MRCY

Image source: The Motley Fool. Tuesday, Aug. 18, 2026 at 5 p.m. ET Chairman and Chief Executive Officer - William L. Ballhaus Executive Vice President and Chief Financial Officer - David Farnsworth Vice President of Investor Relations - Tyler Hojo Operator: Good day, everyone. And welcome to the Mercury Systems Fourth Quarter Fiscal 26 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. Tyler Hojo: Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, William L. 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 is posted on the Investor Relations section of the website under Events and Presentations. Turning to slide 2 in the presentation. I would 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 would 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 will now turn the call over to Mercury's Chairman and CEO, William L. Ballhaus. Please turn to Slide 3. William L. Ballhaus: Thanks, Tyler. Good afternoon. Thank you for joining our FY 26 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 3 topics. First, some introductory comments on our business and results. Second, an update on our 4 priorities. Performance excellence, growth, margin expansion, free cash flow. And third, expectations for FY 2027 and longer term. Then I will turn it over to David, 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 warfighter 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%. And 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 4 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 in backlog and next 12 month backlog of 38.4%, 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 4 priorities and Priority 1, 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 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 warfighter. 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 multiyear 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 several quarters and beyond. Please turn to Slide 7. Now turning to Priority 3, margin expansion. In our efforts to progress toward our targeted EBITDA margin profile in the low to mid-20s, we are focused on the following drivers: backlog margin expansion as we convert lower margin back 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 26 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, net working 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 $27 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 well we believe is enhanced multiyear 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. For FY 2027, we expect revenue growth approaching double digits year over year with total revenue approaching $1.1 billion. We anticipate Q1 revenue to be the lowest of the year and up high single digits year over year with revenue increasing through the balance of the year. We expect adjusted EBITDA margin in the high teens and adjusted EBITDA approaching $200 million for the full year, reflecting nearly 30% year over year growth. We expect adjusted EBITDA margin to generally increase through the year with Q1 adjusted EBITDA margin expected to be in line with Q1 FY 26. Amidst increased demand, we plan to make targeted investments in inventory, automation and factory optimization to drive organic growth. For the full year, we are anticipating FY 27 free cash flow conversion beneath our 50% target, approaching 35% with free cash flow in the second half expected to be higher than in the first half. We expect Q1, which due to timing is typically our weakest cash flow quarter, to be a larger outflow than normal, primarily reflecting the receipt of materials to support our growth outlook and the defense spending tailwinds we see ahead. Given our record backlog and what we believe is enhanced multiyear visibility into scenarios beyond FY 2027, we are providing additional reference points for FY 2028. In our initial view of FY 2028, our reference point for top line organic growth is in the low double digits. For adjusted EBITDA margin in line with the low end of our target margin profile, and for free cash flow, a return towards conversion in line with our target. Further, although this outlook for FY 2027 and FY 2028 incorporates a limited set of tailwinds that have materialized in firm bookings, It does not incorporate the benefit of potential additional tailwinds that could occur on a number of production programs across our portfolio. Including our common processing architecture, effectors, airborne applications, space and missile defense. Additionally, this outlook does not incorporate any benefit the Palantir partnership mentioned earlier. Or other automation efforts across our organization to improve backlog conversion. We believe any such improvements may translate higher organic growth and adjusted EBITDA margin representing potential upside to our outlook. In summary, with our positive momentum, record backlog and improved visibility coming out of strong FY 2026, we look forward to executing well for our customers, enabling high performance processing and mission dominance for the warfighter at the edge, and delivering on what we believe is a value creation opportunity in front of us. With that, I will turn it over to David to walk through the financial results for the quarter and fiscal year, and I look forward to your questions. David. David Farnsworth: Thank you, Bill. Our fourth quarter results reflect continued progress toward our goal of delivering organic growth and expanding margins. We still have work to do to reach our targeted profile but we are encouraged by the progress we have made and expect to continue this momentum going forward. With that, please turn to Slide 11, which details our fourth quarter results. Our record bookings for the quarter were approximately $660 million with a book-to-bill of 2.28. Our record backlog of over $1.9 billion is up $540 million or 38.4% year over year. Revenues for the fourth quarter were a record of nearly $290 million, up approximately $17 million or 6.1% organically compared to the prior year. Gross margin for the fourth quarter was 30.6% as compared to 31.0% for the same quarter last year. The gross margin during the fourth quarter was primarily driven by our program mix and higher net EAC change impacts of approximately $4 million as compared to the prior year. Net EAC change impacts were lower for the fiscal year as compared to the prior fiscal year. As we have previously noted, we expect to see an improvement in our gross margin performance over time as the average margin in our backlog improves, and through our continued focus on simplifying, automating, and optimizing our operations. We expect average backlog margin to continue to increase as we convert lower margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses increased $13 million year over year. The increase in operating expenses was driven primarily by higher selling, general and administrative expenses and research and development costs of $10 million and $4 million, respectively. These increases were primarily driven by compensation related expenses, including stock based compensation. These increases were partially offset by lower acquisition costs and other related expenses and amortization of intangible assets totaling approximately $2 million. GAAP net income and earnings per share in the fourth quarter were approximately $1 million and $0.01 respectively, as compared to GAAP net income and earnings per share of approximately $16 million and $0.27, respectively, in the same quarter last year. Adjusted EBITDA for the fourth quarter was approximately $49 million as compared to $51 million in the same quarter last year. Our adjusted EBITDA as a percentage of revenue was 16.7%. As compared to 18.8% for the same quarter last year. Adjusted earnings per share for the fourth quarter was $0.37, as compared to $0.47 in the prior year. Free cash flow for the fourth quarter was approximately $29 million as compared to $34 million in the prior year. Turning to our full year results on Slide 12. Our bookings for fiscal 26 were approximately 1.5 billion up $514 million or nearly 49.8%. Marking a record year of bookings. Our book-to-bill was 1.57, yielding record backlog of over 1.9 billion. Which is up 38.4% from fiscal 25. Fiscal 26 revenues were 984 million up approximately $72 million or 7.9% compared to the prior fiscal year. Gross margin was 28.6% for fiscal 26, an increase of approximately 70 basis points from the 27.9% gross margin realized during fiscal 25. Our gross margin improvement in fiscal 26 was primarily driven by lower manufacturing adjustments and reduced net EAC change impacts as compared to the prior year. Operating expenses increased approximately $7 million or 2.5% in fiscal 26 as compared to the prior year. The increase was primarily due to additional selling, general, and administrative expenses of approximately $21 million. The increase was primarily driven by higher compensation expense of which $10 million was related to stock compensation. This increase was partially offset by decreases in research and development expenses and amortization of intangible assets of $8 million and $4 million, respectively. Our operating expenses as a percentage of revenue decreased by 150 basis points as compared to the prior year. Which reflects the efficiency improvements in headcount reductions we previously discussed to align our team composition with our increased production mix, driving improved operating leverage. GAAP net loss and loss per share in fiscal 26 were approximately 30 million¢ respectively, as compared to GAAP net loss and loss per share of approximately $380 thousand and $0.65, respectively in the prior year. The improvement in year over year earnings is primarily a result of increased gross margins partially offset by increased operating expenses. Adjusted EBITDA for fiscal 26 was 150 million up $31 million or 25.7% as compared to the prior year. Our adjusted EBITDA as a percentage of revenue was 15.3% up 217 basis points as compared to the prior year. This increase illustrates our improved execution and increased operating leverage in the current period as compared to the prior year. Adjusted earnings per share for the fiscal year was $1.06, as compared to $0.64 in the prior fiscal year. Free cash flow for fiscal 26 was approximately $68 million as compared to $119 million in the prior year. Slide 13 presents Mercury's balance sheet for the last 5 quarters. We ended the fourth quarter with cash and cash equivalents of $214 million. This represents a decrease of approximately $95 million from the same period in the prior year. This decrease was primarily driven by a $150 million payment against our revolving credit facility. The decrease was partially offset by free cash flow of $68 million generated this fiscal year. Billed receivables decreased sequentially by approximately $26 million or 27.6%, while unbilled receivables increased by $16 million during the fourth quarter. The net decrease in our total receivables balance reflects the incremental progress we continue to make by delivering on programs to our customers, which drove our cash flow performance during fiscal 26. Inventory increased sequentially by approximately $5 million. The increase was driven primarily by raw materials as we received material at our facilities to support our increased point in time revenue on many of the company's production programs. Prepaid expenses and other current assets decreased sequentially by approximately $22 million, primarily due to our shareholder settlement which was approved and finalized in the fourth quarter partially offset by normal operating expenses. Accounts payable decreased sequentially by approximately $13 million, primarily driven by the timing of payments to our suppliers. Accrued expenses decreased approximately $36 million sequentially primarily due to our shareholder settlement, which was approved and finalized in the fourth quarter. The amount due to our factoring facility decreased sequentially by $14 million, primarily due to the timing of payments from our customers due back to our counterparty. Accrued compensation increased approximately $18 million sequentially primarily due to our incentive compensation plans. Deferred revenues increased sequentially by approximately $23 