Good day, everyone and welcome to the Mercury Systems’ Fourth Quarter Fiscal 2015 Conference Call. Today’s call is being recorded. At this time, for opening remarks and introduction, I would 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 have not received a copy of the press release we issued earlier this afternoon, you can find it on our website at mrcy.com. We would like to remind you that remarks that 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 use of the words may, will, could, should, would, plans, expects, anticipates, continue, estimate, project, intend, likely, forecast, probable, potential and other 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 unperceived 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 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 or unanticipated expenses 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…

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 for your questions. Mercury concluded the solid fiscal year with a strong fourth quarter and we are off to a good start in FY ‘16. For fiscal 2015 as a whole bookings and backlog reached record levels for the second year in a row, growing 9% and 19% respectively and positioning us well as we head into fiscal 2016. Total revenue for FY ‘15 increased 13% year-over-year to $235 million, significantly above industry growth and at the top end of our guidance. Reflecting improved operating leverage in the business as a result of our acquisition integration efforts, adjusted EBITDA for FY ‘15 was up 89% year-over-year and at 19% of revenue in line with our target business model. Operating cash flow increased by $18 million, up 126% from FY ‘14 and our year end cash balance grew by more than $30 million. Moving to our fourth quarter results, our total revenue was up 19% from Q4 last year and at the top end of our guidance. Adjusted EBITDA for the fourth quarter nearly doubled year-over-year to $14.2 million or nearly $10.4 million of incremental revenue. This was well ahead of our Q4 guidance and at about 22% of revenue also at the top end of our target business model. Mercury remained GAAP profitable in the quarter. Our cash flow from operations continued to strengthen as anticipated driven by improved profitability as well as strong collections. Total bookings in Q4 were up strong 45% from the sequential third quarter and up 3% year-over-year at $82.5 million. Our total book-to-bill was 1.3 compared with 1.5 in Q4 last…

Thank you, Mark and good afternoon, again everyone. Before go through the financial results, I would like to once again remind everyone that unless otherwise noted, I will be discussing the company’s financial results in comparisons to prior periods and guidance on a continuing operations basis, which excludes Mercury Intelligence Systems or MIS, which was sold in January of 2015. However, in accordance with GAAP, MIS is reflected in our statement of cash flows and balance sheet for periods in which it was on by us. Turning to our results, Q4 was a strong finish to a successful fiscal 2015. Mercury delivered double-digit growth in both revenue and backlog for the fiscal year. Revenue for the full year grew 13% over fiscal 2014 and as anticipated our book to bill for all of fiscal 2015 was positive coming in at 1.3 for Q4 and 1.4 – sorry 1.14 for the year as a whole. We closed the year with record total backlog of $208 million, up $33.8 million or 19% from $174.1 million a year earlier. Of this total backlog, $198.9 million or 96% of it related to defense, representing 24% growth in defense backlog year-over-year. Approximately, $166.5 million or 80% of our total backlog is expected to be shipped within the next 12 months. These bookings and the backlog growth, we delivered in fiscal ‘15 leaves us very well positioned as we entered fiscal 2016. Looking at Q4 specifically, total revenue grew $10.4 million or 19% year-over-year to $64.1 million, slightly ahead of our guidance of $62 million to $64 million. Revenue from defense customers for the fourth quarter increased $10.3 million or 21% year-over-year, our revenue from commercial customers increased $0.1 million or 2%. In our largest reporting segment, Mercury Commercial Electronics or MCE, revenue increased $8.1 million…

Thank you. [Operator Instructions] Our first question is from Sheila Kahyaoglu with Jefferies. Your line is open.

Hi, good afternoon guys. Thanks for taking my question and good quarter.

Hi, Sheila.

I guess, do you mind reconciling a bit the robust bookings and backlogs that you had in the quarter and the 5% revenue growth for the year you are forecasting?

Sure. I mean, I think at the end of the day, there is still a lot of water that’s going to flow under the bridge in respect to the fiscal – government fiscal ‘16 defense budget. So, we try to take that into account in terms of our guidance going forward. And as you know, they are still going to deal with sequestration prior to it kicking in again in January of next year.

And in terms of the major programs, is there a shift, I mean, would you see more Patriot work in ‘16 over ‘15? How do we think about your program mix?

Sure. So, I think next fiscal year, we expect to deliver revenues really from a broader base of programs than what we saw during fiscal 2015. We do expect to see probably some declines of revenue associated with both the F-35 and Patriot, but given that we still expect that our top revenue programs for the year will be actually very similar to this year, meaning, SEWIP, Aegis, Patriot, Buzzard, Reaper as well as the F-35.

