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 commercial provider of secure sensor and mission processing subsystems. Optimized for customer and mission success, its solutions power a wide variety of critical defense and intelligence programs. The Company is pioneering a next-generation defense electronics business model specifically designed to meet the industry's current and emerging technology and business needs. The Company delivers affordable innovative solutions, rapid time-to-value and service and support to its defense prime contractor customers. The Company's products and solutions have been deployed in more than
300
programs with over
25
different defense prime contractors. Key programs include Aegis, Patriot, Surface Electronic Warfare Improvement Program ("SEWIP"), Gorgon Stare, F-35, Predator, Reaper and Paveway. The Company's organizational structure allows it to deliver capabilities that combine technology building blocks and deep domain expertise in the aerospace and defense sector.
|
|
B.
|
Summary of Significant Accounting Policies
|
B
ASIS
OF
P
RESENTATION
The accompanying consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 June 30, 2016 which are contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on August 16, 2016. The results for the three and six months ended
December 31, 2016
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.
U
SE
OF
E
STIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
R
ECLASSIFICATION
The Company has restated the income tax provision for the three and six months ended December 31, 2015 by
$247
and
$1,143
, respectively, for the adoption of FASB Accounting Standards Update (“ASU”) 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The adoption resulted in a decrease in the income tax provision in both periods associated with excess tax benefits, which previously was reflected as a change in additional paid in capital before the adoption of this ASU. The Company’s Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows have been updated to reflect this change.
The Company included costs related to the sustainment of its product portfolio as research and development expense, which was previously included as costs of revenues on the Consolidated Statements of Operations and Comprehensive Income. For comparative purposes, for the three and six months ended December 31, 2015, the Company has reclassified
$1,161
and
$1,934
, respectively, from costs of revenues to research and development expense.
B
USINESS
C
OMBINATIONS
The Company utilizes the acquisition method of accounting under FASB ASC 805,
Business Combinations
, (“FASB ASC 805”), for all transactions and events 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 FASB ASC 805 for the initial
recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in business combinations.
F
OREIGN
C
URRENCY
Local currencies are the functional currency for the Company’s subsidiaries in Switzerland, the United Kingdom, and Japan. 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. Deferred taxes are not recognized for translation-related temporary differences of foreign subsidiaries as their undistributed earnings are considered to be permanently reinvested. The related translation adjustments are reported in accumulated other comprehensive income in shareholders’ equity. Gains (losses) resulting from foreign currency transactions are included in other income (expense) in the Consolidated Statements of Operations and Comprehensive Income and were immaterial for all periods presented.
R
EVENUE
R
ECOGNITION
The Company relies upon FASB ASC 605,
Revenue Recognition,
to account for its revenue transactions. Revenue is recognized upon shipment provided that title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured, and customer acceptance criteria, if any, have been successfully demonstrated. Out-of-pocket expenses that are reimbursable by the customer are included in revenue and cost of revenue.
Certain contracts with customers require the Company to perform tests of its products prior to shipment to ensure their performance complies with the Company’s published product specifications and, on occasion, with additional customer-requested specifications. In these cases, the Company conducts such tests and, if they are completed successfully, includes a written confirmation with each order shipped. As a result, at the time of each product shipment, the Company believes that no further customer testing requirements exist and that there is no uncertainty of acceptance by its customer.
The Company uses FASB ASU No. 2009-13 (“FASB ASU 2009-13”),
Multiple-Deliverable Revenue Arrangements
. FASB ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence (“VSOE”) if available; (2) third-party evidence (“TPE”) if VSOE is not available; and (3) best estimated selling price (“BESP”), if neither VSOE nor TPE is available. Additionally, FASB ASU 2009-13 expands the disclosure requirements related to a vendor’s multiple-deliverable revenue arrangements.
The Company enters into multiple-deliverable arrangements that may include a combination of hardware components, related integration or other services. These arrangements generally do not include any performance-, cancellation-, termination- or refund-type provisions. Total revenue recognized under multiple-deliverable revenue arrangements was
23%
and
29%
of total revenues in the three and six months ended
December 31, 2016
, respectively. Total revenue recognized under multiple-deliverable revenue arrangements was
36%
and
42%
of total revenues in the three and six months ended December 31, 2015, respectively.
