Mercury Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2013. Amounts below are in millions of dollars unless otherwise noted. Mercury supplies sensor-processing, RF/microwave, defense, intelligence and data-analytics products and services. The company reorganized its reporting segments in fiscal Q3: Mercury Commercial Electronics (MCE) and Mercury Defense and Intelligence Systems (MDIS); prior periods were recast.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $54.1; down 19% from $67.0 | $153.4; down 17% from $184.1 |
| Gross margin | $22.6; 41.7%, versus 52.3% | $60.5; 39.5%, versus 57.5% |
| Operating income (loss) | $(1.5), versus $7.1 | $(19.7), versus $24.2 |
| Net income (loss) | $0.8, versus $5.2 | $(11.2), versus $16.9 |
| Diluted EPS | $0.03, versus $0.17 | $(0.37), versus $0.56 |
| Adjusted EBITDA | $5.2, versus $12.0 | $7.9, versus $39.6 |
| Cash from operating activities | $(6.7) for nine months, versus $27.7 generated | |
| Free cash flow | $(9.0) for nine months, versus $21.2 generated |
Cash and cash equivalents were $35.1 at March 31, down from $116.0 at June 30, 2012. Current assets were $142.3 and current liabilities $28.6 (working capital of $113.7). The company reported no borrowings on its $200 million senior unsecured revolver, $3.0 million of outstanding letters of credit and $54.6 million of remaining borrowing capacity. It was in compliance with its covenants.
Changes and key drivers
- Quarterly revenue fell in both MCE (18%) and MDIS (15%). MCE’s defense revenue declined, including lower Patriot and UAV program sales; MDIS cited customer funding delays. Micronetics contributed $10.4 million of quarterly revenue, partly offsetting weakness.
- For the nine months, MCE revenue fell 31%, mainly due to lower Joint Strike Fighter, Patriot and classified-program sales. MDIS revenue rose 74%, largely from acquired businesses, but did not offset MCE’s decline.
- Gross margin contracted amid lower revenue from higher-margin organic MCE computing products, changes in program mix, and lower-margin acquired businesses. Operating expenses included $5.4 million of restructuring charges and higher acquired-intangible amortization for the nine-month period.
- Micronetics was acquired on August 8, 2012, funded with cash on hand. Net purchase price was $68.2 million; its preliminary allocation included $46.5 million of goodwill and $18.5 million of identifiable intangibles. Mercury also repaid $6.6 million of Micronetics debt.
Outlook, risks and unusual items
- Management gave no specific revenue or earnings guidance. It said current cash, available credit, expected operating cash and financing capabilities should meet anticipated cash needs for at least the next 12 months.
- Management attributed near-term uncertainty to constrained U.S. defense spending, potential sequestration and continuing budget resolutions, and delays in customer funding. It reported delays in some programs but no known recent cancellations of key programs, and characterized delays as temporary.
- The fiscal 2013 restructuring plan eliminated 142 positions, primarily in engineering, manufacturing and administration, and included Micronetics integration actions. Nine-month charges were $5.4 million; future charges under this plan were expected to be immaterial. Approximately $64,000 of additional fiscal 2012 plan costs were expected in fiscal Q4.
- Goodwill impairment testing recorded no charge. However, management said a 1% increase in the discount rate for the ACS reporting unit would have caused it to fail the interim step-one test. Defense-budget uncertainty and assumptions underlying valuations remain relevant risks.
- Other disclosed risks include customer and program concentration, acquisition integration and realization of expected benefits, supply and production delays, fixed-price contract costs, and government procurement and export regulation. Lockheed Martin represented 26% of quarterly revenue; Aegis represented 15%.
- Purchase commitments totaled $19.0 million, largely due within one year; total listed contractual obligations were $32.6 million. Certain intellectual-property indemnification obligations may be unlimited. The DOJ matter involving former PDI employees was settled, with PDI making no admission of liability; Mercury reported indemnification for the matter.
Important facts for investors to verify
- Whether defense-budget and customer-funding delays persist, and how they affect MCE revenue, margins and cash generation.
- Whether Micronetics integration delivers expected benefits and how acquired-business margins compare with Mercury’s organic business.
- Cash conversion and working-capital trends, given nine-month operating cash outflow and the substantial decline in cash after acquisitions.
- Revolver availability and covenant headroom; the filing reports $54.6 million of borrowing capacity despite no revolver borrowings.
- Goodwill valuation assumptions and customer/program concentration, particularly the disclosed sensitivity of the ACS impairment test.