Good day, everyone and welcome to the Mercury Systems’ Second Quarter Fiscal 2014 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the company’s Senior Vice President and Chief Financial Officer, Mr. Kevin Bisson. Please go ahead, sir.

Good afternoon and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett. 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 www.mrcy.com. We would like to remind you that remarks that we make during this call about future expectations, trends and plans for the company and its business constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of the words may, will, could, should, would, plans, expects, anticipates, continue, estimate, project, intend, likely, forecast, probable, potential and similar expressions. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, continued funding of defense programs, as well as the timing and amounts of such funding, general economic and business conditions, including unforeseen weakness in the company’s markets, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success and technological advances in delivering technological innovations, changes in the U.S. government’s interpretation of federal procurement rules and regulations, market acceptance of the company’s products, shortages in components, production delays due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed price…

Thanks, Kevin. Good afternoon, everyone and thanks for joining us. I will begin today’s call with a business update. Kevin will review the financials and guidance and then we will open it up for your questions. Despite challenging conditions in the industry, Mercury performed well in the second quarter. Total revenue for the quarter was $53 million versus our guidance of $48 million to $54 million. Our GAAP loss from continuing operations was $0.03 per share favorable to our guidance of a loss of $0.12 to $0.06 and much improved both sequentially and year-over-year. Adjusted EBITDA was 10% of revenue, up substantially from last quarter in Q2 last year and well above the high end of our guidance. Cash flow also exceeded our plan due to higher than expected collections at quarter end. We continue to make good progress on our most important programs. Total revenues in our defense business for the second quarter increased 10% sequentially from Q1 to $50.8 million and were up 12% versus the second quarter last year. Total defense bookings increased 10% sequentially to $47.9 million. Our total book-to-bill was 0.9 compared with 1.3 in Q2 last year. Our book-to-bill in defense was 0.9 flat sequentially and down from 1.2 a year ago. Defense backlog and total backlog exiting the second quarter were both down 2% sequentially. From a bookings perspective, our largest programs this quarter were for F-15 EW upgrades with BAE, Aegis with Lockheed Martin as well as ASIP, the airborne signals intelligence program and a classified airborne program both with Northrop. International defense bookings, including foreign military sales were 49% of total defense bookings compared with 17% in the sequential first quarter. From a revenue perspective, Aegis, ASIP, Gorgon Stare and Predator/Reaper were important contributors during Q2. International defense revenues, including FMS,…

Thank you, Mark and good afternoon again everyone. Turning now to our financial results, revenue for the second quarter of fiscal 2014 of $53.1 million was $3.3 million or 7% higher than revenue of $49.8 million for the second quarter of last year and was at the upper end of our stated guidance of $48 million to $54 million. The company generated a GAAP net loss of $0.03 per share in this year’s second quarter, which was substantially smaller than the GAAP net loss of $0.16 per share in the second quarter of fiscal 2013. This year’s second quarter loss per share was smaller than the company’s guidance of a net loss of $0.06 to $0.12 per share for the quarter. Adjusted EBITDA for the second quarter of fiscal 2014 of $5.1 million was $4.1 million higher than the adjusted EBITDA of $1 million for the second quarter of last year and exceeded our stated guidance of $400,000 to $3.5 million. The company generated free cash flow of $4.5 million in this year’s second quarter and ended the second quarter with $44.5 million of cash and cash equivalents and with no debt. Reviewing second quarter performance in greater detail, total revenue for our largest operating segment, Mercury Commercial Electronics or MCE was $45 million, which was $4.5 million or 11%, higher than the $40.5 million of MCE revenue generated in the second quarter of last year. The year-over-year increase in second quarter revenue derived mainly from significantly higher Aegis program revenue that was partially offset by lower RF components and UAV program related revenue. Revenue from the company’s Mercury Defense and Intelligence Systems or MDIS operating segment for the second quarter was $10.6 million which was $3.5 million lower than the $14.1 million of MDIS revenue for the second quarter…

Thank you, sir. (Operator Instructions) Our first question comes from Kevin Ciabattoni from KeyBanc Capital.

Hi, good afternoon guys.

Hi Kevin.

Just looking at the target model, you say you hope to achieve it by ’15 is that something you expect to be able to achieve on a full year basis or is it something we are more likely to see as the tail end of the year just kind to trying to figure out the ramp there?

Yes, so we anticipate achieving it full fiscal 2015 Kevin.

Okay, great. Any color you can give us on amortization for next year I know you gave the restructuring number Kevin that that was helpful?

