Mercury Systems, Inc. Stock

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

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhaus; and our Executive Vice President and CFO, Dave Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing to is posted on the Investor Relations section of the website under Events and Presentations.

Turning to Slide 2 in the presentation. I'd like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on Slide 2 in the earnings press release and the risk factors included in Mercury's SEC filings.

We will also be providing fiscal year '28 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'd also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, during our call, we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release. I'll now turn the call over to Mercury's Chairman and CEO, Bill Ballhaus. Please turn to Slide 3.

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 '27 with enhanced visibility and are increasing our outlook for organic growth. Today, I'll cover 3 topics: first, some introductory comments on our business and results; second, an update on our 4 priorities: performance excellence, growth, margin expansion and free cash flow; and third, expectations for FY '27 and longer term. Then I'll turn it over to Dave, who will walk through our financial results in more detail.

Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs. I'd also like to thank our Mercury team for their dedication and commitment to delivering high-performance processing and enabling mission dominance for the war fighter 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 '26 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% and 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 approximately 85.8% of our FY '26 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 '26 and an outlook for increased growth, which I'll 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 war fighter.

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 '27 and into FY '28. 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 '27. 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 next several quarters and beyond.

Please turn to Slide 7. Now turning to priority 3, margin expansion. In our efforts to progress toward our targeted adjusted EBITDA margin profile in the low to mid-20s, 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. 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 '26 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 $227 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 '27 with a record backlog and what 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 '26 performance positions us well to perform in line with this target increase over time. For FY '27, 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 '27, we are providing additional reference points for FY '28.

In our initial view of FY '28, 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 '27 and FY '28 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 from the Palantir partnership mentioned earlier or other automation efforts across our organization to improve backlog conversion. We believe any such improvements may translate into 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 a strong FY '26, we look forward to executing well for our customers, enabling high-performance processing and mission dominance for the war fighter at the edge and delivering on what we believe is a significant value creation opportunity in front of us. With that, I'll turn it over to Dave to walk through the financial results for the quarter and fiscal year, and I look forward to your questions. Dave?

Thank you, Bill. 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 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 approximately $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 approximately $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 2026 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 2025.

Fiscal 2026 revenues were $984 million, up approximately $72 million or 7.9% compared to the prior fiscal year. Gross margin was 28.6% for fiscal 2026, an increase of approximately 70 basis points from the 27.9% gross margin realized during fiscal 2025. Our gross margin improvement in fiscal 2026 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 2026 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 and 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 2026 were approximately $30 million and $0.50, respectively, as compared to GAAP net loss and loss per share of approximately $38 million 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 2026 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 2026 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 2026.

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 approximately $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 net working capital improvement year-over-year enabled us to make $150 million payment against our revolver during the fourth quarter.

This continues to demonstrate the progress we've made in reversing the multiyear trend of growth in net working 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'll now turn the call back over to Bill.

Thanks, Dave. With that, operator, please proceed with the Q&A.

The first question comes from the line of Peter Arment with Baird.

Bill, Dave, Tyler, nice results, strong outlook. So maybe just, Bill, if you could give a little comment on your -- basically the way '27 sets up is you're 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're seeing in the margin expansion side?

Yes. And thanks, Peter, for the comments. I think it's a continuation of what we've been discussing around the progression of our backlog margin as we've continued and for the most part, and we've said this all along that as we work our way through FY '27, we're 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 '27. We increased our target outlook. We've got increased line of sight now to getting to our target profile, and we talked about how we expect to get there through FY '27 and FY '28. And I think it's just a continuation of the positive story that we've been communicating.

Got it. And just quickly, a follow-up on the bookings. You had a large single award in the quarter. I'm just curious if there's any customer program that is now kind of 10% of backlog? And any comments you'd make on kind of how CPA bookings finished, I guess, in total for the year?

Yes. No, CPA finished very strong. We had a record year for CPA bookings. And again, that is following the progression that we outlined going back a couple of years where we talked about getting back to production and getting to full rate production. And as we did that and executed well, it would open up a full set of opportunities, and we're seeing that right now. But to summarize the bookings performance for the year, I wouldn't pin it on one area or one 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're excited to see that kind of demand signals across our entire portfolio.

The next question comes from the line of Ken Herbert with RBC.

Bill, David and Tyler. I wanted to follow up on the fiscal '27 revenue outlook. I mean it's stepped up over what you've certainly sort of implied as your sort of normalized organic growth outlook. Can you just maybe talk, Bill, about how we think about this reflecting some of the recent large framework agreements, UCA agreements we've seen put in place on the missile side, maybe the European defense. I mean, how much does it contemplate growth in some of these other areas versus just maybe better outlook on the core business?

Yes. I think it's the latter. I mean, again, we've seen increased demand, record bookings and backlog, and it's a reflection of what we're seeing broad-based across the portfolio. And we've 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's behind our outlook, one of the biggest jumps we saw this quarter was the increase in our next 12 months backlog. It's about $1 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's a lot that we haven't folded into that outlook. So the tailwinds that we talked about in terms of increased production quantities, et cetera, that we have in our pipeline, reflecting conversations that we're 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 haven't 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've seen over the last year, in particular, how against our outlook, we've been able to improve backlog conversion and exceed our outlook. We have a lot of work right now that's 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 increase our scale and scale efficiently. So I'd say that there's very little of the tailwinds that we've talked about that's incorporated into our current outlook.

Yes. 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 an EBITDA enhancement or real opportunity? Or is it impactful potentially for the top line as well? If you can give any more detail on timing and how that sort of layers into the business and how we should think about the impact of that on the financials?

Yes. So we're early into it. But what we've seen so far -- based on what we've seen so far, I think there's 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 war fighter and do it faster. That's 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've 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're early into it. And as we see the results, we'll be sure to provide updates as we see them.

The next question comes from the line of Jonathan Ho with William Blair.

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 affects your ability to manage production efficiency, supply chain and facilities utilization.

Yes, it's a tremendous benefit. And I think the impact of our bookings performance during the year, there's a couple of elements to it. So obviously, based on the increase in our next 12-month backlog and the visibility that comes with it, 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's an even bigger increase in our backlog that's 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's 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.

Got it. Got it. And just in terms of sort of the capital priorities, I know you paid down some of the revolver. You've done a better job of freeing up working capital. And what are sort of the higher free cash flow priorities for you this quarter as well or this upcoming year as well?

Yes. 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 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, and CapEx 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.

The next question comes from the line of Sheila Kagahu with Jefferies.

This is Kyle on for Sheila. Congrats on a great quarter. It's great to see the bookings come through. I was just looking through the 10-K, and it's really interesting the kind of 5-year market outlook you guys are offering up there. And I'm just curious related to the growth outlook for '27 and '28, whether there's anything kind of limiting growth, whether that's budget certainty, you made some comments around strategic inventories or anything else or just trying to gauge your level of whether that's conservatism or if there's something in the near term that's kind of limiting what growth could look like over a multiyear period?

Yes. I think we think about it less in terms of constraints and more around the natural progression in our portfolio as we've 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've been going through that progression, we're also looking at improving our backlog conversion so that we can overdrive our performance outlook. And then on top of that, we've got a number of tailwinds that we're focused on the market that also aren't included in that outlook. So we believe that our outlook is consistent with the progression that we've seen in the portfolio. And I think there are a number of opportunities for us to outperform and overdrive that outlook.

Okay. That's helpful. And then maybe just a follow-up on what you're embedding and the free cash flow guide for next year in terms of maybe both working capital and CapEx, given there's 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.

I'll let Dave speak to the CapEx. I will say, and I appreciate you noting the step-up in our overtime revenue. We've been discussing for several quarters now how we've 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've really seen strong progress on that over the last couple of quarters and expect that to continue. Dave, do you want to comment on the CapEx piece?

Yes. I think the expectation ought to be that our CapEx is going to be flat year-over-year. The areas that we're focused on are the areas that Bill brought up in his discussion earlier and has brought up in prior quarters is really optimizing our operations from both a capacity and a footprint standpoint and at the same time, to increase our level of automation as we go forward. And one of the things that we've talked about for the last 2 quarters and you've seen and we feel good about where the balance sheet is and feel like we've got the capacity to lean a little into our supply base and be able to bring in material earlier so that we can reduce what's the normal lead time for some of that activity. And with the visibility we have, we feel like with the backlog that exists, that's a really good use of our capital.

The next question comes from the line of Seth Seifman with JPMorgan.

This is Rocco, on for Seth. Domestic sales grew nicely in the year, up 13%. However, the international sales were down around 15%. Are there any kind of headwinds to call out in the international market? Or did domestic demand just take up more capacity this year?

Yes. Thanks very much for the question. First of all, I think it's a really powerful signal that 86% of our business, our domestic business is growing at 13%. And I think it's just -- it reflects underneath the hood, the kind of growth tailwinds that we're seeing in the business and our ability to execute at that level. As we've discussed in prior calls, over the last year, we have outsourced our manufacturing in our international business to a contract manufacturer. And we've seen a slowdown in deliveries as we've 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 work out over the next couple of quarters. So I think it's just a temporary 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 next couple of quarters.

All right. That makes sense. And then can you guys provide any color on the drivers of the strong growth in EW this year? Should we think about the focus kind of more broad-based on COAS or any other systems as being kind of primary growth drivers?

I mean, as we said earlier, we're seeing growth and increased demand. It's really broad-based. I mean it is literally across our portfolio, we're seeing increased demand. So I wouldn't limit my comments to any one particular area. We're seeing strong demand signals across the board.

The next question comes from the line of Austin Moeller with Canaccord Genuity.

Great quarter. 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?

Yes. I don't think we've dimensioned specifically what we see there. What I would say, I would reiterate Bill's comment. We've seen over the course of the last year, very strong demand. We've 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 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've talked in the past that a significant piece of that would be in the radar line item. We've talked about that, so you can look at the radar line and the growth there and think that a lot of that is in accordance with that. But we don't talk about the individual margin profile of any of the products.

I will say, though, that it's pretty exciting for us to see that as we're increasing our deliveries, we're also increasing the pipeline. So we're 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 one area in which we see potential tailwinds that would enable performance that's above the outlook that we provided.

The one other comment I'll make on CPA, we've talked about over time, our technology focus on increasing performance and driving the smaller form factors. We're now starting to see some customer interest in the smaller form factors. And we're early into it, but it's pretty exciting to see that start to materialize because I think that opens up a whole new additional TAM in terms of smaller form factors that sit on different platforms that could be another accelerator for our CPA area, and that's pretty exciting to see.

And just on those smaller form factors, if you can put those on to a mobile platform 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 DRS?

I think it's an opportunity for us to take share in areas where the security requirements are necessary. And given that we've been the only provider of the CPA technology and the security apparatus that's 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.

The next question comes from the line of Clarke Jeffries with Piper Sandler.

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 on the rest of the backlog?

Yes. I don't think we've dimensioned any of the bookings. I would say that it was one of our more significant bookings for the year, a quarter, a multiyear booking. And I would say that, 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.

Yes. And the only thing I would add, Bill, is that this is the case, obviously, because it's in our bookings where the customer is leaning in with us, where the customer is recognition of, hey, we want to go out and get this early. We want to lock this up. Hey, we want to work with you, Mercury, to go get this done. So I think that's a critical kind of view that wasn't us doing it on our own. That was customer -- working with the customer set to get that done.

