Breaking Down Mercury Systems, Inc. (MRCY) Financial Health: Key Insights for Investors

Understanding Mercury Systems, Inc. (MRCY) Revenue Streams

Understanding Mercury Systems, Inc.’s Revenue Streams

Revenue Overview: For the fiscal year ended June 28, 2024, total revenues decreased by $138.6 million, or 14.2%, to $835.3 million compared to $973.9 million in fiscal 2023. This decline was attributed to a strategic shift in resource allocation and a transition from higher development program volumes.

Breakdown of Primary Revenue Sources

• Domestic Revenues: $704.1 million in FY 2024, down from $865.2 million in FY 2023.
• International Revenues: $131.1 million in FY 2024, compared to $108.7 million in FY 2023.

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth rate showed a significant decline, with revenues dropping from $973.9 million in FY 2023 to $835.3 million in FY 2024, representing a 14.2% decrease.

Contribution of Different Business Segments to Overall Revenue

In fiscal 2024, revenue contributions by product grouping included:

• Integrated Solutions: Decreased by $115.8 million
• Modules and Sub-assemblies: Decreased by $18.4 million
• Components: Decreased by $4.4 million

End applications showed the following declines:

• Radar: $119.1 million
• C4I: $25.6 million
• Electronic Warfare: $23.9 million

Analysis of Significant Changes in Revenue Streams

A notable revenue shift occurred with the transition of operational focus, resulting in a temporary pause in production at one site, which contributed to the overall revenue decline. The backlog as of June 28, 2024, was approximately $1.3 billion, with $758.9 million expected to be recognized within the next twelve months.

Revenue by End Market

A Deep Dive into Mercury Systems, Inc. (MRCY) Profitability

Profitability Metrics

Gross Profit Margin: The gross profit margin for fiscal 2024 was 23.5%, down from 32.5% in fiscal 2023. This decline is attributed to net estimated cost adjustments and increased manufacturing costs.

Operating Profit Margin: The operating margin for fiscal 2024 was (17.7)%, compared to (2.2)% in the previous fiscal year. The loss from operations amounted to $(147.8) million in 2024, a significant drop from the income of $31.6 million in 2022.

Net Profit Margin: The net loss for fiscal 2024 resulted in a net profit margin of (16.5)%, compared to (2.9)% in fiscal 2023. The net loss was $(137.6) million in 2024 versus $(28.3) million in 2023.

Trends in Profitability Over Time

The following table illustrates the trends in profitability metrics over the past three fiscal years:

Comparison of Profitability Ratios with Industry Averages

The industry average gross profit margin for similar companies in the defense sector is approximately 30%. The significant gap indicates challenges in cost management and operational efficiency.

Operating margins in the industry average around 8%, highlighting the struggles faced by the company in maintaining profitability amidst rising costs and operational setbacks.

Meanwhile, the net profit margin average in the industry is approximately 5%, further indicating the financial distress relative to peers.

Analysis of Operational Efficiency

The following table summarizes key operational efficiency metrics:

In summary, the operational challenges have resulted in a marked decrease in gross margin by 900 basis points year-over-year, primarily due to unfavorable changes in estimates across various programs.

Debt vs. Equity: How Mercury Systems, Inc. (MRCY) Finances Its Growth

Debt vs. Equity: How Mercury Systems, Inc. Finances Its Growth

Debt Levels

As of June 28, 2024, Mercury Systems, Inc. reported a total long-term debt of $591.5 million and short-term debt categorized under operating lease liabilities of $62.6 million. The total liabilities amounted to $906.1 million, compared to $824.7 million the previous year.

Debt-to-Equity Ratio

The debt-to-equity ratio for Mercury Systems, calculated using total liabilities and total shareholders' equity of $1.472 billion, stands at approximately 0.61. This is below the industry average of 0.75, indicating a relatively conservative approach to leveraging.

Recent Debt Issuances and Credit Ratings

On February 28, 2022, the company amended its revolving credit facility to a $1.1 billion line of credit, which has a maturity extended to February 28, 2027. As of June 28, 2024, it had outstanding borrowings of $591.5 million. The interest expense for fiscal 2024 was $35.0 million. The company has not specified a formal credit rating but remains in compliance with all covenants under its revolving credit facility.

