- Earnings call transcript Q1 2023

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Operator

Good day, everyone and welcome to the Mercury Systems First Quarter Fiscal 2023 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I’d like to turn the call over to the company’s Executive Vice President and Chief Financial Officer, Mike Ruppert. Please go ahead, sir.

Michael Ruppert

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

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

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

Mark Aslett

Actual XX% up for Thanks, then begin Mercury's the your review the it Good guidance we'll in XX% results a update. and growth LTAMDS, low in financials we're following year-over-year high exceeded The layer and and the full outlook quarter in the thanks I'll and for us. as the of largest bookings with tracking across 'XX. the QX increased fiscal everyone joining Mike open quarter afternoon, and first end of bookings quarter, the SDA our Mike. in business of all year guidance will result. questions. the our metrics raising first end tranche AMCS. were

We last and orders book-to-bill QX combined also backlog, by received EBITDA XX F-XX This increased year-over-year. from the with strong in second position half our that strong QX well deliver us QX. and and remainder QX and 'XX. Block Backlog X.XX X over the year, months. grew the bookings, QX in in the the to expected of X.XX and fiscal bookings for of Driven XX% revenue [indiscernible] moved was

down year. X%, Our quarter constraints. Total semiconductor seasonally results Together 'XX. the revenue with QX half a supply the is our continued long other year-over-year for orders revenue second was fiscal weakest better Organic delays, X% than times first and reflected lead typically increased in quarter. weighting also result order last far QX of

expect positive turn quarter. We organic growth in the to second

driven Our fiscal 'XX SEWIP. was in as program orders largest the and EBITDA down were of F-XX primarily F-XX, weighting XX% This adjusted Aegis, half revenue QX expected. programs year-over-year second was and LTAMDs, mix. by

as future was and to which raw well of chain order and watermark This million delays for of purchase QX the as an in revenues. Free we $XX the the year as reflected increase to margins cash the primarily outflow supply will in low be support materials believe that collections the affected timing disruptions progresses. year. expect of We quarter

payments quarter. In holding of end the addition, unusually at we saw the customers

fiscal QX positive 'XX, and cash the free to free expect flow year. half cash substantially in of resulting flow through in second improve We grow for the

continue We in more million time wins Design than levels QX volume. totaled activity. high of $XXX business estimated in new to see

pandemic. X. business the macro the to Slide near QX the with to term, the fiscal forces. beginning marked Turning continue In in the year industry of will Mercury's our face of effects fourth challenging dealing

we that it's our impacting today back we've our beginning this We're what similar period of to crisis Bookings, and of the navigated growth operations They're Mercury's positioning. on impacts 'XX in the of fiscal in second multiyear more We post in EBITDA we're was timing clear slowdown period and unique are anticipated, XXXX. the related. and X% we challenges, they're year. period supply the the much about not care After well Reflecting nearly future several we However, a didn't were COVID-related orders. fiscal as financials. than the to we XX% demand phase. accelerating saw revenue that given pandemic, and employees, and to entered over issues health optimistic years as in the profitability to the control and Mercury. related, minimal year. not adjusted term can COVID-related short In declining 'XX, a believe for sequestration executing our up us grow they're with plan half Bookings the

year-over-year. lowest in we XX% fiscal Our in than variant order more still was significant as a days. well year. half. than semiconductor EBITDA defense Revenue budget The prior prior nation, disruptions effects productivity fell all the X.XX beginning delayed a 'XX, attrition in higher of and as by the second up We reduced Delta and X.X, experienced to full magnified manufacturing XXX from more chain year's book-to-bill year's the supply slowdown the Adjusted the our the was COVID In early decade. saw XX%. grew the

with revenue progressed, we free year as outsized margins Working capital the negative chain as HX, X% in had disruptions fiscal less had roughly anticipated. X% revenue EBITDA and Supply cash total on than result, an Organic declined a increased flat. year grew 'XX, HX As adjusted impact ended turning flow result. with investments we a the linearity.

