Good day and thank you for standing by. Welcome to the Luna Innovations Incorporated Fourth Quarter 2021 Conference Call. I would now like to hand the conference over to your speaker today, Allison Woody, Director of Administration. Please go ahead..

Thank you. Good morning and thank you for joining us today. This morning, we issued our fourth quarter and full year 2021 earnings press release. In addition, we also issued two additional press releases, one announcing the completion of the divestiture of Luna Labs and the other announcing the acquisition of LIOS Sensing.

In addition, as usual, we posted to the Investor Relations section of our website a presentation with supplemental information for the quarter. If you do not have a copy of the release or the supplemental materials, please check our website at lunainc.com. We will also post a replay of this call to our website.

Some of our comments and discussions today are based on non-GAAP measures. These adjusted numbers exclude the effect of certain non-cash expenses and other items. The adjusted results are a supplement to the GAAP financial statements.

Luna believes the presentation and exclusion of these items is useful to focus on what we deem to be a more reliable indicator of ongoing operating performance.

Before we proceed with our presentation today, let us remind you that statements made on this conference call as well as in our public filings, releases and websites, which are not historical facts, maybe forward-looking statements that involve risks and uncertainties and are subject to changes at any time, including, but not limited to, statements about our expectations regarding future operating results or the ongoing prospects of the company.

Actual results may differ materially as a result of a variety of factors. More complete information regarding forward-looking statements, risks and uncertainties are available in the company’s SEC filings, which can be found on the SEC website and our website.

We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments, except as required by law.

After our prepared remarks, Scott Graeff, our President and Chief Executive Officer; Gene Nestro, our Chief Financial Officer; and Brian Soller, our Chief Operating Officer, will be available to take your questions. And at this time, I’d like to turn the call over to Scott..

first, the completed deployments of all systems for Lockheed’s first order of our newest portable OVR product. Those were all completed in the first half of the year and our customer has indicated they are extremely happy with the performance; and second, the integration of the RIO laser facility in our North American operations.

We now have our polarization control and RIO laser product lines being overseen by the same general manager as part of that organization redesign that I mentioned.

And in 2022, comms test teams will be focused on leveraging the laser production facility in Santa Clara for additional customer shipments throughout Luna’s applications and businesses; advancing our progress with larger blanket type orders for polarization while increasing orders in the medical arena; focusing on delivering continued success in aerospace with our 6,200 platform, silicon photonics and high-speed component products; and of course, execution, execution, execution.

Before I turn the call over to Gene, I want to cover our outlook for 2022 at a high level. As always, we spent considerable time planning and budgeting for 2022.

This year, the third year of this pandemic is especially challenging as we try to gauge the macro environmental puts and takes that have an effect on our customer and as a result, on Luna’s business.

And while the exact numbers are particularly challenging to predict for 2022, we, as an organization, remained very excited about where we’re heading and the vast number of opportunities that lie in front of us. Let me make that clear again.

We, as an organization, remained very excited about where we’re heading and the opportunities that lie in front of us. We’re also providing quarterly guidance on the top line for at least the first quarter. To help those of you building financial models, this may help to provide you with some insight into quarterly cadence throughout 2022.

Today, we’re issuing our 2022 outlook range, which includes the LIOS business as of mid-March. Those ranges are total revenues of $109 million to $115 million, which represents a 25% to 31% growth, adjusted EBITDA of $10 million to $12 million, representing a 32% to 58% growth and first quarter 2022 revenue outlook of $20 million to $22 million.

As I’ve underscored several times today, Luna is a different organization than it was even a year ago. Therefore, some of the cadence as well as prior historical financial trends that you’re used to might be slightly different going forward. Gene will go into the details, but I want to highlight a couple of our assumptions here.

First, that we still believe the delivery of our top and bottom line financial performance will be greater as we move from Q1 to Q4 throughout the year. We’ve provided the top line for the first quarter as a helpful guide for you in understanding that cadence. Second, our outlook is tied to the best information that we have as of this moment.

I’ve always told you that we gain additional insight in the customer demands, supply chain effects, and other macro environmental factors. We will incorporate those into our assumptions and update you accordingly. You saw us provide that added level of insight during our Q3 call last year.