Understood. And then just -- I know that you've made a comment around the broad-based health of the bookings, but wondering if there's 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?

Yes. I'd say we've 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're in numerous conversations with customers where their agreements are in place, funding is starting to be put in place, and it's in our pipeline, but yet to materialize in bookings. And we've characterized those kinds of situations as potential tailwinds that if they were to land, they would have potentially a meaningful impact on our outlook. But none of those so far have materialized.

Yes. And I think the way to think about it is for those kinds of activities as we've been -- we've always said that, hey, likelihood would that -- that would be later in the calendar year. So as we get to what's our -- 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 a tailwind, haven't included any of that in our outlook because there's 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're just working with them to get to what the conclusions will be on those things.

Mr. Ballhaus, it appears there are no further questions. Therefore, I would like to turn the call back over to you for any closing remarks.

Okay. Thanks, Dercy. I think with that, we'll go ahead and end the call. I appreciate everybody's time this evening and look forward to getting together next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.

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

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhaus; and our Executive Vice President and CFO, Dave Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing to is posted on the Investor Relations section of the website under Events and Presentations.

Turning to Slide 2 in the presentation. I'd like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on Slide 2 in the earnings press release and the risk factors included in Mercury's SEC filings.

I'd also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, during our call, we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release.

I'll now turn the call over to Mercury's Chairman and CEO, Bill Ballhaus. Please turn to Slide 3.

Thanks, Tyler. Good afternoon. Thank you for joining our Q3 FY '26 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'll cover 3 topics: first, some introductory comments on our business and results; second, an update on our 4 priorities: performance excellence, building a thriving growth engine, expanding margins and driving free cash flow; and third, performance expectations for the balance of FY '26 and longer term. Then I'll turn it over to Dave, who will walk through our financial results in more detail.

Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs. I'd also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge.

Please turn to Slide 4. 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 4 priority areas with highlights that include solid execution across our broad portfolio of production and development programs, backlog growth of 18% year-over-year and a sequential increase of 12-month backlog of 10.3% a streamlined operating structure, enabling increased positive operating leverage and significant margin expansion and continued progress on free cash flow drivers with net working capital down 4.1% year-over-year.

Please turn to Slide 5. Starting with our 4 priorities and priority one, performance excellence, where we are focused on sound execution on development programs, accelerating deliveries for our customers broadly across our portfolio and ramping the rate on numerous programs transitioning to higher volume production.

We accelerated progress across a number of programs and generated approximately $25 million of revenue, $15 million of adjusted EBITDA and $25 million of cash, all primarily planned for the fourth quarter. This acceleration enabled by our efforts to align our supply base to yield faster backlog conversion contributed to top line growth, adjusted EBITDA margin and free cash flow that exceeded our expectations for Q3 and will also factor into our outlook for Q4, which I'll speak to shortly.

Our strong bookings and record backlog, combined with our ability to more rapidly convert backlog is translating into organic growth exceeding our expectations coming into FY '26. Notably, our domestic revenue, representing approximately 88% of our Q3 revenue, generated 17% year-over-year growth.

Beyond the 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 50,000 square feet of factory space to support ramped production for our common processing architecture programs and to allow for efficient scaling.

In the quarter, we also completed the acquisition of a critical manufacturing process technology provider integral to a number of our key ramping programs. These are among a number of actions we have taken, along with prior investments across a number of critical technology developments that are driving our ability to accelerate delivery of vital capabilities to our war fighters and our allies.

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 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 12-month bookings are a record $1.23 billion.

Q3 bookings were driven largely by follow-on production orders, reflecting strong customer demand across core franchise programs. This bookings mix reflects the transitioning of our business toward higher rate production, and we believe does not meaningfully capture the potential incremental tailwinds we see in the market.

The largest bookings in the quarter were across several missile, C4I and space programs. In addition, the quarter featured the strongest bookings of the fiscal year for solutions that leverage our common processing architecture. Finally, we secured a follow-on development award on a strategic program that has the potential to proliferate across multiple platforms.

Beyond our backlog growth, we continue to see the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. I remain optimistic that these potential market tailwinds may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond.

Please turn to Slide 7. Now turning to priority 3, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low to mid-20% range, we're focused on the following drivers: backlog margin expansion as we convert lower-margin backlog and add new bookings aligned with our target margin profile, ongoing initiatives to further simplify, automate and optimize our operations and driving organic growth to increase positive operating leverage.

Q3 adjusted EBITDA margin of 15.3% was ahead of our expectations and up 360 basis points year-over-year. Gross margin of 29.3% was up 230 basis points year-over-year, consistent with our expectation that average backlog margin will continue to increase as we convert legacy lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile.

Operating expenses are down year-over-year, both on an absolute basis and as a percent of sales, reflecting our focus on continuously driving cost structure efficiencies to enable significant positive operating leverage as we accelerate organic growth.

Please forward to Slide 8. Finally, turning to priority 4, improved free cash flow. We continue to make progress on the drivers of free cash flow and in particular, reducing net working capital, which at approximately $434.4 million is down $18.7 million year-over-year. Net debt was $259.7 million at the end of Q3.

We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning and supply chain management will continue to yield a strong balance sheet that provides sufficient flexibility for us to pursue and capture potential market tailwinds.

Please turn to Slide 9. Looking ahead, I'm very optimistic about our team's performance, strategic positioning, the market backdrop and our expectation to deliver results in line with our target profile of above-market top line growth, adjusted EBITDA margins in the low to mid-20% range and free cash flow conversion of 50%.

We believe our strong year-to-date results reflect meaningful progress toward this target profile with an aggregate 1.3 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 '26. 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 '26. 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 '26.

We now expect annual revenue growth for FY '26 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 '26 performance to deliver a significant step toward our target profile. Additionally, I'm gaining optimism regarding the potential for tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize and upside bookings to our plan over time.

With that, I'll turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave?

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. Our 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 the fourth quarter of FY '26.

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 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 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's balance sheet for the last 5 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 12 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 capacity 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 the 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 $150 million payment against our revolver during the fourth quarter.

This continues to demonstrate the progress we've 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 '24.

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. We believe continuing to execute on our 4 priority 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'll now turn the call back over to Bill.

Thanks, Dave. With that, operator, please proceed with the Q&A.

[Operator Instructions] Your first question comes from the line of Ken Herbert from RBCCM.

Bill and Dave, really nice results. Yes. Bill, maybe just to start on the implied margins in the fourth quarter 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, I guess, 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 into fiscal '27?

Yes. Ken, it's Dave. If it's okay, I'll start and then Bill can jump in. As far as kind of the sequential growth in margin, we've seen that in the past, and it's accompanied a real significant change in the linearity of our business. As you recall, in the fourth quarter, we've typically seen a higher level of revenue and the mix has been a bit different.

And one of the things we've been able to do this year is start to flatten out that linearity a little bit. So a stronger Q3 and with stronger margins accompanying Q3 as well. So where in the past, we've seen a step-up of potentially a couple of hundred basis points, it was from a much lower starting point normally. And so we don't expect to see that great a jump up in the fourth quarter, more of a gradual kind of trend, but we feel good about the total year.

And as Bill said, mid-teens around the margin for the year. And we do feel we're headed in absolutely the right direction and in keeping with our expectation of getting towards our target margins.

Yes. I guess what I'll add is what Dave highlighted just kind of reflects this smooth transition of the business from this high mix of concentration -- high mix of development programs 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.

And what we've expected to see as we've evolved was to see a combination of increasing top line growth and then further acceleration of the bottom line. I think if you adjust for some of what we pulled forward from this year into last year into Q4, what that's translated into is a relatively smooth progression to mid-single-digit top line growth now to high single-digit top line growth, nice margin expansion on the bottom line and then some recent indicators of that continuing as we move forward.

And I think a couple of things that I would point to would be the growth in our domestic business in Q4, which was up 17% year-over-year. And then in the quarter, a really nice step-up in our next 12 months of backlog, up 10% Q2 to Q3. So more than anything, Ken, I think Dave's point around linearity, we're just seeing a nice smooth progression of the business.

That's great. I appreciate that, Bill. As we think maybe either Dave or Bill, as we think about the strong bookings in the quarter, you called out, I mean, you highlighted missiles, C4I and some space programs. Are there any particular programs within those broader buckets you're comfortable calling out or you'd specifically highlight as significant sources of bookings?

It's one of the things we've talked about in the past, 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%. And the strong bookings really just reflects strong demand across our portfolio in areas like space, like C4I, like missile defense, and we think that's a real strong attribute of our business. No single program, no real lumpiness in the bookings, just, I think, a strong indication of demand across our broad portfolio.

Yes. And it really is, as we've been talking about, as we look, there's not one area that we say, oh, this area is going much -- this area is like an area you wouldn't focus too much energy on because it's either declining or flat. I mean all the areas from a booking standpoint are seeing solid activity, and it's in keeping with what the market is doing.

And these are all -- to a large degree, these are the production efforts we've been talking about, and this is gearing up more production on those same programs that we've been working on.

Yes, it really reflects, again, just that transition from heavy concentration of development to the follow-on production orders. So nice progression in the quarter.

Your next question comes from the line of Pete Skibitski from Alembic Global.

Very impressive quarter. So Ken was asking about the margins. I guess I'll ask about the revenue, which was really strong this quarter. And it seemed like just the tone of your commentary was more positive in terms of the sales outlook, and you've raised the guide here to the mid-single-digit range. But even looking at that guide, the fourth quarter revenue looks like it would have implied to be down year-over-year. So I just wanted to know if there's continued conservatism there in the guide or if there's just a large percentage of unbilled receivable type work in the fourth quarter relative to the third quarter or maybe something else?

Yes. I guess one way, at least you can think about it is aside from the $30 million that we accelerated from Q1 of FY '26 into Q4 of last year, the year-over-year growth comparison and top line growth looks pretty consistent with what Q1, Q2 and Q3 look like.

So again, it more reflects a steady progression of our business to more like mid-single digits last year and then high single digits this year with, I think, some real positive indicators, again, based on the book-to-bill, the continuing growth of our backlog, which we expect to continue to grow. And then in particular, the portion of our backlog that we expect to convert over the next 12 months.

Okay. And then just on the unbilled receivables, they were down only modestly this quarter. What's the right way to think about that? Does that mean some of these cycles are just going to take a lot longer? Or I'm a little confused as to why we didn't see a bigger step down in receivables.

Yes. And this is Dave again. And I think what you see some of what's reflected in there in our inventories is a bit of the up cycle we're seeing in terms of this production coming in. So there's always a bit of a timing phenomenon. And I think you're seeing 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. So nothing more than kind of the timing of things. I wouldn't read anything else into it.

We're still focused on burning down some of our older unbilled balances. But there will be -- as we ramp up revenue, there will be new unbilled balances and certainly better than the terms were in the past, but there'll be some from a timing standpoint. So nothing different than what we've been saying in here.

We're still focusing capacity 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 ].

But definitely more dynamics under the hood than you would see if you just looked at the quarter-to-quarter number. And then, Pete, the other thing that I'd point out is close to 12% growth year-over-year and the net working capital coming down year-over-year despite that growth, I think, reflects just some of the progress that we're continuing to make and the increased efficiency of our net working capital.

Your next question comes from the line of Austin Moeller from Canaccord Genuity.

