Mark Aslett - CEO Gerry Haines - CFO.

Jason Gursky - Citi Jonathan Ho - William Blair Peter Arment - Robert W Baird Brian Ruttenbur - Drexel Hamilton Mark Jordan - Noble Financial Sheila Kahyaoglu - Jefferies.

Good day everyone, and welcome to the Mercury Systems First Quarter Fiscal 2017 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 the copy of the earnings press release we issued earlier this afternoon, you can find it on our website at 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, 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.

governments 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 product, service or systems integration engagements, and various other factors beyond our control.

These risks and uncertainties also include such additional risk factors as are discussed in the company's filings with the U.S. Securities and Exchange Commission, including in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.

The company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which such statement is made.

I'd also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, during our call, we will also discuss several non-GAAP financial measures, specifically, adjusted EBITDA, adjusted income, adjusted earnings per share or EPS, and free cash flow.

Adjusted income exclude several income items from GAAP income. The excluded items are amortization of intangible assets, restructuring and other charges, impairment of long-lived assets, acquisition and financing costs, fair value adjustments from purchase accounting, litigation and settlement income and expense, and stock-based compensation expense.

Along with the tax impact of those items. This yields adjusted income which is expressed on a per share basis as adjusted EPS calculated using weighted average diluted shares outstanding. Adjusted EBITDA excludes interest income and expense, income taxes, and depreciation. In addition to the exclusions for adjusted income.

Finally, free cash flow excludes capital expenditures from cash flows from operating activities. A reconciliation of these non-GAAP metrics is included in the earnings press release we issued this afternoon. With that, I'll turn the call over to Mercury's President and CEO, Mark Aslett..

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’s off to a great start in fiscal 2017.

Our acquired and organic businesses both performed very well in the first quarter and we came in at or above the high end of our guidance on all of our metrics. October revenues for Q1 were up 15% year-over-year with our largest revenue programs being Aegis, F-35, LRDR and DEWS, which is Digital Electronic Warfare System.

Organically revenue was up 8% year-over-year as expected. Q1 GAAP income and adjusted EBITDA were up 34% and 54% respectively from Q1 last year. Total bookings grew 41% driving a 1.1 book-to-bill and record backlog of $296 million, up 36% year-over-year and our 12 months forward revenue coverage remain strong.

Our largest booking in Q1 was Patriot foreign military sales to Japan. We also received major bookings was Paveway, Aegis, which is the advance intrigued defensive electronic warfare suite and the ProVision body scanner. These results demonstrate that our content expansion growth strategy continues to work well.

Over the past few years, we’ve successfully leverage internal R&D investments and acquisitions to build the best in class portfolio of products and capabilities.

Our improved sales strategies have strengthened our customer relationships and we are targeting what we believe to be the largest secular growth opportunity in the defense industry outsourcing by the major defense primes [ph]. At the same time, we’ve created a business model, we can efficiently scale through acquisition.

The strategic deals in RF and EW that we completed since fiscal 2011 has substantially expanded our capability sets and as important our total addressable market. These transactions have enabled Mercury to provide affordable pre-integrated secure processing sub-systems by also creating substantial synergies and opportunities of growth.

After starting essentially from scratch more than five years ago, we believe that Mercury is currently one of the top RF suppliers in the defense industry. We’re launching our RF capabilities, channel and program based to win new programs that continue to grow and diversify our bookings and revenues.

In addition, we’re expanding our content footprint on Mercury’s existing franchise programs. These are programs that appear to be well funded and currently in or moving into production. While making substantial investments in our RF business, we’ve positioned Mercury as one of the defense industry’s most capable and better secure processing companies.

We’ve created a unique and differentiate set of capabilities in embedded security, through Intel R&D investments and our industry leading secure Intel all server class product line, as well as through the LIT and Microsemi carbout acquisitions. This strategy is paying off and our pipeline of opportunities continues to grow.

