Business context and reporting period
Mercury Systems, Inc. filed this Form 10-K for the fiscal year ended June 30, 2015. It supplies commercially developed secure and sensor-processing subsystems, primarily for defense and intelligence applications, through Mercury Commercial Electronics (MCE) and Mercury Defense Systems (MDS). The filing also provides unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $234.8 million | $208.7 million |
| Gross margin | 46.9% | 45.4% |
| Operating income (loss) | $18.4 million | $(7.4) million |
| Continuing-operations income (loss) | $14.4 million | $(4.1) million |
| Net income (loss), including discontinued operations | $10.4 million | $(11.4) million |
| Diluted EPS from continuing operations | $0.44 | $(0.13) |
| Adjusted EBITDA (non-GAAP) | $44.4 million | $23.5 million |
| Cash from operating activities | $32.2 million | $14.2 million |
| Free cash flow (non-GAAP) | $26.2 million | $7.5 million |
Revenue grew about 12.5% year over year. MCE revenue rose 18% to $207.1 million; MDS revenue fell 20% to $27.4 million. Fiscal 2015 fourth-quarter revenue was $64.1 million, with $6.1 million income from continuing operations and $5.9 million net income.
At June 30, 2015, cash and cash equivalents were $77.6 million, working capital was $154.9 million, total assets were $390.0 million, and shareholders’ equity was $350.1 million. No borrowings were outstanding on the revolving credit facility; borrowing capacity was $151.5 million, with $3.8 million in letters of credit. The company reported compliance with its credit covenants.
Material changes versus the prior comparable period
- Profitability improved substantially, reflecting higher revenue, a more favorable product mix and lower SG&A and R&D expenses. Gross margin increased 1.5 percentage points.
- Defense revenue increased, led by F-35, Patriot and SEWIP; declines in Aegis and Gorgon Stare partly offset the growth. International revenue declined to $45.3 million from $51.3 million.
- Bookings were $268.6 million, a 1.14 book-to-bill ratio. Backlog increased to $208.0 million from $174.1 million; $166.5 million was expected to ship or be invoiced within 12 months.
- Cash from operations increased by $18.0 million, and year-end cash increased by $30.3 million.
- The company completed the sale of its former Mercury Intelligence Systems (MIS) segment on January 23, 2015. FY2015 discontinued operations included a $2.3 million goodwill impairment and an $0.9 million loss on disposal.
Outlook, commentary, risks and unusual items
Management said acquisition integration activities were complete and anticipated no further restructuring after June 30, 2015. It expected approximately $16 million of annualized savings from the integration plan. It provided no quantified company revenue or earnings guidance in the supplied filing text. Management described potential growth from defense electronics, ISR, electronic warfare and missile-defense programs, while noting continuing uncertainty around government budgets and procurement.
- Restructuring and other charges were $3.2 million in FY2015. The company noted it could incur nominal periodic charges through FY2017 if it cannot sublease unoccupied headquarters space.
- Customer and program concentration is significant: Raytheon represented 37% and Lockheed Martin 20% of FY2015 revenue; Patriot represented 18%, F-35 16% and Aegis 12%.
- Key risks include defense appropriations, sequestration and program delays or cancellations; reliance on a small number of customers and radar programs; competition and technology changes; fixed-price project cost overruns; and dependence on sole-source components and primarily one contract manufacturer.
- Non-GAAP adjusted EBITDA excludes restructuring, stock compensation, amortization and other costs; the filing cautions that similar costs may recur. Legal matters in the ordinary course were not expected by management to materially affect results, cash flows or financial position. Certain product agreements carry potentially unlimited intellectual-property indemnification obligations.
Important facts for investors to verify
- Whether bookings and backlog convert to revenue on schedule; backlog orders may be canceled or delayed.
- Whether Patriot, F-35 and SEWIP growth continues and whether customer and program concentration changes.
- Whether the expected integration savings are achieved without impairing engineering capacity, product delivery or future growth.
- Whether operating cash flow remains strong as receivables, inventory and other working-capital needs fluctuate.
- How the company’s reported GAAP results compare with adjusted EBITDA and free cash flow, including the recurring nature of excluded costs.