Good day, everyone, and welcome to the Mercury Systems First Quarter Fiscal 2022 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 2 in the presentation. Before we get started, I would like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects and anticipated financial performance. 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. Good afternoon everyone and thanks for joining us. I'll begin with the business update. Mike will review the financials and guidance and then we'll open it up for your questions. Our results for the first quarter of fiscal 2022 were in line with our expectations. Total revenue exceeded our guidance and adjusted EBITDA came in above the midpoint. Our 1MPACT transformation efforts are progressing well and we continue to execute strategically. During the quarter, we signed an agreement to acquire Avalex Technologies, while continuing to invest in the business organically. Our outlook for fiscal 2022 remains unchanged. Reflecting the lower bookings and backlog exiting last fiscal year we continue to expect flat organic revenue growth versus fiscal 2021. We expect total company revenue to grow 10% in fiscal 2022, eclipsing $1 billion for the first time. Due to the timing of the expected close, our Q2 and fiscal 2022 guidance excludes Avalex as well as any future M&A. We also anticipate margin expansion and record adjusted EBITDA. We expect to deliver substantial year-over-year growth in bookings in fiscal 2022 weighted towards the second half and especially Q4. This should lead to a positive book-to-bill for the year and solid growth in our backlog, setting the stage for strong results in fiscal 2023. That said, the risk levels have become elevated in three areas since last quarter; first, the potential for a prolonged defense budget continuing resolution; second, the White House vaccination mandate for the defense industry and the resulting impact on our employees and operations; and third, inflation and supply chain constraints in the semiconductor industry. We're working diligently to mitigate risk wherever we can and anticipate a return to high-single-digit to low-double-digit organic growth in fiscal 2023. This growth coupled with margin expansion driven by improved operating leverage and our impact efforts should lead to strong fiscal 2023 results overall. We're optimistic about our growth prospects over the longer term. We believe that Mercury is well-aligned with the national defense strategy. The government continues to push for modernization, speed, and affordability in both sensor and effector mission systems and C4I. The need to secure processing, trusted microelectronics, and open mission systems are increasing. We're well-positioned to benefit from the longer-term secular growth trends that we've discussed in the past: supply chain delayering by the government and the primes, the flight to quality suppliers, the shift to outsourcing by our customers at the subsystem level, and the government's increased focus on supply chain reassuring for microelectronics. Our vision of being the leading commercial provider of trusted and secure devices to systems is what our customers are seeking. They're looking to partner more with companies like Mercury and buy less from traditional suppliers. As a result, our engagements are becoming larger and more strategic for our customers and for us. Our five-year plan remains intact, that is to deliver high-single-digit to low-double-digit organic revenue growth averaging 10% over time coupled with M&A and margin expansion. Taking a quick look at the financial highlights on slide 4. Q1 is typically our seasonally weakest quarter. Bookings were down slightly year-over-year as expected and our book-to-bill for the quarter was 0.89. We feel confident that Q1 represents the low watermark for bookings in fiscal 2022. Our largest bookings programs in the quarter were F-35, a classified EW program, a classified C2 program, F-18, and F-16. Total revenue was up 9% year-over-year above the high end of our guidance. Organic revenue was down 11%, slightly better than anticipated. Our largest revenue programs in the quarter were MH-60, a classified C2 program, a classified radar program, P8, and F-35. We continue to see high levels of new business activity. Our pipeline remains strong with design wins in Q1, totaling nearly $500 million in estimated lifetime value. Free cash flow for the quarter was slightly negative. On the bottom line, however, adjusted EPS came in at the higher end of our Q1 guidance, and adjusted EBITDA at the midpoint, down 20% and 10% year-over-year, respectively. Turning to slide 5. We expect Mercury's total company revenue to continue growing faster than overall defense spending over time. We focused the business on large and faster-growing parts of the defense market, and we now participate in more than 300 different programs. We're designed in on our top programs with the majority being sole-sourced positions. No single program is more than 5% of total company revenue in fiscal 2021. Looking ahead to the next five years, no single program is expected to be more than 6% of total revenue. For fiscal 2022, we expect bookings and revenue to increase as we move through the year. As I said earlier, risk levels have increased related to the defense budget CR, COVID vaccine mandates, and supply chain. We successfully managed COVID-related risks throughout the pandemic. During the second quarter, we intend to comply with the White House vaccine mandates. This should enhance the resiliency of the business by protecting our employees and strengthening our ability to deliver on our commitments. In the short term, however, it may result in higher employee turnover and impacts to our operations. Beyond the challenges associated with COVID, we continue to see the effects of inflation in semiconductor supply chain constraints. The team is working daily with our suppliers to address these challenges. Over time, we believe the vaccine mandates will help alleviate programmatic delays, as our employees and our customers and the DoD ultimately return to on-site work. The vaccines could also have a positive effect on some of the supply chain issues we're facing. As a result, we're cautiously optimistic that bookings will grow substantially year-over-year in fiscal 2022 leading to a positive book-to-bill and growth in backlog. We anticipate double-digit growth in bookings in the second half of fiscal 2022, driven by our top 20 programs. This growth should be led by programs such as F-35; LTAMDS, which is now called GhostEye; Filthy Buzzard; SEWIP; and various FMS programs. In addition to these franchise program bookings, we expect growth from recently acquired programs to accelerate in the second half