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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
________________________________________________________________

FORM 10-Q
________________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
COMMISSION FILE NUMBER: 0-23599
________________________________________________________________
MERCURY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________
Massachusetts 04-2741391
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
50 MINUTEMAN ROAD 01810
ANDOVERMA
(Address of principal executive offices) (Zip Code)
978-256-1300
(Registrant’s telephone number, including area code)
________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x  Accelerated filer ¨
Non-accelerated filer ¨  Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes      No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per shareMRCYThe Nasdaq Stock Market
Shares of Common Stock outstanding as of January 31, 2021 56,142,029 shares
1


MERCURY SYSTEMS, INC.
INDEX
 
  PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 6.

2


PART I. FINANCIAL INFORMATION
 
ITEM 1.     FINANCIAL STATEMENTS
MERCURY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
January 1, 2021July 3, 2020
Assets
Current assets:
Cash and cash equivalents$109,113 $226,838 
Restricted cash61,626  
Accounts receivable, net of allowance for credit losses of $1,495 and $1,451 at January 1, 2021 and July 3, 2020, respectively
120,852 120,438 
Unbilled receivables and costs in excess of billings119,346 90,289 
Inventory218,410 178,093 
Prepaid income taxes700 2,498 
Prepaid expenses and other current assets15,686 16,613 
Total current assets645,733 634,769 
Property and equipment, net125,397 87,737 
Goodwill783,302 614,076 
Intangible assets, net310,345 208,748 
Operating lease right-of-use assets79,125 60,613 
Other non-current assets5,266 4,777 
Total assets$1,949,168 $1,610,720 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable$48,175 $41,877 
Deferred consideration61,626  
Accrued expenses26,540 23,794 
Accrued compensation42,065 41,270 
Deferred revenues and customer advances33,447 18,974 
Total current liabilities211,853 125,915 
Deferred income taxes42,770 13,889 
Income taxes payable4,117 4,117 
Long-term debt160,000  
Operating lease liabilities84,335 66,981 
Other non-current liabilities15,462 15,034 
Total liabilities518,537 225,936 
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; 55,128,763 and 54,702,322 shares issued and outstanding at January 1, 2021 and July 3, 2020, respectively
551 547 
Additional paid-in capital1,092,723 1,074,667 
Retained earnings340,939 312,455 
Accumulated other comprehensive loss(3,582)(2,885)
Total shareholders’ equity1,430,631 1,384,784 
Total liabilities and shareholders’ equity$1,949,168 $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)
 Second Quarters EndedSix Months Ended
 January 1, 2021December 27, 2019January 1, 2021December 27, 2019
Net revenues$210,676 $193,913 $416,297 $371,217 
Cost of revenues122,009 105,407 239,511 204,311 
Gross margin88,667 88,506 176,786 166,906 
Operating expenses:
Selling, general and administrative31,596 32,804 64,500 62,774 
Research and development28,128 24,660 55,545 46,530 
Amortization of intangible assets7,643 7,992 15,374 15,011 
Restructuring and other charges951 1,101 2,248 1,749 
Acquisition costs and other related expenses2,236 1,124 2,236 2,541 
Total operating expenses70,554 67,681 139,903 128,605 
Income from operations18,113 20,825 36,883 38,301 
Interest income60 312 132 1,499 
Interest expense(73) (73) 
Other expense, net(981)(351)(1,827)(1,785)
Income before income taxes17,119 20,786 35,115 38,015 
Income tax provision4,433 5,110 6,631 3,092 
Net income$12,686 $15,676 $28,484 $34,923 
Basic net earnings per share$0.23 $0.29 $0.52 $0.64 
Diluted net earnings per share$0.23 $0.29 $0.51 $0.63 
Weighted-average shares outstanding:
Basic55,070 54,548 54,976 54,468 
Diluted55,434 55,001 55,385 55,037 
Comprehensive income:
Net income$12,686 $15,676 $28,484 $34,923 
Foreign currency translation adjustments(658)(192)(759)(117)
Pension benefit plan, net of tax31 8 62 15 
Total other comprehensive loss, net of tax(627)(184)(697)(102)
Total comprehensive income$12,059 $15,492 $27,787 $34,821 
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 Second Quarter Ended January 1, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
SharesAmount
Balance at October 2, 202055,045 $550 $1,082,044 $328,253 $(2,955)$1,407,892 
Issuance of common stock under employee stock incentive plans38 1 1 — — 2 
Issuance of common stock under employee stock purchase plan46 — 3,184 — — 3,184 
Stock-based compensation— — 7,494 — — 7,494 
Net income— — — 12,686 — 12,686 
Other comprehensive loss— — — — (627)(627)
Balance at January 1, 202155,129 $551 $1,092,723 $340,939 $(3,582)$1,430,631 

