What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-09 compared with 2020-11-10 · 172 added, 70 removed, 205 unchanged (54% of the section changed)

31 unchanged sentences

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

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.

As of January 1, 2021, we had 2,376 employees.

We employ hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities to achieve our objectives to fully capitalize upon and maintain our technological leads in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications.

Our talent attraction, engagement and retention is critical to execute on our long-term strategy.

We invest in our culture and values to drive employee engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation.

We believe that our success depends on our ability to embrace diversity company-wide and realize the benefits of a diverse workforce that includes a greater variety of solutions to problems, a broader collection of skills and experiences and an array of viewpoints to consider.

Mercury is committed to providing an inclusive environment that respects the diversity of the world.

We believe that the workforce required to grow our business and deliver creative solutions must be rich in diversity of thought, experience and culture.

Our diversity and inclusion initiatives focus on building and maintaining the talent that will create cohesive and collaborative teams that drive innovation.

These values will help our employees realize their full potentials at work to provide Innovation That Matters®.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted earnings per share (“adjusted EPS”), and adjusted EBITDA for the second quarter ended January 1, 2021 were $210.7 million, $0.2 million, $12.7 million, $0.23, $0.54, and $45.3 million, respectively.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted EPS, and adjusted EBITDA for the six months ended January 1, 2021 were $416.3 million, $9.1 million, $28.5 million, $0.51, $1.05, and $88.1 million, respectively.

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

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RESULTS OF OPERATIONS:

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.

Results of operations for the second quarter ended January 1, 2021 includes only results from the December 30, 2020 acquisition date for Physical Optics Corporation ("POC").

Results of operations for the six months ended January 1, 2021 include full period results from the acquisition of American Panel Corporation ("APC") and only results from the acquisition date for POC which was acquired subsequent to July 3, 2020.

Results of operations for the six months ended December 27, 2019 include only partial period results from the acquisition date for APC.

Accordingly, the periods presented below are not directly comparable.

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

The second quarter ended January 1, 2021 compared to t he second quarter ended December 27, 2019

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

(In thousands) January 1, 2021 As a % of

Revenue December 27, 2019 As a % of

Net revenues $ 210,676 100.0 % $ 193,913 100.0 %

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Interest income 60 — 312 0.2

Interest expense (73) — — —

Other expense, net (981) (0.5) (351) (0.2)

Income before income taxes 17,119 8.1 20,786 10.7

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

Income tax provision 4,433 2.1 5,110 2.6

Net income $ 12,686 6.0 % $ 15,676 8.1 %

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).

Total revenues increased $16.8 million, or 8.6%, to $210.7 million during the second quarter ended January 1, 2021, as compared to $193.9 million during the second quarter ended December 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 $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.

The increase was primarily due to $16.5 million of additional organic revenues which were predominantly driven by increased demand for integrated subsystems, across radar applications, and within land and naval platforms.

These increases were partially offset by decreases to components across electronic warfare and other applications across airborne and other platforms.

The organic revenues increase was driven by the LTAMDS program, a ground radar program, an airborne program and the Filthy Buzzard program, which were partially offset by decreases in a classified missile program, P8 and the Filthy Badger program.

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 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.

Gross margin was 42.1% for the second quarter ended January 1, 2021, a decrease of 350 basis points from the 45.6% gross margin achieved during the second quarter ended December 27, 2019.

The lower gross margin was primarily driven by $3.1 million of direct COVID related expenses, as well as program mix and higher Customer Funded Research and Development (“CRAD”).

These costs were partially offset by operational efficiencies and lower inventory step-up amortization.

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 $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.

Selling, general and administrative expenses decreased $1.2 million, or 3.7%, to $31.6 million during the second quarter ended January 1, 2021, as compared to $32.8 million in the second quarter ended December 27, 2019.

The decrease was primarily related to improved operating leverage, partially offset by additional headcount from organic growth and direct COVID related expenses.

Selling, general and administrative expenses decreased as a percentage of revenue to 15.0% for the second quarter ended January 1, 2021 from 16.9% for the second quarter ended December 27, 2019.

R ESEARCH AND D EVELOPMENT

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.

Research and development expenses increased $3.4 million, or 14.1%, to $28.1 million during the second quarter ended January 1, 2021, as compared to $24.7 million during the second quarter ended December 27, 2019.

Research and development expenses accounted for 13.4% and 12.7% of our revenues for the second quarters ended January 1, 2021 and December 27, 2019, respectively.

