水星系统 (MRCY) 2026财年第四季度业绩电话会：创纪录的积压订单与2027财年展望

核心要点

• Mercury Systems公布2026财年第四季度新订单额达到创纪录的约6.6亿美元，同比增长93.1%，订单出货比达2.28。
• 季度营收达到创纪录的近2.9亿美元，内生增长6.1%。调整后EBITDA约为4900万美元，利润率为16.7%。
• 2026财年营收增长7.9%至9.84亿美元，调整后EBITDA增长25.7%至1.5亿美元。全年调整后EBITDA利润率扩大217个基点至15.3%。
• 在手订单超过19亿美元，同比增长38.4%。未来12个月的在手订单达到创纪录的10亿美元，同比增长23.3%，提高了2027财年和2028财年的业绩能见度。
• 管理层预计2027财年营收将接近11亿美元，增速接近两位数。调整后EBITDA预计将接近2亿美元，利润率达到15%-19%的高位水平。
• 由于Mercury在库存、自动化和工厂优化方面进行投资，预计2027财年自由现金流转化率将接近35%，低于公司50%的目标。

关键财务数据

业务与运营表现

Mercury表示，2026财年的增长涵盖其整个产品组合。第四季度获得的重大生产合同涵盖通用处理架构（CPA）、执行器、航空应用、太空及导弹防御领域。其中，CPA创下了单季度最高新订单额以及创纪录的全年业绩。

国内业务约占2026财年营收的85.8%，内生增长达13%。受向合同制造商过渡影响，国际交付有所放缓，但管理层表示这只是暂时的，预计这种影响将在未来几个季度逐步消除。

按时间确认的营收同比增长23.6%，达到15个季度以来的最高水平。管理层将这一改善主要归因于原材料到货以及供应链更好地配合了不断增长的生产需求。

该公司还录得一笔重大的多年期订单，涉及锁定用于先进防御平台未来生产需求的存储器供应。管理层表示，该业务的利润率通常处于Mercury整体利润率水平的高位区间。

尽管营收有所增长，净营运资金仍同比减少1800万美元（或4%），至约4.31亿美元。较2024财年第一季度的峰值已下降约2.29亿美元（或34.8%）。Mercury利用其改善的营运资金状况偿还了1.5亿美元的循环信贷额度。

Mercury最近与Palantir达成战略协议，将AI软件应用于物料规划和工厂运营。管理层表示，潜在的好处可能包括加快在手订单转化、提高营收、发挥运营杠杆以及改善现金生成能力，但该项目仍处于早期阶段，展望中未计入任何相关收益。

管理层业绩指引

对于2027财年，管理层预计：

• 营收将接近11亿美元，同比增长率接近两位数。
• 2027财年第一季度营收将为全年最低，但将实现高单位数的同比增长，并在今年剩余时间内保持环比增长。
• 调整后EBITDA接近2亿美元，同比增长近30%。
• 调整后EBITDA利润率处于15%-19%的高位区间，全年总体呈改善趋势。预计第一季度利润率将与2026财年第一季度持平。
• 自由现金流转化率接近35%，低于公司50%的目标。预计下半年的自由现金流将超过上半年。
• 第一季度现金流出规模大于往常，主要原因是采购原材料以支持增长前景及潜在的国防支出顺风。
• 资本支出同比基本持平，重点集中于产能、布局优化和自动化。

管理层还提供了2028财年的参考指标，并明确表示不应将其视为正式指引。这些指标包括：两位数低段的内生营收增长，调整后EBITDA利润率接近公司20%-25%目标范围的下限，以及自由现金流转化率逐步回升至50%的目标。

2027财年和2028财年的展望仅包含已反映在确定在手订单中的有限需求顺风因素。未包含CPA、执行器、航空应用、太空及导弹防御领域的潜在额外生产需求，也未包含来自Palantir及其他自动化举措的潜在效益。

风险与关注重点

• Mercury仍在转化利润率较低的历史在手订单。管理层预计，随着这部分历史订单减少以及新订单进入营收组合，利润率将在2027财年逐步改善。
• 第四季度毛利率同比下降40个基点，反映出项目组合的影响以及约400万美元的完工估算（EAC）净变动增加的影响。
• 由于计划在库存和产能方面进行投资，预计2027财年的现金转化率仍将低于长期目标。
• 据讨论透露，由于外包制造产能爬坡问题导致交付推迟，国际业务营收下降了约15%。
• 近期的一些大额订单合并了本将在2027财年体现为新订单和营收的份额，使得未来12个月的在手订单覆盖率高于正常水平。
• 潜在的多年期弹药和战略框架订单仍取决于客户的决定、资金到账和时间安排。管理层尚未将这些机会纳入其业绩展望。

