Mercury Systems (MRCY) 3 May 222022 Q3 Earnings call transcript

Good day, everyone, and welcome to the Mercury Systems Third Quarter Fiscal 2022 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, Executive Vice President and Chief Financial Officer, Michael Ruppert. Please go ahead sir.

Good afternoon and thank you for joining us. our Chief is Aslett. Officer, today me President Executive and Mark With

presentation. it at Please you've of Mark posted this the Events issued find copy received and under afternoon, the website Investor to our earnings can If Slide referring a X on we I the will not to presentation The in mrcy.com. slide press turn be release the you Relations Presentations. on that of website is and earlier section

call and of turn Mercury's non-GAAP to Please presentation press X. reconciliation the in earnings measures, in an we Mark or would adjusted in statements, that information future Before I forward-looking principles today's subject revenue future turn presentation also and with over regarding outlook, slide metrics statements CEO, you reporting started, financial to to should several financial accordance remind addition acquired These share, mention to prospects like to these today's risks per forward-looking will included free earnings GAAP, get risk like the financial the A I'll financial appendix results business includes including All EBITDA, cash results Slide in plans, we and the performance. X revenue. are could flow, with anticipated conjunction is non-GAAP during the generally uncertainties SEC performance forward-looking or be accepted objectives, also in Mercury's included statements adjusted our press filings. that materially. statements to President to as on to that cautionary income, adjusted Slide factors Mercury's earnings in differ Aslett. cause and release. call, our discuss accounting and and specifically, organic considered now release actual I'd

Mercury your update. open Good will guidance up strong the across delivering to then Mike. us. in well the we'll and begin to for it and perform financials continued review joining QX, thanks everyone questions. business results I'll Mike board. afternoon, Thanks, and the with

a as quarter to to was a our record book-to-bill to and it headwinds. well team due bookings expected, labor delays backlog. as these for order X.XX quarter manage leading chain was As It successfully challenging and a record market constraints continues but supply

result, coupled As growth positioning next to our for M&A with lead overall our a a strong organic to strong organic performance This expect well as a growth XMPACT driven Mercury expansion we fiscal should deliver QX, margin to XXXX. in initiatives return by program year. as

resolution. coupled speedy low continues a humanitarian just Looking We organic and crisis the to ahead revenue double-digit plan achieve to to growth unfolding for attack unprovoked Ukraine M&A. by made single-digit target on over expansion longer our hope and goals. term, high these the five-year We're time with track in and margin

since invasion Our over confidence of in that XX has provided outlook our increased the the our to given longer-term domestically course short the in broader and to the We Europe. the years assistance implications the of term defense anticipate for on growth see substantial believe we'll next nature due in Ukraine. both spending impact an the growth incremental don't military revenues internationally We

expect the do in the mid-term and bookings and we in resulting However, higher five next see in proposal an increase activity to years. over bid

up Bookings on growth results quarter. QX our year-over-year third to XX% the We increased XX% Turning Slide sequentially. bookings substantial were X. in saw and

last in the XMPACT radar F-XX, the QX seeing that very top QX. bookings largest take year. and Despite P-XXXX begun award LTAMDS, for further did FMS five performance, largest program. strong was the challenges The CHXXK, the in delay were Our program, programs bookings in this delays of we

inventory. May, receive late the June. are in The majority currently their to resulting in currently customer products in of Mercury Our award expect in a

for next LTAMDS year our said, headwinds the increased our year for Additionally, In long partially mitigate in and partly time the quarter LTAMDS. upside future the materials, F-XX and The had the with awards as are that helped $XX domestic was funded pleased fiscal in remainder quarter to larger reported expected strong well seeing was lead for received customers early to biggest QX. with the we associated TRX booking receive and demand missile two the international million. this In were in Block two XX to for FMS QX, bookings The was That the quarter awards These order for with production. third five fiscal our QX, XXXX associated of larger delay. our signals defense. missiles plan. This XXXX. we as contributed totaling production likely awards delay to total created LTAMDS, order moved been

This slept Mercury's that record an as the QX. in reflecting as quarter the which market RFP from year anticipated, for our chain systems QX labor supply LRIP the revenue we orders Raytheon total delay to as additional receive reverse from partially was and down may X.X% prior we reported well expect challenges. for

the ago. value due on more XX% billion. and working wins adjusted F-XX in $X Our supply flow quarters our lifetime were same lifetime headwinds QX, pipeline was with line year continue LTAMDS, received impact Through the were of and XX estimated quarter negative our and a lifetime estimated is EBITDA the the strong. Design capital. totaled Free remains largest total wins down more we MH-XX, from an value programs to business of Year-to-date, estimated in see wins Adjusted guidance. our first of cash We'll revenue with and design new EPS activity high-levels than in period value. CDS. F-XX, million in chain design primarily the QX $XXX three to up QX of than new from

