UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): January 28, 2020
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||||||||||||
| | ||||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code: (978 ) 256-1300
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |||||
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |||||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |||||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | |||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Item 2.02. Results of Operations and Financial Condition.
On January 28, 2020, Mercury Systems, Inc. (the “Company”) issued a press release and an earnings presentation regarding its financial results for the second quarter of fiscal 2020 ended December 27, 2019. The Company’s press release and earnings presentation are attached as exhibits 99.1 and 99.2 to this Current Report on Form 8-K and incorporated by reference herein.
Information in Item 2.02 of this Current Report on Form 8-K and the exhibits 99.1 and 99.2 attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing.
USE OF NON-GAAP FINANCIAL MEASURES
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, organic revenue and acquired revenue, which are non-GAAP financial measures. Adjusted EBITDA, adjusted income, and adjusted EPS exclude certain non-cash and other specified charges. The Company believes these non-GAAP financial measures are useful to help investors more completely understand its past financial performance and prospects for the future. However, the presentation of these non-GAAP financial measures is not meant to be considered in isolation or as a substitute for financial information provided in accordance with GAAP. Management believes these non-GAAP financial measures assist in providing a more complete understanding of the Company’s underlying operational results and trends, and management uses these measures along with the corresponding GAAP financial measures to manage the Company’s business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit No. | Description | ||||
| 99.1 | Press Release, dated January 28, 2020 of Mercury Systems, Inc. | ||||
| 99.2 | Earnings Presentation, dated January 28, 2020 of Mercury Systems, Inc. | ||||
SIGNATURES
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.
| Dated: January 28, 2020 | MERCURY SYSTEMS, INC. | ||||
By: /s/ Michael D. Ruppert Michael D. Ruppert Executive Vice President, Chief Financial Officer, and Treasurer | |||||
EXHIBIT INDEX
Exhibit No. | Description | ||||
Exhibit 99.1
News Release | |||||
Mercury Systems Reports Second Quarter Fiscal 2020 Results
Second Quarter Highlights Include:
Record revenue increased 22% over prior year with 12% organic growth
Net income, adjusted EBITDA, EPS and adjusted EPS exceeded guidance
Bookings exceeded $200 million for the third consecutive quarter
Record backlog increased 39% over prior year
ANDOVER, Mass. January 28, 2020 Mercury Systems, Inc. (NASDAQ: MRCY, www.mrcy.com), reported operating results for the second quarter of fiscal 2020, ended December 27, 2019.
Management Comments
“The business performed extremely well in the second quarter of fiscal year 2020 evidencing the strength of our strategy and ability to execute,” said Mark Aslett, Mercury’s President and Chief Executive Officer. “We achieved record levels of revenue, profitability and operating cash flow. Bookings of $210 million yielded a book-to-bill of 1.08 producing another record backlog. Based on our strong performance in the first half of the fiscal year as well as the continued momentum in the business and overall industry, we are once again raising our guidance for the full fiscal year,” said Aslett.
Second Quarter Fiscal 2020 Results
Total Company second quarter fiscal 2020 revenues were $193.9 million, compared to $159.1 million in the second quarter of fiscal 2019. The second quarter fiscal 2020 results included an aggregate of approximately $16.3 million of revenue attributable to the GECO Avionics, The Athena Group, Syntonic Microwave and American Panel Corporation acquired businesses.
Total Company GAAP net income for the second quarter of fiscal 2020 was $15.7 million, or $0.29 per share, compared to $12.4 million, or $0.26 per share, for the second quarter of fiscal
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 2
2019. Adjusted earnings per share (“adjusted EPS”) was $0.54 per share for the second quarter of fiscal 2020, compared to $0.47 per share in the second quarter of fiscal 2019.
Second quarter fiscal 2020 adjusted EBITDA for the total Company was $42.8 million, compared to $37.0 million for the second quarter of fiscal 2019.
Cash flows from operating activities in the second quarter of fiscal 2020 were $32.1 million, compared to $25.3 million in the second quarter of fiscal 2019. Free cash flow, defined as cash flows from operating activities less capital expenditures for property and equipment, was $20.7 million in the second quarter of fiscal 2020, compared to $18.2 million in the second quarter of fiscal 2019.
All per share information is presented on a fully diluted basis.
Bookings and Backlog
Total bookings for the second quarter of fiscal 2020 were $209.6 million, yielding a book-to-bill ratio of 1.08 for the quarter.
Mercury’s total backlog at December 27, 2019 was $727.5 million, a $205.5 million increase from a year ago. Of the December 27, 2019 total backlog, $521.8 million represents orders expected to be shipped within the next 12 months.
Business Outlook
This section presents our current expectations and estimates, given current visibility, on our business outlook for the current fiscal quarter and fiscal year 2020. It is possible that actual performance will differ materially from the estimates given, either on the upside or on the downside. Investors should consider all of the risks with respect to these estimates, including those listed in the Safe Harbor Statement below and in the Second Quarter Fiscal 2020 Earnings Presentation and in our periodic filings with the U.S. Securities and Exchange Commission, and make themselves aware of how these risks may impact our actual performance. Effective as of July 1, 2019, the Company's fiscal year has changed to the 52-week or 53-week period ending on the Friday closest to the last day in June. All references in this press release to the third quarter of fiscal 2020 are to the quarter ending March 27, 2020 and to fiscal 2020 are to the fiscal year ending July 3, 2020.
For the third quarter of fiscal 2020, revenues are forecasted to be in the range of $190.0 million to $200.0 million. GAAP net income for the third quarter is expected to be approximately $15.9 million to $17.4 million, or $0.29 to $0.32 per share, assuming no incremental restructuring, acquisition, other non-operating adjustments or non-recurring financing related expenses in the period, an effective tax rate, excluding discrete items, of approximately 26% and approximately
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 3
55.1 million weighted average diluted shares outstanding. Adjusted EBITDA for the third quarter of fiscal 2020 is expected to be in the range of $42.0 million to $44.0 million. Adjusted EPS is expected to be in the range of $0.50 to $0.53 per share.
For the full fiscal year 2020, we currently expect revenue of $780.0 million to $795.0 million, and GAAP net income of $71.7 million to $74.5 million, or $1.30 to $1.35 per share, assuming no incremental restructuring, acquisition, other non-operating adjustments or non-recurring financing related expenses in the period, an effective tax rate of approximately 26% for the remainder of the year, excluding discrete items, and approximately 55.1 million weighted average diluted shares outstanding. Adjusted EBITDA for the full fiscal year is expected to be approximately $172.5 million to $176.0 million, and adjusted EPS for the full fiscal year is expected to be approximately $2.09 to $2.13 per share.
Recent Highlights
December – Mercury announced that four of its products were recognized by the judges of the annual Military & Aerospace Electronics Innovators Awards program. The judging panel consisted of a panel of senior third-party expert professionals.
November – Mercury announced that its high-performance signal processing and RF solutions were selected by Raytheon for its advanced Lower Tier Air and Missile Defense Sensor (“LTAMDS”) program, the Army’s next-generation missile defense radar. LTAMDS is a new radar that will ultimately replace the U.S. Army’s current Patriot radars, and will operate on the Army’s Integrated Air and Missile Defense network.
