Operator: Good day, everyone, and welcome to the Mercury Systems Third 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. 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 Q3 FY '26 earnings call. We delivered Q3 results that were ahead of our expectations with significant year-over-year growth in backlog, revenue and adjusted EBITDA. Strong demand signals and solid execution contributed to better-than-expected organic growth and margin expansion this quarter. Today, I'll cover 3 topics: first, some introductory comments on our business and results; second, an update on our 4 priorities: performance excellence, building a thriving growth engine, expanding margins and driving free cash flow; and third, performance expectations for the balance of FY '26 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 4. Our Q3 results reflected robust organic growth and margin expansion, record bookings of $348.3 million and a 1.48 book-to-bill, resulting in a record backlog approaching $1.6 billion. Revenue of $235.8 million, up 11.5% organically year-over-year. Adjusted EBITDA of $36.1 million and adjusted EBITDA margin of 15.3%, up 46% and 360 basis points, respectively, year-over-year; and free cash outflow of $1.8 million, meaningfully outperforming our expectations. We ended Q3 with $332 million of cash on hand. These results reflect ongoing focus on our 4 priority areas with highlights that include solid execution across our broad portfolio of production and development programs, backlog growth of 18% year-over-year and a sequential increase of 12-month backlog of 10.3% 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 4.1% year-over-year. Please turn to Slide 5. Starting with our 4 priorities and priority one, performance excellence, where we are focused on sound execution on development programs, accelerating deliveries for our customers broadly across our portfolio and ramping the rate on numerous programs transitioning to higher volume production. We accelerated progress across a number of programs and generated approximately $25 million of revenue, $15 million of adjusted EBITDA and $25 million of cash, all primarily planned for the fourth quarter. This acceleration enabled by our efforts to align our supply base to yield faster backlog conversion contributed to top line growth, adjusted EBITDA margin and free cash flow that exceeded our expectations for Q3 and will also factor into our outlook for Q4, which I'll speak to shortly. Our strong bookings and record backlog, combined with our ability to more rapidly convert backlog is translating into organic growth exceeding our expectations coming into FY '26. Notably, our domestic revenue, representing approximately 88% of our Q3 revenue, generated 17% year-over-year growth. Beyond the solid performance, 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 added capacity to our highly automated manufacturing footprint in Phoenix, Arizona and initiated operations within our additional 50,000 square feet of factory space to support ramped production for our common processing architecture programs and to allow for efficient scaling. In the quarter, we also completed the acquisition of a critical manufacturing process technology provider integral to a number of our key ramping programs. These are among a number of 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 war fighters and our allies. 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 expect possible upside tied to potential tailwinds from customer-driven acceleration and increased 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 Q3, we delivered a record quarter with $348.3 million of bookings, resulting in a book-to-bill of 1.48 and a record backlog approaching $1.6 billion. Our trailing 12-month bookings are a record $1.23 billion. Q3 bookings were driven largely by follow-on production orders, reflecting strong customer demand across core franchise programs. This bookings mix reflects the transitioning of our business toward higher rate production, and we believe does not meaningfully capture the potential incremental tailwinds we see in the market. The largest bookings in the quarter were across several missile, C4I and space programs. In addition, the quarter featured the strongest bookings of the fiscal year for solutions that leverage our common processing architecture. Finally, we secured a follow-on development award on a strategic program that has the potential to proliferate across multiple platforms. Beyond our backlog growth, we continue to see the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. 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, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low to mid-20% range, we're 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. Q3 adjusted EBITDA margin of 15.3% was ahead of our expectations and up 360 basis points year-over-year. Gross margin of 29.3% was up 230 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. Operating expenses are down year-over-year, both on an absolute basis and as a percent of sales, reflecting our focus on continuously driving cost structure efficiencies to enable significant positive operating leverage as we accelerate organic growth. Please forward to Slide 8. Finally, turning to priority 4, improved free cash flow. We continue to make progress on the drivers of free cash flow and in particular, reducing net working capital, which at approximately $434.4 million is down $18.7 million year-over-year. Net debt was $259.7 million at the end of Q3. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning and supply chain management will continue to yield a strong balance sheet that provides sufficient flexibility for us to pursue and capture potential market tailwinds. Please turn to Slide 9. Looking ahead, I'm very optimistic about our team's performance, strategic positioning, the market backdrop and our expectation to deliver results in line with our target profile of above-market top line growth, adjusted EBITDA margins in the low to mid-20% range and free cash flow conversion of 50%. We believe our strong year-to-date results reflect meaningful progress toward this target profile with an aggregate 1.3 book-to-bill, 9% top line growth, 15% adjusted EBITDA margins, 400 basis points of EBITDA margin expansion year-over-year and free cash flow of $39.5 million. Coming out of Q3, we are raising our expectations for FY '26. We believe our efforts to stage material earlier have improved revenue linearity and increased forecast visibility, and that progress is now reflected in our updated expectations for FY '26. As a result, our outlook incorporates backlog conversion that historically may have materialized in accelerations and results above forecast. Our Q4 bookings have the potential to be the strongest of the year based on a pipeline of opportunities that is more robust than our Q3 pipeline, which we believe could be an indicator of increased top line growth and further margin expansion beyond FY '26. We now expect annual revenue growth for FY '26 approaching mid-single digits, up from low single digits. We expect full year adjusted EBITDA margin of mid-teens, up from approaching mid-teens. Finally, with respect to free cash flow, we expect free cash flow to be positive for Q4. In summary, with our positive momentum year-to-date and coming out of a very solid Q3, I expect FY '26 performance to deliver a significant 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. 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?
David Farnsworth: Thank you, Bill. Our third quarter results reflect continued solid 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 10, which details our third quarter results. Our bookings for the quarter were approximately $348 million with a book-to-bill of 1.48. Our record backlog of nearly $1.6 billion is up $240 million or 17.9% year-over-year. Revenues for the third quarter were nearly $236 million, up approximately $24 million or 11.5% organically compared to the prior year. During the third quarter, we were again able to accelerate progress on a number of customers' high-priority programs worth approximately $25 million of revenue, primarily planned for the fourth quarter of FY '26. Gross margin for the third quarter increased approximately 230 basis points to 29.3% as compared to the same quarter last year. The gross margin increase during the third quarter was primarily driven by lower net EAC change impacts of nearly $2 million and lower net manufacturing adjustments of approximately $4 million. These increases were partially offset by higher inventory reserves of approximately $3 million. 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 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 $11 million or 14.3% year-over-year. The decrease in operating expenses was driven primarily by lower restructuring and other charges, selling, general and administrative expenses and research and development costs of approximately $5 million, $4 million and $1 million, respectively. These decreases reflect 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 the third quarter were approximately $3 million and $0.04, respectively, as compared to GAAP net loss and loss per share of approximately $19 million and $0.33, respectively, in the same quarter last year. Adjusted EBITDA for the third quarter was approximately $36 million, up $11 million or 46.2% as compared to the same quarter last year. The increase was partially driven by enhanced execution and improved operating leverage. Adjusted earnings per share was $0.27 as compared to $0.06 in the prior year. The year-over-year increase was primarily related to our improved execution and increased operating leverage in the current period as compared to the prior year. Free cash flow for the third quarter was an outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. As we noted last quarter, we did expect to see a free cash outflow in the third quarter. However, we were able to successfully mitigate a large portion of that outflow through improved collections on billed receivables. Slide 11 presents Mercury's balance sheet for the last 5 quarters. We ended the third quarter with cash and cash equivalents of $332 million, which represents an increase of approximately $62 million or 23% from the same period in the prior year. This increase was primarily driven by the last 12 months free cash flow of approximately $73 million, which was partially offset by $15 million of shares repurchased and retired from our share repurchase program earlier this fiscal year. Billed and unbilled receivables decreased sequentially by approximately $10 million and $4 million, respectively. We continue to expect to allocate factory capacity in the fourth quarter to programs with unbilled receivable balances, which will help drive free cash flow with minimal impact to revenue. Inventory increased sequentially by approximately $12 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 decreased sequentially by approximately $10 million, primarily due to insurance proceeds and normal operating expenses. Accounts