Mercury Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 27, 2019 (13 weeks), compared with the first quarter ended September 30, 2018. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and results
Mercury supplies secure sensor and safety-critical mission-processing subsystems to aerospace, defense, intelligence, and commercial aviation markets. The company reported one operating and reportable segment. Results include full-quarter contributions from several recent acquisitions and only four days from American Panel Corporation (APC), acquired September 23, 2019; management cautions that the periods are not directly comparable.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $177.3 million | $144.1 million | +23% |
| Gross margin | $78.4 million; 44.2% | $61.6 million; 42.8% | +140 basis points |
| Operating income | $17.5 million; 9.8% of revenue | $13.8 million; 9.7% | +27% |
| Net income | $19.2 million | $7.5 million | +157% |
| Diluted EPS | $0.35 | $0.16 | +$0.19 |
| Adjusted EPS (non-GAAP) | $0.44 | $0.39 | +$0.05 |
| Adjusted EBITDA (non-GAAP) | $36.7 million | $31.6 million | +16% |
Organic revenue rose 17% to $158.1 million; acquired revenue was $19.3 million, up 114%. Management attributed organic growth chiefly to demand for integrated subsystems and components in other sensor and effector and electronic warfare applications, including a classified missile program and SEWIP Block II. Growth was partly offset by lower F-35 and WIN-T program revenue. Gross margin improved with program mix, lower customer-funded R&D, operating efficiencies, and no repeat of the prior-year Germane inventory step-up charge.
Cash flow, balance sheet, and liquidity
- Operating cash flow was $24.3 million, versus $20.0 million. Capital spending was $9.6 million, versus $3.7 million; free cash flow, a non-GAAP measure, was $14.7 million, versus $16.3 million.
- Cash and cash equivalents were $161.3 million at quarter-end, down $96.6 million from June 30, principally reflecting $96.5 million of net cash used for APC, $14.6 million of share repurchases/retirements, and $9.6 million of capital expenditures.
- There were no borrowings under the $750 million revolving credit facility; $1.7 million of letters of credit were outstanding. The company reported compliance with facility covenants. Total liabilities were $178.6 million, including operating lease liabilities; the filing reports no outstanding debt borrowings.
- Current assets were $503.0 million and current liabilities $94.1 million. Management said available cash, operating cash generation, the revolver, and financing capabilities should meet anticipated cash needs for at least 12 months.
- Operating cash flow was below total investing outflows of $106.1 million, which included the APC acquisition. Non-cancelable purchase commitments totaled $84.0 million, generally due within one year.
Material changes, outlook, and risks
- APC was acquired for a preliminary net purchase price of $96.5 million, funded with cash on hand. Its preliminary purchase accounting included $54.8 million of goodwill; estimates remain subject to measurement-period adjustment. APC contributed $0.9 million of revenue after acquisition.
- The quarter’s $2.0 million income tax benefit included a $6.1 million discrete benefit from excess tax benefits on stock-based compensation. This helped lift reported net income; adjusted results are non-GAAP and exclude specified items.
- Remaining performance obligations were $214.9 million; Mercury expects to recognize approximately 75% as revenue within 12 months. This is not a general revenue or earnings forecast, and the filing provides no explicit full-year guidance.
- Gross margin was higher, while R&D rose to 12.3% of revenue from 10.4%, primarily reflecting headcount and acquisition-related compensation costs and lower customer-funded R&D. SG&A declined slightly as a share of revenue, to 16.9% from 17.1%.
- Three customers represented 42% of revenue: Lockheed Martin 18%, Raytheon 13%, and Northrop Grumman 11%. Defense funding and order timing, customer concentration, program mix, component availability, fixed-price contract costs, acquisition integration and synergies, and technology and regulatory changes are among the disclosed risks.
- ASC 842 lease accounting was adopted July 1, 2019, adding $51.3 million of right-of-use assets and $60.2 million of operating lease liabilities; prior periods were not recast. Management reported effective disclosure controls and no material change in internal controls during the quarter. Pending legal matters were not expected to have a material financial impact.
Important facts for investors to verify
- How much reported growth and future performance depend on acquired businesses versus organic demand, and whether APC purchase-accounting estimates change.
- Whether the classified missile, SEWIP Block II, and other program demand persists, especially given order timing and customer concentration.
- How much of the reported earnings increase reflects the $6.1 million discrete stock-compensation tax benefit and other adjustments excluded from non-GAAP measures.
- Conversion of the $214.9 million remaining performance obligations into revenue and cash, alongside inventory, contract assets, and customer advances.
- Cash deployment for acquisitions, capital spending, share-related payments, and the $84.0 million of purchase commitments; confirm continued revolver availability and covenant compliance.