Mercury Systems Inc (MRCY)

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Mercury Systems, Inc. (MRCY)

F3Q 2014 Earnings Conference Call

April 29, 2014 05:00 PM ET


Kevin Bisson - SVP and CFO

Mark Aslett - President and CEO


Tyler Hojo - Sidoti & Company

Howard Rubel - Jefferies & Company

Peter Arment - Sterne, Agee

Jonathan Ho - William Blair

Mark Jordan - Noble Financial

Michael Ciarmoli - KeyBanc Capital Markets



Good day, everyone and welcome to the Mercury Systems’ Third Quarter Fiscal 2014 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the company’s Senior Vice President and Chief Financial Officer, Kevin Bisson. Please go ahead, sir.

Kevin Bisson

Good afternoon everyone and thank you for joining 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 web site at

We would like to remind you that remarks that we 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, as well as the timing and amounts 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 and technological advances in 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, 2013. 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 statement to reflect events or circumstances after the date on which such statement is made.

I would 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.

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 joining us. I will begin today’s call with a business update. Kevin will review the financials and guidance and then we will open it up for your questions.

Mercury delivered results in Q3 at or above the high end of our guidance, was record defense bookings. Total revenue was $55.5 million versus our guidance of $50 million to $56 million. Our GAAP loss from continuing operations was $0.02 per share, this was favorable to our guidance for loss of $0.15 for $0.09 and much improved both sequentially and year-over-year excluding one-time items.

Adjusted EBITDA was 14% of revenue up 52% sequentially and up 47% year-over-year and well above the high end of our guidance. Cash flow from operations also exceeded our forecast for the quarter. Total revenues in our defense business was $51.1 million essentially flat with Q2 and up 1.7 million or 3% from the third quarter last year. International defense revenues for the third quarter including FMS were 18% of total defense revenue, compared with 17% in Q2.

From a program perspective Aegis, Gorgon Stare and Predator/Reaper were major revenue contributors this quarter ours was a classified airborne radar program. Radar revenue grew 28% from Q3 last year and is up 45% year-to-date compared with the same period in fiscal ’13. Radar is the largest source of revenue in our Mercury Commercial Electronic segment so MCE is continuing to rebound strongly after a difficult fiscal ’13. Our low industry conditions remain challenging our major highlight this quarter was bookings which totaled $76.1 million up 51% sequentially and 57% year-over-year. Total defense bookings increased 56% sequentially to a company record $74.6 million. Our book-to-bill is 1.4 compared with an 0.9 in Q3 last year. Our book-to-bill in defense improved to 1.5 from 0.9 in the sequential second quarter and 0.9 a year ago. Defense backlog and total backlog exiting Q3 were up on a sequential basis 22% and 16% respectively. There were four large programs this quarter from a bookings perspective. We received the order for the first brand of Seaward block 2 over phase 2 with Lockheed Martin. We received the large booking associated with certain technologies on JSF with Raytheon and we continue to see strong bookings on Aegis with Lockheed Martin. In addition, we received a follow on production order for Gorgon Stare Increment 2, which is in theater and will be extremely well.

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