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8-K - 8-K - MERCURY SYSTEMS INCd165641d8k.htm
EX-99.3 - EX-99.3 - MERCURY SYSTEMS INCd165641dex993.htm
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EX-99.6 - EX-99.6 - MERCURY SYSTEMS INCd165641dex996.htm
EX-99.2 - EX-99.2 - MERCURY SYSTEMS INCd165641dex992.htm
EX-99.5 - EX-99.5 - MERCURY SYSTEMS INCd165641dex995.htm
EX-23.1 - EX-23.1 - MERCURY SYSTEMS INCd165641dex231.htm
EX-10.1 - EX-10.1 - MERCURY SYSTEMS INCd165641dex101.htm
EX-10.3 - EX-10.3 - MERCURY SYSTEMS INCd165641dex103.htm
EX-10.2 - EX-10.2 - MERCURY SYSTEMS INCd165641dex102.htm

Exhibit 99.4

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

On March 23, 2016, we entered into a definitive Purchase Agreement with Microsemi Corporation (“Microsemi” or the “Seller”), pursuant to which Mercury Systems, Inc. (“Mercury” or “we” or “our”) will purchase all of the outstanding equity interests of Microsemi LLC—RF Integrated Solutions and its subsidiaries through which the custom microelectronics, RF and microwave solutions, and embedded security operations of the Power and Microelectronics Group within Microsemi (the “Carve-Out Business”) is operated, resulting in the entities comprising the Carve-Out Business becoming our 100% owned direct or indirect subsidiaries (the “Acquisition”). For purposes of this unaudited pro forma condensed consolidated financial information, the Acquisition was accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations,” which we refer to as ASC 805. We estimate that the funds necessary to consummate the Acquisition will be approximately $300.0 million in cash on a cash-free, debt-free basis, subject to working capital and other post-closing adjustments and the total amount including payment of related fees and expenses will be approximately $317.2 million. Consummation of the Acquisition is subject to customary closing conditions. We intend to finance the Acquisition of the Carve-Out Business through the offering of shares of common stock, with the balance funded under our anticipated new term loan A facility with a total committed facility of up to $265.0 million (the “Financing”) and cash on hand. Accordingly, the purchase price and the related transaction expenses and fees are collectively expected to be $317.2 million and are expected to be funded by $94.3 million in gross proceeds from the sale of common stock, $200.0 million in gross proceeds from the term loan A facility, and $22.9 million of cash on hand. There can be no assurance that the offering of shares of common stock, the consummation of the Financing and the consummation of the Acquisition (the “Transactions”) will be consummated under the terms contemplated or at all.

 

This unaudited pro forma condensed consolidated financial information has been prepared in accordance with Article 11 of Regulation S-X and is not intended to indicate the results that would actually have been achieved had the Transactions been completed on the assumed date for the periods presented.

 

The unaudited pro forma condensed consolidated statement of operations for the fiscal year ended June 30, 2015 gives effect to the Transactions as if they had occurred on July 1, 2014, combines the historical results of Mercury for its fiscal year ended June 30, 2015, the historical results of the Carve-Out Business for its fiscal year ended September 27, 2015, and reflects pro forma adjustments that are expected to have a continuing impact on the combined results.

 

The historical results of Mercury were derived from its audited consolidated statement of operations included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and incorporated by reference herein. The historical results of the Carve-Out Business were derived from its audited consolidated statements of operations and comprehensive income for its fiscal year ended September 27, 2015, included in the Current Report on Form 8-K filed on April 4, 2016 and incorporated by reference herein.

 

The unaudited pro forma condensed consolidated statement of operations for the six-month period ended December 31, 2015 gives effect to the Transactions as if they had occurred on July 1, 2014, combines the historical results of Mercury for the six months ended December 31, 2015 and the Carve-Out Business for its six months ended January 3, 2016, and reflects pro forma adjustments that are expected to have a continuing impact on the combined results.

