Mercury Systems Inc (MRCY) 2021 Q1 法說會逐字稿

Good day, everyone, and welcome to the Mercury Systems First Quarter Fiscal 2021 Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the call over to the company's Executive Vice President and Chief Financial Officer, Mike Ruppert. Please go ahead, sir.

Good afternoon, and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett. If you've not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that Mark and I will be referring to is posted on the Investor Relations section of the website under Events and Presentations.

Please turn to Slide 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. Before we start, I'd like to extend my appreciation to the entire Mercury team for maintaining their focus on execution and results during a very challenging time. Thanks to our employees and the outstanding work that they did, Mercury continued to perform extremely well during the first quarter, as I'll discuss in my business update. After that, Mike will review the financials and guidance, and then we'll open it up for your questions.

Mercury is off to a solid start in fiscal '21. We continue to invest for the future in our people, technologies and capabilities. At the same time, we delivered double-digit organic and total company revenue growth with strong bottom line results. We came in above the high end of our guidance for revenue, net income, adjusted EBITDA, EPS and adjusted EPS.

Mercury's design wins amounted to more than $300 million in estimated lifetime value. Although the risks associated with COVID are increasing, we're positive about the outlook and raising our full year fiscal '21 guidance.

Mercury's business model is performing extremely well. Our strategy and technology are aligned with the major industry drivers and trends and new business conditions remain robust. M&A activity has picked up, and with nearly $1 billion of financial capacity, we're well positioned to pursue our pipeline of opportunities.

Turning to our Q1 financial highlights on Slide 4. Our results continue to reflect the 3 fundamental trends that we've discussed in the past: supply chain delayering by the government and the primes, the primes' flight to quality suppliers; and the shift to outsourcing by our customers at the subsystem level. The fourth trend is the government's increased focus on creating a domestic supply chain to secure and trusted advanced electronics designed and built in the U.S.

For the first quarter, Mercury's total bookings decreased 7% compared with the strong Q1 last year. For the last 12 months, bookings were up approximately 15%. Our book-to-bill was approximately 1.0 for the first quarter and 1.14 for the last 12 months. We currently expect to deliver a strong second half, leading to a positive book-to-bill for the full fiscal year. As Mike will discuss in detail, we expect fiscal '21 to be another year of double-digit growth in total company revenue and adjusted EBITDA. We expect this growth to be driven by high single-digit to low double-digit organic revenue growth, in line with our long-term strategy.

Our backlog at the end of Q1 was up 16% year-over-year, and our 12-month forward revenue coverage is strong. Our largest bookings programs in the quarter were CPS, E-2D Hawkeye, another new classified radar program and the F-35. We continue to believe that Mercury is targeting the right part of the market, driven up by our participation in more than 300 different programs and platforms.

Revenue for Q1 increased 16% in total and 12% organically year-over-year. Our largest revenue programs in the quarter were the new classified radar program, CDS, SEWIP and E-2D Hawkeye.

In addition to having many more programs than in the past, we have much greater program diversification. No single program accounts for more than 4% of total revenue this fiscal year. Similarly, as we look over the next 5 years, we expect no single program to account for more than 5% of total revenue.

Mercury continued to deliver strong results on the bottom line in Q1. GAAP net income was down 18%, and adjusted EBITDA was up 16% year-over-year, both exceeding the high end of our guidance. Free cash flow came in at 28% of adjusted EBITDA, reflecting increased inventory and employee health and safety expenses related to COVID.

Moving to Slide 5. We successfully managed COVID-related risks for the past 8 months. We believe that Mercury is well positioned to continue doing so. Since the earliest days of the pandemic, we've leaned forward to protect the health, safety and livelihoods of our employees while delivering on our commitments to our customers and shareholders. Most everyone in the company who can work from home has been doing so since March. We've continued to perform well, attracting talented people to help grow the business. Looking forward, we believe that Mercury's COVID risks are tied mainly to our manufacturing operations and supply chain, both of which we continue to manage effectively. There's risk associated with the overall defense budget environment as well.

We were very quick to implement COVID safety protocols at our manufacturing facilities. As time has progressed, we've proactively adjusted those protocols in line with the evolving science and data, putting our employees' health and safety at the center of our decision-making. We've implemented COVID symptom checking and temperature screening for everyone who enters our facilities, along with mandatory mask use. We're doing weekly on-site PCR testing for all employees at 7 manufacturing locations. This is up from the initial 3 sites where we began testing in early July. We expect to add other locations over time.

As a backup, we're also providing self-administered rapid PCR testing kits at home for anyone who may need to travel or whose weekly test result is inconclusive. We believe that pervasive testing and transparency around the results are critical and have likely changed our employees' behaviors in a meaningful way. It's a significant investment, but the right thing to do from a health, safety and business continuity perspective.

At the time of our last call, we were facing substantial COVID risk due to significantly elevated positivity rates in various parts of the country. These include Arizona and California where we have large manufacturing facilities. All of our manufacturing facilities have remained open and operational. As a result, we've continued to deliver on our commitments to customers, earning Mercury the defense industry's highest employee Glassdoor ratings in the process.

Mercury is well down the path compared with most other companies in terms of learning how to operationalize layered COVID testing at scale as well as advanced workplace safety protocols. With winter fast approaching and new cases increasing rapidly around the country, we believe this knowledge will help to protect employee health, ensure operational continuity and reduce financial risk.

As outlined on Slide 6, we're optimistic about Mercury's ability to continue delivering organic revenue growth at a rate that exceeds the industry average. Our new business pursuits are taking longer with people working from home, but we have a near record level of backlog, our new business pipeline is strong and the activity level remains high. We're beginning to benefit from several new and prior design wins. Some of these programs are transitioning into production and others will over time.

We've talked in the past about LTAMDS, which was one of our top 5 bookings in fiscal '20. LTAMDS is expected to generate significant revenue for us in fiscal '21 as is the sizable classified radar program we booked last quarter, which was also in the top 5 bookings last year.

I mentioned earlier that our Q1 design wins amounted to more than $300 million in estimated lifetime value. One of the most notable was Mercury's selection for the next phase of the Army's Aviation Mission Common Server program. AMCS is a great example of delayering by the DoD, who are focused on working with nontraditional suppliers like Mercury. It also demonstrates how we've aligned our technology road maps with the government's commitment to existing platform modernization and new platform risk reduction.

