Q2 2021 Mercury Systems Inc Earnings Call

Good day, everyone and welcome to the Mercury systems second quarter fiscal 2021 conference call today's call is being recorded.

At this time for opening introductions I'd like to turn the call over to the company's executive Vice President and Chief Financial Officer, Mike Rupert. Please go ahead Sir.

Good afternoon, and thank you for joining US with me today is our president and Chief Executive Officer Mark outlet.

If you've not received a copy of the earnings press release, we issued earlier. This afternoon, you can find it on our website at <unk> Dot com.

And slide presentation, and Mark and I will be referring to and posted on the Investor Relations section of the website under events and presentations.

Please turn to slide two and the presentation.

Before we get started I would like to remind you that today's presentation includes forward looking statements, including information regarding Mercury's financial outlook future plans objectives business prospects and anticipated financial performance.

These forward looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially.

All forward looking statements should be considered in conjunction with the cautionary statements on slide two and the earnings press release and the risk factors included and Mercury's SEC filings.

I'd 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 also discuss several non-GAAP financial measures.

Specifically adjusted income adjusted earnings per share adjusted EBITDA free cash flow organic revenue and acquired revenue.

A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release.

I'll now turn the call over to Mercury as President and CEO Mark outlet.

Let's turn to slide three.

Thanks, Mike and good afternoon, everyone I will begin with a business update Mike will review the financials and guidance and then we'll open it up for your questions.

On Florida employees Mercury delivered a solid second quarter of fiscal 'twenty. One we came in above the high end of our guidance with total revenue and at or above the high and for profitability.

Our book to Bill for the quarter was warm and on design wins demand, it's more than $300 million and estimated lifetime value.

At the end of the quarter, we acquired POC and as a result of substantially raising our total company revenue and adjusted EBITDA guidance for the full fiscal year.

We now expect to deliver 16% to 19% growth and total company revenue for fiscal 'twenty, one, including high single digit organic revenue growth, leading to double digit growth and adjusted EBITDA.

Turning to the details on slide four.

<unk> strategy technologies and capabilities are aligned with the major industry drivers and trends.

Business conditions remain robust M&A activity is back and we have the balance sheet and financial strength to capitalize on the opportunities and our pipeline.

Looking ahead to the second half of fiscal 'twenty, one we expect the contracting environment to improve given that the defense appropriations Bill has been signed.

Our baseline forecast remains for overall defense spending to be flat near term and then grow at low single digits over the longer term we.

We expect this growth to be driven by a continuation of the national defense strategy.

And with the change and administrations, we expect another round of fiscal stimulus.

<unk> could over time crowd out discretionary spending including defense.

However, unlike what we saw in the past from sequestration today that seems to be a strong sense of bipartisan commitment to defense spending.

And if new pressures on the defense budget do materialize, we're likely to see and even greater focus on existing platform modernization speed and affordability.

This could lead to greater use of non traditional defense contractors and contracting methodologies and supporting Mercury's ability to grow in line with our goals and objectives.

And we believe that overall mercury is well positioned in this environment to continue delivering high single digit to low double digit organic revenue growth on average over time exceeding overall defense spending growth.

Turning to slide five.

We're targeting the faster growing parts of the defense market.

Wave of modernization occurring and both sensor and effector mission systems on C fly is driving growth across our business.

And with <unk> also well positioned to leverage the fundamental trends that we've discussed in the past.

First as outsourcing by our customers at the subsystem level as a result, we're capturing more content on programs and platforms.

Second we see the impact of the de layering as the government seeks more affordable and rapid solutions, particularly and the C fly and market.

Third is the price flight to quality suppliers, and RF and secure processing and.

And finally, the governments push to created domestic supply chain to secure and trusted advanced microelectronics.

Although the microelectronics IP developed mainly and the U S. Most manufacturing and packaging is still down offshore.

The <unk> remains focused on China's militarization and tightened tensions and the diplomatic technological and economic domains. As a result, they identified U S produced trusted microelectronics is that number one defense technology priority.

Given the investments, we've made and secure processing and the trusted microelectronics. Bob This is a significant opportunity for us.

Although as we've said the fab Buildout and Phoenix has been impacted by Covid. Our long term plan remains on track, we continue to see growing interest from our semiconductor partners customers and the <unk>.

And our strategy and investments seek to address a significant national security threat.

Turning to our financial highlights on slide six Q2 was similar to Q1, given the continued impact of Covid on the extended CR.

But if there is total bookings for the second quarter were up slightly from Q2 last year and we delivered a one <unk> book to Bill.

For the price 12 months bookings were up approximately 10% and our book to Bill was one <unk>.

On the past, we're expecting the second half to be stronger than the first which should lead to a positive book to bill for the full fiscal year.

On new business pipeline is robust and the activity level remains high.

And we're beginning the second half with record backlog on <unk>.

<unk> backlog was up 30% year over year, providing us with strong forward revenue coverage.

Our largest bookings programs and the quarter, we see with <unk>.

Jews and Cmos.

