SEC Filing | Mercury Systems, Inc.

1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2000 Commission File Number 0-23599 MERCURY COMPUTER SYSTEMS, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2741391 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 199 RIVERNECK ROAD 01824 CHELMSFORD, MA (Zip Code) (Address of principal executive offices) 978-256-1300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- Number of shares outstanding of the issuer's classes of common stock as of October 31, 2000: Class Number of Shares Outstanding - -------------------------------------- ---------------------------- Common Stock, par value $.01 per share 21,487,117 Total number of pages 14

2 MERCURY COMPUTER SYSTEMS, INC. INDEX PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2000 and June 30, 2000 3 Consolidated Statements of Operations for the Three Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 PART II. OTHER INFORMATION Item 2. Use of Proceeds from Registered Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports Filed on Form 8-K 12 SIGNATURE 13 2

3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS MERCURY COMPUTER SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) September 30, June 30, 2000 2000 (Unaudited) ------------- --------- ASSETS Current assets: Cash and cash equivalents $ 10,755 $ 5,850 Marketable securities 33,434 36,784 Trade accounts receivable, net of allowances of $307 and $308 at September 30, 2000 and June 30, 2000, 26,776 25,046 respectively Inventory 17,838 15,975 Deferred income taxes, net 1,909 1,909 Income tax receivable -- 722 Prepaid expenses and other current assets 3,727 3,496 --------- --------- Total current assets 94,439 89,782 Marketable securities 28,286 25,705 Property and equipment, net 28,606 27,574 Deferred income taxes, net 787 787 Other assets 339 369 --------- --------- Total assets $ 152,457 $ 144,217 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,159 $ 9,231 Accrued expenses 3,980 2,486 Accrued compensation 5,154 6,143 Capital lease - short term 553 580 Notes payable - short term 577 577 Billings in excess of revenues and customer advances 3,810 2,788 Income taxes payable 2,588 -- --------- --------- Total current liabilities 22,821 21,805 Commitments and -- -- contingencies Capital lease - long term 322 447 Notes payable - long term 13,464 13,605 Stockholders' equity: Common stock, $.01 par value: 40,000,000 shares authorized; 21,425,437 and 21,395,137 shares issued and outstanding at September 30, 2000 and June 30, 2000, respectively 214 214 Additional paid-in capital 34,698 34,446 Retained earnings 80,950 73,841 Accumulated other comprehensive income (12) (141) --------- --------- Total stockholders' equity 115,850 108,360 --------- --------- Total liabilities and stockholders' equity $ 152,457 $ 144,217 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 3

4 MERCURY COMPUTER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited and in thousands except per share data) Three months ended September 30, 2000 1999 -------- -------- Net revenue $ 41,469 $ 37,863 Cost of revenue 13,124 10,037 -------- -------- Gross profit 28,345 27,826 Operating expenses: Selling, general and administrative 12,123 9,105 Research and development 6,743 5,537 -------- -------- Total operating expenses 18,866 14,642 -------- -------- Income from operations 9,479 13,184 Interest income 928 322 Interest expense (275) (18) Equity loss in joint venture (1,235) (515) Gain on sale of division, net 1,600 -- Other expenses (43) (16) -------- -------- Income before income taxes 10,454 12,957 Provision for income taxes 3,345 4,665 -------- -------- Net income $ 7,109 $ 8,292 ======== ======== Net income per share: Basic $ 0.33 $ 0.40 ======== ======== Diluted $ 0.31 $ 0.37 ======== ======== Weighted average shares outstanding: Basic 21,405 20,688 ======== ======== Diluted 22,747 22,166 ======== ======== The accompanying notes are an integral part of the consolidated financial statements 4

5 MERCURY COMPUTER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited and in thousands) Three Months Ended September 30, 2000 1999 -------- -------- Cash flows provided from operating activities: Net income $ 7,109 $ 8,292 Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Depreciation and amortization 1,408 1,257 Gain on sale of division, net (1,600) -- Provision for inventory write-downs 1,378 1,247 Equity loss in joint venture 1,235 515 Changes in assets and liabilities: Trade accounts receivable (1,739) 4,671 Inventory (3,273) (2,117) Prepaid expenses and other current assets (479) 408 Other assets (971) 41 Accounts payable (3,069) (2,510) Accrued expenses and compensation 520 126 Billings in excess of revenues and customer advances 1,048 (2,011) Income taxes payable 3,315 4,334 -------- -------- Net cash provided by operating activities 4,882 14,253 -------- -------- Cash flows from investing activities: Purchase of marketable securities (20,388) (17,482) Sale of marketable securities 21,236 11,263 Purchases of property and equipment (2,448) (755) Proceeds from sale of division net of selling costs 1,600 -- Investment in joint venture -- (2,500) -------- -------- Net cash used in investing activities -- (9,474) -------- -------- Cash flows from financing activities: Proceeds from employee stock purchase plan and the exercise of stock options 252 344 Payments of debt (141) -- Principal payments under capital lease obligations (152) (110) -------- -------- Net cash (used in) provided by financing activities (41) 234 -------- -------- Net increase in cash and cash equivalents 4,841 5,013 Effect of exchange rate change on cash and cash equivalents 64 70 Cash and cash equivalents at beginning of period 5,850 3,676 -------- -------- Cash and cash equivalents at end of period $ 10,755 $ 8,759 ======== ======== Cash paid during the period for: Interest $ 275 $ 19 Income taxes 631 265 The accompanying notes are an integral part of the consolidated financial statements. 5

