ACADEMIA

Mercury Computer Systems reported operating results for its third quarter of fiscal 2012 ended March 31, 2012. All results are presented and compared on a continuing operations basis.

Third Quarter Fiscal 2012 Results

Third quarter fiscal 2012 revenues were $67.0 million, an increase of $7.1 million from the third quarter of the prior fiscal year. Revenues from defense customers increased by $18.7 million, or 41%, while revenues from commercial customers decreased by $11.6 million, from the prior year's third quarter.

GAAP net income from continuing operations for the third quarter of fiscal 2012 was $5.2 million, or $0.17 per diluted share, compared to $5.4 million, or $0.20 per diluted share, for the prior year's third quarter. GAAP net income from continuing operations per diluted share includes $0.02 associated with the amortization of acquired intangible assets for the third quarter of fiscal 2012 and $0.02 for the prior year's third quarter. GAAP net income from continuing operations per diluted share for the third quarter of fiscal 2012 was reduced by $0.02 per share in comparison to the prior year's third quarter, associated with the impact of the issuance of incremental shares related to the Company's follow-on public stock offering in last year's third quarter.

Third quarter fiscal 2012 GAAP net income from continuing operations includes approximately $2.4 million in tax expense, $2.0 million in depreciation expense, $1.3 million in stock-based compensation costs, $1.1 million in amortization of acquired intangible assets, ($0.2) million in fair value adjustments from purchase accounting, and $0.1 million of KOR acquisition costs and other related expenses. Third quarter fiscal 2012 adjusted EBITDA (net earnings from continuing operations before interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring, impairment of long-lived assets, acquisition costs and other related expenses, fair value adjustments from purchase accounting, and stock-based compensation costs) was $12.0 million, compared to $11.3 million for the prior year's third quarter.

Cash flows from operating activities were a net inflow of $12.4 million in the third quarter of fiscal 2012, compared to a net inflow of $5.4 million in the third quarter of fiscal 2011. Free cash flow, defined as cash flow from operating activities less capital expenditures, was a net inflow of $9.6 million in the third quarter of fiscal 2012, compared to a net inflow of $3.7 million in the third quarter of fiscal 2011. Cash and cash equivalents as of March 31, 2012 were $114.8 million, an increase of $9.9 million from December 31, 2011, largely due to cash generated by operating activities.

Management Comments

"Mercury once again delivered solid operational and financial results in the third quarter, driven by strong organic growth in our defense business and profitable revenue from recent acquisitions," said Mark Aslett, President and CEO, Mercury Computer Systems. "Total revenue was near the high end of our guidance range, GAAP earnings per share and adjusted EBITDA both exceeded the high end of guidance, and operating cash flow more than doubled from the third quarter of last year."

"Our third-quarter defense bookings and revenues both increased 41% year-over-year, including ACS and Mercury Federal Systems as well as results from our KOR Electronics acquisition," Aslett said. "This growth demonstrates the continuing success of our strategy to focus Mercury on well-funded areas in the defense marketplace -- primarily ISR, electronic warfare and missile defense -- while positioning the company as the premier commercial subsystem outsourcing partner to the primes and the intelligence community as they seek more open and affordable ISR and EW solutions."

"Our capabilities are well-aligned with the Defense Department's emerging strategic priority --maintaining our military's access and freedom to operate by defending against electronic and cyber warfare threats, ballistic and cruise missiles, advanced air defenses or anti-personnel explosive devices," said Aslett. "As a result, we are continuing to win healthy numbers of new designs while expanding our new business pipeline."

"As we begin the fourth quarter, we currently expect Mercury to deliver approximately 7% to 9% full year revenue growth, with defense revenue growth of approximately 30%," Aslett said. "Looking farther ahead, we believe that total company revenue growth, including M&A, will be in the mid-teens percentage range on average, over time, which should position Mercury as one of the winners in navigating the new defense industry environment."

Backlog

Mercury's total backlog at March 31, 2012 was $105.2 million, a $19.7 million increase from March 31, 2011. Of the March 31, 2012 total backlog, $95.1 million represents orders scheduled to be shipped over the next 12 months. The defense backlog at March 31, 2012 was $99.5 million, a $27.6 million increase from March 31, 2011. The total book-to-bill ratio was 0.74-to-1 for the third quarter of fiscal 2012 compared to 0.67-to-1 for the third quarter of fiscal 2011. Fiscal year 2012 to-date book-to-bill ratio was 0.93-to-1 compared to 0.83-to-1 during the same period in fiscal 2011.

Revenues by Operating Segment

Advanced Computing Solutions (ACS) -- Revenues for the third quarter of fiscal 2012 from ACS were $60.4 million, including KOR, representing an increase of $2.3 million from the third quarter of fiscal 2011, as a result of an increase of $13.9 million, or 32%, in ACS defense, offset by a decrease of $11.6 million in commercial. Approximately 95% of ACS revenues for the third quarter of fiscal 2012 related to defense business, as compared to approximately 75% in the third quarter of fiscal 2011.

Mercury Federal Systems (MFS)-- Revenues for the third quarter of fiscal 2012 from MFS were $8.8 million, including PDI, representing an increase of $5.4 million from the third quarter of fiscal 2011.

