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Item 7. Management’s Discussion and Analysis

2020-08-18 compared with 2019-08-15 · 186 added, 142 removed, 296 unchanged (53% of the section changed)

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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 cybersecurity 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.

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 this Annual Report on Form 10-K.

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Mercury Systems, Inc.

is a leading commercial provider of secure sensor and safety-critical mission processing subsystems.

Headquartered in Andover, Massachusetts, we deliver solutions that power a broad range of critical aerospace, defense and intelligence programs, configured and optimized for mission success in some of the most challenging and demanding environments.

Our innovative next-generation defense electronics business model is designed to meet the industry’s current and emerging technology and business needs by delivering affordable state-of-the-art solutions, rapid time-to-value, 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, a testament to our deep domain expertise and culture of innovation.

Our unique capabilities, technology and R&D investment strategy combine to differentiate Mercury in our industry.

Our technologies and capabilities include secure embedded processing modules and subsystems, mission computers, secure and rugged rack-mount servers, safety-critical avionics, radio frequency (“RF”) components, multi-function assemblies and subsystems.

We maintain our technological edge by investing in critical capabilities and 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 building blocks to design, build and manufacture integrated sensor processing subsystems - often including classified application-specific software and IP - for the C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) and electronic warfare (“EW”) markets.

These subsystems are deployed by our customers - defense and commercial aerospace

companies, defense prime contractors and the U.S.

Department of Defense (“DoD”) - in a variety of mission-critical applications.

An important component of adapting these technologies and IP for these applications is our investment in specialized packaging, ruggedization and cooling to address size, weight and 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 brings significant domain expertise to our customers.

is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense.

Headquartered in Andover, Massachusetts, we deliver solutions that power a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments.

We envision, create and deliver innovative technology solutions purpose-built to meet our customers’ most-pressing high-tech needs, including those specific to the defense community.

As a leading manufacturer of essential components, modules and subsystems, we sell to defense prime contractors, the U.S.

government and OEM commercial aerospace companies.

Mercury has built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that it believes meets and exceeds the performance needs of our defense and commercial customers.

Customers add their own applications and algorithms to our specialized, secure and innovative pre-integrated solutions.

This allows them to complete their full system by integrating with their platform, the sensor technology and, in some cases, the processing from Mercury, with their platform.

Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers.

Mercury’s transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications.

Our long-standing deep relationships with leading high-tech companies, coupled with our high level of R&D investments and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model.

Our capabilities, technology and R&D investment strategy combine to differentiate Mercury in our industry.

Our technologies and capabilities include secure embedded processing modules and subsystems, mission computers, secure and rugged rack-mount servers, safety-critical avionics, RF components, multi-function assemblies, subsystems and custom microelectronics.

We maintain our technological edge by investing in critical capabilities and IP in processing and RF, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as AI.

Our mission critical solutions are deployed by our customers for a variety of applications including C4ISR, electronic intelligence, avionics, EO/IR, electronic warfare, weapons and missile defense, hypersonics and radar.

Since we conduct much of our business with our defense customers via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter.

Customers specify delivery date requirements that coincide with their need for our products.

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 June 30, 2019 , we had 1,661 employees.

As of July 3, 2020, we had 1,947 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”), and adjusted EBITDA for fiscal 2019 were $654.7 million , $113.3 million , $46.8 million , $0.96 , $1.84 and $145.3 million , respectively.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted EPS, and adjusted EBITDA for fiscal 2018 were $493.2 million , $59.7 million , $40.9 million .

$0.86 , $1.42 and $114.6 million , respectively.

Our consolidated revenues, acquired revenues, net income, EPS, adjusted EPS, and adjusted EBITDA for fiscal 2020 were $796.6 million, $64.0 million, $85.7 million, $1.56, $2.30 and $176.2 million, respectively.

Our consolidated revenues, acquired revenues, net income, EPS, adjusted EPS and adjusted EBITDA for fiscal 2019 were $654.7 million, $13.5 million, $46.8 million, $0.96, $1.84 and $145.3 million, respectively.

See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

OUR RESPONSE TO COVID

The COVID pandemic continues to impact people and countries around the world.

This is a time of extraordinary uncertainty.

It is also a time when the work we do in support of strategic national priorities is recognized as critical.

At Mercury, we remain focused on the four goals we established at the outset of the COVID crisis:

to protect the health, safety, and livelihoods of our people;

to mitigate or reduce operational and financial risks to the Company;

to continue to deliver on our commitments to customers and shareholders;

and to continue the mission-critical work Mercury does every day to support the ongoing security of our nation, our brave men and women in uniform, and the communities in which we all live.

To protect the health, safety, and livelihoods of our employees, we took immediate action on several fronts, instituting a variety of new policies and programs including, but not limited to, additional sick leave for COVID-related circumstances, a work-from-home policy for all employees who can perform their duties remotely as well as increasing overtime pay for eligible employees.

