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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
________________________________________________________________
FORM 10-Q
________________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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
ANDOVER, MA
 
01810
(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 Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
MRCY
The Nasdaq Stock Market (Nasdaq Global Select Market)
Shares of Common Stock outstanding as of April 30, 2019: 48,448,701 shares




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)
 
March 31,
2019
 
June 30,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
112,515

 
$
66,521

Accounts receivable, net of allowance for doubtful accounts of $822 and $359 at March 31, 2019 and June 30, 2018, respectively
114,806

 
104,040

Unbilled receivables and costs in excess of billings
55,941

 
39,774

Inventory
131,655

 
108,585

Prepaid income taxes

 
3,761

Prepaid expenses and other current assets
10,253

 
9,062

Total current assets
425,170

 
331,743

Property and equipment, net
55,857

 
50,980

Goodwill
543,515

 
497,442

Intangible assets, net
180,828

 
177,904

Other non-current assets
7,011

 
6,411

Total assets
$
1,212,381

 
$
1,064,480

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
35,220

 
$
21,323

Accrued expenses
20,342

 
16,386

Accrued compensation
27,500

 
21,375

Deferred revenues and customer advances
10,728

 
12,596

Total current liabilities
93,790

 
71,680

Deferred income taxes
11,811

 
13,635

Income taxes payable
2,880

 
998

Long-term debt
276,500

 
195,000

Other non-current liabilities
15,018

 
11,276

Total liabilities
399,999

 
292,589

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; 47,265,355 and 46,924,238 shares issued and outstanding at March 31, 2019 and June 30, 2018, respectively
473

 
469

Additional paid-in capital
599,238

 
590,163

Retained earnings
213,939

 
179,968

Accumulated other comprehensive (loss) income
(1,268
)
 
1,291

Total shareholders’ equity
812,382

 
771,891

Total liabilities and shareholders’ equity
$
1,212,381

 
$
1,064,480


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)
 
 
Three Months Ended 
 March 31,
 
Nine Months Ended 
 March 31,
 
 
2019
 
2018
 
2019
 
2018
Net revenues
 
$
174,636

 
$
116,336

 
$
477,781

 
$
340,317

Cost of revenues
 
100,789

 
63,570

 
271,464

 
182,717

Gross margin
 
73,847

 
52,766

 
206,317

 
157,600

Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
27,411

 
21,138

 
79,971

 
62,928

Research and development
 
17,439

 
15,021

 
48,579

 
43,950

Amortization of intangible assets
 
6,786

 
7,104

 
20,906

 
18,568

Restructuring and other charges
 
46

 
1,384

 
573

 
1,792

Acquisition costs and other related expenses
 
103

 
1,281

 
555

 
2,265

Total operating expenses
 
51,785

 
45,928

 
150,584

 
129,503

Income from operations
 
22,062

 
6,838

 
55,733

 
28,097

Interest income
 
205

 

 
342

 
14

Interest expense
 
(2,473
)
 
(999
)
 
(6,928
)
 
(1,101
)
Other (expense) income, net
 
(328
)
 
66

 
(2,207
)
 
(1,065
)
Income before income taxes
 
19,466

 
5,905

 
46,940

 
25,945

Tax provision (benefit)
 
5,357

 
2,209

 
12,969

 
(4,837
)
Net income
 
$
14,109

 
$
3,696

 
$
33,971

 
$
30,782

Basic net earnings per share
 
$
0.30

 
$
0.08

 
$
0.72

 
$
0.66

Diluted net earnings per share
 
$
0.29

 
$
0.08

 
$
0.71

 
$
0.65

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
47,258

 
46,844

 
47,164

 
46,685

Diluted
 
47,958

 
47,532

 
47,783

 
47,473

 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
Net income
 
$
14,109

 
$
3,696

 
$
33,971

 
$
30,782

Change in fair value of derivative instruments, net of tax
 
(2,147
)
 

 
(2,147
)
 

Foreign currency translation adjustments
 
(210
)
 
(457
)
 
(367
)
 
(513
)
Pension benefit plan, net of tax
 
(15
)
 
5

 
(45
)
 
45

Total other comprehensive loss, net of tax
 
(2,372
)
 
(452
)
 
(2,559
)
 
(468
)
Total comprehensive income
 
$
11,737

 
$
3,244

 
$
31,412

 
$
30,314

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 Three Months Ended March 31, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
Shares
 