分析师问答要点

管理层将2027财年预期的利润率提升主要归因于低利润率在手订单的转化、更有利的新订单组合以及生产规模扩大带来的运营杠杆效应。管理层预计，到2027财年底，业务运营将达到目标利润率水平。

在需求方面，管理层强调创纪录的新订单并不依赖于单一项目。增长是全面性的，同时CPA订单额创下新高。Mercury还看到客户对较小尺寸CPA产品表现出早期兴趣，管理层认为这可以在需要增强安全性的领域拓展该技术的适用场景。

创纪录的在手订单使Mercury能够更好地跨多年与供应商进行协调、规划生产并优化工厂利用率。公司计划优先投资于内生增长，同时继续降低净负债和杠杆率。

管理层表示，相较于几项可能的顺风因素，当前的展望仍然偏于保守。生产数量的增加、多年的客户承诺以及更快的在手订单转化可能会支撑业绩超出公布的展望，但由于其时间和规模尚不确定，这些潜在好处尚未纳入考量。

业绩电话会议完整文字记录

完整财报电话会议逐字稿

管理层陈述

Operator

Good day, everyone, and welcome to the Mercury Systems Fourth 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.

Tyler Hojo

Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, Bill Ballhaus; and our Executive Vice President and CFO, Dave 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 to is posted on the Investor Relations section of the website under Events and Presentations.

Turning to Slide 2 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 2 in the earnings press release and the risk factors included in Mercury's SEC filings.

We will also be providing fiscal year '28 reference points today, which, along with our target profile should not be construed as financial guidance and speak only as of today. They illustrate the financial profile the business could achieve based on the factors referenced above, including our ability to convert backlog to revenue and gain additional orders beyond current backlog. These factors may materially affect whether we reach these reference points or target profile. 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, Bill Ballhaus. Please turn to Slide 3.

William Ballhaus

Thanks, Tyler. Good afternoon. Thank you for joining our FY '26 Q4 and full year earnings call. We delivered Q4 results that were ahead of our expectations with record bookings, record backlog, record revenue, the highest EBITDA margin of the year and robust free cash flow. Based on our solid execution and strong demand signals, we enter FY '27 with enhanced visibility and are increasing our outlook for organic growth. Today, I'll cover 3 topics: first, some introductory comments on our business and results; second, an update on our 4 priorities: performance excellence, growth, margin expansion and free cash flow; and third, expectations for FY '27 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 high-performance processing and enabling mission dominance for the war fighter at the edge. Please turn to Slide 4. Our Q4 results reflected robust organic growth and margin expansion, record bookings of $660 million, up 93.1% year-over-year and nearly double our previous record bookings quarter, a 2.3 book-to-bill, record backlog of over $1.9 billion and record next 12-month backlog of $1 billion, record revenue of $290 million, adjusted EBITDA of $49 million and adjusted EBITDA margin of 16.7% and free cash flow of $29 million.

We ended Q4 with $227 million of net debt, down 19.5% year-over-year. These results reflect ongoing focus on our 4 priority areas with highlights that include solid execution across our broad portfolio, leading to FY '26 organic revenue growth of 7.9% and adjusted EBITDA growth of 25.7%. Year-over-year growth in backlog and next 12-month backlog of 38.4% and 23.3%, respectively, an increase of 217 basis points year-over-year in full year adjusted EBITDA margin and continued progress on free cash flow drivers with net working capital down 4% year-over-year, while revenue grew 7.9%.

Please turn to Slide 5. Starting with our 4 priorities and priority 1, performance excellence, where we are focused on sound execution on development programs, delivering for our customers across our portfolio and scaling efficiently on numerous programs transitioning to higher volume production. In Q4, we ramped up across a number of programs and generated record quarterly revenue. Our overtime revenue, up 23.6% year-over-year was the highest in 15 quarters, driven largely by the receipt of material, which we believe is an indicator that we are better aligning our supply chain with the increased organic growth we are seeing in several areas across the business.

Notably, our domestic revenue, representing approximately 85.8% of our FY '26 revenue grew 13% organically year-over-year. Our strong bookings and record backlog, combined with progress in scaling efficiently, have resulted in organic growth above our prior expectation for FY '26 and an outlook for increased growth, which I'll speak to shortly. Beyond the solid performance, we continue efforts to expand capacity, increase automation and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency. Of note, we recently announced a strategic agreement with Palantir to leverage AI software to enhance material planning and factory operations in an effort to improve backlog conversion and deliver critical technologies to the war fighter.