 

The historical results of Mercury were derived from its unaudited consolidated statement of operations included in its Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015 and incorporated by reference herein. The historical results of the Carve-Out Business were derived from its unaudited consolidated statements of operations and comprehensive income for the relevant periods within its fiscal year 2016, as well as the audited financial statements filed as an exhibit to Mercury’s Current Report on Form 8-K filed on April 4, 2016 and incorporated by reference herein.

 

The unaudited pro forma condensed consolidated balance sheet data at December 31, 2015 gives effect to the Transactions as if they occurred on such date and combines the historical balance sheets of Mercury as of

 

1


December 31, 2015 and the Carve-Out Business as of January 3, 2016. The Mercury balance sheet information was derived from its unaudited consolidated balance sheet included in its Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015 and incorporated by reference herein. The Carve-Out Business balance sheet information was derived from its unaudited condensed consolidated balance sheet as of January 3, 2016 filed as an exhibit to Mercury’s Form 8-K filed on April 4, 2016 and incorporated by reference herein.

 

The Carve-Out Business was not operating as a separate legal entity within Seller. Accordingly, its financial statements have been prepared on a carve-out basis. The carve-out financial statements have been derived from the consolidated financial statements and accounting records of Seller, using the historical results of operations and historical bases of assets and liabilities which comprise Carve-Out Business. The carve-out financial statements also include allocations of certain Seller-shared expenses. Seller’s management believes the assumptions and methodologies underlying the allocation of shared expenses from Seller are reasonable in depicting Carve-Out Business on a carve-out basis; however, such expenses may not be indicative of the actual level of expense that would have been incurred by the Carve-Out Business if it had operated as a stand-alone entity or of the costs expected to be incurred in the future. As such, the carve-out financial statements included in this prospectus supplement may not necessarily reflect the Carve-Out Business’ results of operations, financial position or cash flows in the future or what its results of operations, financial position or cash flows would have been had the Carve-Out Business been a stand-alone entity during the periods presented.

 

The unaudited pro forma condensed consolidated financial statements have been prepared by Mercury’s management and are not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had Mercury and the Carve-Out Business been a combined company during the periods presented. The pro forma adjustments are based on the preliminary assumptions and information available at the time of the preparation of this prospectus supplement, and such assumptions are subject to change.

 

The unaudited pro forma condensed consolidated statements of operations exclude certain non-recurring charges that have been or will be incurred in connection with the Transactions, including certain expenses related to the Transactions, including financing and professional fees of both Mercury and the Carve-Out Business. These expenses are expected to total approximately $17.2 million.

 

The unaudited pro forma data should be read in conjunction with the information contained in the historical consolidated financial statements of Mercury included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and incorporated by reference herein, the historical unaudited consolidated financial statements of Mercury included in its Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015 and incorporated by reference herein, the historical audited consolidated financial statements of the Carve-Out Business for the fiscal years ended September 27, 2015, September 28, 2014 and September 29, 2013 and filed as an exhibit to Mercury’s Current Report on Form 8-K filed on April 4, 2016, and the historical unaudited condensed consolidated financial statements of the Carve-Out Business for the three months ended January 3, 2016 and December 28, 2014, filed as an exhibit to Mercury’s Current Report on Form 8-K filed on April 4, 2016.

 

The unaudited pro forma condensed consolidated financial information is presented for informational purposes only. It is not necessarily indicative of what our financial position or results of operations actually would have been had we completed the Transactions at the date indicated, nor does it purport to project the future financial position or operating results of the combined company. The unaudited pro forma condensed consolidated statement of operations does not reflect any revenue or cost savings from synergies that may be achieved with respect to the combined companies, or the impact of non-recurring items directly related to the Acquisition and related financing.

 

2


MERCURY SYSTEMS, INC.