also. Looking ahead to fiscal 2023, we expect bookings from our top 20 programs to ramp yet again. We anticipate seeing fewer delays in key programs among the F-35, TR3 and Block 4 as well as enabling airborne upgrades, such as SEWIP and Filthy Buzzard. As we've said, this should lead to strong results in fiscal 2023 driven by a return to high-single-digit to low-double-digit organic growth. Turning to slide 6. Since fiscal 2014, we completed 13 acquisitions deploying $1.2 billion of capital, dramatically scaling and transforming the business as a result. We've grown total company revenue 4.4 times; and through synergy adjusted EBITDA more than nine times over that period. This has resulted in substantial value creation for shareholders. We believe there's additional value to be had going forward. As we discussed last quarter, early this calendar year we proactively launched a company-wide effort, which we called 1MPACT to lay the foundation for our next phase of value creation at scale. The goal is to achieve Mercury's full growth, margin expansion and adjusted EBITDA potential organically and through M&A over the course of the next five years. The first opportunity is to streamline and simplify our organizational structure, which we began in Q4 and have now largely completed. We're anticipating a $22 million net benefit in total for fiscal 2022 related to this 1MPACT activity. The Q1 actions alone accounted for $14 million of our total. To lead the 1MPACT, during the first quarter we hired Thomas Huber previously with Boston Consulting Group, McKinsey and Bain, as our Chief Transformation Officer. This 1MPACT progresses over the course of the next two to three years. In addition to growth, we'll be focusing on six major areas aimed at incremental EBITDA uplift leading to margin expansion over time. We're beginning to move from planning into the execution phase in several of these areas. We continue to target $30 million to $50 million of incremental adjusted EBITDA by fiscal 2025 as a result of this activity. Again, this includes a $22 million net benefit in fiscal 2022. Complementing 1MPACT, we've also strengthened the leadership team. In addition to Thomas Huber, Mitch Stevison joined Mercury from Raytheon as Chief Growth Officer early last month. Yesterday, we announced that Roger Wells has joined us from FLIR Teledyne as President of our Microelectronics division. We're very pleased to have Thomas, Mitch and Roger aboard. Turning to slide 7. Over the past seven years, our acquisitions and integration processes have generated significant cost and revenue synergies creating tremendous volume. We believe deploying 1MPACT will accelerate and increase the value we create through M&A going forward. 1MPACT could also allow us to increase our deal cadence and potentially the size of our transactions. Combined with the synergies generated, this could have a compounding effect on future value creation. The M&A environment continues to be extremely active and our pipeline is strong. We remain disciplined in our approach in terms of deal pursuits, diligence, pricing and integration. We were very busy from an M&A perspective in Q1 resulting in the acquisition of Avalex which we expect to close early this month. Avalex continues to build out our avionics and mission computing business complementing our recent acquisition of Physical Optics Corporation. As we discussed last quarter, potentially our most important fiscal 2021 design win related to the Army's AMCS program a win that was enabled by POC as well as prior acquisitions. Like those transactions, we expect Avalex to leverage supply chain delayering and further strengthen our position in platform and mission management. We look forward to welcoming the Avalex team to Mercury. Turning to slide 8. We remain strategically committed to delivering strong margins, while growing the business organically and supplementing this organic growth with disciplined M&A and full integration. This strategy is working extremely well. We believe it will continue to generate significant value for our shareholders over the longer term as we execute our plans in five areas. The first is to grow our revenues organically at high single-digits to low double-digits, averaging 10% over time supplemented by growth from 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 stronger operating performance across our manufacturing locations and supply chain. 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 1MPACT and other areas of the plan should produce attractive returns for our shareholders. Turning to slide 9. We're expecting substantial growth in bookings and backlog in fiscal 2022. This should lead to a strong year in fiscal 2023 as organic growth returns to more normal levels and margins expand as a result of 1MPACT. In the short term, risks have increased related to the defense budget, COVID vaccine mandates and the supply chain. However, looking ahead longer term, we remain very optimistic. We've aligned our business with the national defense strategy in the industry's key market trends. Our model serving at the intersection of the high-tech industry within defense is exceptionally well positioned. Our strategy and investments in secure processing, trusted microelectronics and open mission systems are serving as the engines of growth in the business. Our M&A pipeline is robust, positioning us with continued acquisition-related growth. We've streamlined our organizational structure, strengthened our leadership team, and launched 1MPACT. As a result, we believe that we can replicate what we've done successfully since fiscal 2014 and achieve Mercury's full growth and adjusted EBITDA potential organically and through M&A over the next five years. Before I turn the call over to Mike, I'd like to welcome Mercury's newest director, Debora Plunkett. Debora was elected to the Board at our Annual Meeting, October 27. Her extensive experience in cyber, national security and information assurance will be a significant asset to Mercury. In addition, as planned Vince Vitto has retired from the Board. Vince has contributed valuable insights and counsel as a director for more than 15 years, the last 10 of them in his role as Chairman. On behalf of all of us at Mercury, I extend our deep appreciation to Vince for his dedicated service and leadership. At the same time, I'd like to welcome director Bill O'Brien as our new Chairman. I look forward to working with Bill to achieve Mercury's full potential in the years ahead. Finally, I'd like to recognize the entire Mercury team for a tremendous effort during these challenging times. My sincere thanks for your outstanding work and all of your contributions. With that, I'd like to turn the call over to Mike. Mike?