This is among many actions we have taken, along with prior investments across a number of critical technology developments designed to scale our ability to rapidly deliver vital capabilities for our customers. Please turn to Slide 6. Moving on to priority 2, driving organic growth. We believe that our near-term organic growth will be driven by increased volume on existing production programs and the ongoing transition of a number of development programs to production. Additionally, we see possible upside tied to potential tailwinds from increased customer demand and quantities across a broad set of production programs in our portfolio. Lastly, we are excited about new development programs and the potential of the production volume associated with those wins.

In Q4, we delivered a record quarter with $660 million of bookings, resulting in record fiscal year bookings of $1.5 billion, up 49.8% year-over-year and a book-to-bill of 1.57 for the year. Our record total backlog approaching $2 billion is also providing enhanced visibility as we enter FY '27 and into FY '28. Notably, our next 12-month backlog revenue coverage is higher than typical because a few of our recent larger orders included consolidated quantities that otherwise would have manifested in bookings and revenue recognized in FY '27. The strength in Q4 bookings was broad-based with significant production awards across our products and solutions in common processing architecture, effectors, airborne applications, space and missile defense. Most notably, we had our largest quarter ever for CPA bookings, which we believe reflects the differentiation of our CPA solutions and reinforces our confidence in the growth prospects of this area.

The quarter also included significant bookings related to securing memory to support future production requirements across a number of advanced defense platforms. We are also beginning to see the favorable impacts of the defense budgetary environment leading to a number of multiyear customer commitments. Driven by increased defense budgets globally and domestic priorities, we continue to see the potential for higher demand on multiple programs across our portfolio, including space, munitions, missile defense and our common processing architecture. I remain optimistic that these potential market tailwinds 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 turn to Slide 7. Now turning to priority 3, margin expansion. In our efforts to progress toward our targeted adjusted EBITDA margin profile in the low to mid-20s, 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 increase positive operating leverage. Gross margin for FY '26 of 28.6% was up 70 basis points year-over-year, consistent with our expectation that average backlog margin will continue to increase as we convert legacy lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. FY '26 operating expenses are down year-over-year as a percent of revenue, reflecting our ongoing focus to drive efficiencies and enable positive operating leverage as we accelerate organic growth.

Full year adjusted EBITDA margin of 15.3% was in line with our expectations and up 217 basis points year-over-year. Please forward to Slide 8. Finally, turning to priority 4 free cash flow conversion. We continue to make progress on the drivers of free cash flow, and in particular, net working capital, which at approximately $431 million is down $18 million year-over-year. Full year free cash flow of $68 million led to net debt of $227 million at the end of Q4, which we reduced by $55 million year-over-year. We believe our continuous improvement related to program execution, demand planning and supply chain management, along with strong balance sheet flexibility, positions us well to drive organic growth and capitalize on any additional potential market tailwinds.

Please refer to Slides 9 and 10. We are entering FY '27 with a record backlog and what we believe is enhanced multiyear visibility. We have increased organic growth expectations underpinned by our team's demonstrated strong performance, our strategic positioning, which we believe is closely aligned with critical global defense priorities and a favorable market backdrop with an anticipated 9.9% addressable market compound annual growth rate spelled out in more detail in our Form 10-K filing. Looking ahead, aligned with our target profile of achieving above-market organic growth and in recognition of the favorable market outlook, we are increasing targeted organic revenue growth to low double digits while maintaining targeted adjusted EBITDA margin in the low to mid-20s and targeted free cash flow conversion of 50%.

We believe our strong FY '26 performance positions us well to perform in line with this target increase over time. For FY '27, we expect revenue growth approaching double digits year-over-year with total revenue approaching $1.1 billion. We anticipate Q1 revenue to be the lowest of the year and up high single digits year-over-year with revenue increasing through the balance of the year. We expect adjusted EBITDA margin in the high teens and adjusted EBITDA approaching $200 million for the full year, reflecting nearly 30% year-over-year growth. We expect adjusted EBITDA margin to generally increase through the year with Q1 adjusted EBITDA margin expected to be in line with Q1 FY '26. Amidst increased demand, we plan to make targeted investments in inventory, automation and factory optimization to drive organic growth.

For the full year, we are anticipating FY '27 free cash flow conversion beneath our 50% target, approaching 35% with free cash flow in the second half expected to be higher than in the first half. We expect Q1, which due to timing is typically our weakest cash flow quarter to be a larger outflow than normal, primarily reflecting the receipt of materials to support our growth outlook and the defense spending tailwinds we see ahead. Given our record backlog and what we believe is enhanced multiyear visibility into scenarios beyond FY '27, we are providing additional reference points for FY '28.

