NEW YORK, April 18, 2018 /PRNewswire/ -- Report entitled "Systems Failure" outlines how Mercury faces 50%-85% downside risk to $7.00 to $23.00 per share as a result of numerous material adverse changes taking place
- Mercury's Financials Are Signaling Stress: Mercury's Adj. EBITDA margin of 23.4% is an extreme outlier for a government subcontractor and have grown 450bps in the same three-year period its free cash flow has grown zero; days inventory and its cash collection cycle are near all-time highs while gross margin expectations are contracting. Management's annual cash bonuses are based solely on Adjusted EBITDA, providing incentive to inflate this metric. Mercury recently disclosed it expects to lose its small business status in FY2018, which would be a Material Adverse Effect, causing lost business opportunities and increased costs
- New Department of Defense Inspector General Audit Report On SEWIP Validates Allegations of Cost Overruns: SEWIP has been a material driver of recent financial results for Mercury, and management has signaled future growth from this Navy electronics program. Inconsistencies between public statements by management and recent SEC disclosures suggest declining SEWIP revenues. Mercury has stated the loss or cancellation of SEWIP could adversely affect future results
- Recent Resignation of CFO, Chief Accounting Officer, and Treasurer Concerning: Mercury created a mechanism for employees to confidentially report accounting concerns before the Chief Accounting Officer's departure. Insiders also enacted a 10b5-1 stock sale program. The CFO recently resigned in February 2018 post closing of Themis Computer. Mercury has borrowed $189m on its line of credit to fund the acquisition, and consistent with prior practices, is likely to issue 4m new shares to deleverage. The former CFO has omitted from his recent biography that he was the Chief Legal Officer and Secretary at Cabletron / Enterasys Networks, a company where numerous executives were sentenced to prison
- Mercury's Shares Richly Valued: Mercury trades at 4.7x, 19.3x and 31.5x 2018E sales, Adj. EBITDA and Adj EPS on the belief its sales will grow 16%, its 23% Adj. EBITDA margins are accurate, and double digit organic growth will continue. We believe organic growth will be closer to 6.5%, and are skeptical of its EBITDA margins given no cash flow growth. At a 20x-25x free cash flow multiple, a range consistent with industry peers, Mercury's shares would decline by up to 85%
Spruce Point Capital has a short position in Mercury Systems, Inc. (MRCY) and stands to benefit if its share price falls.
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Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
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SOURCE Spruce Point Capital Management, LLC