And with revenue for Q2 increased 9% organically and 9% and total.

Our largest revenue programs and the quarter were <unk> the ground radar program F 35, and airborne radar program and Patriot.

We're seeing the benefit of recent design win activity, including our Thompson and several classified radar programs.

These programs are beginning to transition into production and others will over time.

And we're participating in more than 300 different programs and platforms, many malls and in the past.

And no single program is expected to be more than four percentage of total revenue this fiscal year.

Similarly, as we look out over the next five years. We currently expect no single program to accounts for more than five percentage of total revenue.

As I mentioned on design wins in Q2 total more than $300 million and estimated lifetime value the launches for the second consecutive quarter related to trusted microelectronics.

Given current activity levels and the strength of our design win pipeline. We believe the second half of fiscal 'twenty. One may be more robust for example, and platform and mission management, where I will focus on building out our avionics and mission computing solutions.

Acquiring PSC increases, both our scale and capabilities and this part of our business POC strategy and culture fit well with us and we're thrilled to welcome the team to Mercury.

Turning to the bottom line Mercury continued to deliver strong results and Q2 <unk>.

Consistent with our guidance GAAP net income decreased 19% year over year, while adjusted EBITDA was up 6% exceeding the high end of our guidance for.

For the last 12 months GAAP net income and adjusted EBITDA were up 28% and 18% respectively.

Free cash flow for Q2 came in at 22 percentage of adjusted EBITDA as Mike will discuss.

Turning to slide seven amidst the pandemic will continue to invest and the rollout of weekly COVID-19 testing across our facilities. This is the core elements of our operational and business continuity strategy.

We began testing early on back in July.

We believe that as a result Mercury is ahead of most other companies operationalize and Covid testing and behavioral based health and safety protocols.

Putting our employees at the centralized decision, making has proved to be the right thing to do for all the company's stakeholders.

All of our facilities have remained open and productive through the pandemic.

Looking ahead it is encouraging to see the boxing rollout that said, we do expect that our business culture and the investments on the protocols that we've put in place will continue well into calendar 2021.

Turning to slide eight M&A.

M&A remains an integral part of our strategy Mark.

After the recent hiatus and activity. We're pleased to have completed the acquisition of POC.

We believe that we're well positioned to continue supplementing mercury's high level of organic growth with accretive acquisitions going forward.

The market is very active on our pipeline is robust with multiple opportunities of varying sizes. All in line with the core of our strategy.

We believe that Mercury is seen as a great buyer, given our purpose culture and values.

Strategy and positioning and business performance.

And we're in a good place in terms of our financial capacity and liquidity.

And we intend to remain disciplined and pursuit of strategically aligned deals that can be accretive and both the short and long term.

Turning to slide nine.

Overall, our strategy remains the same to deliver strong margins, while growing the business organically and supplementing organic growth with disciplined M&A and full integration.

We believe this strategy will continue to generate significant value for our shareholders over the long term as we execute our plans and find areas.

The first is to grow our revenues organically at high single digit to low double digits, averaging 10 percentage over time.

And to supplement this high level of organic growth with acquisitions.

And second is to invest and new technologies, our facilities manufacturing assets and business systems as well as and our people.

Third is manufacturing and sourcing as well as driving strong operating performance across all manufacturing locations.

And we're seeking to grow revenues faster than operating expenses. This should allow us to continue investing and organic growth, while maintaining strong operating leverage and the business.

And finally, we're fully integrating the businesses, we acquire to generate cost and revenue synergies over time.

These synergies combined with other areas of the plan should produce attractive returns for our shareholders.

Turning to slide 10.

And this strategy has worked very well over the past six years, we're confident and we will extend this record of success in fiscal 'twenty, one and beyond.

We have clear purpose and positioning and a unique business model sitting at the intersection of Tech and defense, we have a highly engaged workforce and our COVID-19 related business continuity protocols and working well.

And we're in the right markets and aligned with government and industry trends, we continue to make growth focused investments and our people our technology and our trusted domestic manufacturing assets M&A is back on Mercury's balance sheet is in great shape.

We anticipate high single digit organic growth for the fiscal year and non with POC, 16% to 19% total company revenue growth, leading to double digit growth and adjusted EBITDA with that I'd like to turn the call over to Mike Mike.

Thank you Mark and good afternoon, and again everyone.

Q2, and a quarter with strong financial performance.

Net income and GAAP EPS were at the midpoint and high end of our Q2 guidance respectively.

Total revenue adjusted EBITDA, and adjusted EPS exceeded our guidance.

We delivered solid bookings and concluded the quarter with record backlog.

In addition on December 30, we completed the acquisition of POC, which we funded with a combination of cash on hand, and our revolving credit facility as a result of the acquisition as well as Mercury is strong organic performance and the first half we are increasing our full year fiscal 'twenty one guidance for revenue net income adjust.

And EBITDA and adjusted EPS.

Let's turn now to our Q2 results on slide 11.

As I mentioned, we closed the acquisition and POC at the very end of the quarter. As a result, POC had an immaterial impact on the operating results shown on slide 11.

