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 two 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 two, 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 three.

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 continue 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 2021. We continue to invest for the future in ouor 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 volume. Although the risk associated with COVID are increasing. We're positive about the outlook and raising our full year fiscal 2021 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 a $1 billion of financial capacity, we're well-positioned to pursue our pipeline of opportunities. Turning to our Q1 financial highlights on slide four. Our results continues to reflect the three fundamental trends that we discussed in the past. Supply chain delayering by the government and the primes. The prime, flight to quality suppliers and the shift to outsourcing by our customers to the subsystem level. The first trend is the government increased focus on creating a domestic supply chain to secure and trust advanced electronics designed and built in…

Thank you, Mark. And good afternoon again, everyone. I'd like to start by noting that Mark was recently honored by Glassdoor as number one among the 25 highest rated CEOs during COVID-19. Mark 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. In Q1, we continue 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 positioned as well to protect our employees and adapt to future disruptions associated with COVID. Given the investments that we've made to de risk the business, as well as Mercury's strong performance in Q1, we're increasing the midpoints of our full year fiscal2021 guidance for both revenue and adjusted EBITDA. Turning out our Q1 results on slide nine. Mercury started fiscal 2021 with a solid first quarter, total revenue net income adjusted EBIT, EPS and adjusted EPS exceeded our Q1 guidance. We also delivered solid bookings the concluded the quarter with near record backlog. Q1 bookings were 201 million driven primarily by the radar and CTI markets. Bookings were down 7% compared to a strong Q1, 2020 where we had a book-to-bill of 1.22 in the last 12 months, bookings are up 15%. Our booked to bill for Q1 was 0.98, following a 1.8 booked a bill in Q4 20. For the last 12 months our book-to-bill was 1.14…

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

Hi, Mark and Mike, how are you? Good. Guys, a 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 be able to close deals in this environment. Any other kind of dynamic surrounding that in terms of duties, pace of contracting slowing down or timing on big programs. Just wanted to get me more color on that?

So the, the bookings decrease that we saw in the first quarter, I would say is kind of related to two things. The first is that we did see some COVID-related impact with the ability or the speed at which our customers could move that did impact certain bookings towards the end of the quarter. Probably the biggest impact is that we did have a large or a customer had a large foreign military sale that basically moved to next fiscal year. So our fiscal year 2022. 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're looking 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 from me, just to get more context with the continuing resolution. So are you guys, I guess, two parts there. 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 having another kind of flattish bookings quarter until we get the budget, and that may be a pretty heavy back half of the year once we get the budget bookings wise?

Yes. So right now, as you see, we don't see any potential risk or major risks associated with Q2. We've kind of 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.

Okay. Thanks very much.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Seth Seifman with JP Morgan.

Thanks very much and good afternoon, good evening. I guess maybe just a quick question about M&A in the landscape. I mean, you mentioned that it's fairly robust. So I guess first, do you find in the 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 in 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 focused on C2I building up 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 three major areas that we're continuing to look at deals. The market is 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 is resulted in our M&A deals going as well as that 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. It's seven 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 that 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 like to add anything up 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, that's how we've created value. So, we're continuing to go see the sights and meet the people, and we'll continue to do that.

Great. Thanks. 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've talked about 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 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 kind of pause it. So as you know, we entered into the microelectronics space when we did the acquisition, certain assets for Microsemi. So we acquired the microelectronics business that was targeting the defense sector. We've been very successful growing our business, as well as improving the profitability 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 microelectronic capabilities that is taking advantage of all of the innovation that's occurring in the high tech world, in particular in the commercial new silicon space. And that's where we have invested heavily in the new file capability that we've been standing up in Phoenix. And probably the 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 future focus on trusted microelectronics which is we said, is a longer term opportunity. But it's the number one 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, or the next phase of the SHIP program.

Okay. Thank you very much.

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

Good evening, Mark and Mike. Nice results. Hey, 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 two for that team or Intel team. How does that translate for you? Is it over multi years? Or is it weighted in a shorter timeline?

Yes. Sorry, Peter. It's going to play out over a multi year period. I'm not going to get into the specifics of the amounts, because we're still in the, I guess the early phases of that trusted microelectronics capability that withstanding up. But it is an important capability. It is an important program. And, yes, I think it's tied directly to the needs of the DoD. We did have a -- actually our largest design win this past quarter was in the EW space utilizing next generation trusted microelectronics capability. So that was an estimated lifetime value of over $250 million. So yes, 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?

And we haven't specifically, and we will on more than one team on the SHIP's 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 qualities, and to combine them together into a heterogeneous piece of silicon for defense use. And I think both or multiple of 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 challenge that we have enough 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 I'm just squeezing one quick more on. 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 timeframe. How would that if at all impact you, thinking about year 2021 results?

