Good day, everyone and welcome to the Mercury Systems' Fourth Quarter Fiscal 2014 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 Nicole. 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 web site at www.mrcy.com. We'd 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 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 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 service and…

Thanks Kevin, good afternoon everyone and thank you for joining us. I will begin today's call with the business update. Kevin will review the financials and guidance, and then we will open it up for your questions. Mercury closed fiscal 2014 with strong momentum, delivering record defense bookings and backlog for the second consecutive quarter. Before we discuss our results in continuing operations however, I'd like to start out by toughing briefly on the decision to seek a divestiture of Military Intelligence Systems. We determined that MIS, which last year produced $9.4 million of revenue, and a pre-tax operating loss of $1.1 million, excluding one time charges, is not aligned with Mercury's current strategic priorities. MIS provides extremely valuable services to our nation's intelligence community, and we believe, the best way to unlock this value for Mercury and our shareholders, is to explore a divestiture. As a result, for accounting purposes, beginning in Q4, we are showing MIS as a discontinued operation on our financial statements, as we begin to search for a strategic buyer, who can more roughly realize its full potential. We recorded a $6.7 million goodwill impairment charge, related to MIS in the fourth quarter. We will continue to focus our efforts and prioritize investments on the core of the business. In terms of fiscal 2014 as a whole, our results from continued operations were significantly stronger year-over-year. Bookings and backlog reached record levels, growing 18% and 28% respectively. We returned the company to growth, as revenue increased 7%, while total adjusted EBITDA more than doubled to 11% of revenue, and we continue to generate positive cash flow from operations. Looking forward, our forecast for accelerated growth, improved margins and lower operating expenses, puts us in a good position to achieve our target business model for fiscal…

Thank you, Mark, and good afternoon again everyone. Before I review the company's financial performance, I wanted to reiterate Mark's earlier point that the company's financial results for the fourth quarter exclude Mercury Intelligence Systems, or MIS. MIS' fourth quarter results were classified as discontinued operations within the company's income statement, based on the company's decision during the fourth quarter, to initiate plans for the sale of MIS. In addition, as part of its annual test and its goodwill during the fourth quarter, the company reported a $6.7 million impairment charge related to MIS, that was also included in discontinued operations. In my remaining remarks, company financial results, forecasts as well as historic and future financial guidance, will be reported and referenced on a continuing operations basis, excluding MIS. Turning now to our financial results; revenue for the fourth quarter of fiscal 2014 of $53.7 million was $1.9 million higher than revenue of $51.8 million for the fourth quarter of last year, and was at the high end of our state guidance of $50 million to $54 million. The company incurred a GAAP net loss from continuing operations of $0.02 per share, in this year's fourth quarter, compared to a $0.06 per share GAAP net loss from continuing operations, in the fourth quarter of fiscal 2013. This year's fourth quarter loss from continuing operations was substantially more favorable than the company's financial guidance of a net loss of $0.04 to $0.09 per share. Excluding the impact of restructuring charges, the company generated EPS from continuing operations of $0.01 per share in the fourth quarter of fiscal 2014, compared to a $0.03 per share net loss from continuing operations for the fourth quarter of fiscal 2013. Adjusted EBITDA for the fourth quarter of 2014 of $7.2 million was $3.7 million higher…

Thank you. (Operator Instructions). Our first question comes from the line of Sheila Kahyaoglu of Jefferies. Your line is now open.

Hi, thank you for taking my question, and appreciate the detail on the call. I guess, can you give us some idea, you are now 80% through your restructuring and your planned integration process, what capacity utilization looks like within your facilities, and if there is more room in terms of -- how should we be thinking about that?

Yeah. So we have got a lot of opportunity for continued growth in the New Hudson AMC facility, which is the larger of the two manufacturing facilities that we have. We are currently only running one shift in that facility, which gives us plenty of opportunity to continue to grow that part of the business Sheila.

Okay, got it. and then it seems like SEWIP block 2 isn't currently in other phase. When should we be expecting that to ramp, and also, in terms of block 3, what's the process on that, if you could give us some clarity there? And then I guess in just terms of recent awards, are you participating at all in Lockheed Space Fence?

Okay, well let me quickly answer the last question first. Yes, we are participating, you know, in part of a Lockheed on Space Fence in the RF and microwave domain, so we are very pleased to be part of that team on that program. Let me step back a little bit and kind of answer the SEWIP question, because I think you asked actually multiple questions; so when we talk about SEWIP, we talk about, if its actually one program, but its not. Actually SEWIP, given what we are involved with, is actually three separate programs; block 2, a derivative program, but is distinct from the original block 2 program with the smaller ships, and then block 3. So let me kind of walk through each of those in turn, given that is such an important program for us, in terms of its size and potential for growth. The biggest, I think thing that we are most excited about, is really the progress that we have made, not only in terms of Q4, but also throughout fiscal 2014, firming up our content expansion opportunities on SEWIP block 2. And I think we have been able to do this, because we have been providing Lockheed's not only better performance, but also improved affordability. In actuality, it has actually led us to displace several incumbent suppliers on the program for different parts of the system. And this in turn, is really a direct result of the acquisitions that we have done, as well as the investments in the new AMC up in Hudson. So if you look at the expansion itself that's related to block 2, what we have seen over the past several quarters, is that as a result of our efforts, the value for block 2 and content expansion is…

That was very helpful. Thank you so much Mark. And I guess, can you give us an idea of what SEWIP contributed in 2014 in terms of sales?

