Good day everyone, and welcome to the Mercury Systems Third Quarter Fiscal 2016 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've not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. We 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, possible, potential, assumes 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 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 or 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…

Thanks, Gerry. Good afternoon, everyone and thanks for joining us. I'll 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 made significant progress in the third quarter of fiscal 2016. On top of a major acquisition enhancement and the related debt and equity transactions. The business performed well and we continued to deliver strong results. Our highest priority for the near-term is closing the convet Microsemi and beginning of the integration. As Gerry will discuss the debt structure is being finalized and we've established an exceptional bank group that can support the company's huge M&A agenda. The follow-on equity offering was also very strong with a greater than 3x over subscription. As we discussed during our call on March 23rd, the acquisition will strengthen and help grow the core of up business. It has a secure solid state storage to industry leading pre-integrated processing subsystems. It substantially expands our RF and Microwave business. It provides us with new capabilities and embedded security and custom microelectronics while also giving us access to new markets, customers, and programs. Moving now to our Q3 results, Mercury's total revenue was up 11% year-over-year year and near the top end of our guidance. Our largest revenue programs with SEWIP, Aegis, F-16, and Patriot. Reflecting favorable mix and improved operating leverage in the business, adjusted EBITDA for Q3 came in well above the high-end of our guidance, increasing by $3.1 million or 27% year-over-year on $6.3 million of incremental revenue. This was the strong quarter where bookings were upto 42% year-over-year in Q3. Our total book-to-bill was $1.23 million and total backlog exiting the quarter grew 16% year-over-year to record levels. Our 12-months old revenue coverage remained strong positioning us…

Thank you, Mark. And good evening again, everyone. Before we go through the financial results I'd like to remind everyone that unless otherwise noted, I'll be discussing the company's financial results, comparisons to prior periods, and guidance on a continuing operations basis. However in accordance with GAAP, Mercury I systems is in is reflected in our statement of cash flows for periods prior to our sale of that business in January of 2015. Turning into our results; the third quarter was another significant milestone toward achieving our objective for fiscal 2016. Total revenue increased $6.3 million dollars, 11% from Q3 last year to $65.9 million, near the high-end of our guidance of $63 to $67 million dollars. International revenue including foreign military sales was 21% of total revenue compared to 17% of percent in Q3 of last year. Revenue from radar-related applications. Was roughly flat year-over-year. Accounting for 59% of total revenue in Q3 compared with 61% a year ago. Electronic warfare related applications. Accounted for 27% of total revenue in Q3, up from 18% of revenue a year ago. Net of intercompany elimintaions, revenue on our largest reporting segment,. Mercury commercial electronics or MCE was $57.5 million, an increase of $4.7 million or 9% from Q3 of last year. And our fifty defense systems or MDS reporting segment; that revenue was $8.6 million, up $1.9 million or 28% from Q3 of fiscal year solid. The segment results exclude revenues of negative $0.2 million in Q3 of fiscal '16 and positive. Zero 0.1 million in Q3 of fiscal '15 that are included in our consolidated results for those quarters. This revenue difference is attributable to development programs where the revenue is recognized in both segments under contract accounting, and reflects the reconciliation to our consolidated results. Turning to bookings, Mercury's…

Thank you. [Operator Instructions] And our first question comes from Peter Arment from Sterne Agee. Your line is now open.

Good afternoon, Mark and Gerry. Mark, I know we're going to talk about MSC once the deal closes on the next quarter call but can you talk about just kind of -- your desire to continue to do acquisitions in terms of as we look out over the next, say twelve months, during when you're going to be integrating, what will be the largest deal to-date? Can you use just give us one more color on kind of that the bandwidth that you guys have?

Sure. So I'll focus in that time period that you mentioned is solidly going to on integrating the business and starting to harvest the synergies that we discussed during the equity offering. So that's going to be our primary focus, so I don't see us going out and doing another significant acquisition in the short-term Peter. That said, the team continue to build relationships with folks and looking for opportunities because as you know there is a lead-time associated with developing these sorts of opportunities.