November – Mercury announced the EnterpriseSeries™ RES AI rugged rackmount server line, bringing High Performance Computing (“HPC”) capabilities to aerospace, defense and other mission-critical applications at the edge. Mercury’s rugged HPC servers leverage the latest data center processing and co-processing technologies to accelerate the most demanding workloads.
October – Mercury announced the new DCM6112 digitization transceiver, optimized to provide the best balance of low-latency and wide bandwidth for critical electronic warfare (“EW”) applications. Using the latest commercial semiconductor technology, Mercury’s new transceiver enables rapid deployment of directionally-accurate EW systems needed to counter the latest electromagnetic threats.
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 4
October – Mercury announced a $15 million capital investment to expand its trusted custom microelectronics business, bringing cutting-edge commercial silicon technology to the Department of Defense (“DoD”). The technology is applicable to all defense platforms and programs and offers fast, affordable and secure and trusted chip-scale open system architecture (“OSA”) devices to accelerate future modernization efforts.
Conference Call Information
Mercury will host a conference call and simultaneous webcast on Tuesday, January 28, 2020, at 5:00 p.m. ET to discuss the second quarter fiscal 2020 results and review its financial and business outlook going forward.
To join the conference call, dial (877) 303-6977 in the USA and Canada, or (760) 298-5079 in all other countries. Please call five to ten minutes prior to the scheduled start time. The live audio webcast as well as the Company's earnings presentation that will be discussed on the call can be accessed from the 'Events and Presentations' page of Mercury's website at www.mrcy.com/investor.
A replay of the webcast will be available two hours after the call and archived on the same web page for six months.
Use of Non-GAAP Financial Measures
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides adjusted EBITDA, adjusted income, adjusted earnings per share (“adjusted EPS”), free cash flow, organic revenue and acquired revenue, which are non-GAAP financial measures. Adjusted EBITDA, adjusted income, and adjusted EPS exclude certain non-cash and other specified charges. The Company believes these non-GAAP financial measures are useful to help investors understand its past financial performance and prospects for the future. However, these non-GAAP measures should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. Management believes these non-GAAP measures assist in providing a more complete understanding of the Company’s underlying operational results and trends, and management uses these measures along with the corresponding GAAP financial measures to manage the Company’s business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals. A reconciliation of GAAP to non-GAAP financial results discussed in this press release is contained in the attached exhibits.
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 5
About Mercury Systems – Innovation That Matters®
Mercury Systems is the leader in making trusted, secure mission-critical technologies profoundly more accessible to the aerospace and defense industries. Optimized for customer and mission success, our innovative solutions power more than 300 critical aerospace and defense programs. Headquartered in Andover, Mass., and with manufacturing and design facilities around the world, Mercury specializes in engineering, adapting and manufacturing new solutions purpose-built to meet the industry’s current and emerging high-tech needs. Our employees are committed to Innovation that Matters®. To learn more, visit www.mrcy.com, or follow us on Twitter.
Investors and others should note that we announce material financial information using our website (www.mrcy.com), SEC filings, press releases, public conference calls, webcasts, and social media, including Twitter (twitter.com/mrcy) and LinkedIn (www.linkedin.com/company/mercury-systems). Therefore, we encourage investors and others interested in Mercury to review the information we post on the social media and other communication channels listed on our website.
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Mercury Reports Second Quarter Fiscal 2020 Results, Page 6
Forward-Looking Safe Harbor Statement
This press release contains certain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, including those relating to the acquisitions described herein and to fiscal 2020 business performance and beyond and the Company’s plans for growth and improvement in profitability and cash flow. You can identify these statements by the use of the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of any U.S. Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in the U.S. Government’s interpretation of, federal export control or procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, increases in interest rates, changes to cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to interest rate swaps or other cash flow hedging arrangements, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as are discussed in the Company's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2019. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. 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.
# # #
Contact:
Michael D. Ruppert, CFO
Mercury Systems, Inc.
978-967-1990
Mercury Systems and Innovation that Matters are registered trademarks, and Ensemble Series, EnterpriseSeries, BuiltSAFE and BuiltSECURE are trademarks of Mercury Systems, Inc. Other product and company names mentioned may be trademarks and/or registered trademarks of their respective holders.
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 7
| MERCURY SYSTEMS, INC. | ||||||||||||||
| UNAUDITED CONSOLIDATED BALANCE SHEETS | ||||||||||||||
| (In thousands) | ||||||||||||||
| December 27, | June 30, | |||||||||||||
| 2019 | 2019 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 182,037 | $ | 257,932 | ||||||||||
| Accounts receivable, net | 132,072 | 118,832 | ||||||||||||
| Unbilled receivables and costs in excess of billings | 61,302 | 57,387 | ||||||||||||
| Inventory | 153,642 | 137,112 | ||||||||||||
| Prepaid income taxes | 5,454 | 90 | ||||||||||||
| Prepaid expenses and other current assets | 10,602 | 10,819 | ||||||||||||
| Total current assets | 545,109 | 582,172 | ||||||||||||
| Property and equipment, net | 72,696 | 60,001 | ||||||||||||
| Goodwill | 614,648 | 562,146 | ||||||||||||
| Intangible assets, net | 224,507 | 206,124 | ||||||||||||
Operating lease right-of-use assets(1) | 49,826 | — | ||||||||||||
| Other non-current assets | 5,834 | 6,534 | ||||||||||||
| Total assets | $ | 1,512,620 | $ | 1,416,977 | ||||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 35,988 | $ | 39,030 | ||||||||||
Accrued expenses(1) | 23,906 | 18,897 | ||||||||||||
| Accrued compensation | 31,372 | 28,814 | ||||||||||||
| Deferred revenues and customer advances | 16,618 | 11,291 | ||||||||||||
| Total current liabilities | 107,884 | 98,032 | ||||||||||||
| Deferred income taxes | 18,406 | 17,814 | ||||||||||||
| Income taxes payable | 1,397 | 1,273 | ||||||||||||
Operating lease liabilities(1) | 55,257 | — | ||||||||||||
| Other non-current liabilities | 12,620 | 15,119 | ||||||||||||
| Total liabilities | 195,564 | 132,238 | ||||||||||||
| Shareholders’ equity: | ||||||||||||||
| Common stock | 545 | 542 | ||||||||||||
| Additional paid-in capital | 1,056,238 | 1,058,745 | ||||||||||||
| Retained earnings | 261,666 | 226,743 | ||||||||||||
| Accumulated other comprehensive loss | (1,393) | (1,291) | ||||||||||||
| Total shareholders’ equity | 1,317,056 | 1,284,739 | ||||||||||||
| Total liabilities and shareholders’ equity | $ | 1,512,620 | $ | 1,416,977 | ||||||||||