So I just wanted to ask, are you looking at the IBAS defense industrial base investments within the fiscal year '27 budget? And do you see any opportunities to get incremental investments from that program to expand your capacity?

Austin, thanks very much for the question. We have had interactions with IBAS and we continue and 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're interested in investing in, and we think can increase our capacity, our efficiency and our innovation. So yes, definitely something that is in front of us.

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 '27 budget request?

Well, I mean, we definitely see opportunities across the board. And that's not only in our existing portfolio of programs, but it's also tied to administrative priorities like Golden Dome, missile defense, armament, kind of across the board right now, we're seeing opportunities. And we feel like our capabilities are really well aligned with the administration's priorities broadly.

And one of the things that we've said before is something that we think is unique about our positioning is we have exposure to a broad set of tailwinds across the market, and that's what we're focused on capturing right now.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

This is Eegan McDermott on for Sheila.

You didn't sound like Sheila.

No, I. Maybe just building off of the missile questions that have been asked. Curious, one, if you could sort of just size how big Mercury's missile exposure is as a percent of sales, even roughly? And two, with a few large LTAMDS contracts kind of out there of late, thinking like the $8 billion FMS to Kuwait, wondering how you would think about what an order of that magnitude kind of means for your business?

Yes. Thanks very much for the question. I mean we don't size up our -- the size of our missile portfolio, but we do have a number of programs with exposure to missiles for sure.

Relative to LTAMDS, we typically don't comment on any one program or go into much detail. I will say that it is publicly available that there are conversations around increased demand, increased quantities on LTAMDS and that really hasn't factored into any of our bookings to date, but certainly would be a positive if there were increased quantities and accelerations of deliveries. And it's one of the potential tailwinds that we're keeping our eye on as we're looking forward.

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 at all higher?

Yes. For us, it is typically something that we work with the prime. And so 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. So I think that's something you'd have to have that conversation broadly with the prime.

Your next question comes from the line of Jonathan Ho from William Blair.

This is [indiscernible] on for Jonathan. [ I'm glad ] to see the strong results, and it sounds like demand is strong and relatively broad-based across the board. But are there any areas or just more broadly, where do you see the most opportunity for reordering and restocking activity over the near term, just given the ongoing geopolitical conflicts.

Yes. No, thanks for the question. I mean just to sort of break down our growth vectors. First and foremost, the primary driver of our near-term organic growth is this transitioning of our business from this really high concentration of development programs and it's dozens of programs. It's not 1 or 2, it's dozens of programs to the low rate production phase and then the higher rate production phase. So we're seeing that start to manifest itself in '25 to '26 and expect our organic growth to continue to accelerate based on those programs ramping up.

And that really doesn't have anything to do with tailwinds that we see in the market. Beyond the existing portfolio, we're continuing to win new development programs that are really exciting, where we're bringing together technology and innovation from across our portfolio, doing things that nobody else can do and winning new development programs that over time are going to add to that production content.

And then beyond those 2 items, we do see a number of potential tailwinds tied to a number of different factors, the size of the domestic budgets, the size of the global budgets and then other tailwinds like Golden Dome, rearmaments, acceleration of munitions. And we're starting to see those tailwinds manifest in the form of multiyear strategic agreements at increased quantities, increased deliveries with the primes.

And right now, none of those tailwinds are reflected in any of our bookings or our outlook, and we view them as all additive to the target profile that we've talked about and are converging on.

We have said for a couple of quarters now that we think that some of those tailwinds could start to manifest likely by the end of calendar '26, but potentially as early as our fourth quarter, which obviously is our current quarter. And we're obviously watching those items as they progress in our pipeline with a lot of excitement.

So beyond that, there's a broad set of demand, a lot of tailwinds right now that we have exposure to, and we're looking forward to seeing how that all plays out over the next quarter and beyond.

Yes. The one thing I would add is from a current business, like what we're executing on today, when you look at the Q, you'll see the areas that have significant growth in the revenue. And that's Bill was laying out kind of on the go-forward basis, but you can see space is up significantly for us.

When you look at radar is up, as you'd expect, other sensors and effectors, if you think of effectors that's up significantly in our revenue so far this year. Those are things that the customer needs delivered as fast as possible.

So you see those things, but we see everything from an opportunity standpoint, from our pipeline standpoint, as Bill said, just a significant improvement in -- across the board. So you'll see it across our entire portfolio of 300 programs.

Yes. And I think one of the best indicators of that is, again, if you look at our domestic business, how it's up 17% year-over-year. A couple of years ago, this is where a lot of our development programs existed in the portfolio, and you can really see now the phenomenon of us having completed the development programs transitioning into lower rate production and now starting to ramp up. So a lot of things that we're seeing in the portfolio and the business that we're excited about.

[Operator Instructions] There are no further questions at this time. Well, pardon me. Your next question comes from the line of Peter Arment from Baird.

Nice results. Bill, it's been a common theme in the last few quarters that you've talked about kind of the ability to stage material earlier and kind of better align your supply base that's leading to kind of better performance on the top line. Can you maybe just give us a little more insight into kind of that staging or a little more color around that?

Yes. I think it's been one of the big improvements in the business. And we're not done. We still have work to do on this front, but you can see the impact of our efforts in this quarter, the linearity and our outlook for the year.

And just a reminder, if you go back close to 3 years ago, we really swung the pendulum hard on our material focus to a just-in-time delivery model. And this was largely because of the buildup in our net working capital and our need to address that. So we swung the pendulum hard.

And the upside is we've been able to reduce our net working capital by about $250 million over the last couple of years, but it really did introduce some constraints in being able to accelerate our backlog conversion. And it wasn't so much that availability of material or items in our supply chain were hard to get. It was we just staged the delivery to the right because of the net working capital buildup in the business.

Over time, what we've done is we've worked to accelerate the delivery of material, which has led to accelerations that we've cited into past quarters. But that led to a [ bathtub ] in the future quarters that made it hard for us to forecast what that quarter would look like because we had a lot of unknowns associated with building the bathtub and trying to accelerate more material.

So over the last several quarters, we've been focused on pulling our supply chain to the left, bringing the 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.

And what that's translated into is a higher organic growth rate, our ability to convert backlog faster than we thought we'd be able to coming into the year. So it's a great shift in the business. We're really excited about it. We have still more work to do.

But what it does is for future quarters, it gives us much better visibility into our deliveries, and we can incorporate that into our forecast. And that's a pivot and a transition that we've made this quarter. So hopefully, that's helpful in explaining the dynamics.

Yes, very helpful. And just if I could just ask on -- you mentioned you had the strongest bookings quarter for the CPA or the common processing architecture. So it sounds like momentum is really building there. What other kind of color can you give us around the CPA that you're seeing with customers?

Well, I think we've got a number of different degrees of freedom to drive growth there. I mean we've always said that as we're able to increase production, the follow-on bookings would come. And that we certainly are seeing that in this quarter was evidence of that.

We're seeing strong demand for our current products. And again, this is an area, where we've got differentiation in the market, and there are certain security standards that we are the only ones that can meet those standards. So we've got a nice moat around this business.

And as we've made progress on the development programs, it's given us the opportunity to focus on the next set of innovations that we want to bring to the market. So that's showing up as higher performance for our current form factors. So being able to get the latest processing and memory capabilities into the hands of our customers with our common processing architecture wrapped around it.

And I think maybe even more exciting, being able to drive into small -- smaller form factors and secure chiplets, which I think opens up a big TAM for that capability. So a lot of progress over the last couple of years on our development programs, on our technology. The production follow-on orders are coming as a result of that, and we see a lot of room to run into different form factors to open up the market.

And eventually, over time, as we're taking our mission-critical processing to the edge, and we're increasing the performance and driving the smaller form factors, we see ourselves as being able to provide the compute infrastructure that's needed to have AI distributed across the battle space. And that's where we see being able to take this capability in the future.

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

Well, with that, I think we'll conclude our call. We really appreciate everybody's participation and interest and look forward to getting together next quarter. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

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

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhaus; and our Executive Vice President and CFO, Dave Farnsworth.

If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing to is posted on the Investor Relations section of the website under Events and Presentations.

Turning to Slide 2 in the presentation. I'd like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on Slide 2 in the earnings press release and the risk factors included in Mercury's SEC filings.

I'd also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, during our call, we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release.

I'll now turn the call over to Mercury's Chairman and CEO, Bill Ballhaus. Please turn to Slide 3.

Thanks, Tyler. Good afternoon. Thank you for joining our Q2 FY '26 earnings call. We delivered Q2 results that were ahead of our expectations. With solid year-over-year growth in backlog, revenue and adjusted EBITDA and robust free cash flow.

Our ability to accelerate progress on a number of our customers' high priority programs once again contributed to strong results this quarter, including record first half revenue.

Today, I'll cover three topics: First, some introductory comments on our business and results. Second, an update on our four priorities: performance excellence, building a thriving growth engine, expanding margins and driving free cash flow. And third, performance expectations for the balance of FY '26 and longer term. Then I'll turn it over to Dave, who will walk through our financial results in more detail.

Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs. I'd also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge.

Please turn to Slide 4. We our Q2 results support our expectations for robust organic growth with expanding margins and positive free cash flow. Bookings of $288 million and a 1.23 book-to-bill, resulting in a record backlog approaching $1.5 billion. Revenue of $233 million with first half revenue up 7.1% year-over-year. Adjusted EBITDA of $30 million and adjusted EBITDA margin of 12.9%, up 36.3% and 300 basis points, respectively, year-over-year. Free cash flow of $46 million, well ahead of our expectations. We ended Q2 with $335 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 8.8% year-over-year, a streamlined operating structure, enabling increased positive operating leverage and significant margin expansion and continued progress on free cash flow drivers with net working capital down $61 million year-over-year or 12.9%.

Please turn to Slide 5. Starting with our four priorities and Priority One Performance Excellence, where our efforts positively impacted our results primarily in two areas. First, in Q2, we recognized $4 million of net adverse EAC changes across our portfolio, which is in line with recent quarters, reflecting sound execution on our development and production programs. Second, we accelerated progress across a number of programs and generated approximately $30 million of revenue, $10 million of adjusted EBITDA and $30 million of cash primarily planned for the third quarter. This acceleration contributed to top line growth, adjusted EBITDA margins and free cash flow that exceeded our expectations for Q2 and will also factor into our outlook for Q3, which I'll speak to shortly.

Notably, our focus on accelerating customer deliveries led to record first half revenue and the highest first half point in time revenue since FY '21.

Beyond the solid performance across our portfolio of programs, we progressed on a number of actions in the quarter to increase capacity ad automation and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency.

Notably, we continue to build out our highly automated manufacturing footprint in Phoenix, Arizona and progressed on bringing online an additional 50,000 square feet of factory space to support ramp production for our common processing architecture programs and to allow for efficient scaling if potential market tailwinds materialize. This is just one of many 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 war fighters and our allies.

Please turn to Slide 6. Moving on to priority to driving organic growth. We delivered another strong quarter with $288 million of bookings, resulting in a book-to-bill of 1.23 and a record backlog approaching $1.5 billion.

Q2 awards reflected a mix of franchise program extensions competitive new design wins and follow-on production awards across both domestic and international customers.

Bookings were led by a scope expansion on a long-standing cost-plus development program supporting modernization efforts within a core missile defense platform, extending Mercury's role through additional hardware content and further strengthening our position as the program progresses toward future production.

