What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-10 compared with 2020-05-05 · 100 added, 273 removed, 175 unchanged (68% of the section changed)

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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, 2019, and as updated herein.

We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

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Mercury Systems, Inc.

is 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 aviation, defense, security and intelligence programs, configured and optimized for mission success in some of the most challenging and demanding environments.

Headquartered in Andover, Massachusetts, with manufacturing and design facilities around the world, Mercury specializes in engineering, adapting and manufacturing new solutions purpose-built to meet current and emerging high-tech needs.

Our products and solutions have been successfully deployed with over 25 different defense prime contractors, a testament to 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 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 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 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 bring 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.

We have built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that we believe 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.

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.

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.

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 27, 2020, we had 1,884 employees.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the third quarter ended March 27, 2020 were $208.0 million, $16.5 million, $23.6 million, $0.43, $0.60, and $47.1 million, respectively.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted EPS, and adjusted EBITDA for the nine months ended March 27, 2020 were $579.2 million, $52.1 million, $58.5 million, $1.06, $1.58, and $126.6 million, respectively.

As of October 2, 2020, we had 1,979 employees.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the first quarter ended October 2, 2020 were $205.6 million, $8.8 million, $15.8 million, $0.29, $0.51, and $42.8 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 coronavirus disease 2019 (“COVID”) pandemic continues to impact people and countries around the world.

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

This is a time of extraordinary uncertainty.

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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 quarter, 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 testing, and limiting non-essential site visits by internal and external visitors.

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 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.

RESULTS OF OPERATIONS:

Results of operations for the third quarter ended March 27, 2020 include full period results from the acquisitions of GECO Avionics, LLC (“GECO”), The Athena Group, Inc.

(“Athena”), Syntonic Microwave LLC (“Syntonic”) and American Panel Corporation (“APC”).

Results of operations for the nine months ended March 27, 2020 include full period results from the acquisitions of Germane Systems, LC (“Germane”), GECO, Athena, Syntonic and only the results from acquisition date for APC which was acquired subsequent to June 30, 2019.

Results of operations for the third quarter ended March 31, 2019, include only results from the acquisition date for GECO.

Results of operations for the nine months ended March 31, 2019, include only results from the acquisition date for Germane and GECO.

Results of operations for the first quarter ended October 2, 2020 includes full period results from the acquisition of American Panel Corporation (“APC”).

Results of operations for the first quarter ended September 27, 2019, include only results from the acquisition date for APC.

Accordingly, the periods presented below are not directly comparable.

The third quarter ended March 27, 2020 compared to t he third quarter ended March 31, 2019

The following table set forth, for the third quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income:

(In thousands) March 27, 2020 As a % of

Revenue March 31, 2019 As a % of

The first quarter ended October 2, 2020 compared to t he first quarter ended September 27, 2019

The following table sets forth, for the first quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Income:

(In thousands) October 2, 2020 As a % of

Revenue September 27, 2019 As a % of

Net revenues $ 205,621 100.0 % $ 177,304 100.0 %

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Interest income 72 — 1,187 0.7

Interest expense (58) — (2,473) (1.4)

Other income (expense), net 2,186 1.0 (328) (0.1)

Other expense, net (846) (0.3) (1,434) (0.8)

Income before income taxes 17,996 8.8 17,229 9.7

Tax provision 5,363 2.6 5,357 3.1

Tax provision (benefit) 2,198 1.1 (2,018) (1.2)

Net income $ 15,798 7.7 % $ 19,247 10.9 %

Total revenues increased $33.4 million, or 19.1%, to $208.0 million during the third quarter ended March 27, 2020, as compared to $174.6 million during the third quarter ended March 31, 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).

Total revenues increased $28.3 million, or 16.0%, to $205.6 million during the first quarter ended October 2, 2020, as compared to $177.3 million during the first quarter ended September 27, 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 was primarily due to $19.3 million of additional organic revenues which were predominantly driven by increased demand for integrated subsystems and modules and sub-assemblies across radar and electronic warfare (“EW”) applications.

