Good day everyone and welcome to the Mercury Systems Fourth Quarter Fiscal 2013 Earnings 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 Senior Vice President and Chief Financial Officer, Kevin Bisson. Please go ahead, sir.

Thanks Kate. Good afternoon and thanks 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’d 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 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 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 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…

Thanks Kevin. Good afternoon, everyone, and thank you for joining us. I’ll begin today’s call with a business update, Kevin will review the financials and guidance and then we’ll open it up for your questions. Mercury closed fiscal 2013 with a very strong quarter for bookings and backlog as we anticipated. We made good progress in our most important programs and design wins were up substantially compared with Q3. So revenue for the quarter grew by $1 million sequentially to $55 million versus our guidance of $48 million to $54 million. We had a GAAP loss from continuing operations of $0.07 per share versus our guidance of a loss of $0.13 to $0.07. This loss however included $0.03 per share in unforecasted restructuring charges related to our new advanced microelectronics center which I will discuss a little later. Fourth-quarter adjusted EBITDA was 7%, significantly above the high end of our guidance and we continued to generate positive cash flow in the quarter. We were at or above guidance on all our key metrics and concluded FY '13 with positive momentum despite the industry headwinds that have persisted all year. It was five quarters ago when we first talked about potential adverse impact out of budget sequestration beginning in January 2013, and a year ago when the pre-sequestration slow down began having a material impact on our business. We responded aggressively through the fiscal year with a series of decisive actions to reduce our operating expenses and minimize working capital. We also completed two restructurings that enabled us to continue driving improvements and successfully manage the business at the lower revenue run rate we anticipated. Taking a cautious and conservative stance, we focus on managing revenue primarily from backlog while relying less on book and ship in an effort to minimize…

Thank you, Mark, and good afternoon again everyone. Turning to our financial results, revenue for the fourth quarter of fiscal 2013 of $55.4 million was $1.3 million higher sequentially than revenue of $54.1 million for the third quarter and exceeded our stated guidance of $48 million to $54 million. The Company incurred a GAAP net loss of $0.07 per share in the fourth quarter compared to GAAP earnings of $0.03 per diluted share in the third quarter of fiscal 2013. As noted previously, third quarter earnings benefited from the retroactive reinstatement of the federal research and development tax credits that contributed $0.05 per share in earnings for the third quarter. In addition, included in the loss for the fourth quarter were restructuring charges that contributed approximately $0.03 per share to the quarter's net loss. Adjusted EBITDA for the fourth quarter of fiscal 2013 of $3.8 million was lower than the $5.2 million of adjusted EBITDA for the third-quarter but exceeded our stated guidance of $100,000 to $3 million for the quarter. The Company generated free cash flow of $3.2 million in the fourth quarter which was $2 million higher than the third quarter. The Company ended the fiscal year with $39.1 million of cash and cash equivalents and with no debt. Reviewing the fourth quarter performance in greater detail, total revenue for our largest segment, Mercury Commercial Electronics or MCE, was $45.1 million which was $1.1 million higher than the $44 million of MCE revenue generated in the third quarter but $3.8 million lower than the fourth quarter of fiscal 2012. The sequential increase in MCE revenue derived from higher B-1 bomber program shipments and increased commercial revenue from a telecommunications equipment customer that were partially offset by lower F-15 Digital Electronic Warfare Suite or DEWS program revenue. It should…

(Operator Instructions) Our first question comes from the line of Tyler Hojo with Sidoti and Company. Your line is open.

Just first question just in regards to the guidance, I get the – continuing along the line of just basically guiding based on what's in backlog but just in regards to kind of book and ship sort of expectations, what are you currently anticipating, something similar to what you did in Q4, how do we think about that?

So I think probably the best way of answering it Tyler is really at the year level. So if you look at what we did from a book and ship perspective, total Company, we ended up FY '13 on average it was approximately 20% of revenue versus slightly over 30% in FY '12, and so I think that trend is likely going to continue going forward. It could change obviously on a third quarter basis but on average that's a good number.

Okay, that's very helpful. And then, Mark, just in regards to further restructuring spend in fiscal '14, is there anything planned, and the follow-on to that is, I know one of the reasons why you felt confident in terms of taking the knife to cost as aggressively as you did is because you just went through a product refresh, where do we stand, at what point are you going to need to kind of reinvest in a new product suite?