So, we think that we take that into account right now, Peter, from what we can see. Typically, under a CR, you kind of see three things going on. There is fewer new programs starts. You've got -- they 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 is 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.

Appreciate the color. Thanks, Mark.

Yes. Thank you, Peter.

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

Hey, good evening, Mark and Mike. Thanks for taking the questions. 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 can 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 fabulous or a company that owns the fabrication facility, right. So Intel's 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, is we have seen that, there's really two 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, you know, bringing or getting access to the silicon on one hand, is very important. And then 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 microelectronic strategy, that I think the DOJ is focused on Michael.

Got it. That's helpful. And then thinking of that context, I mean, 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 the fun, 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 multi-year period, which is generating high levels of organic growth that has been 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 three market areas that I described previously. And so those are continue to build up our capabilities and 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 on board military platforms, which can be grouped into two major areas. One is C2I, its a command and control type processing applications, which is a major thrust for the DoD under an initiative such as job [ph] C2. 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 in design wins and allowing us to grow business as high single digit, low double digits, which were then supplementing with M&A and full integration.

Understood. Thanks for taking the questions, Mark.

Thank you, Michael.

Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Hey, good evening, Mark and Mike. Hope you're well. Mark, I guess just to start off, you mentioned SHIP. I didn't think it would be such a popular contract to get through 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 sequesteration, if that's what you're specifically referring to Sheila. Yes, we've got much bigger backlog than what we had back then. We've got far more programs than what we had back in fiscal 2013. And as I talked about in my prepared remarks, no one specific program can serve more than 4% of our revenues here in the short term, or 5% over the next five years. So I think we've got much greater program diversification as well. So -- and I think we are obviously participating in more parts of the market is the M&A strategy, has evolved 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. If 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 is we've moved into integrated sub systems, it’s a record levels. And so, not only do we have good visibility to believe in the near term, but our non 12 month backlog was 320 million -- 310 million, which is up significantly year-over-year and positions as 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?

So there's 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?

No, not really. Again, we don't typically deal with the House and the Senate Armed Services Committee, or just 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 a large part of the market and growing. So I can't think of anything specifically off the top of my head, Sheila.

No worries. Thank you. And congratulations on your Glassdoor rating.

Thank you.

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

Hey, thank you very much. Sorry about the delay there. So, 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. We're not seeing a big bump in you 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 two to be at 500, 600 basis points for some. So where did that leave you guys, when you talk about maintaining above average growth, but they also talk about 10%. So just generally speaking even with the book-to-bill maybe falling a little bit, but slightly above one times. We still feel good about 10% growth organically, almost time through a budget cycle?

We do right now, Jon. Yes. 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 at an 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 2020. And now we're seeing the benefit of that in fiscal year 2021. And obviously our design win activity over the past several years has been very, very high. So outsourcing is clearly happening. We're continue to see the flight to quality suppliers, I think that initially was in the manufacturing domain, where post sequesteration, all 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 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. And we're seeing that in the services here in the U.S. in particular the army has 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, I think that 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 position Jon and our ability to continue to do what we've been doing over the past five or six years.

Appreciate that. And there's a brief follow up on the international peace. Please give us a sense, I mean, it feels like a lot of this outsourcing, lot of these mega trends are still in relatively early innings domestically have even thrown the first pitch yet internationally to start extend the metaphor?

Yes. So the answer is yes. So airbus defense has become a significant customer of ours internationally. And they, I think, really embraced, yes, the delayering and the outsourcing. And as you may remember, we acquired business over in Geneva called CES. That businesses 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.

Thank you.

Thanks, Jon.

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

Hi, good evening. Hey, Mike, I wonder if I -- Mike. I wonder 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 2021. 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?

Hey, Mike, if I could 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 three different facilities and manufacturing facilities, our largest of which are is in Phoenix. And at the time, we saw positive positivity rates in 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 seven of our different sites. As we did that we saw some impacts on the production. And so, during the first quarter we made a very conscious decision, given that we knew that we were going to roll out testing elsewhere, to basically to invest in inventory, to try and de risk the business both operationally and financially, which I think we did very successfully. For me, having rolled out testing upscale, it became a really a foundational and 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 I'm 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 seven locations, which is not insignificant. So Mike over to you.

Sure. So and then, just on the timing, because I think Mark did a good job of laying out the rationale for why we built it up. And you can see on the -- where shows up on 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 over 2.7 in Q4, they came down to 2.3 this quarter. And is worth thinking about it, we expect turns to return to by the end of fiscal 2021 to the levels that we saw at the end of fiscal 2020 when we're 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 de-risk 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 with 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 rolling out the testing, as well as potential supply chain disruption of our supply chain as well. So those were the, I guess the two areas that we focusing on.