The organic revenues increase were driven by a classified radar program, as well as the P8 and Aegis programs, which were partially offset by decreases in a classified missile program and the WIN-T program.

Total revenues also increased $14.1 million from acquired revenues due to a full period of results for GECO, and results for Athena, Syntonic and APC, which were all acquired following March 31, 2019.

The increase was primarily due to $20.4 million of additional organic revenues which were predominantly driven by increased demand for integrated subsystems, across radar, electronic warfare and C4I applications, within land and naval platforms.

The increases in demand for integrated subsystems were partially offset by decreases to modules and sub-assemblies and components.

The organic revenues increase was driven by a classified radar program, as well as the Patriot, CDS, Galaxie and LTAMDS programs, which were partially offset by decreases in a classified missile program and the CPS program.

Total revenues also increased $7.9 million from acquired revenue due to a full period of results for APC, which was acquired on September 23, 2019.

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

G ROSS M ARGIN

Gross margin was 44.9% for the third quarter ended March 27, 2020, an increase of 260 basis points from the 42.3% gross margin achieved during the third quarter ended March 31, 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.

The gross margin improvement was partially offset by an increase in Customer Funded Research and Development (“CRAD”) and $0.5 million of higher inventory step-up amortization associated with our acquired businesses, as compared to the same period in fiscal 2019.

Gross margin was 42.9% for the first quarter ended October 2, 2020, a decrease of 130 basis points from the 44.2% gross margin achieved during the first quarter ended September 27, 2019.

The lower gross margin was primarily driven by program mix, higher Customer Funded Research and Development (“CRAD”) and $1.8 million of COVID related expenses.

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

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

The gross margin decreases were partially offset by operational efficiencies.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses increased $6.6 million, or 24.1%, to $34.0 million during the third quarter ended March 27, 2020, as compared to $27.4 million in the third quarter ended March 31, 2019.

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

Selling, general and administrative expenses increased as a percentage of revenue to 16.3% for the third quarter ended March 27, 2020 from 15.7% for the third quarter ended March 31, 2019.

Selling, general and administrative expenses increased $2.9 million, or 9.8%, to $32.9 million during the first quarter ended October 2, 2020, as compared to $30.0 million in the first quarter ended September 27, 2019.

The increase was primarily related to additional headcount from organic growth and a full quarter of expenses related to the APC acquisition.

Selling, general and administrative expenses decreased as a percentage of revenue to 16.0% for the first quarter ended October 2, 2020 from 16.9% for the first quarter ended September 27, 2019 due to improved operating leverage.

R ESEARCH AND D EVELOPMENT

Research and development expenses increased $7.6 million, or 43.7%, to $25.0 million during the third quarter ended March 27, 2020, as compared to $17.4 million during the third quarter ended March 31, 2019.

The increase was primarily due to additional headcount from organic growth and our recent acquisitions.

Research and development expenses accounted for 12.0% and 10.0% of our revenues for third quarters ended March 27, 2020 and March 31, 2019, respectively.

The increase as a percentage of revenue was primarily driven by the continued investment in internal R&D during the third quarter ended March 27, 2020 to promote future growth of the business.

Research and development expenses increased $5.5 million, or 25.4%, to $27.4 million during the first quarter ended October 2, 2020, as compared to $21.9 million during the first quarter ended September 27, 2019.

The increase was primarily due to additional headcount from organic growth and a full quarter of expenses related to the APC acquisition.

Research and development expenses accounted for 13.3% and 12.3% of our revenues for the first quarters ended October 2, 2020 and September 27, 2019, respectively.

The increase as a percentage of revenue during the first quarter ended October 2, 2020 was primarily driven by the continued investment in internal R&D to promote future growth, including new opportunities in avionics, secure processing, radar modernization and our trusted custom microelectronics business.