6 MERCURY COMPUTER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) A. BASIS OF PRESENTATION These consolidated financial statements should be read in conjunction with the Company's financial statements and footnotes included in the Company's Form 10-K, filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of Mercury Computer Systems, Inc. B. INVENTORY September 30, June 30, 2000 2000 ------------- -------- Raw materials $ 7,138 $ 4,252 Work in process 5,801 7,415 Finished goods 4,899 4,308 ------- ------- Total $17,838 $15,975 ======= ======= C. NET INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted net income per common share: Three Months Ended September 30, 2000 1999 ------- ------- Net income $ 7,109 $ 8,292 ======= ======= Shares used in computation: Weighted average common shares outstanding used in computation of basic net income per share 21,405 20,688 Dilutive effect of stock options 1,342 1,478 -------- ------- Shares used in computation of diluted net income per share 22,747 22,166 ======== ======= Basic net income per share $ 0.33 $ 0.40 ======== ======= Dilutive net income per share $ 0.31 $ 0.37 ======== ======= Options to purchase 350,293 and 25,587 shares of common stock outstanding during the three months ended September 30, 2000 and 1999, respectively, were not included in the calculation of diluted net income per common share because the option price was greater than the average market price of the common shares during the period. D. NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was issued in June 1998. SFAS No. 137 defers the effective date of SFAS No. 133 to the first quarter of fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in either current earnings or accumulated other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The adoption of SFAS No. 133 did not have a material impact on the Company's financial position or results of operations. 6

7 MERCURY COMPUTER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. The application of the guidance in SAB 101 will be required in the Company's fourth quarter of fiscal year 2001. The effects of applying this guidance will be reported as a cumulative effect adjustment resulting from a change in accounting principle. The Company has not completed its evaluation of SAB101 and therefore is unable to determine its impact. In March 2000, the Financial Accounting Standard Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The application of FIN 44 did not have a material impact on the Company's financial position or results of operations. E. COMPREHENSIVE INCOME Mercury's total comprehensive income was as follows: Three Months Ended September 30, 2000 1999 ------- ------ Net income $7,109 $8,292 Other comprehensive income, net of tax: Foreign currency translation adjustments (27) 88 Unrealized gain or (loss) on securities 15 (12) ------ ------ Other comprehensive income (12) 76 ------ ------ Total comprehensive income $7,097 $8,368 ====== ====== F. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION During the three month period ended September 30, 2000, the Company had six principal operating segments: North American defense, international defense, medical imaging, commercial businesses, wireless communications, and research and development. These operating segments were determined based upon the nature of the products offered to customers, the market characteristics of each operating segment, and the Company's management structure. The Company has five reportable segments: North American defense segment, medical imaging segment, commercial segment, other defense and commercial segment, and research and development segment. The other commercial segment is comprised of international defense, wireless communications, and other commercial businesses unrelated to the defense or medical businesses. A new commercial operating segment was established during the first quarter of fiscal 2000. Previously, most commercial businesses were included with the North American and international operating segments. Historical information was not restated to reflect this business reorganization because it is impractical to obtain the necessary information. The accounting policies of the business segments are the same as those described in "Note B: Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended June 30, 2000. The following table provides operating segment information for the three-month periods ended September 30, 2000 and 1999: 7