(1) Effective July 1, 2019, the Company has adopted ASC 842 - Leases using the optional transition method. Prior periods were not changed. As of December 27, 2019, the Company has Right-of-use assets of $49.8 million and total Lease liabilities of $62.6 million, of which $7.3 million is included in Accrued expenses. | ||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 8
| MERCURY SYSTEMS, INC. | ||||||||||||||||||||||||||
| UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||
| Second Quarters Ended | Six Months Ended | |||||||||||||||||||||||||
| December 27, 2019 | December 31, 2018 | December 27, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Net revenues | $ | 193,913 | $ | 159,089 | $ | 371,217 | $ | 303,145 | ||||||||||||||||||
Cost of revenues(1) | 105,407 | 88,202 | 204,311 | 170,675 | ||||||||||||||||||||||
| Gross margin | 88,506 | 70,887 | 166,906 | 132,470 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
Selling, general and administrative(1) | 32,804 | 27,819 | 62,774 | 52,560 | ||||||||||||||||||||||
Research and development(1) | 24,660 | 16,192 | 46,530 | 31,140 | ||||||||||||||||||||||
| Amortization of intangible assets | 7,992 | 6,939 | 15,011 | 14,120 | ||||||||||||||||||||||
| Restructuring and other charges | 1,101 | 23 | 1,749 | 527 | ||||||||||||||||||||||
| Acquisition costs and other related expenses | 1,124 | 53 | 2,541 | 452 | ||||||||||||||||||||||
| Total operating expenses | 67,681 | 51,026 | 128,605 | 98,799 | ||||||||||||||||||||||
| Income from operations | 20,825 | 19,861 | 38,301 | 33,671 | ||||||||||||||||||||||
| Interest income | 312 | 71 | 1,499 | 137 | ||||||||||||||||||||||
| Interest expense | — | (2,196) | — | (4,455) | ||||||||||||||||||||||
| Other expense, net | (351) | (870) | (1,785) | (1,879) | ||||||||||||||||||||||
| Income before income taxes | 20,786 | 16,866 | 38,015 | 27,474 | ||||||||||||||||||||||
| Tax provision | 5,110 | 4,483 | 3,092 | 7,612 | ||||||||||||||||||||||
| Net income | $ | 15,676 | $ | 12,383 | $ | 34,923 | $ | 19,862 | ||||||||||||||||||
| Basic net earnings per share | $ | 0.29 | $ | 0.26 | $ | 0.64 | $ | 0.42 | ||||||||||||||||||
| Diluted net earnings per share | $ | 0.29 | $ | 0.26 | $ | 0.63 | $ | 0.42 | ||||||||||||||||||
| Weighted-average shares outstanding: | ||||||||||||||||||||||||||
| Basic | 54,548 | 47,189 | 54,468 | 47,118 | ||||||||||||||||||||||
| Diluted | 55,001 | 47,705 | 55,037 | 47,696 | ||||||||||||||||||||||
| (1) Includes stock-based compensation expense, allocated as follows: | ||||||||||||||||||||||||||
| Cost of revenues | $ | 200 | $ | 159 | $ | 341 | $ | 411 | ||||||||||||||||||
| Selling, general and administrative | $ | 5,384 | $ | 4,542 | $ | 10,027 | $ | 8,426 | ||||||||||||||||||
| Research and development | $ | 947 | $ | 583 | $ | 1,822 | $ | 1,126 | ||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 9
| MERCURY SYSTEMS, INC. | ||||||||||||||||||||||||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Second Quarters Ended | Six Months Ended | |||||||||||||||||||||||||
| December 27, 2019 | December 31, 2018 | December 27, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||||
| Net income | $ | 15,676 | $ | 12,383 | $ | 34,923 | $ | 19,862 | ||||||||||||||||||
| Depreciation and amortization | 12,547 | 11,708 | 23,928 | 23,254 | ||||||||||||||||||||||
| Other non-cash items, net | 7,593 | 4,644 | 14,038 | 10,164 | ||||||||||||||||||||||
| Changes in operating assets and liabilities | (3,750) | (3,434) | (16,513) | (7,950) | ||||||||||||||||||||||
| Net cash provided by operating activities | 32,066 | 25,301 | 56,376 | 45,330 | ||||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||||
| Acquisition of businesses, net of cash acquired | — | 1,244 | (96,502) | (45,029) | ||||||||||||||||||||||
| Purchases of property and equipment | (11,324) | (7,075) | (20,919) | (10,802) | ||||||||||||||||||||||
| Net cash used in investing activities | (11,324) | (5,831) | (117,421) | (55,831) | ||||||||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||||
| Proceeds from employee stock plans | — | 1,677 | 3 | 1,677 | ||||||||||||||||||||||
| Borrowings under credit facilities | — | — | — | 45,000 | ||||||||||||||||||||||
| Payments of deferred financing and offering costs | — | — | — | (1,851) | ||||||||||||||||||||||
| Payments for retirement of common stock | (375) | (120) | (14,937) | (6,932) | ||||||||||||||||||||||
| Net cash (used in) provided by financing activities | (375) | 1,557 | (14,934) | 37,894 | ||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 371 | 7 | 84 | (11) | ||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 20,738 | 21,034 | (75,895) | 27,382 | ||||||||||||||||||||||
| Cash and cash equivalents at beginning of period | 161,299 | 72,869 | 257,932 | 66,521 | ||||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | 182,037 | $ | 93,903 | $ | 182,037 | $ | 93,903 | ||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 10
| UNAUDITED SUPPLEMENTAL INFORMATION RECONCILIATION OF GAAP TO NON-GAAP MEASURES | ||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Adjusted EBITDA, a non-GAAP measure for reporting financial performance, excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP. Management believes that exclusion of these items assists in providing a more complete understanding of the Company’s underlying results and trends, and management uses these measures along with the corresponding GAAP financial measures to manage the Company’s business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals. The adjustments to calculate this non-GAAP financial measure, and the basis for such adjustments, are outlined below:
Other non-operating adjustments. The Company records other non-operating adjustments such as gains or losses on foreign currency remeasurement and fixed asset sales or disposals among other adjustments. These adjustments may vary from period to period without any direct correlation to underlying operating performance.
Interest income and expense. The Company receives interest income on investments and incurs interest expense on loans, capital leases and other financing arrangements. These amounts may vary from period to period due to changes in cash and debt balances and interest rates driven by general market conditions or other circumstances outside of the normal course of Mercury’s operations.
Income taxes. The Company’s GAAP tax expense can fluctuate materially from period to period due to tax adjustments that are not directly related to underlying operating performance or to the current period of operations.
Depreciation. The Company incurs depreciation expense related to capital assets purchased to support the ongoing operations of the business. These assets are recorded at cost or fair value and are depreciated using the straight-line method over the useful life of the asset. Purchases of such assets may vary significantly from period to period and without any direct correlation to underlying operating performance.
Amortization of intangible assets. The Company incurs amortization of intangibles related to various acquisitions it has made and license agreements. These intangible assets are valued at the time of acquisition, are amortized over a period of several years after acquisition and generally cannot be changed or influenced by management after acquisition.
Restructuring and other charges. The Company incurs restructuring and other charges in connection with management’s decisions to undertake certain actions to realign operating expenses through workforce reductions and the closure of certain Company facilities, businesses and product lines. The Company’s adjustments reflected in restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. Management believes these items are non-routine and may not be indicative of ongoing operating results.
Impairment of long-lived assets. The Company incurs impairment charges of long-lived assets based on events that may or may not be within the control of management. Management believes these items are outside the normal operations of the Company's business and are not indicative of ongoing operating results.