R ESTRUCTURING AND O THER C HARGES

Restructuring and other charges were consistent during the third quarters ended March 27, 2020 and March 31, 2019.

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

Restructuring and other charges were $1.3 million, during the first quarter ended October 2, 2020, as compared to $0.6 million during the first quarter ended September 27, 2019.

Restructuring and other charges during the first quarter ended October 2, 2020 primarily related to severance costs associated with the elimination of 19 positions, predominantly in the manufacturing, sales and R&D functions.

These charges related to talent shifts and resource redundancy resulting from the internal reorganization we completed in August which created better alignment with our market and brand strategy as well as promote scale as we continue to grow.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

Acquisition costs and other related expenses were consistent during the third quarters ended March 27, 2020 and March 31, 2019.

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.

We did not incur any acquisition costs and other related expenses during the first quarter ended October 2, 2020.

The first quarter ended September 27, 2019 included $1.4 million of acquisition and other related expenses related to the acquisition of APC.

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, 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 $0.5 million during the third quarter ended March 27, 2020.

This was driven by higher average balances of cash on hand during the third quarter ended March 27, 2020, as compared to the prior year.

I NTEREST E XPENSE

We incurred $0.1 million of interest expense during the third quarter ended March 27, 2020, related to outstanding borrowings of $200.0 million on our revolving credit facility (“the Revolver”) during the period.

We drew against the Revolver during the third quarter ended March 27, 2020 to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

O THER I NCOME ( E XPENSE) , N ET

Other income (expense), net increased $2.5 million, to $2.2 million of other income during the third quarter ended March 27, 2020, as compared to $0.3 million of other expense for the third quarter ended March 31, 2019.

The increase was driven by a $3.8 million gain on the sale of cost-method investment, partially offset by foreign currency translation losses of $1.2 million for the third quarter ended March 27, 2020, compared to $0.2 million foreign currency translation gain for the third quarter ended March 31, 2019.

Interest income decreased to $0.1 million during the first quarter ended October 2, 2020, as compared to $1.2 million for the first quarter ended September 27, 2019.

This was driven by the lower rate earned on cash on hand during the first quarter ended October 2, 2020, as compared to the prior year.

O THER E XPENSE , N ET

Other expense, net decreased to $0.8 million during the first quarter ended October 2, 2020, as compared to $1.4 million for the first quarter ended September 27, 2019.

The decrease was primarily driven by foreign currency translation gains of $0.3 million as compared to foreign currency translation losses of $0.3 million during the first quarters ended October 2, 2020 and September 27, 2019, respectively.

Both periods include $0.8 million of financing and registration fees.

I NCOME T AXES

We recorded an income tax provision of $5.4 million and $5.4 million on income before income taxes of $28.9 million and $19.5 million for the third quarters ended March 27, 2020 and March 31, 2019, respectively.

During the third quarters ended March 27, 2020 and March 31, 2019, we recognized a discrete tax benefit of $0.2 million and $0.1 million related to excess tax benefits on stock-based compensation.

We also recognized a discrete tax benefit of $1.0 million, net of a $0.3 million tax reserve, related to research and development credits and a $0.8 million discrete tax benefit from a release of a valuation allowance on a capital loss carryforward during the third quarter ended March 27, 2020.

The effective tax rate for the third quarters ended March 27, 2020 and March 31, 2019 differed from the Federal statutory rate of 21% primarily due to Federal research and development credits, excess tax benefits related to stock-based compensation, a release of a valuation allowance on a capital loss carryforward, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.

The Company recorded an increase to its unrecognized tax positions of $0.3 million related to research and development credits during the third quarter ended March 27, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to COVID.

The CARES Act, among other things, permits immediate expensing of Qualified Improvement Property (“QIP”) for tax purposes.

While we are currently evaluating the impact of the CARES Act on our consolidated financial statements and related disclosures, we expect that it will result in a cash benefit.

