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): October 30, 2018
Mercury Systems, Inc.
(Exact Name of Registrant as Specified in Charter)
Massachusetts | 000-23599 | 04-2741391 | ||
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||
50 Minuteman Road, Andover, Massachusetts | 01810 | |
(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 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
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. ☐
Item 2.02. Results of Operations and Financial Condition.
On October 30, 2018, Mercury Systems, Inc. (the “Company”) issued a press release and an earnings presentation regarding its financial results for the first quarter of fiscal 2019 ended September 30, 2018. 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 October 30, 2018, of Mercury Systems, Inc. |
99.2 | Earnings Presentation, dated October 30, 2018, 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: October 30, 2018 | MERCURY SYSTEMS, INC. |
By: /s/ Michael D. Ruppert Michael D. Ruppert Executive Vice President, Chief Financial Officer, and Treasurer | |
EXHIBIT INDEX
Mercury Reports First Quarter Fiscal 2019 Results, Page 1
Exhibit 99.1
News Release | |
Mercury Systems Reports First Quarter Fiscal 2019 Results
First Quarter Highlights Include:
Revenue increases 36% over prior year
Book-to-bill ratio of 1.24 yields record bookings and backlog
Revenue, adjusted EBITDA and adjusted EPS exceed consensus estimates
Operating cash flow of $20 million and free cash flow of $16 million
ANDOVER, Mass. October 30, 2018 Mercury Systems, Inc. (NASDAQ: MRCY, www.mrcy.com), reported operating results for the first quarter of fiscal 2019, ended September 30, 2018.
Management Comments
“The first quarter of fiscal year 2019 marked a strong start to the year for Mercury,” said Mark Aslett, Mercury’s President and Chief Executive Officer. “We achieved another record for bookings and backlog, exceeded consensus estimates for revenue, adjusted EBITDA, and adjusted EPS as well as delivered solid operating and free cash flow. During the quarter, we amended our existing revolving credit facility, increasing it to $750 million, and renewed the 5-year term to support our growth through organic investment and strategic acquisitions. Based on our financial performance for the quarter, the continued momentum in our organic and acquired businesses as well as the strong backlog, we are raising our guidance for the full fiscal year,” said Aslett.
First Quarter Fiscal 2019 Results
Total Company first quarter fiscal 2019 revenues were $144.1 million, compared to $106.1 million in the first quarter of fiscal 2018. The first quarter fiscal 2019 results included an
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Mercury Reports First Quarter Fiscal 2019 Results, Page 2
aggregate of approximately $31.3 million of revenue attributable to the Themis Computer and Germane Systems acquired businesses.
Total Company GAAP net income for the first quarter of fiscal 2019 was $7.5 million, or $0.16 per share, compared to $18.0 million, or $0.38 per share, for the first quarter of fiscal 2018. Adjusted earnings per share (“adjusted EPS”) was $0.39 per share for the first quarter of fiscal 2019, compared to $0.37 per share in the first quarter of fiscal 2018.
First quarter fiscal 2019 adjusted EBITDA for the total Company was $31.6 million, compared to $25.3 million for the first quarter of fiscal 2018.
Cash flows from operating activities in the first quarter of fiscal 2019 were a net inflow of $20.0 million, compared to a net inflow of $8.0 million in the first quarter of fiscal 2018. Free cash flow, defined as cash flows from operating activities less capital expenditures, was a net inflow of $16.3 million in the first quarter of fiscal 2019, compared to a net inflow of $4.4 million in the first quarter of fiscal 2018.
All per share information is presented on a fully diluted basis.
Bookings and Backlog
Total bookings for the first quarter of fiscal 2019 were $178.7 million, yielding a book-to-bill ratio of 1.24 for the quarter.
Mercury’s total backlog at September 30, 2018 was $507.9 million, a $147.2 million increase from a year ago. Of the September 30, 2018 total backlog, $377.8 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 2019. 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 First Quarter Fiscal 2019 Earnings Release 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.
For the second quarter of fiscal 2019, revenues are forecasted to be in the range of $151.6 million to $156.6 million. GAAP net income for the second quarter is expected to be approximately $8.3
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Mercury Reports First Quarter Fiscal 2019 Results, Page 3
million to $10.3 million, or $0.17 to $0.22 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 27%, excluding discrete items, and approximately 47.8 million weighted average diluted shares outstanding. Adjusted EBITDA for the second quarter of fiscal 2019 is expected to be in the range of $31.7 million to $34.5 million. Adjusted EPS is expected to be in the range of $0.39 to $0.43 per share.
For the full fiscal year 2019, we currently expect revenue of $607.0 million to $625.0 million, and GAAP net income of $39.1 million to $45.6 million, or $0.82 to $0.96 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 28%, excluding discrete items, and approximately 47.7 million weighted average diluted shares outstanding. Adjusted EBITDA for the full fiscal year is expected to be approximately $133.5 million to $142.5 million, and adjusted EPS for the full fiscal year is expected to be approximately $1.65 to $1.79 per share.
Recent Highlights
September - Mercury announced it received a $9.2 million follow-on order from a leading defense prime contractor for custom-engineered radiation-tolerant solid-state drives (SSD) for a defense data storage application. The order was booked in the Company’s fiscal 2019 first quarter. Mercury has received orders for this custom SSD exceeding $20 million since initial product announcement in March of calendar year 2018.
