Mercury Systems, Inc. (MRCY) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents a mixed picture: positive developments in product line growth and backlog replacement with higher-margin bookings are offset by persistent low-margin backlog and uncertainties in guidance. The Q&A reveals cautious cash management and a lack of raised guidance despite outperformance, reflecting concerns over supply chain uncertainties. While there are growth drivers like Golden Dome and international opportunities, the lack of specific guidance details and uncertainties around the Star program impact lead to a neutral sentiment. Given the market cap, these factors are likely to result in a neutral stock price movement.
Key Financial Performance
Bookings $288 million, a 1.23 book-to-bill ratio, resulting in a record backlog approaching $1.5 billion. This represents an 8.8% year-over-year increase in backlog, driven by a mix of franchise program extensions, competitive new design wins, and follow-on production awards.
Revenue $233 million, with first half revenue up 7.1% year-over-year. The increase was attributed to accelerated progress on high-priority programs and strong execution across the portfolio.
Adjusted EBITDA $30 million, with an adjusted EBITDA margin of 12.9%, up 36.3% and 300 basis points year-over-year. This was driven by backlog conversion, higher operating leverage, and accelerated customer deliveries.
Free Cash Flow $46 million, well ahead of expectations. This was supported by a $61 million or 12.9% year-over-year reduction in net working capital.
Gross Margin 26%, down approximately 130 basis points year-over-year. The decline was due to the execution of lower-margin programs, though improvements are expected as backlog margins increase.
Operating Expenses Decreased by approximately $2 million or 2.4% year-over-year. This was due to efficiency improvements, headcount reductions, and lower amortization expenses, partially offset by increased restructuring and litigation costs.
Net Working Capital Reduced by $61 million or 12.9% year-over-year, reaching the lowest level since Q1 FY '22. This reduction was driven by improved program execution, demand planning, and supply chain management.
Net Debt $257 million, the lowest level since Q1 FY '22, reflecting improved cash flow and reduced working capital.
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Operating Highlights
New Design Wins: Secured two key new design wins in growth markets: a major RF and processing subsystem for advanced air mobility ground control infrastructure and a space-based application with a leading aerospace and defense prime.
Common Processing Architecture Programs: Expanded manufacturing footprint in Phoenix, Arizona, with an additional 50,000 square feet to support ramp production for common processing architecture programs.
Global Defense Budgets: Potential for higher demand driven by increased global defense budgets and domestic priorities like Golden Dome.
International Expansion: Follow-on production awards included international land-based radar and electronic warfare applications.
Operational Efficiency: Streamlined operating structure, increased automation, and consolidated subscale sites to drive scalability and efficiency.
Free Cash Flow: Generated $46 million in free cash flow, with net working capital down $61 million year-over-year.
Margin Expansion: Focused on converting lower-margin backlog and adding new bookings aligned with target margin profile, achieving a 300 basis point year-over-year increase in adjusted EBITDA margin.
Customer Trust: Secured $20 million in follow-on awards leveraging common processing architecture and cybersecurity software, reflecting customer trust in critical franchise programs.
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Risk or Challenges
Net Adverse EAC Changes: Recognized $4 million of net adverse EAC changes across the portfolio, reflecting challenges in execution on development and production programs.
Gross Margin Decline: Gross margin decreased by 130 basis points to 26%, driven by execution on lower-margin programs, indicating potential profitability challenges.
Restructuring and Efficiency Costs: Increased restructuring and other charges by $4 million, reflecting ongoing efforts to streamline operations but adding short-term financial strain.
Litigation and Settlement Costs: Increased selling, general, and administrative costs by $2 million due to litigation and settlement expenses, impacting operational costs.
Q3 Revenue and Free Cash Flow Outlook: Expecting Q3 revenue to decline year-over-year and free cash outflow due to accelerated cash receipts in Q2, creating short-term financial pressure.
Inventory Increase: Inventory increased by $5 million year-over-year, driven by work in process, which could indicate inefficiencies in production or supply chain management.