In accordance with the provisions of FASB ASU 2009-13, the Company allocates arrangement consideration to each deliverable in an arrangement based on its relative selling price. The Company generally expects that it will not be able to establish VSOE or TPE due to limited single element transactions and the nature of the markets in which the Company competes, and, as such, the Company typically determines its relative selling price using BESP. The objective of BESP is to determine the price at which the Company would transact if the product or service were sold by the Company on a standalone basis.
The Company's determination of BESP involves the consideration of several factors based on the specific facts and circumstances of each arrangement. Specifically, the Company considers the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar parts, the Company’s ongoing pricing strategy and policies (as evident from the price list established and updated by management on a regular basis), the value of any enhancements that have been built into the deliverable and the characteristics of the varying markets in which the deliverable is sold.
The Company analyzes the selling prices used in its allocation of arrangement consideration at a minimum on an annual basis. Selling prices will be analyzed on a more frequent basis if a significant change in the Company’s business necessitates a more timely analysis or if the Company experiences significant variances in its selling prices.
Each deliverable within the Company’s multiple-deliverable revenue arrangements is accounted for as a separate unit of accounting under the guidance of FASB ASU 2009-13 if both of the following criteria are met: the delivered item or items have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The Company's revenue arrangements generally do not include a general right of return relative to delivered products. The Company considers a deliverable to have standalone value if the item is sold separately by the Company or another vendor or if the item could be resold by the customer.
Deliverables not meeting the criteria for being a separate unit of accounting are combined with a deliverable that does meet that criterion. The appropriate allocation of arrangement consideration and recognition of revenue is then determined for the combined unit of accounting.
The Company also engages in long-term contracts for development, production and services activities which it accounts for consistent with FASB ASC 605-35,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts
, and other relevant revenue recognition accounting literature. The Company considers the nature of these contracts and the types of products and services provided when determining the proper accounting for a particular contract. Generally for fixed-price contracts, other than service-type contracts, revenue is recognized primarily under the percentage of completion method or, for certain short-term contracts, by the completed contract method. Revenue from service-type fixed-price contracts is recognized ratably over the contract period or by other appropriate input or output methods to measure service provided, and contract costs are expensed as incurred. The Company establishes billing terms at the time project deliverables and milestones are agreed. The risk to the Company on a fixed-price contract is that if estimates to complete the contract change from one period to the next, profit levels will vary from period to period. For time and materials contracts, revenue reflects the number of direct labor hours expended in the performance of a contract multiplied by the contract billing rate, as well as reimbursement of other billable direct costs. For all types of contracts, the Company recognizes anticipated contract losses as soon as they become known and estimable.
The Company also considers whether contracts should be combined or segmented in accordance with the applicable criteria under GAAP. The Company combines closely related contracts when all the applicable criteria under GAAP are met. The combination of two or more contracts requires judgment in determining whether the intent of entering into the contracts was effectively to enter into a single project, which should be combined to reflect an overall profit rate. Similarly, the Company may separate a project, which may consist of a single contract or group of contracts, with varying rates of profitability, only if the applicable criteria under GAAP are met. Judgment also is involved in determining whether a single contract or group of contracts may be segmented based on how the arrangement was negotiated and the performance criteria. The decision to combine a group of contracts or segment a contract could change the amount of revenue and gross profit recorded in a given period.
The use of contract accounting requires significant judgment relative to estimating total contract revenues and costs, including assumptions relative to the length of time to complete the contract, the nature and complexity of the work to be performed, anticipated increases in wages and prices for subcontractor services and materials, and the availability of subcontractor services and materials. The Company’s estimates are based upon the professional knowledge and experience of its engineers, program managers and other personnel, who review each long-term contract monthly to assess the contract’s schedule, performance, technical matters and estimated cost at completion. Changes in estimates are applied retrospectively and when adjustments in estimated contract costs are identified, such revisions may result in current period adjustments to earnings applicable to performance in prior periods.
Contract costs also may include estimated contract recoveries for matters such as contract changes and claims for unanticipated contract costs. The Company records revenue associated with these matters only when the amount of recovery can be estimated reliably and realization is probable.
The Company defines service revenues as revenue from activities that are not associated with the design, development, production, or delivery of tangible assets, software or specific capabilities sold. Examples of the Company's service revenues include: analyst services and systems engineering support, consulting, maintenance and other support, testing and installation. The Company combines its product and service revenues into a single class as service revenues are less than 10 percent of total revenues.
