What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-11 compared with 2021-02-09 · 136 added, 122 removed, 255 unchanged (50% of the section changed)

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

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

As of April 2, 2021, we had 2,359 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.

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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.

Mercury is strongly focused on 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.

We believe that 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 third quarter ended April 2, 2021 were $256.9 million, $38.5 million, $15.6 million, $0.28, $0.64, and $54.8 million, respectively.

Our consolidated revenues, acquired revenues, net income, diluted net earnings per share, adjusted EPS, and adjusted EBITDA for the nine months ended April 2, 2021 were $673.2 million, $47.5 million, $44.1 million, $0.80, $1.69, and $142.8 million, respectively.

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

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

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

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

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

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

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

We will continue to monitor the COVID pandemic and adapt our policies and programs as needed to protect the health, safety and livelihoods of our people.

RESULTS OF OPERATIONS:

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.

Results of operations for the third quarter ended April 2, 2021 includes a full period of results from the acquisition of Physical Optics Corporation ("POC").

Results of operations for the nine months ended April 2, 2021 include only results from the acquisition date for POC which was acquired on December 30, 2020.

Results of operations for the third quarter ended March 27, 2020 include full period results from the acquisition of American Panel Corporation ("APC").

Results of operations for t he nine months ended March 27, 2020 include only results from the acquisition date for APC which was acquired on September 23, 2019.

Accordingly, the periods presented below are not directly comparable.

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

The third quarter ended April 2, 2021 compared to the third quarter ended March 27, 2020

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

(In thousands) April 2, 2021 As a % of

Revenue March 27, 2020 As a % of

Net revenues $ 256,857 100.0 % $ 208,016 100.0 %

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Interest expense (549) (0.2) (58) —

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

Other (expense) income, net (200) (0.1) 2,186 1.0

Income before income taxes 20,997 8.2 28,928 13.9

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Net income $ 15,635 6.1 % $ 23,565 11.3 %

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).

Total revenues increased $48.8 million, or 23.5%, to $256.9 million during the third quarter ended April 2, 2021, as compared to $208.0 million during the third quarter ended March 27, 2020, 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 $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.

The increase in total revenue was primarily due to an additional $38.5 million and $10.3 million of acquired and organic revenues, respectively.

These increases were driven by higher demand for integrated subsystems which increased $69.3 million or 55.3% which was partially offset by decreases in components and modules and sub-assemblies of $16.4 million and $4.1 million, respectively.

The increase in total revenue was primarily from the C4I end application which increased $59.8 million and was partially offset by an $11.6 million decrease to electronic warfare ("EW").

The increase was across all platforms and, in particular, land which grew $28.3 million during the third quarter ended April 2, 2021.

The largest program increases were related to a classified radar program, as well as the E2D Hawkeye, Abrams and CPS programs.

There were no programs comprising 10% or more of our revenues for the third quarters ended April 2, 2021 or March 27, 2020.

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 42.1% 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.

Gross margin was 41.1% for the third quarter ended April 2, 2021, a decrease of 380 basis points from the 44.9% gross margin achieved during the third quarter ended March 27, 2020.

The lower gross margin was primarily driven by the acquisition of POC which contributed to the increased Customer Funded Research and Development (“CRAD”) of $12.7 million in the quarter, as well as incremental COVID related expenses of $2.3 million and program mix.

These gross margin decreases were partially offset by operational efficiencies and $0.6 million lower margin associated with fair value adjustments from purchase accounting for recent acquisitions.

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

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S ELLING , G ENERAL AND A DMINISTRATIVE

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.

Selling, general and administrative expenses increased $4.3 million, or 12.5%, to $38.3 million during the third quarter ended April 2, 2021, as compared to $34.0 million in the third quarter ended March 27, 2020.

The increase was primarily related to the recent acquisition of POC of $4.3 million.

Selling, general and administrative expenses decreased as a percentage of revenue to 14.9% for the third quarter ended April 2, 2021 from 16.3% for the third quarter ended March 27, 2020 due to improved operating leverage.

The acquisition of POC resulted in a 66 basis point reduction in selling, general and administrative expenses as a percentage of revenue for the third quarter ended April 2, 2021.

R ESEARCH AND D EVELOPMENT

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.

Research and development expenses increased $5.2 million, or 21.0%, to $30.2 million during the third quarter ended April 2, 2021, as compared to $25.0 million during the third quarter ended March 27, 2020.

The increase was primarily related to $4.3 million of additional employee related compensation from organic growth and the recent acquisition of POC.

The increase during the third quarter ended April 2, 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.

Research and development expenses accounted for 11.8% and 12.0% of our revenues for the third quarters ended April 2, 2021 and March 27, 2020, respectively.

