Good day, everyone, and welcome to the Mercury Systems Fourth Quarter Fiscal 2024 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, Dave Farnsworth. Please go ahead, Mr. Farnsworth.

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhaus. If you have 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 Bill and I will be referring to is posted on the Investor Relations section of the website under Events & Presentations. Turning to Slide 2 in the presentation, I'd 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, and free cash flow. 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 Chairman and CEO, Bill Ballhaus. Please turn to Slide 3.

Thanks, Dave. Good afternoon. Thank you for joining our Q4 and fiscal year 2024 earnings call. We exited FY '24 with positive momentum, delivering results in line with or ahead of expectations. And I look forward to that momentum continuing as we enter into FY '25. Today, I'd like to talk through three topics. First, some introductory comments on our business and results as we close FY '24. Second, a progress update in each of our four priority areas established just over a year ago, delivering predictable performance, building a thriving growth engine, expanding margins, and driving improved free cash flow. And third, expectations for our performance as we enter FY '25 and longer term. And then I'll turn it over to Dave who will walk through our financial results. Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs and our Mercury team for their dedication and commitment to delivering mission critical processing at the edge. One other note, I'd like to thank Nelson Erickson for his contributions to Mercury over the years. I know many of you have interacted with Nelson on the Investor Relations front. Nelson has elected to pursue a new opportunity outside of Mercury and we wish him well in his future endeavors. Please turn to Slide 4. In FY '24, we made considerable progress addressing transient challenges in the business. As we enter FY '25, I'm optimistic about our strategic positioning as a leader in mission critical processing at the edge, and our expectations on delivering predictable organic growth with expanding margins and robust free cash flow. Our Q4 and full year results were in line with or ahead of our expectations. Q4 bookings of $284 million and…

Thank you, Bill. Our performance in Q4 was in line with our expectations, and I will echo Bill's comments that the actions we've taken throughout the year have supported the improved performance that we delivered during the fourth quarter and highlights the initial progress that we have made given our objective to transition the business toward delivering predictable performance, building a thriving growth engine, expanding margins, and driving improved cash flow. We continue to expect a resource shift toward follow-on production awards that, in turn, we believe will begin to rebalance our portfolio more heavily towards higher margin, predictable production programs, as well as consume further existing inventories. We are also making strides in releasing working capital, especially related to unbilled receivables. We expect to see these transitions become more apparent in our financial results during fiscal year 2025. Progress in our four priority focus areas is highlighted by a few key milestones that we achieved during the quarter. These milestones included our ability to retire risk across the majority of our remaining challenged programs, expanding our record backlog to over $1.3 billion, continuing to streamline our operations to drive margin expansion, and reversing the multi-year trend of growth in working capital. With that, please turn to Slide 11, which details our fourth quarter results. Our bookings for the quarter were $284 million with a book-to-bill of 1.14, yielding a backlog of $1.3 billion, up $186 million or 16% year-over-year. Revenues for the fourth quarter were $249 million, down $5 million or 2% compared to the prior year of $253 million. This represents an improvement over our earlier outlook that we described during our third quarter earnings call, driven by material receipts scheduled for Q1, arriving in Q4. As you may recall, we maintained a wide range in guidance as…

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

[Operator Instructions] Your first question comes from the line of Pete Skibitski with Alembic Global. Please go ahead.

Hey, good evening, guys. Nice quarter.

Hey, Pete.

Maybe we could start out talking about the CPA area and the four challenged programs there. You seem pretty confident that it's going to shift to the full rate production. I don't know if we should think the end of the first quarter or the end of the second quarter, but maybe go into more detail about the reliability testing and why you're confident that will complete? And when it does complete, are those four programs not going to generate a meaningful amount of revenue this year? Is that the right way to think about it? Thanks.