The increase during the second quarter ended January 1, 2021 was primarily driven by the continued investment in internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and our trusted custom microelectronics business.

R ESTRUCTURING AND O THER C HARGES

Restructuring and other charges were $1.0 million during the second quarter ended January 1, 2021, as compared to $1.1 million during the second quarter ended December 27, 2019.

Restructuring and other charges during the second quarter ended January 1, 2021 primarily related to severance costs associated with the elimination of 23 positions, predominantly in the manufacturing, SG&A and R&D functions.

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.

These charges related to changing market and business conditions including talent shifts and resource redundancy resulting from the internal reorganization the Company completed in the first quarter.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

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.

Acquisition costs and other related expenses were $2.2 million during the second quarter ended January 1, 2021, as compared to $1.1 million during the second quarter ended December 27, 2019.

The second quarter ended January 1, 2021 included expenses related to the acquisition of POC which was completed on December 30, 2020.

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.

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I NTEREST I NCOME

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.

Interest income decreased to $0.1 million during the second quarter ended January 1, 2021, as compared to $0.3 million for the second quarter ended December 27, 2019.

This was driven by the lower rate earned on cash on hand during the second quarter ended January 1, 2021, as compared to the prior year.

I NTEREST E XPENSE

We incurred $0.1 million of interest expense during the second quarter ended January 1, 2021, related to the $160.0 million draw on our Revolver to support the POC acquisition, compared to no interest expense during the second quarter ended December 27, 2019.

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.

Other expense, net increased to $1.0 million during the second quarter ended January 1, 2021, as compared to $0.4 million for the second quarter ended December 27, 2019.

The increase was primarily driven by a $0.4 million loss on the sale of a cost-method investment, offset by net foreign currency translation gains of $0.4 million during the second quarter ended January 1, 2021.

The second quarter ended December 27, 2019 included net foreign currency translation gains of $0.5 million.

Both periods include $0.7 million of financing and registration fees.

I NCOME T AXES

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.

We recorded an income tax provision of $4.4 million and $5.1 million on income before income taxes of $17.1 million and $20.8 million for the second quarters ended January 1, 2021 and December 27, 2019, respectively.

During the second quarters ended January 1, 2021 and December 27, 2019, we recognized a discrete tax benefit of $0.1 million and $0.4 million, respectively, related to excess tax benefits on stock-based compensation.

The effective tax rate for the second quarters ended January 1, 2021 and December 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”).

Six months ended January 1, 2021 compared to the six months ended December 27, 2019

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

(In thousands) January 1, 2021 As a % of

Revenue December 27, 2019 As a % of

Net revenues $ 416,297 100.0 % $ 371,217 100.0 %

Cost of revenues 239,511 57.5 204,311 55.0

Gross margin 176,786 42.5 166,906 45.0

Operating expenses:

Selling, general and administrative 64,500 15.5 62,774 16.9

Research and development 55,545 13.3 46,530 12.5

Amortization of intangible assets 15,374 3.7 15,011 4.0

Restructuring and other charges 2,248 0.6 1,749 0.5

Acquisition costs and other related expenses 2,236 0.5 2,541 0.8

Total operating expenses 139,903 33.6 128,605 34.7

Income from operations 36,883 8.9 38,301 10.3

Interest income 132 — 1,499 0.4

Interest expense (73) — — —

Other expense, net (1,827) (0.5) (1,785) (0.5)

Income before income taxes 35,115 8.4 38,015 10.2

Income tax provision 6,631 1.6 3,092 0.8

Net income $ 28,484 6.8 % $ 34,923 9.4 %

Total revenues increased $45.1 million, or 12.1%, to $416.3 million during the six months ended January 1, 2021, as compared to $371.2 million during the six months ended December 27, 2019.

The increase is primarily due to $37.0 million of additional organic revenues primarily related to integrated subsystems across radar and C4I applications, within land and naval platforms.

The increases in organic revenues were primarily driven by a ground radar program, LTAMDS, an airborne program and the Patriot program, which were partially offset by decreases in a classified missile program, AIDEWS and F16/SABR programs.

Total revenues also increased due to $8.1 million of additional acquired revenues from the APC and POC 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 42.5% for the six months ended January 1, 2021, a decrease of 250 basis points from the 45.0% gross margin achieved during the six months ended December 27, 2019.

The lower gross margin was primarily driven by $5.0 million of direct COVID expenses, as well as additional CRAD and program mix.

These costs were partially offset by operational efficiencies and lower inventory step-up amortization.

