Mercury Systems Inc (MRCY) Q2 2021 Earnings Call Transcript

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Mercury Systems Inc (MRCY 0.88%)
Q2 2021 Earnings Call
Feb 2, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day everyone, and welcome to the Mercury Systems' Second Quarter Fiscal 2021 Conference Call. [Operator Instructions]

At this time for opening 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.

Michael Ruppert -- Executive Vice President and Chief Financial Officer

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.

Mark Aslett -- President and Chief Executive Officer

Thanks, Mike, and good afternoon, everyone. I'll begin with a business update, Mike will review the financials and guidance and then we'll open it up for your questions.

Thanks to our employees Mercury delivered a solid second quarter of fiscal '21, we came in above the high-end of our guidance for total revenue and at or above the high-end for profitability. Our book-to-bill for the quarter was 1.0 and our design wins amounted to more than $300 million in estimated lifetime value.

At the end of the quarter we acquired POC, and as a result substantially raising our total company revenue and adjusted EBITDA guidance for the full fiscal year. We now expect to deliver 16% to 19% growth in total company revenues for fiscal '21, including high-single digit organic revenue growth, leading to double-digit growth in adjusted EBITDA.

Turning to the details on Slide 4, Mercury's strategy, technologies and capabilities are aligned with the major industry drivers and trends. New business conditions remain robust, M&A activity is back and we have the balance sheet and financial strength to capitalize on the opportunities in our pipeline.

Looking ahead to the second half of fiscal '21, we expect the contracting environment to improve given that the Defense Appropriations bill has been signed. Our baseline forecast remains for overall defense spending to be flat near term and grow at low-single digits over the longer term. We expect this growth to be driven by continuation of a national defense strategy.

With the change in administrations we expect another round of fiscal stimulus. Those dollars could over time crowd out discretionary spending including defense. However, unlike what we saw in the past with sequestration today there seems to be a strong sense bipartisan commitment to defense spending. And if new pressures early defense budget do materialize, we're likely to see an even greater focus on existing platform modernization, speed and affordability.

This could lead to greater use of non-traditional defense contractors and contracting methodologies supporting Mercury's ability to grow in line with our goals and objectives. We believe that overall Mercury is well positioned in this environment to continue delivering high-single digit to low-double digit organic revenue growth on average over time, exceeding overall defense spending growth.

Turning to Slide 5, we're targeting the faster growing parts of the defense market, the way that modernization occurring in both sensor and effector mission systems and C4I is driving growth across our business. Mercury is also well positioned to leverage the fundamental trends that we've discussed in the past versus outsourcing by our customers at the subsystem level. As a result, we're capturing more content on programs and platforms.

Second, we see the impact of delayering, as the government seeks more affordable and rapid solutions particularly in the C4I market. Third is the price flight to quality supply is in RF and secure processing. And finally, the government's push to create a domestic supply chain for secure and trusted advanced microelectronics. Although the microelectronics IP is developed mainly in the U.S., most manufacturing and packaging is still done offshore.

The DoD remains focused on China's militarization and heightened tensions in the diplomatic, technological and economic domains. As a result, they identified U.S. produced trusted microelectronics as their number 1 defense technology priority. Given the investments we've made in secure processing and the trusted microelectronics fab this is a significant opportunity for us. Although, as we've said the fab build out in Phoenix has been impacted by COVID, our long-term plan remains on track. We continue to see growing interest from our semiconductor partners, customers and the DoD. Our strategy and investment seek to address a significant national security threat.

Turning to our financial highlights on Slide 6. Q2 was similar to Q1, given the continued impact of the COVID and the extended CR. Mercury's total bookings for the second quarter were up slightly from Q2 last year and we delivered a 1.0 book-to-bill. For the prior 12 months bookings were up approximately 10% and our book-to-bill was 1.12.

As in the past, we're expecting the second half to be strong than the first, which should lead to a positive book-to-bill for the full fiscal year. Our new business pipeline is robust and the activity level remains high. We're beginning the second half with record backlog, our Q2 backlog was up 30% year-over-year, providing us with strong forward revenue coverage.

Our largest bookings programs in the quarter were SEWIP, P-8, DEWS and CMOD [Phonetic]. Mercury's earning for Q2 increased 9% organically and 9% in total. Our largest revenue programs in the quarter were LTAMDS a ground radar program F-35 and airborne radar program in Patriot. We're seeing the benefit of recent design win activity including LTAMDS and several classified radar programs. These programs are beginning to transition into production and others will over time.

We're participating in more than 300 different programs and platforms, many more than in the past. No single program is expected to be more than 4% of total revenue this fiscal year. Similarly, as we look out over the next five years, we currently expect no single program to account for more than 5% of total revenue. As I mentioned, our design wins in Q2 totaled more than $300 million in estimated lifetime value. The largest for the second consecutive quarter related to trusted microelectronics.

Given current activity levels and the strength of our design win pipeline, we believe the second half of fiscal '21 may be more robust. For example in platform and mission management where we're focused on building out our avionics and mission computing solutions. Acquiring POC increases both our scale and capabilities in this part of our business. POC strategy and culture fit well with ours and we're thrilled to welcome the team to Mercury.