Yeah. Thanks, Pete. So just to reiterate where we are, we've gone through root cause corrective action, put in place the manufacturing process changes based on our understanding of the root cause and the material science, have been very deliberate in ramping up the production line with a lot of in-process testing along the way, and really pressure testing the corrective actions that we've put in place. All of that has been going to plan. So I feel really good about the progress to-date and how things are progressing. We have plans to ramp up to full rate production in the first half of the year. And as I mentioned, the critical path to ramping up is really behind us. We have the capital equipment in place. We have the additional people trained that we need in order to ramp up to full rate production. So I feel pretty confident about the path we're on to ramping up. And so we have a backlog that we need to deliver on. I think there is a combination of programs where the majority of the revenue has been recognized and a backlog where we will recognize revenue. And we'll work out how we allocate the production across the capacity as we ramp that up. And so that will play out over time as we work our way through the first half. But I'm anticipating that as we work our way through the first half, we will get up to full rate production, we'll work through the unbilled and the backlog associated with those programs. We're holding the four programs open really through the ramp-up of production. But as I said, everything seems to be going to plan. And then as we said before, as we ramp this production up and we make progress on delivering to our customers, there are follow-on opportunities that we're expecting to see. So, I'm pretty optimistic about where we are right now. I feel very pleased with the progress that the team has made. And look forward to working our way through the first half, which I think will give us much better visibility into the second half based on the progress that we actually make. Hopefully that's helpful.

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

Hi, good afternoon. And let me echo my congratulations on the strong quarter. Just wanted to understand, when we look at your, I guess there isn't formal guidance, but when we look at 2025, what are the levers that could swing your results either more positively or negatively as we look towards the future? And it does seem like you have stronger visibility, so what is sort of maybe keeping you from giving that guidance? Thank you.

Yeah, so first, let me just speak to the visibility. A year ago, we were talking about the path towards our targeted profile, and in particular our margin profile. We had a number of factors that would bridge us from current level of performance to that targeted margin profile. And it was things like, first, reducing the volatility that we had seen in the business tied to EACs, inventory write-downs, contract matters, RMA reserves, et cetera. Second, making progress on our cost structure. We built this business through 15 acquisitions over nine years. And so really needing to integrate the business and drive efficiency into our cost structure. We talked about a mix shift toward production and the margin uplift that would come with that. And then the rest of the bridge towards our target margins was really around other efficiencies and operating leverage that we would see, primarily driven by the volume increases associated with development programs transitioning to production over the next couple of years. So you fast-forward to today and your comment on visibility, our backlog is at a record high, and that provides a certain level of visibility. We've also made great progress over the last 12 months in a couple of those areas in the bridge. First, in reducing the volatility, and you can clearly see the trends as we've worked our way through the year, and then how we were able to work our way and manage that volatility in Q4. We made very significant progress on our cost structure and driving efficiency through the cost structure, and you saw the progression through the year and the run rate savings that we've talked through. So now as we think about going forward, the things that I'm keeping an eye on that will really dictate…

Your next question comes from the line of Ken Herbert with RBC Capital Markets. Please go ahead.

Yeah. Hey, good afternoon. Thanks for taking the question. I just wanted to ask, as you look at the sort of a push towards continued risk reduction and getting, obviously, to the 20:80 split you talked about in terms of development to production programs, when do you expect to cross that threshold? And then, as part of that, there seems to be significant new business opportunities today, just when you look at the growth in sort of spending and outlays today and a lot of what's happening in defense markets around missile, missle defense and other areas. What is your appetite for sort of new business these days? And are you able to participate in some of the sort of some of the opportunities today as you continue to drive down the risk profile?

Yeah. Ken, great question. Thanks for the question. Well, look, I think we feel very good about the market, the tailwinds, our positioning. I think that's evidenced by what we're seeing in our bookings, 1.22 for the year, our book-to-bill, and a record backlog. What we've been really focused on, based on what we've seen in the business over the last several quarters is managing the volatility in the business and, specifically, what we bring into the backlog. So, this last year, in FY '24, we brought in a number of development programs, but many of them were cost-plus in nature, which we think is much more aligned towards us working on next-generation products, introducing innovation, getting new platform positions. But having a set of contract terms that are more commensurate with the risk than what we've seen looking backwards where we felt like we had a high concentration of firm fixed price development programs. So, we feel like we're striking the right balance of pursuing new opportunities, taking advantage of the opportunities in the market and our positioning, but doing it in a much more appropriately risk-adjusted manner with the cost-plus nature of the contracts. Pulling those aside, getting to your mix question, when we look at our firm fixed price bookings over the last year, we've seen about 80% of our firm fixed price bookings as production bookings versus development. So, I think that's a leading indicator of the mix shift moving in the right direction. In addition to that, over the next 12 months, since such a high percentage of our backlog converts to revenue over a 12-month period, the margin dynamic that I referred to where our margin today in our backlog is slightly lower than what we would expect to see going forward, driven by a small number of legacy development programs that were either impacted by EACs or have very low margin, or where we're investing because we think the return warrants the investment, I think that should all transition over the next year and be replaced by higher margin bookings. And we already started to see that in FY '24. And so I have a good feel that we'll be transitioning that backlog margin out over the next 12 months and see the improvements that we expect to see. So, anyways, I think that transitioning to the mix should continue to happen over the next 12 months. And we don't think that we're passing on any market opportunities because of some new approach to risk. We think we're pursuing those opportunities but with the right contract terms around them.

