Mark Aslett - Chief Executive Officer Gerry Haines - Chief Financial Officer.

Jason Gursky - Citi Peter Arment - Baird Equity Research Michael Ciarmoli - SunTrust Jonathan Ho - William Blair Company Brian Ruttenbur - Drexel Hamilton Kristine Liwag - Bank of America Merrill Lynch Sheila Kahyaoglu - Jefferies & Company.

Good day everyone, and welcome to the Mercury Systems Third 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, Mr. Gerry Haines. Please go ahead, sir..

Thank you, operator. Good afternoon and thank you everyone 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 mrcy.com.

We’d like to remind you that remarks that we may make during the call today 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 and 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 upon any such forward-looking statements, which speak only as of the date made. The company undertakes no obligation to update any forward-looking statements 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 income, adjusted earnings per share or EPS, adjusted EBITDA and free cash flow.

Adjusted income excludes several items from GAAP net 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.

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. I'll now 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'll open it up to your questions. Mercury delivered strong bookings, record revenues and record adjusted EBITDA in the third quarter of FY ’17.

Our organic and acquired businesses including CES all posted strong results. We came in at the high end of our Q3 guidance on all of our metrics and we’ve raised our guidance for the full fiscal year. Mercury’ total revenues grew 63% from Q3 of FY ‘16 to a record $107 million. We continued to deliver strong growth organically.

Excluding the CES business acquired in Q2 revenues was up nearly 53% from Q3 last year. Adjusted EBITDA on a consolidated - consolidated basis was up 71% year-over-year ended more than 23% of revenue, one percentage point inside our recently updated target financial model.

Our largest revenue programs in the quarter was SEWIP, Patriot, a large ground-based radar, Filthy Buzzard, Golden staff and Aegis. Our largest bookings programs in Q3 was SEWIP, F-16 SATA, Triton, Aegis and F-35. In addition during Q3 we received a five year sole source, $152 million basic ordering agreement from the Navy for Filthy Buzzard.

This is really important win for us, giving us great visibility on a major EW program for an extended period of time. We also booked a second full rate production order for SEWIP Block 2 value to close to $16 million. The first full rate production order came in just two quarters ago, so receiving the second order within a year is very beneficial.

International defense bookings for Q3 including foreign military sales were up more than 2.5 times versus a ago, up total backlog exiting Q3 was strong, up 45% year-over-year, and our 12 month forward revenue coverage remains excellent.

There were three corporate highlights since our last call, our headquarters relocation from Chelmsford to Andover, Massachusetts, our highly successful equity offering and the acquisition of Delta Microwave. The headquarters move was successfully completed in early March as planned.

I'm very pleased with how the new facility turned out and our employees seem to feel the same way. We’re also happy with the fact that we executed such a large and complex move with zero loss of productivity.

The equity offering in January couldn't have gone any better, as a result Mercury is well positioned with a strong balance sheet and the capacity to continue pursuing our markets and content expansion growth strategy. We continue to execute against this strategy by acquiring Delta Microwave just after quarter end.

We expect Delta to be a great addition for Mercury, given its talented team, product portfolio and customer relationships, as well as the potential it brings with backlog driven growth, manufacturing cost synergies and tax benefits.

Delta Microwave is a strong position on the number of franchise US and international defense programs such as F-35, Paveway, MALD, Role ph River Joint that complement for Mercury's presence.

The deal brings us new capabilities related to high-power, high-frequency, active and passive RF components and subassemblies and in particular GaN solid-state power amplifiers. These new capabilities have scale and breadth to our core RF business, while expanding our addressable market.

Delta has strong relationships with space OEMs, supplying future manned spaceflight missions, as well as military and commercial satellite programs. These are new growth opportunities for Mercury and they also strengthen our core radar, EW and precision guided munitions market presence.

Delta has an outstanding leadership team that will remain with Mercury. We expect the business deliver higher adjusted EBITDA, driven by substantial revenue growth, as well as cost synergies in our fiscal year’s ‘18 and ‘19. In addition to targeting manufacturing synergies.

We plan to invest in greater levels of internal R&D, as well as manufacturing and test automation at Deltas Oxnard California plant, a world-class facility with capabilities similar to those of our Hudson New Hampshire AMC.

These capabilities are more and more important as our customers the major primes accelerate what we’re calling best flight ph to quality. The primes have experienced a number of issues with competing suppliers that are having difficulties right now and we’re picking up a significant share of this business.

Our customers are seeking to do business with a small number of high-quality scalable suppliers who can deliver affordability and innovation. In essence, the primes are looking for outsourcing partners that have the capacity to co-invest, white internally funded R&D and we’re doing exactly that.

In addition, over the past few years we've made significant investments in our manufacturing assets. We focus the majority of these investments on improving scalability, affordability, and quality.

