MERCURY SYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS MERCURY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) (Unaudited) October 2, 2020 July 3, 2020 Assets Current assets: Cash and cash equivalents $ 239,122 $ 226,838 Accounts receivable, net of allowance for credit losses of $ 1,422 and $ 1,451 at October 2, 2020 and July 3, 2020, respectively 99,069 120,438 Unbilled receivables and costs in excess of billings 108,754 90,289 Inventory 206,044 178,093 Prepaid income taxes 4,760 2,498 Prepaid expenses and other current assets 18,956 16,613 Total current assets 676,705 634,769 Property and equipment, net 94,744 87,737 Goodwill 614,422 614,076 Intangible assets, net 200,830 208,748 Operating lease right-of-use assets 61,980 60,613 Other non-current assets 4,501 4,777 Total assets $ 1,653,182 $ 1,610,720 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 63,057 $ 41,877 Accrued expenses 25,123 23,794 Accrued compensation 31,536 41,270 Deferred revenues and customer advances 26,890 18,974 Total current liabilities 146,606 125,915 Deferred income taxes 11,009 13,889 Income taxes payable 4,117 4,117 Operating lease liabilities 68,274 66,981 Other non-current liabilities 15,284 15,034 Total liabilities 245,290 225,936 Commitments and contingencies (Note M) Shareholders’ equity: Preferred stock, $ 0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding — — Common stock, $ 0.01 par value; 85,000,000 shares authorized; 55,044,702 and 54,702,322 shares issued and outstanding at October 2, 2020 and July 3, 2020, respectively 550 547 Additional paid-in capital 1,082,044 1,074,667 Retained earnings 328,253 312,455 Accumulated other comprehensive loss ( 2,955 ) ( 2,885 ) Total shareholders’ equity 1,407,892 1,384,784 Total liabilities and shareholders’ equity $ 1,653,182 $ 1,610,720 The accompanying notes are an integral part of the consolidated financial statements. 3 MERCURY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except per share data) (Unaudited) First Quarters Ended October 2, 2020 September 27, 2019 Net revenues $ 205,621 $ 177,304 Cost of revenues 117,502 98,904 Gross margin 88,119 78,400 Operating expenses: Selling, general and administrative 32,904 29,970 Research and development 27,417 21,870 Amortization of intangible assets 7,731 7,019 Restructuring and other charges 1,297 648 Acquisition costs and other related expenses — 1,417 Total operating expenses 69,349 60,924 Income from operations 18,770 17,476 Interest income 72 1,187 Other expense, net ( 846 ) ( 1,434 ) Income before income taxes 17,996 17,229 Tax provision (benefit) 2,198 ( 2,018 ) Net income $ 15,798 $ 19,247 Basic net earnings per share $ 0.29 $ 0.35 Diluted net earnings per share $ 0.29 $ 0.35 Weighted-average shares outstanding: Basic 54,883 54,388 Diluted 55,339 55,078 Comprehensive income: Net income $ 15,798 $ 19,247 Foreign currency translation adjustments ( 101 ) 75 Pension benefit plan, net of tax 31 7 Total other comprehensive (loss) income, net of tax ( 70 ) 82 Total comprehensive income $ 15,728 $ 19,329 The accompanying notes are an integral part of the consolidated financial statements. 4 MERCURY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) (Unaudited) For the First Quarter Ended October 2, 2020 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance at July 3, 2020 54,702 $ 547 $ 1,074,667 $ 312,455 $ ( 2,885 ) $ 1,384,784 Issuance of common stock under employee stock incentive plans 344 3 ( 1 ) — — 2 Purchase and retirement of common stock ( 1 ) — ( 66 ) — — ( 66 ) Stock-based compensation — — 7,444 — — 7,444 Net income — — — 15,798 — 15,798 Other comprehensive loss — — — — ( 70 ) ( 70 ) Balance at October 2, 2020 55,045 $ 550 $ 1,082,044 $ 328,253 $ ( 2,955 ) $ 1,407,892 For the First Quarter Ended September 27, 2019 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount Balance at June 30, 2019 54,248 $ 542 $ 1,058,745 $ 226,743 $ ( 1,291 ) $ 1,284,739 Issuance of common stock under employee stock incentive plans 462 5 ( 2 ) — — 3 Purchase and retirement of common stock ( 176 ) ( 2 ) ( 14,560 ) — — ( 14,562 ) Stock-based compensation — — 5,769 — — 5,769 Net income — — — 19,247 — 19,247 Other comprehensive income — — — — 82 82 Balance at September 27, 2019 54,534 $ 545 $ 1,049,952 $ 245,990 $ ( 1,209 ) $ 1,295,278 The accompanying notes are an integral part of the consolidated financial statements. 5 MERCURY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) First Quarters Ended October 2, 2020 September 27, 2019 Cash flows from operating activities: Net income $ 15,798 $ 19,247 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 12,997 11,381 Stock-based compensation expense 7,184 5,659 (Benefit) provision for deferred income taxes ( 2,921 ) 238 Other non-cash items 268 548 Changes in operating assets and liabilities, net of effects of businesses acquired: Accounts receivable, unbilled receivables, and costs in excess of billings 3,496 2,230 Inventory ( 27,768 ) 298 Prepaid income taxes ( 2,268 ) ( 3,087 ) Prepaid expenses and other current assets ( 2,268 ) ( 877 ) Other non-current assets ( 1,561 ) ( 64 ) Accounts payable, accrued expenses, and accrued compensation 10,803 ( 6,275 ) Deferred revenues and customer advances 7,598 ( 826 ) Income taxes payable ( 52 ) ( 2,972 ) Other non-current liabilities 1,623 ( 1,190 ) Net cash provided by operating activities 22,929 24,310 Cash flows from investing activities: Purchases of property and equipment ( 10,978 ) ( 9,595 ) Acquisition of business, net of cash acquired — ( 96,502 ) Net cash used in investing activities ( 10,978 ) ( 106,097 ) Cash flows from financing activities: Proceeds from employee stock plans 2 3 Purchase and retirement of common stock ( 66 ) ( 14,562 ) Net cash used in financing activities ( 64 ) ( 14,559 ) Effect of exchange rate changes on cash and cash equivalents 397 ( 287 ) Net increase (decrease) in cash and cash equivalents 12,284 ( 96,633 ) Cash and cash equivalents at beginning of period 226,838 257,932 Cash and cash equivalents at end of period $ 239,122 $ 161,299 Cash paid during the period for: Interest $ — $ — Income taxes $ 6,950 $ 3,647 Supplemental disclosures—non-cash activities: Non-cash investing activity $ 1,369 $ — The accompanying notes are an integral part of the consolidated financial statements. 