We expect the wave of modernization occurring in both Sensor and Effector Mission Systems and C4I to continue driving growth across the business. As in the past, we expect to see this growth in multiple markets, including radar, EW, avionics and platform and mission computing as well as secure rugged servers.

We believe that overall defense spending will continue to be primarily driven by national security threats, especially considering China's militarization and tightened U.S.-China diplomatic, technological and economic tensions. Microelectronics has become a critical defense technology. Although the IP around microelectronics is largely developed in the U.S., most manufacturing and packaging are done offshore. In response, the DoD has identified U.S.-produced trusted microelectronics as their #1 defense technology priority. Given the investments we've made in secure processing and trusted microelectronics domestically, this is a strategic opportunity for Mercury over the long term.

For the past 10 years, we focused on pioneering a next-generation defense electronics company, a company sitting at the intersection of tech and defense and positioned as a leader in embedded security IP and trusted microelectronics. Our goal is to make commercially developed technologies in these areas profoundly more accessible to the defense industry. Today's national security environment makes this objective even more timely.

Probably the biggest news on this front in Q1 was that Intel was selected by the DoD for the second phase of the Navy's State-of-the-Art Heterogeneous Integration Prototype program known as SHIP. The SHIP program will utilize next-generation chiplet-based architectures, and Mercury is delighted to be part of the Intel team. Our involvement in SHIP is evidence of the growing interest that we're seeing from our semiconductor partners, customers and the DoD in our microelectronics strategy. It demonstrates the value of the trusted microelectronics fab capability we're creating in Phoenix as well as Mercury's ability to help address a significant national security threat.

Moving to the defense budget outlook. With the government operating as anticipated under a CR, there's the potential for an extended delay in the approval of the Defense Appropriations bill. As we've seen in past years, we believe that a lengthy CR could affect the contracting environment and cause further delays in the timing of specific orders, new program starts or program production increases. There's also the prospect of another round of fiscal stimulus and the potential for those dollars over time to crowd out discretionary spending, including defense. Unlike what we saw in the password sequestration, however, today, there seems to be a stronger sense of bipartisan commitment to defense, irrespective of the outcome of the election. This includes current defense spending levels, which may have peaked as well as dealing with offshore supply chain threats.

If new pressures on defense spending do materialize, we are likely to see an even greater focus on existing platform modernization, speed and affordability. This could lead to greater use of nontraditional contractors and contracting methodologies, which should benefit Mercury.

Turning to Slide 7. We continue to believe that we're targeting and participating in large, growing and well-funded markets. At the same time, we have the balance sheet strength to supplement Mercury's high level of organic growth with accretive M&A.

After a COVID-driven slowdown, we're seeing a significant increase in M&A activity. People are finding ways to conduct diligence and get deals done in a pandemic environment, for example, by ensuring that counterparties are tested for COVID before meetings and using different modes of transportation.

Our deal pipeline is very robust right now as is our liquidity. We believe that Mercury is perceived to be a great buyer, given our purpose, culture and values, our strategy and positioning as well as the performance of our business. Against this backdrop, Mercury remains disciplined in pursuit of deals that are strategically aligned and that can be accretive in both the short and long term.

Our overall strategy remains the same, to deliver strong margins while growing the business organically and supplementing that organic growth with disciplined M&A and full integration.

Turning to Slide 8. In summary, we believe this strategy will continue to generate significant value for our shareholders over the long term as we execute our plans in 5 areas. First is to grow our revenues organically at high single digit to low double digits, averaging 10% over time and to supplement this high level of organic growth with acquisitions.

The second is to invest in new technologies, our facilities, manufacturing assets and business systems as well as in our people. Third is manufacturing in-sourcing as well as driving stronger operating performance across our manufacturing locations. Fourth, we're seeking to grow revenues faster than operating expenses. This should allow us to continue investing in organic growth while maintaining strong operating leverage in the business. And finally, we're fully integrating the businesses we acquire to generate cost and revenue synergies over time. These synergies, combined with other areas of the plan, should produce attractive returns for our shareholders.

This strategy has worked very well over the past 6 years, and we're confident that Mercury will extend this record of success in fiscal '21. We're in the right markets, and we've aligned our business with dominant industry trends. We've created a transformational business model at the intersection of tech and defense. We're fueling the model with growth-focused investments in our people, our trusted domestic manufacturing assets and 4 to 5x the industry average level of R&D. We're successfully reducing COVID-related risk, and our employees are fully engaged in the mission of delivering value to our customers and shareholders.

With that, I'd like to turn the call over to Mike. Mike?

Thank you, Mark, and good afternoon, again, everyone. I'd like to start by noting that Mark was recently honored by Glassdoor as #1 among the 25 Highest Rated CEOs during COVID-19. Mark's earning such high praise from our employees demonstrates the strength of Mercury's culture and values and the investments we've made to protect their health during the pandemic. So congratulations, and thank you, Mark.

In Q1, we continued to make investments focused on employee health as well as operational continuity and business risk reduction. These included the COVID workplace safety and testing protocols that Mark discussed as well as the continuation of payments from our employee relief fund. We also invested in inventory to mitigate potential COVID-related impacts to our production capacity and supply chain or unforeseen changes in customer behavior as the pandemic continues. We believe these measures position us well to protect our employees and adapt to future disruptions associated with COVID. Given the investments that we've made to derisk the business as well as Mercury's strong performance in Q1, we're increasing the midpoint of our full year fiscal '21 guidance for both revenue and adjusted EBITDA.

Turning now to our Q1 results on Slide 9. Mercury started fiscal '21 with a solid first quarter. Total revenue, net income, adjusted EBITDA, EPS and adjusted EPS exceeded our Q1 guidance. We also delivered solid bookings and concluded the quarter with near record backlog. Q1 bookings were $201 million, driven primarily by the radar and the C2I markets. Bookings were down 7% compared to a strong Q1 '20, where we had a book-to-bill of 1.22. In the last 12 months, bookings are up 15%. Our book-to-bill for Q1 was 0.98, following a 1.28 book-to-bill in Q4 '20. For the last 12 months, our book-to-bill was 1.14, following 2 years of 1.2 book to bills, which supports our continued growth. For the year, we still expect strong bookings with a book-to-bill above 1.

