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Mercury Systems Reports Second Quarter Fiscal 2014 Results And Final Phase Of Acquisition Integration Plan

Stocks in this article: MRCY

Ensemble is a registered trademark of Mercury Systems, Inc. Mercury Systems, Inc., Innovation That Matters, Air Flow-By, and Application-Ready Subsystems are trademarks of Mercury Systems, Inc. OpenVPX is a trademark of the VMEbus International Trade Association. Other product and company names mentioned may be trademarks and/or registered trademarks of their respective holders.

MERCURY SYSTEMS, INC.  
UNAUDITED CONSOLIDATED BALANCE SHEETS 
(In thousands) December 31, June 30,
  2013 2013
     
Assets    
Current assets:    
 Cash and cash equivalents  $ 44,535  $ 39,126
 Accounts receivable, net   31,117  30,498
 Unbilled receivables and costs in excess of billings  9,888  17,743
 Inventory  33,140  37,432
 Deferred income taxes  10,190  11,672
 Prepaid income taxes  8,681  2,369
 Prepaid expenses and other current assets  6,916  7,461
 Total current assets  144,467  146,301
     
Restricted cash  546  546
Property and equipment, net  16,145  15,019
Goodwill   176,612  176,521
Intangible assets, net  31,131  34,866
Other non-current assets  841  1,178
 Total assets  $ 369,742  $ 374,431
     
Liabilities and Shareholders' Equity    
Current liabilities:    
 Accounts payable  $ 3,553  $ 4,813
 Accrued expenses  6,793  7,999
 Accrued compensation  9,105  12,218
 Deferred revenues and customer advances  4,879  5,788
 Total current liabilities  24,330  30,818
     
Deferred gain on sale-leaseback  2,664  3,242
Deferred income taxes  7,035  7,721
Income taxes payable  2,880  2,880
Other non-current liabilities  2,021  1,269
 Total liabilities  38,930  45,930
     
Shareholders' equity:    
 Common stock  311  304
 Additional paid-in capital  237,331  231,711
 Retained earnings  92,223  95,524
 Accumulated other comprehensive income   947  962
 Total shareholders' equity  330,812  328,501
     
 Total liabilities and shareholders' equity  $ 369,742  $ 374,431
     
 
MERCURY SYSTEMS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)        
  Three Months Ended Six Months Ended
  December 31, December 31,
  2013 2012 2013 2012
Net revenues  $ 53,090  $ 49,804  $ 107,030  $ 99,232
Cost of revenues (1)   28,152  32,232  59,507  61,270
 Gross margin  24,938  17,572  47,523  37,962
         
Operating expenses:        
 Selling, general and administrative (1)   14,753  14,574  29,854  29,107
 Research and development (1)  10,231  7,588  19,575  17,627
 Amortization of intangible assets  1,927  2,230  4,035  4,018
 Restructuring and other charges  97  217  82  5,201
 Acquisition costs and other related expenses  --   42  --   272
 Total operating expenses  27,008  24,651  53,546  56,225
         
Loss from operations  (2,070)  (7,079)  (6,023)  (18,263)
         
Interest income  3  2  4  4
Interest expense  (11)  (15)  (26)  (23)
Other income, net  440  116  872  455
         
Loss before income taxes  (1,638)  (6,976)  (5,173)  (17,827)
         
Tax benefit  (593)  (2,192)  (1,872)  (5,843)
         
Net loss  $ (1,045)  $ (4,784)  $ (3,301)  $ (11,984)
         
         
Basic net loss per share:  $ (0.03)  $ (0.16)  $ (0.11)  $ (0.40)
         
Diluted net loss per share:  $ (0.03)  $ (0.16)  $ (0.11)  $ (0.40)
         
Weighted-average shares outstanding:        
 Basic 30,988 30,107 30,820 29,995
 Diluted  30,988 30,107 30,820 29,995
         
         
(1) Includes stock-based compensation expense, allocated as follows:        
 Cost of revenues  $ 260  $ 99  $ 496  $ 230
 Selling, general and administrative   $ 2,037  $ 1,706  $ 4,369  $ 3,609
 Research and development   $ 420  $ 205  $ 887  $ 520
         
