管理層發言
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, William L. Ballhaus, and our Executive Vice President and Chief Financial Officer, David E. Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing is posted on the Investor Relations section of the website under Events and Presentations. Turning to slide two 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 two 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, William L. Ballhaus. Please turn to Slide three.
Thanks, Tyler. Good afternoon. Thank you for joining our Q2 FY 2026 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 2026 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 four. 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. And 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 five. Starting with our four priorities and priority one, performance excellence. 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 2021. Beyond this 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 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 warfighters and our allies. Please turn to Slide six. Moving on to priority two, 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 manufacturer's development of its ground control infrastructure, as well as a new design award 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 in follow-on awards that leverage our common processing architecture and include embedded anti-tamper and cybersecurity software from our recent acquisition of StarLab, reinforcing the strategic value within the 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 seven. Now turning to priority three, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low to mid-twenty percent 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 2026 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 forward to Slide eight. Finally, turning to priority four, improve free cash flow. We continue to make progress on the drivers of free cash flow, 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 2022. Net debt is now down to $257 million, also the lowest level since Q1 FY 2022. 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 2026 to programs with unbilled receivable balances which will help drive free cash flow, although with little impact to revenue. Please turn to Slide nine. 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-twenty percent 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 two quarters. Coming out of Q2, we maintain our full-year view on FY 2026, which excludes any further accelerations within or into FY 2026 or upside bookings 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 accelerations 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, which impacts Q3, and we expect this 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 2026 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. 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 of fiscal 2026. 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 the 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% was driven by efficiency improvements and headcount 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 non-operating 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 $40 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 accelerated progress primarily planned for the third quarter. Slide 11 presents Mercury's balance sheet for the last five 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 2026 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 with 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 counterparty. 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 2024. 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 appropriately timed 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.
分析師問答
Thank you, sir. Again, that is star one to ask a question. We'll take the first question today from Peter Arment from Baird.
Good evening, Bill and Dave, Tyler. Nice results. Bill, can you give us a little bit of a handicap? How do we think about how much is left of the lower margin backlog that you've got to convert and pull through? It 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 how that exits the system?
It's the same progression that we've been talking about for several quarters now. At the end of FY 2024, we discussed that the average backlog margin was lower than our ongoing expectations, driven by a number of factors, and that would need to flow through over time. If you look at the duration of our backlog, it wasn't a four-quarter period nor necessarily a twelve-quarter period — somewhere in between. As we work our way through 2026 and 2027, 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. The good news is our gross margin in the quarter was down, which reflects that we are burning down that lower margin distribution in our backlog, and we continue to replace that portion of our backlog with higher-margin bookings that we expect to be in line with our target profile. No change from what we said before; it's a continuation. If anything, we made great progress this quarter in burning down the low-margin distribution as well as bringing in solid bookings in the quarter.
Thanks for that, Bill. Just a quick follow-up. When we think about the pull forward, is that something tied to the low margin backlog? Or is this just something you're calling out because there is some confusion about what's pull forward or what's growth, etc.?
Over the last several quarters we've been successful in accelerating deliveries, and that has impacted results ahead of our expectations. 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 a gross margin with minimal operating expense. This quarter is a continuation of what we've been delivering over the last several quarters.
Appreciate the call. I'll jump back in the queue. Thanks, Bill. Thanks, Peter.
Up next is Kenneth George Herbert from RBC.
Hi. Good afternoon, Bill, Dave, and Tyler. Maybe, Bill, I just want to start first on the capacity you called out that you're adding in terms of the common processing architecture. 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? How should we think about how much more capacity you need to continue to bring on to support the order activity and demand pull?
As a reminder, the capacity we're bringing online in Phoenix and the associated cost is already in our operating expense. The investment we're making is modest CapEx to bring additional lines online. We are continuing to ramp up production in our common processing architecture area per plan and are feeling very good about how we're delivering for our customers. We continue to grow our backlog — you saw another $20 million of orders associated with CPA in the quarter — and we remain confident that as time goes on and we continue to execute, we'll see increased demand for that product line, which is behind bringing on the additional space. One of the nice things about our position is that when we look at potential tailwinds, the investment profile is incremental and graceful; we don't have to invest far ahead of demand to be able to deliver. For the most part we're running single shifts across our factories. The first step to increase capacity to meet tailwinds would be to add additional shifts. With the capacity coming online in Phoenix later this year, we'll be in a position to very efficiently meet increased demand for CPA by moving to additional shifts. That's a very good place for us to be.
I appreciate the color. If I could, I just wanted to ask a question on the guidance. You've demonstrated a pattern to outperform and pull revenues forward relative to expectations. You've set up today with a fairly soft fiscal third quarter and a strong fourth quarter. What kept you back from pushing up the guide or having a little more confidence in the full year numbers given recurring ability to outperform?