Turning to the bottom line, Mercury continue to deliver strong results in Q2. Consistent with our guidance GAAP net income decreased 19% year-over-year, while adjusted EBITDA was up 6% exceeding the high-end of our guidance. For the last 12 months GAAP net income and adjusted EBITDA were up 28% and 18%, respectively. Free cash flow for Q2 came in at 22% of adjusted EBITDA as Mike will discuss.

Turn to Slide 7, amid the pandemic we continue to invest in the rollout of weekly COVID testing across our facilities. This is the core element of our operational and business continuity strategy. We began testing early on back in July. We believe Mercury is ahead of most other companies operationalizing COVID testing and behavioral-based health and safety protocols. Putting our employees at the center of our decision making has proved to be the right thing to do for all the company stakeholders. All of our facilities have remained open and productive through the pandemic. Looking ahead, it's encouraging to see the vaccine roll-out. That said, we do expect that our business continuity investments and the protocols that we put in place will continue well into calendar 2021.

Turning to Slide 8. M&A remains an integral part of our strategy. After the recent hypes and activity, we're pleased to have completed the acquisition of POC. We believe that we're well-positioned to continue supplementing Mercury's high level of organic growth with accretive acquisitions going forward.

The market is very active. Our pipeline is robust, with multiple opportunities of varying sizes all in-line with the core of our strategy. We believe that Mercury is seen as a great buy given our purpose, culture and values, strategy and positioning and business performance. We're in a good place in terms of our financial capacity and liquidity. We intend to remain disciplined and pursue the strategically aligned deals that can be accretive in both the short and long term.

Turning to Slide 9. Overall, our 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. We believe this strategy will continue to generate significant value for our shareholders over the long term, as we execute our plans in five areas.

The first is to grow our revenues organically at high-single digit to low-double digit 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 insourcing 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.

Turning to Slide 10. This strategy has worked very well over the past six years. We're confident that Mercury will extend its record of success in fiscal '21 and beyond. We have clear purpose and positioning and a unique business model sitting at the intersection of tech and defense. We have a highly engaged workforce and our COVID-related business continuity protocols are working well.

We're in the right markets and aligned with dominant industry trends. We continue to make growth focused investments in our people, our technology and our trusted domestic manufacturing assets, M&A is back and Mercury's balance sheet is in great shape.

We anticipate high-single digit organic growth for the fiscal year and now with POC 16% to 19% total company revenue growth leading to double-digit growth in adjusted EBITDA.

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

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Thank you, Mark and good afternoon again everyone. Q2 was a quarter with strong financial performance. GAAP net income and GAAP EPS were at the midpoint and high end of our Q2 guidance respectively. Total revenue, adjusted EBITDA and adjusted EPS exceeded our guidance. We delivered solid bookings and concluded the quarter with record backlog.

In addition, on December 30th, we completed the acquisition of POC, which we funded with a combination of cash on-hand and our revolving credit facility. As a result of the acquisition as well as Mercury's strong organic performance in the first half, we are increasing our full-year fiscal '21 guidance for revenue, net income, adjusted EBITDA and adjusted EPS.

Let's turn now to our Q2 results on Slide 11. As I mentioned, we closed the acquisition of POC at the very end of the quarter, as a result POC had an immaterial impact on the operating results shown on Slide 11.

Mercury's total bookings for Q2 were $210 million, up 0.2% year-over-year. For the last 12 months, bookings are up 10%. Our bookings continue to be driven by our key markets, including radar, EW and C4I. Our book-to-bill for Q2 was 1.0 and for the last 12 months, our book-to-bill was 1.12. For the full fiscal '21, we continue to expect bookings with a book-to-bill above 1.

Mercury ended the second quarter with record backlog of $945 million including POC, an increase of 30% compared to Q2 of fiscal '20. Backlog expected to ship within the next 12 months was $598 million, up 15% compared to Q2 '20, providing a solid visibility into the second half of fiscal '21.

Total company revenue increased 9% from Q2 last year to $210.7 million, exceeding the high-end of our guidance of $200 million to $210 million. Organic revenue also grew at 9% year-over-year. POC which is considered acquired revenue in Q2, contributed revenue of only $200,000 during the quarter. Mercury's revenue base continue to be highly diversified with no single program representing more than 10% of total revenue during the quarter.

Gross margin for Q2 was 42.1% compared to 45.6% in the second quarter of fiscal '20. In addition to favorable program mix in Q2 last year, the decrease primarily reflected $3.1 million of direct COVID-related expenses charged to cost of goods sold this quarter. This had a 150 basis point impact on margins.

Operating expenses in Q2 were up 4%, driven primarily by an increase in R&D expense. R&D was $28.1 million in Q2, up 14% from Q2 last year. For the first half and last 12 months, R&D increased 19% and 27%, respectively. R&D as a percentage of sales was 13.3% compared to 12.7% in Q2 of '20. This increase was driven by new opportunities in avionics, mission computers, secured processing and radar modernization as well as continued investment in our microelectronics business.