Mercury's total bookings for Q2 were $210 million up <unk>, 2% year over year for the last 12 months bookings are up 10% our bookings continue to be driven by our key markets, including radar EW and sephora.

Our book to Bill for Q2, with one point out and for the last 12 months, our book to Bill was one <unk> for.

For the full fiscal 'twenty, one we continue to expect bookings with a book to bill above one.

Mercury ended the second quarter with record backlog of $945 million, including POC and increase of 30% compared to Q2 of fiscal 'twenty.

Backlog expected to ship within the next 12 months was $598 million up 15% compared to Q2, 'twenty, providing a solid visibility into the second half of fiscal 'twenty one.

Total company revenue increased 9% from Q2 last year that $210 7 million exceeding the high end of our guidance of $200 million to $210 million.

Organic revenue also grew at 9% euro per year.

PSC, which is considered acquired revenue in Q2 contributed revenue of only 200000 during the quarter.

Mercury's revenue base continues to be highly diversified with no single program, representing more than 10% of total revenue during the quarter.

Gross margin for Q2 was 42, 1% compared to 45, 6% and the second quarter of fiscal 'twenty and.

In addition to favorable program mix and Q2 last year. The decrease primarily reflected $3 $1 million of direct COVID-19 related expenses charged to cost of goods sold this quarter. This had a 150 basis point impact on margins.

Operating expenses in Q2 were up 4% driven primarily by an increase in R&D expense.

R&D was $28 1 million and Q2 up 14% from Q2 last year.

For the first half and last 12 months, R&D increased 19% and 27% respectively.

R&D as a percentage of sales was 13, 3% compared to 12, 7% and Q2 and 20.

This increase was driven by new opportunities and avionics and mission computers secure processing and radar modernization as well as continued investment and our microelectronics business.

Q2, GAAP net income and GAAP EPS were down, 19% and 21% year over year, respectively.

The decrease was primarily driven by $3 $3 million of direct COVID-19 related expenses, and a $1 1 million increase and acquisition related expenses and.

Adjusted income and adjusted EPS, which add back these expenses were both up year over year.

Adjusted EBITDA for Q2 was up 6% year over year to $45 3 million above the top end of our guidance of <unk> $42 million to $44 million driven by strong revenue and profitability.

Adjusted EBITDA margins for Q2 were 21, 5% compared with our guidance of 21%.

Covid related direct expenses totaling $3 3 million were added back to adjusted EBITDA in Q2, primarily related to the weekly employee casting that Mark discussed we also incurred expenses for payments from our employee relief fund as well as per supplies and services required for Covid related workforce safety protocols.

We charged approximately $3 1 million and these expenses to cost of goods sold and approximately 200000 to operating expenses.

And Q2 operating cash flow and free cash flow were $23 nine and $10 2 million respectively. The declines year over year reflected the continued investments we made this quarter and Capex R&D and Covid derisking.

Slide 12 presents Mercury's balance sheet for the last five quarters.

Q2 fiscal 'twenty, one reflects the acquisition of POC.

We ended Q2 with cash and cash equivalents of $109 million, our cash balance was down $130 million from $239 million at the end of Q1.

This reflected the acquisition of POC, which we financed with a $150 million of cash on hand, as well as $160 million drawn from our revolving credit facility.

The decrease was partially offset by the cash flow, we generated and the business.

From a capital structure perspective, Mercury remains well positioned with continued flexibility and great access to capital our net debt at the end of the quarter with minimal and $51 million, we still have significant capacity for future R&D and capital investments to drive organic growth as well as M&A.

As Mark said, our pipeline of M&A opportunities remains strong as we begin the second half of fiscal 'twenty. One we expect to continue to be active and we have substantial financial flexibility to continue to execute on the M&A portion of our strategy.

Turning to cash flow on slide 13 free cash flow from Q2 was $10 2 million, representing approximately 22% of adjusted EBITDA.

We had approximately $7 1 million of onetime cash outflows during the quarter. These.

These included $3 5 million and direct Covid related cash outflows of $2 2 million payment to <unk> shareholders for a tax settlement and $1 4 million of POC acquisition related expenses.

Together these items reduced our free cash flow conversion ratio by approximately 16 points.

Cash flow from operations. This quarter was $23 9 million compared to $32 1 million and Q2 'twenty.

The decline was primarily driven by the completion and payments for the inventory, we procured and Q1 as well as the timing of shipments and related billings and the quarter.

And this was partially offset by sources of cash across other working capital accounts.

Capital expenditures in Q2 were $13 8 million or six 5% of revenue and were primarily related to facility build outs, and Andover, Massachusetts, Cyprus, California, and Hudson, New Hampshire, along with continued investment and our microelectronics business.

I'll now turn to our financial guidance, starting with Q3 on slide 14.

Our guidance for the third quarter and the full fiscal year includes estimates for POC.

The Q3 guidance also includes direct COVID-19 related expenses of $3 million.

Our guidance for the full fiscal year does not include direct COVID-19 related expenses for Q4.

