Mercury Computer Systems, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended June 30, 2012. Fiscal Q4 refers to the three months ended June 30, 2012; this filing is an annual report, not a standalone quarterly filing. The company supplies embedded signal- and image-processing systems, software, and services, primarily for defense and intelligence markets, through Advanced Computing Solutions (ACS) and Mercury Federal Systems (MFS).
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $244.9 million | $228.7 million |
| Gross margin | $136.2 million; 55.6% | $129.9 million; 56.8% |
| Operating income | $30.1 million; 12.3% of revenue | $25.0 million; 10.9% |
| Income from continuing operations | $22.6 million; diluted EPS $0.75 | $18.5 million; diluted EPS $0.71 |
| Adjusted EBITDA (non-GAAP) | $48.9 million | $40.9 million |
| Cash from operating activities | $31.9 million | $31.5 million |
| Free cash flow (non-GAAP) | $22.4 million | $22.6 million |
Revenue increased 7% year over year. Gross margin declined 120 basis points, which management attributed to product mix and the addition of KOR and PDI, whose service-oriented work generally carries lower margins. Cash and cash equivalents were $116.0 million, down from $162.9 million; working capital was $170.8 million. The company reported no borrowings under its $35 million credit facility and was in covenant compliance. It reported no debt at June 30, 2012; long-term obligations in selected financial data were $15.6 million.
FY2012 cash used in investing was $80.8 million, principally reflecting the $71.0 million net cash cost of acquiring KOR and PDI and $9.4 million in capital expenditures. The company reported total assets of $385.6 million and shareholders’ equity of $333.1 million.
Fiscal Q4: Revenue was $60.9 million, compared with $61.2 million in FY2011 Q4. Gross margin was $30.3 million, operating income $6.0 million, and income from continuing operations $5.7 million (diluted EPS $0.19). The filing’s quarterly table does not state a comparable Q4 gross-margin percentage.
Material changes versus the prior year
- ACS revenue decreased 1% to $215.9 million: $31.8 million of higher defense revenue, including KOR, was more than offset by a $33.3 million decline in commercial revenue. Defense represented 93% of ACS revenue, versus 78% in FY2011.
- MFS revenue rose 151% to $28.7 million, driven by a wide-area persistent-surveillance program and six months of PDI revenue. KOR and PDI together contributed $19.8 million of revenue and $2.7 million of income from continuing operations after acquisition.
- Defense-related sales accounted for approximately 94% of total revenue, versus 78% in FY2011. Raytheon, Northrop Grumman, and Lockheed Martin represented 22%, 17%, and 15% of revenue, respectively.
- Research and development expense increased to $46.0 million from $44.5 million. SG&A decreased to $57.2 million from $57.9 million.
Outlook, management commentary, risks, and unusual items
- Management expected about $5.3 million in annual savings from a FY2012 restructuring plan that eliminated 41 positions and shifted some Huntsville manufacturing to a contract manufacturer. Approximately $0.7 million of additional restructuring expense was expected in FY2013.
- Management stated that cash, operating cash generation, the available credit line, and financing capacity should meet anticipated needs for at least 12 months. No formal revenue or earnings guidance is provided in the filing.
- Backlog was $104.6 million at June 30, 2012, of which $91.9 million was expected to ship within 12 months. Management cautioned that orders can be canceled, reduced, or delayed and backlog is not a reliable forecast of future revenue.
- On August 8, 2012, after year-end, Mercury completed its cash-funded acquisition of Micronetics for $14.80 per share. The filing does not provide a completed purchase-price allocation or full acquisition financial details.
- FY2012 included $2.8 million of restructuring expense and $1.2 million of acquisition costs. A $4.9 million reversal of the LNX earn-out liability reduced operating expenses after Mercury determined the targets would not be achieved; this was a non-cash fair-value adjustment and affected the reported tax rate.
- Key risks include dependence on government defense funding and appropriations, potential sequestration and continuing resolutions, concentrated customers and radar programs, contract and order timing, sole-source components and reliance on one primary contract manufacturer, fixed-price project cost estimates, acquisition integration, and margin pressure as the business mix shifts toward services.
- The DOJ was investigating alleged conduct by former PDI employees in 2008–2009 that may have violated the Procurement Integrity Act. No resolution or litigation had occurred by filing; the company cited contractual indemnity and escrow and did not expect a material financial impact.
Most important facts for investors to verify
- Whether defense appropriations, program awards, and customer orders sustain revenue—especially given the 94% defense exposure and top-three customer concentration.
- Whether backlog converts to shipments and cash on schedule, and whether cancellations or delays affect results.
- Whether the restructuring delivers the projected $5.3 million annual savings and whether the transition affects delivery, quality, or costs.
- Whether KOR, PDI, and Micronetics integrate as expected; monitor acquisition-related cash use, margins, goodwill, and future financing needs.
- Reconcile adjusted EBITDA and free cash flow to GAAP measures; assess the effect of the LNX earn-out reversal and other acquisition and restructuring items on reported earnings.
- Track the DOJ investigation, indemnification coverage, and any developments that could change the company’s assessment of exposure.