Earnings call transcript Q3 2023

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Operator

Good day, everyone and welcome to the Mercury Systems Third 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 Senior Vice President and Interim Chief Financial Officer, Michelle McCarthy. Please go ahead, Ms. McCarthy.

Michelle McCarthy

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

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

you be Slide results I to risk future cautionary could our actual presentation filings. that to X considered and remind performance X, the that conjunction should These like Turning subject information plans, cause outlook, statements risks or statements in earnings included performance. forward-looking with the prospects today's in the and differ presentation. forward-looking press Mercury's would including Slide business release materially. the statements, on anticipated includes financial to and future SEC are uncertainties to in Mercury's regarding in factors All statements forward-looking objectives,

cash addition flow, press adjusted release. A principles earnings discuss to in accepted generally I'd per also share, is our with accordance measures, and that the accounting results earnings revenue financial appendix presentation in adjusted EBITDA, of to to GAAP, and acquired an adjusted financial revenue. these as organic specifically non-GAAP we mention free will reconciliation reporting several call, during included metrics also income, or like non-GAAP today's slide in

over Please to turn now to President Aslett. Mark Slide turn Mercury's I'll the and call CEO, X.

Mark Aslett

and discuss your the everyone the for it up business will for Michelle begin then afternoon, I'll open thanks with Good Michelle. and we'll Thanks, financials and guidance questions. update. joining.

any review announced developments strategic on call disclose about quick a quarter. we today. and the intend don't The continuing, the note First, to alternatives is new of we review last

With that, on running and plan. let's course unfolds process the third in to the continue execute discuss, the Michelle to business our As quarter. and ordinary will we're I strategic this as turn

for the in were book-to-bill and line in the XX% our came backlog guidance and with the QX. Bookings adjusted QX X.XX midpoint of this months. year-over-year. our half XX first above Revenues over in X.XX follows and high-end last EBITDA grew was X.XX, at the expectations

largest the F-XX, CSfC a program. quarter Our in programs AH-XX bookings and V-XX, Aegis, were classified

We awards. are positioned strong in of QX given timing for the bookings planned sequentially growth the as

revenue an organic total revenue. year-over-year QX X% as increased

program. guidance higher-than-expected Our adjusted programs largest [indiscernible], for GAAP income positive to revenue tax cashflow a a Aegis, impact. as year-over-year GAAP per F-XX, tax the as R&D and excluding the due Adjusted wide to classified benefit. EPS F-XX, be our expected exceeded were quarter and earnings declined share and CSfC net third EBITDA

we to Looking book-to-bill. flat now the our level, is forward to fiscal XX 'XX year-over-year deliver million is and to results year-over-year, year decline award Revenue to X% expect supply guidance in chain fiscal positive for a up flat below slightly approximately and versus revenue of bookings be to midpoint the of expected Organic to due be prior expected 'XX. 'XX delays. fiscal record the

by for the be to we're is and line, breakeven adjusted bottom and income million QX around XX range net the in the flow 'XX. expected Free EBITDA XX On and lowering cash midpoint. GAAP negative for at million fiscal

year-over-year, We tax. expect outflows R&D lower the cash excluding

derivative by primarily and margins. the the seen bookings on driven now in prior business. on we bottom-line are Slide impacts to fourth revenue. year This the effects pandemic of X, We've lower the impact fiscal year Turn dealing with organic within years

margin We're for reasons. two experiencing temporary degradation

second program first impacts development the as is mix. on programs. in a shift business The and related programs product certain related is significant our toward especially the execution, development to pandemic And

decreased wins a both XX:XX funded business, won corresponding several to revenues. programs years, with acquisitions. last production fiscal XX:XX the in in R&D development ratio to a organically approximately of significant amount new the of doubling and customer 'XX, we've for These Over stage through approximately

A than many where in our typical sit given average we period of of performance shorter chain. months, approximately far pre-pandemic the value customers was on programs an XX

increased course programs. average of pandemic, the of delays by in months, Over the driven this XX and to period an part development approximately

In the average. comparison gross XXs programs initial phase in XX% on are production typically average, carry to programs margins gross low on margins in mature above development mid the more

past Although programs Mercury's significantly production. couple drive ratio programs into margins fiscal in 'XX, they more elevated of this and stage pressured have transition years will future the development over these as growth

mixed also margin as expansion We are pre-pandemic expect a see levels. and to transition they returns to meaningful

