Mercury Systems Inc. 2026 Q4 Earnings Call

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhaus, and our Executive Vice President and CFO, David Farnsworth. If you have 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 we will be referencing to is posted on the investor relations section of the website under events and presentations. Turning to slide 2 in the presentation, I'd like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially.

All forward-looking statements should be considered in conjunction with the cautionary statements on slide 2 in the earnings press release and the risk factors included in Mercury's SEC filings. We will also be providing fiscal year 2028 reference points today, which along with our target profile should not be construed as financial guidance and speak only as of today. They illustrate the financial profile the business could achieve based on the factors referenced above, including our ability to convert backlog to revenue and gain additional orders beyond current backlog. These factors may materially affect whether we reach these reference points or target profile. 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, and free cash flow.

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 Chairman and CEO, Bill Ballhaus. Please turn to slide 3.

Thanks, Tyler. Good afternoon. Thank you for joining our FY 2026 Q4 and full-year earnings call. We delivered Q4 results that were ahead of our expectations with record bookings, record backlog, record revenue, the highest EBITDA margin of the year, and robust free cash flow. Based on our solid execution and strong demand signals, we enter FY 2027 with enhanced visibility and are increasing our outlook for organic growth. Today, I will cover three topics. First, some introductory comments on our business and results. Second, an update on our four priorities, performance excellence, growth, margin expansion, and free cash flow. Third, expectations for FY 2027 and longer term. Then I will turn it over to Dave, who will walk through our financial results in more detail. Before jumping in, I would like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs.

I would also like to thank our Mercury team for their dedication and commitment to delivering high-performance processing and enabling mission dominance for the war fighter at the edge. Please turn to slide 4. Our Q4 results reflected robust organic growth and margin expansion. Record bookings of $660 million, up 93.1% year-over-year and nearly double our previous record bookings quarter. A 2.3 book-to-bill. Record backlog of over $1.9 billion and record next 12-month backlog of $1 billion. Record revenue of $290 million. Adjusted EBITDA of $49 million and adjusted EBITDA margin of 16.7%. Free cash flow of $29 million. We ended Q4 with $227 million of net debt, down 19.5% year-over-year. These results reflect ongoing focus on our four priority areas with highlights that include solid execution across our broad portfolio leading to FY 2026 organic revenue growth of 7.9% and adjusted EBITDA growth of 25.7%.

Year-over-year growth and backlog and next 12-month backlog of 38.4% and 23.3% respectively. An increase of 217 basis points year-over-year in full-year adjusted EBITDA margin and continued progress on free cash flow drivers with net working capital down 4% year-over-year while revenue grew 7.9%. Please turn to slide 5. Starting with our four priorities and priority one, performance excellence, where we are focused on sound execution on development programs, delivering for our customers across our portfolio, and scaling efficiently on numerous programs transitioning to higher volume production. In Q4, we ramped up across a number of programs and generated record quarterly revenue.

Our overtime revenue, up 23.6% year-over-year, was the highest in 15 quarters, driven largely by the receipt of material which we believe is an indicator that we are better aligning our supply chain with the increased organic growth we are seeing in several areas across the business. Notably, our domestic revenue, representing approximately 85.8% of our FY 2026 revenue, grew 13% organically year-over-year. Our strong bookings and record backlog, combined with progress in scaling efficiently, have resulted in organic growth above our prior expectation for FY 2026 and an outlook for increased growth, which I will speak to shortly. Beyond the solid performance, we continue efforts to expand capacity, increase automation, and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency.

Of note, we recently announced a strategic agreement with Palantir to leverage AI software to enhance material planning and factory operations in an effort to improve backlog conversion and deliver critical technologies to the war fighter. This is among many actions we have taken, along with prior investments across a number of critical technology developments designed to scale our ability to rapidly deliver vital capabilities for our customers. Please turn to slide 6. Moving on to priority 2, driving organic growth. We believe that our near-term organic growth will be driven by increased volume on existing production programs and the ongoing transition of a number of development programs to production. Additionally, we see possible upside tied to potential tailwinds from increased customer demand and quantities across a broad set of production programs in our portfolio.

Lastly, we are excited about new development programs and the potential of the production volume associated with those wins. In Q4, we delivered a record quarter with $660 million of bookings, resulting in record fiscal year bookings of $1.5 billion, up 49.8% year-over-year, and a book-to-bill of 1.57 for the year. Our record total backlog approaching $2 billion is also providing enhanced visibility as we enter FY 2027 and into FY 2028. Notably, our next 12-month backlog revenue coverage is higher than typical because a few of our recent larger orders included consolidated quantities that otherwise would have manifested in bookings and revenue recognized in FY 2027. The strength in Q4 bookings was broad based, with significant production awards across our products and solutions in Common Processing Architecture, effectors, airborne applications, space, and missile defense.

Most notably, we had our largest quarter ever for CPA bookings, which we believe reflects the differentiation of our CPA solutions and reinforces our confidence in the growth prospects of this area. The quarter also included significant bookings related to securing memory to support future production requirements across a number of advanced defense platforms. We are also beginning to see the favorable impacts of the defense budgetary environment, leading to a number of multi-year customer commitments. Driven by increased defense budgets globally and domestic priorities, we continue to see the potential for higher demand on multiple programs across our portfolio, including space, munitions, missile defense, and our Common Processing Architecture. I remain optimistic that these potential market tailwinds may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond. Please turn to slide 7.

Now turning to priority 3, margin expansion. In our efforts to progress toward our targeted adjusted EBITDA margin profile in the low to mid 20s, we're focused on the following drivers: Backlog margin expansion as we convert lower margin backlog and add new bookings aligned with our target margin profile, ongoing initiatives to further simplify, automate, and optimize our operations, and driving organic growth to increase positive operating leverage. Gross margin for FY 2026 of 28.6% was up 70 basis points year-over-year, consistent with our expectation that average backlog margin will continue to increase as we convert legacy lower margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. FY 2026 operating expenses are down year-over-year as a percent of revenue, reflecting our ongoing focus to drive efficiencies and enable positive operating leverage as we accelerate organic growth.

Full year adjusted EBITDA margin of 15.3% was in line with our expectations and up 217 basis points year-over-year. Please forward to slide 8. Finally, turning to priority 4, free cash flow conversion. We continue to make progress on the drivers of free cash flow, and in particular, networking capital, which at approximately $431 million, is down $18 million year-over-year. Full year free cash flow of $68 million led to net debt of $227 million at the end of Q4, which we reduced by $55 million year-over-year. We believe our continuous improvement related to program execution, demand planning, and supply chain management, along with strong balance sheet flexibility, positions us well to drive organic growth and capitalize on any additional potential market tailwinds. Please refer to slides 9 and 10.

We are entering FY 2027 with a record backlog and what we believe is enhanced multi-year visibility. We have increased organic growth expectations underpinned by our team's demonstrated strong performance, our strategic positioning, which we believe is closely aligned with critical global defense priorities, and a favorable market backdrop with an anticipated 9.9% addressable market compound annual growth rate spelled out in more detail in our Form 10-K filing. Looking ahead, aligned with our target profile of achieving above-market organic growth and in recognition of the favorable market outlook, we are increasing targeted organic revenue growth to low double digits while maintaining targeted adjusted EBITDA margin in the low to mid-20s and targeted free cash flow conversion of 50%. We believe our strong FY 2026 performance positions us well to perform in line with this target increase over time.