MRCY

Mercury Systems Inc (MRCY)

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Mercury Systems, Inc. (MRCY)

F3Q13 Earnings Call

April 30, 2013 5:00 pm ET

Executives

Kevin M. Bisson – Senior Vice President, Chief Financial Officer and Treasurer

Mark Aslett – President and Chief Executive Officer

Analysts

Tyler Hojo – Sidoti & Company

Peter Arment – Sterne Agee

Michael F. Ciarmoli – Keybanc Capital Market

Brian Ruttenbur – CRT Capital Group LLC

Howard Alan Rubel – Jefferies & Co. Inc.

Presentation

Operator

Good day everyone and welcome to the Mercury Systems Third Quarter Fiscal 2013 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to the company’s Senior Vice President and Chief Financial Officer, Kevin Bisson. Please go ahead, sir.

Kevin M. Bisson

Thanks Kate and good afternoon and thank you for joining all of us. With me today is our President and Chief Executive Officer, Mark Aslett. If you have not received a copy of the earnings press release, we issued earlier this afternoon, you can find it on our website at www.mrcy.com.

We’d like to remind you that remarks that we may make during this call about future expectations, trends and plans for the company and its business constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of the words may, will, could, should, would, plans, expects, anticipates, continue, estimate, project, intend, likely, forecast, probable, potential and similar expressions.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include but are not limited to continued funding of defense programs, the timing of such funding, general economic and business conditions including unforeseen weakness in the company’s markets, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in the U.S. government’s interpretation of federal procurement rules and regulations, market acceptance of the company’s products, shortages in components, production delays due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to Generally Accepted Accounting Principles, difficulties in retaining key employees and customers, unanticipated costs under fixed price service and system integration engagements and various other factors beyond our control.

These risks and uncertainties also include such additional risk factors as are discussed in the Company’s filings with the U.S. Securities and Exchange Commission including its Annual Report on Form 10-K for the fiscal year ended June 30, 2012. The Company cautions readers not to place undue reliance upon any such forward-looking statements which speak only as of the date made. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statement is made.

I’d also like to mention that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, during our call, we will discuss several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow.

Adjusted EBITDA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring expense, impairment of long-lived assets, acquisition costs and other related expenses, fair-value adjustments from purchase accounting and stock-based compensation costs. Free cash flow excludes capital expenditures from cash flows from operating activities.

Reconciliation of adjusted EBITDA to GAAP net income and free cash flow to GAAP cash flows from operations are included in the press release we issued this afternoon. Finally a word about our segment reporting this quarter we begin reporting our results in two new segments Mercury Commercial Electronics or MCE, and Mercury Defense and Intelligence Systems or MDIS instead of the previous Advanced Computing Solutions or ACS and Mercury Federal Systems or MFS segments. The MCE segment primarily includes the former ACS business including Micronetics. MDIS includes the former MFS in core electronics.

With that, I will turn the call over to Mercury’s President and CEO, Mark Aslett. Mark?

Mark Aslett

Thanks Kevin. Good afternoon, everyone, and thank you for joining us. I’ll begin today’s call with a business update, Kevin will review the financials and guidance and then we’ll open it up for your questions.

We made very good progress this quarter and the team executed well. We recorded the first low rates initial production revenue for SEWIP Block 2 that we anticipated and we delivered results above the high end of our guidance across all our key metrics.

Total revenue for the quarter was up 9% sequentially to $54 million versus guidance of $44 million to $50 million. Our capital earnings from continuing operations improved to $800,000 from a $4.8 million loss in the second quarter.

Earnings were $0.03 per share versus our guidance or loss of $0.02 to $0.08 per share. Adjusted EBITDA was up five fold from Q2 to approximately 10% and significantly above the high end of our guidance. In addition, we continue to generate positive cash flow in the quarter. The only downsize were low bookings and few design wins and I will speak to those metrics in a moment.

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