Good day, everyone, and welcome to the Mercury Systems Second Quarter Fiscal 2021 Conference Call. Today's call is being recorded. At this time, for opening 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.

Good afternoon and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett. If you've not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that Mark and I will be referring to is posted on the Investor Relations section of the website under Events and Presentations. Please turn to slide two in the presentation. Before we get started, I would like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on slide 2, in the earnings press release, and the risk factors included in Mercury's SEC filings. I'd also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, during our call, we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, free cash flow, organic revenue, and acquired revenue. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release. I'll now turn the call over to Mercury's President and CEO, Mark Aslett. Please turn to slide 3.

Thanks Mike, and good afternoon, everyone. I'll begin with the business update. Mike will review the financials and guidance and then we'll open it up for your questions. Thanks to our employees, Mercury delivered a solid second quarter of fiscal 2021. We came in above the high-end of our guidance for total revenue and at/or above the high end for profitability. Our book-to-bill for the quarter was 1.0 and our design wins amounted to more than $300 million in estimated lifetime value. At the end of the quarter, we acquired POC and as a result, we are substantially raising our total company revenue and adjusted EBITDA guidance for the full fiscal year. We now expect to deliver 16% to 19% growth in total company revenue for fiscal 2021 including high single-digit organic revenue growth leading to double-digit growth in adjusted EBITDA. Turning to the details on slide 4. Mercury's strategy, technologies and capabilities are aligned with the major industry drivers and trends. New business conditions remain robust. M&A activity is back and we have the balance sheet and financial strength to capitalize on the opportunities in our pipeline. Looking ahead to the second half of fiscal 2021, we expect the contracting environment to improve given that the Defense Appropriations bill is being signed. Our baseline forecast remains for overall defense spending to be flat near-term then grow at low single digits over the longer term. We expect this growth to be driven by a continuation of the national defense strategy. With the change in administrations, we expect another round of fiscal stimulus. Those dollars could over time crowd out discretionary spending including defense. However, unlike what we saw in the past with sequestration, today there seems to be a strong sense of bipartisan commitment to defense spending. And if new pressures on the defense budget do materialize, we're likely to see an even greater focus on existing platform modernization, speed, and affordability. This could lead to greater use of nontraditional defense contractors and contracting methodologies, supporting Mercury's ability to grow in line with our goals and objectives. We believe that overall Mercury is well positioned in this environment to continue delivering high single-digit to low double-digit organic revenue growth on average over time, exceeding overall defense spending growth. Turning to slide 5. We're targeting the faster-growing parts of the defense market. The waves of modernization occurring in both sensor and effective mission systems and C4I are driving growth across our business. Mercury is also well-positioned to leverage the fundamental trends that we've discussed in the past. First is outsourcing by our customers at the subsystem level. As a result, we're capturing more content on programs and platforms. Second, we see the impact of delayering, as the government seeks more affordable and rapid solutions particularly in the C4I market. Third, is the primes flight to quality suppliers in RF and secure processing. And finally, the government's push to create a domestic supply chain for secure and trusted advanced microelectronics. Although, the microelectronics IP is developed mainly in the US, most manufacturing and packaging are still done offshore. The DoD remains focused on China's militarization and tightened tensions in the diplomatic, technological, and economic domains. As a result, they identified US-produced trusted microelectronics as their number one defense technology priority. Given the investments we've made in secure processing and trusted microelectronics, this is a significant opportunity for us. Although, as we've said, the fab build-out in Phoenix has been impacted by COVID, our long-term plan remains on track. We continue to see growing interest from our semiconductor partners, customers, and the DoD. Our strategy and investments seek to address a significant national security threat. Turning to our financial highlights on slide 6. Q2 was similar to Q1, given the continued impact of COVID and the extended CR. Mercury's total bookings for the second quarter were up slightly from Q2 last year and we delivered a 1.0 book-to-bill. For the prior 12 months, bookings were up approximately 10% and our book-to-bill was 1.12. As in the past, we're expecting the second half to be stronger than the first, which should lead to a positive book-to-bill for the full fiscal year. Our new business pipeline is robust and the activity level remains high. We're beginning the second