Mercury Systems Inc

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 Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo.

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhouse, and our Executive Vice President and CFO, Dave 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 two 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 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, 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 Ballhouse. Please turn the slide to Ray.

Thanks, Tyler, and good afternoon. Thank you for joining our Q4 and FY25 earnings call. We delivered very strong results in Q4 that were once again in line with or ahead of our expectations, resulting in solid FY25 year-over-year growth in backlog, revenue, adjusted EBITDA, and free cash flow. Today, I'd like to cover three topics. First, some introductory comments on our business and results. Second, an update on our four priorities, performance excellence, building a thriving growth engine, expanding margins, and driving improved free cash flow. And third, performance expectations for FY26 and longer term. Then, I'll turn it over to Dave, who will walk through our financial results in more detail. Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs. I'd also like to thank our Mercury team for their dedication and commitment to delivering mission critical processing at the edge. Please turn to slide four. Our Q4 and full year results reflect our expectation to deliver robust organic growth with expanding margins and positive free cash flow. Record quarterly bookings of $342 million and a 1.25 book-to-bill, resulting in a record backlog of $1.4 billion. Q4 revenue of $273 million, up 9.9% year-over-year. And full-year revenue of $912 million, up 9.2% year-over-year. Q4 adjusted EBITDA of $51 million and adjusted EBITDA margin of 18.8%. Full-year EBITDA of $119 million and adjusted EBITDA margin of 13.1%, all up substantially year over year. And free cash flow of $34 million, resulting in record full-year free cash flow of $119 million. We ended Q4 with $309 million of cash on hand. These results reflect ongoing focus on our four priority areas with highlights that include solid execution across our broad portfolio of production and development programs, backlog growth of 6% year-over-year, reduced operating expense enabling increased positive operating leverage, and continued progress on free cash flow drivers with net working capital down 90 million year-over-year, or 16.7%. Please turn to slide five starting now with our four priorities and priority one performance excellence in the fourth quarter. Our focus on performance excellence positively impacted our results primarily in two areas. First, in Q4, we recognize 4.7 million of net adverse EAC changes across our portfolio, which is in line with recent quarters, reflecting our maturing capabilities in program management, engineering, and operations, and progress in completing development programs. Second, our focus on accelerating customer deliveries generated approximately 30 million of revenue and approximately 15 million of adjusted EBITDA planned for FY26. This acceleration incrementally impacted our top line growth and adjusted EBITDA margins for Q4 and FY25, and we'll also factor into our outlook for FY26, which I'll speak to shortly. Please turn to slide six. moving on to priority two driving organic growth q4 record bookings of 342 million resulted in a record backlog of 1.4 billion and a full year book to bill of 1.13 Porter we received a number of significant contract awards, including two new production awards totaling $36.9 million for ground based radar programs that leverage our common processing architecture and cyber security software from recently acquired star lab. A $22 million initial production contract from a U.S. defense prime contractor for sensor processing subsystems that will upgrade existing combat aircraft. An $8.5 million contract to develop and demonstrate a next generation RF signal conditioning solution to enhance the performance and cost of expand active electronically steered array radars broadly used in air, sea and ground based applications. Two agreements with the European Defense Prime Contractor to expand and accelerate production of processing subsystems and components for radar and electronic warfare missions. And a new production agreement that supports a critical US military space program. These awards are important not only because of their value and impact on our growth trajectory, but also because they reflect those customers trust in Mercury to support their most critical franchise programs. Please forward to slide 7. Now turning to priority three, expanding margins. In pursuit of our targeted adjusted EBITDA margins in the low to mid 20% range, we're focused on the following drivers. Backlog margin expansion as we burn down lower margin backlog and replace with new bookings aligned with our target margin profile. Ongoing initiatives to simplify, automate, and optimize our operations. and driving organic growth to realize positive operating leverage. Q4 adjusted EBITDA margin of 18.8% was ahead of our expectations and up sequentially over 700 basis points. This stronger margin performance was driven by the conversion of backlog previously contemplated to be delivered in FY26 and higher operating leverage. gross margin of 31% up approximately 160 basis points year over year was in line with our expectations and largely driven by the average margin in our backlog. We expect backlog margin to continue to increase as we bring in new bookings that we believe will be in line with our targeted margin profile and accretive to the current average margin in our backlog. operating expenses are again down year over year as a result of fully realizing the impact of previously implemented actions to simplify streamline and focus our operations. Please forward to slide eight. Finally, turning to priority four, improved free cash flow. We continue to make progress on the drivers of free cash flow, and in particular, reducing net working capital, which at approximately $449 million is at the lowest level since Q2 of FY22, and down $211 million from peak net working capital levels in Q1 of FY24. Q4 free cash flow of $34 million was ahead of our expectation of break-even, primarily driven by acceleration of cash receipts. Free cash flow for FY25 was approximately $119 million, and net debt is down to $282 million, the lowest level since Q1 of FY22. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning, and supply chain management will lead to continued reduction in working capital and net debt going forward. In addition, as we did in FY25, we continue to expect to allocate factory capacity in FY26 to programs with unbilled receivable balances, which will help drive free cash flow, although with little impact to revenue. Please turn to slide nine. FY25 represented a year of significant progress and dramatically improved results. Looking ahead, I am optimistic about our team, our leadership position in delivering mission critical processing at the edge, the market backdrop, and our expected ability over time to deliver results in line with our target profile of above market top line growth, adjusted EBITDA margins in the low to mid 20% range, and free cash flow conversion of 50%. Although we will not be providing specific guidance for FY26, I will provide the following color, which excludes any acceleration of customer deliveries within or into FY26 and potential funding increases on existing programs driven by administration priorities such as Golden Dome. In FY26, we expect to demonstrate continued progress toward our target profile. For full year FY26, we expect annual revenue growth of low single digits with the first half relatively flat year over year and volume increasing sequentially as we move through the second half. This revenue outlook reflects the previously discussed approximately 30 million of accelerated deliveries into Q4 of FY25. as well as our expectation that we will allocate factory capacity to programs with unbilled receivable balances resulting in free cash flow generation with little revenue impact. As we discussed in previous calls, our backlog margin, while up over the last four quarters, is still below our target margin profile, driven primarily by older, low margin programs. We expect to continue to execute those low margin programs in FY26. As a result, we are expecting full year adjusted EBITDA margin approaching mid-teens with low double digit adjusted EBITDA margins in the first half and first quarter margin flat year over year. We anticipate margins to expand in the second half with Q4 adjusted EBITDA margin expected to be the highest of the fiscal year. finally with respect to free cash flow we expect to be free cash flow positive for the year with second half free cash flow greater than the first in summary with our momentum coming out of fy25 i expect that our performance in fy26 will represent another positive and meaningful step toward our target profile i look forward to providing updated commentary as we progress through the year with that I'll turn it over to Dave to walk through the financial results for the quarter and fiscal year, and I look forward to your questions. Dave? Thank you, Bill.