Good day, everyone and welcome to the Mercury Systems' Second Quarter Fiscal 2015 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 Executive Vice President and Chief Financial Officer, Gerry Haines. 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 haven’t 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'd like to remind you that remarks we may 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, the timing of such funding, general economic and business conditions, including unforeseen weaknesses 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 in technological advances and 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 service and system integration engagements and various…

Thanks Gerry. Good afternoon, everyone and thank you for joining us. I will begin today's call with a business update. Gerry will review the financials and guidance and then we will open it up to your questions. Mercury continued to deliver strong results from continuing operations in the second quarter of fiscal 2015. Revenue was up 12% from Q2 last year, approaching the top end of our guidance. Demonstrating the operating leverage we built in the business as a result of our acquisition integration efforts adjusted EBITDA more than doubled to $10.7 million on less than $7 million of incremental revenue. Adjusted EBITDA was above the high end of our guidance and at 19% of revenues within our target business model. We remained GAAP profitable and we continued to generate positive cash flow from operations which was up substantially from the sequential first quarter. Given this momentum we’re raising our earnings guidance for full year fiscal ’15. Looking at our Q2 growth metrics in detail, total bookings were down year-over-year to $44 million leading to a total book-to-bill at 0.8. Including our strong bookings in Q1 total bookings for the first half are up 39% year-over-year with a 1.2 book-to-bill. Our largest programs this quarter from a booking perspective were Global Hawk, Aegis, SEWIP Block 2 and Gorgon Stare. Total defense bookings for the quarter were down 9% year-over-year to $41.2 million. For the first half however total defense bookings were up 42% driven largely by continued strength in our Mercury Commercial Electronics or MCE. Our defense book-to-bill in Q2 was also 0.8 compared with 0.9 in Q2 of fiscal 2014. Defense backlog and total backlog exiting Q2 were up 64% and 51%, respectively, year-over-year. International defense bookings, including FMS were 15% of the total bookings compared with 49% in…

Thank you, Mark and good afternoon again everyone. Before we go through the financial results please note that I will be discussing the company’s financial results comparisons to prior periods and guidance this afternoon on a continuing operations basis, excluding Mercury Intelligence Systems or MIS unless otherwise noted. However in accordance with GAAP our statement of cash flows is inclusive of MIS. In the fourth quarter of fiscal 2014 we decided to explore the sale of MIS and begin reporting its financial results as discontinued operations at that time. As you may have seen in our press release the sale of MIS closed earlier this month and will have a positive but modest impact on cash, net of transaction costs in our third quarter fiscal quarter. Separately we recorded a non-cash goodwill write-down within discontinued operations in the second fiscal quarter. The impact of the sale transaction itself will be reflected in our financial statements for the third fiscal quarter of 2015. Turning now to Q2, as Mark said, Mercury delivered strong financial results for the fourth consecutive quarter, highlighted by adjusted EBITDA coming in at 19% of revenue, solidly in-line with our target business model. The operating leverage that we anticipated from our restructuring and integration efforts is translating our above market revenue growth into even stronger earnings growth. Total revenues for the quarter grew $6.2 million or 12% year-over-year to $57.1 million versus our guidance of $54 million to $58 million. At a more detailed level revenues from defense customers for the second quarter increased $4.9 million or 10% year-over-year, while revenues from commercial customers increased $1.3 million. In our largest reporting segment, Mercury Commercial Electronics or MCE, revenues increased $7.7 million or 17% year-over-year to $52.7 million. In our Mercury Defense Systems, or MDS reporting segment, revenues…

[Operator Instructions]. Our first question comes from Peter Arment with Sterne Agee. Your line is open.

Yes, thank you. Good afternoon Mark and Gerry.

Hi, Peter. How are you?

Hi.

We are doing all right, snowed in but we are doing okay. Hey, congratulations on the leverage that we are seeing in the business. I guess a question on the sales volume starting to kick through and it sounds like you got confidence that you are going to continuously grow in the next year. How do we think about, is this level of OpEx expenses sustainable or would we have to see a tick-up, just curious of your thoughts on that.

Sure, so I think we clearly do have operating leverage in the business as you can see from the results that we continue to post. So I think if you look at from a business model prospective we are currently operating inside our business model and yeah, we feel good about the range from an adjusted EBITDA perspective, it is encompassed in our guidance. But Gerry I don’t know if you would to like to add anything to that?

Yeah, I think the bottom line is folks are generally pleased with our target business model. We expect to stay in that range. So as you project that out revenue is growing well, OpEx to the extent that it grows would grow to stay within that target range.

Okay. And then just a follow-up Gerry, accounts receivable again ticked-up this quarter, can you give us a little more color on that?

That’s really reflecting milestone achievement on some of our percentage of completion programs. So actually what you are seeing is some conversion of previously un-billed revenue into billed and then that’s also converting into cash. That’s helped driving the cash generation for the business.

Okay. And just lastly Mark for fiscal ’16 budget submittal next week, clearly that’s you have seen of the numbers that have been out there. Have you had any chance to kind of hear about any impacts that you will see on Mercury’s kind of key programs?