QX billion supply in of is the delays, pushing revenue backlog and can positive market revenue accelerated, orders with $X in and been the inflation, total see in first components we some affected we to throughout and QX, for cash suppliers we cash X, open to COVID-related flow. successful time of free slide our supplier the record bookings, result All leading material cash said, order together and can't. linearity disruptions. to and of QX, EBITDA. company XX% productivity manufacturing an contact as a XXXX in whole. which revenue we We've approximately of lead for we of impacts for revenue procurement. to Turning peaked a of in That following affecting the exceeding record end January quarter, facilities Despite our industry to have this largely collections to Early flow. the did The labor anticipate X% lower Omicron XXXX, acceleration remained some Nonetheless, of which headwinds a on mitigate for which as seeing placing impacts churn, constraints see record some semiconductor in book-to-bill staying materials. labor in bookings pass fiscal expected pandemic. and import with increased QX, close chain, and during in-quarter chain adjusted also the however supply we de-commits long We're results efforts and continue the team our productive record also back in fiscal times the growth

to need our as remain CHRO resources lead where previously be, We're help for some market division. Steve joined labor a me. Vice and headwinds well who reporting proven effective our Steve expertise yesterday, Technologies, Steve's, time. with that constraints couldn't will Core team Senior pleased as place. develop world-class to for tight President the Ratner growth efforts $XX Raytheon the and team person, expect a our business. XX,XXX led he attract, and supply growing was is in billion We chain to and Steve scaling to the Mercury continue Having human timely. to retain we leadership talent more having the is

well. launched organically to benefit program XMPACT's proactively slide to year and our financial goal Mercury's of adjusted keys achieve is fiscal through the and actions and the net These in four the EBITDA have this XXXX. over strong course a growth our achieve managing Turning industry taken M&A We ago. headwinds X, results impact next anticipate $XX actions potential fiscal related planned its progressing continuing we been years and to in full and success to to year. IMPACT million

XMPACT more conditions, we've As able be to-date. we to been deliver normal move benefits additive to savings the we to of the expect towards

well expect our XXXX. opportunities. We're generate fiscal customers' EBITDA continue $XX earlier allow track We our on growth as priorities the us align XMPACT on better greater incremental of to aimed million meet at than with them organic us with and target by It's to adjusted to the with as deliver to to fundamentals of to enabling this partner value business. $XX that larger to XMPACT million would originally anticipated. is potentially opportunities improving upside

aimed capital continue by industry share to time. than expect balance optimizing at over to sheet our efficiency. and is asset we XMPACT a As grow working our faster result, also and the take improving

at we The see R&D is potential and and affordably four, competition. scale investment this area We've share addition, our in behalf expand areas; on deliver on a It's common innovations margins. that high-tech R&D, our scalability; XMPACT result. headed. of the and stakeholders. procurement We're believe In substantial five facilities is quickly outpaces taking fifth a where and Mercury's to optimization; and and line second, efficiency chain; us investment organizational can investment major investment scalable we're and defense first, focusing allowing operate more third, returns. in supply industry We processes more with to successfully model through customers all systems. as the efficiency is and proven

our acquisitions, Including to is which integrate scale as it going Micro leveraging grow greater Turning recent performing both and slide Avalex our but X to to ability businesses M&A. is forward. and of proven Atlanta a are XMPACT about to relates it well. acquired

We in capital December XXXX. have since million deployed $XXX

allow the our on and creation. believe of ahead, size increase us transactions, value our we will compounding potentially deal the Looking XMPACT the to cadence impact

environment CX XMPACT, quarter deal intend on believe to sheet microelectronics. execute pursuits, to existing sensor M&A strategy terms to addition going be we active secure and on we integration. diligence, we continue to pricing that M&A The and open balance can successfully our systems, remain themes, strengthened our remain this and forward. we processing, our trusted of and in disciplined continues focused mission In We

to slide X. Turning

and to growth. Ukraine. well China to increased moves as market as this defense the parts will designed time, the said, and Congress majority we're the the the Mercury's with being business revised the was on to NATO billion Despite in year. the believe non-NATO spending Ukraine different appropriations the risk appropriations FY than likely for programs. is countries Russian address both XXXX as to original faster a experiencing and than more the in as driven the We spending the there This XXXX spending. to Defense Taiwan. sole-sourced That initial of continue and expectation the with larger defense intended growing top submitted the due Appropriations a our result expect modernization upwards in request. implications believe war midterm $XXX as represents needs the on well with be over defense $XXX in we FY now through C process overall inflation the for Europe later organic in faster-growing growth budget the as and war programs the strong is focused potential X% appears revenue of and of request passed FY bipartisan than and The long-term. the US, associated bill for over This line effects positions. top and be CR primarily our short We the profound and defense higher elections billion. FY XXXX of XXX by allies support DoD priorities Bill, threat We and X% change XXXX in This which the growth participate approximately We bill. over has is X%

revenues over given Our US trillion to nature our with defense defense short-term combined next advisers in more incremental of partner from $X.X estimate benefiting and of potential NATO spending decade. the course the We in the X% Mercury's drive the spending spending see this additional than growth don't offerings. the of allied increases could GDP of

the that, over should further With organic This high over in fixed manned However, munitions, bid five of achievement and see goals we proposal associated to increased I'd single-digit defense missiles to warfare. call time systems, Mike? over electronics vehicles and activity. systems, to bookings This low and and activity with missile do to electronic the our air like support next higher wing rotorcraft, should to double-digit and of the Mike. the turn on ground expect growth course the years. lead

and Mark afternoon again you, everyone. good Thank

As Mark discussed, backlog we delivered record in QX. bookings and

and still updated for macro environment, year. fiscal are the a of expecting financial While we current fiscal our the fourth we have quarter guidance as record 'XX results result full