We’re expecting fiscal ’17 to be another year of solid revenue growth both organically and at a total company level. Lockheed Martin just received their five year production contract on SEWIP Block 2 and we continue to do important work with Northrop Grumman and SEWIP Block 3. The LRDR program is ramping, Aegis and F-35 also continue to do well.

Patriot should continue to be an important revenue program for us in fiscal ’17 and we’ll see more opportunity on [indiscernible]. Programs in the acquired business related to precision guided missiles and munitions should also do well this fiscal year from a revenue perspective.

Fiscal '17 is shaping up to be another good year for bookings as well, with strong orders for Aegis, SEWIP, F-35 and Paveway [ph] expected. Patriot bookings have positioned to now more than double versus last year driven by strong FMS orders. In the acquired business we expect bookings related to precision guided missiles and munitions to be up also.

Turning now to the recent acquisition. I couldn't be more pleased with the progress we're making on integrating all three businesses as the Microsemi Carve-Out. We're beginning to harvest the synergies that we target, there is strong sense of energy and genuine enthusiasm across the two organizations.

The integration teams are working really well together with a lot of excitement about the new capabilities we're creating. The separation from Microsemi is complete with 100% of the infrastructure and security migrated to Mercury's platform.

The conversion to Mercury's direct sales channel is mostly complete and the dollar savings are beginning to materialize as expected. The migration to Mercury's existing ERP application is progressing well and remains on track to be completed in the second half of this fiscal year as planned.

The purchasing synergies are on track and finally our manufacturing efficiency initiatives are ahead of schedule given our decision to accelerate certain investments. From a growth perspective, both the acquired business and our organic business are performing in line with our expectations.

The sales force is now fully integrated and we can seem to uncover new potential growth opportunities. Customers are telling us that they really like the unique technologies and capabilities that we've assembled and the greatest scale we've created in the business.

They also appreciate the fact that we now have complementary RF manufacturing of both the east and west coast's and have a DMEA certified custom microelectronics manufacturing capability. We're also making good progress and our headquarters moved from Chelmsford to Andover, Massachusetts which we expect to complete early [indiscernible] in 2017.

This is a move that’s modest [ph] for Mercury. It's not just about upgrading our headquarters facility which is important, but it's also focused on continuing to modernize our engineering tools and development methodologies to a more agile approach and improving how we collaborate and communicate with one another across different locations.

During fiscal '16 we demonstrated our ability to complete a large acquisition and an extensive set of financing transactions quickly and with great results. Going forward we intend to remain active and disciplined in our approach to M&A as we work to extend our record of organic and acquisition driven growth.

We'll continue to look for deals that have the potential to be accretive in the short term and drive long term shareholder value. As we do so we'll continue to target acquisitions that expand our addressable market and scale the technology platform that we've build.

We'll remain focused on the key points [ph] of the business, RF and secure processing while working to assemble critical and differentiated solutions for sensor and emission processing. We remain focused on smaller capabilities led tuck-in acquisitions while building a pipeline of larger opportunities.

In summary Mercury is currently on track for another great year in fiscal 2017. This strategy we’re pursuing is increasing our addressable market and the scale of the business while expanding our capabilities. Our strategy is resonating with our customers and it's consistent with the government's defense priorities and goals for procured reforms [ph].

As I just mentioned, we are expecting the strong performance organically in fiscal '17 also. We are anticipating another year of growth in our major product lines and across many of our programs. We expect greater program diversity with the recent acquisition and anticipate more programs producing at a higher rate.

Finally, the acquired business is performing right in line with our expectations and our pipeline of opportunities this growing. As anticipated we become the new government fiscal year with another budget continue resolution and uncertainty related to the electation.

That said, given our strong performance in Q1 and current expectations for the remainder of the year, we are raising our full year fiscal '17 guidance and now expect to deliver adjusted EBITDA within our recently revised target business model. Gerry will take you to through the guidance in detail just a minute.

