Mercury Systems' new CEO debuts its short-term agenda

Mercury Systems' new chief executive has led the defense electronics maker as interim CEO for around eight weeks and is now overseeing its reset after being named to the role on a full-time basis.

The Mercury board of directors' appointment of Bill Ballhaus as CEO took effect Monday and he will also become chairman effective with the 2023 annual stockholders' meeting, Mercury said in its fourth quarter and fiscal 2023 year-end financial release Tuesday.

For Ballhaus, Mercury is now the third company in the defense and government market he will lead as CEO. He also held that role at the government services contractors formerly known as SRA International and DynCorp International, the latter when it was publicly traded prior to its sale in 2010.

The almost three-decade market veteran takes the helm at Mercury amid a raft of changes in its leadership ranks and evidently more to come across the rest of the company, which decided to end its formal process to seek an acquirer in late June.

Mercury's earnings call after markets closed Tuesday represented Ballhaus' first such with investors and therefore also represented his first public remarks as CEO of the company that makes chips, processors and other subsystems.

Ballhaus said Mercury's 2024 fiscal year will be a "transition year" as program execution, the business development and organic growth engines, and cost structure adjustments are the company's main priorities.

Ballhaus told analysts that approximately 20 out of Mercury's 300 programs are experiencing "unique and outsized costs" due to initial development challenges. Those issues resulted $56 million earnings impact for Mercury's 2023 fiscal year that ended June 30.

That 20 out of 300 ratio is a minority even as Ballhaus described Mercury overall as "a very healthy business that's being obscured by these onetime effects on these challenged programs."

The historical mix of Mercury's programs has been 80-20 in favor of production over development but is now 60-40, Ballhaus said.

Some of those development programs became part of Mercury through its many acquisitions over the years that Ballhaus said will provide the company franchises for growth over the long-term.

At the same time, Ballhaus indicated that Mercury did not fully integrate some of those acquired businesses nor had the kind of internal functions necessary to make the most out of those purchases.

"Big picture: the company has scaled up and inorganically moved into areas that I think are very attractive areas to be in, but requires processes that are mature in areas like program management, system engineering, et cetera," Ballhaus told analysts. "I think we're seeing the growing pains associated with that on some of these development programs.

"I don't think it's so much structural, I think it's more process-oriented, and these aren't challenges that companies or leaders that have taken on development programs haven't seen before."

That ongoing process maturity effort involves a monthly series of cross-functional reviews and cost evaluations of Mercury's development programs that have some level of risk profile, Ballhaus said.

Mercury's fiscal 2024 is all about executing on and finalizing those development programs. The sooner that happens as Ballhaus put it, "the sooner we'll be able to see the inflection point in the benefit of those long-run production programs in our organic growth rate."

Full-year fiscal 2023 revenue of $973.9 million was 1% lower than that of FY 2022 and 3% down on an organic basis after excluding acquired sales. Profit of $200.5 million represented an approximate 34% decrease in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

That bottom-line figure represented 13.6% of revenue in FY 2023 compared to 20.3% in FY 2022.

For its 2024 fiscal year that started July 1, Mercury sees revenue in the range of $950 million-to-$1 billion and adjusted EBITDA of $160 million-to-$185 million, the latter of which would represent 16.8%-to-18.5% of sales.