This half leading versus FY crossing year-over-year, and prior growing XX% the occurred with bookings in of time. bookings year. to the growing HX Most However, rebound book-to-bill X.XX this billion a XX% strongly second year, of $X the first fiscal for pre-pandemic. in semiconductor is rebounded 'XX our 'XX, order being back-end longer we start. experienced however, also last a more Unlike coupled with bookings in financial performance lead off times timing, than 'XX great resulting dramatically loaded to in fiscal are

for This be improved strong a marked stage and We half expect and positive faster full flow the fiscal the bill. much cash book with believe 'XX quarter revenue QX growth, free in bottom year sets first margins. bookings growth in We HX to the the second that versus 'XX. of to organic and fiscal

order second strong organic quarter flow, the for growth as whole. return anticipate fiscal Given to a we in a and the 'XX

and earnings flow working efficiency cash as We over positive expect free capital as time as the to improved subside. stronger well headwind supply deliver chain

of the on earlier, experienced As X is in since the business next nearly start the as what we that our the terms The led years. the much pandemic enhancements financial time in at Mercury has a creation over sequestration multiyear growth and same accelerated value ago the results. impact made decade I said of to that

compound 'XX, among annual our Similarly, with through 'XX first strengthening Mercury for X and business second peers through respectively. defense Tier once years EBITDA, and ranked again. our impact adjusted fundamentals growth fiscal in revenue For

see the lead to to Looking shortening improve for high-end we semiconductors semiconductor half. will times second that begin forward to in the already on fiscal times 'XX, of begun a low We've believe end. lead

for position stronger expansion all us working release organic of expect value margin as free bookings should capital, improved We continued flow which and growth, creation we and further forward. cash greatly and as move we growth

buying for government what Europe be industrial to geopolitical believe the with war. will side, Taiwan Russia the in experiencing they now the the is 'XX not on challenging with to defense and and remain are and less. not said, likely positive a On year other clearly also once an after line into however, change, spending the than to challenging time and and shortfall increase ongoing semiconductors government We're We The materials, base both under the related the In continuing super in the X. the the appropriation the labor We're since heading term, Turning fiscal what that is beginning passed, given defense a to currently left. are power most of the to spending. and environment allied Ukraine to That and required the be increases appear midterm this it in today the Slide industry supply inflation. contracting We environment. military budget until inflation, semiconductor or bill and stockpiles the availability moving be in bill short today's defense is significant real personnel. is is budget is The The expecting to more a a and dealing risks U.S. China resolution. the contracting need means environment new we're term. the whether threat industry could capabilities potentially in elections. note, cycle expected build be industry near This new the cold defense far year-over-year. and GFY the defense the defense U.S.

demand getting environment is the stronger. and appears be to strong So overall,

Although the temporary. industry they're dealing that believe with is we headwinds,

spending chain see to defense to improve. shift supply a expect and conditions as We tailwinds grows

stable. At challenging Mercury X. the but level, the chain Slide to supply Turning environment remains

of used times experiencing overall about processing fewer processing has where supply Prior at business opportunity quality supply and seeing and times where represents defensive semiconductors become the long not of increased lead XX years. semiconductors. have to cash still the strength were [indiscernible] weapon capital semiconductor inventory balance our end-to-end in best deliver isolated as expect and balance of stronger long has largest period, most and lead now chain critical chain sheet missions. supply the our but conditions processor results fiscal believe to have times time. weeks. also we're and quarters revenues 'XX weeks. in material Putting Lead that platform some semiconductor that XX rapidly it's the the this we're to A&D placing increased global rapidly decommits our we compared availability extremely Although not of supply They high-end perspective, High-end powers disrupted. time begin It's point for of and XX in of and delays QX. the our this to 'XX. orders positioning sophisticated Mercury's over development to Mercury supply third second been can, we're sheet. to for next will When production. is defense of this Mercury release systems improve. lead risk we XX% from consistent to in multiyear XX from the X likely It's mitigate fourth means high-end to related of chain fiscal receivables range over until with we most significant pandemic, grow and today, our High-end a invest the heart normalize, working in more are this the Throughout to that half unbilled issues, we've the support that and offensive many

working. capture include they're quotes effects. and any to of incorporating to equate the spend and also peers', standard maintain direct to strongest We've more shortened We possible multiyear Semiconductors semiconductor-related with proposals. and These steps environment businesses believe. aggressive mechanisms XX% pressures. price deal our of we products also inflationary the in to our in our repricing adjustment continue validity We've near-term rates-based inflationary than supply taken far this margins our

role. will the Much as to impacts progress X inflation rates. Mercury the program. result priced the XMPACT Mitch over Given nature tremendous since our that seen business took we recently and we company We've in total began industry Mitch through our of growth do Growth our beginning the the which launched has former approximately leadership simplifying and us in good supply of our of headwinds laying potential the as being at foundation fiscal continue XMPACT XX% Processing achieve like our so. to our President in short-cycle changes Officer, the Stevison, who and running organizational likely the from the actions of the by to more accounts next we're 'XX. time hit to ground profit for Raytheon Mercury We're for chain sequestration, of team its market approach We over at Chief full well joined it's helm making ago, months new these structure years. XX streamlining of managing division begin model, diminish his and knows revenue. strengthening and

pleased efforts [ph] as we're Effective joined also margin to these their us engineering deeper 'XX of in their Alan for team. supply Alan focused Alan We XMPACT have accelerate operations, in responsible me. be We're and previously our expansion on was initiatives fiscal reporting welcome into now Execution and defense at X, pushing October the Senior program execution to chain, business. management and He'll Raytheon VP excellence. the missiles division. to to