The acquisition of POC resulted in a 140 basis point reduction in research and development expenses as a percentage of revenue for the third quarter ended April 2, 2021.

A MORTIZATION OF I NTANGIBLE A SSETS

Amortization of intangible assets increased $4.9 million to $12.7 million during the third quarter ended April 2, 2021, as compared to $7.8 million to the third quarter ended March 27, 2020, due to the acquisition of POC.

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.

We did not incur restructuring and other charges during the third quarter ended April 2, 2021, as compared to $0.1 million during the third quarter ended March 27, 2020.

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 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.

Acquisition costs and other related expenses were $2.7 million during the third quarter ended April 2, 2021, as compared to $0.1 million during the third quarter ended March 27, 2020.

The acquisition costs and other related expenses during the third quarter ended April 2, 2021 were primarily related to costs associated with our continuous evaluation of potential acquisition opportunities.

We expect to incur acquisition costs and other related expenses periodically in the future as we continue to seek acquisition opportunities to expand our technological capabilities, 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 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.

Interest income decreased to less than $0.1 million during the third quarter ended April 2, 2021, as compared to $0.5 million for the third quarter ended March 27, 2020.

This was driven by lower cash on hand during the third quarter ended April 2, 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 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.

We incurred $0.5 million of interest expense during the third quarter ended April 2, 2021, related to the $160.0 million balance on our Revolver to facilitate the acquisition of POC during the second quarter ended January 1, 2021, compared to $0.1 million interest expense during the third quarter ended March 27, 2020.

O THER ( E XPENSE) I NCOME , N ET

Other (expense) income, net decreased to $0.2 million of Other expense during the third quarter ended April 2, 2021, as compared to $2.2 million of Other income for the third quarter ended March 27, 2020.

The third quarter ended April 2, 2021 includes net foreign currency translation gains of $0.7 million, which were partially offset by $0.6 million of financing costs and $0.3 million of litigation and settlement costs.

The third quarter ended March 27, 2020 includes a $3.8 million gain on the sale of a cost-method investment, partially offset by foreign currency translation losses of $1.2 million.

I NCOME T AXES

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.

We recorded an income tax provision of $5.4 million and $5.4 million on income before income taxes of $21.0 million and $28.9 million for the third quarters ended April 2, 2021 and March 27, 2020, respectively.

During each of the third quarters ended April 2, 2021 and March 27, 2020, we recognized a discrete tax benefit of $0.2 million, related to excess tax benefits on stock-based compensation.

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

The effective tax rate for the third quarter ended April 2, 2021 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.

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

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

Nine months ended April 2, 2021 compared to the nine months ended March 27, 2020

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

(In thousands) April 2, 2021 As a % of

Revenue March 27, 2020 As a % of

Net revenues $ 673,154 100.0 % $ 579,233 100.0 %

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Interest expense (622) (0.1) (58) —

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

Other (expense) income, net (2,027) (0.3) 401 0.1

Income before income taxes 56,112 8.4 66,943 11.6

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Net income $ 44,119 6.6 % $ 58,488 10.1 %

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.

Total revenues increased $93.9 million, or 16.2%, to $673.2 million during the nine months ended April 2, 2021, as compared to $579.2 million during the nine months ended March 27, 2020.

The increase in total revenue was primarily due to an additional $47.3 million and $46.6 million of organic and acquired revenues, respectively.

These increases were driven by higher demand for integrated subsystems which increased $149.5 million or 47% which was partially offset by decreases in components and modules and sub-assemblies of $39.2 million and $16.4 million, respectively, during the nine months ended April 2, 2021.

The increase in total revenue was primarily from the radar and C4I end applications which increased $74.3 million and $65.1 million and were partially offset by decreases of $18.8 million and $18.3 million from other end applications and EW, respectively.

The increase was primarily across the land and naval platforms which grew $83.4 million and $13.8 million during the nine months ended April 2, 2021.

The largest program increases were related to a classified radar program, as well as the LTAMDS, Patriot and Abrams programs.

There were no programs comprising 10% or more of our revenues for the nine months ended April 2, 2021 or March 27, 2020.

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.

Gross margin was 42.0% for the nine months ended April 2, 2021, a decrease of 290 basis points from the 44.9% gross margin achieved during the nine months ended March 27, 2020.

The lower gross margin was primarily due to the acquisition of POC which contributed to the increase in CRAD of $17.5 million, as well as incremental COVID related expenses of $7.9 million and program mix.

These gross margin decreases were partially offset by operational efficiencies and $1.2 million lower margin associated with fair value adjustments from purchase accounting for recent acquisitions.

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.

Selling, general and administrative expenses increased $6.0 million, or 6.2%, to $102.8 million during the nine months ended April 2, 2021, as compared to $96.8 million during the nine months ended March 27, 2020.