In our initial view of FY '28, our reference point for top line organic growth is in the low double digits for adjusted EBITDA margin in line with the low end of our target margin profile and for free cash flow, a return towards conversion in line with our target. Further, although this outlook for FY '27 and FY '28 incorporates a limited set of tailwinds that have materialized in firm bookings, it does not incorporate the benefit of potential additional tailwinds that could occur on a number of production programs across our portfolio, including our common processing architecture, effectors, airborne applications, space and missile defense.

Additionally, this outlook does not incorporate any benefit from the Palantir partnership mentioned earlier or other automation efforts across our organization to improve backlog conversion. We believe any such improvements may translate into higher organic growth and adjusted EBITDA margin, representing potential upside to our outlook. In summary, with our positive momentum, record backlog and improved visibility coming out of a strong FY '26, we look forward to executing well for our customers, enabling high-performance processing and mission dominance for the war fighter at the edge and delivering on what we believe is a significant value creation opportunity in front of us. With that, I'll turn it over to Dave to walk through the financial results for the quarter and fiscal year, and I look forward to your questions. Dave?

David Farnsworth

Thank you, Bill. Our fourth quarter results reflect continued progress toward our goal of delivering organic growth and expanding margins. 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 11, which details our fourth quarter results. Our record bookings for the quarter were approximately $660 million with a book-to-bill of 2.28. Our record backlog of over $1.9 billion is up $540 million or 38.4% year-over-year. Revenues for the fourth quarter were a record of nearly $290 million, up approximately $17 million or 6.1% organically compared to the prior year. Gross margin for the fourth quarter was 30.6% as compared to 31.0% for the same quarter last year.

The gross margin during the fourth quarter was primarily driven by our program mix and higher net EAC change impacts of approximately $4 million as compared to the prior year. Net EAC change impacts were lower for the fiscal year as compared to the prior fiscal year. As we 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 on simplifying, automating and optimizing our operations. 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 increased approximately $13 million year-over-year. The increase in operating expenses was driven primarily by higher selling, general and administrative expenses and research and development costs of approximately $10 million and $4 million, respectively. These increases were primarily driven by compensation-related expenses, including stock-based compensation. These increases were partially offset by lower acquisition costs and other related expenses and amortization of intangible assets totaling approximately $2 million. GAAP net income and earnings per share in the fourth quarter were approximately $1 million and $0.01, respectively, as compared to GAAP net income and earnings per share of approximately $16 million and $0.27, respectively, in the same quarter last year.

Adjusted EBITDA for the fourth quarter was approximately $49 million as compared to $51 million in the same quarter last year. Our adjusted EBITDA as a percentage of revenue was 16.7% as compared to 18.8% for the same quarter last year. Adjusted earnings per share for the fourth quarter was $0.37 as compared to $0.47 in the prior year. Free cash flow for the fourth quarter was approximately $29 million as compared to $34 million in the prior year. Turning to our full year results on Slide 12. Our bookings for fiscal 2026 were approximately $1.5 billion, up $514 million or nearly 49.8%, marking a record year of bookings. Our book-to-bill was 1.57, yielding record backlog of over $1.9 billion, which is up 38.4% from fiscal 2025.

Fiscal 2026 revenues were $984 million, up approximately $72 million or 7.9% compared to the prior fiscal year. Gross margin was 28.6% for fiscal 2026, an increase of approximately 70 basis points from the 27.9% gross margin realized during fiscal 2025. Our gross margin improvement in fiscal 2026 was primarily driven by lower manufacturing adjustments and reduced net EAC change impacts as compared to the prior year. Operating expenses increased approximately $7 million or 2.5% in fiscal 2026 as compared to the prior year. The increase was primarily due to additional selling, general and administrative expenses of approximately $21 million.

The increase was primarily driven by higher compensation expense, of which $10 million was related to stock compensation. This increase was partially offset by decreases in research and development expenses and amortization of intangible assets of $8 million and $4 million, respectively. Our operating expenses as a percentage of revenue decreased by 150 basis points as compared to the prior year, which reflects the efficiency improvements and headcount reductions we previously discussed to align our team composition with our increased production mix, driving improved operating leverage. GAAP net loss and loss per share in fiscal 2026 were approximately $30 million and $0.50, respectively, as compared to GAAP net loss and loss per share of approximately $38 million and $0.65, respectively, in the prior year.

The improvement in year-over-year earnings is primarily a result of increased gross margins, partially offset by increased operating expenses. Adjusted EBITDA for fiscal 2026 was $150 million, up $31 million or 25.7% as compared to the prior year. Our adjusted EBITDA as a percentage of revenue was 15.3%, up 217 basis points as compared to the prior year. This increase illustrates our improved execution and increased operating leverage in the current period as compared to the prior year. Adjusted earnings per share for the fiscal year was $1.06 as compared to $0.64 in the prior fiscal year. Free cash flow for fiscal 2026 was approximately $68 million as compared to $119 million in the prior year.