We also captured two key new design wins during the quarter in exciting growth markets. These included a major RF and processing subsystem supporting a leading advanced air mobility manufacturers development of its ground control infrastructure as well as a new design awards supporting a space-based application with a leading aerospace and defense prime expanding Mercury's capability set within the fast-growing space market.

Importantly, these design wins represent new platform entry points and future production potential positioning Mercury for continued growth as these programs mature.

Follow-on production awards were another contributor, including incremental quantities on a key U.S. missile franchise, reflecting continued customer confidence as those programs ramp, along with additional awards supporting deployed naval platforms and international land-based radar and electronic warfare applications, underscoring the durability of Mercury's installed base.

Finally, the quarter included approximately $20 million of follow-on awards that leverage our common processing architecture and include embedded anti-tamper and cybersecurity software from our recent acquisition of Star Lab, reinforcing the strategic value within this key set of capabilities.

These awards are important, not only because of their value and impact on our growth trajectory, but also because they reflect those customers' trust in Mercury to support their most critical franchise programs with our proven capabilities and latest innovations.

Beyond our backlog growth, customer conversations continue to progress on the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome.

Although these potential opportunities are still in early pipeline phases, I remain optimistic that they may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond.

Please forward to Slide 7. Now turning to Priority Three, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low to mid-20% range, we are focused on the following drivers: Backlog margin expansion as we convert lower-margin backlog and add new bookings aligned with our target margin profile. Ongoing initiatives to further simplify, automate and optimize our operations and driving organic growth to realize positive operating leverage.

Q2 adjusted EBITDA margin of 12.9% was ahead of our expectations and up 300 basis points year-over-year. This margin performance was driven by the conversion of backlog previously contemplated to be delivered later in FY '26 and higher operating leverage.

Gross margin of 26% was slightly down year-over-year, driven by an increased mix of low-margin backlog converted in the quarter. 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 are down year-over-year as a result of fully realizing the impact of previously implemented actions to further simplify, streamline and focus our operations and ongoing initiatives to drive efficiency.

Please go to Slide 8. Finally, turning to Priority Four improved free cash flow. We continue to make progress on the drivers of free cash flow and in particular, reducing net working capital, which at approximately $414 million, is down $61 million year-over-year and is at the lowest level since Q1 FY '22. Net debt is now down to $257 million, also the lowest level since Q1 of FY '22.

We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning and supply chain management will lead to continued reduction in working capital and net debt over time.

In addition, we continue to expect to allocate factory capacity in FY '26 to programs with unbilled receivable balances, which will help drive free cash flow, although with little impact to revenue.

Please turn to Slide 9. Looking ahead, I am optimistic about our team, our leadership position in delivering mission-critical processing at the edge, the market backdrop and our expected ability over time to deliver results in line with our target profile of above-market top line growth, adjusted EBITDA margins in the low to mid-20% range and free cash flow conversion of 50%.

We believe our strong first half results reflect continued progress toward this target profile with an aggregate 1.17 book-to-bill, 7.1% top line growth, 14.3% adjusted EBITDA margins 400 basis points of margin expansion year-over-year and $41 million of positive free cash flow over the last 2 quarters.

Coming out of Q2, we maintain our full year view on FY '26, which excludes any further accelerations within or into FY '26 and or upside bookings to our plan tied to domestic priorities like Golden Dome or increased global defense budgets.

We continue to expect annual revenue growth of low single digits. Given our Q2 and first half overperformance of approximately $30 million, we expect Q3 revenue to be down year-over-year, absent any additional accelerations followed by a ramp in Q4.

We continue to expect full year adjusted EBITDA margin approaching mid-teens. Given the acceleration into the first half and positive impact on first half margins, we expect Q3 adjusted EBITDA margin approaching double digits as we convert low-margin backlog and realize lower operating leverage. We continue to expect Q4 adjusted EBITDA margin to be the highest of the fiscal year.

Finally, with respect to free cash flow, we continue to expect free cash flow to be positive for the year. As discussed, we pulled forward approximately $30 million of cash receipts into Q2 and which impacts Q3 and we expect will result in free cash outflow for the quarter.

In summary, with our momentum coming out of Q2 and the first half, I expect FY '26 performance to represent another positive step toward our target profile. Additionally, I'm gaining optimism regarding the potential for tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize and upside bookings to our plan over time. I look forward to providing updated commentary as we progress through the year. With that, I'll turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave?

Thank you, Bill. Our second quarter results continue to reflect solid progress toward our goal of delivering organic growth, expanding margins and robust free cash flow. 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 second quarter results. Our bookings for the quarter were approximately $288 million with a book-to-bill of 1.23. Our record backlog of nearly $1.5 billion is up $119 million or 8.8% year-over-year.

Revenues for the second quarter were $233 million, up approximately $10 million or 4.4% compared to the prior year. During the second quarter, we were again able to accelerate progress on a number of customers' high-priority programs worth approximately $30 million of revenue primarily planned for Q3 fiscal '26.

Gross margin for the second quarter decreased approximately 130 basis points to 26% as compared to the same quarter last year. The gross margin decrease during the second quarter was primarily driven by execution on lower-margin programs.

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 $2 million or 2.4% year-over-year. The decrease in research and development costs of approximately $6 million or 28% and was driven by efficiency improvements and head count reductions initiated in fiscal 2025 to align our team composition with our increased production mix as we previously discussed.

We also saw a decrease in amortization expense of over $1 million related to various customer relationship intangibles that were fully amortized in fiscal 2025. These decreases were partially offset by an increase in restructuring and other charges of $4 million as we progress on driving scale and efficiency in our operations.

Decreases in operating expenses were also partially offset by increased selling, general and administrative costs of approximately $2 million, primarily related to litigation and settlement costs.

GAAP net loss and loss per share in the second quarter were approximately $15 million and $0.26, respectively, as compared to GAAP net loss and loss per share of approximately $18 million and $0.30, respectively, in the same quarter last year.

The improvement in year-over-year earnings is primarily a result of increased operating leverage and lower nonoperating expenses.

Adjusted EBITDA for the second quarter was approximately $30 million, up $8 million or 36.3% as compared to the same quarter last year. Our adjusted EBITDA during the second quarter was also partially driven by the acceleration of customer deliveries as previously mentioned by Bill.

Adjusted earnings per share was $0.16 as compared to $0.07 in the prior year. The year-over-year increase was primarily related to our increased operating leverage in the current period as compared to the prior year.

Free cash flow for the second quarter was an inflow of approximately $46 million as compared to $82 million in the prior year. The inflow from the current period was primarily driven by progress made in reducing our net working capital by approximately $61 million or 12.9% year-over-year. As Bill previously noted, free cash flow during the second quarter benefited from the progress we accelerated primarily from the third quarter.

Slide 11 presents Mercury's balance sheet for the last 5 quarters. We ended the second quarter with cash and cash equivalents of $335 million sequentially driven primarily by approximately $52 million in cash provided by operations in the second quarter, which was partially offset by investments of nearly $6 million in capital expenditures and $15 million of shares repurchased and retired from our share repurchase program.

Billed receivables remained relatively flat and unbilled receivables decreased by approximately $5 million year-over-year. As Bill previously noted, we continue to expect to allocate factory capacity in fiscal '26 to programs with unbilled receivable balances, which will help drive free cash flow with minimal impact to revenue.

Inventory increased year-over-year by approximately $5 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 increased year-over-year by approximately $46 million, primarily due to our settlement in principle on the securities class action complaint. This settlement in principle is recorded as a receivable within prepaid expenses and other current assets and a corresponding accrual was recorded in accrued expenses.

Accounts payable increased year-over-year and sequentially by approximately $41 million and $8 million, respectively, driven by the timing of payments to our suppliers. Accrued expenses increased approximately $3 million sequentially, primarily due to restructuring and other charges in the second quarter. Accrued compensation increased approximately $12 million sequentially, primarily due to our incentive compensation plans.

The amount due to our factoring facility increased sequentially by approximately $27 million, primarily due to the timing of payments from our customers due back to our counter-party. Deferred revenues increased sequentially by approximately $11 million as a result of additional milestone billing events achieved during the period.

Working capital decreased approximately $60 million year-over-year or 12.7%. Working capital also decreased by nearly $44 million or 9.5% sequentially. This continues to demonstrate the progress we've made in reversing the multiyear trend of growth in working capital, resulting in a reduction of $246 million or 37.3% from the peak net working capital in Q1 fiscal '24. Net working capital remains a primary focus area for us, and we believe we can continue to deliver improvement.

Turning to cash flow on Slide 12. Free cash flow for the second quarter was an inflow of approximately $46 million as compared to $82 million in the prior year. We continue to expect free cash flow to be positive for the year with an outflow in the third quarter, as Bill previously noted. We believe our continuous improvement in program execution, hardware deliveries, just-in-time material and appropriate lead time payment terms will lead to continued reduction in working capital.

In closing, we are pleased with the performance in the second quarter and the higher level of predictability in the business. We believe continuing to execute on our four 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'll now turn the call back over to Bill.

Thanks, Dave. With that, operator, please proceed with the Q&A. .

[Operator Instructions] We'll take the first question today from Peter Arment from Baird.

Bill and Dave and Tyler. Nice results. Bill, can you give us a little bit of like kind of a any cap, how do we think about how much is left of the lower-margin backlog that you've got to kind of convert and flow through? Sounds like it's going to be still with us for Q3, but obviously, it sounds like Q4 is going to be the highest margin of the year. How should we think about just kind of how that exits the system?

Yes. I mean it's the same progression that we've been talking about for several quarters now where at the end of FY '24. We talked about that the backlog margin, the average backlog margin being lower than what we expected to see on an ongoing basis, driven by a number of factors. And that, that would need to flow through over time.

And if you look at the duration of our backlog, it wasn't a 4-quarter period of time, wasn't necessarily a 12-quarter period of time. somewhere in between. So as we work our way through '26 and through '27, we expect to see most of the impact tied to the low margin distribution of our backlog start to burn through and get behind us. I think the good news on this front.

Our gross margin in the quarter was down. It's actually a good thing because it reflects that we are burning down that lower margin distribution in our backlog. And we continue to replace that part of our backlog with higher-margin bookings that we expect to be in line with our target profile.

So no change from what we said before, it's a continuation. If anything, we made great progress this quarter and burning down the low-margin distribution as well as bringing in solid bookings in the quarter.

Just a quick follow-up. Just when we think about the pull forward, is that something that's also tied to this low-margin backlog? Or is this just something that you're calling out, just because I think there's some confusion about what's pull forward or what's growth, et cetera.

Yes. I mean you've seen over the last several quarters that we've been successful in accelerating deliveries and it's had an impact in us delivery results that were ahead of our expectations. And that's exactly what happened again. This quarter, we had about $30 million of revenue that we pulled forward. It impacted EBITDA positively by about $10 million. That gives you a sense for where that backlog sits in our distribution because it basically flows through gross margin. There's not much of OpEx. There isn't any OpEx that we had associated with it.

So I would say this quarter was just a continuation of what we've been delivering over the last several quarters.

Up next is Ken Herbert from RBC.

Maybe, Bill, I just want to start first on the capacity you called out that you're adding in terms of CPA, can you level set us in terms of where you are with capacity today on that product line, maybe from a revenue standpoint, if possible? And how we should think about how much more capacity you need to continue to bring on to support the order activity and the demand pull? .

