Good day, everyone, and welcome to the Mercury Systems Fourth 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 will open it up to your questions. Before we begin, I'd like to recognize the entire Mercury team for a tremendous effort through the course of an exceptionally demanding year. Thanks to your strong performance. Mercury delivered record bookings, revenue and adjusted EBITDA for the fourth quarter. That said, the quarter and the year were more challenging than we anticipated due to lingering pandemic impacts, the extended defense budget delay, continued supply chain disruption, labor market constraints and growing inflationary pressures. Despite these challenges, our bookings increased 27% year-over-year in Q4 to a record $332 million, leading to 1.14 book-to-bill and record backlog exiting the year. We received the large Aegis FMS order that was delayed in Q1, which was larger than we had originally expected. We also received the funding associated with the F-35 TR3 Block 16 as anticipated among others. Our largest bookings programs in the quarter were Aegis, F-18, F-35, PGK and the SDA Tranche Tracking Layer. Total revenue was up 16% year-over-year and 9% organically. Our largest revenue programs in the quarter were Aegis, F-35, P-8, MH-60, and a classified radar program. We will continue to see high levels of new business activity. Design wins in Q4 totaled more than $680 million in estimated lifetime value. For the year, we received 33 new design wins with an estimated lifetime value of more than $1.6 billion, up 9% from fiscal 2021. On the bottom line, we delivered adjusted EBITDA margins of nearly 25% in the fourth quarter and a record $71.6 million in adjusted EBITDA, which is up 36% from the third quarter and up 21% from the record set in…

Thank you, Mark, and good afternoon, again, everyone. I'll discuss our Q4 and full-year results and then focus on our Q1 and fiscal year guidance. Turning to Slide 7. In Q4, Mercury delivered all-time company records for bookings, revenue and adjusted EBITDA. We exited Q4 with record backlog of more than $1 billion. Our 12-month backlog was up 22% year-over-year providing improved revenue visibility into the next 12 months. Revenue in Q4 was up 16% and organic revenue up 9% year-over-year. During the quarter, we recognized the revenue that we expected from the large Aegis FMS sale, F-35 TR3 and other key programs that we discussed on last quarter's earnings call. We did however experienced more supplier de-commits and award delays on other programs, which had a greater than $25 million revenue impact on our Q4 results. Acquired revenue in Q4 included Pentek, Avalex and Atlanta Micro. As a reminder, Physical Optics Corporation, which we acquired in Q2 of fiscal 2021 is incorporated into organic revenue as of last quarter. Physical Optics continues to perform well despite being impacted by contract delays, labor market and supply chain de-commits like the rest of the industry. In fiscal 2022, Physical Optics had revenue in line with expectations and had a 1.27 book-to-bill. Overall, a strong performance. The acquisition, which was our largest in history, is a critical component of our open mission systems strategy. As planned, when we bought Physical Optics, we are beginning to transition the business from its historical small business innovation research work to subsystem development and production contracts. We are pleased with the acquisition, its growth and its alignment with our strategy. Q4 gross margins were up slightly year-over-year. Growth in higher margin production and licensing revenue was partially offset by increased direct allocations engineers to customer funded…

Thanks, Mike. Turning now to Slide 13. The timing challenges that we've experienced in the past two years are likely to continue at least through the end of fiscal 2023 as we see it today. That said, the demand environment remains strong and we believe that strategically Mercury could not be better positioned. We are entering fiscal 2023 with record backlog and strong new business momentum is expected. We believe this positions us to deliver another year of double-digit bookings growth and a positive book-to-bill with revenue exceeding a $1 billion for the first time while maintaining strong margins. Our five-year outlook remains intact. We expect increased defense spending through this period to positively impact the business. We are well positioned to continue benefiting from the effects of increased electronic systems, content, supply chain delayering and reshoring and increased outsourcing at the subsystem level. We believe the supply chain constraints and inflationary pressures that we are facing today are short-term in nature. Mercury's fundamentals are strong and with 1MPACT should improve over time. Executing on our long-term strategy over the past decade, we've improved margins while growing the business organically supplemented with disciplined M&A and full integration. As a result, we have created significant value for our shareholders and expect to continue doing so. We have also added depth to the Board. Continuing [indiscernible], I'd like to welcome Mercury's newest directors, Howard Lance and Bill Ballhaus, who were elected to the Board on June 24th. In closing, thanks once again to the Mercury team for your outstanding work and contributions. With that operator, please proceed with the Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of Pete Skibitski with Alembic Global. Your line is now open.