Sure. So there are no other planned restructurings at this time. The small restructuring that we did in the fourth quarter, as I alluded to and Kevin alluded to in his prepared remarks, was very much due to the continued integration of the Micronetics acquisition. Specifically we had overlapping facilities and some overlapping personnel in New Hampshire that in essence we restructured in the fourth quarter. So I don't foresee any additional restructuring actions. We clearly are looking to continue to look for synergies in the business but nothing specific at this time. As it relates to R&D, I think if you look at the R&D numbers, it is up slightly on a quarter over quarter basis. Most of that is due to the fact that we've got lower customer funded nonrecurring engineering expenses in the first quarter. This is very much driven by Gorgon Stare. We feel that the investments that we are making are appropriate given the opportunities that we see, and so I wouldn't foresee any significant change at this time.

Okay, wonderful. And just lastly for me, I know the commercial business isn't very large these days but if you look at the backlog, I mean it's up something like seven or eight-fold over this time last year, just wondering if there's anything notable there to talk about.

So I think there's a couple of things. One, as Kevin mentioned in his prepared remarks, we did have an end of life order associated with a telecommunications customer. However, we also added commercial revenue largely on the RF component side with the introduction of Micronetics. And finally, I would say that we got a specific customer in the commercial world that's doing some interesting things in homeland security and we have seen some increases in backlog associated with that.

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

A couple of EBITDA questions, I was just wondering if you could give us the full year guidance just to what you think the stock comp expense will be and also amortization?

We're not giving full-year guidance Mark on that or any other financial measures. I think we've included in the release what our expectations were for stock comp which was roughly about a little over $3 million in Q1.

Alright, so that's up in essence 39% from the first quarter of last year, should we use that kind of a ratio in sort of pencilling in what might be reasonable through the balance of the quarters?

That makes the assumption that there aren't any changes in headcounts and [forfeit] (ph) rates and things like that but I think that's probably being somewhat conservative from that standpoint.

Now, notably in the K but could you give the full year amortization assumption?

Relative to what, stock comp?

No, amortization of purchased intangibles.

I think you can take what we have in our Q1 assumptions and annualize that, that's as good a comment.

Mark, just a clarification question, are you talking for FY 13 or the year past or FY 14?

I was talking for FY 14, again the amortization, that number will be in the K for the full year but just wondering if it was available. My final question relative to AMDR, is that program as we move forward will that be for basically new builds or will there be any opportunity to retrofit that system on existing platforms?

So it's a good question. I think if you look at the [indiscernible] report, currently it is scheduled that there's going to be 22 AMDRs, I mean it starts with the Flight III Arleigh Burke that are going to be introduced in FY '16. However, I think our customer does believe that there's going to be the potential of significant retrofits as well as maybe some incremental opportunities also, Mark.

Okay. [indiscernible] it's essentially for new builds but there is the opportunity for that could be integrated back to existing platforms?

Yes, I think that is our current understanding, so obviously there is lot of water that needs to go under the bridge but that's a really important program for us. I mean based upon I think our assumptions regarding the system configuration, the average selling price, the new build as well as retrofits, we think that it could be in the hundreds of millions of dollars of potential to Mercury over its lifetime.

Our next question comes from the line of Peter Arment with Sterne Agee. Your line is open.

Mark you mentioned in the release that you received an initial small order for the Patriot missile system from the U.S. Army, obviously that's been out there for quite a while that there needs to be a big refresh there, can you give us some more color on how you expect the timing of that?

Sure, we did receive the initial CR which was small in nature in the fourth quarter and we believe this is likely going to be a follow-on order in Q1. However, as we look towards the back half of the year, I think that's where we are currently anticipating a much larger order to occur, and again, it's kind of linked to the U.S. Army Patriot missile system upgrade. So this could be where we start to see increased bookings for the program overall. I think we talked about on the last call it's down significantly year-over-year, in fact we booked and recognized less than $1 million of Patriot in fiscal 2013 versus the $14 million that we recognized in revenue in the prior year. So we are anticipating that Patriot comes back in this fiscal year but it's probably going to be more towards the back half of the year.

And Peter to add to that, there was a sizable opportunity from an FMS standpoint for Patriot as well, I think Raytheon has been very forthright in terms of talking about those opportunities at their recent earnings calls.

Right, I understand. But it also I guess ties into my next question, you said Mark I think it was 30% or maybe Kevin you did, 30% is international, is that correct?

Yes.