Not at a very specific level but given the portfolio of programs that we built really aligned with the you know the roles and the missions because we don’t anticipate any significant shift there we continue to believe that our programs are going to be well funded Peter.

Okay, thank you. I will jump back in queue.

Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Hi, thanks Mark, thanks Gerry and good afternoon. Just wonder, I know you mentioned for the first half bookings are still up but the quarter was a little bit light. It seems like it might have been maybe international orders are [indiscernible], do you any more color there on how we should expect it for the year?

Well we don’t guide international and FMS bookings at an annual level. As Gerry said in his prepared remarks Sheila we do anticipate that bookings will normalize relative to revenue as the year progresses and we do anticipate bookings in total being at or above a $1 book-to-bill. The comparison with prior periods is that we had in terms of why it’s bookings in FMS and internationals slightly down is that we had one very large booking for F15EW in the second quarter of last year. So FMS sales tend to be somewhat lumpy as you know.

Got it. And then just a little bit more on acquisitions I know you have been talking about it for a while but do you have a preference for size and whether it’s revenue synergies for the products that would really add to your offering, given your growth strategy or would it be on cost savings and leveraging your platforms?

Yes, we would actually like to get both. So we’ve built a very strong platform that we believe that we can continue to scale, particularly around the two advance micro electronic centers that we have. And obviously if we’re able to find the right type RF and microwave company there is going to be some cost synergies associated with that. But I think we’ve also been -- what we’ve also demonstrated is the fact that we’ve got an extremely strong channel into our prime defense contractor customers and the growth that we’ve seen in the opportunity set in the RF and microwave domain and the fact that we’ve able to pull through the products and capabilities of both LNX and the former Micronetics into our existing customers, I think is a testament to those relationships. So we are going to look to continue to acquire, I think in the two primary pillars of the business, particularly RF and microwave as well as processing, looking as I said for both revenue and cost synergies.

Got it, thank you. I will jump back in the queue.

The next question comes from Tyler Hojo with Sidoti. Your line is open.

Yes hi, good evening everyone. I was hoping that we could talk a little bit about the kind of your initiatives to expand into the RF and microwave space. I know it’s difficult to kind of quantify exactly how much progress you are making, but maybe Mark you could talk a little bit anecdotally about how customers are in real time kind of receiving some of your initiatives there?

Sure, so I mean we’ve had over 50 customer visits to the new AMC facility, which is a pretty significant uptick since the last quarter. We are seeing, I would say a lot more opportunities. I think word is getting out around the investments that we’ve made, clearly the capabilities that we’ve built, not only in RF and microwave but the fact that we’ve got a unique set of capabilities across the sensor processing chain that other companies in the space don’t have. We also announced this past quarter an initiative called Open RFM. This is we believe a very important set of innovations and capabilities that we are working on that will strive to combine RF and microwave and digital technologies together into open systems architectures which will ultimately lead to improved affordability and the more rapid upgrade of EW and radar subsystems. And we’re getting some great reviews on that to the extent that one of the industry trade magazines basically described it as probably the best innovation they have seen in the last 30 years in the EW space. So we feel really good about the pipeline build that we see, the opportunity set that we are gaining access to, the leverage that we’ve created with the channel as well as our ability to innovate in the space Tyler.

Okay, wonderful. And maybe just as a follow-on how about the BladeCenter business? I know that seems to be one of the more intriguing kind of data points that you guys kind of rolled out at the analyst day, any sort of updates there?

Yes, I mean I think we feel really good about that opportunity. As we’ve talked about it takes out beyond just providing the processing for the sensor, which is what Mercury has historically provided into other mission critical compute applications on-board military platforms in particular areas like battle management as well as mission computing and replacing commodity commercial computing from players like IBM, that recently sold its BladeCenter business to Lenovo and we think that we create a very compelling value proposition. We’re a U.S. company that’s doing all the design, development, production in support of those capabilities. We’re already very well known to provide very high performance computing and we’re seeing the number of opportunities related to that technology set that we’ve just introduced continue to grow. So I would say that as everything in defense here things take a little time to gestate but we’re very, very pleased with the initial reception of that technology.

Okay, great thanks for that and maybe if I just one for Gerry. I think you gave the provisional tax rate for the next quarter but what is it for the full year?

We’re looking at something in the high 30s for the full year.

Okay, great that’s all I had. Thanks a lot guys.

Our next question comes from Mark Jordan with Noble Financial. Your line is open.

Thank you. Just going back to the previous question here, if I'm correct you say that Q3 was to be 23% and we get up to the high 30s you would have an exceptionally high tax rate in the fourth quarter. Could you review your expectations please and why have we had significant tax benefits in the first half?

It’s for the full year we expect, we don’t get a lot of tax advantage out of it. We get some bump for the recently enacted R&D tax credits. There’s a little bit of catch up and we’ll see some continued benefits to that for the balance of the year but we don’t generally see the tax rate move around a ton over the course of the year.

Okay I'm sorry but you confirmed that -- you say that you’re expecting a 23% of tax rate in the third quarter?

Expected tax rate in the quarter yeah, so our ETR, as I said is high and estimated for the year will be in the high 30s.