For the Second Quarter Ended December 27, 2019
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
SharesAmount
Balance at September 27, 201954,534 $545 $1,049,952 $245,990 $(1,209)$1,295,278 
Issuance of common stock under employee stock incentive plans29 —  — —  
Purchase and retirement of common stock(5)— (375)— — (375)
Stock-based compensation— — 6,661 — — 6,661 
Net income— — — 15,676 — 15,676 
Other comprehensive loss— — — — (184)(184)
Balance at December 27, 201954,558 $545 $1,056,238 $261,666 $(1,393)$1,317,056 

For the Six Months Ended January 1, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
SharesAmount
Balance at July 3, 202054,702 $547 $1,074,667 $312,455 $(2,885)$1,384,784 
Issuance of common stock under employee stock incentive plans382 4  — — 4 
Issuance of common stock under employee stock purchase plan46 — 3,184 — — 3,184 
Purchase and retirement of common stock(1)— (66)— — (66)
Stock-based compensation— — 14,938 — — 14,938 
Net income— — — 28,484 — 28,484 
Other comprehensive loss— — — — (697)(697)
Balance at January 1, 202155,129 $551 $1,092,723 $340,939 $(3,582)$1,430,631 

For the Six Months Ended December 27, 2019
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
SharesAmount
Balance at June 30, 201954,248 $542 $1,058,745 $226,743 $(1,291)$1,284,739 
Issuance of common stock under employee stock incentive plans491 5 (2)— — 3 
Purchase and retirement of common stock(181)(2)(14,935)— — (14,937)
Stock-based compensation— — 12,430 — — 12,430 
Net income— — — 34,923 — 34,923 
Other comprehensive loss— — — — (102)(102)
Balance at December 27, 201954,558 $545 $1,056,238 $261,666 $(1,393)$1,317,056 
The accompanying notes are an integral part of the consolidated financial statements.
5


MERCURY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months Ended
 January 1, 2021December 27, 2019
Cash flows from operating activities:
Net income$28,484 $34,923 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense26,281 23,928 
Stock-based compensation expense14,454 12,190 
(Benefit) provision for deferred income taxes(3,773)593 
Other non-cash items2,217 1,255 
Changes in operating assets and liabilities, net of effects of businesses acquired:
Accounts receivable, unbilled receivables, and costs in excess of billings(6,802)(13,512)
Inventory(29,121)(5,371)
Prepaid income taxes 1,809 (5,356)
Prepaid expenses and other current assets1,052 1,137 
Other non-current assets698 (63)
Accounts payable, accrued expenses, and accrued compensation(1,924)(425)
Deferred revenues and customer advances13,719 6,650 
Income taxes payable(131)(2,803)
Other non-current liabilities(95)3,230 
Net cash provided by operating activities46,868 56,376 
Cash flows from investing activities:
Acquisition of business, net of cash acquired(243,637)(96,502)
Purchases of property and equipment(24,753)(20,919)
Proceeds from sale of investment1,538  
Net cash used in investing activities(266,852)(117,421)
Cash flows from financing activities:
Proceeds from employee stock plans3,188 3 
Borrowings under credit facilities160,000  
Purchase and retirement of common stock(66)(14,937)
Net cash provided by (used in) financing activities163,122 (14,934)
Effect of exchange rate changes on cash, cash equivalents and restricted cash763 84 
Net decrease in cash, cash equivalents and restricted cash(56,099)(75,895)
Cash, cash equivalents and restricted cash at beginning of period226,838 257,932 
Cash, cash equivalents and restricted cash at end of period$170,739 $182,037 
Cash paid during the period for:
Interest$ $ 
Income taxes$7,942 $10,454 
Supplemental disclosures—non-cash activities:
Non-cash investing activity$427 $ 
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
BASIS OF PRESENTATION
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 second quarter and six months ended January 1, 2021 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 second quarter of fiscal 2021 are to the quarter ended January 1, 2021. There were 13-weeks during the second quarters ended January 1, 2021 and December 27, 2019, respectively. There were approximately 26-weeks during the six months ended January 1, 2021 and December 27, 2019, respectively.
USE OF ESTIMATES
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.
BUSINESS COMBINATIONS
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.
FOREIGN CURRENCY
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.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, (“ASC 606”). 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 61% and 62% of revenues for the second quarter and six months ended January 1, 2021, respectively. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 79% and 76% of revenues for the second quarter and six months ended December 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 39% and 38% of total revenues for the second quarter and six months ended January 1, 2021, respectively. Total revenue recognized under long-term contracts over time was 21% and 24% of total revenues for the second quarter and six months ended December 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.
8


