Mercury Systems, Inc. (NASDAQ:MRCY) is a leading technology company that delivers mission-critical processing power to the edge, making advanced technologies profoundly more accessible for today's most challenging aerospace and defense missions. Mercury Systems' innovative solutions are mission-ready, trusted and secure, software-defined and open and modular, meeting customers' most-pressing high-tech needs, including those specific to the defense community.
Business Overview
Founded in 1981 and headquartered in Andover, Massachusetts, Mercury Systems has built a robust portfolio of proven product solutions, leveraging the most advanced commercial silicon technologies and purpose-built to exceed the performance needs of its defense and commercial customers. Mercury Systems' products and solutions are deployed in more than 300 programs and across 35 countries, enabling a broad range of applications in mission computing, sensor processing, command and control, and communications.
Financials
In the latest fiscal year ended June 30, 2023, Mercury Systems reported annual revenue of $973,882,000 and a net loss of $28,335,000. Mercury Systems' annual operating cash flow was -$21,254,000, and its annual free cash flow was -$60,050,000. These financial results reflect the challenges Mercury Systems has faced in recent years, as it has navigated a complex operating environment and worked to address certain program execution issues.
Looking at Mercury Systems' quarterly performance, in the third quarter of fiscal year 2024, Mercury Systems reported revenues of $208,258,000, down 20.9% from the prior-year period. Mercury Systems' gross margin for the quarter was 19.5%, a significant decline from 34.3% in the same quarter last year. This contraction in gross margin was primarily due to higher-than-expected program cost growth, as well as increased manufacturing adjustments, including inventory reserves and warranty expenses.
Mercury Systems' third-quarter net loss was $44,574,000, or $0.77 per diluted share, compared to net income of $5,156,000, or $0.09 per diluted share, in the prior-year period. Adjusted EBITDA for the quarter was a loss of $2,397,000, compared to $43,461,000 in the same quarter of the previous year.
Recent Developments
Despite the challenging financial performance in the third quarter, Mercury Systems continues to make progress in its four key priority areas: delivering predictable performance, building a thriving growth engine, expanding margins, and driving improved free cash flow.
On the bookings front, Mercury Systems reported a book-to-bill ratio of 1.06 in the third quarter, with a record backlog of $1.3 billion, up 17% year-over-year. Notably, approximately 80% of Mercury Systems' firm fixed-price bookings this year have been for production contracts, which management views as a positive leading indicator of the ongoing mix shift in the business.
In terms of Mercury Systems' progress on its challenged programs, Mercury Systems has now completed, exited, or retired risk on 11 of the original 19 programs that had driven earnings volatility in recent quarters. Mercury Systems expects to close out half of the remaining four challenged programs in the fourth quarter, with the final four programs all related to Mercury Systems' common processing architecture.
To address the margin challenges, Mercury Systems has implemented a series of cost reduction actions, including a corporate reorganization that streamlined and simplified its operations. Mercury Systems expects these structural efficiencies to be evident in its margin profile going forward as it returns to growth in fiscal year 2025 and beyond.
Liquidity
On the liquidity front, Mercury Systems continues to make progress in reducing its net working capital, which was down 8% year-over-year as of the third quarter. Inventory decreased sequentially by $11 million, while unbilled receivables declined by $26 million. Mercury Systems expects further improvements in working capital and free cash flow as it completes the transition of its challenged programs and shifts its focus to higher-margin production contracts.
Outlook
Looking ahead, Mercury Systems provided the following guidance for the full fiscal year 2024: - Bookings expected to be above $1 billion - Revenues expected to be in the range of $800 million to $850 million - Positive free cash flow for the full fiscal year
Mercury Systems remains confident in the long-term growth prospects of its business, driven by strong demand for its mission-critical processing solutions and its position in attractive, high-growth segments of the aerospace and defense market. As Mercury Systems continues to execute on its strategic priorities and address the near-term challenges, Mercury Systems believes it is well-positioned to deliver above-average industry growth with low to mid-20% adjusted EBITDA margins over the longer term.
Conclusion
Overall, while Mercury Systems has faced some operational and financial headwinds in recent quarters, Mercury Systems' focus on delivering predictable performance, building a thriving growth engine, expanding margins, and driving improved free cash flow suggests that it is taking the necessary steps to position the business for long-term success. Investors will want to closely monitor Mercury Systems' progress in addressing its challenged programs and transitioning its portfolio towards higher-margin production contracts in the coming quarters.