As deliver supply down the in we 'XX, the This challenging chain became towards most capital and financial burn mitigate more those pivoted addition risk to benefits. release. that risk year, we in could to on fiscal pricing, and areas environment working focus XMPACT accelerated help cash mitigation, continue immediate

initiative Another returns, investment progress year. is the R&D and last on efficiency building

Our release and Mesa, our digital second and end of over in well. California transformation to teams the new In Arizona strategy. into center on operations additional as initiatives term our consolidated excellence buildings quarter We're structure the Phoenix facility We're engineering improve a facility the and performance making footprint X fiscal in the also our consolidate and to good in expect QX, engineering help Fremont, of will X 'XX. long and cost in we progress by site California. track we

relates about will it to Mike. like The to As and on ability environment active to existing to focused at I’d With going the remain proven grow M&A, our acquired integrate but scale M&A themes. continues businesses XMPACT greater call forward. leveraging a our Mike? and be over turn to that, is

Michael Ruppert

everyone. and Thank afternoon, good again, Mark you,

As I'll and and our results move usual, fiscal 'XX with first quarter to then QX our start guidance.

we from excellent discussed, visibility has supply half. results demand inflationary perspective, guidance QX our across QX, quarter Exiting Mercury's metrics, and Mark all despite second and have a into the the first headwinds. As chain exceeded

of As a end flow low cash 'XX result, raising expecting a year. we're fiscal guidance our the and positive

compared Slide QX Turning XX% Bookings QX to our to results X. on $XXX were 'XX. up million,

to compared X.XX was in QX book-to-bill 'XX. Our X.XX

demand For rebound ended positive was The in the the 'XX, our last XX book-to-bill book-to-bill months indicates X.XX. QX our environment.

XX% billion, backlog quarter up $X.XX of was the at QX from the end Our a 'XX. record

X% million. down us approximately was the we QX backlog XX-month results expect $XXX that to points 'XX. Atlanta $XXX acquired Avalax exceeding into margins top the for on we're was compared increased to receive and of quarter, of Micro in remainder last was compared last year-over-year Our Revenue full XX% up providing about year. and X% Organic of programs visibility fiscal to $XXX to year HX bookings with the for up optimistic to Coupled good QX, our in key million QX revenue and revenue $XXX million, and end million our year-over-year. million. included guidance basis $XX Gross which were XXX

QX smaller a quarter. of in higher-margin had we expected, proportion reflected As production revenue material margins also inflation. gross labor and the

Adjusted As we for million, $XX.X gradually result of as gross million. move macroeconomic program to of environment. $XX to through million higher and fiscal a 'XX, a our margins we see EBITDA was above stabilizing mix $XX guidance QX expect

primarily adjusted from range. Our margins by EBITDA 'XX guidance margins points fiscal the exceeded driven for our QX were margins. down and XXX XX.X% quarter, gross Adjusted EBITDA basis in QX XX%

was for supply primarily cash timing award free shortly, $XX approximately flow was discuss due an the continued and of to I'll As chain million. disruption. outflow This first quarter

payment We X delayed Mercury's base. also X Slide behavior the balance presents sheet customer our observed last for quarters. across

remains sheet positioned capacity the strong Driven balance credit cash with of our debt with million of while was billion our Our by The business. invest approximately free outflow. We HX, balance $X.X $XX revolver. be anticipated we $XXX primarily in million and the the to cash strong to delever QX well and under significant continuing revolving cash expect increase ended under to in cash related sequential sheet flow equivalents to funded the generation facility.

capital our at At $XXX X.XX%. approximately leverage rates. implies We debt current now that debt During have positions floating continue fixed on million attractive levels, our SOFR rate to to quarter, our X% allocate of us swapped fixed majority rate. the a interest of we which funded at to

to delays chain of support As This with for our over performance material X risks is a DoD's This a of Mercury to strategic accelerated that we've resulted purchases that the last result volatility which the associated the and The primarily obligations working ensure million on and programs. macroeconomic $XXX the source investment capital environment, priorities delivery on supplier. in mitigate to and the critical consists of material customers purchases approximately increased quarters, Mark in unbilled programs discussed. are has aligned receivables majority sole supply these contracting inventory. and with are invested

chain a decrease we supply convert conditions sales. to substantially of our obligations unbilled As normalize performance to and customer and receivables and annualized as completed, percentage inventory are cash expect