 

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

 

DECEMBER 31, 2015

 

(In thousands)

 

(UNAUDITED)

 

    Mercury
Systems, Inc.
    Carve-Out
Business
as  of

January 3,
2016
    Pro Forma
Adjustments
    Adjustment   Pro Forma
Combined
 

Assets

         

Current assets:

         

Cash and cash equivalents

  $ 81,554      $ —        $ (22,872   A,B,C,D   $ 58,682   

Accounts receivable, net

    35,468        22,873        —            58,341   

Unbilled receivables and costs in excess of billings

    24,645        —          —            24,645   

Inventory

    36,707        22,780        2,500      A     61,987   

Other current assets

    20,604        3,397        1,222      A,H     25,223   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total current assets

    198,978        49,050        (19,150       228,878   

Property and equipment, net

    13,324        10,850        —            24,174   

Goodwill

    173,749        75,613        93,293      A     342,655   

Intangible assets, net

    18,608        11,412        92,488      A     122,508   

Other non-current assets

    3,433        1,831        6,425      C     11,689   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total assets

  $ 408,092      $ 148,756      $ 173,056        $ 729,904   
 

 

 

   

 

 

   

 

 

     

 

 

 

Liabilities and Shareholders’ Equity

         

Current liabilities:

         

Accounts payable

  $ 11,858      $ 5,932      $ —          $ 17,790   

Current portion of long-term debt

    —          —          —            —     

Other current liabilities

    29,534        1,580        —            31,114   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total current liabilities

    41,392        7,512        —            48,904   

Long-term debt, less current portion

    —          —          198,300      C     198,300   

Other non-current liabilities

    5,242        3,686        26,451      A     35,379   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities

    46,634        11,198        224,751          282,583   
 

 

 

   

 

 

   

 

 

     

 

 

 

Shareholders’ equity:

         

Preferred stock

    —          —          —            —     

Common stock

    332        —          45      D     377   

Additional paid-in capital

    259,140        137,558        (50,825   D     345,873   

Retained earnings

    101,221        —          (915   B,H     100,306   

Accumulated other comprehensive income

    765        —          —            765   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total shareholders’ equity

    361,458        137,558        (51,695       447,321   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities and shareholders’ equity

  $ 408,092      $ 148,756      $ 173,056        $ 729,904   
 

 

 

   

 

 

   

 

 

     

 

 

 

 

3


MERCURY SYSTEMS, INC.

 

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2015

(In thousands except per share amounts)

(UNAUDITED)

 

     Mercury
Systems, Inc.
     Carve-Out
Business
     Pro Forma
Adjustments
    Adjustment      Pro Forma
Combined
 

Net revenues

   $ 118,826       $ 49,670       $ —           $ 168,496   

Cost of revenues

     62,719         26,085         51        I         88,855   
  

 

 

    

 

 

    

 

 

      

 

 

 

Gross margin

     56,107         23,585         (51        79,641   

Operating expenses:

             

Selling, general and administrative

     24,709         4,445         4,721        I         33,875   

Research and development

     15,777         5,339         767        I         21,883   

Amortization of intangible assets

     3,351         2,791         2,939        E         9,081   

Allocated costs

     —           5,539         (5,539     I         —     

Other operating expenses

     2,770         —           —             2,770   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total operating expenses

     46,607         18,114         2,888           67,609   
  

 

 

    

 

 

    

 

 

      

 

 

 

Income from operations

     9,500         5,471         (2,939        12,032   

Other income, net

     197         —           (4,425     C,F         (4,228
  

 

 

    

 

 

    

 

 

      

 

 

 

Income from continuing operations before income taxes

     9,697         5,471         (7,364        7,804   

Tax provision

     2,944         1,865         (2,622     H         2,187   
  

 

 

    

 

 

    

 

 

      

 

 

 

Income from continuing operations

   $ 6,753       $ 3,606       $ (4,742      $ 5,617   
  

 

 

    

 

 

    

 

 

      

 

 

 

Per share income from continuing operations:

             

Basic

   $ 0.20               $ 0.15   
  

 

 

            

 

 

 

Diluted

   $ 0.20               $ 0.15   
  

 

 

            

 

 

 

Weighted-average shares outstanding:

             

Basic

     33,047            4,500        D,G         37,547   
  

 

 

       

 

 

      

 

 

 

Diluted

     33,819            4,500        D,G         38,319   
  

 

 

       

 

 

      

 

 

 

 

4


MERCURY SYSTEMS, INC.