half with record backlog. Our Q2 backlog was up 30% year-over-year providing us with strong forward revenue coverage. Our largest bookings programs in the quarter were SEWIP, P-8, DWES, and C MODS. Mercury's revenue for Q2 increased 9% organically and 9% in total. Our largest revenue programs in the quarter were LTAMDS, a ground radar program, F-35, an airborne radar program and Patriot. We've seen the benefit of recent design win activity including LTAMDS and several classified radar programs. These programs are beginning to transition into production and others will over time. We're participating in more than 300 different programs and platforms, many more than in the past. No single program is expected to be more than 4% of total revenue this fiscal year. Similarly, as we look out over the next five years, we currently expect no single program to account for more than 5% of total revenue. As I mentioned, our design wins in Q2, totaled more than $300 million in estimated lifetime value, the largest for the second consecutive quarter related to trusted microelectronics. Given current activity levels and the strength of our design win pipeline, we believe the second half of fiscal 2021 may be more robust, for example, in platform and mission management, where we'll focus on building out our avionics and mission computing solutions. Acquiring POC increases both our scale and capabilities in this part of our business. POC's strategy and culture fit well with us and we're thrilled to welcome the team to Mercury. Turning to the bottom line. Mercury continued to deliver strong results in Q2. Consistent with our guidance, GAAP net income decreased 19% year-over-year, while adjusted EBITDA was up 6%, exceeding the high end of our guidance. For the last 12 months, GAAP net income and adjusted EBITDA were up 28% and 18% respectively. Free cash flow for Q2 came in at 22% of adjusted EBITDA as Mike will discuss. Turning to slide 7. Amidst the pandemic, we'll continue to invest in the rollout of weekly COVID testing across our facilities. This is the core element of our operational and business continuity strategy. We began testing early on back in July. We believe that as a result, Mercury is ahead of most other companies operationalizing COVID testing and behavioral-based health and safety protocols. Putting our employees at the center of our decision-making has proved to be the right thing to do for all the company's stakeholders. All of our facilities have remained open and productive through the pandemic. Looking ahead, it's encouraging to see the vaccine rollout. That said, we do expect that our business continuity investments and the protocols that we've put in place will continue well into calendar 2021. Turning to slide 8. M&A remains an integral part of our strategy. After the recent hiatus in activity, we're pleased to have completed the acquisition of POC. We believe that we're well positioned to continue supplementing Mercury's high level of organic growth with accretive acquisitions going forward. The market is very active. Our pipeline is robust with multiple opportunities of varying sizes all in line with the core of our strategy. We believe that Mercury is seen as a great buyer given our purpose, culture and values, strategy and positioning, and business performance. We're in a good place in terms of our financial capacity and liquidity. We intend to remain disciplined in pursuit of strategically aligned deals that can be accretive in both the short and long-term. Turning to slide 9. Overall, our strategy remains the same: to deliver strong margins while growing the business organically and supplementing that organic growth with disciplined M&A and full integration. We believe this strategy will continue to generate significant value for our shareholders over the long-term as we execute our plans in five areas. The first is to grow our revenues organically at high single-digit to low double-digit averaging 10% over time and to supplement this high level of organic growth with acquisitions. The second is to invest in new technologies, our facilities, manufacturing assets, and business systems as well as in our people. Third is manufacturing in-sourcing as well as driving strong operating performance across our manufacturing locations. Fourth, we're seeking to grow revenues faster than operating expenses. This should allow us to continue investing in organic growth while maintaining strong operating leverage in the business. And finally, we're fully integrating the businesses we acquire to generate cost and revenue synergies over time. These synergies combined with other areas of the plan should produce attractive returns for our shareholders. Turning to slide 10. This strategy has worked very well over the past six years. We're confident that Mercury will extend its record of success in fiscal 2021 and beyond. We have clear purpose and positioning and a unique business model sitting at the intersection of tech and defense. We have a highly engaged workforce and our COVID-related business continuity protocols are working well. We're in the right markets and aligned with dominant industry trends. We continue to make growth-focused investments in our people, our technology, and our trusted domestic manufacturing assets. M&A is back and Mercury's balance sheet is in great shape. We anticipate high single-digit organic growth for the fiscal year and now with POC, 16% to 19% total company revenue growth leading to double-digit growth in adjusted EBITDA. With that I'd like to turn the call over to Mike. Mike?