 
MERCURY SYSTEMS, INC. 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
  Three Months Ended Six Months Ended
  December 31, December 31,
  2013 2012 2013 2012
Cash flows from operating activities:        
 Net loss  $ (1,045)  $ (4,784)  $ (3,301)  $ (11,984)
 Depreciation and amortization  3,908  4,421  8,028  8,420
 Other non-cash items, net  2,762  (626)  6,018  (1,815)
 Changes in operating assets and liabilities, net of effects of businesses acquired  1,733  2,548  (1,214)  (3,011)
         
 Net cash provided by (used in) operating activities  7,358  1,559  9,531  (8,390)
         
Cash flows from investing activities:        
 Acquisition of businesses, net of cash acquired  --  --  --  (67,721)
 Purchases of property and equipment  (2,826)  (746)  (3,934)  (1,726)
 Increase in other investing activities  (300)  (112)  (300)  (377)
         
 Net cash used in investing activities  (3,126)  (858)  (4,234)  (69,824)
         
Cash flows from financing activities:        
 Proceeds from employee stock plans  520  537  580  670
 Payments of deferred financing and offering costs  --  (774)  --  (774)
 Payment of acquired debt  --  --  --  (6,575)
 Payments of capital lease obligations  (222)  (222)  (343)  (268)
 Decrease in restricted cash  --  3,000  --  3,000
 Excess tax benefits from stock-based compensation  3  --  3  9
         
 Net cash provided by (used in) financing activities  301  2,541  240  (3,938)
         
Effect of exchange rate changes on cash and cash equivalents  (104)  90  (128)  88
         
Net increase (decrease) in cash and cash equivalents  4,429  3,332  5,409  (82,064)
         
Cash and cash equivalents at beginning of period  40,106  30,568  39,126  115,964
         
Cash and cash equivalents at end of period  $ 44,535  $ 33,900  $ 44,535  $ 33,900
         
 
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 Six Months Ended
  December 31, December 31,
  2013 2012 2013 2012
Net loss  $ (1,045)  $ (4,784)  $ (3,301)  $ (11,984)
 Interest expense, net  8  13  22  19
 Tax benefit  (593)  (2,192)  (1,872)  (5,843)
 Depreciation  1,981  2,191  3,993  4,402
 Amortization of intangible assets  1,927  2,230  4,035  4,018
 Restructuring  97  217  82  5,201
 Acquisition costs and other related expenses  --   42  --   272
 Fair value adjustments from purchase accounting  --   1,272  --   2,197
 Stock-based compensation expense  2,717  2,010  5,752  4,359
Adjusted EBITDA   $ 5,092  $ 999  $ 8,711  $ 2,641
         
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 Six Months Ended
  December 31, December 31,
  2013 2012 2013 2012
Cash flows from operations  $ 7,358  $ 1,559  $ 9,531  $ (8,390)
 Capital expenditures  (2,826)  (746)  (3,934)  (1,726)
Free cash flow  $ 4,532  $ 813  $ 5,597  $ (10,116)
         
 
MERCURY SYSTEMS, INC.  
RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE
Quarter Ending March 31, 2014
(In thousands, except per share data)
 
The Company defines adjusted EBITDA as net income before interest income and expense, 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 per share   (0.15)  (0.09)
     
     
GAAP expectation -- Net loss  (4,526)  (2,858)
     
Adjust for:    
 Interest expense, net  14  14
 Income taxes  (3,886)  (2,454)
 Depreciation  1,990  1,990
 Amortization of intangible assets  1,901  1,901
 Restructuring  3,325  3,325
 Stock-based compensation expense  2,143  2,143
Adjusted EBITDA expectation  $ 961  $ 4,061
     
 
MERCURY SYSTEMS, INC.  
RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE
Year Ending June 30, 2014
(In thousands, except per share data)
 
The Company defines adjusted EBITDA as net income before interest income and expense, 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 per share   (0.34)  (0.20)
     
     
     
GAAP expectation --- Net loss  (9,800)  (6,000)
     
Adjust for:    
 Interest expense, net  100  100
 Income taxes  (7,000)  (4,800)
 Depreciation  8,000  8,000
 Amortization of intangible assets  7,800  7,800
 Restructuring  4,900  4,900
 Stock-based compensation expense  10,000  10,000
Adjusted EBITDA expectation  $ 14,000  $ 20,000
     
CONTACT: Kevin Bisson, CFO
         Mercury Systems, Inc.
         978-967-1990

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