Looking to continued 'XX. adjusted anticipate further growth. result expect initiatives, return and XMPACT to and ahead revenue Together, we improved we increased growth a to organic fiscal operating bookings strong 'XX, our in expansion EBITDA leverage and with versus fiscal margin this

to our last to on which QX, Turning XX% quarter record quarter. X. was XX% QX bookings, up were compared up from results slide a XXXX and for

to book-to-bill strong million, Our book-to-bill is XX%. are QX was backlog record up of our a QX. Year-to-date, We bookings X.XX X% X.XX%. finished $XXX compared and up with

XX-month next was into XX $XXX months. providing million, and improved XX% up visibility the sequentially, year-over-year Our XX% backlog revenue

and minimizing did great program experienced job, the we resources actively line a impacts. Although top quarter, thereby the progress supply chain-related team managing to delays programs, bottom other during

came at and revenue included high revenue down X% Micro $XXX our than better and Pentek, Organic slightly in the the Avalex was which million. into quarter. Acquired $XX.X result, QX our As million. $XXX at end year-over-year Atlanta coming expectations guidance revenue, of million, a was

Our consulting POC mix, is margins QX. including XXXX XXXX, in XX.X% compared higher X% driven fiscal in up in XX% organic in expenses and million, them year, our to $X.X we primarily to compared Gross expense, large by of was year. charges, Operating XX.X% to to to acquisition part associated which recent revenue engineering related other most with program. considered were $XX.X associated down million programs related content, last December XMPACT of quarter. program the of with last closed QX acquisitions were and in QX R&D related as compared QX as well the amortization restructuring costs third-party

$X.X EBITDA expected $XX.X lower for the was driven As quarter, a into income percentage net $XX.X was QX engineering $X.XX resources, share. per programs. allocated was or than This income per QX $X.XX to mainly of sales was or R&D Adjusted net GAAP customer-funded was XX%. directly million coming million Adjusted by share. million.

were million. EBITDA as leverage, QX flow fiscal operating was result compared outflow Similar Free growth. margins impacted margins adjusted negative organic declined an flow of Our in revenue we of QX delays. to for XX.X% cash reflects to gross This was lower with $XX.X cash as while continued XX.X%, a XXXX. year-over-year, supplier invest for and QX,

Mercury We XX deliveries balance last ended as with driven flow with Omicron. the equivalents This cash We of cash million, due quarter impacted to quarters. five the QX direct also therefore and presents million of cash approximately experienced by labor the primarily $XX Mercury's January compared sheet the the timing of quarter and QX, shortages in outflow. to $XXX $XXX cash in million free for well. ended debt. Slide in

strategic upsized the growth billion perspective, flexibility ability in unbilled The we revolving was The mix, During capital to we're our rates. growing $X.X by on confident supply quarter, amplified of from organic impacts to the supplement increased million our significant our the in our expansion to $XXX provides proportion our financial as above-industry most our and increased increase maturity milestones disruptions and revenue credit driven our attractive business associated at development driver with a delivery by chain continue we final capacity self-assemblies facility QX. the of perform on a extended more content on This of product. subsystems receivables from execute acquisitions. customers overtime specific outsourcing was working of which strategy. is subject From we Billings as been $XX million and in quarter. are our customers, basis. other recognized the on performance an has and milestones, of an our such work average of and the typically the as or primary percentage progress the revenue hand end Like delayed delivery completion the production rates. from cash overtime and with of to Revenue collections Winning of we of completion recognize obligations. growth our the

extended the seen actively times job resources final managing XX% a milestones other total revenue increase programs across to increased to proportion team In decommits of component compared Also in As an overtime strategy, lead the delayed supplier programs. an a we've financial possible. available expansion QX, ago. content did shipment XX% of in wherever minimize on certain QX, overtime revenue revenue, excellent total impact, the of result year by revenue. to To and our approximately our responding

QX, anticipated. and QX supply mitigate we Although, adjusted due EBITDA did XXXX. to in fiscal demand support revenue Inventory $X higher component million met our and shortages delay lower This and than collections accelerated goals, approximately planned chain previously material raw risk deliveries. these in in into cash to in-quarter mainly resulted increased purchases

forward, prebuys improve, supply we XXXX. risk, components, cost-effective believe Going seeing we to at could into we inventory where policy. key insurance move expect short-term That our turns a fiscal be to we chain as as consider continue said, will for it

milestone Turning advanced Free total, an in linearity, cash shortages outflow we as discussed. was the to largely to as our a impact I million. was QX delays, saw direct delays related labor flow and well QX impacts to due purchases. cash supplier cash primarily on flow XX. within million as unbilled delivery In and of inventory $XX of on approximately slide receivables, supplier This $XX.X flow for

in We deliveries with QX, either resulting or be the resolved of expect in delays QX the in and supplier the early timing in of fiscal QX to billings cash majority conversion XXXX.

