Business context and reporting period
Mercury Systems, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2015, its fiscal 2015 third quarter. The company supplies secure and sensor-processing subsystems primarily for defense and intelligence applications. Its continuing operations comprise Mercury Commercial Electronics (MCE) and Mercury Defense Systems (MDS); the Mercury Intelligence Systems (MIS) business was sold on January 23, 2015, and is reported as discontinued operations.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the corresponding prior-year period.
| Metric | Three months ended March 31, 2015 | Nine months ended March 31, 2015 |
|---|---|---|
| Revenue | $59.6, up 12% | $170.7, up 10% |
| Gross margin | 46.9%, versus 45.7% | 46.2%, versus 45.3% |
| Operating income (loss) | $6.2, versus $(1.4) | $10.4, versus $(7.1) |
| Income from continuing operations | $4.7, versus $(0.3) | $8.3, versus $(3.4) |
| Net income (loss) | $3.7, versus $(0.6) | $4.4, versus $(3.9) |
| Diluted earnings (loss) per share | $0.11, versus $(0.02) | $0.13, versus $(0.13) |
| Adjusted EBITDA (non-GAAP) | $11.5, versus $7.8 | $30.2, versus $16.3 |
Revenue growth was led by MCE, up 23% in the quarter and 19% for the nine-month period. MDS revenue declined 24% and 33%, respectively, primarily due to lower Gorgon Stare program revenue. Management attributed stronger gross margins mainly to product mix and higher revenue from MCE digital-processing products and programs.
Cash, liquidity and financial position
- Nine-month operating cash flow was $19.5 million, compared with $11.7 million; capital expenditures were $3.5 million, yielding reported free cash flow (non-GAAP) of $16.1 million, versus $6.7 million.
- Cash and cash equivalents were $66.5 million at March 31, 2015, up from $47.3 million at June 30, 2014. Working-capital movements included increased receivables and inventory, which used cash.
- No borrowings were outstanding under the credit facility. Available borrowing capacity was $126.9 million, with $3.9 million in letters of credit outstanding; the company reported compliance with covenants.
- Total liabilities were $48.6 million. The filing reports $63,000 in capital lease obligations and other, and no material outstanding bank debt. Purchase commitments and operating leases totaled $61.8 million, including $43.7 million due within one year.
- Management expected existing cash, operating cash generation, and available credit to cover anticipated needs for at least the next 12 months.
Material changes, outlook and risks
- The MIS sale generated net proceeds of $0.9 million and a pre-tax disposal loss of $0.9 million. The nine-month discontinued-operations loss of $3.9 million also included a $2.3 million goodwill impairment.
- Management expected approximately $0.7 million of restructuring charges in fiscal 2015’s fourth quarter for further MCE resource consolidation and optimization. The acquisition-integration restructuring activities were otherwise described as completed.
- The filing provides no specific revenue or earnings guidance. Management cautioned that quarterly orders can fluctuate with customer delivery requirements and may not indicate future demand.
- Customer and program concentration is notable: Raytheon and Lockheed Martin represented 36% and 22% of nine-month revenue, respectively; Patriot and F-35 represented 19% and 13%. The company identifies defense-program funding and timing, customer order patterns, fixed-price contract costs, component shortages, production delays, competition, export controls, and acquisition or restructuring execution as risks.
- Other items to monitor include $2.3 million of liabilities for uncertain tax positions, an ongoing IRS audit for fiscal 2013, and potential exposure under certain intellectual-property indemnities that may be unlimited. Management said pending legal matters were not expected to materially affect results or financial condition.
Important facts for investors to verify
- Whether MCE’s program-driven growth and improved margins can continue, and whether MDS stabilizes as Gorgon Stare revenue changes.
- Whether cash conversion remains strong as receivables, inventory, and other working-capital requirements fluctuate.
- How customer and program concentration, defense funding, and delivery schedules affect future revenue.
- Whether the planned fourth-quarter restructuring charge and remaining facility obligations stay within management’s expectations.
- The final tax and indemnification outcomes related to the MIS divestiture and the company’s uncertain tax positions.