Q2 GAAP net income and GAAP EPS were down 19% and 21% year-over-year respectively. The decrease was primarily driven by $3.3 million of direct COVID-related expenses and a $1.1 million increase in acquisition-related expenses. Adjusted income and adjusted EPS which add back these expenses were both up year-over-year.

Adjusted EBITDA for Q2 was up 6% year-over-year to $45.3 million, above the top-end of our guidance of $42 million to $44 million, driven by strong revenue and profitability. Adjusted EBITDA margins for Q2 were 21.5% compared with our guidance of 21%. COVID-related direct expenses totaling $3.3 million were added back to adjusted EBITDA in Q2, primarily related to the weekly employee testing that Mark discussed.

We also incurred expenses for payments from our employee-relief fund as well as for supplies and services required for COVID-related workforce safety protocols. We charged approximately $3.1 million of these expenses to cost of goods sold and approximately $200,000 to operating expenses.

In Q2, operating cash flow and free cash flow were $23.9 million and $10.2 million, respectively. The declines year-over-year reflected the continued investments we made this quarter in capex, R&D and COVID derisking.

Slide 12 presents Mercury's balance sheet for the last five quarters. Q2 fiscal '21 reflects the acquisition of POC. We ended Q2 with cash and cash equivalents of $109 million. Our cash balance was down $130 million from $239 million at the end of Q1. This reflected the acquisition of POC, which we financed with $150 million of cash on-hand as well as $160 million drawn from our revolving credit facility. The decrease was partially offset by the cash flow we generated in the business.

From a capital structure perspective, Mercury remains well positioned with continued flexibility and great access to capital. Our net debt at the end of the quarter was minimal at $51 million. We still have significant capacity for future R&D and capital investments to drive organic growth as well as M&A. As Mark said, our pipeline of M&A opportunities remains strong as we begin the second half of fiscal '21. We expect to continue to be active and we have substantial financial flexibility to continue to execute on the M&A portion of our strategy.

Turning to cash flow on Slide 13. Free cash flow for Q2 was $10.2 million, representing approximately 22% of adjusted EBITDA. We had approximately $7.1 million of one-time cash outflows during the quarter. These included $3.5 million in direct COVID-related cash outflows, a $2.2 million payment to Temish [Phonetic] shareholders for a tax settlement and $1.4 million of POC acquisition-related expenses. Together, these items reduced our free cash flow conversion ratio by approximately 16 points.

Cash flow from operations this quarter was $23.9 million compared to $32.1 million in Q2 '20. The decline was primarily driven by the completion of payments for the inventory we procured in Q1, as well as the timing of shipments and related billings in the quarter. This was partially offset by sources of cash across other working capital accounts.

Capital expenditures in Q2 were $13.8 million or 6.5% of revenue and were primarily related to facility build-outs in Andover, Massachusetts, Cypress, California, and Hudson, New Hampshire, along with continued investment in our microelectronics business.

I'll now turn to our financial guidance, starting with Q3, on Slide 14. Our guidance for the third quarter and the full fiscal year includes estimates for POC. The Q3 guidance also includes direct COVID-related expenses of $3 million. Our guidance for the full fiscal year does not include direct COVID-related expenses for Q4.

For Q3 fiscal '21, we currently expect total revenue in the range of $245 million to $255 million, representing growth of 18% to 23% compared to Q3 fiscal '20. At the midpoint, this guidance includes approximately $30 million of revenue attributable to the POC acquisition. Q3 GAAP net income is expected to be $15.9 million to $17.8 million or $0.29 to $0.32 per share. The year-over-year decline is a result of $6.2 million or $0.11 per share of non-operating investment income and discrete tax benefits that we had in Q3 '20 that we will not have in Q3 '21.

Additionally, our Q3 '21 guidance includes an incremental $2.6 million of COVID-related expenses. Q3 adjusted EPS is expected to be $0.59 to $0.63 per share. Adjusted EBITDA for Q3 is expected to be $52 million to $54.5 million, representing growth of 10% to 16% compared to Q3 fiscal '20. Adjusted EBITDA margins are expected to be 21.2% to 21.4% of revenue. We expect free cash flow to adjusted EBITDA conversion to reflect continued investment in expansion capex, R&D, as well as COVID-related expenses.

Turning to Slide 15, our guidance for fiscal '21 reflects the second half addition of POC on top of the full year of strong organic growth we previously anticipated. For fiscal '21, we now expect total company revenue of $925 million to $945 million. This represents 16% to 19% growth from fiscal '20 and includes two full quarters of POC, as well as high-single digit organic growth.

As we stated when we announced POC, the company had calendar year '20 revenue of approximately $120 million. We expect the business to grow at a high-single digit, low-double digit rate in calendar year '21, weighted toward the second half of the calendar year. The midpoint of our guidance for fiscal '21 assumes that POC will generate approximately $60 million of revenue for Mercury's H2, and $10.5 million of EBITDA or approximately 18% EBITDA margins.