semiconductor and delays experience lead in components times other to and fourth the continue for materials extended We quarter.

similar supply The in continued focused operationally both expect QX, QX, and primarily minimizing to constraints. remains a supply we As financially. on outflow due impacts, cash result, team chain to and free a chain

guidance, I'll slide subside. XX. expect by fiscal guidance now and the with both unbilled receivables to and QX begin as to our year headwinds our incremental that I'll turn normalize assumes for cycles year no on financial acquisition-related expense. noting our full these We starting conversion XXXX cash

While which continue activity experienced expect half QX. with we also QX, delays been to year, continued customers funding first contracting saw order positive. is we momentum flowing in in and conversations we domestic the have our our the down of in in Program

our on discussed. Our fiscal key and outlook that current sale, QX, the XXXX on on other including TRX funding guidance based is FMS Mark programs F-XX driving large programs

a QX, We mix reflecting in headwinds more and margin expect revenue are fiscal margins. outlook adopting pressure program however XXXX, organic and macro continued to we for which cautious

This million, from Adjusted guidance tax our This in a above XX.X%. revenue are performance. We're range $XX.X non-operating fiscal program X% our income restructuring $X.XX and and to and as providing XXXX and GAAP fiscal the EPS revenue prior risks XXXX guidance is we prior XXXX. We or of in XX. expected fiscal in midpoint and expecting billion guidance fiscal $X.XX XX% XXXX. represents we're be share, fiscal activity approximately amortization book-to-bill fiscal fiscal for for benefits impacted bookings million to expect the and acquisition-related to of million from million XX% As range $XX of charges to total Slide $X.XX to XXXX well turn of double-digit XXXX. revenue due not XXXX, the discrete to XX% fourth $X as reflects EBITDA Organically, year-to-date year-over-year. one as XXXX. Adjusted decline now our reducing million other and share. the also be ranges. with to up at supply a is midpoint to for year-to-date to chain our other our adjusted are to of have expenses. by visibility approximately on the company expected respectively $X.XX which and guidance EBITDA $X.XX EBITDA expected is $X $XX.X X% compares This margins X% that largely growth result, guided to Adjusted $XXX for X% be now to billion, million, a $XXX of XXXX representing fiscal be growth now the for enter good expected I'll to reflecting mix. revenue fiscal per per in quarter net XXXX fiscal to reflects

visibility approximately I While EBITDA. we've for QX net records in the light still we're our and QX remainder. revenue, labor while all-time risks, timing, forecasting market headwinds, and discussed, guidance are and chain we're of with to forward there adjusted forecasted supply record adjusted XX% of company revenues coverage backlog of entering And with our income the order solid

programs a We a we and from that strong margin revenue. of The is QX higher perspective. also towards expect our expect weighted production growth mix programs to gross drive licensing margin

$XXX.X and nearly per the midpoint. in income QX $XX revenue prior by million expenses. is impact current million $XX.X million year million. GAAP our share. surpassing $X.XX quarter amortization expected million, or history, the represents to Our related forecast to record Mercury's the at comparison This QX biggest with to $XXX.X expected revenue The last for net $XX.X to be $X.XX to reflects incremental expenses is

Our to expected to million more and to midpoint, million. of the XXX points is adjusted also operating $X.X XX% largely margins guidance QX includes and related than by $XX.X higher gross revenue growth, basis approximately the we share. of Driven leverage from to of expect in range adjusted Margins EPS $X.XX the on expected QX to million restructuring EBITDA QX. sales QX $XX.X be $X.XX per for charges and be other up XMPACT are initiative. at

to We expect including macro continued QX supply impacted flow be to chain continue environment, free for cash by disruption. the

outflows XMPACT investments capital expect program cash associated working with revenue quarter-over-quarter also growth. We and

we cash QX. As free in a a outflow result, expect

fiscal expect We free normalize cash in to XXXX. flow

to record fiscal Mark. we the a at QX This should us in expecting the move X.X we quarter. record are guide turn backlog well don't into as bookings XXXX. that, bookings, above resulting While we the I'll of call back book-to-bill With now in with position over end

Mike. Thanks,

the expand backlog as a through to XX. XXXX Slide organic with this We of XXXX, quarter fiscal margins and Mercury fiscal manage to the continue stage strong growth return strong believe and momentum. we bookings to set challenges our XMPACT. for industry now fourth Turning enters will the

and in secure defense customers. the delayering positions processing, to will investments level industry and are in our in reshoring increased of investments the effects well increased our a by likely and U.S. ahead security. trusted which to us period intersection in longer-term, from the allies in make benefit model continue substantially our at for of our believe well the the that Mercury national We high-tech as well-positioned to growth strategy sitting as business. is microelectronics and supply drive continue chain open to subsystem outsourcing mission at systems ongoing Looking

to and Our team improve while the with like we organically work to disciplined the strategy continue Mercury growing and created appreciation so. doing decade business a for strategy my By full extend to is executing we've expect this significant closing, challenging margins In the they've this to value supplemented on nearly outstanding during I'd integration. M&A our for shareholders time. entire done for

Our proceed With third to operator, purpose executing plan topics. quarter to keep of shareholders. focused those earnings your and is strategic our The please call for please be results and driving today's value that, questions and all ask our outlook the with our on that discuss focus continues you Q&A. we

comes question the JPMorgan. first line you. of Your Thank [Operator Instructions] with today from Seifman Seth

line open. Your is

Thanks guys good and very much afternoon.