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.
ACCOUNTS RECEIVABLE
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.
CONTRACT BALANCES    
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 $119,346 and $90,289 as of January 1, 2021 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 six months ended January 1, 2021. The contract liability balances were $33,887 and $19,892 as of January 1, 2021 and July 3, 2020, respectively. The increase was due to a greater number of long-term contracts with milestone billings across multiple programs.
Revenue recognized for the second quarter and six months ended January 1, 2021 that was included in the contract liability balance at July 3, 2020 was $4,336 and $13,366, respectively. Revenue recognized for the second quarter and six months ended December 27, 2019 that was included in the contract liability balance at June 30, 2019 was $2,898 and $8,274, respectively.
REMAINING PERFORMANCE OBLIGATIONS
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 January 1, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $410,275. The Company expects to recognize approximately 69% of its remaining performance obligations as revenue in the next 12 months and the balance thereafter.
WEIGHTED-AVERAGE SHARES
Weighted-average shares were calculated as follows:
Second Quarters EndedSix Months Ended
January 1, 2021December 27, 2019January 1, 2021December 27, 2019
Basic weighted-average shares outstanding55,070 54,548 54,976 54,468 
Effect of dilutive equity instruments364 453 409 569 
Diluted weighted-average shares outstanding55,434 55,001 55,385 55,037 
9


Equity instruments to purchase 114 and 2 shares of common stock were not included in the calculation of diluted net earnings per share for the second quarter and six months ended January 1, 2021, respectively, because the equity instruments were anti-dilutive. Equity instruments to purchase 419 and 297 shares of common stock were not included in the calculation of diluted net earnings per share for the second quarter and six months ended December 27, 2019, respectively, because the equity instruments were anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
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 No. 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 a material 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 a material impact to the Company's consolidated financial statements or related disclosures.
Effective October 3, 2020, the Company adopted SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses, which includes amendments to its rules and forms related to the disclosure of financial information regarding acquired or disposed businesses. The amendments are intended to improve the financial information about acquired or disposed businesses provided to investors, facilitate more timely access to capital, and reduce the complexity and costs of preparing disclosures. Among other changes, the amendments impact SEC rules relating to: the definition of “significant” subsidiaries, requirements to provide financial statements for “significant” acquisitions, and the formulation and usage of pro forma financial information. The final rule is applicable for fiscal years beginning after December 31, 2020, with early adoption permitted as long as all amendments are adopted in their entirety. The Company has early adopted this final rule in conjunction with our acquisition of Physical Optics Corporation ("POC") on December 30, 2020. This adoption did not have a material impact on the Company's consolidated financial statements or related disclosures.
10