Slide 13 presents Mercury's balance sheet for the last 5 quarters. We ended the fourth quarter with cash and cash equivalents of $214 million. This represents a decrease of approximately $95 million from the same period in the prior year. This decrease was primarily driven by a $150 million payment against our revolving credit facility. The decrease was partially offset by free cash flow of $68 million generated this fiscal year. Billed receivables decreased sequentially by approximately $26 million or 27.6%, while unbilled receivables increased by $16 million during the fourth quarter. The net decrease in our total receivables balance reflects the incremental progress we continue to make by delivering on programs to our customers, which drove our cash flow performance during fiscal 2026.

Inventory increased sequentially by approximately $5 million. The increase was driven primarily by raw materials as we received material at our facilities to support our increased point-in-time revenue on many of the company's production programs. Prepaid expenses and other current assets decreased sequentially by approximately $22 million, primarily due to our shareholder settlement, which was approved and finalized in the fourth quarter, partially offset by normal operating expenses. Accounts payable decreased sequentially by approximately $13 million, primarily driven by the timing of payments to our suppliers. Accrued expenses decreased approximately $36 million sequentially, primarily due to our shareholder settlement, which was approved and finalized in the fourth quarter.

The amount due to our factoring facility decreased sequentially by approximately $14 million, primarily due to the timing of payments from our customers due back to our counterparty. Accrued compensation increased approximately $18 million sequentially, primarily due to our incentive compensation plans. Deferred revenues increased sequentially by approximately $23 million, primarily driven by additional milestone billing events achieved during the period. Net working capital decreased approximately $18 million year-over-year or 4%. As we have previously discussed, our continued net working capital improvement year-over-year enabled us to make $150 million payment against our revolver during the fourth quarter.

This continues to demonstrate the progress we've made in reversing the multiyear trend of growth in net working capital, resulting in a reduction of approximately $229 million or 34.8% from the peak net working capital in Q1 fiscal '24. We believe our strong balance sheet provides sufficient flexibility for us to pursue and capture potential market tailwinds. Turning to cash flow on Slide 14. Free cash flow for the fourth quarter was approximately $29 million as compared to $34 million in the prior year. We believe our continuous improvement in program execution, hardware deliveries and appropriately timed payment terms will lead to continued reduction in working capital.

In closing, we are pleased with the performance in the fourth quarter and fiscal '26 and the higher level of predictability in the business. We believe continuing to execute on our 4 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.

William Ballhaus

Thanks, Dave. With that, operator, please proceed with the Q&A.

Operator

The first question comes from the line of Peter Arment with Baird.

分析师问答

Peter Arment

Bill, Dave, Tyler, nice results, strong outlook. So maybe just, Bill, if you could give a little comment on your -- basically the way '27 sets up is you're going to continue to see an improvement in margins throughout the year and obviously much stronger in the second half of the year. Is it just the pricing and backlog? Is it mix? Is it just volume leverage? How would you kind of characterize what you're seeing in the margin expansion side?

William Ballhaus

Yes. And thanks, Peter, for the comments. I think it's a continuation of what we've been discussing around the progression of our backlog margin as we've continued and for the most part, and we've said this all along that as we work our way through FY '27, we're not going to be talking about this dynamic anymore. we see in the first part of the year burning down lower margin backlog and margins increasing as we move our way through the year such that by the time we get to the end of the fiscal year, we expect to be operating in line with our target profile.

So if you kind of put the whole picture together and look at how we exited the quarter with a really strong quarter. We set ourselves up with great visibility for '27. We increased our target outlook. We've got increased line of sight now to getting to our target profile, and we talked about how we expect to get there through FY '27 and FY '28. And I think it's just a continuation of the positive story that we've been communicating.

Peter Arment

Got it. And just quickly, a follow-up on the bookings. You had a large single award in the quarter. I'm just curious if there's any customer program that is now kind of 10% of backlog? And any comments you'd make on kind of how CPA bookings finished, I guess, in total for the year?

William Ballhaus

Yes. No, CPA finished very strong. We had a record year for CPA bookings. And again, that is following the progression that we outlined going back a couple of years where we talked about getting back to production and getting to full rate production. And as we did that and executed well, it would open up a full set of opportunities, and we're seeing that right now. But to summarize the bookings performance for the year, I wouldn't pin it on one area or one program. It was broad-based across the business. And we had a record quarter. It was nearly double our prior record quarter, the quarter prior, and just really reflects the strong outlook that we have across the business for strong organic growth. So really broad-based, and we're excited to see that kind of demand signals across our entire portfolio.

