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Mercury Systems Reports Third Quarter Fiscal 2020 Results

Third Quarter Highlights Include: 
Record bookings of $250 million increased 32% over prior year 
Record revenue increased 19% over prior year with 11% organic growth 
Record net income, adjusted EBITDA, EPS and adjusted EPS 
Record backlog increased 38% over prior year

ANDOVER, Mass., April 28, 2020 (GLOBE NEWSWIRE) -- Mercury Systems, Inc. (NASDAQ: MRCY, www.mrcy.com), reported operating results for the third quarter of fiscal 2020, ended March 27, 2020.

Management Comments 
“The record performance in the third quarter of fiscal year 2020 demonstrates the resiliency of our people and our business in a period of unparalleled challenges,” said Mark Aslett, Mercury’s President and Chief Executive Officer.  “We achieved record bookings of $250 million yielding a book-to-bill of 1.20 and another record backlog as well as record revenues, net income, adjusted EBITDA, EPS and adjusted EPS. While the COVID-19 global pandemic continues to disrupt the economies and financial markets of many countries and we are unable to predict its ultimate impact, we remain focused on continuing the mission-critical work we do every day to support our people, our customers and the ongoing security of our nation,” said Aslett.

Third Quarter Fiscal 2020 Results
Total Company third quarter fiscal 2020 revenues were $208.0 million, compared to $174.6 million in the third quarter of fiscal 2019. The third quarter fiscal 2020 results included an aggregate of approximately $16.5 million of revenue attributable to the GECO Avionics, The Athena Group, Syntonic Microwave and American Panel Corporation acquired businesses.

Total Company GAAP net income for the third quarter of fiscal 2020 was $23.6 million, or $0.43 per share, compared to $14.1 million, or $0.29 per share, for the third quarter of fiscal 2019.  Adjusted earnings per share (“adjusted EPS”) was $0.60 per share for the third quarter of fiscal 2020, compared to $0.49 per share in the third quarter of fiscal 2019.

Third quarter fiscal 2020 adjusted EBITDA for the total Company was $47.1 million, compared to $38.8 million for the third quarter of fiscal 2019.

Cash flows from operating activities in the third quarter of fiscal 2020 were $30.1 million, compared to $26.2 million in the third quarter of fiscal 2019. Free cash flow, defined as cash flows from operating activities less capital expenditures for property and equipment, was $19.2 million for both the third quarter of fiscal 2020 and the third quarter of fiscal 2019.

All per share information is presented on a fully diluted basis.

Bookings and Backlog
Total bookings for the third quarter of fiscal 2020 were $250.3 million, yielding a book-to-bill ratio of 1.20 for the quarter.

Mercury’s total backlog at March 27, 2020 was $769.8 million, a $211.6 million increase from a year ago. Of the March 27, 2020 total backlog, $544.8 million represents orders expected to be shipped within the next 12 months.

Business Outlook
This section presents our current expectations and estimates, given current visibility, on our business outlook for the current fiscal quarter and fiscal year 2020. It is possible that actual performance will differ materially from the estimates given, either on the upside or on the downside. Investors should consider all of the risks with respect to these estimates, including those listed in the Safe Harbor Statement below and in the Third Quarter Fiscal 2020 Earnings Presentation and in our periodic filings with the U.S. Securities and Exchange Commission, and make themselves aware of how these risks may impact our actual performance. Effective as of July 1, 2019, the Company's fiscal year has changed to the 52-week or 53-week period ending on the Friday closest to the last day in June. All references in this press release to the fourth quarter of fiscal 2020 and full fiscal 2020 are to the period ending July 3, 2020.

For the fourth quarter of fiscal 2020, revenues are forecasted to be in the range of $205.8 million to $215.8 million. GAAP net income for the fourth quarter is expected to be approximately $17.6 million to $19.8 million, or $0.32 to $0.36 per share, assuming no incremental restructuring, acquisition, other non-operating adjustments, non-recurring financing or COVID related expenses in the period, an effective tax rate, excluding discrete items, of approximately 26% and approximately 55.2 million weighted average diluted shares outstanding. Adjusted EBITDA for the fourth quarter of fiscal 2020 is expected to be in the range of $46.4 million to $49.4 million. Adjusted EPS is expected to be in the range of $0.54 to $0.58 per share.