payable decreased sequentially by approximately $2 million, primarily driven by the timing of payments to our suppliers. Accrued expenses decreased approximately $3 million sequentially, primarily due to the payments of the legal settlement and restructuring activities we announced earlier this fiscal year. Accrued compensation increased approximately $2 million sequentially, primarily due to our incentive compensation plans. The amount due to our factoring facility decreased sequentially by approximately $18 million, primarily due to the timing of payments from our customers due back to our counterparty. Deferred revenues decreased sequentially by approximately $11 million, primarily driven by execution across a number of programs during the period. Working capital decreased approximately $19 million year-over-year or 4.1%. Our continued working capital improvement year-over-year, which is evidenced by our strong balance sheet position has 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 working capital, resulting in a reduction of approximately $225 million or 34% from the peak net working capital in Q1 fiscal '24. Our balance sheet provides sufficient flexibility for us to pursue and capture potential market tailwinds. Turning to cash flow on Slide 12. Free cash flow for the third quarter was a slight outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. We continue to expect free cash flow to be positive for the year with positive cash flow expected in the fourth 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 third quarter and the higher level of predictability in the business. We believe continuing to execute on our 4 priority 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: [Operator Instructions] Your first question comes from the line of Ken Herbert from RBCCM.
Kenneth Herbert: Bill and Dave, really nice results. Yes. Bill, maybe just to start on the implied margins in the fourth quarter seasonally, you typically have a nice step-up into the fourth quarter. The revised outlook for the full year implies more modest margin expansion into the fourth quarter. Maybe you can just talk about some of the puts and takes into the fourth quarter. And then, I guess, more importantly, not to get too far ahead, but how much of the move towards the longer-term target up into the low 20s could we expect to see into fiscal '27?
David Farnsworth: Yes. Ken, it's Dave. If it's okay, I'll start and then Bill can jump in. As far as kind of the sequential growth in margin, we've seen that in the past, and it's accompanied a real significant change in the linearity of our business. As you recall, in the fourth quarter, we've typically seen a higher level of revenue and the mix has been a bit different. And one of the things we've been able to do this year is start to flatten out that linearity a little bit. So a stronger Q3 and with stronger margins accompanying Q3 as well. So where in the past, we've seen a step-up of potentially a couple of hundred basis points, it was from a much lower starting point normally. And so we don't expect to see that great a jump up in the fourth quarter, more of a gradual kind of trend, but we feel good about the total year. And as Bill said, mid-teens around the margin for the year. And we do feel we're headed in absolutely the right direction and in keeping with our expectation of getting towards our target margins.
William Ballhaus: Yes. I guess what I'll add is what Dave highlighted just kind of reflects this smooth transition of the business from this high mix of concentration -- high mix of development programs and concentration of development programs a couple of years ago to completion of those programs transition into low rate production and then increased levels of production. And what we've expected to see as we've evolved was to see a combination of increasing top line growth and then further acceleration of the bottom line. I think if you adjust for some of what we pulled forward from this year into last year into Q4, what that's translated into is a relatively smooth progression to mid-single-digit top line growth now to high single-digit top line growth, nice margin expansion on the bottom line and then some recent indicators of that continuing as we move forward. And I think a couple of things that I would point to would be the growth in our domestic business in Q4, which was up 17% year-over-year. And then in the quarter, a really nice step-up in our next 12 months of backlog, up 10% Q2 to Q3. So more than anything, Ken, I think Dave's point around linearity, we're just seeing a nice smooth progression of the business.
Kenneth Herbert: That's great. I appreciate that, Bill. As we think maybe either Dave or Bill, as we think about the strong bookings in the quarter, you called out, I mean, you highlighted missiles, C4I and some space programs. Are there any particular programs within those broader buckets you're comfortable calling out or you'd specifically highlight as significant sources of bookings?
William Ballhaus: It's one of the things we've talked about in the past, one of the real strengths of our business is the diversification across our portfolio, no real concentration. No one program makes up more than 10%. And the strong bookings really just reflects strong demand across our portfolio in areas like space, like C4I, like missile defense, and we think that's a real strong attribute of our business. No single program, no real lumpiness in the bookings, just, I think, a strong indication of demand across our broad portfolio.
