Mercury Systems Inc (MRCY) 2017 Q1 法說會逐字稿

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 would 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 at our website at MRCY.com . We would like to remind you that the 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 or uncertainties include but are not limited to continued funding of defense programs, a 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 in delivering technological innovations.

Changes in or in the US 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 restructuring 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 general accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed price product, service, or system integration engagement and various other factors beyond our control. These risks and uncertainties also include such additional risk factors as are discussed in the Companies filings with the US 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 obligations to update any forward-looking statements to reflect events or circumstances arising after the date on which such statement is made. I would 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 matters specifically adjusted EBITDA, adjusted income, adjusted earnings per share or EPS and free cash flow. Adjusted income excludes several 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 all of our metrics then we'll open it up for your questions. Mercury's off to a great start in fiscal 2017. Our acquired inorganic businesses both performed very well in the first quarter and we came in at or above the high end of our guidance in all of our metrics. Our total revenues for Q1 were up 50% year-over-year with our largest, Egypt, LRDR and digital electronic warfare system. Organically revenue is up over 8% year-over-year as expected. Q1 GAAP income in adjusted EBITDA were up 34% and 54% respectively from Q1 last year. Internal bookings grew 41% driving a 1.1 book-to-bill and a record backlog of $296 million, up 36% year-over-year and our 12-month forward revenue coverage remains strong. Our largest booking in Q1 was Patriot foreign military sales to Japan. We also received major bookings to small diameter bond two, Paveway Aegis which is the advanced integrated defense organic warfare suite and provision body scanner.

These results demonstrate that our content expansion growth strategy continues to work well. Over the past few years we've successfully leveraged internal R & D investments and acquisitions to build a 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.

At the same time we created business model we can efficiently scale through acquisition. The strategic deals in RF and EW that we completed since fiscal 2011 have substantially expanded our capability set and as importantly our total addressable market. These transactions have enabled Mercury to provide affordable pre integrated secure processing sub systems while also creating substantial synergies and opportunities for growth. After starting essentially from scratch more than five years ago, we believe that Mercury's currently one of the top RF suppliers to the defense industry.

We're leveraging our RF capabilities, channel and program base to win new programs that is 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 are 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 embedded secure processing companies. We've created a unique and differentiated set of capabilities in embedded security through internal R&D investment in our industry-leading secure Intel server-class product line as well as through the LIT and Microsemi carve-out acquisitions. This strategy is paying off and our pipeline of opportunities continues to grow.

We are an expecting fiscal 2017 to be another year of solid revenue growth both organically and in a total company level. Lockheed Martin just received their five-year production contract on SEWIP Block 2 and we continue to import work with Northrup on 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 2017 and we're seeing more opportunity on Filthy Buzzard. Programs in the acquired business related to precision-guided missiles and munitions should also do well this fiscal year from a revenue perspective. Fiscal 2017 is shaping up to be another good year for bookings as well with strong orders for Aegis, SEWIP and F-35 and Filthy Buzzard expected.

Patriot bookings are 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 of the Microsemi carve-out. We're beginning to harvest the synergies that we target. There's strong sense of energy and general 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 for micro-sunlight 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 inline with our expectations.

The sales force is now fully integrated and we continue to uncover new potential growth opportunities. Customers are telling us that they really like the unique technologies and capabilities set we've assembled and the greatest scale we've created in the business. They also appreciate the fact that we now have complimentary RF manufacturing on both the east and west coasts and have a DMEA certified custom microelectronics manufactuing capability. We are also making good progress on our headquarters move from Chelsea to Andover Massachusetts which we expect to complete in early calendar 2017. This is a move that matters 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 2016 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 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 built. We will remain focused on the key pillars of the business, RF and secure processing while working to assemble critical and differentiated solutions for sensor and mission processing. We'll remain focused on smaller capability led tuck-in acquisitions while building a pipeline of larger opportunities. In summary, Mercury's currently on track for another great year in fiscal 2017. This strategy we're pursuing is increasing our addressable market in 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 procurement reform. As I just mentioned, we're expecting a strong performance organically in fiscal 2017 also. We're 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 is growing.

As anticipated, we began the new government fiscal year with another budget continuing resolution and uncertainty related to the election. That said, given our strong performance in Q1, and current expectations for the remainder of the year, we are raising our full-year fiscal 2017 guidance and now expect to deliver adjusted EBITDA, within our recently revised target business model. Gerry will take you through the guidance in detail in just a minute. As a reminder we'll be discussing our strategy and plans for growth in depth in our investor day in New York City on November 8th and we sincerely hope that you can join us. With that I would 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, comparisons to prior periods and guidance on a consolidated basis that includes LIT and the Microsemi carve-out businesses we acquired in fiscal 2016. As a reminder we're now reporting Mercury's financial results as 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 remain optimistic about our ability to capture the cost synergies that we anticipated as our integration efforts are proceeding to plan and are even accelerating somewhat. As Mark said, we're also planning -- beginning to see potential growth opportunities taking shape.