The the lead inflation times, second growth both and semiconductor and is on tight contributor delays long costs impacts related Supply have to margin and mentioned markets cost pandemic impacting in inefficiencies, resulted degradation execution. labor direct as R&D. chain I

technology across Mercury leverage sophisticated are In developing introductions experiencing and multiple The we're growth both highly programs. are developments driven to higher focuses and labor by on with new chain new inefficiencies, inflation. These terms investment certain of is model supply are manufacturing completion, that R&D, used a product related differentiated capabilities are planned. well is longer as a DoD taking new associated commercial The costs labor cost products. then technologies than constraints nearing materials and which as

model. complete program the of been that product activities, is than multiple two costs expected of our once we the due or effective, effective Approximately good quickly development more of terms active XXX new programs have so plus and news all the introduction programs complete XX% in incurred. and our programs benefit but total will The leverage a product dozen to

complete over capital through We transition and 'XX invoicing as improve margins should and expect also transition This results, receivables cash not only to as and EBITDA lower but pressures thereafter. relieve gross contracts the lead cost to to we working three quarters production-based these shipment fiscal stronger unbilled adjusted collections. diminish, to next quickly two programs

what to and short-term, on sound, controlling They're strong. are cost given timing we Mercury. demand environment They're technologies and developed remains previously, our As our optimistic which we and and unique related we're focused not end largely the very I related. the in future. to outlook said that that We're we financial not they're programs this challenges about are market business the won. Structurally, can model and

margins execution overcome will the mix time. a the as to development to transition challenges. And to naturally expect XX:XX and programs continue we normal production We follow expansion as chain current business normalize, over as levels margin return we conditions supply as more pre-pandemic return to further late-stage to

to We their continuous leadership, Turning improvements Wells program in Roger execution. driving Systems on Microelectronics. have board Kutcher Execution now Business our to operations lead product Head we're new supply Under chain leading and of Alan Mission five. as Stevison Excellence, Mitch development, now Slide and continue

challenges. was clarifying leadership instrumental of in New magnitude our late-stage and timing the development

development the challenges began on manufacturing of and progress improve the making to end yields by the third We're engineering quarter.

allowing execution. expect We final 'XX, continue program this fiscal progress in for in QX to

of is we first travel phase be business in California, addition, track on the completed are integration through due In Torrance, to in POC. restrictions delayed former COVID-related our the the systems quarter. to and was largely This fourth

activities through largest integration The of related execution time, the over increase and these program platform to well material the especially a working respect as Torrance and which with capabilities. we systems to capital. business, Completing across build labor business is visibility of part as costs, series some will acquisitions our amazing

the we we've long-term and trusted in around expect it processing work our the that In done deliver to growth addition microelectronics, business. to secure

made statement we more balance we and improve Although have cash still the work on progress our income QX, sheet to flow. in

receivables, and margins We unbilled to reduction lead expect our impact increased improved together or in with that cash improved program resulting inventory flow. execution will in

improve in semiconductor the plan. Semiconductors to now Employee times We affecting this Turn chain pandemic, to the is and with in continues to still the to environment, 'XX delivering [indiscernible] prior to hiring the QX, of quarter incrementally. QX average XX. some smoothly. XX a from which more suppliers lead XX at and extent, beginning at XX fewer flow supplier and lesser efficiency, Mercury to to XX and Slide saw of weeks weeks, program ahead six industry outpace fiscal although range XX continues to attrition to operating processor are peaked supply timing

developments Although second in lead of getting half times the a constraints significant areas expect on affecting in don't still shorter, current program 'XX. We new certain until times improvement and lead average fiscal product are are execution.

example, prices increased the remain in also, third challenge a pressures where $XX the Xx. approximately for made million purchases, inflationary we quarter, nearly Semiconductor related semiconductor end-of-life of

commercial business. business. we and can, initiatives of Our streamlined We've working launched raised In continues on costs 'XX expansion in higher prices just the our board of capital into organizational we're fiscal wherever strengthened our results. impact microelectronics significantly the program deeper this on [indiscernible] side passing early We to margin push positive and leadership environment, across team. efficiency we've the the structure evolve inflationary

consolidating and effectiveness investment facility R&D manufacturing improving footprint. We're our

our in digital improve in also time. structure cost back over efforts office should Our transformation the operations engineering, help

to issues, a we positive. fiscal believe as well to An targets defense including appears be to for the appropriations substantial Turning support budget scenario resolution well security 'XX, budget base as spending as for seven, continued CR. request for continuing President's potential as Slide approved extended Ukraine. government case full the The year remains defense related outlook growth that bill national last spending the year,

support However, given be the appears environment, for there defense increased strong bipartisan geopolitical to spending.

in benefit for industry We've spending well in and to trends. Mercury push ongoing secular military demand compute for platform and is growth we an seen international short and believe grow defense electronification. term, longer Domestic capability platforms, the both is board on to continued that expected positioned from and

the also reshoring increased outsourcing at customers chain supply to subsystem benefit by as well from our level. We as stand and delayering

into by solutions Our deliver the potential move at driven our addressable platform has increased scale. market chip largely substantially, systems, innovative strategic processing to and

high positions at sitting of model well. defense Our tech as and intersection the