million, primarily driven by additional milestone billing events achieved during the period. Net working capital decreased approximately $18 million year over year or 4%. As we have previously discussed, our continued networking capital improvement year over year enabled us to make a $150 million payment against our revolver during the fourth quarter. This continues to demonstrate the progress we have made in reversing the trend of growth in networking capital. Resulting in a reduction of approximately $229 million or 34.8% from the peak net working capital in Q1 fiscal 24. We believe our strong balance sheet provides sufficient flexibility for us to pursue and capture potential market tailwinds. Turning to cash flow on Slide 14. Free cash flow for the fourth quarter was approximately $29 million as compared to $34 million in the prior year. We believe our continuous improvement in program execution, hardware deliveries, and appropriately timed payment terms will lead to continued reduction in working capital. In closing, we are pleased with the performance in the fourth quarter and fiscal 26 and the higher level of predictability in the business. We believe continuing to execute on our 4 priority focus areas will not only drive revenue growth and profitability, but will also result in further margin expansion and cash conversion. Demonstrating the long term value creation potential of our business. With that, I will now turn the call back over to Bill. William L. Ballhaus: Thanks, David. With that, operator, please proceed with the Q&A. Operator: We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. The first question comes from the line of Peter Arment with Baird. Peter, your line is now open. Peter Arment: Hey. Thanks, Bill, David, Tyler. Nice results. Strong outlook. William L. Ballhaus: Thanks, Peter. Hey. So maybe just, Bill, if you could give a little comment on, basically, the way 2027 sets up is you are going to continue to see an improvement in margins throughout the year. And obviously, much stronger in the second half of the year. Is it just the pricing and backlog? Is it mix? Is it just volume leverage? How would you kind of characterize what you are seeing in margin expansion side? Yeah. And thanks, Peter, for the comments. I think it is a continuation of what we have been discussing around the progression of our backlog margin we have continued and, for the most part, and we have said this all along that as we work our way through FY 2027, we are not going to be talking about this dynamic anymore. We see in the first part of the year burning down lower margin backlog and margins increasing as we move our way through the year such that by the time we get to the end of the fiscal year, we expect to be operating in line with our target profile. So if you kind of put the whole picture together and look at how we exited the quarter with a really strong quarter, We set ourselves up. With great visibility for 2027. We increased our target outlook. We have got increased line of sight now to getting to our target profile, and we talked about how we expect to get there through FY 2027 and FY 28. And, I think it is just a continuation of the positive story that we have been communicating. Peter Arment: Got it. And just quickly, I will follow-up on the bookings. You had a largest single award in the quarter. I am just curious if there is any customer program that is now kind of 10% of backlog and any comments you would make on kind of how CPA bookings finished, I guess, in total for the year? Thanks. William L. Ballhaus: Yeah. No. CPA finished very strong. We had a record year of CPA bookings. And, again, that is following the progression that we outlined going back a couple years where we talked about getting back to production and getting to 4-way production. And as we did that and would open up a full set of opportunities, and we are seeing that right now. But to summarize the bookings performance for the year, I would not pin it on 1 area or 1 program. It was broad based. Across the business. And we had a record quarter. It was nearly double our prior record quarter the quarter prior. And just really reflects the strong outlook that we have across the business for strong organic growth. So really broad based, and we are excited to see that kind of demand signals across our entire portfolio. Got it. Peter Arment: I will jump back in the queue. Thanks, guys. William L. Ballhaus: Thanks. Operator: The next question comes from the line of Kenneth Herbert with RBC. Your line is now open. Ken Herbert: Yeah. Hi. Good afternoon, Bill, David, and Tyler. I wanted to follow-up on the fiscal 27 revenue outlook. I mean, it is stepped up over what you certainly sort of implied as your sort of normalized organic growth outlook you just maybe talk, Bill, about how we think about this reflecting some of the recent large framework agreements, UCA agreements we have seen put in place on the missile side, maybe the European defense. I mean, much does it contemplate growth in some of these other areas versus just maybe better outlook on the core business? William L. Ballhaus: Yeah. I think it is the latter. I mean, again, we have seen increased demand, record bookings and backlog, and it is a reflection of what we are seeing broad based across the portfolio. And, you know, we have been discussing the tailwinds that we see in the market and very few of those tailwinds are reflected in our outlook right now. So if you kind of piece together what is behind our outlook, 1 of the biggest jumps we saw this quarter was the increase in our next 12 months backlog. it is about a billion. So the visibility that we have on FY 27 and going into FY 28 is really high. The coverage that we have on FY 27 is really high. But there is a lot that we have not folded into that outlook. So the tailwinds that we talked about in terms of increased production quantities, etcetera, that we have in our pipeline reflecting conversations that we are having with multiple customers in areas like CPA, effectors, munitions, space, missile defense, none of that is reflected in our outlook, and we still see significant potential in those areas. And as we said before, if any of those were to materialize in terms of firm bookings, it could have a significant impact on our outlook, but none of that is factored in so far. Also, we have not factored in any improvements in our backlog conversion And we have a lot of things that we have in work right now across the enterprise to improve our backlog conversion. Now you have seen over the last year in particular how against our outlook, we have been able to improve backlog conversion and exceed our outlook. And we have a lot in work right now that is not incorporated into our outlook, to include the Palantir agreement that we announced and a number of automation efforts that we put in place so that we can you know, increase our scale and scale efficiently. So I would say that there is very little of the tailwinds that we have talked about that is incorporated into our current output. Yeah. Ken Herbert: I wanted to follow-up, though, if I could on the Palantir agreement. Is it appropriate to think of that as more of a sort of a EBITDA enhancement or real opportunity? Or is it impactful potentially for the top line as well? If you can give any more detail and timing in how that sort of layers into the business and how we should think about the impact of that on the financials. William L. Ballhaus: Yeah. So we are early into it, but what we have seen so far based on what we have seen so far, I think there is a lot of potential in terms of the improvements that we can drive leveraging their technology. Now the sole focus of this DOW sponsored initiative is to get the benefits of our technology and capabilities into the hands of the warfighter and do it faster. that is the focus of the initiative. Naturally, with that, we would see potentially an increase in revenue. And with tied to the deliveries. And with that, an increase in margin, and we talked about the positive operating leverage that we get as we increase top line and accelerate the top line And then, again, with that improvements in cash, those are the primary KPIs that we think have the potential to be positively impacted by the relationship with Palantir. But we are early into it, and as we see the results, we will we will be sure to provide updates as we see them. Ken Herbert: Great. Thanks, Bill. Operator: The next question comes from the line of Jonathan Ho with William Blair. Your line is now open. Jonathan Ho: Hi. Good afternoon, and let me echo my congratulations as well on a record bookings quarter. I wanted to better understand how having this level of backlog coverage and visibility of affects your ability to manage production efficiency supply chain, and facilities utilization. William L. Ballhaus: Yeah. it is a tremendous benefit. And you know, I think the impact of our bookings performance during the year there is a couple elements to it. So, obviously, based on the increase in our next 12 month backlog, and the visibility that comes with it gives us really good confidence in terms of our outlook and ability to execute against the outlook. But if you look at the increase in the backlog year over year, there is an even bigger increase in our backlog that is outside the next 12 months. And so it gives us a great ability to look forward to plan, to work with our supply chain to try and optimize across the full life cycle. there is just a number of degrees of freedom that it gives us to try and optimize and drive improvements in terms of our performance. So we feel really good about the strong foundation that we have the ability to increase our outlook for organic growth, and the enhanced visibility that we have in the business over the next few years. Jonathan Ho: Got it. And just in terms of sort of the capital priorities, I know you paid down some of the revolver. You have done a better job of freeing up working capital. What are sort of the higher free cash flow priorities for you this quarter as well or this upcoming year as well? Thank you. William L. Ballhaus: Yeah. I mean, our focus as it has been is to continue to drive down net debt, continue to drive down our leverage, And as you, Jonathan, as you have heard me say many times, we are 99.99% focused on the organic value creation opportunity in front of us. And to that end, because of the strong signals that we see, we will make some targeted investments in inventory in facilities, in CapEx that will that will help us scale increase, and accelerate organic growth. But our primary focus right now in terms of creating value is to capture the tailwinds that we see in the market. Thank you. Operator: The next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open. Kyle: Hi, guys. This is Tyler on for Sheila. Thanks for taking my question, and congrats on a great quarter. it is great to see the bookings come through. Thanks, Tyler. I was just looking through the 10 k, and it is really interesting that the kind of 5 year market outlook you guys are offering up there. I am just curious, related to the growth outlook for 2028 and 2020, whether there is anything kind of limiting growth, whether that is budget certainty. You know, you made some comments around strategic inventories. Or anything else or, you know, just trying to gauge your level of conservatism or if there is something in the near term that is kind of limiting what growth could look like over a multiyear period. William L. Ballhaus: Yeah. We are-- I think we think about it less in terms of more around the natural progression in our portfolio as we moved from a high concentration of development programs to low rate production, medium rate production, and higher rate production. And with that, seeing the increase in the organic growth of the business that you would expect to see from low single digits to mid single digits approaching double digits, and then into double digits. And at the same time as we have been going through that progression, we are also looking at improving our backlog conversions so that we can overdrive our performance outlook. And then on top of that, have a number of tailwinds, so we are focused on a market that also