The Company does not provide its customers with rights of product return, other than those related to warranty provisions that permit repair or replacement of defective goods. The Company accrues for anticipated warranty costs upon product shipment. Revenues from product royalties are recognized upon invoice by the Company. Additionally, all revenues are reported net of government assessed taxes (e.g., sales taxes or value-added taxes).
W
EIGHTED
-A
VERAGE
S
HARES
Weighted-average shares were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Basic weighted-average shares outstanding
|
39,151
|
|
|
33,120
|
|
|
39,004
|
|
|
33,047
|
|
Effect of dilutive equity instruments
|
834
|
|
|
711
|
|
|
916
|
|
|
772
|
|
Diluted weighted-average shares outstanding
|
39,985
|
|
|
33,831
|
|
|
39,920
|
|
|
33,819
|
|
Equity instruments to purchase
9
and
6
shares of common stock were not included in the calculation of diluted net earnings per share for the three and six months ended
December 31, 2016
because the equity instruments were anti-dilutive. Equity
instruments to purchase
2
and
25
shares of common stock were not included in the calculation of diluted net earnings per share for the three and six months ended December 31, 2015 because the equity instruments were anti-dilutive.
C.
Acquisitions
C
ES
C
REATIVE
E
LECTRONIC
S
YSTEMS
A
QUISITION
On November 4, 2016, the Company and CES Creative Electronic Systems S.A. ("CES") entered into a Stock Purchase Agreement, pursuant to which, Mercury acquired CES for a total purchase price of
$39,123
, subject to net working capital and net debt adjustments. The acquisition and associated transaction expenses were funded with cash on hand. Based in Geneva, Switzerland, CES is a leading provider of embedded solutions for military and aerospace mission-critical computing applications. CES specializes in the design, development and manufacture of safety-certifiable product and subsystems solutions including: primary flight control units, flight test computers, mission computers, command and control processors, graphics and video processing and avionics-certified Ethernet and IO. CES has decades of experience designing subsystems deployed in applications certified up to the highest levels of design assurance. CES products and solutions are used on platforms such as aerial refueling tankers and multi-mission aircraft, as well as the several types of unmanned platforms.
The following table presents the net purchase price and the preliminary fair values of the assets and liabilities of CES:
|
|
|
|
|
|
Amounts
|
Consideration transferred
|
|
|
Cash paid at closing
|
$
|
39,123
|
|
Working capital adjustment
|
(359
|
)
|
Net purchase price
|
$
|
38,764
|
|
|
|
|
Estimated fair value of tangible assets acquired and liabilities assumed
|
|
|
Accounts receivable and cost in excess of billings
|
$
|
2,698
|
|
Inventory
|
8,072
|
|
Fixed assets
|
1,468
|
|
Current and non-current deferred tax assets
|
312
|
|
Other current and non-current assets
|
1,073
|
|
Current liabilities
|
(3,141
|
)
|
Non-current liabilities
|
(8,031
|
)
|
Non-current deferred tax liabilities
|
(1,169
|
)
|
Estimated fair value of net tangible assets acquired
|
1,282
|
|
Estimated fair value of identifiable intangible assets
|
15,134
|
|
Estimated goodwill
|
22,348
|
|
Estimated fair value of assets acquired
|
38,764
|
|
Net purchase price
|
$
|
38,764
|
|
The amounts above represent the preliminary fair value estimates as of
December 31, 2016
and are subject to subsequent adjustment as the Company obtains additional information during the measurement period. The preliminary identifiable intangible asset estimates include customer relationships of
$9,472
with a useful life of
9
years and developed technology of
$5,662
with a useful life of
7
years. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.
The goodwill of
$22,348
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. CES provides the Company with in mission computing, safety-critical avionics and platform management that are in demand from our customers. These new capabilities will also substantially expand Mercury’s addressable market into commercial aerospace, defense platform management, C4I and mission computing markets that are aligned to Mercury’s existing market focus. The acquisition is directly aligned with the Company's strategy of expanding its capabilities, services and offerings along the sensor processing chain. The goodwill from this acquisition is reported under the MCE reporting unit.
The revenues and net income from CES included in the Company's consolidated results for the three and six months ended
December 31, 2016
were
$3,956
and
$207
, respectively.
