Mercury Systems Inc

Good day, everyone, and welcome to the Mercury Systems first quarter fiscal 2026 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would 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 of 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. 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 to slide three. Thanks, Tyler. Good afternoon. Thank you for joining our Q1 FY26 earnings call. We delivered Q1 results that were ahead of our expectations with solid year-over-year growth in backlog, revenue, adjusted EBITDA, and free cash flow. Our ability to accelerate deliveries on a number of our customers' high-priority programs once again contributed to strong results this quarter. Today, I'll 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 the balance of 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 Q1 results support our expectations for robust organic growth with expanding margins and positive free cash flow. Bookings of $250 million and a 1.11 book to bill resulting in a record backlog of $1.4 billion. Revenue of $225 million, up 10.2% year-over-year. Adjusted EBITDA of $35.6 million and adjusted EBITDA margin of 15.8%, up 66% and 530 basis points respectively year-over-year. And free cash outflow of $4.4 million, a $16.5 million improvement in free cash flow year-over-year. we ended Q1 with $305 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 6.5% year-over-year, a streamlined operating structure enabling increased positive operating leverage and significant margin expansion, and continued progress on free cash flow drivers with net working capital down 105.7 million year-over-year, or 18.8%. Please turn to slide five. Starting with our four priorities and priority one, performance excellence, where our efforts positively impacted our results primarily in two areas. First, in Q1, we recognized 4 million of net adverse EAC changes across our portfolio, which is in line with recent quarters and down 51% year over year, reflecting our maturing capabilities in program management, engineering, and operations, and sound execution on our development programs. Second, we accelerated customer deliveries across a number of high-margin programs, generating approximately 20 million of revenue and 10 million of adjusted EBITDA previously planned for the second quarter. This acceleration, partially driven by a 26 million year-over-year increase in point-in-time revenue, contributed to top-line growth and adjusted EBITDA margins that exceeded our expectations for Q1, and we'll also factor into our outlook for Q2, which I'll speak to shortly. Beyond this solid performance across our portfolio of programs, we progressed on a number of actions in the quarter to increase capacity, add automation, and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency. Notably, we continued to build out our highly automated manufacturing footprint in Phoenix, Arizona. We expect to bring online over 50,000 square feet of factory space in Q3 of FY26 to support ramped production for our common processing architecture programs and to allow for more efficient scaling if potential market tailwinds materialize. Please turn to slide six. Moving on to priority two, driving organic growth. Following record bookings in Q4, we delivered another solid quarter with 250 million of awards, resulting in a record backlog of 1.4 billion and a book-to-bill of 1.11. Notable Q1 awards reflected a healthy mix of competitive wins, follow-on production awards, and new design programs that continue to strengthen our position across key franchises. $26 million in competitive takeaways, including a major RF subsystem win supporting a ramping U.S. missile program. Multiple follow-on production awards, including an order from a leading European defense prime for an electronic warfare application that reinforces our strong international positioning, and a follow-on for RF modules supporting a major U.S. fighter aircraft. several follow-on orders that leverage our common processing architecture and include embedded anti-tamper and cybersecurity software from our recent acquisition of Starlab. And on the development front, we saw continued momentum with new design wins across mission computing, RF, and processing technologies, expanding Mercury's role on next-generation defense platforms. 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 with our proven capabilities and latest innovations. Beyond our backlog growth, we continue to have customer conversations on the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. I am optimistic that they 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 forward to slide seven. Now turning to priority three, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low to mid 20% range, we are 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 realize positive operating leverage. Q1 adjusted EBITDA margin of 15.8% was ahead of our expectations and up 530 basis points year over year. This margin performance was driven by the conversion of backlog previously contemplated to be delivered later in FY26 and higher operating leverage. Gross margin of 28%, up approximately 260 basis points year over year, was driven by a favorable mix of backlog margin converted in the quarter. We expect average 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 as a percent of revenue are down year over year as a result of fully realizing the impact of previously implemented actions to further simplify, streamline, and focus our operations and ongoing initiatives to drive efficiency. 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 networking capital, which at approximately $458 million, is down $106 million year over year. Q1 free cash flow represented a $16.5 million improvement over Q1 of last year. 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, 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. 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%. We believe our strong Q1 results Combined with the solid Q4 results of FY25 reflect continued progress toward this target profile with an aggregate 1.2 booked a bill, 10% top line growth, 17.4% adjusted EBITDA margins, and positive free cash flow over the last two quarters. Coming out of Q1, we maintain our full year view on FY26, which excludes any further acceleration of customer deliveries within or into FY26, or upside bookings to our plan tied to domestic priorities like Golden Dome or increased global defense budgets. We continue to 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. Given our Q1 overperformance, we expect Q2 revenue to be down year over year absent any additional acceleration of deliveries. We continue to expect full year adjusted EBITDA margin approaching mid-teens with low double-digit adjusted EBITDA margins in the first half. Given the accelerated delivery of high margin backlog into Q1, we expect Q2 adjusted EBITDA margin approaching double digits as we convert low margin backlog. We continue to 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 half. In summary, with our momentum coming out of Q1, I expect FY26 performance to represent another positive step toward our target profile. Additionally, I'm gaining optimism regarding the potential for tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize and upside bookings to our plan over time. I look forward to providing updated commentary as we progress through the year. Before I hand it over to Dave, I wanted to touch on a new $200 million buyback authorization that was announced in our earnings press release. This authorization underscores our confidence in the business, our improving fundamentals, and the multiple opportunities we see ahead to drive long-term shareholder value. With that, I'll turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave? Thank you, Bill.