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DATE

Tuesday, May 5, 2026, at 5 p.m. ET

CALL PARTICIPANTS

  • Chairman and Chief Executive Officer — William L. Ballhaus
  • Executive Vice President and Chief Financial Officer — David E. Farnsworth
  • Vice President of Investor Relations — Tyler Hojo

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TAKEAWAYS

  • Bookings -- $348.3 million, setting a quarterly record, with a book-to-bill ratio of 1.48 and trailing-twelve-month bookings at $1.23 billion.
  • Backlog -- Nearly $1.6 billion, up $240 million, or 17.9% year over year, and the next-12-month backlog increased 10.3% sequentially.
  • Revenue -- $235.8 million, reflecting organic growth of 11.5% year over year.
  • Adjusted EBITDA -- $36.1 million, increasing 46% year over year, with a margin of 15.3%, up 360 basis points.
  • Gross margin -- 29.3%, up 230 basis points over the prior year, primarily driven by lower net EAC changes and manufacturing adjustments, partially offset by higher inventory reserves.
  • Operating expenses -- Down approximately $11 million, or 14.3% year over year, driven by lower restructuring charges, SG&A, and R&D costs.
  • GAAP net loss -- $3 million, compared to $19 million in the same quarter last year, with GAAP loss per share of $0.04 versus $0.33.
  • Adjusted EPS -- $0.27, up from $0.06 in the prior year, driven by improved execution and operating leverage.
  • Free cash flow -- Outflow of $1.8 million, which management stated meaningfully outperformed expectations.
  • Cash and cash equivalents -- $332 million at quarter end, up $62 million, or 23% over last year, with $73 million last 12 months’ free cash flow partially offset by $15 million in share repurchases.
  • Net working capital -- Down $18.7 million, or 4.1% year over year; reduced by $225 million, or 34%, from Q1 fiscal 2024 peak.
  • Domestic revenue -- Accounted for 88% of total, growing 17% year over year in the quarter.
  • Program acceleration -- Approximately $25 million of revenue, $15 million of adjusted EBITDA, and $25 million cash accelerated into the quarter from next quarter, attributed to improved supply execution.
  • Manufacturing and capacity expansion -- Additional 50,000 square feet opened in Phoenix, Arizona, plus acquisition of a process technology provider integral to key ramping programs.
  • Segment & product highlights -- Largest booking contributions came from missile, C4I, and space programs, with record bookings for solutions leveraging common processing architecture.
  • Outlook update -- Annual revenue growth now expected to approach mid-single digits, adjusted EBITDA margin outlook raised to “mid-teens,” and positive free cash flow expected in Q4.

SUMMARY

Mercury Systems (MRCY +1.73%) reported record bookings and backlog, with organic revenue and margin expansion attributed to operational execution and diversified demand across core defense programs. Management stated that accelerated material staging and investments in automation have improved delivery linearity, visibility, and backlog conversion rates. The company highlighted strong domestic growth, capacity expansion in Phoenix, and acquisition of a key process technology provider as contributors to the quarter's performance. Mercury Systems raised its annual outlook for revenue and margins, citing improved backlog quality and anticipated positive free cash flow in the next quarter. Management described pipeline strength in Q4 and pointed to multiple tailwinds from defense budgets and programs not yet reflected in current bookings or guidance.

  • Management stated Q3 working capital improvement enabled a $150 million debt repayment against the revolver in Q4.
  • Current bookings reflect strong demand across the portfolio in areas like space, C4I, and missile defense, with no single program exceeding 10% of total bookings.
  • Automation, site consolidation, and new production capabilities in Phoenix were implemented to support scalable growth.
  • Backlog margin is improving as legacy lower-margin orders are converted and new bookings come in at target margin profiles.
  • Revenue linearity improvements and earlier material staging have allowed for more predictable quarterly performance and reduced forecast volatility.
  • The outlook does not include potential upside from programs such as Golden Dome and LTAMDS, even as management expressed optimism about prospective tailwinds.
  • Management noted exposure to a broad set of tailwinds across the market and active positioning to capture such opportunities.
  • Adjusted EBITDA margin guidance for the full year now aligns with the “mid-teens” level, reflecting both margin expansion and improved operating leverage.