In summary, 2021, as the second year of this pandemic, has been another challenging year for all of us, Luna included. I know that Luna’s clarity about its vision and purpose have served us well, and we’ve navigated the uncertainty and positioned ourselves to capitalize on future opportunities.

I am grateful too and proud of the Luna team for their focus and work and remind them that we need to maintain focus and must, importantly, execute against our goals. The expectations of myself and my executive team are very high as we drive the organization to deliver against our goals. And now I’ll hand the call over to Gene..

integration and deal-related costs, which were $249,000 in Q4 2021 versus $2.2 million in Q4 2020; amortization of intangibles, which were $760,000 in Q4 2021 versus $478,000 in Q4 2020; and a full quarter of OptaSense operating expenses in Q4 2021.

Our operating profit increased to $1 million in Q4 2021 compared to a loss of $600,000 in Q4 last year. As a reminder, since OptaSense was acquired in December 2020, Q4 2020 had expenses in that quarter without the benefit of associated revenue due to the holidays at the end of December.

Net income from continuing operations for Q4 2021 was $1.5 million or $0.04 on a per share basis compared to a net loss from continuing operations of $945,000 for Q4 2020. Income tax expense for Q4 2021 was primarily impacted by equity compensation, R&D tax credits and discontinued operations.

For the full year 2021, we recorded a tax benefit of $2 million due to our pretax loss and the deductions related to equity compensation. A key metric reflecting our underlying operations is adjusted EBITDA.

As Scott mentioned, adjusted EBITDA increased to $3.1 million for the fourth quarter 2021, a slight increase compared to Q4 2020 of approximately $3 million. Let me move now to the balance sheet. We ended the quarter and year with $17.1 million of cash and cash equivalents compared to $15.4 million at the end of 2020.

Our working capital was $49.8 million on December 31 compared to $45.4 million on December 31, 2020. Our working capital increased slightly due to the full year impact of the OptaSense acquisition. Our total debt outstanding is $15.8 million as of December 31, 2021. This is comprised of $8.3 million in term debt and $7.5 million draw on our revolver.

At year-end, we had access to an additional $7.5 million in the revolving credit facility. As a reminder, subsequent to year-end, we utilized our balance sheet, both cash and debt to acquire LIOS Sensing.

Overall, and as Scott mentioned, this was not the financial performance we originally anticipated, but it is solid performance against the revised outlook we provided after moving Luna Labs to disc ops. And I’m pleased that we achieved the top end of revenue and adjusted EBITDA ranges. Let me now address our outlook for 2022.

Note that our 2022 outlook takes into consideration the Luna Labs divestiture as well as the acquisition of LIOS Sensing, which will be a stub period for the quarter given the timing of the close. First, we anticipate 2022 total revenues to be in the range of $109 million to $115 million, which represents a 25% to 31% growth compared to fiscal 2021.

Second, we anticipate 2022 adjusted EBITDA to be in the range of $10 million to $12 million, which represents 32% to 58% growth compared to 2021. And finally, and new for this quarter, we are providing a revenue outlook for the first quarter.

While we are not promising that we will continue to do so, we felt it was important to provide you with transparency into the first quarter of the year. Our expectations for revenue in Q1 of 2022 are $20 million to $22 million.

We are assuming that the COVID impact for the first half of 2022 is similar to the last half of 2021 and then improves in the second half of 2022 and that our supply chain gradually improves throughout 2022. With that, I will turn the call back over to Scott..

fiber, 5G, lightweighting, electric vehicles and structural safety monitoring to mention a few.

These represent incredible opportunities for us, and the strategic moves and investments we’ve made during the past 24 months have helped us to create a strong contemporary and scalable foundation and a team to oversee it to take full advantage of opportunities as they arise.

This foundation will allow us to drive both organic and acquisitive growth for the longer term. We have a superior product portfolio with products that are needed by companies, regardless of events like a pandemic. We continue to believe in our potential and hope that you do as well.

Thank you to all our investors, partners and customers for your patience this year as we work through to develop our organization into the strong company it is today. And thank you, as always, to the Luna team for your accomplishments and for continuing to be supportive of each other through this pandemic.

Brian, Gene and I would be happy to take any questions at this time. So Mary, I’d like to now open it up for Q&A..

Thank you. Your first question comes from the line of Barry Sine from Spartan Capital. Your line is open. Hello, Barry Sine, your line is now open..

Hi. Can you hear me? I think I was muted..

