Q4 2021 Mercury Systems Inc Earnings Call
Officers, Mike Rupert. Please go ahead Sir.
Okay.
Good afternoon, and thank you for joining US with me today is our president and Chief Executive Officer, Mark Avalon, 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.
On slide presentation that Mark and I will be referring to is posted on the investor Relations section of the website under events and presentations.
Please turn to slide 2 in 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 as well as Mercury's new value creation initiatives, which we call impact.
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 2 in the earnings press release and the risk factors included in 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 Aslib, Please turn to slide 3.
Thanks, Mike Good afternoon, everyone and thanks for joining us I'll begin with a business update Mike will review the financials and guidance and then we'll open it up to your questions.
Our results for Q4 and fiscal 'twenty, 1 was strong led by robust design wins and double digit growth in revenue on adjusted EBITDA.
However, a more challenging year than we anticipated and we believe that fiscal 'twenty 2 could be similar.
That said the team is doing an outstanding job managing derisking in growing the business and we are beginning the year with over $900 million of backlog.
The secular growth trends benefiting book, we also remain favorable and we are well aligned with the national defense strategy.
On the Goldman continues to push for modernization speed and affordability in both sensor and effector mission systems on the fly.
As a result, our 5 year plan remains intact that is to deliver a high single digits to low double digit organic revenue growth, averaging 10% over time, coupled with M&A and margin expansion.
Since fiscal <unk>, we've completed 13 acquisitions multiplying the size of the company delivering significant synergies and creating substantial value for shareholders.
As we crossed the $1 billion revenue threshold in fiscal 'twenty, 2 we're taking proactive steps with an eye towards repeating what we've done over the past 7 years.
This afternoon, we announced a companywide effort, which we pulled impact to lay the foundation for our next phase of value creation at scale.
The goal is to achieve Mercury's full gross margin expansion on adjusted EBITDA potential over the course of the next 5 years.
Before talking more about in pox, let's take a quick look at our financial results on slide 4.
We delivered strong fourth quarter results as anticipated bookings came in as expected down slightly from a very strong Q4 last year, but up substantially from Q3, resulting in a positive book to Bill of 1 <unk> zero for.
Our largest bookings programs in the quarter with C with filthy Buzzard F 16, Saba P J K and P..8.
Total revenue exceeded the high end of our guidance up 15% year over year and down 3% organically.
Our largest revenue programs in the quarter with C with Cps F 35, filthy buzzard and aegis.
On new business pipeline is robust and our design wins in Q4 total more than $500 million in estimated lifetime value.
On the bottom line, we delivered another record quarter for adjusted EPS and adjusted EBITDA, We also announced and completed the <unk> acquisition.
For the full 2021 fiscal year, we delivered strong results across all key metrics highlighted by year end backlog of over $900 million, which grew 9% from fiscal 'twenty.
Total revenue increased 16%, including 5% organic growth.
We delivered record adjusted EBITDA, which was up 15% year over year.
We've diversified the business to the point, where we now participate in more than 300 different programs, which continue to serve us well.
We are designed in on on top programs with the majority being sole source positions.
Our largest revenue programs for the year were classified radar program L. Thomas F 35, C with an E <unk> Hawkeye.
No single program was more than 5% of total company revenue in fiscal 'twenty..1 looking ahead to the next 5 years no single program is expected to be more than 6% of total revenue.
Design win activity remains very strong and activity levels elevated our fiscal 'twenty, 1 design wins totaled $1.5 billion in estimated lifetime value.
We had several important design wins during the year.
We received an award for the next generation dissected Jamba beyond Filthy Buzzard, which is 1 of our top programs. We won by leveraging the EW capabilities, we acquired with core electronics and our partnership with a leading silicon Valley's semiconductor company.
This design win is an estimated lifetime value of $260 million and possibly more.
We've made significant capital investments on our trusted microelectronics business in Phoenix, leveraging this investment in partnership with another leading semiconductor for them.
We will produce the next generation RF system in package. We believe this device will outperform existing commercially available products.
The estimated lifetime value of this win is around $100 million.
Potentially on most important fiscal 'twenty, 1 design win relates to the <unk> Airborne mission common server.
Amcs program.
The initial award is small however, we believe that the estimated lifetime value could approach $1 billion should the army deploy amcs across its fleet of aircraft installed.
This opportunity would not have been possible without the acquisitions of CES RTL gecko and most recently physical optics Corporation, it's an amazing win by the team.
From an M&A perspective, we completed 2 acquisitions in fiscal 'twenty, 1 deploying $375 million of capital strengthening both our C fly on sensor and effector mission systems capability.
The acquisition of PSC was the company's largest to date and we're excited about the future potential as part of Mercury.
At the same time, we made record investments in the business, including internal R&D to drive innovation and secure processing trusted microelectronics and mission computing. We've also made significant capital investments to consolidate and build that all facilities.
So all in all fiscal 'twenty, 1 was a very strong year in a challenging environment.
Turning to slide funds for.
Fiscal 'twenty, 1 and as we've discussed our organic revenues were impacted by Covid related modernization delays on seaway have been other naval surface programs customer execution issues on the F 35, <unk> III and the delay on the launch foreign military sales.
In addition to lowering bookings these issues combined reduce our organic revenue growth by approximately 5 percentage points for the year.
On our call last quarter, we previewed fiscal 'twenty, 2 expecting mid to high single digit organic growth leading to total company revenue growth in the mid teens.
Given our experience in fiscal 'twenty, 1 we've taken a more conservative stance on organic growth for fiscal 'twenty to <unk>.