6 MERCURY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data) (Unaudited) A. Description of Business Mercury Systems, Inc. (the “Company” or “Mercury”) is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense. Headquartered in Andover, Massachusetts, the Company delivers solutions that power a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments. The Company envisions, creates and delivers innovative technology solutions purpose-built to meet its customers’ most-pressing high-tech needs, including those specific to the defense community. As a leading manufacturer of essential components, modules and subsystems, the Company sells to defense prime contractors, the U.S. government and original equipment manufacturer (“OEM”) commercial aerospace companies. The Company 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 its defense and commercial customers. Customers add their own applications and algorithms to the Company's 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. The Company's products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers. The Company's transformational business model accelerates the process of making new technology profoundly more accessible to its customers by bridging the gap between commercial technology and aerospace and defense applications. The Company's long-standing deep relationships with leading high-tech companies, coupled with the Company's high level of research and development (“R&D”) investments and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. The Company's capabilities, technology and R&D investment strategy combine to differentiate Mercury in its industry. The Company's 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, subsystems and custom microelectronics. The Company maintains its technological edge by investing in critical capabilities and intellectual property 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 artificial intelligence. The Company's mission critical solutions are deployed by its customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance, electronic intelligence, avionics, electro-optical/infrared, electronic warfare, weapons and missile defense, hypersonics and radar. Investors and others should note that the Company announces material financial information using its website ( www.mrcy.com ), Securities and Exchange Commission (“SEC”) filings, press releases, public conference calls, webcasts, and social media, including Twitter ( twitter.com/mrcy and twitter.com/mrcy_CEO ) and LinkedIn ( www.linkedin.com/company/mercury-systems ). Therefore, the Company encourages investors and others interested in Mercury to review the information the Company posts on the social media and other communication channels listed on its website. B. Summary of Significant Accounting Policies B ASIS OF P RESENTATION The accompanying consolidated financial statements have been prepared by the Company in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States of America for interim financial information and with the instructions to the Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual consolidated financial statements have been condensed or omitted pursuant to those rules and regulations; however, in the opinion of management the financial information reflects all adjustments, consisting of adjustments of a normal recurring nature, necessary for fair presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended July 3, 2020 which are contained in the Company’s Annual Report on Form 10-K filed with the SEC on August 18, 2020. The results for the first quarter are not necessarily indicative of the results to be expected for the full fiscal year. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation . 7 All references to the first quarter of fiscal 2021 are to the quarter ended October 2, 2020. There were 13-weeks during the first quarters ended October 2, 2020 and September 27, 2019, respectively. U SE OF E STIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. B USINESS C OMBINATIONS The Company utilizes the acquisition method of accounting under ASC 805, Business Combinations , (“ASC 805”), for all transactions and events in which it obtains control over one or more other businesses, to recognize the fair value of all assets and liabilities acquired, even if less than one hundred percent ownership is acquired, and in establishing the acquisition date fair value as the measurement date for all assets and liabilities assumed. The Company also utilizes ASC 805 for the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in business combinations. F OREIGN C URRENCY Local currencies are the functional currency for the Company’s subsidiaries in Switzerland, the United Kingdom, France, Japan, Spain and Canada. The accounts of foreign subsidiaries are translated using exchange rates in effect at period-end for assets and liabilities and at average exchange rates during the period for results of operations. The related translation adjustments are reported in Accumulated other comprehensive loss (“AOCL”) in shareholders’ equity. Gains (losses) resulting from non-U.S. currency transactions are included in Other expense, net in the Consolidated Statements of Operations and Comprehensive Income and were immaterial for all periods presented. R EVENUE R ECOGNITION The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers , (“ASC 606”). Mercury is a leading technology company serving the aerospace and defense industry, positioned at the intersection of high-tech and defense. Revenues are derived from the sales of products that are grouped into one of the following three categories: (i) components; (ii) modules and sub-assemblies; and (iii) integrated subsystems. The Company also generates revenues from the performance of services, including systems engineering support, consulting, maintenance and other support, testing and installation. Each promised good or service within a contract is accounted for separately under the guidance of ASC 606 if they are distinct. Promised goods or services not meeting the criteria for being a distinct performance obligation are bundled into a single performance obligation with other goods or services that together meet the criteria for being distinct. The appropriate allocation of the transaction price and recognition of revenue is then determined for the bundled performance obligation. Revenue recognized at a point in time generally relates to contracts that include a combination of components, modules and sub-assemblies, integrated subsystems and related system integration or other services. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 64 % and 73 % of revenues for the first quarters ended October 2, 2020 and September 27, 2019, respectively. The Company also engages in long-term contracts for development, production and service activities and recognizes revenue for performance obligations over time. These long-term contracts involve the design, development, manufacture, or modification of complex modules and sub-assemblies or integrated subsystems and related services. Long-term contracts include both fixed-price and cost reimbursable contracts. The Company’s cost reimbursable contracts typically include cost-plus fixed fee and time and material contracts. Total revenue recognized under long-term contracts over time was 36 % and 27 % of total revenues for the first quarters ended October 2, 2020 and September 27, 2019, respectively. The Company generally does not provide its customers with rights of product return other than those related to assurance warranty provisions that permit repair or replacement of defective goods over a period of 12 to 36 months. The Company accrues for anticipated warranty costs upon product shipment. The Company does not consider activities related to such assurance warranties, if any, to be a separate performance obligation. The Company does offer separately priced extended warranties which generally range from 12 to 36 months that are treated as separate performance obligations. The transaction price allocated to extended warranties is recognized over time in proportion to the costs expected to be incurred in satisfying the obligations under the contract. All revenues are reported net of government assessed taxes (e.g., sales taxes or value-added taxes). Refer to Note L for disaggregation of revenue for the period. 8 A CCOUNTS R ECEIVABLE Accounts receivable, net, represents amounts that have been billed and are currently due from customers. The Company maintains an allowance for credit losses to provide for the estimated amount of receivables that will not be collected. The Company provides credit to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended as necessary. The allowance is based upon an assessment of the customers’ credit worthiness, reasonable forecasts about the future, history with the customer, and the age of the receivable balance. The Company typically invoices a customer upon shipment of the product (or completion of a service) for contracts where revenue is recognized at a point in time. For contracts where revenue is recognized over time, the invoicing events are typically based on specified performance obligation deliverables or milestone events, or quantifiable measures of performance. C ONTRACT B ALANCES Contract balances result from the timing of revenue recognized, billings and cash collections, and the generation of contract assets and liabilities. Contract assets represent revenue recognized in excess of amounts invoiced to the customer and the right to payment is not subject to the passage of time. Contract assets are presented as unbilled receivables and costs in excess of billings on the Company’s Consolidated Balance Sheets. Contract liabilities consist of deferred product revenue, billings in excess of revenues, deferred service revenue, and customer advances. Deferred product revenue represents amounts that have been invoiced to customers, but are not yet recognizable as revenue because the Company has not satisfied its performance obligations under the contract. Billings in excess of revenues represents milestone billing contracts where the billings of the contract exceed recognized revenues. Deferred service revenue primarily represents amounts invoiced to customers for annual maintenance contracts or extended warranty contracts, which are recognized over time in proportion to the costs expected to be incurred in satisfying the obligations under the contract. Customer advances represent deposits received from customers on an order. Contract liabilities are included in deferred revenue and the long-term portion of deferred revenue is included within other non-current liabilities on the Company’s Consolidated Balance Sheets. Contract balances are reported in a net position on a contract-by-contract basis. The contract asset balances were $ 108,754 and $ 90,289 as of October 2, 2020 and July 3, 2020, respectively. The contract asset balance increased due to growth in revenue recognized and timing of billable events under long-term contracts over time during the first quarter ended October 2, 2020. The contract liability balances were $ 27,655 and $ 19,892 as of October 2, 2020 and July 3, 2020, respectively. The increase was due to a greater number of long-term contracts with advanced billings across multiple programs. Revenue recognized for the first quarter ended October 2, 2020 that was included in the contract liability balance at July 3, 2020 was $ 9,030 . Revenue recognized for the first quarter ended September 27, 2019 that was included in the contract liability balance at June 30, 2019 was $ 5,376 . R EMAINING P ERFORMANCE O BLIGATIONS The Company includes in its computation of remaining performance obligations customer orders for which it has accepted signed sales orders. The definition of remaining performance obligations excludes contracts with original expected durations of less than one year, as well as those contracts that provide the customer with the right to cancel or terminate the order with no substantial penalty, even if the Company’s historical experience indicates the likelihood of cancellation or termination is remote. As of October 2, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 287,526 . The Company expects to recognize approximately 72 % of its remaining performance obligations as revenue in the next 12 months and the balance thereafter. W EIGHTED -A VERAGE S HARES Weighted-average shares were calculated as follows: First Quarters Ended October 2, 2020 September 27, 2019 Basic weighted-average shares outstanding 54,883 54,388 Effect of dilutive equity instruments 456 690 Diluted weighted-average shares outstanding 55,339 55,078 Equity instruments to purchase 203 and 154 shares of common stock were not included in the calculation of diluted net earnings per share for the first quarters ended October 2, 2020 and September 27, 2019, respectively, because the equity instruments were anti-dilutive. 9 R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS 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 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 add guidance as to 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. The Company is currently evaluating the effect that ASU 2019-12 will have on its consolidated financial statements and related disclosures. R ECENTLY A DOPTED A CCOUNTING P RONOUNCEMENTS Effective July 4, 2020, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. This ASU requires an entity to record an allowance for credit losses for certain financial instruments and financial assets, including trade receivables, based on expected losses rather than incurred losses. The Company will rely on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount and will exercise judgment in determining the relevant information and estimation methods that are appropriate in measurement of the credit losses. This adoption did not have a material impact to the Company's consolidated financial statements or related disclosures. Effective July 4, 2020 the Company adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . 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. This adoption did not have an impact on the Company's consolidated financial statements or related disclosures. Effective July 4, 2020 the Company adopted 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 adoption did not have an impact to the Company's consolidated financial statements or related disclosures. 10 C. Acquisitions A MERICAN P ANEL C ORPORATION A CQUISITION On September 23, 2019, the Company acquired American Panel Corporation (“APC”). Based in Alpharetta, Georgia, APC is a leading innovator in large area display technology for the aerospace and defense market. APC's capabilities are deployed on a wide range of next-generation platforms. The Company acquired APC for an all cash purchase price of $ 100,000 , prior to net working capital and net debt adjustments. The Company funded the acquisition with cash on hand. The following table presents the net purchase price and the fair values of the assets and liabilities of APC: Amounts Consideration transferred Cash paid at closing $ 100,826 Working capital and net debt adjustment ( 5,952 ) Liabilities assumed 2,454 Less cash acquired ( 826 ) Net purchase price $ 96,502 Fair value of tangible assets acquired and liabilities assumed Cash $ 826 Accounts receivable 3,726 Inventory 11,233 Fixed assets 690 Other current and non-current assets 3,494 Accounts payable ( 1,554 ) Accrued expenses ( 1,457 ) Other current and non-current liabilities ( 5,852 ) Fair value of net tangible assets acquired 11,106 Fair value of identifiable intangible assets 33,200 Goodwill 53,022 Fair value of net assets acquired 97,328 Less cash acquired ( 826 ) Net purchase price $ 96,502 On September 23, 2020, the measurement period for APC expired. The identifiable intangible assets include customer relationships of $ 20,600 with a useful life of 11 years, completed technology of $ 10,400 with a useful life of 11 years and backlog of $ 2,200 with a useful life of two years . The goodwill of $ 53,022 largely reflects the potential synergies and expansion of the Company's offerings across product lines and markets complementary to the Company's existing products and markets. The goodwill from this acquisition is reported under the Mission reporting unit. Since APC was a qualified subchapter S subsidiary, the acquisition is treated as an asset purchase for tax purposes. The Company has estimated the tax value of the intangible assets from this transaction and is amortizing the amount over 15 years for tax purposes. As of October 2, 2020, the Company had $ 50,649 of goodwill deductible for tax purposes. D. Fair Value of Financial Instruments The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at October 2, 2020: Fair Value Measurements October 2, 2020 Level 1 Level 2 Level 3 Assets: U.S. equity securities $ 1,964 $ 1,964 $ — $ — Total $ 1,964 $ 1,964 $ — $ — 11 The carrying values of cash and cash equivalents, including money market funds, restricted cash, accounts receivable and payable, and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The Company recorded a loss on the change in fair value of a cost-method investment of $ 43 . The change in fair value of these U.S. equity securities was the result of an observable price change during the first quarter ended October 2, 2020. Its fair value is based on a quoted price of identical instruments in an active market and is included within Prepaid expenses and other current assets on the Consolidated Balance Sheet as of October 2, 2020. The loss on investments were included within Other expense, net in the Consolidated Statements of Operations and Comprehensive Income for the first quarter ended October 2, 2020. E. Inventory Inventory is stated at the lower of cost (first-in, first-out) or net realizable value, and consists of materials, labor and overhead. On a quarterly basis, the Company uses consistent methodologies to evaluate inventory for net realizable value. Once an item is written down, the value becomes the new inventory cost basis. The Company reduces the value of inventory for excess and obsolete inventory, consisting of on-hand inventory in excess of estimated usage. The excess and obsolete inventory evaluation is based upon assumptions about future demand, historical usage, product mix and possible alternative uses. Inventory was comprised of the following: October 2, 2020 July 3, 2020 Raw materials $ 124,628 $ 111,225 Work in process 57,066 49,647 Finished goods 24,350 17,221 Total $ 206,044 $ 178,093 The $ 27,951 increase in inventory was due to an increase in overall demand, especially for larger, more complex integrated subsystems, and advanced purchases intended to mitigate potential disruptions to the supply chain or unforeseen changes in customer behavior resulting from the COVID pandemic. F. Goodwill During the first quarter of fiscal 2021, the Company reorganized its internal reporting unit structure to align with the Company's market and brand strategy as well as promote scale as the organization continues to grow. In accordance with FASB ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company determines its reporting units based upon whether discrete financial information is available, if management regularly reviews the operating results of the component, the nature of the products offered to customers and the market characteristics of each reporting unit. A reporting unit is considered to be an operating segment or one level below an operating segment also known as a component. Component level financial information is reviewed by management across three divisions: Processing, Microelectronics and Mission. Accordingly, these were determined to be the Company's new reporting units. The internal reorganization and change in reporting units qualified as a triggering event and required goodwill to be tested for impairment. As required by ASC 350, the Company tested goodwill for impairment immediately before and after the reorganization. As a result of these analyses, it was determined that goodwill was not impaired before or after the reorganization. In the first quarter ended October 2, 2020, the Company assigned goodwill to the new reporting units based on the relative fair value of transferred operations. The following table sets forth the changes in the carrying amount of goodwill for the first quarter ended October 2, 2020: Total Balance at July 3, 2020 $ 614,076 Goodwill adjustment for the APC acquisition 346 Balance at October 2, 2020 $ 614,422 The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year. 12 G. Restructuring Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. During the first quarter ended October 2, 2020, the Company incurred net restructuring and other charges of $ 1,297 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 the Company completed in August which created better alignment with its market and brand strategy as well as promote scale as the Company continues to grow. All of the restructuring and other charges are classified as Operating expenses in the Consolidated Statements of Operations and Comprehensive Income and any remaining severance obligations are expected to be paid within the next twelve months. The restructuring liability is classified as Accrued expenses in the Consolidated Balance Sheets. The following table presents the detail of activity for the Company’s restructuring plans: Severance & Related Restructuring liability at July 3, 2020 $ 597 Restructuring and other charges 1,297 Cash paid ( 898 ) Restructuring liability at October 2, 2020 $ 996 H. Income Taxes The Company recorded an income tax provision of $ 2,198 and an income tax benefit of $ 2,018 on income before income taxes of $ 17,996 and $ 17,229 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, the Company recognized a discrete tax benefit of $ 2,480 and $ 6,127 , respectively, related to excess tax benefits on stock-based compensation. The Company also recognized a discrete tax benefit of $ 443 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. During the first quarter ended October 2, 2020, there were no material changes to the Company's unrecognized tax positions. I. Debt R EVOLVING C REDIT F ACILITY On September 28, 2018, the Company amended its Credit Agreement to increase and extend the borrowing capacity to a $ 750,000 , 5-year revolving credit line (the “Revolver”), with the maturity extended to September 28, 2023. As of October 2, 2020, the Company's outstanding balance of unamortized deferred financing costs was $ 4,033 , which is being amortized to Other expense, net in the Consolidated Statements of Operations and Comprehensive Income on a straight line basis over the term of the Revolver. As