INDUSTRY GLOSSARY

  • Book-to-bill: Ratio of net bookings received to net revenue billed over a period, indicating demand strength and future revenue pipeline.
  • Backlog: Firm orders received but not yet recognized as revenue, serving as an indicator of future business.
  • Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted for non-recurring or non-core items as defined by the company.
  • Common processing architecture (CPA): Mercury Systems’ modular hardware and software platform enabling scalable and secure high-performance computing across multiple aerospace and defense applications.
  • EAC (Estimate at Completion): Projected total cost required to complete a contract or project; changes can impact margin.
  • Golden Dome: Reference to a domestic missile defense initiative cited as a future market tailwind.
  • LTAMDS: Lower Tier Air and Missile Defense Sensor, a significant radar defense program referenced in Pentagon and international procurement.
  • IBAS: Defense Department’s Industrial Base Analysis and Sustainment program, which funds manufacturing capacity and innovation.

Full Conference Call Transcript

Operator: Good day, everyone, and welcome to the Mercury Systems, Inc. Third Quarter Fiscal 2026 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the company's Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo.

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 E. 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 Relations section of the website under Events and Presentations. Turning to slide two in the presentation, I would like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury Systems, Inc.'s financial outlook, future plans, objectives, business prospects, and anticipated financial performance.

These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on slide two, the earnings press release, and the risk factors included in Mercury Systems, Inc.'s SEC filings. 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 Systems, Inc.'s Chairman and CEO, William L. Ballhaus.

William L. Ballhaus: Please turn to slide three. Thanks, everyone. Good afternoon, and thank you for joining our Q3 FY 2026 earnings call. We delivered Q3 results that were ahead of our expectations, with significant year-over-year growth in backlog, revenue, and adjusted EBITDA. Strong demand signals and solid execution contributed to better-than-expected organic growth and margin expansion this quarter. Today, I will cover three topics: first, some introductory comments on our business and results; second, an update on our four priorities—performance excellence, building a thriving growth engine, expanding margins, and driving free cash flow; and third, performance expectations for the balance of FY 2026 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 Systems, Inc. to support their most critical programs. I would also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge. Please turn to slide four.

Our Q3 results reflected robust organic growth and margin expansion: record bookings of $348.3 million and a 1.48 book-to-bill, resulting in a record backlog approaching $1.6 billion; revenue of $235.8 million, up 11.5% organically year over year; adjusted EBITDA of $36.1 million and adjusted EBITDA margin of 15.3%, up 46% and 360 basis points, respectively, year over year; and free cash outflow of $1.8 million, meaningfully outperforming our expectations. We ended Q3 with $332 million of cash on hand.

These results reflect ongoing focus on our four priority areas, with highlights that include solid execution across our broad portfolio of production and development programs; backlog growth of 18% year over year and a sequential increase of twelve-month backlog of 10.3%; a streamlined operating structure enabling increased positive operating leverage and significant margin expansion; and continued progress on free cash flow drivers, with net working capital down 4.1% year over year. Please turn to slide five. Starting with our four priorities and priority one, performance excellence, where we are focused on sound execution on development programs, accelerating deliveries for our customers broadly across our portfolio, and ramping the rate on numerous programs transitioning to higher-volume production.

We accelerated progress across a number of programs and generated approximately $25 million of revenue, $15 million of adjusted EBITDA, and $25 million of cash, all primarily planned for the fourth quarter. This acceleration, enabled by our efforts to align our supply base to yield faster backlog conversion, contributed to top-line growth, adjusted EBITDA margin, and free cash flow that exceeded our expectations for Q3 and will also factor into our outlook for Q4, which I will speak to shortly. Our strong bookings and record backlog, combined with our ability to more rapidly convert backlog, are translating into organic growth exceeding our expectations coming into FY 2026.

Notably, our domestic revenue, representing 88% of our Q3 revenue, generated 17% year-over-year growth. Beyond this solid performance, we progressed on a number of actions in the quarter to increase capacity, add automation, and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency. Notably, we added capacity to our highly automated manufacturing footprint in Phoenix, Arizona, and initiated operations within our additional 50 thousand square feet of factory space to support ramped production for our common processing architecture programs and to allow for efficient scaling. In the quarter, we also completed the acquisition of a critical manufacturing process technology provider integral to a number of our key ramping programs.