As a reminder, we'll be discussing our strategy and plans for growth in depth at our investor day in New York City on November 8th and we sincerely come if you can join us. With that I'd like to turn the call over to Gerry.

Gerry?.

Thank you Mark and good afternoon again, everyone. Before we go through the financial results, I'll note that we'll be discussing the company's financial results compared since to prior periods and guidance on a consolidated basis, that includes LIT and the Microsemi carbout business we acquired in fiscal 2016.

As a reminder, we are now reporting Mercury's financial results as a single reporting segment. Eliminating the historical distinction between Mercury Commercial Electronics and Mercury Defense Systems. Turning to our financials, Mercury is on track for another year of solid growth.

We also remained optimistic about our ability to counter the cost synergies, that we anticipated as our integration efforts are proceeding to plan and are even accelerate to somewhat. As Mark said, we are also planning -- beginning to see potential growth opportunities taking shape.

Looking at our first quarter results, Mercury deliver a strong start to fiscal '17 on a consolidated basis and organically.

Total revenue, increased $29.2 million to $87.6 million, up 50% from Q1 last year, and exceeding the top end of our guidance of $82 million to $87 million, as we continue to see strong customer receptivity to our capabilities and solutions.

Approximately $63.3 million of our total revenue for Q1 was attributable to the organic business, which grew 8.4% year-over-year, a rate slightly higher than our organic growth of 8% for all of fiscal '16.

The carbout business is acquired from Microsemi also contribute solidly to the quarter generating $24.3 million of revenue consistent with our expectations. International revenue including foreign military sales was 16.1% of total revenue compared to 14.4% in Q1 of last year.

Revenue from radar and electronic warfare together accounted for 66% of consolidated total revenue compared with 82% a year-ago. The lower total proportion reflects a larger and more diverse revenue mix for the quarter as a result of the acquisition. Radar revenue however was up 4% year-over-year while electronic warfare revenue grew 59%.

Mercury's total bookings for the first quarter were $96.4 million yielding a strong book to bill of approximately 1.1, this compares with bookings of $68.5 million in Q1 last year. We ended the first quarter of fiscal '17 with record total backlog of $296 million which was up $78 million or 36% from $218 million a year-ago.

Approximately $247.3 million or 83% of this total backlog, is expected to ship within the next 12 months. We continue to translate our booking and revenue growth in the solid profitability. For Q1 of fiscal ’17, Mercury’s total gross margin was approximately 45% within both our Q1 guidance and our target business model.

As anticipated, our gross margin this quarter was negatively affected by inventory valuation step-up driven by purchase accounting. This impact should diminish in Q2 and is expected to be material in Q3. The lower gross margin year-over-year was also due to changes in the mix of program activities and product sales for the quarter.

In total, Q1 operating expenses were $35.7 million versus our guidance of 33 million to 34 million and 25.2 million for the same period last year. This reflects higher compensation expense and the impact of our annual equity incentive awards that take place in August.

In addition, customer funded development work although up 20% year-over-year came in somewhat lower than expected in Q1 resulting in higher R&D expense. OpEx in the first quarter also included approximately 0.3 million of rent expense attributable to the lease of our new headquarters’ location.

This is a non-cash charge driven by gap leasing accounting. This duplicative non-cash expenses which is expected to total approximately $1.2 million for the full fiscal year will end in May of 2017, when actual cash rent payments commence and the lease for our current headquarter site expires.

GAAP income for the first quarter fiscal ’17 was $3.8 million or $0.10 a share. This compares with $2.9 million or $0.08 per share in Q1 last year. Adjusted EPS for the first quarter increased $0.22 a share, up 15.8% from $0.19 a share in Q1 of fiscal ’16 and near the high end of our guidance range of $0.19 to $0.23 a share.

