Mercury Systems (NASDAQ:MRCY) reported fiscal 2026 second-quarter results that management said came in ahead of expectations, driven by improved execution across programs, accelerated customer deliveries, and continued progress on working capital reduction.
Quarterly results and backlog growth
Chairman and CEO Bill Ballhaus said the company delivered “solid year-over-year growth in backlog, revenue, and adjusted EBITDA,” along with “robust free cash flow.” For the quarter, Mercury posted bookings of $288 million, a book-to-bill ratio of 1.23, and a record backlog “approaching $1.5 billion.” CFO Dave Farnsworth said backlog was up $119 million, or 8.8%, year over year.
Adjusted EBITDA was approximately $30 million, and adjusted EBITDA margin was 12.9%, which management said was up 36.3% and 300 basis points year over year, respectively. Adjusted EPS was $0.16, compared with $0.07 in the prior-year quarter. On a GAAP basis, Mercury reported a net loss of about $15 million, or $0.26 per share, compared with a net loss of about $18 million, or $0.30 per share, a year earlier.
Accelerated deliveries boosted Q2, shift expected in Q3
A key driver of the quarter was Mercury’s ability to accelerate deliveries on “high-priority programs.” Ballhaus said the company pulled forward approximately $30 million of revenue that had been “primarily planned for the third quarter,” along with about $10 million of adjusted EBITDA and about $30 million of cash. Farnsworth similarly noted that the quarter benefited from deliveries accelerated from Q3.
Management emphasized that these accelerations improve near-term results but can shift quarterly comparisons. Ballhaus said that after the first-half overperformance of roughly $30 million, the company expects fiscal Q3 revenue to be down year over year “absent any additional accelerations,” followed by a ramp in Q4. He also said Mercury expects Q3 adjusted EBITDA margin to be “approaching double digits” as it converts lower-margin backlog and realizes lower operating leverage, with Q4 expected to have the highest margin of the fiscal year.
When asked why the company did not raise its full-year view given repeated outperformance, Ballhaus said the ability to accelerate shipments is “largely driven by our ability to accelerate material” from suppliers, and Mercury does not want to set expectations until it has full confidence that components are in hand.
Bookings mix, program wins, and demand tailwinds
Ballhaus said second-quarter awards reflected a blend of franchise program extensions, competitive new design wins, and follow-on production awards across domestic and international customers. He highlighted several drivers within bookings:
- A scope expansion on a long-standing cost-plus development program tied to modernization efforts within a “core missile defense platform,” which management said increased Mercury’s hardware content and strengthened its position as the program moves toward production.
- Two new design wins, including an RF and processing subsystem supporting a ground control infrastructure program for an advanced air mobility manufacturer, and a space-based application design award with an aerospace and defense prime.
- Follow-on production awards, including incremental quantities on a key U.S. missile franchise, plus additional awards supporting deployed naval platforms and international land-based radar and electronic warfare applications.
- Approximately $20 million of follow-on awards leveraging Mercury’s Common Processing Architecture (CPA) and embedded anti-tamper and cybersecurity software from its Star Lab acquisition.
On the demand environment, Ballhaus said customer conversations continue to progress on potential higher demand across multiple programs, driven by increased global defense budgets and domestic priorities such as “Golden Dome.” He stressed these opportunities are still early in the pipeline and would be reflected in results only as they translate into bookings.
In the Q&A, management said international and foreign military sales (FMS) revenue in the quarter was $38 million, which one analyst estimated to be in the mid-teens percentage of revenue. Mercury did not provide a specific revenue breakout for missiles and munitions, noting it does not report that category as a separate line item.
Margins: low-margin backlog burn-down and operating leverage
Gross margin in Q2 was 26%, down about 130 basis points year over year. Farnsworth attributed the decline primarily to execution on lower-margin programs. Ballhaus described the lower gross margin as consistent with Mercury’s effort to “burn down” lower-margin backlog inherited from prior periods and replace it with new bookings aligned with the company’s targeted margin profile.
Ballhaus reiterated Mercury’s longer-term goal of adjusted EBITDA margins in the low-to-mid 20% range and said the path depends on three factors: improving backlog margin as lower-margin programs roll off, continued simplification and automation efforts, and positive operating leverage as revenue grows without meaningful increases in operating expenses. Management added that operating expenses were down year over year due to prior streamlining actions, although SG&A increased about $2 million due to litigation and settlement costs, and restructuring and other charges rose by $4 million.
On estimated-at-completion (EAC) adjustments, Ballhaus said the company recognized $4 million of net adverse EAC changes in Q2, in line with recent quarters, and characterized the level as within a “normal course range.” He said fewer development programs remain in the portfolio that could drive these adjustments, and management said it remains confident it can reach its target margin profile with EAC changes in the “zip code” experienced recently.
Free cash flow, working capital, and balance sheet actions
Mercury reported free cash flow of $46 million in Q2, which management said was well ahead of expectations. Farnsworth said the improvement was driven primarily by a $61 million year-over-year reduction in net working capital, or 12.9%. Ballhaus said net working capital ended the quarter at about $414 million, the lowest level since Q1 fiscal 2022, while net debt was reduced to $257 million, also the lowest level since Q1 fiscal 2022.
The company ended Q2 with $335 million of cash. Farnsworth said cash increased sequentially primarily due to about $52 million of cash provided by operations, partially offset by nearly $6 million of capital expenditures and $15 million of shares repurchased and retired under the company’s repurchase program.
Management said it continues to allocate factory capacity in fiscal 2026 to programs with unbilled receivable balances to help drive free cash flow with minimal impact to revenue. In response to an analyst question, the company said it has not quantified how much this practice may be constraining reported revenue.
Mercury also noted that prepaid expenses and other current assets increased year over year, which Farnsworth attributed primarily to a “settlement in principle” on a securities class action complaint, recorded as a receivable with a corresponding accrual in accrued expenses.
Looking ahead, Ballhaus said the company maintained its full-year fiscal 2026 view, which assumes low single-digit annual revenue growth, adjusted EBITDA margin approaching the mid-teens, and positive free cash flow for the year. He added that Q3 free cash flow is expected to be an outflow due to cash receipts pulled into Q2. Management said the outlook does not assume additional accelerations or upside bookings tied to Golden Dome or higher global defense budgets.
About Mercury Systems (NASDAQ:MRCY)
Mercury Systems, Inc (NASDAQ: MRCY) is a technology company that designs, manufactures and markets secure processing subsystems for aerospace and defense applications. The company’s products are built to address the stringent security, safety and reliability requirements of mission-critical programs, with a focus on radar, electronic warfare, intelligence and other sensor and processing functions. Mercury’s offerings encompass rugged embedded computing modules, high-performance radio frequency (RF) and microwave components, digital signal processing subsystems and secure networking solutions.
Since its origins in advanced signal processing, Mercury Systems has expanded its capabilities through a combination of internal development and targeted acquisitions.