Yes. Hi, Barry..

Sorry about that. Hi, good morning, folks. A couple of questions, if you don’t mind. First of all, on the revenue guidance for 2022, I think you said $109 million to $115 million. As you know, a number of companies, including yours, have been impacted by global supply chain issues. And that really has two aspects to it.

First of all, your own challenges getting parts, and I think you had the ease of issue last year, for example, but also your customers’ challenges where maybe they couldn’t take an order because of their supply chain issues.

How much confidence do you have on that guidance in terms of supply chain issues? And I guess to ask the question in another way, what is the likelihood that we get to October, you say, you know what, we’re not going to make guidance because of supply chain?.

Yes. Good question, Barry. I think we really took that into account. As you know, from historically, it has been less about supply chain issues with us. As you said, it’s a supply chain issue with our customers who are saying, hey, don’t ship that. I’m not ready for it, whatever it may be because we end up being a cog in a bigger wheel for those guys.

So we took a lot of that into account, looked at the first half of the year. I think we gradually work our way in the back half of the year. We took that into account when we laid out the $109 million to $115 million. Right now, we factored some of that in. We learned some lessons from 2021. And we feel really good about the guidance that we gave.

Again, all I can do, and I said it on my call – all I can do is give guys with what I see in front of me right now. I mean we talked to customers, we did everything we could do in really understanding where they are, when do they feel like things will pull out and factor that in.

But with what I see today in all the information, we spend a lot of time doing it. and the $109 million to $115 million, we really feel good about that being a guidance that we can carry throughout the year and stand behind, again, learning some lessons from 2021..

Okay.

And then on the acquisition, I think it’s spelled as LEOS or LIOS?.

Yes..

Could you give us the 2021 revenue and EBITDA, so we know what you’re bringing on board on that business?.

The full year revenue in U.S. dollars would be around $16 million..

No, I think it was $13 million. I think €12 million is what they did. NKT will go out. I think what’s going out with the press release and they kind of spelled that out that I believe, it was right around €12 million, $13 million, something like that, Barry. They were kind of flat on the EBITDA side.

So – but we do see some synergies in that from rolling them into Luna..

Okay. And then in the slide deck that you put out, you note that with that acquisition, you now have all of the modalities. Not quite sure what that means, but I guess that means you have all the technologies that you need.

Does that mean that from that perspective, from a M&A perspective in terms of future transactions that you’re good where you are from a product portfolio? And I know you said in the script that you’re still acquisitive, but would the focus be more on customers and geographies?.

Yes, I think that’s right. This was important, and a lot of people mentioned off-line. So when we did OptaSense that completed everything. And the one thing that we kept saying was kind of the temperature and some of the strain that LIOS brings to the table.

That was something that in many of our customers, we would go to and sell a system to, but they needed a more elaborate temperature solution than we could provide with the OptaSense technology.

So many times, we would either go out and bring LIOS to the table or we go out and buy a LIOS system and incorporate it into our overall solution to that customer. So it was a customer that we got to know, a company that we got to know because we brought them to the table and got to know their technology.

And that’s how we’ve done a lot of our acquisitions, and we’ve got to know them prior to doing the transaction. So I think this certainly – like I said, this is – this completes the final arrow in the quiver. You’re always going to look if you can grow faster through acquisition. But this, from a product standpoint, I think, completes our portfolio.

Do you agree, Brian?.

Yes, I agree with that completely. From a – from the distributed testing business, perspective, as we say in the release in the material, the modalities are now covered between acoustics, strain, temperature and our other discrete offerings. So we have the basic building blocks now.

So it doesn’t really affect necessarily the strategic M&A side of the business, it just means that we don’t have to go looking to fill those basic building blocks. Now we will be looking for things with more adjacencies, things that would perhaps accelerate our growth more, as you mentioned, customer bases, geographies..

And Barry, we talked about the ongoing monitoring and being part of that, call it, recurring revenue stream. And we did some of that, started getting into that. We talked about that. And every time you get into that, you look at a build or buy.

And we knew we had additional technologies, but in acquiring OptaSense and LIOS, their software package that they brought and the advancements that they already made on that ongoing monitoring is really critical to where we were going.

So it brings a technology that we needed, but also brings a level of software that – to what we needed to bring to Luna..

Okay.