And I assume Patriot is in a lot of those other programs, your legacy programs, that you have done well and are part of that but are you seeing – what kind of opportunities you're seeing further to see that percentage increase?

So I mean clearly one of them is the F-16 program that we talked about in the past and we were thrilled that just last week Lockheed Martin selected our customer Northrop Grumman as part of the upgrade, not only the U.S. Air Force's F-16 AESA radar or to upgrade the radar to an F-16 on AESA, but also for Taiwan. So we definitely see opportunities around the world associated with that. One of the big programs that we acquired then we did the acquisition of Micronetics is associated with EW upgrades on the F-15 platform, Patriots that we mentioned, and we're also seeing more opportunities now associated with FMS sales for Aegis. So we've got a number of important programs that we think are just going to continue to give us the strong base of business from the international markets.

And just lastly, you mentioned that there were some examples where the integration was going well, Micronetics never kind of exceeding expectations, can you just give a little more color there Mark?

Sure. I think probably the one that we're most excited about is the SEWIP program and SEWIP as you know Block 2, we've been involved with that for some time. In November 09, the Navy competitively awarded the SEWIP Block 2 upgrade to Lockheed to upgrade the Slick-32s, and I think we've built a great relationship with Lockheed and they really have become an important partner in the RF and microwave dimension. I think we are continuing to win more content on that program and I think based upon the configuration, the potential for future design wins, are largely linked to Micronetics, set those price, et cetera, we believe that's another program that is worth in the hundreds of millions of dollars to Mercury over its lifetime. Then even beyond that, clearly there's the SEWIP Block 3 and Raytheon has teamed with Lockheed and we believe that's a very, very strong team to beat and we've recently been selected as really a teammate to both of those companies largely in the RF and the microwave domain. So there's a lot of opportunity and I think that's really a great example of our relationships in our channel and Micronetics' technologies and capabilities.

Peter I would add as well from a financial standpoint, bookings this quarter for Micronetics went up over 50% sequentially from the third quarter, and from a bottom-line perspective, their adjusted EBITDA is well ahead of our target business model of 18% to 22%. So, to top off what Mark pointed out from a business and an operational standpoint, they continue to perform very, very well financially.

Our next question comes from the line of Sheila Kahyaoglu with Jeffries. Your line is open.

Can you talk what the organic growth rate was in the quarter year-over-year?

Are you talking about the MCE core business?

Yes, for the total Company, ex Micronetics, what revenue was in the quarter?

I'm not sure that's actually a metric that we've got at hand, I know that the revenue growth rate is the MCE core compute business which is the one that we talked about historically, revenue growth was basically 2% up on a sequential basis, and then total bookings were up 35% sequentially, all of the business. So that's the core compute part of the business excluding the acquisition of Micronetics.

So this is for revenue was up 2% sequentially?

Revenue is up 2% sequentially and bookings excluding Micronetics were up 35% sequentially.

Okay. And then in terms of just given your current bookings run rate, when do you expect the organic growth to on a year-over-year basis become positive or can you give us some idea there, I know you're guiding on a quarterly basis?

Yes, we're really just sticking with the quarterly guidance, Sheila.

Sure. And then on SABR, you mentioned overall it's $90 million to $120 million opportunity for Mercury, does that mean that your content is about 150,000, does that sound right?

No, because a lot depends upon your assumptions around the configuration as well as the number of both U.S. systems and Taiwanese systems that's going to be upgraded, and also the potential for future FMS awards. So, we haven't been specific regarding the ASP of the system, but we believe over time, the F-16 SABR opportunity could be worth approximately $90 million to $125 million to us.

Okay, and then I guess when do you expect that business to start contributing to the top line?

So it's a little too early to tell. I mean we are still working the contract, we could see some initial bookings towards the back end of the year but I don't think it's going to be kind of in the first half, let's put it that way.

Our next question comes from the line of Jonathan Ho with William Blair. Your line is open.

Just wondered first of all with Aegis Block 2, when do you expect to go in full rate production and how big of a ramp is that from sort of the low rate initial production?

At the SEWIP Block 2?

Aegis Block 2.

So there is no Aegis Block 2 beside as AMDR, is that the program you're talking about?

I think there was something mentioned about Block 2 initial production swinging forward.

That's SEWIP. So I think full rate production is actually not for another couple of years. So I think we are anticipating additional bookings and revenue this year that I think there's the potential to see maybe some full rate production bookings in the latter half of fiscal '14, although at this point in the year it's still a little too early to tell.