Chief of partnerships Harbison welcome markets defense has We're to help businesses. the team. to announced track and an building growth, very to Mercury pleased us impressive in opportunities. and has driving commercial Christine Christine Growth Christine successful joined March, we technology in record as As Officer capture developing these Fox new

I'd that, Michelle? Michelle. to call the like With over turn to

Michelle McCarthy

our qX results. then results eight, move which I'll fiscal Thank and slide afternoon third and guidance. turn and Please you, 'XX with the to our again, to Mark, quarter everyone. QX details good start guidance

and revenue book-to-bill in a QX income million, of the while XXX high-end net adjusted yielding exceeded X.XX EBITDA midpoint. expected. came guidance, our Mercury's were the as bookings Total of for at

half. still versus Bookings first improved the linearity in weighted but the of the was month third quarter heavily

X%. over was We're to backlog up visibility XX-month forecasted bookings XX% and quarter revenues. with year. QX required forward backlog coverage XX% and entering our the up was fourth to the total remaining achieve Compared Our last to solid QX of

X% QX compared being completed having revenue, approximately Micro their to revenue a inorganic XXX on million are since quarter and or in in full Avalex total fourth QX million XXX organic up was Atlanta 'XX. XX basis, included million as now required. fiscal

in XX.X% last labor decline was in from Gross margins primarily expenses, operating incur year. engineers of programs. XX.X% QX the quarter R&D, for by third proportion development savings as decreased to within continue partially direct offset The higher a on to

we've As over drivers gross mentioned, cited margins. the last several quarters, consistently of two lower Mark key

derivative development program in First, resulting pandemic point. a drivers of in higher two execution delays. between warrants close And program our effects correlation concentration the these of the mix. that a finer second, revenues the There's

'XX wins mission 'XX, In areas processing, contracts organically avionics, the were into a key Optics translated and our acquisition, acquisition. of both and wins, growth These strategic our through related we in backlog. secure Physical to as within fiscal and design design development Corporation fiscal especially achieved significant through two of predominantly level

to transition and number latency to great The of followed constraints began across supply a development in to critical labor remote created efforts. our availability our work, components, Shortly of onset of the program limit resignation, added COVID functions. the by delays which thereafter, 'XX, executing chain fiscal

reductions as many directly in in margin fiscal R&D partially 'XX and of fiscal public and earnings filings. of prior charged [indiscernible], in levels some to as see these programs. to began increased This lower our calls expenses, labor offset development 'XX engineers by We more resulted discussed

XX% with on low across The higher our XXs these to average the most This production engineering of development to margins program. content, margins unit on average programs. labor gross low programs, the gross in coupled above compares mid to volume contributes

As development doubled fiscal has XX% approximately from in nearly mentioned, our 'XX revenue Mark approximately XX% fiscal proportion 'XX. to program in of

development effects fiscal of in While created derivative in The many our delays created qualification largest shift and execution programs final delays the of entering pandemic on the mixed initial testing alone pressure resulted and 'XX. the concurrent margin, gross inefficiencies.

experienced labor these our of required technical over incremental We is resulting stage, a margin, inflation material, so typical dozen and development are this which impact of years. a for has price active cost given on as predicated have challenges firm gross many our both of that compounding encountered development on across fixed have contracts, several programs The programs. or the growth challenges as remediating last

More development in more programs yield testing labor scrap of senior and expected. the qualification higher resulted the stage specifically, engineering cost did as in not as incurred when the unit growth well as charges, these charges

continuously In require a prior estimates program these in in an changes accordance margin in identified on to revisions up based performance. in what resulted changes our the are This retrospectively, circumstances. estimated with impact GAAP, Such identified. complete were of Changes programs, in estimates and are reassessed we applied cumulative outsized costs the catch across facts these quarter which on estimate development programs. in and contract and adjustments

revenue next the contributed these to of the or As fiscal mentioned, to growth 'XX quarters. the nearly all three to Mark nearing susceptibility that profile programs our weighted Completing development in will also mix across have cost are growth cost and dozen to two completion so margin rebalance contract production portfolio. and only shift not a will as reduce program our back we that programs

As experienced we reference, of our a estimates. minimal to frame cost complete historically in changes

dozen we manage. minimal in changes QX these continue outside estimates other to of programs development During we nearly experience the trend programs, XXX same active the of across these

