Mercury Systems, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended July 2, 2021 (52 weeks). The filing also reports fourth-quarter results; FY2020 was a 53-week year ended July 3, 2020, so annual comparisons are not fully like-for-like. Mercury supplies secure processing, microelectronics, avionics and other products and subsystems to aerospace and defense customers.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $924.0 million | $796.6 million | +16.0% |
| Gross margin | $385.2 million; 41.7% | $356.8 million; 44.8% | Margin down 310 basis points |
| Operating income | $81.0 million; 8.8% of revenue | $91.1 million; 11.4% | Down 11.0% |
| Net income | $62.0 million | $85.7 million | Down 27.6% |
| Diluted GAAP EPS | $1.12 | $1.56 | Down 28.2% |
| Adjusted EBITDA (non-GAAP) | $201.9 million | $176.2 million | +14.6% |
| Adjusted EPS (non-GAAP) | $2.42 | $2.30 | +5.2% |
| Operating cash flow | $97.2 million | $115.2 million | Down $18.0 million |
| Free cash flow (non-GAAP) | $51.6 million | $71.9 million | Down $20.2 million |
Annual revenue growth comprised $87.4 million of acquired revenue and $40.0 million of organic growth. Integrated subsystem revenue rose 35.0%; component revenue fell 22.5%. Higher C4I and radar revenue was partly offset by declines in electronic warfare and other sensor and effector applications.
Fourth quarter: Revenue was $250.8 million versus $217.4 million in Q4 FY2020 (+15.4%). Gross margin was $102.8 million (approximately 41.0% of revenue), versus $96.6 million (44.4%). Operating income was $22.4 million versus $26.4 million; net income was $17.9 million versus $27.2 million; diluted EPS was $0.32 versus $0.49.
Liquidity, debt and capital
- Cash and cash equivalents were $113.8 million at year-end, down from $226.8 million.
- Long-term debt was $200.0 million drawn on a $750.0 million revolving facility maturing September 2023. The company reported compliance with its covenants.
- Investing cash use was $416.9 million, including $372.8 million for acquisitions and $45.6 million for property and equipment. Financing cash provided was $206.2 million, mainly from revolver borrowings.
- Current assets were $643.1 million and current liabilities $150.8 million. Purchase commitments totaled $147.6 million, all due within one year; operating lease commitments totaled $100.0 million.
- Management said cash, operating cash flow, revolver availability and financing capacity were expected to cover anticipated requirements for at least the next 12 months.
Material changes and notable items
- Mercury acquired Physical Optics Corporation (POC) for a net purchase price of approximately $307.9 million and Pentek for approximately $64.9 million. Their reported FY2021 revenues were $76.4 million and $3.2 million, respectively; POC reported a pretax loss of $2.8 million for its included period. Acquisition-related results make periods less comparable.
- Gross margin declined chiefly due to POC-related customer-funded development work, program mix and $7.2 million of incremental COVID-related costs. FY2021 included $9.9 million in direct COVID-related expenses.
- Research and development expense was $113.5 million, up from $98.5 million. Restructuring and other charges rose to $9.2 million, including severance associated with approximately 90 positions and consulting costs for 1MPACT.
- Backlog was $909.6 million, up from $831.1 million; $530.0 million was expected to ship or be invoiced within 12 months. Backlog may be canceled or delayed.
- Raytheon Technologies, Lockheed Martin and the U.S. Navy represented 19%, 15% and 12% of FY2021 revenue, respectively. Defense-related sales accounted for approximately 98% of revenue.
Outlook, risks and contingencies
On August 3, 2021, management announced 1MPACT, a five-year initiative intended to achieve the company’s growth, margin-expansion and adjusted EBITDA potential. Its focus areas include organizational efficiency, procurement and supply chain, facilities, R&D investment, capital and asset efficiency, and common processes and systems. The filing provides no specific revenue, earnings or margin guidance. On August 2, 2021, Mercury initiated a further workforce reduction of approximately 90 employees and expected $9.4 million of charges in the following quarter.
Key risks include government funding changes or program cancellations, customer concentration, semiconductor and other supply constraints, competition and customer insourcing, execution of acquisitions and 1MPACT, fixed-price contract cost estimates, cybersecurity and export-control requirements, and COVID-related operational disruption. The company identified a former sales representative’s arbitration claim seeking approximately $9 million in direct damages, with treble damages requested on some claims; Mercury disputes the claims. Management said other pending matters were not expected to materially affect financial position, results or cash flows.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified fixed-price contract cost estimates and valuation of POC customer-relationship intangibles as critical audit matters. POC and Pentek, representing approximately 22% of consolidated assets and 9% of revenue, were excluded from management’s FY2021 internal-control assessment while integration continued.
Important facts for investors to verify
- Whether organic growth and acquisition contributions can be sustained, and whether 1MPACT produces measurable margin and cash-flow improvements.
- Whether lower gross margin persists, particularly as customer-funded development and acquired businesses affect product mix.
- Whether working-capital investment, component shortages and large purchase commitments constrain cash generation or deliveries.
- Whether customer concentration, defense-program funding, or cancellation and delay of orders affects backlog conversion and revenue.
- How POC and Pentek integration, purchase-price valuations, and the arbitration claim develop; review subsequent filings for updates.
- Reconcile reported GAAP results with adjusted EBITDA, adjusted EPS and free cash flow, which exclude specified costs that the company expects may recur.