0001049521-26-000006
SEC filingRevenue grew 4.4% to $232.9M, but gross margin contracted 130 bps to 26.0% due to scrap and reserves.
For the second quarter ended December 26, 2025, Mercury Systems reported net revenues of $232.9 million, a 4.4% increase from $223.1 million in the prior year quarter. The growth was driven by execution on the program base and continued ramp toward full-rate production on common processing architecture programs. Point-in-time and over-time revenue each represented 55% and 45% of total revenue, respectively, consistent with the prior year.
Gross margin declined 130 basis points to 26.0% from 27.3%, pressured by $3.1 million in higher scrap costs and $2.4 million in higher inventory reserves. These were partially offset by $5.3 million in lower manufacturing variances and a net favorable impact from estimate-at-completion changes of approximately $3.5 million (an incremental improvement of $0.9 million vs. prior year). Operating loss improved to $10.8 million from $12.4 million, reflecting a 100 bps improvement in operating margin to -4.6%. Net loss narrowed to $15.1 million ($0.26 per share) from $17.6 million ($0.30 per share).
Selling, general and administrative expenses rose 4.0% to $42.1 million, driven by higher litigation and settlement costs ($2.0 million related to the former CEO dispute) and software licensing fees. Research and development expenses fell 28.0% to $15.4 million, primarily from headcount reductions of approximately 225 employees initiated in fiscal 2025. Restructuring charges of $4.1 million were incurred from workforce reductions of about 60 positions during the quarter.
Revenue growth was led by the modules and sub-assemblies product grouping (+$14.4 million) and components (+$3.6 million), partially offset by a decline in integrated solutions (-$8.3 million). By end application, increases were seen in radar (+$6.5 million), electronic warfare (+$3.6 million), C4I (+$2.5 million), and other sensor and effector (+$1.8 million), partially offset by other end applications (-$4.7 million). By platform, Land (+$14.3 million), Other (+$5.7 million), and Naval (+$1.7 million) grew, while Airborne declined (-$12.0 million). The largest program increases were from two secure processing programs and SEWIP, partially offset by decreases in Aegis and an electronic warfare program. No single program comprised 10% or more of revenue.
Management did not provide explicit forward guidance. The company highlighted ongoing execution on its program base and the ramp of common processing architecture programs. It noted potential future gross margin impacts from tariffs on imported components, though no material increases were seen in the current quarter. The company continues to invest in R&D and pursue acquisitions to expand capabilities in sensor/effector and C4I markets. A new $200 million share repurchase program was authorized in November 2025, with 221,510 shares repurchased at an average cost of $67.70 during the quarter. The company believes existing cash, the $850 million revolver, and cash from operations are sufficient for at least the next twelve months.
As of December 26, 2025, Mercury Systems reported cash and cash equivalents of $335.0M, up from $309.1M at June 27, 2025. Total assets stood at $2.50B, with inventory of $349.6M (increase of $16.7M) and goodwill unchanged at $938.1M. Long-term debt remained flat at $591.5M under the revolving credit facility, which has a borrowing capacity of $850.0M and matures in 2030. The company has an interest rate swap with $300M notional to fix rates on a portion of borrowings, with a fair value liability of $4.5M. Shareholders' equity was $1.46B, down slightly from $1.47B due to net loss and share repurchases.
The company has $203.7M in non-cancelable purchase commitments for inventory and services as of December 26, 2025. Additionally, remaining performance obligations (RPO) totaled $823.5M, of which ~50% is expected to be recognized as revenue in the next 12 months. Contract liabilities (deferred revenue and customer advances) were $137.3M. Other commitments include operating lease liabilities of $51.0M and a defined benefit pension plan liability of $5.5M. Environmental and legal contingencies are disclosed but not quantifiable except for a $32.5M settlement accrual for a securities class action (receivable and payable recorded).
Mercury initiated a new $200M share repurchase program on November 3, 2025. During Q2 fiscal 2026, the company repurchased 221,510 shares for $15.0M at an average price of $67.70, leaving $185.0M available. No dividends were declared. Debt remained unchanged; the company amended its credit facility to extend maturity to 2030 but made no borrowings or repayments. Capital expenditures were $12.5M (2.7% of sales), with an additional $4.4M of inventory transferred to property and equipment. The company also paid $3.2M in deferred financing costs related to the amendment.
Mercury operates as a single reportable segment. However, the notes provide revenue disaggregation by end user, end application, product grouping, and platform. Domestically, 84% of Q2 revenue came from U.S. customers, with international/FMS comprising 16%. By end application, Sensor & Effector accounted for 45% of revenue ($105.2M in Q2), C4I 39%, and Other 16%. By product grouping, integrated solutions represented 53% of revenue, modules/sub-assemblies 26%, and components 21%. Platforms included airborne (36%), land (25%), naval (10%), space (5%), and other (24%). Customer concentration: RTX (19%), Northrop Grumman (12%), and Lockheed Martin (11%) in Q2. No single program exceeded 10% of revenue.
Net loss for the six months ended December 26, 2025 was $(27.6) million, widening from $(35.1) million in the prior year. Operating cash flow of $53.8 million exceeded net loss by a wide margin, driven by significant non-cash add-backs (depreciation and amortization of $37.2 million, stock-based compensation of $20.2 million, and stock-based matching contributions of $11.4 million) and a net benefit from deferred taxes of $(7.4) million. Working capital was a net source of cash, with a large increase in accounts payable, accrued expenses, and due to factoring ($67.0 million) offsetting inventory build ($23.7 million) and higher prepaid expenses ($29.8 million). Capital expenditures of $12.5 million rose versus $9.8 million in the prior period, representing 1.8x coverage by operating cash flow. The company used $15.0 million for share repurchases, fully funded by operating cash flow. Free cash flow (operating cash flow less capex) was $41.3 million. No dividends were paid. A non-cash investing activity of $4.4 million (inventory transferred to property and equipment) added to effective capex but was not reflected in cash outflows.