Amount
 
Balance at December 31, 2018
47,249

 
$
472

 
$
594,670

 
$
199,830

 
$
1,104

 
$
796,076

Issuance of common stock under employee stock incentive plans
25

 
1

 

 

 

 
1

Retirement of common stock
(9
)
 

 
(501
)
 

 

 
(501
)
Stock-based compensation

 

 
5,069

 

 

 
5,069

Net income

 

 

 
14,109

 

 
14,109

Other comprehensive loss

 

 

 

 
(2,372
)
 
(2,372
)
Balance at March 31, 2019
47,265

 
$
473

 
$
599,238

 
$
213,939

 
$
(1,268
)
 
$
812,382

 
For the Three Months Ended March 31, 2018
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
Shares
 
Amount
 
Balance at December 31, 2017
46,834

 
$
468

 
$
581,534

 
$
166,171

 
$
1,058

 
$
749,231

Issuance of common stock under employee stock incentive plans
11

 
1

 

 

 

 
1

Retirement of common stock
(4
)
 
(1
)
 
(208
)
 

 

 
(209
)
Stock-based compensation

 

 
3,529

 

 

 
3,529

Net income

 

 

 
3,696

 

 
3,696

Other comprehensive loss

 

 

 

 
(452
)
 
(452
)
Balance at March 31, 2018
46,841

 
$
468

 
$
584,855

 
$
169,867

 
$
606

 
$
755,796

 
For the Nine Months Ended March 31, 2019
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
Shares
 
Amount
 
Balance at June 30, 2018
46,924

 
$
469

 
$
590,163

 
$
179,968

 
$
1,291

 
$
771,891

Issuance of common stock under employee stock incentive plans
439

 
5

 
(5
)
 

 

 

Issuance of common stock under employee stock purchase plan
51

 
1

 
1,676

 

 

 
1,677

Retirement of common stock
(149
)
 
(2
)
 
(7,432
)
 

 

 
(7,434
)
Stock-based compensation

 

 
14,836

 

 

 
14,836

Net income

 

 

 
33,971

 

 
33,971

Other comprehensive loss

 

 

 

 
(2,559
)
 
(2,559
)
Balance at March 31, 2019
47,265

 
$
473

 
$
599,238

 
$
213,939

 
$
(1,268
)
 
$
812,382

 
For the Nine Months Ended March 31, 2018
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
Shares
 
Amount
 
Balance at June 30, 2017
46,303

 
$
463

 
$
584,795

 
$
139,085

 
$
1,074

 
$
725,417

Issuance of common stock under employee stock incentive plans
816

 
8

 
(8
)
 

 

 

Issuance of common stock under employee stock purchase plan
39

 

 
2,049

 

 

 
2,049

Retirement of common stock
(317
)
 
(3
)
 
(15,115
)
 

 

 
(15,118
)
Stock-based compensation

 

 
13,134

 

 

 
13,134

Net income

 

 

 
30,782

 

 
30,782

Other comprehensive loss

 

 

 

 
(468
)
 
(468
)
Balance at March 31, 2018
46,841

 
$
468

 
$
584,855

 
$
169,867

 
$
606

 
$
755,796


The accompanying notes are an integral part of the consolidated financial statements.

5




MERCURY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended 
 March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
33,971

 
$
30,782

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
34,830

 
30,320

Stock-based compensation expense
14,836

 
13,045

Benefit for deferred income taxes
(1,054
)
 
(5,482
)
Other non-cash items
2,715

 
1,243

Changes in operating assets and liabilities, net of effects of businesses acquired:
 
 
 
Accounts receivable, unbilled receivables, and costs in excess of billings
(22,081
)
 
(19,827
)
Inventory
(13,770
)
 
(24,931
)
Prepaid income taxes
3,761

 
(1,060
)
Prepaid expenses and other current assets
(724
)
 
944

Other non-current assets
137

 
277

Accounts payable, accrued expenses, and accrued compensation
15,610

 
2,943

Deferred revenues and customer advances
(2,065
)
 
2,758

Income taxes payable
4,795

 
(11,286
)
Other non-current liabilities
587

 
(2,046
)
Net cash provided by operating activities
71,548

 
17,680

Cash flows from investing activities:
 
 
 
Acquisition of business, net of cash acquired
(81,529
)
 
(185,396
)
Purchases of property and equipment
(17,862
)
 