of October 2, 2020, the Company was in compliance with all covenants and conditions under the Revolver and there were no outstanding borrowings against the Revolver. There were outstanding letters of credit of $ 904 as of October 2, 2020. J. Employee Benefit Plan P ENSION P LAN The Company maintains a defined benefit pension plan (the “Plan”) for its Swiss employees, which is administered by an independent pension fund. The Plan is mandated by Swiss law and meets the criteria for a defined benefit plan under ASC 715, Compensation—Retirement Benefits (“ASC 715”), because participants of the Plan are entitled to a defined rate of return on contributions made. The independent pension fund is a multi-employer plan with unrestricted joint liability for all participating companies for which the Plan’s overfunding or underfunding is allocated to each participating company based on an allocation key determined by the Plan. 13 The Company recognizes a net asset or liability for the Plan equal to the difference between the projected benefit obligation of the Plan and the fair value of the Plan’s assets as required by ASC 715. The funded status may vary from year to year due to changes in the fair value of the Plan’s assets and variations on the underlying assumptions of the projected benefit obligation of the Plan. The Plan's funded status at October 2, 2020 was a net liability of $ 12,337 , which is recorded in Other non-current liabilities on the Consolidated Balance Sheet. The Company recorded a net gain of $ 31 and $ 7 in AOCL during the first quarters ended October 2, 2020 and September 27, 2019, respectively. The Company recognized net periodic benefit costs of $ 413 and $ 296 associated with the Plan for the first quarters ended October 2, 2020 and September 27, 2019, respectively. The Company's total expected employer contributions to the Plan during fiscal 2021 are $ 957 . K. Stock-Based Compensation S TOCK I NCENTIVE P LANS The aggregate number of shares authorized for issuance under the Company’s Amended and Restated 2018 Stock Incentive Plan (the “2018 Plan”) is 2,862 shares, with an additional 710 shares rolled into the 2018 Plan that were available for future grant under the Company’s 2005 Stock Incentive Plan, as amended and restated (the “2005 Plan”) at the time of shareholder approval of the 2018 Plan. The 2018 Plan replaced the 2005 Plan. The shares authorized for issuance under the 2018 Plan will continue to be increased by any future cancellations, forfeitures or terminations (other than by exercise) of awards under the 2005 Plan. The foregoing does not affect any outstanding awards under the 2005 Plan, which remain in full force and effect in accordance with their terms. The 2018 Plan provides for the grant of non-qualified and incentive stock options, restricted stock, stock appreciation rights and deferred stock awards to employees and non-employees. All stock options are granted with an exercise price of not less than 100% of the fair value of the Company’s common stock on the date of grant and the options generally have a term of seven years . There were 1,698 shares available for future grant under the 2018 Plan at October 2, 2020. On October 28, 2020, the Shareholders of the Company approved 3,000 shares to be added to the 2018 Plan. As part of the Company's ongoing annual equity grant program for employees, the Company grants performance-based restricted stock awards to certain executives and employees pursuant to the 2018 Plan. Performance awards vest based on the requisite service period subject to the achievement of specific financial performance targets. Based on the performance targets, some of these awards require graded vesting which results in more rapid expense recognition compared to traditional time-based vesting over the same vesting period. The Company monitors the probability of achieving the performance targets on a quarterly basis and may adjust periodic stock compensation expense accordingly based on its determination of the likelihood for reaching targets. The performance targets generally include the achievement of internal performance targets in relation to a peer group of companies. E MPLOYEE S TOCK P URCHASE P LAN The aggregate number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is 1,800 shares. Under the ESPP, rights are granted to purchase shares of common stock at 85 % of the lesser of the market value of such shares at either the beginning or the end of each six-month offering period. The ESPP permits employees to purchase common stock through payroll deductions, which may not exceed 10 % of an employee’s compensation as defined in the ESPP. There were no shares issued under the ESPP during the first quarters ended October 2, 2020 and September 27, 2019, respectively. Shares available for future purchase under the ESPP totaled 29 at October 2, 2020. On October 28, 2020, the Shareholders of the Company approved 500 shares to be added to the ESPP. S TOCK O PTION AND A WARD A CTIVITY The following table summarizes activity of the Company’s stock option plans since July 3, 2020: Options Outstanding Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Outstanding at July 3, 2020 3 $ 5.52 1.12 Granted — — Exercised ( 1 ) 5.52 Canceled — — Outstanding at October 2, 2020 2 $ 5.52 0.87 14 The following table summarizes the status of the Company’s non-vested restricted stock awards and deferred stock awards since July 3, 2020: Non-vested Restricted Stock Awards Number of Shares Weighted Average Grant Date Fair Value Outstanding at July 3, 2020 957 $ 61.59 Granted 454 77.26 Vested ( 343 ) 51.02 Forfeited ( 9 ) 61.95 Outstanding at October 2, 2020 1,059 $ 69.80 S TOCK - BASED C OMPENSATION E XPENSE The Company recognizes expense for its share-based payment plans in the Consolidated Statements of Operations and Comprehensive Income in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”). The Company had $ 802 and $ 542 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for the periods ended October 2, 2020 and July 3, 2020, respectively. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period, net of estimated forfeitures. The following table presents share-based compensation expenses included in the Company’s Consolidated Statements of Operations and Comprehensive Income: First Quarters Ended October 2, 2020 September 27, 2019 Cost of revenues $ 295 $ 141 Selling, general and administrative 5,676 4,643 Research and development 1,213 875 Stock-based compensation expense before tax 7,184 5,659 Income taxes ( 1,868 ) ( 1,471 ) Stock-based compensation expense, net of income taxes $ 5,316 $ 4,188 L. Operating Segment, Geographic Information and Significant Customers Operating segments are defined as components of an enterprise evaluated regularly by the Company's CODM in deciding how to allocate resources and assess performance. During the first quarter of fiscal 2021, the Company reorganized its internal reporting unit structure to align with the Company's market and brand strategy as well as promote scale as the organization continues to grow. The Company evaluated this reorganization under ASC 280 to determine whether this change has impacted the Company's single operating and reportable segment. The Company concluded this change had no effect given the CODM continues to evaluate and manage the Company on the basis of one operating and reportable segment. The Company utilized the management approach for determining its operating segment in accordance with ASC 280. The geographic distribution of the Company’s revenues as determined by country in which the Company's legal subsidiary is domiciled is summarized as follows: U.S. Europe Asia Pacific Eliminations Total FIRST QUARTER ENDED OCTOBER 2, 2020 Net revenues to unaffiliated customers $ 195,847 $ 9,663 $ 111 $ — $ 205,621 Inter-geographic revenues 240 344 — ( 584 ) — Net revenues $ 196,087 $ 10,007 $ 111 $ ( 584 ) $ 205,621 FIRST QUARTER ENDED SEPTEMBER 27, 2019 Net revenues to unaffiliated customers $ 161,996 $ 14,440 $ 868 $ — $ 177,304 Inter-geographic revenues 972 651 — ( 1,623 ) — Net revenues $ 162,968 $ 15,091 $ 868 $ ( 1,623 ) $ 177,304 15 The Company offers a broad family of products designed to meet the full range of requirements in compute-intensive, signal processing, image processing and command and control applications. To maintain a competitive advantage, the Company seeks to leverage technology investments across multiple product lines and product solutions. The Company’s products are typically compute-intensive and require extremely high bandwidth and high throughput. These systems often must also meet significant SWaP constraints for use in aircraft, unmanned aerial vehicles, ships and other platforms and be ruggedized for use in harsh environments. The Company's products transform the massive streams of digital data created in these applications into usable information in real time. The systems can scale from a few processors to thousands of processors. In recent years, the Company completed a series of acquisitions that changed its technological capabilities, applications and end markets. As these acquisitions and changes occurred, the Company's proportion of revenue derived from the sale of components in different technological areas, and modules, sub-assemblies and integrated subsystems which combine technologies into more complex diverse products has shifted. The following tables present revenue consistent with the Company's strategy of expanding its technological capabilities and program content. As additional information related to the Company’s products by end user, application, product grouping and/or platform is attained, the categorization of these products can vary over time. When this occurs, the Company reclassifies revenue by end user, application, product grouping and/or platform for prior periods. Such reclassifications typically do not materially change the underlying trends of results within each revenue category. The following table presents the Company's net revenue by end user for the periods presented: First Quarters Ended October 2, 2020 September 27, 2019 Domestic (1) $ 178,743 $ 157,475 International/Foreign Military Sales (2) 26,878 19,829 Total Net Revenue $ 205,621 $ 177,304 (1) Domestic revenues consist of sales where the end user is within the U.S., as well as sales to prime defense contractor customers where the ultimate end user location is not defined. (2) International/Foreign Military Sales consist of sales to U.S. prime defense contractor customers where the end user is known to be outside the U.S., foreign military sales through the U.S. government, and direct sales to non-U.S. based customers intended for end use outside of the U.S. The following table presents the Company's net revenue by end application for the periods presented: First Quarters Ended October 2, 2020 September 27, 2019 Radar (1) $ 72,409 $ 37,919 Electronic Warfare (2) 39,075 36,057 Other Sensor & Effector (3) 23,095 27,890 Total Sensor & Effector 134,579 101,866 C4I (4) 53,781 49,011 Other (5) 17,261 26,427 Total Net Revenue $ 205,621 $ 177,304 (1) Radar includes end-use applications where radio frequency signals are utilized to detect, track, and identify objects. (2) Electronic Warfare includes end-use applications comprising the offensive and defensive use of the electromagnetic spectrum. (3) Other Sensor & Effector products include all Sensor & Effector end markets other than Radar and Electronic Warfare. (4) C4I includes rugged secure rackmount servers that are designed to drive the most powerful military processing applications. (5) Other products include all component and