Thank you, Mark and good afternoon, again everyone. Q2 was a quarter with strong financial performance. GAAP net income and GAAP EPS were at the midpoint and high end of our Q2 guidance respectively. Total revenue, adjusted EBITDA, and adjusted EPS exceeded our guidance. We delivered solid bookings and concluded the quarter with record backlog. In addition on December 30th, we completed the acquisition of POC, which we funded with a combination of cash on hand and our revolving credit facility. As a result of the acquisition and Mercury's strong organic performance in the first half, we are increasing our full year fiscal 2021 guidance for revenue, net income, adjusted EBITDA and adjusted EPS. Let's turn now to our Q2 results on slide 11. As I mentioned, we closed the acquisition of POC at the very end of the quarter. As a result, POC had an immaterial impact on the operating results shown on slide 11. Mercury's total bookings for Q2 were $210 million, up 0.2% year-over-year. For the last 12 months, bookings are up 10%. Our bookings continue to be driven by our key markets including radar, EW and C4I. Our book-to-bill for Q2 was 1.0, and for the last 12 months, our book-to-bill was 1.12. For the full fiscal 2021, we continue to expect bookings with a book-to-bill above 1. Mercury ended the second quarter with record backlog of $945 million including POC, an increase of 30% compared to Q2 of fiscal '20. Backlog expected to ship within the next 12 months was $598 million, up 15% compared to Q2 '20 providing solid visibility into the second half of fiscal 2021. Total company revenue increased 9% from Q2 last year to $210.7 million, exceeding the high end of our guidance of $200 million to $210 million. Organic revenue also grew at 9% year-over-year. POC, which is considered acquired revenue in Q2, contributed revenue of only $200,000 during the quarter. Mercury's revenue base continues to be highly diversified with no single program representing more than 10% of total revenue during the quarter. Gross margin for Q2 was 42.1% compared to 45.6% in the second quarter of fiscal '20. In addition to favorable program mix in Q2 last year, the decrease primarily reflected $3.1 million of direct COVID-related expenses charged to cost of goods sold this quarter. This had a 150 basis point impact on margins. Operating expenses in Q2 were up 4%, driven primarily by an increase in R&D expense. R&D was $28.1 million in Q2, up 14% from Q2 last year. For the first half, and last 12 months, R&D increased 19% and 27% respectively. R&D as a percentage of sales was 13.3% compared to 12.7% in Q2 of '20. This increase was driven by new opportunities in avionics, mission computers, secure processing, and radar modernization, as well as continued investment in our microelectronics business. Q2 GAAP net income and GAAP EPS were down 19% and 21% year-over-year respectively. This decrease was primarily driven by $3.3 million of direct COVID-related expenses and a $1.1 million increase in acquisition-related expenses. Adjusted income and adjusted EPS, which add back these expenses were both up year-over-year. Adjusted EBITDA for Q2 was up 6% year-over-year to $45.3 million, above the top end of our guidance of $42 million to $44 million, driven by strong revenue and profitability. Adjusted EBITDA margins for Q2 were 21.5% compared with our guidance of 21%. COVID-related direct expenses totaling $3.3 million were added back to adjusted EBITDA in Q2, primarily related to the weekly employee testing that Mark discussed. We also incurred expenses for payments from our employee relief fund as well as for supplies and services required for COVID-related workforce safety protocols. We charged approximately $3.1 million of these expenses to cost of goods sold and approximately $200,000 to operating expenses. In Q2, operating cash flow and free cash flow were $23.9 million and $10.2 million respectively. The declines year-over-year reflected the continued investments we made this quarter in CapEx, R&D and COVID derisking. Slide 12 presents Mercury's balance sheet for the last five quarters. Q2 fiscal 2021 reflects the acquisition of POC. We ended Q2 with cash and cash equivalents of $109 million. Our cash balance was down $130 million from $239 million at the end of Q1. This reflected the acquisition of POC, which we financed with $150 million of cash on hand, as well as $160 million drawn from our revolving credit facility. The decrease was partially offset by the cash flow we generated in the business. From a capital structure perspective, Mercury remains well positioned with continued flexibility and great access to capital. Our net debt at the end of the quarter was minimal at $51 million. We still have significant capacity for future R&D and capital investments to drive organic growth as well as M&A. As Mark said, our pipeline of M&A opportunities remains strong as we begin the second half of fiscal 2021. We expect to continue to be active and we have substantial financial flexibility to continue to execute on the M&A portion of our strategy. Turning to cash flow