8 North Research American Medical Other and Defense Imaging Commercial Commercial Development Segment Segment Segment Segment Segment Corporate Consolidated ------- ------- ---------- ---------- ----------- --------- ------------ THREE MONTHS ENDED SEPTEMBER 30, 2000: Sales to unaffiliated customers 27,729 8,878 3,335 1,527 -- -- 41,469 Income (loss) before taxes(1) 18,396 2,713 1,666 (26) (6,743) (5,552) 10,454 Depreciation/amort. expense 187 9 2 66 378 766 1,408 THREE MONTHS ENDED SEPTEMBER 30, 1999: Sales to unaffiliated customers 30,253 4,961 -- 2,649 -- -- 37,863 Income (loss) before taxes(1) 21,939 2,018 -- (150) (5,225) (5,625) 12,957 Depreciation/amort. expense 34 11 -- 55 272 885 1,257 (1) Interest income, interest expense and foreign exchange gain/(loss) are reported in Corporate and not allocated to the principal operating segments. Only expenses directly related to an operating segment were charged to the appropriate operating segment. All other expenses for marketing and administrative support activities that could not be specifically identified with a principal operating segment were allocated to Corporate. G. EQUITY LOSS IN JOINT VENTURE In September, 1999, the Company formed AgileVision as a joint venture with Sarnoff Corporation, the developer of color television and a pioneer in the creation of digital television ("DTV"). AgileVision provides broadcasters and cable providers equipment to optimize their DTV investment and develop new broadband media commerce revenue streams, including master control systems that permit broadcasters to perform multiple functions on a single platform that previously would have required the engineering and integration of numerous discrete products and systems. As of September 30, 2000, the Company's investment in AgileVision amounted to $4,500,000. During the three month periods ended September 30, 2000 and 1999, the Company recognized $1,235,000 and $515,000, respectively, in expenses related to the operation of Agilevision. The Company has funded the losses of Agilevision to date and as of September 30, 2000, intends to continue to fund this venture. Summarized Income Statements for AgileVision during the periods ended September 30, 2000 and 1999 are as follows: Three Months Ended September 30, 2000 1999 ------ ----- Expenses $1,235 $ 515 ------ ----- Loss from continuing operations 1,235 $ 515 ------ ----- Net loss $1,235 $ 515 ====== ===== Summarized Statements of Financial Position of AgileVision: September 30, June 30, 2000 2000 ------------- -------- Current assets $ 511 $ 1,009 Non-current assets 20 12 ------- ------- Total assets 531 1,021 ======= ======= Current liabilities 3,599 2,744 Shareholders' equity (3,068) (1,723) ------- ------- Total liabilities and equity $ 531 $ 1,021 ======= ======= 8

9 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company, statements made by its employees or information included in its filings with the Securities and Exchange Commission may contain statements which are not historical facts but which are "forward-looking statements" which involve risks and uncertainties. The words "may," "will," "expect," "anticipate," "continue", "estimate", "project," "intend" and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial position. These statements are based on the Company's current expectations and estimates as to prospective events and circumstances about which there can be no firm assurances given. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. Important factors that may cause the Company's actual results to differ from forward-looking statements are referenced in the Company's Form 10-K filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS : REVENUES The Company's total revenues increased 10% from $37.9 million during the three months ended September 30, 1999 to $41.5 million during the three months ended September 30, 2000. Defense electronics revenues decreased 4% from $30.6 million or 81% of total revenues during the three months ended September 30, 1999 to $29.2 million or 71% of total revenues during the three months ended September 30, 2000. The decline in defense revenues was due to the delay in fulfilling customer orders for the deliver of next- generation technology. Medical imaging revenues increased 80% from $5.0 million or 13% of total revenues during the three months ended September 30, 1999 to $8.9 million or 21% of total revenues during the three months ended September 30, 2000. The increase in medical imaging revenues reflects the ramp-up to production volume of product for our customer's computed tomography ("CT") imaging systems. Other revenues increased 43% from $2.3 million or 6% of total revenues during the three months ended September 30, 1999 to $3.4 million or 8% of total revenues during the three months ended September 30, 2000. The increase in other revenues was due primarily to the addition of a new commercial customer. COST OF REVENUES Cost of revenues increased 31% from $10.0 million during the three months ended September 30,1999 to $13.1 million during the three months ended September 30, 2000. As a percent of total revenues, cost of revenues increased from 26.5% during the three month period ended September 30, 1999 to 31.6% for the three months ended September 30, 2000. This increase in cost as a percentage of revenue was primarily due to an increase in the Company's inventory reserves. SELLING, GENERAL AND ADMINISTRATIVE Selling, general, and administrative expenses increased 33% from $9.1 million during the three months ended September 30, 1999 to $12.1 million during the three months ended September 30, 2000. The increase was primarily due to expenses associated with the implementation of a new financial, manufacturing, and administrative computer system. Additionally, commissions associated with higher sales volume and the ongoing development of the Company's sales and management infrastructure to support the Company's growth contributed to the increased expenses. 9

