MERCURY SYSTEMS, INC. FORWARD-LOOKING STATEMENTS
From time to time, information provided, statements made by our employees or information included in our filings with theSecurities and Exchange Commission ("SEC") may contain statements that are not historical facts but that are "forward-looking statements," which involve risks and uncertainties. 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 epidemics and pandemics such as COVID, effects of anyU.S. Federal government shutdown or extended continuing resolution, effects of continued geopolitical unrest and regional conflicts, competition, inflation, 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 theU.S. Government's interpretation of, federal export control or procurement rules and regulations, changes in, or in the interpretation or enforcement of, environmental rules and regulations, market acceptance of the Company's products, shortages in or delays in receiving components, supply chain delays or volatility for critical components such as semiconductors, production delays or unanticipated expenses including due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions, restructurings and value creation initiatives such as 1MPACT, or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, effects of shareholder activism, increases in interest rates, changes to industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, such as the deductibility of internal research and development, 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 set forth under Part I-Item 1A (Risk Factors) in the Company's Annual Report on Form 10-K for the fiscal year endedJuly 1, 2022 . We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
OVERVIEW
Mercury Systems, Inc. is a technology company that delivers commercial innovation to rapidly transform the global aerospace and defense industry. Headquartered inAndover, Massachusetts , our end-to-end processing platform enables a broad range of aerospace and defense programs, optimized for mission success in some of the most challenging and demanding environments. Processing technologies that comprise our platform include signal solutions, display, software applications, networking, storage and secure processing. Our innovative solutions are mission-ready, trusted and secure, software-defined and open and modular to meet our customers' most-pressing high-tech needs. Customers access our solutions via the Mercury platform, which encompasses the broad scope of our investments in technologies, companies, products, services and the expertise of our people. Ultimately, we connect our customers to what matters most to them. We connect commercial technology to defense, people to data, partners to opportunities and the present to the future. And, at the most human level, we connect what we do to our customers' missions; supporting the people for whom safety, security and protecting freedom are of paramount importance. As a leading manufacturer of essential components, products, modules and subsystems, we sell to defense prime contractors, theU.S. government and original equipment manufacturers ("OEM") commercial aerospace companies. We have built a trusted, contemporary portfolio of proven product solutions purpose-built for aerospace and defense that we believe meets and exceeds the performance needs of our defense and commercial customers. Customers add their own applications and algorithms to our specialized, secure and innovative products and pre-integrated solutions. This allows them to complete their full system by integrating with their platform, the sensor technology and, increasingly, the processing from us. Our products and solutions are deployed in more than 300 programs with over 25 different defense prime contractors and commercial aviation customers. Our transformational business model accelerates the process of making new technology profoundly more accessible to our customers by bridging the gap between commercial technology and aerospace and defense applications. Our long-standing deep relationships with leading high-tech and other commercial companies, coupled with our high level of research and development ("R&D") investments on a percentage basis and industry-leading trusted and secure design and manufacturing capabilities, are the foundational tenets of this highly successful model. We are leading the development and adaptation of commercial 22 -------------------------------------------------------------------------------- technology for aerospace and defense solutions. From chip-scale to system scale and from data, including radio frequency ("RF") to digital to decision, we make mission-critical technologies safe, secure, affordable and relevant for our customers. Our capabilities, technology, people and R&D investment strategy combine to differentiate us in our industry. We maintain our technological edge by investing in critical capabilities and intellectual property ("IP" or "building blocks") in processing, leveraging open standards and open architectures to adapt quickly those building blocks into solutions for highly data-intensive applications, including emerging needs in areas such as artificial intelligence ("AI"). Our mission critical solutions are deployed by our customers for a variety of applications including command, control, communications, computers, intelligence, surveillance and reconnaissance ("C4ISR"), electronic intelligence, mission computing avionics, electro-optical/infrared ("EO/IR"), electronic warfare, weapons and missile defense, hypersonics and radar. Since we conduct much of our business with our defense customers via commercial items, requests by customers are a primary driver of revenue fluctuations from quarter to