648
Income taxes	$	5,179		$	9,928		Income taxes	$	10,454	$	4,308

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 provider~~the leader in making trusted, secure mission-critical technologies profoundly more accessible to aerospace and defense. Operating at the intersection of ~~secure sensor~~high-tech and ~~safety-critical mission processing subsystems. Optimized for customer~~defense, Mercury specializes in engineering, adapting and ~~mission success, its~~manufacturing purpose-built solutions to meet current and emerging high-tech needs. Mercury’s innovative solutions power ~~a wide variety of critical~~more 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 pioneering~~MA, Mercury has pioneered a ~~next-generation~~transformational defense electronics business model specifically designed to ~~meet the industry's current~~provide end-users with trusted and ~~emerging~~secure leading-edge technology, affordably and ~~business needs. The Company delivers affordable innovative solutions, rapid time-to-value~~with significantly shorter lead times. Mercury’s relationships with key commercial processing technology providers, such as Intel, NVIDIA and ~~service~~Xilinx, coupled with its commitment to open standards architecture (“OSA”), allow it to develop products that are optimized for customer success and ~~support~~upgradeability. A proven portfolio of advanced capability, a demonstrated model for accelerated development and a commitment to its ~~defense prime contractor customers. The Company's products~~cultures 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”), Gorgon Stare, Predator, F-35, Reaper, F-16 SABR, E2D Hawkeye, Paveway, Filthy Buzzard, PGK, ProVision, P1, AIDEWS, CDS, and WIN-T. The Company's organizational structure allows itvalues, uniquely position Mercury to deliver ~~capabilities~~Innovation That Matters® from chip-scale to system-scale.

Investors and others should note that ~~combine technology building blocks~~the Company announces material financial information using its website (www.mrcy.com), SEC filings, press releases, public conference calls, webcasts, and ~~deep domain expertise~~social media, including Twitter (twitter.com/mrcy and twitter.com/mrcy_CEO) and LinkedIn (www.linkedin.com/company/mercury-systems). Therefore, the Company encourages investors and others interested in Mercury to review the ~~aerospace~~information 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

BASIS OF 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, ~~2018~~2019 which are contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on August ~~16, 2018.~~15, 2019. The results for the ~~three~~second quarter and ~~nine~~six months ended ~~March 31,~~December 27, 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.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

BUSINESS COMBINATIONS

The Company utilizes the acquisition method of accounting under ASC 805, Business Combinations, (“ASC 805”), for all transactions and events which it obtains control over one or more other businesses, to recognize the fair value of all assets

and liabilities acquired, even if less than one hundred percent ownership is acquired, and in establishing the acquisition date fair value as the measurement date for all assets and liabilities assumed. The Company also utilizes ASC 805 for the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in business combinations.

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 ~~(loss) ("AOCI"~~(“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

DEffective July 1, 2019, the Company adopted ASC 842,~~ERIVATIVES~~ Leases, (“ASC 842”), which requires lessees to recognize a right-of-use (“ROU”) asset and lease liability for most lease arrangements. The Company has adopted ASC 842 using the optional transition method and, as a result, there have been no reclassifications of prior comparable periods due to this adoption.

The Company ~~records~~has arrangements involving the ~~fair~~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 the lease unless it is not readily determinable and then it may use its ~~derivative~~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 lease 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 Company’s consolidated financial ~~instruments in its condensed~~statements.

The 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 is reasonably certain to exercise, it records a reduction to the 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 ~~other non-current assets,~~any material lease arrangements. There are no material restrictions, covenants, sale and leaseback transactions, variable lease payments or ~~other non-current liabilities depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes~~residual value guarantees in the ~~fair value of the derivative financial instruments~~Company's lease arrangements. Operating leases are ~~either recognized periodically~~included in ~~earnings or in shareholders’ equity as a component of other comprehensive income (loss) (“OCI”). Changes~~Operating lease right-of-use assets, Accrued expenses, and Operating lease liabilities in the ~~fair value of~~Company's Consolidated Balance Sheets. The standard had no impact on the ~~cash flow hedge that qualifies for hedge accounting treatment is recorded in OCI and reclassified into earnings in the same line item on the~~Company's Consolidated Statements of Operations and Comprehensive Income asor Consolidated Statements of Cash Flows. See Note N to the ~~impact~~consolidated financial statements for more information regarding the adoption of the hedged transaction when the underlying contract matures and, for interest rate exposure derivatives, over the term of the corresponding debt instrument. Changes in the fair values of derivatives not qualifying for hedge accounting are reported in earnings as they occur. All derivatives for the Company qualified for hedge accounting as of March 31, 2019.this standard.

REVENUE RECOGNITION

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, (“ASC 606”), which was adopted on July 1, 2018, using the retrospective method. Revenue is recognized in accordance with the five step model set forth by ASC 606, which involves identification of the contract(s), identification of performance obligations in the contract, determination of the transaction price, allocation of the transaction price to the previously identified performance obligations, and revenue recognition as the performance obligations are satisfied. The adoption of ASC 606 did not have a material impact to the amount or timing of revenue recognition related to the Company's legacy accounting methods for contracts including ship and bill, multiple-deliverable, and contract accounting. Such adoption did not have a material impact, individually or in the aggregate, to any amounts in the Company's Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Shareholders’ Equity or Consolidated Statements of Cash Flows. Refer to Note L for disaggregation of revenue for the period.

During step one of the five step model, the Company considers whether contracts should be combined or segmented, and based on this assessment, the Company combines closely related contracts when all the applicable criteria are met. The combination of two or more contracts requires judgment in determining whether the intent of entering into the contracts was effectively to enter into a single contract, which should be combined to reflect an overall profit rate. Similarly, the Company may separate an arrangement, which may consist of a single contract or group of contracts, with varying rates of profitability, only if the applicable criteria are met. Judgment also is involved in determining whether a single contract or group of contracts may be segmented based on how the arrangement and the related performance criteria were negotiated. The decision to combine a group of contracts or segment a contract could change the amount of revenue and gross profit recorded in a given period.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. 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. The Company's contracts with customers generally do not include a right of return relative to delivered products. In certain cases, contracts are modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are accounted for as part of the existing contract. Certain contracts with customers have options for the customer to acquire additional goods or services. In most cases the pricing of these options are reflective of the standalone selling price of the good or service. These options do not provide the customer with a material right and are accounted for only when the customer exercises the option to purchase the additional goods or services. If the option on the customer contract was not indicative of the standalone selling price of the good or service, the material right would be accounted for as a separate performance obligation.

. The Company is 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 one of the following three categories: (i) components; (ii) modules and sub-assemblies; and (iii) integrated subsystems. The Company also generates revenues from the performance of services, including systems engineering support, consulting, maintenance and other support, testing and installation. Each promised good or service within a contract is accounted for separately under the guidance of ASC 606 if they are distinct, i.e., if a good or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.distinct. Promised goods or services not meeting the criteria for being a distinct performance obligation are bundled into a single performance obligation

with other goods or services that together meet the criteria for being distinct. The appropriate allocation of the transaction price and recognition of revenue is then determined for the bundled performance obligation.

Once the Company identifies the performance obligations, the Company then determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. Variable consideration typically arises due to volume discounts, or other provisions that can either decrease or increase the transaction price. To the extent the

transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the method the Company expects to better predict the amount of consideration to which it will be entitled. The determination of the estimates for variable consideration require judgment, and are based on past history with similar contracts and anticipated performance. Further, variable consideration is only included in the determination of the transaction price if it is probable that a significant reversal in the amount of revenue recognized will not occur. There are no constraints on the variable consideration recorded.

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

The Company analyzes the standalone selling prices used in its allocation of transaction price on contracts at least annually. Standalone selling prices will be analyzed on a more frequent basis if a significant change in the Company’s business necessitates a more frequent analysis or if the Company experiences significant variances in its selling prices.

Revenue recognized at a point in time generally relates to contracts that include a combination of components, modules and sub-assemblies, integrated subsystems and related system integration or other services. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled ~~74%~~79% and 76% of revenues for the ~~three~~second quarter and ~~nine~~six months ended ~~March 31,~~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 ~~77%~~76% and 78% of revenues for the ~~three~~second quarter and ~~nine~~six months ended ~~March~~December 31, 2018, respectively. Revenue is recognized at a point in time for these products and services (versus over time recognition) due to the following: (i) customers are only able to consume the benefits provided by the Company upon completion of the product or service; (ii) customers do not control the product or service prior to completion; and (iii) the Company does not have an enforceable right to payment at all times for performance completed to date. Accordingly, there is little judgment in determining when control of the good or service transfers to the customer, and revenue is generally recognized upon shipment (for goods) or completion (for services).

The Company also engages in long-term contracts for development, production and service activities and recognizes revenue for performance obligations over time. These long-term contracts involve the design, development, manufacture, or modification of complex modules and sub-assemblies or integrated subsystems and related services. Revenue is recognized over time, due to the fact that: (i) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; and (ii) the Company’s performance creates an asset with no alternative use to the Company and the Company has an enforceable right to payment for performance completed to date. The Company considers the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract. TheseLong-term contracts include both fixed-price and cost reimbursable contracts. The Company’s cost reimbursable contracts typically include cost-plus fixed fee and time and material ~~("T&M")~~ contracts.

For long-term contracts, the Company typically leverages the input method, using a cost-to-cost measure of progress. The Company believes that this method represents the most faithful depiction of the Company’s performance because it directly measures value transferred to the customer. Contract estimates and estimates of any variable consideration are based on various assumptions to project the outcome of future events that may span several years. These assumptions include: labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer. The Company bears the risk of changes in estimates to complete on a fixed-price contract which may cause profit levels to vary from period to period. For cost reimburseable contracts, the Company is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. In the limited instances where the Company enters into T&M contracts, revenue recognized reflects the number of direct labor hours expended in the performance of a contract multiplied by the contract billing rate, as well as reimbursement of other direct billable costs. For T&M contracts, the Company elected to use a practical expedient permitted by ASC 606 whereby revenue is recognized in the amount for which the Company has a right to invoice the customer based on the control transferred to the customer. For all types of contracts, the Company recognizes anticipated contract losses as soon as they become known and estimable.

Accounting for long-term contracts 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 as well as availability for 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.

Total revenue recognized under long-term contracts over time was ~~26%~~21% and 24% of total revenues for the ~~three~~second quarter and ~~nine~~six months ended ~~March 31,~~December 27, 2019, respectively. Total revenue recognized under long-term contracts over time was ~~23%~~24% and 22% of total revenues for the ~~three~~second quarter and ~~nine~~six months ended ~~March~~and December 31, 2018, respectively.

The Company generally does not provide its customers with rights of product return other than those related to assurance warranty provisions that permit repair or replacement of defective goods over a period of ~~12-36~~12 to 36 months. The Company accrues for anticipated warranty costs upon product shipment. The Company does not consider activities related to such assurance warranties, if any, to be a separate performance obligation. The Company does offer separately priced extended warranties which generally range from 12 to 36 months that are treated as separate performance obligations. The transaction price allocated to extended warranties is recognized over time in proportion to the costs expected to be incurred in satisfying the obligations under the contract.

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

C~~OSTS~~TO O~~BTAIN AND~~ F~~ULFILL~~A C~~ONTRACT~~

The Company has elected to use a practical expedient available under ASC 606 whereby sales commissions are expensed as incurred for contracts where the amortization period would have been one year or less. The Company has not deferred sales commissions for contracts where the amortization period is greater than one year because such amounts that would qualify for deferral are not significant.

The Company has elected to treat shipping and handling activities performed after the customer has obtained control of the related goods as a fulfillment cost. Such costs are accrued for in conjunction with the recording of revenue for the goods and are classified as cost of revenues.