Operator

The next question comes from the line of Ken Herbert with RBC.

Kenneth Herbert

Bill, David and Tyler. I wanted to follow up on the fiscal '27 revenue outlook. I mean it's stepped up over what you've certainly sort of implied as your sort of normalized organic growth outlook. Can you just maybe talk, Bill, about how we think about this reflecting some of the recent large framework agreements, UCA agreements we've seen put in place on the missile side, maybe the European defense. I mean, how much does it contemplate growth in some of these other areas versus just maybe better outlook on the core business?

William Ballhaus

Yes. I think it's the latter. I mean, again, we've seen increased demand, record bookings and backlog, and it's a reflection of what we're seeing broad-based across the portfolio. And we've been discussing the tailwinds that we see in the market and very few of those tailwinds are reflected in our outlook right now. So if you kind of piece together what's behind our outlook, one of the biggest jumps we saw this quarter was the increase in our next 12 months backlog. It's about $1 billion. So the visibility that we have on FY '27 and going into FY '28 is really high.

The coverage that we have on FY '27 is really high. But there's a lot that we haven't folded into that outlook. So the tailwinds that we talked about in terms of increased production quantities, et cetera, that we have in our pipeline, reflecting conversations that we're having with multiple customers in areas like CPA, effectors, munitions, space, missile defense, none of that is reflected in our outlook. And we still see significant potential in those areas. And as we said before, if any of those were to materialize in terms of firm bookings, it could have a significant impact on our outlook. But none of that is factored in so far.

Also, we haven't factored in any improvements in our backlog conversion. And we have a lot of things that we have in work right now across the enterprise to improve our backlog conversion. Now you've seen over the last year, in particular, how against our outlook, we've been able to improve backlog conversion and exceed our outlook. We have a lot of work right now that's not incorporated into our outlook to include the Palantir agreement that we announced and a number of automation efforts that we put in place so that we can increase our scale and scale efficiently. So I'd say that there's very little of the tailwinds that we've talked about that's incorporated into our current outlook.

Kenneth Herbert

Yes. I wanted to follow up, though, if I could, on the Palantir agreement. Is it appropriate to think of that as more of a sort of an EBITDA enhancement or real opportunity? Or is it impactful potentially for the top line as well? If you can give any more detail on timing and how that sort of layers into the business and how we should think about the impact of that on the financials?

William Ballhaus

Yes. So we're early into it. But what we've seen so far -- based on what we've seen so far, I think there's a lot of potential in terms of the improvements that we can drive, leveraging their technology. Now the sole focus of this DOW-sponsored initiative is to get the benefits of our technology and capabilities into the hands of the war fighter and do it faster. That's the focus of the initiative.

Naturally, with that, we would see potentially an increase in revenue and with -- tied to the deliveries. And with that, an increase in margin, and we've talked about the positive operating leverage that we get as we increase top line and accelerate the top line -- and then again, with that improvements in cash. Those are the primary KPIs that we think have the potential to be positively impacted by the relationship with Palantir. But we're early into it. And as we see the results, we'll be sure to provide updates as we see them.

Operator

The next question comes from the line of Jonathan Ho with William Blair.

Jonathan Ho

Let me echo my congratulations as well on a record bookings quarter. I wanted to better understand how having this level of backlog coverage and visibility affects your ability to manage production efficiency, supply chain and facilities utilization.

William Ballhaus

Yes, it's a tremendous benefit. And I think the impact of our bookings performance during the year, there's a couple of elements to it. So obviously, based on the increase in our next 12-month backlog and the visibility that comes with it, it gives us really good confidence in terms of our outlook and ability to execute against the outlook. But if you look at the increase in the backlog year-over-year, there's an even bigger increase in our backlog that's outside the next 12 months.

And so it gives us a great ability to look forward, to plan, to work with our supply chain to try and optimize across the full life cycle. There's just a number of degrees of freedom that it gives us to try and optimize and drive improvements in terms of our performance. So we feel really good about the strong foundation that we have, the ability to increase our outlook for organic growth and the enhanced visibility that we have in the business over the next few years.

Jonathan Ho

Got it. Got it. And just in terms of sort of the capital priorities, I know you paid down some of the revolver. You've done a better job of freeing up working capital. And what are sort of the higher free cash flow priorities for you this quarter as well or this upcoming year as well?