 

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED JUNE 30, 2015

(In thousands except per share amounts)

(UNAUDITED)

 

     Mercury
Systems, Inc.
     Carve-Out
Business
     Pro Forma
Adjustments
    Adjustment      Pro Forma
Combined
 

Net revenues

   $ 234,847       $ 99,445       $ —           $ 334,292   

Cost of revenues

     124,628         52,183         95        I         176,906   
  

 

 

    

 

 

    

 

 

      

 

 

 

Gross margin

     110,219         47,262         (95        157,386   

Operating expenses:

             

Selling, general and administrative

     49,010         9,238         7,528        I         65,776   

Research and development

     32,554         10,204         1,397        I         44,155   

Amortization of intangible assets

     7,008         8,011         3,447        E         18,466   

Allocated costs

     —           9,020         (9,020     I         —     

Other operating expenses

     3,292         355         —             3,647   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total operating expenses

     91,864         36,828         3,352           132,044   
  

 

 

    

 

 

    

 

 

      

 

 

 

Income from operations

     18,355         10,434         (3,447        25,342   

Other income, net

     440         52         (8,788     C,F         (8,296
  

 

 

    

 

 

    

 

 

      

 

 

 

Income from continuing operations before income taxes

     18,795         10,486         (12,235        17,046   

Tax provision

     4,366         4,095         (4,795     H         3,666   
  

 

 

    

 

 

    

 

 

      

 

 

 

Income from continuing operations

   $ 14,429       $ 6,391       $ (7,440      $ 13,380   
  

 

 

    

 

 

    

 

 

      

 

 

 

Per share income from continuing operations:

             

Basic

   $ 0.45               $ 0.37   
  

 

 

            

 

 

 

Diluted

   $ 0.44               $ 0.36   
  

 

 

            

 

 

 

Weighted-average shares outstanding:

             

Basic

     32,114            4,500        D,G         36,614   
  

 

 

       

 

 

      

 

 

 

Diluted

     32,939            4,500        D,G         37,439   
  

 

 

       

 

 

      

 

 

 

 

Adjustment A—Preliminary Purchase Price Adjustment

 

The purchase price for the Acquisition is approximately $300.0 million, payable at closing and is subject to working capital and other adjustments. The purchase price of $300.0 million has been allocated to the assets acquired and the liabilities assumed on a preliminary basis as follows:

 

(in thousands)

      

Accounts receivable

   $ 22,873   

Inventory

     25,280   

Property, plant and equipment

     10,850   

Other current and non-current assets

     5,840   

Intangible assets

     103,900   

Goodwill

     168,906   
  

 

 

 

Total assets acquired

     337,649   

Accounts payable and accrued expenses

     (7,512

Other non-current liabilities

     (3,686

Deferred tax liability

     (26,451
  

 

 

 

Total purchase price

   $ 300,000   
  

 

 

 

 

5


We have allocated approximately $103.9 million to intangible assets (see Adjustment E), and assigned estimated economic lives with averages ranging from 3 years to 11.2 years. The determination of the preliminary fair value was primarily based upon historical intangible asset valuations in comparison to the purchase price for prior acquisitions. This value will be adjusted upon completion of the valuation analysis. The determination of useful life was also based upon historical experience. The estimated amortization expense for these acquired intangible assets included in the unaudited pro forma condensed consolidated statements of operations is approximately $5.7 million and $11.5 million, using straight line amortization, for the six months ended December 31, 2015 and the twelve months ended June 30, 2015, respectively.