As highlighted this quarter, we continue to build out of our trusted manufacturing facility in Phoenix which we expect to be an important competitive advantage for us in the secure processing domain. The facility achieved renewal of its DMEA trusted manufacturing certification, while also adding a DMEA design certification.

Q3 also marked a successful completion of the ERP system conversion in Phoenix. This was the largest and most complex such conversion we've ever done contribute to an amazing job by the Mercury team.

Overall, we’re on track to deliver the synergies that we anticipated from the Microsemi carve-out transaction and to complete the integration activities on time and on budget. The CES integration is also on track.

Now operating as Mercury’s Mission Systems International or MMSI, CES delivered a strong third quarter financially in terms of revenue, profitability and new design wins. We continue to feel really good about the business, which brings us a magnificent team and world-class technologies in the safety processing arena.

As we anticipated, we’re seeing great opportunities for that capabilities inside our customer base and MMSI on that first aid ph program is part of Mercury in Q3. Turning now to new business. The level of new business pursuits and design activity remains the highest since joining Mercury.

Our corporate strategy, the acquisitions that we’ve done and the capabilities in go to market model we developed are playing out extremely well. The way we positioned ourselves in secure sensor mission processing, the commercial business model that we operate and our trusted manufacturing assets are all reflected in our healthy design win pipeline.

Looking to our Q3 design win specifically, we made further progress on two large secure airborne processing opportunities. We continue to win new designs and penetrate in the missiles and munitions space, and MMSI one of major new mission computed design for a platform.

Along with these design wins we are pursuing multiple opportunities in tactical EW and secure processing both in the embedded domain, as well as for the new Secure Rack Server that we formally launched this quarter. The Secure Rack Server is an exciting product line for us.

To comply with government program protection requirements, the primes are beginning to personalize [ph] purchase, specialized, security capabilities from trusted domestic suppliers Mercury among them.

Our is the only rack server that we know of which includes not only advanced security capabilities, but also ruggedization and a fully trusted supply chain for both hardware and software.

We directly target some of the market expansion opportunities we talked about in our investor day, specifically moving beyond the sensor into other mission critical computer applications such as command-and-control, as well as combat systems.

I’ve also mentioned that in the third quarter, Mercury began shipping the largest computing subsystem that we've ever built, it includes more than 20 racks sophisticated high performance computing capabilities for a large ground-based radar.

All in all, an impressive effort by the team given the speed at which we’ve been able to design, develop and deliver the first shipments to our customer. Mercury strongly positioned from an opportunity perspective as we begin the fourth quarter of fiscal ‘17.

The strategic deals that we completed since FY ‘11 has substantially expanded our capability sets, as well as our total addressable market, it also enable us to provide a board range of affordable pre-integrated secure processing subsystems.

At the same time we successfully leveraged internal R&D investments, as well as acquisitions to build a best-in-class portfolio of products and capabilities. As a result, we're involved in franchise programs that appear to be well funded and are currently in or moving into production, while also winning important new designs.

We’re continuing to grow and diversify our program base, while expanding our content. Our broader program portfolio also means low risk and additional opportunities for growth.

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 above the industry average. We will continue to look for deals that are strategically aligned, 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 in aerospace and defense electronics and the scale of technology platform that we've built.

We remain focused on the key pillars of the business, RF and secure processing, while also continuing to assemble critical and differentiated solutions to secure sensor and mission processing. We’ll continue to acquire smaller capability lead tuck-ins, while building a pipeline of larger opportunities. Moving to the industry conditions.

We've begun FY ‘17 with another budget continuing resolution which remains in place environment in Washington. That being said, given our strong backlog and the high level of activity we’re sitting in our business, we remain confident in our outlook.

Our current high-level activity stems from a couple of trends, the first is the primes outsourcing more and as like to quality that I mentioned earlier. We designed our business model and strategy with these in mind and is clearly paying off.

The second trend is what appears to be an active focus by the government in the primes to delay their supply chains, the means of gaining access to innovative and commercial suppliers, while making their solutions more affordable.

We view this is a positive, given that over time Mercury is moved up the value chain from a tier 3 to the mid-tier 2 level. Our recent acquisitions have made us more capable of providing affordable subsystem solutions. This in turn has allowed us to disintermediate less capable product oriented competitors.

We’re seeing the results in our bookings, revenue and the strength of our design win pipeline. Despite the continue budget challenges, we believe Mercury remains on track to meet our financial goals for fiscal 2017 and beyond. This means continued to deliver above industry average growth in revenue and profitability.

We’re anticipating continued strong performance in the fourth quarter both organically and in our acquired businesses, driven by growth in our chosen end markets, major product lines and across many of our programs.

In light of Mercury's strong results through the first three quarters of FY ’17, the continued success of our integration activities and our strong backlog, we are again raising our full-year guidance. Gerry will take you through the outlook in more detail. With that, I’d like to turn the call over to Gerry.