C
ARVE-
O
UT
B
USINESS
A
QUISITION
On March 23, 2016, the Company and Microsemi Corporation (“Microsemi”) entered into a Stock Purchase Agreement, pursuant to which, Microsemi agreed to sell all the membership interests in its custom microelectronics, RF and microwave solutions and embedded security operations (the “Carve-Out Business”) to the Company for
$300,000
in cash on a cash-free, debt-free basis, subject to a working capital adjustment. On May 2, 2016, the transaction closed and the Company acquired the Carve-Out Business. Pursuant to the terms of the Stock Purchase Agreement, all outstanding Carve-Out Business employee stock awards that were unvested at the closing were replaced by Mercury. The replacement stock awards granted were determined based on a conversion ratio provided in the Stock Purchase Agreement. Mercury funded the acquisition with a combination of a new
$200,000
bank term loan facility (see Note I) and cash on hand, which included net proceeds of approximately
$92,788
raised from an underwritten common stock public offering.
The following table presents the net purchase price and the preliminary fair values of the assets and liabilities of the Carve-Out Business:
|
|
|
|
|
|
Amounts
|
Consideration transferred
|
|
|
Cash paid at closing
|
$
|
300,000
|
|
Value allocated to replacement awards
|
407
|
|
Net purchase price
|
$
|
300,407
|
|
|
|
|
Estimated fair value of tangible assets acquired and liabilities assumed
|
|
|
Accounts receivable and cost in excess of billings
|
$
|
17,092
|
|
Inventory
|
25,477
|
|
Fixed assets
|
13,996
|
|
Other current and non-current assets
|
524
|
|
Current liabilities
|
(4,692
|
)
|
Non-current deferred tax liabilities
|
(25,449
|
)
|
Estimated fair value of net tangible assets acquired
|
26,948
|
|
Estimated fair value of identifiable intangible assets
|
102,800
|
|
Estimated goodwill
|
170,659
|
|
Estimated fair value of assets acquired
|
300,407
|
|
Net purchase price
|
$
|
300,407
|
|
The amounts above represent the preliminary fair value estimates as of
December 31, 2016
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 estimates include customer relationships of
$70,900
, completed technology of
$29,700
and backlog of
$2,200
. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.
The goodwill of
$170,659
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 Carve-Out Business provides the Company with additional capability and expertise related to embedded security custom microelectronics, and microwave and radio frequency technology. The acquisition is directly aligned with the Company's strategy of expanding its capabilities, services and offerings along the sensor processing chain. The goodwill from this acquisition is reported under the Carve-Out Business reporting unit. As of
December 31, 2016
, the Company had
$29,461
of goodwill related to the Carve-Out Business deductible for tax purposes.
The revenues and net loss from the Carve-Out Business included in the Company's consolidated results for the three months ended
December 31, 2016
were
$25,986
and
$(1,495)
, respectively. The revenues and net loss from the Carve-Out Business included in the Company's consolidated results for the six months ended
December 31, 2016
were
$50,296
and
$(3,913)
, respectively.
Pro Forma Financial Information
The following tables summarize the supplemental statements of operations information on an unaudited pro forma basis as if the Carve-Out Business acquisition had occurred on July 1, 2015:
|
|
|
|
|
|
|
|
|
|
Three Months ended December 31,
|
|
Six Months ended December 31,
|
|
2015
|
|
2015
|
Pro forma net revenues
|
$
|
85,393
|
|
|
$
|
168,496
|
|
Pro forma net income
|
$
|
5,041
|
|
|
$
|
7,080
|
|
Basic pro forma net earnings per share
|
$
|
0.13
|
|
|
$
|
0.18
|
|
Diluted pro forma net earnings per share
|
$
|
0.13
|
|
|
$
|
0.18
|
|
The unaudited pro forma results presented above are for illustrative purposes only for the applicable periods and do not purport to be indicative of the actual results which would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operations which may occur in the future.
L
EWIS
I
NNOVATIVE
T
ECHNOLOGIES
A
CQUISITION
On December 16, 2015, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Lewis Innovative Technologies, Inc. (“LIT”) and the holders of the equity interests of LIT. Pursuant to the Share Purchase Agreement, the Company completed its purchase of all of the equity interests in LIT, and LIT became a wholly-owned subsidiary of the Company. Based in Huntsville, Alabama, LIT provides advanced security technology and development services necessary for protecting systems critical to national security while meeting strict Department of Defense (“DoD”) program protection requirements.
The Company acquired LIT for a cash purchase price of
$9,756
. The Company funded the purchase with cash on hand. The purchase price was subject to a post-closing adjustment based on a determination of LIT's closing net working capital. In accordance with the Share Purchase Agreement,
$1,000
of the purchase price was placed into escrow to support the post-closing working capital adjustment and the sellers' indemnification obligations. The escrow is available for indemnification claims through June 16, 2017. The Company acquired LIT free of debt.