Okay, that's helpful. And then just regarding you know, you mentioned kind of the radar kind of revenue mix was flat year-over-year. Are you still seeing a lot of opportunities when you look out I guess regarding the upgrades to Patriot? Maybe just a little more color there.

I think it's the theme that's going to continue for a certain time. And to cross both the apple [ph] for fighters on various UAVs, clearly missile defense radars are seeing some substantial news stocks as well as upgrades there, probably the most significant of which is the LIT order that we just announced this quarter which was a very large deal for us. We're also seeing other opportunities in terms of ground-based radar, so yes, I think it's a theme that we expect to continue Peter.

Okay. And just lastly, you mentioned the -- I think it was 8% of the bookings were internationals this quarter certainly, lower than we've seen in the past. Are you seeing any impact from delays from customers or is it just more timing and lumpiness?

It's more lumpiness than anything else. I think at the year level we expect that our international and FMS revenues will actually increase slightly year-over-year. But as you know, they are notoriously difficult to predict from a timing perspective.

Okay, I'll jump back in queue, nice quarter.

Thank you, Peter.

Thank you. And our next question comes from Sheila Kahyaoglu from Jefferies & Company. Your line is now open.

Hi, guys, good evening. Thanks for taking my question. So in terms of the proceeds from the transaction, we should assume that $30 million of additional net proceeds from the stock offering and the lower term loan A is going to be cash on the balance sheet? And I guess can you just update us on your target leverage and metrics?

Obviously we've taken the term loan A down from $265 million to $200 million. The equity offering at $94 million plus supplements the $84 million plus that's already on the balance sheet. And then the acquisition, the headline price was $300 million, there will be some expenses associated with that and the remainder will land on the balance sheet as we move forward. As we gather, we're expecting a lower interest rate because we've got a lower quantum of debt on a net basis, given the cash on the balance sheet, that's going to put us inside of two turns of debt.

Got it. And then in terms of our LRDR, I think this is the first large blade server when -- can you talk about -- it is a new program, how you guys got on it with competitive and the decision for Lockheed to outsource? So, that portion of it.

Sure. So we've done obviously, as you know, a tremendous amount of work with Lockheed Martin on the Aegis program and this is some of the team that have worked on this, or obviously working on Aegis as well. We think that we've got one of the broadest and best processing product portfolios in the industry today. And I think the opportunity stat has arisen as a result of the fact that IBM selling its blade server business to the Chinese company Lenovo, and the DOD and our customers design to purchase. Solutions from domestic supplies. So we've been working with them on it for a while, they called us when the announcement was made and asked whether or not we had something that -- we could provide to them which we did very, very quickly. And so we're thrilled to be a part of it, I can't comment on the process that they underwent in terms of whether it was competitive or not but we are the sole source provider of the processing solution.

Perfect, thank you.

Thanks Sheila.

Thank you. And our next question comes from Michael Ciarmoli from KeyBanc Capital Markets. Your line is now open.

Good evening guys, nice quarter and thanks for taking my questions. Maybe just a follow-up on the LRDR, I think the booking contract or award was $28 million, can you give us a sense as to what that covers? Is that for one installation or how should we think about your sort of ships that content there? How does this program evolve?

Sure Mike, it's a good question. So right now there is only one radar that we know of, that is going to be deployed in Alaska to clear air force station. The order that we received is going to cover the initial systems that will be used for development and integration efforts, as well as systems that will actually be deployed up in Alaska. I think we'll see what happens but I think there is some discussion at a government level as to whether or not we need additional installations like the Alaska in various possible places around the world as well as domestically. But nothing is finalized there. We do think however that this is an important program for us, not only because of its size, but also because it is our first launch, blades over opportunity and historically most of our work is actually either being in the naval domain or the airborne domain and this is a very large grand contract for us as well. So we're thrilled to be part of the team and we do see additional opportunities going forward as the program progresses.

Got it, that's helpful. Who are you guys competing with on these blade servers? I mean was any other company potentially in the running or are there other significant companies out there with this capability?

