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2016-04-26


Mercury Systems Reports Third Quarter Fiscal 2016 Results, Raises Full Year Adjusted EBITDA Guidance


Highlights include:
 

Bookings up 42% over prior year, yielding record backlog of $220 million
Revenue increases 11% over prior year
Adjusted EBITDA up 27% year-over-year to $14.6 million
Adjusted EBITDA and Adjusted EPS exceed estimates
Company raises earnings guidance for fiscal 2016  

CHELMSFORD, Mass., April 26, 2016 (GLOBE NEWSWIRE) -- Mercury Systems, Inc. (NASDAQ:MRCY) (www.mrcy.com), reported operating results for the third quarter of fiscal 2016, ended March 31, 2016.

Management Comments
“The third quarter was another significant milestone toward achieving our objectives for the fiscal year,” stated Mark Aslett, Mercury’s President and Chief Executive Officer.  “Revenue growth continued to outpace the industry, increasing 11% year-over-year, while our adjusted EBITDA grew even faster at 27%.  In addition, bookings of $80.8 million yielded record backlog of $220 million.  Mercury’s strong revenue performance, coupled with our operating leverage, continued to enhance our adjusted EBITDA performance, positioning Mercury for a strong finish to our fiscal 2016. We currently expect to close the pending acquisition of the embedded security, RF and microwave solutions, and custom microelectronics operations of Microsemi Corporation within approximately one week,” Aslett concluded.

Third Quarter Fiscal 2016 Results
Third quarter fiscal 2016 revenues were $65.9 million, an increase of $6.3 million, or 11%, compared to the third quarter of fiscal 2015.  GAAP income from continuing operations for the third quarter of fiscal 2016 was $4.5 million, or $0.13 per share, compared to GAAP income from continuing operations of $4.7 million, or $0.14 per share, for the prior year’s third quarter. The third quarter of fiscal 2016 included $1.7 million, or $0.03 per share of acquisition and financing costs. Adjusted earnings per share (“adjusted EPS”) was $0.25 per share for the third quarter of fiscal 2016, compared to $0.22 per share in the third quarter fiscal 2015.  All per share information is presented on a fully diluted basis and does not reflect the impact of the 5.175 million common shares issued by the Company in the follow-on underwritten public offering, which closed on April 13, 2016.

Third quarter fiscal 2016 adjusted EBITDA was $14.6 million, an increase of 27% from $11.5 million in the third quarter of fiscal 2015. 

Total GAAP net income for the third quarter of fiscal 2016 was $4.5 million, or $0.13 per share, compared to total GAAP net income of $3.7 million, or $0.11 per share, for the prior year’s third quarter.  The third quarter of fiscal 2015 included a loss, net of income taxes, of ($1.0) million, or ($0.03) per share, from discontinued operations.

Cash flows from operating activities in the third quarter of fiscal 2016 were a net inflow of $4.3 million, compared to a net inflow of $9.1 million in the third quarter of fiscal 2015.  Free cash flow, defined as cash flow from operating activities less capital expenditures, was a net inflow of $2.6 million in the third quarter of fiscal 2016, compared to a net inflow of $7.8 million in the third quarter of fiscal 2015. 

The Company’s reported financial results are from continuing operations for all periods referenced in this release unless otherwise noted.  

Bookings and Backlog
Bookings for the third quarter of fiscal 2016 were $80.8 million, yielding a book-to-bill of 1.2 for the quarter.  Mercury’s total backlog at March 31, 2016 was $219.7 million, an increase of $29.8 million from a year ago.  Of the March 31, 2016 total backlog, $172.0 million represents orders expected to be shipped over the next 12 months. 

Revenues by Reporting Segment
Mercury Commercial Electronics (MCE) — Revenues for the third quarter of fiscal 2016 from MCE were $57.5 million, representing an increase of $4.7 million, or 9.0%, from the third quarter of fiscal 2015.  The increase in revenues compared to last year’s third quarter related primarily to higher SEWIP program revenues. 

Mercury Defense Systems (MDS) — Revenues for the third quarter of fiscal 2016 from MDS were $8.6 million, an increase of $1.9 million, or 28.2%, from the third quarter of fiscal 2015, primarily due to strength in the Filthy Buzzard program.