We also established a relief fund, with an initial $1 million budget, to assist eligible Mercury employees, including temporary agency employees, experiencing unexpected financial burdens as a result of the COVID crisis.

The intent of the Mercury COVID Relief Fund is to provide financial assistance to employees who may otherwise be unable to pay for basic necessities, unexpected care for immediate family members, or other urgent needs that promote their health and safety during the current COVID crisis.

As we have been designated an “essential business” as a part of the defense industrial base, during the year, our facilities continued to operate while complying with social distancing requirements consistent with Centers for Disease Control and Prevention (“CDC”) guidelines and requirements.

We implemented numerous preventive measures to maximize the safety of our facilities, including but not limited to, establishing physical segregation areas, implementing environmental cleaning and disinfection protocols in compliance with CDC guidelines and requirements, temperature and COVID testing at our manufacturing facilities, and limiting non-essential site visits by internal and external visitors.

We will continue to monitor and assess our response to protect the health, safety and livelihoods of our people.

B USINESS D EVELOPMENTS :

During the third quarter ended March 27, 2020, we drew $200.0 million on our $750.0 million Revolver to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

We paid down the $200.0 million draw during our fourth quarter ended July 3, 2020 based on reduced turbulence in the capital markets.

On September 23, 2019, we acquired American Panel Corporation (“APC”) on a cash-free, debt-free basis for a total purchase price of $100,000, prior to net working capital and net debt adjustments.

Based in Alpharetta, Georgia, APC is a leading innovator in large area display technology for the aerospace and defense market.

APC's capabilities are deployed on a wide range of next-generation platforms.

The acquisition was funded with cash on hand.

Effective July 1, 2019, our 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 fiscal 2020 are to the 53-week period from July 1, 2019 to July 3, 2020.

All references to fiscal 2019 is to the 52-week period from July 1, 2018 to June 30, 2019.

There have been no reclassifications of prior comparable periods due to this change.

On May 20, 2019, we announced the commencement of an underwritten public offering of our common stock, par value $0.01 per share.

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The acquisition and transaction related expenses were funded with borrowings obtained under the Revolver.

On February 1, 2018, we acquired Themis Computer (“Themis”).

Themis is a leading designer, manufacturer and integrator of commercial, SWaP-optimized rugged servers, computers and storage systems for U.S.

and international markets.

The acquisition and transaction related expenses were funded with borrowings obtained under the Revolver.

RESULTS OF OPERATIONS:

F ISCAL 2020 V S .

Results of operations for the twelve month period ended June 30, 2018 include only results from the acquisition dates for Themis and RTL.

Results of operations for the twelve month period ended June 30, 2019 include only results from the acquisition dates for Germane, GECO, Athena, and Syntonic, which were acquired subsequent to June 30, 2018.

Results of operations for fiscal 2020 include full period results from the acquisitions of Germane, GECO, Athena, Syntonic and only the results from acquisition date for APC, which was acquired subsequent to fiscal 2019.

Results of operations for fiscal 2019 include only results from the acquisition date for Germane, GECO, Athena and Syntonic.

Accordingly, the periods presented below are not directly comparable.

There was also an additional three days of operations in fiscal 2020 which did not have a material impact on our results of operations.

The Company has applied the FAST Act Modernization and Simplification of Regulation S-K, which limits the discussion to the two most recent fiscal years.

Refer to Item 7.

of the Company's Form 10-K issued on August 16, 2018 for prior year discussion related to fiscal 2017.

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

(In thousands)

Refer to Item 7 of the Company's Form 10-K issued on August 15, 2019 for prior year discussion related to fiscal 2018.

The following tables set forth, for the periods indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income:

(In thousands) Fiscal 2020 As a % of

Revenue Fiscal 2019 As a % of

Net revenues $ 796,610 100.0 % $ 654,744 100.0 %

Cost of revenues 439,766 55.2 368,588 56.3

Gross margin 356,844 44.8 286,156 43.7

Operating expenses:

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Interest expense (1,006) (0.1) (9,109) (1.4)

Other expense, net

Other income (expense), net 1,726 0.2 (8,880) (1.3)

Income before income taxes 93,933 11.8 59,527 9.1

Tax provision 8,221 1.0 12,752 2.0

Net income $ 85,712 10.8 % $ 46,775 7.1 %

Total revenues increased $141.9 million, or 22%, to $796.6 million during fiscal 2020 compared to $654.7 million during fiscal 2019 including “acquired revenue” which represents net revenue from acquired businesses that have been part of Mercury for completion of four full quarters or less (and excludes any intercompany transactions).

After the completion of four fiscal quarters, acquired businesses will be treated as organic for current and comparable historical periods.