Seth. Hi

milestone it’s build a coming why pretty guess So, free you And larger so the more expect where that kind all completion huge grows And flow fourth companies? working EBITDA on more percentage working Mike a the at because you isn't so relative color with more maybe sales can such of the of capital as you there and given aren't payments in on converting? percentage Mercury quarter that goes over working in balance capital advance be outlook. Mike the the time on little appreciate basis, level should a do way commensurate that's not us delivery I maybe to with cash I work in that's and bit the all necessarily of give more unbilled if kind the a that the that's of capital a high associated

Yes.

So so me hit try a questions them. on in let of to couple there Seth

working in in as all, look unbilled in you in QX delays. of of QX, we we And expect the as of cash biggest was happened supply similar terms actually what and of and because capital QX cash to look receivables saw said flow a at use what First impact QX. of we we at as terms chain

So, programs up supply expect of to milestones. When come QX deal while decommits the to you and big are where chain expect at we with QX, in QX. we're some seeing timing you think supply have unbilled program down to the other actually look have do and end be we inventory, we we we going relatively unbilled mentioned and of continue at be it a as flat we to the chain due then to

quarter, the that revenue result heels due at the of billed end on be of expect a to As the timing of large of we deliveries the receivables quarter. up to that

do be from QX, capital we continue it working to in of a So, expect perspective to a use cash.

get environment. And to then discussed. We percentage that. reasons And milestones of look increase as that's supply that think inventory lot we chain the XXXX overtime turns going with -- on down we payments, pressures to customers a in know down We're do around especially abate levels. chain fiscal negotiating Now, we this a been as as of and inventory at revenue. come more a expect we also expect the into of supply into unbilled unbilled the contracts, result our because pre-purchasing that of to time normalize those the over we've with as go milestone as normal fiscal you working coming better as to we our that you XXXX

into been than That some customers, that having is go in to I fiscal there's in reduction in that business increasing. are model your question the capital think our working I we so said, to and unbilled primes inventory So, of think we as going opportunities our answer different general. to XXXX by for terms more have

Great. very much. Thank you

comes Your from the of Arment Baird. Peter next question line with

Your line is open now

Mark, given Mike. all high given think play unrealistic supply guys industry-wide the think the it's Hi XXXX it just back back that's or in an to mean you challenges up kind low just chain that good double-digit maybe Mark business growth for just I model in? but digit question is caught to that Hi, you and afternoon your unrealistic getting are when single of challenges about fiscal

remarks said the the at single it model we So you now at the as yes for good resulting over think digit are as have substantial fiscal the expecting to think about, backlog what on high in that not increase accelerate year a well year terms But XXXX. fourth Peter, and overall XX% had I think level, prepared going in right as over we of the expect to We're growth right us quarter, to we about have what well. time. growth the QX if we I bookings opportunity huge year-over-year we happen continue we in feel actually double guide low digit, in in

think to for organic next it year. as up say, us fiscal call. growth well to I'm But the for positions hold not next I guide XXXX. I going a return So specifically We'll

it. Appreciate Thanks.

question next Alembic from of Your comes Global. with Pete Skibitski line the

Your open. line is

the do I'm two in guys about volatile? also One more little items out? good have things of clarify a terms to are in you fundamentally I of XX% fundamental you Hi, mix of in a the on are that. here right wondering evening, there. but of kind XXXX the changing of if kind mix was of from improve going you it to we drill also. to wanted could feel I some head move heading guys. like greater time you in a is And those Michael production-focused bit margins on a or terms for you into as And direction just into Thanks wondering out to kind quarter XQ, Can you down fourth acquisitions is gross we mix, into than there's you more margin? talked little there. expect couple

Yes.

margins look which In margins at different a XXXX, were saw of have you to model we when XX% than last acquisition, we Optics the fiscal couple pre back were has was parts. XXXX kind there years Physical a of XX.X%. our because impact ours So moving the gross point closer you acquisition expenses, What we was of new business Physical year. Fiscal basis of gross XX.X%. only the and Pete, over program continuity lot we And in from seen the of during fiscal it mix XXX a basis also we sure margins. had points in gross we also to COVID XXXX, we margins testing as on starts. we XXX dilutive good XXXX we make to owned pandemic. gross slightly for the It invested half then of had business had Optics had

look you a it fiscal Optics to year. see XXXX, going don't We've Physical if acquisition. whole had you're is margins at that the for guide gross and we now Corp. So

related of XXXX the mix. program biggest into movement XXXX is development that And new compared fiscal in are fiscal beyond. starts to most around be the have XXX to it's XXXX are transition to a year. going and going fiscal that we to lot into through. pass have then that's some seeing to that due points for inflation, probably gross But chain to able basis to pressure And we going program although that margins production of terms the supply in we're So dilutive been of in