September - Mercury announced it received a $5.0 million order from a leading defense prime contractor for rugged, embedded processing subsystems to perform advanced, shipboard radar processing. The order was booked in the Company’s fiscal 2018 fourth quarter and is expected to be shipped over the next several quarters.
September - Mercury announced the first volume production shipment of BuiltSECURE™ high density double data rate fourth-generation synchronous dynamic random-access memory (DDR4 SDRAM) to a leading defense prime contractor. The devices will be integrated into the radar warning receiver of a Command, Control, Communications, Computer and Intelligence (C4I) system.
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Mercury Reports First Quarter Fiscal 2019 Results, Page 4
September - Mercury announced that it received a $20.5 million follow-on order against a previously announced $152 million 5-year sole source basic ordering agreement (BOA) to deliver integrated subsystems to the U.S. Navy in support of both Navy and Air Force training environments. The order was received in the Company's fiscal 2018 fourth quarter and is expected to be shipped over the next several quarters. In total, Mercury received orders of $28.9 million in the Company’s fiscal 2018 fourth quarter against this BOA, with follow-on orders anticipated to continue through the life of the agreement.
September - Mercury announced the EnsembleSeries™ LDS3517 processing blade for advanced on-platform processing, machine learning and artificial intelligence (AI) applications. Each blade combines an Intel Xeon® D server-class processor, a Xilinx® UltraScale® FPGA and a mezzanine site in a 3U OpenVPX™ form-factor.
September - Mercury announced it received a $6.7 million follow-on order from a leading defense prime contractor for BuiltSECURE™ high-density secure memory devices to be integrated into the command, control and intelligence system of an advanced airborne platform. The order was booked in the Company’s fiscal 2019 first quarter and is expected to be shipped over the next several quarters.
September - Mercury announced it received a $3.6 million order from a leading defense prime contractor for high-performance radio frequency (RF) microelectronics integrated into a naval radar system. The order was booked in the Company’s fiscal 2018 fourth quarter and is expected to be shipped over the next several quarters.
September - Mercury announced that the Company was named to Fortune magazine's 2018 100 List of Fastest-Growing Companies. The annual Fortune list ranks public companies with market capitalization of $250 million or more, based on revenue growth rate, EPS growth rate and three-year annualized total return. The Company achieved a ranking of #27 on the list with the unique distinction of being the only aerospace and defense company included.
September - Mercury announced it received a $10.3 million order from a leading defense prime contractor for secure, rugged, embedded processing subsystems to perform advanced sensor
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Mercury Reports First Quarter Fiscal 2019 Results, Page 5
processing on a mobile platform. The order was booked in the Company’s fiscal 2018 fourth quarter and is expected to be shipped over the next several quarters.
August - Mercury announced it received an $8.4 million order from a leading defense prime contractor for precision-engineered radio frequency (RF) converter subsystems for an advanced airborne electronic protection application. The order was booked in the Company’s fiscal 2018 fourth quarter and is expected to be shipped over the next several quarters.
August - Mercury announced it received a $17 million order from a leading defense prime contractor for GPS Selective Availability Anti-Spoofing Modules (SAASM) for a precision guided munitions application. The order was booked in the Company’s fiscal 2019 first quarter and is expected to be shipped over the next several quarters.
August - Mercury announced it received an $11.6 million follow-on order from a leading defense prime contractor for high-performance digital signal processing subsystems for an unmanned airborne intelligence, surveillance and reconnaissance (ISR) application. The order was booked in the Company’s fiscal 2018 fourth quarter and is expected to be shipped over the next several quarters.
August - Mercury announced it received an $8.4 million follow-on order against a previously announced $152 million 5-year sole source basic ordering agreement to complete subsystem engineering development in support of the U.S. Navy’s training environment. The order was received in the Company's fiscal 2018 fourth quarter and engineering development is expected to be completed over the next several quarters.
August - Mercury announced its first annual data at rest (DAR) technology forum for the Commercial Solutions for Classified (CSfC) program with participation from the National Security Agency (NSA). The event, held on October 2, 2018 in Baltimore, Md., assembled the DAR ecosystem of customers, component suppliers and Trusted Integrators to share best practices for cost-effective, rapidly deployed CSfC programs.
August - Mercury announced it received an $11.8 million order from a leading defense prime contractor for the development of a custom-engineered radiation-tolerant solid-state drive (SSD) for
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Mercury Reports First Quarter Fiscal 2019 Results, Page 6
a defense data storage application. The order was booked in the Company’s fiscal 2018 fourth quarter.
July - Mercury announced the acquisition of Germane Systems for $45 million. Based in Chantilly, VA, Germane is an industry leader in the design, development and manufacturing of rugged servers, computers and storage systems for command, control and information ("C2I") applications. Mercury acquired Germane for an all cash purchase price of $45 million, subject to net working capital and net debt adjustments. The acquisition and associated transaction expenses were funded through Mercury’s existing revolving credit facility. The acquisition is expected to be accretive to fiscal 2019 adjusted EPS.
July - Mercury announced it received a $2.1 million order for SWaP-optimized multi-function radio frequency (RF) modules from a leading defense prime contractor for an airborne electronic warfare application. The order was booked in the Company’s fiscal 2018 fourth quarter and is expected to be shipped over the next several quarters.