on slide 13. Free cash flow for Q2 was $10.2 million representing approximately 22% of adjusted EBITDA. We had approximately $7.1 million of one-time cash outflows during the quarter. These included $3.5 million in direct COVID-related cash outflows, a $2.2 million payment to Themis shareholders for a tax settlement and $1.4 million of POC acquisition-related expenses. Together these items reduced our free cash flow conversion ratio by approximately 16 points. Cash flow from operations this quarter was $23.9 million compared to $32.1 million in Q2 2020. The decline was primarily driven by the completion of payments for the inventory we procured in Q1 as well as the timing of shipments and related billings in the quarter. This was partially offset by sources of cash across other working capital accounts. Capital expenditures in Q2 were $13.8 million or 6.5% of revenue and were primarily related to facility build-outs in Andover, Massachusetts; Cypress, California; and Hudson, New Hampshire along with continued investment in our microelectronics business. I'll now turn to our financial guidance starting with Q3 on slide 14. Our guidance for the third quarter and the full fiscal year includes estimates for POC. The Q3 guidance also includes direct COVID-related expenses of $3 million. Our guidance for the full fiscal year does not include direct COVID-related expenses for Q4. For Q3 fiscal 2021, we currently expect total revenue in the range of $245 million to $255 million representing growth of 18% to 23% compared to Q3 fiscal 2020. At the midpoint, this guidance includes approximately $30 million of revenue attributable to the POC acquisition. Q3 GAAP net income is expected to be $15.9 million to $17.8 million or $0.29 to $0.32 per share. The year-over-year decline is a result of $6.2 million or $0.11 per share of non-operating investment income and discrete tax benefits that we had in Q3 2020, which we will not have in Q3 2021. Additionally, our Q3 2021 guidance includes an incremental $2.6 million of COVID-related expenses. Q3 adjusted EPS is expected to be $0.59 to $0.63 per share. Adjusted EBITDA for Q3 is expected to be $52 million to $54.5 million representing growth of 10% to 16% compared to Q3 fiscal 2020. Adjusted EBITDA margins are expected to be 21.2% to 21.4% of revenue. We expect free cash flow to adjusted EBITDA conversion to reflect continued investment in expansion CapEx, R&D and COVID-related expenses. Turning to slide 15. Our guidance for fiscal 2021 reflects the second half addition of POC on top of the full year of strong organic growth we previously anticipated. For fiscal 2021, we now expect total company revenue of $925 million to $945 million. This represents 16% to 19% growth from fiscal 2020 and includes two full quarters of POC as well as high single-digit organic growth. As we stated when we announced POC, the company had calendar year 2020 revenue of approximately $120 million. We expect the business to grow at a high single-digit low double-digit rate in calendar year 2021 weighted towards the second half of the calendar year. The midpoint of our guidance for fiscal 2021 assumes that POC will generate approximately $60 million of revenue for Mercury's H2 and $10.5 million of EBITDA or approximately 18% EBITDA margins. We expect revenue from the POC business to continue to grow at a high single-digit low double-digit rate in fiscal 2022 and EBITDA margins to expand. Total GAAP net income on a consolidated basis for fiscal 2021 is expected to be $69.1 million to $72.8 million or $1.24 to $1.31 per share. This is down year-over-year as a result of approximately $21 million or $0.38 per share of non-operating investment income and discrete tax benefits that we had in fiscal 2020 that we will not have in fiscal 2021. Additionally, our fiscal 2021 guidance includes approximately $8.7 million of direct COVID expenses compared to $2.6 million in fiscal 2020. Adjusted EPS for fiscal 2021 is expected to be in the range of $2.35 to $2.42 per share. This is up 2% to 5% compared to fiscal 2020 as a result of both our organic performance as well as accretion from the POC acquisition. This increase is partially offset as a result of a discrete tax benefit of approximately $8 million or $0.15 per share in fiscal 2020 which is not expected to recur in fiscal 2021. Mercury's adjusted EBITDA for fiscal 2021 is expected to be in the range of $201 million to $206 million, an increase of 14% to 17% from fiscal 2020. Adjusted EBITDA margins are expected to be approximately 21.7% to 21.8%. Again this includes POC, which is expected to have an approximate 30 basis point dilutive impact on our margins in fiscal 2021. As I mentioned, we expect POC's EBITDA margins to expand as we integrate the business into Mercury. We expect capital expenditures for fiscal 2021 to be approximately 6% to 7% of revenue, as we continue to invest in growing the business. Finally, for the year, we expect free cash flow to be approximately 30% of adjusted EBITDA. This conversion level is primarily driven by our expansion CapEx and COVID investments.