Hey. Good evening, guys.

Hi, Pete.

Guys, if we think about fourth quarter topline fiscal 2023 revenue guidance, can you talk maybe about quantifying what part of the headwind is labor related, what part is supply chain related? And then just maybe – are you seeing it across all of your hundreds of programs or are there a few key programs – sizeable programs that are being unusually impacted?

Sure. So why don't we kind of give the high level and then maybe Mike could kind of fill in some of the details, Pete. So at a high level, we saw greater than $35 million impact on bookings, the two probably biggest impact around the F-18. And then we also saw that SEWIP kind of slipped out of the quarter into Q1. Revenue, I think as Mike said in his prepared remarks was really due to two things, it was largely due to some of the order delays where we were actually expecting the order and to be able to recognize some revenue, SEWIP is a good example of that the product was built. But then also we absolutely saw some supply decommits. So we're expecting material that ended up not arriving as we'd anticipated. So Mike, I don’t know if there's anything that you'd like to add there.

Yes. Pete, so Mark said it great. Just in terms of numbers, as we look at the impact on fiscal 2022 associated with the award delays, we estimate that that was about $22 million, and then the supplier decommits and extended lead times about $20 million in terms of the revenue impact in fiscal 2022.

Okay. And are you thinking kind of 50/50 also for fiscal 2023?

So in fiscal 2023, when we look at those two things, what you'll see is that we talked about in the prepared remarks is that it's more about timing during the year. And so what we're seeing is that the award delays that we've had this year and the supplier decommits are leading to a lower H1 from a revenue perspective and a margin perspective because of a mix of business and a bigger H2. So we're really looking at it as a fiscal 2022 impact right now.

So Pete, I'd just like to add though, I think it's an important point, right. So we clearly saw a pretty substantial ramp in bookings in the second half. We thought that was going to occur. We did get some impacts, as I mentioned, just with some orders that didn't arrive. The good thing is that the actual demand environment and order flow remains pretty strong. We're actually expecting very strong growth in bookings in the first half, which should actually help improve the linearity as we head into fiscal year 2024. So unfortunately, if you step back, we're kind of in a multiyear industry event here and the linearity of bookings in both fiscal year 2021 and fiscal year 2022 hasn't helped us with respect to the timing of revenue and EBITDA. So we're trying to take that into account as we head into the new fiscal year, just given the challenges that the industry's experiencing. But overall, I think we're seeing some improvements around bookings, which we believe is going to help not only in H2, but also next year as well.

Yes, very, very unusual times. And if I could ask just one last one. We've had this CHIPS Act pass, but even separate from that, are you guys able to identify additional semiconductor capacity coming online in kind of the near-term that could address the shortages that you've had or at least lessen the impact?

Yes. It's a great question, Pete. Yes, I think, as I’ve said in my prepared remarks, as one of our customers said on their earnings call, right, it's hand to mouth right now, it's pretty challenging. For high-end semiconductors, the lead times of 36 to 99 weeks. To put that in perspective, that's 3x to 5x what we saw pre-pandemic, and that's just for the semiconductor – for the high-end semiconductors. But the increases in the lead times has gone up across mechanicals components [and decommits]. I mean, literally it's across the entire supply chain. The CHIPS Act won't help in the short-term, right. I think it's a strategically and critically important piece of legislation for the nation. Yes, but that's really about how do we actually bring back – reassure the chip manufacturing capability to make our supply chain more resilient. And it's very clear with what the industry is facing right now that that's the right thing to do. So – but it won't help us in the short-term. So I think it's going to take some rollover in demand in the semiconductor space to really to loosen up the challenges around availability. I think we're already starting to see some of that in certain parts of the semiconductor markets. So memory is generally more available than what it has been in the past. You're seeing some freeing up of supply around lower end semiconductors associated with consumer electronics. Unfortunately, that doesn't really help Mercury because we are producing very sophisticated processing subsystems, which is where we're still seeing the tightness and the very long lead times. So I think is if the economy starts to slow down and as you start to see some demand softened, I do think you'll start to see some pick up in terms of availability. What we've also seen in the past is that when there is a scarcity, a lot of companies over order because they're concerned about the ability to actually get access to the parts. And so we're hoping somewhat that as demand starts to slow, the effects of the limited supply could actually turn quite quickly. But as we see it today, we don't see it that occurring and we just don't have the visibility piece.