July - Mercury announced the launch of its third generation RES HD modules featuring the newest Intel® Xeon® Scalable processors and three additional storage, PCIe expansion, and managed switch modules. The new XR6 RES HD modules maximize performance with the latest commercial-off-the -shelf (COTS) components and plug into three scalable and extendible RES HD chassis.
July - Mercury announced the beginning of customer engagements for the newest product offering in its ASURRE-Stor® portfolio of self-encrypting solid-state drives (SSD). This newest drive features up to 512 GB of user-accessible storage capacity in a rugged 2.5-inch, low-profile form factor (7mm) optimized for laptops and workstations storing highly sensitive data.
Conference Call Information
Mercury will host a conference call and simultaneous webcast on Tuesday, October 30, 2018, at 5:00 p.m. ET to discuss the first quarter fiscal 2019 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
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Mercury Reports First Quarter Fiscal 2019 Results, Page 7
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.
Mercury Systems - Innovation That Matters®
Mercury Systems (NASDAQ:MRCY) is a leading commercial provider of secure sensor and safety-critical processing subsystems. Optimized for customer and mission success, Mercury’s solutions power a wide variety of critical defense and intelligence programs. Headquartered in Andover, Mass., Mercury is pioneering a next-generation defense electronics business model specifically designed to meet the industry’s current and emerging technology needs. To learn more, visit www.mrcy.com.
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Mercury Reports First Quarter Fiscal 2019 Results, Page 8
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 acquisition described herein and to fiscal 2019 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 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, 2018. 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, Ensemble Series, EnterpriseSeries, BuiltSAFE and BuiltSECURE are trademarks and Innovation that Matters is a registered trademark of Mercury Systems, Inc. Other product and company names mentioned may be trademarks and/or registered trademarks of their respective holders.
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Mercury Reports First Quarter Fiscal 2019 Results, Page 9
MERCURY SYSTEMS, INC. | ||||||||
UNAUDITED CONSOLIDATED BALANCE SHEETS | ||||||||
(In thousands) | ||||||||
September 30, | June 30, | |||||||
2018 | 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 72,869 | $ | 66,521 | ||||
Accounts receivable, net | 113,920 | 104,040 | ||||||
Unbilled receivables and costs in excess of billings | 39,977 | 39,774 | ||||||
Inventory | 121,156 | 108,585 | ||||||
Prepaid income taxes | 6,736 | 3,761 | ||||||
Prepaid expenses and other current assets | 9,521 | 9,062 | ||||||
Total current assets | 364,179 | 331,743 | ||||||
Property and equipment, net | 50,829 | 50,980 | ||||||
Goodwill | 520,589 | 497,442 | ||||||
Intangible assets, net | 183,606 | 177,904 | ||||||
Other non-current assets | 7,771 | 6,411 | ||||||
Total assets | $ | 1,126,974 | $ | 1,064,480 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 25,726 | $ | 21,323 | ||||
Accrued expenses | 15,144 | 16,386 | ||||||
Accrued compensation | 20,281 | 21,375 | ||||||
Deferred revenues and customer advances | 21,605 | 12,596 | ||||||
Total current liabilities | 82,756 | 71,680 | ||||||
Deferred income taxes | 13,266 | 13,635 | ||||||
Income taxes payable | 2,879 | 998 | ||||||
Long-term debt | 240,000 | 195,000 | ||||||
Other non-current liabilities | 11,452 | 11,276 | ||||||
Total liabilities | 350,353 | 292,589 | ||||||
Shareholders’ equity: | ||||||||
Common stock | 472 | 469 | ||||||
Additional paid-in capital | 587,788 | 590,163 | ||||||
Retained earnings | 187,447 | 179,968 | ||||||
Accumulated other comprehensive income | 914 | 1,291 | ||||||
Total shareholders’ equity | 776,621 | 771,891 | ||||||
Total liabilities and shareholders’ equity | $ | 1,126,974 | $ | 1,064,480 | ||||
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Mercury Reports First Quarter Fiscal 2019 Results, Page 10
MERCURY SYSTEMS, INC. | ||||||||
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
(In thousands, except per share data) | ||||||||
Three Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Net revenues | $ | 144,056 | $ | 106,069 | ||||
Cost of revenues (1) | 82,473 | 55,395 | ||||||
Gross margin | 61,583 | 50,674 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative (1) | 24,741 | 20,568 | ||||||
Research and development (1) | 14,948 | 13,742 | ||||||
Amortization of intangible assets | 7,181 | 5,637 | ||||||
Restructuring and other charges | 504 | 95 | ||||||
Acquisition costs and other related expenses | 399 | 261 | ||||||
Total operating expenses | 47,773 | 40,303 | ||||||
Income from operations | 13,810 | 10,371 | ||||||
Interest income | 66 | 19 | ||||||
Interest expense | (2,259 | ) | (3 | ) | ||||
Other (expense) income, net | (1,009 | ) | (815 | ) | ||||
Income before income taxes | 10,608 | 9,572 | ||||||
Tax provision (benefit) | 3,129 | (8,381 | ) | |||||
Net income | $ | 7,479 | $ | 17,953 | ||||
Basic net earnings per share: | $ | 0.16 | $ | 0.39 | ||||
Diluted net earnings per share: | $ | 0.16 | $ | 0.38 | ||||
Weighted-average shares outstanding: | ||||||||
Basic | 47,048 | 46,504 | ||||||
Diluted | 47,697 | 47,489 | ||||||