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 11
Acquisition and financing costs. The Company incurs transaction costs related to acquisition and potential acquisition opportunities, such as legal, accounting, and other third party advisory fees. Although we may incur such third-party costs and other related charges and adjustments, it is not indicative that any transaction will be consummated. Additionally, the Company incurs unused revolver and bank fees associated with maintaining its credit facility. The Company also incurs non-cash financing expenses associated with obtaining its credit facility. Management believes these items are outside the normal operations of the Company’s business and are not indicative of ongoing operating results.
Fair value adjustments from purchase accounting. As a result of applying purchase accounting rules to acquired assets and liabilities, certain fair value adjustments are recorded in the opening balance sheet of acquired companies. These adjustments are then reflected in the Company’s income statements in periods subsequent to the acquisition. In addition, the impact of any changes to originally recorded contingent consideration amounts are reflected in the income statements in the period of the change. Management believes these items are outside the normal operations of the Company and are not indicative of ongoing operating results.
Litigation and settlement income and expense. The Company periodically receives income and incurs expenses related to pending claims and litigation and associated legal fees and potential case settlements and/or judgments. Although we may incur such costs and other related charges and adjustments, it is not indicative of any particular outcome until the matter is fully resolved. Management believes these items are outside the normal operations of the Company’s business and are not indicative of ongoing operating results. The Company periodically receives warranty claims from customers and makes warranty claims towards its vendors and supply chain. Management believes the expenses and gains associated with these recurring warranty items are within the normal operations and operating cycle of the Company's business. Therefore, management deems no adjustments are necessary unless under extraordinary circumstances.
Stock-based and other non-cash compensation expense. The Company incurs expense related to stock-based compensation included in its GAAP presentation of cost of revenues, selling, general and administrative expense and research and development expense. The Company also incurs non-cash based compensation in the form of pension related expenses. Although stock-based and other non-cash compensation is an expense of the Company and viewed as a form of compensation, these expenses vary in amount from period to period, and are affected by market forces that are difficult to predict and are not within the control of management, such as the market price and volatility of the Company’s shares, risk-free interest rates and the expected term and forfeiture rates of the awards, as well as pension actuarial assumptions. Management believes that exclusion of these expenses allows comparisons of operating results to those of other companies, both public, private or foreign, that disclose non-GAAP financial measures that exclude stock-based compensation and other non-cash compensation.
Mercury uses adjusted EBITDA as an important indicator of the operating performance of its business. Management excludes the above-described items from its internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to the Company’s board of directors, determining the portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in the Company’s operations, and allocating resources to various initiatives and operational requirements. The Company believes that adjusted EBITDA permits a comparative assessment of its operating performance, relative to its performance based on its GAAP results, while isolating the effects of charges that may vary from period to period without any correlation to underlying operating performance. The Company believes that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making. The Company believes that trends in its adjusted EBITDA are valuable indicators of its operating performance.
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 12
Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. The Company expects to continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and investors should not infer from the Company’s presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring.
The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure.
| Second Quarters Ended | Six Months Ended | |||||||||||||||||||||||||
| December 27, 2019 | December 31, 2018 | December 27, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Net income | $ | 15,676 | $ | 12,383 | $ | 34,923 | $ | 19,862 | ||||||||||||||||||
| Other non-operating adjustments, net | (549) | (18) | (248) | 347 | ||||||||||||||||||||||
| Interest (income) expense, net | (312) | 2,125 | (1,499) | 4,318 | ||||||||||||||||||||||
| Income tax provision | 5,110 | 4,483 | 3,092 | 7,612 | ||||||||||||||||||||||
| Depreciation | 4,555 | 4,769 | 8,917 | 9,134 | ||||||||||||||||||||||
| Amortization of intangible assets | 7,992 | 6,939 | 15,011 | 14,120 | ||||||||||||||||||||||
| Restructuring and other charges | 1,101 | 23 | 1,749 | 527 | ||||||||||||||||||||||
| Impairment of long-lived assets | — | — | — | — | ||||||||||||||||||||||
| Acquisition and financing costs | 1,882 | 762 | 4,118 | 1,805 | ||||||||||||||||||||||
| Fair value adjustments from purchase accounting | 600 | — | 600 | 620 | ||||||||||||||||||||||
| Litigation and settlement expense, net | 142 | 179 | 455 | 179 | ||||||||||||||||||||||
| Stock-based and other non-cash compensation expense | 6,639 | 5,338 | 12,415 | 10,081 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 42,836 | $ | 36,983 | $ | 79,533 | $ | 68,605 | ||||||||||||||||||
Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs, and, therefore, has not been calculated in accordance with GAAP. Management believes free cash flow provides investors with an important perspective on cash available for investment and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. The Company believes that trends in its free cash flow are valuable indicators of its operating performance and liquidity.
Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. The Company expects to continue to incur expenditures similar to the free cash flow financial adjustment described above, and investors should not infer from the Company’s presentation of this non-GAAP financial measure that these expenditures reflect all of the Company's obligations which require cash.
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 13
The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure.
| Second Quarters Ended | Six Months Ended | |||||||||||||||||||||||||
| December 27, 2019 | December 31, 2018 | December 27, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Cash provided by operating activities | $ | 32,066 | $ | 25,301 | $ | 56,376 | $ | 45,330 | ||||||||||||||||||
| Purchases of property and equipment | (11,324) | (7,075) | (20,919) | (10,802) | ||||||||||||||||||||||
| Free cash flow | $ | 20,742 | $ | 18,226 | $ | 35,457 | $ | 34,528 | ||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 14
| UNAUDITED SUPPLEMENTAL INFORMATION RECONCILIATION OF GAAP TO NON-GAAP MEASURES | ||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Adjusted income and adjusted earnings per share (“adjusted EPS”) are non-GAAP measures for reporting financial performance, exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. Management believes that exclusion of these items assists in providing a more complete understanding of the Company’s underlying results and trends and allows for comparability with our peer company index and industry. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. The Company uses these measures along with the corresponding GAAP financial measures to manage the Company’s business and to evaluate its performance compared to prior periods and the marketplace. The Company defines adjusted income as income before amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, and stock-based and other non-cash compensation expense. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision(1). Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding.