For Q3 fiscal 'twenty one we currently expect total revenue and a range of 245 to 255 billion representing growth of 18% to 23% compared to Q3 fiscal 'twenty.

At the midpoint. This guidance includes approximately $30 million of revenue attributable to the PSC acquisition.

Q3, GAAP net income and is expected to be $15 nine to $17 8 million or 29% to 32 per share.

On a year over year decline as a result of $6 2 million or <unk> 11 per share of non operating investment income and discrete tax benefits that we had in Q3 'twenty that we will not have and Q3 and 21.

Additionally, our Q3 'twenty one guidance includes an incremental $2 $6 million of Covid related expenses.

Q3, adjusted EPS is expected to be 59 to 63 per share.

Adjusted EBITDA for Q3 is expected to be 52 to $54 5 billion representing growth of 10% to 16% compared to Q3 fiscal 'twenty adjusted.

Adjusted EBITDA margins are expected to be 21 to 21, 4% of revenue.

We expect free cash flow to adjusted EBITDA conversion to reflect continued investment and expansion capex and R&D as well as COVID-19 related expenses.

Turning to slide 15, our guidance for fiscal 'twenty. One reflects the second half addition of POC on top of the full year of strong organic growth we previously anticipated.

For fiscal 'twenty, one and we now expect total company revenue of $925 million to $945 million.

This represents 16% to 19% growth from fiscal 'twenty and includes two full quarters of POC as well as high single digit organic growth.

As we stated when we announced POC and <unk>.

Company had calendar year 'twenty revenue of approximately $120 million we.

We expect the business to grow at a high single digit low double digit rate and calendar year 'twenty, one weighted toward the second half of the calendar year.

The midpoint of our guidance for fiscal 'twenty, one assumes that POC will generate approximately $60 million and revenue for Mercury and <unk> and $10 5 million of EBITDA were approximately 18% EBITDA margins.

We expect revenue from the POC business to continue to grow at a high single digit low double digit rate in fiscal 'twenty, two and EBITDA margins to expand.

Total GAAP net income on a consolidated basis for fiscal 'twenty. One is expected to be $69, one to $72 8 million or $1 24 to $1 31 per share.

This is down year over year as a result of approximately $21 million or <unk> 38 per share of non operating investment income and discrete tax benefits that we had in fiscal 'twenty that we will not have and fiscal 'twenty one.

Additionally, our fiscal 'twenty, one guidance includes approximately $8 $7 million of direct COVID-19 expenses compared to $2 6 billion and fiscal 'twenty.

Adjusted EPS for fiscal 'twenty, one is expected to be and the range of $2 35 to $2 42 per share. This.

This is up 2% to 5% compared to fiscal 'twenty as a result of both our organic performance as well as accretion from the POC acquisition.

This increase was partially offset as a result of a discrete tax benefit of approximately $8 million or <unk> 15 per share and fiscal 'twenty, which is not expected to recur in fiscal 'twenty one.

Mercury is adjusted EBITDA for fiscal 'twenty, one is expected to be and the range of $201 million to $206 million and increase of 14% to 17% from fiscal 'twenty and.

Adjusted EBITDA margins are expected to be approximately 21 seven to 21, 8%.

Again. This includes the POC, which is expected to have an approximate 30 basis point dilutive impact on our margins in fiscal 'twenty one.

And as I mentioned, we expect Poc's EBITDA margins to expand as we integrate the business and the Mercury.

We expect capital expenditures for fiscal 'twenty, one to be approximately 6% to 7% of revenue as we continue to invest and growing the business.

Finally for the year, we expect free cash flow to be approximately 30% of adjusted EBITDA.

This conversion level is primarily driven by our expansion Capex and Covid investments.

Turning to slide 16, Mercury delivered solid results for Q2, driven by strong organic growth and another quarter of great execution by the team.

We also announced and completed the acquisition of POC.

Looking ahead to HD, and we're well positioned to continue deploying capital for strategic M&A, while executing on our long term financial model of above industry average organic revenue growth and EBITDA margins.

With that we will be happy to take your questions. Operator, you can proceed with the Q&A now.

Thank you, ladies and gentlemen, if you would like to ask a question. Please press Star then one on your telephone keypad.

Courtesy to other callers, we do ask that you limit yourself to one question. So that all callers have a chance to pose a question.

And our first question is going to come from the line and the Peter.

Covid ski with Alembic global.

Hey, good evening guys.

And Mark maybe on POC can you add any more color in terms of the potential revenue synergies that you guys envision from the deal.

Does this allow you to enable to bid on larger programs are.

Current customer sets.

Yes, I'm just wondering you've done deals already in that space and I'm wondering what gets you that you didn't have before.

Sure. It's a good question Pete.

And this is largely a revenue synergy deal.

As you know it does take time for those revenue synergies to actually occur and defense is based upon the lifecycle of the programs, but one other things that we particularly liked about the business is the broad range of programs that.

And don't overlap with Mercury, so strong presence on the F 18 F 15.

V 22.

H 60, so they've got a range of programs and what we've been able to do over time is to basically.