Great. That’s very helpful. And then just last one if I could sneak it in. In terms of just your operating margin runway, again I feel like the adjusted EBITDA guidance about 10% seems a bit conservative. If you look at what you have done in the second half, is there a gross margin mix headwind or anything we should be concerning for ‘16?

So, I think as you know, EBITDA is really being driven by gross margin and the gross margin is very much dependent upon program mix and that can move around quarter-to-quarter and year-to-year.

Okay, thanks.

Thank you. Our next question is from Peter Arment with Sterne Agee. Your line is open.

Yes, good afternoon.

Hi, Peter.

Mark, good quarter, could you give us a little more color, I guess, on thinking about your backlog growth was really impressive this year and then bookings you have been able to really secure. How do we think about kind of the way the backlog looks for ‘16? I mean, are you still seeing the same kind of bookings opportunities, obviously the international as a big piece that’s volatile, but I mean should we expect a similar level of background growth or are you seeing any changes in the market?

So, I am not going to unnecessarily forecast growth in backlog. Obviously, we ended fiscal ‘15 very strongly. Our book-to-bill of MCE and MDS was 1.15 and 1.2 respectively. We do currently anticipate revenue growth in both MCE and MDS year-over-year and we do anticipate positive book-to-bill for 2016 in total. But I am not going to get into a mode this early in the year of forecasting the growth in backlog.

Okay. I should give it a try. Just maybe you could at least give us kind of how you are viewing the opportunities on the M&A front, I mean, obviously not specifically, but just in general, I mean, it’s generally been considered relatively sellers market and defense multiples have come up. I mean, how are you seeing things? Are you seeing still healthy opportunities?

Yes. I mean, I think we believe that we are actually seeing more opportunities than what we have seen in the past. And we are continuing to look at a range of opportunities that are in line with our core target markets, which as I described on the call RF, microwave and embedded processing.

Okay. And just if I could sneak one last in, just, Gerry, the tax rate for this year you said 35% in the first quarter, is that going to be fairly linear throughout the year you think?

I actually said 38% for the provisional rate for the quarter, Peter. And broadly speaking absent the possibility of discrete items, it’s probably going to be pretty consistent.

Okay.

That’s not all I can say and obviously things like R&D credits and so on occasionally pop in, but you can never predict when those are, so we kind of just go with them.

Right, okay. Thank you.

Yes.

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

Thank you. I just wanted to expand on the tax rate issues. I looked back at my notes and I think our initial guidance you gave for fiscal ‘15 was 39%, came in at about 23% for the year. What were the specific items that drove that down and do you have that same opportunity for events to occur that would materially move down at 38% rate that you mentioned in fiscal ‘16?

Yes. So the short answer is it was all driven by a handful of discrete items, the R&D credit being probably the most significant of them. That remains a possibility, of course every year it comes up and every year they appear to be willing to reinstitute it. But of course, you always have to play wait and see and then sometimes it’s delayed, it’s kind of accumulated and then pop at a certain point. Apart from that, I don’t think that we see large items in terms of the discretes that can pop through. There is always the chance of something, but again we don’t have what I would call the traditional things like overseas tax planning issues and things like that, that we can use to or for that matter that the revenue balance can change rates on – for us and so on. So again, we plan what I said and I think that’s where we are for now.

Okay. Do you have a CapEx expectation for 2016?

We do have one. It’s, as I said, probably going to be a little lower than – I am sorry, a little bit higher than the low rate that we saw in fiscal ‘15. But again, I don’t think it will go above the double-digits.

Okay. Talking again about the M&A market in terms of Hudson now that you got that fully integrated, what would you term as your capacity utilization there and do you think it’s reasonable that you will be able to find something to tuck in and obtain some significant operational efficiencies at that site in fiscal ‘16?

Yes. So, we haven’t necessarily talked about the capacity utilization of the facility. It is beginning to ramp. However, particularly as we have got more programs that in the EW domain that are moving in production, couple of key programs that we think are going to be important in EW next year, a program such as SEWIP, Buzzard and the Jewish program, which is BAE’s digital electronic warfare suite. However, we do think that we have got a substantial opportunity potentially acquiring companies and integrating their manufacturing assets if they have them into that facility, which will obviously continue to improve the efficiency in the overhead absorption. So we are pretty excited about the AMC, I think it’s a critical part of our long-term growth strategy. It clearly differentiates us versus other players in the industry. And it’s going to be an asset that I think when you look back in time will be important in terms of supporting the company spread.