Gerry?.

Thank you, Mark. And good afternoon, again everyone. Before I go through the financial results, I'll note that unless otherwise stated we’ll be discussing the company's financial results, comparisons to prior periods and guidance on a consolidated basis.

The historical results include the CES business we acquired in Q2 of this fiscal year, but exclude Delta Microwave which we acquired early in Q4. This is another busy and very successful quarter for Mercury.

In addition to once again delivering strong financial results, we relocated our headquarters, completed a very successful capital raise and also finalized negotiations for the Delta Microwave acquisition to put a portion of that newly raise capital to work.

Turning to our financials, Mercury's revenue for the third quarter of fiscal ‘17 exceeded the $100 million mark for the first time in the company's history, even before taking into account the contribution of CES.

Total revenue increased $41.4 million to $107.3 million, up 63% from Q3 last year and just above the high-end of our guidance of $103 million to $107 million. Excluding the impact of CES, revenues would have been $101 million, an increase of $35.1 million or 53.3% year-over-year, which itself would have been a record.

International revenue including foreign military sales was 18.2% of total revenue compared with 21% in Q3 of last year. Revenue from radar and electronic warfare together accounted for 64% of consolidated total revenue compared with 87% a year ago.

Once again, this quarter the lower proportion versus Q3 last year reflects the larger and more diverse revenue mix for the quarter resulting from the addition of several new businesses and the associated expansion of our addressable market and revenue base.

Q3 radar revenue was down 16% year-over-year, while electronic warfare revenue more than doubled. Bookings for the third quarter kept pace with a record revenue totalling $106.5 million, up 32% from $80.8 million in Q3 last year and yielding a solid book-to-bill ratio of 1.0.

International and foreign military sales bookings represented 22.6% of total bookings compared to 8.2% in Q3 of last fiscal year. We ended the third quarter with a strong total backlog of $318 million compared with $219.7 million a year ago. Approximately $270.7 million or 85% of this total backlog is expected to ship within the next 12 months.

Mercury continues to translate this bookings and revenue growth into very solid profitability. Our gross margin for the third quarter of fiscal ‘17 was 47.3% at the top end of our Q3 guidance and around the midpoint of our target business model. Gross margin was down one point from the prior quarter, reflecting changes in our Q3 sales mix.

Q3 fiscal ‘17 gross margin also included a negative impact of approximately $0.3 million from the step up CES inventory valuations due to purchase accounting. This phenomenon will also occur IN next quarter when we include our latest acquisition Delta Microwave in our results.

Total Q3 operating expenses were $39.1 million versus our guidance of $38.1 million to $38.5 million and $24.6 million for the same period last year. The year-over-year change was primarily due to the incremental addition of the Microsemi and CES acquisitions.

Q3 operating expenses also reflect the company's ongoing investments to realize planned manufacturing efficiencies, as well as increased R&D investment in our newly acquired businesses as we boost spending to align with our organic level of R&D investment.

OpEx in the third quarter also included approximately $0.3 million of non-cash rent expense attributable to the lease of our new headquarters driven by GAAP lease accounting. This duplicative non-cash expense will end in May of this year when cash rent payments for our new facility commence and the lease for our prior headquarters site expires.

GAAP net income for the third quarter of fiscal ‘17 was $7.0 million or $0.16 per share. This compares with $4.4 million or $0.13 per share in Q3 last year. Adjusted EPS for the third quarter increased to $0.29 per share, up 16% from $0.25 a share in Q3 of fiscal ‘16.

This is within our guidance range of $0.29 to $0.32 per share, even after the impact of the share increase resulting from our Q3 equity offering, which was not included in our guidance. Excluding the impact of those additional shares, adjusted EPS would have been $0.33 a share, exceeding our guidance.

The actual EPS numbers are based on approximately $44.8 million weighted average diluted shares outstanding for the quarter. In terms of adjusted EBITDA, Mercury continued to achieve strong growth, combined with improved profitability, driven by the synergies were realizing from the investments in our business integration programs.

Mercury's Q3 fiscal ‘17 adjusted EBITDA increased 71% to a record $25 million, up from $14.6 million a year ago. This exceeded our Q3 guidance from $22.8 million to $24.7 million and at over 23% of revenue is more than four point [ph] into our long-term target range of 22% to 26%.

Turning to the balance sheet, Mercury ended the third quarter fiscal ‘17 with cash and cash equivalents of $270.2 million compared with $84.2 million a year earlier. As I mentioned earlier, we have since put a little more than $40 million of this to work through our acquisition of Delta Microwave.

From cash flow perspective, Mercury's operating cash flow of $24.9 million for Q3 of fiscal ‘17 was partially offset by $13 million of capital expenditures. This yielded $11.9 million of free cash flow compared with $2.6 million in Q3 of fiscal 2016.

