Mercury Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended April 1, 2022 (13 weeks), and nine months ended April 1, 2022 (39 weeks). Mercury supplies technology and products to aerospace and defense customers. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $253.1 | $256.9 | $698.5 | $673.2 |
| Gross margin | $99.8; 39.4% | $105.6; 41.1% | $275.4; 39.4% | $282.4; 42.0% |
| Operating income | $10.0 | $21.7 | $4.0 | $58.6 |
| Net income (loss) | $4.1 | $15.6 | $(5.6) | $44.1 |
| Diluted EPS | $0.07 | $0.28 | $(0.10) | $0.80 |
| Adjusted EBITDA (non-GAAP) | $52.5 | $54.8 | $128.9 | $142.8 |
| Adjusted EPS (non-GAAP) | $0.57 | $0.64 | $1.38 | $1.69 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $0.6 | $70.1 |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $(18.9) | $35.3 |
Third-quarter revenue declined 1.5%; nine-month revenue grew 3.8%. Organic revenue fell 9% in the quarter and 11% for the nine months, while acquired revenue contributed $19.3 million and $98.1 million, respectively. Results include different periods of contribution from acquisitions, limiting comparability.
Balance sheet, debt and liquidity
- At April 1, 2022, cash was $91.7 million, current assets $755.0 million, and current liabilities $182.8 million. Unbilled receivables and costs in excess of billings were $242.3 million, up from $162.9 million at July 2, 2021.
- Long-term debt was $451.5 million, versus $200.0 million at July 2, 2021. The amended revolving credit facility provides $1.1 billion of capacity and matures February 28, 2027. Mercury reported covenant compliance.
- Nine-month investing cash outflow was $265.9 million, including $243.3 million for acquisitions and $19.5 million for property and equipment. Financing provided $243.6 million, principally from $251.5 million of revolver borrowings.
- Management said cash, available revolver capacity, operating cash generation and financing capabilities should cover anticipated cash needs for at least 12 months.
Changes, outlook and risks
- Quarterly gross margin fell 170 basis points and nine-month margin fell 260 basis points year over year. Management cited program mix, supply-chain disruption and higher engineering content; increased customer-funded development also weighed on reported margin.
- Nine-month operating income declined to $4.0 million and the company reported a $5.6 million net loss. Higher amortization, restructuring, acquisition-related costs, interest and other expense contributed to the deterioration.
- The 1MPACT initiative targets growth, margin expansion and adjusted EBITDA potential over five years. Nine-month charges were $22.4 million, including $14.1 million in consulting, $7.5 million in severance tied to about 110 eliminated positions, and facility optimization costs. Management expected a further $3.3 million of consulting charges in fiscal Q4 2022.
- Management provided no specific full-year revenue or earnings guidance in the supplied filing text. Remaining performance obligations were $453.9 million; about 68% was expected to be recognized as revenue within 12 months.
- Key stated risks include supply-chain delays, labor and material inflation, inability to pass cost increases through fixed-price contracts, defense funding and order timing, acquisition integration and execution of 1MPACT. The filing added that Russia’s invasion of Ukraine could intensify inflation, energy and commodity costs, and other risks.
- Contingencies include arbitration claims seeking approximately $9 million in direct damages, with treble damages requested on some claims, and environmental matters involving alleged groundwater contamination and nearby PFAS detections. Mercury said responsibility for the environmental matters was too early to determine; it did not expect pending matters overall to materially affect its financial position, results or cash flows.
Important facts for investors to verify
- Whether organic revenue and margins stabilize as supply constraints, program mix and customer delivery schedules change.
- Whether increased unbilled receivables convert to billed sales and cash collections, given near-zero nine-month operating cash flow.
- Debt utilization, interest costs, covenant headroom and acquisition-related financing needs.
- Actual restructuring costs and measurable growth or margin benefits from 1MPACT, alongside continued acquisition and stock-based compensation costs.
- Developments and potential exposure from the ERA arbitration and environmental matters, and the effect of inflation on fixed-price contracts.
Adjusted EBITDA, adjusted EPS and free cash flow are non-GAAP measures; the filing cautions that they should not be viewed as substitutes for GAAP results and may not be comparable across companies.