We recorded an income tax provision of $2.2 million and an income tax benefit of $2.0 million on income before income taxes of $18.0 million and $17.2 million for the first quarters ended October 2, 2020 and September 27, 2019, respectively.

During the first quarters ended October 2, 2020 and September 27, 2019, we recognized a discrete tax benefit of $2.5 million and $6.1 million, respectively, related to excess tax benefits on stock-based compensation.

The Company also recognized a discrete tax benefit of $0.5 million related to foreign tax rate changes during the first quarter ended September 27, 2019.

The effective tax rate for the first quarters ended October 2, 2020 and September 27, 2019 differed from the Federal statutory rate primarily due to Federal and State research and development credits, excess tax benefits related to stock-based compensation, non-deductible compensation, 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”).

Nine months ended March 27, 2020 compared to the nine months ended March 31, 2019

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

(In thousands) March 27, 2020 As a % of

Revenue March 31, 2019 As a % of

Net revenues $ 579,233 100.0 % $ 477,781 100.0 %

Cost of revenues 319,002 55.1 271,464 56.8

Gross margin 260,231 44.9 206,317 43.2

Operating expenses:

Selling, general and administrative 96,765 16.7 79,971 16.7

Research and development 71,497 12.3 48,579 10.2

Amortization of intangible assets 22,859 3.9 20,906 4.4

Restructuring and other charges 1,815 0.3 573 0.1

Acquisition costs and other related expenses 2,652 0.5 555 0.1

Total operating expenses 195,588 33.7 150,584 31.5

Income from operations 64,643 11.2 55,733 11.7

Interest income 1,957 0.3 342 0.1

Interest expense (58) — (6,928) (1.5)

Other income (expense), net 401 0.1 (2,207) (0.5)

Income before income taxes 66,943 11.6 46,940 9.8

Tax provision 8,455 1.5 12,969 2.7

Net income $ 58,488 10.1 % $ 33,971 7.1 %

Total revenues increased $101.4 million, or 21.2%, to $579.2 million during the nine months ended March 27, 2020, as compared to $477.8 million during the nine months ended March 31, 2019.

The increase is primarily due to $60.8 million of additional organic revenues related to integrated subsystems and components across radar, EW and other sensor and effector applications.

The increases in organic revenues were primarily driven by the P8, AIDEWS and Filthy Badger programs, which were partially offset by decreases to the WIN-T and F-35 programs.

Total revenues also increased due to $40.7 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.

G ROSS M ARGIN

Gross margin was 44.9% for the nine months ended March 27, 2020, an increase of 170 basis points from the 43.2% gross margin achieved during the nine months ended March 31, 2019.

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

The nine months ended March 27, 2020 includes $0.5 million of higher inventory step-up amortization associated with our acquired businesses, as compared to the same period in fiscal 2019.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses increased $16.8 million, or 21.0%, to $96.8 million during the nine months ended March 27, 2020, as compared to $80.0 million during the nine months ended March 31, 2019.

The increase was primarily

related to additional headcount from organic growth and our recent acquisitions.

Selling, general and administrative expenses as a percentage of revenues was 16.7% for both the nine months ended March 27, 2020 and March 31, 2019.

R ESEARCH AND D EVELOPMENT

Research and development expenses increased $22.9 million, or 47.1%, to $71.5 million during the nine months ended March 27, 2020, as compared to $48.6 million during the nine months ended March 31, 2019.

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

Research and development expenses increased as a percentage of revenues to 12.3% during the nine months ended March 27, 2020 from 10.2% during the nine months ended March 31, 2019.

The increase was driven by continued investment in internal R&D during the nine months ended March 27, 2020 to promote future growth of the business.

R ESTRUCTURING A ND O THER C HARGES

Restructuring and other charges were $1.8 million for the nine months ended March 27, 2020, as compared to $0.6 million during the nine months ended March 31, 2019.