Your next question comes from the line of Michael Ciarmoli with Truist Securities. Please go ahead. [Operator Instructions]

Sorry, can you guys hear me?

Yeah, now we can hear you, Michael. How's it going, Michael?

Sorry about that. Good. Good. Sorry about that, guys. Just first, a clarification. Are the CPA-related programs, are they going to be margin dilutive relative to normal historical fixed price programs once they do, or relative to production programs when they ramp up?

I don't think so at all. First of all, there's nothing around the root cause corrective action directive action that would even incrementally affect our gross margin on those programs. And I think this is an area where there's strong demand, there's tailwinds in the market, we have differentiation, and really a unique capability to meet very stringent mission requirements that, if anything, I could see the opposite effect in actually being additive. So no, no concerns about them being diluted to our margins.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Thank you, guys. Maybe just on my last point, with EBITDA margins, they were better in Q4, but then stepped down just given the backlog dynamics you both talked about. So, is that just timing? And we should expect low double digits to be sort of the normalized level in '25 and stepping up in '26?

Well, I think there's two impacts, and I'll start and then Dave can chime in. But I think the two impacts are both the backlog margin dynamic that I pointed to, and then just volume. And so, we're expecting to start off the first half of the year in high single-digits. But as we move to the back half of the year and we see the margin transition in the backlog and we also see the additional volume in the second half, we expect to see an improvement in our margins tied to those effects of the transition of the backlog and the positive operating leverage. But Dave, please add if there's anything to add.

Yeah. No, I think that's right, Sheila. I mean, it is largely driven by the margin in the backlog, and so we expect that to increase as we go through the year. And we're replacing new bookings for things that we're burning out of backlog. And as we complete some of the contracts that we have some tailwinds on from the prior EACs, but then it is -- the other side of it is exactly what Bill said, we've been a business that largely in the first half of the year has lower volume and then ramps up in the second half of the year, and you saw that again in the fourth quarter. And so that volume will definitely drive improved operating leverage and higher EBITDA in the back half of the year.

Your next question comes from the line of Jan-Frans Engelbrecht with Baird. Please go ahead.

Good evening, Bill and Dave. Congrats on a good set of results. I'm on for Peter today. My first question, a big focus in fiscal year '24 was focusing on retiring the technical risk outside of the Common Processing Architecture, and you're very much on track with your prior messaging having solved at least 13 of these. But is there anything that you're tracking internally in terms of unbilled receivables or any metric or ratio that you want to achieve in fiscal year 2025 that we can sort of track over the next few quarters as you report?

Well, look, I think the KPIs are really consistent with driving towards the target profile that we've been very consistent in describing, and that's above industry growth rates for the top line, EBITDA margins in the low to mid-20s, and free cash flow conversion of 50%. And addressing the two transient -- primary transient challenges that we've seen in the business, which is the high mix of development programs and high working capital, FY '24, we made significant progress on the development programs and mitigating technical risk. We also made considerable progress on the working capital, and that's a KPI that we continue to be focused on and expect to see that continue to come down in FY '25. And also, in FY '25, see a step up in those KPIs associated with our targeted profile. So, step up in our top line growth rate, step up in our margins, and again, being free cash flow positive for the year. So, I think it's just a continuation of the KPIs that you've heard us talk about for the last year, and certainly our focus for the last year, and the four priorities that we put in place just over a year ago.