My last question, if I could just get your sense on your thoughts on buybacks? I know that’s a Board decision, but if you could kind of where the stock is now and the progress you’ve made and you’ve got some pretty solid guidance out there? What should investors think about and expect from Luna in terms of share buyback activity this year?.

Yes. I think we will continue to – it’s an ongoing conversation that we have with our Board, and we look at what’s the best use of our capital. I think putting it to work here in looking at some of these deals that we’ve done. Like I talked about, we divested three assets over the last kind of 5 years and acquired five.

So we’re looking at growing the business from that perspective. What’s the best use of our capital? So we will continue to talk about all those different things with the Board. We talked about stock buyback. We talked about dividends.

All those good things – but – and we always really discuss what’s the best use of our capital? Right now, we believe the best use of our capital was to go out and continue to grow the top line, both organically through investments in ourselves as well as being acquisitive..

Okay, thank you very much..

Yes. Thanks, Barry..

Our next question comes from the line of Alex Henderson from Needham. Your line is open..

Great. Thanks.

I was hoping you could talk a little bit about the magnitude and scope of the larger programs that you have in the pipeline, maybe not specifically in individual sense, but rather in a broader sense, how many of them are there? And if you were to aggregate them, what’s the revenue contribution from those might look like, to give some sense of the pipeline opportunity there?.

Yes. I mentioned on it a little bit. We talked about really some of the organic growth that we see coming from Luna is going from selling onesie, twosies these things to selling dozens and big orders were we’re spec-ed into things. And I think the first move that we talked about was where we got spec-ed into the F-35 with Lockheed Martin.

So that was of the magnitude of a 100-plus unit order. When they talk about being spec-ed in and needing say, 10 of these things a month for the foreseeable future, so 10 a month for 10 years. So if you look at that, that’s an annual revenue of $7 million to $10 million per year.

And then when you look at – and we talked about this partnership that we have with Meggitt, right? And that’s the public bid that Airbus is out on the A320, and they are looking for a heat detection fire suppression system.

We’re working with Meggitt on that and moving forward with that, that being specked into the A320, that’s a 10-year $300 million plus kind of order. That’s a $30 million revenue kind of opportunity for us when it gets up and going.

I talk about there is probably another half dozen when I think – when I look at it, five, six different deals that are out there inside the red zone. These are deals that are no longer a jump ball. These are not deals that we say, well, we still have to win. We have won those. We have been selected. We just need to bring them over the finish line.

And those are of the similar magnitude that I would say in Lockheed Martin. Those are of the $7 million to $10 million type of annual revenue type deals. And I talk about five or six of them, Alex. So those are the meaningful growth.

When we talk about the confidence level of the growth that we believe we can have here at Luna, those are the things that don’t require quotas and bag carrying, those are not additional sales guys to bring those over.

Those are us working those blue sheets here, myself out in front of them, Brian, out in front of them to bring those over the finish line. So that’s a major impact in what we look like over the next, call it, a couple 2, 3 to 5 years. That is getting those up and going. I’m not saying getting the win. I think the wins will come sooner than that.

I think that the magnitude of that will come in the next, say, 3 years. And I think that is – that’s in the $30 million to $50 million of annual revenue in some of those deals combined going forward. I hope that answers your question. I can’t get into any of – ton of detail, but it gave you a little bit more color..

It does. It sounds like you’re talking about potentially having as much as 70% of your annual current revenue run rate in what I would describe as recurring-related businesses, not necessarily by the end of this year, but at some point in the next year or two.

Is there some other businesses underneath the current business that you are doing – that would add to that percentage of magnitude? In other words, stuff that’s already in hand other than, say, the Lockheed business, which you have already identified?.

Yes. I think the deals that we are talking about, the ones that we talk about right now public, certainly Lockheed. And remember, that’s one plane. That’s the F-35. And we look at the F-22 and we look at the C-130. We look at a lot of planes with not just Lockheed but Northrop Grumman and others.

So, there is a lot of near-term – we are very far along, and we will be able to talk in more detail here in the next coming weeks and months of the progress related to our partnership with Meggitt. Many folks have listened to the Meggitt earnings release, and they talk about it.

We certainly don’t want to get out ahead of Meggitt, but we will talk about that here soon in where that is. But continue to work with a lot of partners that were already working with. Like I said, this is not – there is always new opportunities, but these are ones that are not – they are not in the funnel.