are not included in that outlook. So, you know, we believe that our outlook is consistent with the progression that we have seen in the portfolio, and I think there are a number of opportunities for us to outperform and overdrive that outlook. Kyle: Okay. that is helpful. And then maybe just a follow-up on what you are embedding in the free cash flow guide for next year in terms of maybe both working capital and CapEx given there is a tick up in the fourth quarter and it was noted in the release about spending some incremental money there. And maybe as a follow on to that, if you could just comment on the health of the supply chain, which resulted in a really strong overtime revenue. this quarter. Thanks, guys. William L. Ballhaus: I will let David speak to the CapEx I will say, and I appreciate you noting the step up in our overtime revenue. We have been discussing for several quarters now how we have been working to align our supply chain with margin to our deliveries so that we have more and more degrees of freedom to be able to optimize across our factories and increase our backlog conversion. And we have really seen strong progress on that over the last couple of quarters and expect that to continue. David, do you wanna comment on the CapEx piece? David Farnsworth: Yeah. I-- it is going to be flat. You know, I think the expectation ought to be that our CapEx Year over year The areas that we are focused on are the areas that Bill's brought up in his discussion earlier and has brought up in prior quarters, is really optimizing our operations from both the capacity and a footprint standpoint. And at the same time, to increase our level of automation as we go forward. And 1 of the things that we have talked about for the last 2 quarters and you have seen and we feel good about where the balance sheet is and feel like we have got capacity to lean a little into our supply base. And be able to bring in material earlier so that we can reduce what is the normal lead time. For some of that activity. And, you know, with the visibility we have, we feel like with the backlog that exists, that is a really good use of our capital. Operator: The next question comes from the line of Seth Seifman with JPMorgan. Your line is now open. Analyst: Hey. Good evening, guys. This is Rocco on for Seth. Hey, Rocco. The domestic sales grew nicely in the year, up 13%. However, the international sales were down around 15%. There any kind of headwinds to call out in the international market? Or did domestic demand just take up more capacity this year? William L. Ballhaus: Yeah. Thanks very much for the question. First of all, I think it is a really powerful full signal that 86% of our business, our domestic business, is growing at 13%. And I think it just it reflects underneath the hood the kind of growth tailwinds that we are seeing in the business and our ability to scale at that level. As we have discussed in prior calls, over the last year, we have outsourced our manufacturing in our international business to a contract manufacturer. And we have seen a slowdown in deliveries as we have ramped up that contract manufacturer. These are issues that are natural, common in moving to a relationship like that, and we expect to have them worked out over the next couple of quarters. So I think it is just a temporary, you know, slowdown in deliveries. The business is strong. The demand tailwinds are really strong, and our backlog is really strong internationally. So I see this as just a temporary slowdown in our deliveries that we expect to unwind over the couple of quarters. Right. That makes sense. Then can you guys provide any color on the drivers of the strong growth in EW this year? We think about the focus kind of more broad based on COAS or any other systems being kind of primary growth drivers? I mean, as we said earlier, we are seeing growth and increased demand is really broad based. I mean, it is literally across our portfolio. We are seeing increased demand. So I would not limit my comments to any 1 particular area. We are seeing strong demand signals across the board. Analyst: Great. Thanks, guys. Operator: The next question comes from the line of Austin Moeller with Canaccord Genuity. Your line is now open. Austin Moeller: Hi. Good afternoon. Great quarter. So I was wondering if there was a way that you could give us your view on the revenue opportunity for CPA based ruggedized servers in terms of either the growth rate, or your target share of the total revenue mix? And are those ruggedized servers either higher or lower margin than some of the other weapon systems or programs. David Farnsworth: Yeah. I do not think we dimension specifically what we see there. What I would say, I would reiterate Bill's comment. You know, we have seen over the course of the last year very strong demand We have talked about some of the larger awards and activities we have there. We talked about that earlier in the quarter with the CTG activity that we announced. It is growing well and ahead of what we expected. At this point, you know, when we slowed down for a while to get this right and then really started ramping up and you can look at the kind of the spread of activity We have talked in the past that a significant piece of that would be in the radar line item. We have talked about that, so you can look at the radar line item, the growth there, and think that a lot of that is in accordance with that, but we do not talk about the margin profile of any of our products. William L. Ballhaus: I will say, though, that it is pretty exciting for us to see that as we are increasing our deliveries, we are also increasing the pipeline. So we are seeing a number of new program opportunities, some of which could be fairly near term that is very exciting in the CPA area. And, again, this is just 1 area in which we see potential tailwinds that would enable performance that is above the outlook that we provided. 1 other comment I will make on CPA. We have talked about over time our technology focus on increasing performance driving the smaller form factors. We are now starting to see some customer interest in the smaller form factor And we are early into it, but it is pretty exciting to see that start to materialize. I think that opens up a whole new additional TAM in terms of smaller form factors that could fit on different platforms. They could be another accelerator for our CPA area, and that is pretty exciting to see. Austin Moeller: And just on those smaller form factors, if you can put those onto a mobile like an armored ground vehicle or an unmanned service vessel, Do you see an opportunity there to take share from some of the other network computing manufacturers like a DRF? William L. Ballhaus: I think it is an opportunity for us to take share in areas where the security requirements are necessary. And given that we have been the only provider of the CPA technology in the security apparatus that is included in it, I think that gives us a lot of optimism for being able to penetrate new markets in smaller form factors and get on additional platforms. Austin Moeller: Thanks for the deep dive there. I appreciate it. William L. Ballhaus: Thanks, Austin. Operator: The next question comes from the line of Samuel Pope Struhsaker with Stifel. Your line is now open. Analyst: Hello. Thank you for taking the question. I was wondering if you could give a little bit more detail on the agreement related to securing memory. How significant was that to the bookings And does that agreement fall within a typical margin of the rest of backlog Yeah. William L. Ballhaus: I do not think we have we have dimensioned any of the bookings. I would say that it was 1 of our more significant bookings for the quarter, a multiyear booking. And I would say that part of our business tends to run at the higher end of our margin profile, but I think I would leave it at that. Yeah. David Farnsworth: And the only thing I would add, Bill, is that this is a case, obviously, because it is it is in our bookings where the customer is leading in with us. Yeah. Where the customer is, in recognition of, hey, we want to go out and get this early. We wanna lock this up. Hey, we want to work with you, Mercury, to go get this done. Yeah. So I think that is a, you know, critical kind of view that was not us doing it on our own. That was the customer working with the customer set to get that done. Analyst: Understood. And then just, you know, I know that you have made a comment around the broad based health of the bookings, but wondering if there is any segments or end markets that are outsized contributors to the duration of these agreements extending and the sort of the confidence in the multiyear partnership increasing, is that space? Or is it any other sector that you think is some of the duration benefit here as well? William L. Ballhaus: Yeah. I would say we have seen a small number of orders that are multiyear related across the business. But in terms of the munitions agreements and the multiyear strategic frameworks, those are still potential tailwinds where we are in numerous conversations with customers where their agreements are in place, funding is starting to be put in place. And it is in our pipeline but yet to materialize in bookings. And we have characterized those kinds of situations as potential tailwinds that if they were to land, they would have an the potentially a meaningful impact on our outlook. But none of those so far have materialized. Yeah. David Farnsworth: And I think the way to think about it is, you know, for those kinds of activities as we have been-- we have always said that, hey, likelihood that would be would be later in the calendar year. So, you know, as we get to what is our, you know, this first quarter and the second quarter is when we expect to get more clarity around that. And to Bill's point right now, we consider them tailwinds. We have not included any of that in our outlook. Because there is still a little bit of an uncertainty as to the exact timing on some of those things. And then on top of that, is it going to be a year at a time? Is it going to be a multiyear agreement? And we proposed all of those things at our customers' request. And we are just working with them to get to what the conclusions will be on those things. Analyst: Really appreciate the color. Thank you. Operator: Mister Ballhaus, it appears there are no further questions. Therefore, I would like to turn the call back over to you for any closing remarks. William L. Ballhaus: Okay. Thanks, operator. I think with that, we will go ahead and end the call. I appreciate everybody's time this evening and look forward to getting together next quarter. Operator: This concludes today's call. Thank you for attending. You may now disconnect. Before you buy stock in Mercury Systems, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Mercury Systems wasn’t one of them. The 10 stocks that made the cut are built for long-term growth and could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $431,488!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,279,584!* That performance is why people listen. With a track record of beating the S&P 500 by nearly 5x, Stock Advisor offers a distinct advantage. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built for the long haul. See the 10 stocks » *Stock Advisor returns as of August 25, 2026. This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Mercury Systems (MRCY) Q4 2026 Earnings Call Transcript was originally published by The Motley Fool