The increase in total revenue was primarily due to $108.1 million of organic revenues which was predominantly driven by increases in demand for integrated subsystems and components product groupings across the C4I applications and, to a lesser extent, other sensor and effector applications.

The increase in total revenues is primarily attributed to higher revenues associated with a classified radar program as well as the F-35 and UAV Predator programs.

These increases were partially offset by lower revenues from the Aegis and SEWIP programs.

Acquired revenues increased $53.5 million primarily due to increases in demand for integrated subsystems and components product groupings across the C4I applications, driven predominantly by the WIN-T and CPS programs.

The increase in total revenue was primarily due to $91.4 million and $50.5 million of organic revenues and acquired revenues, respectively.

These increases were driven by higher demand throughout all product groupings, especially integrated subsystems, across all end applications and, in particular, radar, within the airborne, naval and land platforms.

The increase in total revenues is primarily attributed to higher revenues associated with the P8, SEWIP and AIDEWS programs.

Acquired revenue represents activity from the Germane, GECO, Athena, Syntonic and APC acquired businesses.

See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures.

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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 $9.3 million to $73.8 million during fiscal 2019 compared to $83.1 million during fiscal 2018 .

based customers, increased $18.1 million to $91.9 million during fiscal 2020 compared to $73.8 million during fiscal 2019.

International revenues represented 11.5% and 11.3% of total revenues during fiscal 2020 and 2019, respectively.

G ROSS M ARGIN

Gross margin was 43.7% for fiscal 2019 , a decrease of 210 basis points from 45.8% in fiscal 2018 .

The lower gross margin was primarily driven by acquired business of Germane, which historically generated lower gross margins.

Lower gross margins are also attributed to a higher volume of Customer Funded Research and Development (“CRAD”), which primarily represents

engineering labor associated with long-term contracts for customized development, production and service activities.

Gross margin was 44.8% for fiscal 2020, an increase of 110 basis points from 43.7% in fiscal 2019.

The higher gross margin was primarily driven by program mix, including a higher volume of secure processing programs, and operational efficiencies, including higher utilization.

These gross margin improvements were partially offset by a higher volume of Customer Funded Research and Development (“CRAD”), COVID related expenses and $1.1 million of additional inventory step-up amortization, as compared to fiscal 2019.

CRAD primarily represents engineering labor associated with long-term contracts for customized development, production and service activities.

These products are predominately grouped within integrated subsystems and, to a lesser extent, modules and sub-assemblies.

Decreases in gross margin were partially offset by lower inventory step-up amortization associated with our acquired businesses compared to the same period in fiscal 2018 as well as results from the higher margin contributions from the acquisitions of Athena and Syntonic during the fourth quarter of fiscal 2019.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses increased $21.6 million, or 20.0%, to $132.3 million during fiscal 2020 as compared to $110.7 million during fiscal 2019.

The increase was primarily related to higher compensation related costs due to added headcount from fiscal 2019 as well as the full year impact of the Themis acquisition.

Our headcount within the organic business also increased during fiscal 2019.

Selling, general and administrative expenses decreased as a percentage of revenue to 16.9% during fiscal 2019 from 17.9% during fiscal 2018 primarily due to improved operating leverage.

The increase was primarily related to additional headcount from organic growth and our recent acquisitions as well as COVID related expenses.

Selling, general and administrative expenses decreased as a percentage of revenue to 16.6% during fiscal 2020 from 16.9% during fiscal 2019 evidencing improved operating leverage.

R ESEARCH AND D EVELOPMENT

Research and development expenses increased $10.1 million , or 17% , to $68.9 million during fiscal 2019 compared to $ 58.8 million for fiscal 2018 .

The increase was primarily due to increased headcount from our recent acquisitions, driving higher compensation related costs partially offset by a higher volume of CRAD.

Research and development expenses increased $29.6 million, or 43.0%, to $98.5 million during fiscal 2020, as compared to $68.9 million for fiscal 2019.

The increase was primarily related to additional headcount from organic growth and our recent acquisitions as well as COVID related expenses, which was partially offset by a higher volume of CRAD.

Research and development expenses accounted for 12.4% and 10.5% of our revenues during fiscal 2020 and fiscal 2019, respectively.

The decrease was primarily driven due to higher revenues and additional CRAD in fiscal 2019 compared to fiscal 2018 .

The increase as a percentage of revenue was primarily driven by the continued investment in internal R&D during fiscal 2020 to promote the future growth of the business.

A MORTIZATION OF I NTANGIBLE A SSETS

Amortization of intangible assets increased $1.9 million to $27.9 million during fiscal 2019 compared to $26.0 million for fiscal 2018 , primarily due to the full year impact of amortization from the acquisition of Themis, as well as the amortization from our fiscal 2019 acquisitions.