And through some of Mercury as other capabilities and likewise, what we've been able to do and what we're seeing right now is the opportunity of Mercury taking PMC.

Capabilities into some of our programs and particularly on the go very very strong capabilities in the storage demand.

Some of our largest programs are interested and notwithstanding more about what they could provide.

And they've got some very unique capabilities and mission computing, where we see opportunities as well so a lot of opportunity and I think the cross selling and potentially upselling overtime page.

And I appreciate the color and just one follow up.

Capex wise, and obviously kind of in line with Mercury as Capex levels on a percentage of revenue.

You need a POC.

Yes, sorry.

Okay.

And.

And their capex levels are lower than ours, we haven't provided specific guidance, but.

In terms of our maintenance capex of 3% to 4% and as you know we've been investing behind hired and that bears a lower than and those levels.

Lower than your maintenance level.

Yes, lower than 3% 4%.

Okay. Thanks, so much guys.

Thank you.

Thank you on and our next question will come from the line of Peter Arment with Baird equity research.

Yes, good afternoon, and Mark and Mike on next quarter and Mark.

I think you both mentioned that M&A is back. So obviously you just closed on the POC deal, but maybe you could just maybe highlight if you are you seeing a change in cadence in terms of just overall deal activity and any color on that and do you think just the flattening budget environment might accelerate things for you.

Sure. Thanks Peter.

No.

And the opportunity pipeline is pretty robust right now and then.

And I think we set the same last quarter, there's a lot of opportunities.

Some of which we've been.

Developing relationships with companies for quite some time and honest was the case with PNC and others.

Processes that.

We are invited into.

On the deals themselves I think range in terms of size from from deals signed that we've done in the past to deals that are much launches and not.

For us we're going to stick with the current themes that we have.

Those all using M&A to gain capabilities not to core markets C fly and as well as sensor and effector mission systems as well as to penetrate those markets decline.

The market is very active.

It's hard to tell whether it's driven by the defense budget or.

And just where interest rates are and the cost of money, but overall.

Very very dynamic marketplace, Mike I don't know if you want to add on it.

Yes, I think you hit it on the pipeline is strong and Peter and we've been active and as I said in my prepared remarks.

And after closing PSA and still have a lot of financial flexibility and good balance sheet capacity to continue to execute on the pipeline.

I appreciate the color I'll leave it at one question. Thanks.

Yes.

Thank you and our next question will come from the line of Greg Konrad with Jefferies and company.

Jeff.

Sorry.

And there are enough and one day.

Disclosure with the launch of a new family of open architecture solutions.

Open architecture kind of stands out can you maybe talk about the opportunity and how this maybe expand the opportunity set.

Sure. So open architectures, Greg as you know and it really being a foundational.

Part of Mercury strategy, so as a horizontal player and the industry and it.

A company that is investing in innovation and industry, leading levels. What we seek to do is to design and technology that can be rapidly reuse and open systems architectures.

That obviously drives affordability and draw.

And more rapid technology upgrades and we've historically done mark in the processing and domain.

And as we grow our business.

RF as well as mixed signal, we are now taking those same principles and applying them into those technology and earnings as well and I think that's what's really driving the growth that we're seeing.

Cross the business and both C fly and as well as and sense of modernization.

And then just one on cash and you mentioned, 6% to 7% of revenue per Capex. This year maintenance Capex of three four and the targeted conversion of 30% for this year can you maybe talked about how capex trends over the next couple of years and given maybe some of the Covid investments run off how are you.

Youre thinking about conversion and maybe getting back to closer to your target rate.

Sure.

So yes.

<unk>.

And here and I mentioned some of the things that we're investing and in terms of the other.

Trusted microelectronics from Capex perspective.

The facility in Andover, some of our facility and Cyprus.

Those are investments that we've been making over the last 12 months and we expect those.

And to ramp down as we complete the <unk>.

Build out this fiscal year.

And that Hasnt been said.

And as you know and our expansion capex tends to be tied to our acquisitions and consolidated facilities and so.

So going forward.

Our capex will really be driven by that of the <unk>.

Barring that I do see over the next year or so getting back down to the maintenance capex level, they've been settled through the three and 4%.

And it's hard to tell on the Covid investments, we've made it a priority to continue to invest so per.

In fact, our employees and business continuity and we're going to continue to do that.

And as we think it's.

As long as we think it is needed and so hopefully as we get into fiscal 'twenty, three and beyond those cost out.

Ramped down and.

Once we do return to those maintenance capex levels, and a COVID-19 expenses dropdown.

And I expect that we'll be at the free cash flow conversion levels debt target that we set.

Thank you.

And our next question and that's going to come from the line of Collyn and Ken Dillon with Citi.

Got it thanks for the question appreciate it.

And you just talked about.

And <unk> role as a merchant supplier and an increasingly shrinking.

Smid A&D asset pool and then.

And discuss a little bit about what youre seeing in terms of the change of administration you discussed horizontal extension.

And what and do administration might mean for your ability to pursue future deals.