They are things that we are actively negotiating. And I think you can quickly see Luna being in that 50%-plus of its revenue in recurring revenue..

It’s a major change in the company’s fundamentals if that – if you get to that..

Yes. It is..

I wanted to go back to the tax comment. Obviously, it’s nice to get a credit in ‘21.

Could you give us some guidance of what you are assuming in terms of tax for modeling purposes for ‘22?.

Yes. We are still – with all these moving parts, we are still working through that with our tax advisors. The best way I can say that is our statutory rate is around 25%, 26% based on the states that we are in. And the foreign operations are around like 24% to 25%. And so I don’t have a great answer right now because we are still working that up.

These transactions are kind of hot off the press..

And going back to the inside the red zone deals for a second.

Anything – yes, what do you think the cadence is in bringing those from inside the red zone to recognize revenue? Is that going to feather in over the course of the year? Is it going to feather in over a longer period? How do we think about that feathering in?.

Yes, I think some of them will start to show up here in 2022. I mean I think the meaningful movement to revenue will happen in 2023 and maybe 2024. Keep in mind, when you get into some of these environments that we are in and not today, but years ago, Luna was selling one-off to say a guy on a bench or whatever it may be.

And then several years ago, we started getting into manufacturing lines. Now when you talk about getting specked into battery manufacturing or you are talking not getting specked into commercial aerospace, these are things that need to be repeatable, reliable and just break proof.

I mean you just cannot go down – and when you are talking about getting to that point, so it’s continuing to work in a development stage with some of these folks in their environment. They send it back, and it’s like, yes, it stopped working.

It’s like, okay, well, did your iPhone work when you throw it into the ocean and try to go down 300 meters? Oh, no, it didn’t. Okay. We got to work with that. We can do that. It’s just going to take a little bit of time to make your iPhone work at 300 meters.

And that’s the kind of thing that we continue to work with some of these folks when they tell us the environment that it’s in. We just need to know what environment you are talking about. If you are talking about suit, let us know. We can work with that. We just need to know that the environment.

So, it’s getting into those type of things that just take a little bit of time to work with them in their steering committees as part of their partnerships and collaborate with them to be specked in. When you talk about getting specked in, it is not a company-customer relationship. It is a partnership when you are getting into this.

And we are on – we are signing confidentiality agreements that I got to give away my first born if I let up. And we are down in their environment, working with them. So, those will feather in over the next 1 year to 2 years and hopefully be up and running after that..

Thank you very much and congratulations on the transactions in the print. Looks – making great progress..

Thanks. Appreciate it..

Our next question comes from the line of Jim Marrone from Singular Research. Your line is open..

Great. Good morning gentlemen. I have a few questions, if I may..

Yes..

And forgive me if I repeat what was discussed already, perhaps I am just looking for more clarification. So, let’s start with the guidance. So, in regards to the revenue guidance of $109 million to $115 million, that’s a $20 million to $30 million jump from the $87.5 million.

And your guidance is reflecting the transaction, so the divestiture as well as the acquisition.

So, I am just trying to get a sense of that $20 million to $30 million growth, how much of it is it tied to the divestiture and acquisition? And how much of it is attributed to organic growth? So, are you able to parse out between the two?.

Yes. We always have a difficult time a little bit doing that. LIOS, as it sits in Cologne, Germany, we will – as part of NKT Photonics is part of the parent company, NKT. So, it was already a division of a division. So, we look at rolling that in and running that with OptaSense as one transaction.

So, we immediately have started the integration of how we are going to manage that. So, it’s really hard to break out how much of that is legacy Luna versus the acquisition. We also are certainly hedging ourselves.

We are also saying, “Hey, I have got $22 million of increase off the $87 million to $109 million.” I said on a call earlier that someone asked, I think LIOS did about €12 million last year. We look at rolling them in. I think the organic will be somewhere. I said it before, mid to upper teens, low-20s organically.

I look at getting some integration done, some synergies that will be done in LIOS. But I also want to make sure I don’t get out ahead of myself. 2021 was a little bit of a bite in the ass for Luna. I am not used to getting on a call and not doing what I say I was going to do.

And there were factors that went into that, certainly, supply chain and the pandemic, and Delta and all this kind of crazy shift. But I can tell you that it was something that we learned from and said don’t get out ahead of ourselves. Let’s make sure we get this behind us.