We expect revenue from the POC business to continue to grow at a high-single digit, low-double digit rate in fiscal '22, and EBITDA margins to expand. Total GAAP net income on a consolidated basis for fiscal '21 is expected to be $69.1 million to $72.8 million or $1.24 to $1.31 per share. This is down year-over-year as a result of approximately $21 million or $0.38 per share of non-operating investment income and discrete tax benefits that we had in fiscal '20 that we will not have in fiscal ' 21.

Additionally, our fiscal '21 guidance includes approximately $8.7 million of direct COVID expenses compared to $2.6 million in fiscal '20. Adjusted EPS for fiscal '21 is expected to be in the range of $2.35 to $2.42 per share. This is up 2% to 5% compared to fiscal '20 as a result of both our organic performance as well as accretion from the POC acquisition. This increase is partially offset 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 incur in fiscal '21.

Mercury's adjusted EBITDA for fiscal '21 is expected to be in the range of $201million to $206 million, an increase of 14% to 17% from fiscal '20. Adjusted EBITDA margins are expected to be approximately 21.7% to 21.8%. Again, this includes POC, which is expected to have an approximate 30 basis point dilutive impact on our margins in fiscal '21. As I mentioned, we expect POC's EBITDA margins to expand as we integrate the business into Mercury.

We expect capital expenditures for fiscal '21 to be approximately 6% to 7% of revenue as we continue to invest in growing the business. Finally, for the year, we expect free cash flow to be approximately 30% of adjusted EBITDA. This conversion level is primarily driven by our expansion capex and COVID investments.

Turning to Slide 16. Mercury delivered solid results for Q2, driven by strong organic growth and another quarter of great execution by the team. We also announced and completed the acquisition of POC. Looking ahead to H2, we're well positioned to continue deploying capital for strategic M&A, while executing 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.

Questions and Answers:

Operator

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

Peter Skibitski -- Alembic Global Advisors -- Analyst

Hey, good evening, guys. Hey, Mark, maybe on POC, can you add any more color in terms of the potential revenue synergies that you guys envision from the deal? Can you -- does this allow you to enable to bid on larger programs or add different customer sets or -- I'm just wondering you've done deals already in that space. I'm wondering will this deal gets you that you didn't have before?

Mark Aslett -- President and Chief Executive Officer

Sure, it's a good question, Pete. And this is largely a revenue synergy deal. As you know, it does take time for those revenue synergies to actually occur in defense, it's based upon the lifecycle of the programs. But one of the things that we particularly like about the business is that broad range of programs that don't overlap with Mercury. So strong presence on the F-18, F-15, V-22, H-60. So we've got a range of programs and what we've been able to do overtime is to basically pull through some of Mercury's other capabilities. And likewise what we've been able to do and what we're seeing right now is the opportunity of Mercury taking POC's capabilities into some of our programs. In particular, we got very, very strong capabilities in the storage domain, where some of our largest programs are interested in understanding more about what they could provide and they got some very unique capabilities in machine computing where we see opportunities as well. So more opportunity, I think, for cross-selling and potentially upselling over time, Pete.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Okay. Appreciate the color. Just one follow-up, is it -- capex-wise is largely kind of in line with Mercury's capex levels on a percentage of revenue?

Mark Aslett -- President and Chief Executive Officer

You mean in POC?

Peter Skibitski -- Alembic Global Advisors -- Analyst

Yes, sorry.

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Pete, their capex levels are lower than ours, we haven't provided specific guidance. But in terms of our maintenance capex of 3% to 4%, as you know we've been investing higher than that theirs were lower than those levels.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Lower than your maintenance level.

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Yeah. Lower than the 3% to 4%.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Okay. Thanks so much, guys.

Mark Aslett -- President and Chief Executive Officer

Thank you.

Operator

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

Peter Arment -- Robert W. Baird -- Analyst

Good afternoon, Mark and Mike. Nice quarter. And Mark, you -- I think you both mentioned that M&A is back, so obviously just closed on the POC deal, but maybe you could just maybe highlight if you -- are you seeing a change in cadence in terms of just overall deal activity? Any color on that? And do you think just the flattening budget environment might accelerate things for you? Thanks.

Mark Aslett -- President and Chief Executive Officer

Sure. Thanks, Peter. So the opportunity pipeline is pretty robust right now. And I think we said the same last quarter. There is a lot of opportunities, some of which we've been developing relationships with companies for quite some time, as was the case with POC and others are processes that we're invited into. The deal themselves I think range in terms of size from deals size that we've done in the past to deals that are much larger than that.

For us, we're going to stick with the current themes that we have, those are using M&A to gain capabilities in our two core markets, C4I as well as sensor and effector mission systems, as well as to penetrate those markets over time.

So the market is very active. It's hard to tell whether it's driven by the defense budget or just where interest rates are and cost of money, but overall, it's a very, very dynamic marketplace. Mike I don't know if you want to add anything to that.

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Yeah, no, I think you hit it. The pipeline is strong, Peter, and we've been active. And as I said in my prepared remarks, even after closing POC, we still have a lot of financial flexibility and good balance sheet capacity to continue to execute on that.