It has been consistent quarter over quarter. If we think about the setup coming into FY 2026, we pulled forward about $30 million of accelerated deliveries and revenue from FY 2026 into FY 2025, which 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, you would have seen mid single-digit growth last year and high single-digit growth this year. Movement between quarters can impact the optics around growth. Coming through the first half of FY 2026, we're well ahead of plan on top line, EBITDA, and free cash flow. Our expectations for the year are the same as they were coming into the year; we've simply overperformed and shifted the profile to the left. The reason we're giving our commentary the way we did for Q3 is absent any further accelerations from Q4 into Q3 or from FY 2027 into FY 2026. Our ability to accelerate deliveries is largely driven by our ability to accelerate materials. For Q2, in the last few weeks we were able to pull in material to deliver more units in Q2, leading to our highest point-in-time revenue in five years. To accelerate further, we must have the material on hand, and we can't be certain until it arrives. We don't want to set expectations based on things we don't have full confidence in. Over the last several quarters we've demonstrated the ability to accelerate $20 to $30 million of deliveries into a quarter, but we won't set expectations assuming that will happen every quarter because it's dependent on material availability. Hopefully that clarifies our commentary.
Thanks, Bill. I appreciate the context.
The next question comes from Jefferies. Sheila Kahyaoglu was on the line, but Kyle Walters is on for Sheila.
Hi, guys. This is Kyle on for Sheila. Thanks for taking my question. On an extension of the question Peter asked about low-margin backlog and your response that it persists through FY 2027, how do we think about the puts and takes as we consider mid-teen margins this year and what FY 2027 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 bookings trends? Thanks.
A point of clarification: we may still have lower-margin backlog as we work through FY 2027, but it becomes increasingly smaller each quarter. As we move forward, the impact of low-margin backlog on our EBITDA margins continues to drop because the volume comes down. Each quarter we are burning down that low-margin backlog and replacing it with new bookings that are higher margin, which increases our average backlog margin over time. So every quarter that progresses, the impact becomes smaller because we are not adding new things at low margin.
As a reminder, this isn't a situation where a part of our business is consistently running at lower margins. We have legacy development programs and programs where we took EAC impacts in FY 2024 and FY 2025 that resulted in the lower-margin distribution in our backlog. We're converting those and burning them through over time, and they're not being replaced; we're replacing them with higher-margin bookings.
Understood. Very helpful. If I could ask one follow-up about the net EACs: they're lower than in the past but still around $4–$5 million a quarter. Can you talk about where we are in scrubbing that portfolio and getting toward a normal baseline?
I didn't go to baseball; innings are hard for me, so maybe we're on the last leg of the relay race. Those EAC adjustments largely reflect completing programs at the very end. There are not many programs left and the adjustments are much smaller compared to the past. We are seeing solid positive adjustments at the same time. This quarter it was roughly $3.5 million. Could we see a positive EAC in a quarter? Yes. Could it be slightly negative? Also possible. It's within a normal range and consistent with our outlook. Every time we finish one of these programs and put it behind us, it lessens the opportunity for those adjustments. We're getting there; the adjustments are in a normal course range and we're confident in our ability to reach our target margin profile with the EACs running at this level over the last several quarters.
The next question today will come from Seth Seifman from JPMorgan.
Nice quarter. I wanted to ask about the common processing architecture ramp. I know you don't want to give an exact number, but if we think about a rough proportion of what that comprises in the sales mix, is there any way for you to speak to where that is and where it should be going a year or two out?
We haven't disclosed a percentage of the business or sales mix. I will say we've been successful over the last year in ramping up to meet program demands. The team has been executing well since we implemented our root cause corrective action and resumed bringing the production line back up, and we've seen follow-on orders. We see good growth potential in this part of the business, healthy demand, and technical differentiation. We don't talk about specific positions in individual programs, but there are programs fully ramped in production within the common processing architecture and others still ramping up.
Okay. So there is still runway. And then about cash — up to over $300 million and you bought back a little stock in the quarter — how should we think about where that cash balance should be over time and what you'll do with the cash?
Good question. We've said that around $100 to $150 million is probably the right balance for us. Our cash is higher than that after generating significant cash in the last year and a half. Over the last two or three quarters, it felt prudent to keep higher cash on the balance sheet given uncertainty around government payment timing. Our emphasis remains on deleveraging, which is a focus as we move through the next couple of quarters.
I'd reiterate the priorities around deleveraging and continuing to drive down debt remain the focus.
Okay. Great. Thanks very much.
Up next we'll take a question from Michael Ciarmoli from Truist.
Good evening, guys. Good results. Bill or Dave, looking at your top line — you're growing slower than some SMidCap peers and some of your customers. Can you help with exactly how much capacity is being allocated to the unbilled and maybe tease out that drag? Is it kind of $10 million, $15 million a quarter, to get a sense of how much is flowing through the P&L at no revenue recognition while tying up capacity?
We haven't quantified how much revenue would be higher if we stopped allocating factory capacity to programs with unbilled receivables. It's a focus to continue to burn down net working capital; we believe the unbilled balances are too high, and there's certainly some drag, but we haven't put a specific number on that.