Mercury Systems’ second quarter results were met with a negative market reaction, despite the company delivering revenue above Wall Street expectations. Management highlighted robust demand across its defense portfolio, driven by record bookings and backlog, with CEO William L. Ballhaus noting, “Our overtime revenue, up 23.6% year over year, was the highest in 15 quarters.” However, operating margin declined compared to last year, reflecting a combination of program mix and higher expenses. Leadership acknowledged that while growth was broad-based, near-term profitability was impacted by the ramp-up of key programs and ongoing investments in capacity and automation. Is now the time to buy MRCY? Find out in our full research report (it’s free). Revenue: $289.8 million vs analyst estimates of $265.4 million (6.1% year-on-year growth, 9.2% beat) Adjusted EPS: $0.37 vs analyst expectations of $0.38 (3.3% miss) Adjusted EBITDA: $48.52 million vs analyst estimates of $44.92 million (16.7% margin, 8% beat) Operating Margin: 5%, down from 8.6% in the same quarter last year Backlog: $1.9 billion at quarter end, up 35.7% year on year Market Capitalization: $5.39 billion While we enjoy listening to the management’s commentary, our favorite part of earnings calls is the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention. Peter Arment (Baird) asked about the drivers of margin expansion and the transition to higher operating margins. CEO William L. Ballhaus explained that progress is tied to converting lower-margin backlog and ramping up higher-margin production, expecting improved margins later in the year. Ken Herbert (RBC) questioned how much future growth is tied to large framework agreements and missile programs. Ballhaus clarified that current guidance includes only limited tailwinds from such agreements, with most potential upside not yet included in forecasts. Jonathan Ho (William Blair) inquired about how increased backlog visibility impacts production efficiency. Ballhaus responded that this enhances planning and factory optimization, allowing better alignment with supply chain partners and increased confidence in growth projections. Sheila Kahyaoglu (Jefferies) sought clarity on the company’s free cash flow guidance and supply chain health. CFO David Farnsworth said capital investments will focus on facility automation and inventory, and management remains confident about ongoing supply chain improvements. Austin Moeller (Canaccord Genuity) asked for details on the growth and competitive positioning of CPA ruggedized servers. Ballhaus highlighted strong demand and emerging opportunities for smaller form factor deployments, which could expand addressable markets and increase share against competitors. In the coming quarters, the StockStory team will be closely monitoring (1) the pace at which Mercury Systems converts its record backlog into revenue, (2) signs of margin recovery as automation and supply chain initiatives take hold, and (3) progress in resolving international supply chain disruptions. Additionally, the impact of the Palantir partnership and any new multiyear defense framework agreements will be important markers for future growth. Mercury Systems currently trades at $91, down from $105 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members). ALSO WORTH WATCHING: Top 5 Momentum Stocks. The best time to own a great stock is when the market is finally noticing it. These aren’t just high-quality businesses. Something is happening with them right now. Elite fundamentals meet near-term momentum — both boxes checked at the same time. Find out which stocks our AI platform is flagging this week. See this week’s Strong Momentum stocks — FREE. Get Our Strong Momentum Stocks for Free HERE. Stocks that have made our list include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.

Get insights on thousands of stocks from the global community of over 7 million individual investors at Simply Wall St. Mercury Systems (MRCY) has drawn fresh attention after reporting full year earnings that combined higher sales with a smaller net loss, along with quarterly results featuring record bookings, a backlog above $1.9b, and revenue ahead of market estimates. See our latest analysis for Mercury Systems. The latest earnings have been a clear catalyst for Mercury Systems, with the 1 month share price return of 9.28% and year to date share price return of 38.10% pointing to building momentum. At the same time, the 1 year total shareholder return of 63.50% and 3 year total shareholder return above 7x suggest that longer term holders have already seen very large gains. If recent defense contract wins have your attention, it can be useful to see what else is moving in related areas of the market through 39 power grid technology and infrastructure stocks After a run that has taken Mercury Systems to around $105 per share and close to analyst targets, the question is whether to accept today’s price or wait in case the next pullback offers a cleaner entry point. Mercury Systems last closed at $105, which sits slightly below the most followed fair value estimate of about $106.22. That small gap still rests on some ambitious underlying assumptions. Read the complete narrative. Want to see what sits behind that earnings trajectory for Mercury Systems? The narrative leans heavily on future margin gains and revenue conversion that are characterized as anything but conservative. Investors may be curious which specific profit and growth assumptions are required for this fair value to hold. Result: Fair Value of $106.22 (ABOUT RIGHT) Have a read of the narrative in full and understand what's behind the forecasts. However, Mercury Systems still faces the drag from low margin legacy contracts, as well as the risk that past delivery pull forwards leave future revenue and earnings under pressure. Find out about the key risks to this Mercury Systems narrative. The most followed fair value for Mercury Systems sits close to $106. Yet the Simply Wall St DCF model points to a value of about $76.67, which implies the stock at $105 is trading well above that cash flow based estimate. Which set of assumptions do you find more realistic for the next few years? Look into how the SWS DCF model arrives at its fair value. With both optimism and caution running through the Mercury Systems story, it makes sense to move quickly and weigh the evidence yourself. To understand how the balance of risks and rewards stacks up before you decide on your own stance, review the 1 key reward and 1 important warning sign. If Mercury Systems has sharpened your interest in defense and technology exposure, do not stop here. Use the Simply Wall St screener to compare other potential opportunities. Target potential upside with companies trading below estimated value by checking the 50 high quality undervalued stocks. Strengthen your income focus by reviewing companies offering robust yields through the 11 dividend fortresses. Prioritize capital preservation and steadier returns by scanning the 79 resilient stocks with low risk scores. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Companies discussed in this article include MRCY. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected]

This article first appeared on GuruFocus. Revenue: Record Q4 revenue of $290 million, up 6.1% organically year over year; full-year FY26 revenue of $984 million, up 7.9% organically. Bookings: Record Q4 bookings of $660 million, up 93.1% year over year; record full-year bookings of $1.5 billion, up 49.8%. Backlog: Record total backlog of over $1.9 billion, up 38.4% year over year; record next 12-month backlog of $1 billion. Gross Margin: Q4 gross margin of 30.6%; full-year FY26 gross margin of 28.6%, up 70 basis points year over year. Adjusted EBITDA: Q4 adjusted EBITDA of $49 million (16.7% margin); full-year adjusted EBITDA of $150 million, up 25.7% year over year, with margin of 15.3% (up 217 basis points). GAAP Net Income/Loss: Q4 GAAP net income of $1 million ($0.01 per share); full-year GAAP net loss of $30 million ($0.50 per share). Adjusted EPS: Q4 adjusted EPS of $0.37; full-year adjusted EPS of $1.06, up from $0.64 in the prior year. Free Cash Flow: Q4 free cash flow of $29 million; full-year free cash flow of $68 million. Net Debt: $227 million at end of Q4, down 19.5% year over year. Net Working Capital: Approximately $431 million, down $18 million or 4% year over year. FY27 Outlook: Revenue growth approaching double digits year over year, with total revenue approaching $1.1 billion; adjusted EBITDA approaching $200 million with margin in the high 10s; free cash flow conversion approaching 35%. Warning! GuruFocus has detected 4 Warning Signs with MRCY. Is MRCY fairly valued? Test your thesis with our free DCF calculator. Release Date: August 18, 2026 For the complete transcript of the earnings call, please refer to the full earnings call transcript. Record bookings of $660 million in Q4, up 93.1% year-over-year, and record backlog of over $1.9 billion, providing enhanced visibility. Record revenue of $290 million in Q4, with organic growth of 7.9% for the full year, driven by strong execution and supply chain alignment. Adjusted EBITDA margin expanded by 217 basis points year-over-year to 15.3%, with expectations for continued improvement. Free cash flow of $68 million for the year, leading to a 19.5% reduction in net debt, demonstrating improved working capital management. Increased FY27 organic growth outlook to approaching double-digits, with a target of low double-digits for FY28, reflecting strong demand signals. Strategic partnership with Palantir to leverage AI for improving material planning and factory operations, potentially enhancing backlog conversion and margins. International revenue declined approximately 15% year-over-year due to temporary slowdowns in deliveries from a contract manufacturer ramp-up. Q4 gross margin decreased to 30.6% from 31.0% in the prior year, impacted by program mix and higher net EAC changes. FY27 free cash flow conversion is expected to be below the 50% target at approximately 35%, with Q1 anticipated to be a larger outflow due to inventory investments. Operating expenses increased $13 million in Q4, driven by higher compensation and R&D costs, partially offsetting margin gains. GAAP net loss for FY26 was $30 million, though improved from the prior year, reflecting ongoing profitability challenges. The outlook does not incorporate potential tailwinds from increased defense budgets or multi-year agreements, which could be delayed or not materialize. Q: Can you provide more detail on the fiscal 2027 revenue outlook and how much it reflects recent large framework agreements or European defense growth versus a better outlook on the core business?A: Bill Ballhaus (CEO) stated the increased outlook is a reflection of broad-based demand across the portfolio, driven by record bookings and backlog. He emphasized that very few of the market tailwinds discussed are reflected in the current outlook. The visibility for FY27 and into FY28 is high due to the record next 12-month backlog of $1 billion, but potential tailwinds in areas like CPA, effectors, munitions, space, and missile defense, as well as improvements in backlog conversion (including the Palantir partnership), are not incorporated into the guidance and represent potential upside. Q: How should we think about the margin expansion trajectory for fiscal 2027? Is it driven by pricing, mix, or volume leverage?A: Bill Ballhaus (CEO) explained that the margin expansion is a continuation of the progression of backlog margins. The company is burning down lower-margin backlog in the first part of the year, with margins increasing as they move through the year. By the end of fiscal 2027, they expect to be operating in line with their target profile, which is a low-to-mid-20s adjusted EBITDA margin. Q: Can you provide more detail on the Palantir agreement? Is it more of an EBITDA enhancement or a real top-line opportunity?A: Bill Ballhaus (CEO) stated that while it is early, the sole focus of the DOW-sponsored initiative is to get technology to the warfighter faster. Naturally, this could lead to increased revenue tied to deliveries, increased margins due to operating leverage, and improvements in cash. He noted that these are the primary KPIs that could be positively impacted, but they are early into the relationship and will provide updates as results materialize. Q: How does the record backlog and visibility affect your ability to manage production efficiency, supply chain, and facilities utilization?A: Bill Ballhaus (CEO) stated that the increased next 12-month backlog provides great confidence in the outlook and execution. The even larger increase in backlog beyond the next 12 months gives them the ability to plan further ahead, work with the supply chain to optimize across the full lifecycle, and provides more degrees of freedom to drive improvements in performance. Q: What