Mercury ended Q1 with backlog of $826 million, an increase of 16% compared to Q1 of fiscal '20. Backlog expected to ship within the next 12 months was $516 million, providing a solid visibility into the remainder of the year. Revenue increased 16% from Q1 last year to $205.6 million, above the high end of our guidance of $190 million to $205 million. Q1 organic revenue growth was 12%, and our revenue base continues to be diversified with no single program representing more than 10% of total revenue during the quarter.

Gross margin for Q1 was 42.9% compared to 44.2% in Q1 fiscal '20. The decrease was primarily driven by COVID-related expenses and program mix. Gross margin this quarter was impacted by $1.8 million of direct COVID-related expenses charged to cost of goods sold, which had an approximate 90 basis point impact on margins. Q1 R&D was up 25% from a year ago. As a percentage of sales, R&D was 13.3% compared to 12.3% in Q1 '20. This increase was driven by new opportunities in avionics mission computers, secure processing and radar modernization as well as continued investment in our trusted microelectronics business. Consistent with our business model, we continue to invest significantly more in R&D than the industry average.

Q1 GAAP net income and GAAP EPS were down 18% and 17%, respectively, year-over-year. As we discussed last quarter, we expected lower Q1 GAAP numbers as a result of higher discrete tax benefits in Q1 fiscal '20. GAAP net income and GAAP EPS both exceeded our Q1 guidance. Adjusted EBITDA for Q1 was up 16% year-over-year to $42.8 million, above the top end of our guidance of $38 million to $41 million.

Adjusted EBITDA margins exceeded our guidance of approximately 20%, coming in at 20.8%. This outperformance was primarily driven by operational improvements as well as additional operating leverage on SG&A. Direct COVID-related expenses totaling $2.3 million were added back to adjusted EBITDA in Q1, primarily related to preventative COVID testing at our largest manufacturing facilities. We also incurred expenses for payments from our employee relief fund as well as for supplies and services required for workforce safety protocols.

We charged approximately $1.8 million of these expenses to cost of goods sold and approximately $500,000 to operating expenses. We're continuing to invest in protecting the health, safety and livelihoods of our employees as well as in derisking the business as the pandemic continues. Free cash flow was $12 million in Q1, down 19% from Q1 '20, reflecting investments in inventory to reduce COVID-related risks as well as cash outflows for COVID expenses.

Slide 10 presents Mercury's balance sheet for the last 5 quarters. We ended Q1 with cash and cash equivalents of $239 million, which, combined with our undrawn $750 million revolver, provides us with nearly $1 billion of financial capacity at very attractive rates. As Mark said, M&A activity has increased significantly. We remain well positioned from a capital structure perspective to complete strategic and accretive acquisitions while continuing to invest in organic growth.

Turning to cash flow on Slide 11. Free cash flow for Q1 was $12 million, representing approximately 28% of adjusted EBITDA. Our COVID-related cash outflows amounted to approximately $2 million, which had an approximate 5% impact on our conversion rate. Free cash flow for Q1 was otherwise in line with expectations coming into the quarter.

Cash flow from operations this quarter was approximately $23 million compared to $24 million in Q1 '20. In addition to $14 million of bonus payments and the $2 million of cash outflows for COVID, the $1 million decline in cash flow was primarily driven by a $28 million use of cash for inventory. This was offset by sources of cash across other working capital accounts. As I mentioned, the inventory investment was primarily made in order to mitigate potential COVID-related impacts to our production capacity and supply chain or unforeseen changes in customer behavior. We expect this inventory to burn down over the course of fiscal '21 and inventory turns to increase as we move through the year.

Capital expenditures in Q1 were $11 million or 5.3% of revenue compared to $9.6 million or 5.4% last year. Q1 capital expenditures were slightly lower than expected as we experienced some COVID-related delays in expansion CapEx for facility upgrades and equipment. We expect CapEx to increase as a percentage of sales in Q2 as we catch up from the delays in Q1 and continue to invest in the business. Our biggest investments in H1 are primarily related to facility build-outs in Andover, Massachusetts; Cypress, California; and Hudson, New Hampshire; along with continued investment in trusted microelectronics.

I'll now turn to our financial guidance, starting with Q2 on Slide 12. Our guidance for the second quarter and the full fiscal year assumes no major operational impacts associated with COVID, which, as we've discussed, we've made every effort to mitigate. Mark also talked about the potential for headwinds related to the defense budget. That said, we believe Mercury is in the right parts of the market and on well-supported programs that align with current threats and DoD priorities. Our guidance reflects this positioning.

Our guidance for Q2 includes COVID-related expenses of $3.1 million. This is up from Q1, reflecting the rollout of weekly on-site COVID testing to additional facilities. Our guidance for the full fiscal year does not include COVID-related expenses or cash outflows for the second half.

For Q2, we currently expect revenue in the range of $200 million to $210 million. This is approximately 6% organic growth at the midpoint compared to the second quarter last year. The single-digit organic growth we anticipate for Q2 is related to program timing, and we still expect high single-digit to low double-digit organic growth for the year. Q2 GAAP net income is expected to be $11.9 to $13.4 million or $0.21 to $0.24 per share. The year-over-year declines reflect the incremental $3.1 million of COVID-related expenses as well as a slightly higher expected tax rate.

Q2 adjusted EPS is expected to be $0.48 to $0.51 per share. Adjusted EBITDA for Q2 is expected to be $42 million to $44 million, representing approximately 21% of revenue. We expect CapEx in Q2 of fiscal '21 to be approximately 8% of sales at the midpoint of our guidance. CapEx for the quarter is primarily related to trusted microelectronics investments as well as the facility build-outs that were delayed from Q1 into Q2.

We expect free cash flow to adjusted EBITDA for Q2 to be approximately 40%, driven by expansion CapEx as well as continued COVID-related expenses. Also, in accordance with the Themis purchase agreement, we will distribute $2.3 million to former Themis shareholders for a tax benefit realized post acquisition, which will impact free cash flow in Q2.

Turning to Slide 13. Our guidance for fiscal '21 reflects a strong outlook for organic growth and continued investments in R&D and capital. For the full fiscal year '21, we now expect total company revenue of $865 million to $885 million. This represents 9% to 11% growth from fiscal '20 and is an increase from our previous guidance. It represents organic growth of approximately 8% to 10% year-over-year, consistent with our high single-digit, low double-digit target. Like we saw in fiscal '19 and '20, we expect a percentage split between H1 and H2 revenue to be weighted toward the second half of fiscal '21.