The fair value estimates of LIT's assets and liabilities have not changed since June 30, 2016. On December 15, 2016, the measurement period for LIT expired with no further adjustments required.
|
|
D.
|
Fair Value of Financial Instruments
|
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
115
|
|
|
$
|
—
|
|
Total
|
|
$
|
115
|
|
|
$
|
—
|
|
|
$
|
115
|
|
|
$
|
—
|
|
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 fair value of the Company’s certificates of deposit are determined through quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. The Company determined the face value of its long-term debt approximates fair value at
December 31, 2016
due to the recent issuance and stability of interest rates during this period. The Company has an immaterial cost-method investment. The cost-method investment, which is presented within other non-current assets in the accompanying consolidated balance sheets, does not have a readily determinable fair value, as such the Company recorded the investment at cost and will continue to evaluate the asset for impairment on a quarterly basis.
Inventory is stated at the lower of cost (first-in, first-out) or market 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, history, product mix and possible alternative uses. Inventory was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30, 2016
|
Raw materials
|
|
$
|
35,776
|
|
|
$
|
31,205
|
|
Work in process
|
|
19,536
|
|
|
15,967
|
|
Finished goods
|
|
14,776
|
|
|
11,112
|
|
Total
|
|
$
|
70,088
|
|
|
$
|
58,284
|
|
The
$11,804
increase in inventory was primarily due to the inclusion of inventory from CES. There are
no
amounts in inventory relating to contracts having production cycles longer than one year.
The following table sets forth the changes in the carrying amount of goodwill by reporting unit for the six months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCE
|
|
MDS
|
|
Carve-Out Business
|
|
Total
|
Balance at June 30, 2016
|
|
$
|
134,378
|
|
|
$
|
39,406
|
|
|
$
|
170,243
|
|
|
$
|
344,027
|
|
Goodwill adjustment for the Carve-Out Business acquisition
|
|
—
|
|
|
—
|
|
|
416
|
|
|
416
|
|
Goodwill arising from the CES acquisition
|
|
22,348
|
|
|
—
|
|
|
—
|
|
|
22,348
|
|
Balance at December 31, 2016
|
|
$
|
156,726
|
|
|
$
|
39,406
|
|
|
$
|
170,659
|
|
|
$
|
366,791
|
|
During the six months ended
December 31, 2016
, the Company recorded a
$416
adjustment to goodwill related to the acquisition of the Carve-Out Business. The adjustment was the result of changes in fair value estimates derived from additional information obtained during the measurement period.
In the six months ended
December 31, 2016
, there were no triggering events, as defined by FASB ASC 350,
Intangibles - Goodwill and Other
, which required an interim goodwill impairment test. The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year.
The following table presents the detail of activity for the Company’s restructuring plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance &
Related
|
|
Facilities
& Other
|
|
Total
|
Restructuring liability at June 30, 2016
|
|
$
|
190
|
|
|
$
|
736
|
|
|
$
|
926
|
|
Restructuring and other charges
|
|
214
|
|
|
152
|
|
|
366
|
|
Cash paid
|
|
(242
|
)
|
|
(529
|
)
|
|
(771
|
)
|
Restructuring liability at December 31, 2016
|
|
$
|
162
|
|
|
$
|
359
|
|
|
$
|
521
|
|
During the six months ended
December 31, 2016
, the Company incurred net restructuring and other charges of
$366
. Restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities.
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 Company recorded an income tax provision of
$1,779
and of
$1,433
on income from operations before income taxes of
$6,983
and
$6,473
for the three months ended
December 31, 2016
and
2015
, respectively. The Company recorded an income tax provision of
$520
and of
$1,801
on income from operations before income taxes of
$9,543
and
$9,697
for the six months ended
December 31, 2016
and
2015
, respectively. The effective tax rate for the three and six months ended
December 31, 2016
and 2015 differed from the federal statutory rate primarily due to federal research and development credits, domestic manufacturing deduction, excess tax benefits related to stock compensation, and state taxes.
No material changes in the Company’s unrecognized tax positions occurred during the six months ended
December 31, 2016
. The Company is currently under audit by the Internal Revenue Service for fiscal year 2013. There have been no significant changes to the status of this examination during the six months ended
December 31, 2016
. It is reasonably possible that within the next 12 months the Company’s unrecognized tax benefits, exclusive of interest, may decrease by up to
$757
at the conclusion of the audit. The Company expects that the decrease, if recognized, would not affect the effective tax rate.