are the capital priorities for the upcoming year given the improved free cash flow and working capital performance?A: Bill Ballhaus (CEO) reiterated that the primary focus is on the organic value creation opportunity. Due to strong demand signals, they will make targeted investments in inventory, facilities, and CapEx to help scale and accelerate organic growth. The main priority remains capturing the market tailwinds they see. Q: Is there anything limiting growth in the FY27 and FY28 outlook, such as budget certainty or strategic inventory constraints?A: Bill Ballhaus (CEO) framed it less as constraints and more as the natural progression of the portfolio from development to higher-rate production. The outlook reflects a move from low-to-mid single-digit growth to approaching double-digits and then into double-digits. He reiterated that there are opportunities to outperform this outlook through improved backlog conversion and unincorporated market tailwinds. Q: What is the revenue opportunity for CPA-based ruggedized servers, and are they higher or lower margin than other programs?A: Dave Farnsworth (CFO) did not dimension the specific revenue opportunity but reiterated strong demand and growth ahead of expectations. He pointed to the radar line item as a significant piece of this growth. Bill Ballhaus (CEO) added that they are seeing new program opportunities, including interest in smaller form factors, which could open up a new TAM and act as another accelerator for the CPA area. Q: Can you provide more detail on the agreement related to securing memory? How significant was it to bookings, and does it fall within the typical margin of the rest of the backlog?A: Bill Ballhaus (CEO) stated it was one of the more significant multi-year bookings for the year and that this part of the business tends to run at the higher end of the margin profile. Dave Farnsworth (CFO) added that this was a case where the customer proactively wanted to secure the supply early, which is a critical signal of customer demand and partnership. Q: Are there any segments or markets that are outsized contributors to the duration of agreements and multi-year partnerships?A: Bill Ballhaus (CEO) noted a small number of multi-year orders across the business. However, the munitions agreements and multi-year strategic frameworks are still considered potential tailwinds. These are in the pipeline but have yet to materialize in bookings. Dave Farnsworth (CFO) added that they expect more clarity on these in the first and second quarters of fiscal 2027, and they have not included any of this in the current outlook due to uncertainty in timing and structure. Q: What were the drivers of the strong growth in the domestic business, and what caused the decline in international sales?A: Bill Ballhaus (CEO) highlighted that 86% of the business is domestic and grew at 13%, reflecting strong growth tailwinds. The decline in international sales was attributed to a temporary slowdown in deliveries as they ramped up a contract manufacturer for their international business. He expects these issues to be worked out over the next couple of quarters, noting that the international backlog and demand remain strong. For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Mercury Systems MRCY reported adjusted earnings of 37 cents per share for the fourth quarter of fiscal 2026, in line with the Zacks Consensus Estimate. Adjusted earnings declined 21.3% year over year from 47 cents. Revenues of $289.78 million increased 6.1% year over year and beat the Zacks Consensus Estimate by 9.37%.The revenue performance was supported by record bookings and continued production ramp-up. Total bookings reached $660 million, up 93.1% year over year, while the book-to-bill ratio stood at 2.28. The strong order activity pushed backlog above $1.9 billion. The fourth-quarter booking performance was broad-based across common processing architecture, effectors, airborne applications, space and missile defense. MRCY also posted its largest quarter ever for common processing architecture bookings, reflecting stronger activity as programs move toward production.The company also secured a significant multiyear booking related to memory requirements for advanced defense platforms. Management said the customer is seeking to secure supply early, reflecting demand tied to future production needs. Mercury Systems Inc price-consensus-eps-surprise-chart | Mercury Systems Inc Quote Revenue growth was driven by higher activity across the portfolio and increased production volumes. Overtime revenues rose 23.6% year over year, reaching its highest level in 15 quarters, with management linking the increase largely to improved material availability.Domestic revenues, which represented approximately 85.8% of fiscal 2026 revenues, grew 13% organically year over year. Mercury Systems is also expanding capacity, automation and factory operations to support programs transitioning to higher-volume production. Gross margin was 30.6%, down from 31% in the prior-year quarter. Management attributed the pressure primarily to program mix and approximately $4 million of higher net estimated-at-completion change impacts.Operating expenses increased approximately $13 million year over year. Selling, general and administrative expenses rose about $10 million, while research and development costs increased roughly $4 million, with compensation-related costs, including stock-based compensation, driving much of the increase.Adjusted EBITDA was $48.52 million, down from $51.27 million a year earlier, while adjusted EBITDA margin contracted to 16.7% from 18.8%. The company expects margins to improve as lower-margin legacy backlog is converted and newer bookings carry margins closer to its target profile. MRCY is pursuing factory optimization initiatives to improve scalability and execution as production volumes rise. These efforts include capacity expansion, increased automation and consolidation of subscale sites.Mercury Systems also entered a strategic agreement with Palantir to use artificial intelligence software for material planning and factory operations. Management expects the effort to help improve backlog conversion and delivery performance, although the fiscal 2027 outlook excludes any benefit from the partnership. Cash flows from operating activities increased 10.7% year over year to $42.15 million, while free cash flow declined 15.9% to $28.57 million. MRCY ended the fourth quarter with $214.31 million in cash and cash equivalents, down from $331.8 million in the third quarter. Long-term debt declined to $441.5 million from $591.5 million after the company made a $150 million payment against its revolving credit facility. For fiscal 2027, MRCY expects revenues to approach $1.1 billion, with growth approaching double digits year over year. Adjusted EBITDA is expected to approach $200 million, with the margin in the high teens. Fiscal first-quarter revenues are expected to grow at a high-single-digit rate year over year. MRCY currently carries a Zacks Rank #3 (Hold).ATI Inc ATI, AAR AIR and Astronics ATRO are some better-ranked stocks that investors can consider in the broader Zacks Aerospace sector. ATI Inc, AAR and Astronics sport a Zacks Rank #1 (Strong Buy) each at present. You can see the complete list of today’s Zacks #1 Rank stocks here.Shares of ATI Inc have surged 97.3% in the year-to-date period. The Zacks Consensus Estimate for ATI Inc’s 2026 EPS is pegged at $4.81 and indicating an improvement of 48.46% year over year.Shares of AAR have surged 80% in the year-to-date period. The Zacks Consensus Estimate for AAR 2026 EPS is pegged at $5.92 and indicating an improvement of 17.23% year over year. Shares of Astronic have surged 90.5% in the year-to-date period.The Zacks Consensus Estimate for Astronics 2026 EPS is pegged at $2.55 and indicating an improvement of 52.69% year over year. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Mercury Systems Inc (MRCY) : Free Stock Analysis Report ATI Inc. (ATI) : Free Stock Analysis Report AAR Corp. (AIR) : Free Stock Analysis Report Astronics Corporation (ATRO) : Free Stock Analysis Report This article originally published on Zacks Investment Research (zacks.com). Zacks Investment Research

Our analysts just identified a stock with the potential to be the next Nvidia. Tell us how you invest and we'll show you why it's our #1 pick. Tap here. Performance excellence initiatives drove record Q4 results, characterized by the highest overtime revenue in 15 quarters as supply chain alignment improved to support organic growth. Strategic positioning is shifting from development-heavy programs to higher-volume production, resulting in 13% organic growth within the domestic business segment. Record bookings of $660 million in Q4, nearly double the previous record, were driven by broad-based demand across common processing architecture (CPA), effectors, and space applications. Management attributes margin expansion to the ongoing conversion of legacy lower-margin backlog and the addition of new bookings aligned with a low-to-mid-20s EBITDA target profile. The company entered a strategic agreement with Palantir to leverage AI software for enhancing material planning and factory operations to accelerate backlog conversion. Operating leverage is improving as the company consolidates subscale sites and increases automation to align headcount with a production-centric business mix. International revenue declined 15% due to temporary delivery slowdowns associated with transitioning manufacturing to a contract partner, though international backlog remains strong. FY 2027 revenue is expected to approach $1.1 billion, representing growth that is approaching double digits., with Q1 anticipated as the lowest revenue and margin quarter of the year. Management increased the long-term organic revenue growth target to low double digits, supported by a billion dollars in next-12-month backlog coverage. FY 2027 free cash flow conversion is projected at 35%, below the 50% long-term target, due to intentional investments in inventory to support defense spending tailwinds. FY 2028 reference points anticipate organic growth in the low double digits and adjusted EBITDA margins reaching the low end of the 20-25% target profile. Current guidance excludes potential upside from uncontracted tailwinds in munitions and missile defense, as well as efficiency gains from the Palantir partnership. Net working capital was reduced by $18 million year-over-year, contributing to a $150 million payment against the revolving credit facility to lower net debt. A significant multiyear booking was secured for memory components to support future production requirements across advanced defense platforms. Management noted that next-12-month backlog coverage is higher than typical due to customers consolidating multiyear quantities into single large orders. The shareholder settlement was finalized in Q4, resulting in a sequential decrease in prepaid assets and accrued expenses. One stock. Nvidia-level potential. 30M+ investors trust Moby to find it first. Get the pick. Tap here. Management expects margins to increase sequentially as they burn down legacy lower-margin backlog in the first half of the year. By the end of FY 2027, the company expects to be operating in line with its target profile due to improved pricing in the new backlog. The primary goal is to accelerate the delivery of technology to the warfighter by improving factory operations and material planning. While early, management expects the partnership to drive top-line growth through faster deliveries and improve margins via positive operating leverage. Mercury is seeing new customer interest in smaller form factors for CPA, which could expand the addressable market to armored vehicles and unmanned vessels. Management believes their unique security apparatus provides a competitive advantage in penetrating markets where high-performance processing is required at the edge. Several multiyear agreements are in the pipeline but have not yet materialized into firm bookings or the current financial outlook. Management expects more clarity on the timing and funding of these potential tailwinds during the first and second quarters of the new fiscal year.