Total GAAP net income on a consolidated basis for fiscal '21 is expected to be $67.9 to $72.3 million or $1.22 to $1.30 per share. This is down year-over-year as a result of approximately $21 million or $0.38 per share of nonoperating investment income and discrete tax benefits that we had in fiscal '20.

Adjusted EPS for fiscal '21 is expected to be in the range of $2.20 to $2.28 per share. This is down slightly year-over-year as a result of a discrete tax benefit of approximately $8 million or $0.15 per share in fiscal '20, which is not expected to recur in fiscal '21. Adjusted EBITDA for fiscal '21 is expected to be in the range of $190 million to $196 million, an increase of 8% to 11% from fiscal '20. Adjusted EBITDA margins are expected to be approximately 22%.

We expect capital expenditures for fiscal '21 to be approximately 6% to 7% of revenue. Despite the delays in Q1, we still expect an increased level of CapEx for the year, driven by our continued investments in organic growth. Finally, for the year, we expect free cash flow to be approximately 40% of adjusted EBITDA. Again, this estimate does not include any potential second half COVID-related cash outflows. This conversion level is driven by our expansion CapEx and our COVID investment in H1.

Turning to Slide 14. In summary, Mercury delivered solid results for the first quarter of fiscal '21, extending the momentum from fiscal '20. Revenue, net income, adjusted EBITDA, EPS and adjusted EPS exceeded our guidance, while we made substantial COVID-related investments to protect our employees and ensure business continuity. Looking ahead, we're well positioned to deploy capital for strategic M&A while continuing to execute on our long-term financial model of above-industry average organic revenue growth and EBITDA margins.

With that, we'll be happy to take your questions. Operator, you can proceed with the Q&A now.

Our first question comes from the line of Pete Skibitski with Alembic Global.

Nice quarter. Just wanted to learn some more about your thoughts on the sequential decline in backlog. It sounded like you're mainly thinking it was due to COVID and employees not being able to close deals in this environment. Any other kind of dynamics surrounding that in terms of DoD's pace of contracting slowing down or timing on big programs? Just wanted to get more color on that.

Sure. So the bookings decrease that we saw in the first quarter, I would say, is kind of related to 2 things. The first is that we did see some COVID-related impact with the ability -- or the speed of which our customers could move. That did impact certain bookings towards the end of the quarter. But probably the biggest impact is that we did have a large -- or a customer at a large foreign military sale that basically moved to next fiscal year, so our fiscal year '22.

So those were the -- I guess, the major impacts that we saw that resulted in bookings that went on to impact backlog. That being said, I think as Mike said in his prepared remarks, if you look at over the last 12 months, bookings is up 15%, backlog is up 16%. And we've had book-to-bill of 1.2 or above in the last couple of years. So it's unfortunate that we saw some of the movements that we did, but we don't believe that anything fundamentally has changed, Pete.

Okay. That's great. Just one follow-up for me, just to get more context with the continuing resolution. So are you guys -- I guess, 2 parts to that. A, should we think about any risk to your revenue guidance for 2Q because of the CR, kind of how are you guys feeling? And then also, is it fair to say or think that we're going to have another kind of flattish bookings quarter until we get the budget and then maybe a pretty heavy back half of the year once we get the budget, bookings-wise?

Yes. So right now, as we see it, we don't see any potential risk or major risk associated with Q2. We've kind of have encompassed that in the guidance that we gave. We raised the midpoint of our guidance for the full fiscal year. So I think overall, we do feel pretty confident about our ability to deliver for the full fiscal year. And so we'll see how things evolve. Mike did say, I think, in his prepared remarks that we do expect the second half to be stronger than the first, and that is very consistent with what we've seen in the past several years as well. So no real change there as well.

(Operator Instructions) Our next question comes from the line of Seth Seifman with JPMorgan.

I guess maybe just a quick question about M&A and the landscape. I mean you mentioned that it's fairly robust. So I guess, first, do you find in a COVID environment that you're able to do kind of the diligence that you typically do on M&A? And alongside that, in the event that we do see a change in administration, is there a period of time where you'd want to kind of wait and see who populates the administration and how they set out their priorities before moving ahead on M&A? Or is it kind of a similar approach either way?

Yes. Let me take the questions in the reverse order. So I don't believe that the change of administration is going to change our priorities, Seth. The areas that we're focused on, we believe, are the important ones. As you know, we're focused on C2I, building out that business. We're focused on building up our platform and mission management business, which is basically avionics and mission computing as well as looking at sensor processing. Those are the 3 major areas that we're continuing to look at deals. The market has clearly picked up. And I think one of the things that was important for us is that we maintain the discipline in the process that I think has resulted in our M&A deals going as well as they have historically.

And really, at the heart of that has been our diligence efforts. So what we've been able to do with our testing now, it's 7 different locations for COVID. We've been able to actually extend that testing to counterparties in potential M&A scenarios. So both parties get tested in advance, and you know that there's a mutual level of trust there that people are coming to various meetings having tested negative. We've also, I think, adjusted certain ways in which we're traveling to meetings. And as a result of that, we have been much more active than what we had in the early phases of COVID. I don't know if you'd like to add anything to that at all, Mike?

No. I mean I think you hit on it. I mean, Seth, the activity has picked up. There's a lot going on. We've adapted to the virtual due diligence environment where we can. But as Mark said, we are integrators, it's how we've created value. So we're continuing to go see the sites and meet the people, and we'll continue to do that.

Great. And then just as a follow-up on microelectronics. I know you mentioned some opportunities. We see a fair amount in the trade press from DoD, including some awards there. And so clearly, there's some activity going on now, both for you and more broadly. At the same time, when you talked about it in the past, got the impression that this was something that was very much kind of a longer-term opportunity. So on microelectronics, can you kind of help us understand a little better what's kind of -- what's there in the near term and then kind of how the opportunities evolve over time?

Yes. So I'd kind of parse it, so as you know, right, we ended into the microelectronics space when we did the acquisition of certain assets from Microsemi. So we acquired their microelectronics business that was targeting the defense sector. We've been very successful growing that business as well as improving the profitability of it over time.

And so we've already got a lot of activity going on in the space in various different end markets. I think what you're touching upon is really what the DoD is now looking for, which is trusted microelectronics capabilities that is taking advantage of all of the innovation that's occurring in the high-tech world and in particular in the commercial silicon space. And that's where we have invested heavily in the new fab capability that we've been standing up in Phoenix.