As we estimates contracts, to production these development three programs more support development in two well the follow-on quarters, cost complete as programs we over to stable as to apply forward. learned next lessons the complete backlog going to our the will

from expect cost mix production-based gross to to improved As these due such, recovery but only from to specific to the we also an growth margin, the not shift programs. contracts, see

receivables. In perspective, secondary or growth of so addition, cost capital the a and new structures development impact seeking of have programs, we future fee significant partially these source on or programs possible, unbilled are fixed program execution. where growth mitigating primary a plus and been cost dozen working From

two nearly billing three We expect collection quarters cash their next and the completion the to million. allow in to $XX of

more they product are the product or underlying manufacturing the will same currently leverage other we as programs. technology the same and Even these programs will multiple or shared programs. importantly, that resources redistributed engineering have improve development be engineering specialized require many otherwise technology by across other consumed Therefore, completed, across resources or yields

and We cash expect an to this allow billing receivables. $XX for collection of unbilled of the million additional

proportion mix, which of of gross a will well the as dozen both our development nearly summary, have 'XX year execution In fiscal programs, programs margins in our complete been across so these by pressured to of next in as the three challenges all or two quarters.

return We improve contract a expect higher production that overcoming these challenges will to not other us but also execution multiple only more mix, margin across normal, programs.

As improved overall and the improved margins, million over as as $XX receivables, working in we expect resulting to well unbilled in of a gross result, capital flows, see cash level. release

million last and using year-to-date tax of X.X income QX $X.XX million share, We QX a fourth quarter methodology or and net our a per in in X.X discrete taxes expected benefit results. the more increased GAAP given over income the appropriate QX $X.XX quarter. share to due million to $XX method, per calculated or year,

quarter operating expense. million, due are EBITA discussed, gross year-over-year, to compared pre-tax last lower third gross higher just as and lowering well XX.X margin. margins again QX lower to in Our year, due million the interest Adjusted XX.X was as with results

EBITDA adjusted in quarter. margin the Our was XX.X%

of $XX legislation. $XX quarter was million payment including first the R&D the change Free cash third to the an approximately outflow tax million, flow in of for related

been free Excluding better of our of entering this, breakeven nearly quarter. million have near an expectations the $X cash than flow would inflow

cash equivalents structure five million. sheets quarters. for presents the and a balance strong. of Slide remains QX capital $XX perspective, cash We our Mercury's with From sheet balance last ended nine

under debt flexibility. with billion financial We have million us $X.X our provides significant which revolver, funded $XXX.X of

extent a decommits the of more observed reduction in We receipts quarter. quarter. quarter. in it supplier supply QX, an the of while certain it resulted chain, this XX% a in is in for indicator timing the $XX material planned unbilled for payable, than later To positive and stabilization This million the the in of driving in increase receivables, some given in receipts reflected is the as inventory well as accounts is also growth

flow XX. cash to Slide Turning on

Although than our we timely growth our patterns, as saw a by challenges. unbilled offset result more this in customer was reducing primarily of development program payment receivables, billed receivables, execution more

largely of grow In percentage just sales, higher by as the of unbilled quarter I similar suppliers We impacts. resulted snapback offset our and outflows. driven receivables continues QX with leveraged some receivable at in prior factoring addition, a to increased capital level mentioned the cash to help arrangement Working a inventory. to these

serve a next for unbilled development should year expect the 'XX. catalyst of and As extending over a flow toward completion three discussed, reduction receivables, we progress the which as to to continued in cash two improved quarters program significant fiscal start

the have and chain with beginning normalize, inventory. addition, control we supply expect initiatives to to and progressing, greater various visibility, over impact predictability, In

As a as target percentage the result, we sales XX% of consistent for continue level. appropriate is to pre-pandemic believe with an working capital

I'll turn environment financial year we for first getting The months the demand year. as a fourth and in was slide To starting we 'XX 'XX XX. nine positive to expect in the bookings with now strong record fiscal begin fiscal on quarter. full guidance our book-to-bill stronger the reiterate, of

on in for improved of these adopting leverage to-date, of this production outlook especially the fourth gross more challenges Entering the quarter. follow-on program in first development the cautious experienced related growth and the awards strong and XX. half, second we're higher Based margins, remainder execution and throughout the the second fiscal half in cost we a margin fiscal with development expected the the programs supported year, operating completion higher half, revenues,

represents and organic and This with X% The associated flat growth billion. including awards continued delay. guidance decline well a reflects Our our $XXX to to year-over-year company delays, growth now follow revenue compared 'XX. supply prior as on 'XX for approximately with revenue award as flat total our reduction from fiscal $X.XX million production development fiscal guidance chain is programs, funding in X%

to We adjusted EBITDA now midpoint million, to is net to now in the range $X.XX expect in the range EPS GAAP share are of a now $X.XX. $X.XX $XX million fiscal of the to per up of expected from fiscal the per loss expected results be $XXX range last in $XX.X with XX% 'XX down Adjusted to million, year. $XXX be share. 'XX to GAAP million loss for $X.XX at

flow free cash and We now tax to cash both expect negative million approximately related R&D outflows the legislation. with $XX of year without for fiscal