Yes. And I want to -- just a reminder that the capacity that we're bringing online in Phoenix the cost associated with that is already in our OpEx. And so the investment that we're making is a little bit of CapEx to bring additional lines on board. We are continuing to ramp up production in our CPA area that has gone basically per plan feeling very good about how we're delivering for our customers. We continue to grow our backlog.

You saw in the quarter, we had another $20 million of orders associated with FPGA. And we remain confident that as time goes on and we continue to execute on our program. So we'll continue to see increased demand over time for that product line, and that's behind bringing on the additional space.

As far as additional capacity and investments required beyond that one of the nice things about where we sit right now is when we look at all of the potential tailwinds that are out there, and we talked about what what's driving those.

For us to be positioned to execute and deliver on those tailwinds, the investment profile is really incremental and it's graceful, and we don't have to invest ahead of the demand in order to be able to deliver on it. And for the most part, we're running at single ships across all of our factories. And so the first step for us to increase capacity to meet tailwinds would be to add additional ships. And now with this capacity coming online in Phoenix later this year, we'll be in the same position with CPA that we can very efficiently meet increased demand associated with tailwinds just by moving to an additional shift. So I think that's a really good place for us to be.

I appreciate the color. And if I could, I just wanted to ask a question on the guidance. I mean, I think you've demonstrated a pattern here to be able to outperform and it seems like recurring, you're able to pull revenues to the left relative to expectations.

You've obviously set up here today with this call a fairly soft fiscal third quarter within a strong fourth quarter, and I appreciate the seasonality. But maybe what kept you back from pushing up the guide or having a little bit more confidence in the full year numbers because you've got multiple quarters now of being able to obviously outperform and exceed expectations and continue to overdeliver relative to sort of the near-term setup?

Yes. And it has been pretty consistent quarter-over-quarter for the last several quarters. And if we think about the setup to FY '26.

Coming into the year, we pulled forward about $30 million of accelerated deliveries and revenue from [ '26 into '25 ] which really set the stage for our expectation for the year to be low single-digit growth on top of high single digits last year.

If it weren't for that pull forward, we would have been looking at mid-single-digit growth last year and high single-digit growth this year. So it just shows how the movement between quarters can really impact the optics around growth in a period.

Now as we've come through the first 2 quarters of FY '26, we're well ahead of plan. If you look at our top line, if you look at our EBITDA and if you look at free cash flow, all of that is ahead of plan. So our expectations for the year are the same now as they were coming into the year. What we've done is we've overperformed and we shifted the profile to the left.

Now the expectations and the commentary that we gave for Q3 is absent any further accelerations from Q4 into Q3 or any accelerations from FY '27 into FY '26.

The reason why we're giving our commentary that way is, for the most part, our ability to accelerate deliveries is largely driven by our ability to accelerate material. So if you think about what has happened in Q2.

In the last few weeks of Q2, we were able to pull in material so that we could deliver more units in Q2. And you heard that our point in time revenue in Q2 was the highest that it's been in 5 years. That's a reflection of us moving hardware through our factories and shipping it.

In order to do that, it's based on accelerating material from our suppliers and we can't be certain that we're going to be able to accelerate until that material is in-house. And I don't want to give commentary and set expectations based on things that we don't have 100% confidence around.

Now for the last several quarters, we have demonstrated the ability to exercise that muscle across our entire operation. And every quarter, we've been able to accelerate 20 million to 30 million in deliveries into the quarter. But we're not setting our expectations based on that because we're going to work through the quarter on the next set of constraints and the next set of materials that we're trying to accelerate. And based on prior quarters, we've been able to do that, but we don't want to set expectations assuming that, that's going to happen. So hopefully, that provides a little bit of clarity on that commentary.

The next question comes from Sheila Kahyaoglu from Jefferies.

This is Kyle on for Sheila. On an extension of the question that Peter asked about low-margin backlog and your response that sort of persists through FY '27.

How do we think about the puts and takes as you think about mid-teen margins this year and what FY '27 could ultimately look like if you're still burning through some of that past backlog in light of potentially pulling forward growth and what you're seeing in the bookings trends.

Yes, Kyle. Thanks for the question. I think just a point of clarification. We may have lower margin backlog still in our backlog as well working our way through FY '27. But it becomes increasingly smaller as time goes on. And so as we move forward, the impact of our low-margin backlog on our EBITDA margin continues to drop over time because the volume comes down.

So as every quarter that progresses, we expect that impact to continue to come down because what we're doing is we're burning down that low margin backlog is going away, and we're replacing it with new bookings that are coming in at higher margins. And that's what's giving us the increase in our average backlog margin as time goes on. So hopefully, that helps quite a point.

And Bill, if I [indiscernible] for Kyle, it's becoming every quarter that goes by, it's a smaller percentage because of the aggregate because, as Bill said, we're not adding new things at low margin. So every quarter that we've had a bit of a lower than our expected margin, that number comes in the backlog. That number starts coming down. And when Bill said, hey, we expect that some of that to go through FY '27. It's shrinking every quarter and that's getting closer and closer to nothing as we go through.

So I don't think people should build an expectation that we're going to have the same level of low-margin activity every quarter as we go through '27, we're not saying that at all.

Yes. As a reminder, this isn't a situation where it looks like we have a part of our business that's consistently running at lower margins. We have legacy programs, development programs where we took EAC impacts in FY '24 and FY '25 that have resulted in that lower-margin distribution in our backlog, and we're just converting that and burning it through over time, and it's not being replaced. We're replacing it with higher margin bookings.

Understood. Very helpful. If I could just ask one follow-on about the net EACs. Obviously, they're much lower than they have been in the past, but have still been a little sticky at that $4 million or $5 million a quarter. Can you just talk about what your -- where we are in what inning we are in terms of kind of scrubbing that portfolio and getting more towards a normal baseline.

Not put into baseball questions because I was a track guy, so innings are hard for thing. Maybe we're on the last leg of the relay race.

So the -- largely, those EAC adjustments or reflection as we've talked about, as we're going through and completing some of these programs at the very end. There are not that many programs left. They are very small adjustments compared to what they were in the past. We're seeing solid positive adjustments at the same time. So this quarter, it was $3.5 million roughly. Could I see -- and we've been asked many times, could we see that being positive for the quarter. Yes, we could see that could it be slightly negative in the quarter.

It's within a range that is not unexpected for us. It's consistent with what we've considered in our outlook, and we keep every time we finish one of these programs, put it behind us. it lessens the same opportunity for those adjustments to happen in the future. So I guess by way we're getting there it's things that happened within the quarter as we're completing these things largely as we've talked about and passed on development programs, but they're older programs that we're just completing as we go through the final kind of qualification on these things.

And I would just say, very in that we think they're kind of in a normal course range right now. And we're confident in our ability to get to our target margin profile with the EACs and the ZIP code that they've been running over the last several quarters. .

The next question today will come from Seth Seifman from JPMorgan.

Good evening, everyone. Nice quarter. Wanted to ask the common processing architecture in terms of ramping up, I know you I'm sure you don't want to give an exact number, but if we think about kind of a rough proportion of what that comprises in the sales mix. Is there any way for you to kind of speak to: A, where that is; and B, where it should be going as we think a year or 2 out? .

Well, we haven't given -- we haven't quantified the percentage of the business for the sale of mix, et cetera. I will say that we have been successful over the last year in ramping up to meet our program demands.

The good news is the team has been executing very well in this area since we went through and implemented our root cause corrective action and started bringing the production line back up, and we've seen the follow-on orders coming. And we do see good growth potential in this part of the business. We see healthy demand, and it's an area where we're technically differentiated. And so we have a lot of optimism about this part of our business and continue to have that.

And I think we don't talk about kind of where we are in individual programs, but I think, there are programs that are fully ramped up in the production within the common processing architecture, there are other programs that are still ramping up.

Okay. So there's still a runway, I guess. Okay. And then just when we think about cash up to over $300 million, you bought back a little bit of stock in the quarter. How do we think about where that cash balance sort of should be over time and what you guys are going to do with the cash?

Yes. No, good question. I mean, we've said and kind of still validate and think about that rent $100 million to $150 million is probably the right kind of balance for us is higher than that as we've generated significant cash in the last 1.5 years. That's the right level over the last 2 or 3 quarters kind of probably felt like the prudent approach to cash was to keep cash on our books as we were going through a little bit of uncertainty around government shutdowns, not shutdowns, what was going to happen in terms of payment. Our emphasis is on delevering that's something we're looking at, obviously, as we go through the next couple of quarters.

Yes, I'd say the priorities around delevering and continuing to drive down net debt that remains the focus. .

Okay. next, we'll take a question from Michael Ciarmoli from Truist.

Bill or Dave, just -- I mean looking at your top line, and I could appreciate all the commentary, you're growing slower than some of your SMID-cap peers and even some of your customers. And I think maybe you kind of alluded to it, but can you help us with exactly how much capacity is being allocated to the unbilled and maybe tease out that drag? I mean, is it kind of $10 million, $15 million a quarter just to try and get a sense of kind of how much is flowing through the P&L at no revenue recognition, but obviously, it's -- you're tying up capacity, executing on that.

[indiscernible], we hadn't talked about that. We haven't put out this is how much revenue how much higher revenue would be if we stop doing that. It's a focus of ours to continue to burn down our net working capital. We're still not where we think our net working capital should be. We still think the unknown balances are too high. Certainly, there is some drag for that. We've talked about that, but we haven't quantified it.

Okay. Okay. That's fair. Maybe we'll take that offline. Just maybe back to Ken's question as well on kind of the choke points and why you can't consistently see some of this acceleration. We're one month into the quarter, as you kind of gauge your suppliers and look at maybe potential choke points, are there certain items that are giving you less confidence? Is it semiconductors? Is it circuit boards? Can you just maybe is it discrete components? What is sort of the potential watch items on that material list that's giving you reason for pause?

Like literally every week with the teams across every program. We're going through every bill that are line by line and looking at what does it take for us to get it complete. And that can vary by program, but we're literally working across all of our programs to figure out how we can accelerate it completion so that we can move hardware through our factories.

And the reality is while we're pushing on our suppliers to close out kits. We don't know that the material will be here until the day that it shows up because literally, a supplier could tell us that the material beer on Friday. And then on Friday tell us that it's delayed by 60 days for one reason or another. So that's the reason why we're not incorporating any further accelerations into our outlook, but we're working it very aggressively every day across the business. And I think the good news is, the last several quarters, we have demonstrated that we have built a muscle in the company to do this fairly consistently. We're just not baking it into our commentary.

And I would say, Mike, I wouldn't characterize it as some things lessening our confidence. We go into the quarter, as Bill said, with, hey, what would we need to do to be able to accelerate this. And then we work on those constraints all quarter long to build our confidence that we can get it done. So not -- I wouldn't suggest that anything is lessening our confidence in our ability to do it. It's a process we work through.

Austin Moeller from Canaccord Genuity.

Nice quarter. Are you able to comment, and I know it's small, but are you able to comment on the revenue impact mercury of the stop work order on the STAR program. And if that were to be resumed when you might expect task orders or long leads to come in on delivery components for that?