Okay. Final question from me if I may, you mentioned that obviously this 2015 was in line with your – relative to your business model, do you see a situation where that target model would be increased or do you think that that’s a – given all of your business that you do that’s probably going to be the long-term model that you work with them?

I think the model is the model until we change it. If you look at our results for fiscal ‘15, Mark, we ended up at 19% adjusted EBITDA, that’s kind of in the midpoint of our current model. Obviously in Q4, with higher revenues and a stronger program mix, towards the high end of our range, but we are extremely pleased with the performance year-over-year and the models stand as it is they are now.

Okay, thank you very much.

[Operator Instructions] Our next question is from Michael Ciarmoli with KeyBanc Capital. Your line is open.

Hi, good evening guys. Thanks for taking my questions.

Hi, Mike. How are you?

Good, good, doing well. Mark, just on the bookings in the quarter, I mean I think, you guys said after what it have been several strong quarters you are going to get back to a normalized environment that came in at 1.3 times. So that would appear to have exceeded that normalized environment. I mean, could you give us any color, was that above your expectations for the quarter and maybe can you give us a sense of what was strong in the quarter from a bookings perspective?

Sure. So it was slightly above where we thought we were going to come in at a quarterly level. I think as we have said, somewhat consistently throughout the year that bookings are lumpy and that we did expect it to kind of normalize. Book to bill ratio for fiscal ‘14 in total was 1.14, so it was slightly ahead of what we thought, but not too much. If you look at the – sorry fiscal ‘15 I apologize. If you look at the major programs that drove the bookings in Q4, Aegis was obviously an extremely strong program. We did close slightly over $14.5 million of bookings. We had another really strong quarter, Patriot that was associated with Korea some spas as well as ongoing business for the U.S. Army. We had strengthened Buzzard – the Filthy Buzzard program in Mercury Defense Systems, which is beginning to ramp and will be an important driver of growth in that business. We also saw some strength in the P8 business, where we are providing some of the radar processing. So, we had a number of really important programs that we were pleased to deliver some – some great numbers.

Got it. And then would I – if I were to look at the backlog, I know you guys probably won’t give the full color by program, but it is pretty similar, I mean from some of those programs you just mentioned with the other top programs, is that kind of the bulk of the backlog or is anything new kind of jumped in there that’s kind of accounting for a significant piece of that exposure in the backlog?

I don’t think we typically breakdown our backlog by program, Mike. As I mentioned, for fiscal ‘16, we anticipate our top revenue programs to be SEWIP, Aegis, Patriot, Filthy Buzzard, Reaper as well as the F-35. And we are also expecting some growth mix next year on Jews, which I mentioned P8 and maybe Trident. So we have got a broader mix of programs heading into fiscal ‘16. They will drive some of the growth in the business.

Got it. And then you won’t give directionally or you won’t give the specifics, but it sounds like you are expecting a positive book-to-bill, so it sounds like we should expect backlog to grow through ‘16. And just you mentioned CapEx, free cash flow was very strong for the year, can you give us any sense would you be willing to give a free cash flow forecast for ‘16?

I don’t think we will forecast it, but as I said the CapEx is going to be relatively contained, it’s not a capital-intensive busy business. ‘15 was probably just slightly like, we have been at the increase at 15% covering around $10 million, so not to significant an offset there and that’s probably where I will leave it.

Okay, fair enough. I think that’s it for me. I will jump back in the queue guys. Thanks.

Thank you. And our next question is from Michael French with Drexel Hamilton. Your line is open.

Good afternoon gentlemen.

Hi, Michael.

How are you doing?

Good, congratulations on a strong performance. I apologize if you went into this a little bit, but I was wondering if you could update us on the process of optimizing RF and microwave manufacturing and the impact it had on margins during the quarter and where you think the impact is going to be on the margins going forward?

So during the quarter, we did do a small restructuring, it was round about $700,000. It was a few handfuls of people. It was more related to the ongoing efficiencies that we have identified in terms of leaning out the engineering and the manufacturing operations. The benefits associated with that all baked into our guidance of fiscal ‘16.

Okay, very good. Thank you.

You are welcome.

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

Okay. Well, we would like to thank you for your interest in Mercury and we look forward to speaking to you again next quarter. Thank you.