quarter turn XX. now I'll to our fourth Slide on guidance

revenue For expect with the $XXX of we million. The backlog At range the QX entering approximately about X% a our revenue coverage is fourth of supported currently to fourth quarter and XX% quarter, in line strong bookings. a year-over-year. million remaining the the forecast for to the a decline by well existing of is quarter midpoint, $XXX sight this over

in QX increase expect discussed. We as margins the certain we complete late-stage gross development to has programs of

to improved revenue. expect leverage higher also operating on see We

range We expect QX GAAP to $X.X net income $X.X from million million. to

adjusted expect at to of of million EBITDA the be representing $XX.X midpoint. EBITDA to revenue quarter $XX.X We adjusted million, margins XX% approximately fourth

'XX fiscal capital. beyond, and and is to expansion Mercury ahead Looking growth, for well working positioned improved margin stronger

to strong coupled low current We digit and to spending, with drive a return increased growth. fleet defense revenue programs expect high double-digit backlog to our existing single of

uplift to gross our On current contracts, development fiscal throughout see the programs, 'XX. production from the margin of higher the mixed as in natural we margin expect bottom-line, a weighting transitions

we development In from expect subside, to improvements further see gross certain contracts the margins. our as in existing addition, of margin headwinds

of efficient will the customer in allowing same capital to material labor, working more resulting to time, our timing the chain improved us performance rebalancing meet in the manner, us levels. supply normalization begin of availability receipts At a with obligations continued position

and and cash savings Finally, we expansion margin support 'XX term. fiscal longer continued improved impact over flows the expect in to

now I'll Mark. the to back turn that, over With call

Mark Aslett

Thanks, Michelle.

now stronger Turning Slide getting as XX. Demand 'XX. and begin fourth to we is the of strong fiscal quarter

to expect and a bookings positive we book-to-bill. year, the For deliver record

in continued production, overall conditions across to programs our fiscal 'XX, to and We normalize. the we as are and push transition development continue supply a execution positioned and rebound the for line finish improves, progress chain

next substantially longer-term of performance and margins EBITDA period cash fiscal higher improved and for growth, stronger Mercury. capital a year flow, by begin we working will financial improved believe Driven

domestically years, Looking at from internationally. increased over we're the five defense spending, next positioned well to and both benefit

grow Mercury a we low to that high As can will digits believe double result, continue at and single organically digits. to

our well shift stronger the maximum execution well In as addition plan normalize supply as includes driven production, five-year and the should chain better tailwinds to as over through growth, XMPACT. development time. as expansion, capital conditions to greater to margin efficiency These in continued conversion cash as improvements lead working profitability, by

In all sincere my the and working improved Mercury like which extremely extend of thanks to entire to My team, I'd to appreciation is deliver to you. committed closing, results. hard

I results. Before questions focused it to over Q&A, our keep you we turn ask please earnings that on your

please operator, that with With the Q&A. proceed

Operator

Thank you. [Operator Instructions].

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

Peter Arment

effects. of guess, the I'm ago to EBITDA, understand with things kind appreciate development to kind XX% what of XX% all was dynamic, from these were the ago just understand to quarter, kind And of like details a of Thanks. your you potentially you development the I growing effects known fourth is derivative just now those the help you've dealing just kind trying talked And the months to lot growing. was of at the for mix a and three months XX% bridge then of sir. explained of about, understand least of mix change were guidance try I that kind adjusted three what and to trying me what pandemic that implied still lingering

Mark Aslett

associated with margin high we've we delays we And delays, business. coming award expecting we picture, some year, follow-on what a growth of technical I seen be we've than as the along some that. think, also of Peter, the are, of right, big result experienced programs And the further a challenges. that as cost were of would So result development these were currently as the into

production higher on knock-on the kind expected really of expecting that VARs the development in So it's plus costs, for than programs margin higher two things, completion second impact the we're half. a later right, with the

the are main So drivers. two those

supply pass in The as we quarter is some have also that business have I affected fourth that other one constraints seen availability the certain think chain well.