other sales where the end use is not specified. The following table presents the Company's net revenue by product grouping for the periods presented: First Quarters Ended October 2, 2020 September 27, 2019 Components (1) $ 50,296 $ 53,419 Modules and Sub-assemblies (2) 17,466 35,240 Integrated Subsystems (3) 137,859 88,645 Total Net Revenue $ 205,621 $ 177,304 16 (1) Components include technology elements typically performing a single, discrete technological function, which when physically combined with other components may be used to create a module or sub-assembly. Examples include, but are not limited to, power amplifiers and limiters, switches, oscillators, filters, equalizers, digital and analog converters, chips, MMICs (monolithic microwave integrated circuits), and memory and storage devices. (2) Modules and Sub-assemblies include combinations of multiple functional technology elements and/or components that work together to perform multiple functions but are typically resident on or within a single board or housing. Modules and sub-assemblies may in turn be combined to form an integrated subsystem. Examples of modules and sub-assemblies include, but are not limited to, embedded processing modules, embedded processing boards, switch fabric boards, high speed input/output boards, digital receiver boards, graphics and video processing and Ethernet and IO (input-output) boards, multi-chip modules, integrated radio frequency and microwave multi-function assemblies, tuners and transceivers. (3) Integrated Subsystems include multiple modules and/or sub-assemblies combined with a backplane or similar functional element and software to enable a solution. These are typically but not always integrated within a chassis and with cooling, power and other elements to address various requirements and are also often combined with additional technologies for interaction with other parts of a complete system or platform. Integrated subsystems also include spare and replacement modules and sub-assemblies sold as part of the same program for use in or with integrated subsystems sold by the Company. The following table presents the Company's net revenue by platform for the periods presented: First Quarters Ended October 2, 2020 September 27, 2019 Airborne (1) $ 89,436 $ 86,157 Land (2) 37,551 16,310 Naval (3) 46,282 39,710 Other (4) 32,352 35,127 Total Net Revenues $ 205,621 $ 177,304 (1) Airborne platform includes products that relate to personnel, equipment, or pieces of equipment designed for airborne applications. (2) Land platform includes products that relate to fixed or mobile equipment, or pieces of equipment for personnel, weapon systems, vehicles and support elements operating on land. (3) Naval platform includes products that relate to personnel, equipment, or pieces of equipment designed for naval operations. (4) All platforms other than Airborne, Land or Naval. The geographic distribution of the Company’s identifiable long-lived assets is summarized as follows: U.S. Europe Asia Pacific Eliminations Total October 2, 2020 $ 89,261 $ 5,479 $ 4 $ — $ 94,744 July 3, 2020 $ 82,588 $ 5,144 $ 5 $ — $ 87,737 Identifiable long-lived assets exclude ROU assets, goodwill, and intangible assets. Customers comprising 10% or more of the Company’s revenues for the periods shown are as follows: First Quarters Ended October 2, 2020 September 27, 2019 Raytheon Technologies 23 % 13 % Lockheed Martin Corporation 19 % 18 % Northrop Grumman Corporation * 11 % L3Harris Technologies * 13 % 42 % 55 % * Indicates that the amount is less than 10% of the Company's revenue for the respective period. While the Company typically has customers from which it derives 10% or more of its revenue, the sales to each of these customers are spread across multiple programs and platforms. There were no programs comprising 10% or more of the Company's revenues for the first quarters ended October 2, 2020 and September 27, 2019. M. Commitments and Contingencies L EGAL C LAIMS The Company is subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of its business. Although legal proceedings are inherently unpredictable, the Company believes that it has valid defenses with respect to any matters currently pending against the Company and intends to defend itself vigorously. The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on the Company’s cash flows, results of operations, or financial position. 17 I NDEMNIFICATION O BLIGATIONS The Company’s standard product sales and license agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments the Company could be required to make under these indemnification provisions is, in some instances, unlimited. P URCHASE C OMMITMENTS As of October 2, 2020, the Company has entered into non-cancelable purchase commitments for certain inventory components and services used in its normal operations. The purchase commitments covered by these agreements are for less than one year and aggregate to $ 113,227 . O THER As part of the Company's strategy for growth, the Company continues to explore acquisitions or strategic alliances. The associated acquisition costs incurred in the form of professional fees and services may be material to the future periods in which they occur, regardless of whether the acquisition is ultimately completed. The Company may elect from time to time to purchase and subsequently retire shares of common stock in order to settle employees’ tax liabilities associated with vesting of a restricted stock award or exercise of stock options. These transactions would be treated as a use of cash in financing activities in the Company's Consolidated Statements of Cash Flows. N. Subsequent Events The Company has evaluated subsequent events from the date of the Consolidated Balance Sheet through the date the consolidated financial statements were issued. 18