(1) Includes stock-based compensation expense, allocated as follows: | ||||||||
Cost of revenues | $ | 252 | $ | 148 | ||||
Selling, general and administrative | $ | 3,884 | $ | 3,976 | ||||
Research and development | $ | 543 | $ | 497 | ||||
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Mercury Reports First Quarter Fiscal 2019 Results, Page 11
MERCURY SYSTEMS, INC. | ||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(In thousands) | ||||||||
Three Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 7,479 | $ | 17,953 | ||||
Depreciation and amortization | 11,546 | 9,337 | ||||||
Other non-cash items, net | 5,520 | 813 | ||||||
Changes in operating assets and liabilities | (4,516 | ) | (20,075 | ) | ||||
Net cash provided by operating activities | 20,029 | 8,028 | ||||||
Cash flows from investing activities: | ||||||||
Acquisition of businesses, net of cash acquired | (46,273 | ) | (6,000 | ) | ||||
Purchases of property and equipment | (3,727 | ) | (3,628 | ) | ||||
Other investing activities | — | (374 | ) | |||||
Net cash used in investing activities | (50,000 | ) | (10,002 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings under credit facilities | 45,000 | — | ||||||
Payments of deferred financing and offering costs | (1,851 | ) | — | |||||
Payments for retirement of common stock | (6,812 | ) | (13,548 | ) | ||||
Net cash provided by (used in) financing activities | 36,337 | (13,548 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (18 | ) | (41 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 6,348 | (15,563 | ) | |||||
Cash and cash equivalents at beginning of period | 66,521 | 41,637 | ||||||
Cash and cash equivalents at end of period | $ | 72,869 | $ | 26,074 | ||||
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Mercury Reports First Quarter Fiscal 2019 Results, Page 12
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.
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.
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports First Quarter Fiscal 2019 Results, Page 13
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 First Quarter Fiscal 2019 Results, Page 14
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.
Three Months Ended | |||||||||
September 30, | |||||||||
2018 | 2017 | ||||||||
Net income | $ | 7,479 | $ | 17,953 | |||||
Other non-operating adjustments, net (1) | 365 | 222 | |||||||
Interest expense, net | 2,193 | (16 | ) | ||||||
Income taxes | 3,129 | (8,381 | ) | ||||||
Depreciation | 4,365 | 3,700 | |||||||
Amortization of intangible assets | 7,181 | 5,637 | |||||||
Restructuring and other charges | 504 | 95 | |||||||
Impairment of long-lived assets | — | — | |||||||
Acquisition and financing costs | 1,043 | 854 | |||||||
Fair value adjustments from purchase accounting | 620 | 509 | |||||||
Litigation and settlement expense (income), net | — | — | |||||||
Stock-based and other non-cash compensation expense | 4,743 | 4,696 | |||||||
Adjusted EBITDA | $ | 31,622 | $ | 25,269 | |||||
(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. | |||||||||
Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures 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 First Quarter Fiscal 2019 Results, Page 15
The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure.
Three Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operations | $ | 20,029 | $ | 8,028 | ||||
Capital expenditures | (3,727 | ) | (3,628 | ) | ||||
Free cash flow | $ | 16,302 | $ | 4,400 | ||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports First Quarter Fiscal 2019 Results, Page 16
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 table reconciles the most directly comparable GAAP financial measures to the non-GAAP financial measures.
Three Months Ended | |||||||||||||||||
September 30, | |||||||||||||||||
2018 | 2017 | ||||||||||||||||
Net income and earnings per share | $ | 7,479 | $ | 0.16 | $ | 17,953 | $ | 0.38 | |||||||||
Amortization of intangible assets | 7,181 | 5,637 | |||||||||||||||
Restructuring and other charges | 504 | 95 | |||||||||||||||
Impairment of long-lived assets | — | — | |||||||||||||||
Acquisition and financing costs | 1,043 | 854 | |||||||||||||||
Fair value adjustments from purchase accounting | 620 | 509 | |||||||||||||||
Litigation and settlement expense (income), net | — | — | |||||||||||||||
Stock-based and other non-cash compensation expense | 4,743 | 4,696 | |||||||||||||||
Impact to income taxes (1) | (3,073 | ) | (11,951 | ) | |||||||||||||
Adjusted income and adjusted earnings per share | $ | 18,497 | $ | 0.39 | $ | 17,793 | $ | 0.37 | |||||||||
Diluted weighted-average shares outstanding: | 47,697 | 47,489 | |||||||||||||||
(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. | |||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports First Quarter Fiscal 2019 Results, Page 17
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.
Three Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Organic Revenue | $ | 112,801 | $ | 106,069 | ||||
Acquired Revenue | 31,255 | — | ||||||
Net revenues | $ | 144,056 | $ | 106,069 | ||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports First Quarter Fiscal 2019 Results, Page 18
MERCURY SYSTEMS, INC. | |||
RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE | |||
Quarter Ending December 31, 2018 | |||
Year Ending June 30, 2019 | |||
(In thousands, except per share data) | |||
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 adjusted EBITDA financial measure to its most directly comparable GAAP measures.