Yes, Austin, we don't quantify individual contracts or programs we have literally 300 different programs. And one of the strengths we have is the broadness of our portfolio and the revenue across it. there's no single contract that we have that approaches 10% of our revenue. And we're working closely with our customer here. and have thought through with them and understand where we are in terms of funding where they are, what they're doing in terms of that sub work. And it's incorporated in our outlook, but it has been -- there's nothing that we would change at this juncture.

And I understand the dynamic of the contract shift towards higher margin production contracts in the near term here. But is there a specific mix of component product types that you expect be bridging you to your long-term gross margin and EBITDA margin expectations of low to mid-20s?

Yes. No, not specifically. Bill has talked about the production versus development mix and whether 80/20 is not an ideal number, there probably isn't -- we're in the range kind of we expect to be in the margins that we're bringing into our new bookings are consistent with our longer-term model of what we expect. So it's across the portfolio, we feel good across the portfolio about the margin profile we're seeing in all our new bookings.

Next up is a question from Jonathan Ho, William Blair.

Just wanted to see if there's any additional color you can offer regarding updates to both Golden Dome and those international orders that you're perhaps getting a little bit more visibility towards?

Yes. interesting because when we think about the growth drivers in our business right now, we have a number of different growth factors. I mean, obviously, at the core, it's the ramp to rate from our development programs to production. And that's largely what is the drive group behind us achieving our target profile of above-market growth, top line growth, EBITDA margins in the low to mid-20% range and free cash flow conversion of 50-plus percent.

And then on top of that, which you don't really factor into that outlook are a number of different tailwinds in the market associated with the larger U.S. defense budget, a larger percentage of that budget being allocated to the acquisition of capabilities like ours, the executive orders that we feel like really play to our sweet spot. Things like mandating the use of commercial technology, which is right in the center of our value proposition. Of course, gold and done significant tailwinds there and the growth of the international and defense market.

So that's kind of the landscape of growth drivers that are out there. I would say that for both and done and for the international opportunities. We're having numerous conversations. They continue to progress across our portfolio on a large number of programs. So it's not one or two opportunities that we're tracking. There's a dozen-plus programs where we're having conversations with customers around significant increases in quantities. And I would say that as any of those tailwinds were to hit, that would shift our expectations around on our ability to hit our target profile and exceed our target profile.

So still in the pipeline phases. Conversations are still progressing. And the best leading indicator that we'll have is when those conversations materialize into bookings, and we'll keep you posted as those conversations progress.

Excellent. And then just in terms of your cost savings and facilities consolidation initiatives, can you give us a sense of how far along we are there and maybe some of the incremental margin opportunities that are still remaining?

Yes. I mean we -- we've made a lot of progress as we've talked about the savings that we've already recognized, and you can certainly see that when you look at the kind of the run rate we have on our OpEx now versus what it was 2 years ago.

We continue to identify everything. We continue to work on the things that make the most sense to make us more efficient to some of the automation Bill talking about simplifying the process, looking at our facilities.

Obviously, the facilities take a longer time frame to recognize those kind of savings, but Bill said many times, this is a long-term life always part of your life is looking for savings, how can you do things better. So we still see it going for a long time.

Bill has talked about the operating leverage and how you can see as we've been able to accelerate activity. We haven't increased our or of expense associated with those activities. So it kind of flows right through. That's the kind of impact that we expect to keep seeing as we build the business going forward.

[Operator Instructions] We'll go now to a Noah Poponak with Goldman Sachs.

Good evening, everyone. Could you level set us on the percentage of your revenue that is international? And I don't know if you could estimate or if you have the number on what's direct versus eventually ends up outside of the U.S., but it's through a U.S. customer? And then same question on missile and munition just as we all kind of recalibrate for growth rates in those two segmentations.

Yes. So first, I would tell you that we don't break out -- if you're asking about FMS versus non-FMS, we don't actually break that out in our financials. And to a large degree, we follow our customer set. So as we're going through, we're working with our customers on what that breakout is. But if you look at the queue, you can see the international and FMS revenue and for the second quarter that was about $8 million or so that's percentage so quick...

15% range, something like that.

Okay, Yes. And do you have an approximation for how much revenue you generate from the category of missiles and munitions?

We don't break that out separately.

You'll be able to see in the breakout between FMS and international and our domestic business. And as we know with our business, programs and revenue can be kind of lumpy, the international FMS business has been growing nicely. Its growth rate is down a little bit this quarter. But of course, that highlights that our domestic business, when you look at the first half year-over-year is up low teens, which I think speaks to some of the inherent growth of our domestic business right now, which is pretty exciting. So there's a little bit of detail that you'll see in the Q. We remain very bullish about the international opportunity where our backlog is.

And you could look at it, we do break out sensors and effectors but ranking in just specifically how much is missile you can look at that, but it would be something we don't show.

Understood. That is helpful. I appreciate it. A question on margins. Could you speak to, even if directionally in the medium-term framework. What do you expect for the gross margin and then R&D and SG&A as a percentage of revenue to walk to that EBITDA margin which I just -- it would be helping to understand just given those percentages have been moving around as you've taken on your strategy.

Yes. I don't think we've spoken to gross margins explicitly when it comes to our target margin profile. But what we said about our targeted EBITDA margins in the low to mid-20% range. Basically the elements of the bridge from where we are to get to that target range involve the backlog margin progressing the way we talked about. So burning of low-margin programs and continuing to bring in new bookings in line with our target margins. And we've been doing that consistently for several quarters, and we continue marching down that path. .

Continuing to streamline and focus automate drive efficiencies into the business. And then third, positive operating leverage because we feel like we've got our in a very good place. And as we continue to grow the top line, we don't expect to see meaningful growth in our OpEx. So those three elements really provide the bridge from where we are to that targeted margin profile.

Okay. That's helpful. And just one last one. I had the step back up in restructuring to the $4 million. Just curious what you're doing there? And what it does for the future?

Yes. That's when we took an action in the quarter, and you can see this when you look in the queue that affected about 100 folks and some facilities. So we do expect to see some lot of that as we go through the get the full impact of that over the next year or so.

And Mr. Ballhaus, it appears there are no further questions at this time. Therefore, I would like to hand the call back to you for any additional or closing remarks.

Okay. Well, thank you very much, and thanks, everyone, for joining us for our quarterly call, and we look forward to meeting you again next quarter. Thank you very much.

Again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.

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

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhaus; and our Executive Vice President and CFO, Dave Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing to is posted on the Investor Relations section of the website under Events and Presentations.

Turning to Slide 2 in the presentation. I'd like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on Slide 2 in the earnings press release and the risk factors included in Mercury's SEC filings.

I'd also like to mention that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, during our call, we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release.

I'll now turn the call over to Mercury's Chairman and CEO, Bill Ballhaus. Please turn to Slide 3.

Thanks, Tyler. Good afternoon. Thank you for joining our Q1 FY '26 earnings call. We delivered Q1 results that were ahead of our expectations with solid year-over-year growth in backlog, revenue, adjusted EBITDA, and free cash flow. Our ability to accelerate deliveries on a number of our customers' high-priority programs once again contributed to strong results this quarter. Today, I'll cover 3 topics: first, some introductory comments on our business and results; second, an update on our 4 priorities: performance excellence, building a thriving growth engine, expanding margins and driving improved free cash flow; and third, performance expectations for the balance of FY '26 and longer term. Then I'll turn it over to Dave, who will walk through our financial results in more detail.

Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs. I'd also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge.

Please turn to Slide 4. Our Q1 results support our expectations for robust organic growth with expanding margins and positive free cash flow. Bookings of $250 million and a 1.11 book-to-bill, resulting in a record backlog of $1.4 billion. Revenue of $225 million, up 10.2% year-over-year, adjusted EBITDA of $35.6 million and adjusted EBITDA margin of 15.8%, up 66% and 530 basis points, respectively, year-over-year; and free cash outflow of $4.4 million, a $16.5 million improvement in free cash flow year-over-year. We ended Q1 with $305 million of cash on hand.

These results reflect ongoing focus on our 4 priority areas with highlights that include solid execution across our broad portfolio of production and development programs, backlog growth of 6.5% year-over-year, a streamlined operating structure enabling increased positive operating leverage and significant margin expansion and continued progress on free cash flow drivers with net working capital down $105.7 million year-over-year or 18.8%.

Please turn to Slide 5. Starting with our 4 priorities: and priority one, Performance Excellence, where our efforts positively impacted our results primarily in 2 areas: First, in Q1, we recognized $4 million of net adverse EAC changes across our portfolio, which is in line with recent quarters and down 51% year-over-year, reflecting our maturing capabilities in program management, engineering and operations, and sound execution on our development programs.

Second, we accelerated customer deliveries across a number of high-margin programs, generating approximately $20 million of revenue and $10 million of adjusted EBITDA previously planned for the second quarter. This acceleration, partially driven by a $26 million year-over-year increase in point-in-time revenue, contributed to top line growth and adjusted EBITDA margins that exceeded our expectations for Q1 and will also factor into our outlook for Q2, which I'll speak to shortly.

Beyond the solid performance across our portfolio of programs, we progressed on a number of actions in the quarter to increase capacity, add automation, and consolidate subscale sites and our ongoing efforts to drive scalability and efficiency. Notably, we continue to build out our highly automated manufacturing footprint in Phoenix, Arizona. We expect to bring online over 50,000 square feet of factory space in Q3 of FY '26 to support ramped production for our Common Processing Architecture programs and to allow for more efficient scaling if potential market tailwinds materialize.

Please turn to Slide 6. Moving on to priority 2, Driving Organic Growth. Following record bookings in Q4, we delivered another solid quarter with $250 million of awards, resulting in a record backlog of $1.4 billion and a book-to-bill of 1.11. Notable Q1 awards reflected a healthy mix of competitive wins, follow-on production awards, and new design programs that continue to strengthen our position across key franchises, $26 million in competitive takeaways, including a major RF subsystem win supporting a ramping U.S. missile program. Multiple follow-on production awards, including an order from a leading European defense prime for an electronic-warfare application that reinforces our strong international positioning and a follow-on for RF modules supporting a major U.S. fighter aircraft.

Several follow-on orders that leverage our Common Processing Architecture and include embedded anti-tamper and cybersecurity software from our recent acquisition of Star Lab. And on the development front, we saw continued momentum with new design wins across mission computing, RF and processing technologies, expanding Mercury's role on next-generation defense platforms. These awards are important, not only because of their value and impact on our growth trajectory, but also because they reflect those customers' trust in Mercury to support their most critical franchise programs with our proven capabilities and latest innovations.

Beyond our backlog growth, we continue to have customer conversations on the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. Although these potential opportunities are still in early pipeline phases, I am optimistic that they may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond.

Please forward to Slide 7. Now turning to priority 3, Expanding Margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low to mid-20% range, we are focused on the following drivers: backlog margin expansion as we convert lower-margin backlog and add new bookings aligned with our target margin profile, ongoing initiatives to further simplify, automate and optimize our operations, and driving organic growth to realize positive operating leverage.

Q1 adjusted EBITDA margin of 15.8% was ahead of our expectations and up 530 basis points year-over-year. This margin performance was driven by the conversion of backlog previously contemplated to be delivered later in FY '26 and higher operating leverage. Gross margin of 28%, up approximately 260 basis points year-over-year was driven by a favorable mix of backlog margin converted in the quarter. We expect average backlog margin to continue to increase as we bring in new bookings that we believe will be in line with our targeted margin profile and accretive to the current average margin in our backlog.

