Mercury Systems Inc

day, everyone, and welcome to the Mercury Systems third quarter fiscal 2026 conference 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 Bolhaus, 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 presentations. 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 Q3 FY26 earnings call. We deliver Q3 results that were ahead of our expectations, with significant year-over-year growth in backlog, revenue, and adjusted EBITDA. Strong demand signals and solid execution contributed to better-than-expected organic growth and margin expansion 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 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 Q3 results reflected robust organic growth and margin expansion. Record bookings of $348.3 million and a $1.48 booked a bill, resulting in a record backlog approaching $1.6 billion. Revenue of $235.8 million, up 11.5% organically year over year. Adjusted EBITDA of $36.1 million and adjusted EBITDA margin of 15.3%. up 46% and 360 basis points respectively year over year, and free cash outflow of $1.8 million, meaningfully outperforming our expectations. We end the Q3 with $332 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 18% year-over-year and a sequential increase of 12-month backlog of 10.3%. A streamlined operating structure enabling increased positive operating leverage and significant margin expansion. And continued progress on free cash flow drivers with networking capital down 4.1% year-over-year. Please turn to slide five. Starting with our four priorities and priority one, performance excellence. where we are focused on sound execution on development programs, accelerating deliveries for our customers broadly across our portfolio, and ramping the rate on numerous programs transitioning to higher volume production. We accelerated progress across a number of programs and generated approximately $25 million of revenue, $15 million of adjusted EBITDA, and $25 million of cash, all primarily planned for the fourth quarter. This acceleration, enabled by our efforts to align our supply base to yield faster backlog conversion, contributed to top-line growth, adjusted EBITDA margin, and free cash flow that exceeded our expectations for Q3 and will also factor into our outlook for Q4, which I'll speak to shortly. Our strong bookings and record backlogs combined with our ability to more rapidly convert backlog, is translating into organic growth exceeding our expectations coming into FY26. Notably, our domestic revenue, representing approximately 88% of our Q3 revenue, generated 17% year-over-year growth. Beyond this solid performance, we progress 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 added capacity to our highly automated manufacturing footprint in Phoenix, Arizona. and initiated operations within our additional 50,000 square feet of factory space to support ramped production for our common processing architecture programs and to allow for efficient scaling. In the quarter, we also completed the acquisition of a critical manufacturing process technology provider integral to a number of our key ramping programs. These are among a number of actions we have taken, along with prior investments across a number of critical technology developments that are driving our ability to accelerate delivery of vital capabilities to our warfighters and our allies. Please turn to slide six. Moving on to priority two, 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 expect possible upside tied to potential tailwinds from customer-driven acceleration and increased 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. We delivered a record quarter with 348.3 million of bookings, resulting in a book-to-bill of 1.48 and a record backlog approaching 1.6 billion. Our trailing 12-month bookings are a record 1.23 billion. Q3 bookings were driven largely by follow-on production orders, reflecting strong customer demand across core franchise programs. This bookings mix reflects the transitioning of our business toward higher rate production and we believe does not meaningfully capture the potential incremental tailwinds we see in the market. The largest bookings in the quarter were across several missile, C4I, and space programs. In addition, the quarter featured the strongest bookings of the fiscal year for solutions that leverage our common processing architecture. Finally, we secured a follow-on development award on a strategic program that has the potential to proliferate across multiple platforms. Beyond our backlog growth, we continue to see the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. 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 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'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. Q3 adjusted EBITDA margin of 15.3% was ahead of our expectations and up 360 basis points year over year. Gross margin of 29.3% was up 230 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. Operating expenses are down year over year, both on an absolute basis and as a percent of sales, reflecting our focus on continuously driving cost structure efficiencies to enable significant positive operating leverage as we accelerate organic growth. 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 $434.4 million is down $18.7 million year over year. Net debt was $259.7 million at the end of Q3. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning, and supply chain management will continue to yield a strong balance sheet that provides sufficient flexibility for us to pursue and capture potential market tailwinds. Please turn to slide nine. Looking ahead, I'm very optimistic about our team's performance, strategic positioning, the market backdrop, and our expectation 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 year-to-date results reflect meaningful progress toward this target profile, with an aggregate 1.3 booked a bill, 9% top-line growth, 15% adjusted EBITDA margins, 400 basis points of EBITDA margin expansion year-over-year, and free cash flow of $39.5 million. Coming out of Q3, we are raising our expectations for FY26. We believe our efforts to stage material earlier have improved revenue linearity and increased forecast visibility, and that progress is now reflected in our updated expectations for FY26. As a result, our outlook incorporates backlog conversion that historically may have materialized in accelerations and results above forecast. Our Q4 bookings have the potential to be the strongest of the year, based on a pipeline of opportunities that is more robust than our Q3 pipeline, which we believe could be an indicator of increased top-line growth and further margin expansion beyond FY26. We now expect annual revenue growth for FY26 approaching mid-single digits up from low single digits. We expect full-year adjusted EBITDA margin of mid-teens up from approaching mid-teens. Finally, with respect to free cash flow, we expect free cash flow to be positive for Q4. In summary, with our positive momentum year-to-date and coming out of a very solid Q3, I expect FY26 performance to deliver a significant 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 in upside bookings to our plan over time. 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?