were time $XX receivables million a payment to intentional approximately Turning result Accounts more 'XX. conditions $XX Unbilled meet increased. environment, million. increase, our the receivables our customer and labor to were primarily supply over receivables have revenue approximately increased unbilled market across complete to recognition, putting on QX a the $XX receiving. same shift criteria Within contracting increase to behavior. receivable from ability $XXX the program At specifics. further subsystems integrated milestones of billed which our strategic naturally up are a impacting extent, unbilled QX macroeconomic lesser million, in of that as time, million building chain with and pressure the

take continue terms awards. to including a new receivables, payment approach including unbilled and these contract disciplined contract to or payments. incorporate structures all negotiating in performance-based legacy We're to proactive unlocking progress We

to down Mark range 'XX increased and We as XX expect throughout a from QX QX fiscal [indiscernible] to 'XX. XX times these actions in revenue drive $XX million to compared as annualized Inventory percentage discussed. 'XX. overtime approximately semiconductor receivables unbilled of fiscal 'XX weeks

purchases lean support raw delivery supply quarters. and in risk mitigate accelerating material on We chain forward customer continue schedules to to future

goods components customers. our goods have deliver accelerate order working hindered partners parts with our to to finished supply of our receivables, Additionally, to key in as with deliver key ability finished We're our deliveries unbilled customers. in to shortages to

flow Turning Slide cash associated lower continued free to in onetime with by supply quarter, as QX, as well capital working net outflow a Last we cash on build driven income, constraints. forecasted X. payments chain

expected was end, the Reflecting However, than quarter. $XX the the receipts and at expected. the award to collections proximity million, quarter were contracting than outflow primarily expected within to larger cash quarter lower delays in customer due of billings

or majority in delays these QX. QX the cash billings result to expect in We of collections

resulting in QX, our first We of also in end, payment in payments not an across until delayed increase of as quarter base the paid being customer due QX, observed behavior with billed receivables. weeks

Although in this in factoring put an if QX, future, address the it facility place we've in accounts to wasn't receivable used necessary.

said, As was of the point fiscal cash Mark we QX low believe flow. 'XX free

cash to improve positive and We year. through free cash expect free QX grow second flow the flow in leading half, for the to

believe starting longer-term forward, Slide especially Looking working fiscal balance release to financial the substantial from turn our results guidance, we capital early 'XX reflect a sheet subside. with as our of the QX chain that our now supply potentially for financial impacts will of XX. I'll headwinds on

Forecasting the challenging. current environment remains

can, incorporates the chain impacts constraints inflation a well as guidance as with year. we continuing extent a to Our associated resolution and labor election midterm supply material potential in and ongoing

million in cautious from $XXX expected several to increase continue margins second We our supply variability to the be in currently higher-margin 'XX, chain contracts. year. revenue the development quarter currently as HX $XXX the regard range production increase by QX, of million. The programs. gross approximately with inflation. so expect be lower-margin to driven we at we we revenue margins QX, the second to to material of complete X% to expect expect gross half and to we is In fiscal compared For growth of growth midpoint is This last

basis be the to expect at XX.X% fiscal margin. million, QX QX approximately points with QX million and is EBITDA line to We midpoint. representing in This higher 'XX than revenue $XX $XX of actual adjusted XXX for

in flow be point QX, For resulting risks XX. low QX, slightly for near Slide 'XX. now to high team positive free in we cash guidance currently control, Mercury fiscal fiscal mitigate the year QX of expect In I'll to our breakeven within to worked end 'XX our exceeding with to guidance. full on the the marking turn

for overperformance but the outlook industry the builds Our near-term the remains our based remainder the updated and remains guidance The full on certain. environment on of year. QX cautious risk macroeconomic the for year far outlook from

margins strong be, point we demand the continues improve in in organic and environment will to our retrospect, for and growth believe QX Mercury's fiscal low However, 'XX.

revenue low year-over-year growth, a of the bookings for we're we book-to-bill As raising adjusted X.XX a previous backlog. QX by and result, year. EBITDA with end Driven for or ended our of the guidance XX% XX-month

in growth growth linearity, For revenues. bookings forecasted bookings continued and leading our fiscal 'XX, greater we expect our improved visibility to in to double-digit backlog and

We growth This in for From total company to revenue a to we revenue X% book-to-bill represents fiscal positive a organic growth. year. and billion perspective, expect to approximately $X.XX the now billion 'XX. X% expect also $X.XX of flat X% year-over-year