Turning to slide 16. Mercury delivered solid results for Q2, driven by strong organic growth and another quarter of great execution by the team. We also announced and completed the acquisition of POC. Looking ahead to H2, we're well positioned to continue deploying capital for strategic M&A, while executing on our long-term financial model of above industry average organic revenue growth and EBITDA margins. With that, we'll be happy to take your questions. Operator, you can proceed with the Q&A now.

Thank you. Our first question is from Peter Skibitski with Alembic Global.

Good evening, everyone. Mark, can you provide more insight into the potential revenue synergies from the POC deal? Does this position you to bid on larger projects or engage with different customer segments? I'm curious about what this acquisition offers that you didn’t have previously.

Sure. It's a good question Pete, and this is largely a revenue synergy deal. As you know, it does take time for those revenue synergies to actually occur in defense just based upon the life cycle of the programs. But one of the things that we particularly like about the business is the broad range of programs that don't overlap with Mercury. So, they have a strong presence on the F-18, F-15, V-22, H-60. So they've got a range of programs. What we've been able to do over time is to basically pull through some of Mercury's other capabilities. What we're seeing right now is the opportunity of Mercury taking POC's capabilities into some of our programs. In particular, they've got very strong capabilities in the storage domain where some of our largest programs are interested in understanding more about what they could provide, and they've got some very unique capabilities in mission computing where we see opportunities as well. So, a lot of opportunity I think for cross-selling and potentially upselling over time Pete.

Okay. I appreciate the information. Just one follow-up. In terms of capital expenditures, is it generally aligned with Mercury's capital expenditure levels as a percentage of revenue?

Pete their CapEx levels are lower than ours. We haven't provided specific guidance. But in terms of our maintenance CapEx of 3% to 4% as you know we've been investing running higher than that. Theirs are lower than those levels.

Lower than your maintenance level?

Yeah, lower than the 3% to 4%.

Okay. Thanks so much guys.

Thank you. And our next question will come from the line of Peter Arment with Baird Equity Research.

Good afternoon, Mark and Mike. Nice quarter. And Mark, I think you both mentioned that M&A is back. So obviously you just closed on the POC deal but maybe you could just highlight if – are you seeing a change in cadence in terms of just overall deal activity? Any color on that? And do you think just the flattening budget environment might accelerate things for you? Thanks.

Sure. Thanks Peter. So the opportunity pipeline is pretty robust right now, and I think we said the same last quarter. There are a lot of opportunities, some of which we've been developing relationships with companies for quite some time, as with the case with POC and others are processes that we're invited into. The deals themselves I think range in terms of size from deal size that we've done in the past to deals that are much larger than that. For us, we're going to stick with the current themes that we have. Those are using M&A to gain capabilities in our two core markets C4I as well as sensor and effector mission systems, as well as to penetrate those markets over time. The market is very active. It's hard to tell whether it's driven by the defense budget or just where interest rates are and the cost of money. But overall, it's a very, very dynamic marketplace. Mike, I don't know if you want to add anything to that?

Yeah. No, I think you hit it. The pipeline is strong Peter, and we've been active. And as I said in my prepared remarks, even after closing POC, we still have a lot of financial flexibility and good balance sheet capacity to continue to execute on that pipeline.

Appreciate the color. I'll leave at one question. Thanks.

Thank you. And our next question will come from the line of Greg Konrad with Jefferies & Company.

Just to start I mean in the announcement one disclosure was the launch of a new family of open architecture EMS solutions, the open architecture kind of stands out. Can you maybe talk about the opportunity and how this maybe expands the opportunity set?

Sure. So open architectures Greg as you know have really been a foundational part of Mercury's strategy. So as a horizontal player in the industry and a company that is investing in innovation at industry-leading levels what we seek to do is to design technology that can be rapidly reused in open systems architectures that obviously drives affordability. It drives more rapid technology upgrades. And we've historically done that in the processing domain, and as we've grown our business RF as well as mixed signal. We're now taking those same principles and applying them into those technology areas as well. And I think that's what's really driving the growth that we're seeing across the business in both C4I, as well as in sensor modernization.

And then just one on cash, you mentioned 6% to 7% of revenue for CapEx this year maintenance CapEx of 3% to 4% and the target conversion of 30% for this year. Can you maybe talk about how CapEx trends over the next couple of years? And given maybe some of the COVID investments runoff how you're thinking about conversion maybe getting back to closer to your target rate?

Sure. So yeah, in terms of this year and I mentioned some of the things that we were investing in – in terms of the trusted microelectronics from a CapEx perspective the facility in Andover some of our facility in Cypress those are investments that we've been making over the last 12 months and we expect those to ramp down as we complete those build-outs this fiscal year. That having been said, Greg, as you know our expansion CapEx tends to be tied to our acquisitions as we consolidate facilities. And so, going forward our CapEx will really be driven by that. But barring that, I do see over the next year or so getting back down to those maintenance CapEx levels that we've said of 3% to 4%. And it's hard to tell on the COVID investments. I mean we've made it a priority to continue to invest to protect our employees and business continuity. And we're going to continue to do that as long as we think it's needed. And so hopefully though as we get into fiscal 2022 and beyond those costs have ramped down. And once we do return to those maintenance CapEx levels and our COVID expenses draw down, we fully expect that we'll be at the free cash flow conversion levels target that we set.