 

Inventories reflect an adjustment of $2.5 million, versus its historical carrying value, to record the inventory at its estimated fair value. This amount is recorded in the December 31, 2015 unaudited pro forma condensed consolidated balance sheet. The increased inventory will temporarily increase our cost of revenues after closing and therefore it is considered non-recurring and is not included in the unaudited pro forma condensed consolidated statements of operations for the six months ended December 31, 2015 and the twelve months ended June 30, 2015.

 

Property, plant and equipment’s estimated fair market value reflects its book value. Total depreciation expense on the property, plant and equipment was approximately $1.5 million for the six months ended December 31, 2015 and $3.2 million for the twelve months ended June 30, 2015.

 

A preliminary deferred tax liability of $26.5 million has been recognized in accordance with accounting for income taxes. The amount primarily relates to the tax effect of the acquired intangible assets of $103.9 million and the tax effect on the difference between values assigned and the estimated tax basis of other assets and liabilities acquired.

 

The acquisition date fair value of the consideration to be transferred totaled approximately $300.0 million, consists of the following:

 

(in thousands)

      

Term loan A

   $ 200,000   

Equity-assumed proceeds from this offering

     94,320   

Cash on hand

     22,872   
  

 

 

 

Total source of funds

     317,192   

Estimated fees and expenses

     (17,192
  

 

 

 

Total purchase price

   $ 300,000   
  

 

 

 

 

Adjustment B—Transaction-Related Expenses

 

Adjustment records $1.5 million decrease to cash and retained earnings associated with gross estimated transaction-related fees and expenses that will be charged to expense upon closing of the Acquisition.

 

Adjustment C—Debt Issuance and Deferred Financing Costs

 

Adjustment records decreases to cash and long-term debt of $1.7 million from debt issuance costs associated with the issuance of $200.0 million of long term debt, and increases to other assets and decreases to cash for $6.4 million of deferred financing costs associated with the issuance of debt. Debt issuance costs offset long-term debt and amortize as non-cash interest expense over the five year term of the bank term loan A. Deferred financing costs are deferred and amortized as non-cash interest expense over the five year term of the bank term loan A. The pro forma non-cash interest expense adjustments for these costs were $0.8 million and $1.7 million for the six months ended December 31, 2015 and twelve months ended June 30, 2015, respectively.

 

6


Adjustment D—Equity Offering

 

We intend to issue approximately $89.4 million in common stock in a public offering (net of underwriting fees of approximately $4.9 million) to fund a portion of the purchase price. Net proceeds were calculated based on 4,500,000 shares to be issued and an assumed offering price of $20.96 per share (the closing price of Mercury’s stock on April 1, 2016) and an assumed underwriting discount of 5.25%. The gross proceeds and proceeds net of underwriting discount will vary to the extent the actual price for the common shares in the offering is higher or lower than the assumed $20.96 price per share.

 

We expect to incur additional costs in connection with the issuance of common stock of approximately $2.6 million. These figures assume that the 15% overallotment allocation exercisable in connection with the offering is not exercised. If the overallotment allocation is exercised, we would use less cash on hand to fund the Acquisition. These costs have been recorded as a reduction to additional paid in capital and cash of $7.5 million on the unaudited pro forma condensed consolidated balance sheet.

 

Adjustment E—Amortization of Intangibles

 

Adjustment records the net effect of additional amortization expense for intangible assets acquired from Carve-Out Business at fair value:

 

(in thousands, except weighted average live information)

   Intangible
Amount
Fair Value
     Pro  Forma
Amortization

Expense
Year Ended
June 30,
2015
    Pro Forma
Amortization
Expense Six
Months Ended
December 31,
2015
    Weighted
Average
Lives
(Years)
 

Customer relationships

   $ 64,700       $ 5,777      $ 2,888        11.2   

Backlog

   $ 2,800         933        467        3.0   

Trademarks / trade names

   $ 400         133        67        3.0   

Developed technology

   $ 36,000         4,615        2,308        7.8   
     

 