XX revenue still guidance see below to this by driven we're momentum strong the model, organic business the bookings the over our rebound months. While is beginning last target

to approximately with We into of fiscal Based 'XX. revenue expect And 'XX HX. and ranges, we accelerating expect continue growth midpoint to guidance HX half be on and fiscal HX in weighted. XX% second in in organic XX% our the of

our As range expected in up for bookings fiscal to to fiscal HX. X% Adjusted to heavily provide EBITDA backlog for QX. EBITDA backlog strong visibility is I to half. revenue, current fiscal weighted 'XX outperformance mentioned, in $XXX.X be million, as approximately The from Like we is second $XXX and XX% of QX be Mercury's 'XX 'XX. XX.X%. expected EBITDA million the towards in coverage EBITDA X% and expected to Adjusted margins be EBITDA by our should increase enter expect margins are the guidance driven adjusted to and we

From the expansion. delayed year, estimate This of we XX% perspective, repealed. through free current revenue lead fiscal tax approximately an ramps expect we're R&D assumes adjusted to leverage increase operating targeting capitalization laws EBITDA EBITDA adjusted gross to flow As or a in cash margins in the margin and 'XX.

conversion cash to for turn back driving expect said, the Mark. we to that, the I’ll I've over now HX, full With As to improved call flow begin in year. normalize

Mark Aslett

Mike. Thanks,

believe revenue We strong better fiscal entered Mercury billion organic and Turning record strategically. backlog couldn't We time. with anticipate reflecting positive now $X strong return that We a a growth, and 'XX to new momentum. a book-to-bill with the positioned first for bookings, XX. be business to Slide

expect free 'XX This to a for positive margins, to working better results, improved recede. to 'XX should year cash stronger the We deliver and fiscal as supply chain capital us in lead headwinds improved flow. fiscal efficiency positioning begin

We processing Looking further should ahead, next to our X driven Defense fundamentals value intact. plan years associated potential believe be continues that as are with from poised greater scale. the innovative where we're internationally perspective growth. a Mercury capability as and systems remains out the driven building create subsystem at well over participates. set at has positioned by mission a the XMPACT for to continue been budgets solutions our chain systems We benefiting of that from will result. are and increased market in deliver and delayering industry for outsourcing the our rapid level. defense addressable strong expand as company chip anticipate future to trends, content percentage by and to including electronic reshoring We're with the domestically we This improve move large supply well into Mercury's time. and a part strategic platforms

digit of at to [indiscernible] that rates Mercury at well. us and grow believe organically low headwinds positions will single high tech current the and model high double-digit continue as intersection Our We the defense to diminish. can

as capital strategy integration. M&A we've conversion. and as full continued by the cash expansion past decade, working to leading includes margin addition driven In supplemented improved the over EBITDA and efficiency our improved on X-year XMPACT, adjusted business by Executing and organic our to well growth, long-term growing plan margins stronger disciplined organically, with M&A-related

so. shareholders With like significant operator, the expect tremendous In thanks effort for a we to As to and for Mercury to recognize a value of please entire I'd that, team result, sincere with proceed all times, continue the my our challenging closing, these you. doing Q&A. created during

Operator

question comes William from first line the Ho Instructions] [Operator of Blair. with Jonathan today Your

Jonathan Ho

actions your for us of And to help understand terms can thing margins improvements of the balance pricing a little better, you mean flow One on bit how that maybe through maybe to what I flow cash wanted the understand side? could or the gross either year? in

Mark Aslett

Sure.

bit, a Jonathan. So we've done fair

X able of our products a seeking that actually a being XMPACT, more up we really up be And in we I As more the to we're is of provided. with second that had and to pricing we and actually some we areas Both stood organization purchase part price doing inflationary we're to things procurement, that team procurement ended related those pretty stood to initiatives: up efficiently; then major that. line the where initially seeing. value the helping pressures successful to offset think have of X

our all customers associated capturing we’re So that aggressively well. of the to in the in across-the-board pretty business, products. with increase as the of on going sure as actually at costs start make also price microelectronics commercial pressures business, did we -- with the to at addressing year, looked as And pretty well pressures the associated basis a in the our inflationary passing go-forward very our actually forward noncommercial much inflationary contracts then have our we on

to like I you’d a Mike, from maybe perspective. if financial comment don’t know further So

Michael Ruppert

working No, you the as look Mark. time, think add our hit at Jonathan, do at we're thing that as only you I to it, is said, But the pressure I have that guidance, through our would we embedded offset guidance. some pricing. in we same inflation

but So well. mitigating we're there our some in in guidance as the piece is it of there

Jonathan Ho

of comes some around that normalize quality conversion? all do have around customer you to of in When when just follow-up. sort or Great. start cash any maybe And terms behavior the it collections, quick does the as payments, then at a concerns of to receivables? And