David Farnsworth: Yes. And it really is, as we've been talking about, as we look, there's not one area that we say, oh, this area is going much -- this area is like an area you wouldn't focus too much energy on because it's either declining or flat. I mean all the areas from a booking standpoint are seeing solid activity, and it's in keeping with what the market is doing. And these are all -- to a large degree, these are the production efforts we've been talking about, and this is gearing up more production on those same programs that we've been working on.
William Ballhaus: Yes, it really reflects, again, just that transition from heavy concentration of development to the follow-on production orders. So nice progression in the quarter.
Operator: Your next question comes from the line of Pete Skibitski from Alembic Global.
Peter Skibitski: Very impressive quarter. So Ken was asking about the margins. I guess I'll ask about the revenue, which was really strong this quarter. And it seemed like just the tone of your commentary was more positive in terms of the sales outlook, and you've raised the guide here to the mid-single-digit range. But even looking at that guide, the fourth quarter revenue looks like it would have implied to be down year-over-year. So I just wanted to know if there's continued conservatism there in the guide or if there's just a large percentage of unbilled receivable type work in the fourth quarter relative to the third quarter or maybe something else?
William Ballhaus: Yes. I guess one way, at least you can think about it is aside from the $30 million that we accelerated from Q1 of FY '26 into Q4 of last year, the year-over-year growth comparison and top line growth looks pretty consistent with what Q1, Q2 and Q3 look like. So again, it more reflects a steady progression of our business to more like mid-single digits last year and then high single digits this year with, I think, some real positive indicators, again, based on the book-to-bill, the continuing growth of our backlog, which we expect to continue to grow. And then in particular, the portion of our backlog that we expect to convert over the next 12 months.
Peter Skibitski: Okay. And then just on the unbilled receivables, they were down only modestly this quarter. What's the right way to think about that? Does that mean some of these cycles are just going to take a lot longer? Or I'm a little confused as to why we didn't see a bigger step down in receivables.
David Farnsworth: Yes. And this is Dave again. And I think what you see some of what's reflected in there in our inventories is a bit of the up cycle we're seeing in terms of this production coming in. So there's always a bit of a timing phenomenon. And I think you're seeing a bit of a decline. There was a much more significant decline, but there were things added in as we were ramping up on new activities. So nothing more than kind of the timing of things. I wouldn't read anything else into it. We're still focused on burning down some of our older unbilled balances. But there will be -- as we ramp up revenue, there will be new unbilled balances and certainly better than the terms were in the past, but there'll be some from a timing standpoint. So nothing different than what we've been saying in here. We're still focusing capacity on working through the older balances and getting them cleared from our books. So we have the capacity to do all the new work that [ we see ].
William Ballhaus: But definitely more dynamics under the hood than you would see if you just looked at the quarter-to-quarter number. And then, Pete, the other thing that I'd point out is close to 12% growth year-over-year and the net working capital coming down year-over-year despite that growth, I think, reflects just some of the progress that we're continuing to make and the increased efficiency of our net working capital.
Operator: Your next question comes from the line of Austin Moeller from Canaccord Genuity.
Austin Moeller: So I just wanted to ask, are you looking at the IBAS defense industrial base investments within the fiscal year '27 budget? And do you see any opportunities to get incremental investments from that program to expand your capacity?
William Ballhaus: Austin, thanks very much for the question. We have had interactions with IBAS and we continue and we have programs that are funded by IBAS, and that continues to be an area, where we look for opportunities to go after things that they're interested in investing in, and we think can increase our capacity, our efficiency and our innovation. So yes, definitely something that is in front of us.
Austin Moeller: Great. And just my next question, do you see more contract opportunities within Golden Dome or within the Defense autonomous working group within the fiscal year '27 budget request?
William Ballhaus: Well, I mean, we definitely see opportunities across the board. And that's not only in our existing portfolio of programs, but it's also tied to administrative priorities like Golden Dome, missile defense, armament, kind of across the board right now, we're seeing opportunities. And we feel like our capabilities are really well aligned with the administration's priorities broadly. And one of the things that we've said before is something that we think is unique about our positioning is we have exposure to a broad set of tailwinds across the market, and that's what we're focused on capturing right now.