These are among a number of actions we have taken, along with prior investments across a number of critical technology developments, that are driving our ability to accelerate delivery of vital capabilities to our warfighters and our allies. Please turn to slide six. Moving on to priority two, driving organic growth. We believe that our near-term organic growth will be driven by increased volume on existing production programs and the ongoing transition of a number of development programs to production. Additionally, we expect possible upside tied to potential tailwinds from customer-driven acceleration and increased quantities across a broad set of production programs in our portfolio.

Lastly, we are excited about new development programs and the potential of the production volume associated with those wins. In Q3, we delivered a record quarter with $348.3 million of bookings, resulting in a book-to-bill of 1.48 and a record backlog approaching $1.6 billion. Our trailing-twelve-month bookings are a record $1.23 billion. Q3 bookings were driven largely by follow-on production orders reflecting strong customer demand across core franchise programs. This bookings mix reflects the transitioning of our business toward higher-rate production and we believe does not meaningfully capture the potential incremental tailwinds we see in the market. The largest bookings in the quarter were across several missiles, C4I, and space programs.

In addition, the quarter featured the strongest bookings of the fiscal year for solutions that leverage our common processing architecture. Finally, we secured a follow-on development award on a strategic program that has the potential to proliferate across multiple platforms. Beyond our backlog growth, we continue to see the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. I remain optimistic that these potential market tailwinds may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond. Please turn to slide seven. Now turning to priority three, expanding margins.

In our efforts to progress toward our targeted adjusted EBITDA margins in the low- to mid-20% range, we are focused on the following drivers: backlog margin expansion as we convert lower-margin backlog and add new bookings aligned with our target margin profile; ongoing initiatives to further simplify, automate, and optimize our operations; and driving organic growth to increase positive operating leverage. Q3 adjusted EBITDA margin of 15.3% was ahead of our expectations and up 360 basis points year over year.

Gross margin of 29.3% was up 230 basis points year over year, consistent with our expectation that average backlog margin will continue to increase as we convert legacy lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses are down year over year, both on an absolute basis and as a percent of sales, reflecting our focus on continuously driving cost structure efficiencies to enable significant positive operating leverage as we accelerate organic growth. Please forward to slide eight. Finally, turning to priority four, improved free cash flow.

We continue to make progress on the drivers of free cash flow, and in particular, reducing net working capital, which had approximately $4.344 billion, and is down $18.7 million year over year. Net debt was $259.7 million at the end of Q3. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning, and supply chain management will continue to yield a strong balance sheet that provides sufficient flexibility for us to pursue and capture potential market tailwinds. Please turn to slide nine.

Looking ahead, I am very optimistic about our team's performance, strategic positioning, the market backdrop, and our expectation to deliver results in line with our target profile of above-market top-line growth, adjusted EBITDA margins in the low- to mid-20% range, and free cash flow conversion of 50%. We believe our strong year-to-date results show meaningful progress toward this target profile, with an aggregate 1.3 book-to-bill, 9% top-line growth, 15% adjusted EBITDA margins, 400 basis points of EBITDA margin expansion year over year, and free cash flow of $39.5 million. Coming out of Q3, we are raising our expectations for FY 2026.

We believe our efforts to stage material earlier have improved revenue linearity and increased forecast visibility, and that progress is now reflected in our updated expectations for FY 2026. As a result, our outlook incorporates backlog conversion that historically may have materialized in accelerations and results above forecast. Our Q4 bookings have the potential to be the strongest of the year, based on a pipeline of opportunities that is more robust than our Q3 pipeline, which we believe could be an indicator of increased top-line growth and further margin expansion beyond FY 2026. We now expect annual revenue growth for FY 2026 approaching mid-single digits, up from low single digits.

We expect full-year adjusted EBITDA margin of mid-teens, up from approaching mid-teens. Finally, with respect to free cash flow, we expect free cash flow to be positive for Q4. In summary, with our positive momentum year to date, and coming out of a very solid Q3, I expect FY 2026 performance to deliver a significant step toward our target profile. Additionally, I am gaining optimism regarding the potential tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize and provide upside bookings to our plan over time. With that, I will turn it over to David to walk through the financial results for the quarter, and I look forward to your questions. David?

David E. Farnsworth: Thank you, Bill. Our third quarter results reflect continued solid 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 10, which details our third quarter results. Our bookings for the quarter were approximately $348 million, with a book-to-bill of 1.48. A record backlog of nearly $1.6 billion is up $240 million, or 17.9%, year over year. Revenues for the third quarter were nearly $236 million, up approximately $24 million, or 11.5% organically, compared to the prior year.