All right. Fair enough. Thanks for the color guys.

Yes.

Your next question comes from the line of Peter Arment with Baird. Your line is now open.

Hey, thanks. Good afternoon, Mark and Mike. Mike, just a clarifying comments first. So do you expect to be free cash flow positive this year? And then Mark or Mike wants to make a comment. Trying to understand just the dynamics a little bit that's going on with your unbilled receivables. You talk about 60% of kind of overtime revenue and getting back to 35%. What are some of the key things we need to see to begin to see that happen? Is it just availability of the supply chain? Maybe if you could just walk us through a little color, that'd be helpful.

Yes. So Peter, I’m going to start with your first question in terms of free cash flow. So coming into the year, we weren't facing the same number of supply chain issues that we're facing today or that we did face during the year. So if you look at fiscal 2022, our free cash outflow was $48 million. Now, we invested in the business, we had about $27 million of one-time cost really associated with 1MPACT and some of the org redesign that we did. And I mentioned some of the other one-time costs in my prepared remarks. But the biggest impact by far has been the supplier and contracting delays, which, we estimate was probably about an $80 million impact on our cash flow during the year in addition to those one-time costs that I just mentioned. So coming into the year, we didn't expect that working capital increase that was really driven by the supply chain and the contracting delays that I mentioned. And that really shows up in unbilled. And to answer your second question in terms of unbilled and making sure that I clarify the percentages that we've talked about. So if you look at our overtime revenue, it has increased since fiscal 2020 from 27% to 55% in fiscal 2022. So this year 60% that you mentioned was our Q4 overtime revenue or percentage of completion revenue. I mean that's related to our subsystem work. And that's a natural growth as we do more subsystems consistent with our customer base. When we look at what's the rate metric for unbilled, how do we size it and say what's the right amount of unbilled because we're naturally going to have some. The way we look at that is the percentage of our overtime revenue. And so if you look back from fiscal 2019 to fiscal 2021, you'll see – we average it around 35%. And in fiscal 2022, that number went up to 43%. And that's what you're seeing because of the supply chain delays, which delayed milestones, which delayed deliveries. And that's the number that as we look at normalization of our working capital, we're really going to drive down. And so that 43% that we ended the year in 2022, we think the good target is 35% over time. And we think that'll unwind in fiscal – little bit in fiscal 2023, more in the second half and then heading into fiscal 2024.

Mike, you sort of touch upon – I think the second part of the question was around, do we expect positive free cash flow in 2023?

Yes. I'm sorry about that. Yes, we do. We talked about 30% to 40% free cash flow to adjusted EBITDA conversion for fiscal 2023. That's going to be second half weighted. As I mentioned in my prepared remarks, we are looking at an outflow in Q1 unless we're currently forecasting. But for the year, we are looking for positive free cash flow and then that normalized even further as we go into fiscal 2024.

So it's just to clarify. So if we get into like fiscal 2024 and say the supply chain availability is much better, then it doesn't necessarily mean the topline story, but you could actually start seeing a lot of these unbilled receivables unwind. Is that the right way to think about it?

Absolutely. Yes. And it's also inventory. So if you look at our – in general and step all the way back, you look at working capital as a percentage of sales. You'll see that before fiscal 2021, and even in fiscal 2021, we're around 40%, prior to that we're around 35%. This year on an LTM basis, we've jumped up closer to 56%. And that's the combination of that higher unbilled as a percentage of overtime revenue plus inventory because as we've talked about, we invested in inventory to defray some of the risk associated with the supply chain. And we've seen inventory increase as we've seen contracting delays. So yes, you're absolutely right. The right way to think about it is, as we get through fiscal 2023 and then into fiscal 2024, you should see working capital as a percentage of sales come down.

Appreciate the color. Thank you.

Your next question comes from the line of Seth Seifman from JPMorgan. Your line is now open.