And probably the most -- yes, most significant news this past quarter was the fact that Intel was down selected by the DoD on a program called SHIP, which stands for State-of-the-Art Heterogeneous Integration Prototype. And it's basically what they're looking to do is exactly what we've been discussing is they're looking to be able to use chiplet-based architectures, secure them and package them in a very innovative way for use inside of the defense industry. So we were part of the Intel team. We're obviously delighted that they won. And that's a very important part of the -- our future focus on trusted microelectronics, which, as we said, is a longer-term opportunity, but it's the #1 tech priority for DoD. So very happy with the progress that we're making and the fact that Intel won the SHIP -- the next award of -- or the next phase of the SHIP program.

And our next question comes from the line of Peter Arment with Baird.

Nice results. Mark, if I could just follow on to your comments on SHIP. So that award was roughly, I think, $173 million, I think, for the Phase 2 for that team or Intel's team. How does that translate for you? Is it over multi years? Or is it weighted in a shorter time line?

Yes. Peter, it's going to play out over a multiyear period. I'm not going to get into the specifics of the amount because we're still in the -- I guess, the early phases of that trusted microelectronics capability that we're standing up. But it is an important capability. It is an important program. And I think it's tied directly to the needs of the DoD.

We did have a -- actually, our largest design win this past quarter within the EW space utilizing next-generation trusted microelectronics capability. So that was an estimated lifetime value of over $250 million. So I'm really happy with kind of what we see happening with respect to our partners in the silicon space as well as the receptivity that we're seeing from customers in the end markets in which we're playing. So overall, continue to make good progress, I think, validating the investments that we've made and the strategy that we're pursuing.

Yes. And just -- you've been talking about it for a number of years, and obviously, the DoD putting money behind it. Are you seeing anything from a competitive perspective in terms of trying to replicate what you guys have been building out?

We haven't specifically. And we were on more than one team on the SHIP program, and obviously, working with different silicon providers because, ultimately, what the DoD wants to be able to do is to get access to the best commercially available silicon from multiple different parties and to combine them together into a heterogeneous piece of silicon for defense use.

And I think both model -- multiple other parties that we're working with on SHIP, I think, did their own due diligence and I think ended up choosing Mercury because of the investments that we've made, the channel that we have and our reputation. So we haven't seen anyone trying to replicate what we're doing, the way in which we're doing it. But that doesn't mean over time, if we're successful, that it won't attract competition because, obviously, it's a very important set of capabilities, and for me, it's going to enable a whole suite of new applications that can't be done today with the existing technology.

Yes. And then if I can just squeeze in one quick more. On the CR, there was a discussion on one of the prime calls earlier last week regarding a CR maybe going out to the spring time frame. How would that, if at all, impact you when you're thinking about your '21 results?

So we think that we've taken it into account right now, Peter, from what we can see. Typically, under a CR, you kind of see 3 things going on. There are -- there's fewer new program starts. You've got -- there can't really be increases in terms of the production volumes under a program. And you may see some timing slowdown with respect to contracting events. And it's really that latter one that I think, if anything, has kind of impacted Mercury in the past. So we'll have to see. But for now, we feel pretty good about the guidance that we've given and the fact that we did increase the guidance for the full fiscal year.

And our next question comes from the line of Michael Eisen with RBC Capital Markets.

Following up on the conversation around the microelectronics and the clear push to domesticate some of this production and packaging, can you help us understand what amount is being imported currently? And who are some of the major competitors that you're competing against internationally?

So most -- from what we know, Michael, most of the actual design activity is done by the silicon providers themselves, but obviously manufactured offshore. And it depends upon whether you are a fabless or a company that owns the fabrication facility, right? So Intel is in one camp and then you have the likes of Xilinx and NVIDIA in the other.

Most of the packaging is either done in those facilities or if it's customized by smaller players in the international markets. We have seen that, yes, there's really 2 things going on. One, the DoD wants to be able to get access to the underlying silicon for use inside of the A&D industry. And where a lot of the risk lies today is the fact that it's packaged offshore. So bringing -- or getting access to the silicon on one hand is very important than being able to combine it together with different types of silicon, but then securing it and packaging it domestically in trusted facilities is really what we're focused on as well. So there's multiple different elements of that trusted microelectronics strategy that I think the DoD is focused on, Michael.

Got it. That's helpful. And then thinking of that context, you had some comments just a few moments ago that there really isn't anyone that you're competing with in some of these technologies at this point. So when I think of the balance of R&D spending and your comments around how robust the M&A pipeline is, are there still an ample amount of targets in the market for you to continue the pace of, call it, double-digit contribution through M&A? Or should we expect a higher level of R&D having to fund the organic side of that equation?

So the answer is yes, there is absolutely sufficient opportunities for us to continue to do what we had been doing over a multiyear period, which is generating high levels of organic growth that is being driven by the significant investments that we're making in the underlying technology and our people. And then adding, again, on top of that, M&A in the 3 markets -- 3 market areas that I described previously.

And so those are continue to build up our capabilities in sensor processing, which is really the heritage of the company. And then most recently, as you know, we've made a significant effort to penetrate all of those other types of computers that go onboard military platforms, which can be grouped into 2 major areas. One is C2I, so command and control type processing applications, which is a major thrust for the DoD under an initiative such as JADC2. And then also in platform and mission management, where we see the supply chain delayering trends really picking up pace around mission computing and avionics.

So the answer is yes. We're going to continue to invest organically in R&D. It's a critical part of our model that's driving growth and design wins and allowing us to grow business at high single digit, low double digits, which we're then supplementing with M&A and full integration.

And our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Mark, I guess just to start off, you mentioned SHIP. I didn't think it would be such a popular contract to get big questions. But in relation to that, how do you think Mercury is differently positioned this budget cycle than it was about a decade ago with the outsourcing trend?

Yes. So I think we're a very different company than what we were when you talk about sequestration, if that's what you're specifically referring to, Sheila. Yes, we've got, one, a much bigger backlog than what we had back then. We've got far more programs than what we had back in fiscal '13. And as I talked about in my prepared remarks, no one specific program accounts for more than 4% of our revenues in the short term or 5% over the next 5 years.

So I think we've got much greater program diversification as well. So -- and I think we're obviously participating in more parts of the market as the M&A strategy has evolved and as we've moved from just providing processing associated with sensors into these other adjacent markets for the high-performance compute capability that we provide. Would you like to add anything to that, Mike?