Peter Arment

does Just What's follow future? the as your this because these approach as how Thanks. sounds Just bidding were larger some on development Mark, of a in of change if just approach like it up there? these challenging. you I programs sort technically could

Mark Aslett

quickly then yes, mean, I done What in think, leverage our at look and commercial capabilities, portfolio. you developing fraction pandemic, we've experiencing those I product investment if job, the And we're got sharing right, new So Peter, model, a cost effectively, really we've to good a of prior model. the and program, and here overall capabilities very programs. over small multiple a is program right,

are as managing. about we or programs a dozen active XXX it's programs that So Michelle mentioned, currently

The products programs. multiple go into

when got it'll you've one multiple affect So things. issue,

move it, things So things it's believe Today, we we being said, plus fixed fixed of we late that quickly. well. to and cost through are do that have yes, contracts only when the we And XX% fee. the the much Yes. about have stages start qualification. are see contracts types test get more the of we in the firm leverage with of opposite working nearing being you'll most actually price of that once are That terms development

the fee structure. the does And of our we're clearly need business depending the type new largely possible, business make investment sense fixed that because sense programs, it makes and actual models. it cost-plus seek development move where where of pursuing, to really towards we so But and to on will upon

tied unfortunate that happened, critical programs. on to but it's It's along far them. we're capabilities really So important the are

Operator

from Your question line the of next Seth Seifman with comes JPMorgan.

open. is line Your

Seth Seifman

Mark, six dozen that or are the us maybe five can a I only guess you I programs, tell don't programs maybe, if this. top driving know it's

Mark Aslett

is very, very capabilities DoD known set important very get And producing. that they're I we're we're which of specifically specialized they're that link capabilities to And are programs to a the them we going not we're going unique don't terms in in in because specifics, the development So of of to want think the the in stages final into. it into nature. But programs.

I unfortunately, much, too Seth. disclose So can't really

Seth Seifman

Okay.

So classified they're programs?

Mark Aslett

doing They classified, given technologies not normally into but that just is are we're something programs, linking certain would we not disclose. what

Seth Seifman

on to presumably, just of supplying on on technical guys Okay. Is risk the as towards on it out kind your of Mercury last going going a customer in work? call programs this point you're is, these executed And then the on work finishes production moving to along hands, you of programs the terms maybe these production, development, on pass prime to its contractor? further there part once get you when have that's your to the is of development as

Mark Aslett

believe No, going customers these ship doing. them as I can for as don't soon think, we so, take work Seth. that our I But are products, they're because to the them, they need

began a end just So risk I yields, to don't with literally believe got the at to ramping of We've that. we the delays the product get introduction There's associated up additional which any new see or that. through finishing up QX. development and efforts

that already most the are on seeing hopefully, we're So progress. important, ones

Operator

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

Your line is open.

Ken Herbert

again, mean, how retiring to Maybe, Mark, for working the progress much possible the 'XX? very release about prior the next the development of quantify that Is just 'XX that think assumption, I think fiscal on we on in as the think development What's this it on these other a and would these, of I tailwind stay of be? guidance, you year. important cash capital to to sort about can your impact in terms but programs. think as official be I risk

Mark Aslett

question, Ken. It's good a

issues respect down -- potentially I'll doing. with the see, of impact kind just over it terms the we're of in that take of unbilled. we throw about the what kind maybe just me level And it to then positive can and Let impact talk Michelle, that who to

model level, leverage are that development mentioned, in are working activities and affecting associated that program, because our So, products of new product as with product is the introduction programs. I two multiple there them late-stage

I kind one, capabilities first On very of programs. set that's a a said, multiple as one across unique, it's the of used

in conducted cause very a third quarter, extensive analysis. so, root and second And the we

implemented. we've government with in have agreed Our the that and conclusions actions customer U.S. our the actually corrective

this the which And effectiveness the we we're options so at. monitoring actually is and point, currently at and adjusting need kind yields improve of the to for as product that we're throughput actually stage

against in So perspective you it's anticipated. currently on particular as quarter. we fourth this requirements. just hoped to actually that would QX, don't gone of the applying give to XX%, think, the we're build to And and happen product ensure have these future. bearing And ramping Michelle the phases. obviously we we've now And we're up later lessons systems yes, Yes, and half to what on made albeit in almost learned than X% now from I production yield the track a progress first said, in tensor the program of things we're that

say, will though, before. very, it's that done very hasn't technology I been sophisticated

pretty we're one, on. that far ahead So actually

The And strong other that's the actually production. have extremely some manufacturing to collaboration, we issues. us full address of returned we're internally, one, enabled an actually to

one QX. that, to we resolve one, a at actually the turn actually However, deploy of variants fix the issue to we another as that experienced did On expect affecting on programs. issue the software of we in in QX multiple end that, is

us development the deliver that and at products, you to just final we then are kind of collect the where then quell, production, invoice really tell stages cash. will and which of obviously, and can allow So we're at run

we this unbilled a can is of Michelle, because, that, Michelle? of don't with on amount for that know, so the these to built receivables hand And I bit a sheet. why significant over the little it balance you programs a background,

MichelleMcCarthy

QX, programs million, Yes, of Mark. perspective, capital of ship Hi, dozen into we much product. the that out obviously, release in Thanks, quarter. And the expected, occur of coming had but as of occurring a a we kind some than in originally of will from working completion later reduction result referenced will we $XX Ken. the about or think we that so Yes. unbilled that coming

going release. for just of So same we're to in engineering But that's receivables, dozen the likely programs. waiting essentially shared that those QX importantly, technology product 'XX. either cash see resources programs, in more of $XX another or because need 'XX, or so there's multiple more other right, other almost and for when are line, million Those of specialized QX and complete waiting that so we of convert, unbilled programs across is

common resolve can convert also other redistribute or we programs, that believe which engineers those the product once to there's we another can issues, in 'XX. to we fiscal million $XX issues, convert and technology So will the these cash,

where see you're to revenue. across take programs, really, working means you're looking it's we unbilled about a XX-month capital that from at these what And it of is when that impact and reduction, around So kind going that trailing capital a think XX% perspective, working XX million release.