(11,067
)
Other investing activities

 
(375
)
Net cash used in investing activities
(99,391
)
 
(196,838
)
Cash flows from financing activities:
 
 
 
Proceeds from employee stock plans
1,677

 
2,049

Borrowings under credit facilities
81,500

 
210,000

Payments under credit facilities

 
(15,000
)
Payments for retirement of common stock
(7,434
)
 
(15,118
)
Payments of deferred financing and offering costs
(1,851
)
 

Net cash provided by financing activities
73,892

 
181,931

Effect of exchange rate changes on cash and cash equivalents
(55
)
 
(193
)
Net increase in cash and cash equivalents
45,994

 
2,580

Cash and cash equivalents at beginning of period
66,521

 
41,637

Cash and cash equivalents at end of period
$
112,515

 
$
44,217

Cash paid during the period for:
 
 
 
Interest
$
8,163

 
$
1,101

Income taxes
$
5,179

 
$
9,928

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 commercial provider of secure sensor and safety-critical mission processing subsystems. Optimized for customer and mission success, its solutions power a wide variety of critical aerospace, defense and intelligence programs. Headquartered in Andover, Massachusetts, it 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, Predator, F-35, Reaper, F-16 SABR, E2D Hawkeye, Paveway, Filthy Buzzard, PGK, ProVision, P1, AIDEWS, CDS, and WIN-T. 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
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 June 30, 2018 which are contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on August 16, 2018. The results for the three and nine months ended March 31, 2019 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.
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 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 income (loss) ("AOCI") in shareholders’ equity. Gains (losses) resulting from non-U.S. currency transactions are included in other income (expense), net in the Consolidated Statements of Operations and Comprehensive Income and were immaterial for all periods presented.

7



DERIVATIVES
The Company records the fair value of its derivative financial instruments in its condensed consolidated financial statements in other non-current assets, or other non-current liabilities depending on their net position, regardless of the purpose or intent for holding the derivative contract. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in shareholders’ equity as a component of other comprehensive income (loss) (“OCI”). Changes in the fair value of the cash flow hedge that qualifies for hedge accounting treatment is recorded in OCI and reclassified into earnings in the same line item on the Consolidated Statements of Operations and Comprehensive Income as the impact of the hedged transaction when the underlying contract matures and, for interest rate exposure derivatives, over the term of the corresponding debt instrument. Changes in the fair values of derivatives not qualifying for hedge accounting are reported in earnings as they occur. All derivatives for the Company qualified for hedge accounting as of March 31, 2019.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, (“ASC 606”), which was adopted on July 1, 2018, using the retrospective method. Revenue is recognized in accordance with the five step model set forth by ASC 606, which involves identification of the contract(s), identification of performance obligations in the contract, determination of the transaction price, allocation of the transaction price to the previously identified performance obligations, and revenue recognition as the performance obligations are satisfied. The adoption of ASC 606 did not have a material impact to the amount or timing of revenue recognition related to the Company's legacy accounting methods for contracts including ship and bill, multiple-deliverable, and contract accounting. Such adoption did not have a material impact, individually or in the aggregate, to any amounts in the Company's Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, Consolidated Statements of Shareholders’ Equity or Consolidated Statements of Cash Flows. Refer to Note L for disaggregation of revenue for the period.
During step one of the five step model, the Company considers whether contracts should be combined or segmented, and based on this assessment, the Company combines closely related contracts when all the applicable criteria 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 contract, which should be combined to reflect an overall profit rate. Similarly, the Company may separate an arrangement, which may consist of a single contract or group of contracts, with varying rates of profitability, only if the applicable criteria are met. Judgment also is involved in determining whether a single contract or group of contracts may be segmented based on how the arrangement and the related performance criteria were negotiated. 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.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. 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's contracts with customers generally do not include a right of return relative to delivered products. In certain cases, contracts are modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are accounted for as part of the existing contract. Certain contracts with customers have options for the customer to acquire additional goods or services. In most cases the pricing of these options are reflective of the standalone selling price of the good or service. These options do not provide the customer with a material right and are accounted for only when the customer exercises the option to purchase the additional goods or services. If the option on the customer contract was not indicative of the standalone selling price of the good or service, the material right would be accounted for as a separate performance obligation.
The Company is a leading provider of secure sensor and safety-critical mission processing subsystems. 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, i.e., if a good or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer. 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.
Once the Company identifies the performance obligations, the Company then determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. Variable consideration typically arises due to volume discounts, or other provisions that can either decrease or increase the transaction price. To the extent the