Got it. And just in terms of the significant improvement in backlog, I just wanted to get a sense from you in terms of how this impacts your visibility and your ability to plan out for 2014? I mean this has sort of increased your comfortability level or do you feel like we should just sort of maintain the current stance in terms of visibility for the remainder of the year?

Yes, we're still taking a pretty conservative approach, Jonathan, again largely due to what's going from a macro perspective. The budget situation is such that the [indiscernible] in the present who got very, very desperate numbers and there is a tremendous amount of work I think that needs to be done in a relatively short space of time to end up with an approved defense appropriations bill. So I think we set out in fiscal '13 to really preserve liquidity given the industry environment, and I think we clearly achieved that. We also set out to actually grow the backlog to help lower the risk on a quarter by quarter basis and I think the fact that we actually grew backlog by 34% is also I think a testament to the team's efforts. But in the short term, we're kind of taking it still from a conservative perspective just given the overall environment.

Got it. And just finally, is there any way that you can provide a sense of the linearity for revenue this year, I mean should we just sort of assume it's similar to prior years or is there any sort of inflection points that you think it could be up or down?

Yes, I think we are really just going to stick with that one quarter at a time guidance, Jonathan.

(Operator Instructions) Our next question comes from the line of Michael Ciarmoli with KeyBanc Capital. Your line is open.

Just to maybe elaborate you mentioned the goal of increasing the bookings and backlog, what sort of targets or plans do you have for fiscal '14, can we assume that you are going to try and build the backlog again this year or do you have any bookings expectations that you could share with us?

Not specifically, Mike, at the year levels, because again we're really only focused on providing guidance on a quarterly basis. I can tell you that as we talk about it, there are certain programs that are going to be decided within our fiscal '14 timeframe that are very important, probably the largest of which is the AMDR program and a decision on that could be made within the next 90 days. That could have an impact, materially large impact on our bookings to the upside should Lockheed be selected. There's also, as I mentioned earlier, upside potential on programs such as Patriot with the U.S. Army, we've got the first part of that large award which will come in, we think there's upside potential on SEWIP, but again I think most of these are towards the back end of the year, and so currently the way which we are viewing it is this could be where growing bookings and backlog but it may not all drop through from a revenue perspective given the timing.

Okay, fair enough. And then what's usually your timeframe, you get design wins, how long are those usually converted into orders, I know obviously the contracting environment is a mess right now, but do you have any new design wins or recent design wins that are factoring into sort of your bookings plan?

We do, but I don't think those are major drivers, I think the major drivers are the ones that we just talked about, so we are obviously extremely pleased that Northrop was selected on SABR program was selected for the U.S. Air Force upgrades as well as Taiwan. We've talked about the incumbents really having an advantage in this environment, it's really been a key part of our strategy to invest in capabilities ahead of time and to align ourselves really with industry leaders who have got a very, very strong incumbent position on programs, and really on platforms that matter going forward and we think the case of F-16 and the case of Patriot and the case of AMDR, they are all great examples of us being able to do that. So I think that FY '14 is going to be a year where some of these really important programs are selected and hopefully we are on the winning side of the equation.

Okay. And then just on any meaningful cancellations or delays, I know the space has been kind of in the crosshairs but anything else in the portfolio that's given you guys an elevated level of concern?

In [indiscernible] we've heard the rumors that it may be delayed. We care working with a couple of different companies on that, so I wouldn't say it's really material to our growth plans, it's not one of the five programs that we keep talking about, meaning AMDR, Patriot, F-16 upgrades, E2D, et cetera, so it's really not in that category. The one where we are anticipating I think declines year-over-year is really on the Gorgon Stare program and we kind of mentioned that in our prepared remarks. It was interesting during the FY '14 markup of the defense appropriations bill, the future funding for GS got lined out and then it got reinstituted, largely because Congress was basically saying that it's the only wide area in motion imagery program that's out there and you will kind of come into the end of the development of that, and we feel that once the program or the capability is deployed in [theater] (ph) then we may see some additional bookings and revenue this fiscal year but it's probably going to be the lower level than what it was in fiscal 2013.

Mr. Aslett, it appears there are no further questions, therefore I'd like to turn the call back over to you for any closing remarks.

Okay, thanks very much for dialling in and listening to the call. We look forward to speaking to you again next quarter. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.