 

   

 

 

   

Subtotal

        11,458        5,730     

Less original intangible amortization expense included in the historical financial statements of the Carve-Out Business

        (8,011     (2,791  
     

 

 

   

 

 

   

Net amortization expense

      $ 3,447      $ 2,939     
     

 

 

   

 

 

   

 

Adjustment F—Interest Expense on Debt Financing

 

Adjustment anticipates the completion of a debt financing at the time the Acquisition closes in the amount of $200.0 million through a bank term loan A with an assumed interest rate of 3.63% (based on 3-month LIBOR rate on April 1, 2016) and a five year term. The actual rates of interest can change from those assumed. If the actual rates were to increase or decrease by 0.125% from those assumed, then pro forma interest expense could increase or decrease by approximately $0.2 million per year. The pro forma interest expense adjustments were $3.6 million and $7.1 million for the six months ended December 31, 2015 and twelve months ended June 30, 2015, respectively.

 

7


Adjustment G—Weighted Average Shares

 

Adjustment records the anticipated increase in weighted average shares from equity offering to fund the Acquisition:

 

(in thousands)

   Historic
Twelve Months
Ended
June 30,

2015
     Pro Forma
Adjustments
     Pro Forma
Twelve Months
Ended
June 30,

2015
 

Weighted number of common shares—basic

     32,114         4,500         36,614   

Effect of dilutive equity instruments

     825         —           825   
  

 

 

    

 

 

    

 

 

 

Weighted number of common shares—diluted

     32,939         4,500         37,439   
  

 

 

    

 

 

    

 

 

 

(in thousands)

   Historic
Six Months
Ended
December 31,

2015
     Pro Forma
Adjustments
     Pro Forma
Six Months
Ended
December 31,

2015
 

Weighted number of common shares—basic

     33,047         4,500         37,547   

Effect of dilutive equity instruments

     772         —           772   
  

 

 

    

 

 

    

 

 

 

Weighted number of common shares—diluted

     33,819         4,500         38,319   
  

 

 

    

 

 

    

 

 

 

 

Adjustment H—Income Taxes

 

In the unaudited condensed consolidated pro forma balance sheet, the impact of pro forma adjustments increase deferred tax liabilities and goodwill by approximately $26.5 million, primarily related to the tax effect of acquired intangible assets, and increased current prepaid taxes and retained earnings by $0.6 million related to the tax impact of transaction costs. We expect that the Acquisition will result in approximately $25.0 million of goodwill that is deductible for tax purposes.

 

In the unaudited condensed consolidated pro forma statement of operations, an adjustment records the applicable tax provision on the pro forma adjustments presented. The pro forma adjustments pertain primarily to U.S. tax jurisdictions, and are subject to a 40% combined tax rate. These adjustments reduce income tax expense by $2.6 million and $4.8 million for the six months ended December 31, 2015 and twelve months ended June 30, 2015, respectively. The acquisition of the Carve-Out Business includes approximately $21.0 million of expected transaction tax benefits. These benefits relate to the tax deductibility of certain intangible assets and goodwill allocated from the purchase price. The estimated value of deductible intangible assets and goodwill for tax purposes are approximately $51.4 million over 15 years.

 

Adjustment I—Allocated Cost

 

Adjustment presents the Carve-Out Business’ allocated costs to their functional cost and expense categories as follows:

 

      Operating
Expenses
Six Months
Ended
December 31,
2015
     Operating
Expenses
Year

Ended
June 30,
2015
 

Cost of revenues

   $ 51       $ 95   

Sales, general and administrative

     4,721         7,528   

Research and development

     767         1,397   
  

 

 

    

 

 

 
     5,539       $ 9,020   

less:

     

Allocated costs

     (5,539      (9,020
  

 

 

    

 

 

 

Total

   $ —         $ —     
  

 

 

    

 

 

 

 

8