Okay and previously I think you said that you’re implying that the second half bookings would be slightly below revenue, bringing your book-to-bill down to one to one plus. So you would had about a couple of quarters of three quarters of weaker -- would you expect any sort of seasonal period of strength in the first half of fiscal ’16?

We’re not going to guide fiscal ’16 at this point in time Mark. I think we anticipate stronger bookings quarter in Q3 but as Gerry said because we have some deals move during the second quarter that moved in to the third. But the year as a whole we do anticipate, as Gerry mentioned a normalizing with a book-to-bill up or above one for fiscal ’15 in total.

Okay and a final question from me, it’s good you’ve completed your restructuring. I know in the first quarter you had estimated full year restructuring charges of $3.1 million. Now you’re saying it’s going to be -- if things are completed and virtually $2.6 million is what you would expect. Is the $0.5 million lower level just fudge [ph] factor you had or did you find economies as you’re bringing this to close?

Well, the numbers work out -- as they worked out there were some slight shifts around. There will be an immaterial amount that flows through, but it won’t be enough to actually be visible and it’s just some adjustment around estimates for a sub lease of space that we vacated that we’ve lessees of and so on so you have to make adjustments. But again on an EPS basis that won’t even have a $0.01 of impact. So it was just a little bit of up in the final phase.

Thank you.

[Operator Instructions]. The next question comes from Jonathan Ho with William Blair. Your line is open.

Hi, good afternoon.

Hi Jonathan.

Hey so just wanted to start out with the timing around MDS revenue. I know you guys said that it was a little bit lumpy in terms of that business. Just wanted to get some sense from you how we should be thinking about that for the rest of the year and just from a modeling perspective how we should sort of look at the linearity of that business?

So it is lumpy Jonathan, unfortunately like we are operating the defense industry. We saw some delays in bookings in the third quarter and it was related to needing to get a DCAA audit. We do anticipate that bookings will pick up somewhat materially in the second half. So we don’t think there is anything really going on there other than just timing.

Got it. And then you guys talked about some of the smaller defense contractors maybe struggling in this environment, as well as the larger defense primes now sort of re-looking at their cost allocations. Can you maybe give us a sense of how you guys are taking advantage of this or maybe some examples of where you see the opportunity to, I guess starting to materialize at this point. You guys have talked about this in the past but just want to get a sense of how that’s been tracking and what those opportunities look like today?

Sure I think we continue to believe that the RF and microwave industry is going through a pretty significant transition. One of our largest competitors is shutting down a very significant facility, probably about 10 or 15 miles along the road from us. Another RF and microwave business is part of a much larger widely diversified industrial business is also shutting down a significant facility in Massachusetts. Both of those actually create opportunity for Mercury because our customers are very worried about the supply chain disruption that those facility closures can cause. At the lower end of the market I think we’ve demonstrated on programs like SEWIP that we are able to take share from the smaller companies who don’t have the wherewithal in terms of the manufacturing assets and capabilities as programs such as SEWIP Block 2 transitions into full rate production. And so I think we’ve done a great job basically taking away those production revenues from the smaller companies in the industry. In the processing dimension I think the other significant shift that we see occurring is really related to some of the specialized or security capabilities that we have been building into our products for some time now. As we discussed at Investor Day we’re significantly ahead of the industry and as I look at the growth that’s occurring inside of our processing business it’s very much related to that trend, whether it be for domestic upgrades where due to DoD mandates, security and protection becomes more important or through foreign military sales and international sales, where again there is requirement associated with protecting intellectual property and capabilities and we’re very well positioned there and I think we’re taking share in that dimension also Jonathan.

Thank you. And then just one final one, as we look at sort of the AMC facility, it looked like there was a lot of opportunity from a utilization standpoint there. I know it’s still relatively early but how do you guys think about sort of raising capacity utilization? Where do we stand in terms of that, in terms of what innings and can you just maybe give us a sense of timing as to how you think about sort of raising that utilization rate?

So as we talked about at Investor Day we are currently running one shift. We have got a tremendous amount of opportunity, I think to continue to push more business through that facility. Obviously we built it for programs such such as SEWIP Block 2 that are moving into full rate production towards the back end of this fiscal year and we certainly hope that ours customer Lockheed and Raytheon are successful in their bidding proposal for Block 3. So we got a lot of opportunity I think to continue to grow in the existing facility by adding additional shifts and we also feel that as we look at M&A I think there is going to be an opportunity potentially if we find the right sorts of companies to be able to take out some costs and to consolidate facilities that way as well, so which will improve the utilization rates still further. So great facility, the customers love it and I think it’s going to continue to support the growth in the business.

Great, thank you.

One quick correction for everyone who’s on the line. I wanted to come back to the tax issue where I think I misspoke. I believe I said high-30s. I meant to say high-20s approaching 30 as the ETR for the full year. Again roughly 23% in the quarter and approaching 30% for the -- our full year basis. Apologies for that.

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

Okay. Well, thank you all for listening. Hopefully everyone is safe and warm, digging out from snow Gerry and I certainly have been today. We look forward to speaking to you again next quarter. Take care. Bye-bye.