Operating expenses as a percent of revenue are down year-over-year, as a result of fully realizing the impact of previously implemented actions to further simplify, streamline, and focus our operations and ongoing initiatives to drive efficiency.

Please forward to Slide 8. Finally, turning to priority 4, Improved Free Cash Flow. We continue to make progress on the drivers of free cash flow, and in particular, reducing net working capital, which at approximately $458 million is down $106 million year-over-year. Q1 free cash flow represented a $16.5 million improvement over Q1 of last year. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning and supply chain management will lead to continued reduction in working capital and net debt going forward. In addition, we continue to expect to allocate factory capacity in FY '26 to programs with unbilled receivable balances, which will help drive free cash flow, although with little impact to revenue.

Please turn to Slide 9. Looking ahead, I am optimistic about our team, our leadership position in delivering mission-critical processing at the edge, the market backdrop, and our expected ability over time to deliver results in line with our target profile of above-market top line growth, adjusted EBITDA margins in the low to mid-20% range, and free cash flow conversion of 50%.

We believe our strong Q1 results, combined with the solid Q4 results of FY '25 reflect continued progress toward this target profile with an aggregate 1.2 book-to-bill, 10% top line growth, 17.4% adjusted EBITDA margins and positive free cash flow over the last 2 quarters.

Coming out of Q1, we maintain our full year view on FY '26, which excludes any further acceleration of customer deliveries within or into FY '26 or upside bookings to our plan tied to domestic priorities like Golden Dome or increased global defense budgets. We continue to expect annual revenue growth of low single digits with the first half relatively flat year-over-year, and volume increasing sequentially as we move through the second half. Given our Q1 overperformance, we expect Q2 revenue to be down year-over-year, absent any additional acceleration of deliveries.

We continue to expect full year adjusted EBITDA margin approaching mid-teens with low double-digit adjusted EBITDA margins in the first half. Given the accelerated delivery of high-margin backlog into Q1, we expect Q2 adjusted EBITDA margin approaching double digits as we convert low-margin backlog. We continue to anticipate margins to expand in the second half with Q4 adjusted EBITDA margin expected to be the highest of the fiscal year.

Finally, with respect to free cash flow, we expect to be free cash flow positive for the year with second half free cash flow greater than the first half.

In summary, with our momentum coming out of Q1, I expect FY '26 performance to represent another positive step toward our target profile. Additionally, I'm gaining optimism regarding the potential for tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize in upside bookings to our plan over time. I look forward to providing updated commentary as we progress through the year.

Before I hand it over to Dave, I wanted to touch on a new $200 million buyback authorization that was announced in our earnings press release. This authorization underscores our confidence in the business, our improving fundamentals and the multiple opportunities we see ahead to drive long-term shareholder value.

With that, I'll turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave?

Thank you, Bill. Our first quarter results continue to reflect solid progress toward our goal of positioning the business to deliver performance excellence characterized by organic growth, expanding margins and robust free cash flow. We still have work to do, but we are encouraged by the progress we have made and expect to continue this momentum throughout fiscal 2026.

With that, please turn to Slide 10, which details our first quarter results. Our bookings for the quarter were $250.2 million with a book-to-bill of 1.11. Our record backlog of $1.4 billion is up $86.4 million or 6.5% year-over-year. Revenues for the first quarter were $225.2 million, up approximately $21 million or 10.2% compared to the prior year. During the first quarter, we were again able to accelerate customer deliveries worth approximately $20 million of revenue previously planned to be delivered in Q2 FY '26.

Gross margin for the first quarter increased approximately 260 basis points to nearly 28% as compared to the same quarter last year. Gross margin improvement during the first quarter was primarily driven by favorable program mix, lower manufacturing adjustments of $7.4 million and a reduction in net EAC change impacts of approximately $4 million or 51% year-over-year. 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 through our continued focus on building a thriving growth engine, coupled with ongoing initiatives to simplify, automate and optimize our operations.

Operating expenses increased $6.3 million or 9.6% year-over-year. The increase was primarily driven by higher compensation costs and incremental litigation and settlement expenses within selling, general and administrative costs of $7.3 million and $6 million, respectively. These increases were partially offset by a reduction in research and development costs of $5.2 million or 28.3%, driven by headcount reductions initiated in fiscal 2025 to align our team composition with our increased production mix, as we previously discussed. We also incurred $1.6 million of restructuring and other charges during the quarter as we progress on driving scale and efficiency in our operations.

GAAP net loss and loss per share in the first quarter were $12.5 million and $0.21, respectively, as compared to GAAP net loss and loss per share of $17.5 million and $0.30, respectively, in the same quarter last year. The improvement in year-over-year earnings is primarily a result of increased gross margins, partially offset by increased operating expenses previously discussed.

Adjusted EBITDA for the first quarter was $35.6 million, up $14.1 million or 65.8% as compared to the same quarter last year. Adjusted earnings per share was $0.26 as compared to $0.04 in the prior year. The year-over-year increase was primarily related to our increase in revenue and the associated gross margin in the current period as compared to the prior year. Free cash flow for the first quarter was an outflow of $4.4 million as compared to an outflow of $20.9 million in the prior year. This reflects a $16.5 million or 79% reduction to our outflow as compared to the prior year.

Slide 11 presents Mercury's balance sheet for the last 5 quarters. We ended the first quarter with cash and cash equivalents of $304.7 million, sequentially driven primarily by $2.2 million in cash provided by operations in the first quarter, which was offset by investments of $6.5 million in capital expenditures. Over the last 4 quarters, we generated approximately a $135.6 million of free cash flow. Billed receivables decreased year-over-year and sequentially by $31.9 million and $16.9 million, respectively. Unbilled receivables decreased year-over-year and sequentially by $23.4 million and $3.6 million, respectively. The decrease in both billed and unbilled receivables reflects the progress we've made by delivering on programs to our customers.

As Bill previously noted, we continue to expect to allocate factory capacity in fiscal '26 to programs with unbilled receivable balances, which will help drive free cash flow with minimal impact to revenue. Inventory decreased year-over-year by $10.8 million. Prepaid expenses and other current assets increased sequentially by $43.2 million, primarily due to our settlement in principle on the securities class action complaint. This settlement in principle is recorded as a receivable within prepaid expenses and other current assets and a corresponding accrual was recorded in accrued expenses.

Accounts payable increased year-over-year and sequentially by $23.1 million and $18.7 million, respectively, driven by the timing of payments to our suppliers. Accrued expenses increased $32.2 million sequentially, primarily due to our settlement in principle on the securities class action complaint previously mentioned. Accrued compensation decreased $27.8 million sequentially, primarily due to payments under our incentive compensation plans.

Deferred revenues increased year-over-year by $29.2 million as a result of additional milestone billings achieved during the period. Sequentially, deferred revenues decreased slightly by $1.3 million. Working capital decreased $105.7 million year-over-year or 18.8%, this demonstrates the progress we've made in reversing the multiyear trend of growth in working capital, resulting in a reduction of $202.3 million or 30.6% from the peak net working capital in Q1 FY '24. Net working capital remains a primary focus area for us, and we believe we can continue to deliver improvement.

Turning to cash flow on Slide 12. Free cash flow for the first quarter was an outflow of $4.4 million as compared to $20.9 million in the prior year. We still expect to be free cash flow positive for the year with second half free cash flow greater than the first half, as Bill previously noted. We believe our continuous improvement in program execution, hardware delivery, 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 first quarter 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.

Lastly, as you saw in our filing, we've announced that we've entered into an amendment to our revolving credit facility. This amendment extends the maturity date of the credit facility by 5 years with a facility size of $850 million. This amendment enhances our financial flexibility and provides continued access to a strong source of liquidity, allowing us to execute our strategic priorities and invest in our long-term growth.

With that, I'll now turn the call back over to Bill.

Thanks, Dave. With that, operator, please proceed with the Q&A.

[Operator Instructions] Your first question comes from the line of Ken Herbert with RBC.

Nice results, Bill and Dave. Maybe just to start off, when we back out sort of the pull forward on the revenues, you're sort of basically flat in terms of the growth with 12%-ish EBITDA margins, sort of in line, I think, with how you were initially guiding for the first quarter? Can you just talk about your ongoing ability to continue to pull the revenues forward as we think about that as through the rest of the fiscal year? And I know, obviously, it's hard to predict that and depending upon a lot of factors. But how do we think about that? And how do we think about that from a potential to really drive sort of incremental upside as we go through the rest of the fiscal year?

Yes. Ken, thanks. This is Bill. I'll take that. If I think about the last few quarters, we have been successful as we've worked our way through the quarters at looking at the constraints on delivering to our customers and for their high priority programs, being able to work through the constraints and accelerate deliveries. The challenge with doing that is we really don't have good line of sight on how we're working through those constraints, until we get toward the middle or the end of the quarter.

And so as we think about Q2 and our commentary for the balance of the year, that's the primary reason why we haven't factored any future accelerations into it. That said, we're continuing across our portfolio every day and every week to work on constraints and trying to accelerate for our customers. And we hear loud and clear from our customers that in today's environment, if -- in general, if we can deliver early, that's a very good thing for them and for their customers. So we continue to work through it. The kinds of things that we're working through are largely tied to trying to accelerate material from our suppliers, in some cases, we have some factory constraints that we need to try and work our way through as material comes in. And those are the kinds of things that we're working on, on a day-to-day basis.

So again, we haven't factored it into our outlook for Q2 or for the rest of the year. We do continue to work it. And as we're successful in accelerating deliveries, then obviously, we pull that into our updated view on the current period in the fiscal year.

And if I could, the additional capacity that you're bringing online in Phoenix, what's the timing? And can you help maybe -- help us quantify sort of what that could add in terms of either capacity or ultimately what it could add from a revenue standpoint?

Yes. I mean, I think, to answer the question, I'd like to take a step back and answer it in the broader context of how we're thinking about our approach to scaling up, not only to meet our anticipated ramp, but also any potential tailwinds across a broad number of programs in our portfolio, where we're having active conversations with our customers today about increased quantity.

And I would say our general outlook is that our investment profile in order to meet the anticipated ramp-up in front of us, and the potential tailwinds, I would categorize as an elegant profile, meaning incremental investment when we have line of sight to the demand. And the kinds of places that we would be investing would be adding multiple shifts. Most of our locations are operating on a single shift or an extended shift. So, we have capacity to add multiple shifts. And on certain lines, we might increase automation with additional test equipment, so that we could accelerate our processing and shrink our cycle time.

So in general, what we see are incremental investments like that, that are tied to firm demand and typically not in advance of that demand. I'd say the one exception to what I just described is the capacity that we're bringing online in Phoenix that is currently and has been in our cost structure, in our operating expense in terms of the rent. We are making some incremental investments in terms of CapEx to bring additional lines up in that factory. And it's intended in the near term to meet the anticipated demand increase for our Common Processing Architecture program. I won't dimension [indiscernible] the capacity that we could potentially bring online, because it's really tied to the number of shifts, do we work extended weeks, those kinds of things. And right now, we're not forecasting or anticipating the need to do that across the board in Phoenix.

I think, Bill, I would just add that it gives us additional flexibility in -- to be able to flex up.

Absolutely.

Great.

And just to be clear on that point, we will have the ability to ramp up and scale up efficiently on other programs in that space should some of the tailwinds that I've mentioned materialize in bookings.