Your next question comes from the line of Pete Skibitski with Alembic Global. Please go ahead.

Yeah. Thanks, guys. Just want to understand something on LTAMDS, it's a big program opportunity for you, I know. And I just want to understand more on that front. Is it one of the four CPA programs? I ask because I think Raytheon got a very large, I think, it's sort of an LRIP order. And so I would expect you guys to receive an order from them at some point, I guess, relatively soon. And so we're just wondering if you could give some color on that for us, if it's one of the remaining issue programs? And whether or not it is, should we expect a large booking later this year related to that?

Yeah, thanks, Pete. And I'm sure you've seen the recent announcement from Raytheon about their funding, and I won't comment on that, which we think is good news. To answer your question directly, it is not one of our challenged programs. And it is separate from the six that I addressed, the two that I think are just ordinary course risk, and then the four that are tied to the CPA. And it is a program where it represents us successfully completing a development program, and then in FY '24, getting a production award. I also think it reflects our disciplined approach to execution and how we're approaching that program. Meaning, strong program management, system engineering up front, being very disciplined in how we order material and stage it, consistent with our integrated master schedule. And are executing on that program in a very deliberate manner right now. So, it's one of the programs we feel very good about. We talked about in the past that we do expect that to be a driver of organic growth going forward, and our expectations remain the same on that front.

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

Hey, guys. Thanks for taking the follow-up. I guess, Bill, you touted the book-to-bill, being strong. Bookings are down two years in a row. I mean, are you guys losing share? And can you talk to that and talk to whether or not the core underlying business is actually showing growth?

I'd say the one dynamic that we've seen relative to bookings in FY '24 is that some of the challenges that we've had on development programs have led to delays in bookings. I wouldn't characterize them as lost bookings. And I think a great example of that, our follow-on orders associated with our common processing architecture, where we deliberately stood down the line so that we can put in place the corrective actions. We're ramping it up, and we expect to see follow-on orders coming as we make deliveries to our customers. And when I think about our pipeline, our conversion, our conversion rates, I don't see anything in our conversion that gives me concerns around competitive dynamics and losing market share. So, we feel good about our book-to-bill given where we are. I think that's a good leading indicator of where we're headed. And if anything, we've just seen some delays rather than losses tied to the development programs.

Your next question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead.

Hey, everyone.

Hey, Noah.

Thanks for the time. You referenced -- I think you referenced a few years of transition from development to production in the main programs that you're alluding to in that mix transition. Does your fiscal '26 look like the medium-term profile that you're referencing? Or should we be thinking of more than just fiscal '25 as kind of transition years to that run rate profile? And when do you next expect the business to have positive GAAP net income on a full year basis?

I'll let Dave take the last one. Let's see, on the transition, as I think about, again, the bridge from where we are towards our target profile, really with the progress that we made in FY '24, there are two pieces of the bridge that I'm most focused on. One is the transition out of backlog of the remaining low margin development programs and the programs that have been impacted by the FY '24 EACs. That's going to give us a step up towards our targeted EBITDA margins. The rest of the step primarily is going to come from the volume lift that we'll see from development programs that we have in-house, that we've executed on where we're awaiting the transition or working through the transition to production. Now there's a number of those programs. It's not one or two, it's a number of them and they each have their own profile, but as -- to roll forward into revenue. But as I think about our organic growth over the next couple of years, it's going to be primarily driven by those development programs and their transition to production. And they happen on different timelines. We talked about LTAMDS as more near term, but we have a number of other programs that we'll be feathering in as we exit '25, as we work our way through '26, and get full run rate benefit of those programs in the back half of '26 and '27. So there's a number of different programs. But as I think about our organic growth for the next couple of years, I think we have good line of sight tied to the development programs that we've won, executed on, and are working our way through the transition from development to production.

Yeah. And I think I would point back to Bill's comments around the color we're putting around FY '25. And that's -- that we -- I'd point back to our adjusted EBITDA margins that we expect, which is low double-digit adjusted margins overall in fiscal '25.

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

Okay. Thank you, operator. And thanks, everyone, for your interest and participation today. And we look forward to providing another update on Q1 FY '25 in our next earnings call. Thanks very much.

Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.