Operator: Your next question comes from the line of Sheila Kahyaoglu from Jefferies.
Eegan McDermott: This is Eegan McDermott on for Sheila.
William Ballhaus: You didn't sound like Sheila.
Eegan McDermott: No, I. Maybe just building off of the missile questions that have been asked. Curious, one, if you could sort of just size how big Mercury's missile exposure is as a percent of sales, even roughly? And two, with a few large LTAMDS contracts kind of out there of late, thinking like the $8 billion FMS to Kuwait, wondering how you would think about what an order of that magnitude kind of means for your business?
William Ballhaus: Yes. Thanks very much for the question. I mean we don't size up our -- the size of our missile portfolio, but we do have a number of programs with exposure to missiles for sure. Relative to LTAMDS, we typically don't comment on any one program or go into much detail. I will say that it is publicly available that there are conversations around increased demand, increased quantities on LTAMDS and that really hasn't factored into any of our bookings to date, but certainly would be a positive if there were increased quantities and accelerations of deliveries. And it's one of the potential tailwinds that we're keeping our eye on as we're looking forward.
Eegan McDermott: And maybe just a follow-up on that. Is it fair to think that margins on an order like that out of Kuwait or other FMS would differ from U.S. orders at all or be at all higher?
William Ballhaus: Yes. For us, it is typically something that we work with the prime. And so we would work with them as to what pricing makes sense and how it makes sense. Typically, the higher margin rates are on foreign direct versus FMS contracts at the prime level. So I think that's something you'd have to have that conversation broadly with the prime.
Operator: Your next question comes from the line of Jonathan Ho from William Blair.
Unknown Analyst: This is [indiscernible] on for Jonathan. [ I'm glad ] to see the strong results, and it sounds like demand is strong and relatively broad-based across the board. But are there any areas or just more broadly, where do you see the most opportunity for reordering and restocking activity over the near term, just given the ongoing geopolitical conflicts.
William Ballhaus: Yes. No, thanks for the question. I mean just to sort of break down our growth vectors. First and foremost, the primary driver of our near-term organic growth is this transitioning of our business from this really high concentration of development programs and it's dozens of programs. It's not 1 or 2, it's dozens of programs to the low rate production phase and then the higher rate production phase. So we're seeing that start to manifest itself in '25 to '26 and expect our organic growth to continue to accelerate based on those programs ramping up. And that really doesn't have anything to do with tailwinds that we see in the market. Beyond the existing portfolio, we're continuing to win new development programs that are really exciting, where we're bringing together technology and innovation from across our portfolio, doing things that nobody else can do and winning new development programs that over time are going to add to that production content. And then beyond those 2 items, we do see a number of potential tailwinds tied to a number of different factors, the size of the domestic budgets, the size of the global budgets and then other tailwinds like Golden Dome, rearmaments, acceleration of munitions. And we're starting to see those tailwinds manifest in the form of multiyear strategic agreements at increased quantities, increased deliveries with the primes. And right now, none of those tailwinds are reflected in any of our bookings or our outlook, and we view them as all additive to the target profile that we've talked about and are converging on. We have said for a couple of quarters now that we think that some of those tailwinds could start to manifest likely by the end of calendar '26, but potentially as early as our fourth quarter, which obviously is our current quarter. And we're obviously watching those items as they progress in our pipeline with a lot of excitement. So beyond that, there's a broad set of demand, a lot of tailwinds right now that we have exposure to, and we're looking forward to seeing how that all plays out over the next quarter and beyond.
David Farnsworth: Yes. The one thing I would add is from a current business, like what we're executing on today, when you look at the Q, you'll see the areas that have significant growth in the revenue. And that's Bill was laying out kind of on the go-forward basis, but you can see space is up significantly for us. When you look at radar is up, as you'd expect, other sensors and effectors, if you think of effectors that's up significantly in our revenue so far this year. Those are things that the customer needs delivered as fast as possible. So you see those things, but we see everything from an opportunity standpoint, from our pipeline standpoint, as Bill said, just a significant improvement in -- across the board. So you'll see it across our entire portfolio of 300 programs.