Peter Arment -- Robert W. Baird -- Analyst

Appreciate the color. I'll leave it at one question. Thanks.

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Yeah. Thanks, Peter.

Operator

Thank you. And our next question will come from the line of Greg Konrad with Jefferies & Company.

Greg Konrad -- Jefferies & Company, Inc -- Analyst

Just to start, I mean, in the announcement one disclosure was -- the launch of a new family of open architecture EMS Solutions, the open architecture kind of stands out. Can you maybe talk about the opportunity and how this maybe expands the opportunity set?

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Sure. So open architectures Greg, as you know have really been a foundational part of Mercury's strategy. So as a horizontal player in the industry and a company that is investing in innovation at industry leading levels, what we seek to do is to design technology that can be rapidly reused in open-systems architectures that obviously drives affordability, drive more rapid technology upgrades and we historically done that in the processing domain and here as we've grown our business RF as well as mixed signal we're now taking those same principles and applying them into those technology areas as well. And I think that's what's really driving the growth that we're seeing across the business in both C4I, as well as in sensor modernization.

Greg Konrad -- Jefferies & Company, Inc -- Analyst

And then just one on cash, you mentioned 6% to 7% of revenue for capex this year, maintenance capex of 3%, 4% and the target conversion of 30% for this year. Can you maybe talk about how, capex trends over the next couple of years? And given maybe some of the COVID investments run-off, how you're thinking about conversion maybe getting back to closer to your target rate?

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Sure. So, yeah, in terms of this year I mentioned some of the things that we were investing in, in terms of the trusted microelectronics from capex perspective, the facility in Andover some of our facility in Cypress those are investments that we've been making over the last 12 months, and we expect those to ramp down, as we complete those build outs this fiscal year. That having been said, Greg, as you know our expansion capex tends to be tied to our acquisitions as we consolidate facilities. So going forward, our capex will really be driven by that.

But for now I do see over the next year or so, getting back down to those maintenance capex levels that we've set out through the 3%, 4%, and it's hard to tell on the COVID investments. I mean, we've made it a priority to continue to invest to protect our employees and business continuity and we're going to continue to do that as long as we think it's needed. And so, hopefully, though, as we get into fiscal '22 and beyond those costs have ramped down and once we do return to those maintenance capex levels and our COVID expenses draw down, we fully expect that we'll be at the free cash flow conversion levels the target that we set.

Greg Konrad -- Jefferies & Company, Inc -- Analyst

Thank you.

Operator

And our next question is going to come from the line of Colin Campbell with Citi.

Colin Campbell -- Citi -- Analyst

Guys, thanks for the questions. I appreciate it. Can you just talk a little about Mercury's role, as a merchant supplier in an increasingly shrinking SMID A&D asset pool? And then discuss a little bit about what you're seeing in terms of the change of administration? You discussed horizontal expansion and what new administration might mean for your ability to pursue future deals?

Mark Aslett -- President and Chief Executive Officer

Sure, Colin, it's a good question. So my belief is that the Department of Defense would benefit from a strong and robust Tier 2 industrial base and specialist companies that are able to provide capabilities more quickly and more affordably and that has the ability and the willingness to actually invest in innovation, and Mercury is certainly one of those companies, right. Our R&D level this year is 13% that is way above the 2% to 2.5% industry average.

And how that's playing out is really with respect to our growth levels. Our customers are seeking to work with companies who they can partner with, who can invest in innovation that can benefit not only them, but the DoD and that's very much what we're doing. We're investing in innovation as Mike described, we're also investing in the capital improvements inside of our infrastructure, particularly around our manufacturing assets, trusted domestic manufacturing assets that is so, so important in today's world with just where much of the technologies manufactured in the commercial world.

So I think the DoD would benefit from having a strong industrial base and Mercury is clearly one of those companies focused on providing secure and trusted processing solutions.

Colin Campbell -- Citi -- Analyst

Perfect, thanks. I'll keep it to one.

Operator

And our next question will come from the line of Michael Ciarmoli with Truist.

Michael Ciarmoli -- Truist Financial -- Analyst

Good evening, guys. Thanks for taking my question and nice results. Maybe this is -- it just mean maybe semantics, but I think the organic growth you guys are looking for 8% to 10% now calling it high-single digits I realize nothing's absolutely changed you're adding the $60 million in for POC the prior guide stays the same, but has anything changed with the organic growth environment? It sounded like with the budget in place clearly, the bookings environment improved a bit. I would have thought that maybe would have translated as well into the organic environment, but any color there?

Mark Aslett -- President and Chief Executive Officer

Yeah, it's really more just a refinement of the prior range that we gave, Mike. I think, as I said in my prepared remarks in the second quarter was really remarkably unlike the first where we did see continued impact with respect to COVID slowness, as well as the extended CR. So although, we were pleased with the bookings that maybe weren't quite as high as what we would have liked. And obviously as the year progresses that does have an impact.