look do we gross as doing gross are XXXX, more that well. we're margin to we programs as of focused that beyond around expansion we a into expanding on production. as those forward of margin So XMPACT And lot as the transition look things fiscal see

the see in expect we got, some QX, Because see what where we in EBITDA And from then guidance. year-to-date. lot been programs we've expansion it's fees and do opportunity. in of margin So expansion seeing just quickly production licensing that's on our you're driving of yes, and to QX QX margin a more QX some gross

things great as F-XX switch out last of you the at spend LTAM new the obviously to will reason have because think into And dramatically, guys like two kind that That's budgets could are also. those hopefully development XXXX, R&D mix and Okay. Once any XXXX whatnot and and to you related of lot go you is there color. is one year got a product new big. look

how about going forward? I'm So wondering just mix thinking you changes opportunity broad for

Yeah.

And programs, programs, in we stage We’ve decline, XMPACT, in programs or right, we generally other the year, substantial you also up-pickup – last had, Buzzard in that on the Filthy rebound. it I impacted right. we've clearly this year impacted year know, And we fiscal do saw early last. Similarly production. as the year. see, think booking this that I lot a as in F-XX We seen was business. sorry, both decline was continue that's think as well won certain next of

CWIP, not expecting franchise are modernization We well part as whole to as of COVID naval as out. the rebound is should impacted and XMPACT go

we at time. to amount to procurement XXXX when that of R&D think business grow, continue while you budget, by that So that, X% an look amount I is said, increase of will the over the in flat, all the – do we – are production have

capabilities So shift business which new its and I in the inline threats well some particular technologies towards, Mercury I bodes think the peer think the in threats, with model. for and emerging seeing you’re budget

we’ve So down and is programs, good I literally our think it to does some aligned business got come model mix.

guys. Okay. for the Thanks color,

of comes next William question Ho from Jonathan You with the line Blair.

now is open. Your line

afternoon. Good Hi.

could Just you you but sense pricing some down pass those that through, you some should we wanted us you. your about execute comment from ability pass-through for think give could bit to some little of pass-throughs Thank to of the and sort a around to that? you not. how – Can pricing drill just maybe I of the think ability customers, your was

Sure.

me, let crack Mike, and the maybe it it to at at throw So over end. take

fixed estimate reimbursable. still POC, you contracts contracts not. look if terms do So typically we we're to the today customer price you commercial with allow is cost roughly on million I $XX the majority our plus price think where operating cost-plus revenue The cost year pass this fixed and of on at largely is higher to the type that

have and insertion costs and our increases production really backlog shorter to the it those have next as our or potentially when Jonathan, That short Unlike a cycles, which the what's increased pass production term depends tech program on So run that depends in backlogs more next effects can customers, either multiyear said, margin, through. allow many we us price really flow frequently during in buffer the XMPACT. to circumstances. being typically does do the who upon of near-term the upon the help

upon addition most the to depends In escalation inflation the in actual that contractual that inflationary passing causes. cases also terms. the to really down costs on was So

every actually XMPACT. with we've pricing our renewal. And that up a procurement on actually of associated we're looking part ways manage that of particular been contract we So inflationary and other can in as doing as in the pressures seeing. ton reviewing for which been XMPACT it work comes We've work streams

RBC. line Your with the Ken of next from question comes Herbert

now Your open. is line

– Mark afternoon, good I Mike. wondered and Hey,

Ken. Hi,

address I of a your XMPACT mean, million targeted from it $XX you Mark, can I you of to sort little if by or expect by year a bit. wondered looks – million million benefit million the $XX slide $XX this end fiscal you like the you're of $XX at XXXX.

restructuring. you're you're seems this the how would this Eastern it well achieved at But sort My far? like opportunity has your to looking changed as think spending how happened you this you've money all -- of, you're the way. expand So the along side is pretty and on about question be there at thinking what's around then flip what Europe so in

Sure.

good So it’s a question.

believe started that and of expansion with that So we the the we around structure drivers be efforts Right forward. at making really pretty of $XX early looking off organizational layers. focused pretty things And progress going now the spans XMPACT. on other like organizational majority I margin -- through And got of The majority we're really million. the was that that to we're Ken on. the think what we we're pleased

In economies a whilst of And we're pricing implemented going in side we initiatives procurement of talked across pricing us and up pricing. particular, in should also the a We've in of management, supply process, which better analytics had a which harvest about time base. the excellence complexity process we much much both enhanced of developing We're to the the business. QX, over will reducing ramping insights and the practices tremendous several scale tool center new of supply amount So to in automation estimating a leverage enable cost little and AI-based the best chain. to allow demand on into drive the work in greater procurement of things. better

going what's with there. pretty happy So on

around of big know, tremendous footprint consolidation our the QX, amount it got and there. is optimization, Another to are we do Fremont looking you completed excellence. Jose and But when facilities we've takes planning. at And time operational We facilities. you -- one of more San in the and

The just and above around we always is R&D average that's critical one driven of investing looking think intersection we're in so final industry growth business And is ROI. got historically. a investment And really defense. that given as efficiency And tech we've well. Mercury's set detailed R&D underway the work at area that and invest the in fact I at the of the a sitting

in that short-term part think, at probably just the capabilities the there's of amount As of we requested been look short-term Ukraine, I upside. of given the nature have as the another assistance tremendous military

F-XX that over or years benefit two are in going said next the we I've do three new sales to to we upgraded As from think with Eastern likely Europe.