This includes reducing our expected fiscal 'twenty to revenues from <unk> and other naval fleet upgrades the F 35, and sudden Fms programs.
The biggest change since our last call relates to outcomes Raytheon at their recent Investor Day. The next <unk> award will likely be in the next fiscal year.
We have been expecting a large booking in the second quarter of fiscal 'twenty..2 this bookings now move to our fiscal 'twenty 3 with revenue spread over several years.
Like C with an F 30 Fives L times is an important well funded program is the largest single design win in the company's history to date and will be a significant driver of growth beginning in fiscal 'twenty 3 and over the course for the next 5 years from beyond.
As Mike will discuss in detail as a result of these changes we're now expecting flat organic growth in fiscal 'twenty 2.
We're expecting approximately 10% total company revenue growth prior to future M&A eclipsing $1 billion for the first time and record adjusted EBITDA.
We're expecting a number of programs to drive growth in fiscal 'twenty..2 these include revenue associated with the large Fms order that was delayed in Q1 last year.
The good news is that we received an initial award for this program in the fourth quarter of fiscal 'twenty 1.
<unk> 8 additional bookings in fiscal 'twenty 2.
In addition, we are involved with several radar upgrades, we expect to see growth in the EW domain and we're seeing strong demand across multiple programs in situ and platform and mission management.
Over time, we expect Mercury total company revenue to continue growing faster than overall defense spending.
We focused the business on large and fast growing path from the defense market.
Looking ahead to fiscal 'twenty, 2 we're expecting a significant rebound in growth in bookings versus fiscal 'twenty, 1 with a positive book to bill for the year on the substantial growth in our backlog.
Over the past 2 months, we've seen an improvement in customer activity levels and the speed at which things are moving.
We believe this can be attributed to vaccination rates and employees is our customers on the government returning to on site work.
We also believe that Biden administration's budget release has given program offices more policy around priorities, which could further reduce program delays.
In addition, our design win activity remains strong for <unk>.
Fiscal 'twenty 2 we expect our design wins to again total more than $1 billion in estimated lifetime value.
We expect these programs as well as prior design wins to convert into increased bookings in backlog as they transition into production over time.
Looking farther ahead to fiscal 'twenty 3 we currently expect our organic growth to accelerate back to more normal high single digit to low double digit levels. This growth is expected to be driven by 1 the improving environment 2 the anticipated growth in bookings in fiscal 'twenty, 2 and finally.
The substantial expected revenue growth on F 35, L Toms filthy buzzard and other programs.
Turning to slide 6 since fiscal 14, we completed 13 acquisitions deploying $1.2 billion of capital.
As a result from this investment we've dramatically scaled and transformed the business.
We've grown the estimated lifetime value of Mercury as top 30 programs and pursuits from $4.6 billion to more than $11 billion.
This opportunity pipeline is greater than <unk>, the size of our backlog and represents the foundation for our future growth.
Over this period, we've successfully grown the total company revenue for 4 times on adjusted EBITDA more than 9 times, resulting in a 10 X increase in our market cap.
As demonstrated by the more rapid growth in adjusted EBITDA, we've extracted substantial cost and revenue synergies from our acquisitions over time.
This has significantly reduced our gross purchase price to net multiple for the deals that we've done.
Looking forward crossing the $1 billion revenue threshold as both a milestone to be celebrated and we believe an inflection point for mercury.
I mentioned that we expect organic growth to rebound in fiscal 'twenty..3. In addition, we are in an extremely active period for M&A right now our pipeline is very robust with multiple opportunities of varying sizes. All in line for the core of our strategy.
With the acceleration of organic growth expected in fiscal 'twenty 3 combined with M&A. We believe that we have the opportunity over time to replicate what we've done so successfully since fiscal 2014.
As a result, we've launched impart to determine what we need to do today to enable us to become a multiple of our current size.
Goal is to achieve our full growth in adjusted EBITDA potential organically on through M&A over the course of the next 5 years.
Since fiscal 2014, driven by our acquisitions, we've substantially changed the company.
We've expanded the scope of our offerings and capabilities, leading to a nearly 8 fold increase in sub systems revenue. We've in sourced manufacturing head count has increased 3 and a half times our footprint has grown from <unk> 27 locations and our sales supply chain spend has increased nearly 3 acts.
Despite achieving significant synergies as I mentioned, we believe there is additional value to be hot.
We proactively began contemplating impostor earlier this calendar year with capturing on volume and our future scaling in mind.
Turning to slide 7 early in Q3, we engaged with tier 1 consulting firm to do a full assessment of the company.
Working with them, we took a fresh look at the business from an organizational structure and value creation perspective.
Based on a lot of assessment, the first opportunities to consolidate and streamline our organizational structure. This will improve visibility speed of decision, making and accountability.
These actions started in the fourth quarter with the accelerating in Q1.
We're anticipating a $22 million net benefit in total for fiscal 'twenty 2 related to these options the.
For Q1 option alone accounts for $14 million is that total.
In fact will be led by our new Chief transformation officer reporting to me.
As it progresses over the course of the next 2 to 3 years. In addition to growth we will be focusing on 6 major areas.
Organizational efficiency and scalability procurement and supply chain facilities optimization, R&D investment efficiency capital and asset efficiency and scalable common processes and systems.
These options is still in the planning stages, and we will have more to say about them over time.
At this point, we think it's reasonable to target $30 million to $50 million of incremental adjusted EBITDA by fiscal 'twenty 5 as a result of this activity.
Again this includes a $22 million net benefit in fiscal 'twenty 2.