8



transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the method the Company expects to better predict the amount of consideration to which it will be entitled. The determination of the estimates for variable consideration require judgment, and are based on past history with similar contracts and anticipated performance. Further, variable consideration is only included in the determination of the transaction price if it is probable that a significant reversal in the amount of revenue recognized will not occur. There are no constraints on the variable consideration recorded.
For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation using the standalone selling price of each distinct good or service in the contract. Standalone selling prices of the Company’s goods and services are generally not directly observable. Accordingly, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company forecasts the expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service. The objective of the expected cost plus a margin approach 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 the expected cost plus a margin approach involves the consideration of several factors based on the specific facts and circumstances of each contract. 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, often based on 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 standalone selling prices used in its allocation of transaction price on contracts at least annually. Standalone selling prices will be analyzed on a more frequent basis if a significant change in the Company’s business necessitates a more frequent analysis or if the Company experiences significant variances in its selling prices.
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 74% and 76% of revenues for the three and nine months ended March 31, 2019, respectively. Contracts with distinct performance obligations recognized at a point in time, with or without an allocation of the transaction price, totaled 77% and 78% of revenues for the three and nine months ended March 31, 2018, respectively. Revenue is recognized at a point in time for these products and services (versus over time recognition) due to the following: (i) customers are only able to consume the benefits provided by the Company upon completion of the product or service; (ii) customers do not control the product or service prior to completion; and (iii) the Company does not have an enforceable right to payment at all times for performance completed to date. Accordingly, there is little judgment in determining when control of the good or service transfers to the customer, and revenue is generally recognized upon shipment (for goods) or completion (for services).
The Company 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. Revenue is recognized over time, due to the fact that: (i) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; and (ii) the Company’s performance creates an asset with no alternative use to the Company and the Company has an enforceable right to payment for performance completed to date. 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. These 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 ("T&M") contracts.
For long-term contracts, the Company typically leverages the input method, using a cost-to-cost measure of progress. The Company believes that this method represents the most faithful depiction of the Company’s performance because it directly measures value transferred to the customer. Contract estimates and estimates of any variable consideration are based on various assumptions to project the outcome of future events that may span several years. These assumptions include: labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer. The Company bears the risk of changes in estimates to complete on a fixed-price contract which may cause profit levels to vary from period to period. For cost reimburseable contracts, the Company is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. In the limited instances where the Company enters into T&M contracts, revenue recognized 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 direct billable costs. For T&M contracts, the Company elected to use a practical expedient permitted by ASC 606 whereby revenue is recognized in the amount for which the Company has a right to invoice the customer based on the control transferred to the customer. For all types of contracts, the Company recognizes anticipated contract losses as soon as they become known and estimable.

9



Accounting for long-term contracts 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 as well as availability for 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.
Total revenue recognized under long-term contracts over time was 26% and 24% of total revenues for the three and nine months ended March 31, 2019, respectively. Total revenue recognized under long-term contracts over time was 23% and 22% of total revenues for the three and nine months ended March 31, 2018, 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 12-36 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.
On long-term contracts, the portion of the payments retained by the customer is not considered a significant financing component because most contracts have a duration of less than one year and payment is received as progress is made. Many of the Company's long-term contracts have milestone payments, which align the payment schedule with the progress towards completion on the performance obligation. On some contracts, the Company may be entitled to receive an advance payment, which is not considered a significant financing component because it is used to facilitate inventory demands at the onset of a contract and to safeguard the Company from the failure of the other party to abide by some or all of their obligations under the contract.
All revenues are reported net of government assessed taxes (e.g., sales taxes or value-added taxes).
ACCOUNTS RECEIVABLE    
Accounts receivable, net, represents amounts that have been billed and are currently due from customers. The Company maintains an allowance for doubtful accounts 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, 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.
COSTS TO OBTAIN AND FULFILL A CONTRACT
The Company has elected to use a practical expedient available under ASC 606 whereby sales commissions are expensed as incurred for contracts where the amortization period would have been one year or less. The Company has not deferred sales commissions for contracts where the amortization period is greater than one year because such amounts that would qualify for deferral are not significant.
The Company has elected to treat shipping and handling activities performed after the customer has obtained control of the related goods as a fulfillment cost. Such costs are accrued for in conjunction with the recording of revenue for the goods and are classified as cost of revenues.
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