Mercury Systems (MRCY) reported $289.78 million in revenue for the quarter ended June 2026, representing a year-over-year increase of 6.1%. EPS of $0.37 for the same period compares to $0.47 a year ago. The reported revenue represents a surprise of +9.37% over the Zacks Consensus Estimate of $264.96 million. With the consensus EPS estimate being $0.37, the company has not delivered EPS surprise. While investors scrutinize revenue and earnings changes year-over-year and how they compare with Wall Street expectations to determine their next move, some key metrics always offer a more accurate picture of a company's financial health. As these metrics influence top- and bottom-line performance, comparing them to the year-ago numbers and what analysts estimated helps investors project a stock's price performance more accurately. Here is how Mercury Systems performed in the just reported quarter in terms of the metrics most widely monitored and projected by Wall Street analysts: Net Revenue- Sensor & Effector- Radar: $60.06 million versus $57.97 million estimated by three analysts on average. Compared to the year-ago quarter, this number represents a +13.4% change. Net Revenue- Sensor & Effector- Electronic Warfare: $34.8 million compared to the $29.21 million average estimate based on three analysts. The reported number represents a change of +37.9% year over year. Net Revenue- Other: $34.63 million versus the three-analyst average estimate of $36.77 million. The reported number represents a year-over-year change of -11.2%. Net Revenue- Sensor & Effector- Total: $147.52 million versus $122.3 million estimated by three analysts on average. Compared to the year-ago quarter, this number represents a +38.5% change. Net Revenue- C4I: $107.64 million versus the three-analyst average estimate of $104.08 million. The reported number represents a year-over-year change of -15.7%. Net Revenue- Sensor & Effector- Other Sensor & Effector: $52.66 million versus $35.11 million estimated by three analysts on average. Compared to the year-ago quarter, this number represents a +86.1% change. View all Key Company Metrics for Mercury Systems here>>> Shares of Mercury Systems have returned +19.7% over the past month versus the Zacks S&P 500 composite's +4% change. The stock currently has a Zacks Rank #3 (Hold), indicating that it could perform in line with the broader market in the near term. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Mercury Systems Inc (MRCY) : Free Stock Analysis Report This article originally published on Zacks Investment Research (zacks.com). Zacks Investment Research

Interested in Mercury Systems Inc? Here are five stocks we like better. Record bookings and backlog drove Mercury Systems’ fiscal 2026 performance: fourth-quarter bookings surged 93.1% to $660 million, backlog rose 38.4% to more than $1.9 billion, and revenue reached nearly $290 million. Full-year revenue increased 7.9% to $984 million, while adjusted EBITDA climbed 25.7% to $150 million. However, fourth-quarter adjusted EPS and free cash flow declined, and the company still posted a $30 million GAAP loss for the year. Mercury expects fiscal 2027 revenue to approach $1.1 billion and adjusted EBITDA to near $200 million, supported by production growth and supply-chain improvements. Management also outlined potential additional defense demand, though much of it is not yet included in its outlook. Why Are Insiders Are Dumping Shares of Robinhood, Stryker, and Mercury Systems? Mercury Systems (NASDAQ:MRCY) reported record fourth-quarter bookings, backlog and revenue for fiscal 2026, as the defense technology company cited broad demand across its portfolio and raised its long-term organic-growth target. Chairman and Chief Executive Officer Bill Ballhaus said fourth-quarter bookings reached $660 million, up 93.1% from a year earlier, producing a book-to-bill ratio of 2.3. The quarter included the company’s largest-ever bookings for its Common Processing Architecture, or CPA, products, along with production awards in effectors, airborne applications, space and missile defense. → AMG’s Alternatives Boom Powers Record Growth Mercury Systems Up 27%: Financials Send Investors a Clear Signal Fiscal-year bookings totaled $1.5 billion, an increase of 49.8% year over year, while total backlog rose 38.4% to more than $1.9 billion. Mercury’s next-12-month backlog reached $1 billion, which Ballhaus said provides greater visibility entering fiscal 2027 and into fiscal 2028. Fourth-quarter revenue was a record nearly $290 million, representing organic growth of 6.1% from the prior-year quarter. Adjusted EBITDA was $49 million, or 16.7% of revenue, compared with $51 million, or 18.8% of revenue, a year earlier. Free cash flow was $29 million, down from $34 million in the prior-year period. → Microsoft's Maia 300 Chip Targets NVIDIA's AI Dominance Analysts Went All In On These Computer Stocks, Save Your Spot GAAP net income for the fourth quarter was about $1 million, or $0.01 per share, compared with $16 million, or $0.27 per share, in the same quarter last year. Adjusted earnings per share were $0.37, down from $0.47. For the full fiscal year, revenue increased 7.9% to $984 million. Gross margin improved 70 basis points to 28.6%, while adjusted EBITDA rose 25.7% to $150 million. Full-year adjusted EBITDA margin expanded 217 basis points to 15.3%. → The Metals Company’s Big Bet Now Comes Down to a License Mercury reported a GAAP net loss of about $30 million, or $0.50 per share, for fiscal 2026, improving from a loss of $38 million, or $0.65 per share, in fiscal 2025. Adjusted earnings per share rose to $1.06 from $0.64. Free cash flow was $68 million, compared with $119 million in the previous fiscal year. Executive Vice President and CFO David Farnsworth said full-year gross-margin improvement was driven primarily by lower manufacturing adjustments and reduced net estimate-at-completion, or EAC, change impacts. Operating expenses rose 2.5% during the year, though they declined by 150 basis points as a percentage of revenue. Ballhaus said Mercury is seeing increased volume on existing production programs and a transition of development programs into production. Domestic revenue, which accounted for about 85.8% of fiscal 2026 revenue, grew organically by 13% year over year. The company said its overtime revenue rose 23.6% in the fourth quarter, reaching its highest level in 15 quarters. Ballhaus attributed the improvement largely to material receipts and said the company has made progress aligning its supply chain with increased production demand. Mercury also recently announced a strategic agreement with Palantir to use AI software in material planning and factory operations. Ballhaus said the Department of Defense-sponsored initiative is intended to accelerate deliveries to warfighters and could potentially support revenue growth, margin expansion and cash-flow improvement. However, he said the company is still early in the initiative and has not incorporated benefits from the agreement into its outlook. International sales declined about 15% during the year, according to management. Ballhaus said Mercury had outsourced manufacturing in its international business to a contract manufacturer and experienced slower deliveries while that operation ramped. He characterized the slowdown as temporary and said the company expects the issues to be resolved over the next several quarters. For fiscal 2027, Mercury expects revenue growth approaching double digits, with total revenue approaching $1.1 billion. The company expects first-quarter revenue to be its lowest of the year but to rise by high single digits year over year, followed by revenue growth through the rest of the fiscal year. Mercury expects full-year adjusted EBITDA to approach $200 million, representing nearly 30% year-over-year growth, with adjusted EBITDA margin in the high teens. Management expects margin to increase through the year, as lower-margin legacy backlog is converted and newer bookings move through production. The company expects fiscal 2027 free-cash-flow conversion to approach 35%, below its 50% target, as it makes targeted investments in inventory, automation and factory optimization. Mercury expects first-quarter cash flow to be a larger outflow than normal because of material purchases intended to support anticipated growth. Free cash flow is expected to be higher in the second half than in the first half. Mercury ended the fourth quarter with $214 million in cash and cash equivalents and $227 million in net debt, down 19.5% from a year earlier. The company made a $150 million payment on its revolving credit facility during the fiscal year. Net working capital declined $18 million year over year to about $431 million. For fiscal 2028, Mercury provided reference points rather than formal guidance: low-double-digit organic revenue growth, adjusted EBITDA margin at the low end of its low-to-mid-20% target range, and free-cash-flow conversion returning toward its 50% target. Ballhaus said the company’s outlook includes only a limited amount of defense-market tailwinds that have become firm bookings. Potential increases in demand across CPA, effectors, airborne applications, space, missile defense and munitions have not been included in the outlook, he said. Mercury Systems, Inc (NASDAQ: MRCY) is a technology company that designs, manufactures and markets secure processing subsystems for aerospace and defense applications. The company's products are built to address the stringent security, safety and reliability requirements of mission-critical programs, with a focus on radar, electronic warfare, intelligence and other sensor and processing functions. Mercury's offerings encompass rugged embedded computing modules, high-performance radio frequency (RF) and microwave components, digital signal processing subsystems and secure networking solutions. Since its origins in advanced signal processing, Mercury Systems has expanded its capabilities through a combination of internal development and targeted acquisitions. This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to [email protected]. The article "Mercury Systems Q4 Earnings Call Highlights" was originally published by MarketBeat. View MarketBeat's top stocks for August 2026.