The increase was primarily related to $7.9 million of additional employee related compensation from organic growth and our recent acquisitions as well as incremental COVID related expenses of $0.8 million.

Selling, general and administrative expenses as a percentage of revenues decreased to 15.3% for the nine months ended April 2, 2021 from 16.7% for the nine months ended March 27, 2020 due to improved operating leverage.

The acquisition of POC resulted in a 20 basis point reduction in selling, general and administrative expenses as a percentage of revenue for the nine months ended April 2, 2021.

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.

Research and development expenses increased $14.3 million, or 20.0%, to $85.8 million during the nine months ended April 2, 2021, as compared to $71.5 million during the nine months ended March 27, 2020.

The increase was primarily related to $10.9 million of additional employee related compensation from organic growth and our recent acquisition of POC.

The increase during the third quarter ended April 2, 2021 was primarily driven by the continued investment in internal R&D to promote future growth, including new opportunities in avionics missions computers, secure processing, radar modernization and our trusted custom microelectronics business.

Research and development expenses accounted for 12.7% and 12.3% of our revenues for the nine months ended April 2, 2021 and March 27, 2020, respectively.

The acquisition of POC resulted in a 60 basis point reduction in research and development expenses as a percentage of revenue for the nine months ended April 2, 2021.

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.

Restructuring and other charges were $2.2 million during the nine months ended April 2, 2021, as compared to $1.8 million during the nine months ended March 27, 2020.

Restructuring and other charges during the nine months ended April 2, 2021 primarily related to severance costs associated with the elimination of 42 positions, predominantly in the manufacturing, SG&A and R&D functions.

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.

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

A CQUISITION C OSTS AND O THER R ELATED E XPENSES

Acquisition costs and other related expenses were $2.2 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.

Acquisition costs and other related expenses were $5.0 million during the nine months ended April 2, 2021, as compared to $2.7 million during the nine months ended March 27, 2020.

The acquisition costs and other related expenses we incurred during the nine months ended April 2, 2021 were primarily related to our continuous evaluation of potential acquisition opportunities and the acquisition of POC which was completed on December 30, 2020 while those incurred during the nine months ended March 27, 2020 were related to the acquisition of APC as well as costs associated with our evaluation of potential acquisition opportunities.

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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.

Interest income decreased to $0.2 million during the nine months ended April 2, 2021, as compared to $2.0 million during the nine months ended March 27, 2020.

The decrease was driven by lower cash on hand during the nine months ended April 2, 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.

We incurred $0.6 million of interest expense during the nine months ended April 2, 2021, related to the $160.0 million draw on our Revolver to facilitate the acquisition of POC, compared to less than $0.1 million of interest expense during the nine months ended March 27, 2020.

O THER (E XPENSE) I NCOME , N ET

Other (expense) income, net decreased to $2.0 million of Other expense during the nine months ended April 2, 2021 as compared to $0.4 million of Other Income for the nine months ended March 27, 2020.

There were $2.3 million and $2.4 million of financial and registration fees, respectively, for the nine months ended April 2, 2021 and March 27, 2020.

The nine months ended April 2, 2021 includes $0.8 million in litigation and settlement expenses and a $0.4 million loss on the sale of a cost-method investment which were partially offset by net foreign currency translation gains of $1.3 million.

The nine months ended March 27, 2020 includes a $3.8 million gain on sale of a cost-method investment, partially offset by $0.8 million net foreign currency translation losses during the nine months ended March 27, 2020.

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.

We recorded an income tax provision of $12.0 million and $8.5 million on income before income taxes of $56.1 million and $66.9 million for the nine months ended April 2, 2021 and March 27, 2020, respectively.

During the nine months ended April 2, 2021 and March 27, 2020, we recognized a discrete tax benefit of $2.8 million and $6.6 million, respectively, related to excess tax benefits on stock-based compensation.

The effective tax rate for the nine months ended April 2, 2021 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.

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

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.

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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, 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 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, continuous evaluation of potential acquisition opportunities 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 January 1, 2021, we had $160.0 million of outstanding borrowings on the Revolver.

As of April 2, 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 Six Months Ended,

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

As of and For the Nine Months Ended,

(In thousands) April 2, 2021 March 27, 2020

Net cash provided by operating activities $ 70,053 $ 86,458

Net cash used in investing activities $ (338,433) $ (123,980)

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.

Net cash provided by financing activities $ 163,133 $ 186,713

Net (decrease) increase in cash and cash equivalents $ (104,895) $ 149,214

Cash and cash equivalents at end of period $ 121,943 $ 407,146

Our cash, cash equivalents and restricted cash decreased by $104.9 million from July 3, 2020 to April 2, 2021, primarily as the result of $305.3 million used for the acquisition of POC and $34.7 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 $70.1 million provided by operating activities.

