Mercury Systems(MRCY) - 2024 Q4 - Annual Report

Part I Business Mercury Systems provides mission-critical processing solutions for aerospace and defense, reorganizing in fiscal 2024 with revenues of $835.3 million and a net loss of $137.6 million Fiscal 2024 vs. 2023 Key Financials | Metric | Fiscal 2024 | Fiscal 2023 | | :--- | :--- | :--- | | Revenues | $835.3 million | $973.9 million | | Net Loss | $(137.6) million | $(28.3) million | | Diluted Loss Per Share | $(2.38) | $(0.50) | | Adjusted EBITDA | $9.4 million | $132.3 million | - The company reorganized in 2024, consolidating two divisions into a single integrated structure to streamline operations and unify business lines under a Chief Operating Officer[8] - The global aerospace and defense electronics market is estimated at $154 billion in 2024, projected to grow to $197 billion by 2029, with Mercury's addressable Tier 2 market estimated at $50 billion in 2024, growing to $66 billion by 2029[15] - Total order backlog increased to approximately $1.3 billion as of June 28, 2024, up from $1.1 billion at the end of fiscal 2023, with $758.9 million expected to be recognized as revenue within the next twelve months[29] Significant Customer Revenue Concentration (Fiscal 2024) | Customer | % of Fiscal 2024 Revenue | | :--- | :--- | | L3Harris | 12% | | Lockheed Martin | 11% | | RTX Corporation | 10% | Risk Factors The company faces significant risks from defense program dependence, customer concentration, substantial debt, potential goodwill impairment, and legal disputes - Sales to the U.S. government and its prime contractors accounted for approximately 95% of total net revenues in fiscal 2024, making the company highly dependent on defense program funding[37] - The company is dependent on a small number of customers, with L3Harris, Lockheed Martin, and RTX Corporation accounting for 12%, 11%, and 10% of total net revenues, respectively, in fiscal 2024[41] - As of June 28, 2024, the company had $591.5 million of outstanding borrowings on its revolving credit facility, exposing it to interest rate risk and restrictive covenants[60] - The company carries significant goodwill ($938.1 million) and intangible assets ($250.5 million) on its balance sheet, which are subject to impairment risk if operating performance declines[62] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[81] Cybersecurity Cybersecurity risk is managed through an ERM process overseen by the CIO and Board, with no material incidents reported to date - Cybersecurity risk is managed via an Enterprise Risk Management (ERM) process, overseen by the CIO and a management Compliance Committee, with ultimate oversight from the Board of Directors[80][82] - The company has not experienced any cybersecurity incidents that have had a material effect on its financial position, results of operations, or cash flows[82] Properties The company's significant properties are leased facilities in the U.S. and Switzerland, with key locations in Andover, Phoenix, and Hudson Top 3 Leased Properties by Size | Location | Size (Sq. Feet) | Commitment | | :--- | :--- | :--- | | Andover, MA | 145,262 | Leased, expiring 2032 | | Phoenix, AZ | 125,756 | Leased, expiring 2033 | | Hudson, NH | 121,553 | Leased, expiring 2030 | Legal Proceedings The company is involved in legal matters including an environmental claim, a dispute with its former CEO, and securities and wage class action lawsuits - The company is in a dispute with its former CEO, who is claiming severance and other benefits under his change in control agreement, with a potential liability of up to approximately $14.1 million if the arbitrator rules against it[85][249] - A securities class action complaint filed on December 13, 2023, was dismissed without prejudice on July 24, 2024, with the plaintiffs given 30 days to file an amended complaint[85][249] Information About Our Executive Officers This section provides biographical information for the company's executive officers, including the President, CEO, CFO, and COO - William L. Ballhaus was appointed President and CEO effective August 15, 2023, having previously served as interim CEO since June 24, 2023[89] - David E. Farnsworth joined as Executive Vice President and Chief Financial Officer in July 2023[89] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with no history or future plans for cash dividends, as earnings are retained for growth Fiscal Year 2024 Stock Price Range | Quarter | High | Low | | :--- | :--- | :--- | | Q4 2024 | $32.45 | $26.61 | | Q3 2024 | $36.05 | $26.23 | | Q2 2024 | $39.31 | $31.69 | | Q1 2024 | $40.38 | $33.40 | - The company has never declared or paid cash dividends and does not anticipate paying any in the foreseeable future[95] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2024 saw a 14.2% revenue decrease to $835.3 million, a