quarter. Customers specify delivery date requirements that coincide with their need for our products. Because these customers may use our products in connection with a variety of defense programs or other projects of different sizes and durations, a customer's orders for one quarter generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers and, therefore, we generally cannot identify sequential quarterly trends. As ofSeptember 30, 2022 , we had 2,424 employees. We employ hardware and software architects and design engineers, primarily engaged in engineering and research and product development activities to achieve our objectives to fully capitalize upon and maintain our technological leads in the high-performance, real-time sensor processing industry and in mission computing, platform management and other safety-critical applications. Our talent attraction, engagement and retention is critical to execute on our long-term strategy. We invest in our culture and values to drive employee engagement that turns ideas into action, delivering trusted and secure solutions at the speed of innovation. We believe that our success depends on our ability to embrace diversity company-wide and realize the benefits of a diverse workforce that includes a greater variety of solutions to problems, a broader collection of skills and experiences and an array of viewpoints to consider. We are strongly focused on providing an inclusive environment that respects the diversity of the world. We believe that the workforce required to grow our business and deliver creative solutions must be rich in diversity of thought, experience and culture. Our diversity and inclusion initiatives focus on building and maintaining the talent that will create cohesive and collaborative teams that drive innovation. We believe that these values will help our employees realize their full potentials at work to provide Innovation That Matters®. Our consolidated revenues, acquired revenues, net loss, diluted net loss per share, adjusted earnings per share ("adjusted EPS"), and adjusted EBITDA for the first quarter endedSeptember 30, 2022 were$227.6 million ,$11.8 million ,$(14.3) million ,$(0.26) ,$0.24 , and$31.2 million , respectively. See the Non-GAAP Financial Measures section for a reconciliation to our most directly comparable GAAP financial measures. 23 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Results of operations for the first quarter endedSeptember 30, 2022 includes results from the acquisitions ofAtlanta Micro, Inc ("Atlanta Micro") andAvalex Technologies, LLC . ("Avalex"). Results of operations for the first quarter endedOctober 1, 2021 do not include results from Atlanta Micro or Avalex. Accordingly, the periods presented below are not directly comparable.
The first quarter ended
The following table sets forth, for the first quarter ended indicated, financial data from the Consolidated Statements of Operations and Comprehensive Loss:
As a % of As a % of
September 30, Total Net Total Net
(In thousands) 2022 Revenue October 1, 2021 Revenue
Net revenues $ 227,579 100.0 % $ 225,013 100.0 %
Cost of revenues 149,484 65.7 136,604 60.7
Gross margin 78,095 34.3 88,409 39.3
Operating expenses:
Selling, general and administrative 38,943 17.1 36,956 16.4
Research and development 27,766 12.2 28,882 12.8
Amortization of intangible assets 14,574 6.4 13,734 6.1
Restructuring and other charges 1,508 0.7 12,274 5.5
Acquisition costs and other related
expenses 2,498 1.1 2,138 1.0
Total operating expenses 85,289 37.5 93,984 41.8
Loss from operations (7,194) (3.2) (5,575) (2.5)
Interest income 29 - 9 -
Interest expense (4,547) (2.0) (595) (0.3)
Other expense, net (3,645) (1.5) (1,420) (0.6)
Loss before income taxes (15,357) (6.7) (7,581) (3.4)
Income tax benefit (1,022) (0.4) (441) (0.2)
Net loss $ (14,335) (6.3) % $ (7,140) (3.2) %
REVENUES
Total revenues increased $2.6 million , or 1.1%, to $227.6 million during the
first quarter ended September 30, 2022 , as compared to $225.0 million during the
first quarter ended October 1, 2021 , including "acquired revenue" which
represents net revenue from acquired businesses that have been part of Mercury
for completion of four full quarters or less (and excludes any intercompany
transactions). After the completion of four full fiscal quarters, acquired
businesses will be treated as organic for current and comparable historical
periods. The increase in total revenue was primarily due to an additional $11.8
million of acquired revenues from the Atlanta Micro and Avalex businesses,
partially offset by $9.2 million less organic revenues. These decreases were
driven by modules and sub-assemblies, which increased $20.9 million or 60%,
partially offset by decreases in integrated subsystems and components product
groupings of $15.2 million and $3.1 million , respectively. The increase in total
revenue was primarily from C4I and electronic warfare end applications which
increased $11.7 million and $1.1 million , respectively, partially offset by
decreases to other sensor and effector and radar end applications of $10.2
million and $5.5 million , respectively. The increase was primarily across the
other and airborne platforms which grew $8.9 million and $1.8 million ,
respectively, partially offset by a decrease to naval platforms of $6.2 million
during the first quarter ended September 30, 2022 . The largest program increases
were related to the LTAMDS, a secure processing program, F-35, SEWIP and P8
programs. There were no programs comprising 10% or more of our revenues for the
first quarters ended September 30, 2022 or October 1, 2021 . See the Non-GAAP
Financial Measures section for a reconciliation to our most directly comparable
GAAP financial measures.