Three Months Ending | Twelve Months Ending | |||||||||||||||
December 31, 2018 | June 30, 2019 | |||||||||||||||
Range | Range | |||||||||||||||
Low | High | Low | High | |||||||||||||
GAAP expectation -- Net income | $ | 8,300 | $ | 10,300 | $ | 39,100 | $ | 45,600 | ||||||||
Adjust for: | ||||||||||||||||
Other non-operating adjustments, net | — | — | 400 | 400 | ||||||||||||
Interest expense (income), net | 2,200 | 2,200 | 8,800 | 8,800 | ||||||||||||
Income taxes | 3,100 | 3,900 | 14,900 | 17,400 | ||||||||||||
Depreciation | 4,800 | 4,800 | 19,200 | 19,200 | ||||||||||||
Amortization of intangible assets | 7,000 | 7,000 | 26,800 | 26,800 | ||||||||||||
Restructuring and other charges | — | — | 500 | 500 | ||||||||||||
Impairment of long-lived assets | — | — | — | — | ||||||||||||
Acquisition and financing costs | 700 | 700 | 2,700 | 2,700 | ||||||||||||
Fair value adjustments from purchase accounting | — | — | 600 | 600 | ||||||||||||
Litigation and settlement expense (income), net | — | — | — | — | ||||||||||||
Stock-based and other non-cash compensation expense | 5,600 | 5,600 | 20,500 | 20,500 | ||||||||||||
Adjusted EBITDA expectation | $ | 31,700 | $ | 34,500 | $ | 133,500 | $ | 142,500 | ||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports First Quarter Fiscal 2019 Results, Page 19
MERCURY SYSTEMS, INC. | |||
RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE | |||
Quarter Ending December 31, 2018 | |||
Year Ending June 30, 2019 | |||
(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 (1). Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding.
The following table reconciles the most directly comparable GAAP financial measures to the non-GAAP financial measures.
Three Months Ending December 31, 2018 | ||||||||||||||||
Range | ||||||||||||||||
Low | High | |||||||||||||||
GAAP expectation -- Net income and earnings per share | $ | 8,300 | $ | 0.17 | $ | 10,300 | $ | 0.22 | ||||||||
Amortization of intangible assets | 7,000 | 7,000 | ||||||||||||||
Restructuring and other charges | — | — | ||||||||||||||
Impairment of long-lived assets | — | — | ||||||||||||||
Acquisition and financing costs | 700 | 700 | ||||||||||||||
Fair value adjustments from purchase accounting | — | — | ||||||||||||||
Litigation and settlement expense (income), net | — | — | ||||||||||||||
Stock-based and other non-cash compensation expense | 5,600 | 5,600 | ||||||||||||||
Impact to income taxes (1) | (2,900 | ) | (2,900 | ) | ||||||||||||
Adjusted income and adjusted earnings per share expectation | $ | 18,700 | $ | 0.39 | $ | 20,700 | $ | 0.43 | ||||||||
Diluted weighted-average shares outstanding expectation: | 47,800 | 47,800 | ||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
Mercury Reports First Quarter Fiscal 2019 Results, Page 20
Twelve Months Ending June 30, 2019 | |||||||||||||||||
Range | |||||||||||||||||
Low | High | ||||||||||||||||
GAAP expectation -- Net income and earnings per share | $ | 39,100 | $ | 0.82 | $ | 45,600 | $ | 0.96 | |||||||||
Amortization of intangible assets | 26,800 | 26,800 | |||||||||||||||
Restructuring and other charges | 500 | 500 | |||||||||||||||
Impairment of long-lived assets | — | — | |||||||||||||||
Acquisition and financing costs | 2,700 | 2,700 | |||||||||||||||
Fair value adjustments from purchase accounting | 600 | 600 | |||||||||||||||
Litigation and settlement expense (income), net | — | — | |||||||||||||||
Stock-based and other non-cash compensation expense | 20,500 | 20,500 | |||||||||||||||
Impact to income taxes (1) | (11,400 | ) | (11,400 | ) | |||||||||||||
Adjusted income and adjusted earnings per share expectation | $ | 78,800 | $ | 1.65 | $ | 85,300 | $ | 1.79 | |||||||||
Diluted weighted-average shares outstanding expectation: | 47,700 | 47,700 | |||||||||||||||
(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. | |||||||||||||||||
50 Minuteman Road, Andover, Massachusetts 01810 U.S.A. • +1 978.256.1300 • www.mrcy.com • twitter: @MRCY
1st Quarter Fiscal Year 2019 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 October 30, 2018, 5:00 pm ET Webcast replay available by 7:00 p.m. ET October 30, 2018 © 2018 Mercury Systems, Inc. 1
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 to fiscal 2019 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 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, 2018. 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. © 2018 Mercury Systems, Inc. 2
