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Mercury's (MRCY) Q4 Earnings Solid, Organic Revenues Surge

Zacks Equity Research

Shares of Mercury Systems MRCY have returned 63.2% so far this year, significantly outperforming the industry’s growth of 12.3%.

Robust organic growth along with strategic acquisitions has been aiding the company to deliver a stellar performance.

The company recently completed the acquisitions of The Athena Group and Syntonic Microwave and is now set to purchase American Panel Corporation. (APC)

A strong defense procurement environment is a tailwind for the company. Recent design wins and a ramp-up in the current programs are boosting its organic growth.

The company’s recently released fourth-quarter fiscal 2019 results bear testimony to this fact.

Analysis of Q4 Results

In the quarter, non-GAAP earnings per share of 47 cents were flat year over year and beat the Zacks Consensus Estimate of 44 cents.

Revenues came in at $177 million, marking a year-over-year jump of 16%. The metric also surpassed the Zacks Consensus Estimate of $173 million.

The company’s largest revenue programs were Surface Electronic Warfare Improvement Program (SEWIP), Filthy Buzzard, F-35 and AEGIS.

Organic revenues (90% of total) grew 4% to $158.5 million in the quarter under review.  In the year-ago period, organic revenues benefited from an $11-million order, that the preceding fiscal third quarter was supposed to win. Excluding that order, organic revenues would have increased 12% in the reported quarter.

The company reported Acquired revenues (10%) of nearly $18.4 million, attributable to the buyouts of Germane Systems, GECO Avionics, The Athena Group and Syntonic Microwave.

Sensor and Effector Mission Systems (SEMS) revenues rose 17% year over year to account for 62% of the total revenues.

Revenues from Command, Control, Communications, Computers and Intelligence (C4I) represented 26% of the total revenue stream and surged 32% year over year.

Mercury's total bookings in the quarter augmented 41% year over year to $241 million, driving a 1.36 book-to-bill ratio. Key bookings included a classified radar program, Filthy Buzzard, F-35, Triton and E-2D Hawkeye.

The company ended the quarter with a backlog of $625 million, up 40% year over year.


Gross margin for the fiscal fourth quarter expanded 40 basis points (bps) to 45.1%.

Adjusted EBITDA in the quarter inched up 1% year over year to $37.9 million. However, adjusted EBITDA margin contracted 320 bps to 21.4%.

Balance Sheet and Cash Flow

Mercury exited the quarter with cash and cash equivalents of $257.9 million, up from $112.5 million at the end of the earlier reported quarter.

The company generated $26 million of cash flow from operational activities compared with $26.2 million in the sequential quarter.

Free cash flow in the period under discussion was $17.1 million, down from $19.2 million sequentially.

Fiscal 2019 Highlights

The company reported revenues of $654.7 million, which increased 33% from fiscal 2018. Organic revenues rose 12% year over year to $541.5 million.

Sensor and Effector and C4I revenues rose 18% and 110%, respectively.

Adjusted earnings per share were $1.84, up 30% year over year.

Total bookings increased 39% on a year-over-year basis to $783 million, driving a 1.2 book-to-bill ratio. Backlog at the end of fiscal 2019 was $625 million, up 40%.

Gross margin for fiscal 2019 of 43.7% contracted 210 bps due to the inclusion of Germane Systems, program mix and a higher level of customer funded R&D.


For the first quarter of fiscal 2020, revenues are forecast in the range of $160-170 million, indicating a rise of 11-18% from the year-ago reported figure. The acquisition of APC, which is likely to close at the end of the fiscal first quarter, is not expected to have any material impact on the results.

Gross margins are expected to be 43.5%, up 70 bps year over year.

Adjusted EBITDA for the quarter is anticipated in the band of $32-$34 million. Adjusted earnings are projected within 39-42 cents per share.

For fiscal 2020, the company expects revenues (excluding the impact of the APC buyout) of $740-$776 million, implying 13-16% growth from the prior-year reported number. The company expects organic revenue growth to be more than 10% in the current fiscal year.

Adjusted EBITDA for the full fiscal is assumed to be $160.5-$168.5 million.

Adjusted EPS for the full fiscal is estimated to be $1.97-$2.08, suggesting an improvement of 7-13% from the year-earlier reported figure.

Zacks Rank and Stocks to Consider

Mercury currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader technology sector are Rosetta Stone RST, LogMeIn LOGM and Perficient PRFT, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Rosetta Stone, LogMeIn and Perficient is currently projected to be 12.5%, 5% and 10.8%, respectively.

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