Michael Ruppert

Yes.

one. that take I'll So

the step made we've programs for priorities majority very receivables back, well the that with feel are the we and Jonathan, balance that inventory. of receivables So on if of the assets designed unbilled that sheet the aligned billed the in purchases material to the collectibility the strategic both that you of good about Because were is quality on. are DoD's as as that

balance sheet the just on unwinds those it performance our so matter final obligations a as really once customers. time And we deliver is to of

Mark Aslett

jump it's in there Mike, and into delve in back just kind I to of this more let because detail. maybe little think bit a step important me really

that chain those So very seen most to throughout and continue challenging both are from to the we've challenges XXXX. improvement. we've had And of due expect cash challenges are actually environment. we going a that capital flow clearly working perspective some supply And the

I think the versus supply somewhat grateful decommits which in-quarter we're improved fourth for. the has quarter

and scarcity semiconductor general lead much I very However, is times, think still of related extremely long to particularly those devices high the challenge the end overall. the on

think the -- which also as devices and probably because of seeing rapid given inflation. older more now industry labor defense is we're well is seeing processing. material hit as our a in to more business challenge related XX% end-of-life particularly both us cycles than it And most life I more frequent and

'XX, to use, get recognition that time. remainder recognition the point-in-time when reminder, than revenue recognized as dictate the actually that. in industry. a The the as of companies So recognize And we fiscal unfortunately, that's rules revenue put really to what recognition. really is choose of larger due over we type it's XX% we down when much percentage Or deliver accounting a other actually don't another our way, the revenue is revenue in business we of product, actually

model particular and is working cash why let have why flows really temporary and a on our believe being a talk understanding been we what's better business built little -- but impacted of is flow a going really basis. get has me So capital the so in begun you impacted about cash bit on why and

actually tremendous historically products into to get point-in-time lead mix bumps been changes strong road customer because times able so past as with XXXX it's which If our revenue, to really the been whole look worked well the orders has And many actually semiconductor absorb to largely and we the back multiyear inventory years short. quite guidance quarter-to-quarter given period. have industry, the deal our also we we to deliveries lengthened volatility. actually period over and track for model position our The us And been lead in disrupted in reason typically times future dramatically flexibility we've So unlike I a the receive support model from XXXX, and quite has when a really typically and purchase is customers actually historically industry. revenue suddenly of some on based why and record well manufacturing in our awards. don't given our as which

So this top have challenge this became -- been the the became of -- was happened, It's major at at however, lines quarter XXXX of likely these our if you is, up for little many a in seeds of the reason show continued lead into well. many quarters the time it's actually and quarter it's times suddenly a clearly And level. The this itself. customers' and what's industry as for taken impacted. that actually bottom prime it truth ago, to so back bit look a just contractor last

needs pretty the to So and production is the approach what actually base of a to in And footing. an and the short-term lower change industrial chain duration clear resilient it industrial basis, tiers an of towards industry the that defense build more contracts, it's supply we're industrial moves if policy. defense really artifact

build sole-sourced Mercury; And commitments. these as programs full well These typically we programs of to have during we're an as we're LRIP inventory lengthen typically of dramatically in to usually semiconductor production. definitely inventory designed or for of that needed are back customer we buying pandemic. programs and positions. seen lead So it we've times, the are for way the rate sooner products, types inventory would in our support And record additional where financial a programs purchase than normally to and defense our

we semi more on the life those stock too. which to older ended industry had legacy meant addition, rapidly up of components In

deliveries commented have part charges earnings this planned semiconductor held up product also -- created others whip. season, whip which As more inventory

So consumption largely in precipitated the cash by raw in change materials semi industry. has whip and the been the

our Now absolutely it cash. customers an as of that view we in and our future but consumed it's investment

we or default This type recognition, recognize the our of far customers. On revenue is by for the other revenue. of revenue side, and industry how the related overtime remainder in the many that's recognition most common to unbilled the

again, we've really lead mentioned. partially Now our business. tied larger ship that with quality, which driver we're growth certain but with and actually the It's treatment related, pegging significant the longer And labor model. built buying here, we And really been we're challenge have just I success units. in this including challenging semiconductor units dramatically has of up of inventory Also, the capital. supply we've in as couldn't supply been is working up final we meant that the shortages used until ended subsystems the program. successful being times, winning this part as to also The a legacy contracts specific it we shortages, collect cash been in accounting correct area, business -- a

to cash of help going conversion we So we and pretty in over you're release understand and start our cash tied But a nonbuilt people and just thought believe level to important dig time dramatically the flow was kind inventory it rates. receivables up what's should that on. really down improving

the for question, thanks Jonathan. So

Operator

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

Unidentified Analyst

on M&A about It's of looking XMPACT the return of change of thinking to year-to-date, Sheila. in the environment seen is any movement for how how But M&A about we've initiative. the importance I the for profile shifted? talked kind of you you're at? kind actually [ph] some rates are Scott mean Mark, And you given