Financial highlights Q1 FY19 vs. Q1 FY18 LTM Q1FY19 vs. LTM Q1FY18 • Record bookings up 67% • Record bookings up 40% • Revenue up 36% • Revenue up 24% • Organic revenue(1) up 6% • Organic revenue(1) up 11% • Adjusted EBITDA up 25% • Adjusted EBITDA up 20% • Record backlog up 41% • Record backlog up 41% • Free cash flow up 271% • Free cash flow up 52% (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. © 2018 Mercury Systems, Inc. 3
We’re executing well on our strategy to become leading… • USG needs more domestically-produced technology for military platforms • Represents significant opportunity for Mercury given our strategy • DoD will need to leverage high-tech commercial investment and innovation • Issue is globalization of supply chains and DoD’s need for trust and assurance • Mercury can help bridge gap between global supply chains and DoD needs • We domestically develop and manufacture secure processing products • Insert our secure processing technology into Themis and Germane solutions • Mercury better prepared and strategically aligned than other companies … provider of secure and safety critical processing subsystems © 2018 Mercury Systems, Inc. 4
We’re executing well on our vision to become leading… • Themis and Germane businesses performing well and to plan • No change to customer behaviors, financials and current outlook • Built out best-in-class cyber security infrastructure • Compliant with Defense acquisition cyber security rules • Defense Security Service superior ratings – top 12% • Two James S. Cogswell security awards – top 1% • Extremely capable and experienced CIO, CISO and IT team … provider of secure and safety critical processing subsystems © 2018 Mercury Systems, Inc. 5
Q1 FY19 strategic achievements • Amir Allahverdi overseeing manufacturing and supply chain • Achieved highest Glassdoor ratings in Defense industry • Ranked 27th on Fortune Magazine’s 100 Fastest Growing List • Good progress on acquisition integrations • Continuing consolidation of West Coast RF manufacturing facilities • Transitioned Themis to Mercury’s Oracle ERP platform • Combining Themis and Germane organizations © 2018 Mercury Systems, Inc. 6
Business outlook remains strong • Improved Defense spending environment • Expect 8% - 9% FY19 organic revenue growth • Target markets growing faster than defense budget overall • Benefiting from modernization in Radar, EW, missiles, EO/IR, C2I • Capitalizing on favorable industry trends – increased outsourcing, flight to quality, supply chain delayering • Internal R&D investments to capture more subsystem business • Supplementing organic growth with smart, strategic M&A • Increased credit facility to $750mm with improved terms © 2018 Mercury Systems, Inc. 7
Summary • On track for continued strong performance in FY19 • Business expected to grow faster than industry overall • Manufacturing and M&A integration synergies • Anticipating double-digit revenue growth and strong cash flow • Expect to achieve high-end of adj. EBITDA target over time by: – Increased revenue organically and through M&A – Insourced manufacturing and operating efficiencies improving margins – Keeping organic operating expense growth rate below revenue growth rate – Fully integrating acquired businesses to generate cost and revenue synergies Continuing to successfully execute model – no fundamental change © 2018 Mercury Systems, Inc. 8
Q1 FY19 vs. Q1 FY18 In $ millions, except percentage and per share data Q1 FY18 Q1 FY19 Change Bookings $107.2 $178.7 67% Book-to-Bill 1.01 1.24 Backlog $360.7 $507.9 41% 12-Month Backlog 281.7 377.8 Revenue $106.1 $144.1 36% Organic Revenue Growth(1) 7% 6% Gross Margin 47.8% 42.8% (5.0 pts) Operating Expenses $40.3 $47.8 19% Selling, General & Administrative 20.6 24.7 Research & Development 13.7 14.9 Amortization/Restructuring/Acquisition 6.0 8.1 GAAP Income $18.0 $7.5 (58%) Effective Tax Rate (88%) 30% GAAP EPS $0.38 $0.16 (58%) Weighted Average Diluted Shares 47.5 47.7 Adjusted EPS(2) $0.37 $0.39 5% Adj. EBITDA(2) $25.3 $31.6 25% % of revenue 23.8% 22.0% Free Cash Flow(2) $4.4 $16.3 271% 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. © 2018 Mercury Systems, Inc. 9
