What happened
Defense electronics specialist Mercury Systems (MRCY 3.10%) delivered top- and bottom-line beats in its most recent quarter, but in the report it delivered after the close of trading Tuesday, management lowered its full-year projections. Investors responded by sending shares of Mercury down 17% as of about 2:20 p.m. ET Wednesday.
So what
Mercury makes chips and electronics systems used in aerospace and defense applications. The company plays an important role in the defense industry ecosystem, but has to manage a complex supply chain, and its order volumes can vary based on the production plans of its larger customers.
In its fiscal third quarter, which ended March 31, Mercury earned $0.40 per share on revenue of $263.5 million, beating Wall Street's consensus expectations for $0.37 per share in earnings on sales of $254 million. Revenue was up 4% year over year, and both revenue and net income came in above the high end of the company's guidance ranges.
Total bookings for the quarter were $245 million, meaning Mercury booked slightly less business in the quarter than it billed out as revenue. The company's total backlog as of March 31 was $1.1 billion, up $103.2 million from a year earlier.
Now what
The issues came in the guidance. Mercury said it expects to earn between $0.47 per share and $0.61 per share in the current quarter on revenue of between $269.3 million and $289.3 million. Those figures are significantly below the consensus estimates of $1.06 per share on $321.7 million in sales.
For the full fiscal year, Mercury is guiding for earnings per share in the $1.36 to $1.50 range. Wall Street had been expecting $1.93 per share.
Mercury said it is in a period of "temporary margin degradation." Part of that relates to the macroeconomic headwinds including inflation, tight labor markets, and continued supply chain issues. But Mercury is also investing in the development of new products for contracts that will begin to produce revenue in fiscal 2024 and beyond.
"Our challenges are not related to end-market demand, which remains strong," CEO Mark Aslett said. "They're largely timing and cost-related, they're short-term, and they're not unique to Mercury."
Defense stocks can get caught in R&D cycles, given the complex nature of the work they do, as well as the long lags between when contracts are awarded and when production begins. The bigger issue for Mercury appears be to the macroeconomic environment. The impacts of a tight labor market and broad-based inflation could eat into its profits once production ramps up in 2024, unless the company manages them correctly.
Mercury has a solid business and a lot of long-term growth opportunities. But in light of management's weak guidance, investors on Wednesday appear to be in no mood to give the company the benefit of the doubt while the nearer-term issues play out.