So fundamentally, though, when you look at the guidance, the organic guidance for the total company and layering on top the six months of POC. We expect to deliver another year of both double digit growth in overall revenue and double digit growth in adjusted EBITDA. So it's going to be another really strong year for us.

Michael Ciarmoli -- Truist Financial -- Analyst

Got it. Just -- and sorry, just one more and a follow-up to that. The outsourcing component of your growth driver, I mean, if we looked at historic budget downturns, do you think anything changes there? I mean, if some of the larger primes get squeezed, do you think they keep more work in-house maybe as they've done historically to help absorb their overhead or do you think that that trend can continue in a down budget environment?

Mark Aslett -- President and Chief Executive Officer

Yeah. I think the trend continues Mike, particularly for what we do.

Michael Ciarmoli -- Truist Financial -- Analyst

Okay.

Mark Aslett -- President and Chief Executive Officer

Again, because, yeah, I think, there's going to be a greater focus on innovation. There's going to be a greater focus on potentially affordability and we play into both of those trends. Again, if you look at our R&D levels versus the internal divisions of our customers for similar things, we are dramatically higher. And we're leveraging that innovation across the -- many customers and many programs.

And so, when they do a make or buy purchasing decision, what they'll find is that it's far more affordable to acquire the capabilities from Mercury than it is to develop it in-house. And we, because we investment model have always got the latest generation of technology, which actually helps them. We did bidding for new business.

So, we absolutely see that the outsourcing trend is alive and well. If you look at the growth in our sub-systems, in the second quarter, which is really where with same outsourcing, it was up 75% year-over-year. And so, we saw very, very substantial growth there as certain programs are transitioning into production. And it's -- we're pretty pleased with the way in which things are going.

Michael Ciarmoli -- Truist Financial -- Analyst

Got it. Thanks a lot, guys.

Mark Aslett -- President and Chief Executive Officer

Thank you.

Operator

And our next question is going to come from the line of Kenneth Herbert with Canaccord Genuity.

Kenneth Herbert -- Canaccord Genuity -- Analyst

Hey, good afternoon, Mark and Mike. You both sounded pretty optimistic on bookings in the second half of this year. Mark, can you just provide any more detail on now that we have a budget, where do you expect to see that coming from? And maybe just how -- sort of how strong could the book-to-bill be in the second half of the year, based on the sort of the elevated bookings? It sounds like you've got good visibility on.

Mark Aslett -- President and Chief Executive Officer

Sure. So we do expect a positive book-to-bill organically for the full fiscal year. We just obviously acquired POC. So we're getting our arms around that in terms of just what their bookings might look like. But, organically, we are expecting a positive book-to-bill. In terms of where the potential growth is coming from at the year level, we see opportunities in airborne radar, EW as well as C4I, those are kind of the three, I think potential drivers of bookings growth at the year level.

Kenneth Herbert -- Canaccord Genuity -- Analyst

That's helpful. And if I could just a specific question on some of the aircraft programs. There clearly seems to be a push to extend the life and in fact restart production in the case of the F-16 and the F-15. Are those impactful programs for you as we think about sort of modernization and requirements there or how do you think about the opportunity of some of these older platforms relative to the newer systems?

Mark Aslett -- President and Chief Executive Officer

Yeah. So obviously participate in both and that's actually a kind of a nice element of our model there. We're obviously pursuing next generation systems as the government is focus on those. But as we know, the platforms changed far less often than the overall electronics inside them.

And we are clearly seeing a wave of modernization in the radar domain. Our radar business was up pretty substantially, up 75% in the second quarter year-over-year. As a result of that modernization, we're also seeing a wave of modernization in EW. And I think a lot of that is driven by the great par competition, the threat that we see coming out of the Asia-Pacific.

And then, I think as you step-back, what we have also seen is really the major reason that we moved into C4I is once we start to touch the sensors themselves, it drives a corresponding knock-on upgrade in two other processing parts of the platform themselves, more is in platform and mission management. This is obviously where the acquisition of POC fits along with the prior acquisitions that we've done in space as well around command and control intelligence processing.

So our goal quite simply is to be able to provide all of the different types of processing solutions that go on board systems that require trust and secure processing. And we believe we've got some industry-leading capabilities that are appropriate for both modernization as well as new systems.

Kenneth Herbert -- Canaccord Genuity -- Analyst

Great, thank you very much.

Operator

And our next question is going to come from the line of Seth Seifman with JP Morgan.

Seth Seifman -- JP Morgan -- Analyst

Thanks very much. Good evening, guys.

Mark Aslett -- President and Chief Executive Officer

Hi, Seth.

Seth Seifman -- JP Morgan -- Analyst

Hi. So I wanted to ask about LTAMDS, I think, you mentioned it was the most -- may be the fastest-growing program in 2Q and I'm not sure if that's part of high growth in radar that you talked about. But given where that program is in the development process and given the impact that it seems to be having on result from Raytheon which is basically a lot of cost. Is that a program that's considerably and if you could give us a sense of considerably below sort of your typical gross margins? And then sort of what the margin opportunity is on that over time and how the mix of LTAMDS versus other growth might play-out over time in terms of how the gross margin evolves?

