January 30, 2019 | 8:29 PM by Jay Kunstman | jkunstman@jaguaranalytics.com

Behind The Numbers – Mercury Systems (MRCY)

Mercury Systems, a leading commercial provider of secure sensor and safety-critical processing subsystems, reported Q2 2019 earnings after the close yesterday. Shares were certainly rewarded today, jumping 15%.

-EPS came in at $0.47 vs $0.42 estimate – Beat
-Revenue came in at $159.09M vs $154.33M estimate – Beat
-Total Revenue increased 35% Y/Y
-Total Bookings increased 22% Y/Y
-Backlog increased 39% Y/Y
-Book-to-Bill Ratio was 1.09
-Q3 EPS Guidance of $0.43 – $0.46 vs $0.44 estimate
-Q3 Revenue Guidance of $162.7M – $167.7M vs $155.79 estimate

Management stated that their largest revenue programs in the quarter were the F-35, Filthy Buzzard, Predator, the next-generation missile system, and DEWS. From a bookings perspective, their largest bookings programs included the UAV mission computer, and the next generation ground-based radar. They also commented they booked large orders for the F-35, Aegis and MALD.

Facility Consolidation

President and CEO Mark Aslett remarked that the company has funded the capital dollars necessary to build out its trusted digital SMT manufacturing facility in Phoenix, Arizona. “The in-source digital production capabilities we’ve created in Phoenix are crucially important to our ability to continue growing the business.” In addition, Mr. Aslett added that the consolidation of the company’s West Coast RF manufacturing locations are progressing. They received planning permission, and we’ll soon begin the buildout of the leased facility, adjacent to its existing Oxnard, California plant.

JPMorgan, in their post-earnings note, commented that Mercury is nearing the end of its efforts in consolidating facilities on the West Coast. The Phoenix SMT facility is largely complete and will allow the company to insource more work and bring on additional capacity for secure processing. Mercury is still working to combine operations in Oxnard and Camarillo, CA, but expects to be done by the end of the year. Importantly, the company does not expect a major inventory build to finish the move. “We could see further consolidation efforts in the future, as Mercury fully integrates its acquisitions, and the results thus far are encouraging.”

M&A

Along with its earnings results, the company announced it had acquired GECO Avionics for $36.5M. GECO is based in Mesa, Arizona, and has more than 20 years of experience designing and manufacturing affordable, safety-critical Avionics and mission computing solutions. Their technologies to deploy on a range of military platforms, including Boeing’s Apache Attack Helicopter and KC-46 Pegasus Refueling Tanker.

JPMorgan noted the acquisition will bring in just around $20M in annual revenue, but contribute little to adjusted EPS. However, the acquisition is the company’s fifth in the C4I market over the past two years and builds upon the Richland and CES deals in secure servers and avionics. Mercury’s other recent investments in C4I (Themis and Germane) are performing well and management expects to be done integrating the two by the end of the year. Mercury remains focused in building out its capabilities in C4I with sales that now account for ~30% of the company. Following the GECO deal, leverage for Mercury will stand at ~1.4x and while management has been judicious on M&A, JPMorgan thinks the company is capable of levering up to between 3-4x adj EBITDA should the right opportunities come along, which equates to deploying ~$500M for deals.

#MRCY
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