S ELLING , G ENERAL AND A DMINISTRATIVE

Selling, general and administrative expenses increased $1.7 million, or 2.7%, to $64.5 million during the six months ended January 1, 2021, as compared to $62.8 million during the six months ended December 27, 2019.

The increase was primarily related to $0.6 million of direct COVID related expenses, additional headcount from organic growth and our recent acquisitions.

Selling, general and administrative expenses as a percentage of revenues decreased to 15.5% for the six months ended January 1, 2021 from 16.9% for the six months ended December 27, 2019 due to improved operating leverage.

R ESEARCH AND D EVELOPMENT

Research and development expenses increased $9.0 million, or 19.3%, to $55.5 million during the six months ended January 1, 2021, as compared to $46.5 million during the six months ended December 27, 2019.

Research and development expenses accounted for 13.3% and 12.5% of our revenues for the six months ended January 1, 2021 and December 27, 2019, respectively.

The increase was primarily driven by the continued investment in internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and our trusted custom microelectronics business.

R ESTRUCTURING A ND O THER C HARGES

Restructuring and other charges were $2.2 million during the six months ended January 1, 2021, as compared to $1.7 million during the six months ended December 27, 2019.

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

These charges related to changing market and business conditions including talent shifts and resource redundancy resulting from the internal reorganization the Company completed in the first quarter.

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

Acquisition costs and other related expenses were $2.2 million during the six months ended January 1, 2021, as compared to $2.5 million during the six months ended December 27, 2019.

The expenses we incurred during the six months ended January 1, 2021 were related to the acquisition of POC which was completed on December 30, 2020.

The acquisition costs and other related expenses we incurred during the six months ended December 27, 2019 were related to the acquisition of APC as well as costs associated with our evaluation of other acquisition opportunities.

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 decreased to $0.1 million during the six months ended January 1, 2021, as compared to $1.5 million during the six months ended December 27, 2019.

This was driven by a lower rate of interest earned on cash on hand during the six months ended January 1, 2021 compared to the prior period.

I NTEREST E XPENSE

We incurred $0.1 million of interest expense during the six months ended January 1, 2021, related to the $160.0 million draw on our Revolver to support the POC acquisition, compared to no interest expense during the six months ended December 27, 2019.

O THER E XPENSE , N ET

Other expense, net of $1.8 million was consistent during the six months ended January 1, 2021 and December 27, 2019.

The six months ended January 1, 2021 included a $0.4 million loss on the sale of a cost-method investment and litigation and settlement expenses, partially offset by net foreign currency translation gains of $0.6 million.

The six months ended December 27, 2019 included net foreign currency translation losses of $0.2 million.

Both periods included $1.6 million of financing and registration fees.

I NCOME T AXES

We recorded an income tax provision of $6.6 million and $3.1 million on income before income taxes of $35.1 million and $38.0 million for the six months ended January 1, 2021 and December 27, 2019, respectively.

During the six months ended January 1, 2021 and December 27, 2019, we recognized a discrete tax benefit of $2.6 million and $6.5 million, respectively, related to excess tax benefits on stock-based compensation.

The effective tax rate for the six months ended January 1, 2021 and December 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 IRS.

L IQUIDITY AND C APITAL R ESOURCES

Our primary sources of liquidity come from existing cash and cash generated from operations, our Revolver and our ability to raise capital under our universal shelf registration statement.

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

We 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 near-term fixed commitments for cash expenditures consist primarily of payments under operating leases, inventory purchase commitments and purchase price payout to the employee shareholders of POC .

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

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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.

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

As of January 1, 2021, we had $160.0 million of 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 First Quarters Ended,

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

As of and For the Six Months Ended,

(In thousands) January 1, 2021 December 27, 2019

Net cash provided by operating activities $ 46,868 $ 56,376

Net cash used in investing activities $ (266,852) $ (117,421)

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 $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.

Net cash provided by (used in) financing activities $ 163,122 $ (14,934)

Net decrease in cash, cash equivalents and restricted cash $ (56,099) $ (75,895)

Cash, cash equivalents and restricted cash at end of period $ 170,739 $ 182,037

Our cash, cash equivalents and restricted cash decreased by $56.1 million from July 3, 2020 to January 1, 2021, primarily as the result of $243.6 million used for the acquisition of POC and $24.8 million invested in purchases of property and equipment, partially offset by $160.0 million of borrowings on our Revolver to facilitate the acquisition of POC and $46.9 million provided by operating activities.