Mark Aslett

to Mike, do one? that you want take

Michael Ruppert

Yes. Sure, Scott.

definitely think a move and it's the over couple I last and impacted listen, we've weeks, that industry. rates the -- months seen of in quarters

to some on And seen said, going discount multiples. good valuations to in out And continue been think when come just are there. That definitionally, down. I having I of assets you could garner based industry of that higher think there that the we've those at recently. they're good for that rates, assets, look scarcity

doing what where the think of keep pretty right approach. careful valuations, perspective, just we're with to the that we're we're in disciplined I our doing, we've cases environment We're with our in now been from when M&A our in uncertainty. lot especially a very we're doing going we're underwriting

good my give I in to as to we from mentioned comes got M&A. And rates that revolver it have, is at the a think M&A lot does the attractive revolver, look billion a $X.X capacity the of when at us on we've focus time when it capability I right. our So perspective, prepared remarks, you when

Unidentified Analyst

just I you really where mean, over you’re mean, it now. quick And XMPACT. previously any been are maybe able follow-up maybe to? you point I on then a areas challenging a have year more had And it’s than what little to there expected? into successes been a

Mark Aslett

Yes.

question. So good

we've a the simplifying we've So we strengthened direct And procurement. we structure -- some up team. the I have centralized really -- about streamlining then or one procurement advantage have focusing organization learning-based environment. in of in we procurement leadership pricing really us AI to actually achieved a So as put business products more a This areas, us dramatically our of to on dividends the We chain paid have this think to into an that the lot, a by procurement it and actually appropriately. began business was stood still be take that huge today. and challenging today, help machine set key right? inside has supply supply We the price tool. place organization scale able actually We well

we're term Now really that XX% inflationary the those semiconductor seeing helped to in increases XX% in to mitigate short pressure. items X the

done able right work We've and of good through of eliminating projects we're an a a able low-return ensure engagement job areas. been perspective. to amount looking fair by So a employee to focusing project at from that mitigate investment on kind also, I from any to think, that we've going the retention fair efficiency project, done a We’ve bit. R&D be

are few know, business. continue people of months. to the you fiscal footprint progress think with of challenging need to we’ve our we well and facilities just others to work over also tremendous done transformation. as that of of already wrapped done being several this XX say by last of the done the the right our Over now a on a I terms the amount the complete very made retaining as got very, reductions substantial able facility that employees at expect We’ve I off hire to labor would course we’ve the a job good great As of that, the we’ve we’ve resignation. the in number looking above markets And that that end And the year. we digital grow

We’re of just completing manufacturing a new execution the system. rollout digital

We process Cloud productivity are us Gulf tools going scalability our engineering Amazon the to time. to the give of and and high over better which is migrating in efficiency

we’ve the supply chain and that which the substantial we’re well course are done, the done actually Unfortunately, that not next a yield. X see And substantially do really so we as just the the lot. think given believe to expansion I around productivity cash and linked. we’ve we’re we’ve seeing But of challenges what improved years, of going benefits margin over as generation flow seen

Operator

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

Michael Ciarmoli

cash is, Mark, what payments. you’ve better a we the of I’m your trying are basically capital I sheet these you’re prime hear I like contractors? programs, risk got flow how I the you’ve free time back back while spent dynamic on working that mean understand when I is customers, they’re just all simultaneously, your to working But with among I and I buying taking ton in mean holding inventory here know cash mean, stock? support mean dynamic -- on back customers? payment that mean, all I to balance yet just just holding thinking you’re investing the flow. customers and the And they’re

Mark Aslett

Yes, good it's a question.

sure it Let me maybe kind I'm touch contribute. high will level a on of at and Mike

holdback So quarter. we of the at see did the end some

we're first it's So some like of I'll was we the also periods June, right? One And got you customer end particular us of holding for quarter, X which but then the the not on definitely we So holdback the quarter. an at day long new give that example, right? time of paid for paid things. saw third the

in just taking was those us, I also largest affected to of moving cash window. our up the associated The all particular, other thing X in orders. ended the revenue quarter orders the specific And the cash with and right and outside Mike, the of the timing first

have line X bottom I So level, some challenging it's revenue of number look, that. But been associated overall. quarters, going terms of think industry a we're and and top an Mike, I in on. the seeing that's with in at things think changes And behaviors last

you would So to that. Mike, I like add if to don't know maybe

Michael Ruppert

that I and and prime business you the mean, hit different thing talked between through only market models our and customers it. I is Mike, add of a about going us he just it Yes. on spend would think the bit No, are I good time that.