Yes, I mean there are clearly commercial companies but I think as we've discussed in the past, part of the challenge that the DOD is facing is thinks that technology in many of your competitors products designed, developed, manufactured and supported overseas which becomes increasingly more difficult for the DOD to utilize that technology. Given their desire to ensure the provenance and the integrity of not only the technology but also the supply chain and the increasing Monday's that we see at Curry across the DOD with respect to program, protection, security requirements. So I think the maturity is that we've really positioned ourselves extremely well with not only, the broadest and probably highest performance processing product line. But the fact that we've invested significantly in embedded security capabilities, both through our own internal R&D investments with the re-snap position of like to see. And with the soon to be a acquired Microsemi businesses. So we've created a very unique and differentiated set of capabilities that are increasingly important.

Got it. And then just last one for me and I'll jump off here. In terms of Microsemi, in terms of the integration, can you elaborate a little bit in terms of what we should expect? I mean are we going to see any facility consolidation or are you going to run these units sort of as standalone where they exist now? I'm just trying to get a sense of how you are going to proceed with layering this business into the existing.

Yes, sure. What we talked about here, this is not on a headcount reduction exercise, this is the ability to be able expand their manufacturing capability to be able to manufacture some of our existing product line which we see as an opportunity from a margin expansion perspective. You We see the ability to generate margin, and by shifting what is today more of a distributor model into more of a direct sales approach given the strength of our channel and customer relationships. And then finally there are purchasing synergies, just given that we're involved in similar areas. The total of the synergies that we described as approximately $10 million by 2020. What two-thirds of that by the end of the second fiscal year, the plan that we've developed is a phased approach. So as we are standing up, some of these new money factoring new capabilities. We're doing that in a very thoughtful phased approach. So we don't you create undue risk in the business.

Greats, thanks a lot guys.

Thank you. And our next question comes from Johnson Health [ph] from William Blair and Company. Your line is now open.

I just wanted to understand what's been sort of the response from your customers regarding Microsemi and can you maybe give us a little bit more color in terms of what sort of opportunities this might open up with different groups within the primes, new areas that you can potentially target? Just a general sense of what the reaction has been.

So the reaction has been extremely positive. And I think not only because they know the leadership team and the capabilities of the businesses that we're acquiring. But also because I think customers clearly see the synergy in the fit with Mercury's strategy, technology and capabilities. I think the areas that we're focused on, from a synergy perspective, are around being able to actually provide more complete and integrated security capabilities. We see the opportunity and the microwave to -- being able to expand our content footprint. I've just given some of the capabilities that they have. As an example, they've got a gun-based high power amplifiers, they are involved in providing certain capabilities in certain next-generation on tennis which would be potentially a significant market expansion opportunity for us and we are applying to raise a digital domain. We see the opportunity of selling a secure solid state storage alongside our secure processing product lines. So there are whole host of opportunities I think that we're going to look to harvest from a revenue growth perspective over the longer term.

Got it. And you guys have talked a little bit about sort of the security opportunity on the embedded side but I just wanted to understand like how is this sort of showing up in the market like is this additional requirements that are coming on two platforms. It's just new capabilities so people need to add, it's a software capabilities. I'm just trying to understand sort of how to think about or maybe quantify what this could do for your business?

Yes, so I think it's a number of fold so the DOD have got Monday to start to protect the electronic subsystems and in the case of the processors, it's really the brains of the system on both existing systems domestically, new you program stocks but also protecting the critical information and the technologies that are embodied inside of these platforms. Also it becomes critically important as the systems are actually exported overseas; so international and foreign military sales. So we're really seeing opportunities across the patching, both, airborne, naval and ground-based applications. And when you couple that, not only the security but the requirements for very high performance processing and buying that from a company that does the design, development, manufacturing domestically, it really narrows down the field very rapidly. And in essence what we've done is, we've created a very unique business model with a very unique set of assets to be able to help our customers address those government needs.

Great, thank you.

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

Good afternoon, gentlemen. I'd like to go back to the blade server and the opportunities there. You mentioned that possibly some sites outside Alaska could be opportunities and that makes sense since we know that something when we say. Now other markets besides ground-based missile defense where you hope to market these, and if so, what's the status of those endeavors?