As anticipated, our free cash flow was nearly doubled to $6.5 million we reported for the sequential second quarter of fiscal ‘17. Our forecast was for free cash flow to be stronger in the second half of the year than in the first half, reflecting a decline in capital expenditures coupled with strong operating cash flow.

Our current capital expansion projects have now started tapering off and were beginning to see the benefits associated with more highly integrated and capable business.

Our Microsemi carve-out integration plan remains on track and we anticipate realizing the estimated $10 million of originally projected run rate cost synergies well within the timeframe laid out in our initial plans.

As we indicated when the transaction was first announced, we expect approximately two thirds of those run rate cost synergies to be realized within the first two years. Net capital expenditures for this quarter was somewhat lower than anticipated due to slight shifts in the timing of certain spending.

This reflects only the timing of expenditures and the projects remain on time and on plan. Notwithstanding the timing shifts, we still expect Q4 capital expenditures to be substantially lower than in Q3 at roughly $7 million $8 million for the quarter.

Echoing Mark's comments, our equity offering in January was met by extremely strong demand and completed on favourable terms. Net proceeds from the offering were $215.7 million of which we used $40.5 million for the acquisition of Delta Microwave, which was completed on April 3rd, just after the close of Q3.

This use of cash is consistent with our strategy to take advantage of smaller tuck-in deals even as we continue to build out a pipeline of additional opportunities of various sizes. As Mark said, Delta Microwave is a terrific business in terms of the capabilities, market expansion, growth and profitability it brings to Mercury.

Delta’s backlog in our Q4 totalled more than $22 million, which puts the business on a trajectory for substantial growth on a year-over-year basis. At the same time, the deal creates opportunities for significant cost synergies in addition to the estimated $6.1 million net present value of the tax benefits associated with the transaction structure.

These cost synergies are currently expected to total approximately $2.5 million, nearly half of this amount should be realized in fiscal 2018 with 90% of it expected to be realized by the end of year two and $173 million of remaining capacity on our universal shelf registration.

As a result, we are well-positioned to continue executing on our capital deployment strategy, supporting future growth both organically and through acquisitions. I'll turn now to our financial guidance for the full fiscal year and fourth quarter of 2017.

For purposes of modeling and guidance, we've assumed no restructuring and no acquisition or additional financing related expenses and an effective tax rate of 35% in the periods discussed.

The guidance also assumes weighted average fully diluted shares outstanding of approximately 47.3 million shares for fiscal Q4 and 43.1 million shares for the full fiscal year.

In light of our strong year-to-date results, our robust bookings and backlog, our pipeline of opportunities and our acquisition integration efforts, we are once again raising our revenue and adjusted EBITDA guidance for the full fiscal year 2017. We also expect strong positive operating cash flow for the balance of the fiscal year.

As we predicted earlier, CapEx reached its peak in Q3, although at a level somewhat lower than originally anticipated.

We continue to expect our CapEx to taper off to more normalized levels over the next few quarters, reflecting the completion of the recent move into our new headquarters and the acceleration of our Microsemi and CES integration efforts, highlighted by the progress this past quarter and expanding the capabilities of our DMEA certified facility in Phoenix, Arizona.

The Microsemi and CES integration plans, including the planned savings remain solidly on track. With that as background, before the acquisition of Delta Microwave, we now expect our base revenue for the full year fiscal ‘17 to increase to between $400 million and $404 million, up from our prior guidance of $393 million to $400 million.

Including the contribution of Delta Microwave, we now expect Mercury's total revenue for fiscal ‘17 to be in the range of $405 million to $409 million. Total GAAP net income for fiscal ’17, including Delta Microwave is expected to be in the range of $22.6 million to $23.8 million or $0.52 to $0.55 per share.

We currently expect total adjusted EBITDA for fiscal ‘17 to be approximately $91 million to $92.9 million, an increase of 59% to 62% from fiscal ‘16 and at approximately 22% to 23% of revenue for the year well within the range established by our current target business model.

Adjusted EPS for fiscal ‘17 is now expected to be approximately $1.08 to $1.11 per share. Turning now to Q4 and doing the math based on our actual results for the first three quarters of the year. For the fourth quarter of fiscal ‘17 forecasting total revenue, including Delta Microwave to be in the range of $112 million to $116 million.

Gross margin for Q4 is expected to be in the range of 45% to 46%, reflecting the negative impact to purchase accounting inventory valuation step ups and modest changes in our Q4 sales mix. Q4 GAAP net income is expected to be in the range of $6.5 million to $7.7 million or $0.14 to $0.16 per share.

Adjusted EPS for Q4 is expected to be in the range of $0.26 to $0.29 per share.

This estimate assumes approximately $4.8 million of amortization of intangible assets, $0.3 million of fair value adjustments from purchase accounting, $3.9 million of stock-based compensation expense and as previously stated 47.3 million weighted average diluted shares outstanding for the quarter.