William Ballhaus

Yes. I mean our focus as it has been is to continue to drive down net debt, continue to drive down our leverage. And as you heard me say many times, we are 99.99% focused on the organic value creation opportunity in front of us. And to that end, because of the strong signals that we see, we will make some targeted investments in inventory, in facilities, and CapEx that will help us scale, increase and accelerate organic growth. But our primary focus right now in terms of creating value is to capture the tailwinds that we see in the market.

Operator

The next question comes from the line of Sheila Kagahu with Jefferies.

Kyle Wenclawiak

This is Kyle on for Sheila. Congrats on a great quarter. It's great to see the bookings come through. I was just looking through the 10-K, and it's really interesting the kind of 5-year market outlook you guys are offering up there. And I'm just curious related to the growth outlook for '27 and '28, whether there's anything kind of limiting growth, whether that's budget certainty, you made some comments around strategic inventories or anything else or just trying to gauge your level of whether that's conservatism or if there's something in the near term that's kind of limiting what growth could look like over a multiyear period?

William Ballhaus

Yes. I think we think about it less in terms of constraints and more around the natural progression in our portfolio as we've moved from a high concentration of development programs to low rate production, medium rate production and higher rate production. And with that seeing the increase in the organic growth of the business that you would expect to see from low single digits to mid-single digits, approaching double digits and then into double digits.

And at the same time, as we've been going through that progression, we're also looking at improving our backlog conversion so that we can overdrive our performance outlook. And then on top of that, we've got a number of tailwinds that we're focused on the market that also aren't included in that outlook. So we believe that our outlook is consistent with the progression that we've seen in the portfolio. And I think there are a number of opportunities for us to outperform and overdrive that outlook.

Kyle Wenclawiak

Okay. That's helpful. And then maybe just a follow-up on what you're embedding and the free cash flow guide for next year in terms of maybe both working capital and CapEx, given there's a tick up in the fourth quarter, and it was noted in the release about spending some incremental money there. And maybe as a follow-on to that, if you could just comment on the health of the supply chain, which resulted in a really strong overtime revenue this quarter.

William Ballhaus

I'll let Dave speak to the CapEx. I will say, and I appreciate you noting the step-up in our overtime revenue. We've been discussing for several quarters now how we've been working to align our supply chain with margin to our deliveries so that we have more and more degrees of freedom to be able to optimize across our factories and increase our backlog conversion. And we've really seen strong progress on that over the last couple of quarters and expect that to continue. Dave, do you want to comment on the CapEx piece?

David Farnsworth

Yes. I think the expectation ought to be that our CapEx is going to be flat year-over-year. The areas that we're focused on are the areas that Bill brought up in his discussion earlier and has brought up in prior quarters is really optimizing our operations from both a capacity and a footprint standpoint and at the same time, to increase our level of automation as we go forward. And one of the things that we've talked about for the last 2 quarters and you've seen and we feel good about where the balance sheet is and feel like we've got the capacity to lean a little into our supply base and be able to bring in material earlier so that we can reduce what's the normal lead time for some of that activity. And with the visibility we have, we feel like with the backlog that exists, that's a really good use of our capital.

Operator

The next question comes from the line of Seth Seifman with JPMorgan.

Christopher Barbero

This is Rocco, on for Seth. Domestic sales grew nicely in the year, up 13%. However, the international sales were down around 15%. Are there any kind of headwinds to call out in the international market? Or did domestic demand just take up more capacity this year?

William Ballhaus

Yes. Thanks very much for the question. First of all, I think it's a really powerful signal that 86% of our business, our domestic business is growing at 13%. And I think it's just -- it reflects underneath the hood, the kind of growth tailwinds that we're seeing in the business and our ability to execute at that level. As we've discussed in prior calls, over the last year, we have outsourced our manufacturing in our international business to a contract manufacturer. And we've seen a slowdown in deliveries as we've ramped up that contract manufacturer. These are issues that are natural, common in moving to a relationship like that, and we expect to have them work out over the next couple of quarters. So I think it's just a temporary slowdown in deliveries. The business is strong. The demand tailwinds are really strong and our backlog is really strong internationally. So I see this as just a temporary slowdown in our deliveries that we expect to unwind over the next couple of quarters.

Christopher Barbero

All right. That makes sense. And then can you guys provide any color on the drivers of the strong growth in EW this year? Should we think about the focus kind of more broad-based on COAS or any other systems as being kind of primary growth drivers?

William Ballhaus

I mean, as we said earlier, we're seeing growth and increased demand. It's really broad-based. I mean it is literally across our portfolio, we're seeing increased demand. So I wouldn't limit my comments to any one particular area. We're seeing strong demand signals across the board.

Operator

The next question comes from the line of Austin Moeller with Canaccord Genuity.