Amortization of intangible assets increased $2.7 million to $30.6 million during fiscal 2020, as compared to $27.9 million for fiscal 2019, primarily due to the acquisition of APC and the full year impact of amortization from our fiscal 2019 acquisitions.

R ESTRUCTURING AND O THER C HARGES

Restructuring and other charges decreased $2.6 million , or 82% , to $0.6 million during fiscal 2019 compared to $3.2 million in fiscal 2018 .

The decrease was primarily driven by higher severance costs related to the separation of 38 employees primarily in R&D and operations functions during fiscal 2018.

Restructuring and other charges were $1.8 million during fiscal 2020, as compared to $0.6 million in fiscal 2019.

The increase was primarily driven by severance costs for separation of 20 employees during fiscal 2020.

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 OSTS AND O THER R ELATED E XPENSES

We incurred $1.5 million of acquisition costs and other related expenses during fiscal 2019 , compared to $2.5 million during fiscal 2018 .

The acquisition costs and other related expenses we incurred during fiscal 2019 were primarily related to the acquisitions of Germane, GECO, Syntonic and Athena.

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.

We announced the execution of a purchase agreement to acquire American Panel Corporation (“APC”).

Our agreement to acquire APC is for an all cash purchase price of $100.0 million , subject to net working capital and net debt adjustments.

We expect to incur additional acquisition costs and other related expenses during the first quarter of fiscal 2020.

See Note R to our consolidated financial statements for further discussion on subsequent events.

Acquisition costs and other related expenses were $2.7 million during fiscal 2020, as compared to $1.5 million during fiscal 2019.

The acquisition costs and other related expenses incurred during fiscal 2020 were related to the acquisition of 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 the sensor and effector and C4I markets.

Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.

I NTEREST I NCOME

Interest income increased to $0.9 million in fiscal 2019 due to higher average balances of cash on hand primarily driven by net proceeds of $454.3 million from our following offering and a higher interest rate throughout the year.

Interest income increased to $2.2 million in fiscal 2020 from $0.9 million in fiscal 2019, due to higher average balances of cash on hand, as compared to fiscal 2019.

I NTEREST E XPENSE

Interest expense for fiscal 2019 increased $6.2 million to $9.1 million compared to $2.9 million in fiscal 2018.

Fiscal 2019 included interest expense related to the additional borrowings on the Revolver from our recent acquisitions, prior to the pay down on the Revolver during the fourth quarter of fiscal 2019.

During fiscal 2018, we incurred $2.9 million in cash interest expense on the Revolver in order to facilitate the acquisition of Themis.

O THER E XPENSE, N ET

Other expense, net increased $7.3 million to $8.9 million during fiscal 2019 compared to $1.6 million in fiscal 2018 .

The increase was primarily due to $5.4 million in expense associated with the termination of the interest rate swap in conjunction with leveraging the net proceeds generated by our follow-on equity offering to pay down the balance on the Revolver during the fourth quarter of fiscal 2019.

Additionally, the increase was partially driven by $0.5 million foreign exchange loss compared to a $0.6

million gain during the same period in fiscal 2018 as well as $0.4 million of additional financing and registration fees incurred during fiscal 2019 compared to fiscal 2018.

Interest expense for fiscal 2020 decreased $8.1 million to $1.0 million, as compared to $9.1 million in fiscal 2019.

We drew $200.0 million against the Revolver during the third quarter of fiscal 2020 to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

We paid down the $200.0 million draw during the fourth quarter of fiscal 2020 as a result of the reduced turbulence in capital markets.

Fiscal 2019 included interest expense related to borrowings on the Revolver from our acquisitions, prior to the pay down of the balance on the Revolver with the net proceeds generated by our follow-on equity offering during the fourth quarter of fiscal 2019.

O THER I NCOME ( E XPENSE), N ET

Other income (expense), net was $1.7 million of other income during fiscal 2020, as compared to $8.9 million of other expense in fiscal 2019.

The increase was primarily due to $6.4 million of other investment income partially offset by $0.6 million of additional litigation and settlement expenses.

Fiscal 2019 included $5.4 million in other expense associated with the termination of the interest rate swap in conjunction with the pay down of the balance on the Revolver with the net proceeds generated by our follow-on equity offering to during the fourth quarter of fiscal 2019.

I NCOME T AXES

We recorded an income tax provision of $12.8 million and $1.7 million on income before income taxes of $59.5 million and $42.6 million for our fiscal years ended June 30, 2019 and 2018, respectively.

We recognized a discrete tax benefit of $2.7 million and $7.9 million related to excess tax benefits on stock-based compensation for our fiscal years ended June 30, 2019 and 2018, respectively.

Our fiscal year ended June 30, 2018 also includes a discrete tax benefit of $3.7 million derived from new information obtained about net operating loss carry-forwards of the Carve-Out Business.