Going forward, we will continue to reinvest some of the gross savings on people and business systems with an eye towards future scalability.
The overall impact is about enabling our future doing what we've done since fiscal 2014, but doing it efficiently and effectively hedge greater scale.
A way to think about this and to use an analogy to have on large customers that recently merged with other defense volume going through similar value creation programs.
With respectively acquired a company greater than 2 times our size over the course of the past 7 years. It just so happens that we've done so via 13 acquisitions as compared to the single merger of equals y top customers.
In addition, today, but unrelated to impact we announced that our executive Vice President.
Bob has decided to retire from the company.
DVA will rejoin his finally in France after 26 years at Mercury.
In September we will begin serving as a strategic adviser to me while also working closely with the leadership team for a smooth and orderly transition.
EBITDA contributions and counsel have been instrumental to our growth and success, we extend to him Austin CFO.
And wish him well on retirement.
Turning to slide 8 we expected impact will also accelerate value creation as we applied the new processes and methodologies for future M&A activity, which remains an integral part of our strategy.
The M&A environment is extremely active right now as I mentioned in our pipeline is strong we remained disciplined on our approach both in terms of deal for suits and diligence as well as integration.
The integration of POC and <unk> are on track and both businesses are performing well.
Looking forward, we believe that we're well positioned to continue supplementing mercury's organic growth with accretive acquisitions.
Turning to slide 9 in summary.
We believe that the current environment is transitory and will begin to see signs of improvement.
Although organic growth may be lower in FY 'twenty 2 versus what we thought last quarter, we believe that the secular growth trends that benefit Mercury is still in place.
We're expecting substantial growth in bookings and backlog in fiscal 'twenty 2 as a result fiscal 'twenty 3 is shaping up to be a strong year as organic growth returns to normal levels and margins expand as a result of recent impact options taken.
On a longer term outlook remains intact and our strategy remains the same that is to deliver strong margins, while growing the business organically and supplementing this organic growth with disciplined M&A and full integration.
This strategy has worked extremely well for us for nearly a decade as we crossed the $1 billion revenue threshold, we've launched impart to achieve Mercury is full growth in adjusted EBITDA potential over the course of the next 5 years with that I'd like to turn the call over to Mike Mike.
Thank you Mark and good afternoon again, everyone.
As usual I'll start with our Q4 and fiscal 'twenty, 1 results and then move to our guidance for Q1 and full year fiscal 'twenty 2 on.
I'll conclude with some detail on the magnitude and timing of potential financial benefits from the impact effort. The Mark just discussed.
We finished fiscal 'twenty, 1 with a strong fourth quarter and delivered record revenue adjusted EBITDA and adjusted EPS for the year.
As Mark mentioned entering fiscal 'twenty, 2 we're expecting flat organic growth, but double digit total growth strong results on the bottom line and a substantial rebound in our bookings.
As a result, we believe that we're well positioned for a return to high single digit low double digit organic growth in fiscal 'twenty 3.
In addition, we expect adjusted EBITDA margins to expand in fiscal 'twenty 3 driven by positive operating leverage in addition to benefits of the impact program.
Turning now to slide 10, Mercury delivered solid results in Q4 total revenue adjusted EBITDA and adjusted EPS, all met or exceeded our guidance, our Q4 bookings and book to Bill were strong as the bookings environment began to improve from the slowdown we experienced through the first 3.
Quarters of fiscal 'twenty 1.
Bookings for Q4 were $260 million down 7% compared to Q4 'twenty. When we had a record bookings quarter bookings were up 24% compared to last quarter as we saw a rebound in activity.
Q4 book to Bill was 1 point on for <unk>.
<unk> revenue for Q4 increased 15% from Q4 dollars $20 million to $251 million, which is above the top end of our guidance range of $236.5 to $246.5 million.
Organic revenue was $210 million and acquired revenue, which included physical optics Corporation and Penn Tech was $40.8 million.
Our acquisitions continue to perform well as we integrate them into mercury.
GAAP net income and GAAP EPS were down, 34% and 35% respectively from Q4 'twenty.
This was driven primarily by non operating income discrete tax benefits amortization expense and restructuring and other charges.
Adjusted net income and adjusted EPS, which excludes most of these items were up year over year.
We recorded $7 million of restructuring and other charges in Q4, reflecting a work force reduction in the quarter as well as third party consulting costs associated with our impact program.
Adjusted EBITDA for Q4 increased 19% to a record $59.1 million compared to $49.6 million last year.
Our adjusted EBITDA margins were 23, 5% for the quarter up from 22, 8% in Q4 fiscal 'twenty.
This margin expansion included 110 basis point dilutive impact from the POC acquisition.
Turning to our full year results on slide 11, we manage through Covid and market conditions to deliver record revenue adjusted EBITDA and adjusted EPS in fiscal 'twenty 1.
The volume of new design wins remained high at $1.5 billion, we continue to position the business for future growth through investments in R&D and Capex.
We also completed 2 acquisitions deploying $375 million of capital.
Total bookings for fiscal 'twenty, 1 were 881 million. This was down 8% from fiscal 'twenty, when we had a record bookings year.
As Mark mentioned, our bookings during the year were impacted by a variety of market and program dynamics.
Our book to Bill for fiscal 'twenty, 1 was slightly below 1 at <unk> 95.
We ended the year with backlog of $910 million up 9% year over year.
Revenue in fiscal 'twenty, 1 increased 16% year over year to a record 924 million exceeding our guidance of $910 million to $920 million.