Yes, I think it’s similar to the quarterly rate we are seeing right now, somewhere between $1.9 million, $2 million a quarter.

Okay. And then some report is out there that the F-16 upgrade programs in doubt with the ‘15 budget, any thoughts on what you are seeing there and how that might impact the business going forward?

Sure. So I truly argued early today, to me when I read it, it looked, it looked more like propaganda. I think it’s still speculator as to what actually going to happen from a funding perspective for the U.S. fees, but from what we know right now Taiwan looks like its in great shape, its going ahead and we have received our first order for the Saver Program during Q2. So I guess we are going to have to wait and see, more information around cape to see whether or not the radar upgrades are going to be done as part of that or separately. So I haven’t heard anything official Kevin.

Okay, thanks. And then just one last one from me, just wondering if you could give us any color on what your seeing in terms of the level of outsourcing from the primes and whether you have seen any change since you have been able to get the new Hampshire, the new Hampshire facility kind of up and running just in terms of overall outsourcing?

Sure. Yes, I would love to. So we feel very excited about the opportunity in RF and microwave. I think as we said on the last call, we spent a tremendous amount of time looking at the industry structure and the way in which we described it at Investor Day was basically said it was an hourglass. Net, net what we see is our customers are looking for a better alternative of either the companies that are their traditional suppliers on the high end or the small companies that they are working with. And what we have done through the acquisitions that we have made in the space that, the most recent was Micronetics and now the investments in the AMC, we are providing an alternative, so a couple of different data points. During the quarter that was done with one of our customers and that’s provides a lot of capabilities in the EW space. And literally as a direct result of bringing the new AMC facility online, the investments that we have made in our existing AMC as well as the additions that we have made to the engineering team in RF and Microwave they are going to outsource substantially more work to us than what they were previously planning on doing, which I think is great. We hired pretty much all of our major customers throughout the new AMC facility in Hudson, New Hampshire. The feedback is being overwhelmingly positive to the extent that, at least two of them are actually approving us as a strategic supplier in RF and microwave for more advanced RF and microwave subsystems. And one of the other customers that we are dealing with today where we are not actually doing much at all in RF has given the available commitments that we are going to get some business for them and they have seen us as a strategic partner going forward. So I couldn’t be happier with the progress that we are making and I think it’s a substantial opportunity for growth for us going forward Kevin.

Great, thanks. That’s good color. That’s all the questions I have.

Thank you.

Thanks Kevin.

Thank you. And our next question comes from Jonathan Ho from William Blair. Your line is open. Please go ahead sir.

Good afternoon. Just wanted to see if you could give us a little bit more color on how each of the components that you outlined in your cost savings plan is going to contribute to that $16 million in aggregate savings and maybe a little bit more color in terms of how we should be modeling the savings to come in to the model over time?

Yes, I think we were, Jonathan, I think we were fairly explicit about that. I think we, in terms of the second half of this year we outlined that we would expect roughly $4.3 million in savings. And I think if you do the numbers I think it’s about $1.2 million for manufacturing and $1.5 million for R&D and $1.6 million for SG&A, another $9 million in fiscal ’15 over compared to fiscal 2014’s expense levels. And again I think the splits there are roughly $4 million in SG&A, $3 million in cost of sale or manufacturing, the rest in R&D. And then because we have actions planned probably towards the end of ‘15 where the savings won’t be achieved until ’16, the remaining $2 million, $2.5 million of savings we would expect to be in ’16. So I think if you add those three together and I think it comes pretty closely to $16 million of savings. Again…

Got it.

As far as high level Jonathan it’s roughly 40% of the savings are in manufacturing, 40% are in SG&A and 20% of that $16 million in R&D. But just to put a fine point on it, this is not about a reduction in our research and development. When you look at the number of heads that we have reduced this quarter, it was 17 and we are done with that option. Most of the activities that we are talking about going forward are really about the fact that now that we have got the new AMC up and running, we can consolidate more of our or other non-core facilities over time. And given that we have got an operating model in place with the business, we can standardize on a common set of core business processes and systems that in particular will allow us to actually centralize our manufacturing operations as well as our general and administrative functions and that’s really where you see the big, big overall savings.

Got it. And just as a second question, just want to understand from a confidence perspective, now that you guys have offered toward the 10% perspective on 2015, can you remind us, which are the programs you expect to sort of support that visibility? Are there any potentially at risk or with the budget visibility that’s there now, do you feel pretty good about sort of the potential for those programs to happen?