The following tables reconcile the most directly comparable GAAP financial measures to the non-GAAP financial measures.
| Second Quarters Ended | ||||||||||||||||||||||||||
| December 27, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Net income and earnings per share | $ | 15,676 | $ | 0.29 | $ | 12,383 | $ | 0.26 | ||||||||||||||||||
| Amortization of intangible assets | 7,992 | 6,939 | ||||||||||||||||||||||||
| Restructuring and other charges | 1,101 | 23 | ||||||||||||||||||||||||
| Impairment of long-lived assets | — | — | ||||||||||||||||||||||||
| Acquisition and financing costs | 1,882 | 762 | ||||||||||||||||||||||||
| Fair value adjustments from purchase accounting | 600 | — | ||||||||||||||||||||||||
| Litigation and settlement expense, net | 142 | 179 | ||||||||||||||||||||||||
| Stock-based and other non-cash compensation expense | 6,639 | 5,338 | ||||||||||||||||||||||||
Impact to income taxes(1) | (4,504) | (3,009) | ||||||||||||||||||||||||
| Adjusted income and adjusted earnings per share | $ | 29,528 | $ | 0.54 | $ | 22,615 | $ | 0.47 | ||||||||||||||||||
| Diluted weighted-average shares outstanding | 55,001 | 47,705 | ||||||||||||||||||||||||
| (1) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs. | ||||||||||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 15
| Six Months Ended | ||||||||||||||||||||||||||
| December 27, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Net income and earnings per share | $ | 34,923 | $ | 0.63 | $ | 19,862 | $ | 0.42 | ||||||||||||||||||
| Amortization of intangible assets | 15,011 | 14,120 | ||||||||||||||||||||||||
| Restructuring and other charges | 1,749 | 527 | ||||||||||||||||||||||||
| Impairment of long-lived assets | — | — | ||||||||||||||||||||||||
| Acquisition and financing costs | 4,118 | 1,805 | ||||||||||||||||||||||||
| Fair value adjustments from purchase accounting | 600 | 620 | ||||||||||||||||||||||||
| Litigation and settlement expense, net | 455 | 179 | ||||||||||||||||||||||||
| Stock-based and other non-cash compensation expense | 12,415 | 10,081 | ||||||||||||||||||||||||
Impact to income taxes(1) | (15,353) | (6,082) | ||||||||||||||||||||||||
| Adjusted income and adjusted earnings per share | $ | 53,918 | $ | 0.98 | $ | 41,112 | $ | 0.86 | ||||||||||||||||||
| Diluted weighted-average shares outstanding | 55,037 | 47,696 | ||||||||||||||||||||||||
| (1) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs. | ||||||||||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 16
| UNAUDITED SUPPLEMENTAL INFORMATION RECONCILIATION OF GAAP TO NON-GAAP MEASURES | ||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Organic revenue and acquired revenue are non-GAAP measures for reporting financial performance of its business. Management believes this information provides investors with insight as to the Company’s ongoing business performance. Organic revenue represents total company revenue excluding net revenue from acquired companies for the first four full quarters since the entities’ acquisition date (which excludes intercompany transactions). Acquired revenue represents revenue from acquired companies for the first four full quarters since the entities' acquisition date (which excludes intercompany transactions). After the completion of four full fiscal quarters, acquired revenue is treated as organic for current and comparable historical periods.
The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure.
| Second Quarters Ended | Six Months Ended | |||||||||||||||||||||||||
| December 27, 2019 | December 31, 2018 | December 27, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Organic revenue | $ | 177,583 | $ | 159,089 | $ | 335,637 | $ | 294,151 | ||||||||||||||||||
| Acquired revenue | 16,330 | — | 35,580 | 8,994 | ||||||||||||||||||||||
| Net revenues | $ | 193,913 | $ | 159,089 | $ | 371,217 | $ | 303,145 | ||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 17
| MERCURY SYSTEMS, INC. | |||||||||||
| RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE | |||||||||||
| Quarter Ending March 27, 2020 | |||||||||||
| Fiscal Year Ending July 3, 2020 | |||||||||||
| (In thousands) | |||||||||||
The Company defines adjusted EBITDA as income before other non-operating adjustments, interest income and expense, income taxes, depreciation, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, and stock-based and other non-cash compensation expense.
The following table reconciles the most directly comparable GAAP financial measures to the non-GAAP financial measures.
| Third Quarter Ending | Fiscal Year Ending | |||||||||||||||||||||||||
March 27, 2020(1) | July 3, 2020(1) | |||||||||||||||||||||||||
| Range | ||||||||||||||||||||||||||
| Low | High | Low | High | |||||||||||||||||||||||
| GAAP expectation -- Net income | $ | 15,900 | $ | 17,400 | $ | 71,700 | $ | 74,500 | ||||||||||||||||||
| Adjust for: | ||||||||||||||||||||||||||
| Other non-operating adjustments, net | — | — | (200) | (200) | ||||||||||||||||||||||
| Interest income, net | (500) | (500) | (2,500) | (2,500) | ||||||||||||||||||||||
| Income tax provision | 5,600 | 6,100 | 16,800 | 17,500 | ||||||||||||||||||||||
| Depreciation | 5,100 | 5,100 | 20,000 | 20,000 | ||||||||||||||||||||||
| Amortization of intangible assets | 7,800 | 7,800 | 30,600 | 30,600 | ||||||||||||||||||||||
| Restructuring and other charges | — | — | 1,700 | 1,700 | ||||||||||||||||||||||
| Impairment of long-lived assets | — | — | — | — | ||||||||||||||||||||||
| Acquisition and financing costs | 800 | 800 | 5,700 | 5,700 | ||||||||||||||||||||||
| Fair value adjustments from purchase accounting | 600 | 600 | 1,800 | 1,800 | ||||||||||||||||||||||
| Litigation and settlement expense, net | — | — | 500 | 500 | ||||||||||||||||||||||
| Stock-based and other non-cash compensation expense | 6,700 | 6,700 | 26,400 | 26,400 | ||||||||||||||||||||||
| Adjusted EBITDA expectation | $ | 42,000 | $ | 44,000 | $ | 172,500 | $ | 176,000 | ||||||||||||||||||
| (1) Rounded amounts used. | ||||||||||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 18
| MERCURY SYSTEMS, INC. | |||||||||||
| RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE | |||||||||||
| Quarter Ending March 27, 2020 | |||||||||||
| Fiscal Year Ending July 3, 2020 | |||||||||||
| (In thousands, except per share data) | |||||||||||
The Company defines adjusted income as income before amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, and stock-based and other non-cash compensation expense. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision(2). Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding.
The following tables reconcile the most directly comparable GAAP financial measures to the non-GAAP financial measures.