24
--------------------------------------------------------------------------------GROSS MARGIN
Gross margin was 34.3% for the first quarter endedSeptember 30, 2022 , a decrease of 500 basis points from the 39.3% gross margin achieved during the first quarter endedOctober 1, 2021 . The lower gross margin was primarily driven by program mix, as well as material and labor inflation. Program mix was heavily impacted by industry-wide award delays and supply chain constraints resulting in a lower proportion of high margin programs when compared to the prior period. This included higher engineering content associated with programs in the period evidenced by an increase of$3.3 million inCustomer Funded Research and Development ("CRAD") compared to the first quarter endedOctober 1, 2021 . CRAD primarily represents engineering labor associated with long-term contracts for customized development, production and service activities. The nature of these efforts result in lower margin content, but serve as pre-cursors to higher margin production awards. These products are predominantly grouped within integrated subsystems and to a lesser extent modules and sub-assemblies. Finally, the first quarter endedSeptember 30, 2022 included$0.4 million of favorable fair market value adjustments from purchase accounting as compared to$1.8 million for the first quarter endedOctober 1, 2021 .
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased$1.9 million , or 5.4%, to$38.9 million during the first quarter endedSeptember 30, 2022 , as compared to$37.0 million in the first quarter endedOctober 1, 2021 . The increase was primarily related to the recent acquisitions of Avalex and Atlanta Micro which contributed$1.6 million of incremental cost, partially offset by lower share-based compensation expense.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased$1.1 million , or 3.9%, to$27.8 million during the first quarter endedSeptember 30, 2022 , as compared to$28.9 million during the first quarter endedOctober 1, 2021 . The decrease was primarily related to timing of R&D investment and an incremental$3.3 million of CRAD during the first quarter endedSeptember 30, 2022 , partially offset by$1.3 million of incremental expense from our recent acquisitions of Avalex and Atlanta Micro.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets increased$0.9 million to$14.6 million during the first quarter endedSeptember 30, 2022 , as compared to$13.7 million during the first quarter endedOctober 1, 2021 , primarily due to the acquisitions of Avalex and Atlanta Micro.
RESTRUCTURING AND OTHER CHARGES
During the first quarter endedSeptember 30, 2022 , the Company incurred$1.5 million of restructuring and other charges, as compared to$12.3 million during the first quarter endedOctober 1, 2021 . Restructuring and other charges of$1.3 million related to third-party consulting costs associated with 1MPACT and the remaining$0.2 million related to severance costs. During the first quarter endedOctober 1, 2021 , restructuring and other charges of$7.3 million related to severance costs associated with the elimination of 100 employees based on changes in the business environment and alignment with the internal organizational changes completed under 1MPACT and the remaining$4.9 million of restructuring and other charges related to third-party consulting costs associated with 1MPACT.
ACQUISITION COSTS AND OTHER RELATED EXPENSES
Acquisition costs and other related expenses were$2.5 million during the first quarter endedSeptember 30, 2022 . The acquisition costs and other related expenses during the first quarter endedSeptember 30, 2022 were primarily related to$2.1 million for third-party advisory fees in connection with engagements by activist investors and other acquisition related costs. We expect to continue to incur such acquisition costs and other related expenses in the future as we continue to seek acquisition opportunities to expand our technological capabilities and especially within secure processing, open mission systems, C3 and trusted microelectronics. Transaction costs incurred by the acquiree prior to the consummation of an acquisition would not be reflected in our historical results of operations.
INTEREST EXPENSE
We incurred
OTHER EXPENSE, NET
Other expense, net increased to$3.6 million during the first quarter endedSeptember 30, 2022 , as compared to$1.4 million during the first quarter endedOctober 1, 2021 . The first quarter endedSeptember 30, 2022 includes incremental net foreign currency translation losses of$1.4 million and litigation and settlement expenses of$0.9 million . 25 --------------------------------------------------------------------------------
INCOME TAXES
We recorded an income tax benefit of$1.0 million and$0.4 million on a loss before income taxes of$15.4 million and$7.6 million for the first quarters endedSeptember 30, 2022 andOctober 1, 2021 , respectively.
During the first quarters ended
The effective tax rate for the first quarters ended
During the first quarter ended
OnAugust 16, 2022 ,President Biden signed the Inflation Reduction Act of 2022 into law which contained provisions that include a 15% corporate minimum tax effective for the Company in fiscal 2024 and a 1% excise tax on stock buybacks effectiveJanuary 1, 2023 . We expect the impact of these provisions to be immaterial. The Tax Cuts and Jobs Act of 2017 requires companies to amortize domestic research and development expenditures over five years for tax purposes, and foreign research and development expenditures over fifteen years for tax purposes. We estimate the cash impact from this provision to be approximately$40 million in fiscal 2023. We will continue to monitor any potential delay or repeal of this provision.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity come from existing cash and cash generated from operations, our Revolver, our ability to raise capital under our universal shelf registration statement and our ability to factor our receivables. Our near-term fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments. We plan to continue to invest in improvements to our facilities, continuous evaluation of potential acquisition opportunities and internal R&D to promote future growth, including new opportunities in avionics mission computers, secure processing, radar modernization and trusted custom microelectronics.