That's great. And, Mark, thanks for the detail. 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 other areas that 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 impacts 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 build, we're still 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 can.

Great. Thank you very much.

Yes. Thank you.

Thank you. And our next question comes from the line of Jonathan Ho with William Blair.

Hi, good afternoon. Just wanted to maybe start out with the CapEx delays, and particularly around COVID. This 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 delays that we saw was in building up the new facility for trusted microelectronics. And the revenue for that is really -- there's not much in this fiscal year ramps in future years. We have seen that begin to pick up. I think we had issues with getting equipment delivered, and then you need to do the turn up and test because our suppliers won'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.

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 it was just a normal timing shift? Thank you.

Yes. It was significant. It was over $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 re-engineer 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 a really a one-off case. It's not something that we see as being a trend.

Thank you.

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

Hey. Good evening, guys. Thanks for taking the questions. Maybe, Mike and Mark, I think he 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 to COVID costs and tying that in with R&D, which looked to be a multi-year 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? And we're certainly seeing it in your margins, but just wanted to get more color there, just as the gross margins are at a multi-year 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 2021 to look a lot like fiscal 2020. 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 2020. 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 were also be dilutive. But when you take those into account, I think that the business in fiscal 2021 is going to have the same level of profitability that we saw in fiscal 2020, which was also up from fiscal 2019 when we're at 44%. So, we think the business is and the profitability still strong. We are seeing a lot of new programs 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 businesses 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 that 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 -- would seem unlikely that these roll off as we go into winter here 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 one quarter out, because no one knows what's going to happen over the rest of the year in terms of these expenses. But as Mark discussed, lot of that costs 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.

Got it. Perfect. Thanks, guys.

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

Hey, guys, good evening. 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 the fence slowing, you come into this quarter, your book-to-bill just a smidge below one. How can you allay that?

Sure. So as we said in the prepared remarks, we do expect a positive book-to-bill for the year. 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 went in prior years. The program is kind of moving into initial production, which we talked about. We're seeing a substantial increase in E-2D Hawkeye, where we are writing various capabilities. We’re seeing significant growth in C2I in various rugged. So the capabilities that came to us through one of the acquisition. So, we've actually got a pretty good line of sight right now from what we can see on being able to deliver a positive book-to-bill on.

And when you say positive, you mean north of one. That's what you mean?

Yes.

Yes. Okay. Yeah. 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, Alton 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 clients. Right, in terms that just the investment. And so, we're obviously on Altons and that's potentially the large single program we want in our history. And it's going to be in our top-5 programs in fiscal year at '21 from the revenue perspective and not moved extremely quite play. This quarter, the AMCs program which I mentioned which is not 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 is the government or the clients are seeking to deal with more non-traditional contract as of which we all won. 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 it'll be a look at a future budget environment, I think is 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 non-traditional contracting.

Got it, alright. I think that's it, yes thanks a lot, yes.

Okay, thanks Ron.

Thank you. [Operator Instructions] Your next question comes from the line of Noah Poponak with Goldman Sachs.

Hi, good evening.

Hello there, Noah.

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

Yes well, you'll be fine.

Okay, awesome. Mark, just a quick follow-up to Ron's question there. Are you saying you expect book-to-bill over one and are you also saying you expect the absolute bookings dollars to grow year-over-year in 2021 or is it just performing the book-to-bill other one? And I apologize if that's still here but do differ?

Yes, it's still over one.

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 slippages 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 five years every six months. But as we see it right now, the answer to that is yes. And the biggest driver that as we talked about in the past is really two things. One is, we've had a significant increase in new design win activity over the course of the last five years on an LTM basis. The estimated life time value of design wins is $2 billion. So, pretty significant increase that we've seen over time. The second, as we talked about is that we've been actually pretty successful capturing more content in seeing increased outsourced 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 won at the part more at the module level. And on an LTM basis, subsystems revenue were up 46% and it was out 57% in the first quarter. So, more programs, more content on those programs is probably the largest driver of our ability to continue to with 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 a below and no doubt to be on low-double digits. So, some of that bookings headwind interfering with the second quarter or is there just some conservatives in 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 showing up with those numbers?

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

Yes. And I would just say it's timing, Noah. It's Q2 if you're comparing with Q2 last year, high gross margins it's 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, you know kind of H1, H2, you look at the midpoint of our Q2 guidance. You'll see it's very similar to what it's been previous year's 53% of our revenue 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 expected to look a lot like fiscal '20 and fiscal '20 R&D as a percentage of sales were 12.4%. We'd 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 saw what it did in Q1. It was 13.3% compared to 12.3% last year. So, we do see opportunities we're going to continue to invest or see how the second half plays out. But again, probably a little higher than last year.

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

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

Okay, thanks so much.

Thank you. 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.