So, by saying we can be $20 million to close to $30 million over last year, we believe that’s good growth. We believe this 25% to 35% year-over-year top line growth is good, but it factors in some things that may still be lingering from the pandemic..

Right. Okay.

And so if we can just continue with that thought, so just in regards to the supply side, like what exactly is the issue? Is it the fact that you can’t get parts because there is factories that are shutdown, or is it the logistical thing in which port congestion or road transportation? What exactly, on the supply side, is an impact in the business? And how are – what are you hearing in terms of it being cleaned up and going forward?.

Yes. I will let Brian weigh in on that. He is kind of all over that supply issue. But like I said before, a lot of the supply issue is at our customer. It’s not necessarily us. We buy in bulk and we have – typically, we have the parts in order to make the system that we do.

The problem that we are – and that’s why you run – we have been running a book-to-bill 1.1 and 1.2 in previous quarters, where we typically run right around 1 on a book-to-bill because a lot of the orders are in and they are sitting on the dock waiting to be shipped, We have a customer saying, “I’m not ready for it yet.” So, it’s less a supply issue on our side and more with our customers.

I will let – Brian can elaborate on..

Alright. And I have a follow-up question to that point. But if I could hear Brian and his response..

Sure. Hey Jim. Yes, so it comes down to all of the above. On the product and supply side, in terms of delivery, the limitation of materials – certain materials within our supply chain makes it harder for us to build and deliver to our customers.

We are still seeing delivery times increasing from a lead time perspective for parts we need up to even, in some cases, 50 weeks, 52 weeks. So, that hasn’t really eased yet. We do see that easing in the second part of the year.

But really going back to 2020, we started new sourcing strategies, increasing our partner engagement, really improving our supply chain flexibility, diversification within our supply chain to be able to build resilience to this. So, we are certainly being affected by it.

It hasn’t improved in the last quarter or so, but we do see some hope and some light on the horizon in terms of the situation for later in the year, especially now that we see COVID globally is having less of an impact than it did even a month or two months ago. That helps on the mobilization and resources side as well.

We need to get our people in the field to affect our projects and the associated revenues. So, we are not out of the woods yet, but – and we have some of that, of course, considered in our plan, in our forecast, but we do see some easing in the relative near-term..

Right. And this is on the customer and as opposed to your side of the business.

Is that right?.

On both. Yes, on both..

Yes. Okay. And so if you can just talk a little bit about – more about the customer base and the pipeline. So, I am just getting like conflicting comments and maybe if you can just clarify a little bit about that.

So, it seems like you guys are still tied to the aerospace in regards to the Lockheed Martin and perhaps new opportunities in the commercial aerospace, you brought up Airbus. I am not sure if there is any traction with Boeing.

But then I am also hearing like the growth is going to be in the mining sector as well as infrastructure with bridges and so forth.

So, I am just trying to get a sense of where you guys are going? And like is it continuing to be the focus on aerospace and the Lockheed Martin program, or is it going to get into these other sectors? So, if you can just comment on that..

Yes. I don’t look at it as conflicting. I look at it as the same technology being used in different applications. We have been working for – with Meggitt for years. That was a relationship that started with Micron Optics before we acquired them in 2018. This is a long-term relationship that takes time.

If you want to get specked into the A320, it doesn’t happen by applying this morning and getting an answer this afternoon. So, it takes years to work with these folks. We certainly are all over infrastructure as well, Jim. With all the things going on with the U.S.

government on bridges, tunnels, dams, I try to give an example of where the same technology is being used in different applications. And that’s just kind of where we are. We are not chasing every rabbit in the field, but these are huge opportunities.

When I get on a dam, we get on a dam in Brazil and there is thousands of dams that have the exact same application, I am certainly going to chase it. If I can get specked into the F-35, I am going to chase it. If I can get specked into Airbus, I am going to chase it.

And you might say, “Well, that’s gosh, that’s infrastructure as well as aerospace.” It is, but it’s the same technology. And again, like I said, I am not chasing every rabbit for Monday, Tuesdays, I am looking at big partnerships that we can land that get that recurring revenue to be a meaningful percentage of our annual revenue.

That’s where I am going..