Thank you, Mark, and good afternoon, again everyone. As usual, I'll start with our first quarter results, and then move to our Q2 and fiscal 2022 guidance. As Mark said, Mercury's Q1 results were in line with our expectations. Total revenue exceeded our guidance, while adjusted EBITDA exceeded the midpoint and adjusted EPS came in at the high end of guidance. We remain on track towards achieving our previously announced revenue and adjusted EBITDA guidance for full year fiscal 2022. We expect a double-digit increase in bookings versus fiscal 2021, a positive book-to-bill for the year and strong growth in our backlog. We continue to expect the year to be weighted towards H2, and especially Q4. We expect margins to expand in the second half of the year and free cash flow to begin to normalize. Looking further ahead to fiscal 2023, we expect a return to high single-digit low double-digit organic revenue growth driven by bookings and backlog growth in fiscal 2022. We expect this organic growth coupled with improved operating leverage and the 1MPACT initiative, to result in strong margin expansion and EBITDA growth in fiscal 2023 versus fiscal 2022. Turning to our Q1 results on slide 10. Bookings in Q1 were $199 million, down 1% compared to Q1 2021. Our book-to-bill was 0.89. Our backlog at the end of the quarter was $884 million, up 7% from Q1 2021, and down 2.8% compared to Q4 2021. While our total backlog declined from last quarter, our 12-month backlog was up 4.5% compared to last quarter, as a result of bookings shifting in the near-term revenue. As a result, we have better visibility into the second half of fiscal 2022. Coupled with bookings on key programs that we expect to receive in Q2, we're optimistic about our results for the full year. Revenue in Q1 increased 9% from Q1 2021 to $225 million exceeding the top end of our guidance of $210 million to $220 million. Organic revenue was $184 million, down 11% year-over-year, but better than anticipated driven by timing and mix on several of our larger programs. Acquired revenue which included Physical Optics Corporation and Pentek was $41.3 million. The Avalex acquisition that we announced in September and is expected to close in early November and therefore was not in our Q1 results. Gross margins for Q1 were 39.3% compared to 42.9% in Q1 fiscal 2021, down 360 basis points. This was primarily driven by the inclusion of POC which had a 240 basis point impact. We also had more new program starts and development work compared to a year ago. These programs tend to have lower margins in the near term, but are the precursor to higher-margin production work over time. Operating expenses in Q1 were up 35.5% compared to last year. This was primarily driven by an increase in restructuring and other charges. It also reflected higher amortization expense associated with the recent acquisitions, as well as acquisition-related expenses. In Q1, we recorded $12.3 million of restructuring and other charges reflecting a workforce reduction in the quarter, as well as third-party consulting costs associated with our 1MPACT program. Our investments in R&D continue to exceed the industry average as we continue to invest for growth. R&D for Q1 was $28.9 million up 5% compared to $27.4 million in Q1 2021. The biggest drivers of R&D in Q1 were in mission computing and secure processing. Since fiscal 2017, we've now invested over $400 million in new technologies such as secure processing, trusted microelectronics and mission computing that will drive our growth going forward. In Q1 we incurred a GAAP net loss of $7.1 million or negative $0.13 per share. The loss was driven primarily by $12.3 million of restructuring and other charges in the quarter. Adjusted EBITDA for Q1 was $38.3 million within our guidance range of $36.8 million to $39.6 million. Our adjusted EBITDA margins were 17% for the quarter down 380 basis points from 20.8% in Q1 fiscal 2021. This was primarily driven by program mix. Free cash flow for Q1 was an outflow of $7.4 million, driven primarily by our net loss including cash outflows associated with restructuring and other charges. We also saw some changes in customer payment patterns. We believe these resulted from the debt sailing negotiations and potential government shutdown coinciding with quarter end. Slide 11 presents Mercury's balance sheet for the last five quarters. We ended Q1 with cash and cash equivalents of $96 million compared to $114 million in Q4 2021. The reduction was primarily driven by our negative free cash flow during the quarter. We also used cash for the net share settlement of vested restricted stock units in connection with our annual grant vesting. We ended Q1 with $200 million of debt funded under our $750 million revolving credit facility. We expect the Avalex acquisition to close this month and to finance the $155 million cash purchase price using the revolver. Following the acquisition, we will have approximately $355 million of debt and leverage of 1.3x net debt to adjusted EBITDA. From a capital structure perspective, we remain well positioned with continued flexibility and great access to capital. Upon closing, the Avalex acquisition we will have invested $530 million in capital in the last 12 months towards M&A marking the largest capital deployment in the 12-month period in Mercury's history. We continue to invest in strategic acquisitions that are aligned with our R&D investments. Turning to cash flow on Slide 12. Free cash flow for Q1 was an outflow of $7.4 million. Our net loss in Q1 was the biggest driver of our cash flow compared to previous periods. Q1 is typically seasonally lower due to employee bonus and tax payments. However, this quarter we also had cash outflows for restructuring and other charges associated with 1MPACT as well as acquisition-related expenses primarily associated with Avalex. As previously noted, we experienced some changes in customer payment patterns. We also invested in inventory related to forecasted revenue growth, in the second half of the year. I'll now turn to our financial guidance starting with Q2, on Slide 13. Our guidance for the second quarter and the full fiscal year, assumes no incremental acquisition-related expense. Our guidance for Q2, includes restructuring and other charges of $5.2 million related