Adjusted EBITDA for the fourth quarter is expected to be in the range of $24.8 million to $26.7 million, representing approximately 22% to 23% of revenue at the forecasted revenue range.

This includes $0.1 million of non-cash rent expense attributable again to the lease of our new headquarters, as well as modestly increased operating expenses associated with our integration and R&D spending plans. In summary, we anticipate that fiscal ‘17 will be yet another year when the second half is stronger than the first half.

Our content and market expansion growth strategies have positioned us well despite the uncertain defense budget environment. Our bookings in order flow are strong. We have substantial new business opportunities in the pipeline.

We’re harvesting the acquisition integration synergies that we anticipated consistent with our original plans in terms of both dollars and time. We're expanding Mercury's addressable market and driving profitable growth through disciplined M&A.

Reflecting these positive dynamics, we believe that Mercury is on track for strong growth and solid financial performance in fiscal ‘2017. With that, we'll be happy to take your questions. Operator, you can proceed with the Q&A now..

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

Great. Thank you. Good afternoon, guys. Just a quick....

Hi, Jason....

Housekeeping question if I might, you mentioned organic growth a few times throughout the discussion and through - and gives a few numbers.

But I didn’t quite catch what you guys believe the underlying organic growth number was for this quarter?.

So we said that the organic revenue total for the year was expected to be 400 to 404, which is a lift from our prior organic guidance, which did not include Delta of course..

Okay, great.

And then just to know more further detail on the specific quarter?.

We didn’t give more detail to break it out for the quarter, no..

Okay. That’s fine. Just wanted to make sure I didn’t miss anything. And then, perhaps just stepping back and thinking about some of the recent wins here, the opportunity set this year in front of us, as well as the more recent acquisitions.

Can you just maybe provide us a quick update here on the glide path to your margin targets and whether the timing on that remains intact or that you can pull it forward given the recent wins and the opportunity sets in the acquisitions, just kind of a general updates on the things that have gone on since you set those targets and whether that is moving things around to be honest?.

Are you talking the adjusted EBITDA model that we have Jason?.

Yes, that’s exactly....

Yes. So if you think, we’re 11 months into the acquisition of the Microsemi cave-out and when we did that deal, we took the opportunity arising target model to the 22% to 26% range. At the time when we announced the deal we thought that we would be able to get into the target model, low end of that range in the current fiscal year.

And I think as a result of the increased growth that we’re delivering in the business, both on organic basis, as well as the acquired business, as well as the success of our integration efforts, we think that we’ll be well inside of that range on a year-to-date – sort of by the end of this fiscal year.

So we’re actually slightly ahead of where we thought we were going to be when we did the deal a year ago..

Okay.

And do you think that that will sustain itself over the next 4 to 6 quarters, there is nothing unique about the recent wins, the opportunity set in front of you that would change your ability to kind of be solidly in that range from the point that you achieve it?.

No, I think we’re in – I think we’re in a good spot. So we’ll continue to recognize the synergies for the work that we’re doing. Obviously, anyhow in this quarter, as well as next fiscal year, as Gerry said in his prepared remarks.

So you know, the target that we gave about 22 to 26 is obviously a multiyear journey like we done in the past and you know, we actually feel really good about the progress that we're making..

Okay. Good. Thanks, guys..

All right..

Sure..

Thank you. Our next question is from the line of Seth Seifman of JPMorgan. Your line is open..

Hey. Good afternoon. This is Benon, sign on for Seth..

Hi, Ben.

I was hoping you guys could talk a little bit about you know, maybe the risk of the current budget situation and you know, what kind of might happen to your outlook under an extended continuing resolution if we don’t get a budget by Friday and maybe what happens under like a full year continuing resolution?.

Yes, we – given the backlog that we have and the programs that we’re on, we kind of looked it through the lens of a continuing resolution and we actually feel pretty good about you know, where we’re positioned right now, you know, hence also raising our guidance for the remainder of this fiscal year. So we feel good Ben..

And might there be any risk to like FY ’18?.

Not that we see right now, but obviously we’re in the midst of our planning and we’ll have more to talk about it at our fiscal year ‘18 guidance on our next earnings call..

Okay. Thanks..

Thank you. Our next question is from the line of Peter Arment from Baird Equity Research. Your line is open..

Yes. Good afternoon, Mark and Gerry..

Hi, Peter..

Mark, you had some great contract announcements this quarter, is there a way to kind of break it down on a percentage basis of what – what is new versus what is kind of follow on. I mean, it looks like a lot that awards are follow-on or maybe the scope is expanded, so in and itself may be a new win.

But is there a way to view that?.

It’s hard to say, you know, in terms of the actual awards themselves, I mean, if you look at what we see hopping in a very high level, what’s driving the growth is really the industry trends that I talked about all in my prepared remarks, specifically the flight to quality, which is a pretty big deal and we are taking share and there is a number of specific things that either we have won or are in pursuit in the radar, as well as in the EW domain that you know are important programs for us.