Sure.

It's a good question so and my belief is that the department of defense would benefit from.

And a strong and robust tier two and.

Industrial rates.

And.

And specialist company and they are able to drive capabilities more quickly and more affordably and it has.

The ability and the willingness to actually invest and innovation.

And Mercury and certainly one of those companies right R&D level. This year is 13%.

That is way above the 2% to 2.5% industry average and how that's playing out is really.

With respect to our growth levels.

And this all seeking to work with companies that can partner with who can invest and innovation that can benefit not on any then book the Doj and.

That's very much what we're doing we're investing in innovation and as Mike described we are also investing and the capital improvements.

And size of our infrastructure, particularly around manufacturing offsets trusted domestic manufacturing offsets that is so so important in today's world with just where much of the and the technologies manufactured and the commercial world. So.

I think the Doj would benefit from having a strong industrial base and yes.

Mercury is clearly one of those companies focus on providing secure and trusted.

<unk> solutions.

Perfect. Thanks, and good luck.

And our next question will come from the line of Michael share Mali with truest.

Good evening guys. Thanks for taking my question and measure results.

And it's.

Just me and.

And maybe semantics, but I think the organic growth you guys are looking for 8% to 10% and now calling on high single digits I realize nothing's absolutely changed you are adding a $60 million and per POC. The prior guidance stays the same but has anything changed with your organic growth environment.

It sounded like with the budget and place clearly the bookings environment improved a bit I would've thought that maybe would have translated as well on to.

The organic environment, but any color there.

Yes, it's really more just a refinement of the prior range that we gave Mike.

I think as I said in my prepared remarks.

The second quarter was really remarkably and alike.

We did see continued in part with respect to Covid slowness.

And as well as the extended CR. So although we were pleased with the bookings the movie Werent quite as high as what we would've liked.

And obviously as the year progresses.

And so fundamentally the when you look at the guidance the organic guidance for the total company and.

Layering on top.

And the.

Six months.

C.

We expect to deliver another year of both double digit growth and overall revenue and double digit growth and adjusted EBITDA. So it is going to be another really strong year for us.

Got it just sorry, just one more on a follow up to that.

Outsourcing component of your growth driver I mean.

Thank you and have toric budget downturns that do you think anything changes there I mean, if some of the larger price get squeezed.

I think they keep more work and how maybe that they've done historically to help absorb absorb their overhead or or do you think that that trend can continue.

And a down budget environment.

Yes, I think the trend continues Mike.

Particularly from what we do.

Again, because I think that's going to be a greater focus on innovation, that's going to be a greater focus on potentially and affordability.

And we plan to both of those trends again, if you look at our R&D levels.

This is the Intel divisions of our customers with similar things we are dramatically higher.

And we're leveraging that innovation across the <unk>.

Many customers and many.

And programs and so when they do a make or buy purchasing decision moorefield.

And what we will find is that it's far more affordable.

To acquire the capabilities from Mercury than it is to develop it in house and.

And we.

Because of the investment model.

And are always go up and latest generation of technology, which actually helps them.

Net bidding for new business. So we absolutely see the outsourcing trend is alive and well.

And if you look at the growth in our sub systems.

In the second quarter, which is really where we're seeing the outsourcing.

It was up 75% year over year and.

And so we feel very very substantial growth there is certain programs and transitioning into production.

And.

We're pretty pleased with.

The Hawaii, and which things that go on.

Got it thanks, a lot guys.

Thanks, Dan.

And our next question is going to come from the line of Kenneth Herbert with Canaccord Genuity.

Hey, good afternoon, and Mark and Mike.

You both sound pretty optimistic on on bookings and the second half of this year and Mark can you provide any more detail on the.

Not only have a budget, where you are where do you expect to see that coming from and and maybe just how sort of how strong the book to bill will be and the second half of the year.

Based on the sort of elevated bookings it sounds like you've got good visibility on.

Sure. So we do expect.

A positive book to Bill.

Organically.

For the full fiscal year.

Yes, we just obviously acquired POC. So we're getting our arms around that and terms. It just won't that bookings might look like but organically. We are expecting a positive book to bill in terms of where the the.

The potential growth is coming from.

The year level.

And we see opportunities and add on rail.

E <unk> as well as before and he those other kind of the three.

Inc potential drivers bookings growth with a year level.

That's helpful and if I could just ask specific question on on some of the aircraft programs and there clearly seems to be a push to extend the life and in fact, we start production in the case of the.

And <unk> are those impact.

Actual programs for you as we think about sort of modernization and requirements there or how.

How do you think about the opportunity of some of these older platforms relative to the newer systems.

Yes, so we obviously participate in both enough to actually a kind of a nice element of our model.

And we're obviously the ceiling next generation systems as the government is and its focus on those but as we know the.

And the platforms change fall less often and EMEA will electronics and sign them.

And yes, we are clearly seeing a wave of modernization and the radar and Maine.

Our radar business was up.

Pretty substantially.

About 75% in the second quarter year over year.

And as a result of that modernization and we're also seeing a wave of modernization E. W and I think and lot of that is driven by.