No single program represented more than 5% of our revenue in fiscal 'twenty, 1 and our top 5 programs represented less than 20% of revenue.
Total GAAP net income on a consolidated basis for fiscal 'twenty, 1 was $62 million or $1.12 per share the.
The decrease was driven primarily by non operating income discrete tax benefits amortization expense COVID-19 expenses and restructuring and other charges.
Adjusted net income and adjusted EPS for both up year over year.
Adjusted EBITDA for fiscal 'twenty, 1 increased 15% to a record $201.9 million compared to $176.2 million last year on.
Our adjusted EBITDA margins were 21, 9% compared to 22, 1% in fiscal 'twenty.
POC had a dilutive impact of 30 basis points on adjusted EBITDA margins for the 6 months following the acquisition.
Slide 12 presents Mercury's balance sheet for the last 5 quarters.
In Q4, we completed the $65 million acquisition of <unk>, which we financed with $25 million of cash on hand, and $40 million of debt under our revolver.
We ended Q4 with cash and cash equivalents of $114 million compared to a $122 million in Q3.
The reduction was driven by the cash used for the <unk> acquisition, partially offset by the cash generated in the business.
We ended Q4 with $200 million of debt up $40 million related to the funding of the <unk> acquisition.
From a capital structure perspective, Mercury remains well positioned with continued flexibility and great access to capital.
We still have significant capacity to invest in M&A and our pipeline of M&A opportunities continues to be strong.
Turning to cash flow on slide 13 free cash flow for Q4 was in line with our expectations at $16.3 million, representing 28% of adjusted EBITDA.
During the quarter, we had cash outflows related to Covid acquisition related expenses, primarily related to the <unk> acquisition as well as for consulting costs associated with our impact program.
For the year free cash flow was $51.6 million, representing approximately 26% of adjusted EBITDA in line with expectations and.
In fiscal 'twenty, 2 we expect free cash flow conversion to increase compared to fiscal 'twenty 1.
I'll now turn to our financial guidance, starting with the full year fiscal 'twenty 2 on slide 14.
Got it thanks for Q1 and for full fiscal year reflects the market conditions and potential impacts from the fiscal 'twenty, 1 bookings delays that mark discussed.
Guidance assumes no acquisition related expenses as well as an effective tax rate of 25%.
Our guidance includes restructuring and other charges of $9.4 million in Q1 related to the impact initiatives.
For fiscal 'twenty 2 we currently expect total company revenue of 1 to 1 point out $3 billion, an increase of 8% to 11% compared to fiscal 'twenty 1.
This is prior to any additional acquisitions.
As Mark discussed we expect headwinds from last year's delays in major programs like C. With F 35 tier 3 and a large foreign military sale.
We expect those to be offset by increases in other electronic warfare radar programs as well as CTO and platform and mission management programs. As a result, we expect our fiscal 'twenty 2 organic revenue to be approximately flat compared to fiscal 'twenty 1.
We expect bookings to rebound in fiscal 'twenty, 2 driving a book to bill above 1 for the year.
Similar to fiscal year's 19 through 21, we expect our total revenue in fiscal 'twenty 2 to progressively increase by quarter throughout the year weighted heavily towards the second channel.
Total GAAP net income on a consolidated basis for fiscal 'twenty..2 is expected to be 60 to $65.2 million or $1.7 to $1.16 per share.
Adjusted EPS for fiscal 'twenty, 2 is expected to be in the range from $2.45 to $2.55 per share an increase of 1% to 5% compared to fiscal 'twenty 1.
Adjusted EBITDA for fiscal 'twenty, 2 is expected to be in the range of $220 million to $227 million up 9% to 12% from fiscal 'twenty 1.
This guidance includes $22 million of savings from the impact related organizational efficiencies that mark discussed.
Adjusted EBITDA margins are expected to be approximately 22%. Despite a 100 basis point dilution due to a full year of POC, which has lower EBITDA margins.
Mike revenue, we expect adjusted EBITDA, and adjusted EBITDA margins to progressively increase from quarter to quarter with Q1 being the low point for the year.
As revenue ramps throughout the year, we expect operating leverage to lead to margin expansion.
Looking further ahead, we believe the investments that we've made over the last few years will result in further adjusted EBITDA margin expansion in future years. We believe this will be driven by program mix and operating leverage as well as operating efficiencies with the impact initiatives accelerating margin expansion in fiscal 'twenty 3.
Ray and beyond.
From a free cash flow perspective, we're targeting approximately 40% free cash flow to adjusted EBITDA in fiscal 'twenty 2.
We expect the Covid cash outflows, we saw on fiscal 'twenty, 1 to diminish and we expect capital expenditures for the year to return closer to maintenance levels, we do anticipate cash outflows associated with impact, including $6.8 million of separation costs and $4.7 million on third party consulting fees.
Turning now to our first quarter of fiscal 'twenty 2 guidance on slide 15 were forecasting total revenue in the range of $210 million to $220 million, an increase of approximately 2% to 7% year over year.
On an organic basis, we expect Q1 revenue to be down approximately 15% year over year, driven by the booking slowdown in fiscal 'twenty 1.
We expect to incur a GAAP net loss in the first quarter of for 4 to $2.3 million or 8 to <unk> <unk> per share.
The net loss as a result of the $9.4 million of restructuring and other charges previously discussed.
Adjusted EPS, which excludes restructuring and other charges is expected to be 38 to <unk> 41 per share.
Adjusted EBITDA for Q1 is expected to be $36.8 to $39.6 million, representing approximately 17, 5% to 18% of revenue.