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

Acquisition costs and other related expenses were $2.7 million during the nine months ended March 27, 2020, as compared to $0.6 million during the nine months ended March 31, 2019.

The acquisition costs and other related expenses we incurred during the nine months ended March 27, 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 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 I NCOME

Interest income increased $1.7 million, to $2.0 million during the nine months ended March 27, 2020, as compared to $0.3 million during the nine months ended March 31, 2019.

This was driven by higher average balances of cash on hand during the nine months ended March 27, 2020 compared to the prior period.

I NTEREST E XPENSE

We incurred $0.1 million of interest expense during the nine months ended March 27, 2020, related to outstanding borrowings of $200.0 million on our Revolver during the period.

O THER I NCOME ( E XPENSE) , N ET

Other income (expense), net was $0.4 million of other income during the nine months ended March 27, 2020, compared to $2.2 million of other expense during the nine months ended March 31, 2019.

The increase was due to a $3.8 million gain on the sale of a cost-method investment, partially offset by additional foreign exchange losses of $0.8 million during the nine months ended March 27, 2020.

There were additional financing and registration fees of $0.3 million during the nine months ended March 27, 2020, as compared to the nine months ended March 31, 2019.

I NCOME T AXES

We recorded an income tax provision of $8.5 million and $13.0 million on income before income taxes of $66.9 million and $46.9 million for the nine months ended March 27, 2020 and March 31, 2019, respectively.

During the nine months ended March 27, 2020 and March 31, 2019, we recognized a discrete tax benefit of $6.6 million and $1.9 million, respectively, related to excess tax benefits on stock-based compensation.

We also we recognized a discrete tax benefit of $1.0 million, net of a $0.3 million tax reserve, related to research and development credits and a $0.8 million discrete tax benefit from a release of a valuation allowance on a capital loss carryforward during the nine months ended March 27, 2020.

The effective tax rate for the nine months ended March 27, 2020 and March 31, 2019 differed from the Federal statutory rate of 21% primarily due to Federal research and development credits, excess tax benefits related to stock-based compensation, a release of a valuation allowance on a capital loss carryforward, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.

On March 27, 2020, the CARES Act was enacted in response to COVID.

The CARES Act, among other things, permits immediate expensing of QIP for tax purposes.

While we are currently evaluating the impact of the CARES Act on our consolidated financial statements and related disclosures, we expect that it will result in a cash benefit.

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 IRS.

L IQUIDITY AND C APITAL R ESOURCES

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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 facilities, including the expansion of our trusted custom microelectronics business during fiscal 2020.

We plan to continue to invest in improvements to our facilities and internal R&D to promote future growth, including new opportunities in avionics, secure processing, radar modernization and our trusted custom microelectronics.

Our facilities improvements include buildouts in Andover, Massachusetts, Cypress, California and Hudson, New Hampshire, along with the ongoing 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” herein for a risk factor related to health epidemics, pandemics and similar outbreaks.

Shelf Registration Statement

On August 28, 2017, we filed a shelf registration statement on Form S-3ASR with the SEC.

On September 14, 2020, we filed a shelf registration statement on Form S-3ASR with the SEC.

The shelf registration statement, which was effective upon filing with the SEC, registered each of the following securities:

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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.

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

As of March 27, 2020, we had outstanding borrowings of $200.0 million on the Revolver.

As of October 2, 2020, we had no outstanding borrowings on the Revolver.

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

As of and For the Nine Months Ended,

(In thousands) March 27, 2020 March 31, 2019

As of and For the First Quarters Ended,

(In thousands) October 2, 2020 September 27, 2019

Net cash provided by operating activities $ 22,929 $ 24,310

Net cash used in investing activities $ (10,978) $ (106,097)

Net cash provided by financing activities $ 186,713 $ 73,892

Net increase in cash and cash equivalents $ 149,214 $ 45,994

Net cash used in financing activities $ (64) $ (14,559)

Net increase (decrease) in cash and cash equivalents $ 12,284 $ (96,633)

Cash and cash equivalents at end of period $ 239,122 $ 161,299

Our cash and cash equivalents increased by $149.2 million from June 30, 2019 to March 27, 2020, primarily as the result of $86.5 million provided by operating activities.