net loss of $137.6 million, and significant restructuring, despite improved operating cash flow - The company initiated multiple workforce reductions in fiscal 2024, eliminating approximately 350 positions and incurring $26.2 million in restructuring charges to simplify its organizational structure and realign costs[103][115][233] Fiscal 2024 vs. 2023 Operating Results (in thousands) | Metric | Fiscal 2024 | Fiscal 2023 | | :--- | :--- | :--- | | Net Revenues | $835,275 | $973,882 | | Gross Margin | $195,901 (23.5%) | $316,728 (32.5%) | | Loss from Operations | $(147,754) | $(21,685) | | Net Loss | $(137,640) | $(28,335) | - Net cash provided by operating activities was $60.4 million in fiscal 2024, a significant improvement from a net cash use of $21.3 million in fiscal 2023, primarily due to better management of accounts receivable and inventory[128][130] Non-GAAP Financial Measures Reconciliation (in thousands) | Metric | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $9,413 | $132,253 | $200,507 | | Adjusted (Loss) Income | $(39,758) | $56,801 | $122,265 | | Adjusted (Loss) EPS | $(0.69) | $1.00 | $2.19 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks include interest rate risk from its variable-rate debt, concentrated credit risk, and minor foreign currency risk - The company is exposed to interest rate risk through its variable-rate borrowings on the Revolver, which had $591.5 million outstanding at year-end, with an interest rate swap used to fix the rate on $300.0 million of this debt[157][61] - Significant credit risk concentration exists, with five customers accounting for 51% of the company's receivables, unbilled receivables, and costs in excess of billings as of June 28, 2024[159] Financial Statements and Supplementary Data This section presents audited financial statements, KPMG's report highlighting critical audit matters, and notes on accounting policies, goodwill, and restructuring - The independent auditor, KPMG LLP, identified two Critical Audit Matters: (1) the estimate of total contract costs for certain fixed-price contracts recognized over time, and (2) the valuation of goodwill for the Mission Systems reporting unit during an interim test[164] Consolidated Balance Sheet Highlights (in thousands) | Account | June 28, 2024 | June 30, 2023 | | :--- | :--- | :--- | | Total Current Assets | $953,784 | $937,018 | | Goodwill | $938,093 | $938,093 | | Total Assets | $2,378,905 | $2,391,367 | | Long-term Debt | $591,500 | $511,500 | | Total Liabilities | $906,130 | $824,682 | | Total Shareholders' Equity | $1,472,775 | $1,566,685 | - An interim goodwill impairment test was triggered for the Mission Systems reporting unit in Q3 2024 due to a sustained decline in stock price, with the quantitative analysis concluding that the fair value exceeded the carrying value by 2.5%, and no impairment was recorded[229] Revenue by Product Grouping (in thousands) | Product Grouping | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Components | $192,758 | $197,180 | $167,333 | | Modules and Sub-assemblies | $181,881 | $200,281 | $167,242 | | Integrated Solutions | $460,636 | $576,421 | $653,622 | | Total Net Revenues | $835,275 | $973,882 | $988,197 | Controls and Procedures Management and KPMG LLP concluded that disclosure controls and internal control over financial reporting were effective as of June 28, 2024 - Management concluded that disclosure controls and procedures were effective as of June 28, 2024[301] - Management's assessment concluded that internal control over financial reporting was effective as of June 28, 2024, which was audited by KPMG LLP[302] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Required information is incorporated by reference from the company's 2024 Proxy Statement[304] Executive Compensation Executive compensation information is incorporated by reference from the company's 2024 Proxy Statement - Required information is incorporated by reference from the company's 2024 Proxy Statement[304][305] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the company's 2024 Proxy Statement - Required information is incorporated by reference from the company's 2024 Proxy Statement[305] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the company's 2024 Proxy Statement - Required information is incorporated by reference from the company's 2024 Proxy Statement[305] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2024 Proxy Statement, with KPMG LLP as the auditor - The company's independent registered public accounting firm is KPMG LLP. Further information is incorporated by reference from the 2024 Proxy Statement[305] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section provides a list of all financial statements and exhibits filed with the report, including the consent of the independent auditor KPMG LLP[306][310]