The adjusted EBITDA margins in Q1 are impacted by the negative operating leverage due to lower revenue while recurring operating expenses remained stable. We expect to continue to invest in R&D and each 1 to position ourselves for continued growth in <unk> and beyond as a result, we expect to see.
See lower margins in each 1 with expansion in H 2.
As I mentioned for the full fiscal year, we expect our adjusted EBITDA margin to be approximately 22% of revenue.
We expect free cash flow to adjusted EBITDA for Q1 to be approximately 25% of adjusted EBITDA or.
Our conversion will be impacted by cash outflows associated with the restructuring and other charges previously mentioned.
Turning to slide 16, given our significant growth over the last few years and our outlook for accelerated organic and acquisition driven growth in fiscal 'twenty, 3 and beyond we've launched impact to set the stage for becoming a multiple of our current size over time.
Impact also aims at realizing our full adjusted EBITDA potential.
Slide 16 summarizes our preliminary estimate of the potential savings related to impact and the timing for realizing those savings.
We're still on the planning phase for the impact work streams and the 6 focus areas that mark outlined.
Once they've been completed each will include detailed savings and timing estimates.
We currently expect to complete the planning phase in Q1 and begin actioning that work streams in Q2.
Although we are still refining our views are preliminary estimates are that we can generate approximately $35 million to $55 million of gross savings by fiscal 'twenty 5.
The impact effort is primarily focused on scalability.
As such we expect to reinvest approximately $5 million of the savings into the new organizational structure.
On a net basis, we're expecting a $30 million to $50 million benefit to adjusted EBITDA.
From a timing perspective at the midpoint of the savings range. Our preliminary estimate is that we'll be able to recognize cumulatively approximately $25 million of savings by the end of fiscal 'twenty 3 we expect to realize $35 million by the end of fiscal 'twenty, 4 and 100% of the gross savings.
Or $45 million at the midpoint by fiscal 'twenty 5.
As I've discussed we have already included approximately $22 million of savings in our fiscal 'twenty 2 guidance related to the actions taken in Q4 and Q1.
We expect to see margin expansion during the year as a result of these actions.
Our fiscal 'twenty, 2 guidance assumes margins expand by 10 basis points compared to fiscal 'twenty..1 despite a 100 basis point dilutive impact from a whole year of POC.
As mentioned earlier, we expect organic revenue growth to return to our target high single digit low double digit range in fiscal 'twenty 3.
We expect adjusted EBITDA margins to expand at the same time, driven by positive operating leverage as well as our impact efforts.
Looking further ahead, we expect to see continued margin expansion driven by programs transition into production operating leverage as revenues grow faster than expenses and continued acquisition integration.
We see the $30 million to $50 million of estimated net benefits of impact as being additive to this previously expected margin expansion.
We are optimistic about the potential for the impact program and will continue to provide updates as it progresses.
Turning to slide 17 in summary, Mercury delivered strong financial performance in Q4 and fiscal 'twenty, 1 including record revenue adjusted EBITDA and adjusted EPS for the year and more than $900 million of yearend backlog new.
New business activity is returning to more normalized levels and we're expecting fiscal 'twenty 2 to be a strong year for bookings. Additionally, we believe that launching impact will enable us to accelerate adjusted EBITDA margin expansion over time as a result, we're optimistic as we look towards the second half of fiscal 'twenty 2 and.
Into fiscal 'twenty 3.
We believe we're on a strong position to continue executing on our long term value creation strategy of high single digit low double digit organic revenue growth, coupled with EBITDA margin expansion supplemented with strategic and accretive M&A.
With that we will be happy to take your questions. Operator, you can proceed with the Q&A now.
Thank you Sir as a reminder to ask a question you will need to press Star then 1 on your telephone keypad.
On your question press the pound key in order to allow as many callers as possible to ask a question management requests that you limit yourself to 1 question only thank you.
And our first question is going to come from the line of Sheila <unk> Jefferies.
Sheila Your line is open.
You'd like to go to the next question.
Okay.
I get that question she'd like you can re queue. Our next question is going to come from the line of Seth Sigman with J P. Morgan.
Ladies and gentlemen standby.
Okay.
Sorry hold on can you hear me.
Yes, we can hear you now yes.
Okay, sorry, sorry, yeah. So.
I.
<unk> about growth and.
I know you discussed it.
But I wonder if I'm still having a little bit of trouble understanding the pace of growth.
It has slowed so much I guess.
Don't see necessarily your customer on F 35 <unk>.
Having the same issues in the relevant segment.
And taken altogether, what accounts for especially for the reduction that we're going to see an and.
In the September quarter, when the Q comes out and.
In October what what sub segments.
<unk> sales will we see the most impact and then sort of.
What gives you confidence in this point in the kind of it looks like apparently very sharp.
Increase in sales that we're going to see the rest of the year.
Sure. So a lot of questions, let me kind of just maybe on the pocket.
Try and.
Recap what happened in fiscal 'twenty, 1 in terms of revenue on bookings.
So as you're trying to say on the prepared remarks, what we really saw during the year.
Net orders were progressively delayed.
Beginning in the first quarter as a result of really 3 things.
Covid customer execution issues on various programs on the changes in administration.
All of those things actually resulted in more than a 5 point reduction in organic growth ended up being around about 6.5 points of actual reduction.
Spread across the F 35 C with an all of the naval programs.
As well as the Fms and so if you kind of simplify it without those pressures the FY 'twenty 1 revenues would.
It would have actually been.
Organic revenues would have being ended up being consistent with historical organic revenue growth rates of high single digit to low double digits.