The second one is clearly our customers are outsourcing more and you know, it’s not just about affordability that clearly seeking companies that are able to innovate and I mean, Mercury is a very innovative company and we’ve seen that on existing programs, such as Patriot where we continuing to chip away and win more business on the program, likewise on SEWIP, where again, we’re continuing to win more content on both Block 2, as well as Block 3.

The one that haven't really spoken a lot about, that I think is really in the early stages is the de-layering of supply chains inside of our customers, as well as the government, is they are seeking again greater affordability, and to gain access to more innovative companies.

We think that this is a potentially significant opportunities for us longer term, as we kind of moved up the value chain from that tier 3 to mid tier 2. Beyond that, what we’re also seeing is really growth in our five major kinds of market segments, its radar and EW modernization is alive and well. We’re seeing some great opportunities there.

The move into the C4I with the introduction of our new secure rackmount server, we’re pretty excited about, we think that could potentially be faster time to money than some of the more embedded secure processing applications, as well with the acquisition of CES, we pick up some new market expansion and potential content expansion opportunities there.

The other thing that I would say that we're seeing is that we are clearly seeing demand for – in the missiles and munitions domain. I think in the short-term that is being driven by you know, higher use in theatre. But we’re also talking to our customers about the potential of bringing new capabilities to bear on some next-generation systems.

And I think the final one is that we saw [ph] a pretty significant increase in our international and foreign military sales and that we expect to continue here. So, I mean, without mentioning specific programs, we feel just based on where we’re at with the trends and how we've aligned the business, we’re in very good shape..

Yes. That’s helpful color. And just on the international bookings itself, I think you mentioned it was up, I believe 2.5 times in the quarter.

Is there an even specific there you can point to?.

Yeah, I mean, on an LTM basis, international defense revenues, including FMS is actually up 41% year-over-year, Patriot, is a big piece of that, as well, you know, we’ve seen some strong revenues associated with [indiscernible] as well..

Terrific. Thanks. I’ll get back in queue..

Okay..

Thank you. Our next question is from the line of Michael Ciarmoli of SunTrust. Your line is open..

Hey. Good afternoon, guys. Thanks for taking my questions. Maybe Mark or Gerry, just a housekeeping back to that target model.

I think you talked a couple times about higher R&D and more estimate [ph] should we assume that you’re still going to be in sort of that a 11% to 13% range for R&D or just anything shift around given maybe that focus?.

So we’re actually higher than that right now Mike, and may stay a little elevated that 11% to 13% is the longer term target for us..

Okay, okay.

On the continuing resolution, it sounds like you're comfortable with the revenue, but you know, the bookings you guys have been putting up have been pretty tremendous here, do you see any impact from an extended CR or budget environment hitting the bookings and you know, maybe even separately, do you think the bookings environment can hold sort of this volume that you’ve been running at?.

So, I mean, we’ll see. We feel like Q4 could be a strong quarter for us, as we kind of look forward we haven't completed our planning. We do expect that the first half of ‘18 could be a little weaker than the second half and that is very consistent with what we've seen in the past two or three years, so really no change there.

We had literally and probably in the last seven years. So we didn’t see any significant changes. I think that the rhythm of the business will be what it is being in years past..

Got it.

And then just last one for me on Delta, I think you guys said they had a $22 million, backlog, can you give us any color on how that’s trended and I think even the maybe the implied renewed run rate looks to be about $5 million a quarter, which seems to be up from where they were running, just want to make sure I got the math square on that?.

Yes. So I’ll talk at it at a high level, then Gerry can kind go through the numbers to say. So the – it’s a great business. I think we are pretty pleased to been able to acquire. It’s audited to the capabilities that we have and so some great programs. The business is on a pretty significant growth trajectory.

We see the opportunity of harvesting some pretty significant synergies on a cost basis, as well as benefiting from the tax. And so you know, when you look at the price that we’ve paid on a net basis, we think we got a great deal. But I’ll hand it over to Gerry, who can maybe kind of enumerate some of the things that we see there..

Yes. So we highlighted some of the synergy side and the tax benefit side which are fairly substantial numbers relative to the size of that acquisition. So we think that's a nice way to go into it and that - you know, the uptick is certainly what I’d say not representative of the past for that business and that’s part of what made us interested in it.

You know, it’s the size of that $22 million, backlog relative to the 12 [ph] revenue they had at December 31st is obviously a pretty clear in balance.

We diligence pretty hard when we look at the acquisitions to validate what we see is the pipeline of opportunities, as well as the technologies and capabilities that they have and so on and then we think about how can we leverage that inside of our channel.

So we like what we saw and you he picked up, you know, we expect about a $5 million revenue contribution for the year which is all Q4, which is the only period of ownership of that acquisition. So, kind of step function there if you will in the overall growth rate of that business.