There are others opportunities, so clearly this is the first one that we've publicly announced. We have sold additional systems into certain of our other customers for various applications including on some large naval programs. We see the opportunities in some of the larger white bodied signals, intelligence platforms. So anywhere where there is more of a controlled environment where space is not necessarily at a premium like it is, say in an aircraft or a fighter aircraft, an opportunity exists to sell those systems. The one other things that we've also talked about and I think what we're seeing as a result of us having this new capabilities is the fact that we're actually being -- we're seeing opportunities that expands our addressable market from not just providing the processing associated with the sensor but into other mission critical computer altercations onboard; so commanding control of a combat systems as an example. So it really is opening up the aperture and we've already got some other wins, albeit it at an earliest stage for some development programs.

And perhaps along similar lines, the F-35 is in the news again. There is another GAO about the ALIS system having some problems. And you've been on the processor upgrades for F-35. So is there possibly any connection to the issues they are having now and perhaps the skillset that you could bring to address those? I mean just to create opportunity for you or just any overlap at all here?

So I'm not aware that any of our technologies or capabilities will be involved with the issues that you described. We obviously are playing a major role through the licensing of some of our intellectual properties and technologies on that program to various customers. In longer term, we do see the opportunity just based upon some of the significant investments that we've made through our own internal R&D efforts, to intercept some of the longer term needs associated with that particular program. So we'll see how the upgrade cycle occurs, the competition associated with that but we're very supportive of the program as well as our customers who are pursuing that particular opportunity.

Thanks, Mark. I appreciate your response.

Thank you, Mike.

Thank you. [Operator Instructions] And our next question comes from Morri Marcus [ph] from Sidoti and Company. Your line is now open.

Good afternoon guys, how you're doing?

Hi, Morri.

So I've just got two quick questions on the quarter. Number one is, what caused gross margin to be better than expected? And then, number two is just on research and development, it seems like you have a lot more government funded work, is that true?

So gross margin really is ultimately driven by mix. We also continue to see the benefit of some improvements from a process standpoint as we've grown and just simply gotten a little bit better, so we're always looking to move the dials a little bit in and produce as efficiently as we can. So we saw those sort of small factors combined to just give us a little bit better margin than what we had originally thought as we were entering the quarter. Customer funded R&D has been progressively increasing as we've won opportunities in new programs, as we get into the design win piece and we get into bigger subsystems and things like that where we're doing more stuff. Obviously those systems are more complex, have literally and figuratively more moving parts, so the design work that goes into them tends to increase, and we've been certainly devoting resources to that effort.

Okay. So then it would be fair to assume that going forward it's just take a little bit more government funded R&D or customer funded R&D?

I think it's been a trend that has continued that we expect to continue. I think Gerry hit the nail on the head. I think that by far the majority of the work that we're doing now is at the subsystem level, that's very much in line with the trends that we've discussed in terms of our customer outsourcing at a higher level of integration. We're investing in the technology building blocks, the reason that we're seeing an increase in customer funding is to do with the customization of those particular products into the subsystems that our customers need for their specific applications. So it's basically a proof point that our strategy is working well.

Okay, got it. And then just one more question and -- I don't know if you guys can talk on this just because it's kind of recently announced, the navy announced that about $800 million IBIQ to kind of main primes just regarding electronic maneuver warfare commanding control program just designed studies fabrication, integration and test valuation. This is pretty much as the idea we've talked down the past where the open RF and open modular systems. Just going forward, is that -- is that something you guys are looking to get on what we think is a lot of the client or customers that you guys have worked on in the past?

So I can't comment specifically on that program that you mentioned. But I can say that the initiative that we have around open RF which is seeking to much greater modularity into what is today, a very proprietary set of capabilities in our microwave and digital, trying to open up to up to speed up the rate at which new technology can be introduced, creating standards which will help improve the affordability. It's something that all of our customers, as well as the government is interested in. Like you saw Mercury do in the digital, we are seeking to kind of pioneer a set of technologies and solutions in that area. So you will continue to see us be very active in the space.

Okay, great. Thank you.

You're welcome.

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, thank you all very much for listening. We look forward to speaking to you again next quarter.

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