Record Q4 FY26 Bookings of $660 million grew 93.1% year-over-year; book-to-bill of 2.28 Record Backlog of over $1.9 billion; up 38.4% year-over-year Record Q4 FY26 Revenue of approximately $290 million; up 6.1% year-over-year GAAP net income of $1 million; adjusted EBITDA of $49 million and adjusted EBITDA margin of 16.7% ANDOVER, Mass., Aug. 18, 2026 (GLOBE NEWSWIRE) -- Mercury Systems, Inc. (NASDAQ: MRCY, www.mrcy.com), reported operating results for the fourth quarter and fiscal year 2026, ended July 3, 2026. “We delivered fourth quarter fiscal 2026 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," said Bill Ballhaus, Mercury’s Chairman and CEO. “Based on our solid execution and strong demand signals, we enter fiscal year 2027 with enhanced visibility and are increasing our outlook for organic growth." “In the fourth quarter we delivered record bookings of $660 million, up 93% year-over-year and nearly double our previous record bookings quarter; a 2.3 book-to-bill, resulting in a record backlog of approximately $1.9 billion; record revenue of $290 million, up 6.1% year-over-year; GAAP net income of $1 million; adjusted EBITDA of $49 million; adjusted EBITDA margin of 16.7%; cash flows provided by operating activities of $42 million; and free cash flow of $29 million." Fourth Quarter Fiscal 2026 Results Fourth quarter fiscal 2026 revenues were $290 million, compared to $273 million in the fourth quarter of fiscal 2025. Total bookings for the fourth quarter of fiscal 2026 were $660 million, yielding a book-to-bill ratio of 2.28 for the quarter. GAAP net income and diluted earnings per share for the fourth quarter of fiscal 2026 were $1 million and $0.01, respectively, compared to GAAP net income and diluted earnings per share of $16 million and $0.27, respectively, for the fourth quarter of fiscal 2025. Adjusted earnings per share (“adjusted EPS”) was $0.37 per share for the fourth quarter of fiscal 2026, compared to $0.47 per share in the fourth quarter of fiscal 2025. Fourth quarter fiscal 2026 adjusted EBITDA was $49 million, compared to $51 million for the fourth quarter of fiscal 2025. Cash flows provided by operating activities in the fourth quarter of fiscal 2026 were $42 million, compared to $38 million in the fourth quarter of fiscal 2025. Free cash flow, defined as cash flows from operating activities less capital expenditures for property and equipment, was $29 million for the fourth quarter of fiscal 2026 and $34 million for the fourth quarter of fiscal 2025. Full Year Fiscal 2026 Results Full year fiscal 2026 revenues were $984 million, compared to $912 million for full year fiscal 2025. Total bookings for fiscal 2026 were $1.5 billion, yielding a book-to-bill ratio of 1.57 for the year. GAAP net loss and loss per share for fiscal 2026 were $30 million, and $0.50, respectively, compared to GAAP net loss and loss per share of $38 million, and $0.65, respectively, for fiscal 2025. Adjusted EPS was $1.06 per share for fiscal 2026, compared to adjusted loss per share of $0.64 per share for fiscal 2025. Fiscal 2026 adjusted EBITDA was $150 million, compared to $119 million for fiscal 2025. Cash flows provided by operating activities in fiscal 2026 were $102 million, compared to $139 million in fiscal 2025. Free cash flow, defined as cash flows from operating activities less capital expenditures for property and equipment, was $68 million for fiscal 2026 and $119 million for fiscal 2025. Backlog Mercury’s total backlog at July 3, 2026 was over $1.9 billion, an approximate $540 million increase from a year ago. Of the July 3, 2026 total backlog, $1.0 billion represents orders expected to be recognized as revenue within the next 12 months. Conference Call Information Management will host a conference call and simultaneous webcast at 5:00 p.m. ET on Tuesday, August 18, 2026, to discuss Mercury's quarterly financial results, business highlights and outlook. In addition, Company representatives may answer questions concerning business and financial developments and trends, the Company's view on earnings forecasts, and other business and financial matters affecting the Company, the responses to which may contain information that has not been previously disclosed. To participate in the conference call Q&A as an analyst please register online at https://events.q4inc.com/analyst/603599389?pwd=RYGqad9c or dial +1 585 542 9983 by phone using Meeting ID: 603599389. The live listen-only webcast and replay will be available ir.mrcy.com/events-presentations. A replay of the webcast will be available two hours after the call and archived on the same web page for six months. Use of Non-GAAP Financial Measures In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, the Company provides adjusted EBITDA, adjusted income, adjusted earnings per share (“adjusted EPS”) and free cash flow, which are non-GAAP financial measures. Adjusted EBITDA, adjusted income, and adjusted EPS exclude certain non-cash and other specified charges. The Company believes these non-GAAP financial measures are useful to help investors understand its past financial performance and prospects for the future. However, these non-GAAP measures should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. Management believes these non-GAAP measures assist in providing a more complete understanding of the Company’s underlying operational results and trends, and management uses these measures along with the corresponding GAAP financial measures to manage the Company’s business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals. A reconciliation of GAAP to non-GAAP financial results discussed in this press release is contained in the attached exhibits. Mercury Systems – Innovation that Matters® Mercury Systems is a global leader in aerospace and defense electronics, providing breakthrough capabilities in signal and data processing. With a four-decade legacy of innovation that spans silicon to systems and radio frequency front ends to effectors, we accelerate commercial technology adoption to deliver powerful and secure mission-critical processing solutions to the edge. We are headquartered in Andover, Massachusetts, and have multiple locations worldwide. Our end-to-end processing ecosystem, the Mercury Processing Platform, is built on technologies we have developed and acquired over 40 years. Our technologies are available as standard products or custom solutions from silicon to system scale to ensure interoperability, reduced complexity, optimized performance and speed development. To learn more, visit mrcy.com. (Nasdaq: MRCY) Investors and others should note that we announce material financial information using our website (www.mrcy.com), SEC filings, press releases, public conference calls, webcasts, and social media, including X (X.com/mrcy) and LinkedIn (www.linkedin.com/company/mercury-systems). Therefore, we encourage investors and others interested in Mercury to review the information we post on the social media and other communication channels listed on our website. Forward-Looking Safe Harbor StatementThis press release contains certain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, including those relating to the Company's focus on enhanced execution of the Company's strategic plan. You can identify these statements by the words “may,” “will,” “could,” “should,” “would,” “plans,” “expects,” “anticipates,” “continue,” “estimate,” “project,” “intend,” “likely,” “forecast,” “probable,” “potential,” and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, cost increases, our inability to increase production and deliver products on time and with appropriate quality, continued funding of defense programs, the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of any U.S. federal government shutdown or extended continuing resolution, effects of increasingly volatile geopolitical events and regional conflicts, competition, changes in technology and methods of marketing, delays in or cost increases related to completing development, engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in, or in the U.S. government’s interpretation of, federal export control or procurement rules and regulations, including tariffs, changes in, or in the interpretation or enforcement of, environmental rules and regulations, market acceptance of the Company's products, shortages or delays in receiving components, supply chain delays or volatility for critical components, production delays or unanticipated expenses including due to quality issues or manufacturing execution issues, failure to meet contractual performance specifications, adherence to required manufacturing standards, capacity underutilization, increases in scrap or inventory write-offs, failure to achieve or maintain manufacturing quality certifications, such as AS9100, failure to achieve or maintain qualified business systems, such as those required by the DFARS, adverse findings in government audits or investigations, the impact of supply chain disruption, inflation and labor shortages, among other things, on program execution and the resulting effect on customer satisfaction, inability to fully realize the expected benefits from acquisitions, restructurings and operational efficiency initiatives or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, effects of shareholder activism, increases in interest rates, changes to industrial security and cyber-security regulations and requirements and impacts from any cyber or insider threat events, including the risks from heightened, persistent, and increasingly sophisticated nation-state level cyberattacks and emerging threats associated with agentic AI-enabled cyber tools, changes in tax rates or tax regulations, changes to interest rate swaps or other cash flow hedging arrangements, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, litigation, including the state law claim related to our settled federal securities class action lawsuit, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as are discussed in the Company's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended July 3, 2026 and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. Contact:Tyler Hojo, CFA, Vice President of Investor RelationsMercury Systems, Inc.978-967-3676 Mercury Systems and Innovation That Matters are registered trademarks of Mercury Systems, Inc. Other product and company names mentioned may be trademarks and/or registered trademarks of their respective holders. UNAUDITED SUPPLEMENTAL INFORMATION RECONCILIATION OF GAAP TO NON-GAAP MEASURES(In thousands, except per share data) Adjusted EBITDA, a non-GAAP measure for reporting financial performance, excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP. Management