And then as we begin to fork in the synergies over time, I mean, kind of harmonized with our model, some of that means we’ll invest like in R&D, some of it means we’ll take advantage of our channel and try to help them continue to grow in a way that they have. So we’re very excited about it..

Got it. Thanks a lot guys. I’ll jump back in the queue..

Sure..

Thank you. And our next question is from the line of Jonathan Ho of William Blair Company. Your line is open..

Hi, good afternoon.

Just wanted to start out in terms of the Phoenix facility and just maybe get a sense from you in terms of a little bit more color on what the strategic differentiation could come from that facility and you know, what it allows you to do differently than before you have the facility?.

Yes. It’s a great question Jonathan.

So the biggest thing is that is a sort of trusted manufacturing facility and if you move from just generalize processing into secure processing which you know is a major area of focus for us, more and more the government wants and our customers, the Primes want to be able to see that not only the technology, the problem to the technology, but as a trusted supply chain associated with it, in terms of the development and the manufacturing.

So we’ve had a number of customers kind of walk through that facility, literally and we’re still completing to build out and one particular customer on a very large naval radar pursuit that we’re going after literally walk out and said you guys are 15 years ahead of the other company that is the incumbent on the program.

We clearly see that Mercury is leaning in, investing not only in RF, but also in the trusted manufacturing associate with secure processing. So you know, for us it's something that we've been doing for some period of time.

This facility came through after the acquisition of Microsemi and we’re pretty excited of the potential that it provides on the couple of major secure add ph one processing opportunities that we’re in the midst of pursuing right now. So you know, we think it’s an important part of our business model, Jonathan..

Great. And then just going back to the CR, I mean, it seems like your confidence level is much higher this time around relative to the last round of continuing resolution that we saw few years ago.

I am just wondering you know, what is it about the business at this juncture, is it the backlog, what is it that's giving you that sort of stronger visibility and better control over the business?.

Sure. So we clearly have got a much higher backlog than we’ve had in years past. As you know, that is been an area of focus for us because it’s a means by which we can de-risk the business. We’ve also said at our annual investor day, that we now have got a much bigger business.

We’ve got many more programs, so we got greater program diversity and we’ve got more programs producing its higher rates than what we had in the past. I think beyond that, as I said in my prepared remarks, we also feel that our business model is working extremely well.

We are taking share and we’re seeing a lot of activity based upon the capability set and the investments that we've made. So not to say that there isn’t risk because there is, but we feel that we’re monitoring it well and we wouldn’t raise our guidance with Q4, had we felt that we wouldn’t be able to deliver that.

So right now we feel in pretty good shape..

Great. Thank you..

All right, Jonathan..

Thank you. And our next question is from the line of Brian Ruttenbur of Drexel Hamilton. Your line is open..

Yes. Thank you very much. Couple of quick questions.

So just to summarize, you see no changes in kind of your near-term revenue, fourth quarter revenue, because of – or due to changes with the budget to CR, it again kicked down for the whole government fiscal year, what about sequestration, what about if the government does pass a fiscal budget by Friday and let’s say they call in a supplemental, give me some levers that oh, this is good, this is bad and maybe help me gauge by how much are not at all any of this in the fourth quarter?.

Yes.

I mean, ultimately it comes down to the to the programs that we have in backlog that we’re executing against you know, for the fourth quarter and as I say, we kind of went through and we scrub the programs themselves, so any potential impact with respect to a CR in Q4 and we’ve taken that into account in the guidance and we’ve obviously raised the guidance, you know, excluding CES and then we have Delta and then we are adding Delta on top.

So right now we obviously feel comfortable and confident with the increased outlook that we have just given..

I think it’s important to note that when we talk backlog right, we are talking funded backlog and I think that's a critical point, it's unlike the sort of multiyear backlog that you might see in some larger businesses which are funded on a you know, the year-by-year basis. So it's just not the same.

And you know, it’s a biggest risk in a sequestration situation is – sorry, in a CR situation is lack of new programs starts, but as Mark pointed out we’re much more reliant on programs that are actually ramping up in production. So they are at different phases of their lives not new program starts for the most part.

Of course, we look for new program opportunities all the time, but you’ve heard us talk for a long time about content expansion, capturing share from competitors and so on. Those aren’t new program concepts, those are existing program concepts. So we’re heavily weighted on that direction and that’s what’s helped to fuel our backlog..

And you will see what happens when the administration submits the FY ’18 request which I am hearing is kind of in the mid May timeframe. So we’ll see what that looks like and we’ll compare what they submit with the internal plan that we’re in the midst of building for next fiscal year and beyond..

Okay. All right, thank you.

Just a follow up on acquisitions plans, and what are they in the near term, do you need time to digest before you make any additional large acquisitions or should we expect only small bolt-on as in $20 million in revenue size that side or do you feel prepared to take on large acquisitions at this point in time?.