The revenues by reporting segment are adjusted for ($0.2) million and $0.1 million of revenues included in our consolidated results in the third quarter of fiscal 2016 and fiscal 2015, respectively.  This revenue is attributable to development programs where the revenue is recognized in both segments under contract accounting, and reflects the reconciliation to our consolidated results.

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 2016, which excludes the impact of our pending acquisition announced on March 23, 2016 and expected to close in the current quarter.  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 our periodic filings with the U.S. Securities and Exchange Commission, and make themselves aware of how these risks may impact our actual performance.  

For the fourth quarter of fiscal 2016, on a standalone basis, revenues are forecasted to be in the range of $65.5 million to $68.5 million. Adjusted EPS is expected to be in the range of $0.20 to $0.22 per share, including approximately $1.8 million of amortization of intangible assets, $2.2 million of stock-based compensation expense and an effective tax rate of approximately 36%. Adjusted EBITDA for the fourth quarter of fiscal 2016 is expected to be in the range of $12.0 million to $13.5 million. This results in estimated revenue for the full fiscal year of $250.2 million to $253.2 million and adjusted EBITDA for the full fiscal year of approximately $51.0 million to $52.5 million.

The Company expects to provide combined guidance, including the businesses expected to be acquired from Microsemi, when it announces fourth quarter fiscal 2016 results.  

Recent Highlights
March – Mercury announced that it signed a definitive agreement with Microsemi Corporation to acquire the embedded security, RF and microwave, and custom microelectronics businesses of Microsemi.  For the twelve months ended September 27, 2015, these businesses had combined revenues of $99 million and pro forma standalone adjusted EBITDA of approximately 28%.  The businesses are primarily focused on the defense electronics market and employ a total of approximately 275 people based at facilities in Phoenix, Ariz., Camarillo, Calif., San Jose, Calif., and West Lafayette, Ind. The acquisition is expected to close during Mercury’s fourth fiscal quarter, which ends June 30, 2016.

March – Mercury announced the rugged OpenVPX™ Ensemble® LDS6526 processing blade that seamlessly integrates the Intel® Xeon® Processor D-1500 system-on-a-chip (SoC) product family (formerly codenamed "Broadwell DE"), the versatility and performance boost of software-defined off-load processing with built-in, double-bandwidth sensor I/O capability into a powerful 6U form factor blade for streaming signal processing applications.

March – Mercury announced it received a $2.2 million follow-on order from a leading defense prime contractor for high-performance signal processing subsystems for a manned airborne radar application.  The order was booked in the Company's fiscal 2016 third quarter and is expected to be shipped over the next several quarters.

March – Mercury announced it received a $2.2 million order from a leading systems integrator to supply high-performance digital signal processing and radio frequency (RF) modules for a signals intelligence application.  The order was booked in the Company's fiscal 2016 third quarter and is expected to be shipped by the end of its fiscal 2016 fourth quarter.

February – Mercury announced that its headquarters facility in Chelmsford, Mass., as well as its facilities in Hudson, N.H., Manteca, Calif., and Cypress, Calif. each received "Superior" security ratings in recent vulnerability assessments conducted by the U.S. Department of Defense's Defense Security Service (DSS). For three of the four facilities, these represent multiple consecutive "Superior" ratings, the highest awarded to defense contractors by DSS. Currently, fewer than 10 percent of the approximately 13,500 facilities overseen by the DSS receive a Superior rating. Including these most recent ratings, Mercury has received an aggregate of twelve "Superior" ratings across numerous facilities.

January – Mercury announced it received a $3.7 million follow-on order from a leading defense prime contractor for high-performance digital signal processing modules for a manned airborne synthetic aperture radar (SAR) application.  The order was booked in the Company's fiscal 2016 second quarter and is expected to be shipped by its fiscal 2016 fourth quarter.

January – Mercury announced it received a $3 million follow-on order from a leading defense prime contractor for high performance microwave subsystems for an electronic warfare application.  The order was received in the Company's fiscal 2016 second quarter and is expected to be shipped over the next several quarters.

January – Mercury announced it received a $2 million follow-on order from a leading defense prime contractor for high-performance signal processing subsystems for a manned airborne radar application.  The order was booked in the Company's fiscal 2016 second quarter and is expected to be shipped over the next several quarters.