to the 1MPACT initiative. Our Q2 and fiscal 2022 guidance does not reflect Avalex, which we expect to close this month. As we announced, Avalex is expected to generate approximately $40 million in revenue, for the 12 months ended December 31, 2022 with adjusted EBITDA margins of approximately 25% or $10 million. Assuming we closed the acquisition at the beginning of this month, we would expect revenue and adjusted EBITDA of approximately $3 million and $750,000 in Q2 respectively. For the second half of our fiscal year, we expect Avalex, to contribute approximately $20 million in revenue and $5 million in adjusted EBITDA. Since the acquisition has not yet closed, this is not included in our Q2 or full-year guidance. Heading into Q2, we expect a rebound in bookings with Q1 being the low point for the year. In Q2, we expect a book-to-bill above one, which will drive the revenue growth and margin expansion in the second half of the fiscal year. Exiting Q2, we expect our backlog to increase and have even greater visibility into the revenues expected for the remainder of the year. For Q2, we currently expect revenue in the range of $215 million to $225 million. This is approximately 4% growth at the midpoint compared to the second quarter last year. At the midpoint, we expect organic revenue to be down approximately 15% from Q2 last year, as a result of bookings in the last few quarters. We currently expect gross margins in Q2 to be in line with Q1, due to similar program mix between development programs and production programs. In the second half of fiscal 2022, we expect gross margins to increase, as we complete several of our lower-margin development contracts. The revenue growth in H2 is expected to be driven by higher-margin production programs. Q2 GAAP net income is expected to be $300,000 to $1 million or breakeven to $0.02 per share. The year-over-year declines reflect the expected incremental 1MPACT-related expenses. Q2 adjusted EPS is expected to be $0.39 to $0.43 per share. We expect adjusted EBITDA for Q2, to be $38 million to $41 million representing approximately 18% of revenue at the midpoint. This is about 100 basis points higher than Q1, even as gross margins are similar. As sales ramp up in the second half of the year, we expect an increase in gross margin combined with operating leverage to result in EBITDA margin expansion. We expect free cash flow to adjusted EBITDA for Q2 to be approximately 15% driven by continued 1MPACT cash outflows. Turning to Slide 14, we're maintaining our guidance for fiscal 2022 for revenue and adjusted EBITDA. We're increasing our guidance for adjusted EPS primarily as a result of lower expected depreciation expense compared to our prior guidance. Our updated GAAP net income and GAAP EPS guidance reflects the restructuring and other charges as well as acquisition-related expenses incurred in Q1 in addition to the incremental known 1MPACT-related expenses expected in the year. As Mark discussed, there is continued uncertainty associated with the defense budget and contracting environment COVID as well as the supply chain. The team is working diligently to minimize these risks and to-date has been able to do so. Our guidance assumes that we'll be able to continue to manage these risks without material impact to our results. For the full fiscal year 2022, we're expecting double-digit bookings growth and a book-to-bill above 1. We expect total company revenue of $1 billion to $1.03 billion. This represents 8% to 11% growth from fiscal 2021, in line with our previous guidance and flat organic growth year-over-year. Again our revenue guidance does not include the Avalex transaction and is prior to additional acquisitions. We expect our revenue in fiscal 2022 to be weighted heavily towards the second half and in particular Q4. Total GAAP net income on a consolidated basis for fiscal 2022 is expected to be $54.6 million to $59.7 million or $0.98 to $1.07 per share. GAAP net income and earnings per share are lower year-over-year as a result of expected restructuring and other charges as well as non-operating activity and discrete tax benefits in fiscal 2021 which are not guided for fiscal 2022. Adjusted EPS for fiscal 2022 is expected to be in the range of $2.51 to $2.60 per share, an increase of 4% to 7% compared to fiscal 2021. Adjusted EBITDA for fiscal 2022 is expected to be in the range of $220 million to $227 million, up 9% to 12% from fiscal 2021. Adjusted EBITDA margins are expected to be approximately 22%. As Mark said we've included approximately $22 million of savings in our fiscal 2022 guidance related to the 1MPACT actions taken in Q4 and Q1. Like revenue, we expect adjusted EBITDA and EBITDA margins to be heavily weighted towards the second half and in particular Q4. As revenue ramps throughout the year, we expect an increase in gross margins and operating leverage to lead to adjusted EBITDA margin expansion. From a free cash flow perspective, we're targeting approximately 30% free cash flow to adjusted EBITDA in fiscal 2022. We expect cash flow to begin to normalize in H2, driving improved conversion for the year. We have guided certain additional costs associated with 1MPACT that are incorporated into this estimate although we may incur additional expenses that are not yet probable or estimated. Turning to slide 15 in summary. Our Q1 revenue exceeded expectations and adjusted EBITDA was in line with expectations as we continue to invest in the business. For the rest of the year, we expect a rebound in bookings, solid revenue growth and margin expansion. We believe our fiscal 2022 bookings and backlog growth will position us for a strong fiscal 2023 as organic growth returns to our target high single-digit low double-digit range and margins expand as a result of positive operating leverage and 1MPACT. Looking further ahead, we're well positioned for accelerated growth and continued adjusted EBITDA margin expansion. We've invested significantly in CapEx, R&D and M&A over the last few years, driving key design wins on franchised programs. As a result, we have high confidence in our ability over the next five years to continue executing on our strategy for long-term value creation. With that, we'll be happy to take your questions. Operator, you can proceed with the Q&A now.