T
ERM
L
OAN
A
ND
R
EVOLVING
C
REDIT
F
ACILITIES
On May 2, 2016, the Company and certain of its subsidiaries, as guarantors, entered into a Credit Agreement (the “Credit Agreement”) with a syndicate of commercial banks and Bank of America, N.A acting as the administrative agent. The Credit Agreement provides for a
$200,000
term loan facility ("Term Loan") and a
$100,000
revolving credit facility ("Revolver"). As of
December 31, 2016
, the Company’s outstanding balance on the Term Loan was
$197,500
, before
$6,790
of unamortized debt issuance costs. The stated interest rate of the Term Loan was
3.0%
as of
December 31, 2016
.
The Company was in compliance with all covenants and conditions under the Credit Agreement. There were no borrowings against the Revolver; however, there were outstanding letters of credit of
$5,624
as of
December 31, 2016
.
|
|
J.
|
Stock-Based Compensation
|
S
TOCK
O
PTION
P
LANS
The number of shares authorized for issuance under the Company’s 2005 Stock Incentive Plan, as amended and restated (the “2005 Plan”), is
15,252
shares at
December 31, 2016
. The 2005 Plan provides for the grant of non-qualified and incentive stock options, restricted stock, stock appreciation rights and deferred stock awards to employees and non-employees. All stock options are granted with an exercise price of not less than
100%
of the fair value of the Company’s common stock at the date of grant and the options generally have a term of
seven
years. There were
2,809
shares available for future grant under the 2005 Plan at
December 31, 2016
.
As part of the Company's ongoing annual equity grant program for employees, the Company grants performance-based restricted stock awards to certain executives pursuant to the 2005 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.
E
MPLOYEE
S
TOCK
P
URCHASE
P
LAN
The number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is
1,800
shares. Under the ESPP, rights are granted to purchase shares of common stock at
85%
of the lesser of the market value of such shares at either the beginning or the end of each six-month offering period. The ESPP permits employees to purchase common stock through payroll deductions, which may not exceed
10%
of an employee’s compensation as defined in the ESPP. There were
50
and
46
shares issued under the ESPP during the six months ended
December 31, 2016
and
2015
, respectively. Shares available for future purchase under the ESPP totaled
348
at
December 31, 2016
.
S
TOCK
O
PTION
AND
A
WARD
A
CTIVITY
The following table summarizes activity of the Company’s stock option plans since
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
Outstanding at June 30, 2016
|
|
258
|
|
|
$
|
13.34
|
|
|
1.06
|
Granted
|
|
—
|
|
|
—
|
|
|
|
Exercised
|
|
(126
|
)
|
|
13.27
|
|
|
|
Cancelled
|
|
—
|
|
|
—
|
|
|
|
Outstanding at December 31, 2016
|
|
132
|
|
|
$
|
13.41
|
|
|
0.82
|
The following table summarizes the status of the Company’s non-vested restricted stock awards since
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
Non-vested Restricted Stock Awards
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Outstanding at June 30, 2016
|
|
1,666
|
|
|
$
|
13.09
|
|
Granted
|
|
675
|
|
|
23.92
|
|
Vested
|
|
(702
|
)
|
|
11.41
|
|
Forfeited
|
|
(28
|
)
|
|
15.99
|
|
Outstanding at December 31, 2016
|
|
1,611
|
|
|
$
|
18.31
|
|
S
TOCK
-
BASED
C
OMPENSATION
E
XPENSE
The Company recognized the full expense of its share-based payment plans in the consolidated statements of operations for the six months ended
December 31, 2016
and
2015
in accordance with FASB ASC 718,
Compensation - Stock Compensation
. The Company had
$177
and
$153
of capitalized stock-based compensation expense on the Consolidated Balance Sheets as of
December 31, 2016
and 2015, respectively. Under the fair value recognition provisions of FASB 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of revenues
|
$
|
148
|
|
|
$
|
6
|
|
|
$
|
223
|
|
|
$
|
155
|
|
Selling, general and administrative
|
3,539
|
|
|
2,063
|
|
|
6,578
|
|
|
4,191
|
|
Research and development
|
406
|
|
|
323
|
|
|
924
|
|
|
748
|
|
Share-based compensation expense before tax
|
4,093
|
|
|
2,392
|
|
|
7,725
|
|
|
5,094
|
|
Income taxes
|
(1,575
|
)
|
|
(992
|
)
|
|
(2,964
|
)
|
|
(2,033
|
)
|
Share-based compensation expense, net of income taxes
|
$
|
2,518
|
|
|
$
|
1,400
|
|
|
$
|
4,761
|
|
|
$
|
3,061
|
|
D
EFINED
B
ENEFIT
P
LAN
With the acquisition of CES on November 4, 2016, the Company assumed a pension plan (the "Plan") for Swiss employees, mandated by Swiss law. The Plan meets the criteria for a defined benefit plan under U.S. GAAP. The Company recognizes a net asset or liability for this defined benefit pension plan equal to the difference between the projected benefit obligation of the Plan and the fair value of the Plan’s assets. 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 Plan.