Balance Sheet As of (In $ millions)(1) 9/30/17 12/31/17 3/31/18 6/30/18 9/30/18 ASSETS Cash & cash equivalents $26.1 $32.0 $44.2 $66.5 $72.9 Accounts receivable, net 121.4 123.0 141.6 143.8 153.9 Inventory, net 93.3 105.9 117.1 108.6 121.2 PP&E, net 51.6 51.6 51.3 51.0 50.8 Goodwill and intangibles, net 510.7 505.5 685.7 675.3 704.2 Other 19.5 17.8 17.0 19.3 24.0 TOTAL ASSETS $822.6 $835.8 $1,056.9 $1,064.5 $1,127.0 LIABILITIES AND S/E AP and accrued expenses $69.5 $65.8 $69.8 $59.1 $61.2 Other liabilities 18.8 20.8 36.3 38.5 49.2 Debt(2) 0.0 0.0 195.0 195.0 240.0 Total liabilities 88.3 86.6 301.1 292.6 350.4 Stockholders' equity 734.3 749.2 755.8 771.9 776.6 TOTAL LIABILITIES AND S/E $822.6 $835.8 $1,056.9 $1,064.5 $1,127.0 Notes: (1) Rounded amounts used. (2) On July 31, 2018 (in Q1 FY19), Mercury acquired Germane Systems, LC, and borrowed $45 million on its existing revolving credit facility to fund the acquisition. © 2018 Mercury Systems, Inc. 10
Cash flow summary FY18 FY19 (In $ millions)(1) Q1 Q2 Q3 Q4 Q1 Net Income $18.0 $9.1 $3.7 $10.1 $7.5 Depreciation and amortization 9.3 9.6 11.4 12.0 11.5 Other non-cash items, net 0.8 4.7 3.3 5.1 5.5 Change in Working Capital (7.8) (1.4) (10.6) (2.9) (5.9) Accounts receivable, unbilled receivables, and costs in excess of billings Inventory (11.1) (11.3) (2.5) 8.7 (4.6) Accounts payable and accrued expenses 12.8 (1.2) (8.7) (8.2) (2.0) Other (14.0) (0.7) 4.2 0.8 8.0 Changes in Operating Assets and Liabilities (20.1) (14.6) (17.5) (1.6) (4.5) Operating Cash Flow 8.0 8.8 0.9 25.6 20.0 Capital expenditures (3.6) (4.0) (3.5) (4.0) (3.7) Free Cash Flow(2) $4.4 $4.8 $(2.6) $21.6 $16.3 Free Cash Flow(2) / Adjusted EBITDA(2) 17% 18% n.a. 57% 52% Free Cash Flow(2) / GAAP Net Income 25% 53% n.a. 214% 218% Notes: (1) Rounded amounts used. (2) Non-GAAP, see reconciliation table. © 2018 Mercury Systems, Inc. 11
Q2 FY19 guidance In $ millions, except percentage and per share data Q2 FY18(1) Q2 FY19(2) Change Revenue $117.9 $151.6 - $156.6 29% - 33% Gross Margin 45.9% 43.9% - 44.5% (2.0) - (1.4) pts Operating Expenses $43.3 $52.2 - $52.6 21% - 22% GAAP Income $9.1 $8.3 - $10.3 (9%) - 13% Effective tax rate(3) 13% 27% GAAP EPS $0.19 $0.17 - $0.22 (11%) - 16% Weighted-average diluted shares outstanding 47.4 47.8 Adjusted EPS(4) $0.28 $0.39 - $0.43 39% - 54% (4) Adj. EBITDA $26.6 $31.7 - $34.5 19% - 30% % of revenue 22.5% 20.9% - 22.0% Notes: (1) Q2 FY18 figures are as reported in the Company’s earnings release dated January 23, 2018. (2) The guidance included herein is from the Company’s earnings release dated October 30, 2018. 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. © 2018 Mercury Systems, Inc. 12
FY19 annual guidance In $ millions, except percentage and per share data FY18(1) FY19(2) Change Revenue $493.2 $607.0 - $625.0 23% - 27% Gross Margin 45.8% 43.7% - 44.4% (2.1) - (1.4) pts Operating Expenses $178.9 $199.2 - $202.6 11% - 13% GAAP Income $40.9 $39.1 - $45.6 (4%) - 11% Effective tax rate(3) 4% 28% GAAP EPS $0.86 $0.82 - $0.96 (5%) - 12% Weighted-average diluted shares outstanding 47.5 47.7 Adjusted EPS(4) $1.42 $1.65 - $1.79 16% - 26% (4) Adj. EBITDA $114.6 $133.5 - $142.5 16% - 24% % of revenue 23.2% 22.0% - 22.8% Notes: (1) FY18 figures are as reported in the Company’s earnings release dated July 31, 2018. (2) The guidance included herein is from the Company’s earnings release dated October 30, 2018. 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. © 2018 Mercury Systems, Inc. 13
Summary • Strong Q1 results with record bookings and backlog • Revenue, adjusted EBITDA, and adjusted EPS exceeded guidance • Solid operating and free cash flow • Increased credit facility to $750mm and renewed 5 year term • Conservative capital structure provides financial flexibility for continued M&A • Well-positioned for FY19 financial performance resulting in guidance raise © 2018 Mercury Systems, Inc. 14
Appendix © 2018 Mercury Systems, Inc. 15