Hey. Thanks very much and good afternoon. Guys, I just wanted to ask about the expected EBITDA in the first quarter and that kind of 13-ish percent margin, which even last year, which you would've considered kind of a tough quarter for profitability was 17% to 18% margin. I mean it would seem like that's implying something like a low-30s type of gross margin in the first quarter. Is that because of inflation? Is that because of mix? And to the extent that that is the case, how does that improve through the year? And does that imply some kind of exit rate that's higher than usual? Or does it imply a quick step-up in the second quarter?

Yes. So you're right, when we look at Q1 revenue $215 million to $225 million is the guidance range. We don't guide – as you know, we don't guide gross margin, but we were 39% in Q1 of 2022. We're going to be – mix is going shift Seth. So don't necessarily hold me to this, but that's going to be about 300 basis points lower in Q1 this year then Q1 last year. So around 36% is what we currently expect. So your number is right. And so what's driving that. It is two things. First is the result of production slips. So revenues lower and gross margins are down because of the engineering work that we're looking at in the first half of the year is lower margin. And the reason for that is that the production work, where we're waiting for supplies has gotten pushed to the second half. So that's one part of it. And the second part is inflation. We've tried to take into account in our guidance some of the inflation that we won't be able to pass through. We have at least a 100 basis points impact from inflation in those gross margins, but we're trying to manage that through 1MPACT and other initiatives. So gross margin is down about 300 basis points and then EBITDA is down 400 basis points because we are 13% at the midpoint of our Q1 guidance. Now we are 17%. In Q1 2022, about 300 basis points is from the gross margin that I just mentioned. And the other 100 bps was associated with the negative operating leverage and labor inflation is the other piece of it. So that is what's driving Q1. As you look at the year, Seth, we are going to see gradual increase in gross margins throughout the year. So while we're – I just mentioned 36% in – that's what we're estimating for Q1. We expect that to ramp up, probably be relatively similar, maybe a little higher in Q2. But then in the second half of the year, we have good visibility, as I said in my prepared remarks to the programs that are going to make up the revenue in the second half. And therefore, the margins on those programs too so we see a nice margin mix in the second half of the year. So you get closer to 42%, 43% gross margins that you also benefit from operating leverage because of the higher revenue in the second half.

If you step back, Seth, it's literally what I said, big picture earlier. The bookings really in the last two years have being heavily weighted to the second half of the year. So we had a massive ramp in H2 this year, but with that the timing of those orders combined with long lead times on the materials, even though we've pre-purchased inventories wherever we have a strong conviction that the orders and the timing going to come in, push the production revenue and the EBITDA to the right. So it's not like we're losing anything, we're not. But from a timing perspective and the mix of business is skewed towards the back half of the year, like it was in fiscal year 2022. Now, as I mentioned in Pete's comment, the good thing is that we saw the ramp in bookings in the second half and that ramp in bookings or that strengthened bookings is actually continuing in the first half of this year unlike last. So we are expecting pretty good growth year-over-year in the first half compared to what we experienced last year. So things do seem to be moving from an order flow perspective, but right now, we are being impacted from a time and mix.

Got it. Okay. I'll stick to one. Thanks very much.

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

Hi, good afternoon. Can you maybe help us understand or provide a little bit more color on how quickly you can push through pricing and maybe how we should think about that margin progression over the course of that second half of 2023?

Yes. It's a good question. So the biggest area that we're probably seeing from an inflation perspective is in relation to semiconductors, which I think is, as I've mentioned in my prepared remarks, it came for about 38% of our external spend and that's supporting the 70% of our revenue, which is coming from processing systems. So that's the biggest impact that we're seeing. The rated which you can pass through the inflationary pressures varies quite honestly. So it depends upon the mix of business, right. How much is cost plus versus fixed price. How much of it you've already got in backlog, when those materials come in. I can tell you though that we've got a major focus on it and it's been a big part of what we're doing with 1MPACT, multiple different areas we're focusing on, enhancing both the pricing side of things, our cost estimation, bidding proposal practices to ensure that we're adequately pricing the effects of inflation. While looking at the commercial side of the business to make sure that we're capturing the value associated with the capabilities and the value that we're providing to customers. So right now, we just implemented a standard commercial product price increase that was effective across our microelectronics portfolio, beginning July 1. Yes, we have got pretty – we've narrowed the “validity”. We are controlling discounts. We changed our contract modification authorities internally, leveraging the new pricing tools that we put in place. So as we see materials, we're able to actually immediately wherever possible flow those actuals into our costs. So there's a huge amount of work going on. And yes, we're actually expecting to offset a fair amount of the inflation that we're seeing in fiscal year 2023, but maybe not all.