January – Mercury announced it received a $4 million follow-on order from a leading defense prime contractor for high-performance digital signal processing modules for an unmanned airborne synthetic aperture radar (SAR) application.  The order was booked in the Company's fiscal 2016 second quarter and is expected to be shipped over the next 11 months.

January – Mercury announced the Company's fluid management Liquid Flow-By™ cooling technology for embedded processing subsystems. With the ability to cool the most powerful and processing-dense devices available, Liquid Flow-By enables open system architecture (OSA) modules to operate unrestricted and reliably, regardless of the presence of a cooling air supply.

January – Mercury announced it had recently received $6.5 million in orders relating to a sensor processing application for fighter aircraft.  The orders were booked in the Company's fiscal 2016 second quarter.

Conference Call Information  

Mercury will host a conference call and simultaneous webcast on Tuesday, April 26, 2016, at 5:00 p.m. ET to discuss the third quarter fiscal 2016 results and review its financial and business outlook going forward.

To join the conference call, dial (877) 303-6977 in the USA and Canada, or (760) 298-5079 in all other countries.  Please call five to ten minutes prior to the scheduled start time. The live audio webcast can be accessed from the 'Events and Presentations' page of Mercury's website at www.mrcy.com/investor.

A replay of the webcast will be available two hours after the call and archived on the same web page for six months.

Use of Non-GAAP Financial Measures
In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides adjusted EBITDA, adjusted income from continuing operations, adjusted earnings per share “adjusted EPS”, and free cash flow, which are non-GAAP financial measures.  Adjusted EBITDA, adjusted income from continuing operations, and adjusted EPS exclude certain non-cash and other specified charges. Free cash flow is defined as cash flow from operating activities less capital expenditures.  The Company believes these non-GAAP financial measures are useful to help investors understand its past financial performance and prospects for the future.  However, these non-GAAP measures should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP.  Management believes these non-GAAP measures assist in providing a more complete understanding of the Company’s underlying operational results and trends, and management uses these measures along with the corresponding GAAP financial measures to manage the Company’s business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals.  A reconciliation of GAAP to non-GAAP financial results discussed in this press release is contained in the attached exhibits.

Mercury Systems – Innovation That Matters  

Mercury Systems (NASDAQ:MRCY) is a leading commercial provider of secure processing subsystems designed and made in the USA. Optimized for customer and mission success, Mercury’s solutions power a wide variety of critical defense and intelligence programs. Headquartered in Chelmsford, Mass., Mercury is pioneering a next-generation defense electronics business model specifically designed to meet the industry’s current and emerging technology needs. To learn more, visit www.mrcy.com.

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 fiscal 2016 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 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 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, changes to export regulations, increases in tax rates, 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, 2015. 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.

Mercury Systems, Innovation That Matters and Liquid Flow-By 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 31,   June 30,
    2016     2015  
           
Assets        
Current assets:      
  Cash and cash equivalents $   84,245     $   77,586  
  Accounts receivable, net      39,314         31,765  
  Unbilled receivables and costs in excess of billings     29,376         22,021  
  Inventory     34,348         31,960  
  Deferred income taxes     12,788         12,407  
  Prepaid income taxes     1,912         3,747  
  Prepaid expenses and other current assets     4,652         8,678  
  Total current assets     206,635         188,164  
       
Restricted cash     264         264  
Property and equipment, net     13,512         13,226  
Goodwill      173,741         168,146  
Intangible assets, net     17,235         17,998  
Other non-current assets     3,369         2,190  
  Total assets $   414,756     $   389,988  
       
Liabilities and Shareholders’ Equity        
Current liabilities:      
  Accounts payable $   12,412     $   6,928  
  Accrued expenses     12,534         9,005  
  Accrued compensation     11,880         9,875  
  Deferred revenues and customer advances     5,166         7,477  
  Total current liabilities     41,992         33,285  
       
Deferred gain on sale-leaseback     61         929  
Deferred income taxes     2,391         3,108  
Income taxes payable     1,513         1,459  
Other non-current liabilities     1,056         1,069  
  Total liabilities     47,013         39,850  
       
Shareholders’ equity:      
  Common stock     333         326  
  Additional paid-in capital     260,805         254,568  
  Retained earnings     105,747         94,468  
  Accumulated other comprehensive income      858         776  
  Total shareholders’ equity     367,743         350,138  
  Total liabilities and shareholders’ equity $   414,756     $   389,988  

 