10



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 $55,941 and $39,774 as of March 31, 2019 and June 30, 2018, respectively. The contract asset balance increased due to growth in revenue recognized under long-term contracts over time during the nine months ended March 31, 2019. The contract liability balances were $11,572 and $13,425 as of March 31, 2019 and June 30, 2018, respectively. These balances remained consistent period over period.
Revenue recognized for the three and nine month period ended March 31, 2019 that was included in the contract liability balance at June 30, 2018 was $1,173 and $10,156, respectively.
REMAINING PERFORMANCE OBLIGATIONS
The Company has elected to use a practical expedient available under ASC 606 whereby contracts with original expected durations of one year or less are excluded from the remaining performance obligations, while these contracts are included within backlog. 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 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 March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $161,976. The Company expects to recognize approximately 58% 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:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2019
 
2018
 
2019
 
2018
Basic weighted-average shares outstanding
47,258

 
46,844

 
47,164

 
46,685

Effect of dilutive equity instruments
700

 
688

 
619

 
788

Diluted weighted-average shares outstanding
47,958

 
47,532

 
47,783

 
47,473


Equity instruments to purchase 11 and 244 shares of common stock were not included in the calculation of diluted net earnings per share for the three and nine months ended March 31, 2019, respectively, because the equity instruments were anti-dilutive. Equity instruments to purchase 33 and 302 shares of common stock were not included in the calculation of diluted net earnings per share for the three and nine months ended March 31, 2018, respectively, because the equity instruments were anti-dilutive.
C. Acquisitions
GECO AVIONICS AQUISITION
On January 29, 2019, the Company announced that it had acquired GECO Avionics, LLC ("GECO"). Based in Mesa, Arizona, GECO has over twenty years of experience designing and manufacturing affordable safety-critical avionics and mission computing solutions. The Company acquired GECO for an all cash purchase price of $36,500, which was funded through the revolving credit facility ("the Revolver").

11



The following table presents the net purchase price and the fair values of the assets and liabilities of GECO on a preliminary basis:
 
Amounts 
Consideration transferred
 

Cash paid at closing
$
36,500

Net purchase price
$
36,500

 
 

Estimated fair value of tangible assets acquired and liabilities assumed
 

       Accounts receivable
$
1,320

       Inventory
1,454

       Fixed assets
459

       Accounts payable
(217
)
       Accrued expenses
(239
)
Estimated fair value of net tangible assets acquired
2,777

Estimated fair value of identifiable intangible assets
10,900

Estimated goodwill
22,823

Estimated fair value of net assets acquired
36,500

Net purchase price
$
36,500


The amounts above represent the preliminary fair value estimates as of March 31, 2019 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 $5,500 with a useful life of 11 years, developed technology of $4,800 with a useful life of ten years and backlog of $600 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 goodwill of $22,823 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 Sensor and Mission Processing (“SMP”) reporting unit. Since GECO was a limited liability company, 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 March 31, 2019, the Company had $22,823 of goodwill deductible for tax purposes. The Company has not furnished pro forma information relating to GECO because such information is not material to the Company's financial results.
The revenues and loss before income taxes from GECO included in the Company's consolidated results for the three months ended March 31, 2019 were $2,477 and $333, respectively. The GECO results include expenses resulting from purchase accounting which include amortization of intangible assets and inventory step-up.
GERMANE SYSTEMS AQUISITION
On July 31, 2018, the Company announced that it had entered into a membership interest purchase agreement (the "Purchase Agreement") and acquired Germane Systems, LC (“Germane”) pursuant to the terms of the Purchase Agreement.
Based in Chantilly, Virginia, Germane is an industry leader in the design, development and manufacturing of rugged servers, computers and storage systems for command, control and intelligence (“C2I”) applications. The Company acquired Germane for an all cash purchase price of $45,000, subject to net working capital and net debt adjustments. The Company funded the acquisition with borrowings obtained under the Revolver. On December 12, 2018 the Company and former owners of Germane agreed to post-closing adjustments totaling $1,244, which decreased the Company's net purchase price.