Settlement in Principle on Securities Class Action: Settlement recorded as a receivable and corresponding accrual, reflecting legal and financial risks.
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Guidance & Outlook
Revenue Growth: The company expects annual revenue growth in the low single digits for FY '26. Q3 revenue is expected to be down year-over-year, followed by a ramp in Q4.
Adjusted EBITDA Margin: The company anticipates full-year adjusted EBITDA margin approaching mid-teens. Q3 adjusted EBITDA margin is expected to approach double digits, with Q4 adjusted EBITDA margin being the highest of the fiscal year.
Free Cash Flow: Free cash flow is expected to be positive for FY '26, despite a projected outflow in Q3 due to cash receipts pulled forward into Q2.
Market Opportunities: The company is optimistic about potential tailwinds from increased global defense budgets and domestic priorities like Golden Dome, which could positively impact demand over the next several quarters.
Backlog and Bookings: The company has a record backlog of nearly $1.5 billion and expects average backlog margin to increase as lower-margin backlog is converted and new bookings align with target margin profiles.
Operational Efficiency: The company plans to continue simplifying, automating, and optimizing operations to drive scalability and efficiency, including expanding its automated manufacturing footprint in Phoenix, Arizona.
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Shareholder Return Plan
Share Repurchase Program: During the second quarter, Mercury Systems repurchased and retired $15 million worth of shares as part of its share repurchase program. This was highlighted as a part of their financial activities for the quarter.
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Key Q&A
Q:Can you provide an update on the progress of burning down the lower-margin backlog and its impact on margins?
A:The company expects the lower-margin backlog to persist through FY '26 and FY '27 but to diminish over time. Progress has been made in burning down the low-margin backlog, which is being replaced with higher-margin bookings. Gross margin in the quarter was down, reflecting the burn-down of the lower-margin backlog.
Q:What is the impact of pull-forward revenue on the quarter's results?
A:The company pulled forward $30 million in revenue, positively impacting EBITDA by $10 million. This reflects the ability to accelerate deliveries, which has been consistent over the last several quarters.
Q:Can you provide details on the capacity expansion for the CPA product line and its impact on operations?
A:The company is ramping up production in the CPA area, with additional capacity being brought online in Phoenix. The cost of this expansion is already included in OpEx, and the company is positioned to meet increased demand by adding shifts rather than investing ahead of demand.
Q:Why has the company not raised its full-year guidance despite consistent outperformance?
A:The company has consistently outperformed expectations but has not raised guidance due to uncertainties in accelerating material deliveries from suppliers. The ability to accelerate deliveries is not guaranteed, and the company does not want to set expectations based on uncertain factors.
Q:What is the outlook for mid-teen margins and the impact of low-margin backlog on future margins?
A:The impact of the low-margin backlog on EBITDA margins is expected to decrease over time as the backlog diminishes. The company is replacing low-margin backlog with higher-margin bookings, which will improve average backlog margins.
Q:What is the status of net EAC adjustments and their impact on margins?
A:Net EAC adjustments are now in a normal range, with $3.5 million in adjustments this quarter. These adjustments are expected to become less frequent as older programs are completed.
Q:What is the growth potential for the common processing architecture (CPA) product line?
A:The CPA product line has shown growth potential, with successful ramp-up and follow-on orders. The company sees healthy demand and technical differentiation in this area.
Q:What is the company's approach to cash management and priorities for cash usage?
A:The company aims to maintain a cash balance of $100 million to $150 million, with a focus on delevering and reducing net debt. Recent cash management has been cautious due to uncertainties around government shutdowns.
Q:What is the revenue impact of the stop work order on the Star program?
A:The company has not quantified the revenue impact of the stop work order on the Star program but has incorporated it into its outlook. The program is one of many in the company's broad portfolio.
Q:What are the growth drivers for the company, including Golden Dome and international opportunities?