Third Quarter Ending March 27, 2020(1) | ||||||||||||||||||||||||||
| Range | ||||||||||||||||||||||||||
| Low | High | |||||||||||||||||||||||||
| GAAP expectation -- Net income and earnings per share | $ | 15,900 | $ | 0.29 | $ | 17,400 | $ | 0.32 | ||||||||||||||||||
| Amortization of intangible assets | 7,800 | 7,800 | ||||||||||||||||||||||||
| Restructuring and other charges | — | — | ||||||||||||||||||||||||
| Impairment of long-lived assets | — | — | ||||||||||||||||||||||||
| Acquisition and financing costs | 800 | 800 | ||||||||||||||||||||||||
| Fair value adjustments from purchase accounting | 600 | 600 | ||||||||||||||||||||||||
| Litigation and settlement expense (income), net | — | — | ||||||||||||||||||||||||
| Stock-based and other non-cash compensation expense | 6,700 | 6,700 | ||||||||||||||||||||||||
Impact to income taxes(2) | (4,100) | (4,100) | ||||||||||||||||||||||||
| Adjusted income and adjusted earnings per share expectation | $ | 27,700 | $ | 0.50 | $ | 29,200 | $ | 0.53 | ||||||||||||||||||
| Diluted weighted-average shares outstanding expectation | 55,100 | 55,100 | ||||||||||||||||||||||||
| (1) Rounded amounts used. | ||||||||||||||||||||||||||
| (2) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs. | ||||||||||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports Second Quarter Fiscal 2020 Results, Page 19
Fiscal Year Ending July 3, 2020(1) | ||||||||||||||||||||||||||
| Range | ||||||||||||||||||||||||||
| Low | High | |||||||||||||||||||||||||
| GAAP expectation -- Net income and earnings per share | $ | 71,700 | $ | 1.30 | $ | 74,500 | $ | 1.35 | ||||||||||||||||||
| Amortization of intangible assets | 30,600 | 30,600 | ||||||||||||||||||||||||
| Restructuring and other charges | 1,700 | 1,700 | ||||||||||||||||||||||||
| Impairment of long-lived assets | — | — | ||||||||||||||||||||||||
| Acquisition and financing costs | 5,700 | 5,700 | ||||||||||||||||||||||||
| Fair value adjustments from purchase accounting | 1,800 | 1,800 | ||||||||||||||||||||||||
| Litigation and settlement expense, net | 500 | 500 | ||||||||||||||||||||||||
| Stock-based and other non-cash compensation expense | 26,400 | 26,400 | ||||||||||||||||||||||||
Impact to income taxes(2) | (23,500) | (23,700) | ||||||||||||||||||||||||
| Adjusted income and adjusted earnings per share expectation | $ | 114,900 | $ | 2.09 | $ | 117,500 | $ | 2.13 | ||||||||||||||||||
| Diluted weighted-average shares outstanding expectation | 55,100 | 55,100 | ||||||||||||||||||||||||
| (1) Rounded amounts used. | ||||||||||||||||||||||||||
| (2) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs. | ||||||||||||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Second Quarter Fiscal Year 2020 Financial Results Mark Aslett President and CEO Conference call: Dial (877) 303-6977 in the USA and Canada, Michael Ruppert (760) 298-5079 in all other countries Executive Vice President and CFO Webcast login at www.mrcy.com/investor January 28, 2020, 5:00 pm ET Webcast replay available by 7:00 p.m. ET January 28, 2020 © 2020 Mercury Systems, Inc.
Forward-looking safe harbor statement This presentation contains certain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, including those relating to the acquisitions described herein and to fiscal 2020 business performance and beyond and the Company’s plans for growth and improvement in profitability and cash flow. You can identify these statements by the use of the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of any U.S. Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in the U.S. Government’s interpretation of, federal export control or procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, increases in interest rates, changes to cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to interest rate swaps or other cash flow hedging arrangements, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as are discussed in the Company's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2019. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. 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. Use of Non-GAAP (Generally Accepted Accounting Principles) Financial Measures In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides adjusted EBITDA, adjusted income, adjusted EPS, free cash flow, organic revenue and acquired revenue, which are non-GAAP financial measures. Adjusted EBITDA, adjusted income, and adjusted EPS exclude certain non-cash and other specified charges. The Company believes these non-GAAP financial measures are useful to help investors better understand its past financial performance and prospects for the future. However, these non-GAAP measures should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. Management believes these non-GAAP measures assist in providing a more complete understanding of the Company’s underlying operational results and trends, and management uses these measures along with the corresponding GAAP financial measures to manage the Company’s business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals. A reconciliation of GAAP to non-GAAP financial results discussed in this presentation is contained in the Appendix hereto. © 2020 Mercury Systems, Inc. 2
Introduction • Record revenue, backlog and profitability • Positive industry environment; defense appropriations bill approved • Business model performing extremely well • Investing to support organic growth while delivering record results • Raising total FY20 revenue, adjusted EBITDA and adjusted EPS guidance • Now expect 13-14% organic revenue growth for FY20 © 2020 Mercury Systems, Inc. 3
Financial highlights Q2 FY20 vs. Q2 FY19 LTM Q2 FY20 vs. LTM Q2 FY19 • Bookings up 21% • Record bookings up 27% • Record backlog up 39% • Record backlog up 39% • Record revenue up 22% • Record revenue up 26% • Organic revenue(1) up 12% • Organic revenue(1) up 16% • GAAP net income up 27% • Record GAAP net income up 84% • Record adjusted EBITDA up 16% • Record adjusted EBITDA up 19% • Record Op cash of $32.1M; up 27% • Record Op cash of $108.6M; up 51% • FCF of $20.7M; 48% adj. EBITDA • FCF of $71.8M; 46% adj. EBITDA Notes: (1) Organic revenue represents total company revenue excluding net revenue from acquisitions for the first four full quarters since the entities’ acquisition date (which excludes any intercompany transactions). After the completion of four fiscal quarters, acquired businesses are treated as organic for current and comparable historical periods. © 2020 Mercury Systems, Inc. 4
Pioneered next-generation defense electronics company • Making commercial technologies profoundly more accessible to A&D • Transformational business model at intersection of high tech and A&D – Fueled by internal R&D 4-5x industry average* – Highly innovative trusted, secure mission-critical technologies – Growth capital investments 2-3x industry norms* – Developing sensor processing and C4I subsystems far more quickly and affordably – Industry-leading secure computing solutions – Developed and produced in trusted domestic facilities by a highly-cleared workforce • Challenging global security environment leading to increased defense spending • Strategy and model aligned with DoD priorities and procurement reform • DoD now focused on accelerating and fielding innovative capabilities * Internal R&D and capital investment expressed as a percentage of total company revenue © 2020 Mercury Systems, Inc. 5
Favorable growth environment driving improved results • Sensor and effector mission systems (SEMS) revenue up 24% YoY, C4I up 22% • Substantial growth in estimated lifetime value of top 30 programs and pursuits • Growth driven by content expansion and market penetration • Benefiting from significant wave of sensor and C4I modernization • Favorable trends – delayering, flight to quality, outsourcing, taking share • Tracking 100+ active programs, top programs growing faster than total revenue © 2020 Mercury Systems, Inc. 6
Growth strategy update • Created low-risk content expansion in capabilities and addressable markets • Acquired capabilities drove Tier 2 subsystems provider transformation • Expanding in core sensor and effector mission systems market • C4I market expansion: C3I and platform/mission management • Uniquely positioned to provide DoD trusted, secure microelectronics solutions • Investing $15M to expand scope of existing microelectronics business • Completed West coast RF facility buildout and consolidation • Integration of prior acquisitions progressing well; APC integration on track © 2020 Mercury Systems, Inc. 7