12



The following table presents the net purchase price and the fair values of the assets and liabilities of Germane on a preliminary basis:
 
Amounts 
Consideration transferred
 

Cash paid at closing
$
47,166

Working capital and net debt adjustment
(1,244
)
Less cash acquired
(193
)
Net purchase price
$
45,729

 
 

Estimated fair value of tangible assets acquired and liabilities assumed
 

       Cash
$
193

       Accounts receivable
4,277

       Inventory
8,575

       Fixed assets
867

       Other current and non-current assets
596

       Accounts payable
(3,146
)
       Accrued expenses
(1,229
)
       Other current and non-current liabilities
(232
)
Estimated fair value of net tangible assets acquired
9,901

Estimated fair value of identifiable intangible assets
12,910

Estimated goodwill
23,111

Estimated fair value of net assets acquired
45,922

Less cash acquired
(193
)
Net purchase price
$
45,729


The amounts above represent the preliminary fair value estimates as of March 31, 2019 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 $8,500 with a useful life of 11 years, developed technology of $4,200 with a useful life of eight years and backlog of $210 with a useful life of one year. Any subsequent adjustments to these fair value estimates occurring during the measurement period will result in an adjustment to goodwill.
The goodwill of $23,111 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 Mercury Defense Systems (“MDS”) reporting unit. Since Germane was a limited liability company, 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 March 31, 2019, the Company had $22,402 of goodwill deductible for tax purposes. The Company has not furnished pro forma information relating to Germane because such information is not material to the Company's financial results.
The revenues and income before income taxes from Germane included in the Company's consolidated results for the three months ended March 31, 2019 were $12,707 and $1,159, respectively. The revenues and income before income taxes from Germane included in the Company's consolidated results for the nine months ended March 31, 2019 were $34,756 and $2,065, respectively. The Germane results include expenses resulting from purchase accounting which include amortization of intangible assets and inventory step-up.
THEMIS COMPUTER AQUISITION
On December 21, 2017, the Company and Thunderbird Merger Sub, Inc., a newly formed, wholly-owned subsidiary of the Company (the “Merger Sub”), entered into a Merger Agreement (the “Merger Agreement”) with Ceres Systems (“Ceres”), the holding company that owned Themis Computer (“Themis”, and together with Ceres, collectively the “Acquired Company”). On February 1, 2018, the Company closed the transaction and the Merger Sub merged with and into Ceres with Ceres continuing as the surviving company and a wholly-owned subsidiary of Mercury (the “Merger”). By operation of the Merger, the Company acquired both Ceres and its wholly-owned subsidiary, Themis.

13



Based in Fremont, California, Themis is a leading designer, manufacturer and integrator of commercial, SWaP-optimized rugged servers, computers and storage systems for U.S. and international markets. Under the terms of the Merger Agreement, the merger consideration (including payments with respect to outstanding stock options) consisted of an all cash purchase price of approximately $180,000. The merger consideration is subject to post-closing adjustments based on a determination of closing net working capital, transaction expenses and net debt (all as defined in the Merger Agreement). The Company funded the acquisition with borrowings obtained under the Revolver. On July 13, 2018, the Company and former owners of Ceres agreed to post-closing adjustments totaling $700, which decreased the Company's net purchase price.
The following table presents the net purchase price and the fair values of the assets and liabilities of Themis:
 
Amounts 
Consideration transferred
 
Cash paid at closing
$
187,089

Working capital and net debt adjustment
(1,274
)
Less cash acquired
(6,810
)
Net purchase price
$
179,005

 
 
Fair value of tangible assets acquired and liabilities assumed
 
       Cash
$
6,810

       Accounts receivable
7,713

       Inventory
7,333

       Fixed assets
479

       Other current and non-current assets
2,896

       Accounts payable
(3,287
)
       Accrued expenses
(5,319
)
       Other current and non-current liabilities
(1,210
)
       Deferred tax liability
(14,307
)
Fair value of net tangible assets acquired
1,108

Fair value of identifiable intangible assets
71,720

Goodwill
112,987

Fair value of net assets acquired
185,815

Less cash acquired
(6,810
)
Net purchase price
$
179,005


On February 1, 2019, the measurement period for Themis expired. The identifiable intangible asset estimates include customer relationships of $52,600 with a useful life of 12.5 years, developed technology of $17,150 with a useful life of 9.5 years and backlog of $1,970 with a useful life of one year.
The goodwill of $112,987 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 MDS reporting unit and is not tax deductible.

