Mercury Systems, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the 13 weeks ended September 30, 2022; comparative quarter ended October 1, 2021. Although the request labels the period “2023 Q1,” this filing reports the quarter ended September 30, 2022. Mercury supplies processing technologies and systems to the aerospace and defense markets.
Financial performance
| Metric | Q1 FY2023 | Prior comparable quarter |
|---|---|---|
| Revenue | $227.6 million | $225.0 million |
| Gross margin | 34.3% | 39.3% |
| Operating loss | $7.2 million | $5.6 million |
| Net loss / diluted loss per share | $14.3 million / $0.26 | $7.1 million / $0.13 |
| Adjusted EBITDA (non-GAAP) | $31.2 million | $38.3 million |
| Adjusted EPS (non-GAAP) | $0.24 | $0.41 |
| Operating cash flow / free cash flow (non-GAAP) | $(66.0) million / $(73.4) million | $(2.0) million / $(7.4) million |
Revenue rose 1.1%, but included $11.8 million of acquired revenue from Atlanta Micro and Avalex; organic revenue declined 4% to $215.8 million. Gross margin fell 500 basis points, which management attributed mainly to program mix, award delays, supply constraints, and material and labor inflation. Net loss widened as interest expense rose to $4.5 million, primarily reflecting borrowings, and other expense increased to $3.6 million.
Balance sheet and liquidity
At September 30, 2022, cash was $52.0 million and long-term debt was $511.5 million, up from $451.5 million at July 1, 2022. The company had a $1.1 billion revolving credit facility maturing in February 2027 and reported compliance with its covenants. It borrowed $60.0 million during the quarter. A swap fixes the rate on $300 million of borrowings at 3.79%. Management said available cash, revolver capacity, operating cash generation, and financing capabilities should cover anticipated cash needs for at least 12 months.
Operating cash outflow reflected higher receivables and unbilled contract assets, inventory purchases, bonus payments, and other cash costs. Unbilled receivables and costs in excess of billings increased to $330.5 million from $303.4 million; the company linked this increase to award and billing delays and supply-chain constraints. Inventory increased to $287.6 million. Cash declined by $13.7 million to $52.0 million. Non-cancelable purchase commitments totaled $150.0 million, all due within one year.
Material changes, outlook, and risks
- Revenue growth was supported by acquisitions while organic revenue declined. C4I and modules and sub-assemblies increased, while integrated subsystems and several sensor and effector applications declined.
- Remaining performance obligations were $587.1 million; Mercury expected to recognize approximately 63% within 12 months. This is not a full-year revenue or earnings forecast.
- The filing provides no specific fiscal-year revenue, earnings, or margin guidance. Management cited supply-chain delays, long semiconductor lead times, delayed customer awards and billing, inflation, defense funding and order timing, and acquisition integration as risks.
- Restructuring charges were $1.5 million, mainly consulting costs for the 1MPACT initiative. Acquisition and related expenses were $2.5 million, including advisory fees associated with activist-investor engagements. Management expects some similar adjusted-measure exclusions to recur.
- Mercury terminated an initial interest-rate swap and received a $6.0 million cash settlement, classified in operating cash flows, then entered a replacement swap. Management said the Inflation Reduction Act provisions were expected to have an immaterial effect; it estimated approximately $40 million of fiscal 2023 cash impact from tax amortization of research and development costs.
- Legal matters include former sales representative claims seeking approximately $9 million in direct damages, with treble damages requested on some claims, and an environmental demand concerning alleged groundwater contamination; the company said its responsibility for the environmental matter was too early to determine. It did not expect pending matters overall to materially affect financial position, results, or cash flows.
Investor verification priorities
- Monitor conversion of unbilled receivables and contract assets into billings and cash, and whether operating cash flow improves.
- Check whether organic revenue, gross margin, and adjusted EBITDA recover, and assess acquisition contributions separately from organic performance.
- Review debt levels, interest costs, swap terms, revolver covenant headroom, and the company’s liquidity assumptions.
- Track customer award and supply-chain timing, particularly semiconductor availability, and the execution of the $150.0 million of near-term purchase commitments.
- Follow the ERA arbitration and environmental matter for developments that could change the company’s assessment of exposure.