And our next question is going to come from the line of Colin Canfield with Citi.

Guys thanks for the question. Appreciate it. Can you just talk a little bit about Mercury's role as a merchant supplier in an increasingly shrinking smid A&D asset pool, and then discuss a little bit about what you're seeing in terms of the change of administration? You discussed horizontal expansion right and what a new administration might need for your ability to pursue future deals.

Sure, Colin. It's a good question. So, my belief is that the Department of Defense would benefit from a strong and robust Tier 2 industrial base. In specialist companies, they are able to provide capabilities more quickly and more affordably and they have the ability and the willingness to actually invest in innovation. Mercury is certainly one of those companies, right? Our R&D level this year is 13%. That is way above the 2% to 2.5% industry average. How that's playing out is really with respect to our growth levels. Our customers are seeking to work with companies who they can partner with, who can invest in innovation and can benefit not only them but the DoD. And that's very much what we're doing. We're investing in innovation, as Mike described. We're also investing in the capital improvements inside of our infrastructure, particularly around our manufacturing assets, trusted domestic manufacturing assets that are so important in today's world with just where much of the technology is manufactured in the commercial world. So, I think the DoD would benefit from having a strong industrial base and Mercury is clearly one of those companies focused on providing secure and trusted processing solutions.

Perfect. Thanks. I keep the one.

And our next question will come from the line of Michael Ciarmoli with Truist.

Good evening, guys. Thanks for taking the question. Nice results. Maybe this is just me and maybe semantics, but I think the organic growth you guys are looking for 8% to 10%. You're now calling it high-single-digits. I realize nothing's absolutely changed. You're adding the $60 million in for POC. The prior guide stays the same. But, has anything changed with the organic growth environment? It sounded like with the budget in place clearly the bookings environment improved a bit. I would have thought that maybe would have translated as well into the organic environment. But any color there?

Yes. It's really more just a refinement of the prior range that we gave Mike. I think as I said in my prepared remarks, the second quarter was really remarkably like the first where we did see continued impact with respect to COVID slowness as well as the extended CR. Although we were pleased with the bookings, they maybe weren't quite as high as what we would have liked. And obviously as the year progresses that does have an impact. Fundamentally, when you look at the guidance, the organic guidance for the total company and now layering on top the six months of POC, we expect to deliver another year of both double-digit growth in overall revenue and double-digit growth in adjusted EBITDA. So it's going to be another really strong year for us.

Got it. Just to – sorry, just one more and a follow-up to that. The outsourcing component of your growth driver, I mean, if we look at historic budget downturns, do you think anything changes there? I mean if some of the larger primes get squeezed, do you think they keep more work in-house maybe as they've done historically to help absorb their overhead, or do you think that trend can continue in a down budget environment?

Yes. I think the trend continues Mike, particularly for what we do. Again, because, yes, I think there's going to be a greater focus on innovation. There's going to be a greater focus on potentially affordability. And we're playing at both of those trends. Again, if you look at our R&D levels versus the internal divisions of our customers for similar things, we are dramatically higher. We're leveraging that innovation across many customers and many programs. When they do a make or buy purchasing decision, what they'll find is that it's far more affordable to acquire the capabilities from Mercury than it is to develop it in-house. Because of the investment model, we have always got the latest generation of technology, which actually helps them as they're bidding for new business. So we absolutely see that the outsourcing trend is alive and well. If you look at the growth in our subsystems in the second quarter, which is really where we're seeing the outsourcing, it was up 75% year-over-year. We saw very substantial growth there in certain programs transitioning into production, and we're pretty pleased with the way in which things are going.

Got it. Thanks a lot, guys.

Thank you.

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

Hi. Good afternoon, Mark and Mike. You both sounded optimistic about bookings in the second half of this year. Mark, can you provide any more details on your budget and where you expect the bookings to come from? Also, how strong could the book-to-bill ratio be in the second half of the year considering the elevated bookings you seem to have good visibility on?

Sure. So we do expect a positive book-to-bill organically for the full fiscal year. We just obviously acquired POC, so we're getting our arms around that in terms of just what their bookings might look like. But organically, we are expecting a positive book-to-bill. In terms of where the potential growth is coming from, at the year level, we see opportunities in airborne radar, EW as well as C4I. Those are kind of the three potential drivers of bookings growth at the year level.