Mark Aslett -- President and Chief Executive Officer

Yeah. I would like to talk about it from a high level and then Mike can maybe kind of relate it back to the financial model. So LTAMDS was our number 1 revenue program in the first quarter, and it was along with three other radar programs, two ground radar programs and an airborne radar program. So you clearly are seeing the way the radar modernization. We're seeing a similar theme at the year level where the radar and EW are probably going to be the major drivers of growth.

The LTAMDS program as you know is something that we've been investing our own internally funded R&D on for several years now and it's been a substantial driver of our internal R&D funding. Raytheon has clearly gotten the benefit of that. The program itself, we're in the very early stages, right? We're delivering initial technologies and capability associated with the first six systems. But Raytheon over time believes that upwards of 250 patriot radars could be subject to these upgrades.

And I think, again as we've talked about in the past, this is a substantial opportunity for Mercury. So, the program along with some of the other programs that we mentioned in both Q2 as well as for the full fiscal year are in the early phases. And as a result of that and margin profile is typically lower and when the programs themselves go into full rate production. So little bit dilutive overall as well combined with the level of internally funded R&D.

I don't know, if you want to add anything to that Mike?

Michael Ruppert -- Executive Vice President and Chief Financial Officer

I think you hit it. I mean, Seth, it's like a typical program and it is one of our biggest -- it is our biggest in Q2 and over the first half of the year it's our biggest program and it is lower margins, like a lot of our bigger programs at the beginning, as they ramp up, as Mark said, and then we have higher margins as they go in the full-rate production. And from an R&D perspective, from Mercury's perspective, a lot of our R&D in that program has been over the last couple of years and a lot of that is behind us, that we were investing going all the way back to three, four years.

Seth Seifman -- JP Morgan -- Analyst

Great, thanks very much.

Operator

And our next question is going to come from the line of Jonathan Ho with William Blair & Company.

Jonathan Ho -- William Blair & Company -- Analyst

Hi, good afternoon. Just one question for me, when it comes to your trusted and cyber programs, you referenced that earlier in the discussion, can talk about how that's maybe playing out in some of the programs and potential margin impact as well? Thanks.

Mark Aslett -- President and Chief Executive Officer

Yeah, so, Jonathan, unfortunately, I am not going to be able to link it with our capabilities to specific programs just given the nature of what we do. But yeah, we have invested substantially, literally and over the last 10 years now on our specialized processing capabilities. And we believe that we're actually on our fourth generation of it. We believe we got industry-leading capabilities there, that spans the IP into next-generation trusted microelectronics, all the way up through various system-level capabilities. And that type of processing, we believe is crossing the chasm and it's driving significant growth inside of the business. It's just unfortunate can't tell you specifically the areas or the programs just due to the nature of it.

Jonathan Ho -- William Blair & Company -- Analyst

Understood. Thank you.

Operator

Thank you. And our next question will come from the line of Noah Poponak with William -- Goldman Sachs.

Noah Poponak -- Goldman Sachs -- Analyst

Hey. Good evening, guys.

Mark Aslett -- President and Chief Executive Officer

Hi, Noah.

Noah Poponak -- Goldman Sachs -- Analyst

Are you saying LTAMDS is already your single largest program?

Mark Aslett -- President and Chief Executive Officer

LTAMDS is the largest program in Q2. Yeah, as you know it can jump around quarter-to-quarter and period-to-period, but yeah, it's the first -- it's the largest in Q2 and we expect it to be the second-largest this fiscal year.

Noah Poponak -- Goldman Sachs -- Analyst

Could you size it in the fiscal year?

Mark Aslett -- President and Chief Executive Officer

I don't think we've -- well, it's 5% of the total in the second quarter and it's round-about that, maybe a little bit less at the year level.

Noah Poponak -- Goldman Sachs -- Analyst

I mean how many multiples of the current run rate does LTAMDS become for you when the program is at full-rate production?

Mark Aslett -- President and Chief Executive Officer

Well, I guess it depends on how quickly that full-rate production occurs. But what we are delivering right now is technologies associated with the initial proto-typical systems that Raytheon is on the contract for. After that, we'll see what happens in terms of the production awards. But the thing that's interesting to me that LTAMDS is just the evolution of the program itself, right. You may remember stated out as a typical contracting program and along the way transitioned to an OTA just based upon the capabilities and the needs, the urgent need of it and it's moved very, very rapidly.

So it's probably the program that is moved the fastest into our grip that I can remember in recent history. So it's an important program based upon new size. The potential over the long-term growth for Mercury, growth for Raytheon as well as a really important set of capabilities to deal with the emerging threats that we are facing as a nation.

Noah Poponak -- Goldman Sachs -- Analyst

Yeah. Just in that it was moving that quickly, I guess, so that's interesting. If I'm just staring at the multi-year model here, you've grown -- the company has grown total revenue at least 20% five years in a row now, 21% if you're -- if you end up a little bit above the high end, you'll hit that 20%. '22 POC is going to lap in -- is going to be inorganic for half of the year. So '22 if you do one more acquisition, '22 is going to be 20%. If I'm staring at how much balance sheet firepower you have and combining that with your organic target, I mean, is it reasonable at this point for me to just assume the company grows total revenue 20% through the middle of the decade?