Thank you, sir. [Operator Instructions] And our first question is going to come from the line of Peter Skibitski with Alembic Global.

Hi. Good evening Mark and Michael. Thanks for all the color. I guess just a quick one I guess for me. Nice revenue quarter. You hit your adjusted EBITDA guidance here for the first quarter. Michael, you touched on the adjusted EBITDA margin below your expectation. But was that just the incremental revenue that came through? Was just maybe a little bit more CRAD revenue than expected? Is that kind of what you meant by program mix?

Yes. That's the right way to think about it, Pete. It's -- it really is just program mix and the higher revenue was associated with the lower margin development programs or CRAD.

Okay.

CRAD was up 13% year-over-year.

Okay, okay. That's great. And if I can sneak one last one in. But looking into the second quarter, Mark, what are you kind of most concerned about? Is it the CR, or is it the semi shortage? Is it the vaccine mandate? Is there a way to kind of rank kind of what you guys are most concerned about?

Yes, it's a good question. It's actually all of those things. So, as I said on the call in the prepared remarks, the risk level has elevated across all of those areas. Now, I think we still feel pretty good that Q1 is the low watermark for bookings this fiscal year, and we're going to see progressive growth in both bookings and revenue as the year progresses. But we're very mindful of the risk in those three areas and we'll see how things evolve, Pete.

Thank you. Our next question will come from the line of Seth Seifman with JPMorgan.

Hey. Thanks very much. Good afternoon. Maybe just a follow-up there digging in on the question of the CR. If it gets pumped out through the first calendar quarter of fiscal or I guess, if it gets funded out through the first calendar quarter of 2022, what does that mean in terms of the bookings you expect in your second half? And to what degree is your bookings target reliant upon an appropriations bill? And what time period do you need that?

Sure. So, in our guidance, Seth, we've actually assumed a one quarter CR. We don't have that many new program starts and much of the bookings growth in the second half, is actually tied to growth in our existing core markets and largely around our top 20 programs, which were existing programs. So, it's hard to say for sure what the risk could be, because there are unknown unknowns, but we've assumed one level -- sorry, one quarter of CR in the guidance.

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

Hi. Yes, good evening, Mark and Mike. Mark, maybe if you could just circle back a little bit to Pete's question about the second half, the EBITDA margins that you're having in the first half, obviously below your historical, what you've enjoyed and the second half, obviously implies kind of a big step-up. So maybe if you could just highlight a couple of the key things that are going to drive that. I know you talked about maybe less few ad or some of the development programs. Thanks.