Sure. The numbers that we gave you are not necessarily guidance per se, we are trying to put the context of the integration plan that we announced and the potential impacts that we see in the business model. Net-net, I think as a result of the activities that we have taken, in essence what it does is it brings in the attainment of the target business model and allows us to attain that target business model range at a lower revenue run-rate than what we previously anticipated. So in essence, what supports from a programmatic perspective is the fiscal ‘15 kind of outlook as it were, will give more firm guidance on the fourth quarter call fiscal ‘14. It’s really around SEWIP Block 2, the LRIP as well as some production as well as increased content on SEWIP Block 2 that we talked about in Investor Day. I think Patriot has the potential to see increased revenues in fiscal ‘15 associated with both foreign military sales as well as the fact that the U.S. Army Patriot upgrades particularly for the radar processor got very good funding in the overall budget. We expect Aegis to be an important revenue contributor not necessarily a growth program, but an important contributor overall. And then I think I would finally I would say Filthy Badger and Buzzard in our Mercury Defense and Intelligence Systems operating segment and as well as JSF. So programmatically, those are the drivers. From a business model perspective, I think I would kind of boil it down to really two things. We are anticipating continued strong rebound in the more traditional processing part of our business and continued strength in RF and microwave.

Jonathan, I would add to put some numbers behind it. If you took the high end of our revenue guidance for the second half of the year and annualize that, you are probably looking at a 70% growth rate year-over-year. So kind of puts into perspective what a 10% year-over-year growth rate would mean for us.

Got it, got it. And just one final question on the environment, now that we have got sort of the budget passage and some of the visibility towards ‘14 and ‘15, I mean do you feel sort of a normalization in terms of your contacts with the prime contractors, their confidence level and visibility order flow, just want to get a sense for you how the environment feels at this point?

Yes, I think overall people feel much better than say where we were during fiscal ‘13. In essence, the budget deal eliminated sequestration and traded off reduced spending levels, but the spending levels for fiscal ‘14 and ‘15 are somewhat baked at this point flat to what was enacted in fiscal ‘13 at $500 billion a year. So they have taken away that uncertainty surrounding sequestration, which in our mind was one of the big issues that were causing the delays in funding and contracting to occur. So I think it’s really positive overall. I think people feel better about that we have got at least some short-term clarity from the overall budget environment. And the 2014 defense appropriations bill was singed earlier than it was last year. So we are not out of the woods, but I think things are heading in the right direction and we generally feel better about it.

Great, thank you.

Thank you. And our next question comes from Tyler Hojo from Sidoti & Company. Your line is open. Please go ahead sir. Tyler Hojo - Sidoti & Company: Yes, hi Mark and Kevin.

Hi, Tyler.

Hi, Tyler. Tyler Hojo - Sidoti & Company: Yes, just a follow-up on the last question when you talk about seeing kind of business normalize what you had been talking to us about was being really conservative in terms of how you had been running the business, really running it for cash and kind of stepping away from some of the book and ship opportunities that you have traditionally gotten. So in context with what you have said about seeing some normalization, do you get a little bit more aggressive? And then maybe as a follow on to that, do you need to get more aggressive in order to get accounted to that 10% growth bogie?

So if you look at say the high end of guidance for H2 that would suggest a 10% revenue growth rate. And given the integration plans and the reduction in operating expenses that would lead to a huge improvement in terms of adjusted EBITDA over the first half of the year and that’s somewhat consistent in terms of what we saw during fiscal ‘13 if you can remember back that far, Tyler. When the defense appropriations bill was actually approved in the second half of fiscal ‘13, we actually saw a 12% increase in bookings and a 10% increase in revenues. And in essence at the high end of the range, we are kind of forecasting that to occur again. At the full year level again at the high end of the guidance range, we are basically delivering revenue growth or forecasting to deliver revenue growth that’s in the high single-digits. So as you project forward really into fiscal 2015, it’s not too much of a stretch to see how we can achieve a target business model given the integration plan that we just outlined, given the growth rates that we are potentially forecasting for fiscal ‘14 and given some of the things I talked about from a program perspective. So look, we are trying to give you some perspective on what we see the outlook for the business being going forward in the context of the integration plans. And obviously as we exit this fiscal year, we will give firmer guidance for fiscal ‘15, but we are just trying to putting context what we see in the net result that the actions that we are taking. Tyler Hojo - Sidoti & Company: Yes, I know and it’s definitely appreciated to kind of lay something out for us as we start thinking about fiscal ‘15, but when you think about your comfort level, I mean, do you still run the business pretty conservatively today until you see maybe a little bit more improvement or are you at the point where you think you could be a little bit more aggressive going after those book and ship type orders?