Your next question comes from the line of Pete Arment with Baird.

Nice results there.

Peter, you're a little --

Peter, we can't hear you.

Yes, it's a little quiet.

Can you hear me now?

It's a little bit better, but I think Dave puts his ear really close to the speaker, we should be able to pick up.

Go ahead, Peter.

I'm sorry. Can you --

Here we go.

[indiscernible]

[indiscernible] on the CPA, you guys have had a couple of good bookings quarters coming into this first quarter, and it sounds like you've had some other follow-on orders. Just could you give us the latest on how that production is ramping up?

Yes. And this has been a multi-quarter progression going back to when we first brought back up the line and went through a very methodical approach to initial production. And our commentary all along has been that we had confidence that once we started to produce again and increase production, we would start to see bookings fall. And that has been the progression that we've seen. And we believe that as we continue to ramp up production and deliver, that will unlock future demand. So this is one of the parts of the business where we're continuing to focus on what we call ramp to rate, higher rate production, because we can see the potential demand, customer demand for our existing CPA products.

We're also focused on how we can expand that TAM and investments that we can make in different form factors with a similar kind of CPA architecture and approach, that over time we think could expand the TAM to additional platforms where we could sell this technology into. So we're excited about the progress that we're making on our programs, the increases in production that we've been able to achieve. And this is obviously a part of the business that we're very committed to. We're excited about, and we see significant growth potential.

That's great color. And then if you could also just comment on kind of the European defense environment. It sounds like you're getting favorable follow-on production awards there, and seeing that mix continue to ramp?

Yes, it's interesting. As we think about just the market broadly, the general tailwinds that we're seeing fall into a couple of different categories. I'd say, first, it's the growth in the domestic budgets. And it's not just the size of the defense budget, it's also the percent that's being allocated to the acquisition of technology and capabilities like we delivered. And there's also some interesting tailwinds with executive orders around the use of commercial technology and certain priorities like Golden Dome.

And then another major driver, which you mentioned is the tailwinds in Europe tied to the ReArm Europe initiative, where defense budgets look like in aggregate, they're tripling over the next few years towards $1 trillion in aggregate. We have very strong channels to market to that European defense budget growth. If we look at our last -- our trailing 12 months, the growth of that part of the business has been about 15%, when we look at direct to European primes and via FMS. And I would say that, that's largely before the tailwinds have really kicked in.

Now the conversations that I alluded to earlier that we're having with our primes domestically are mirrored with the European primes, where we're talking about increased quantities, accelerating rates, things like that, in areas primarily associated with EW and radar processing. Now those are conversations that are early in the pipeline, but I do think they're healthy and reflective of what could be a healthy demand environment internationally, where, again, we have good exposure, and we have a demonstrated growth rate in the 15% range over the last 12 months.

Your next question comes from the line of Seth Seifman with JPMorgan.

This is [ Rocco ] on for Seth. As expected, gross margins took a bit of a step back in Q1. How should we be thinking about the margin progression through the year? Are volumes the key to expanding margins? Or are there other focus pieces to watch?

Well, I'd say year-over-year, our gross margins are up about 260 basis points, and that was really a key enabler to our EBITDA margin expansion of over 500 basis points year-over-year. So we feel really good about the progression of our margins toward our target profile. And as we said before, we've got clear line of sight to our target profile that consists of improvements to our average backlog margin, as we convert low-margin backlog and replace it with bookings that are in line with our target margin, increased initiatives to drive automation and efficiency and then positive operating leverage. Those are really the 3 components of our bridge from where we are today that, again, over the last 2 quarters, our EBITDA margin has been 17.4%, and we feel like we're on our way towards the target profile of low to mid-20s focused on those 3 components.

And Rocco, I know you -- I think your question, you were looking sequentially?

Yes. [indiscernible] sequentially.

Yes. So sequentially, of course, there's a little bit of mix in there, from the margin standpoint. So Q4 and when we talked about this on the earnings call, we talked about, it had a very favorable mix for us during that quarter. And so we did -- our expectation was not that Q1 would approximate that same mix.

Right. That makes sense. And then how should we think about free cash flow conversion this year? Should we expect it to come in below the target of 50% following the strong conversion last year? Or is there additional cash to pull out in the near term?

Well, as Bill said, and we've been talking about, we're focused on getting our working capital to the level it should be, and what we feel like the model gets us to. Of course, that takes time, and there's quarter-to-quarter kind of perturbations around that, because of timing of billings and shipments. But we do expect over the long run that we'll be at that 50% level. And -- but in any given quarter, that's -- we're not saying our expectation is this quarter or next quarter that it will be that way. But over time, and what we said for FY '26 is we expect to be free cash flow positive. Cash flow positive with the second half higher than the first half.

And I think as we progress through FY '26, over time we'll be able to provide an updated view on that.

Your next question comes from the line of Austin Moeller with Canaccord Genuity.

Just my first question here. Can you walk us through the delivery timeline for LTAMDS based on what's currently in your backlog and the contract that was recently received by Raytheon for the next batch?

Yes. Thanks for the question. I don't think we'll comment on the current deliveries and the current timeline associated with option year 1. With respect to what you referenced, there's typically a time constant from the time that primes in general, get awarded their funding until we get our funding. And we're working through the progressions associated with that time constant. And as those conversations materialize in bookings, then I think we'll be able to give an updated view on our commentary.

Okay. And how do you view the revenue growth rate and backlog opportunity for your U.S. versus international customers?

I mean we feel good about both potentials for growth. I don't think we've quantified one versus the other. But certainly, the tailwinds and -- that Bill talked about make us feel good about the long-term prospects for growth in both of those marketplaces.

Yes. I agree. I mean, both domestically, internationally and as we look across our portfolio in general, we see a number of different growth drivers and potential tailwinds above getting to our target profile, which we've spoken to.

Your next question comes from the line of Jonathan Ho with William Blair.

Congratulations on the strong results. Just wanted to ask quickly on Golden Dome and maybe what you're seeing there. Is there any sort of update in terms of timing or potential opportunities just given your ability to participate in all the theaters?

Well, thanks, Jonathan. Thanks for the comment and for the question. I'd say it's still early in terms of specifics on where funding will be allocated and the timing with which it will be allocated. I will say, though, I feel like we are well positioned with respect to how that opportunity could materialize. And specifically, when you think about the different layers associated with a Golden Dome, a space layer, an airborne layer, tracking layer, interceptor, ground-based processing, shipboard processing, et cetera.

And the administration's commitment to having capabilities in place over a 3-year timeframe, it really points to existing capabilities in those layers, and we participate across that entire architecture. And so while there's some uncertainty around the specifics and the timing, we do believe that over time as the funding priorities are clear and the funding is allocated to programs, eventually that's going to translate into increased demand for mission-critical processing at the edge on the platforms in those different layers, and we feel very positioned to capture those tailwinds.

So there's uncertainty around the specifics. We do expect things to unfold over time, but we are very confident and believe we're well positioned to be able to capture those tailwinds, because of our broad exposure across that architecture.

And just as a quick follow-up, I just want to make sure -- I didn't completely hear one of the questions. But in terms of the U.S. government shutdown, are you seeing any impact either to funding or -- and to program starts -- or contract awards? Just wanted to make sure that there was some impact there?

Yes. I would say that so far, the -- any impact associated with the shutdown, we'd say is very minimal. And there's a couple of factors behind that response. One is we have very good backlog coverage as we look at our outlook for the fiscal year. Most of our funding comes through the primes and most of our awards come from the primes. I would say that if there's an extended shutdown over time, we could see some timing-related impacts associated with new bookings. But at this point, we haven't seen anything that is beyond minimal.

[Operator Instructions] Your next question comes from the line of Michael Ciarmoli with Truist Securities.

This is actually [ Sam ] on for Mike. Congrats on the nice quarter. I was curious, obviously, last quarter, you guys talked to kind of trying to work down some of the lower-margin older backlog that you guys have. I was curious if you could just give a general update on how you feel like you're progressing with that? And kind of thoughts for the rest of the year? And if there's any relationship between the pull forward on the higher-margin work and execution on that lower-margin portfolio?

Yes. I think as -- sorry. As was pointed out earlier, we did accelerate some high-margin activity from Q2. We were able to complete it in Q1. So when you kind of normalize for that, we were very close to the range we were thinking about or had communicated. So, I think we made good progress on burning down or expanding some of the lower-margin activity. Still have some to go. We talked about we're going to be working on that throughout the year but made good progress and the higher margin was a result of the mix of high-margin things that we were able to bring into the quarter.

Great. And if I could just do one follow-up. On free cash flow, obviously, you guys mentioned kind of second half will be the stronger generation for the year. But should we kind of think about a steady sequential progression through 2Q into the second half? Or should it -- we think about it maybe more as a bit of a step function increase once we get closer to the end of the year?

Yes. I think we only talk about cash for the year and talk about it being stronger in the second half. Cash can be -- can vary quarter-to-quarter based on just timing.

Your final question comes from the line of Sheila Kah with Jefferies.

Maybe if I could just start off on your margin. You talked about margin improvement from the 16% we saw in the quarter to your target of low to mid-20s, and that's based on visibility in your bookings, positive operating leverage and increased automation. Can you maybe talk about how we should think about the timing of those? And then maybe as a follow-up to that, how we should think about the backlog margin composition as you think about your core business? And the order momentum you've seen in recent quarters?

Yes. So as far as the timing goes, it really depends on how we convert over the next few quarters. If you think back to when we made the comment about our backlog margin being lower than what we would typically expect to see, it was at the end of FY '24. And since that time, we've commented that we've been able to bring in bookings that are in line with our targeted profile. So the low-margin programs in our backlog distribution at the end of FY '24 will burn off over some period of time from the end of FY '24. Now our backlog duration isn't a year, but it also isn't 2-plus years. So somewhere between, I don't know, 8 quarters-ish, that low-margin backlog should pretty much all convert.

And so that would put us in the FY '27 timeframe. So we want to see how we progress through FY '26. The progress we make in Q2, Q3 and Q4 before we get any more precise around how we expect to converge on the target profile.

Your second question, our backlog progression has been in line with our expectations. We've seen an increased mix towards production, which we think is just healthy in general, given the heavy mix of development programs that we had going back to 2 years ago. And the margin profile of our backlog is converging on what we believe is consistent with our targeted margin profile.

Can I actually ask one more question on the buyback. Why now on the share repurchase agreement? And just do we think about the buyback program using the revolver balance to fund the buyback?

Thanks, Sheila. This is Bill. I'll take that one. We've made a lot of progress on delevering, which has been our focus over the last couple of years. And we've seen significant free cash flow. I think over the last 4 quarters, our free cash flow has been just north of $130 million. And while our primary focus is on the organic value creation opportunity in front of us, and that's primarily tied to the top line ramp, as we transition toward production, and the margin expansion that we've talked about, we also want to make sure that we've got the all appropriate degrees of freedom available to us, so that we can drive long-term shareholder value.

So we haven't talked anymore about our plans for capital deployment beyond that other than our primary focus is the organic value creation opportunity in front of us. But we want to have access to all the levers and degrees of freedom.

Mr. Ballhaus, that appears that there are no further questions. I would like to turn the call back over to you for any closing remarks.

Casey, thank you, and thank you to all of you who participated today. We look forward to getting together to discuss our results next quarter. Thank you.

This concludes today's conference call. You may now disconnect.