Yes. Let me kind of go through just a little bit H2 versus H1, kind of overview from a high level and then maybe kind of Mike could kind of dig in a little and tease things apart. So, for the second half from a revenue perspective, as we said, we're expecting double-digit growth in revenue versus the first half and year-over-year. Pretty much like the growth that we're expecting for the full year, we're expecting that the growth will be driven sequentially by the two major market segments in which we're participating, which is sensor and effector mission systems as well as C4I. And the growth is going to come primarily from our top 20 programs, which are largely expected to grow at a much higher rate, and it's really this that I think is the primary driver of the margin expansion. So, taking it down a level, if we look at it in the second half from a programmatic perspective, the growth, what the programs that are going to drive growth are LTAMDS, F-18, SEWIP, F-16, SABR F-35 and not large FMS program that moved from Q1 of last year. Other programs or large programs in the second half or ALR-56, a classified C2 program as well as T-45. So, it's kind of in line with what Mike said, right? It's really the program mix H1 versus H2. Do you want to add anything?

Yes, yes. And Peter, I think Mark just went through all the programs. I think as you look at the EBITDA for the year, the midpoint of our guidance is still 22% between our Q1 and our Q2 kind of midpoint of our guidance, we're running at about 17.5%. So we clearly expect to pick up in the second half, and as I said in the prepared remarks in Q4, specifically as well and that's going to be driven by a couple of things. Number one is the gross margin expansion, and Mark just talked about some of the specific programs. But at high level, the program mix between the development programs that we had in H1 compared to production programs in H2 is going to drive a lot of that. The second thing is operating leverage, and we're continuing to invest in R&D in H1 at levels that are consistent with what we've done in the past. Because of that, we're seeing some negative operating leverage which is putting pressure on margins. We expect that to reverse in the second half and really drive margins as well. So those are the two big things; program mix and operating leverage driving the EBITDA margins in H2.

Thank you. Our next question will come from the line of Sheila Kahyaoglu with Jefferies.

Hey, good afternoon, guys and thanks for the time. Just staying on the implied margin ramp. When we think about the first half, how much of the margin pressure is coming from new program mix? Is it like 500 bps? Is it 100 bps? And you also talked about elevated supply chain risk and inflation as a watch item. How are you kind of thinking about that into the second half?

So, why don't I hit on the margin question first? The preponderance of the lower gross margin Sheila in H1 is related to the program mix and the new development programs. And as we go through the second half of the year, we're going to see a ramp up in gross margins. I think, when we get to Q4, we're going to see gross margins that can look back at where we were in fiscal '20 for the year around 40%, 45%. I think that's where we'll be around Q4. And again, we don't specifically guide gross margins. But at the year level, I think we're going to be slightly above where we were in fiscal 2021, which implies that ramp-up in gross margins in H2, which is related to the programs that Mark went through.

Yes. And then on the supply chain side of things Sheila, yes, we clearly are seeing what many other companies have talked about right in this earnings season with substantial increases in lead times and price inflation. I would say the team to date has done a very, very good job in navigating around that. We missed very little revenue in the first quarter associated with it, but we do expect that the inflationary environment and the risk associated with revenue will be around for quite some time. That was one of the reasons that in the first quarter, we did make additional raw material purchase commitments, that was tied to revenue in the second half, that also was able to take advantage of some better pricing. So, the team is doing a great job. It's challenging and we're managing through it.

Thank you. Our next question will come from the line of Jonathan Ho with William Blair & Co.

Good afternoon. I just wanted to maybe understand a little bit more about your comments around sort of the vaccine mandate and potentially, how that could impact your business. Can you give us a sense of how much additional churn you're looking at, and maybe your thoughts around sort of skill shortages and difficulty hiring workers, how do you think about managing that process? Thank you.

Yes. So, as you know Jonathan, I think we did a very good job kind of managing through the initial stages of the pandemic. We're obviously now in a different phase with the White House mandating the vaccines. So, we're working through that. A very large majority of the population is vaccinated currently, but there's still a portion that is not. So, we're working to educate those and cajole and coax them to actually get the vaccine. It's unclear at this stage, exactly how many of those choose not to get vaccinated and it's still a little unclear, just given some of the change in the turn coming out of the White House as to what companies are going to be able to do and what flexibility that they have with respect to the mandate themselves. So, we know how employees that we intend to comply. We're communicating with them in a two-way dialogue. But at this point it's unclear as to the exact impact it will have. We are preparing mitigants to actually offset any disruptions that we may have, which includes overtime and temporary labor like other people. We haven't had any issues with respect to hiring. I think time to hire is still pretty strong and we have the labor that we need. So right now, we're doing okay, but this is an important quarter with respect to those potential changes.

Thank you. Our next question will come from the line of Michael Ciarmoli with Truist Securities.