So as I said in my prepared remarks, I think we – the internal team that we have doing the integration is doing an amazing job.

I mean, the speed at which we are converting legacy ERP applications and building out you know, the facilities with the new manufacturing capabilities that are important for us to continue or harvest long-term synergies, they are just doing great. The speed at which we’re able to move on the smaller ones is much more rapid.

So we are doing a good job there. As it relates to the size of acquisitions, nothing is really changed. We’ll continue to look at the smaller ones, as I said on the call, as well as we’ll continue to look at building a pipeline of larger opportunities. That's why we went out and raised the money to be able to do both of those things..

So, in summary, you feel prepared to take on the large acquisition in the very near term or do you need more timing to digest?.

Well, you know, we’re busy with the two that we just acquired, but if the right acquisition came along, you know, we would take a run at it..

Okay. Thank you very much..

Thank you. Our next question is from the line of Ronald Epstein from Bank of America Merrill Lynch. Your line is open..

Hey. Good afternoon, guys. It’s Kristine Liwag, calling in for Ron..

Hi, Kristine..

Hi. As you move up the supply chain to be a mid tier [ph] provider, is there a structural difference in margins compared to being a lower tier supplier.

For example, do you anticipate any changes in contracts, structure, or do you take on more integration risk or perhaps as a higher R&D or integration or investment required?.

Not we see right now. I think that the value that we are bringing as we kind of move from modules and subassemblies into subsystems is that you know, we are in effect integrating our own technology or pre-integrating our own technology. So you know, we’re providing better affordability to our customers and then doing it in-house.

Our solutions typically end up being delivered more quickly at lower risk and you know, we’re already doing that, you know, it’s a big part of our revenues today and we don’t see a significant change as we continue to see that part of our business grow..

And then – that’s helpful. And then maybe to clarify, you mentioned in your prepared remarks that you have a $100 million in your revolver and $110 in your universal shelf filing.

I was wondering is this before or after the Delta Microwave, acquisition?.

So all of that is after Delta and its 173 left on the shelf that’s just untapped you know, issue ability if you will.

The $100 million revolver obviously is something we can borrow and repay from time to time, but it's unused so far and then we have the Q3 reported number on the balance sheet, its little over $270 million of that 40.5 was used for the Delta Microwave acquisition..

Okay, great. Thank you very much..

You’re welcome..

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

Hi, good evening. Thanks....

Hi, Sheila..

Hey. How are you Mark? So I know it’s a little bit harder to quantify now that Microsemi is almost fully integrated.

But is it fair to say excluding Microsemi and the organic profile of the business in the quarter was low double-digit?.

So if you look at maybe on an LTM basis, I think, so actually – so I am not going to mention on a quarterly basis, but if you look at the underlying growth rate in the business itself, where its pretty consistent with what we’ve seen you longer term. So it's high single-digit, low double-digit..

Yes. As you pointed, Sheila, it’s a little bit unfair in a sense to try to segregate them, once we really lean into the integration activities.

But you know, I think another way of saying it is, if you look at the pro forma combination of the two businesses based on historical growth rates, the total is growing faster than the pro forma total would have suggested on an historical basis..

Okay. Understood. That’s why the ranges giving out numbers.

And I guess, as we head into 2018, how do you aid or have to quantify what your revenue growth is going to be as you think out year, but how do you quantify growth maybe or give us what you’re thinking what growth from versus new market share wins or additional wins?.

So we’ll have more to talk about that next quarter, we’re really not going to comment on fiscal year ‘18 at this point..

Okay. And then I guess, just to follow up on one of the last questions that was asked, that you mentioned that you are just starting to go to market with the Rack Server offering....

Yes....

I was just wondering, is this – if you go to, does the sales force go to market in the same ways, is there any change in - I guess, that you think about your target SG&A model is it still the 16% to 18% range?.

Yes, there shouldn’t really be any change in our SG&A.

I think the difference between this particular product and some of the work that we do in the embedded systems domain, this is more of a product sale targeting what we have discussed in the past where with the likes of IBM exiting the blade server marketplace and as our customers are seeking you know, more domestic capabilities and secure processing from trusted suppliers, that’s left a gap in the marketplace that we are seeking to fill with both our rackmount server, as well as our blade server opportunity.

And we’re seeing opportunities there in various market segments of large ground-based radars where historically we haven’t participated, launch surveillance platforms there to be used different types of computing versus what we have provided historically to undersea activity. So these are potentially new areas for us with this the capability.

So we’re pretty excited about the opportunities that obviously things take time, but right now based on the feedback that we've gotten, there is a definite market need and we’re well-positioned to fill it..

Great. Thank you very much..

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 very much for taking the time to listen. We look forward to speaking to you again next quarter. Thank you..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everybody have a great day..