Western I both think clearly and sold be Europe Canada. there's potentially going additional F-XX to to

clearly And there's munitions. and then precision air various system. think I missile very opportunities defense in

LTMs, on Patriot. we're We're the [indiscernible]. We're on Aegis, on Aegis. So Shore

across defense expect substantial given in we I upside good think Europe really And decade. course next potential there's spending the the so increase that the just over

Okay, in should But think conversion that prepared returning And provide quick at if XXXX or levels fiscal that's I maybe detail to sort basis, know, of could on flows just about point? normal you real cash helpful. how an refer I you're Mike, to when is this you're yet. about talking normal not or EBITDA something we to a

think see terms other play of provide how we and good cash when seen. that's flow headwinds a in we'll XX% some still I get out of we've going the to to as adjusted Historically, chain that target more Ken mean things fiscal target And a free guidance XXXX of we've supply I forward. we set EBITDA. Yes.

Perfect. Thank you.

of from Ciarmoli Your Michael Securities. Truth comes the question line with next

now open. Your is line

general of basis at in play one to Hi. terms calling XX% to programs. think start mean, guess I get years? But of Good you and the Mark margins advocate can right if I maybe tell now some RDT&E evening, for we're a what new of for start I programs. the the these five calling couple deal of bit. gross target point just you've over savings us the it We've or expanding model in a know you're margin Thanks environment was years. the margins. you're Mike mean, guys. XX% got the some I past versus talking from and got forward I you which mix in over about three going like an run challenges mean, the margins. the mean, I EBITDA new seems to XX% go of devil's taking we -- XMPACT, five-year you've for expansion. seen on view, maybe confidence question. to these the to just I continuous be level trailing here what we a saw

is I confidence high, level think, yes, So Mike. our

think I of a won we programs. bunch have

as initiatives leveraging pricing excellence. things of it I through operational expected to think time as go then major were significant are driving relates done programs managing went which those expansion we a And drivers over some our production from a direct well time. the that to both just XMPACT there. The is footprint as margin think into are and perspective over opportunity. and Procurement the indirect, I

basically drive So analysis we've those. tremendous got and already amount underway stream to of a work with work the the

if above So I on likely -- expansion. we call there from margin don't side. see your you the office want you Mike. going are comment at the number know I threw And it's to but think to out all that

reiterate, production. the other going years. are into we lot are of BXX a as visibility we've T-XX, in Yes. development got like over that like to confidence are that production. the That's plan, those just five Mike, transitioning at No, look now, that's have next programs five-year that things spot a you I'd into of right on. and look to -- think, lot we transition now our programs at they in I if And it

then operating we we're faster put think expenses. we're of see going XMPACT them we five across contract see discussed. as the last investments the made couple our gross I that whole see R&D grow So portfolio. to revenues and top on the over We're to also And take years we than then next think our years. the we've I initiatives expansion based well on leverage mix going is grow going Mark that of as as leverage to margin And over SG&A,

five So I as product we with of confidence be would a years well to current able we'll XMPACT. lot over by just the margins the have as supported the program next reiterate I think that -- expand or current

the forward just do you Got it. kind margin those revenues. see that forward? mean, is prominent Those driver, looking revenues the thinking that high -- programs, a of of mix about I Is from licensing going types in more or becoming of drop-through

going do programs That's business We into forward. production. new margins lower see licensing have rate is have we're some part going Mike full moving revenues of development these expansion that But our to that bigger model. the

it. Got

the the longer-term, that business, if out So the we a is remember and know when business we area tremendous and the focused trusted right? strategy other is since, as you microelectronics as the over was look Genesis back way that important that microelectronics there. microelectronics in when pretty think Mike, And Yes, you of capability. focus X.XD out assets built acquired amount Microsemi. XD on We obviously, from are we

the in that to very it's -- trusted and So as we're of also expansion. early build at actually piece margin dilutive today. a that stage margins be continues and ramp to And will driver a it's to microelectronics

Thanks Got guys. it. Perfect.

Yes.

Austin from with Canaccord. Your of comes next line the Moeller question

Your now open. line is

afternoon Good Mike. and Mark

programs that you my XX% Just the the increase inventory in drove build an talk key know I or mentioned program. the question FMS some in had year-over-year first you of quarter? delineate here can

Yeah.

chain So drove delay working of and on variety of drove was were the disruption. would balance. that because We've the and had XX% we complete. program, I receivable examples and of capital one were got final the was delivery a that up Inventory Austin, supply have quite of we think based Milestones that situations balance things working receivables. unbilled couple a there the a other unbilled was programs few where on

the perspective, that’s we've computer driving the pre-buying more are related buying seeing direct programs, lot electronics a because a where from not what's company. capital in a We're an inventory supplier our really those I products. use company. thing There's nearly that's specific direct decommits. in for XX% from that's an of the we And been we terms that those semiconductors. it's that of capabilities working to mean one of specific material so, we’re is are materials and around delay focused of longest parts our been but And perspective, to inventory. are And programs. And parts we remember one areas

at Do company of sort electronic And sales That's helpful. the for warfare over military years? you driver then the to Just just follow-up. expect the the of Okay. look a foreign threaten be given you key extensive the [ph] or certainly in Ukraine four almost Asia it system, Pacific region to the certain the to is Russia's conflict, if going Islands. China Cresuca like and use of Taiwan use they're Sincacu coming