The effective tax rate for the fiscal year ended June 30, 2019 differed from the Federal statutory rate of 21% 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 and excess tax benefits related to stock-based compensation.

The effective tax rate for the fiscal year ended June 30, 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, excess tax benefits related to stock-based compensation, and acquired tax attributes.

We recorded an income tax provision of $8.2 million and $12.8 million on income before income taxes of $93.9 million and $59.5 million for fiscal years 2020 and 2019, respectively.

We recognized a discrete tax benefit of $7.3 million and $2.7 million related to excess tax benefits on stock-based compensation for fiscal years 2020 and 2019, respectively.

We also recognized a tax benefit of $6.3 million and a tax reserve of $2.2 million related to research and development tax credits claimed on prior year Federal and state tax returns and recognized a tax benefit for other favorable provision to return adjustments of $2.9 million.

The effective tax rate for fiscal 2020 and 2019 differed from the Federal statutory rate of 21% primarily due to Federal and state research and development tax 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.

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Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments.

We plan to invest in improvements to our new facilities 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.

We plan to continue to invest in the modernization of our facilities, including the expansion of our trusted custom microelectronics business during fiscal 2021.

Based on our current plans, business conditions, including the COVID pandemic, and essential business status, we believe that existing cash and cash equivalents, our available Revolver, cash generated from operations, and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.

Refer to Item 1A - “Risk Factors” for risk factors concerning the Company, including a risk factor related to health epidemics, pandemics and similar outbreaks.

Shelf Registration Statement

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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.

As of June 30, 2019, we have not sold any stock using our at the market offering feature.

As of July 3, 2020, we have not sold any stock using our at the market offering feature.

We intend to file a new shelf registration statement to replace the current registration that is expiring at the end of August 2020.

Follow-on Equity Offerings

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On May 29, 2019, the underwriters executed their over-allotment option.

At the closing of the over-

allotment, we issued 0.9 million additional shares of common stock.

At the closing of the over-allotment, we issued 0.9 million additional shares of common stock.

Total net proceeds, including the over-allotment, from the offering of 6.9 million shares were $454.3 million.

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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, we repaid the remaining outstanding interest on the Revolver using cash on hand.

During fiscal 2019, we drew additional borrowings of $129.5 million to facilitate the acquisitions of Germane, GECO, Athena and Syntonic.

During the fourth quarter of fiscal 2019, we paid the balance of the Revolver using proceeds from the follow-on equity offering.

As of June 30, 2019, we had no outstanding balance on the Revolver.

See Note L in the accompanying consolidated financial statements for further discussion of the Revolver.

For the Years Ended

(In thousands)

June 30, 2019

June 30, 2018

June 30, 2017

We paid down the $200.0 million draw during the fourth quarter of fiscal 2020 as a result of reduced turbulence in the capital markets.

As of July 3, 2020, we had no outstanding balance on the Revolver.

See Note M in the accompanying consolidated financial statements for further discussion of the Revolver.

For the Fiscal Years Ended

(In thousands) July 3, 2020 June 30, 2019 June 30, 2018

Net cash provided by operating activities $ 115,184 $ 97,517 $ 43,321

Net cash used in investing activities $ (135,486) $ (153,774) $ (200,877)

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net cash (used in) provided by financing activities $ (10,932) $ 247,765 $ 182,937

Net (decrease) increase in cash and cash equivalents $ (31,094) $ 191,411 $ 24,884

Cash and cash equivalents at end of year $ 226,838 $ 257,932 $ 66,521

Our cash and cash equivalents increased by $191.4 million during fiscal 2019 primarily as the result of net proceeds of $454.3 million generated from our follow-on equity offering, in addition to new borrowings of $129.5 million.

The proceeds from the equity offering were used to pay down the Revolver balance of $324.5 million.

In addition, we generated $97.5 million from operating activities.

These increases were partially offset by $127.1 million used in our fiscal 2019 acquisitions, $26.7 million invested in purchases of property and equipment, $8.0 million used in the retirement of common stock used to settle individual employees' tax liabilities associated with vesting of restricted stock awards and $5.4 million associated with the termination of the hedge facility.

Our cash and cash equivalents decreased by $31.1 million during fiscal 2020 primarily as the result of $96.5 million of cash on hand used to fund the acquisition of APC, $43.3 million invested in purchases of property and equipment, and $16.2 million used in the retirement of common stock used to settle individual employees' tax liabilities associated with vesting of restricted stock awards.

These decreases were partially offset by $115.2 million provided by operating activities.

Operating Activities

During fiscal 2019, we generated $97.5 million in cash from operating activities compared to $43.3 million in cash generated from operating activities in fiscal 2018.