Thank you. I will stick to one.

Your next question comes from the line of Austin Moeller with Canaccord Genuity. Your line is now open.

Hi. Good afternoon, Mark and Mike. My first question here, how do you view the discussions that are going on around the new $30 billion F-35 order, it's for around 375 aircraft, which is 22% lower than the last walk by how would you expect that to impact Mercury relative to maybe what you expected and do you think you could have higher margins on that smaller production lot?

Sure. So let me kind of step back a little bit Austin and kind of just give a more general update on the F-35 because I think to some extent it answers the question, but it's important to understand all the moving parts. So we're obviously aware of just the production rebase lining and kind of what's going on. As we said in the past, we're on multiple parts of the F-35 system across different parts of our product line. And although we experienced a pretty substantial reduction in order flow in fiscal year 2021 as a result of the TR3 development delays and the COVID impacts on manufacturing that resulted in the initial production rebase lining things have improved substantially since then. Probably one of the more important ones for us is that L3Harris reported on their last call, they successfully completed all of the safety flight testing requirements and delivered the first flight chipset of what is known as the F-35 TR3 ICP. It's the core processor associated with the F-35. They previously reported that the other elements of the systems that were a part of which is the panoramic cockpit display in the aircraft memory system of also, well down the path. Lockheed, clearly, was able to actually reach an agreement on lots 15 through 17. And so I think to me, there was some very important events occurred during our fourth quarter that I think not only important for Mercury, but also for the industry as a whole. Stepping back and looking at the F-35 for Mercury at a year level, we saw a very substantial rebound in orders as we've expected. So our orders on that F-35 were up 123% year-over-year with 24 million of orders in the fourth quarter. As we'd expected and discussed…

Great. And then just a follow-up on the tracking where I know you'd mentioned the SDA constellation. There's 200 satellites planned for the tracking where 684 satellites planned for the transport where 200 for the deterrence et cetera. And some of these SDA constellations start to scale. Do you perceive that this could maybe become a top 10 program or a more relevant program for Mercury?

I don't think it's going to hit the top 10 as we see it today. But we were obviously very, very pleased with the wind. We're providing some of our space qualified solid state drives, and I think there seems to be high interest in that particular area. So we'll see how the space market evolves from Mercury, but clearly, we are thrilled to be a part of the trucking layer with one of our customers.

Fantastic. Thanks for all the details.

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

Hey. Good evening, guys. Thanks for taking the question. Just to follow-up on Jonathan's question. Mark or Mike, can you tell us what percent of revenues are under fixed price contracts versus cost plus versus maybe the more commercial catalog book ship where you can get immediate price increases?

And if [indiscernible] Mike.

Yes. Mike, the vast majority of our programs are either commercial terms or fixed price. So from a cost plus perspective, that only is about $40 million to $50 million of our fiscal 2022 revenue, so called 5% of the overall business. Commercial still counts for a lot of our pricing probably 50% plus probably around 60%, and then 35% is non-commercial firm fixed price.

We talked about last quarter, Mike, right, is the fact that we've actually got a relatively short sales cycle, where our customers actually order capabilities from Mercury inline with our manufacturing lead times probably the only time that a short cycle business assists with your ability to be able to pass on those inflationary pressures versus having multiyear agreements, which is really not the way in which the industry works with the sub tiers right now.

Yes. I guess that's what I'm trying to figure out then if 50% is commercial, it seems like there's more of an outsized impact then for you guys on the inflation where you could be passing along or maybe I've got that wrong?

No, we are passing it through. So we're seeing bigger effects internally then, I think, than what we actually experienced last year in terms of the margin degradation. And I think it's due to the fact that we're able to pass the prices on where appropriate as a commercial company or just given the short cycle nature of the business. But it doesn't mean that we're immune again, 38% of our external spend is related to semiconductors and we're seeing 10% to 20% price increases across the board in the different categories so then ultimately becomes a matter of timing. When do you absorb those costs and how quickly can you pass them through? We do believe it's temporary.