EW say, based biggest defense. right is now missile probably leveraged with on see, driver Yeah. domain I radar associated the as aero But we also well. would to the for Mercury in what we're

And there's to clearly also. opportunities going there be so,

details. for you Thank great. Okay,

Yes.

from Rieger Your Berenberg. Christopher the with question line comes next of

Your open. now line is

sort over the how spending average, a I stage. remarks. what quarter you've your little bit, on what but kind please there the of prepared know appreciated. months, talk past past Hi, which in it to addressed evening. be of over have particularly about efficiency touched your initiatives was has several and like could these further guys. priorities transpired your Thanks. -- in current on Good are? color you out ask perhaps geopolitical XMPACT-related of the about any sales XX% of R&D, historical of light And may to about light perhaps changed but bit kind a would you But R&D I'd relative

Yeah.

don't focus much. changed -- the I and priorities So our too think areas have

shifts defense belief mission seen of invasion investments with clearly Ukraine. the aligns well processing, we're result of that as in a and a think making open very, our with the and systems, is strategy that we've CXI focus I trust areas that as got secure well we've aligned processing microelectronics the strong around the national very as

the literally around focused those secure the It's on sensor that. what is that areas are job R&D really we're processing, we've built trusted open and our heavily really microelectronics So, focused on systems, mission and company CX.

it. Appreciate Thanks.

Yeah.

Jefferies the comes Sheila next Kahyaoglu Your LLC. of from question with line

Your line is open.

Good afternoon, guys. you. Thank

Hey, Sheila.

have Maybe what's commentary chain revenues? we're revenue to seeing the and on you decline with away other the than contraction much your supply some what going is questions. cash less margin The I impact. expected Can in flow regards square and with cash

So, talk maybe dynamics what can you those them about makes and normalize?

Yeah.

perspective, margin guidance, the revenue a down. on the you're Sheila, revenue from So right and was

We’re the $XX by the range just end top million. brought of down

programs. was by $X million. getting brought That We mix EBITDA the by program key million. into the next some associated down on production was guidance So timing really and pushed reduced with $XX midpoint year of

majority of So that's change from the the revenue and perspective. margin a

a milestones shipment a expected about associated final lot programs. in extended down. from with flow I of decommits lower perspective which flow cash lead as our That So and our component in saw which times we the drove talked in-quarter QX, than cash supplier delayed collections resulted more

we inventory Now But we're we with in and the we the look normalize dynamic still QX. quarter, and the at dealing programs look we're a supply in at as unbilled had think current we to QX. similar expected reductions going to see chain,

And into the So, we fiscal 'XX, get to normalize. chain we as think is supply that 'XX. it's we expect into that cash pushing fiscal really the

a the award color, So, million the really of $X into bit timing in of and contracting was based some One you QX, When in award We delays it was Sheila But that previously book that lowering or and anticipated. into pushed give the a the little and delay F-XX. revenue QX let the you the that look of it timing there more lowered two amount ship programs the QX. upon QX me just jump expected the guidance, little right? bit in we at experienced the revenue moved. in-quarter

second TXX. The was

in more expecting were some And had some $X of we production ongoing combined million 'XX. way expecting year We're that supply impacted award. in efforts. development program those initial we delays the fiscal the that revenue. actual now That drop than were Here

recover were some able the shortfall of we delays that the saw. to So, or we

biggest from of one The And EBITDA into is that other high-margin least side. that the year drivers license as that did perspective, one was the a well. have at margin next we on thing moved clearly

maybe Okay. Thank you one more. then And for that color.

-- they MH-XX what should CDS, CH-XXK, think is. don't I talk big I are and mentioned think we heard how programs sure them I you of you But one forward? contributors about not have going guys about I'm in that how

Yes.

our Physical Optics So, they of came to through us the business. acquisition

As so businesses on next-generation out we have or business. well building mission that hand focused six delayering And know avionics really, a you been fit computing the we've essence into selected and that together in plays really trends.

the on host with additional of different F-XX of work So, great CH-XX, a business F-XXEX, on that programs TXX additional a came on F-XX, some programs. additional MH-XX host work work

wins new So won - two the just past this we and on actually quarter design CH-XX.

they're they but going five So I programs not the in -- they're are top top in say in XX there the forward. -- wouldn't the

are expected us programs and important to for overtime. So grow

Okay. Thank you much. very

Mr.

for questions, you over remarks. any closing appears no call it Aslett, I turn the further to there like to back would therefore are

thank care. We speaking everyone you Well again quarter. very Thank listening. to for you. to Take Okay. you much next look forward

concludes conference you This today's for attending. Thank call.

now You may disconnect.