For the full fiscal year 2020, we currently expect revenue of $785.0 million to $795.0 million, and GAAP net income of $76.1 million to $78.3 million, or $1.38 to $1.42 per share, assuming no incremental restructuring, acquisition, other non-operating adjustments, non-recurring financing or COVID related expenses in the period, an effective tax rate, excluding discrete items, of approximately 26% for the remainder of the year and approximately 55.1 million weighted average diluted shares outstanding. Adjusted EBITDA for the full fiscal year is expected to be approximately $173.0 million to $176.0 million, and adjusted EPS for the full fiscal year is expected to be approximately $2.12 to $2.16 per share.

Recent Highlights
March – Mercury announced the EnsembleSeries™ SCM6010 OpenVPX™ data storage module featuring the latest non-volatile memory express (“NVMe”) M.2 commercial technology critical for high-speed, low-latency performance. The SCM6010’s removable storage canisters are an industry first, enabling users to quickly replace the storage for rapid mission updates, removal of sensitive material and technological refreshes.

March – Mercury announced the EnsembleSeries™ DCM3220 digital transceiver, a multi-channel, highly configurable transmit/receive module with integrated FPGA processing. The versatile, low-latency digital transceiver has the highest spectral processing density of any 3U OpenVPX™ module available today.

February – Mercury announced that its TRRUST-Stor® 3U VPX RT solid state drive had launched into low Earth orbit  as part of a satellite constellation system developed by a leading defense prime contractor.

February – Mercury announced an OEM agreement with Hewlett Packard Enterprise (“HPE”) that will enable Mercury to develop a new rugged rackmount server product line based on HPE’s ProLiant server technology. Mercury’s new EnterpriseSeries™ RES-XR6 Alliance rackmount servers leverage components from HPE’s ProLiant platform and combine them with Mercury’s proven innovative technologies, thermal and mechanical design features into a rugged field-deployable solution that delivers industry-leading advanced compute capabilities to mission-critical defense and tactical edge applications.

February – Mercury announced that the Boston Business Journal (BBJ) had recognized the Company as one of the 50 fastest-growing middle-market companies in Massachusetts. Mercury ranked 11th on the BBJ’s annual list based on its 2016 to 2018 revenue growth.

February – Mercury announced it received a $24 million order from a leading defense prime contractor for SWaP-optimized radio frequency modules ready for integration into an advanced electronic warfare system. The order was booked in the Company’s fiscal 2020 second quarter and is expected to be shipped over the next several quarters.

January – Mercury announced the EnsembleSeries™ SFM6126 OpenVPX™ PCI Express gen 3 switch with innovative capabilities for creating a true composable data center edge processing architecture for aerospace and defense applications. This represents a critical data distribution building block for Mercury’s comprehensive embedded data center compute architecture, ensuring availability in space-constrained, harsh environments.

January – Mercury announced the EnsembleSeries™ CIOE-1390 module, the industry’s first commercially-available compute module with Intel® Atom® multicore processors and embedded BuiltSAFE™ technology for flight safety certification. The new COM Express®-based processor modules leverage the collaboration between Intel and Mercury’s design and flight safety certification experts to address the demand for onboard processing power needed for smarter and more integrated avionics applications on rotary-wing platforms and Urban Air Mobility vehicles.

January – Mercury announced that Orlando P. Carvalho, former Executive Vice President of Lockheed Martin’s Aeronautics business, was elected to the Board of Directors. With this election, the Board of Directors consists of nine members, eight of which are independent directors.

Conference Call Information

Mercury will host a conference call and simultaneous webcast on Tuesday, April 28, 2020, at 5:00 p.m. ET to discuss the third quarter fiscal 2020 results and review its financial and business outlook going forward.

The live audio webcast as well as the Company's earnings presentation can be accessed from the ‘Events and Presentations’ page of Mercury's IR website at mrcy.com/investor. Please log into the webcast 15 minutes prior to the scheduled start time.

To join the conference call by phone, dial (877) 303-6977 in the USA and Canada, or (760) 298-5079 in all other countries. Please dial in 15 minutes prior to the scheduled start time.

A replay of the webcast will be available two hours after the call and archived for six months on the ‘Events and Presentations’.

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.

About Mercury Systems – Innovation That Matters®

Mercury Systems is the leader in making trusted, secure mission-critical technologies profoundly more accessible to aerospace and defense. Our innovative solutions power more than 300 aerospace, commercial aviation, defense, security and intelligence programs, configured and optimized for mission success in some of the most challenging and demanding environments. Headquartered in Andover, Mass., with manufacturing and design facilities around the world, Mercury specializes in engineering, adapting and manufacturing new solutions purpose-built to meet current and emerging high-tech needs. Our products and solutions have been successfully deployed with over 25 different defense prime contractors, a testament to our deep domain expertise and our commitment to Innovation that Matters®. To learn more, visit www.mrcy.com, or follow us on Twitter.

