Mercury Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2017 (three months); comparative period ended September 30, 2016. Mercury provides secure processing and electronics solutions primarily for defense and intelligence programs. The filing notes that the periods are not directly comparable because acquisitions completed after September 30, 2016 contributed to current-quarter results.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $106.1 million | $87.6 million |
| Gross margin | $50.7 million; 47.8% | $39.4 million; 45.0% |
| Operating income | $10.4 million; 9.9% of revenue | $3.7 million; 4.3% |
| Net income | $18.0 million; diluted EPS $0.38 | $3.8 million; diluted EPS $0.10 |
| Adjusted EBITDA (non-GAAP) | $25.0 million | $18.2 million |
| Adjusted EPS (non-GAAP) | $0.37 | $0.22 |
| Operating cash flow | $8.0 million | $10.3 million |
| Free cash flow (non-GAAP) | $4.4 million | $4.2 million |
Revenue increased 21%; management reported organic growth of 7%, with acquired businesses contributing $12.6 million. Gross margin rose 280 basis points, reflecting product mix and the prior-year impact of $2.1 million in acquired-inventory step-up amortization. Net income included an $8.4 million income tax benefit, including discrete benefits of $7.9 million for stock-based compensation and $4.1 million related to acquired net operating loss carryforwards; therefore, reported earnings growth was materially affected by tax items.
Cash and cash equivalents were $26.1 million at September 30, down from $41.6 million at June 30, 2017. Current assets were $252.0 million and current liabilities $75.3 million. Total liabilities were $88.3 million. The $400 million revolving credit facility, expiring in June 2022, had no borrowings; letters of credit totaled $2.6 million. The former term loan had been repaid in the prior fiscal quarter.
Changes, outlook, and risks
- Growth was primarily attributed to SEWIP, F-35, F-16/SABR and acquired revenue, partly offset by lower revenue from a large ground-based radar program and Aegis. Electronic warfare revenue rose to $28.0 million from $21.0 million; radar revenue declined to $36.5 million from $37.5 million.
- Mercury acquired Richland Technologies for $6.0 million in July 2017. The filing also reports current-quarter revenue from Delta and CES, acquired in earlier periods. Purchase-price allocations for acquisitions remained preliminary.
- Cash from operations fell year over year, with working-capital movements including higher inventory purchases and lower receivable collections. Investing cash use included the RTL acquisition and $3.6 million of capital spending. Financing use included $13.5 million to retire shares for employee tax withholding on vested awards.
- Management said available cash, operating cash generation, the undrawn revolver and financing capabilities should cover anticipated cash requirements for at least twelve months. No specific revenue or earnings guidance was provided. The company registered an at-the-market equity program permitting up to $200 million of common-stock sales.
- Key risks cited include defense-program funding and timing, customer ordering patterns, production delays or component shortages, fixed-price contract cost estimates, acquisition integration and synergies, competition, export and procurement rules, and employee retention. Three customers—Raytheon, Lockheed Martin and Northrop Grumman—accounted for 49% of quarterly revenue. Purchase commitments were $54.0 million, due within one year; operating lease obligations totaled $73.1 million.
- Routine legal matters were not expected to materially affect results or financial position. Certain intellectual-property indemnification obligations may be unlimited. Management reported effective disclosure controls and no material change in internal control during the quarter, while integration of acquired businesses continued.
Important facts for investors to verify
- How much of future growth is organic and repeatable after separating acquisition contributions and program-specific timing.
- Underlying earnings and tax rate excluding the quarter’s discrete tax benefits; reconcile GAAP results with the company’s non-GAAP measures.
- Working-capital trends, particularly receivables, inventory and operating cash conversion.
- Acquisition integration, preliminary purchase accounting and expected returns from CES, Delta and RTL.
- Defense customer/program concentration, contract performance and the company’s capacity to meet purchase commitments while preserving liquidity.