The increase in cash generated by operating activities was primarily the result of improved working capital efficiency, less cash paid for income taxes and higher comparable net income.

During fiscal 2020, we generated $115.2 million in cash from operating activities, an increase of $17.7 million, as compared to fiscal 2019.

The increase in cash generated by operating activities was primarily the result of higher comparable net income, deferred revenues and customer advances partially offset by higher inventory purchases intended to mitigate potential disruptions to the supply chain resulting from the COVID pandemic and support the growth of the business, unbilled receivables and additional cash paid for income taxes.

Investing Activities

During fiscal 2019 , we used cash of $153.8 million in investing activities compared to $200.9 million used during fiscal 2018 .

The decrease was primarily driven by lower cash used for acquisitions.

During fiscal 2019 we used $127.1 million for the acquisitions of Germane, GECO, Athena and Syntonic compared to $185.4 million used in the acquisitions of Themis and RTL during fiscal 2018.

The decrease was partially offset by increased purchases of property and equipment of $11.9 million.

During fiscal 2020, we invested $135.5 million, a decrease of $18.3 million, as compared to $153.8 million during fiscal 2019.

The decrease was primarily driven by lower cash used for acquisitions, partially offset by a $16.6 million increase in purchases of property and equipment.

During fiscal 2020, we used $96.5 million of cash on hand to fund the acquisition of APC, as compared to $127.1 million used for the acquisitions of Germane, GECO, Athena and Syntonic during fiscal 2019.

Financing Activities

During fiscal 2019, we had net proceeds of $454.3 million from our follow-on equity offering, which was used to pay down the Revolver balance of $324.5 million subsequent to the additional $129.5 million of borrowings during the year used to fund the acquisitions during fiscal 2019.

The net cash provided by financing activities was partially offset by $8.0 million in payments related to the retirement of common stock used to settle employees’ tax liabilities associated with vesting of restricted stock awards.

As a result of these activities, we generated net cash of $247.8 million from financing activities during fiscal 2019.

During fiscal 2018, we had $195.0 million of net borrowings that were drawn against the Revolver.

These net borrowings were offset by $15.5 million in payments related to the retirement of common stock used to settle employees’ tax liabilities associated with vesting of restricted stock awards.

As a result of these activities, we generated net cash of $182.9 million from financing activities during fiscal 2018.

During fiscal 2020, we used $10.9 million of cash in financing activities, as compared to $247.8 million in cash provided by financing activities during fiscal 2019.

The $258.7 million decrease was primarily due to $454.3 million provided by our follow-on equity offering during fiscal 2019, which was used to pay down the Revolver balance of $324.5 million subsequent

to the additional $129.5 million of borrowings during the year used to fund the acquisitions completed during fiscal 2019.

During fiscal 2020 we drew $200.0 million against the Revolver during the third quarter of fiscal 2020 to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

We paid down the $200.0 million draw during the fourth quarter of fiscal 2020 as a result of reduced turbulence in the capital markets.

Fiscal 2020 also includes $16.2 million of payments related to the retirement of common stock used to settle individual employees' tax liabilities associated with the vesting of restricted stock awards, an increase of $8.2 million from fiscal 2019.

C OMMITMENTS AND C ONTRACTUAL O BLIGATIONS

The following is a schedule of our commitments and contractual obligations outstanding at June 30, 2019 :

(In thousands)

The following is a schedule of our commitments and contractual obligations outstanding at July 3, 2020:

(In thousands) Total Less Than

Years More Than

Operating leases $ 94,037 $ 9,572 $ 21,013 $ 18,689 $ 44,763

Purchase obligations 103,548 103,548 — — —

$ 197,585 $ 113,120 $ 21,013 $ 18,689 $ 44,763

Effective July 1, 2019, the Company adopted ASC 842.

We 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.

See Note B and Note J to the consolidated financial statements for more information regarding our obligations under leases and the adoption of this standard.

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 $73.8 million at June 30, 2019 .

We have a liability at June 30, 2019 of $1.3 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns.

The purchase commitments covered by these agreements are for less than one year and aggregated $103.5 million at July 3, 2020.

We had a liability at July 3, 2020 of $4.1 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns.

Our liability increased by an additional $2.2 million reserve related to research and development credits claimed on amended Federal and state returns during the fiscal year ended July 3, 2020.

We do not know the ultimate resolution of these uncertain tax positions and as such, do not know the ultimate timing of payments related to this liability.

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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 of cash flows.

These transactions would be treated as a use of cash in financing activities in our Consolidated Statements of Cash Flows.

O FF -B ALANCE S HEET A RRANGEMENTS

Other than our lease commitments incurred 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.

Other than certain indemnification provisions, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity.

We do not have any majority-owned subsidiaries that are not consolidated in the financial statements.

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generally accepted accounting principles (“GAAP”), including adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, organic revenue and acquired revenue.