MERCURY SYSTEMS, INC. 
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  
(In thousands, except per share data)
                             
    Three Months Ended   Nine Months Ended
  March 31,   March 31,
    2016       2015       2016       2015  
Net revenues $   65,898     $   59,578     $   184,724     $   170,728  
Cost of revenues (1)      35,407         31,660         98,126         91,776  
  Gross margin     30,491         27,918         86,598         78,952  
               
Operating expenses:              
  Selling, general and administrative (1)      12,687         11,842         37,396         36,809  
  Research and development (1)     7,269         8,115         23,046         23,961  
  Amortization of intangible assets     1,754         1,744         5,105         5,268  
  Restructuring and other charges     409         27         968         2,457  
  Impairment of long-lived assets     -          -          231         -   
  Acquisition costs and other related expenses     1,553         33         3,533         33  
  Total operating expenses     23,672         21,761         70,279         68,528  
               
Income from operations     6,819         6,157         16,319         10,424  
               
Interest income     39         6         89         13  
Interest expense     (3 )       (7 )       (10 )       (23 )
Other income, net     144         7         298         399  
               
Income from continuing operations before income taxes     6,999         6,163         16,696         10,813  
Tax provision     2,473         1,469         5,417         2,516  
Income from continuing operations     4,526         4,694         11,279         8,297  
Loss from discontinued operations, net of tax     -         (1,019 )       -         (3,858 )
Net income $   4,526     $   3,675     $   11,279     $   4,439  
               
Basic net earnings (loss) per share:              
  Continuing operations $   0.14     $   0.14     $   0.34     $   0.26  
  Discontinued operations     -          (0.03 )       -          (0.12 )
Basic net earnings per share: $   0.14     $   0.11     $   0.34     $   0.14  
               
Diluted net earnings (loss) per share:              
  Continuing operations $   0.13     $   0.14     $   0.33     $   0.25  
  Discontinued operations     -          (0.03 )       -          (0.12 )
Diluted net earnings per share: $   0.13     $   0.11     $   0.33     $   0.13  
               
Weighted-average shares outstanding:              
  Basic   33,251       32,298       33,162       32,001  
  Diluted    33,991       33,233       33,940       32,953  
               
               
(1) Includes stock-based compensation expense, allocated as follows:                          
  Cost of revenues $   152     $   110     $   307     $   375  
  Selling, general and administrative  $   1,802     $   1,446     $   5,993     $   5,190  
  Research and development  $   196     $   314     $   944     $ 1,111  

 

MERCURY SYSTEMS, INC.  
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(In thousands) 
 
    Three Months Ended   Nine Months Ended
    March 31,   March 31,
    2016       2015       2016       2015  
Cash flows from operating activities:                              
  Net income  $   4,526     $   3,675     $   11,279     $   4,439  
  Depreciation and amortization     3,319         3,296         9,878         10,446  
  Other non-cash items, net     1,532         3,256         4,220         8,055  
  Changes in operating assets and liabilities     (5,047 )       (1,114 )       (3,569 )       (3,420 )
                               
  Net cash provided by operating activities     4,330         9,113         21,808         19,520  
                               
Cash flows from investing activities:                              
  Acquisition of businesses, net of cash acquired     8         -         (9,756 )       -  
  Purchases of property and equipment     (1,752 )       (1,344 )       (4,908 )       (3,467 )
  (Increase) decrease in other investing activities     (382 )       885         (567 )       886  
                               
  Net cash used in investing activities     (2,126 )       (459 )       (15,231 )       (2,581 )
                               
Cash flows from financing activities:                              
  Proceeds from employee stock plans     507         736         2,804         2,048  
  Payments of capital lease obligations     -         (161 )       -         (481 )
  Payments for retirement of common stock     (87 )       -         (4,211 )       -  
  Excess tax benefits from stock-based compensation     25         298         1,384         834  
                               
  Net cash provided by (used in) by financing activities     445         873         (23 )       2,401  
                               
Effect of exchange rate changes on cash and cash equivalents     42         6         105         (107 )
                               
Net increase in cash and cash equivalents     2,691         9,533         6,659         19,233  
                               
Cash and cash equivalents at beginning of period     81,554         56,987         77,586         47,287  
                               
Cash and cash equivalents at end of period $ 84,245     $ 66,520     $ 84,245     $ 66,520  