During the third quarter, we were again able to accelerate progress on a number of customers' high-priority programs worth approximately $25 million of revenue, primarily planned for 2026. Gross margin for the third quarter increased approximately 230 basis points to 29.3% as compared to the same quarter last year. The gross margin increase during the third quarter was primarily driven by lower net EAC change impacts of nearly $2 million and lower net manufacturing adjustments of approximately $4 million. These increases were partially offset by higher inventory reserves of approximately $3 million.

As Bill 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 to simplify, automate, and optimize 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 decreased approximately $11 million, or 14.3%, year over year. The decrease in operating expenses was driven primarily by lower restructuring and other charges, selling, general and administrative expenses, and research and development costs of approximately $5 million, $4 million, and $1 million, respectively.

These decreases reflect the efficiency improvements and headcount actions we have previously discussed to align our team composition with our increased production mix, driving improved operating leverage. GAAP net loss and loss per share in the third quarter were approximately $3 million and $0.04, respectively, as compared to GAAP net loss and loss per share of approximately $19 million and $0.33, respectively, in the same quarter last year. Adjusted EBITDA for the third quarter was approximately $36 million, up $11 million, or 46.2%, as compared to the same quarter last year. The increase was partially driven by enhanced execution and improved operating leverage. Adjusted earnings per share was $0.27 as compared to $0.06 in the prior year.

The year-over-year increase was primarily related to our improved execution and increased operating leverage in the current period. As compared to the prior year, free cash flow for the third quarter was an outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. As we noted last quarter, we did expect to see a free cash outflow in the third quarter; however, we were able to successfully mitigate a large portion of that outflow through improved collections on billed receivables. Slide 11 presents Mercury Systems, Inc.'s balance sheet for the last five quarters.

We ended the third quarter with cash and cash equivalents of $332 million, which represents an increase of approximately $62 million, or 23%, from the same period in the prior year. This increase was primarily driven by the last twelve months' free cash flow of approximately $73 million, which was partially offset by $15 million of shares repurchased and retired from our share repurchase program earlier this fiscal year. Billed and unbilled receivables decreased sequentially by approximately $10 million and $4 million, respectively. We continue to expect to allocate factory in the fourth quarter to programs with unbilled receivable balances, which will help drive free cash flow with minimal impact to revenue. Inventory increased sequentially by approximately $12 million.

The increase was driven primarily by work in process as we bring product to its final state in support of our increased proportion of point-in-time revenue on many of the company's production programs. Prepaid expenses and other current assets decreased sequentially by approximately $10 million, primarily due to insurance proceeds and normal operating expenses. Accounts payable decreased sequentially by approximately $2 million, primarily driven by the timing of payments to our suppliers. Accrued expenses decreased approximately $3 million sequentially, primarily due to the payments of a legal settlement and restructuring activities we announced earlier this fiscal year. Accrued compensation increased approximately $2 million sequentially, primarily due to our incentive compensation plans.

The amount due to our factoring facility decreased sequentially by approximately $18 million, primarily due to the timing of payments from our customers due back to our counterparty. Deferred revenues decreased sequentially by approximately $11 million, primarily driven by execution across a number of programs during the period. Working capital decreased approximately $19 million year over year, or 4.1%. Our continued working capital improvement year over year, which is evidenced by our strong balance sheet position, has 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 multiyear trend of growth in working capital, resulting in a reduction of approximately $225 million, or 34%, from the peak net working capital in Q1 fiscal 2024. Our balance sheet provides sufficient flexibility for us to pursue and capture potential market tailwinds. Turning to cash flow on slide 12. Free cash flow for the third quarter was a slight outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. We continue to expect free cash flow to be positive for the year, with positive cash flow expected in the fourth quarter, as Bill previously noted.

We believe our continuous improvement in program execution, hardware deliveries, just-in-time material, and appropriately timed payment terms will lead to continued reduction in working capital. In closing, we are pleased with the performance in the third quarter and the higher level of predictability in the 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 one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 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. Your first question comes from the line of Kenneth George Herbert from RBC. Your line is now open.