Based on our current plans and business conditions, we believe that existing cash and cash equivalents, our available Revolver, cash generated from operations and our financing capabilities will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.
Shelf Registration Statement
OnSeptember 14, 2020 , we filed a shelf registration statement on Form S-3ASR with theSEC . The shelf registration statement, which was effective upon filing with theSEC , registered each of the following securities: debt securities, preferred stock, common stock, warrants and units. We intend to use the proceeds from financings using the shelf registration statement for general corporate purposes, which may include the following:
•the acquisition of other companies or businesses;
•the repayment and refinancing of debt;
•capital expenditures;
•working capital; and
•other purposes as described in the prospectus supplement.
We have an unlimited amount available under the shelf registration statement.
Revolving Credit Facilities
OnFebruary 28, 2022 , we amended the Revolver to increase and extend the borrowing capacity to a$1.1 billion , 5-year revolving credit line, with the maturity extended toFebruary 28, 2027 . As ofSeptember 30, 2022 , we had$511.5 million of outstanding borrowings on the Revolver. See Note I in the accompanying consolidated financial statements for further discussion of the Revolver. 26 --------------------------------------------------------------------------------
Receivables Purchase Agreement
OnSeptember 27, 2022 , we entered into an uncommitted receivables purchase agreement ("RPA") withBank of the West , as purchaser, pursuant to which we may offer to sell certain customer receivables, subject to the terms and conditions of the RPA. The RPA is an uncommitted arrangement such that we are not obligated to sell any receivables andBank of the West has no obligation to purchase any receivables from us. Pursuant to the RPA,Bank of the West may purchase certain of our customer receivables at a discounted rate, subject to a limit that as of any date, the total amount of purchased receivables held byBank of the West , less the amount of all collections received on such receivables, may not exceed$20 million . The RPA has an indefinite term and the agreement remains in effect until it is terminated by either party. We did not sell any receivables during the quarter endedSeptember 30, 2022 .
CASH FLOWS
As of and For the First Quarters Ended,
September 30,
(In thousands) 2022 October 1, 2021
Net cash used in operating activities $ (66,039) $ (2,006)
Net cash used in investing activities $ (7,278) $ (8,614)
Net cash provided by (used in) financing activities $ 59,937 $ (7,316)
Net decrease in cash and cash equivalents $ (13,673) $ (18,035)
Cash and cash equivalents at end of period $ 51,981 $ 95,804
Our cash and cash equivalents decreased by$13.7 million fromJuly 1, 2022 toSeptember 30, 2022 , primarily as the result of$66.0 million used in operating activities,$7.3 million invested in purchases of property and equipment, partially offset by$60.0 million of borrowings on our Revolver.
Operating Activities
During the first quarters endedSeptember 30, 2022 andOctober 1, 2021 , we had an outflow of$66.0 million and$2.0 million in cash from operating activities, respectively. The decrease was primarily due to an increase in accounts receivables, including unbilled receivables and costs in excess of billings, driven by contracting delays which impacted the timing of billing events and cash conversion as well as delayed payment behavior across our customer base. In addition, we had higher outflows for inventory as compared to the first quarter endedOctober 1, 2021 as we continue to accelerate raw material purchases to support customer delivery schedules and mitigate supply chain risk in future quarters, particularly in light of the long lead times for semiconductors. Operating activities also included cash outflows for our fiscal 2022 bonus payout, restructuring and other charges associated with 1MPACT as well as acquisition costs and other related expenses related to third-party advisory fees in connection with engagements by activist investors. These decreases were partially offset by proceeds from a cash settlement for the termination of an interest rate swap, additional deferred revenues and customer advances as well as cash paid for income taxes.
Investing Activities
During the first quarter endedSeptember 30, 2022 , we invested$7.3 million , a decrease of$1.3 million , as compared to the first quarter endedOctober 1, 2021 . The decrease was driven by$3.2 million less other investing activities partially offset by$2.0 million higher purchases of property and equipment as compared to the first quarter endedOctober 1, 2021 .
Financing Activities
During the first quarter endedSeptember 30, 2022 , we borrowed$60.0 million on our Revolver and had$0.1 million of cash payments related to the purchase and retirement of common stock used to settle individual employees' tax liabilities associated with the annual vesting of restricted stock awards, as compared to$7.3 million in the first quarter endedOctober 1, 2021 . The decrease in the payments related to the purchase and retirement of common stock used to settle individual employees' tax liabilities associated with vesting of restricted stock awards is due to a change in our incentive stock plan tax withholding methods. 27
--------------------------------------------------------------------------------
© Edgar Online, source