This is based on 39.9 million weighted average diluted shares outstanding for the quarter. Mercury’s Q4 fiscal ’17 adjusted EBITDA increased 54% from $11.8 million a year ago to $18.2 million this year representing 21% of revenue and in line with our guidance range of $17 million to $19 million for the quarter.

Turning to the balance sheet, our financial position remain strong and we continue to maintain a flexible capital structure to support future growth. Mercury ended the first quarter of fiscal ’17 with cash and cash equivalents of $77.3 million compared with $79.1 million a year earlier.

Operating cash flow was $10.3 million for the first quarter compared to 5.6 million in Q1 of fiscal ’16. Operating cash flow for Q1 of this year was partially offset by $6.1 million of capital expenditures yielding 4.2 million of free cash flow for the quarter.

This plan increase in capital expenditures reflects commencement of the build out of our new headquarters’ location, the addition of the acquired businesses and the acceleration of our integration activities. We’re very pleased with the progress of our integration efforts.

By investing earlier than originally plan in certain equipment and infrastructure. We now believe, we can accelerate the time table for realization of the planned manufacturing synergies. As a result of this accelerated effort, we now expect capital expenditures to peak in Q2 at approximately $13 million.

In Q1, we also retired previously outstanding common shares worth approximately $6.1 million related to the annual net investing [ph] of employee stock-based incentive compensation. This cash use prevented dilution that would have otherwise occurred. I’ll turnout now to our financial guidance for the second quarter and full fiscal year of 2017.

For purposes of modeling and guidance we've assumed no restructuring and no acquisition related expenses and an effective rate of 35% in the periods discussed. Our guidance for Q2 and the full fiscal year reflects our confidence in the current outlook for fiscal '17 as a whole.

We expect the second half of the fiscal year to be relatively stronger than the first half as our accelerated acquisition integration efforts begin yielding planned savings and increased operating leverage as the year progresses.

As a result we are raising our revenue and adjusted EBITDA guidance for the whole year and continue to expect strong positive operating cash flow for the year. With that as background for the second quarter of fiscal '17 we're forecasting revenue in the range of $91 million to $95 million with gross margin expected to be approximately 46% to 47%.

This includes a $0.7 million negative impact of inventory fair value adjustments resulting from purchase accounting and reflects the anticipated mix of program activities and product sales for the quarter. Q2 GAAP income is expected to be in the range of $2.7 million to $4.5 million or $0.07 to $0.11 per share.

Adjusted EPS for Q2 is expected to be in the range of $0.22 to $0.27 per share. This estimate assumes approximately $4.6 million of amortization of intangible assets, $0.7 million of fair value adjustments from purchase accounting. $3.9 million of stock based compensation expense and an effective tax rate of approximately 35%.

Adjusted EBITDA for the second quarter is expected to be in the range of $18 million to $21 million representing approximately 20% to 22% of revenue at the forecasted revenue range.

This includes $0.4 million of non-cash rent expense attributable again to the lease of our new headquarters location as well as mostly increased operating expenses associated with our integration plan and an associated increase in manufacturing resources.

Turning to the full fiscal year we now expect Mercury's revenue to be in the range of $370 million to $380 million for fiscal '17 up from our prior guidance of $368 million to $376 million. Fiscal '17 GAAP income is now expected to be in the range of $19.8 million to $22.4 million.

And finally we expect currently to see adjusted EBITDA for all of '17 at approximately $83 million to $87 million, an increase of 45% to 52% year-over-year and at 22% to 23% of revenue for the year within the range established by our updated target business model.

In summary, we believe that Mercury's participation on an expanding base of important high priority DOD programs positions us well to continue growing our bookings, backlog, revenue, adjusted EBITDA and adjusted EPS yielding another year of solid financial performance. With that we'll be happy to take your questions.

Operator, you can proceed with the Q&A..

Thank you, [Operator Instructions] Our first question comes from the line of Jason Gursky with Citi. Your line is open..

Hey Mark I was wondering if you wouldn’t mind making a couple of different comments. One, just the budget environment here in the States, the continuing resolution.