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 ~~$55,941~~$61,302 and ~~$39,774~~$57,387 as of ~~March 31,~~December 27, 2019 and June 30, ~~2018,~~2019, respectively. The contract asset balance increased due to growth in revenue recognized under long-term contracts over time during the ~~nine~~six months ended ~~March 31,~~December 27, 2019. The contract liability balances were ~~$11,572~~$19,388 and ~~$13,425~~$12,362 as of ~~March 31,~~December 27, 2019 and June 30, ~~2018,~~2019, respectively. ~~These balances remained consistent period over period.~~The increase was due to advanced billings across multiple programs.

Revenue recognized for the ~~three~~second quarter and ~~nine month period~~six months ended ~~March~~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, ~~2019~~2018 that was included in the contract liability balance at June 30, 2018 was ~~$1,173~~$1,617 and ~~$10,156,~~$8,983, respectively.

REMAINING PERFORMANCE OBLIGATIONS

The Company has elected to use a practical expedient available under ASC 606 whereby contracts with original expected durations of one year or less are excluded from the remaining performance obligations, while these contracts are included within backlog. 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 ~~March 31,~~December 27, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was ~~$161,976.~~$297,593. The Company expects to recognize approximately ~~58%~~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 March 31, Nine Months Ended March 31,
2019 2018 2019 2018
Basic weighted-average shares outstanding 47,258
46,844
47,164
46,685
Effect of dilutive equity instruments 700
688
619
788
Diluted weighted-average shares outstanding 47,958
47,532
47,783
47,473


	Second Quarters Ended			Six Months Ended
	December 27, 2019	December 31, 2018	December 27, 2019	December 31, 2018
Basic weighted-average shares outstanding	54,548	47,189	54,468	47,118
Effect of dilutive equity instruments	453	516	569	578
Diluted weighted-average shares outstanding	55,001	47,705	55,037	47,696

Equity instruments to purchase 11419 and ~~244~~297 shares of common stock were not included in the calculation of diluted net earnings per share for the ~~three~~second quarter and ~~nine~~six months ended ~~March 31,~~December 27, 2019, ~~respectively,~~ because the equity instruments were anti-dilutive. Equity instruments to purchase 3331 and ~~302~~481 shares of common stock were not included in the calculation of diluted net earnings per share for the ~~three~~second quarter and ~~nine~~six months ended ~~March~~and December 31, 2018, ~~respectively,~~ because the equity instruments were anti-dilutive.

C. Acquisitions

GA~~ECO~~MERICAN PANEL CORPORATION A~~VIONICS~~ A~~QUISITION~~CQUISITION

On ~~January 29,~~September 23, 2019, the Company ~~announced that it had~~ acquired ~~GECO Avionics, LLC ("GECO"~~American Panel Corporation (“APC”). Based in ~~Mesa, Arizona, GECO has over twenty years~~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 wide range of ~~experience designing and manufacturing affordable safety-critical avionics and mission computing solutions.~~next-generation platforms. The Company acquired ~~GECO~~APC for an all cash purchase price of ~~$36,500, which was~~$100,000, prior to net working capital and net debt adjustments. The Company funded ~~through~~ the ~~revolving credit facility ("the Revolver").~~acquisition with cash on hand.

The following table presents the net purchase price and the fair values of the assets and liabilities of ~~GECO~~APC 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 10,900
Estimated goodwill 22,823
Estimated fair value of net assets acquired
36,500
Net purchase price $ 36,500


	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 ~~March 31,~~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~~estimate includes customer relationships of ~~$5,500~~$20,400 with a useful life of 11 years, ~~developed~~completed technology of ~~$4,800~~$10,400 with a useful life of ~~ten~~11 years and backlog of ~~$600~~$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 ~~$22,823~~$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 goodwill from this acquisition is reported under the Sensor and Mission 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 intangible assets from this transaction and is 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 privately-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 to the Company's existing products and markets and is 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 Campbell, California and 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 Syntonic 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 27, 2019, the Company had $2,988 of goodwill deductible for tax purposes. The Company has not furnished pro forma information relating to Syntonic because such information is not material to the Company's financial results.

GECO AVIONICS AQUISITION

On 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 manufacturing affordable safety-critical avionics and mission computing solutions. The Company acquired GECO for an all cash purchase price of $36,500, which was funded through the Revolver.

The following table presents the net purchase price and the fair values of the assets and liabilities of 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

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 $6,900 with a useful life of 11 years, completed technology of $4,800 with a useful life of 10 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 $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. The goodwill from this acquisition is reported under the SMP 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 is amortizing the amount over 15 years for tax purposes. As of ~~March 31,~~December 27, 2019, the Company had ~~$22,823~~$20,300 of goodwill deductible for tax purposes. The Company has not furnished pro forma information relating to GECO because such information is not material to the Company's financial results.

The revenues and loss before income taxes from GECO included in the Company's consolidated results for the three months ended March 31, 2019 were $2,477 and $333, respectively. The GECO results include expenses resulting from purchase accounting which include amortization of intangible assets and inventory step-up.

GERMANE SYSTEMS AQUISITION

On July 31, 2018, the Company announced that it had entered into a membership interest purchase agreement (the ~~"Purchase Agreement"~~“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, ~~subject~~prior to net working capital and net debt adjustments. The Company funded the acquisition with borrowings obtained under the Revolver. On December 12, 2018 the Company and former owners of Germane agreed to post-closing adjustments totaling $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 on a preliminary basis:~~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

Estimated 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 (1,229 )
       Other current and non-current liabilities (232 )
Estimated fair value of net tangible assets acquired 9,901
Estimated fair value of identifiable intangible assets 12,910
Estimated goodwill 23,111
Estimated fair value of net assets acquired
45,922
Less cash acquired
(193 )
Net purchase price $ 45,729


	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

~~The amounts above represent the preliminary fair value estimates as of March~~On July 31, 2019, ~~and are subject to subsequent adjustment as the Company obtains additional information during~~ the measurement period ~~and finalizes its fair value estimates.~~for Germane expired. The ~~preliminary~~ identifiable intangible ~~asset estimates~~assets include customer relationships of $8,500 with a useful life of 11 years, ~~developed~~completed technology of $4,200 with a useful life of eight years and backlog of $210 with a useful life of one year. ~~Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.~~

The goodwill of ~~$23,111~~$23,558 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 ~~Mercury Defense Systems (“MDS”)~~MDS reporting unit. Since Germane 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 ~~March 31,~~December 27, 2019, the Company had ~~$22,402~~$21,763 of goodwill deductible for tax purposes. ~~The Company has not furnished pro forma information relating to Germane because such information is not material to the Company's financial results.~~

The revenues and income before income taxes from Germane included in the Company's consolidated results for the three months ended March 31, 2019 were $12,707 and $1,159, respectively. The revenues and income before income taxes from Germane included in the Company's consolidated results for the nine months ended March 31, 2019 were $34,756 and $2,065, respectively. The Germane results include expenses resulting from purchase accounting which include amortization of intangible assets and inventory step-up.

T~~HEMIS~~ C~~OMPUTER~~ A~~QUISITION~~

On December 21, 2017, the Company and Thunderbird Merger Sub, Inc., a newly formed, wholly-owned subsidiary of the Company (the “Merger Sub”), entered into a Merger Agreement (the “Merger Agreement”) with Ceres Systems (“Ceres”), the holding company that owned Themis Computer (“Themis”, and together with Ceres, collectively the “Acquired Company”). On February 1, 2018, the Company closed the transaction and the Merger Sub merged 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.

Based in Fremont, California, Themis is a leading designer, manufacturer and integrator of commercial, SWaP-optimized rugged servers, computers and storage systems for U.S. and international markets. 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 approximately $180,000. 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). The Company funded the acquisition with borrowings obtained under the Revolver. On July 13, 2018, the Company and former owners of Ceres agreed to post-closing adjustments totaling $700, 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 Themis:~~

Amounts
Consideration transferred
Cash paid at closing $ 187,089
Working capital and net debt adjustment (1,274 )
Less cash acquired (6,810 )
Net purchase price $ 179,005

Fair value of tangible assets acquired and liabilities assumed
       Cash $ 6,810
       Accounts receivable 7,713
       Inventory 7,333
       Fixed assets 479
       Other current and non-current assets 2,896
       Accounts payable (3,287 )
       Accrued expenses (5,319 )
       Other current and non-current liabilities (1,210 )
       Deferred tax liability (14,307 )
Fair value of net tangible assets acquired 1,108
Fair value of identifiable intangible assets 71,720
Goodwill 112,987
Fair value of net assets acquired
185,815
Less cash acquired
(6,810 )
Net purchase price $ 179,005

On February 1, 2019, the measurement period for Themis expired. The identifiable intangible asset estimates include customer relationships of $52,600 with a useful life of 12.5 years, developed technology of $17,150 with a useful life of 9.5 years and backlog of $1,970 with a useful life of one year.

The goodwill of $112,987 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 MDS reporting unit and is not tax deductible.

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 ~~March 31,~~December 27, 2019:

Fair Value Measurements
March 31, 2019 Level 1 Level 2 Level 3
Assets:
Certificates of deposit $ 31,335
$ —
$ 31,335
$ —
Total assets measured at fair value $ 31,335
$ —
$ 31,335
$ —
Liabilities:
Interest rate swap $ 2,945
$ —
$ 2,945
$ —
Total liabilities measured at fair value $ 2,945
$ —
$ 2,945
$ —


	Fair Value Measurements
	December 27, 2019		Level 1		Level 2		Level 3
Assets:


Certificates of deposit	$	31,781	$	—	$	31,781	$	—


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 fair value of the interest rate swap is estimated using a discounted cash flow analysis based on the contractual terms of the derivative, leveraging observable inputs other than quoted prices, such as interest rates.


E.	~~Inventory~~

E. Inventory

Inventory is stated at the lower of cost (first-in, first-out) or net realizable value, and consists of materials, labor and overhead. On a quarterly basis, the Company uses consistent methodologies to evaluate inventory for net realizable value. Once an item is written down, the value becomes the new inventory cost basis. The Company reduces the value of inventory for excess and obsolete inventory, consisting of on-hand inventory in excess of estimated usage. The excess and obsolete inventory evaluation is based upon assumptions about future demand, historical usage, product mix and possible alternative uses. Inventory was comprised of the following:


	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

March 31, 2019 June 30, 2018
Raw materials $ 82,858
$ 61,748
Work in process 36,472
30,841
Finished goods 12,325
15,996
Total $ 131,655
$ 108,585


F.	~~Goodwill~~

F.Goodwill

The following table sets forth the changes in the carrying amount of goodwill by reporting unit for the ~~nine~~six months ended ~~March 31,~~December 27, 2019:

SMP AMS MDS Total
Balance at June 30, 2018 $ 119,560
$ 218,147
$ 159,735
$ 497,442
Goodwill adjustment for the Themis acquisition —
—
139
139
Goodwill arising from the Germane acquisition —
—
23,111
23,111
Goodwill arising from the GECO acquisition 22,823
—
—
22,823
Balance at March 31, 2019 $ 142,383
$ 218,147
$ 182,985
$ 543,515


	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

In the ~~nine~~six months ended ~~March 31,~~December 27, 2019, there were no triggering events, as defined by 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


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, 2018 $ 1,801
$ —
$ 1,801
Restructuring and other charges 549
80
629
Cash paid (2,287 ) (24 ) (2,311 )
Reversals(*) —
(56 ) (56 )
Restructuring liability at March 31, 2019 $ 63
$ —
$ 63

~~(*) Reversals result from the unused outplacement services and operating costs.~~


	Severance & Related		Facilities & Other		Total
Restructuring liability at June 30, 2019	$	4	$	—	$	4
Restructuring and other charges	1,716		33		1,749

Cash paid	(700)		(33)		(733)

Restructuring liability at December 27, 2019	$	1,020	$	—	$	1,020

During the ~~nine~~six months ended ~~March 31,~~December 27, 2019, the Company incurred net restructuring and other charges of ~~$573. The increase was primarily driven by severance costs associated with the recently acquired Germane business.~~$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 Statements of Operations 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.