The great power competition with threats that we see coming out of the Asia Pacific.

And then yes, I think as you step back what we've also seen and really the major reason that we moved into.

<unk> once you start to touch the census themselves.

Drive the corresponding knock on upgrade into all the.

Processing parts of the platforms themselves want and platform and mission management.

This is obviously, where the acquisition of POC fit along with the prior acquisitions that we've done and space.

As well.

Around commodity and control intelligence processing. So our goal quite simply is to be able to provide all of the different types of processing solutions that go on board systems that require trust and secure processing and we believe we got from industry leading capabilities.

Yes.

Our appropriate for both modernization as well as new systems.

Great. Thank you very much.

And our next question is going to come from the line of Seth Sigman with J P. Morgan.

Okay. Thanks, very much and good evening guys.

And I accept.

So wanted to add.

Ask about outcomes and I think you mentioned it was the most maybe the fastest growing.

Program.

In Q2, and I'm not sure if that's part of.

High growth and radar.

That you talked about.

But given where that program is on the development process and given the impact that it seems to be having on results and Raytheon, which is basically a lot of cost.

Is that a program that.

Considerably and if you could give us a sense of considerably below sort of your typical gross margins and then sort of what the margin opportunity is on on.

On that.

Over time, and how the mix of <unk> versus other growth might play out over time in terms of how the gross margin evolves.

And I didn't talk about it from.

From a high level, and then Mike and maybe kind of related thoughts.

And the financial model So L towns.

Walt.

Number one revenue program in the first quarter.

And it was along with free all the.

Radar programs to ground radar programs and and it up on our radar program. So you clearly are seeing there.

Wei and <unk>.

Great on modernization.

We're seeing a similar thing.

At the EBITDA level.

And with a $3 on E W.

Probably going to be the major drivers of growth.

The <unk> program as you know is something that we've been investing our own internally funded R&D on for <unk>.

Several years now and it's been a substantial driver of all internal R&D funding.

And Raytheon has clearly gotten the benefit of the program itself.

And in the very early stages right, we're delivering new initial technologies and capability associated with the photos and <unk> systems.

And the Raytheon and over time and believes that upwards of 250 Patriot radars.

Could be subject to these upgrades.

And.

And yes, I think and again as we've talked about in the past.

And this is a substantial opportunity for mercury. So the program along with some of the other programs that we mentioned in both Q2 as well as for the full fiscal year.

All in the early phases and.

As a result was up and margin profile is typically lower than when the Moe and the programs themselves.

And the full rate production, so little bit dilutive.

Overall.

And as well combined with the level of internally funded R&D.

And if you want anything to that Mike.

I think you hit it I mean debt Thats like a typical program and it is one of our biggest and as our biggest and Q2 and over.

For the first half of the year debt.

Our biggest program and it has lower margins, but a lot of our.

Bigger programs at the beginning as they ramp up as Mark said, and then we have higher margins and pay down debt.

The full rate production and from an R&D perspective.

Mercury perspective, a lot of our R&D on that program has been on over the last couple of years.

And a lot of that is behind us.

And as we were investing going all the way back to <unk>.

And three four years.

Great. Thanks, Thanks very much.

And our next question is going to come from the line of Jonathan Ho with William Blair <unk> Company.

Hi, Good afternoon, just one question from me when it comes to your trusted and cyber program and he referenced that earlier and the discussion can you talk about how that's maybe playing out and some of the programs and per.

Potential margin impact as well.

Yes.

Jonathan.

And unfortunately, we're going to be able to link gas and dock capabilities to specific program just given the nature of what we do.

But yes, we have invested.

<unk> literally and.

Over the last.

10 years now.

On our specialized processing capabilities and.

And we believe that and we're actually on a fourth generation of it we believe we have industry leading capabilities debt.

And the bonds.

And into next generation trusted microelectronics, all the way up through.

And there is system level capabilities and.

And is that type of processing.

We believe it is crossing the chasm and its driving significant growth inside of the business and just some full charities.

Total <unk> specifically the areas on the programs just to the nature of the.

Understood. Thank you.

Thank you and our next question will come from the line of Noah <unk> with William Goldman Sachs.

Hey, good evening growth.

Hi, Noah.

Are you, saying <unk> already your single largest program.

Health plans is the largest program and Q2.

You know it can jump around quarter to quarter.

And period to period.

This is the first one is the largest and Q2 and we expect it to be the second launches this fiscal year.

Could you size it and the fiscal year.

And Ah.

And I don't think we've and.

And I'm thinking well, it's 5% of the total and in the and the second quarter and it's running about.

And maybe a little bit less at the level.

I mean, how many how many how many multiples of the current run rate of <unk> become for you and the programs.

For reproduction.

Well I guess it depends on how quickly that full rate production occurs and.

And what we're delivering right now is technologies associated with the <unk>.

Initial.

Prototypical systems.

And that Raytheon.

Raytheon is on the contract for.

After that we will see what happens in terms of the production awards.

And the thing that's interesting to me that else on.