No, I think you hit on most of it. I mean the only other thing I'd add is that when you look at our near term but also our non-12-month backlog, so longer term, as we've moved into integrated subsystems, it's at record levels. And so not only do we have good visibility to, I believe, in the near term, but our non-12-month backlog is $310 million, which is up significantly year-over-year and positions us well to have that visibility beyond 12 months as well as the near term.

And then just given elections tonight, outside of the presidency, are there things you guys are looking for just given your manufacturing footprint or alliances with suppliers in the smaller Senate or House races?

Say that again, sorry? I didn't hear the second part of the question, Sheila.

Just in terms of the elections, outside of who takes the presidency, are there things you guys are looking for this evening in terms of House and Senate races that are supportive to your business?

Not really. Again, we don't typically deal with the House and the Senate Armed Services Committee or -- it is on the political side of things. That's really more the realm of our customers, who I think do a pretty good job kind of distributing the work around the U.S. as appropriate. So we think that we're actually in important areas that are well funded, that are large parts of the market and growing. So I can't think of anything specifically off the top of my head, Sheila.

No worries. And congratulations on your Glassdoor rating.

Thank you.

Thank you.

And our next question comes from the line of Jon Raviv with Citi.

Sort of a question about growth sustainability. It's almost the opposite of a question you might have gotten a few years ago, which was all your customers are accelerating growth. You're not seeing a big bump in new guys. You're still looking at that high single, low double. The opposite question here, of course, is a lot of your big customers are pointing to decelerating growth over the next year or 2 between the 500, 600 basis points for some. So where does that leave you guys? I mean you said -- you've talked about maintaining above-average growth, but you're also talking about 10%. So just generally speaking, even with book-to-bill maybe falling a little bit, but still nice above 1x, do we still feel good about 10% growth organically almost kind of through a budget cycle?

We do right now, Jon, yes. I mean our goal is to continue to grow the business organically at high single digit, low double digit, averaging 10% over time and then obviously, layering on top of that acquisitions. Yes, when you boil it down, we think that the fundamental trends in industry level that have driven growth in the business will continue, so -- the largest of which is outsourcing. And so we're seeing -- continue to see significant growth in outsourcing at the subsystem level.

I talked about on the call that we have several design wins literally this year, where we won the design wins in prior years, it turned into bookings in '20 and now we're seeing the benefit of that in fiscal year '21. And obviously, our design win activity over the past several years has been very, very high.

So outsourcing is clearly happening. We're continuing to see the flight to quality suppliers. I think that initially was in the manufacturing domain, where post sequestration, a lot of the smaller companies didn't have the ability to basically invest in the modernization of their manufacturing plants. We have done that quite successfully, and we have taken share.

That, coupled with the significant investments that we're making in internally funded R&D, is very important in this environment where the government through the use of OTAs is really looking for industry to step up and to invest or co-invest alongside the government. And the fact that we're spending 13% of our revenue on R&D, that's very attractive working with the major primes.

The supply chain delayering, we're also seeing that in Europe where one of our largest customers has really embraced that model, seeking to kind of bypass some of the Tier 1 providers of platform mission management capabilities and working with the lower tiers. We're seeing that in the services here in the U.S., in particular, the Army, who's been very, very active around that delayering trend. And I mentioned on the -- in my prepared remarks, the advanced -- the AMCS program, which is basically a cloud in the sky airborne server, which we're pretty excited about. So there's -- I think the fundamental industry trends are alive and well.

And then when you look at things from a capabilities perspective, I think we'll continue to see growth in the major markets, so sensor modernization, platform mission management, C2I and then trusted microelectronics. So we feel pretty good about how we're positioned, Jon, and our ability to continue to do what we've been doing over the past 5 or 6 years.

I appreciate that. And just a brief follow-up on the international piece. Can you just give us a sense -- I mean it feels like a lot of this outsourcing, a lot of these mega trends are still in relatively early innings domestically. Have we even thrown the first pitch yet internationally to -- sorry, to extend the metaphor?

Yes. So the answer is yes. So Airbus Defence has become a significant customer of ours internationally, and they, I think, have really embraced the delayering in the outsourcing. And as you may remember, we acquired a business over in Geneva called CES. That business has more than doubled since we acquired it and yes, have won a lot of new opportunities. And so we're seeing a similar trend occurring here in the U.S. as well. So more to come there, I believe.

And our next question comes from the line of Ken Herbert with Canaccord.

Mike, I wanted to -- first, if I could, on working capital. I mean you've been investing in inventory now for several quarters, and I can appreciate the COVID sort of risk management aspect to it here. But is there anything else you'd specifically highlight on the inventory front? And then I think you said you expected to sort of reverse much of this for fiscal '21. I just wondered if you can provide any more sort of granularity on when maybe inventory starts to become a source of cash or how we should think about that for this year.

Mike, if I could, can I just kind of pop in for just the first part of that and then I'll hand it over to you. So Ken, it's important to realize what really happened in the first quarter. And so a little bit of history, right? So we instituted testing back in July in 3 different facilities and -- manufacturing facilities, our largest of which are in -- is in Phoenix. And at the time, we saw positivity rates in and around the Phoenix area greater than 40% and 20% over in Oxnard. And it was that massive increase that we saw in the surge of the virus that led us to actually institute the testing, which is now across 7 of our different sites.

As we did that, we saw some impact on the production. And so during the first quarter, we made a very conscious decision given that we knew we were going to roll out testing elsewhere to basically -- to invest in inventory to try and derisk the business, both operationally and financially, which I think we did very successfully.

For me, having rolled out testing at scale, it became really a foundational in the centerpiece of our -- the way in which we're dealing with the COVID challenges. It's taken a tremendous amount of effort by the team to operationalize that. But if you look at what's actually happening right now with the significant increases that we're seeing again and heading into winter, I'm so pleased that we made the decision. It's an investment. It's been a very challenging thing to do, but I can tell you that employees are thrilled that we're doing it. And I think it's foundational to our ability to maintain the operational continuity and the financial performance that we're delivering.

So just a little bit of a backdrop because I think what you saw with the inventory is us managing the initial rollout of COVID testing across 7 locations, so -- which is not insignificant. So Mike, over to you.

Sure. So -- and then, Ken, just on the timing because I think Mark did a good job laying out the rationale for why we built it up, and you can see on the -- where it shows up in the cash flow statement, we invested a little in Q4 of last year and then more this quarter for all the reasons that I mentioned in my prepared remarks and then Mark just discussed.