We had borrowings under the Revolver of $200.0 million, which was drawn to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

We used $96.5 million of cash on hand to fund the acquisition of APC, invested $31.8 million in purchases of property and equipment and used $15.7 million in the purchase and retirement of common stock to settle individual employees' tax liabilities associated with vesting of restricted stock awards.

Our cash and cash equivalents increased by $12.3 million from July 3, 2020 to October 2, 2020, primarily as the result of $22.9 million provided by operating activities, partially offset by $11.0 million invested in purchases of property and equipment.

Operating Activities

During the nine months ended March 27, 2020, we generated $86.5 million in cash from operating activities, an increase of $15.0 million, as compared to the nine months ended March 31, 2019.

The increase was primarily the result of higher comparable net income and higher deferred revenue and customer advances.

This increase was partially offset by greater unbilled receivables driven by our growth in revenue related to contracts with customers recognized over time during the nine months ended March 27, 2020, as compared to the same period of fiscal 2019.

The nine months ended March 27, 2020 also included higher income tax payments, as compared to the nine months ended March 31, 2019.

During the first quarter ended October 2, 2020, we generated $22.9 million in cash from operating activities, a decrease of $1.4 million, as compared to the first quarter ended September 27, 2019.

The decrease was primarily the result of higher inventory purchases intended to mitigate potential disruptions to the supply chain or unforeseen changes in customer behavior resulting from the COVID pandemic and to support growth of the business as well as lower comparable net income.

This decrease was partially offset by higher accounts payable, accrued expenses, and accrued compensation, deferred revenues and customer advances.

Investing Activities

During the nine months ended March 27, 2020, we invested $124.0 million, an increase of $24.6 million, as compared to the nine months ended March 31, 2019.

The increase was driven by the acquisition of APC during the nine months ended March 27, 2020.

There was an additional $13.9 million invested in purchases of property and equipment, primarily related to the build out of our trusted custom microelectronics business during the nine months ended March 27, 2020, as compared to the nine months ended March 31, 2019.

These investments in the business were partially offset by $4.3 million of proceeds from the sale of investment during the nine months ended March 27, 2020.

During the first quarter ended October 2, 2020, we invested $11.0 million, a decrease of $95.1 million, as compared to the first quarter ended September 27, 2019.

The decrease was driven by $96.5 million in cash used for the acquisition of APC during the first quarter ended September 27, 2019.

This decrease in cash used in investing activities was partially offset by an additional $1.4 million invested in purchases of property and equipment during first quarter ended October 2, 2020, primarily related to improvements to our facilities.

Financing Activities

During the nine months ended March 27, 2020, we had $186.7 million in cash provided by financing activities, an increase of $112.8 million, as compared to the nine months ended March 31, 2019.

During the nine months ended March 27, 2020, we had borrowings under the Revolver of $200.0 million, which was drawn to provide access to capital and flexibility in managing operations during this time of uncertainty due to the outbreak of COVID.

Cash provided by financing activities during the nine months ended March 27, 2020 was partially offset by $8.2 million of additional payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with vesting of restricted stock awards, as compared to the nine months ended March 31, 2019.

Cash provided by financing activities was primarily used to fund our growth strategy through mergers and acquisitions in fiscal 2019.

During the first quarter ended October 2, 2020, we had $0.1 million in cash used in financing activities, a decrease of $14.5 million, as compared to the first quarter ended September 27, 2019.

During the first quarter ended September 27, 2019, we had $14.5 million of additional payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with vesting of restricted stock awards, as compared to the three months ended October 2, 2020.