Well, we must be feeling somewhat better, because we are kind of returning back to full year guidance and the guidance that we are giving for Q3 is higher than the guidance that we have given for probably the last three or four quarters. So yes, I mean I think we do anticipate that we are going to see higher growth in revenues and substantially higher bookings in the second half. Are we going to let that ball flow through to the top line? Probably not, we still want to continue to grow the backlog, but we are probably prepared to take a little bit more risk than what we have done over the past several quarters. Tyler Hojo - Sidoti & Company: Got it, okay. Well, I do appreciate that commentary. And maybe just moving to one other item, if you look at the R&D spend this quarter, it was up a bit – quite a bit on a year-on-year basis and up sequentially and if we look at achieving the target business model in ‘15, it’s going to grow quite a bit next year as well. So how do we think about that in context with kind of some of your commentary in regards to the reduction in R&D?

Yes. So we are not going to get into the specifics at the line item detail level, Tyler, for fiscal ‘15. Yes, because again what we are trying to do is really provide more context around how it is that we could get back to the target business model not necessarily give you guidance on each and every line item. I think net-net, we feel like we have made a very small reduction on a net basis to the hedge in engineering. What we are going to do is actually add back in certain areas where we see the potential for growth. And I think much of that is in the RF and microwave space whereas – where we see the potential for our customers transitioning to a better alternative supply which is the way in which we position the company. So we feel can we get back to the target business model, we believe that we can under reasonable set of growth assumptions given the actions that we have taken, but I don’t want to get into too much detail regarding the specific expense line items. Tyler Hojo - Sidoti & Company: It makes sense, well, that’s all I had, so thanks a lot.

Okay. Thanks.

Thank you. And our next question comes from Peter Arment from Sterne, Agee. Your line is open. Please go ahead sir.

Yes, good afternoon Mark and Kevin.

Hi, Peter.

Hi Peter.

Mark I hate you circle back on this 10% growth kind of number that you put out there, but I just want to another way of looking at it is that, is it seen like you are getting, you are just going to get better lift from some of these core programs you outlined and we haven’t really, that’s not really even factoring in kind of the ultimately the share gains that you are going to get from this new AMC centers and all the efforts that you are putting out there for the longer term?

Yes, so it’s a continued rebound in the core processing part of our business which was somewhat depressed during fiscal ‘13 and clearly we started to see a rebound there and some pretty good growth. But in particular as I outlined earlier, we have got some programmatic drive as this well with various programs at different stages that are transitioning as well as different funding profiles of programs that we think can have an impact next year. So yes, so I think it’s a mix of different things. But when you look at the growth rates at the high end of our H2 forecast which is 10% which is really what we delivered in H2 of fiscal ’13 or for full year fiscal ‘14 being in the high single digits, it’s really not too much of a stretch to look out an additional 10% as we move into fiscal ‘15. So again directionally we are trying to give you a perspective on how and when we might achieve that target business model versus what potentially could have looked like prior to the second and the final phase of our integration activities.

Okay and so that’s appreciative very much. Kevin did you mentioned what the international sales were in the second quarter, I thought I wrote down 16%, it was that the right number?

Yes, correct.

Yes, so bookings were actually – bookings this quarter were 48%, international and defense bookings were 48% but total defense bookings in the quarter and international and defense revenues was 16% as Kevin said as defense revenues.

Yes Mark, how do you see the international sales mix transition for the full year ’14?

So we haven’t broken it down in terms of giving guidance, but I think we are seeing strength in foreign military sales internationally. In this quarter it was being driven by the F-15, EW upgrades. It was driven by Aegis. I think going forward we think that Patriot is going to be strong contributor in foreign military sales. The only challenge that we see there is that they are actually notoriously difficult to predict the timing of them. So I think they are going to continue to grow because I think we are well aligned with our customers as they are pursuing growth overseas, but I am not going to ahead (indiscernible) forecast fiscal ‘14 from a international defense perspective at this time.

Okay, that’s all I had. Thanks for all the color.

Alright, thanks.

Thank you. Our next question comes from Mark Jordan from Noble Financial. Your line is open. Please go ahead.

Good afternoon, gentlemen. The question is relative to the guidance on 2015, does the obtaining the business model, does that include or exclude the restructuring charges that you will flow through in 2015?

Mark that would exclude that.

Okay and if I am looking at the right presentation suite, your business model for operating income 12% to 13%?

Correct.

Yes, I think when we are thinking along the adjustable EBIDTA lines, which is kind of the metric that we are using.

