Mercury Systems, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended September 30, 2013. The company supplies commercial-off-the-shelf sensor and data-processing systems, software, and services for commercial, defense, and intelligence applications. It reported through Mercury Commercial Electronics (MCE) and combined Mercury Defense and Intelligence Systems (MDIS).
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $53.9 million | $49.4 million | Up 9% |
| Gross margin | $22.6 million; 41.9% | $20.4 million; 41.3% | Up 60 basis points |
| Operating loss | $4.0 million | $11.2 million | Loss narrowed |
| Net loss | $2.3 million; $0.07 per diluted share | $7.2 million; $0.24 per diluted share | Loss narrowed |
| Adjusted EBITDA | $3.6 million | $1.6 million | Up $2.0 million |
| Operating cash flow | $2.2 million | $(9.9) million | Improved $12.1 million |
| Free cash flow | $1.1 million | $(10.9) million | Improved |
Cash and cash equivalents were $40.1 million at September 30, 2013, versus $39.1 million at June 30, 2013. The company had no borrowings under its $200 million senior unsecured revolver, $4.3 million in outstanding letters of credit, and $43.1 million of borrowing capacity available. It reported compliance with credit-facility covenants. Total liabilities were $41.7 million and shareholders’ equity was $329.2 million.
Material changes and operating drivers
- MCE revenue increased 36% to $43.5 million, driven chiefly by Patriot, SEWIP, F-16, F-15, and B-1 Bomber activity, plus higher commercial shipments to a telecommunications customer.
- MDIS revenue fell 30% to $11.1 million, with lower Gorgon Stare and DRFM jammer activity and customer funding delays. Segment adjusted EBITDA declined to $1.4 million from $3.2 million; MCE adjusted EBITDA improved to $2.3 million from a $2.2 million loss.
- Management attributed the higher consolidated gross margin to a more favorable product mix, lower inventory provisions, and a prior-year $0.8 million purchase-accounting charge.
- Operating expenses declined to $26.5 million from $31.6 million, primarily because prior-year restructuring and acquisition-related costs were not repeated. Current-period restructuring was a $15,000 reversal.
- Operating cash generation improved, while working-capital movements included higher receivables and lower inventory. Capital expenditures were $1.1 million.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management said that cash, expected operating cash flow, available credit, and financing capabilities should meet anticipated cash requirements for at least the next 12 months. It cautioned that quarterly orders may not indicate future demand because customer delivery schedules vary.
Key risks cited include changes in defense funding, continuing resolutions or sequestration, customer funding delays, program timing and order patterns, competition and technology changes, fixed-price contract cost overruns, component shortages, production quality issues, and challenges realizing acquisition or restructuring benefits. The company also noted risks involving exports, taxes, and retaining key employees and customers.
Non-cancelable purchase commitments totaled $17.4 million, all due in less than one year; operating lease commitments totaled $24.7 million. Certain intellectual-property indemnification obligations may be unlimited. The company reported ordinary-course litigation and claims that it did not expect to materially affect its financial position, results, or cash flows. It had a $2.9 million liability for uncertain tax positions and expected $0.7 million of payments within 12 months. No material market-risk changes were reported. Disclosure controls were considered effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether defense-program funding and customer delays continue to weigh on MDIS revenue and profitability.
- Whether MCE’s growth drivers, including shipments of end-of-life telecommunications products, are sustainable.
- Whether improved operating cash flow persists as receivables, inventory, and other working-capital needs fluctuate.
- Available revolver capacity and covenant compliance; the $200 million facility size is not the same as the $43.1 million reported borrowing capacity.
- Customer concentration: Northrop Grumman, Raytheon, Lockheed Martin, and BAE Systems each represented at least 10% of quarterly revenue; together they accounted for 49%.
- Potential dilution and compensation costs: stock-based compensation was $3.0 million, and 2.3 million restricted-stock awards were non-vested at quarter-end.