 

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 continuing operations 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 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.  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 and financing costs.  The Company incurs transaction costs related to acquisition and potential acquisition opportunities, such as legal and accounting fees and expenses.  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 non-interest financing, bank and other fees associated with obtaining and maintaining its financing facilities.  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 expenses. The Company periodically incurs expenses related to pending claims and litigation and associated legal fees and potential case settlements and/or judgments.  Although we may incur such costs and other related charges and adjustments, it is not indicative of any particular outcome until the matter is fully resolved. Management believes these items are outside the normal operations of the Company’s business and are not indicative of ongoing operating results. The Company periodically receives warranty claims from customers and makes warranty claims towards its vendors and supply chain. Management believes the expenses and gains associated with these recurring warranty items are within the normal operations and operating cycle of the Company's business. Therefore, management deems no adjustments are necessary unless under extraordinary circumstances.
   
Stock-based 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   Nine Months Ended
  March 31,   March 31,
    2016       2015       2016       2015  
Income from continuing operations $   4,526     $   4,694     $   11,279     $   8,297  
  Interest (income) expense, net     (36 )       1         (79 )       10  
  Income taxes     2,473         1,469         5,417         2,516  
  Depreciation     1,565         1,510         4,773         4,800  
  Amortization of intangible assets     1,754         1,744         5,105         5,268  
  Restructuring and other charges     409         27         968         2,457  
  Impairment of long-lived assets     -          -          231         -   
  Acquisition and financing costs     1,725         200         4,048         200  
  Fair value adjustments from purchase accounting     -          -          -          -   
  Litigation and settlement expenses     -          -          -          -   
  Stock-based compensation expense     2,150         1,870         7,244         6,676  
Adjusted EBITDA  $   14,566     $   11,515     $   38,986     $   30,224  
                               
                               
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   Nine Months Ended
  March 31,   March 31,
    2016       2015       2016       2015  
Cash flows from operations $   4,330     $   9,113     $   21,808     $   19,520  
  Capital expenditures     (1,752 )       (1,344 )       (4,908 )       (3,467 )
Free cash flow $   2,578     $   7,769     $   16,900     $   16,053  

 

UNAUDITED SUPPLEMENTAL INFORMATION  
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
 
(In thousands, except per share data)
 
Adjusted income from continuing operations 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 continuing operations results and trends and allows for comparability with our peer company index and industry. 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 from continuing operations as income from continuing operations before amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement expenses, stock-based compensation expense, and the tax impact of those items. Adjusted EPS expresses adjusted income from continuing operations on a per share basis using weighted average diluted shares outstanding. 
 
The following table reconciles the most directly comparable GAAP financial measures to the non-GAAP financial measures.
 
  Three Months Ended March 31,
    2016       2015  
Income from continuing operations and earnings per share $   4,526     $   0.13     $   4,694     $   0.14  
  Amortization of intangible assets     1,754             1,744      
  Restructuring and other charges     409             27      
  Impairment of long-lived assets     -              -       
  Acquisition and financing costs     1,725             200      
  Fair value adjustments from purchase accounting     -              -       
  Litigation and settlement expenses
 
    -              -       
  Stock-based compensation expense     2,150             1,870      
  Impact to income taxes     (2,148 )           (1,088 )    
Adjusted income from continuing operations and adjusted earnings per share $   8,416     $   0.25     $   7,447     $   0.22  
               
               
Diluted weighted-average shares outstanding:       33,991           33,233  
               
               
  Nine Months Ended March 31,
    2016       2015  
Income from continuing operations and earnings per share $   11,279     $   0.33     $   8,297     $   0.25  
  Amortization of intangible assets     5,105             5,268      
  Restructuring and other charges     968             2,457      
  Impairment of long-lived assets     231             -       
  Acquisition and financing costs     4,048             200      
  Fair value adjustments from purchase accounting     -              -       
  Litigation and settlement expenses
 
    -              -       
  Stock-based compensation expense     7,244             6,676      
  Impact to income taxes     (6,193 )           (4,703 )    
Adjusted income from continuing operations and adjusted earnings per share $   22,682     $   0.67     $   18,195     $   0.55  
               
               
Diluted weighted-average shares outstanding:       33,940           32,953  


 

Contact:
Gerry Haines, CFO
Mercury Systems, Inc.
978-967-1990