Mercury Systems(MRCY) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Mercury's total revenue for Q3 was $253 million, down 1.5% year-over-year, reflecting supply chain and labor market challenges [15][35] - Adjusted EPS for Q3 was $0.57, while adjusted EBITDA was $52.5 million, with adjusted EBITDA margins at 20.7% [38][54] - Free cash flow for Q3 was an outflow of $10.3 million, impacted by supply chain delays and labor shortages [39][48] Business Line Data and Key Metrics Changes - Bookings increased 41% year-over-year and 25% sequentially, with a book-to-bill ratio of 1.17 [10][34] - Design wins in Q3 totaled over $360 million in estimated lifetime value, with year-to-date design wins up 14% from the previous year [16] - Acquired revenue from recent acquisitions was $19.3 million, contributing to overall revenue [36] Market Data and Key Metrics Changes - The FY 2022 Defense Appropriations Bill was 6% higher than the initial request, with the FY 2023 budget expected to be revised upwards [29][31] - Increased defense spending is anticipated due to geopolitical tensions, particularly from the war in Ukraine [9][31] Company Strategy and Development Direction - Mercury's five-year plan targets high single-digit to low double-digit organic revenue growth, alongside margin expansion and M&A [9][24] - The 1MPACT program aims to achieve full growth potential and improve operational efficiency, with expected benefits of $30 million to $50 million in adjusted EBITDA by fiscal 2025 [24][27] - The company is focusing on larger and faster-growing parts of the defense market, participating in over 300 programs [28] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in returning to organic growth in fiscal 2023, despite current macro challenges [33][61] - The company anticipates increased bid and proposal activity leading to higher bookings in the mid-term due to rising defense spending [9][32] - Management acknowledged ongoing supply chain constraints but remains optimistic about mitigating impacts and improving cash flow in fiscal 2023 [48][49] Other Important Information - The company ended Q3 with a record backlog of $996 million, up 4% compared to Q2 [34] - Gross margins for Q3 were 39.4%, down from 41.1% in the previous year, primarily due to program mix [36] - The company has increased its revolving credit facility from $750 million to $1.1 billion, enhancing financial flexibility [40] Q&A Session Summary Question: Free cash flow outlook and working capital build - Management indicated that unbilled receivables would remain a cash use in Q4 due to supply chain delays, but expect normalization in fiscal 2023 [71][73] Question: Return to high single-digit or low double-digit growth - Management remains optimistic about achieving growth targets, citing strong bookings momentum and backlog [78] Question: Gross margin expectations - Management expects gross margins to improve in Q4 and fiscal 2023 as more programs transition to production [85] Question: Pricing pass-through capabilities - Management noted that fixed-price contracts limit the ability to pass on costs, but shorter production cycles may allow for more frequent adjustments [93][94] Question: 1MPACT program progress and future opportunities - Management expressed satisfaction with the progress of the 1MPACT program and its potential to drive margin expansion [99][101]