From a revenue perspective --

In fiscal 2014, it was less than $5 million.

Bookings were $10 million and revenue was less than $5 million.

Okay. Thank you so much. I will jump back in the queue.

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

Good afternoon gentlemen. Mike, could you just talk a little bit about Aegis, which is obviously continuing to be very good for you. Could you talk about how you see that transitioning to us next generation, and is it correct that that remains -- should it remain at a high level for you through fiscal 2016, and then how should it behave? And secondly, is there any retrofit or upgrade opportunity for the installed base out there, that may go beyond shipments to new installs?

You're [indiscernible] straight line Mark. So I think Aegis continues to be a really important program for us. I think during the year, we booked over $27 million and $7 million alone in Q4. We are currently working with Lockheed, basically on new technologies and capabilities, future technology refreshes, as well as tech insertions, that we believe is going to extend the life of the program as we know it today. As well as actually potentially, increase the program's remaining possible value. So we think there is a lot of opportunity still residing around Aegis, probably even more than what we have talked about historically. In addition, one of the things that we are pretty excited about, is that given some of the investments that we have made in terms of new processing capabilities, we also see the opportunity of expanding out beyond the radar processing, into different parts of the Aegis system, which again could provide some good opportunities for the company going forward. Like we said with SEWIP, we currently expect Aegis to be approximately a 10% program again for fiscal 2015.

Okay. Do you have kind of a CapEx estimate for full year 2015?

I think we did about $7 million mark in fiscal 2014, and I think that's a roundabout estimate for fiscal 2015. If you recall that, if you look back in fiscal 2012, that's around the same level of capital expenditures we had then. That was a more normal year. So I would expect it to be around that level again in fiscal 2015.

Okay. And given the obviously stronger adjusted EBITDA expectations you have for the year. Do you have a range of potential free cash flow generation in fiscal 2015 to compare the $7.5 million in 2014?

Well certainly, it will be higher. At this stage, I don't think we want to give a precise estimate, but I think you can assume that, given the higher levels of adjusted EBITDA, it will be well ahead of the $7.5 million this year, or last year.

Okay. Thank you very much.

Yup.

Thanks Mark.

Thank you. Our next question comes from the line of Tyler Hojo of Sidoti and Company. Your line is now open.

Yeah hi. Good evening Mark and Kevin. So I wanted a little bit more detail on the MoU that you mentioned Mark, in your prepared remarks. Did you say that you had a current customer MoU that could double your current RFM micro business, and if that's the case, kind of what are the gating factors and timing surrounding that?

So it wasn't double the RF business in total with that existing customer, it was double the RF and microwave business on a specific program related to that customer. Now, there are some -- so that's sort of production perspective, and as part of the MoU there is certain development work that we are going to do, that would basically take us into different parts of the system as well. But net-net, we will basically start to see that existing business on our existing program, double, beginning in fiscal 2015 as part of our plan.

Okay. That sounds good. And maybe just a little bit more detail on the AMC buildout. I know, you can't talk specifics, but maybe you could just -- maybe kind of comment on the pace of customer conversations in regards to kind of the new capabilities there?

Sure. So I think we continue to enjoy a lot of interest in the new facility. I think I gave this about last quarter, but this quarter, we are in total, cumulative, we had over 30 customer visits. We did sign that MoU this quarter, and there are several other MoUs that we are currently working on, that should continue to allow us to grow that part of the business going forward. As we have talked about in the past also, and as I outlined in terms of my remarks regarding SEWIP, the AMC is also really important facility, to be able to deliver against our program commitments on existing programs that we won, and where we continue to grow more content. So we feel very good about the new facility, its state-of-the-art feedback has been fantastic, and you know, we are working on additional agreements, Tyler.

Okay, that sounds great. And then just lastly for me, kind of a strategy question for you all. I know over the last year, just given the lack of visibility, kind of the focus has been on running the business to generate cash. Coming off of a really strong bookings quarter and seemingly improved visibility for you all, is there going to be more of a focus or more of a shift on trying to drive more book-and-ship type revenues in your upcoming fiscal 2015?

Maybe. In actuality though, I think given our bookings and backlog and how that translates into revenue. We probably don't need to drive as much book-ship business, which translates into better operating efficiency. So I think we are very-very pleased. We just saw bookings performance in the second half, and where we ended fiscal 2015 from a backlog perspective.

I think also, the more we can rely on backlog to satisfy our revenue requirements, the healthier our cash position is, the healthier our working capital performances, and obviously the more predictable the business is. So I think there is a lot of benefits, obviously from the standpoint of running the business with more of a reliance on backlog, and I think it has helped us.