Got it. And then just on 1MPACT, I think you guys had already recognized $27 million of incremental kind of savings, but now you're pushing the – seems like you're already at that low end. Anything really changing on that incremental adjusted EBITDA there?

So no, I mean, I think the 30 to 50 we believe is still a good number. Yes, I think if anything, the pipeline of opportunities associated with the 1MPACT is increasing, we did push out the achievement of the goal a year largely because I think we're seeing the 1MPACT of inflation at the back end of fiscal 2022 and more so in fiscal year 2023. But overall, I think, 1MPACT should drive substantial margin expansion over the course of the next five years. I don’t know if you want to add anything, Mike.

No, I mean, I think you hit on it. The only thing I would say is the fact that we launched 1MPACT slightly over 12 months ago means we're really well positioned to face the headwinds that we've got. So while we're delaying things, I think we're in a good position to offset some of the headwinds that we're seeing.

Got it. Thanks guys. Appreciate it.

Thank you.

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

Hey. Good evening, guys. Thank you. Maybe if we could just summarize some of the comments from prior, whether it was Seth's question or Mike's just now. When we think about the fiscal 2023 margins, how much of that comes from inflation? I think you said a 100 bps earlier versus volume inefficiencies and then development programs, and you know, Mark, last time I saw you at a facility, your facilities are pretty good. So how much of the 1MPACT comes from those development programs and what are those programs and when do they transition into production?

Yes. So Sheila, let me take a cut at that. In terms of inflation and how we've positioned that into our guidance. We have put some inflation headwinds into the guidance that we have. I mean, one thing to remember, is we're guiding right now in a very fluid environment with the macroeconomic headwinds. And we're trying to predict what's going to happen not just over the next six months, but over the next 12 months. So we're trying to be conservative on the 1MPACT of the, let's call it, the unknown unknowns that we try to consider in our guidance. But if you look at what's in our plan, we do have about 100 basis points associated with inflation and pricing that we won't be able to pass through as we just talked about with Mike, we're using everything we can on our 1MPACT initiatives to pass that through. But that's currently in our guidance. The rest of it really is around program mix and that goes to what we were talking about earlier, which is a lot of the production programs that we have are pushing production into the second half of this fiscal year or into fiscal 2024. But we've got growth programs, we've talked about AMCs in the past, which is still in the development phase that in fiscal 2023, that's still in the development phase probably goes to production sometime in fiscal 2024. We've got other programs within our microwave business. We've got a classified space program that's in development that will go into production in fiscal 2024 and a handful of programs like that. F-18, parts of F-18 that we're doing are currently in development in the higher-margin production world in that case is towards the second half of 2023. So a handful of things that are driving the lower margin in our guidance. Inflation is part of it, but then the program mix is another part of it which was impacted by the supply chain and contracting environment. So things were pushed to the right.

Thank you so much.

Let me just step back a little bit because I think obviously, there's a whole bunch of things hit the industry this quarter. And to me, it feels like we're in the midst of a multiyear industry event that was precipitated by COVID. And yes, clearly, I think we're all being managed or being measured in terms of what happens on a quarterly basis. But if you step back, we're actually – given the guidance that we've just given, we're heading into actually our fourth fiscal year dealing with the primary and the derivative effect of COVID. And actually, each year, it's had a really somewhat distinct set of characteristics that have actually affected the subsequent year. And so given the relative short cycle nature of our business versus our customers and the size of their respective backlogs, the effect may not always be is readily apparent depending upon the time frame. And so it's pretty complex what's going on when you step back from it. But I think we're clearly seeing the effects now moving its way up the industry. The supply chain disruption hit the industry pretty hard this quarter. The seasons that were shown many quarters previously. It was just hard to see and even more difficult to forecast. So we began to see the effects of that in our fiscal year 2020 – 2021, sorry. We got through the initial phase of the healthcare crisis phase of COVID in 2020 pretty much unscathed. But we did see the effects of the order slowdown in 2021. We had a 0.95 book-to-bill. That obviously affected the revenue and the profits associated with 2021. And we're now clearly seeing the uptick in bookings in 2022, but it was back half weighted. Bookings for the year were up 33%. For…

Okay. Great. Thank you so much.

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

Okay. Well, thank you very much, everyone, for joining us. We look forward to speaking to you again next quarter. Take care. Bye-bye.

This concludes today's conference call. Thank you for attending. You may now disconnect.