Hey, guys. Good evening. Thanks for taking the question. So, I guess, Mark and Mike, maybe what was the thought process? I mean, we've obviously seen the larger defense peers here report, call out these risks, lower their guidance. You guys are still calling for substantial strength. Your fiscal year doesn't exactly align well with some of these risks. I mean, it would seem like you're a bit more vulnerable, but you've obviously decided to keep the stake in the ground and not maybe account for some of these risk factors and maybe reducing the guidance. I mean, can you walk us through kind of the confidence level and calling out these risks, but not maybe reflecting them in the guidance?

Sure. Let me kind of step back and just do a little bit of a recap in terms of kind of how we ended up here. So as we said on the call, I think, overall, we're pretty encouraged by the defense budget trends and the longer-term effects associated with the vaccine mandates. Notwithstanding that, as we said in the prepared remarks, I think, in the short term risk levels have increased due to the potential of the prolonged CR, the impacts of the vaccine mandates could have on employee turnover and operations, as well as the supply chain constraints and inflation that we just discussed. As we reflected coming out of 2021 and as we built the forecast, what we did Mike, as you know, is we examined the areas that impacted organic growth the most last year and believe that as we came into this year, we've planned more conservatively. Now, that doesn't mean that our plan has zero risk, as the year is clearly back-end loaded and the environment is more challenging. But to recap what happened in 2021, we saw really a 6-point reduction in organic growth last year. This was led by a 3-point reduction in organic revenue growth due to delays in naval modernization, particularly programs like SEWIP. We saw a 2-point reduction due to the now well-publicized Lockheed supply delays on the F-35 TR3 and Block 4, as well as a greater than a 1-point reduction to various FMS programs. So to risk adjust these, as well as other areas, coming into this year we lowered organic revenue growth expectations by 8 points. And this decline resulted in the guidance that we currently have, which is flat organic revenue growth for the year. But I believe that bookings will grow as the year progresses, leading to a positive book-to-bill for the year as a whole and hence to return to more normal levels of organic growth in 2023 and that's still very much our plan. So let me talk a little bit about some of the programs that were impacted and just give you an update on some of those. So the programs that we further reduced in 2022 were LTAMDS, SEWIP and other naval upgrades; the F-35 just due to the impacts that we were seeing; as well as various FMS programs. And so, if you look at LTAMDS, we're still expecting substantial growth in bookings year-over-year, despite us lowering our original bookings forecast, given that the LTAMDS award moved to fiscal 2023. On the naval fleet modernization schedule, that has and continues to be impacted. Frost has affected several programs including SEWIP. And as a result of that, we lowered our revenue expectations and moved this year's SEWIP award to the fourth quarter, which typically comes in Q3 which actually helped to derisk the plan further. Probably the biggest shift was on the F-35. And here, again, we kind of lowered revenues due to the ongoing engineering delays associated with F-35, TR3 and Block-4. The good news is that in Q1 we actually received a large order and expect additional awards in both Q3 and Q4. Now the bookings this year are far more weighted towards H1 than what they were in last year which is a positive. And overall, we expect double-digit growth in F-35 bookings this year versus a 50% decline in 2021. And in Q1 alone we booked nearly as much on the F-35 as we did for the whole of last year. So that said, there's still risk right, because although we booked a large order in Q1 the associated second half revenue is tied to long lead funding which in itself is tied to TR3 safety of flight test. So that revenue associated with F-35 currently sits in Q4 and is still in the plant, which is part of why the year is back-end loaded. On the FMS side the biggest impact that we had last fiscal year was in Q1. It's when that very large FMS order moved out of the year. Now the good news is that we received an initial award for that program, in the fourth quarter earlier than we'd expected. And we expect a substantial follow-on order in Q2 which will help for the year. So overall, although this elevated risk in the second half due to a potential of a prolonged CR, the COVID vaccine mandates and supply chain we're actually pretty pleased with the progress that we made in the first quarter and our goal remains to pace. So a long answer to a short question, but yeah, we made some pretty good progress Mike.

Thank you. Our next question will come from the line of Austin Moeller with Canaccord Genuity.

Good evening, Mark and Mike. Just on the note about the impact of inflation. I know there's a lot of expectation here that organic growth will manage to remain strong in fiscal year 2023. But, are you concerned about the impact of inflation on either the current defense budget or the future defense budget and that cost growth leading to a reduction in procurement quantities for key weapon systems? Or alternatively, do you think that that will benefit Mercury by driving DoD to further engage in delayering of the supply chain and allow you to negotiate with them directly, as opposed to through the prime?

Yeah. So I think it's probably going to be a little bit of both. We're clearly seeing the delayering trends particularly in the open mission systems arena. We're also seeing a flight to quality supply in particular in RF as well as secure processing where our customers are seeking to deal with those companies that have automated or modernized their manufacturing capabilities, as well as those that are willing and have the capacity to invest in new technologies and capabilities. So it's a little bit of both.