Kenneth George Herbert: Good afternoon, Bill and Dave. Really nice results. Seasonally, you typically have a nice step up into the fourth quarter. The revised outlook for the full year implies more modest margin expansion into the fourth quarter. Maybe you can just talk about some of the puts and takes into the fourth quarter and then, more importantly, not to get too far ahead, but how much of the move towards the longer-term target up into the low 20s could we expect to see in fiscal 2027?

David E. Farnsworth: Hey, Ken. If it is okay, I will start, and then Bill can jump in. As far as the sequential growth in margin, we have seen that in the past, and it is accompanying a real significant change in the linearity of our business. As you recall, in the fourth quarter we have typically seen a higher level of revenue, and the mix has been a bit different. One of the things we have been able to do this year is start to flatten out that linearity a little bit, so a stronger Q3 with stronger margins accompanying Q3 as well.

Where in the past we have seen a step-up of potentially a couple hundred basis points, it was from a much lower starting point normally. We do not expect to see that rate of jump in the fourth quarter—more of a gradual trend—but we feel good about the total year. As Bill said, mid-teens around the margin for the year, and we do feel we are headed in the right direction and in keeping with our expectation of getting towards our target margins.

William L. Ballhaus: What I will add reflects this smooth transition of the business from a high mix and concentration of development programs a couple of years ago, to completion of those programs, transition into low-rate production, and then increased levels of production. What we have expected to see as we have evolved is a combination of increasing top-line growth and then further acceleration of the bottom line. If you adjust for some of what we pulled forward from this year and what that translated into last year into Q4, it is a relatively smooth progression to mid-single-digit top-line growth, now to high-single-digit top-line growth, with nice margin expansion on the bottom line. There are indicators of that continuing as we move forward.

A couple of things I would point to would be the growth in our domestic business in Q3, which was up 17% year over year, and then, in the quarter, a really nice step up in our next-twelve-month backlog, up 10% from Q2 to Q3. More than anything, Ken, I think David’s point around linearity stands—we are seeing a nice, smooth progression of the business.

Kenneth George Herbert: That is great. Appreciate that. As we think about the strong bookings in the quarter—you highlighted missiles, C4I, and some space programs—are there any particular programs within those broader buckets you are comfortable calling out or you would specifically highlight as significant sources of bookings?

William L. Ballhaus: One of the real strengths of our business is the diversification across our portfolio—no real concentration, no one program makes up more than 10%. The strong bookings really reflect strong demand across our portfolio in areas like space, C4I, and missile defense, and we think that is a real strong attribute of our business. No single program and no real lumpiness in the bookings—just a strong indication of demand across our broad portfolio. It really is, as we have been talking about, the transition from a heavy concentration of development to the follow-on production, with nice progression in the quarter.

David E. Farnsworth: As we look across the areas, there is not one we would say is declining or flat. All the areas from a bookings standpoint are seeing solid activity, in keeping with the market. To a large degree, these are the production efforts we have been talking about, gearing up more production on the same programs we have been working.

Operator: Thank you for your question. Your next question comes from the line of Peter John Skibitski from [inaudible]. Your line is now open.

Peter John Skibitski: Thanks. The bookings performance was really strong this quarter. It seemed like the tone of your commentary was more positive in terms of the sales outlook, and you have raised the guide to the mid-single-digit range. Even looking at that guide, the fourth quarter revenue looks like it would imply to be down year over year. Is there continued conservatism there in the guide, or is there a large percentage of unbilled receivable-type work in the fourth quarter relative to the third quarter, or maybe something else?

William L. Ballhaus: One way you could think about it is aside from the $30 million that we accelerated from 2026 into Q4 of last year, the year-over-year comparison in top-line growth looks pretty consistent with what Q1, Q2, and Q3 look like. Again, it reflects a steady progression of our business to mid-single digits last year and then high single digits this year, with some real positive indicators based on the book-to-bill, the continuing growth of our backlog—which we expect to continue to grow—and, in particular, the portion of our backlog that we expect to convert over the next twelve months.

Peter John Skibitski: Okay. And then just on the unbilled receivables, they were down only modestly this quarter. What is the right way to think about that? Does that mean some of these cycles are just going to take a lot longer? I am a little confused as to why we did not see a bigger step down in the receivables.