Adjusted EPS reconciliation Q2 FY19 FY19 (In thousands, except per share data) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 FY18 Q1 FY19 Low High Low High Earnings per share(1) $ 0.10 $ 0.13 $ 0.16 $ 0.19 $ 0.58 $ 0.38 $ 0.19 $ 0.08 $ 0.21 $ 0.86 $ 0.16 $ 0.17 $ 0.22 $ 0.82 $ 0.96 Net Income $ 3,819 $ 5,204 $ 7,048 $ 8,804 $ 24,875 $ 17,953 $ 9,133 $ 3,696 $ 10,101 $ 40,883 $ 7,479 $ 8,300 $ 10,300 $ 39,100 $ 45,600 Amortization of intangible assets 4,602 4,888 4,732 5,458 19,680 5,637 5,827 7,104 7,436 26,004 7,181 7,000 7,000 26,800 26,800 Restructuring and other charges 297 69 459 1,127 1,952 95 313 1,384 1,367 3,159 504 - - 500 500 Impairment of long-lived assets - - - - - - - - - - - - - - - Acquisition and financing costs 553 1,114 569 153 2,389 854 1,366 1,909 799 4,928 1,043 700 700 2,700 2,700 Fair value adjustments from purchase accounting 2,077 870 270 462 3,679 509 84 539 860 1,992 620 - - 600 600 Litigation and settlement expense (income), net - 100 - 17 117 - - - - - - - - - - Stock-based and other non-cash compensation expense 3,632 4,093 3,715 3,901 15,341 4,696 4,941 3,669 4,309 17,615 4,743 5,600 5,600 20,500 20,500 Impact to income taxes (6,085) (4,441) (3,576) (4,500) (18,602) (11,951) (8,615) (4,082) (2,621) (27,269) (3,073) (2,900) (2,900) (11,400) (11,400) Adjusted income $ 8,895 $ 11,897 $ 13,217 $ 15,422 $ 49,431 $ 17,793 $ 13,049 $ 14,219 $ 22,251 $ 67,312 $ 18,497 $ 18,700 $ 20,700 $ 78,800 $ 85,300 Adjusted earnings per share(1) $ 0.22 $ 0.30 $ 0.29 $ 0.32 $ 1.15 $ 0.37 $ 0.28 $ 0.30 $ 0.47 $ 1.42 $ 0.39 $ 0.39 $ 0.43 $ 1.65 $ 1.79 Weighted-average shares outstanding: Basic 38,865 39,151 43,773 46,211 41,986 46,504 46,752 46,844 46,873 46,719 47,048 Diluted 39,865 39,985 44,814 47,472 43,018 47,489 47,447 47,532 47,521 47,471 47,697 47,800 47,800 47,700 47,700 Notes: (1) Per share information is presented on a fully diluted basis © 2018 Mercury Systems, Inc. 16
Adjusted EBITDA reconciliation Q2 FY19 FY19 (In thousands) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 FY18 Q1 FY19 Low High Low High Net income $ 3,819 $ 5,204 $ 7,048 $ 8,804 $ 24,875 $ 17,953 $ 9,133 $ 3,696 $ 10,101 $ 40,883 $ 7,479 $ 8,300 $ 10,300 $ 39,100 $ 45,600 Other non-operating adjustments, net(1) (732) (129) (378) (107) (1,346) 222 (326) (694) 3 (795) 365 - - 400 400 Interest expense, net 1,782 1,888 1,756 1,680 7,106 (16) 104 999 1,731 2,818 2,193 2,200 2,200 8,800 8,800 Income Taxes (1,259) 1,779 3,170 2,503 6,193 (8,381) 1,335 2,209 6,527 1,690 3,129 3,100 3,900 14,900 17,400 Depreciation 2,718 2,966 3,233 3,672 12,589 3,700 3,775 4,277 4,521 16,273 4,365 4,800 4,800 19,200 19,200 Amortization of intangible assets 4,602 4,888 4,732 5,458 19,680 5,637 5,827 7,104 7,436 26,004 7,181 7,000 7,000 26,800 26,800 Restructuring and other charges 297 69 459 1,127 1,952 95 313 1,384 1,367 3,159 504 - - 500 500 Impairment of long-lived assets - - - - - - - - - - - - - - - Acquisition and financing costs 553 1,114 569 153 2,389 854 1,366 1,909 799 4,928 1,043 700 700 2,700 2,700 Fair value adjustments from purchase accounting 2,077 870 270 462 3,679 509 84 539 860 1,992 620 - - 600 600 Litigation and settlement expense (income), net - 100 - 17 117 - - - - - - - - - - Stock-based and other non-cash compensation expense 3,632 4,093 3,715 3,901 15,341 4,696 4,941 3,669 4,309 17,615 4,743 5,600 5,600 20,500 20,500 Adjusted EBITDA $ 17,489 $ 22,842 $ 24,574 $ 27,670 $ 92,575 $ 25,269 $ 26,552 $ 25,092 $ 37,654 $ 114,567 $ 31,622 $ 31,700 $ 34,500 $ 133,500 $ 142,500 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 © 2018 Mercury Systems, Inc. 17
Free cash flow reconciliation (In thousands) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 FY18 Q1 FY19 Cash flows from operations $10,283 $14,238 $ 24,889 $ 9,736 $ 59,146 $ 8,028 $ 8,779 $ 873 $ 25,641 $ 43,321 $ 20,029 Capital expenditures (6,050) (7,703) (13,036) (6,055) (32,844) (3,628) (3,964) (3,475) (4,039) (15,106) (3,727) Free cash flow $ 4,233 $ 6,535 $ 11,853 $ 3,681 $ 26,302 $ 4,400 $ 4,815 $ (2,602) $ 21,602 $ 28,215 $ 16,302 © 2018 Mercury Systems, Inc. 18
Organic revenue reconciliation (In thousands) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 FY18 Q1 FY19 Organic Revenue $ 63,339 $ 68,072 $ 75,080 $ 71,208 $ 277,699 $ 93,498 $ 104,957 $ 100,625 $ 134,358 $ 433,438 $ 112,801 Acquired Revenue(1) 24,310 29,942 32,237 44,400 130,889 12,571 12,955 15,711 18,509 59,746 31,255 Net Revenue $ 87,649 $ 98,014 $ 107,317 $ 115,608 $ 408,588 $ 106,069 $ 117,912 $ 116,336 $ 152,867 $ 493,184 $ 144,056 Notes: (1) Acquired revenue for all preceding periods presented has not been recast for comparative purposes © 2018 Mercury Systems, Inc. 19