Operator

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

open. is line Your

Jonathan Ho

to and sort this? thing FY one that little issues we'll remediate to guess about confidence the clarity bit that think experiencing, specifically ability to get in resolved, 'XX, maybe actually that And a opposed then, of the how a do a gives see more Just bit you this? to maybe these what little as program, continuation? issues understand better around terms dependencies, want in of been the is like around you I I yield wanted you've the

Mark Aslett

Yes.

far in and we're in yields Yes, So again, dramatically that phases. we're the cause up probably impactful, the quarter. has last question, the mentioned ramp agrees, of actually been Jonathan, in as improved I already the And most kind customer the begun to have third the one in root production along.

has we wished follow-on it that fact sooner we've of than because occurring it that happened to we'd earlier awards the some in actually able in resulted Now, timeline not again, had the weren't the previously deliver anticipated. that

variants the respect fix production. product, in fourth for the is with fine. to up you which for teed And had of ramp begun a the issue is just second quarter. second, The Yes, to for which waiting we're software already this one

on one that shared So and that fact the month going the the And programs these are shipping what's programs that quarter across these multiple in or we're capabilities. our enough technologies second programs. products with along I that month first literally -- need will the far know of the to there we the think and customers be

root to enough the understand to We've got and production, So I ramping we're the capabilities. cause think up we've work where at. customers need done

So degree we've competence. I got think a of high

next step the you we the that that look Michelle programs three within XX% these just of than thing for The and of programs completed at quarters cost. complete dozen total And in other two back, expected be are terms to actually expect two if these mentioned, total. you that more the programs, in to the

position. guess we're that point we've of pretty volatility. I actually time this final in the that So good And level one I is first a it's think experienced

the very -- I the across turbulence we last got And think of the at minimal of complete we've went kind large portfolio course back programs. of looked to years. and over three the our we've history of very seen estimates

a events, but end we're the sophisticated near confluence technology, it's of So, here. hopefully very

Operator

from Jefferies. comes of question next the Wylie Scott Your line with

open. line Your is

Scott Wylie

guess Mark, on seeing businesses. into point is, closest And to performance? I one with is they in But space in strong you like market? color Abaco know, on there there of growth any what's from driving and I expansion. And it's share difficult was happening a Scott we Sheila. it's always that kind of is of shift might this natural Abaco's that pretty Advantech into your market margin morning. have comment and question for reported thought other Hey, any the the competitors delta

Mark Aslett

Yes.

ties Scott, into as the this two capabilities programs. sophisticated just so and sets products said, It then programs related associated span dozen really over capabilities we developmental So to out multiple really technologies development, things, developing to and we're new ramping where it's or the with that highly delays engineering production. right, of those

add with to you with that. to respect want of as are to related challenges. competition margins it's growth we It's don't anything to literally specific the programs to anything anything respect think Michelle, we that. cost erosion So like or if through going related this to on

MichelleMcCarthy

highlight just our we demand it the would you through that strong have, continued can I bookings. No, see

as it we expected last been, above QX the some several Although below for quite and one in was year-to-date for we're time as one, have was few quarters.

Operator

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

is now open. line Your

Michael Ciarmoli

ago, got things you got I in in but you're you in here? I just negative more the you Was thought programs, quarter. to had happening? just are mean, XX% just these Can and question. else guess XX XX view don't anything first us aggressive an implied mean, fourth they understand year, this back what cut still this about Peter's mean, EACs, was I EBITDA captured XX talking the tell is on days. the I how days to us given Mark, I are I go the beginning of that EACs there were?

Mark Aslett

Sure.