Balancing Debt Financing and Equity Funding

In fiscal 2024, equity funding was supported through stock issuance under employee stock plans, generating $4.6 million. The company does not pay dividends, opting to reinvest earnings into growth initiatives, which aligns with its strategy to leverage debt while maintaining equity stability.

Assessing Mercury Systems, Inc. (MRCY) Liquidity

Assessing Mercury Systems, Inc.'s Liquidity

Current Ratio: As of June 28, 2024, the current ratio is calculated as follows:

Quick Ratio: The quick ratio, which excludes inventory from current assets, is:

Analysis of Working Capital Trends

Working capital as of June 28, 2024, is reported as:

The decline in working capital illustrates a significant reduction compared to the prior year due to an increase in current liabilities coupled with a decrease in current assets.

Cash Flow Statements Overview

The cash flow summary for the fiscal year ending June 28, 2024, is as follows:

Potential Liquidity Concerns or Strengths

As of the end of the fiscal year 2024, cash and cash equivalents stood at:

Additionally, the company has a revolving credit facility with a borrowing capacity of:

Furthermore, net borrowings under credit facilities were reported as:

The liquidity position reflects an increase in cash and cash equivalents, driven by strong operating cash flows and financing activities, indicating overall liquidity strength despite working capital declines.

Is Mercury Systems, Inc. (MRCY) Overvalued or Undervalued?

Valuation Analysis

The valuation analysis of the company involves several key financial ratios and metrics that help determine whether the stock is overvalued or undervalued.

Price-to-Earnings (P/E) Ratio

The price-to-earnings (P/E) ratio as of June 28, 2024, is calculated based on the diluted net loss per share of $(2.38). The stock price at that date was approximately $30.00, leading to a P/E ratio of:

P/E Ratio = Stock Price / Earnings Per Share

P/E Ratio = $30.00 / $(2.38) = N/A (Negative earnings)

Price-to-Book (P/B) Ratio

The price-to-book (P/B) ratio is calculated using the book value per share. As of June 28, 2024, the total shareholders' equity was $1,472,775 thousand, and the number of shares outstanding was 58,094 thousand.

Book Value per Share = Total Shareholders' Equity / Shares Outstanding

Book Value per Share = $1,472,775 / 58,094 = $25.37

P/B Ratio = Stock Price / Book Value per Share

P/B Ratio = $30.00 / $25.37 = 1.18

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The enterprise value (EV) is calculated as:

EV = Market Capitalization + Total Debt - Cash and Cash Equivalents

With a market capitalization of $30.00 58,094 = $1,742,820, total debt of $591,500 thousand, and cash of $180,521 thousand:

EV = $1,742,820 + $591,500 - $180,521 = $2,153,799

For the fiscal year ending June 28, 2024, adjusted EBITDA was $9.4 million.

EV/EBITDA = Enterprise Value / Adjusted EBITDA

EV/EBITDA = $2,153,799 / $9.4 = 229,622.34

Stock Price Trends

Over the last 12 months, the stock price has exhibited significant volatility. Below is a table summarizing the stock price trends:

Dividend Yield and Payout Ratios

The company has never declared or paid cash dividends on its common stock. As a result, the dividend yield is 0%, and the payout ratio is also 0%.

Analyst Consensus on Stock Valuation

As of the latest reports, the consensus among analysts is mixed, with ratings ranging from buy to hold. The average target price set by analysts is approximately $35.00, indicating a potential upside from the current trading level.

In summary, the valuation metrics indicate a complex picture, with the P/E ratio being undetermined due to negative earnings, a P/B ratio suggesting a slight premium, and an extremely high EV/EBITDA ratio indicating potential overvaluation. Stock price trends show significant volatility, and the lack of dividends suggests a focus on growth rather than income distribution.

Key Risks Facing Mercury Systems, Inc. (MRCY)

Key Risks Facing Mercury Systems, Inc.

The financial health of Mercury Systems, Inc. is influenced by various internal and external risks. These risks can broadly be categorized into operational, financial, and strategic risks.