William Ballhaus: Yes. And I think one of the best indicators of that is, again, if you look at our domestic business, how it's up 17% year-over-year. A couple of years ago, this is where a lot of our development programs existed in the portfolio, and you can really see now the phenomenon of us having completed the development programs transitioning into lower rate production and now starting to ramp up. So a lot of things that we're seeing in the portfolio and the business that we're excited about.
Operator: [Operator Instructions] There are no further questions at this time. Well, pardon me. Your next question comes from the line of Peter Arment from Baird.
Peter Arment: Nice results. Bill, it's been a common theme in the last few quarters that you've talked about kind of the ability to stage material earlier and kind of better align your supply base that's leading to kind of better performance on the top line. Can you maybe just give us a little more insight into kind of that staging or a little more color around that?
William Ballhaus: Yes. I think it's been one of the big improvements in the business. And we're not done. We still have work to do on this front, but you can see the impact of our efforts in this quarter, the linearity and our outlook for the year. And just a reminder, if you go back close to 3 years ago, we really swung the pendulum hard on our material focus to a just-in-time delivery model. And this was largely because of the buildup in our net working capital and our need to address that. So we swung the pendulum hard. And the upside is we've been able to reduce our net working capital by about $250 million over the last couple of years, but it really did introduce some constraints in being able to accelerate our backlog conversion. And it wasn't so much that availability of material or items in our supply chain were hard to get. It was we just staged the delivery to the right because of the net working capital buildup in the business. Over time, what we've done is we've worked to accelerate the delivery of material, which has led to accelerations that we've cited into past quarters. But that led to a [ bathtub ] in the future quarters that made it hard for us to forecast what that quarter would look like because we had a lot of unknowns associated with building the bathtub and trying to accelerate more material. So over the last several quarters, we've been focused on pulling our supply chain to the left, bringing the due dates for material ahead of our need date so that we have more flexibility and more degrees of freedom in how we convert our backlog. And what that's translated into is a higher organic growth rate, our ability to convert backlog faster than we thought we'd be able to coming into the year. So it's a great shift in the business. We're really excited about it. We have still more work to do. But what it does is for future quarters, it gives us much better visibility into our deliveries, and we can incorporate that into our forecast. And that's a pivot and a transition that we've made this quarter. So hopefully, that's helpful in explaining the dynamics.
Peter Arment: Yes, very helpful. And just if I could just ask on -- you mentioned you had the strongest bookings quarter for the CPA or the common processing architecture. So it sounds like momentum is really building there. What other kind of color can you give us around the CPA that you're seeing with customers?
William Ballhaus: Well, I think we've got a number of different degrees of freedom to drive growth there. I mean we've always said that as we're able to increase production, the follow-on bookings would come. And that we certainly are seeing that in this quarter was evidence of that. We're seeing strong demand for our current products. And again, this is an area, where we've got differentiation in the market, and there are certain security standards that we are the only ones that can meet those standards. So we've got a nice moat around this business. And as we've made progress on the development programs, it's given us the opportunity to focus on the next set of innovations that we want to bring to the market. So that's showing up as higher performance for our current form factors. So being able to get the latest processing and memory capabilities into the hands of our customers with our common processing architecture wrapped around it. And I think maybe even more exciting, being able to drive into small -- smaller form factors and secure chiplets, which I think opens up a big TAM for that capability. So a lot of progress over the last couple of years on our development programs, on our technology. The production follow-on orders are coming as a result of that, and we see a lot of room to run into different form factors to open up the market. And eventually, over time, as we're taking our mission-critical processing to the edge, and we're increasing the performance and driving the smaller form factors, we see ourselves as being able to provide the compute infrastructure that's needed to have AI distributed across the battle space. And that's where we see being able to take this capability in the future.
Operator: There are no further questions at this time. I will now turn the call back to Bill Ballhaus, CEO, for closing remarks.
William Ballhaus: Well, with that, I think we'll conclude our call. We really appreciate everybody's participation and interest and look forward to getting together next quarter. Thank you.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.