The evolution of the program itself right and you may remember so on it out as a typical.

Contracting program and along the way transition to and Otas, just based upon the capabilities and the needs the EOG needed it.

And it's moved very very rapidly.

Probably yes.

Probably the program there is move the fastest into allo Rip and I can remember in recent history. So.

It's an important program based upon <unk>.

On the sides.

The potential over the long term.

Growth from Mercury.

Growth for Raytheon as well as a really important set of capabilities to deal with the emerging threats that.

That we are facing information.

Yes.

And I don't know if it was moving that quickly I guess for you so thats interesting.

If I'm just staring at them from multiyear model here you have grown the company has grown total revenue.

And at least 20%.

Five years on our own now.

And now if you add up a little bit above the higher and you'll hit that 20%.

Wanted to get a lap and it's going to be inorganic for half of the year. So 22.

And if you did one more acquisition and 22 is going to be 20%.

And then if im staring at how much balance sheet firepower, you have and combining that with your organic target.

And is it reasonable at this point for me to just assume the company gross total revenue 20%.

Through the middle of the decade.

So it's a great question right.

And we've seen on slide in our Investor day debt right, which the mall and as we're speaking to generate high margins expressed and not more and with greater than 20%.

We're looking to grow the business organically.

And at high single digits to low double digits, averaging roughly 10%.

Yes.

And then to layer on top and an additional 10% through M&A.

<unk> done very successfully.

As you said over the last five years.

And yes, we think that we can continue to deliver high single digit low double digits organically.

And will decline as we kind of look out based upon what we see right now.

And as we mentioned and the M&A environment is extremely robust.

And I think the balance sheets and great shape. So.

And there are many things that we can continue to execute against the model and it generated so much value to shareholders.

As we look forward now.

I guess I was there just the numbers okay.

Mike If I take your if I go into the range for the <unk> guidance components, you gave and and the full year guidance components you gave.

The <unk> margin needs to be down.

Down a little bit sequentially and on the <unk> margin needs to be up from that.

It looks like about 250 basis points is that accurate and then why is there so much.

Jai ratio and I guess on that.

And the back half of the year.

Yes, and I'll, let me make sure I understand your question and let me add.

Answer on that.

And the annual levels of debt.

To give you and where we're coming out on margins and EBITDA margins from the perspective on our guidance 21, 7% and 21 eight.

That does include plc, which is dilutive.

And so.

30 basis points diluted to the margin salvia and back that out we're at that 2002, and 1% and where our guidance for EBITDA was.

Last last quarter. So we're continuing to expect that for the year that does imply and EBITDA margin in Q4 that is.

That is higher we expect to have higher revenue if we look at.

Quarterly revenue what that implies for Q4, which is going to give us operating leverage there as I think gross margins will be slightly higher in Q4, pre COVID-19 expenses, when and where in the first half of the year. So that's what's driving Q4, which is driving the annual EBITDA guidance Mark.

And guidance.

Okay. That's helpful and last one on can you tell us what POC added to the total company backlog.

Okay.

Yes, we haven't broken that out but you can look into it now on a book to bill for the quarter wins with one so our backlog quarter over quarter on an organic basis.

<unk> was flat.

Right, Okay got it.

Okay. Thanks very much.

Excellent.

Once again, if you would like to ask a question. Please press star one on your telephone keypad.

And our next question is a follow up from the line of Peter <unk> Kubicki with Alembic Global.

Yes, Mark kind of a tough question and answer I think but and theirs.

And then a lot of talk about Dod and potentially kind of moving large buckets of money around and then fiscal year, 'twenty, two and beyond and budgets.

Maybe migrate out of the army towards maybe maybe air force and maybe build more ships.

I know, it's tough but from a gut level did you get a sense of how that could impact mercury private work on or is it a push.

Thoughts there if we do see that money moving around.

Yeah. So.

<unk>.

So we have the majority of our business is tied to add bolt on enable.

We are seeing a lot of growth in ground.

But the ground growth that we're seeing is not tied to force structure by number of.

From these or anything like that it's really Paul it's really linked to <unk>.

Ground radar modernization right <unk> is a great example, and there is a couple of others.

And that we're involved with.

So I.

I think it's probably true that the.

Amit typically ends up being a bill payer and.

Yeah.

During different cycles and this could be.

Right.

But those monies that are likely going to moving to and.

On both the naval and the add on demand just given the great power competition and the focus that we have on the Asia Pacific region.

Well as other high and the salaries, including Russia.

So we're not we didn't other big exposure to ground.

And all of them, though is it.

Say radar modernization, which we think look pretty good.

And the other parts of the business look pretty solid.

Okay, great. Thank you.

Thanks.

Thank you.

Mr answered it.

There are no further questions. Therefore, I would like to turn the call back over to you for any closing remarks.

Okay, well, thank you very much everyone for listening in and stay.

Site, and we'll look forward to speaking to you next quarter. Thank you.

Once again, we'd like to thank you for participating on today's conference call you may now disconnect.

[music].

[music].

Okay.