A:Growth drivers include ramping development programs to production, larger U.S. defense budgets, executive orders favoring commercial technology, Golden Dome, and international defense market growth. Conversations on Golden Dome and international opportunities are progressing.
Q:What is the progress on cost savings and facilities consolidation initiatives?
A:Significant progress has been made, with OpEx reductions evident over the past two years. Facilities consolidation takes longer to realize savings, but the company continues to focus on efficiency and automation.
Q:What is the percentage of revenue from international and FMS sales?
A:International and FMS sales accounted for $38 million, or approximately 15% of revenue, in the quarter.
Q:What is the company's medium-term margin framework and expectations for gross margin, R&D, and SG&A?
A:The company has not explicitly stated gross margin expectations but aims for EBITDA margins in the low to mid-20% range. This will be achieved through burning off low-margin programs, streamlining operations, and leveraging operating expenses.
Q:What is the reason for the $4 million restructuring charge in the quarter?
A:The restructuring charge relates to actions affecting about 100 employees and some facilities. The full impact of these actions will be realized over the next year.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the revenue impact of the stop work order on the Star program, the exact percentage of revenue from the common processing architecture (CPA) product line, and the quantification of the drag caused by unbilled balances. Additionally, they did not provide explicit gross margin expectations or a detailed breakdown of revenue from missiles and munitions.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Ballhaus Executive
Bookings scope
Slide afternoon
application
asset
backlog booking
balance cash
bill record
booking plan
budget priority
compensation
defense budget
design win
effort
factory capacity
flow inflow
flow progress
level FY
leverage margin
line cash
missile
number priority
outflow
platform
point margin
point production
priority booking
priority excellence
priority program
processing architecture
production program
program balance
program production
progress number
ramp
record backlog
restructuring charge
settlement principle
MRCY Transcript
Mercury Systems, Inc. (MRCY) Q2 2026 Earnings Call Transcript
Unknown2-4
The earnings call presents a mixed picture: positive developments in product line growth and backlog replacement with higher-margin bookings are offset by persistent low-margin backlog and uncertainties in guidance. The Q&A reveals cautious cash management and a lack of raised guidance despite outperformance, reflecting concerns over supply chain uncertainties. While there are growth drivers like Golden Dome and international opportunities, the lack of specific guidance details and uncertainties around the Star program impact lead to a neutral sentiment. Given the market cap, these factors are likely to result in a neutral stock price movement.
Mercury Systems, Inc. (MRCY) Q1 2026 Earnings Call Transcript
Unknown11-5
The earnings call summary and Q&A reveal a mixed sentiment. Positive factors include revenue growth, margin improvement, and a share repurchase plan. However, the lack of specific guidance, unclear timelines for key programs, and lower free cash flow conversion this year offset these positives. The company's market cap suggests moderate price sensitivity, leading to a neutral prediction for the stock price over the next two weeks.
Mercury Systems, Inc. (MRCY) Q4 2025 Earnings Call Transcript
Positive8-11
The earnings call summary and Q&A reveal strong financial metrics, optimistic guidance, and strategic improvements in operations and margins. The company's focus on automation, capacity expansion, and increased efficiencies is promising. Despite not providing annual guidance, management's confidence in improving margins and free cash flow, coupled with strong demand across markets, suggests positive sentiment. The market cap indicates a moderate reaction, leading to a 'Positive' prediction for stock price movement.
Mercury Systems, Inc. (MRCY) Q3 2025 Earnings Call Transcript
Positive5-6
The earnings call reveals strong financial performance with revenue and EBITDA growth, improved cash flow, and reduced net debt. The Q&A highlights positive management sentiment towards LTAMDS and growth prospects, despite some lack of clarity on specifics. The strategic plan indicates a solid demand and production capacity increase. While there are minor concerns about cash flow fluctuations and backlog margins, the overall outlook is optimistic. Given the small-cap nature of the company, a positive stock price movement (2% to 8%) is expected due to these factors.
MRCY Slides
MRCY Report
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