In terms of the timing, we do expect it to be temporary. We expect the inventory to burn down during the year. Turns have been -- inventory turns were 2.7 in Q4. They came down to 2.3 this quarter. And as we're thinking about it, we expect turns to return to -- by the end of fiscal '21 to the levels that we saw at the end of fiscal '20 when we were at the 2.7.

So we don't know what's going to happen with COVID. But we've positioned ourselves across the business to try to, a, protect our employees; but b, to derisk the business, and this is just one piece of that.

The other thing I would just add, Ken, is that the inventory, this isn't speculative inventory. This is inventory that's predominantly raw materials or finished goods, specifically for programs. So really, it's just advanced buying and building to protect against the unknown over the next 12 months.

Yes. So it's really tied to the manufacturing risk associated with the facilities that are rolling out the testing as well as potential supply chain disruption of our supply chain as well. So those were the -- I guess, the 2 areas that we're focusing on.

That's great. And Mark, just to follow up, is it fair to assume that while you've been sort of building some inventory, you haven't seen any material disruptions from your own supply chain? Or are there areas that you're maybe incrementally more concerned about as we potentially have a bit of a surge in the virus here into the winter?

Yes. So we did see some impact early on. I would say it's been very narrow in terms of its focus. I think most people have figured out how to deal with COVID in various different ways. We don't know of many companies that have actually instituted testing. I believe it's very important from a business continuity perspective.

But again, some of the inventory that we built was to trying to anticipate any potential disruption, where maybe we weren't able to get a second source of supply or the parts were already in high demand. So we've tried to anticipate where we may have risk with respect to our future revenue plan and to hedge that as best we possibly come.

Our next question comes from the line of Jonathan Ho with William Blair.

Just wanted to maybe start out with the CapEx delays and particularly around COVID, does the later start impact any of your production plans at all? Is there a situation where you can catch back up? Just wanted to get some high-level color there.

Yes. So good question, Jonathan. No, it doesn't affect our production capacity. Really the major delay that -- delays that we saw was in building out the new fab facility for trusted microelectronics. And the revenue for that is really -- there's not much in this fiscal year and it ramps in future years. We have seen that begin to pick up. I think we had issues with getting equipment delivered and then to do the turn up and test because our suppliers weren't able to travel. We found ways around it. It has improved. So no, I don't see there being an impact of the CapEx delays on our ability to meet our financial goals and objectives. Mike, would you agree?

I agree. I agree.

Great. And then just as a follow-up, how large of an impact did you see from that booking slip from the FMS deal? And is this a program that's at risk? Or is this something that is just a normal timing shift?

Yes. So it was significant. It was over a $30 million booking and some of which would have turned into revenue this fiscal year. We don't believe that the program is at risk. It was a follow-on award. And from everything that we can gather from our customer, they just needed to reengineer the solution somewhat, based upon certain concerns of the customer, and that is really what has caused the delay.

So it was unfortunate, but obviously, foreign military sales are notoriously difficult to predict in terms of -- from a timing perspective. And I think this is really a one-off case. It's not something that we see as being a trend.

And our next question comes from the line of Michael Ciarmoli with Truist Securities.

Maybe, Mike and Mark, I think you just said the industry trends were alive and well even as we go into another maybe defense cycle here. But looking at the gross margins, even adding back the COVID costs and tying that in with R&D, which looked to be a multiyear high as a percent of sales, is this business less profitable going forward than it was in prior periods? I mean, are you seeing more pricing pressure out there? I mean we're certainly seeing it in your margins. But just wanted to get more color there just as the gross margins are at a multiyear low and you're spending more. So how should we think about that?

Yes. No. Mike, I think that the underlying profitability of the business has not changed. And I think if you look at what we talked about last quarter in terms of the annual guidance is that we expect fiscal '21 to look a lot like fiscal '20. And you can see that on the EBITDA margin line, where our guidance is right around 22%, which is right where we were last year. So at that level, we think the profitability is the same. And as we've talked about in the past, we see opportunities to grow EBITDA over time.

When you look at gross margin, we don't guide gross margin because we are focused on EBITDA, but I did say last quarter that we expect it to look a lot like fiscal '20. You mentioned the COVID expenses that we had in Q1. Those are 90 basis points dilutive to that Q1 gross margin. We also have some more expenses for COVID that we're forecasting in Q2. Those will also be dilutive. But when you take those into account, I think that the business in fiscal '21 is going to have the same level of profitability that we saw in fiscal '20, which was also up from fiscal '19 when we were at 44%.

So we think the business is -- and the profitability is still strong. We are seeing a lot of new program starts that we've talked about that have lower margins out of the gate, and then those become higher-margin as they transition into production. So we think the profitability of the business is strong.

Got it. On the COVID expenses, I mean, they were pretty significant. And I know looking at the guidance here, I guess, you've got $3.1 million. I mean, is it realistic to think that they just roll off in the second half? And in terms of any sort of recoverability there, are those the type of expenses you can put into billing rates? Or do you think if there is some sort of COVID relief at the DoD level, do you get any of that money back? Just trying to -- I mean it would seem unlikely that these roll off as we go into winter here. It seem like they would remain elevated.

Yes. I mean I think that what we've done is -- as you can tell, is we've just forecasted 1 quarter out because no one knows the -- what's going to happen over the rest of the year in terms of these expenses.

But as Mark discussed, a lot of that cost in Q2 and a good portion in Q1 was related to testing at our facilities, and that's going to continue. And it's actually expanding, as Mark talked about, in the second quarter to more sites and more facilities, and we're going to continue to do that because we think it's the right thing to do to protect the business.

So when we get to next quarter, we'll give a view on what we think it's going to be. Is it likely that it could continue? Yes. But at this point, we just don't have the visibility in terms of what those expenses are going to be.

From a recoverability standpoint, most of our business is still commercial sales. So we can put some of these costs in rates. But we're viewing this as an investment that we're making as a company in our people and in the business.

And our next question comes from the line of Ron Epstein with Bank of America.

If you were to guess what the book-to-bill will be at the end of the year, what would you guess it to be? And the reason I'm asking this question, I think the fear is, Mark, with people nervous about the election and fear around defense slowing. You commented this quarter, your year-over-year book-to-bill is just a smidge below 1. How can you allay that here?