At the acquisition date, the Company recorded a liability of approximately
$7,658
in other non-current liabilities representing the net funded status of the Plan. As described in Note C of the consolidated financial statements, the fair values of the assets acquired and liabilities assumed from CES are preliminary estimates, including the estimate of the net liability associated with the Plan. This estimate is subject to subsequent adjustment as the Company obtains additional information during the measurement period and any subsequent adjustments to this fair value estimate occurring during the measurement period will result in an adjustment to goodwill. The Company recognized net periodic benefit cost of
$69
associated with the Plan from the acquisition date of November 4, 2016 through December 31, 2016. Fiscal 2017 cash contributions to the Plan are expected to be
$325
.
|
|
L.
|
Operating Segment, Geographic Information and Significant Customers
|
Operating segments are defined as components of an enterprise evaluated regularly by the Company's chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company is comprised of one operating and reportable segment. The Company utilized the management approach for determining its operating segment in accordance with FASB ASC 280,
Segment Reporting
.
The geographic distribution of the Company’s revenues is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
Europe
|
|
Asia Pacific
|
|
Eliminations
|
|
Total
|
T
HREE
M
ONTHS
E
NDED DECEMBER
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Net revenues to unaffiliated customers
|
|
$
|
91,407
|
|
|
$
|
5,809
|
|
|
$
|
798
|
|
|
$
|
—
|
|
|
$
|
98,014
|
|
Inter-geographic revenues
|
|
1,893
|
|
|
—
|
|
|
—
|
|
|
(1,893
|
)
|
|
—
|
|
Net revenues
|
|
$
|
93,300
|
|
|
$
|
5,809
|
|
|
$
|
798
|
|
|
$
|
(1,893
|
)
|
|
$
|
98,014
|
|
T
HREE
M
ONTHS
E
NDED DECEMBER
31, 2015
|
|
|
|
|
|
|
|
|
|
|
Net revenues to unaffiliated customers
|
|
$
|
58,211
|
|
|
$
|
653
|
|
|
$
|
1,553
|
|
|
$
|
—
|
|
|
$
|
60,417
|
|
Inter-geographic revenues
|
|
1,949
|
|
|
371
|
|
|
—
|
|
|
(2,320
|
)
|
|
—
|
|
Net revenues
|
|
$
|
60,160
|
|
|
$
|
1,024
|
|
|
$
|
1,553
|
|
|
$
|
(2,320
|
)
|
|
$
|
60,417
|
|
SIX M
ONTHS
E
NDED DECEMBER
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Net revenues to unaffiliated customers
|
|
$
|
174,455
|
|
|
$
|
6,662
|
|
|
$
|
4,546
|
|
|
$
|
—
|
|
|
$
|
185,663
|
|
Inter-geographic revenues
|
|
5,180
|
|
|
15
|
|
|
—
|
|
|
(5,195
|
)
|
|
—
|
|
Net revenues
|
|
$
|
179,635
|
|
|
$
|
6,677
|
|
|
$
|
4,546
|
|
|
$
|
(5,195
|
)
|
|
$
|
185,663
|
|
SIX M
ONTHS
E
NDED DECEMBER
31, 2015
|
|
|
|
|
|
|
|
|
|
|
Net revenues to unaffiliated customers
|
|
$
|
115,573
|
|
|
$
|
1,111
|
|
|
$
|
2,142
|
|
|
$
|
—
|
|
|
$
|
118,826
|
|
Inter-geographic revenues
|
|
3,203
|
|
|
402
|
|
|
—
|
|
|
(3,605
|
)
|
|
—
|
|
Net revenues
|
|
$
|
118,776
|
|
|
$
|
1,513
|
|
|
$
|
2,142
|
|
|
$
|
(3,605
|
)
|
|
$
|
118,826
|
|
Foreign revenue is based on the country in which the Company’s legal subsidiary is domiciled.