Peeling back beyond on a little bit.
So the naval and see with upgrades on on approximately 3 point impact.
International Fms sales for large order that moved a large program that moved from the first quarter ended up being around about a point and a half.
Then see with.
F 35 in total was running about 2 points now if you look at those programs right, they're all really good programs.
Actually in the main performed pretty well.
So revenue was up double digits on F..35, we were up double digits on all comps were up double digits on filthy buzzard, but just some of the growth that we experience maybe wasn't necessarily as high as what we thought coming into the year.
See what was down a little bit for the year.
So those programs that I just mentioned are really.
Alright programs for us and I expect it to continue to grow.
Over the course of the next 5 years, because we believe that they are well aligned with the overall national defense strategy. So big picture, Yes, that's kind of what happened from a revenue perspective, and it's a very similar story with respect to the impact on our organic growth in bookings.
So F 35 on a 3 point decline in organic bookings the last large fms contract at a 3 and a half point impact on organic bookings and filthy buzzard for was round about a point.
Yes, it was really all related to the timing of the awards and.
And we do expect that things kind of both bookings.
We will rebound in fiscal 'twenty, 2 accelerating in fiscal 'twenty 3.
Okay.
Thank you and our next question will come from the line of Peter Arment with Baird.
Yes, good afternoon, Mark and Mike.
Okay.
Hey, Mark Hey, Mark maybe just to come on at a different way, maybe just can you talk a little bit out outside of those programs I mean, the diversity you kind of highlighted.
Within your revenue mix, but yet you're still kind of forecasting.
A downtick in flat overall growth mid single digit to high single digit down to kind of flat growth. So maybe what are you seeing on a broader aspect, that's maybe harder to call out for us to see because it's not 1 big program countries. So for Scott.
Yes, so I mean, we have got a pretty significant base of programs as we as we've discussed in the past.
No single program is a candidate for 5% to 6% of total company revenue and we expect that to continue going forward part of the challenge that we've had that Peter and I think it's part of the impact that was saying is that when you have movement on.
Concentrated in your call it top 5 programs, which is really what we experienced last year.
Yes, it does have an impact and that's in essence.
What we've seen and the impact that.
As a result of the.
The reduction in organic growth in fiscal 'twenty, 2 versus what we thought last quarter.
Many of it is us being just more conservative.
In the programs that I, just mentioned really as a result of the.
The impacts that we saw throughout fiscal year 'twenty 1.
So in essence, we're taking a more conservative approach.
To the year.
And then probably the biggest change is that we hot since last quarter or since the last call was on al Tums and yeah on outcomes, we were expecting a significant.
Significant order in the second quarter and now as a result of some changes that Raytheon had discussed yeah. We've taken our time to that launch award out of our fiscal year 'twenty 2.
On into our fiscal 'twenty, 3 we will still have bookings and revenues associated with that program, but we just won't have as much as what we had.
Previously.
So it really does come down to just the.
The major impacts that we're seeing.
On some of these programs that on.
Affecting the overall growth, we're still expecting significant growth from our top 20 programs.
Fiscal 'twenty, 2 we're expecting that growth in bookings will accelerate substantially in the second half and again, we're expecting very significant growth.
Across these programs F 35, filthy buzzard.
<unk>, which is a new program for us see with and then the larger mass programs are all expecting to grow substantially.
On a year over year basis.
And our next question is going to come from the line of Jonathan Ho with William Blair <unk> Company.
Hi, Good afternoon, I guess, the 1 thing I wanted to ask on the impact program is now can you give us a sense of how this maybe it goes above and beyond your typical sort of streamlining efforts when you're doing acquisition integration and what sort of led you to go down the path of on.
I guess, you know wanting to deliver more of that operating leverage this year as you think about structuring for 'twenty 3 and beyond thank you.
Good question, Jonathan So if you think about the journey that we have on and we tried to outline some of that in the prepared remarks.
Since 2014, we've completed 13 acquisitions.
We had a greater than for X increase in revenues over that period and the greater than Nymex increase in EBITDA. So we've extracted substantial revenue.
Revenue synergies that's resulted in us.
Basically reducing net to gross purchase price multiple.
However, along the way.
If you step back there's been some very substantial changes in the company overall.
So we've had a 3 and a half X increase in head count.
And we've seen an 8 fold increase in our sub systems revenue. The number of locations that we have increased from 10% to 27 and our sales supply chain spend has increased <unk>.
So in a period, we've really optimized for growing the business and with growth slowing a little bit.
Organically this year earlier in the year, we think that there was an opportunity for us to kind of go back take a look at.
Other opportunities existed to further consolidate the.
Businesses that we've acquired to extract even greater cost and revenue synergies that being said.
Impact is really all about laying the foundation for future growth.
We think that we have the potential to be a multiple of our current size, but yes in essence crossing the $1 billion revenue threshold is.
Is a milestone.
It is also a turning point and we know that there are certain things that we need to focus in on.
To continue for us to grow and scale the way in which we'd like to so we've basically taken a pretty comprehensive look kind of top to bottom left to right across the business and the 6 areas that we're focusing in on that we really began the assets in the first quarter was around org efficiency and scalability.
So we saw an opportunity.
Streamlining the business.
Consolidated where appropriate those activities began in the fourth quarter and they've accelerated.
In Q1.
With the numbers that Mike announced beyond that the areas that we're going to focusing on our continued improvements around procurement and supply chain.
We see the opportunity as we continue to streamline and optimize the business to also optimize our facility footprint.
We're going to continue to look at.
Investing in R&D, but looking at ways in which we can maybe doing it more efficiently and similarly across the capital base.
Yes balance sheet other ways in which we can be more efficient theyre all systems.
But again to reiterate.
It's all about future scalability and for Mercury to achieve yes.
Its full growth potential both organically as well as through M&A.
Yes, maybe even accelerating and expanding margins over time.
And our next question will come from the line of Michael <unk> with <unk> Securities.
Hey, good evening guys. Thanks for taking the question.
Mark I think you called this maybe transitory, but EMEA organic growth has been sliding here for a couple of years gross margin has been declining for for several years.
How are you guys from looking at impact I mean in thinking about structural changes versus the transitory changes.
How are you contemplating that and I guess just to be clear for housekeeping without the $22 million impact savings I mean there'd be some significant margin compression on the EBITDA level next year. So is there anything else.
From a mixed perspective changing on you guys.
So let me, let me talk a little bit about.
The rebound in growth in 'twenty, 3 and maybe kind of what's driving the 5 year outlook and then Mike can maybe touch upon the margins that you mentioned.
So we do have really increased.
<unk> confidence that growth will return based upon an expected accelerated bookings throughout fiscal 'twenty, 2 but in particular in the second half as well as substantial growth in FY 'twenty 3.
The growth is likely going to come from our top 20 programs, which we expect to accelerate in the second half of 'twenty..2 we expect the growth to be up.
Greater than 20 points, and we're expecting an acceleration of bookings from those programs again as we head into 'twenty 3.
As many of the same programs that we've talked about so substantial ramp on the F 35.
Tom's, we're expecting to more than double in 'twenty, 3 filthy buzzard and will grow substantially and then beyond those key franchise programs. Other programs that we expect new programs for Mercury the acquired programs or new design wins that are also.
Poised to contribute to additional growth.
<unk> in the 'twenty 2 'twenty 3 time frame programs such as the V 22.
<unk> as well as $2.45, so we've won some great programs all aligned with the National Defense strategy, We believe and the reason that we're saying that things are transitory is because we believe that speaking to our customers.
Yes, it is literally being the timing of specific orders.
If you look out farther in time, Mike and you consider kind of our strategy over the 5 years, it really hasnt changed.
Yes, we're still expecting that over the course of the 5 years that we're expecting to be able to grow the business is high single digit low double digit rates and we're well positioned with the national defense strategy.
And the key drivers of growth both from a DSD perspective around modernization speed and affordability, but then also with the key industry trends that we discussed on the Pos such as outsourcing supply chain delayering as well as re shoring.
We have positioned the business and what we believe to be the faster growing parts of the market in particular sense for effective mission systems, and <unk> and as you know over the course of the last 7 years, we've more than doubled the estimated value.
I liked the estimated lifetime value of our top programs for pursuits, and its really these programs as they transition into production over time that will drive future growth. Finally, again, we think that the M&A pipeline is very very active in these organic growth combined with M&A.
<unk> is what makes us believe that we can continue to do what we've been doing successfully for the next 5 years to come on.
On top of that we obviously announced impart and impact is about enabling our future growth, but then also having the opportunity of expanding on margins over time, so not point.
I hand, it over to Mike, who can kind of talk about.
The benefits of the impart program in fiscal 'twenty 2.
For your question.
Hey, Mike.
And I think we can talk about 2 things on talking about the EBITDA margins just to give a little.
Color on that and then we can talk about gross margins too, but let me just start with EBITDA margins and I'd start by saying overall the profitability of the base business Hasnt materially changed over the last couple of years.
Do have to look at our EBITDA margins with and without.
C acquisition in it because it does have a dilutive impact which is important to point out.
If you look at where we were in fiscal 'twenty from an EBITDA margin perspective, we were 22, 1%.
Came down a little in fiscal 'twenty, 1 to 'twenty, 1, 9%, but again POC as I mentioned had about a 30 basis point dilutive impact. So it would have been at 22, 2% so slightly up.
From from fiscal 'twenty, and then when you look at fiscal 'twenty to the mid point of our guidance is 22%, but again as I mentioned in my prepared remarks that POC acquisition now that we'll have it for a full year has 100 basis point dilutive impact. So it would have been 23% other.
Wise and what we're seeing there is debt we have some negative operating leverage because of the flat organic growth.
In fiscal 'twenty, 2 and that's being offset by some of the impact initiatives that we talked about.
And when.
When you look at it just on the base of 21, 9% compared to 22%, which is the midpoint of our guidance I.
Think about it like this is that we've got dilutive impact from POC year over year, we've got production programs pushing to the right like Mark discussed and then from the negative operating leverage that I mentioned, but looking forward to fiscal 'twenty 3 is important because as we go into fiscal 'twenty 3 and we returned.
The organic growth, we're going to have the programs transitioning into production, which is going to lead to gross margin expansion and EBITDA margin expansion, we're not going to have the headwinds from from negative operating leverage and then we will have to see the benefits associated with the impact programs. So we're expanding margins.
And 'twenty, 2 but we think theres a lot of benefit when we start looking at EBITDA margins in fiscal 'twenty, 3 and gross margins as similar story.
Yes.
To go back to it Mike what I said right I mean, if you look at for the year.
Organic bookings were impacted.
Throughout the year, which impacted organic revenue and at the end of the day. It was 3 points on C weapon and various naval surface program upgrades, we add on.
Late in the half on international SMS, which is the large order that moved.
Revenue wise for the first quarter net.
Approximately 2 points of impact on the F 35, yes absent those.