At what point do you believe a continuing resolution would have a negative impact on you or your customers, as the CR goes beyond such and such a date, it could have an impact on the '17 guidance. And then, can you make some comments just on the integration efforts, particularly on the sales side of things and the marketing.

To reflect back maybe on what you’ve achieved here and where do you think you're going from here? There is some opportunities that you’ve identified as you’ve gone through this process that, the goal [ph] that’s more compelling than what you originally thought and you just described as how the sales integration is coming along, whether you’ve identified any additional end markets international, looks a little better just may be more comments on the integration efforts particularly on the sales force would be helpful..

Sure no, problem. So we think at the guidance that we’ve given obviously takes into accounts the fact what we've starting out the year with another budget continuing resolution as expected. I think, our expectations right now is that the CR will head into next fiscal year maybe the March or April time frame.

And we’ve taken that into account in terms the guidance that we provided. As you know, we worked hard to actually build our backlog and we got very, very solid revenue coverage going into the reminder of this year. So we feel good about the position at we're in.

as it relate to the integration, the feedback that we’ve gotten from customers has been extremely positive.

As I said previously, we're in an environment where most of our customers are seeking to rationalize their supply chain and they're really looking to do business with a smaller number of more capable suppliers and I think both Mercury pre-acquisition and the [indiscernible] businesses that we've acquired, we're both seen as very strong suppliers that together become even stronger.

They like the capability set that we’ve brought together, they like the additional scale that we’ve brought into the businesses. The sales force has been fully integrated, so we’ve only got one channel to our customer base.

The shift from the prior Microsemi distribution sale model to Mercury’s direct sales model has occurred without incidence and we've already starting to see some of the benefits there. The opportunities that we see on a combined basis, really fall into three major areas.

You know the first is around embedded security, the second is around guided missions and smart munitions and the third is our continued focus basically expanding our contents in radar as well as EW systems, Jason..

That's helpful. Thanks..

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

Just wanted to start out with one housekeeping question, not sure if you have this, but can you guys give us what the actual growth rate was for the Microsemi business for the quarter?.

So, we honestly didn’t own it did in the competitive quarter a year before. As we said, earlier when we announced the acquisition, the growth rate historically was a little less than the growth rate for Mercury, particularly in fiscal '16. Kind of the low single digits.

And basically, you know what we're pretty actively doing is focusing on the integration because we believe we can inflect the combined growth rate upward, so that it is more than the sum of the growth rates of the two, and you know based on our update to guidance that's exactly what we believe is happening for the balance for the year..

So let me just add a little color there. I think the business performed right in line with our expectations. Historically, you’ve said that the business is grown low-single-digits and that’s largely because we believe the way in which Microsemi went to market for this type of model wasn’t a great fit.

The upgraded guidance that we gave for fiscal ’17 on a pro forma basis would result in our revenue is growing between 5% to 8% at a total year level and we expect both the organic businesses as well as the acquired businesses to grow with inside of revenue range.

So we believe that we’re already beginning to see some of the benefits of the stronger Mercury channel..

Got it. And then you just talk a little bit about the accelerated manufacturing investments and CapEx investment that you intend to make.

Can you maybe give us a little bit more color in terms of where those investments are going and maybe what the longer term margin application is, once you’ve completed this investment?.

Sure. Think of it this way, we’re really investing for growth in the business, because of what Mark just got finished talking about in his last response. So largely what we’re focusing on is adding equipment on the manufacturing side within existing location. So we’re not expanding our footprint to new locations.

But we’re driving hard to build out some of our capabilities both to get more efficient with manufacturing and also to support growth that we think is a very real possibility as we move forward and see some of the accelerated rates.

So setting aside the build-out of the Andover headquarters which Mark talk about in his remarks, which will produce some CapEx temporarily in the year, the rest is really focused on again additive capabilities that bring to bear both what we’re already doing today, but also expanding the set of capabilities through the Phoenix location of the acquired business where we’ve got a DMEA trusted facility already and we think that there is a lot of leverage that we can apply to that.

