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Mercury Computer Systems Reports First Quarter Fiscal 2013 Results

Stocks in this article: MRCY

Challenges Drive Innovation, Echotek and Ensemble are registered trademarks and Application Ready Subsystem and ARS are trademarks of Mercury Computer Systems, Inc. Other product and company names mentioned may be trademarks and/or registered trademarks of their respective holders.

   
   
MERCURY COMPUTER SYSTEMS, INC.  
UNAUDITED CONSOLIDATED BALANCE SHEETS  
(In thousands) September 30, June 30,
  2012 2012
     
Assets    
Current assets:    
Cash and cash equivalents  $ 30,568  $ 115,964
Accounts receivable, net  40,503  38,532
Unbilled receivables and costs in excess of billings  10,959  10,918
Inventory  40,438  25,845
Deferred income taxes  12,258  7,653
Prepaid income taxes  2,307  2,585
Prepaid expenses and other current assets  6,253  6,206
Total current assets  143,286  207,703
     
Restricted cash  3,546  3,281
Property and equipment, net  19,738  15,929
Goodwill  177,517  132,621
Acquired intangible assets, net  41,795  25,083
Other non-current assets  1,098  989
Total assets  $ 386,980  $ 385,606
     
Liabilities and Shareholders' Equity    
Current liabilities:    
Accounts payable  $ 10,888  $ 9,002
Accrued expenses  12,673  9,895
Accrued compensation  8,341  13,190
Deferred revenues and customer advances  4,602  4,855
Total current liabilities  36,504  36,942
     
Deferred gain on sale-leaseback  4,110  4,399
Deferred income taxes  13,537  7,197
Income taxes payable  2,596  2,597
Other non-current liabilities  1,679  1,367
Total liabilities  58,426  52,502
     
Shareholders' equity:    
Common stock  300  297
Additional paid-in capital  225,384  222,769
Retained earnings  101,532  108,732
Accumulated other comprehensive income  1,338  1,306
Total shareholders' equity  328,554  333,104
     
Total liabilities and shareholders' equity  $ 386,980  $ 385,606
     
     
     
MERCURY COMPUTER SYSTEMS, INC.    
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
     
  Three Months Ended
  September 30,
  2012 2011
Net revenues  $ 49,428  $ 49,122
Cost of revenues (1)   29,038  19,206
Gross margin  20,390  29,916
     
Operating expenses:    
Selling, general and administrative (1)   14,533  13,645
Research and development (1)  10,039  11,865
Amortization of acquired intangible assets  1,788  816
Restructuring and other charges  4,984  -- 
Acquisition costs and other related expenses  230  25
Total operating expenses  31,574  26,351
     
(Loss) income from operations  (11,184)  3,565
     
Interest income  2  6
Interest expense  (8)  (9)
Other income, net  339  405
     
(Loss) income from operations before income taxes (benefit)  (10,851)  3,967
     
Tax (benefit) provision  (3,651)  1,314
     
Net (loss) income   $ (7,200)  $ 2,653
     
Basic net (loss) earnings per share:  $ (0.24)  $ 0.09
     
Diluted net (loss) earnings per share:  $ (0.24)  $ 0.09
     
Weighted-average shares outstanding:    
Basic 29,883 29,277
Diluted  29,883 30,033
     
     
(1) Includes stock-based compensation expense, allocated as follows:
Cost of revenues  $ 131  $ 88
Selling, general and administrative   $ 1,903  $ 1,675
Research and development   $ 311  $ 277
     
     
     
MERCURY COMPUTER SYSTEMS, INC.    
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
(In thousands)  
  Three Months Ended
  September 30,
  2012 2011
Cash flows from operating activities:    
Net (loss) income  $ (7,200)  $ 2,653
Depreciation and amortization  3,999  2,671
Other non-cash items, net  (1,189)  2,018
Changes in operating assets and liabilities, net of effect of business acquired  (5,559)  (3,126)
     
Net cash (used in) provided by operating activities  (9,949)  4,216
     
Cash flows from investing activities:    
Acquisition of business, net of cash acquired  (67,721)  --
Purchases of property and equipment  (980)  (1,646)
Increase in restricted cash  (265)  --
Payments for acquired intangible assets  --  (20)
     
Net cash used in investing activities  (68,966)  (1,666)
     
Cash flows from financing activities:    
Proceeds from employee stock plans  133  90
Payments of deferred offering costs  --  (30)
Payment of acquired debt  (6,575)  --
Payments of capital lease obligations  (46)  (59)
Excess tax benefits from stock-based compensation  9  405
     
Net cash (used in) provided by financing activities  (6,479)  406
     
Effect of exchange rate changes on cash and cash equivalents  (2)  31
     
Net (decrease) increase in cash and cash equivalents  (85,396)  2,987
     
Cash and cash equivalents at beginning of period  115,964  162,875
     
Cash and cash equivalents at end of period  $ 30,568  $ 165,862
 
 
 
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 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. The adjustments to calculate this non-GAAP financial measure, and the basis for such adjustments, are outlined below:
     
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 acquired 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. The Company incurs restructuring 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. Management believes this item is outside the normal operations of the Company's business and is not 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 costs and other related expenses. The Company incurs costs associated with third-party professional services related to acquisition and potential acquisition opportunities, such as legal and accounting fees. Although we may incur such costs and other related charges and adjustments, it is not indicative that any transaction will be consummated. Management believes the exclusion of these items eliminates fluctuations in our selling, general, and administrative expenses related to acquisition activities which are unrelated to ongoing operations.
     
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 .
     
Stock-based 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. Although stock-based 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. 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.
     
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.
     
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,  
  2012 2011
(Loss) income from continuing operations  $ (7,200)  $ 2,653
Interest expense, net  6  3
Income tax (benefit) expense  (3,651)  1,314
Depreciation  2,211  1,855
Amortization of acquired intangible assets  1,788  816
Restructuring  4,984  -- 
Acquisition costs and other related expenses  230  25
Fair value adjustments from purchase accounting  925  23
Stock-based compensation expense  2,345  2,040
Adjusted EBITDA  $ 1,638  $ 8,729
     
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.
     
The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure.
     
  Three Months Ended
   September 30,  
  2012 2011
Cash flows from operations  $ (9,949)  $ 4,216
Capital expenditures  (980)  (1,646)
Free cash flow  $ (10,929)  $ 2,570
 
 
 
MERCURY COMPUTER SYSTEMS, INC.
RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE  
Quarter Ending December 31, 2012    
(In thousands, except per share data)    
     
The Company defines adjusted EBITDA as income from continuing operations before interest, income taxes, depreciation, amortization of acquired intangible assets, restructuring, impairment of long-lived assets, acquisition costs and other related expenses, fair value adjustments from purchase accounting, and stock-based compensation costs.
     
The following table reconciles the adjusted EBITDA financial measure to its most directly comparable GAAP measure:
     
  Range
  Low High
     
GAAP expectation --- (Loss) income from operations per diluted share  $ (0.24)  $ (0.17)
     
     
GAAP expectation --- (Loss) income from operations  $ (7,106)  $ (5,204)
     
Adjust for:    
Interest expense, net  9  9
Income taxes  (3,504)  (2,566)
Depreciation  2,208  2,208
Amortization of acquired intangible assets  2,230  2,230
Restructuring  599  599
Acquisition costs and other related expenses  --   -- 
Fair value adjustments from purchase accounting  1,271  1,271
Stock-based compensation expense  2,202  2,202
Adjusted EBITDA expectation  $ (2,091)  $ 749
CONTACT: Kevin M. Bisson, CFO, Mercury Computer Systems, Inc.
         978-967-1990

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