Sheila Kahyaoglu: So much to digest in your script, and I appreciate all that you’ve put together. I just maybe wanted to step back from all this and I hate the sort of question, but what do you think went wrong? Was it just simply acquisitions we integrated and the company grew too quickly, not caring for margins? Do you think this is more structural or a process-oriented problem? And how do you think about the processes you’ll fix if it is that over the next 12 months?
Bill Ballhaus: Yes. I think big picture, the company has scaled up and inorganically moved into areas that I think are very attractive areas to be in, but requires processes that are mature in areas like program management, system engineering, et cetera. And I think we’re seeing the growing pains associated with that on some of these development programs. So to answer your question directly, I don’t think it’s so much structural. I think it’s more process-oriented. And these aren’t challenges that companies or leaders that have taken on development programs haven’t seen before. They’re very fundamental process type issues. So we have a team in place that is squarely focused on these development programs, not only on executing the ones that we have in-house, but maturing our processes so that we can execute more effectively on development programs in the future.
So I would characterize it more as a process maturity challenge that we are laser-focused on and already have maturing processes underway than anything that’s more structural in nature.
Sheila Kahyaoglu: And I guess just on the processes over the next few months, how will you change it? How do you make the systems more mature, so there’s checks? And have you found anything wrong with the contract structures on the development side that might need to be changed?
Bill Ballhaus: Yes. I think on the process maturity, that’s a journey. But like I said, it’s already well underway. So when it comes to reviewing our development programs. We’re doing it with a higher frequency right now, I would say, with more rigor because of the people that we have involved in those processes. And we’re getting very granular when it comes to things like burning down our unbilled in our inventory and literally looking at it program by program every week. So hopefully, that gives you a sense of some of the maturing in our processes.
Dave Farnsworth: Sheila, I would add to that when you talk about the structure of some of the contracts that we’ve had in the past firm fixed price contracts with billing at delivery, and we’ve been working with our customer set to ensure that we have milestones that are better aligned with how we’re spending money on these programs. So we’re working through that. And at the same time, we’re working with our customers to ensure we have really solid alignment in our contracts around the scope of what’s being performed.
Operator: Your next question comes from the line of [Jan Frans Anglebrooke] with Baird.
Unidentified Analyst: I’m on for Peter today. So I just had a question. In the prior release, we heard about 12 development programs that was causing most of the issues and 4 of those programs related to a single technology, but today’s release called out 20 challenged program. So could you just call out, if you can, would you review sort of identified. Was this 8 additional development programs or were there existing programs? Just sort of — just help me bridge and go from 12 to 20.
Bill Ballhaus: Yes. So if we put it in the context of the impacts in the fourth quarter, where we saw a difference from guidance to our actual EBITDA of about $33 million. About $29 million of that was incremental program costs that we saw. And I’d say about 1/4 of that were tied to the programs that were discussed in the third quarter call. The balance of that was tied to about an equivalent number of programs that were separate from the programs that were discussed last quarter. And so I think that gives you a sense of the programs last quarter as they’re working their way through development stabilizing and then also the rigor of the review that we put in place across the rest of our portfolio and all of the other development programs in our portfolio. I think I would characterize it that way. Dave, anything to add.
Dave Farnsworth: No, I agree, Bill. And so the 20 programs includes — the approximately 20 includes the 12 from the previous quarter. And what I would say is that of those initial ones, where Bill said about 1/3 of the growth that it’s really driven by a very small subset of those original programs. The vast majority of them problems were resolved. The programs are on track, and there was no further degradation in the program costs.
Operator: Your next question again comes from the line of Seth Seifman with JPMorgan.
Seth Seifman: I just wanted to follow up quickly on the revenue guide. And so if we look at the midpoint, not really looking for growth in 2024 and looking for sales to be down, I guess, in the first quarter year-on-year. And I guess if you could talk a little bit about what it is in the portfolio that’s preventing you from growing this year? I mean I understand there are execution problems on certain challenges — on certain programs. But from a growth perspective, we’re seeing your customers tend to be the major contractors, and we can all see revenue inflecting higher for those companies, their costs or your revenues. Why would Mercury not be participating in some of the growth we’re seeing across the industry, especially when the limited growth we saw in Q4 of this year was somewhat driven, I guess, by negative EACs, which I assume won’t be repeating.
Bill Ballhaus: Yes. Yes, I appreciate the question. And I will say that one of the benefits of this increase in mix that we have of development programs, we’ve talked about the fact that historically, it’s been in the range of 80-20 and more recently, we shifted to 60-40, 40% development programs. I think implicit in that, our expectations of future growth tied to completing those development programs and then turning on the production programs that go with those that become long-running, predictable and highly profitable. To get there, we have to execute on and finalize the development programs. And that’s really what’s in front of us in ’24. And more effectively, we’re able to get through the development and turn on production, the sooner we’ll be able to see the inflection point in the benefit of those long-run production programs in our organic growth rate.
So I think we’re taking a fairly balanced view of our execution in FY ’24 across these development programs and the transition to turning on the production program.
Dave Farnsworth: And I would add, as Bill said, we’re focusing our resources on these challenged programs and getting them done because the sooner we get those done, the sooner we turn on those production awards, which is going to help us across the board from a growth standpoint, from inventory, from working capital in general. And those programs where we’re focusing resources are programs where incrementally, the revenue was not that great in the beginning part of the year, but it will turn into something much larger as we go forward.