David E. Farnsworth: Some of what is reflected there—and in our inventories—is a bit of the upcycle we are seeing in terms of production coming in. There is always a timing phenomenon. You did see a bit of a decline; there was a much more significant decline, but there were things added in as we were ramping up on new activities. Nothing more than timing. We are still focused on burning down some of our older unbilled balances, but as we ramp up revenue, there will be new unbilled balances—certainly on better terms than in the past—but there will be some from a timing standpoint. Nothing different than what we have been saying.

We are still focused on working through the older balances and getting them cleared from our books so we have the capacity to do all the new work that we see.

William L. Ballhaus: There are definitely more dynamics under the hood than you would see if you just looked at the quarter-to-quarter number. The other thing I would point out is close to 12% growth year over year, and the net working capital coming down year over year despite that growth, reflects the progress we are continuing to make and the increased efficiency of our net working capital.

Operator: Thank you for your question. Your next question comes from the line of Austin Moeller from Canaccord Genuity. Austin, your line is now open.

Austin Moeller: Hi. Good afternoon. Are you looking at the IBAS defense industrial base investments within the fiscal year 2027 budget, and do you see any opportunities to get incremental investments from that program to expand your capacity?

William L. Ballhaus: Hey, Austin. Thanks for the question. We have had interactions with IBAS. We have programs that are funded by IBAS, and that continues to be an area where we look for opportunities to go after things that they are interested in investing in and that we think can increase our capacity, our efficiency, and our innovation. So, yes, definitely something that is in front of us.

Austin Moeller: Great. And just my next question: do you see more contract opportunities within Golden Dome or within the Defense Autonomous Working Group within the fiscal year 2027 budget request?

William L. Ballhaus: We definitely see opportunities across the board, not only in our existing portfolio of programs but also tied to administrative priorities like Golden Dome, missile defense, and armaments. Across the board right now we are seeing opportunities, and we feel like our capabilities are really well aligned with the administration's priorities broadly. One of the things we have said before, and that we think is unique about our positioning, is we have exposure to a broad set of tailwinds across the market. That is what we are focused on capturing right now.

Austin Moeller: Excellent. I will pass it back there. Thank you.

William L. Ballhaus: Thanks, Austin.

Operator: Thank you for your question. Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila, your line is now open.

Analyst: Hi, guys. This is [inaudible] on for Sheila. Maybe building off of the missile questions that have been asked: curious, if you could just size how big Mercury’s missile exposure is as a percent of sales—even roughly—and, with a few large LTAMDS contracts out there of late, thinking like the $8 billion SMS to Kuwait, how would you think about what an order of that magnitude means for your business?

William L. Ballhaus: Thanks very much for the question. We do not size the missile portfolio publicly, but we do have a number of programs with exposure to missiles for sure. Relative to LTAMDS, we typically do not comment on any one program or go into much detail. It is publicly available that there are conversations around increased demand and increased quantities on LTAMDS, and that really has not factored into any of our bookings to date, but it certainly would be a positive if there were increased quantities and accelerations of deliveries. It is one of the potential tailwinds that we are keeping our eye on as we look forward.

Analyst: Thank you. And maybe just a follow-up on that. Is it fair to think that margins on an order like that out of Kuwait, or other FMS, would differ from U.S. orders at all or be higher?

David E. Farnsworth: For us, we typically work with the prime, and we would work with them as to what pricing makes sense and how it makes sense. Typically, the higher margin rates are on foreign direct versus FMS contracts at the prime level. That is something you would have to consider broadly with the prime.

Operator: Thank you for your question. Your next question comes from the line of Jonathan Frank Ho from William Blair. Jonathan, your line is now open.

Analyst: Hi. This is [inaudible] on for Jonathan, and thanks for taking the question. It is nice to see the strong results, and it sounds like demand is strong and relatively broad-based across the board. Are there any areas where you see the most opportunity for reordering and restocking over the near term, given ongoing geopolitical conflicts?

William L. Ballhaus: Thanks for the question. To break down our growth vectors: first and foremost, the primary driver of our near-term organic growth is the transition of our business from a high concentration of development programs—it is dozens of programs, not one or two—to low-rate production and then higher-rate production. We are seeing that start to manifest in 2025 to 2026 and expect our organic growth to continue to accelerate based on those programs ramping up, and that really does not have anything to do with the tailwinds we see in the market.