Austin Moeller

Great quarter. I was wondering if there was a way that you could give us your view on the revenue opportunity for CPA-based ruggedized servers in terms of either the growth rate or your target share of the total revenue mix. And are those ruggedized servers either higher or lower margin than some of the other weapon systems or programs?

David Farnsworth

Yes. I don't think we've dimensioned specifically what we see there. What I would say, I would reiterate Bill's comment. We've seen over the course of the last year, very strong demand. We've talked about some of the larger awards and activities we have there. We talked about that earlier in the quarter with the CTG activity that we announced. It is growing well and ahead of what we expected at this point when we slowed down for a while to get this right and then really started ramping up. And you can look at the kind of the spread of activity. We've talked in the past that a significant piece of that would be in the radar line item. We've talked about that, so you can look at the radar line and the growth there and think that a lot of that is in accordance with that. But we don't talk about the individual margin profile of any of the products.

William Ballhaus

I will say, though, that it's pretty exciting for us to see that as we're increasing our deliveries, we're also increasing the pipeline. So we're seeing a number of new program opportunities, some of which could be fairly near term that is very exciting in the CPA area. And again, this is just one area in which we see potential tailwinds that would enable performance that's above the outlook that we provided.

The one other comment I'll make on CPA, we've talked about over time, our technology focus on increasing performance and driving the smaller form factors. We're now starting to see some customer interest in the smaller form factors. And we're early into it, but it's pretty exciting to see that start to materialize because I think that opens up a whole new additional TAM in terms of smaller form factors that sit on different platforms that could be another accelerator for our CPA area, and that's pretty exciting to see.

Austin Moeller

And just on those smaller form factors, if you can put those on to a mobile platform like an armored ground vehicle or an unmanned service vessel, do you see an opportunity there to take share from some of the other network computing manufacturers like a DRS?

William Ballhaus

I think it's an opportunity for us to take share in areas where the security requirements are necessary. And given that we've been the only provider of the CPA technology and the security apparatus that's included in it, I think that gives us a lot of optimism for being able to penetrate new markets in smaller form factors and get on additional platforms.

Operator

The next question comes from the line of Clarke Jeffries with Piper Sandler.

Clarke Jeffries

I was wondering if you could give a little bit more detail on the agreement related to securing memory. How significant was that to the bookings? And does that agreement fall within a typical margin on the rest of the backlog?

William Ballhaus

Yes. I don't think we've dimensioned any of the bookings. I would say that it was one of our more significant bookings for the year, a quarter, a multiyear booking. And I would say that, that part of our business tends to run at the higher end of our margin profile, but I think I would leave it at that.

David Farnsworth

Yes. And the only thing I would add, Bill, is that this is the case, obviously, because it's in our bookings where the customer is leaning in with us, where the customer is recognition of, hey, we want to go out and get this early. We want to lock this up. Hey, we want to work with you, Mercury, to go get this done. So I think that's a critical kind of view that wasn't us doing it on our own. That was customer -- working with the customer set to get that done.

Clarke Jeffries

Understood. And then just -- I know that you've made a comment around the broad-based health of the bookings, but wondering if there's any segments or end markets that are outsized contributors to the duration of these agreements extending and the sort of the confidence in the multiyear partnership increasing. Is that space? Or is it any other sector that you think is some of the duration benefit here as well?

William Ballhaus

Yes. I'd say we've seen a small number of orders that are multiyear related across the business. But in terms of the munitions agreements and the multiyear strategic frameworks, those are still potential tailwinds where we're in numerous conversations with customers where their agreements are in place, funding is starting to be put in place, and it's in our pipeline, but yet to materialize in bookings. And we've characterized those kinds of situations as potential tailwinds that if they were to land, they would have potentially a meaningful impact on our outlook. But none of those so far have materialized.

David Farnsworth

Yes. And I think the way to think about it is for those kinds of activities as we've been -- we've always said that, hey, likelihood would that -- that would be later in the calendar year. So as we get to what's our -- this first quarter and the second quarter is when we expect to get more clarity around that. And to Bill's point, right now, we consider a tailwind, haven't included any of that in our outlook because there's still a little bit of an uncertainty as to the exact timing on some of those things. And then on top of that, is it going to be a year at a time? Is it going to be a multiyear agreement? And we proposed all of those things at our customers' request, and we're just working with them to get to what the conclusions will be on those things.

Operator

Mr. Ballhaus, it appears there are no further questions. Therefore, I would like to turn the call back over to you for any closing remarks.

William Ballhaus

Okay. Thanks, Dercy. I think with that, we'll go ahead and end the call. I appreciate everybody's time this evening and look forward to getting together next quarter.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.