It has, and it is till, although I think we are doing much better than many companies right now, in terms of just our reported results, the industry is still somewhat challenging, and I think operating from backlog, basically helps buy down that risk. And go back to what Kevin said in his prepared remarks, we ended fiscal 2013 with 31% of the year in backlog. This year we are in much-much better position and probably the best position we have been in, in the past several years. So we feel really good about that.

Yeah. Okay, that's all I had. Thanks a lot.

Thanks Howard.

Thank you. (Operator Instructions). Our next question comes from Kevin Ciabattoni of KeyBanc Capital. Your line is now open.

Good afternoon guys.

Hey Kevin, how are you?

Good. Thanks. So two quarters here of very solid bookings, something was driven largely by Patriot and Aegis in the fourth quarter. Just kind of wondering what we can expect at the bookings line as we had in FY 2015 here, maybe based on kind of what you've seen in the trends since the close of the quarter, or in terms of programs? I know last quarter, you were able to mention that you are expecting some pretty big bookings from Patriot in 4Q, so maybe some thoughts there?

Yeah, so probably the one we are anticipating and excited about getting, is the second phase of LRIP 2 for SEWIP block 2. That should have -- according to our original forecast, occur during fiscal 2014. It got delayed, and so its looking like its going to be in Q1. So overall, I think we are anticipating a book-to-bill round one, for both the quarter, as well as above one for the year as a whole. So we had a very-very good year in fiscal 2014, driven by Patriot in the fourth quarter. But we have got a number of really important programs that we think will continue to be important for us, not least of which is SEWIP that we have talked about and the content expansion, the move to full rate production. We have got JSF or F-35, we got Aegis, it will continue to be a strong contributor. We see growth opportunities in our Mercury Defense Systems business around some of that DFM related programs. So net-net, I think we have got some great programs that we are pleased to be a part of Kevin.

Good color. Thanks. And then, I was surprised to see international and FMS sales down year-over-year in the quarter. It sounds like that was primarily on Aegis sales, is that correct, and then kind of, if you can talk a little bit about what you expect to see from the FMS side in 2015?

Yeah. Its lumpy. So FMS is notoriously difficult to predict, and so I think on [indiscernible], we have been in the low 20s. I don't see that -- I mean, its probably going to be up a little bit, but its probably not going to start with the three.

Okay. And then last question for me. Just looking at the adjusted EBITDA margin for next year, I mean, can you talk a little bit about what the impact of pulling MIS out of that is? I mean, it seems like it should be pretty accretive, moving that over to discontinued ops? Just curious?

Yeah I think we meant -- I think Mark mentioned in his early remarks that, from a bottom line standpoint, MIS generated a loss of about $1 million. So using that as a proxy, yes it is accretive, but I don't think its going to drive the needle that much.

That $1 million loss is for the full year, 2014?

Yes.

Okay, thanks. That's all I have.

Yes.

Thanks Kevin.

Thank you. And our next question comes from the line of Brian Ruttenbur of CRT Capital. Your line is now open.

Thank you very much. Couple of questions. I just -- if it’s a repeat, I apologize. The restructuring charges left to go in fiscal 2015, how much was that, and how much is that cash?

Its about $3 million, most of it is cash relating to, call it lease costs that we will be incurring over time, that we are pulling forward based on vacating those facilities.

Okay. Timing of the sale of MIS, is that something that you anticipate wrapping up in the next six months to nine months, at least fiscal 2015, is that the goal?

Unclear from a timing perspective, just given that we are getting going in the process, Brian. So its hard to forecast out in time, but we will certainly keep people apprised, as things develop.

Okay. So barring any bidders coming in, given that's unprofitable division at least how it fits right now, would -- if you don't have suitable betters, would you just shut that division down?

We think there's a lot of value potentially in the business. I think they have done some pretty valuable work in the testing space. They have got some very interesting intellectual property and early beta product around -- inside the threat detection, using some cloud-based techniques, which I am sure, given this environment, someone will find of interest. But even beyond that, the [indiscernible] certain programs, they have got a wonderful classified facility, as well as some highly cleared [ph] personnel. So I think for the right strategic buyer, there is definitely value there, and I think they could accelerate the unlocking of value. But in the meantime, we think the best thing for Mercury and shareholders, is to explore a sale?

And then last question. You guys were for sale. You have put that on hold. Is this going to be a situation, where potentially down the road, you're interested in selling yourselves again, or maybe, talk about your vision? I understand you are in the middle of a turnaround, or near the end of that turnaround?

So we don't comment on industry rumors and speculation Brian, like pretty much every other public company. We are very pleased with our performance this year. We delivered 7% revenue growth, record bookings, record backlog. We see our opportunity basically increasing our revenue growth rates, delivering strong bookings and you know, very strong performance in adjusted EBITDA. And we are focused on growing the business, I think that's what we are paid to do.

Okay. Thank you very much.

Thank you. And 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 thanks very much for listening, we look forward to speaking to you all again next quarter. Thank you.