C. Acquisitions
PHYSICAL OPTICS CORPORATION ACQUISITION
On December 7, 2020, the Company signed a definitive agreement to acquire POC for a purchase price of $310,000, subject to net working capital and net debt adjustments. On December 30, 2020, the transaction closed and the Company acquired POC. Based in Torrance, California, POC more than doubles the Company's global avionics business and expands its collective footprint in the platform and mission management market. The Company funded the acquisition through a combination of cash on hand and the Company's existing revolving credit facility (the "Revolver").
As of January 1, 2021, the Company held $61,626 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.
The following table presents the net purchase price and the fair values of the assets and liabilities of POC on a preliminary basis:
Amounts
Consideration transferred
Cash paid at closing$251,229 
Additional consideration to be transferred61,626 
Working capital and net debt adjustment(4,737)
Less cash acquired(2,855)
Net purchase price$305,263 
Estimated fair value of tangible assets acquired and liabilities assumed
Cash $2,855 
Accounts receivable21,632 
Inventory11,095 
Fixed assets23,615 
Other current and non-current assets23,397 
Accounts payable(3,777)
Accrued expenses(390)
Other current and non-current liabilities(56,659)
Estimated fair value of net tangible assets acquired21,768 
Estimated fair value of identifiable intangible assets117,470 
Estimated goodwill168,880 
Estimated fair value of net assets acquired308,118 
Less cash acquired(2,855)
Net purchase price$305,263 
The amounts above represent the preliminary fair value estimates as of January 1, 2021 and are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates. The preliminary identifiable intangible asset estimate includes customer relationships of $69,327 with a useful life of 11 years, completed technology of $40,055 with a useful life of 10 years and backlog of $8,088 with a useful life of two years. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.
The estimated goodwill of $168,880 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 and is not deductible for tax purposes. The goodwill from this acquisition is reported in the Mission reporting unit. The Company has not furnished pro forma information relating to POC because such information is not material to the Company’s financial results.
The acquisition had an immaterial impact to the Company’s results of operations for the second quarter and six months ended January 1, 2021, given the proximity of the acquisition date to quarter-end.
11


AMERICAN PANEL CORPORATION ACQUISITION
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 receivable3,726 
Inventory11,233 
Fixed assets690 
Other current and non-current assets3,494 
Accounts payable(1,554)
Accrued expenses(1,457)
Other current and non-current liabilities(5,852)
Fair value of net tangible assets acquired11,106 
Fair value of identifiable intangible assets33,200 
Goodwill53,022 
Fair value of net assets acquired97,328 
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 January 1, 2021, the Company had $49,744 of goodwill deductible for tax purposes.
D.Fair Value of Financial Instruments
During the second quarter and six months ended January 1, 2021, the Company received gross proceeds and recorded a loss on sale of a cost-method investment of $1,538 and $426, respectively. The loss on sale of investment is included within Other expense, net in the Consolidated Statements of Operations and Comprehensive Income for the second quarter and six months ended January 1, 2021. The fair value of the investment was based on a quoted price of identical instruments in an active market and was recorded at cost within Other non-current assets in the Consolidated Balance Sheet prior to its sale.
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 determined the carrying value of long-term debt approximated fair value due to variable interest rates charged on the borrowings, which reprice frequently.
12



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:
January 1, 2021July 3, 2020
Raw materials$138,266 $111,225 
Work in process59,220 49,647 
Finished goods20,924 17,221 
Total$218,410 $178,093 

The $40,317 increase in inventory was due to an increase in overall demand, especially for larger, more complex integrated subsystems, the acquisition of POC and the advanced purchases of inventory 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.
The following table sets forth the changes in the carrying amount of goodwill for the six months ended January 1, 2021:
Total
Balance at July 3, 2020$614,076 
Goodwill adjustment for the APC acquisition346 
Goodwill arising from the POC acquisition168,880 
Balance at January 1, 2021$783,302 
The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year.
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 six months ended January 1, 2021, the Company incurred net restructuring and other charges of $2,248 primarily related to severance costs associated with the elimination of 42 positions across 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.
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 charges2,248 
Cash paid(1,528)
Restructuring liability at January 1, 2021$1,317 