Strategy delivering above-average growth and profitability • Continuing to invest across the business to support organic growth • Using M&A to expand capabilities, access and penetrate adjacent markets • Cost and revenue synergies contributing to strong financial performance • Investing in trusted, secure Innovation that Matters® for aerospace and defense • Destination employer attracting, retaining and engaging best possible talent © 2020 Mercury Systems, Inc. 8
Business outlook and summary Plan to continue generating shareholder value: 1. Drive 10% average organic revenue growth supplemented by strategic M&A 2. Invest in people, new technologies, facilities, manufacturing assets, business systems 3. Enhance margin, quality, on-time delivery and working capital 4. Grow revenues faster than operating expenses to improve operating leverage 5. Fully integrate acquired businesses to generate cost and revenue synergies Expect double-digit revenue and profitability growth, strong cash flow © 2020 Mercury Systems, Inc. 9
Q2 FY20 vs. Q2 FY19 In $ millions, except percentage and per share data Q2 FY19 Q2 FY20(3) Change Bookings $173.2 $209.6 21% Book-to-Bill 1.09 1.08 Backlog $522.0 $727.5 39% 12-Month Backlog 389.1 521.8 Revenue $159.1 $193.9 22% Organic Revenue Growth(1) 11% 12% Gross Margin 44.6% 45.6% 1.0 pts Operating Expenses $51.0 $67.7 Selling, General & Administrative 27.8 32.8 33% Research & Development 16.2 24.7 Amortization/Restructuring/Acquisition 7.0 10.2 GAAP Net Income $12.4 $15.7 27% Effective Tax Rate 26.6% 24.6% GAAP EPS $0.26 $0.29 12% Weighted Average Diluted Shares 47.7 55.0 Adjusted EPS(2) $0.47 $0.54 15% (2) Adj. EBITDA $37.0 $42.8 16% % of revenue 23.2% 22.1% Operating Cash Flow $25.3 $32.1 27% (2) Free Cash Flow $18.2 $20.7 14% % of Adjusted EBITDA 49% 48% Notes: (1) Organic revenue represents total company revenue excluding net revenue from acquisitions for the first four full quarters since the entities’ acquisition date (which excludes any intercompany transactions). After the completion of four fiscal quarters, acquired businesses are treated as organic for current and comparable historical periods. (2) Non-GAAP, see reconciliation table. (3) Effective as of July 1, 2019, the Company's fiscal year has changed to the 52-week or 53-week period ending on the Friday closest to the last day of June. All references in this presentation to the second quarter of fiscal 2020 are to the quarter ended December 27, 2019, to the third quarter of fiscal 2020 are to the quarter ending March 27, 2020 and to fiscal 2020 are to the fiscal year ending July 3, 2020. © 2020 Mercury Systems, Inc. 10
Balance sheet As of (In $ millions)(1) 12/31/18 3/31/19 6/30/19 9/27/19 12/27/19 ASSETS Cash & cash equivalents $93.9 $112.5 $257.9 $161.3 $182.0 Accounts receivable, net 168.3 170.7 176.2 177.5 193.4 Inventory, net 126.4 131.7 137.1 148.5 153.6 PP&E, net 53.1 55.9 60.0 65.9 72.7 Goodwill and intangibles, net 696.3 724.3 768.3 847.4 839.2 Other(2) 18.6 17.3 17.4 73.3 71.7 TOTAL ASSETS $1,156.6 $1,212.4 $1,417.0 $1,473.9 $1,512.6 LIABILITIES AND S/E AP and accrued expenses(2) $70.7 $83.1 $86.7 $84.8 $91.3 Other liabilities(2) 49.9 40.4 45.5 93.7 104.3 Debt 240.0 276.5 - - - Total liabilities 360.6 400.0 132.2 178.5 195.6 Stockholders' equity 796.1 812.4 1,284.7 1,295.3 1,317.1 TOTAL LIABILITIES AND S/E $1,156.6 $1,212.4 $1,417.0 $1,473.9 $1,512.6 Notes: (1) Rounded amounts used (2) Effective July 1, 2019, the Company has adopted ASC 842 - Leases using the optional transition method. Prior periods were not changed. As of December 27, 2019, the Company has Right-of- use assets of $49.8 million and total Lease liabilities of $62.6 million, of which $7.3 million is included in Accrued expenses. © 2020 Mercury Systems, Inc. 11
Cash flow summary For the Fiscal Quarters Ended (In $ millions)(1) 12/31/18 3/31/19 6/30/19 9/27/19 12/27/19 Net Income $12.4 $14.1 $12.8 $19.2 $15.7 Depreciation and amortization 11.7 11.6 11.6 11.4 12.5 Termination of interest rate swap - - 5.4 - - Other non-cash items, net 4.6 6.3 5.1 6.4 7.6 Changes in Operating Assets and Liabilities Accounts receivable, unbilled receivables, and (15.0) (1.2) (6.0) 2.2 (15.7) costs in excess of billings Inventory (4.9) (4.0) (3.3) 0.4 (5.7) Accounts payable and accrued expenses 9.2 8.0 2.7 (6.3) 5.8 Other 7.3 (8.6) (2.2) (9.0) 11.8 (3.4) (5.8) (9.0) (12.8) (3.8) Operating Cash Flow 25.3 26.2 26.0 24.3 32.1 Capital expenditures (7.1) (7.1) (8.8) (9.6) (11.3) Free Cash Flow(2) $18.2 $19.2 $17.1 $14.7 $20.7 Free Cash Flow(2) / Adjusted EBITDA(2) 49% 49% 45% 40% 48% Free Cash Flow(2) / GAAP Net Income 147% 136% 134% 76% 132% Notes: (1) Rounded amounts used. (2) Non-GAAP, see reconciliation table. © 2020 Mercury Systems, Inc. 12
Committed to maintaining differentiated and attractive financial profile • Operating expense leverage Increase Adj. EBITDA • Program production mix margins • Operational improvements • Full acquisition integration • Alignment with DoD priorities Grow organically at • Increased customer outsourcing high-single / • Program content expansion low-double digit • Increased market share • Large pipeline of targets Supplement with • Significant financial firepower strategic • Revolver with attractive terms M&A • Identify, execute, integrate © 2020 Mercury Systems, Inc. 13
Q3 FY20 guidance In $ millions, except percentage and per share data Q3 FY19(1) Q3 FY20(2) Change Revenue $174.6 $190.0 - $200.0 9% - 15% GAAP Net Income $14.1 $15.9 - $17.4 13% - 23% Effective tax rate(3) 27.5% 26.0% GAAP EPS $0.29 $0.29 - $0.32 0% - 10% Weighted-average diluted shares outstanding 48.0 55.1 Adjusted EPS(4) $0.50 $0.50 - $0.53 0% - 6% (4) Adj. EBITDA $38.8 $42.0 - $44.0 8% - 13% % of revenue 22.2% 22.1% Notes: (1) Q3 FY19 figures are as reported in the Company’s earnings release dated April 30, 2019. (2) The guidance included herein is from the Company’s earnings release dated January 28, 2020. For purposes of modeling and guidance, we have assumed no incremental restructuring, acquisition, other non-operating adjustments or non-recurring financing-related expenses. (3) The effective tax rate in the guidance included herein excludes discrete items. (4) Non-GAAP, see reconciliation table. (5) Effective as of July 1, 2019, the Company's fiscal year has changed to the 52-week or 53-week period ending on the Friday closest to the last day of June. All references in this presentation to the second quarter of fiscal 2020 are to the quarter ended December 27, 2019, to the third quarter of fiscal 2020 are to the quarter ending March 27, 2020 and to fiscal 2020 are to the fiscal year ending July 3, 2020. © 2020 Mercury Systems, Inc. 14
FY20 annual guidance In $ millions, except percentage and per share data FY19(1) FY20(2)(5) Change Revenue $654.7 $780.0 - $795.0 19% - 21% GAAP Net Income $46.8 $71.7 - $74.5 53% - 59% Effective tax rate(3) 21.4% 19.0% GAAP EPS $0.96 $1.30 - $1.35 35% - 41% Weighted-average diluted shares outstanding 48.5 55.1 Adjusted EPS(4) $1.84 $2.09 - $2.13 14% - 16% (4) Adj. EBITDA $145.3 $172.5 - $176.0 19% - 21% % of revenue 22.2% 22.1% Notes: (1) FY19 figures are as reported in the Company’s earnings release dated July 30, 2019. (2) The guidance included herein is from the Company’s earnings release dated January 28, 2020. For purposes of modeling and guidance, we have assumed no incremental restructuring, acquisition, other non-operating adjustments or non-recurring financing-related expenses. (3) The effective tax rate in the guidance included herein excludes discrete items. (4) Non-GAAP, see reconciliation table. (5) Effective as of July 1, 2019, the Company's fiscal year has changed to the 52-week or 53-week period ending on the Friday closest to the last day of June. All references in this presentation to the second quarter of fiscal 2020 are to the quarter ended December 27, 2019, to the third quarter of fiscal 2020 are to the quarter ending March 27, 2020 and to fiscal 2020 are to the fiscal year ending July 3, 2020. © 2020 Mercury Systems, Inc. 15
Summary • Strong Q2 and first half financial performance • Revenue increased 22% YoY with 12% organic growth • Bookings exceeded $200M for the third consecutive quarter with 1.08 book-to-bill yielding record backlog • Record operating cash flow & solid free cash flow generation • Continuing to invest in the business while delivering record results • FY20 guidance raise based on results and continued momentum © 2020 Mercury Systems, Inc. 16
Appendix © 2020 Mercury Systems, Inc.