14



D.Fair Value of Financial Instruments
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2019: 
 
 
Fair Value Measurements
 
 
March 31, 2019
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
31,335

 
$

 
$
31,335

 
$

Total assets measured at fair value
 
$
31,335

 
$

 
$
31,335

 
$

Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap
 
$
2,945

 
$

 
$
2,945

 
$

Total liabilities measured at fair value
 
$
2,945

 
$

 
$
2,945

 
$

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 fair value of the interest rate swap is estimated using a discounted cash flow analysis based on the contractual terms of the derivative, leveraging observable inputs other than quoted prices, such as interest rates.
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:
 
 
March 31, 2019
 
June 30, 2018
Raw materials
 
$
82,858

 
$
61,748

Work in process
 
36,472

 
30,841

Finished goods
 
12,325

 
15,996

Total
 
$
131,655

 
$
108,585


F.
Goodwill
The following table sets forth the changes in the carrying amount of goodwill by reporting unit for the nine months ended March 31, 2019:
 
 
SMP
 
AMS
 
MDS
 
Total
Balance at June 30, 2018
 
$
119,560

 
$
218,147

 
$
159,735

 
$
497,442

Goodwill adjustment for the Themis acquisition
 

 

 
139

 
139

       Goodwill arising from the Germane acquisition
 

 

 
23,111

 
23,111

       Goodwill arising from the GECO acquisition
 
22,823

 

 

 
22,823

Balance at March 31, 2019
 
$
142,383

 
$
218,147

 
$
182,985

 
$
543,515


In the nine months ended March 31, 2019, there were no triggering events, as defined by 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.

15



G.
Restructuring
The following table presents the detail of activity for the Company’s restructuring plans:
 
 
Severance &
Related
 
Facilities
& Other
 
Total
Restructuring liability at June 30, 2018
 
$
1,801

 
$

 
$
1,801

Restructuring and other charges
 
549

 
80

 
629

Cash paid
 
(2,287
)
 
(24
)
 
(2,311
)
Reversals(*)
 

 
(56
)
 
(56
)
Restructuring liability at March 31, 2019
 
$
63

 
$

 
$
63


(*) Reversals result from the unused outplacement services and operating costs.
During the nine months ended March 31, 2019, the Company incurred net restructuring and other charges of $573. The increase was primarily driven by severance costs associated with the recently acquired Germane business. 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 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.
H.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted by the U.S. government. The Tax Act has impacted the U.S. statutory Federal tax rate that the Company will use going forward, which has been reduced to 21% from 35%. The Tax Act also introduced a modified territorial tax system and a minimum tax on certain foreign earnings for tax years beginning after December 31, 2017.
The Company recorded an income tax provision of $5,357 and $2,209 on income from operations before income taxes of $19,466 and $5,905 for the three months ended March 31, 2019 and 2018, respectively. The Company recorded an income tax provision of $12,969 and an income tax benefit of $4,837 on income from operations before income taxes of $46,940 and $25,945 for the nine months ended March 31, 2019 and 2018, respectively.
During the three months ended March 31, 2019 and 2018, the Company recognized a discrete tax benefit of $143 and $96, respectively, related to excess tax benefits on stock-based compensation. The effective tax rate for the three months ended March 31, 2019 and 2018 differed from the Federal statutory rate primarily due to Federal research and development credits, excess tax benefits related to stock compensation, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.
During the nine months ended March 31, 2019 and 2018, the Company recognized a discrete tax benefit of $1,858 and $7,675, respectively, related to excess tax benefits on stock-based compensation. The effective tax rate for the nine months ended March 31, 2019 and 2018 differed from the Federal statutory rate primarily due to Federal research and development credits, excess tax benefits related to stock compensation, a modified territorial tax system and a minimum tax on certain foreign earnings, and state taxes.
On August 21, 2018, the Internal Revenue Service ("IRS") provided initial guidance on amendments made to the limitation on executive compensation by the Tax Act. During the three months ended September 30, 2018, the Company recorded an adjustment to its unrecognized tax positions of $1,711 as a result of this guidance. During the three months ended March 31, 2019, there were no material changes made 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 March 31, 2019, the Company's outstanding balance of unamortized deferred financing costs was $6,049, which is being amortized to other income (expense), net on a straight line basis over the new term of the Revolver. The Company drew $45,000 and $36,500 from the Revolver to facilitate the acquisitions of Germane and GECO, respectively.