That's helpful. And if I could just a specific question on some of the aircraft programs. There clearly seems to be a push to extend the life and in fact restart production in the case of the F-16 and the F-15. Are those impactful programs for you as we think about sort of modernization and requirements there, or how do you think about the opportunity of some of these older platforms relative to newer systems?

Yes. So we obviously participate in both and that's actually kind of a nice element of our model that we're obviously pursuing next-generation systems as the government is focused on those. But as we know, the platforms change far less often than the overall electronics inside them. Yes, we are clearly seeing a wave of modernization in the radar domain. Our radar business was up pretty substantially, up 75% in the second quarter year-over-year as a result of that modernization. We're also seeing a wave of modernization in EW, and I think a lot of that is driven by the great power competition, the threats that we see coming out of the Asia Pacific. And if you step back, what we've also seen is that the major reason that we moved into C4I is once you start to touch the sensors themselves, it drives a corresponding knock-on upgrade in two other processing parts of the platforms themselves. One is in platform and mission management. This is obviously where the acquisition of POC fits along with the prior acquisitions that we've done in the space, as well around command and control intelligence processing. Our goal quite simply is to be able to provide all of the different types of processing solutions that go onboard systems that require trust and secure processing. We believe we've got some industry-leading capabilities there that are appropriate for both modernization as well as new systems.

Great. Thank you very much.

And our next question is going to come from the line of Seth Seifman with JPMorgan.

Thanks very much. Good evening guys.

Hi, Seth.

Hi. I wanted to ask about LTAMDS. You mentioned it was possibly the fastest-growing program in Q2. I'm curious if that contributes to the high growth in radar that you discussed earlier. Considering the current stage of development for that program and its impact on Raytheon's results, which seems to involve significant costs, is this program operating at a level considerably below your typical gross margins? Additionally, could you share your thoughts on the margin potential for this program over time? Also, how do you see the balance of LTAMDS compared to other growth areas affecting gross margin development in the future?

Yeah. Why don't I talk about it from a high level and then Mike can maybe kind of relate it back to the financial model. So, LTAMDS was our number one revenue program in the first quarter, but it was along with three other radar programs. Two ground radar programs and an airborne radar program. You are clearly seeing a wave of radar modernization. We're seeing a similar thing at the year level, where both radar and EW are probably going to be the major drivers of growth. The LTAMDS program, as you know is something that we've been investing our own internally funded R&D on for several years now. It has been a substantial driver of our internal R&D funding. Raytheon has clearly gotten the benefit of that. The program itself, we're in the very early stages, right? We're delivering new initial technologies and capability associated with the first six systems. Raytheon believes that upwards of 250 Patriot radars could be subject to this upgrade. This is a substantial opportunity for Mercury. The program along with some of the other programs we mentioned in both Q2 as well as for the full fiscal year are in the early phases. As a result, the margin profile is typically lower than when the programs themselves go into full rate production. So, a little bit dilutive overall as well that combined with the level of internally funded R&D.

I think you made a great point. Seth, this is a typical program and it is our largest in Q2. It has lower margins like many of our larger programs at the start as they ramp up; as Mark mentioned, we achieve higher margins as they transition into full rate production. From an R&D standpoint, much of our investment in that program has occurred over the past couple of years, and we have already put a lot of that behind us, stemming from investments made three to four years ago.

Great. Thanks very much.

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

Hi. Good afternoon. Just one question for me. When it comes to your trusted type of programs you referenced that earlier in the discussion, can you talk about how that's maybe playing out in some of the programs and potential margin impact as well? Thanks.

Yes. Unfortunately, we're not going to be able to link here some of our capabilities to specific programs, just given the nature of what we do. But yes, we have invested substantially, literally over the last 10 years now, on our specialized processing capabilities. We believe we've got industry-leading capabilities there that spans the IP into next-generation trusted microelectronics, all the way up through various system-level capabilities. We believe that type of processing is crossing the CASM and is driving significant growth inside of the business. Just, unfortunately, I just can't tell you specifically the areas or the programs, just due to the nature of it.

Understood. Thank you.

Thank you. And our next question will come from the line of Noah Poponak with Goldman Sachs.

Hey. Good evening, guys.

Hi, Noah.

Are you saying LTAMDS is already your single largest program?

LTAMDS is the largest program in Q2. It can vary from quarter to quarter, but it is the largest this quarter and we expect it to be the second largest for this fiscal year.