So what we see is more significant benefit essentially they leverage of those manufacturing capabilities as revenue begins to inflect in a positive direction..

So just kind of expanding that on a little bit. As Gerry said in his prepared remarks, we do see that on a relative basis, the business will likely perform stronger in the second half, in the first half.

As I said in my prepared remarks, we expect this given the updated guidance that we provided that we now anticipate landing inside at the revised target business model albeit at the lower end of that range.

Which gives us the opportunity overtime to harvest additional synergies from the investments that we’re making as the business continues to grow in the future years. So it’s all about creating platform for growth, as well as increased operating leverage, which I think we’ve demonstrated ably that we’re able to do..

Excellent. Thank you..

Thank you. Our next question comes from the line of Peter Arment with Robert W Baird..

Nice quarter. I guess, I just really want to focus on the kind of the legacy, the precision guidance business.

Is this an area where given what’s going on in the budgets and what the priority spending has been, certainly what we're seeing in terms of use on precision mutations that we should be seeing this being one of your fastest growth areas or is there a lot of legacy programs in there rolling off, maybe if you could just give us a little color on how should we be thinking about that?.

So, we do think it's going to be an area of growth. I don't think there're really legacy programs there that are rolling off. The programs that the acquired businesses are involved with, programs such as MALD, which is the miniature air launch decoy, they're on Small Diameter Bomb II which is really just getting going.

They're also involved in the transition basically the large caliber dumb munitions into smart munitions on programs such as PGK.

That said I think we believe that probably the fastest growing part of our business will remain likely electronic warfare and again we've made significant investments through the acquisitions of core NEW, as well as certain acquisition in the RF and microwave domain and we're seeing a lot of opportunity in that space..

And then just regarding I think you mentioned LRDR, just give us a comment update on what's going on there?.

So, the LRDR program is basically ramping, we expect it to be a significant driver of growth, we got a substantial bookings during fiscal '16 and that it's beginning to turn to revenue this fiscal year. So, that's right on track and it's progressing as we expected Peter..

Thank you. Our next question comes from the line of Brian Ruttenbur with Drexel Hamilton. Your line is open..

A couple of questions, first of all it's my first quarter on with you guys after a while, so congratulations [multiple speakers].

Just a couple of questions around the tax gap -- tax 35%, why the lower tax and moving forward I assume that tax can be maintained in the fiscal '18 or was there something one-time this year?.

So, we expect that rate to be pretty steady through time. Obviously what we don't guide on are special items that are one-time in nature. So, we're looking at an effective rate that should hover right around 35%.

One of the things that obviously we deal with is we don't have significant international operations and some of the other traditional opportunities to get some tax arbitrage in the game. So, I don't think there is anything unusual going on there.

There was some benefit in Q1, that brought their rate down a little bit again because it would have been one-time items, things like the stock based compensation and so on under the new rules..

And then the second question on the CR, can you talk about what programs specifically that could be hurt or benefitted from passing a CR quicker or delayed? And if you just mention one or two, I just wanted to track some of those programs out there.

If there is an acceleration and passing the CR sooner or a delay in the CR?.

We actually don't really see a major impact in either direction Brian and I think we've got very strong visibility given the backlog that we have, CR from what we see right now, won't impact the major programs that are driving the revenue. So, we’ve done a pretty thorough analysis there..

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

The first question is on CapEx, you talked about first quarter, I think it was $6.2 million peaking at in the second quarter at 13, obviously I guess being driven by your investment in your headquarters.

Could you talk about what you expect for the full years in terms of CapEx and how much of that is really non-recurring again tied to the headquarters move or sort of one type investments that are not repetitive?.

Yes, so we said it was really driven by three items, one of which you mentioned which is the Andover headquarters build out which started in Q2, and will continue into Q3 and will sort of be diminished by Q4.