Mark Aslett -- President and Chief Executive Officer

So it's a great question, right. You've probably seen our slide in our Investor Day deck, which the model as we're seeking to generate high margins expressed in that model is greater than 20%. We're looking to grow the business organically at high-single digits to low-double digits, averaging roughly 10% over time. And then to layer on top an additional 10% through M&A, we've done very successfully as you said, over the last five years. And we think that we can continue to deliver that high-single digit, low-double digits organically over time as we kind of looking out based upon what we see right now. And as we mentioned, the M&A environment was extremely robust, and I think the balance sheet's in great shape. So...

Noah Poponak -- Goldman Sachs -- Analyst

Yeah.

Michael Ruppert -- Executive Vice President and Chief Financial Officer

We think that we can continue to execute against the model, it generating so much value to shareholders, as we look forward now.

Noah Poponak -- Goldman Sachs -- Analyst

I guess, those were just the numbers. Okay. Mike, if I take your -- if I go into the range for the 3Q guidance components you gave and then the full-year guidance components you gave, the 3Q margin needs to be I think down a little bit sequentially and then the 4Q margin to be up from that, it looks like about 250 basis points. Is that accurate and why is there so much gyration, I guess, in that through the back half of the year?

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Yeah. So, Noah, let me make sure I understand your question. Let me answer at the annual level just to give you where we're coming out on margins and EBITDA margins from the perspective of our guidance 21.7%, 21.8% that does include POC, which is dilutive. So it's about 30 basis points dilutive to the margin. So if you back that out you are at that 22.1% where our guidance for EBITDA was last quarter. So we're continuing to expect that for the year, that does imply an EBITDA margin in Q4, that is higher. We expect to have higher revenue if we look at the quarterly revenue that that implies for Q4, which is going to give us some operating leverage, give us -- I think gross margins would be slightly higher in Q4. Pre-COVID expense is going to be where in the first half of the year. So that's what's driving Q4 which is driving the annual EBITDA guidance -- margin guidance.

Noah Poponak -- Goldman Sachs -- Analyst

Okay, that's helpful. And last one, can you tell us what POC added to the total company backlog?

Mark Aslett -- President and Chief Executive Officer

Yes, we haven't broken that out, but you can look into it. Noah, our book-to-bill for the quarter was 1. So our backlog quarter-over-quarter on an organic basis was flat.

Noah Poponak -- Goldman Sachs -- Analyst

Right. Okay, got it. Okay, thanks very much.

Mark Aslett -- President and Chief Executive Officer

Thanks, Noah.

Operator

[Operator Instructions] And our next question is a follow-up from the line of Peter Skibitski with Alembic Global.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Yeah, Mark, kind of a tough question to answer, I think, but there has been a lot of talk about DoD potentially kind of moving large buckets of money around in the fiscal year '22 and beyond budgets, maybe migrate money out of the army toward, maybe, airforce and maybe build more ships. I know it's tough, but from a gut level, do you get a sense of how that could impact Mercury pro or con, or is it a push? Do you have any thoughts there, if we do you see that money move around?

Mark Aslett -- President and Chief Executive Officer

Yeah. So we are -- so the majority of our business is tied to airborne and naval, but we are seeing a lot of growth in ground. But the ground growth that we're seeing is not tied to full structure, number of some ways or anything like that, it's really hard -- it's really linked to ground radar modernization right LTAMDS is a great example and there's a couple of others that we're involved with. So I think it's probably true that the army typically ends up being a bill payer, and during different cycles and this could be the same.

But those mullings are likely going to move into both the naval and the airborne domain, just given the great power competition and the focus that we have on the Asia-Pacific region, as well as other high-end adversaries including Russia. So we're not -- we don't have a big exposure to ground I would note as I say radar modernizations, which we think look pretty good and the other parts of the business look pretty solid.

Peter Skibitski -- Alembic Global Advisors -- Analyst

Okay. Great, thank you.

Mark Aslett -- President and Chief Executive Officer

Thanks, Pete.

Operator

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

Mark Aslett -- President and Chief Executive Officer

Okay, well, thank you very much everyone for listening in. Stay safe, we look forward speaking to you next quarter. Thank you. Bye.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Michael Ruppert -- Executive Vice President and Chief Financial Officer

Mark Aslett -- President and Chief Executive Officer

Peter Skibitski -- Alembic Global Advisors -- Analyst

Peter Arment -- Robert W. Baird -- Analyst

Greg Konrad -- Jefferies & Company, Inc -- Analyst

Colin Campbell -- Citi -- Analyst

Michael Ciarmoli -- Truist Financial -- Analyst

Kenneth Herbert -- Canaccord Genuity -- Analyst

Seth Seifman -- JP Morgan -- Analyst

Jonathan Ho -- William Blair & Company -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

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