The decrease in the payments related to the purchase and retirement of common stock used to settle individual employees’ tax liabilities associated with vesting of restricted stock awards is due to a change in our incentive stock plan tax withholding methods.

C OMMITMENTS, C ONTRACTUAL O BLIGATIONS AND C ONTINGENCIES

The following is a schedule of our commitments and contractual obligations outstanding at March 27, 2020:

The following is a schedule of our commitments and contractual obligations outstanding at October 2, 2020:

(In thousands) Total Less Than

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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 $110.2 million at March 27, 2020.

We have a liability at March 27, 2020 of $1.8 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.

The purchase commitments covered by these agreements are for less than one year and aggregated approximately $113.2 million a t October 2, 2020.

We have a liability at October 2, 2020 of $4.1 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 or amount, if any, related to this liability.

Accordingly, these amounts are not included in the above table.

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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 Consolidated Statements of Cash Flows.

O FF - BALANCE S HEET A RRANGEMENTS

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

Third Quarters Ended Nine Months Ended

(In thousands) March 27, 2020 March 31, 2019 March 27, 2020 March 31, 2019

First Quarters Ended

(In thousands) October 2, 2020 September 27, 2019

Net income $ 15,798 $ 19,247

Other non-operating adjustments, net (182) 301

Interest (income) expense, net (400) 2,268 (1,899) 6,586

Income tax provision 5,363 5,357 8,455 12,969

Interest income, net (72) (1,187)

Income tax provision (benefit) 2,198 (2,018)

Depreciation 5,266 4,362

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Restructuring and other charges 1,297 648

66 46 1,815 573

Impairment of long-lived assets — —

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Fair value adjustments from purchase accounting — —

600 93 1,200 713

Litigation and settlement expense, net 187 313

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Adjusted EBITDA $ 42,750 $ 36,697

(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) For the third quarter and nine months ended March 27, 2020, fair value adjustments from purchase accounting relate to APC inventory step-up amortization.

For the third quarter ended March 31, 2019, fair value adjustments from purchase accounting relate to GECO inventory step-up amortization.

For the nine months ended March 31, 2019, fair value adjustments from purchase accounting relate to Germane and GECO inventory step-up amortization.

(3) Effective as of the third quarter of fiscal 2020, the Company has added back incremental COVID related expenses.

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 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:

Third Quarters Ended

(In thousands, except per share data) March 27, 2020 March 31, 2019

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

First Quarters Ended

(In thousands, except per share data) October 2, 2020 September 27, 2019

Net income and diluted earnings per share $ 15,798 $ 0.29 $ 19,247 $ 0.35

Other non-operating adjustments, net (1)

(3,138) (502)

Amortization of intangible assets 7,731 7,019

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Adjusted EPS 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) For the third quarter ended March 27, 2020, fair value adjustments from purchase accounting relate to APC inventory step-up amortization.

For the third quarter ended March 31, 2019, fair value adjustments from purchase accounting relate to GECO inventory step-up amortization.

(4) Effective as of the third quarter of fiscal 2020, the Company has added back incremental COVID related expenses.

(2) 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

(In thousands, except per share data) March 27, 2020 March 31, 2019

Net income and earnings per share $ 58,488 $ 1.06 $ 33,971 $ 0.71

Other non-operating adjustments, net (1)

(3,386) (155)

Amortization of intangible assets 22,859 20,906

Restructuring and other charges (2)

Impairment of long-lived assets — —

Acquisition and financing costs 5,009 2,592

Fair value adjustments from purchase accounting (2)

Litigation and settlement expense, net 629 325

COVID related expenses (4)

Stock-based and other non-cash compensation expense 19,332 14,995

Impact to income taxes (5)

(19,341) (8,892)

Adjusted income and adjusted earnings per share $ 87,002 $ 1.58 $ 65,028 $ 1.36

Diluted weighted-average shares outstanding 55,071 47,783

(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, which includes gains or losses on foreign currency remeasurement, investments and fixed assets sales or disposals among other adjustments.