Could you size it in the fiscal year?

I don't think we've hit 5% of the total in the second quarter, and it may be slightly less for the year overall.

I mean, how many multiples of the current run rate does LTAMDS become for you when the program is at full rate production?

Well, I guess it depends on how quickly that full rate production occurs. But what we're delivering right now is technologies associated with the initial prototypical systems that Raytheon is under contract for. After that, we'll see what happens in terms of the production awards. What’s interesting to me about LTAMDS is just the evolution of the program itself, right? You may remember, it started out as a typical contracting program and along the way transitioned to an OTA, just based upon the capabilities and the urgent need of it. It’s moved very, very rapidly. It's probably the program that has moved the fastest into LRIP that I can remember in recent history. So it's an important program, both based upon the size, the potential long-term growth for Mercury, growth for Raytheon, and a really important set of capabilities to deal with the emerging threats that we are facing as a nation.

Yes. I didn't realize it was progressing that quickly for you, which is interesting. Looking at the multi-year model, the company has achieved total revenue growth of at least 20% for five consecutive years. In 2021, if you finish slightly above the high end, you'll reach that 20%. In 2022, POC will be part of the equation and will contribute to organic growth for half the year. So, if you make one more acquisition, 2022 should also hit 20%. Considering your balance sheet strength and your organic target, is it reasonable for me to expect the company to maintain 20% total revenue growth through the middle of the decade?

It's a great question, right and you've probably seen our slide in our Investor Day deck, right, which the model is we're seeking to generate high margins, expressing up more or less greater than 20%. We're looking to grow the business organically at high single digits to low double digits averaging roughly 10% over time and then to layer on top an additional 10% through M&A. We've done very successfully, as you said over the last five years. We think that we can continue to deliver that high single-digit low double digits organically over time as we kind of look out based upon what we see right now. As we mentioned, the M&A environment is extremely robust. I think the balance sheet is in great shape. So, we think that we can continue to execute against the model that has generated so much value for shareholders as we look forward Noah.

I see the numbers. Mike, if I consider the 3Q guidance components you provided and the full year guidance components, it appears the 3Q margin needs to decrease slightly sequentially, while the 4Q margin should increase by about 250 basis points. Is that correct? And what accounts for the significant fluctuations in the latter half of the year?

Yes. So Noah, let me make sure, I understand your question. Let me answer it at the annual level just to give you where we're coming out on margins and EBITDA margins from the perspective of our guidance of 21.7% to 21.8%. That does include POC which is dilutive. So, it's about 30 basis points dilutive to the margin. If you back that out you're at that 22.1% where our guidance for EBITDA was last quarter. We're continuing to expect that for the year. That does imply an EBITDA margin in Q4 that is higher. We expect to have higher revenue. If you look at the quarterly revenue, what that implies for Q4, which is going to give us some operating leverage. We also think gross margins will be slightly higher in Q4 pre-COVID expenses than they were in the first half of the year. So that's what's driving Q4 which is driving the annual EBITDA guidance.

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

Yes. We haven't broken that out, but you can look into it. Our book-to-bill for the quarter was one. So our backlog quarter-over-quarter on an organic basis was flat.

Right. Okay. Got it. Okay. Thanks very much.

And our next question is a follow-up from the line of Peter Skibitski with Alembic Global.

Yes. Mark, kind of a tough question to answer I think, but there's been a lot of talk about DoD potentially kind of moving large buckets of money around in the fiscal year '22 and beyond budgets, maybe migrate money out of the Army towards Navy maybe Air Force and maybe build more ships. I know, it's tough, but from a gut level do you get a sense of how that could impact Mercury pro or con, or is it a push? Do you have any thoughts there if we do see that money move around?

Yes. The majority of our business is linked to airborne and naval sectors, but we are experiencing significant growth in the ground sector. However, this ground growth is not related to the number of military vehicles like HMMWVs. Instead, it is more associated with ground radar modernization efforts, such as LTAMDS, along with a few other projects we are engaged in. Typically, the Army ends up reallocating funds during different budget cycles, and this situation may be similar. Those funds are likely to shift towards both the naval and airborne areas, especially in light of great power competition and our focus on the Asia Pacific region, as well as other high-end threats like Russia. Therefore, our exposure to the ground sector is limited to radar modernizations, which appear promising. The other areas of our business continue to look strong.

Great. Thank you.

Okay. Well, thank you very much everyone for listening in. Stay safe. We look forward to speaking to you next quarter. Thank you. Bye.

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