13


H.Income Taxes
The Company recorded an income tax provision of $4,433 and $5,110 on income before income taxes of $17,119 and $20,786 for the second quarters ended January 1, 2021 and December 27, 2019, respectively. The Company recorded an income tax provision of $6,631 and $3,092 on income before income taxes of $35,115 and $38,015 for the six months ended January 1, 2021 and December 27, 2019, respectively.
During the second quarters ended January 1, 2021 and December 27, 2019, the Company recognized a discrete tax benefit of $130 and $353, respectively, related to excess tax benefits on stock-based compensation. During the six months ended January 1, 2021 and December 27, 2019, the Company recognized a discrete tax benefit of $2,610 and $6,480, respectively, related to excess tax benefits on stock-based compensation.
The effective tax rate for the second quarters and 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.
During the second quarter ended January 1, 2021, there were no material changes to the Company's unrecognized tax positions.
I.Debt
REVOLVING CREDIT FACILITY
On September 28, 2018, the Company amended the Revolver to increase and extend the borrowing capacity to a $750,000, 5-year revolving credit line, with the maturity extended to September 28, 2023. As of January 1, 2021, the Company's outstanding balance of unamortized deferred financing costs was $3,697, 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. The Company drew $160,000 from the Revolver to facilitate the acquisition of POC.
As of January 1, 2021, the Company was in compliance with all covenants and conditions under the Revolver and there were outstanding borrowings of $160,000 against the Revolver, resulting in interest expense of $73 for both the second quarter and six months ended January 1, 2021. There were outstanding letters of credit of $799 as of January 1, 2021.
J.Employee Benefit Plan
PENSION PLAN
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.
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 January 1, 2021 was a net liability of $12,948, which is recorded in Other non-current liabilities on the Consolidated Balance Sheet. The Company recorded a net gain of $31 and $62 in AOCL during the second quarter and six months ended January 1, 2021. The Company recorded a net gain of $8 and $15 in AOCL during the second quarter and six months ended December 27, 2019. The Company recognized net periodic benefit costs of $420 and $833 associated with the Plan for the second quarter and six months ended January 1, 2021, respectively. The Company recognized net periodic benefit costs of $296 and $592 associated with the Plan for the second quarter and six months ended December 27, 2019, respectively. The Company's total expected employer contributions to the Plan during fiscal 2021 are $957.
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K.Stock-Based Compensation
STOCK INCENTIVE PLANS
At January 1, 2021, the aggregate number of shares authorized for issuance under the Company’s Amended and Restated 2018 Stock Incentive Plan (the “2018 Plan”) is 6,782 shares, including 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”) and 3,000 shares approved by the Company's Shareholders on October 28, 2020. 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. Stock options must be 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 4,669 shares available for future grant under the 2018 Plan at January 1, 2021.
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.
EMPLOYEE STOCK PURCHASE PLAN
At January 1, 2021, the aggregate number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is 2,300 shares, including 500 shares approved by the Company's Shareholders on October 28, 2020. 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 46 shares issued under the ESPP during the six months ended January 1, 2021. There were no shares issued under the ESPP during the six months ended December 27, 2019. Shares available for future purchase under the ESPP totaled 483 at January 1, 2021.
STOCK OPTION AND AWARD ACTIVITY
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, 20203 $5.52 1.12
Granted  
Exercised(1)5.52 
Canceled  
Outstanding at January 1, 20212 $5.52 0.62
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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, 2020957 $61.59 
Granted481 76.94 
Vested(381)52.44 
Forfeited(21)66.74 
Outstanding at January 1, 20211,036 $70.00 
STOCK-BASED COMPENSATION EXPENSE
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 $1,026 and $542 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for the periods ended January 1, 2021 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:
 Second Quarters EndedSix Months Ended
 January 1, 2021December 27, 2019January 1, 2021December 27, 2019
Cost of revenues$369 $200 $664 $341 
Selling, general and administrative5,619 5,384 11,295 10,027 
Research and development1,282 947 2,495 1,822 
Stock-based compensation expense before tax7,270 6,531 14,454 12,190 
Income taxes(1,890)(1,698)(3,758)(3,169)
Stock-based compensation expense, net of income taxes$5,380 $4,833 $10,696 $9,021 

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.
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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.EuropeAsia PacificEliminationsTotal
SECOND QUARTER ENDED JANUARY 1, 2021
Net revenues to unaffiliated customers$197,773 $12,812 $91 $— $210,676 
Inter-geographic revenues636 564  (1,200)— 
Net revenues$198,409 $13,376 $91 $(1,200)$210,676 
SECOND QUARTER ENDED DECEMBER 27, 2019
Net revenues to unaffiliated customers$181,381 $11,721 $811 $— $193,913 
Inter-geographic revenues654 817  (1,471)— 
Net revenues$182,035 $12,538 $811 $(1,471)$193,913 
SIX MONTHS ENDED JANUARY 1, 2021
Net revenues to unaffiliated customers$393,620 $22,475 $202 $— $416,297 
Inter-geographic revenues876 908  (1,784)— 
Net revenues$394,496 $23,383 $202