The revenues by operating segment do not include adjustments to eliminate $2.2 million of inter-company revenues included in those operating segments in the third quarter of fiscal 2012.

Business Outlook

This section presents our current expectations and estimates, given current visibility, on our business outlook for the upcoming fiscal 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, including those listed in the Safe Harbor Statement below, with respect to these estimates, and make themselves aware of the risk factors that may impact our actual performance.

For the fourth quarter of fiscal 2012, revenues are expected to be in the range of approximately $60 million to $66 million. At this range, GAAP net income from continuing operations per diluted share is expected to be in the range of $0.04 to $0.10. GAAP net income from continuing operations per diluted share includes $0.02 associated with the amortization of acquired intangible assets.

Adjusted EBITDA for the fourth quarter of fiscal 2012 is expected to be in the range of $7.0 million to $9.5 million.

Recent Highlights

April -- Mercury announced the Ensemble Series 6U OpenVPX LDS6524 and the 3U OpenVPX SBC3512 modules based on the 22 nanometer 3rd generation Intel Core processor family (formerly codenamed "Ivy Bridge"). Utilizing the quad-core Intel Core i7-3615QE processor for the LDS6524 and the quad-core Intel Core i7-3612QE processor for the SBC3512, the new OpenVPX modules deliver greatly improved performance per watt, a key design metric for high-performance defense and aerospace applications.

April -- Mercury Computer Systems announced it received $5.1 million in follow-on orders from a leading defense prime contractor for rugged embedded multi-processing modules for two airborne radar applications.

April -- Mercury announced that its KOR Electronics subsidiary entered into a strategic alliance with AAI Unmanned Aircraft Systems (UAS), an operating unit of Textron Systems, a Textron Inc. company. The alliance combines AAI's expertise as a UAS systems integrator with KOR's signals intelligence (SIGINT) equipment. The organizations intend to integrate KOR's SIGINT products, focused on expeditionary tactical unmanned aircraft such as AAI's renowned Shadow Tactical Unmanned Aircraft System, as a new addition to AAI's family of Multi-Mission Payloads (MMP). Each modular MMP "pod" can be attached quickly to the Shadow aircraft to equip it for the mission at hand.

April -- Mercury announced it received a contract from a major defense prime contractor to provide high performance digital signal processing modules and software to facilitate a technology refresh for the prime's airborne radar application. The Mercury solution and subsequent refresh will also protect the prime's significant investment in software development across a range of products. The design win is estimated to have a five year probable revenue value of approximately $30 million.

March -- Mercury announced it received $2.8 million in follow-on orders from a global provider of electronic equipment for digital signal processing modules for an airborne synthetic aperture radar (SAR) application. The orders are expected to be shipped over the next four quarters.

March -- Mercury announced the server-class Ensemble Series 6U OpenVPX HDS6601 rugged compute blade based on the Intel Xeon processor E5-2600 family (formerly codenamed Romley-EP). Utilizing two of the new 8-core Intel Xeon E5-2648L processors, the HDS6601 is a 16-core Intel architecture-based module, configured as an easy-to-program symmetric multiprocessing (SMP) cluster. This is the embedded computing industry's first 16-way, 32-thread SMP server blade compliant with the OpenVPX standard, enabling new levels of rugged subsystem performance with deployed systems.

March -- Mercury announced that Robert J. Kohler, former Director of the Office of Development and Engineering with the Central Intelligence Agency (CIA), and Peter Marino, a nationally acclaimed expert on defense and intelligence issues, were elected to the Board of Directors of KOR Electronics, a wholly-owned subsidiary of Mercury Computer Systems, Inc., acquired in December 2011.

February -- Mercury announced two new small form factor-based solutions with outstanding SWaP characteristics for demanding RF applications: the Echotek Series RFM-251-XMC Tuner and the Wideband DCM-V6-XMC Digital Transceiver. These new mixed-signal modules detect, locate and capture signals in real-time across an extremely wide range of frequencies, significantly improving the ability to anticipate threats and protect warfighters.

February -- Mercury announced the Ensemble Series 6U OpenVPX HCD6210 rugged compute blade based on the Freescale T4240 QorIQ AMP Power Architecture. Utilizing two of the new Freescale T4240 QorIQ AMP processors, the HCD6210 blade has a total of 24 cores/48 threads, each core with an AltiVec single instruction, multiple data (SIMD) engine for high-performance signal processing support. Systems based on the HCD6210 can scale from 1 to 16 boards, enabling new levels of subsystem performance in radar, EO/IR and EW applications.

February -- Mercury confirmed that it had been previously awarded a contract from a leading telecommunications provider to deliver an integrated signal processing subsystem based on the ATCA standard. The high performance subsystem, a ground-based gateway, will enable vital terrestrial-satellite communications for a next-generation mobile satellite system to be used for national security, civilian and humanitarian efforts.

January -- Mercury Computer Systems announced that Kevin M. Bisson joined the company as Senior Vice President, Chief Financial Officer and Treasurer. Mr. Bisson replaced Robert E. Hult, Mercury's Senior Vice President, Chief Financial Officer and Treasurer, who retired from that position effective the close of business on January 17, 2012. Mr. Hult agreed to remain as a part-time employee for a limited period to assist with the transition of his responsibilities following his retirement as Chief Financial Officer.