The other two items were obviously the incremental addition of the new business, so there is just the step in CapEx that came with the business, that certainly will continue. The other major driver is the manufacturing expansion of capabilities which I talked about a little bit earlier in the call.

We didn't guide CapEx for the year, but what I will tell is that we expect it to, as I said peak in Q2, H2 as a whole will be lower than H1 and by Q4 we’re expecting to be essentially at a normalized rate, as we get over the hump on couple of these onetime items..

Okay, second question for me, can you talk a little bit about the order flow at the acquired Microsemi operations.

Typically how do those orders -- it is a book and ship business, is there a backlog or how long is the average duration of orders that the Microsemi businesses will see?.

So, we’ve got more book shipped then what the organic business is or has.

And that's largely because since fiscal '13 we worked very hard to grow our backlog and lesser on reliance on book ship that said I think they’ve got a strong diversity of programs, we're going to continue to do with them that we have done with ourselves, seek to grow that backlog overtime.

And the business actually performed very strongly from a booking perspective during the first quarter. So, the business is performing the way in which we expected it Mark..

Okay, final question for me.

Relative to other income you had a larger than normal gain there, could you define what that is and should that go back to sort of the typical you know $1,000 type range moving forward or are there other largely items that could flow through there?.

Yes, we don’t expect anything significant in the way of other income i.e. non-operating items. You know there is -- the real change I think to the CR for the first time we’ve got, things like interest income and expense coming through them was driven by the acquisition.

There is a little bit of foreign exchange activity, but it's really not significant, so I wouldn’t really focus too much on it..

Thank you. [Operator Instructions]. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open. .

Hi, just the follow up on the last question.

Do you have the core bookings or organic bookings in backlog for the quarter?.

We don’t break out the booking in backlog on organic and acquired basis. Couple of reasons for that. One is as I said the lines are blending quickly as we see more and more, what I would call combined opportunities to bring the technology package to bear.

Second is that as Mark said, I think what the important thing was from our perspective is the bookings performance is solid and the answer is a resounding yes. We’ve been extremely pleased both for the two month period that we owned them last quarter and for the full three months that we owned them in Q1.

So they actually coming very much in line with organic Mercury and that’s really what we want, and I think that was pretty amply illustrate about the 1:1 book-to-bill that we have for the quarter on a combined basis. So bottom-line is we’re very happy with the way they’ve come along..

Sure. And I apologies, if I miss this earlier. But it seems like the core business is driving the revenue guidance range. Can you maybe get a little bit more granular and what it is.

And then also with the Japan Patriot upgrade is that expected to be converted into revenue in 2017 or is that a ’18 items?.

So as I said, previously Sheila, when you look at the revised guidance on a pro forma basis assuming that the acquired business did approximately $100 million of revenue in fiscal ’16, meaning we had owned it for the whole year. That would translate into a pro forma growth rate of between $0.05 to $0.08 year-over-year on a combined basis.

We expect both the organic business and the acquired business to grow within those growth ranges. For the acquired business that would results an increasing growth versus where they were last year before we owned them. From a Patriot perspective, we did receive a large order for Patriot during Q1.

And we have increased our revenue forecast for the Patriot program versus where were last quarter..

Okay.

And then on Paveway, is that a new program and I guess how do we think about maybe that your content a Paveway versus the future or another missile?.

Yes. So Paveway and existing program for them, they received a large booking, we received a large booking during the quarter, as well as a long term supply agreement with [indiscernible] which we’ve very pleased about.

I’m not going into comment specifically about content per program or per missile, but we are providing some innovative technology across several of the programs that I previously discussion..

Okay. Thank you..

Thank you. 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..

Well, thanks very much Andrea and thanks everyone for listening. Again we hope to see our Investor Day in New York City on November 8th. That concludes the call. .

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may now disconnect. Everyone, have a great day..