10 RESEARCH AND DEVELOPMENT Research and development expenses increased 22% from $5.5 million during the three months ended September 30, 1999 to $6.7 million during the three months ended September 30, 2000. The increase in research and development expenses was due primarily to the hiring of additional software and hardware engineers to develop and enhance the features and functionality of the Company's products and the introduction of new products in response to a high demand for next generation products. Even with the increase in research and development expenses as compared with a year ago, expenses are running somewhat lower than management's expectations due to the delay in certain prototyping activities. Management anticipates that in the near term, research and development expenses will increase somewhat as certain projects enter into the prototyping phase. INCOME FROM OPERATIONS Income from operations decreased 28% from $13.2 million during the three months ended September 30, 1999 to $9.5 million during the three months ended September 30, 2000. This decrease is associated with lower gross margins coupled with increased operating expenses. Included in income from operations during the three months ended September 30, 1999 were $372,000 in hardware and software revenues and approximately $921,000 in direct expenses related to the shared storage business (the "SSBU"). The direct expenses include expenses from marketing and engineering activities, primarily related to compensation, trade shows, prototype development and direct costs related to the sale of the product, including certain hardware costs. The SSBU was sold during January, 2000 and therefore, the company did not record any income from this business unit during the three months ended September 30, 2000. EQUITY LOSS IN JOINT VENTURE In September, 1999, the Company formed AgileVision as a joint venture with Sarnoff Corporation, the developer of color television and a pioneer in the creation of digital television ("DTV"). AgileVision provides broadcasters and cable providers equipment to optimize their DTV investment and develop new broadband media commerce revenue streams, including master control systems that permit broadcasters to perform multiple functions on a single platform that previously would have required the engineering and integration of numerous discrete products and systems. The Company's contribution to AgileVision was $4.5 million. During the three month periods ended September 30, 1999 and 2000 the Company recognized $515,000 and $1,235,000, respectively in expenses related to the operation of AgileVision. PROVISION FOR INCOME TAX The Company recorded a tax provision of $3.3 million during the three months ended September 30, 2000 reflecting a 32% tax rate as compared to a $4.7 million tax provision during the three months ended September 30, 1999, reflecting a 36% tax rate. The decrease in the tax rate was due primarily to the expiration of the research and experimentation tax credit last year. Congress reinstated the tax credit during fiscal 2000 thus, favorably affecting the Company's current tax rate. 10

11 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2000, the Company had cash and marketable investments of approximately $72.5 million. During the three months ended September 30, 2000, the Company generated approximately $4.9 million in cash from operations compared to $14.3 million generated during the three months ended September 30, 1999. This decrease in cash generated from operations was primarily due to decreased profitability. Days sales outstanding was 58 days at September 30, 2000 and 1999. During the three months ended September 30, 2000, the Company's investing activities use of cash netted to $0. During the period, investing activities consisted of $2.4 million for the purchase of computers, furniture and equipment. These cash outflows were partially offset by the net sale of $848,000 in securities and the receipt of $1.6 million net of selling costs from the sale of a division. During the three months ended September 30, 1999, the Company's investing activities used cash of $9.5 million, which consisted of $6.2 million for the purchase of marketable securities (net of sales), $2.5 million for the investment in a joint venture, and $755,000 for the purchase of computers, furniture equipment and leasehold improvements. During the three months ended September 30, 2000 and 1999, the Company's financing activities used approximately $41,000 and provided approximately $234,000, respectively. These financing activities consisted primarily of inflows from the exercise of stock options and proceeds received from the employee stock purchase plan, offset by outflows from payment under capital lease obligations and debt. Management believes that the Company's available cash, cash generated from operations, will be sufficient to provide for the Company's working capital and capital expenditure requirements for the foreseeable future. If the Company acquires one or more businesses or products, the Company's capital requirements could increase substantially. In the event of such an acquisition or in the event that any unanticipated circumstances arise which significantly increase the Company's capital requirements, there can be no assurance that necessary additional capital will be available on terms acceptable to the Company, if at all. 11

12 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk INTEREST RATE RISK MANAGEMENT There were no material changes in the Company's exposure to market risk from June 30, 2000. PART II. OTHER INFORMATION ITEM 2. Use of Proceeds from Registered Securities: None ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 6. Exhibits and Reports Filed on Form 8-K (a) Exhibits. Financial Data Schedule filed as attached in exhibit 27.1. (b) Reports on Form 8-K. None 12

13 MERCURY COMPUTER SYSTEMS, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MERCURY COMPUTER SYSTEMS, INC. Date: November 14, 2000 By: /S/ G. MEAD WYMAN -------------------------------------- G. Mead Wyman Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 13

5 U.S. DOLLARS 3-MOS JUN-30-2001 JUL-01-2000 SEP-30-2000 1 10,755 61,720 27,083 307 17,838 94,439 49,535 20,929 152,457 22,821 13,786 0 0 214 115,636 152,457 41,469 41,469 13,124 13,124 20,144 0 (275) 10,454 3,345 7,109 0 0 0 7,109 .33 .31