Okay. And then was if I am looking at the right target 18% plus?

Correct.

Right.

Okay. Looking at your guidance for this quarter I guess for that matter last quarter you had about $6 million spread, given a lot of the contractual nature of your business, is that wider range of function of the incremental book and ship business that can come or is that dependent upon last minute adjustments of delivery schedules by your customers?

So it’s more the latter, but the range hasn’t actually changed. We have kept with the same spreads as you called it then it’s been that way for probably four quarters now or more. The guidance range is consistent look.

Okay. And looking at the savings that you expect to be able to realize in 2015 with the restructuring, will those be spread equally through the year or weighted in one period or another?

They all spread out throughout the year according to the auctions that take place. So at this point, we are not going to get into the specifics of what actions in what quarter. We’ll really we feel that we’ll guide that on a quarter by quarter basis, but we have given you the high level savings on a per year basis for you to kind of put your models to go out.

And also as I mentioned earlier, Mark, the actions we took in Q3 of the $16 million of annualized savings, $9 million of it has already been achieved for the actions we took in Q3. So we have got a good chunk of it done right away. And as Mark said, we have got a phased approach going forward in terms of the remaining actions in the associate savings.

Thank you very much.

Yes.

Thank you. And our next question comes from Brian Ruttenbur from CRT Capital. Your line is open. Please go ahead.

Thank you very much. Very encouraging. A couple quick questions. In fourth quarter 2014 what were the level of charges that you stated? Were there any?

Yes, we have – we said well, you compare it’s 1.5 million we are anticipating in Q4 for a total of…

Okay, okay, that was perfect. I just want to make sure there was a lot of numbers getting turnaround. And then the charges in fiscal 2015, what were the total on that? What was the total on that, excuse me?

It’s estimated to be about 4.2 million.

And how is that, by first quarter, second quarter or is there equal or is it all front end loaded?

Yes, we are not giving – Brian, we are not getting into that level of detail at this point. I think it’s as we get closer to the end of this fiscal year we will get into fiscal ‘15 guidance with more clarity.

Okay. So as I understand fiscal ‘15 what you stated is high single-digit growth charges of around $4 million, gross margin should go to back to ideal, which is in the high 40s. SG&A should drop by how much in ‘15, I heard ‘16 but I didn’t it was a little confusing how much ‘15 was going to rock by?

So the gross savings in fiscal ‘15 approximately $9 million, so but again what we are not doing here is kind of guiding exactly what our expense structure is going to be, because we are going to have some potential add backs between now and then. So net-net, if you look at the what we are assuming on the top line and then what we said is we feel that we can achieve our target business model for fiscal ‘15. So we are not going to guide the individual line items, Brian, because we are trying to give a framework and context of the integration plan, not specifically give ‘15 guidance on this call.

Great, thank you very much.

Alright.

Thank you. And our next question comes from Sheila Kahyaoglu from Jefferies. Your line is open. Please go ahead.

Thank you. Good afternoon. Less progress and clearly some productivity, how are you ensuring that you are keeping the cost savings when you are not giving it back to the customer?

So we actually feel pretty good about that, Sheila. I think as we talked about in the past a measure of the value that we deliver to our customers is really in the gross margin line. And I think we have historically the processing part of the business, had very strong gross margins. We are not seeing a ton of pressure there largely because I think the economic benefit to our customers is where they outsource more work to us in an engineering level and we can do it much more quickly and much more cost effectively. And so, in essence we are a commercial item company. We are selling off a commercial price list. And we are investing heavily in the R&D and our customers are getting the benefit of it.

Great, thanks. And can you provide us an update on timing of SEWIP Block 3 and perhaps the reminder of what your current content is on Block 2 and if you are expecting any additional content there?

Yes. So Block 3, I think the timing at this point is that the award is likely going to be made in the second half of this fiscal year for us so over the next six months. And from a content perspective on SEWIP Block 2 and Block 3, we kind of lay that out in detail in our Investor Day presentation in November and things haven’t changed since then, Sheila.

Are you bidding on any additional content there or it’s sort of it?

So we – I mean, we are always looking for new business, but I think the content expansion opportunity is that we have been pursuing a laid out in the investor presentation in November.

It sounds good. Thank you very much.

Okay, thanks Sheila.

Thanks.

Thank you. And Mr. Aslett, it appears that there are no further questions. Therefore, I would like to turn the conference back over to you for any closing remarks.

Okay. Well, thank you for your interest in Mercury. We enjoyed the call, look forward to speaking to you next quarter. Bye-bye.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may all disconnect and have a wonderful day.