Our next question will come from the line of Noah Poponak with Goldman Sachs.

Hi, good evening.

Hi, Noah.

Hi, Noah.

Mark, I just wanted to follow-up on all that detail you just gave on some of your largest programs that have had the delays. I guess, it seems concentrated into SEWIP and then F-35 TR3 and the LTAMDS. Notwithstanding, the fact that you already gave a lot of detail there, what's actually transpired with those programs? Like have there been meaningful stake in the ground hard milestones you can point us to? Have you had conversations with the prime about the order timing that you can point us to, because otherwise it feels a little bit like we're still just guessing on the timing and you don't know if it will slip out of your 4Q and your 1Q. Are there concrete things that have transpired that you can point us to that get us a little more comfortable?

So I'd kind of just reiterate to some extent know what we basically said, right? I think there's been a tremendous amount of disclosure that was previously maybe not out in the public domain around the delays on TR3 and block four that resulted in substantial cost increases delays to the program and potentially a change in the production levels. Maybe we were a leading indicator, right to seeing the effects of that, hard to tell. I think many of the updates that I think has been discussed publicly suggest that the TR3 development and integration efforts are actually doing better than what they were. There's still some important milestones to go. One of those is, obviously, the integration of the capabilities and the flight safety certification testing that is likely going to begin or occur early in the new calendar year, which would bode well for our revenues in the second half. So that's kind of new information. On SEWIP, I think it's again generally understood that there's been a pretty significant impact to the ship modernization upgrade cycle that affected both SEWIP as well as other naval programs. We have taken that into account in our forecast, the fact that we typically get the order in the third quarter, which our customers still intends to do. We've been even more conservative pushing it into Q4, again kind of derisking the plan. Probably the biggest shift was on the F-35. And here, again, we kind of lowered revenues due to the ongoing engineering delays associated with F-35, TR3 and Block-4. The good news is that in Q1 we actually received a large order and expect additional awards in both Q3 and Q4. Now the bookings this year are far more weighted towards H1, than what they were in last year which is a positive. And overall, we expect double-digit growth in F-35 bookings this year versus a 50% decline in 2021. And in Q1 alone we booked nearly as much on the F-35 as we did for the whole of last year. So that said, there's still risk right, because although we booked a large order in Q1 the associated second half revenue is tied to long lead funding which in itself is tied to TR3 safety of flight test. So that revenue associated with F-35 currently sits in Q4 and is still in the plant, which is part of why the year is back-end loaded. On the FMS side the biggest impact that we had last fiscal year was in Q1. It's when that very large FMS order moved out of the year. Now the good news is that we received an initial award for that program, in the fourth quarter earlier than we'd expected. And we expect a substantial follow-on order in Q2 which will help for the year. So overall, although this elevated risk in the second half due to a potential of a prolonged CR, the COVID vaccine mandates and supply chain we're actually pretty pleased with the progress that we made in the first quarter and our goal remains to pace. So a long answer to a short question, but yeah, we made some pretty good progress Mike.

Thank you. Our next question will come from the line of Pete Skibitski with Alembic Global.

Yes. Thanks, guys. I just want to go forward on the F-35 outlook just because Lockheed put out that updated production kind of profile. And Mark you talked at length about TR3. But it sounds like as we head into maybe fiscal 2023 you have 35 revenue it will be a fairly easy comp for you given the delays in the TR3. So -- but how should we think about with the new production profile? Excuse me, how should we think about the profile for you guys through the mid-term? In other words is the F-35 is going to be a growth program for you guys for quite a long time, or will you in the nearer term, let's say, run into kind of this production flattening profile that some of the bigger guys are running into?

So we think that F-35 is going to be obviously, continue to be a really important program for us. Unlike say Lockheed right that the growth is obviously dependent upon the growth in the production rate, there's a few things going on with Mercury. So the first is obviously getting beyond the issues that we've experienced around TR3. TR3 becomes an enabler for Block 4 and Block 4 for us enables content expansion across different parts of the system that should lead to growth in both processing as well as RF content. The second thing is that the -- it's likely that the existing systems both T1 and T2 will be retrofitted over time which could be a pretty substantial opportunity for us as well. And then obviously over time there's likely going to be continued tech refreshes. So we're not a platform provider. Our business is really tied to both the electronic systems on new platforms as well as the ongoing modernization of existing systems and F-35 is a great example. It's already on the third tech refresh of the underlying processing and memory subsystem which will benefit from. So hopefully that answers your question.

Thank you. That's all the time we have for our question-and-answer session. I'd like to turn the call back to Mark Aslett for closing comments.

Okay. Well, thanks very much everyone for joining us this evening. We look forward to speaking to you again next quarter. Take care.

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