Operating Activities

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.

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 and lower comparable net income.

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

During the nine months ended April 2, 2021, we generated $70.1 million in cash from operating activities, a decrease of $16.4 million, as compared to the nine months ended March 27, 2020.

The decrease was primarily the result of higher inventory purchases resulting from an increase in demand, especially for larger, more complex integrated subsystems and the advanced purchases of inventory intended to mitigate disruptions to the supply chain or unforeseen changes in customer behavior resulting from the COVID pandemic.

In addition, the decrease was also attributable to lower comparable net income.

These decreases were partially offset by higher sources of cash from deferred revenues and customer advances and prepaid income taxes as well as lower uses of cash from accounts receivable, unbilled receivables, and costs in excess of billings.

Investing Activities

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.

During the nine months ended April 2, 2021, we invested $338.4 million, an increase of $214.5 million, as compared to the nine months ended March 27, 2020.

The increase was driven by $305.3 million in cash used for the acquisition of POC and an additional $2.9 million invested in purchases of property and equipment, primarily related to our facilities, during the nine months ended April 2, 2021.

We invested $96.5 million in the acquisition of APC which was partially offset by $4.3 million of proceeds from the sale of an investment during the nine months ended March 27, 2020.

Financing Activities

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.

During the nine months ended April 2, 2021, we had $163.1 million in cash provided by financing activities, a decrease of $23.6 million as compared to the nine months ended March 27, 2020.

During the nine months ended April 2, 2021, we borrowed $160.0 million on our Revolver to facilitate the acquisition of POC.

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

Our decrease of $15.6 million in cash used during the nine months ended April 2, 2021 for 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 January 1, 2021:

The following is a schedule of our commitments and contractual obligations outstanding at April 2, 2021:

(In thousands) Total Less Than

2 unchanged sentences

Operating leases 99,242 12,279 24,636 20,986 41,341

Deferred consideration 61,626 61,626 — — —

$ 244,261 $ 157,298 $ 24,636 $ 20,986 $ 41,341

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 $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.

The purchase commitments covered by these agreements are for less than one year and aggregated approximately $145.0 million at April 2, 2021.

We have a liability at April 2, 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.

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

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

Second Quarters Ended Six Months Ended

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

Third Quarters Ended Nine Months Ended

(In thousands) April 2, 2021 March 27, 2020 April 2, 2021 March 27, 2020

Net income $ 15,635 $ 23,565 $ 44,119 $ 58,488

22 unchanged sentences

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

Third Quarters Ended

(In thousands, except per share data) April 2, 2021 March 27, 2020

Net income and diluted earnings per share $ 15,635 $ 0.28 $ 23,565 $ 0.43

12 unchanged sentences

Diluted weighted-average shares outstanding 55,526 55,127

(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.

(1) 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.

Six Months Ended

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

Nine Months Ended

(In thousands, except per share data) April 2, 2021 March 27, 2020

Net income and earnings per share $ 44,119 $ 0.80 $ 58,488 $ 1.06

12 unchanged sentences

Diluted weighted-average shares outstanding 55,434 55,071

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

5 unchanged sentences

This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies.

We expect to continue to incur expenditures similar to the free cash flow adjustment described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash.

We expect to continue to incur expenditures similar to the free

cash flow adjustment described above, and investors should not infer from our presentation of this non-GAAP financial measure that these expenditures reflect all of our obligations which require cash.

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

Second Quarters Ended Six Months Ended

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

Third Quarters Ended Nine Months Ended

(In thousands) April 2, 2021 March 27, 2020 April 2, 2021 March 27, 2020

Cash provided by operating activities $ 23,185 $ 30,082 $ 70,053 $ 86,458

1 unchanged sentence

Free cash flow $ 13,230 $ 19,213 $ 35,345 $ 54,670

Organic revenue and acquired revenue are non-GAAP measures for reporting financial performance of our business.

Organic revenue and acquired revenue are non-GAAP measures for reporting the financial performance of our business.

We believe this information provides investors with insight as to our ongoing business performance.

2 unchanged sentences

After the completion of four full fiscal quarters, acquired revenue is treated as organic for current and comparable historical periods.

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

The following tables reconcile the most directly comparable GAAP financial measure to the non-GAAP financial measure for the third quarters and nine months ended April 2, 2021 and March 27, 2020, respectively:

(In thousands) April 2, 2021 As a % of

Revenue March 27, 2020 As a % of

Revenue $ Change % Change

2 unchanged sentences

Total revenues $ 256,857 100 % $ 208,016 100 % $ 48,841 23 %

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

Revenue December 27, 2019 As a % of

(In thousands) April 2, 2021 As a % of

Revenue March 27, 2020 As a % of

Revenue $ Change % Change

7 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 January 1, 2021.

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