Investors and others should note that we announce material financial information using our website (www.mrcy.com), SEC filings, press releases, public conference calls, webcasts, and social media, including Twitter (twitter.com/mrcy and twitter.com/mrcy_CEO) and LinkedIn (www.linkedin.com/company/mercury-systems). Therefore, we encourage investors and others interested in Mercury to review the information we post on the social media and other communication channels listed on our website.

Forward-Looking Safe Harbor Statement

This press release contains certain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, including those relating to the acquisitions described herein and to fiscal 2020 business performance and beyond and the Company’s plans for growth and improvement in profitability and cash flow. You can identify these statements by the use of the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of epidemics and pandemics such as COVID, 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 industrial security and cyber-security regulations and requirements, changes in tax rates or tax regulations, changes to interest rate swaps or other cash flow hedging arrangements, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as are discussed in the Company's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2019, and as updated by the Company's Current Report on Form 8-K filed on April 28, 2020. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

Contact:
Michael D. Ruppert, CFO
Mercury Systems, Inc.
978-967-1990

Mercury Systems and Innovation that Matters are registered trademarks, and Ensemble Series, EnterpriseSeries, BuiltSAFE and BuiltSECURE are trademarks of Mercury Systems, Inc. Other product and company names mentioned may be trademarks and/or registered trademarks of their respective holders.

MERCURY SYSTEMS, INC.     
UNAUDITED CONSOLIDATED BALANCE SHEETS    
(In thousands)          
    March 27,   June 30,  
    2020   2019  
           
Assets          
Current assets:          
Cash and cash equivalents   $ 407,146     $ 257,932    
Accounts receivable, net   127,129     118,832    
Unbilled receivables and costs in excess of billings   86,860     57,387    
Inventory   161,858     137,112    
Prepaid income taxes   1,129     90    
Prepaid expenses and other current assets   11,271     10,819    
Total current assets   795,393     582,172    
           
Property and equipment, net   78,664     60,001    
Goodwill   614,830     562,146    
Intangible assets, net   216,546     206,124    
Operating lease right-of-use assets(1)   61,112        
Other non-current assets   5,095     6,534    
Total assets   $ 1,771,640     $ 1,416,977    
           
Liabilities and Shareholders’ Equity          
Current liabilities:          
Accounts payable   $ 50,089     $ 39,030    
Accrued expenses(1)   24,727     18,897    
Accrued compensation   34,781     28,814    
Deferred revenues and customer advances   12,419     11,291    
Total current liabilities   122,016     98,032    
           
Deferred income taxes   19,166     17,814    
Income taxes payable   1,751     1,273    
Long-term debt   200,000        
Operating lease liabilities(1)   67,028        
Other non-current liabilities   12,246     15,119    
Total liabilities   422,207     132,238    
           
Shareholders’ equity:          
Common stock   546     542    
Additional paid-in capital   1,064,698     1,058,745    
Retained earnings   285,231     226,743    
Accumulated other comprehensive loss   (1,042 )   (1,291 )  
Total shareholders’ equity   1,349,433     1,284,739    
Total liabilities and shareholders’ equity   $ 1,771,640     $ 1,416,977    
           
(1) Effective July 1, 2019, the Company has adopted ASC 842 - Leases using the optional transition method. Prior periods were not changed. As of March  27, 2020, the Company has Right-of-use assets of $61.1 million and total Lease liabilities of $73.8 million, of which $6.8 million is included in Accrued expenses.  
                   

 

MERCURY SYSTEMS, INC.                
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS        
(In thousands, except per share data)                
    Third Quarters Ended   Nine Months Ended
    March 27, 2020   March 31, 2019   March 27, 2020   March 31, 2019
Net revenues   $ 208,016     $ 174,636     $ 579,233     $ 477,781  
Cost of revenues(1)   114,691     100,789     319,002     271,464  
Gross margin   93,325     73,847     260,231     206,317  
                 
Operating expenses:                
Selling, general and administrative(1)   33,991     27,411     96,765     79,971  
Research and development(1)   24,967     17,439     71,497     48,579  
Amortization of intangible assets   7,848     6,786     22,859     20,906  
Restructuring and other charges   66     46     1,815     573  
Acquisition costs and other related expenses   111     103     2,652     555  
Total operating expenses   66,983     51,785     195,588     150,584  
                 