So longer programs. supply is overall the of on That's awards first in chain second [indiscernible] production us development basically But obviously, if revenues, you result the goal the with expected a go to estimates an development strong half. from the forecast the follow quarter. other in expect I which it's awards half impact back the which drop, second is, QX, follow operating and quarter, up. cumulative fourth availability get in had, year, across other gross the we'd the on right these expected roughly in margin that fiscal we taking higher delays, improved effort in circumstances to higher had of as programs half also only set the those that was line. year transfer especially that to entering on not the this on is fourth supported related affected margin of awards It's margin it mentioned, it, higher the we've in combined the the of two-thirds that leverage, the catch challenges as and follow-on The

the why so changes how from a it estimates perspective, if quarter. an large about Michelle, the to in third in So little you've the a bit impact that was and a account team actually you is particular got want in period? And accounting just to talk

MichelleMcCarthy

Yes, sure.

execution So, on really said, is the function drop the you development of Mark, the as program. a delays

are follow just for incremental up. drop expecting, 'XX. a awards of the right catch outside point, of material not window. costs needed all on of unknown unknowns the supplier cumulative the and right? some through you of put those outside specific kind one is the adjusted the in pushing EBITDA, That And to said, it's programs as this it's because, commitments the one then at production planning year for cases, then, critical receipts quarter So a again, fiscal into that for And required have we

of was pushing point level And found or point where we a able we So in commits not in it decommits, although recognize we to constant some what are the updates could be to have seen we with in that complete where product some constantly getting suppliers. reduction communication we a those from suppliers. would revenue. to progress we those out were the are And cases,

Michael Ciarmoli

all mean, net all us gave the on get the I manifested But this forecast, XX this like just this finish pretty of seems line. across mean, days, to in last expecting XX, I the you January a I guess risky though?

Mark Aslett

stage, process was technology It's development, kind then, we we So had late-stage team through making the like any expected. way the the a that which in development we've yes, of technology wrestling But with in challenges actual we yield. yielding moving been NPI get and other a sophisticated into previously as you progress. the a with very NPI the couldn't

production the team the of engineering engineering it to the processes. actually actually production we none gone it's through the forecast X% or actually was couldn't complete. get expecting So yield, But hard that. was development We've -- from

had quarter and we we from variants, of course which actually product the capabilities. then yield QX, and exiting XX% snag. the then on went as ramp the at primary to began progressed, software hit on X% one actually other the products of yield quarter to Over we Yes, a the the issue

at So and got issues right. with it's new pushed guided just things respect literally what the possible thought that, time late-stage the happen, obviously, introduction product development, and best quell we we to to the were information would

is the in. we to which the needed issues, the forecast coming estimate as look and see these experienced accurate was right. at changes complete, we step Qs, and back why And in you So,

MichelleMcCarthy

their that every these of had the meaningful we them The pretty XXXXs scrap time meant units. are unit. in And also of was Mike. kind But qualification the year. the because units of XXs examples in every no point, one would of testing underway of execution through, that Yes, the earlier specs. we that to entirety, had Mark performance didn't scrap dollars events, to got of there I we just they salvaging occur add went we meet just nature

point. that at needed rework significant was there So

it. working have our the engineers on senior most We team through

recent material And recover you of inflated are that values, can imagine and to labor purchases. higher needed more costs actually material right? so because engineers, the of the those as they're costs seniority are cost Because then at

our the it's estimate our very for again, can we make of results as now and facts Mark best circumstances really the dynamic yield terms what changed how and that it are of new resolved. will are but throughout terms being in reflected in and it's dynamic So in be, has the QX, very said, issues And it's year.

Mark Aslett

part So we're the it's a customers that product associated it. over model, want spending multiple leverage these R&D it's if back programs. amortized That funded Mercury, reason develop money the to with internally of tremendous that's program And really our used with go right, high or to capabilities. to amount got work of you of model, right, is the levels own on

on was The far history, can in my The in the actually the Mercury technologies affordably given negative meaning, this first that model. the pandemic good some per these and instance, is it of when the and technology, and model, had has couple to deliver particular you've that programs. I and of or recollect we challenge execution. products leverage, more far multiple technologies news again, where at of challenges it's a in able time now than that probably works, we've it's and that related challenges this program getting more got on are quickly were effects we're that actually the to if are capabilities it that, is holding the sophistication them And just are occurred, just right of up a

systems, in to believe, collect and the growth of and invoice Once that receivable now, be we begin get be to will mentioned. a we'll obviously able development ship right Michelle And the got yes, activities, and close, cost at Now, ship amount programs, as of the higher we'll less the quickly unbilled able actually up cash. is, statement, start once significant to which make systems will rapid margins. to tied we we we which it'll income progress, meaning through MPI terms benefit, multiple the the

of had So, made than QX, yes, in a we just progress we're lot progress but slower previously anticipated. not we with what done, unfortunately

Operator

I and Mark back concludes the to turn of remarks. Aslett over for This portion call our today's Q&A closing will call,

Mark Aslett

Well, you very the call Appreciate today. everyone. Okay. you. joining Thank thanks much,

Operator

concludes conference call. today's This

may You now disconnect.

Mercury Systems (MRCY) 2 May 232023 Q3 Earnings call transcript