Okay. Very good. And so then if I could just follow-up on that. So, what are you hearing from the customers? Now I know that you are not going to base your business based on the latest news events.

But what are you hearing from the defense sector in terms of spending in the years going forward, of course, I am talking about reflecting the current situation in Europe.

The infrastructure spending, the return to travel and commercial aerospace, like what are you hearing from your customers in terms of what they are anticipating on spending both in the defense sector, commercial aerospace as well as infrastructure?.

Well, I think what you are going to see in 2022 is you are going to see that those sectors really start to turn back on. Those specific areas in 2021 had a few bright spots, but military and defense, in particular, in aerospace in 2021 was not one of our higher performing segments.

Now, from a new orders in the door perspective, 2021 was still a very good year, and we pointed that out here during our remarks. So, I don’t want to say it wasn’t. But 2022 will really be bolstered by the additional activity. We will see with the infrastructure bill and those associated dollars, they will start flowing Q3, Q4 timeframe, we think.

And on the aerospace and defense side, where last year, we mentioned in our remarks. We were expecting some larger follow-on orders from 2020. Well, they didn’t happen in ‘21 due to kind of broad delays in the system. Well, those – we will see those in 2022.

And in fact, we have already had a lot of activity January, February leading up to March here on that front. So, those would be some additive tailwinds for us, and I think ‘22 will be a good year..

Okay.

And that’s built into that revenue guidance as well as the EBITDA then, right?.

It is, yes..

Yes. Okay. Thank you, gentlemen..

Alright. Thanks Jimmy..

Thanks..

Our next question comes from the line of Dave Kang from B. Riley. Your line is open..

Yes. Good morning. My first question is, I may have missed it.

Did you talk about the gross margin of LIOS?.

We did not break that out. We will have to get – we will get our hands around that right now. They are running kind of high-40s, low-50s. We just have to get our hands around. As they were part of a larger organization, and NKT and NKT Photonics was pushing a lot of cost down to that, we just need to get our hands around that date.

But right now, what we are seeing is probably high-40s..

Got it.

And then regarding sensing versus comp test, what was the mix last year? And then what are your expectations this year as far as the mix is concerned?.

Well, it will only increase, Brian, do you have the mix? It’s probably….

I don’t know. Yes..

65%, 35%, something like that…?.

Yes. The mix was 60-40 in ‘21..

With all the increase. LIOS – now it will leave us as part of the. It will flip up to 65, mid-60s, maybe even pushing a little higher than that..

So, if you look at the 110, 65-35, so 70-40 as far as dollar wise, probably roughly?.

$70, $40..

Yes.

And then regarding your EBITDA outlook, what kind of margins are you assuming? I mean I was thinking more like high-50s to maybe 60%, but it sounds like it might be a little bit lower with LIOS acquisition?.

Did you say adjusted EBITDA?.

Yes.

What kind of margin are you?.

Gross margin..

Yes, gross margin..

Yes, gross margin we are still looking at high-50s as we head into this year. So, we have various initiatives in place cost out. We are working with vendors. We are looking at footprint.

So, there is a lot of initiatives going on this year that when you balance that, plus what we are seeing on the supply side with cost increases, we think we can more than offset that. So, at the end of the day, we are thinking high-50s. And then EBITDA percentage – look, our target is to get it up into 20%.

But we are going to have to work our way up there percentage-wise. We do – as I mentioned in my comments, we become more multinational company. We still have to build out some of our functions internationally, whether it’s quality, purchasing and things like that. So, this year right now, we will be up year-on-year for EBITDA and EBITDA percentage.

I think this year, our adjusted EBITDA was around 9%, and I think we will see a couple of percentage points increase on that next year..

Yes. I think running in the 10% – somewhere between 10% to 12% of the EBITDA pull-through is what we are guiding to, I know a lot of you out there would like to see 20% pull-through. I know some of you have contacted me directly that they would like to see that. I would like to see that, too. I think it just takes some time to work that through.

When you are as acquisitive as we are, we just need to get through and get our sea legs underneath us here and make sure we drive towards that. But I can tell you internally, that is where we are driving. We have some lingering costs that are still involved here from some transactions that have gone on and we need to get some efficiencies out of that.

But I think you will see us drive towards that, especially mid-teens on kind of even where we were prior to the OptaSense acquisition. So, we will – we have our eye on it, and we are driving towards that..