are dynamic, We change unbilled the things receivables. doing especially around to

and negotiating customers We’ve new we’re payments existing So processes with get progress milestones got and internally. more updated favorable to now on programs.

way we change to trying contract So with we’re the customers.

support So balance it’s not all programs. sheet of these to used our being

that’s the to going going to so capital of some think we’re unwinding forward. we working why And see

Mark Aslett

yes. -- if mean I

a If doesn't that of conversion, it But for from doing it obviously looking a things there's and reaction. and in X receivables put execution inventory. in is right? cash to what unbilled we're thing, delivery focused done on, every on-time We're a at usually down the cash So way you which we've think burning risk, revenue drive right? action the

on of in put times. of those or focus shortages given accuracy on we part need to that the place lead scalable to materials absolutely have enhanced tools earlier identification commitments and to We planning the leverageable unprecedented in as our part the demand processes demand signal and much We've drive make impact.

capture making that We're balances payments. cash as strengthening we're sure done sure to in side of some we've we're going and can The any unbilled past, I the Labor we're [indiscernible] or going third execution we're that much challenges in think focused that the very So actually larger subsystems as up the related up got that I and had the resourcing milestone revenue, the in labor to proposals that part of on of well. mitigating and future. or we're the the proposal is protections right? finally, is critically then progress on much also we retention and and Mercury liquidate and performance as on back necessarily on prioritizing very when milestones focus all customers. drive over we with I We're terms legacy moving didn't after have those those getting we've negotiating to shifted now we've much, shortages contracts conversation, we focus And as term, ensure issue major actually chain for got a as mentioned, front. think And important, longer to make staffing. thing our towards the commercial the business, the bid actually impact we of value industry part resources that the and the better

when we're think it. in I So QX, Mike over as think, And flow should all as said, bottoming cash is QX we improve in year the that the progresses.

Michael Ciarmoli

it. one Got just quick That’s helpful. And related. on follow-up

Redwave either -- January, we bill end for time maybe budget or turnover seated? Bluewave, Congress to think resolution, internal the your we will wait complete year-end do and full a you of new guys based before the So do continuing frame? think get if kind through dynamic a planning, have you we any see On February of signing run to of the on bill or get midterm, do you

Mark Aslett

right election the things. I get is as the going mine, bill what that year-end that how assumption to might the right, are -- think but and be guess good we your our results operative is Mike, as before affect now on

which to CR terms in taken short relatively a expecting return our guidance. we're we've of yes, obviously So

Operator

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

Austin Moeller

modernization programs a of allies question or could that first new for European my due expect the year relative delay Just Do the here. the some U.S.? to pressure NATO maybe you on and more inflation orders economy by

Mark Aslett

good a question. Yes, it's

both with happening spending. of that is think the you into timing altitude clearly, over And of and defense say this, clearly, months usually The dictates the situation not. what's the -- I the the gut X not in would probably threat kind Ukraine, my great. environment

I So Europe. time will going continue to to little my bit gut a spending we're see of sense But takes increased that it is, with a immediate acting urgency, think it's or Austin. longer, whether is And in they're tell.

Austin Moeller

free out call you that step-up in the program second anticipate specific deliveries the can key And sense. in half you flow? makes support That will any cash Okay.

Mark Aslett

we've I half, programs. some the pretty think in second significant got So

IDIQ my we've We're as ramping That orders year beginning again. through the to as kind head, as very a ramp off this the up of rattling top delivery expecting Just is large well few of a got Buzzard. Filthy progresses. quarter

will EO/IR contributor. program. The microelectronics large program, the large I F-XX a significant think be new

So there's programs of the a year. in second number to half of the expect that we ramp

Michael Ruppert

only working other is bookings. from that also the too of capital would Austin, those as from on programs a chain need being described unbilled a the to in programs seen add perspective, definitization. drive that we’re delays working And in capital release working Yes. just help working second through things thing that release because growth and perspective. work we Mark there’s of that contract the we’ve on to orders while I addition delayed revenue because the that will There’s And and And half, capital of supply we

Operator

Mr.

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

Mark Aslett

Okay. joining to everyone, us Well, speaking for We thank very here next you much, this you quarter. to forward evening. again look Thank you.

Operator

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

disconnect. You may now

Mercury Systems (MRCY) 2 Nov 222023 Q1 Earnings call transcript