16



As of March 31, 2019, the Company was in compliance with all covenants and conditions under the Revolver and there were outstanding borrowings of $276,500 against the Revolver, resulting in interest expense of $2,473 and $6,928 for the three and nine months ended March 31, 2019, respectively. There were outstanding letters of credit of $2,300 as of March 31, 2019.
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 March 31, 2019 was a net liability of $6,271, which is recorded in other non-current liabilities on the Consolidated Balance Sheet. The Company recorded a net loss of $15 and $45 in AOCI during the three and nine months ended March 31, 2019, respectively. The Company recorded a net gain of $5 and $45 in AOCI during the three and nine months ended March 31, 2018, respectively. The Company recognized net periodic benefit costs of $197 and $599 associated with the Plan for the three and nine months ended March 31, 2019, respectively. The Company recognized net periodic benefit costs of $213 and $620 associated with the Plan for the three and nine months ended March 31, 2018, respectively. The Company's total expected employer contributions to the Plan during fiscal 2019 are $642.
K.
Stock-Based Compensation
STOCK INCENTIVE PLANS
The Board of Directors approved the Company’s 2018 Stock Incentive Plan (the “2018 Plan”) on July 23, 2018. The 2018 Plan became effective upon the approval of shareholders at the Company’s annual meeting held on October 24, 2018. The aggregate number of shares authorized for issuance under the 2018 Plan is 2,862 shares, with an additional 710 shares rolled into the 2018 Plan that were available for future grant under the Company’s 2005 Stock Incentive Plan, as amended and restated (the “2005 Plan”) at the time of shareholder approval of the 2018 Plan. The 2018 Plan replaced the 2005 Plan. The shares authorized for issuance under the 2018 Plan will be increased by any future cancellations, forfeitures or terminations (other than by exercise) of awards under the 2005 Plan. The foregoing does not affect any outstanding awards under the 2005 Plan, which remain in full force and effect in accordance with their terms. The 2018 Plan provides for the grant of non-qualified and incentive stock options, restricted stock, stock appreciation rights and deferred stock awards to employees and non-employees. All stock options are granted with an exercise price of not less than 100% of the fair value of the Company’s common stock at the date of grant and the options generally have a term of seven years. There were 3,528 shares available for future grant under the 2018 Plan at March 31, 2019.
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 include: (i) the achievement of internal performance targets only, and (ii) the achievement of internal performance targets in relation to a peer group of companies.
EMPLOYEE STOCK PURCHASE PLAN
The aggregate number of shares authorized for issuance under the Company’s 1997 Employee Stock Purchase Plan, as amended and restated (“ESPP”), is 1,800 shares. Under the ESPP, rights are granted to purchase shares of common stock at 85% of the lesser of the market value of such shares at either the beginning or the end of each six-month offering period. The ESPP permits employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee’s compensation as defined in the ESPP. There were 51 and 39 shares issued under the ESPP during the nine months ended March 31, 2019 and 2018, respectively. Shares available for future purchase under the ESPP totaled 169 at March 31, 2019.

17



STOCK OPTION AND AWARD ACTIVITY
The following table summarizes activity of the Company’s stock option plans since June 30, 2018:
 
 
Options Outstanding
 
 
Number of
Shares
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(Years)
Outstanding at June 30, 2018
 
4

 
$
5.52

 
3.13
Granted
 

 

 
 
Exercised
 

 

 
 
Canceled
 

 

 
 
Outstanding at March 31, 2019
 
4

 
$
5.52

 
2.38

The following table summarizes the status of the Company’s non-vested restricted stock awards since June 30, 2018:
 
 
Non-vested Restricted Stock Awards
 
 
Number of
Shares
 
Weighted Average
Grant Date
Fair Value
Outstanding at June 30, 2018
 
1,135

 
$
27.26

Granted
 
407

 
49.89

Vested
 
(439
)
 
49.76

Forfeited
 
(55
)
 
33.85

Outstanding at March 31, 2019
 
1,048

 
$
39.48


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 $317 of capitalized stock-based compensation expense on the Consolidated Balance Sheets for both March 31, 2019 and June 30, 2018. 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:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2019
 
2018
 
2019
 
2018
Cost of revenues
$
188

 
$
169

 
$
599

 
$
364

Selling, general and administrative
4,039

 
2,929

 
12,465

 
11,175

Research and development
646

 
499

 
1,772

 
1,506

Stock-based compensation expense before tax
4,873

 
3,597

 
14,836

 
13,045

Income taxes
(1,316
)
 
(1,187
)
 
(4,006
)
 
(4,305
)
Stock-based compensation expense, net of income taxes
$