Adjusted EPS reconciliation Q3 FY20(2)(4) FY20(2)(4) (In thousands, except per share data) Q2 FY19 Q2 FY20 LTM Q2 FY19 LTM Q2 FY20 Low High Low High Earnings per share(1) $ 0.26 $ 0.29 $ 0.71 $ 1.18 $ 0.29 $ 0.32 $ 1.30 $ 1.35 Net Income $ 12,383 $ 15,676 $ 33,659 $ 61,836 $ 15,900 $ 17,400 $ 71,700 $ 74,500 Amortization of intangible assets 6,939 7,992 28,660 28,805 7,800 7,800 30,600 30,600 Restructuring and other charges 23 1,101 3,278 1,782 - - 1,700 1,700 Impairment of long-lived assets - - - - - - - - Acquisition and financing costs 762 1,882 4,513 11,941 800 800 5,700 5,700 Fair value adjustments from purchase accounting - 600 2,019 693 600 600 1,800 1,800 Litigation and settlement expense, net 179 142 179 620 - - 500 500 Stock-based and other non-cash compensation expense 5,338 6,639 18,059 21,955 6,700 6,700 26,400 26,400 Impact to income taxes(3) (3,009) (4,504) (12,785) (25,823) (4,100) (4,100) (23,500) (23,700) Adjusted income $ 22,615 $ 29,528 $ 77,582 $ 101,809 $ 27,700 $ 29,200 $ 114,900 $ 117,500 Adjusted earnings per share(1) $ 0.47 $ 0.54 $ 1.63 $ 1.95 $ 0.50 $ 0.53 $ 2.09 $ 2.13 Weighted-average shares outstanding: Basic 47,189 55,548 Diluted 47,705 55,001 55,100 55,100 55,100 55,100 Notes: (1) Per share information is presented on a fully diluted basis. (2) Rounded amounts used. (3) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs. (4) Effective as of July 1, 2019, the Company's fiscal year has changed to the 52-week or 53-week period ending on the Friday closest to the last day in June. All references in this presentation to the second quarter of fiscal 2020 are to the quarter ended December 27, 2019, to the third quarter of fiscal 2020 are to the quarter ending March 27, 2020 and to fiscal 2020 are to the fiscal year ending July 3, 2020. © 2020 Mercury Systems, Inc. 18
Adjusted EBITDA reconciliation Q3 FY20(2)(3) FY20(2)(3) (In thousands) Q2 FY19 Q2 FY20 LTM Q2 FY19 LTM Q2 FY20 Low High Low High Net Income $ 12,383 $ 15,676 $ 33,659 $ 61,836 $ 15,900 $ 17,400 $ 71,700 $ 74,500 Other non-operating adjustments, net(1) (18) (549) (344) (231) - - (200) (200) Interest expense (income), net 2,125 (312) 7,048 2,360 (500) (500) (2,500) (2,500) Income tax provision 4,483 5,110 16,348 8,232 5,600 6,100 16,800 17,500 Depreciation 4,769 4,555 17,932 18,261 5,100 5,100 20,000 20,000 Amortization of intangible assets 6,939 7,992 28,660 28,805 7,800 7,800 30,600 30,600 Restructuring and other charges 23 1,101 3,278 1,782 - - 1,700 1,700 Impairment of long-lived assets - - - - - - - - Acquisition and financing costs 762 1,882 4,513 11,941 800 800 5,700 5,700 Fair value adjustments from purchase accounting - 600 2,019 693 600 600 1,800 1,800 Litigation and settlement expense, net 179 142 179 620 - - 500 500 Stock-based and other non-cash compensation expense 5,338 6,639 18,059 21,955 6,700 6,700 26,400 26,400 Adjusted EBITDA $ 36,983 $ 42,836 $ 131,351 $ 156,254 $ 42,000 $ 44,000 $ 172,500 $ 176,000 Notes: (1) As of July 1, 2018, the Company has revised its definition of adjusted EBITDA to incorporate other non-operating adjustments, net, which includes gains or losses on foreign currency remeasurement and fixed assets sales and disposals among other adjustments. Adjusted EBITDA for prior periods has been recast for comparative purposes. (2) Rounded amounts used. (3) Effective as of July 1, 2019, the Company's fiscal year has changed to the 52-week or 53-week period ending on the Friday closest to the last day in June. All references in this presentation to the second quarter of fiscal 2020 are to the quarter ended December 27, 2019, to the third quarter of fiscal 2020 are to the quarter ending March 27, 2020 and to fiscal 2020 are to the fiscal year ending July 3, 2020. © 2020 Mercury Systems, Inc. 19
Free cash flow reconciliation (In thousands) Q2 FY19 Q2 FY20 LTM Q2 FY19 LTM Q2 FY20 Cash provided by operating activities $ 25,301 $ 32,066 $ 71,844 $ 108,563 Purchases of property and equipment (7,075) (11,324) (18,316) (36,808) Free cash flow $ 18,226 $ 20,742 $ 53,528 $ 71,755 © 2020 Mercury Systems, Inc. 20
Organic revenue reconciliation (In thousands) Q2 FY19 Q2 FY20 LTM Q2 FY19 LTM Q2 FY20 Organic revenue(1) $ 159,089 $ 177,583 $ 563,354 $ 653,636 Acquired revenue - 16,330 8,994 69,180 Net revenues $ 159,089 $ 193,913 $ 572,348 $ 722,816 Notes: (1) Organic revenue represents total company revenue excluding net revenue from acquisitions for the first four full quarters since the entities’ acquisition date (which excludes any intercompany transactions). After the completion of four fiscal quarters, acquired businesses are treated as organic for current and comparable historical periods. © 2020 Mercury Systems, Inc. 21