Sure. So as we said in the prepared remarks, we do expect a positive book-to-bill for the year. Yes, it was unfortunate that we had that FMS contract kind of move out because, obviously, that was a substantial award. If you look at kind of what gives us the confidence right now to basically say that we've got a positive book-to-bill, we got some substantial growth in bookings in certain programs.

And one, as I mentioned, was a new classified radar program, where we won that design win in prior years. The program is kind of moving into initial production, which we've talked about. We're seeing a substantial increase in E-2D Hawkeye where we're providing various capabilities. We're seeing significant growth in C2I, in various rugged server capabilities that came to us through one of the acquisitions. So we've actually got a pretty good line of sight right now from what we can see on being able to deliver that positive book-to-bill, Ron.

And when you say positive, you mean north of 1, if that's what you mean?

Yes, yes, yes.

Okay. Okay. And there's been some stuff written in the trades about pushing forward with more acquisition or reform around acceleration in reform and things like OTAs and other kinds of rapid acquisition awards. Have you seen that impact your business yet? And do you expect to see that in the coming months?

We have absolutely seen it, Ron. So LTAMDS is a great example. So it started out as a traditional procurement process. And then along the way, it transitioned to an OTA, driven by, I think, the urgent need and the DoD wanting to be able to get buy-in from the primes, right, in terms of just the investment. And so we're obviously on LTAMDS, and that's potentially the largest single program we've won in our history. And it's going to be in our top 5 programs in fiscal year '21 from a revenue perspective, and that moved extremely quickly.

This quarter, the AMCS program, which I mentioned, which is that cloud-in-the-sky type concept was also an OTA. And what we're seeing is that when we talk about delayering, typically, the delayering is where either the government or the primes are seeking to deal with more nontraditional contractors, of which we are one, because of their ability to invest and to move quickly.

So yes, we're absolutely seeing an increase in OTAs. I think it could continue because I think if you look at the future budget environment, I think there's going to be a continued need for affordability as well as more rapid technology cycles, and both of those things play into the use of nontraditional contractors.

(Operator Instructions) And our next question comes from the line of Noah Poponak with Goldman Sachs.

Can you guys hear me, okay? I'm on a cell with a less than ideal connection.

Yes. No. We hear you fine.

Okay. Awesome. Mark, just a quick follow-up to Ron's question there, are you saying you expect book-to-bill over 1? And are you also saying you expect the absolute bookings dollars to grow year-over-year in 2021? Or is it just the former of the book-to-bill over 1? And I apologize if that's (inaudible)

Book-to-bill over 1.

Okay. Can you still grow the bookings year-over-year for the year?

Potentially, yes. So we've obviously got some ground to make up with the slippage of that FMS contract in the first quarter.

Got it. And then in your prepared remarks, you pointed to the potential for the defense budget to flatten out. And then you've been asked about your medium- to long-term target to grow revenues high to low single digits organically on a multiyear basis. I guess that defense budget discussion has been a moving target. So maybe just to ask the question -- sort of refresh the question clearly, are you telling us that with the defense budget exactly flat, you can still grow your revenues high single to low double digits organically?

So based upon what we see right now, we believe that is the case. We obviously refresh our strategic plan, which kind of goes out 5 years, every 6 months. But as we see it right now, the answer to that is yes. And the biggest driver of that, as we've talked about in the past, is really 2 things. One is we've had a significant increase in new design win activity. Over the course of the last 5 years on an LTM basis, the estimated lifetime value of design wins is $2 billion.

So a pretty significant increase that we've seen over time. The second, as we've talked about, is that we've been actually pretty successful capturing more content and seeing increased outsourcing by our customers at the subsystem level. And so subsystems revenue for us is much larger dollar content or volume than programs that we have wanted to pass more at the module level. And on an LTM basis, subsystems revenues were up 46% and it was up 57% in the first quarter. So more programs, more content on those programs is probably the largest driver of our ability to continue to deliver that high single digit, low double digit, Noah.

Okay. That's helpful. And then just -- if I'm looking at just the second quarter guidance, specifically, to be in the middle of the revenue range, organic growth would have to only grow mid-single digits. To be at the low end, it would have to grow low double digits. So is some of that bookings headwind interfering with the second quarter? Or is there just some conservatism there?

And then, Mike, similarly, on the margins, the margin has to be down not insignificantly year-over-year to get into the EBITDA guidance range even though the full year has it flat. I guess, is that all the COVID expense? Or is there something else? If you guys could help me with squaring up those numbers.

Sure. So look, organic revenue can kind of move around period to period. For the year, as we mentioned, right, we're expecting that high single digit, low double digit and -- organic growth. So again, the guidance is the guidance that we gave. Mike, do you want to add?

Yes. And I would just say it's timing, Noah. It's -- Q2 if you're comparing to Q2 last year, high gross margins is just program mix. I think if you look at the revenue for this year, and we talked about the annual guidance, if you look on it, H1, H2, you look at the midpoint of our Q2 guidance, you'll see it's very similar to what has been in previous years. About 53% of our revenue will be in H2, 47% in H1, which is exactly what it was in fiscal '20. So what you're seeing is just the timing of programs. But at the annual level, we're still expecting a strong year.

Mike, where do you have R&D coming in as a percentage of sales for the year compared to last year?

So we don't specifically guide that. What I...

Or is it a headwind this year?

It's -- so what I said last quarter was that when you look at fiscal '21, we expect it to look a lot like fiscal '20, and fiscal '20 R&D as a percentage of sales was 12.4%. I would say that with some of the initiatives that -- and opportunities that Mark talked about, we could see R&D as a percentage of sales up slightly. You saw what it did in Q1, was 13.3% compared to 12.3% last year. So we do see opportunities we're going to continue to invest. We'll see how the second half plays out. But again, probably a little higher than last year.

Great. And last one, Mike, does your long-term 22% to 26% EBITDA margin range -- target range still hold?

I think what we've started to say, Noah, we've moved away from the 22% to 26%. We've moved away in general from the target business model. But what we continue to believe is that the opportunity for margin expansion over the 5-year period is still there. And that's going to be driven by the programs transitioning from new program starts into full rate productions. In terms of operating leverage as well as, I think, over time, as we do acquisitions, we'll see some R&D leverage as well.

I'm showing no further questions at this time. I will now turn the call back over to President and CEO, Mark Aslett, for any further remarks.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.