Mercury Systems (MRCY) Tanks 9% as Q2 Earnings Miss Estimates

Mercury Systems (NASDAQ:MRCY) MRCY shares plunged nearly 9% in Monday’s extended trading session after the aerospace and defense tech firm reported lower-than-expected second-quarter fiscal 2022 results. The company reported non-GAAP earnings of 39 cents per share, which missed the Zacks Consensus Estimate of 41 cents.

Moreover, Mercury Systems’ bottom line declined 27.8% from 54 cents per share reported in the year-ago quarter. The year-over-year decline was mainly due to an unfavorable program mix and increased operating expenses.

Mercury Systems’ non-GAAP revenues of $220.4 million missed the Zacks Consensus Estimate of $223 million. However, it increased 5% year over year, mainly due to contributions from newly acquired businesses.

Quarterly Details

Mercury Systems’ acquired businesses (17% of the total revenues) — Physical Optics Corporation, Pentek, Avalex Technologies and Atlanta Micro — cumulatively contributed $37.5 million to second-quarter revenues. MRCY noted that acquired business revenues were slightly less than expectations due to contracting delays.

Additionally, organic revenues (83% of the total revenues) declined 13% year over year and contributed $183 million to second-quarter sales. The decline was mainly due to contracting delays.

Mercury Systems’ total bookings were $236.9 million, resulting in a 1.08 book-to-bill ratio. The company’s largest bookings in the reported quarter were a classified C2 program, MH-60, P8, CDS, Autumn and F-16.

The company ended the quarter with a backlog of $953.7 million, up $8.4 million on a year-over-year basis. Within the next 12 months, products worth $572.4 million from this order backlog are expected to be shipped.

Operating Details

Mercury Systems’ gross profit was $87.2 million, down 1.6% year over year. Moreover, its gross margin contracted 250 basis points (bps) to 39.6%, mainly due to a negative impact from the inclusion of Physical Optics Corporation and the higher mix of new programs and development work.

Adjusted EBITDA slumped 15.9% year over year to $38.1 million, while margin contracted 420 bps to 17.3%. The decline was mainly due to lower gross margin and negative operating leverage as organic revenues declined year over year.

Total operating expenses increased 24.2% to $87.6 million. SG&A expenses as a percentage of revenues increased 140 bps to 16.4%. Research & development expenses as a percentage of revenues contracted 50 bps to 12.9%.

Balance Sheet & Other Details

As of Dec 31, 2021, MRCY’s cash and cash equivalents were $105.2 million compared with $95.8 million as of Oct 1, 2021. Long-term debt was $451.5 million at the end of the second quarter.

The company generated operating cash flow of $6.8 million in the second quarter and $4.8 million in the first half of fiscal 2022. It generated free cash flow of $10.2 million in the second quarter and $2.8 million in the first half of fiscal 2022.

Guidance

Mercury Systems reiterated its guidance for fiscal 2022. The company continues to expect fiscal 2022 revenues between $1 billion and 1.03 billion. Adjusted EBITDA is expected in the range of $220-$227 million, while adjusted earnings for fiscal 2022 are estimated in the band of $2.51-$2.60 per share.

For the third quarter, Mercury Systems projects revenues between $245 million and $255 million. Adjusted EBITDA is anticipated between $50 million and $53 million. Adjusted earnings are projected in the range of 55-59 cents per share.

Zacks Rank & Stocks to Consider

Mercury Systems currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks from the broader technology sector include Analog Devices (NASDAQ:ADI) ADI, CDW (NASDAQ:CDW) Corporation CDW and Keysight Technologies (NYSE:KEYS) KEYS, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Analog Devices’ first-quarter fiscal 2022 earnings has been revised upward by a penny to $1.79 per share over the past 30 days. For fiscal 2022, earnings estimates have moved upward by 1% to $7.53 per share over the past 30 days.

Analog Devices’ earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 6.1%. Shares of ADI have rallied 8.9% in the trailing 12 months.

The Zacks Consensus Estimate for CDW Corporation’s first-quarter 2022 earnings has been revised upward by five cents to $1.87 per share over the past 60 days. For 2022, earnings estimates have moved upward 12 cents to $8.73 per share in the past 60 days.

CDW Corporation’s earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 12.2%. CDW stock has rallied 37.2% over the past year.

The Zacks Consensus Estimate for Keysight’s first-quarter fiscal 2022 earnings has been revised upward to $1.68 per share from $1.65 60 days ago. For fiscal 2022, earnings estimates have been revised upward by a couple of cents to $6.92 per share in the past 30 days.

Keysight’s earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 7.1%. Shares of KEYS have increased 18.3% over the past year.

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