believes that exclusion of these items assists in providing a more complete understanding of the Company’s underlying results and trends, and management uses these measures along with the corresponding GAAP financial measures to manage the Company’s business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals. The adjustments to calculate this non-GAAP financial measure, and the basis for such adjustments, are outlined below: Other non-operating adjustments. The Company records other non-operating adjustments such as gains or losses on foreign currency remeasurement, investments and fixed asset sales or disposals among other adjustments. These adjustments may vary from period to period without any direct correlation to underlying operating performance. Interest income and expense. The Company receives interest income on investments and incurs interest expense on loans, financing leases and other financing arrangements. These amounts may vary from period to period due to changes in cash and debt balances and interest rates driven by general market conditions or other circumstances which may be outside of the normal course of the Company’s operations. Income taxes. The Company’s GAAP tax expense can fluctuate materially from period to period due to tax adjustments that are not directly related to underlying operating performance or to the current period of operations. Depreciation. The Company incurs depreciation expense related to capital assets purchased to support the ongoing operations of the business. These assets are recorded at cost or fair value and are depreciated using the straight-line method over the useful life of the asset. Purchases of such assets may vary significantly from period to period and without any direct correlation to underlying operating performance. Amortization of intangible assets. The Company incurs amortization of intangible assets primarily as a result of acquired intangible assets such as backlog, customer relationships and completed technologies but also due to licenses, patents and other arrangements. These intangible assets are valued at the time of acquisition or upon receipt of right to use the asset, amortized over the requisite life and generally cannot be changed or influenced by management after acquisition. Restructuring and other charges. The Company incurs restructuring and other charges in connection with management’s decisions to undertake certain actions to realign operating expenses through workforce reductions and the closure of certain Company facilities, businesses and lines of business. The Company’s adjustments reflected in restructuring and other charges are typically related to acquisitions and organizational redesign programs initiated as part of discrete post-acquisition integration activities. Management believes these items are non-routine and may not be indicative of ongoing operating results. Impairment of long-lived assets. The Company incurs impairment charges of long-lived assets based on events that may or may not be within the control of management. Management believes these items are outside the normal operations of the Company’s business and are not indicative of ongoing operating results. Acquisition, financing and other third party costs. The Company incurs transaction costs related to acquisition and potential acquisition opportunities, such as legal, accounting, and other third party advisory fees. The Company may also incur third party costs, such as legal, banking, communications, proxy solicitation, and other third party advisory fees in connection with engagements by activist investors or unsolicited acquisition offers. Although the Company may incur such third party costs and other related charges and adjustments, it is not indicative that any transaction will be consummated. Additionally, the Company incurs unused revolver and bank fees associated with maintaining its credit facility as well as non-cash financing expenses associated with obtaining its credit facility. Management believes these items are outside the normal operations of the Company’s business and are not indicative of ongoing operating results. Fair value adjustments from purchase accounting. As a result of applying purchase accounting rules to acquired assets and liabilities, certain fair value adjustments are recorded in the opening balance sheet of acquired companies. These adjustments are then reflected in the Company’s income statements in periods subsequent to the acquisition. In addition, the impact of any changes to originally recorded contingent consideration amounts are reflected in the income statements in the period of the change. Management believes these items are outside the normal operations of the Company and are not indicative of ongoing operating results. Litigation and settlement income and expense. The Company periodically receives income and incurs expenses related to pending claims and litigation and associated legal fees and potential case settlements and/or judgments. Although the Company may incur such costs and other related charges and adjustments, it is not indicative of any particular outcome until the matter is fully resolved. Management believes these items are outside the normal operations of the Company’s business, often occur in periods other than the period of activity, and are not indicative of ongoing operating results. The Company periodically receives warranty claims from customers and makes warranty claims towards its vendors and supply chain. Management believes the expenses and gains associated with these recurring warranty items are within the normal operations and operating cycle of the Company’s business. Therefore, management deems no adjustments are necessary unless under extraordinary circumstances. Stock-based and other non-cash compensation expense. The Company incurs expense related to stock-based compensation included in its GAAP presentation of cost of revenues, selling, general and administrative expense and research and development expense. The Company also incurs non-cash based compensation in the form of pension related expenses and matching contributions to its defined contribution plan. Although stock-based and other non-cash compensation is an expense of the Company and viewed as a form of compensation, these expenses vary in amount from period to period, and are affected by market forces that are difficult to predict and are not within the control of management, such as the market price and volatility of the Company’s shares, risk-free interest rates and the expected term and forfeiture rates of the awards, as well as pension actuarial assumptions. Management believes that exclusion of these expenses allows comparisons of operating results to those of other companies, both public, private or foreign, that disclose non-GAAP financial measures that exclude stock-based compensation and other non-cash compensation. Mercury uses adjusted EBITDA as an important indicator of the operating performance of its business. Management excludes the above-described items from its internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to the Company’s board of directors, determining a portion of bonus compensation for executive officers and other key employees based on operating performance, evaluating short-term and long-term operating trends in the Company’s operations, and allocating resources to various initiatives and operational requirements. The Company believes that adjusted EBITDA permits a comparative assessment of its operating performance, relative to its performance based on its GAAP results, while isolating the effects of charges that may vary from period to period without direct correlation to underlying operating performance. The Company believes that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making. The Company believes that trends in its adjusted EBITDA are valuable indicators of its operating performance. Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. The Company expects to continue to incur expenses similar to the adjusted EBITDA financial adjustments described above, and investors should not infer from the Company’s presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring. The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure. Free cash flow, a non-GAAP measure for reporting cash flow, is defined as cash provided by operating activities less capital expenditures for property and equipment, which includes capitalized software development costs, and, therefore, has not been calculated in accordance with GAAP. Management believes free cash flow provides investors with an important perspective on cash available for investment and acquisitions after making capital investments required to support ongoing business operations and long-term value creation. The Company believes that trends in its free cash flow are valuable indicators of its operating performance and liquidity. Free cash flow is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. The Company expects to continue to incur expenditures similar to the free cash flow financial adjustment described above, and investors should not infer from the Company’s presentation of this non-GAAP financial measure that these expenditures reflect all of the Company's obligations which require cash. The following table reconciles the most directly comparable GAAP financial measure to the non-GAAP financial measure. Adjusted income and adjusted earnings per share (“adjusted EPS”) are non-GAAP measures for reporting financial performance, exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. Management believes that exclusion of these items assists in providing a more complete understanding of the Company’s underlying results and trends and allows for comparability with its peer company index and industry. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. The Company uses these measures along with the corresponding GAAP financial measures to manage the Company’s business and to evaluate its performance compared to prior periods and the marketplace. The Company defines adjusted income as income before other non-operating adjustments, amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition, financing and other third party costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, and stock-based and other non-cash compensation expense. The impact to income taxes includes the impact to the effective tax rate, current tax provision and deferred tax provision(1). Adjusted EPS expresses adjusted income on a per share basis using weighted average diluted shares outstanding. The following tables reconcile the most directly comparable GAAP financial measures to the non-GAAP financial measures.