Mercury Systems, Inc. — Fiscal 2021 First-Quarter 10-Q
Reporting period: 13 weeks ended October 2, 2020; comparable period ended September 27, 2019. Mercury supplies technology and subsystems to aerospace and defense customers. Results include a full quarter of American Panel Corporation (APC), acquired in September 2019, so the periods are not directly comparable.
Key financial results
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $205.6 million | $177.3 million | Up 16.0% |
| Gross margin | 42.9% | 44.2% | Down 130 basis points |
| Operating income | $18.8 million | $17.5 million | Up |
| Net income | $15.8 million | $19.2 million | Down |
| Diluted EPS | $0.29 | $0.35 | Down |
| Operating cash flow | $22.9 million | $24.3 million | Down |
| Capital expenditures | $11.0 million | $9.6 million | Up |
| Free cash flow (non-GAAP) | $12.0 million | $14.7 million | Down |
Cash and cash equivalents were $239.1 million at quarter-end, up from $226.8 million at July 3, 2020. The company had no borrowings under its $750 million revolving credit facility, which matures in September 2023; $0.9 million of letters of credit were outstanding. Current liabilities were $146.6 million and total liabilities were $245.3 million. The filing reports no material change in market-risk exposure.
Performance drivers and material changes
- Organic revenue increased $20.4 million, or 12%, and acquired revenue contributed $8.8 million, including a full quarter of APC results. Growth was driven mainly by integrated subsystems across radar, electronic warfare and C4I, particularly in land and naval applications. Revenue from integrated subsystems rose to $137.9 million from $88.6 million; modules and sub-assemblies and components declined.
- Gross margin fell primarily because of program mix, higher customer-funded R&D and $1.8 million of COVID-related costs; operational efficiencies partly offset the decline.
- SG&A increased 9.8% to $32.9 million but declined as a share of revenue to 16.0% from 16.9%. R&D rose 25.4% to $27.4 million, reflecting growth and investment in avionics, secure processing, radar modernization and custom microelectronics.
- Net income was lower despite higher revenue and operating income. The tax line changed from a $2.0 million benefit to a $2.2 million provision; discrete stock-compensation tax benefits were $2.5 million this quarter versus $6.1 million in the prior-year quarter.
- Adjusted EBITDA, a non-GAAP measure, increased to $42.8 million from $36.7 million; adjusted EPS increased to $0.51 from $0.45. These measures exclude specified items, including stock-based compensation, restructuring and COVID-related costs.
Liquidity, outlook and risks
- Management said existing cash, operating cash generation, the available revolver and financing capacity should meet anticipated cash needs for at least the next 12 months. Planned investment includes facilities improvements and internal R&D.
- Remaining performance obligations were $287.5 million; approximately 72% was expected to be recognized as revenue in the next 12 months. The measure excludes certain short-duration and cancellable contracts.
- Near-term purchase commitments totaled $113.2 million, and operating lease obligations totaled $95.8 million. The filing lists $123.0 million of combined purchase and lease obligations due within one year.
- COVID-related uncertainty, defense-program funding and timing, customer order patterns, supply-chain shortages, fixed-price program costs, acquisition integration, competition and technology changes are among the risks cited. Inventory increased $28.0 million, partly due to demand and purchases intended to mitigate pandemic-related supply disruption.
- The company recorded $1.3 million in restructuring charges, primarily for severance following the elimination of 19 positions. It reported that goodwill was not impaired after a reporting-unit reorganization. Management did not expect pending legal matters to materially affect financial position, results or cash flows.
- No formal revenue or earnings guidance is provided in the filing. A shelf registration permits issuance of securities, including up to $200 million of common stock through an at-the-market offering.
Important facts for investors to verify
- How much of revenue growth and margin movement reflects organic demand, APC, and changing product and program mix.
- Whether the elevated inventory and contract assets convert into billings and cash as expected, and whether supply-chain risks persist.
- Conversion timing and cancellation or duration limitations underlying the $287.5 million of remaining performance obligations.
- Effects of customer concentration: Raytheon Technologies represented 23% of revenue and Lockheed Martin 19% in the quarter.
- Potential future share issuance under the $200 million equity distribution agreement, and ongoing capital spending and purchase commitments.