Got it. And my last question is, I believe regarding supply chain impact, it was about $4 million, $5 million in third quarter.

What was that in the fourth quarter? And what is your assumption for the first quarter?.

On the supply issues?.

Yes..

Yes. I think the first half of the year we assume that it was still lingering is how we rolled it in. And I think you see that in us being able to give a little bit of a look there into Q1 and guiding 20 to 22. There is still some lingering things going on. We talked about our book-to-bill riding higher than where we historically have been.

We, for the last 4 years, 5 years, pre-COVID or pre-OptaSense have run really right at that 1, a little north of 1 maybe, but with some of the supply things going on with our customers, running that book-to-bill more on 1.1 and even north of 1.1. So, I think we continue to see that, right, Brian, in the first half. That’s how we modeled it in.

We think the second half of the year, a lot of that will free up – but the first half of the year, we are assuming it will be similar to Q4. We don’t assume it’s going to change dramatically in the first half of 2022 than it was in Q4. Q3 is the one that really hit us on that supply side.

Remember, I talked about not being able to get an epoxy and some other things..

Yes, we were 1.2 in Q3. Q4 was closer to that 1.1, and we are expecting that for the first quarter two here this year..

Yes..

Got it. Thank you..

Thanks Dave..

Our next question comes from the line of Eric Jamison from Stifel. Your line is open..

Yes. Guys, thanks for taking the questions. Just two, if I may. And just off of Dave’s questions on the guidance, and you mentioned the first half of the year in the prepared remarks that you are going to have a little bit of supply chain issues.

But just trying to get a sense of your Q1 $20 million to $22 million revenue guide, would you then assume that, that’s the low point for the year? And then we would start to see that slowly improving and obviously, the second half of the year, we will see a meaningful step-up?.

Most certainly. I have always said four better than three, but then two better than one from a quarter perspective. Q1 is always by far our softest quarter. So, that’s why I wanted to give a little insight. I don’t typically give quarterly guidance, but I wanted to give some insight into Q1 because it is soft and it is by far our softest.

So yes, you will see an uptick. And that’s been that way as long as I have been here. For some reason, budgets don’t get released, whatever it may be, Q1 is – I don’t think we are unique in that in the test and measurement space, but Q1 is certainly our lightest..

Okay. And then maybe just switching over to the deal announced LIOS this morning. What are the plans for integration? I know you said integration is underway.

And then maybe how did you arrive at the purchase price? And then maybe just what are the financial criteria that you look at when you are doing acquisitions? I know you talked about the strategic sense – the temperature and strain sensing, but just wanted to get your thoughts there..

Yes. This is something that we have been talking to for – I mean I probably first met with the NKT folks maybe 3 years ago and started talking with them and talking about how it could fit within Luna. This talks at one point of NKT Photonics, the entire organization. And then we – really what fit was the LIOS product line in Cologne.

So, we really got to know them. This one, unlike OptaSense where we were locked down in COVID, we could visit the facility. We could start talking to the leadership team. We already have communicated to that leadership team on who within Luna, they are going to report to – their direct reports have already been in contact with them. So, this is a lot.

We are all over the integration of this right out of the gate. With – how we determine purchase price, that’s us directly. We don’t use – Stifel was involved in this transaction from an investment banking standpoint because NKT had a relationship with them.

But this was a direct one-on-one with those guys and really coming up with what made sense for us, when could we roll this in and what did we see. So, we are excited about filling that in. We have been using the LIOS product for a number of years. And it is just super critical in the strategic position for growth for us.

I mean there is no easy customer to sell to than one you already sell to. And LIOS sells to the same customers we sell to. So, it was like OptaSense as well when we did that acquisition, kind of rolling it in and making a smooth transition into and integrating them into Luna.

One company is where I believe you have to get to, to recognize the fullest potential..

Thank you. Good luck..

Alright. Thanks Eric..

We have no further questions at this time. Now I will turn the call back over to Scott Graeff, President and CEO..

Great. Thanks, Mary. Thanks, everyone, for joining us today. To our investors, please feel free to reach out to Gene, Allison or myself with any questions. We look forward to speaking with many of you soon and hope to be able to see you in person during this year. Mary, this concludes our call today..

Thank you very much. This concludes today’s conference call. Thank you for participating. You may now disconnect..