The geographic distribution of the Company’s long-lived assets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
Europe
|
|
Asia Pacific
|
|
Eliminations
|
|
Total
|
December 31, 2016
|
|
$
|
37,863
|
|
|
$
|
1,496
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
39,379
|
|
June 30, 2016
|
|
$
|
28,187
|
|
|
$
|
127
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
28,337
|
|
Identifiable long-lived assets exclude goodwill and intangible assets.
Customers comprising 10% or more of the Company’s revenues for the periods shown below are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Raytheon Company
|
|
22
|
%
|
|
29
|
%
|
|
19
|
%
|
|
33
|
%
|
Lockheed Martin Corporation
|
|
13
|
%
|
|
26
|
%
|
|
19
|
%
|
|
21
|
%
|
Northrop Grumman Corporation
|
|
10
|
%
|
|
*
|
|
|
*
|
|
|
*
|
|
|
|
45
|
%
|
|
55
|
%
|
|
38
|
%
|
|
54
|
%
|
While the Company typically has customers from which it derives 10% or more of its revenue, the sales to each of these customers are spread across multiple programs and platforms. Programs comprising 10% or more of the Company’s revenues for the periods shown below are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
F-35
|
|
11
|
%
|
|
13
|
%
|
|
*
|
|
|
*
|
|
Aegis
|
|
*
|
|
|
*
|
|
|
10
|
%
|
|
*
|
|
SEWIP
|
|
*
|
|
|
16
|
%
|
|
*
|
|
|
12
|
%
|
Patriot
|
|
*
|
|
|
11
|
%
|
|
*
|
|
|
14
|
%
|
|
|
11
|
%
|
|
40
|
%
|
|
10
|
%
|
|
26
|
%
|
|
|
*
|
Indicates that the amount is less than 10% of the Company’s revenues for the respective period.
|
|
|
M.
|
Commitments and Contingencies
|
L
EGAL
C
LAIMS
The Company is subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of our business. Although legal proceedings are inherently unpredictable, the Company believes that it has valid defenses with respect to any matters currently pending against the Company and intends to defend itself vigorously. The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on the Company’s cash flows, results of operations, or financial position.
I
NDEMNIFICATION
O
BLIGATIONS
The Company’s standard product sales and license agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments the Company could be required to make under these indemnification provisions is, in some instances, unlimited.
P
URCHASE
C
OMMITMENTS
As of
December 31, 2016
, the Company has entered into non-cancelable purchase commitments for certain inventory components and services used in its normal operations. The purchase commitments covered by these agreements are for less than one year and aggregate to
$41,603
.
O
THER
As part of the Company's strategy for growth, the Company continues to explore acquisitions or strategic alliances. The associated acquisition costs incurred in the form of professional fees and services may be material to the future periods in which they occur, regardless of whether the acquisition is ultimately completed.
The Company may elect from time to time to purchase and subsequently retire shares of common stock in order to settle an individual employees’ tax liability associated with vesting of a restricted stock award or exercise of stock options. These transactions would be treated as a use of cash in financing activities in the Company's statement of cash flows.
On January 26, 2017, the Company entered into an underwriting agreement. Pursuant to the terms and conditions of the underwriting agreement, the Company agreed to sell
6,000
shares of its common stock, par value $0.01 per share, at a price to the public of $33.00 per share. Pursuant to the underwriting agreement, the Company granted the underwriters an option to purchase up to an additional
900
shares of its common stock within 30 days after the date of the underwriting agreement to cover the overallotment.
The offering was made pursuant to a shelf registration statement previously filed with the SEC on August 15, 2014. On February 1, 2017, the Company closed the offering, including the full over-allotment allocation, selling an aggregate of
6,900
shares of common stock for total proceeds of
$216,315
before expenses, but after underwriting fees of
$11,385
. The Company
intends to use the net proceeds for general corporate purposes, including but not limited to: the acquisition of other companies or businesses, the refinancing or repayment of debt, working capital, share repurchases and capital expenditures.
The Company has evaluated subsequent events from the date of the consolidated balance sheet through the date the consolidated financial statements were issued.