Acquisitions

CES CREATIVE ELECTRONIC SYSTEMS AQUISITION

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.

CARVE-OUT BUSINESS AQUISITION

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.

LEWIS INNOVATIVE TECHNOLOGIES ACQUISITION

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.