Beyond the existing portfolio, we are continuing to win new development programs that are really exciting, where we are bringing together technology and innovation across our portfolio—doing things that nobody else can do—and winning new development programs that over time will add to that production content. Beyond those two items, we do see a number of potential tailwinds tied to factors like the size of domestic and global budgets, and other tailwinds like Golden Dome and the rearmament of munitions. We are starting to see those tailwinds manifest in the form of multiyear strategic agreements at increased quantities and increased deliveries with the primes.

None of those tailwinds are reflected in our bookings or outlook today, and we view them as additive to the target profile we have discussed and are converging on. We have said for a couple of quarters that we think some of those tailwinds could start to manifest likely by the end of calendar 2026, but potentially as early as our fourth quarter, which is our current quarter. We are watching those items as they progress in our pipeline with a lot of excitement. There is broad demand and a lot of tailwinds right now that we have exposure to, and we look forward to seeing how that plays out over the next quarter and beyond.

David E. Farnsworth: The current business—what we are executing on today—also shows it. When you look at the Q, you will see areas with significant growth in revenue. Space is up significantly for us. Radar is up, as you would expect. Other sensors and effectors—if you think effectors—that is up significantly in our revenue so far this year. Those are things the customer needs delivered as fast as possible, and you will see that across our entire portfolio of roughly 300 programs.

William L. Ballhaus: One of the best indicators of that is our domestic business being up 17% year over year. A couple of years ago, this is where a lot of our development programs existed, and you can really see now the phenomenon of us having completed the development programs, transitioning into low-rate production, and now starting to ramp up. There are a lot of things we are seeing in the portfolio and the business that we are excited about.

Operator: Thank you for your question. At this time, we would like to remind you, if you would like to ask a question or an additional follow-up, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. There are no further questions at this time. Oh, pardon me. Next question comes from the line of Peter J. Arment from Baird. Peter, your line is now open.

Peter J. Arment: Hey, thanks. Good afternoon, Bill, Dave, Tyler. Nice results. Bill, it has been a common theme the last few quarters—you have talked about the ability to stage material earlier and better align your supply base that is leading to better performance on the top line. Could you give a little more insight into that staging or a little more color around it? And then, you mentioned you had the strongest bookings quarter for the Common Processing Architecture. What other color can you give us around the CPA that you are seeing with customers?

William L. Ballhaus: It has been one of the big improvements in the business, and we are not done—we still have work to do—but you can see the impact of our efforts in this quarter, the linearity, and our outlook for the year. Going back close to three years, we really swung the pendulum hard on our material focus to a just-in-time delivery model. This was largely because of the buildup in our net working capital and our need to address that. We have been able to reduce our net working capital by about $250 million over the last couple of years, but it introduced constraints in accelerating our backlog conversion.

It was not that material availability was hard to get; we had staged deliveries to the right due to the working capital focus. Over time, we worked to accelerate material delivery, which led to accelerations we cited in past quarters, but that created a bathtub in future quarters, making it hard to forecast because we had unknowns associated with filling the bathtub while trying to accelerate more material. Over the last several quarters, we have focused on pulling our supply chain to the left—bringing due dates for material ahead of our need date—so that we have more flexibility and more degrees of freedom in how we convert our backlog.

That has translated into a higher organic growth rate and our ability to convert backlog faster than we thought we would coming into the year. It gives us much better visibility into our future deliveries, and we can incorporate that into our forecast. That is a pivot we made this quarter. On CPA, we have a number of degrees of freedom to drive. As we increase production, the follow-on bookings come, and we are seeing that—this quarter is evidence of that. We are seeing strong demand for our current products, and we have differentiation in the market with certain security standards that only we can meet, which gives us a nice moat.

As we have progressed on development programs, it has given us the opportunity to focus on the next set of innovations we want to bring to market—higher performance for our current form factors, getting the latest processing and memory capabilities into customers’ hands with our common processing architecture wrapped around it, and, maybe more exciting, driving into smaller form factors and secure chiplets, which opens up a big TAM for that capability. Over time, as we take our mission-critical processing to the edge, increase performance, and drive smaller form factors, we see ourselves providing the compute infrastructure needed to have AI distributed across the battlespace. That is where we see this capability going.

Operator: There are no further questions at this time. I will now turn the call back to William L. Ballhaus, CEO, for closing remarks.

William L. Ballhaus: With that, we will conclude our call. We really appreciate everybody's participation and interest and look forward to getting together next quarter. Thank you.