Industry Competition

The market for aerospace and defense electronics is highly competitive. Competitors may offer more attractive pricing or superior product performance. For instance, the company reported a net loss of $137.6 million for fiscal 2024, compared to a net loss of $28.3 million in fiscal 2023. Such losses could intensify pressures to reduce prices or improve product offerings.

Regulatory Changes

Mercury's contracts are subject to government regulations and compliance requirements. Changes in these regulations can adversely affect operations. As of June 28, 2024, the company had a backlog of orders aggregating approximately $1.3 billion, with $758.9 million expected to be recognized as revenue within the next twelve months. Regulatory changes could impact this backlog, leading to cancellations or delays.

Market Conditions

Changes in market conditions, including fluctuating defense budgets due to geopolitical tensions, can significantly affect revenue. The company has noted that recent global events could drive up to $1.5 trillion of additional defense spending over the next decade. However, any downturn in defense spending could directly impact Mercury's revenue streams.

Operational Risks

Operational challenges have been a concern, with recent reports indicating issues with on-time delivery. These challenges could lead to reduced customer satisfaction and impact future orders. The company reported a gross margin of $195.9 million for fiscal 2024, down from $316.7 million in fiscal 2023. This decline may be attributed to operational inefficiencies.

Financial Risks

Mercury has a significant amount of floating rate debt. Assuming $100.0 million of floating rate debt outstanding, an increase of 100 basis points in interest rates could increase annual interest expenses by approximately $1.0 million. As of June 28, 2024, the company had total borrowings of $591.5 million, with $300.0 million fixed under a swap agreement.

Goodwill and Intangible Assets

The company has a carrying value of goodwill and identifiable intangible assets totaling $938.1 million and $250.5 million, respectively. These assets are subject to impairment, and any adverse changes in business conditions could lead to significant write-downs in the future.

Mitigation Strategies

To address these risks, Mercury has implemented various strategies, including restructuring efforts that resulted in the elimination of approximately 150 positions to streamline operations and reduce costs. Additionally, the company is focused on enhancing its relationships with defense prime contractors to secure future contracts.

Future Growth Prospects for Mercury Systems, Inc. (MRCY)

Future Growth Prospects for Mercury Systems, Inc.

Analysis of Key Growth Drivers

Mercury Systems, Inc. is positioned to leverage several key growth drivers in the aerospace and defense sectors. The company's focus on product innovations, market expansions, and strategic acquisitions are pivotal for future growth.

Product Innovations

The company has made significant investments in research and development, with total expenditures amounting to $101.3 million, $108.8 million, and $107.2 million in fiscal years 2024, 2023, and 2022, respectively. This focus on innovation is expected to enhance their product offerings, particularly in mission-critical technologies.

Market Expansions

Mercury Systems is actively pursuing international markets, with approximately $131.1 million in revenues from international and foreign military sales in fiscal 2024, compared to $108.7 million in fiscal 2023. The company’s international strategy aims to increase its footprint in various countries, enhancing its global market share.

Acquisitions

The company has a history of strategic acquisitions that have broadened its technological capabilities. These acquisitions have shifted the revenue proportion from components to more complex products, which is reflected in their increasing revenue from integrated subsystems.

Future Revenue Growth Projections and Earnings Estimates

Revenue for fiscal 2024 was reported at $835.3 million, a decrease from $973.9 million in fiscal 2023. However, projections for the upcoming years suggest a rebound, driven by increased defense spending, especially due to geopolitical tensions, which could lead to a projected compound annual growth rate (CAGR) of approximately 6.0% to 7.0% in key defense sectors.

Strategic Initiatives and Partnerships

Mercury Systems has initiated several strategic partnerships aimed at enhancing its technological offerings and market reach. The company's partnerships with defense prime contractors are instrumental in bidding for large projects, increasing the likelihood of successful contract awards.

Competitive Advantages

Mercury Systems maintains a competitive edge through its deep-rooted relationships with leading high-tech firms and a robust R&D framework. The company's ability to adapt commercial technology for defense applications sets it apart from competitors. Additionally, the company's focus on secure, mission-critical technologies positions it favorably within the market.

Conclusion

Overall, the growth opportunities for Mercury Systems, Inc. in 2024 and beyond are promising, driven by strategic innovation, market expansion, and strong partnerships within the defense sector.