Mercury Systems (NASDAQ:MRCY) reported third-quarter fiscal 2026 results that exceeded management’s expectations, driven by stronger-than-planned backlog conversion, record bookings, and year-over-year margin expansion. Chairman and CEO Bill Ballhaus said the quarter reflected “strong demand signals and solid execution,” while CFO Dave Farnsworth pointed to continued progress toward the company’s goals of organic growth and expanding profitability.
Record bookings lift backlog as production mix expands
Ballhaus said Mercury delivered record quarterly bookings of $348.3 million, producing a 1.48 book-to-bill and pushing backlog to a record “approaching $1.6 billion.” Farnsworth added the backlog was up $240 million, or 17.9%, from the prior year period. Trailing 12-month bookings were also described as a record at $1.23 billion.
Revenue, earnings, and margins rise year over year
Revenue for the quarter was $235.8 million, which Ballhaus said was up 11.5% organically year over year. Farnsworth similarly cited revenue of nearly $236 million, up about $24 million organically. Ballhaus highlighted domestic revenue—about 88% of Q3 revenue—grew 17% year over year.
Profitability improved as well. Adjusted EBITDA was $36.1 million, and adjusted EBITDA margin was 15.3%, up 46% and 360 basis points, respectively, from the prior year, according to Ballhaus. Farnsworth reported adjusted EBITDA of approximately $36 million, also up 46.2% year over year, and said the increase was supported by “enhanced execution and improved operating leverage.”
On a GAAP basis, Farnsworth said net loss was approximately $3 million, or $0.04 per share, compared with a GAAP net loss of approximately $19 million, or $0.33 per share, in the same quarter last year. Adjusted earnings per share were $0.27 versus $0.06 in the prior year period.
Gross margin was 29.3%, up about 230 basis points year over year. Farnsworth said the increase was primarily driven by lower net EAC change impacts (nearly $2 million) and lower net manufacturing adjustments (about $4 million), partially offset by higher inventory reserves (about $3 million). Operating expenses declined about $11 million, or 14.3%, year over year, which Farnsworth attributed mainly to lower restructuring and other charges, lower SG&A, and lower R&D.
Execution drove pull-forward activity and manufacturing actions
Both Ballhaus and Farnsworth said Mercury accelerated progress on several customer programs during the quarter, pulling forward approximately $25 million of revenue that was “primarily planned for the fourth quarter.” Ballhaus said the acceleration also generated about $15 million of adjusted EBITDA and about $25 million of cash, contributing to Q3 results and also factoring into the company’s Q4 outlook.
Ballhaus described ongoing operational initiatives aimed at scalability and efficiency, including added capacity, automation, and site consolidation. He said the company added capacity to its “highly automated manufacturing footprint in Phoenix, Arizona” and initiated operations within an additional 50,000 square feet of factory space to support ramped production for CPA-related programs. He also said Mercury completed the acquisition of a “critical manufacturing process technology provider” integral to several ramping programs, though no additional financial details were discussed on the call.
Working capital improvement remains a focus as Q3 cash flow nears breakeven
Mercury reported free cash flow outflow of $1.8 million to $2 million in the quarter, which management said was better than expected and consistent with prior commentary that Q3 would be a use of cash. Farnsworth said Mercury “successfully mitigate[d] a large portion of that outflow through improved collections on billed receivables.”
The company ended Q3 with $332 million in cash and cash equivalents. Farnsworth said working capital decreased about $19 million year over year, or 4.1%, and Ballhaus cited net working capital of approximately $434.4 million, down $18.7 million year over year. Farnsworth also said the company’s working capital progress enabled a $150 million payment against its revolver during the fourth quarter and described net working capital as down about $225 million, or 34%, from a peak in Q1 fiscal 2024.
Outlook raised as Mercury points to improved linearity and potential tailwinds
Ballhaus said the company is “raising our expectations for FY 2026” and linked the change to improved ability to stage materials earlier and increase forecast visibility. He said Mercury now expects FY 2026 revenue growth “approaching mid-single digits,” up from “low single digits,” and expects full-year adjusted EBITDA margin in the “mid-teens,” up from “approaching mid-teens.” Both Ballhaus and Farnsworth said the company expects free cash flow to be positive in Q4.
During Q&A, Farnsworth said the company has been working to “flatten out” historical seasonality, with a stronger third quarter reducing the magnitude of a typical fourth-quarter margin step-up. Ballhaus added that the business is progressing as development programs complete and transition into low-rate and higher-rate production, resulting in what he described as a “nice, smooth progression” in performance.
Ballhaus also discussed potential demand tailwinds tied to increased global defense budgets and domestic priorities “like Golden Dome,” while emphasizing that such tailwinds are not included in current bookings or outlook. He said Mercury is seeing those factors begin to appear as multi-year strategic agreements and higher quantities with prime contractors, but added the impacts have not yet been reflected in reported bookings.
On IBAS (defense industrial base) investments, Ballhaus said Mercury has had interactions with the program and has some IBAS-funded programs. He said the company continues to look for opportunities that could help increase capacity, efficiency, and innovation.
Regarding CPA, Ballhaus said demand is strong for existing products and noted Mercury’s differentiation, including meeting certain security standards. He also pointed to future opportunities in smaller form factors and “secure chiplets,” which he said could expand the addressable market over time.
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.