Income from operations   26,342     22,062     64,643     55,733  
                 
Interest income   458     205     1,957     342  
Interest expense   (58 )   (2,473 )   (58 )   (6,928 )
Other income (expense), net   2,186     (328 )   401     (2,207 )
                 
Income before income taxes   28,928     19,466     66,943     46,940  
Tax provision   5,363     5,357     8,455     12,969  
Net income   $ 23,565     $ 14,109     $ 58,488     $ 33,971  
                 
Basic net earnings per share   $ 0.43     $ 0.30     $ 1.07     $ 0.72  
                 
Diluted net earnings per share   $ 0.43     $ 0.29     $ 1.06     $ 0.71  
                 
Weighted-average shares outstanding:                
Basic   54,604     47,258     54,514     47,164  
Diluted   55,127     47,958     55,071     47,783  
                 
(1) Includes stock-based compensation expense, allocated as follows:    
Cost of revenues   $ 341     $ 188     $ 682     $ 599  
Selling, general and administrative   $ 5,476     $ 4,039     $ 15,503     $ 12,465  
Research and development   $ 997     $ 646     $ 2,819     $ 1,772  

 

MERCURY SYSTEMS, INC.                
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)                
    Third Quarters Ended   Nine Months Ended
    March 27, 2020   March 31, 2019   March 27, 2020   March 31, 2019
Cash flows from operating activities:                
Net income   $ 23,565     $ 14,109     $ 58,488     $ 33,971  
Depreciation and amortization   12,651     11,576     36,579     34,830  
Gain on sale of investment   (3,810 )       (3,810 )    
Other non-cash items, net   8,542     6,333     22,580     16,497  
Changes in operating assets and liabilities   (10,866 )   (5,800 )   (27,379 )   (13,750 )
                 
Net cash provided by operating activities   30,082     26,218     86,458     71,548  
                 
Cash flows from investing activities:                
Acquisition of businesses, net of cash acquired       (36,500 )   (96,502 )   (81,529 )
Purchases of property and equipment   (10,869 )   (7,060 )   (31,788 )   (17,862 )
Proceeds from sale of investment   4,310         4,310      
                 
Net cash used in investing activities   (6,559 )   (43,560 )   (123,980 )   (99,391 )
                 
Cash flows from financing activities:                
Proceeds from employee stock plans   2,393         2,396     1,677  
Borrowings under credit facilities   200,000     36,500     200,000     81,500  
Payments of deferred financing and offering costs               (1,851 )
Payments for retirement of common stock   (746 )   (502 )   (15,683 )   (7,434 )
                 
Net cash provided by financing activities   201,647     35,998     186,713     73,892  
                 
Effect of exchange rate changes on cash and cash equivalents   (61 )   (44 )   23     (55 )
                 
Net increase in cash and cash equivalents   225,109     18,612     149,214     45,994  
                 
Cash and cash equivalents at beginning of period   182,037     93,903     257,932     66,521  
                 
Cash and cash equivalents at end of period   $ 407,146     $ 112,515     $ 407,146     $ 112,515  
                                 

 

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, investments 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. 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.

COVID related expenses. The Company incurred costs associated with the COVID pandemic. These costs relate primarily to enhanced compensation and benefits for employees as well as incremental supplies and services to support social distancing and mitigate the spread of COVID. These costs include the Mercury Employee COVID Relief Fund, which was established to support employees experiencing financial burdens resulting from the COVID pandemic. The intent of this fund is to provide relief for employees who may otherwise be unable to pay for basic necessities, unexpected care for immediate family members, or other urgent needs that promote their health and safety during the current Coronavirus crisis. These costs also include expanded sick pay related to COVID, overtime, meals and other compensation-related expenses. Management believes these items are outside the normal operations of the Company and are not indicative of ongoing operating results.

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.

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.

    Third Quarters Ended   Nine Months Ended
    March 27, 2020   March 31, 2019   March 27, 2020   March 31, 2019
Net income   $ 23,565     $ 14,109     $ 58,488     $ 33,971  
Other non-operating adjustments, net   (3,138 )   (502 )   (3,386 )   (155 )
Interest (income) expense, net   (400 )   2,268     (1,899 )   6,586  
Income tax provision   5,363     5,357     8,455     12,969  
Depreciation   4,803     4,790     13,720     13,924  
Amortization of intangible assets   7,848     6,786     22,859     20,906  
Restructuring and other charges   66     46     1,815     573  
Impairment of long-lived assets                
Acquisition and financing costs   891     787     5,009     2,592  
Fair value adjustments from purchase accounting   600     93     1,200     713  
Litigation and settlement expense, net   174     146     629     325  
COVID related expenses(1)   397         397      
Stock-based and other non-cash compensation expense   6,917     4,914     19,332     14,995  
Adjusted EBITDA   $ 47,086     $ 38,794     $ 126,619     $ 107,399  
                 
(1) Effective as of the third quarter of fiscal 2020, the Company has added back incremental COVID related expenses.

Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs, and, therefore, has not been calculated in accordance with GAAP. Management believes free cash flow provides investors with an important perspective on cash available for investment and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. The Company believes that trends in its free cash flow are valuable indicators of its operating performance and liquidity.

Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. The Company expects to continue to incur expenditures similar to the free cash flow financial adjustment described above, and investors should not infer from the Company’s presentation of this non-GAAP financial measure that these expenditures reflect all of the Company's obligations which require cash.

The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure.

    Third Quarters Ended   Nine Months Ended
    March 27, 2020   March 31, 2019   March 27, 2020   March 31, 2019
Cash provided by operating activities   $ 30,082     $ 26,218     $ 86,458     $ 71,548  
Purchases of property and equipment   (10,869 )   (7,060 )   (31,788 )   (17,862 )
Free cash flow   $ 19,213     $ 19,158     $ 54,670     $ 53,686  
                                 

 

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 other non-operating adjustments, 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, COVID related expenses, 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(3). Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding.  

The following tables reconcile the most directly comparable GAAP financial measures to the non-GAAP financial measures.

    Third Quarters Ended
    March 27, 2020   March 31, 2019
Net income and earnings per share   $ 23,565     $ 0.43     $ 14,109     $ 0.29  
Other non-operating adjustments, net(1)   (3,138 )       (502 )    
Amortization of intangible assets   7,848         6,786      
Restructuring and other charges   66         46      
Impairment of long-lived assets                
Acquisition and financing costs   891         787      
Fair value adjustments from purchase accounting   600         93      
Litigation and settlement expense, net   174         146      
COVID related expenses(2)   397              
Stock-based and other non-cash compensation expense   6,917         4,914      
Impact to income taxes(3)   (4,048 )       (2,722 )    
Adjusted income and adjusted earnings per share   $ 33,272     $ 0.60     $ 23,657     $ 0.49  
                 
Diluted weighted-average shares outstanding       55,127         47,958  
                 
(1) Effective as of the third quarter of fiscal 2020, the Company has revised its definition of adjusted income and adjusted earnings per share to incorporate other non-operating adjustments, which includes gains or losses on foreign currency remeasurement, investments and fixed asset sales or disposals among other adjustments. Adjusted EPS for prior periods has been recast for comparative purposes.
(2) Effective as of the third quarter of fiscal 2020, the Company has added back incremental COVID related expenses.
(3) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs.
                                 

 

    Nine Months Ended
    March 27, 2020   March 31, 2019
Net income and earnings per share   $ 58,488     $ 1.06     $ 33,971     $ 0.71  
Other non-operating adjustments, net(1)   (3,386 )       (155 )    
Amortization of intangible assets   22,859         20,906      
Restructuring and other charges   1,815         573      
Impairment of long-lived assets                
Acquisition and financing costs   5,009         2,592      
Fair value adjustments from purchase accounting   1,200         713      
Litigation and settlement expense, net   629         325      
COVID related expenses(2)   397              
Stock-based and other non-cash compensation expense   19,332         14,995      
Impact to income taxes(3)   (19,341 )       (8,892 )    
Adjusted income and adjusted earnings per share   $ 87,002     $ 1.58     $ 65,028     $ 1.36  
                 
Diluted weighted-average shares outstanding       55,071         47,783  
                 
(1) Effective as of the third quarter of fiscal 2020, the Company has revised its definition of adjusted income and adjusted earnings per share to incorporate other non-operating adjustments, which includes gains or losses on foreign currency remeasurement, investments and fixed asset sales or disposals among other adjustments. Adjusted EPS for prior periods has been recast for comparative purposes.
(2) Effective as of the third quarter of fiscal 2020, the Company has added back incremental COVID related expenses.
(3) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs.
                                 

 

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.