Adjusted EPS 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) For the nine months ended March 27, 2020, fair value adjustments from purchase accounting relate to APC inventory step-up amortization.

For the nine months ended March 31, 2019, fair value adjustments from purchase accounting relate to Germane and GECO inventory step-up amortization.

(4) Effective as of the third quarter of fiscal 2020, the Company has added back incremental COVID related expenses.

(5) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes.

The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision.

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs.

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

Third Quarters Ended Nine Months Ended

(In thousands) March 27, 2020 March 31, 2019 March 27, 2020 March 31, 2019

First Quarters Ended

(In thousands) October 2, 2020 September 27, 2019

Cash provided by operating activities $ 22,929 $ 24,310

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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 third quarters ended March 27, 2020 and March 31, 2019, respectively:

(In thousands) March 27, 2020 As a % of

Revenue March 31, 2019 As a % of

Revenue $ Change % Change

Organic revenue $ 191,473 92 % $ 172,159 99 % $ 19,314 11 %

Acquired revenue 16,543 8 % 2,477 1 % 14,066 568 %

Total revenues $ 208,016 100 % $ 174,636 100 % $ 33,380 19 %

The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure for the nine months ended March 27, 2020 and March 31, 2019, respectively:

(In thousands) March 27, 2020 As a % of

Revenue March 31, 2019 As a % of

The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure for the first quarters ended October 2, 2020 and September 27, 2019, respectively:

(In thousands) October 2, 2020 As a % of

Revenue September 27, 2019 As a % of

Revenue $ Change % Change

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R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS

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.

The Company does not expect this guidance to have a material impact to 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 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.

The Company has determined that there is no activity that falls within the 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.

The Company does not expect this guidance to have a material impact to its consolidated financial statements or related disclosures.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) , an amendment of the FASB Accounting Standards Codification.

The ASU provides guidance to determine whether to

capitalize implementation costs of a cloud computing arrangement that is a service contract or expense as incurred.

Costs of arrangements that do not include a software license should be accounted for as a service contract and expensed as incurred.

This ASU is effective for fiscal years beginning after December 15, 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.

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 and related disclosures.

See Note B to our consolidated financial statements (under the caption "Recently Issued Accounting Pronouncements").

R ECENTLY A DOPTED A CCOUNTING P RONOUNCEMENTS

Effective July 1, 2019, we adopted ASC 842, Leases , (“ASC 842”), which requires lessees to recognize a right-of-use (“ROU”) asset and lease liability for most lease arrangements.

This ASU supersedes existing lease guidance, including ASC 840, Leases (Topic 840) .

The standard mandates a modified retrospective transition method for all entities and early adoption is permitted.

This ASU, among other things, allows companies to elect an optional transition method to apply the new lease standard through a cumulative-effect adjustment in the period of adoption.

We adopted ASC 842 using the optional transition method and, as a result, did not recast prior period unaudited consolidated comparative financial statements.

All prior period amounts and disclosures remain presented under ASC 840.

We elected the package of practical expedients which allows us to not reassess:

1) whether any expired or existing contracts are or contain leases;

2) the lease classification for any expired or existing leases;

and 3) initial direct costs for any existing leases.

We also elected the hindsight practical expedient, permitting the use of hindsight when determining the lease term and assessing impairment of ROU assets.

Adoption of the new standard resulted in additional lease assets and lease liabilities on the Unaudited Consolidated Balance Sheet with no cumulative impact to retained earnings and did not have a material impact on our Consolidated Statements of Operations and Comprehensive Income or Consolidated Statements of Cash Flows.

See Note B to our consolidated financial statements (under the caption "Recently Adopted Accounting Pronouncements").

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in our exposure to market risk from June 30, 2019 to March 27, 2020.

There were no material changes in our exposure to market risk from July 3, 2020 to October 2, 2020.

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-Q

Item 2. Management’s Discussion and Analysis