Adjusted EBITDA is defined as net income before other non-operating adjustments, interest income and expense, income taxes, depreciation, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, and stock-based and other non-cash compensation expense.

COVID related expenses, and stock-based and other non-cash compensation expense.

We use adjusted EBITDA as an important indicator of the operating performance of our business.

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

Year Ended June 30,

(In thousands)

For the Fiscal Years Ended

(In thousands) July 3, 2020 June 30, 2019 June 30, 2018

Net income $ 85,712 $ 46,775 $ 40,883

Other non-operating adjustments, net (1)

Interest expense, net

(5,636) 364 (795)

Interest (income) expense, net (1,145) 8,177 2,818

Tax provision 8,221 12,752 1,690

Depreciation 18,770 18,478 16,273

Amortization of intangible assets 30,560 27,914 26,004

Restructuring and other charges (2)

1,805 560 3,159

Impairment of long-lived assets — — —

Acquisition and financing costs (3)

5,645 9,628 4,928

Fair value adjustments from purchase accounting (4)

Litigation and settlement expense (income), net

1,801 713 1,992

Litigation and settlement expense, net 944 344 —

COVID related expenses (5)

Stock-based and other non-cash compensation expense 26,972 19,621 17,615

Adjusted EBITDA $ 176,242 $ 145,326 $ 114,567

(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.

(1) As of July 1, 2018, we revised our definition of adjusted EBITDA to incorporate other non-operating adjustments, net, which includes gains or losses on foreign currency remeasurement, investments and fixed asset sales or disposals among other adjustments.

Adjusted EBITDA for prior periods has been recast for comparative purposes.

Other non-operating adjustments for fiscal 2020 includes $6.4 million of other non-operating investment income.

(2)Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.

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(3) Acquisition and financing costs includes $5.4 million associated with the termination of the interest rate swap for fiscal year 2019.

(4) Fair value adjustments from purchase accounting for fiscal year 2020 relate to APC inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2019 relate to Germane and GECO inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2018 relate to Themis, CES and Delta inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2017 relate to the Carve-Out Business, CES and Delta inventory step-up amortization.

(5) Effective as of the third quarter of fiscal 2020, the Company has added back incremental COVID related expenses, which relate primarily to enhanced compensation and benefits for employees as well as incremental supplies and services to support social distancing and mitigate the spread of COVID.

Adjusted income and adjusted EPS exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP.

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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.

We define adjusted income as net income before other non-operating adjustments, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense.

The impact to income taxes includes the

impact to the effective tax rate, current tax provision and deferred tax provision.

Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding.

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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:

Year Ended June 30,

(In thousands, except per share data)

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

For the Fiscal Years Ended

(In thousands, except per share data) July 3, 2020 June 30, 2019 June 30, 2018

Net income and diluted earnings per share $ 85,712 $ 1.56 $ 46,775 $ 0.96 $ 40,883 $ 0.86

Other non-operating adjustments, net (1)

(5,636) 364 (795)

Amortization of intangible assets 30,560 27,914 26,004

Restructuring and other charges (2)

1,805 560 3,159

Impairment of long-lived assets — — —

Acquisition and financing costs (3)

5,645 9,628 4,928

Fair value adjustments from purchase accounting (4)

Litigation and settlement expense (income), net

1,801 713 1,992

Litigation and settlement expense, net 944 344 —

COVID related expenses (5)

Stock-based and other non-cash compensation expense 26,972 19,621 17,615

Impact to income taxes (6)

(23,634) (16,630) (27,044)

Adjusted income and adjusted earnings per share $ 126,762 $ 2.30 $ 89,289 $ 1.84 $ 66,742 $ 1.41

Diluted weighted-average shares outstanding 55,115 48,500 47,471

(1) Effective as of the third quarter of fiscal 2020, the Company has revised its definition of adjusted income and adjusted earnings per share to incorporate other non-operating adjustments, net, which includes gains or losses on foreign currency remeasurement, investments and fixed asset sales or disposals among other adjustments.

Adjusted EPS for prior periods has been recast for comparative purposes.

Other non-operating adjustments for fiscal 2020 includes $6.4 million of other non-operating investment income.

(2) Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.

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(3) Acquisition and financing costs includes $5.4 million associated with the termination of the interest rate swap for fiscal year 2019.

(4) Fair value adjustments from purchase accounting for fiscal year 2020 relate to APC inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2019 relate to Germane and GECO inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2018 relate to Themis, CES and Delta inventory step-up amortization.

Fair value adjustments from purchase accounting for fiscal year 2017 relate to the Carve-Out Business, CES and Delta inventory step-up amortization.

(6) 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.