    Third Quarters Ended   Nine Months Ended
    March 27, 2020   March 31, 2019   March 27, 2020   March 31, 2019
Organic revenue   $ 191,473     $ 172,159     $ 527,110     $ 466,310  
Acquired revenue   16,543     2,477     52,123     11,471  
Net revenues   $ 208,016     $ 174,636     $ 579,233     $ 477,781  
                                 

 

MERCURY SYSTEMS, INC. 
RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE      
Quarter Ending July 3, 2020      
Fiscal Year Ending July 3, 2020      
(In thousands)      

The Company defines adjusted EBITDA as income before other non-operating adjustments, interest income and expense, income taxes, depreciation, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, COVID related expenses, and stock-based and other non-cash compensation expense.   

The following table reconciles the most directly comparable GAAP financial measures to the non-GAAP financial measures.

    Fourth Quarter Ending   Fiscal Year Ending
    July 3, 2020(1)   July 3, 2020(1)
    Range
    Low   High   Low   High
GAAP expectation -- Net income   $ 17,600     $ 19,800     $ 76,100     $ 78,300  
                 
Adjust for:                
Other non-operating adjustments, net           (3,400 )   (3,400 )
Interest expense (income), net   1,100     1,100     (800 )   (800 )
Income tax provision   6,100     6,900     14,600     15,400  
Depreciation   5,300     5,300     19,000     19,000  
Amortization of intangible assets   7,800     7,800     30,600     30,600  
Restructuring and other charges           1,800     1,800  
Impairment of long-lived assets                
Acquisition and financing costs   700     700     5,700     5,700  
Fair value adjustments from purchase accounting   600     600     1,800     1,800  
Litigation and settlement expense, net           600     600  
COVID related expenses           400     400  
Stock-based and other non-cash compensation expense   7,200     7,200     26,600     26,600  
Adjusted EBITDA expectation   $ 46,400     $ 49,400     $ 173,000     $ 176,000  
                 
(1) Rounded amounts used.                

 

MERCURY SYSTEMS, INC. 
RECONCILIATION OF FORWARD-LOOKING GUIDANCE RANGE      
Quarter Ending July 3, 2020      
Fiscal Year Ending July 3, 2020      
(In thousands, except per share data)      

The Company defines adjusted income as income before other non-operating adjustments, 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, COVID related expenses and stock-based and other non-cash compensation expense. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision(2).  Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding.  

The following tables reconcile the most directly comparable GAAP financial measures to the non-GAAP financial measures.

    Fourth Quarter Ending July 3, 2020(1)
    Range
    Low   High
GAAP expectation -- Net income and earnings per share   $ 17,600     $ 0.32     $ 19,800     $ 0.36  
Other non-operating adjustments, net                
Amortization of intangible assets   7,800         7,800      
Restructuring and other charges                
Impairment of long-lived assets                
Acquisition and financing costs   700         700      
Fair value adjustments from purchase accounting   600         600      
Litigation and settlement expense (income), net                
COVID related expenses                
Stock-based and other non-cash compensation expense   7,200         7,200      
Impact to income taxes(2)   (4,200 )       (4,200 )    
Adjusted income and adjusted earnings per share expectation   $ 29,700     $ 0.54     $ 31,900     $ 0.58  
                 
Diluted weighted-average shares outstanding expectation       55,200         55,200  
                 
(1) Rounded amounts used.
(2) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs.
                                 

 

    Fiscal Year Ending July 3, 2020(1)
    Range
    Low   High
GAAP expectation -- Net income and earnings per share   $ 76,100     $ 1.38     $ 78,300     $ 1.42  
Other non-operating adjustments, net   (3,400 )       (3,400 )    
Amortization of intangible assets   30,600         30,600      
Restructuring and other charges   1,800         1,800      
Impairment of long-lived assets                
Acquisition and financing costs   5,700         5,700      
Fair value adjustments from purchase accounting   1,800         1,800      
Litigation and settlement expense, net   600         600      
COVID related expenses   400         400      
Stock-based and other non-cash compensation expense   26,600         26,600      
Impact to income taxes(2)   (23,500 )       (23,500 )    
Adjusted income and adjusted earnings per share expectation   $ 116,700     $ 2.12     $ 118,900     $ 2.16  
                 
Diluted weighted-average shares outstanding expectation       55,100         55,100  
                 
(1) Rounded amounts used.
(2) Impact to income taxes is calculated by recasting income before income taxes to include the add-backs involved in determining adjusted income and recalculating the income tax provision using this adjusted income from operations before income taxes. The recalculation also adjusts for any discrete tax expense or benefit related to the add-backs.