H.	~~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 U.S. statutory Federal tax rate that the Company will use going forward, which has been reduced to 21% from 35%. The Tax Act also introduced a modified territorial tax system and a minimum tax on certain foreign earnings for tax years beginning after December 31, 2017.H.Income Taxes

The Company recorded an income tax provision of ~~$5,357~~$5,110 and ~~$2,209~~$4,483 on income from operations before income taxes of ~~$19,466~~$20,786 and ~~$5,905~~$16,866 for the ~~three months~~second quarters ended ~~March 31,~~December 27, 2019 and December 31, 2018, respectively. The Company recorded an income tax provision of ~~$12,969~~$3,092 and ~~an income tax benefit of $4,837~~$7,612 on income from operations before income taxes of ~~$46,940~~$38,015 and ~~$25,945~~$27,474 for the ~~nine~~six months ended ~~March 31,~~December 27, 2019 and December 31, 2018, respectively.

During the ~~three months~~second quarters ended ~~March 31,~~December 27, 2019 and December 31, 2018, the Company recognized a discrete tax benefit of ~~$143~~$353 and ~~$96,~~$67, respectively, related to excess tax benefits on stock-based compensation. The effective tax rate for the ~~three months~~

second quarters ended ~~March 31,~~December 27, 2019 and December 31, 2018 differed from the Federal statutory rate primarily due to Federal research and development credits, 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 ~~nine~~six months ended ~~March 31,~~December 27, 2019 and December 31, 2018, the Company recognized a discrete tax benefit of ~~$1,858~~$6,480 and ~~$7,675,~~$1,716, respectively, related to excess tax benefits on stock-based compensation. The effective tax rate for the ~~nine~~six months ended ~~March 31,~~December 27, 2019 and December 31, 2018 differed from the Federal statutory rate primarily due to Federal research and development credits, excess tax benefits related to stock compensation, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.

~~On August 21, 2018, the Internal Revenue Service ("IRS") provided initial guidance on amendments made to the limitation on executive compensation by the Tax Act.~~ During the ~~three months~~second quarter ended ~~September 30, 2018, the Company recorded an adjustment to its unrecognized tax positions of $1,711 as a result of this guidance. During the three months ended March 31,~~December 27, 2019, there were no material changes made to the Company’s unrecognized tax positions.


I.	~~Debt~~

I.Debt

REVOLVING CREDIT FACILITY

On September 28, 2018, the Company amended the Revolver to increase and extend the borrowing capacity to a $750,000, 5-year revolving credit line, with the maturity extended to September 28, 2023. As of ~~March 31,~~December 27, 2019, the Company's outstanding balance of unamortized deferred financing costs was ~~$6,049,~~$5,041, which is being amortized to other ~~income (expense),~~expense, net on a straight line basis over the ~~new~~ term of the Revolver. ~~The Company drew $45,000 and $36,500 from the Revolver to facilitate the acquisitions of Germane and GECO, respectively.~~

As of ~~March 31,~~December 27, 2019, the Company was in compliance with all covenants and conditions under the Revolver and there were no outstanding borrowings ~~of $276,500~~ against the ~~Revolver, resulting in interest expense of $2,473 and $6,928 for the three and nine months ended March 31, 2019, respectively.~~Revolver. There were outstanding letters of credit of ~~$2,300~~$1,106 as of ~~March 31,~~December 27, 2019.


J.	~~Employee Benefit Plan~~

J.Employee Benefit Plan

PENSION PLAN

The Company maintains a defined benefit pension plan (the ~~"Plan"~~“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 ~~March 31,~~December 27, 2019 was a net liability of ~~$6,271,~~$9,343, which is recorded in other non-current liabilities on the Consolidated Balance Sheet. The Company recorded a net ~~loss~~gain of ~~$15~~$8 and ~~$45~~$15 in AOCI during the ~~three~~second quarter and ~~nine~~six months ended ~~March 31,~~December 27, 2019, respectively. The Company recorded a net ~~gain~~loss of $5$15 and ~~$45~~$30 in AOCI during the ~~three~~second quarter and ~~nine~~six months ended ~~March~~December 31, 2018, respectively. The Company recognized net periodic benefit costs of ~~$197~~$296 and ~~$599~~$592 associated with the Plan for the ~~three~~second quarter and ~~nine~~six months ended ~~March 31,~~December 27, 2019, respectively. The Company recognized net periodic benefit costs of ~~$213~~$200 and ~~$620~~$402 associated with the Plan for the ~~three~~second quarter and ~~nine~~six months ended ~~March~~December 31, 2018, respectively. The Company's total expected employer contributions to the Plan during fiscal ~~2019~~2020 are ~~$642.~~$822.


K.	~~Stock-Based Compensation~~

K.Stock-Based Compensation

STOCK INCENTIVE PLANS

The Board of Directors approved the Company’s 2018 Stock Incentive Plan (the “2018 Plan”) on July 23, 2018. The 2018 Plan became effective upon the approval of shareholders at the Company’s annual meeting held on October 24, 2018. 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”) 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 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 ~~3,528~~2,681 shares available for future grant under the 2018 Plan at ~~March 31,~~December 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 2018 Plan. Performance awards vest based on the requisite service period subject to the achievement of specific financial performance targets. Based on the performance targets, some of these awards require graded vesting which results in more rapid expense recognition compared to traditional time-based vesting over the same vesting period. The Company monitors the probability of achieving the performance targets on a quarterly basis and may adjust periodic stock compensation expense accordingly based on its determination of the likelihood for reaching targets. The performance targets ~~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 ~~51 and 39~~no shares issued under the ESPP during the ~~nine~~six months ended ~~March~~December 27, 2019. There were 51 shares issued under the ESPP during the six months ended and December 31, ~~2019 and 2018, respectively.~~2018. Shares available for future purchase under the ESPP totaled ~~169~~118 at ~~March 31,~~December 27, 2019.

STOCK OPTION AND AWARD ACTIVITY

The following table summarizes activity of the Company’s stock option plans since June 30, ~~2018:~~2019:

Options Outstanding
Number of
Shares Weighted Average
Exercise Price Weighted Average
Remaining
Contractual Term
(Years)
Outstanding at June 30, 2018 4
$ 5.52
3.13
Granted —
—

Exercised —
—

Canceled —
—

Outstanding at March 31, 2019 4
$ 5.52
2.38


	Options Outstanding
	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
Outstanding at June 30, 2019	4	$	5.52	2.13
Granted	—	—
Exercised	(1)	5.52
Canceled	—	—
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, ~~2018:~~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, 2018 1,135
$ 27.26
Granted 407
49.89
Vested (439 ) 49.76
Forfeited (55 ) 33.85
Outstanding at March 31, 2019 1,048
$ 39.48

STOCK-BASED COMPENSATION EXPENSE

The Company recognizes expense for its share-based payment plans in the Consolidated Statements of Operations and Comprehensive Income in accordance with ASC 718, Compensation - Stock Compensation ("“ASC ~~718"~~718”). The Company had ~~$317~~$481 and $241 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for ~~both March 31,~~the periods ended December 27, 2019 and June 30, ~~2018.~~2019, respectively. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period, net of estimated forfeitures.

The following table presents share-based compensation expenses included in the Company’s Consolidated Statements of Operations and Comprehensive 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

Three Months Ended March 31, Nine Months Ended March 31,
2019 2018 2019 2018
Cost of revenues $ 188
$ 169
$ 599
$ 364
Selling, general and administrative 4,039
2,929
12,465
11,175
Research and development 646
499
1,772
1,506
Stock-based compensation expense before tax 4,873
3,597
14,836
13,045
Income taxes (1,316 ) (1,187 ) (4,006 ) (4,305 )
Stock-based compensation expense, net of income taxes $ 3,557
$ 2,410
$ 10,830
$ 8,740


L.	~~Operating Segment, Geographic Information and Significant Customers~~

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 ~~one~~1 operating and reportable segment. The Company utilized the management approach for determining its operating segment in accordance with 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 MARCH 31, 2019
Net revenues to unaffiliated customers $ 158,715
$ 15,280
$ 641
$ —
$ 174,636
Inter-geographic revenues 2,984
314
—
(3,298 ) —
Net revenues $ 161,699
$ 15,594
$ 641
$ (3,298 ) $ 174,636
THREE MONTHS ENDED MARCH 31, 2018
Net revenues to unaffiliated customers $ 105,989
$ 8,611
$ 1,736
$ —
$ 116,336
Inter-geographic revenues 1,621
235
—
(1,856 ) —
Net revenues $ 107,610
$ 8,846
$ 1,736
$ (1,856 ) $ 116,336
NINE MONTHS ENDED MARCH 31, 2019
Net revenues to unaffiliated customers $ 435,733
$ 39,918
$ 2,130
$ —
$ 477,781
Inter-geographic revenues 5,434
1,017
—
(6,451 ) —
Net revenues $ 441,167
$ 40,935
$ 2,130
$ (6,451 ) $ 477,781
NINE MONTHS ENDED MARCH 31, 2018
Net revenues to unaffiliated customers $ 309,391
$ 25,506
$ 5,420
$ —
$ 340,317
Inter-geographic revenues 6,537
300
—
(6,837 ) —
Net revenues $ 315,928
$ 25,806
$ 5,420
$ (6,837 ) $ 340,317

~~Effective July 1, 2018,~~In recent years, the Company ~~adopted~~completed a series of acquisitions that changed its technological capabilities, applications and end markets. As these acquisitions and changes occurred, the ~~requirements~~Company increased the proportion of ~~ASC 606 using~~its revenue derived from the ~~retrospective method. As previously mentioned, such adoption did not have a material impact to~~sale of components in different technological areas, and also increased the ~~Company's consolidated financial statements.~~amount of revenue associated with combining technologies into more complex and diverse products including modules, sub-assemblies and integrated subsystems. The following tables present ~~disaggregated~~ 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 March 31, Nine Months Ended March 31,
2019 2018 2019 2018
Domestic (1) $ 153,634
$ 94,369
$ 427,119
$ 274,016
International/Foreign Military Sales (2) 21,002
21,967
50,662
66,301
Total Net Revenue $ 174,636
$ 116,336
$ 477,781
$ 340,317


	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 March 31, Nine Months Ended March 31,
2019 2018 2019 2018
Radar (1) $ 40,674
$ 37,262
$ 123,661
$ 118,480
Electronic Warfare (2) 36,569
19,531
86,320
76,950
Other Sensor & Effector (3) 28,364
14,403
63,477
35,144
Total Sensor & Effector 105,607
71,196
273,458
230,574
C4I (4) 46,217
26,593
137,717
52,981
Other (5) 22,812
18,547
66,606
56,762
Total Net Revenue $ 174,636
$ 116,336
$ 477,781
$ 340,317


	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 March 31, Nine Months Ended March 31,
2019 2018 2019 2018
Components (1) $ 52,372
$ 30,022
$ 133,686
$ 102,742
Modules and Sub-assemblies (2) 36,153
42,121
130,142
131,581
Integrated Subsystems (3) 86,111
44,193
213,953
105,994
Total Net Revenue $ 174,636
$ 116,336
$ 477,781
$ 340,317


	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 sub-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
March 31, 2019 $ 51,083
$ 4,760
$ 14
$ —
$ 55,857
June 30, 2018 $ 47,997
$ 2,974
$ 9
$ —
$ 50,980


	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 March 31, Nine Months Ended March 31,
2019 2018 2019 2018
Lockheed Martin Corporation
24 % 17 % 16 % 19 %
Raytheon Company 19 % 21 % 21 % 19 %
Northrop Grumman Corporation *
*
*
10 %
43 % 38 % 37 % 48 %
* 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. ~~There were no programs~~Programs comprising 10% or more of the ~~Company’s revenues~~Company's revenue for the ~~three~~periods shown 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.

M.Commitments and ~~nine months ended March 31, 2019 and 2018.~~Contingencies


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 ~~March 31,~~December 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 ~~$76,328.~~$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 ~~statement~~Consolidated 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.	~~Derivatives~~	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

(1) The ~~Company utilizes interest rate derivatives to mitigate interest rate exposure with respect to its financing arrangements. On January 11,~~short term portion of the 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 ~~entered into the Swap with Bank~~recognized operating lease expense of ~~America, N.A. for a notional amount of $175,000 in order to fix the interest rate associated with a portion of the Revolver. The Swap agreement was designated~~$2,375 and qualified for hedge accounting treatment as a cash flow hedge. The Swap matures on September 28, 2023, coterminous with the maturity of the Revolver. The Swap established a fixed interest rate on the first $175,000 of$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 ~~outstanding borrowings against the Revolver obligation~~leases at ~~2.54%. The fair value of this hedge was a liability of $2,945 as of March 31, 2019 and is included within other non-current liabilities in the Company's Condensed Consolidated Balance Sheets.~~December 27, 2019.

O.Subsequent Events

The market risk associated with the Company’s derivative instrument is the result of interest rate movements that are expected to offset the market risk of the underlying arrangement. The counterparty to the Swap is Bank of America, N.A. Based on the credit ratings of the Company’s counterparty as of March 31, 2019, nonperformance is not perceived to be a material risk. Furthermore, none of the Company’s derivatives are subject to collateral or other security arrangements and none contain provisions that are dependent on the Company’s credit ratings from any credit rating agency. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of the counterparty to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparty obligations under the contracts exceed the obligations of the Company to the counterparty. As a result of the above considerations, the Company does not consider the risk of counterparty default to be significant.


O.	~~Subsequent Events~~

The Company has evaluated subsequent events from the date of the Consolidated Balance Sheet through the date the consolidated financial statements were issued.

On April 18, 2019, the Company acquired The Athena Group, Inc. ("Athena") and Syntonic Microwave LLC ("Syntonic") for a combined total purchase price of $46,000, subject to net working capital and net debt adjustments. Athena is a privately-held company based in Gainesville, Florida and a leading provider of cryptographic and countermeasure IP vital to securing defense computing systems. Based in Campbell, California, privately-held Syntonic is 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 drew $48,000 on the Revolver to facilitate the closing of the acquisitions, with the higher amount reflecting an estimated adjustment for working capital, including cash, expected to be received with these acquisitions at closing.


~~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, Federal export control or procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, increases in interest rates, changes to interest rate swaps or other cash flow hedging arrangements, changes to industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as set forth under Part I-Item 1A (Risk Factors) in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018.~~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 leading~~the 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 sensor~~aviation, defense, security and ~~safety-critical mission processing subsystems. Optimized~~intelligence programs, configured and optimized for ~~customer and~~ mission success ~~our solutions power a wide variety~~in some of ~~critical aerospace, defense~~the most challenging and ~~intelligence programs.~~demanding environments. Headquartered in Andover, ~~Massachusetts, we are pioneering a next-generation defense electronics business model specifically designed~~MA, 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 ~~technology and business~~high-tech needs. ~~We deliver affordable innovative solutions, rapid time-to-value and service and support to our 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, Reaper, F-16 SABR, E2D Hawkeye, Paveway, Filthy Buzzard, PGK, ProVision, P1, AIDEWS, CDS, and WIN-T. Our organizational structure allows uscontractors, a testament to ~~deliver capabilities that combine technology building blocks and~~our deep domain expertise and our commitment to Innovation that Matters^®.

Our unique capabilities, technology and R&D investment strategy combine to differentiate Mercury in ~~the aerospace and 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 maintain our technological edge by investing in critical capabilities and ~~IP (or~~intellectual property (“IP” or “building blocks”) in processing and RF, leveraging open standards and open architectures to quickly adapt those building blocks into solutions for highly data-intensive applications for the sensor processing chain, all the way from the sensor to the network. This can encompass multiple sensor and mission processing functions - including emerging needs in artificial intelligence (“AI”). We leverage the ~~company’s~~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. We provide significant capabilities relating to pre-integrated EW, electronic attack (“EA”) and electronic counter measure (“ECM”) subsystems, signals intelligence (“SIGINT”) and electro-optical/infrared (“EO/IR”) processing technologies, and radar processing and simulation subsystems. 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 ~~defense~~these applications is our investment in specialized packaging, ruggedization and cooling to address ~~challenges, often referred to as “SWaP” (size,~~size, weight and ~~power), that are common and unique to military use. This~~power (“SWaP”) challenges. These investments, coupled with our domestic design, development, and manufacturing capabilities in mission computing, safety-critical avionics and platform management solutions; and RF, microwave and millimeter wave components and subsystems ~~to meet the needs of the radar, EW, SIGINT and other high bandwidth communications requirements and applications~~ brings significant domain expertise to our customers.

Since we conduct much of our business with our defense customers via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter. Customers specify delivery date requirements that coincide with their need for our products. Because these customers may use our products in connection with a variety of defense programs or other projects of different sizes and durations, a customer’s orders for one quarter generally do not indicate a trend for future

orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends.

As of ~~March 31,~~December 27, 2019, we had ~~1,595~~1,805 employees. During fiscal 2018, the growth in our headcount resulted in us exceeding the threshold for qualifying as a "small business" for government contract purposes. The revenues received as a result of small business set aside funding are not considered material.

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 months~~second quarter ended ~~March 31,~~December 27, 2019 were ~~$174.6~~$193.9 million, ~~$34.8~~$16.3 million, ~~$14.1~~$15.7 million, $0.29, ~~$0.50,~~$0.54, and ~~$38.8~~$42.8 million, respectively. Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted EPS, and adjusted EBITDA for the ~~nine~~six months ended ~~March 31,~~December 27, 2019 were ~~$477.8~~$371.2 million, ~~$94.8~~$35.6 million, ~~$34.0~~$34.9 million, ~~$0.71, $1.36,~~$0.63, $0.98, and ~~$107.4~~$79.5 million, respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

~~As previously announced, effective July 1, 2018, we adopted the requirements of ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers~~ ("ASC 606") using the retrospective method as discussed in Note B in the accompanying consolidated financial statements. All amounts and disclosures set forth in this Form 10-Q reflect these changes. Such adoption did not have a material impact to our consolidated financial statements.

RESULTS OF OPERATIONS:

Results of operations for the ~~three months~~second quarter ended ~~March 31,~~December 27, 2019 ~~includes~~include full period results from the acquisitions of ~~Themis Computer~~GECO Avionics, LLC (“~~Themis”~~GECO”), The Athena Group, Inc. (“Athena”), Syntonic Microwave LLC (“Syntonic”) and American Panel Corporation (“APC”). Results of operations for the six months ended December 27, 2019 include full period results from the acquisitions of Germane Systems, LC ~~("Germane"~~(“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, 2018, include only results from the acquisition date ~~of GECO Avionics, LLC ("GECO"), which was acquired subsequent to December 31, 2018. Results of operations~~ for the nine months ended March 31, 2019 includes full period results from the acquisition of Themis and only results from the acquisition dates for Germane and GECO, as these businesses were acquired subsequent to June 30, 2018.Germane. Accordingly, the periods presented below are not directly comparable.

~~Three months~~The second quarter ended ~~March 31,~~December 27, 2019 compared to ~~the three months~~the second quarter ended ~~March~~December 31, 2018

The following ~~tables~~table set forth, for the ~~three month periods~~second quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income:

(In thousands) March 31, 2019 As a % of
Total Net
Revenue March 31, 2018 As a % of
Total Net
Revenue
Net revenues $ 174,636
100.0 % $ 116,336
100.0 %
Cost of revenues 100,789
57.7
63,570
54.6
Gross margin 73,847
42.3
52,766
45.4
Operating expenses:
Selling, general and administrative 27,411
15.7
21,138
18.2
Research and development 17,439
10.0
15,021
12.9
Amortization of intangible assets 6,786
3.9
7,104
6.1
Restructuring and other charges 46
—
1,384
1.2
Acquisition costs and other related expenses 103
0.1
1,281
1.1
Total operating expenses 51,785
29.7
45,928
39.5
Income from operations 22,062
12.6
6,838
5.9
Interest income 205
0.1
—
—
Interest expense (2,473 ) (1.4 ) (999 ) (0.9 )
Other (expense) income, net (328 ) (0.1 ) 66
0.1
Income before income taxes 19,466
11.2
5,905
5.1
Tax provision 5,357
3.1
2,209
1.9
Net income $ 14,109
8.1 % $ 3,696
3.2 %


(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	%

REVENUES

Total revenues increased ~~$58.3~~$34.8 million, or 21.9%, for the ~~three months~~second quarter ended ~~March 31,~~December 27, 2019, as compared to the ~~same period in~~second quarter ended December 31, 2018 including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full quarters or less (and excludes any intercompany transactions). After the completion of four fiscal ~~2018.~~quarters, acquired businesses will be treated as organic for current and comparable historical periods. The increase was primarily due to ~~$33.0~~$18.5 million of additional organic revenues which ~~was~~were predominantly driven by ~~increases in~~increased demand for ~~integrated subsystems~~components and ~~components product groupings~~modules and sub-assemblies across the radar and electronic warfare (“EW”) ~~and other sensor and effector~~ applications. The ~~increases in~~ organic revenues increase were ~~primarily~~ driven by ~~a classified missile program, as well as~~ the ~~SEWIP Block II program,~~Filthy Badger, F16/SABR and P8 programs, which were partially offset by decreases in the ~~Aegis and Patriot programs.~~F-35 program. Total revenues also increased $16.3 million from acquired revenues due to ~~$25.3 million of additional~~GECO, Athena, Syntonic and APC, which were all acquired revenues from the Themis, Germane, and GECO acquisitions primarily a result of increased demand for integrated subsystems across C4I applications. The increases in acquired revenues were primarily driven by the WIN-T and CPS programs.following December 31, 2018. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

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, were consistent during the three months ended March 31, 2019 as compared to the same period in fiscal 2018.

GROSS MARGIN

Gross margin was ~~42.3%~~45.6% for the ~~three months~~second quarter ended ~~March 31,~~December 27, 2019, ~~a decrease~~an increase of ~~310~~100 basis points from the ~~45.4%~~44.6% gross margin achieved during the ~~same period in fiscal~~second quarter ended December 31, 2018. The ~~lower~~higher gross margin was primarily driven by ~~the acquired businesses of Germane~~program mix and ~~GECO, which historically generated gross margins below our target model. Lower gross margins are also attributed to increases~~operational efficiencies, as well as a decrease in Customer Funded Research and Development (“CRAD”)~~, which~~. 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 lower margin. These products are predominately grouped within integrated subsystems and to a lesser extent modules and sub-assemblies. ~~Lower~~The gross ~~margins for the three months ended March 31, 2019 were~~margin improvement was partially offset by ~~lower~~$0.6 million of inventory step-up ~~amortization associated with our acquired businesses compared~~related to the ~~same period in fiscal 2018.~~APC acquisition for the second quarter ended December 27, 2019.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased ~~$6.3~~$5.0 million, or ~~29.7%~~18.0%, to ~~$27.4~~$32.8 million during the ~~three months~~second quarter ended ~~March 31,~~December 27, 2019, as compared to ~~$21.1~~$27.8 million in the ~~same period in fiscal~~second quarter ended December 31, 2018. The increase was primarily related to ~~higher compensation related costs due to added~~additional headcount from ~~the acquisitions of Germane and GECO,~~organic growth, as well as the ~~full period impact~~acquisitions of ~~the Themis acquisition. Our headcount within the organic business also increased period over period.~~GECO, Athena, Syntonic and APC. Selling, general and administrative expenses decreased as a percentage of revenue to ~~15.7%~~16.9% for the ~~three months~~second quarter ended ~~March 31,~~December 27, 2019 from ~~18.2% during~~17.5% for the ~~same period in fiscal~~second quarter ended December 31, 2018, primarily due to improved operating leverage.

RESEARCH AND DEVELOPMENT

Research and development expenses increased approximately ~~$2.4~~$8.5 million, or ~~16.1%~~52.5%, to ~~$17.4~~$24.7 million during the ~~three months~~second quarter ended ~~March 31,~~December 27, 2019, as compared to ~~$15.0~~$16.2 million during the ~~same period in fiscal~~second quarter ended December 31, 2018. The increase was primarily due to increased headcount from organic growth and our recent ~~acquisitions driving higher compensation related costs, partially offset by increased CRAD.~~acquisitions. Research and development expenses accounted for ~~10.0%~~12.7% and ~~12.9%~~10.2% of our revenues for ~~the three months~~second quarter ended ~~March 31,~~December 27, 2019 and second quarter ended December 31, 2018, respectively. The ~~decrease~~increase as a percentage of revenue was primarily driven by ~~higher revenues and additional CRAD~~the continued investment in the growth of the business for the ~~three months~~second quarter ended ~~March 31, 2019 as compared to the same period in fiscal 2018.~~December 27, 2019.

RESTRUCTURING AND OTHER CHARGES

Restructuring and other charges ~~decreased $1.3~~increased $1.1 million during the ~~three months~~second quarter ended ~~March 31,~~December 27, 2019, as compared to the ~~same period in fiscal~~second quarter ended December 31, 2018. ~~The three months ended March 31, 2018 included $1.4 million of severance related costs.~~ Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.

ACQUISITION COSTS AND OTHER RELATED EXPENSES

We incurred ~~$0.1~~$1.1 million of acquisition costs and other related expenses during the ~~three months~~second quarter ended ~~March 31,~~December 27, 2019, as compared to ~~$1.3~~$0.1 million during the ~~same period in fiscal~~second quarter ended December 31, 2018. The ~~three months~~second quarter ended ~~March 31,~~December 27, 2019 included acquisition costs and other related expenses related to the acquisition of ~~GECO~~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 especially within sensor and effector and C4I markets. Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.

INTEREST INCOME

Interest income 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 second 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 ~~same period~~second quarter ended December 31, 2018. The decrease was driven by additional foreign currency translation gain of $0.5 million for the second quarter ended December 27, 2019, compared to the second quarter ended December 31, 2018.

INCOME TAXES

We recorded an income tax provision of $5.1 million and $4.5 million on income before income taxes of $20.8 million and $16.9 million for the second quarters ended December 27, 2019 and December 31, 2018, respectively. During the second

quarters ended December 27, 2019 and December 31, 2018, we recognized a discrete tax benefit of $0.4 million and $0.1 million related to excess tax benefits on stock-based compensation.

The effective tax rate for the second quarters ended December 27, 2019 and December 31, 2018 differed from the Federal statutory rate of 21% primarily due to Federal research and development credits, 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 (“IRS”).

Six months ended December 27, 2019 compared to the six months ended December 31, 2018

The following tables set forth, for the six month periods indicated, financial data from the Consolidated Statements of 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	%

REVENUES

Total revenues increased $68.1 million, or 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 ~~fiscal~~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, ~~which included~~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 $62.8 million during the six months ended December 27, 2019, compared to $52.6 million in the six months ended December 31, 2018. The increase was primarily

related to additional headcount from organic growth as well as the acquisitions of GECO, Athena, Syntonic and APC. Selling, general and administrative expenses decreased as a percentage of revenues to 16.9% during the six months ended December 27, 2019 from 17.3% during the six months ended December 31, 2018, primarily due to operating leverage.

RESEARCHAND DEVELOPMENT

Research and development expenses increased $15.4 million, or 49.5%, to $46.5 million during the six months ended December 27, 2019, compared to $31.1 million during the six months ended December 31, 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 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 the growth of the business during the six months ended December 27, 2019.

RESTRUCTURING AND OTHER CHARGES

Restructuring and other charges were $1.7 million for the six months ended December 27, 2019, compared to $0.5 million during the six months ended December 31, 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 $2.5 million of acquisition costs and other related expenses during the six months ended December 27, 2019, compared to $0.5 million during the six months ended December 31, 2018. The acquisition costs and other related expenses we incurred during the six months ended December 27, 2019 were related to the acquisition of ~~Themis.~~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 INCOME

Interest income increased to $1.5 million during the six months ended December 27, 2019. This was driven by higher average balances of cash on hand during the six months ended December 27, 2019.

INTEREST EXPENSE

~~Interest~~There was no interest expense ~~increased $1.5 million to $2.5 million~~incurred during the ~~three~~six months ended ~~March 31,~~December 27, 2019, ~~compared to $1.0 million in the same period in fiscal 2018. Interest expense during the three months ended March 31, 2019 was driven by~~as there were no outstanding borrowings of $276.5 million on the revolving credit facility ("the Revolver"), which facilitated the acquisitions of Themis, Germane and GECO. The three months ended March 31, 2018 included only two months of interest on the Revolver ~~related to~~during the ~~Themis acquisition.~~period.

OTHER (E~~XPENSE)~~ I~~NCOME~~XPENSE, NET

Other ~~(expense) income,~~expense, net ~~decreased $0.4 million to $0.3~~was $1.8 million during the ~~three~~six months ended ~~March 31,~~December 27, 2019, as compared to ~~$0.1~~$1.9 million induring the ~~same period in fiscal~~six months ended December 31, 2018. The decrease in other expense, net was due to a ~~result of lower~~$0.3 million foreign exchange gains ~~of $0.4 million incurred~~ during the ~~three~~six months ended ~~March 31,~~December 27, 2019, compared to a $0.3 million foreign exchange loss during the ~~same period in fiscal~~six months ended December 31, 2018. The ~~impact~~increase in foreign exchange gains, was partially offset by an additional $0.2 million of financing and registration fees ~~was consistent for both~~and $0.3 million of litigation and settlement expenses during the ~~three~~six months ended ~~March 31,~~December 27, 2019, ~~and 2018.~~respectively.

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 U.S. statutory Federal tax rate that we will use going forward, which has been reduced to 21% from 35%. The Tax Act introduced a modified territorial tax system and a minimum tax on certain foreign earnings for tax years beginning after December 31, 2017.

We recorded an income tax provision of ~~$5.4~~$3.1 million and ~~$2.2~~$7.6 million on income from operations before income taxes of ~~$19.5~~$38.0 million and ~~$5.9~~$27.5 million for the ~~three~~six months ended ~~March 31,~~December 27, 2019 and December 31, 2018, respectively. During ~~both~~ the ~~three~~six months ended ~~March 31,~~December 27, 2019 and December 31, 2018, we recognized a discrete tax ~~benefit~~benefits of ~~$0.1~~$6.5 million and $1.7 million, respectively, related to excess tax benefits on stock-based compensation.

The effective tax rate for the ~~three~~six months ended ~~March~~December 27, 2019 and December 31, ~~2019~~2018 differed from the Federal statutory rate of 21% primarily due to ~~increases~~Federal research and development credits, excess tax benefits related to ~~the rate caused by state taxes,~~stock-based compensation, a modified territorial tax system and a minimum tax on certain foreign earnings, ~~partially offset by decreases to the rate caused by Federal research~~ and ~~development credits and excess tax benefits related to stock-based compensation. These provisions have been included in the income tax expense for the three months ended March 31, 2019.~~

~~The effective tax rate for the three months ended March 31, 2018 differed from the Federal statutory rate of 28% primarily due to increases to the rate caused by~~ state taxes, partially offset by decreases to the rate caused by Federal research and development credits, domestic manufacturing deduction, and excess tax benefits related to stock-based compensation. During the second quarter of fiscal 2018, the Federal statutory rate transitioned to a blended 28% as a result of the Tax Act.taxes.

Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance and interpretation from the ~~Internal Revenue Service.~~IRS.

~~Nine months ended March 31, 2019 compared to the nine months ended March 31, 2018~~

~~The following tables set forth, for the nine month periods indicated, financial data from the consolidated statements of operations:~~

(In thousands) March 31, 2019 As a % of
Total Net
Revenue March 31, 2018 As a % of
Total Net
Revenue
Net revenues $ 477,781
100.0 % $ 340,317
100.0 %
Cost of revenues 271,464
56.8
182,717
53.7
Gross margin 206,317
43.2
157,600
46.3
Operating expenses:
Selling, general and administrative 79,971
16.7
62,928
18.5
Research and development 48,579
10.2
43,950
12.9
Amortization of intangible assets 20,906
4.4
18,568
5.5
Restructuring and other charges 573
0.1
1,792
0.5
Acquisition costs and other related expenses 555
0.1
2,265
0.7
Total operating expenses 150,584
31.5
129,503
38.1
Income from operations 55,733
11.7
28,097
8.2
Interest income 342
0.1
14
—
Interest expense (6,928 ) (1.5 ) (1,101 ) (0.3 )
Other expense, net (2,207 ) (0.5 ) (1,065 ) (0.3 )
Income before income taxes 46,940
9.8
25,945
7.6
Tax provision (benefit) 12,969
2.7
(4,837 ) (1.4 )
Net income $ 33,971
7.1 % $ 30,782
9.0 %

R~~EVENUES~~

Total revenues increased $137.4 million for the nine months ended March 31, 2019 compared to the same period in fiscal 2018. The increase is primarily attributed to $85.3 million of additional acquired revenues from the Themis, Germane and GECO acquisitions resulting from increased demand for integrated subsystems across C4I applications. These increases in acquired revenues were predominantly driven by the WIN-T and CDS programs. Total revenues also increased due to $52.1 million of organic revenues related to increased demand for integrated subsystems and components across the EW and other sensor and effector applications. The increases in organic revenues were primarily driven by a classified missile program, F-35 and UAV Predator programs, which were partially offset by decreases in the Aegis and SEWIP Block II programs. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

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, decreased $15.6 million during the nine months ended March 31, 2019 as compared to the same period in fiscal 2018, primarily due to lower Aegis program revenues.

G~~ROSS~~ M~~ARGIN~~

Gross margin was 43.2% for the nine months ended March 31, 2019, a decrease of 310 basis points from the 46.3% gross margin achieved during the same period in fiscal 2018. The lower gross margin was primarily driven by acquired businesses of Germane and GECO, which historically generated gross margins below our target model. Lower gross margin was driven by program mix and higher CRAD associated with long-term contracts, partially offset by lower inventory step-up amortization associated with our acquired businesses compared to the same period in fiscal 2018.

S~~ELLING, GENERALAND~~ A~~DMINISTRATIVE~~

Selling, general and administrative expenses increased $17.1 million or 27.1%, to $80.0 million during the nine months ended March 31, 2019, compared to $62.9 million in the same period in fiscal 2018. The increase was primarily related to higher compensation related costs due to added headcount from the acquisitions Germane and GECO, as well as the full period impact of the Themis acquisition. Our headcount within the organic business also increased period over period. Selling, general and

administrative expenses decreased as a percentage of revenues to 16.7% during the nine months ended March 31, 2019 from 18.5% during the same period in fiscal 2018 primarily due to improved operating leverage.

R~~ESEARCHAND~~ D~~EVELOPMENT~~

Research and development expenses increased $4.6 million, or 10.5%, to $48.6 million during the nine months ended March 31, 2019, compared to $44.0 million during the same period in fiscal 2018. The increase was primarily due to increased headcount from our recent acquisitions, driving higher compensation related costs partially offset by increased CRAD. Research and development expenses decreased as a percentage of revenues to 10.2% during the nine months ended March 31, 2019 from 12.9% during the same period in fiscal 2018. The decrease was primarily due to higher revenues and additional CRAD in the nine months ended March 31, 2019, as compared to the same period in fiscal 2018.

R~~ESTRUCTURING~~ AND O~~THER~~ C~~HARGES~~

Restructuring and other charges were $0.6 million for the nine months ended March 31, 2019, compared to $1.8 million during the same period in fiscal 2018. The decrease was primarily driven by lower severance costs compared to the same period in fiscal 2018. Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.

A~~CQUISITION~~ C~~OSTSAND~~ O~~THER~~ R~~ELATED~~ E~~XPENSES~~

We incurred $0.6 million of acquisition costs and other related expenses during the nine months ended March 31, 2019, compared to $2.3 million during the same period in fiscal 2018. The acquisition costs and other related expenses we incurred during the nine months ended March 31, 2019 were primarily related to the acquisitions of Germane and GECO. The acquisition costs and other related expenses for the same period in fiscal 2018 were primarily related to the acquisition of Themis. 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.

I~~NTEREST~~ E~~XPENSE~~

Interest expense increased $5.8 million, to $6.9 million during the nine months ended March 31, 2019 compared to $1.1 million during the same period in fiscal 2018. Interest expense during the nine months ended March 31, 2019 was driven by increasing our outstanding borrowings under the Revolver, to facilitate the acquisitions of Themis, Germane and GECO. The nine months ended March 31, 2018 included only two months of interest on the Revolver related to the Themis acquisition.

O~~THER~~ E~~XPENSE, N~~ET

Other expense, net was $2.2 million during the nine months ended March 31, 2019, compared to $1.1 million during the same period in fiscal 2018. The increase in other expense, net was a result of fewer foreign exchange gains of $0.8 million during the nine months ended March 31, 2019, compared to the same period in fiscal 2018. The increase also included an additional $0.2 million of financing and registration fees during the nine months ended March 31, 2019 compared to the same period in fiscal 2018. The nine months ended March 31, 2019 included $0.3 million of litigation and settlement expenses incurred during the period.

I~~NCOME~~ T~~AXES~~

On December 22, 2017, the Tax Act was enacted by the U.S. government. The Tax Act has impacted the U.S. statutory Federal tax rate that we will use going forward, which has been reduced to 21% from 35%. The Tax Act introduced a modified territorial tax system and a minimum tax on certain foreign earnings for tax years beginning after December 31, 2017.

We recorded an income tax provision of $13.0 million and an income tax benefit of $4.8 million on income from operations before income taxes of $46.9 million and $25.9 million for the nine months ended March 31, 2019 and 2018, respectively. During the nine months ended March 31, 2019 and 2018, we recognized discrete tax benefits of $1.9 million and $7.7 million, respectively, related to excess tax benefits on stock-based compensation.

The effective tax rate for the nine months ended March 31, 2019 differed from the Federal statutory rate of 21% primarily due to increases to the rate caused by state taxes, a modified territorial tax system, and a minimum tax on certain foreign earnings, partially offset by decreases to the rate caused by Federal research and development credits and excess tax benefits related to stock-based compensation. These provisions have been included in the income tax expense for the nine months ended March 31, 2019.

The effective tax rate for the nine months ended March 31, 2018 differed from the Federal statutory rate of 28% primarily due to increases to the rate caused by state taxes and the one-time impact of the Tax Act, partially offset by decreases to the rate caused by Federal research and development credits, domestic manufacturing deduction, and excess tax benefits related to stock

~~compensation. During the second quarter of fiscal 2018, the Federal statutory rate transitioned to a blended 28% as a result of the Tax Act.~~

~~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.~~

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity come from existing cash and cash generated from operations, our Revolver and our ability to raise capital under our universal shelf registration statement. Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments. We ~~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 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 ~~using~~under the shelf registration statement for general corporate purposes, which may include the following:

•the acquisition of other companies or businesses;

•the repayment and refinancing of debt;

•capital expenditures;

•working capital; and

•other purposes as described in the prospectus supplement.

We have an unlimited amount available under the shelf registration statement. Additionally, as part of the shelf registration statement, we have entered into an equity distribution agreement which allows us to sell an aggregate of up to $200.0 million of our common stock from time to time through our agents. The actual dollar amount and number of shares of common stock we sell pursuant to the equity distribution agreement will be dependent on, among other things, market conditions and our fund raising requirements. The agents may sell the common stock by any method deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation sales made directly on ~~NASDAQ,~~Nasdaq, on any other existing trading market for the common stock or to or through a market maker. In addition, our common stock may be offered and sold by such other methods, including privately negotiated transactions, as we and the agents may agree.

Revolving Credit Facility

On September 28, 2018, we amended the Revolver to increase and extend the borrowing capacity to a $750.0 million, 5-year revolving credit line, with the maturity extended to September 2023. ~~In connection with the amendment,~~As of December 27, 2019, we ~~repaid the remaining~~had no outstanding ~~interest~~borrowings on the Revolver using cash on hand. During the nine months ended March 31, 2019, we drew additional borrowings of $81.5 million to facilitate the acquisitions of Germane and GECO in the first and third quarter of fiscal 2019, respectively. The Revolver had an outstanding balance of $276.5 million at March 31, 2019.Revolver. See Note I in the accompanying consolidated financial statements for further discussion of the Revolver.

We utilize interest rate derivatives to mitigate interest rate exposure with respect to our financing arrangements. On January 11, 2019, we entered into an interest rate swap (the “Swap”) with Bank of America, N.A. for a notional amount of $175.0 million in order to establish a fixed interest rate associated with a portion of our Revolver. The Swap was designated and qualified for hedge accounting treatment as a cash flow hedge.

On April 18, 2019, we acquired The Athena Group, Inc. ("Athena") and Syntonic Microwave LLC ("Syntonic") for a combined total purchase price of $46.0 million, subject to net working capital and net debt adjustments. Athena is a privately-held company based in Gainesville, Florida and a leading provider of cryptographic and countermeasure IP vital to securing defense computing systems. Based in Campbell, California, privately-held Syntonic is 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. Both acquisitions were funded through the Revolver.

CASH FLOWS


	As of and For the Nine Month Period Ended March 31,							As of and For the Six Months Ended,
(In thousands)	2019			2018			(In thousands)	December 27, 2019		December 31, 2018
Net cash provided by operating activities	$	71,548		$	17,680		Net cash provided by operating activities	$	56,376	$	45,330
Net cash used in investing activities	$	(99,391	)	$	(196,838	)	Net cash used in investing activities	$	(117,421)	$	(55,831)
Net cash provided by financing activities	$	73,892		$	181,931
Net increase in cash and cash equivalents	$	45,994		$	2,580
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	$	112,515		$	44,217		Cash and cash equivalents at end of period	$	182,037	$	93,903

Our cash and cash equivalents ~~increased~~decreased by ~~$46.0~~$75.9 million from June 30, ~~2018~~2019 to ~~March 31,~~December 27, 2019, primarily as the result of ~~$71.5~~$96.5 million ~~provided by operating activities. We had borrowings under the Revolver~~ of ~~$81.5 million, which was~~cash on hand used to fund ~~our~~the acquisition ~~activities during the period, $17.9~~of APC, $20.9 million invested in purchases of property and equipment ~~$7.4~~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 ~~and $1.9~~These decreases were partially offset by $56.4 million ~~related to the fees incurred to increase the borrowing capacity of our existing Revolver.~~provided by operating activities.

Operating Activities

During the ~~nine~~six months ended ~~March 31,~~December 27, 2019, we generated ~~$71.5~~$56.4 million in cash from operating activities, an increase of ~~$53.9~~$11.0 million when compared to the ~~same period in fiscal~~six months ended December 31, 2018. The increase in cash generated by operating activities was primarily the result of ~~less~~higher comparable net income, higher cash ~~paid for income taxes, increased~~collections on outstanding accounts ~~payable~~receivable and ~~accrued expenses and fewer~~lower inventory purchases. These increases were partially offset by increased prepaid income taxes, decreased accounts payable, accrued expenses and income taxes payable and deferred revenue and customer ~~advances and cash uses for accounts receivable.~~advances.

Investing Activities

During the ~~nine~~six months ended ~~March 31,~~December 27, 2019, we invested ~~$99.4~~$117.4 million compared to ~~$196.8~~$55.8 million during the ~~same period in fiscal~~six months ended December 31, 2018. The ~~decrease~~increase was driven by the ~~acquisitions~~acquisition of ~~Germane and GECO~~APC during the ~~nine~~six months ended ~~March 31,~~December 27, 2019 ~~compared to the acquisitions of Themis~~ and ~~Richland Technologies, LLC ("RTL")~~an additional $10.1 million invested in ~~the same period of fiscal 2018. The decrease was partially offset by $6.8 million in higher~~ purchases of property and equipment, primarily related to the build out of our trusted custom microelectronics business during ~~fiscal 2019.~~the six months ended December 27, 2019, as compared to the six months ended December 31, 2018.

Financing Activities

During the ~~nine~~six months ended ~~March 31,~~December 27, 2019, we had ~~$73.9~~$14.9 million in cash used in financing activities compared to $37.9 million in cash provided by financing activities ~~compared to $181.9 million~~ during the ~~same period in fiscal~~six months ended December 31, 2018. The ~~$108.0~~$52.8 million decrease was primarily due to no borrowings on the ~~$81.5~~Revolver and $8.0 million of net borrowings that were drawn against the Revolver to facilitate the acquisitions of Germane and GECO during the nine months ended March 31, 2019, compared to the $195.0 million of net borrowings that were drawn against the Revolver to facilitate the acquisitions of Themis and RTL during the same period of fiscal 2018. There was also $1.9 million ofadditional payments ~~for deferred financing fees~~ related to the ~~amendment of the Revolver during the nine months ended March 31, 2019. The decrease in cash provided by financing activities was partially offset by fewer payments of $7.7 million 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 the ~~same period of fiscal~~six months ended December 31, 2018.

COMMITMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

The following is a schedule of our commitments and contractual obligations outstanding at ~~March 31,~~December 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	$	76,328	$	76,328	$	—	$	—	$	—	Purchase obligations	$	97,083	$	97,083	$	—	$	—	$	—
Operating leases	59,889		9,868		17,164		13,715		19,142		Operating leases	79,051		10,074		25,509		20,007		23,461
	$	136,217	$	86,196	$	17,164	$	13,715	$	19,142

												$	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 ~~$76.3~~$97.1 million at ~~March 31,~~December 27, 2019.

We have a liability at ~~March 31,~~December 27, 2019 of ~~$2.9~~$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 ~~statement~~Consolidated Statements of ~~cash flows.~~Cash Flows.

OFF-BALANCE SHEET ARRANGEMENTS

Other than ~~our lease commitments incurred~~certain 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--G~~GAAP~~AAP FINANCIAL MEASURES

In our periodic communications, we discuss certain important measures that are not calculated according to U.S. generally accepted accounting principles (“GAAP”), including adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, ~~acquired~~organic revenue and ~~organic~~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 the portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in our operations and allocating resources to various initiatives and operational requirements. We believe that adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of charges that may vary from period to period without any correlation to underlying operating performance. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. We believe that trends in our adjusted EBITDA are valuable indicators of our operating performance.

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

The following table reconciles our net income, the most directly comparable GAAP financial measure, to our adjusted EBITDA:


	Three Months Ended March 31,						Nine Months Ended March 31,							Second Quarters Ended						Six Months Ended
(In thousands)	2019			2018			2019			2018			(In thousands)	December 27, 2019		December 31, 2018		December 27, 2019		December 31, 2018
Net income	$	14,109		$	3,696		$	33,971		$	30,782		Net income	$	15,676	$	12,383	$	34,923	$	19,862
Other non-operating adjustments, net ⁽¹⁾	(502		)	(694		)	(155		)	(798		)
Interest expense (income), net	2,268			999			6,586			1,087
Income taxes	5,357			2,209			12,969			(4,837		)
Other non-operating adjustments, net													Other non-operating adjustments, net	(549)		(18)		(248)		347
Interest (income) expense, net													Interest (income) expense, net	(312)		2,125		(1,499)		4,318
Income tax provision													Income tax provision	5,110		4,483		3,092		7,612
Depreciation	4,790			4,277			13,924			11,752			Depreciation	4,555		4,769		8,917		9,134
Amortization of intangible assets	6,786			7,104			20,906			18,568			Amortization of intangible assets	7,992		6,939		15,011		14,120
Restructuring and other charges ⁽²⁾	46			1,384			573			1,792
Restructuring and other charges⁽¹⁾													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	787			1,909			2,592			4,129			Acquisition and financing costs	1,882		762		4,118		1,805
Fair value adjustments from purchase accounting ⁽³⁾	93			539			713			1,132
Litigation and settlement expense (income), net	146			—			325			—
Fair value adjustments from purchase accounting⁽²⁾													Fair value adjustments from purchase accounting⁽²⁾	600		—		600		620
Litigation and settlement expense, net													Litigation and settlement expense, net	142		179		455		179
Stock-based and other non-cash compensation expense	4,914			3,669			14,995			13,306			Stock-based and other non-cash compensation expense	6,639		5,338		12,415		10,081
Adjusted EBITDA	$	38,794		$	25,092		$	107,399		$	76,913		Adjusted EBITDA	$	42,836	$	36,983	$	79,533	$	68,605

(1) As of July 1, 2018, we has revised our definition of adjusted EBITDA to incorporate other non-operating adjustments, net, which includes gains or losses on foreign currency remeasurement and fixed assets sales and disposals among other adjustments. Adjusted EBITDA for prior periods has been recast for comparative purposes.

~~(2)~~ Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. We believe these items are non-routine and may not be indicative of ongoing operating results.

~~(3) Fair~~(2) For the second quarter and six months ended December 27, 2019, fair value adjustments from purchase accounting ~~for the three months ended March 31, 2019~~ relate to ~~GECO~~APC inventory step-up amortization. ~~The nine~~For the six months ended ~~March~~December 31, ~~2019 include adjustments related to Germane and GECO inventory step-up amortization. Fair~~2018, fair value adjustments from purchase accounting ~~for the three months ended March 31, 2018~~ relate to ~~Themis and CES inventory step-up amortization. The nine months ended March 31, 2018 include adjustments related to Themis, CES and Delta~~Germane 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. 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 tables reconcile net income and diluted earnings per share, the most directly comparable GAAP measures, to adjusted income and adjusted EPS:


	Three Months Ended March 31,											Second Quarters Ended
(In thousands, except per share data)	2019					2018					(In thousands, except per share data)	December 27, 2019						December 31, 2018
Net income and diluted earnings per share	$	14,109		$	0.29	$	3,696		$	0.08	Net income and diluted earnings per share	$	15,676	$	0.29	$	12,383	$	0.26
Amortization of intangible assets	6,786					7,104					Amortization of intangible assets	7,992				6,939
Restructuring and other charges ⁽¹⁾	46					1,384					Restructuring and other charges⁽¹⁾	1,101				23
Impairment of long-lived assets	—					—					Impairment of long-lived assets	—				—
Acquisition and financing costs	787					1,909					Acquisition and financing costs	1,882				762
Fair value adjustments from purchase accounting ⁽²⁾	93					539					Fair value adjustments from purchase accounting⁽²⁾	600				—
Litigation and settlement expenses (income), net	146					—
Litigation and settlement expense, net											Litigation and settlement expense, net	142				179
Stock-based and other non-cash compensation expense	4,914					3,669					Stock-based and other non-cash compensation expense	6,639				5,338
Impact to income taxes⁽³⁾	(2,850		)			(4,082		)			Impact to income taxes⁽³⁾	(4,504)				(3,009)
Adjusted income and adjusted earnings per share	$	24,031		$	0.50	$	14,219		$	0.30	Adjusted income and adjusted earnings per share	$	29,528	$	0.54	$	22,615	$	0.47

Diluted weighted-average shares outstanding				47,958					47,532		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. We believe these items are non-routine and may not be indicative of ongoing operating results.

(2) ~~Fair~~For the second quarter ended December 27, 2019, fair value adjustments from purchase accounting ~~for the three months ended March 31, 2019~~ relate to ~~GECO inventory step-up amortization.~~

~~Fair value adjustments from purchase accounting for the three months ended March 31, 2018 relate to Themis and CES~~APC 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.


	Nine Months Ended March 31,											Six Months Ended
(In thousands, except per share data)	2019					2018					(In thousands, except per share data)	December 27, 2019						December 31, 2018
Net income and diluted earnings per share	$	33,971		$	0.71	$	30,782		$	0.65
Net income and earnings per share											Net income and earnings per share	$	34,923	$	0.63	$	19,862	$	0.42
Amortization of intangible assets	20,906					18,568					Amortization of intangible assets	15,011				14,120
Restructuring and other charges ⁽¹⁾	573					1,792					Restructuring and other charges⁽¹⁾	1,749				527
Impairment of long-lived assets	—					—					Impairment of long-lived assets	—				—
Acquisition and financing costs	2,592					4,129					Acquisition and financing costs	4,118				1,805
Fair value adjustments from purchase accounting⁽²⁾	713					1,132					Fair value adjustments from purchase accounting⁽²⁾	600				620
Litigation and settlement expenses (income), net	325					—
Litigation and settlement expense, net											Litigation and settlement expense, net	455				179
Stock-based and other non-cash compensation expense	14,995					13,306					Stock-based and other non-cash compensation expense	12,415				10,081
Impact to income taxes ⁽³⁾	(8,932		)			(24,648		)			Impact to income taxes⁽³⁾	(15,353)				(6,082)
Adjusted income and adjusted earnings per share	$	65,143		$	1.36	$	45,061		$	0.95	Adjusted income and adjusted earnings per share	$	53,918	$	0.98	$	41,112	$	0.86

Diluted weighted-average shares outstanding				47,783					47,473		Diluted weighted-average shares outstanding			55,037				47,696

(2) ~~Fair~~For the six months ended December 27, 2019, fair value adjustments from purchase accounting ~~for the nine months ended March 31, 2019~~ relate to ~~Germane and GECO~~APC inventory step-up amortization. ~~Fair~~For the six months ended December 31, 2018, fair value adjustments from purchase accounting ~~for the nine months ended March 31, 2018~~ relate to ~~Themis, CES and Delta~~Germane inventory step-up amortization.

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
March 31, Nine Months Ended
March 31,
(In thousands) 2019 2018 2019 2018
Cash provided by operating activities $ 26,218
$ 873
$ 71,548
$ 17,680
Purchase of property and equipment (7,060 ) (3,475 ) (17,862 ) (11,067 )
Free cash flow $ 19,158
$ (2,602 ) $ 53,686
$ 6,613

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

The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure for the ~~three months~~second quarters ended ~~March 31,~~December 27, 2019 and ~~2018.~~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	%

(In thousands) March 31, 2019 As a % of
Total Net
Revenue March 31, 2018 As a % of
Total Net
Revenue $ Change % Change
Organic revenue $ 139,812
80 % $ 106,835
92 % $ 32,977
31 %
Acquired revenue 34,824
20 % 9,501
8 % 25,323
267 %
Total revenues $ 174,636
100 % $ 116,336
100 % $ 58,300
50 %

The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure for the ~~nine~~six monthsended ~~March 31,~~December 27, 2019 and ~~2018.~~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	$	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 thousands) March 31, 2019 As a % of
Total Net
Revenue March 31, 2018 As a % of
Total Net
Revenue $ Change % Change
Organic revenue $ 382,939
80 % $ 330,816
97 % $ 52,123
16 %
Acquired revenue 94,842
20 % 9,501
3 % 85,341
898 %
Total revenues $ 477,781
100 % $ 340,317
100 % $ 137,464
40 %

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

~~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 effective for us on July 1, 2019. The standard mandates a modified retrospective transition method for all entities and early adoption is permitted. As of March 31, 2019, the Company had $59.9 million of future minimum lease payments under non-cancelable operating leases, primarily for facilities. The future minimum lease payments have not yet been adjusted to the present value, as we are still assessing the impact of each applicable discount rate. We will leverage the rate implicit in the lease unless that rate cannot be readily determined, in which case we will use our incremental borrowing rate to determine the discount rate applicable for the calculation of our lease liabilities. See Commitments, Contractual Obligations and Contingencies of Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q for more information about the timing and amount of future operating lease payments, which we believe is indicative of the materiality of adoption of the ASU to our financial statements. We have evaluated our population of leases and are in the process of determining the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

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 do~~The Company does not expect this guidance to have a material impact to ~~our~~its consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects for Accumulated Other Comprehensive Income, an amendment of the FASB Accounting Standards Codification. This ASU permits a company to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act of 2017 on items within ~~accumulated other comprehensive income (loss) ("AOCI")~~AOCI to retained earnings. The amounts applicable for reclassification should include the effect of the change in the U.S. Federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Cuts and Jobs Act of 2017 related to the items remaining in AOCI. The effect of the change in the U.S. Federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations shall not be included. ~~For all entities,~~The Company has determined that there is no activity that falls within the new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that annual period, and early adoption is permitted. We are evaluating the effect that ASU 2018-02 will have on our consolidated financial statements and related disclosures.scope of this 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 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 standard is effective for fiscal years ending after December 15, 2020. The ASU requires retrospective adoption and permits early adoption for all entities. ~~We do~~The Company does not expect this guidance to have a material impact to ~~our~~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, 2019, with early adoption permitted. 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. ~~We do~~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 FASB Accounting Standards Codification. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions for intraperiod tax allocations and deferred tax liabilities for equity method investments and adds guidance whether a step-up in tax basis of goodwill relates to a business combination or a separate transaction. This ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the effect that ASU 2019-12 will have on our consolidated financial statements orand related disclosures.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Effective July 1, ~~2018,~~2019, we adopted ~~ASU No. 2014-09,~~ ASC 842,~~Revenue from Contracts with Customers (Topic 606)~~ Leases, (“ASC 842”), which requires ~~an entity~~lessees to recognize ~~the amount of revenue to which it expects to be entitled~~a right-of-use asset and lease liability for ~~the transfer of promised goods or services to customers.~~most lease arrangements. This ASU supersedes existing lease guidance, including ASC 840, Leases (Topic 840). The ~~ASU replaces most existing revenue recognition guidance in GAAP.~~

~~The new~~ standard ~~permits adoption by using either (i)~~mandates a modified retrospective ~~approach~~transition method for all ~~periods presented~~entities and early adoption is permitted. This ASU, among other things, allows companies to elect an optional transition method to apply the new lease standard through a cumulative-effect adjustment in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. In accordance with this standard, we haveadoption. We adopted ~~the new standard~~ASC 842 using the ~~retrospective method.~~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 ~~have completed~~elected the ~~assessment phase~~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 ~~implemented~~3) initial direct costs for any existing leases. We also elected the ~~new standard accordingly. Further, we have evaluated our policies in relation to our internal controls framework. This assessment included identification, consideration,~~hindsight practical expedient, permitting the use of hindsight when determining the lease term and ~~quantification~~assessing impairment of the impact of the new standard on our financial statements, accounting policies, processes, control environment and systems. The outcome of this assessment included implementation of supporting processes and systems that enable timely and accurate reporting under the new standard.ROU assets. Adoption of the new standard ~~did not result in a significant change in our control environment. Such adoption has~~ resulted in additional ~~disclosures around~~lease assets and lease liabilities on the ~~nature~~Unaudited Consolidated Balance Sheet with no cumulative impact to retained earnings and timing of our performance obligations, contract liabilities, deferred contract cost assets, as well as significant judgments and practical expedients used by us. We have applied the standard’s practical expedient that permits the omission of prior-period information

about our remaining performance obligations. We also elected to use a practical expedient available under the new standard whereby contracts with original expected durations of one year or less are excluded from our remaining performance obligations.

~~Adoption of the new standard~~ did not have a material impact ~~to the amount~~on our Consolidated Statements of Operations and Comprehensive Income or ~~timing~~Consolidated Statements of revenue recognition related to our legacy accounting methods for contracts including ship and bill, multiple-deliverable, and contract accounting, which encompassed the legacy percentage-of-completion, completed contract and time and materials methods. For T&M contracts, we elected to use a practical expedient permitted by the new standard whereby revenue is recognized in the amount for which the Company has a right to invoice the customer based on the control transferred to the customer. Such adoption did not have a material impact to our consolidated financial statements.

In connection with the adoption of the new standard, there is a requirement to capitalize certain incremental costs of obtaining a contract, which for us primarily comprises commission expenses for internal and external sales representatives. Any such costs required to be capitalized would be amortized over the period of performance for the underlying contracts. We have elected the practical expedient under the new standard whereby costs associated with contracts that have a duration less than one year are expensed as incurred. We have completed the evaluation of capitalizing costs to obtain a contract, noting that the impact related to these costs would be limited to commissions on contracts with a duration exceeding one year. The impact was not material to our consolidated financial statements.

~~Effective July 1, 2018, we adopted 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. Such adoption has not and will not have any impact to our consolidated financial statements.Flows.

~~Effective July 1, 2018, we adopted 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. Such adoption has not and will not have any impact to our consolidated financial statements.

~~Effective July 1, 2018, we adopted ASU No. 2017-07,~~ ~~Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, an amendment of the FASB Accounting Standards Codification. This ASU requires employers that sponsor defined benefit pension and/or other post-retirement benefit plans to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Employers are required to present the other components of net benefit costs in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component of net periodic pension cost will be eligible for asset capitalization. The ASU should be applied retrospectively 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 and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. Such adoption has not and will not have a material impact to our consolidated financial statements.

~~Effective January 1, 2019, we adopted ASU No. 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~, an amendment of the FASB Accounting Standards Codification. This ASU provides improved financial reporting of hedging relationships to better portray the economic result of an entity's risk management activities in its financial statements. In addition, the amendments in this update make certain targeted improvements to simplify the application of hedge accounting guidance. The ASU requires modified retrospective adoption and permits early adoption in any interim period after issuance of the ASU. Disclosures reflect the adoption of ASU 2017-12, ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in the third quarter of fiscal 2019. Prior period amounts have not been restated. See Note N for additional disclosures.~~

~~Effective January 1, 2019, we adopted SEC Final Rule 33-10532,~~ ~~Disclosure Update and Simplification~~, which requires disclosure of the changes in each caption of shareholders’ equity for the current and comparative year-to-date periods, with subtotals for each interim period and the amount of dividends per share for each class of shares. Such adoption has not and will not have a material impact to our consolidated financial statements.


~~ITEM 3.~~	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

I~~NTEREST~~ R~~ATE~~ R~~ISK~~

~~Our exposure to interest rate risk is related primarily to our investment portfolio and the Revolver.~~

Our investment portfolio includes money market funds from high quality U.S. government issuers. A change in prevailing interest rates may cause the fair value of our investments to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing rate rises, the fair value of the principal amount of our investment will probably decline. To minimize this risk, investments are generally available for sale and we generally limit the amount of credit exposure to any one issuer.

We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For our variable rate borrowings, we use a fixed interest rate swap, effectively converting a portion of variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. The Swap is designated as a cash flow hedge. We have one swap outstanding at March 31, 2019 effectively converting $175.0 million of the borrowings under our Revolver to a fixed rate.

As of March 31, 2019, there were outstanding borrowings of $276.5 million against the Revolver. On April 18, 2019, we drew an additional $48.0 million on the Revolver to facilitate the closing of the acquisitions, with the higher amount reflecting an estimated adjustment for working capital, including cash, expected to be received with the Athena and Syntonic acquisitions at closing.

There were no material changes in our exposure to market risk from June 30, ~~2018~~2019 to ~~March 31,~~December 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 ~~March 31,~~December 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 ~~March 31,~~December 27, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ~~Management~~However, management is in the process of integrating the recently acquired ~~Germane and GECO businesses~~APC business into our overall internal control over financial reporting environment.

PART II. OTHER INFORMATION


~~ITEM 1.~~	~~LEGAL PROCEEDINGS~~

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.

On July 10, 2018, a securities class action complaint was filed against us, Mark Aslett, and Gerald M. Haines II in the U.S. District Court for the District of Massachusetts. The complaint asserted Section 10(b) and 20(a) securities fraud claims on behalf of a purported class of purchasers and sellers of our stock from October 24, 2017 to April 24, 2018. The complaint alleged that our public disclosures in SEC filings and on earnings calls were false and/or misleading. On September 27, 2018, The City of Daytona Beach Police & Fire Pension Fund was designated as the lead plaintiff and Levi & Korsinsky was designated as lead counsel in the matter. The Court granted plaintiff leave to amend and restate the complaint, which was due on December 10, 2018. On December 10, 2018, the plaintiff filed a notice of voluntary dismissal without prejudice and the case was terminated by the Court and is no longer pending.


~~ITEM 1A.~~	~~RISK FACTORS~~

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, ~~2018. In addition, you should note that risks below related to substantial indebtedness have been updated to include our interest rate derivatives.~~

~~We may incur substantial indebtedness.~~

On September 28, 2018, we amended the Revolver to increase and extend the borrowing capacity to a $750.0 million, 5-year revolving credit line, with the maturity extended to September 28, 2023. At March 31, 2019, drawings on the Revolver were $276.5 million and we drew an additional $48.0 million on the Revolver to facilitate the closing of the Athena and Syntonic acquisitions, with the higher amount reflecting an estimated adjustment for working capital, including cash, expected to be received at closing.

The Revolver accrues interest, at the Company’s option, at floating rates tied to LIBOR or the prime rate plus an applicable percentage. The applicable percentage is set at LIBOR plus 1.25% and is established pursuant to a pricing grid based on the Company's total net leverage ratio. Based on the $276.5 million of floating rate debt outstanding as of March 31, 2019, of which $175.0 million is hedged, our annual interest expense would change by approximately $1.0 million for each 100 basis point increase in interest rates.

We are exposed to the impact of interest rate changes primarily through our borrowing activities. For our variable rate borrowings, we use a fixed interest rate swap, effectively converting a portion of variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings.

Subject to the limits contained in the Revolver, we may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our debt could intensify. Specifically, our debt could have important consequences to our investors, including the following:

making it more difficult for us to satisfy our obligations under our debt instruments, including, without limitation, the Revolver; and if we fail to comply with these requirements, an event of default could result;

~~limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;~~

requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

~~increasing our vulnerability to general adverse economic and industry conditions;~~

exposing us to the risk of increased interest rates as certain of our borrowings have variable interest rates, which could increase the cost of servicing our financial instruments and could materially reduce our profitability and cash flows;

~~limiting our flexibility in planning for and reacting to changes in the industry in which we compete;~~

~~placing us at a disadvantage compared to other, less leveraged competitors; and~~

~~increasing our cost of borrowing.~~

In addition, the Revolver contains restrictive covenants that may limit our ability to engage in activities that are in our long term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt. And, if we were unable to repay the amounts due and payable, the lenders under the Revolver could proceed against the collateral granted to them to secure that indebtedness.

~~In addition, increases in interest rates will increase the cost of servicing our financial instruments with exposure to interest rate risk and could materially reduce our profitability and cash flows.~~

2019. There have been no material changes from the factors disclosed in our ~~2018~~2019 Annual Report on Form 10-K filed on August ~~16, 2018,~~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~~

ITEM 6. EXHIBITS

The following Exhibits are filed or furnished, as applicable, herewith:
















~~10.1~~31.1		~~Form of Stock Option Agreement under the 2018 Stock Incentive Plan~~

~~10.2~~	~~Form of Restricted Stock Award Agreement under the 2018 Stock Incentive Plan~~

~~10.3~~	~~Form of Deferred Stock Award Agreement under the 2018 Stock Incentive Plan~~

~~10.4~~	~~Form of Performance-Based Stock Option Agreement under the 2018 Stock Incentive Plan~~

~~10.5~~	~~Form of Performance-Based Restricted Stock Award Agreement under the 2018 Stock Incentive Plan~~

~~31.1~~	Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1+		Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		eXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the 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.

+ 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 ~~May 9, 2019.~~

February 4, 2020.

MERCURY SYSTEMS, INC.

~~MERCURY SYSTEMS, INC.~~

By:

~~By:~~

/S/ MICHAEL D. RUPPERT

Michael D. Ruppert

Executive Vice President,

Chief Financial Officer, and Treasurer



	Three Months Ended March 31,		Nine Months Ended March 31,
	2019	2018	2019	2018
Basic weighted-average shares outstanding	47,258	46,844	47,164	46,685
Effect of dilutive equity instruments	700	688	619	788
Diluted weighted-average shares outstanding	47,958	47,532	47,783	47,473



	Fair Value Measurements
	March 31, 2019		Level 1		Level 2		Level 3
Assets:
Certificates of deposit	$	31,335	$	—	$	31,335	$	—
Total assets measured at fair value	$	31,335	$	—	$	31,335	$	—
Liabilities:
Interest rate swap	$	2,945	$	—	$	2,945	$	—
Total liabilities measured at fair value	$	2,945	$	—	$	2,945	$	—



	March 31, 2019		June 30, 2018
Raw materials	$	82,858	$	61,748
Work in process	36,472		30,841
Finished goods	12,325		15,996
Total	$	131,655	$	108,585



	SMP		AMS		MDS		Total
Balance at June 30, 2018	$	119,560	$	218,147	$	159,735	$	497,442
Goodwill adjustment for the Themis acquisition	—		—		139		139
Goodwill arising from the Germane acquisition	—		—		23,111		23,111
Goodwill arising from the GECO acquisition	22,823		—		—		22,823
Balance at March 31, 2019	$	142,383	$	218,147	$	182,985	$	543,515