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

Year Ended June 30,

(In thousands)

For the Fiscal Years Ended

(In thousands) July 3, 2020 June 30, 2019 June 30, 2018

Cash provided by operating activities $ 115,184 $ 97,517 $ 43,321

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

(In thousands)

(In thousands) Fiscal 2020 As a % of

Revenue Fiscal 2019 As a % of

Revenue $ Change % Change

Organic revenue $ 732,572 92 % $ 641,209 98 % $ 91,363 14 %

Acquired revenue (1)

64,038 8 % 13,535 2 % 50,503 373 %

Total revenues $ 796,610 100 % $ 654,744 100 % $ 141,866 22 %

(1) Acquired revenue for all preceding periods presented has not been recast for comparative purposes.

(1) Acquired revenue for all preceding periods presented has been recast for comparative purposes.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

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A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 77% and 79% of revenues for the year ended June 30, 2019 and 2018, respectively.

Total revenue recognized under long-term contracts over time was 23% and 21% of revenues for the year ended June 30, 2019 and 2018, respectively.

Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 73% and 77% of revenues for the fiscal years ended July 3, 2020 and June 30, 2019, respectively.

Total revenue recognized under long-term contracts over time was 27% and 23% of revenues for the fiscal years ended July 3, 2020 and June 30, 2019, respectively.

Revenue recognized at a point in time generally relates to contracts that include a combination of components, modules and sub-assemblies, integrated subsystems and related system integration or other services.

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Our determination of the expected cost plus a margin approach involves the consideration of several factors based on the specific facts and circumstances of each contract.

Specifically, we consider the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, our ongoing pricing strategy and policies, often based on the price list established and updated by management on a regular basis, the value of any enhancements that have been built into the deliverable and the characteristics of the varying markets in which the deliverable is sold.

on the price list established and updated by management on a regular basis, the value of any enhancements that have been built into the deliverable and the characteristics of the varying markets in which the deliverable is sold.

Revenue is recognized over time (versus point in time recognition) for long-term contracts with development, production and service activities where the performance obligations are satisfied over time.

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We consider the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract.

These contracts include both fixed-price and cost

reimbursable contracts.

These contracts include both fixed-price and cost reimbursable contracts.

Our cost reimbursable contracts typically include cost-plus fixed fee and time and material (“T&M”) contracts.

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For all types of contracts, we recognize anticipated contract losses as soon as they become known and estimable.

These losses are recognized in advance of contract performance and as of June 30, 2019, approximately $0.6 million of these costs were in accrued expenses on our balance sheet.

These losses are recognized in advance of contract performance and as of July 3, 2020, approximately $0.8 million of these costs were in accrued expenses on our balance sheet.

For long-term contracts, we typically leverage the input method, using a cost-to-cost measure of progress.

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We bear the risk of changes in estimates to complete on a fixed-price contract which may cause profit levels to vary from period to period.

For cost reimburseable contracts, we are reimbursed periodically for allowable costs and are paid a portion of the fee based on contract progress.

For cost reimbursable contracts, we are reimbursed periodically for allowable costs and are paid a portion of the fee based on contract progress.

In the limited instances where we enter into T&M contracts, revenue recognized reflects the number of direct labor hours expended in the performance of a contract multiplied by the contract billing rate, as well as reimbursement of other direct billable costs.

For T&M contracts, we elected to use a practical expedient permitted by ASC 606 whereby revenue is recognized in the amount for which we have a right to invoice the customer based on the control transferred to the customer.

For all types of contracts, we recognize anticipated contract losses as soon as they become known and estimable.

For over time contracts, we recognize 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, in particular, assumptions relative to the amount of time to complete the contract, including the assessment of the nature and complexity of the work to be performed.

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Examples of our service revenues include:

analyst services and systems engineering support, consulting, maintenance and other support, testing and installation.

services and systems engineering support, consulting, maintenance and other support, testing and installation.

We combine our product and service revenues into a single class as services revenues are less than 10 percent of total revenues.

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As part of our annual goodwill impairment testing, we utilized a discount rate for each of our reporting units, as defined by ASC 350, Intangibles-Goodwill and Other , that we believe represents the risks that our businesses face, considering their sizes, the current economic environment, and other industry data we believe is appropriate.

The discount rates for Sensor and Mission Processing (“SMP”), Advanced Microelectronic Solutions (“AMS”) and Mercury Defense Systems (“MDS”) were 8.25%, 8.0%, and 7.8%.

The discount rates for Sensor and Mission Processing (“SMP”), Advanced Microelectronic Solutions (“AMS”) and Mercury Defense Systems (“MDS”) were 7.0%, 6.5%, and 7.0%, respectively.

The annual testing indicated that the fair values of our SMP, AMS, and MDS reporting units significantly exceeded their carrying values, and thus no further testing was required.

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First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination.

If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements.

If the tax position is deemed more-likely-than-not

to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements.

The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis