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spk07: in customer activity levels and the speed at which things are moving. We believe this could be attributed to vaccination rates and employees that are customers in the government returning to onsite work. We also believe the Biden administration's budget release has given program offices more priority around priorities, which could further reduce program delays. In addition, our design and activity remains strong. For fiscal 22, we expect our design wins to gain total more than a billion dollars in estimated lifetime value. We expect these programs, as well as prior design wins, to convert into increased bookings and backlog as they transition into production over time. Looking farther ahead to fiscal 23, 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, one, the improving environment, two, the anticipated growth in bookings in fiscal 22, and finally, the substantial expected revenue growth on S35, LTAMs, filthy buzzers, and other programs. Turn to slide six. Since fiscal 14, we've completed 13 acquisitions, deploying $1.2 billion of capital. As a result of this investment, we've dramatically scaled and transformed the business. We've grown the estimated lifetime value of Mercury's top 30 programs and pursuits from $4.6 billion to more than $11 billion. This opportunity pipeline is greater than 10x the size of our backlog and represents the foundation for our future growth. Over this period, we've successfully grown total company revenue 4.4 times and adjusted EBITDA more than nine times, resulting in a 10x 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 billion-dollar revenue threshold is 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 23. In addition, we're in an extremely active period for M&A right now. Our pipeline is very robust, with multiple opportunities of varying sizes, all in line with the core of our strategy. With the acceleration of organic growth expected in fiscal 23, combined with M&A, we believe that we have the opportunity over time to replicate what we've done so successfully since fiscal 14. As a result, we've launched impact to determine what we need to do today to enable us to become a multiple of our current size. Our goal is to achieve our full growth and adjusted EBITDA potential organically and through M&A over the course of the next five years. Since fiscal 14, driven by our acquisitions, we've substantially changed the company. We've expanded the scope of our offerings and capabilities, leading to a nearly eight-fold increase in subsystems revenue. We've in-sourced manufacturing. Our headcount has increased three and a half times. Our footprint has grown from 10 to 27 locations. And our Excel supply chain spend has increased nearly 3x. Despite achieving significant synergies, as I mentioned, we believe there's additional value to be had. We proactively began contemplating impact earlier this calendar year with capturing that value and our future scaling in mind. Turn to slide 7. Early in Q3, we engaged a 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 that assessment, the first opportunity is 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 effort accelerating in Q1. We're anticipating a $22 million net benefit in total for fiscal 22 related to these actions. The Q1 action alone accounts for $14 million of that total. Impact will be led by a new Chief Transformation Officer reporting to me. As it progresses over the course of the next two to three years, in addition to growth, we'll be focusing on six 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 actions are still in their planning stages and we'll have more to say about them over time. At this point, we think it's reasonable to target $30 to $50 million of incremental adjusted EBITDA by fiscal 25 as a result of this activity. Again, this includes a $22 million net benefit in fiscal 22. Going forward, we'll continue to reinvest some of the gross savings in people and business systems with an eye towards future scalability. Overall, the impact is about enabling our future. fiscal 14, but doing it efficiently and effectively at greater scale. A way to think about this and to use an analogy, two of our large customers that recently merged with other defense primes are going through similar value creation programs. We've effectively acquired a company greater than two times our size over the course of the past seven years. It just so happens that we've done so via 13 acquisitions, as compared with a single merger of equals like our customers. In addition today, but unrelated to impact, we announced that our Executive Vice President, Didier Thibault, has decided to retire from the company. Didier will rejoin his family in France after 26 years of mercury. In September, he'll begin serving as a strategic advisor to me, while also working closely with the leadership team for a smooth and orderly transition. Didier's contributions in council have been instrumental to our growth and success. We extend to him our sincere thanks and wish him well in retirement. Turning to slide eight. The expected impact will also accelerate value creation as we apply the new processes and methodologies to future M&A activity, which remains an integral part of our strategy. The M&A environment is extremely active right now, as I mentioned, and our pipeline is strong. We remain disciplined in our approach, both in terms of deal pursuits and diligence, as well as integration. The integrations of POC and Pentac 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. Turn to slide 9 in summary. We believe that the current environment is transitory and we'll begin to see signs of improvement. Although organic growth may be lower in FY22 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 22. As a result, fiscal 23 is shaping up to be a strong year as organic growth returns to normal levels and margins expand as a result of recent impact actions taken. Our 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 billion-dollar revenue threshold, we've launched Impact to achieve Mercury's full growth and adjustability with our potential over the course of the next five years. With that, I'd like to turn the call over to Mike. Mike?
spk09: Thank you, Mark, and good afternoon again, everyone. As usual, I'll start with our Q4 and fiscal 21 results and then move to our guidance for Q1 and full year fiscal 22. I'll conclude with some detail on the magnitude and timing of potential financial benefits from the impact effort that Mark just discussed. We finished fiscal 21 with a strong fourth quarter and delivered record revenue adjusted EBITDA and adjusted APS for the year. As Mark mentioned, entering fiscal 22, 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 23. In addition, we expect adjusted EBITDA margins to expand in fiscal 23, 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 three quarters of fiscal 21. Bookings for Q4 were $260 million, down 7% compared to Q4-20 when we had a record bookings quarter. Bookings were up 24% compared to last quarter as we saw a rebound in activity. Q4 booked a bill with 1.04. Revenue for Q4 increased 15% from Q4-20 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 Pentec, 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 percent and 35 percent, respectively, from Q420. 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 exclude most of these items, were up year over year. We recorded $7 million of restructuring and other charges in Q4. reflecting a workforce 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 20. This margin expansion included 110 basis point dilutive impact from the POC acquisition. Turning to our full year results on slide 11, we managed through COVID and market conditions to deliver record revenue adjusted EBITDA and adjusted EPS in fiscal 21. The volume of new design wins remained high at $1.5 billion. We continued to position the business for future growth through investments in R&D and CapEx. We also completed two acquisitions, deploying $375 million of capital. Total bookings for fiscal 21 were $881 million. This was down 8% from fiscal 20 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 21 was slightly below one at 0.95. We ended the year with backlog of 910 million, up 9% year over year. Revenue in fiscal 21 increased 16% year over year to a record 924 million, exceeding our guidance of 910 to 920 million. No single program represented more than 5% of our revenue in fiscal 21. and our top five programs represented less than 20% of revenue. Total gap net income on a consolidated basis for fiscal 21 was $62 million, or $1.12 per share. The decrease was driven primarily by non-operating income, discrete tax benefits, amortization expense, COVID expenses, and restructuring and other charges. Adjusted net income and adjusted EPS were both up year over year. Adjusted EBITDA for fiscal 21 increased 15% to a record 201.9 million compared to 176.2 million last year. Our adjusted EBITDA margins were 21.9% compared to 22.1% in fiscal 20. POC had a dilutive impact of 30 basis points on adjusted EBITDA margins for the six months following the acquisition. Slide 12 presents Mercury's balance sheet for the last five quarters. In Q4, we completed the $65 million acquisition of Pentec, 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 $122 million in Q3. The reduction was driven by the cash used for the Pentec 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 Pentec 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 PENTEC acquisition, as well as for consulting costs associated with our impact programs. For the year, free cash flow was $51.6 million, representing approximately 26% of adjusted EBITDA in line with expectations. In fiscal 22, we expect free cash flow conversion to increase compared to fiscal 21. I'll now turn to our financial guidance, starting with the full year fiscal 22 on slide 14. Our guidance for Q1 and the full fiscal year reflects the market conditions and potential impact from the fiscal 21 bookings delays that Mark discussed. Our 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 initiative. For fiscal 22, We currently expect total company revenue of $1 to $1.03 billion, an increase of 8% to 11% compared to fiscal 21. This is prior to any additional acquisitions. As Mark discussed, we expect headwinds from last year's delays in major programs like CWIP, F-35TR-3, and a large foreign military sale. We expect those to be offset by increases in other electronic warfare and radar programs, as well as CQ and platform and mission management programs. As a result, we expect our fiscal 22 organic revenue to be approximately flat compared to fiscal 21. We expect bookings to rebound in fiscal 22, driving a book-to-bill above one for the year. Similar to fiscal years 19 through 21, we expect our total revenue in fiscal 22 to progressively increase by quarter throughout the year, weighted heavily towards the second half. Total GAAP net income on a consolidated basis for fiscal 22 is expected to be $60 to $65.2 million or $1.7 to $1.16 per share. Adjusted EPS for fiscal 22 is expected to be in the range of $2.45 to $2.55 per share, an increase of 1% to 5% compared to fiscal 21. Adjusted EBITDA for fiscal 22 is expected to be in the range of $220 to $227 million, up 9% to 12% from fiscal 21. 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 100 basis point dilution due to a full year of POC, which has lower EBITDA margins. Like 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 farther 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 23 and beyond. From a free cash flow perspective, we're targeting approximately 40% free cash flow to adjusted EBITDA in fiscal 22. We expect the COVID cash outflows we saw in fiscal 21 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 of third-party consulting fees. Turning now to our first quarter fiscal 22 guidance on slide 15, we're forecasting total revenue in the range of $210 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 bookings slowdown in fiscal 21. We expect to incur a gap net loss in the first quarter of $4.4 to $2.3 million, or $0.08 to $0.04 per share. The net loss is 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 $41 per share. Adjusted EBITDA for Q1 is expected to be $36.8 to $39.6 million, representing approximately 17.5 to 18% of revenues. The adjusted EBITDA margins in Q1 are impacted by the negative operating leverage due to lower revenue while recurring operating expenses remain stable. We expect to continue to invest in R&D in H1 to position ourselves for continued growth in H2 and beyond. As a result, we expect to see lower margins in H1 with expansion in H2. 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. 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 23 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 in the planning phase for the impact work streams in the six 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 the work streams in Q2. Although we're still refining our views, our preliminary estimates are that we can generate approximately $35 to $55 million of gross savings by fiscal 25. 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 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 23. We expect to realize $35 million by the end of fiscal 24 and 100% of the gross savings or $45 million at the midpoint by fiscal 25. As I've discussed, we've already included approximately $22 million of savings in our fiscal 22 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 22 guidance assumes margins expand by 10 basis points compared to fiscal 21, despite 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 23. 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 transitioning to production, operating leverage as revenues grow faster than expenses, and continued acquisition integration. We see the $30 to $50 million of estimated net benefits of impact as being additive to this previously expected margin expansion. We're 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 21. including record revenue, adjusted EBITDA, and adjusted EPS for the year, and more than $900 million of year-end backlog. New business activity is returning to more normalized levels, and we're expecting fiscal 22 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 toward the second half of fiscal 22 and into fiscal 23. We believe we're in 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'll be happy to take your questions. Operator, you can proceed with the Q&A now.
spk04: Thank you, sir. As a reminder, to ask a question, you will need to press star then one on your telephone keypad. To withdraw 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 one question only. Thank you. And our first question is going to come from the line of Sheila Coaglu Jeffries. Sheila, your line is open.
spk07: Would you like to go to the next question?
spk04: I think we'll skip that question. Sheila, if you can re-queue. Our next question is going to come from the line of Seth Seisman with JP Morgan. Ladies and gentlemen, stand by.
spk08: Sorry, hold on. Can you hear me? Yes, we can hear you now. Okay, great. Thanks. Sorry, sorry. Yeah, so a question about growth, and, you know, I know you discussed it, but, you know, I wonder if – I'm still having a little bit of trouble understanding – you know, the pace of growth, why it has slowed so much. I guess, you know, we don't see necessarily your customer on F-35 having the same issues in the relevant segment. And, you know, taken all together, what accounts especially for the reduction that we're going to see in the September quarter, you know, when the Q comes out and, you in October, you know, what sub-segments of your 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.
spk07: Sure. So a lot of questions there, Seth. Let me kind of just maybe unpack it and try and recap what happened in fiscal 21 in terms of revenue and bookings. So as I try to say in the prepared remarks, what we really saw during the year was that orders were progressively delayed beginning in the first quarter as a result of really three things. COVID, customer execution issues on various programs and the change in administrations. That or those things actually resulted in more than a five-point reduction in organic growth, ended up being around about six and a half points actual reduction spread across the F-35, CWIP and other naval programs, as well as the FMS. And so if you kind of simplify it without those pressures, the FY21 revenues would have actually been – organic revenues would have ended up being consistent with historical organic revenue growth rates of high single-digit to low double-digits. Peeling back the onion a little bit, so the NAVIL and CWIP upgrades had an approximately – Three-point impact, international FMS sales, the large order that moved or the large program that moved from the first quarter ended up being around about a point and a half. And then CWIP, sorry, F35 Intel was around about two points. Now, if you look at those programs, right, they're all really good programs. And they actually, in the main, perform pretty well. The revenue was up double digits on F35. We were up double digits on LTAMs, up double digits on filthy buzzards. But just some of the growth that we experienced maybe wasn't necessarily as high as what we thought coming into the year. You know, CWIP was down a little bit for the year. So those programs that I just mentioned are really all great programs for us and expected to continue to grow over the course of the next five years because we believe that they're well aligned with the overall national defense strategy. So big picture, that's kind of what happened. And from a revenue perspective, And it's a very similar story with respect to the impact on organic growth in bookings. So F35 had a three-point decline in organic bookings. The large FMS contract had a three-and-a-half-point impact on organic bookings. And Filthy Boss was around about a point. Yeah, it was really all related to the timing of the awards. And we do expect that things, kind of both bookings, will rebound in fiscal 22, accelerating in fiscal 23.
spk04: Thank you. And our next question will come from the line of Peter Arment with Baird.
spk06: Yeah, good afternoon, Mark and Mike. Hey, Mark. Hey. Mark, maybe just to come at it a different way, maybe just, you know, can you talk a little bit 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, you know, a downtick in flat overall growth, you know, 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, you know, maybe, you know, harder to call out for us to see because it's not one big program because you're so diversified?
spk07: Yeah, so we have got a pretty significant base of programs, as we've discussed in the past. And no single program is accounted for 5% to 6% of total company revenue, and we expect that to continue going forward. Part of the challenge that we've had, though, Peter, and I think it's part of the impact that we're seeing, is that when you have movement concentrated in your, call it top five programs, which is really what we experienced last year, it does have an impact. And that's, in essence, what we've seen. And the impact that is a result of the reduction in organic growth in fiscal 22 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 impact that we saw throughout fiscal year 21. So in essence, we're taking a more conservative approach to the year. And then probably the biggest change that we had since last quarter or since the last call was on LTAMs. And on LTAMs, we were expecting a significant order in the second quarter. And now, as a result of some changes that Raytheon had discussed, we've taken LTAMs, that large reward, out of our fiscal year 22. and into our fiscal 23. We'll still have bookings and revenues associated with our program, but we just won't have as much as what we had previously. So it really does come down to just the major impacts that we're seeing on some of these programs that are affecting the overall growth. We're still expecting significant growth from our top 20 programs, In fiscal 22, 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. So F-35, Filthy Buzzard, F-18, which is a new program for us, CWIP, and then the large FMS programs are all expecting to grow substantially on a year-over-year basis.
spk04: And our next question is going to come from the line of Jonathan Ho with William Blair & Company.
spk02: Hi, good afternoon. I guess one thing I wanted to ask on the impact program is, can you give us a sense of how this maybe 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, I guess, wanting to deliver more of that operating leverage this year as you think about structuring for 23 and beyond? Thank you.
spk07: Sure. Good question, Jonathan. So if you think about the journey that we've on and we try to outline some of that in the prepared remarks, since 2014, we've completed 13 acquisitions. We've had a greater than 4x increase in revenues over that period and a greater than 9x increase in EBITDA. So we've extracted substantial revenue synergies that's resulted in us basically reducing our 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 3.5x increase in our headcount. We've seen an 8-fold increase in our subsystems revenue. The number of locations that we have have increased from 10 to 27. And our external supply chain spend has increased 3x. So in that period, we've really optimized for growing the business. And with growth slowing a little bit organically, this year, earlier in the year, we figured that there was an opportunity for us to kind of go back, take a look at what 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 in essence, crossing the billion-dollar revenue threshold is a milestone. but it's also a turning point. And we know that there's 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 six areas that we're focusing in on that we really began the efforts in the first quarter was around org efficiency and scalability. So we saw an opportunity... They're streamlining the business, consolidating 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 focus in on are 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 and balance sheet, other ways in which we can be more efficient there also. But again, to reiterate, it's all about future scalability and for Mercury to achieve its full growth potential, both organically as well as through M&A, and maybe even accelerating and expanding margins over time.
spk04: And our next question will come from the line of Michael Termoli with Truist Securities.
spk01: Hey, good evening, guys. Thanks for taking the questions. Maybe, Mark, I think you called this, you know, maybe transitory, but organic growth has been sliding here for a couple years. Gross margin's been declining for several years. You know, you guys are looking at impact, I mean, and thinking about structural changes, you know, versus the transitory changes. You know, how are you contemplating that? And I guess just to be clear for housekeeping, without the $22 million in impact savings, I mean, there'd be some significant margin compression at the EBITDA level next year. So is anything else from a mixed perspective changing on you guys?
spk07: So let me talk a little bit about, you know, the rebound and growth in 23 and maybe kind of what's driving the five-year outlook and then Mike can maybe touch upon the margins that you mentioned. So we do have really increasing confidence that growth will return based upon an expected accelerated booking throughout fiscal 22, but in particular in the second half, as well as substantial growth in FY23. The growth is likely going to come from our top 20 programs, which we expect to accelerate in the second half of 2022. 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 2023. It's many of the same programs that we've talked about, so substantial ramp on the F-35s, LTAMs we're expecting to more than double in 2023. Filthy Bothered will grow substantially. And then beyond those key franchise programs, there's other programs that we expect, new programs from Mercury, either acquired programs or new design wins that are also poised to contribute to additional growth in the 2022-2023 timeframe. programs such as the B-22, you know, F-18, as well as T-45. So we've won some great programs, all aligned with the National Defense Strategy, we believe. And, you know, the reason that we're saying that things are transitory is because we believe, you know, that speaking to our customers that, you know, it's literally been the timing of specific orders. If you look out farther in time, Mike, and you consider kind of our strategy over the five years, it really hasn't changed. You know, we're still expecting that over the course of the five years that we're expecting to be able to grow the business at high single digit, low double digit rates. We're well positioned with the national defense strategy and the key drivers of growth, both from a DOD perspective around modernization, speed, and affordability, but then also with the key industry trends that we've discussed in the past, such as outsourcing, supply chain, de-layering, as well as reshoring. We have positioned the business in what we believe to be the fastest-growing part of the market, in particular, sensor-effect emission systems and C4I. And as you know, over the course of the last seven years, we've more than doubled the estimated lifetime value of our top programs and pursuits. And it's 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, and these organic growth combined with M&A is what makes us believe that we can continue to do what we've been doing so successfully for the next five years to come. On top of that, we obviously announced impact, and impact is about enabling that future growth, but then also having the opportunity of expanding our margins over time. So on that point, why don't I hand it over to Mike, who can kind of talk about the benefits of the impact program in fiscal 22 for your question.
spk09: Yeah. Hey, Mike. And I think we can talk about two things, talk 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 hasn't materially changed over the last couple of years. You do have to look at our EBITDA margins with and without POC 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 20 from an EBITDA margin perspective, we were 22.1%. We came down a little in fiscal 21 to 21.9%, but again, POC, as I mentioned, had about a 30 basis point dilutive impact, so we would have been at 22.2%, so slightly up from fiscal 20. And then when you look at fiscal 22, the midpoint 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% otherwise. And what we're seeing there is that we have some negative operating leverage because of the flat organic growth in fiscal 22, and that's being offset by some of the impact initiatives that we talked about. And when you look at it just on the base of 21.9% compared to 22%, which is the midpoint of our guidance, 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 some of the negative operating leverage that I mentioned. But looking forward to fiscal 23 is important because, you know, as we go into fiscal 23 and we return to organic growth, you know, 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 negative operating leverage. And then we will see the benefits associated with the impact programs. You know, we're expanding margins in 22, but we think there's a lot of benefit when we start looking at EBITDA margins in fiscal 23, and gross margins is a similar story.
spk07: Yeah, so, you know, to go back to, Mike, what I said, right? I mean, if you look at, you know, for the year, organic bookings were impacted throughout the year, which impacted organic revenues. And at the end of the day, it was three points on CWIP and various naval surface program upgrades. We had a point and a half on international FMS, which is the large order that moved revenue-wise from the first quarter. Then approximately two points of impact on the F-35. Yeah, absent those, our growth, organic growth rate, you know, would have been absolutely in line with what our goals and objectives are, which is sort of a high single-digit, low double-digit organic growth coupled with M&A. So, you know, it's unfortunate that, you know, when you boil it down, it comes down to just some delays associated with various programs.
spk04: And our next question will come from the line of Sheila Coaglu with Jefferies.
spk03: Hey, good afternoon, guys. Can you hear me now? Sorry about that. First time, first question in a decade, and 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. So, Mark, you mentioned some facility rationalization. You just went through a CapEx upgrade. So is this 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?
spk07: Sure. So I'll talk again just in a little bit more depth about the areas, right? So To be clear, this impact activity was contemplated really not related to some of the challenges, I guess, that we faced on the timing of various orders during fiscal year 21. We see that crossing that billion-dollar revenue threshold is a milestone, but it is an inflection point. And with all of the change in the business, effectively acquiring a company two times our size, but doing it through 13 acquisitions, we've extracted a lot of synergies. But we knew that there was probably more value to be had. And we've been very, very focused and optimizing for growth. Yeah, we see the opportunity really, I guess, in fiscal 22 is organic growth rate really just takes a bit of a pause to go attack that. And so, you know, we've already done a lot of manufacturing consolidation, right? So we moved from five RF manufacturing locations on the East Coast down to one major site. You know, we just completed a similar activity site. you know, from three to one on the West Coast, kind of building in scalability. But we've still gone from 10 to 27 locations. And I think there's an opportunity for us to continue to optimize our facility footprint, you know, while continuing to improve delivery, you know, to customers at the same time. The actions 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 structure itself and the way in which you're organized actually drives the cost footprint of the business, you know, we took an opportunity to kind of step back and take another look at it to drive, you know, additional savings. So, Mike, do you want to talk a little bit about, you know, what you might see happening with respect to, you know, overall margins over and above the planned margin expansion that we're anticipating as a result of impact? Yeah. So, Sheila –
spk09: you know, first of all, we're still doing in the planning phases of impact, and so we'll have, you know, more information and more detail as we move along. In terms of, you know, you asked about R&D as a percentage of revenue, where that might trend. You know, stepping back pre-impact, you know, we'd always talked about, as you look over a five-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 for 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 over our five-year plan. We still expect all of that. And what impact is and 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, We're still working through that in terms of, you know, what's going to be the amount around direct procurement and 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 is, you know, 200 to 300 basis points.
spk07: Yeah, 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. And so, you know, as you know, we're a highly acquisitive company, 13 acquisitions over the course of the last seven or so years. You know, serial acquirers, you know, 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, or twice the multiple that revenue has over that timeframe. But as we look forward, the idea was to basically transform the way in which we're doing things to try and improve the scalability, the efficiency of the work, and simplifying things along the way. And so we're applying impact on ourselves to begin with, which we think that will allow that two to three points of incremental large expansion over and above what we've been previously anticipating over time. But the goal is to stand up this transformation office and then to use the processes and the methodologies associated with impact to all future acquisitions. If we do this right, we think that 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 and EBITDA potential, both organically as well as through M&A.
spk04: Our next question will come from the line of Austin Moeller with Canaccord Genuity. Hi, guys.
spk05: Hi, Austin. Hi. Just my first question here. Do you anticipate any future acquisitions in fiscal year 23 or beyond once this impact restructuring is completed, or is Pentex sort of it for a while?
spk07: No, it's a good question, Austin. So, you know, we don't see impact actually slowing down our M&A activities. So, you know, 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, you know, you'll continue to see us acquire businesses that, you know, fit with the core of the strategy. So... We're not expecting impact to stall M&A. That's not the intent at all.
spk04: Thank you. I would now like to turn the conference over to Mr. Aslett for his closing comments.
spk07: Okay. Well, thank you very much, everyone, for joining the call today. We look forward to speaking to you again next quarter. Thank you.
spk04: Once again, we'd like to thank you for your participation on today's Mercury Systems conference call. You may now disconnect.
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