Growth organic growth rate would have been absolutely in line with what our goals and objectives, which is deliver high single digit low double digit organic growth coupled with M&A. So yes.
It's unfortunate, but when you boil it down it comes down to just some delays associated with various programs.
And our next question will come from the line of Sheila <unk> with Jefferies.
Hey, Good afternoon, guys can you hear me now.
Yes, yes, sorry.
Sorry about that for first time first question on the decade I screwed up.
So I wanted to ask about impact a little bit more and I apologize, but I just don't often hear about 22% margin companies talking about realigning their cost structure.
You mentioned from facility rationalization.
You just went through Capex upgrade.
So this is going to be like a gross margin target area and I understand some of your commentary around R&D and utilizing it better just given how much you've expanded but how do we kind of expect that to trend as a percentage of sales.
Sure. So I'll talk again, just say on a little bit more depth about the areas right. So.
<unk>.
To be clear right.
Impact activity.
Yes.
Contemplate it really.
Not is not related to the some of the challenges I guess that we faced on the timing of various orders.
During fiscal year 'twenty, 1 we see that crossing $1 billion revenue threshold is a milestone, but it isn't inflection point and with all of the change in the business.
Effectively acquiring a company 2 times our size, but doing it through 13 acquisitions, we've extracted a lot of synergies, but we knew.
Yes, there was probably more value to be hard and we've been very very focused in.
Optimizing for growth.
Yes, we see the opportunity to really I guess in fiscal 'twenty..2 is organic growth rate really just takes a bit of a pause to go attack that.
So yes, we've already done a lot.
Manufacturing consolidation rights, we moved from 5 RF manufacturing locations on the East coast down to 1 major site.
We just completed similar activity.
From 3 to 1 on the West coast kind of building in scalability.
But we still gone from 10 to 27 locations and I think there is an opportunity for us to continue to optimize our facility footprint.
Whilst continuing to improve delivery to customers at the same time.
Actions that we took in that we began to take in Q4, and Q1 was really about streamlining and optimizing the org structure again.
As a result of the cumulative acquisitions that we've done we've been fully integrating them, but because the cost structure itself and the way in which you are organized actually drives that cost footprint of the business. Yes, we took on opportunity kind of step back and take another look at it.
To drive additional savings so.
So Mike do you want to talk about it a little bit about what you might see happening with respect to.
Overall margins over and above the <unk>.
Planned margin expansion that we that we're anticipating as a result of impact yeah. So.
So Sheila.
First of all we're still doing the.
In the planning phases of impact and so we will have more information in more detail.
As we move along.
In terms of you asked about R&D as a percentage of revenue where that might trend.
Surfing back pre impact wed always talked about as you look over a 5 year period margin expansion and we thought that was going to come from a handful of areas that was program.
Product.
Mix as we programs transition from startup phases into full rate production that has higher margins. We thought it was going to come from operating leverage and we thought it was going to come from R&D leverage as well as we've been investing heavily and we can leverage some of the R&D investments, we're making areas like.
Security and safety across more of our products. So we expected R&D as a percentage of sales to come down driving margin expansion for our 5 year plan, we still expect all of that.
And what what impact is in the numbers that we threw out in terms of 30% to $50 million potential EBITDA improvement is above that margin expansion that we already expected now the amounts in each of the areas that Mark discussed were still working through that in <unk>.
Terms of whats going to be the amount around direct procurement.
And the the amount around R&D and other areas. So we'll provide more information as we go on.
That I think that if you look in the out years, though the margin expansion opportunity on top of where we already were as 200 to 300 basis points, yes.
So the way in which we're thinking about impact.
Sheila is also and this was kind of the primary focus when we were contemplating the activity was related to M&A.
So.
As you know, we're highly acquisitive company 13 acquisitions over the course of the last 7 or so years.
Serial acquirers fully integrating those businesses and.
And we've done a really good job again, extracting cost and revenue synergies with EBITDA growing at twice the rate twice.
Twice for multiple.
Net revenue Haas over that timeframe.
But as we as we look forward on it.
Was to basically transformed the way in which we're doing things to try and improve the scalability and the efficiency of the work.
And simplifying things along the way.
So we're applying impact on our sales to begin with which we think that will allow the 2 to 3 points of incremental launch an expansion over and above what we had been previously anticipating overtime, but the goal is to stand up this transformation office and then to use the <unk>.
The season, the methodologies associated with impart.
To all future acquisitions, if we do this right yeah, we think that.
Yes, we should be able to extract even greater synergies from the deals that we do going forward and we should be able to extract those synergies more quickly.
So it's about the future, it's about mercury kind of achieving its full growth in EBITDA potential.
Organically as well as through M&A.
Our next question will come from the line of Austin Muller with Canaccord Genuity.
Hi, guys.
Bye.
Hi.
Just my first question here do you anticipate.
Any any future acquisitions in fiscal year, 'twenty 3 or beyond once once this impact restructuring is completed or is <unk> sort of it for a while.
It's a good question Austin.
We don't see impact actually slowing down M&A activities.
So the M&A market is very very active right now deals of various sizes kind of all in line with the core of our strategy.
And.
Youll continue to see us acquire businesses that fit with the core of this strategy.
It's not we're not expecting impart.
2.
Stall M&A, that's not the intent at all.
Thank you I would now like to turn the conference over to Mr. Aslib for his closing comments.
Okay, well. Thank you very much everyone for joining the call today, we look forward to speaking to you again next quarter. Thank you.
Once again, we'd like to thank you for your participation on today's Mercury for Income's Conference call you may now disconnect.
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Okay.
Okay.
Yes.
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