Operating Activities

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.

During the six months ended January 1, 2021, we generated $46.9 million in cash from operating activities, a decrease of $9.5 million, as compared to the six months ended December 27, 2019.

This decrease was partially offset by higher deferred revenues and customer advances, and lower prepaid income taxes.

Investing Activities

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.

During the six months ended January 1, 2021, we invested $266.9 million, an increase of $149.4 million, as compared to the six months ended December 27, 2019.

The increase was driven by $243.6 million in cash used for the acquisition of POC and an additional $3.8 million invested in purchases of property and equipment, primarily related to our facilities, during the six months ended January 1, 2021.

Financing Activities

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.

During the six months ended January 1, 2021, we had $163.1 million in cash provided by financing activities as compared to $14.9 million used in financing activities during the six months ended December 27, 2019.

The $178.0 million increase was primarily due to $160.0 million of borrowings on our Revolver to facilitate the acquisition of POC and $14.9 million of fewer 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 six months ended December 27, 2019.

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 October 2, 2020:

The following is a schedule of our commitments and contractual obligations outstanding at January 1, 2021:

(In thousands) Total Less Than

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Operating leases 114,008 12,291 25,272 22,858 53,587

Deferred consideration 61,626 61,626 — — —

$ 307,655 $ 205,938 $ 25,272 $ 22,858 $ 53,587

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 $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.

The purchase commitments covered by these agreements are for less than one year and aggregated approximately $132.0 million at January 1, 2021.

As of January 1, 2021, we held $61.6 million of Restricted cash and recorded a Deferred consideration liability for a purchase price payout to the employee shareholders of POC.

This payout was made during the third quarter of fiscal 2021.

We have a liability at January 1, 2021 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.

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

First Quarters Ended

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

Second Quarters Ended Six Months Ended

(In thousands) January 1, 2021 December 27, 2019 January 1, 2021 December 27, 2019

Net income $ 12,686 $ 15,676 $ 28,484 $ 34,923

Other non-operating adjustments, net (3) (549) (185) (248)

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

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

Interest expense (income), net 13 (312) (59) (1,499)

Income tax provision 4,433 5,110 6,631 3,092

Depreciation 5,641 4,555 10,907 8,917

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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 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

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

Second Quarters Ended

(In thousands, except per share data) January 1, 2021 December 27, 2019

Net income and diluted earnings per share $ 12,686 $ 0.23 $ 15,676 $ 0.29

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

Six Months Ended

(In thousands, except per share data) January 1, 2021 December 27, 2019

Net income and earnings per share $ 28,484 $ 0.51 $ 34,923 $ 0.63

Other non-operating adjustments, net (1)

Amortization of intangible assets 15,374 15,011

Restructuring and other charges 2,248 1,749

Impairment of long-lived assets — —

Acquisition and financing costs 3,810 4,118

Fair value adjustments from purchase accounting — 600

Litigation and settlement expense, net 438 455

COVID related expenses 5,628 —

Stock-based and other non-cash compensation expense 14,806 12,415

Impact to income taxes (2)

(12,299) (15,293)

Adjusted income and adjusted earnings per share $ 58,304 $ 1.05 $ 53,730 $ 0.98

Diluted weighted-average shares outstanding 55,385 55,037

(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) 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.

5 unchanged sentences

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

First Quarters Ended

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

Second Quarters Ended Six Months Ended

(In thousands) January 1, 2021 December 27, 2019 January 1, 2021 December 27, 2019

Cash provided by operating activities $ 23,939 $ 32,066 $ 46,868 $ 56,376

6 unchanged sentences

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 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

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the second quarters and six months ended January 1, 2021 and December 27, 2019, respectively:

(In thousands) January 1, 2021 As a % of

Revenue December 27, 2019 As a % of

Revenue $ Change % Change

2 unchanged sentences

Total revenues $ 210,676 100 % $ 193,913 100 % $ 16,763 9 %

(In thousands) January 1, 2021 As a % of

Revenue December 27, 2019 As a % of

Revenue $ Change % Change

Organic revenue $ 407,244 98 % $ 370,274 100 % $ 36,970 10 %

Acquired revenue 9,053 2 % 943 — % 8,110 860 %

Total revenues $ 416,297 100 % $ 371,217 100 % $ 45,080 12 %

R ECENTLY I SSUED A CCOUNTING P RONOUNCEMENTS

3 unchanged sentences

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

There were no material changes in our exposure to market risk from July 3, 2020 to January 1, 2021.

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