Okay. Maybe we'll take that offline. Back to Ken's question: on choke points and why you can't consistently accelerate, we're one month into the quarter. As you gauge suppliers and potential choke points, are there certain items giving you less confidence? Is it semiconductors, circuit boards, discrete components? What items in the material list are giving you reason for pause?
Every week our teams review bills of materials line by line to determine what it takes to get kits complete. That varies by program. We push our suppliers to close out kits, but we don't know material will be here until it arrives. A supplier could say the material will be here Friday and then delay it for reasons. That's why we don't incorporate accelerations into our outlook until material is on hand. We're working this aggressively across the business every day. The last several quarters we've built the muscle to accelerate fairly consistently, but we don't bake it into our guidance. It's a process we work on throughout the quarter to build confidence.
Okay. That's fair. Thanks, guys. I appreciate it.
Thanks, Mike.
Austin Moeller from Canaccord Genuity has the next question.
Hi. Good afternoon. Nice quarter. Are you able to comment — I know it's small — on the revenue impact to Mercury of the stop work order on the SCAR program, and if that were to be resumed, when you might expect tasks or work to come in on delivering components?
We don't quantify individual contracts or programs. We have many programs, and one of our strengths is the breadth of our portfolio. There's no single contract that approaches 10% of our revenue. We're working closely with our customer and understand where we are in terms of funding and the stop work dynamics. It's incorporated in our outlook, but there's nothing we would change at this juncture.
I understand the dynamic and the shift toward higher-margin production contracts in the near term. Is there a specific mix of component product types you expect will bridge you to your long-term gross margin and EBITDA margin expectations in the low to mid-20s?
We don't provide a specific mix. Bill previously discussed development versus production mix; there's no single ideal number. The margins in our new bookings are consistent with our longer-term model. We feel good across the portfolio about the margin profile of our new bookings.
Understood. Thanks for all the color.
Next up is a question from Jonathan Ho at William Blair.
Hi, good afternoon. Any additional color on updates to both Golden Dome and those international orders that you're perhaps getting a little more visibility toward?
When we think about growth drivers, at the core it's the ramp from development programs to production, which is driving our ability to achieve above-market top-line growth, low- to mid-20% adjusted EBITDA margins, and healthy free cash flow conversion. On top of that are a number of market tailwinds: increased U.S. defense budget, a larger percentage allocated to capabilities like ours, executive orders mandating the use of commercial technology that play to our strengths, Golden Dome, and growth in the international defense market. We're having numerous conversations on Golden Dome and international opportunities across our portfolio on a dozen-plus programs where customers are discussing significant increases in quantities. These conversations are still in the pipeline phase. If any of these tailwinds materialize into bookings, they would shift our expectations and could allow us to exceed our target profile. We'll keep you updated as conversations progress and when they convert to bookings.
Excellent. In terms of your cost savings and facilities consolidation initiatives, how far along are you and what incremental margin opportunities remain?
We've made a lot of progress; you can see it in the run rate of our operating expenses versus two years ago. We continue to identify ways to be more efficient, including automation and simplifying processes. Facilities take longer to realize savings, but we're still seeing opportunities over the long term. Bill spoke about operating leverage: as we accelerate activity, we haven't increased expenses proportionally, so the flow-through benefits margins. That's the type of impact we expect to continue seeing as we build the business.
As a reminder, everyone, it is star one if you have a question today. We'll go next to Noah Poponak with Goldman Sachs.
Hey. Good evening, everyone.
Hey, Noah.
Could you level set us on the percentage of your revenue that is international? And do you have an estimate for what's direct versus revenue that eventually ends up outside the U.S. but goes through a U.S. customer? And then the same question on missile and munitions, as we recalibrate growth rates in those segments.
We don't break out FMS versus non-FMS in our financials. In large part, we follow our customer set. If you look at the backlog and revenue breakout, you can see international and FMS revenue for the second quarter was $38 million, which is roughly in the mid-teens percentage range of revenue. We don't break out missiles and munitions separately.
Understood. That is helpful. A question on margins: directionally in the medium-term framework, what do you expect for gross margin and then R&D and SG&A as a percentage of revenue to walk to that EBITDA margin? Those percentages have been moving as you've taken on your strategy.
We haven't provided an explicit gross margin target within our stated overall EBITDA target. Our targeted adjusted EBITDA margins are in the low to mid-20% range. The bridge from where we are to that target involves: backlog margin progression as we burn off lower-margin programs and bring in new bookings aligned with target margins; continued simplification, automation, and efficiency improvements; and positive operating leverage because we've put OpEx in a good place and expect limited meaningful OpEx growth as revenue expands. Those three elements provide the bridge to our target margin profile.
That's helpful. One last: the step-up in restructuring to about $4 million — what are you doing there and what does it do for the future?
We took an action in the quarter affecting about 100 roles across some facilities. You can see the related items in our filings. We expect to recognize the full impact of that over the next year or so.
Okay. Alright. Thank you.
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. We look forward to meeting 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.