Looking at our first quarter results, Mercury delivered a strong start to fiscal 2017 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 2016. The carve-out businesses acquired from Microsemi also contributed 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 2017 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 bookings and revenue growth into solid profitability. For Q1 of fiscal 2017, 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 an inventory evaluation step-up driven by purchase accounting. This impact should diminish in Q2 and is expected to be immaterial 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 a $0.3 million of rent expense attributable to the lease of our new headquarters location. This is a non-cash charge driven by GAAP lease accounting. It's duplicative non-cash expense 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 headquarters site expires. GAAP income for the first quarter of fiscal 2017 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 to $0.22 a share, up 15.8% from $0.19 a share in Q1 of fiscal 2016 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 Q1 fiscal 2017 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 remains strong and we continue to maintain a flexible capital structure to support future growth. Mercury ended the first quarter of fiscal 2017 with cash and cash equivalents of $77.3 million compared with $79.9 million a year earlier.

Operating cash flow was $10.3 million for the first quarter, compared to $5.6 million in Q1 of fiscal 2016. 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 planned 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 planned in certain equipment and infrastructure, we now believe we can accelerate the timetable 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 vesting of employee stock-based incentive compensation. This cash use prevented dilution that would have otherwise occurred. I'll turn 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 tax 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 2017 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 full year and continue to expect strong positive operating cash flow for the year. With that as background, for the second quarter of fiscal 2017 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 modestly 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 2017. Up from our prior guidance of $368 million to $376 million. Fiscal 2017 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 2017 at approximately $83 million to $87 million, an increase of 45% to 52% year-over-year and a 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 will be happy it to take your questions.

Operator, you can proceed with the Q and A now.

Thank you. (Operator instructions). Our first question comes from the line of Jason Gursky with Citi. Your line is open

hey, good afternoon, guys.

Hey, Jason

Hey, Jason

Mark, I was wondering if you wouldn't mind making a couple of comments. One, just the budget environment here in the States, the continuing resolution. At what point you believe a continuing resolution would have a negative impact on you or your customers if the CR goes beyond such and such a date it could be have an impact on your 2017 guidance. And then could you make some comments on the integration efforts, particularly on the sales side of things and the marketing, just reflect back maybe on what you've achieved here and where you think you're going from here. Is there some opportunities that you've identified as you've gone through this process that look a little bit more compelling than what you originally thought, which you described as how the sales integration is coming along or you've identified any additional end markets, international maybe looks a little better. Maybe more comments on the integration efforts particularly on the sales force would be helpful.

Sure, no problem. So we think that the guidance that we've given obviously takes into account the fact that we're starting out the year with another budget continuing resolution as expected. I think our expectations right now is that in the C.R. will head into next fiscal year, maybe the March or April time frame. And yeah, we've taken that into account in terms of the guidance that we've provided. As you know, we've worked hard to actually build our backlog and we've got very, very solid revenue coverage, going into the remainder of this year. So we feel good about the position that we're in. As it relates to the integration, the feedback that we've gotten from customers has been extremely positive. You know, 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 preacquisition and the (inaudible) businesses that we've acquired were both seen as very strong suppliers that together, you know, 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 sales model to Mercury's direct sales model has occurred without incident and we're already starting to see some of the benefits there. The opportunities that we see on a combined basis really fall into three major areas. The first is around embedded security. The second is around guided missiles and smart munitions and the third is our continued focus basically expanding our content 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

Hey, guys. I just wanted to start off with one housekeeping question. Not sure if you have this but can you guys giving us what the actual growth rate was for the Microsemi business for the first quarter?

We obviously didn't own it in the comparative 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 2016.

The low single digits.

Yeah. 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, based on our, update to guidance, that's exactly what we believe is happening for the balance of the year.

Let me just add a little color there. I think the business performed right in line with our expectations. Historically we said that the business has grown low single digits. That's largely because we believe that the way in which Microsemi went to market for this type of model wasn't a great fit. The updated guidance that we gave for fiscal 2017 on a pro forma basis would result in our revenues growing between 5% to 8% at a total-- total year level and we expect both the organic business as well as the acquired businesses to grow within side that revenue range. So we believe that we're already beginning to see the benefits of the stronger Mercury channel.

Got it, got it. And then you guys talked a little bit about the accelerated manufacturing investments and CapEx investments that is 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 implication is once you've completed those investments?

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 locations. So we're not expanding our footprints 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 those accelerated rates. So, setting aside the build-out of the Andover's headquarters which Mark talked about in his remarks, which will produce some CapEx but temporarily in the year, the rest is really focused on, again additive capabilities that bring to bare 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 there's a lot of leverage that we can apply to that. So what we see is more significant benefit, essentially the leverage of those manufacturing capabilities as revenue begins to inflect in a positive direction.

So just kind of expanding on that 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 than the first half. As I said in my prepared remarks, we expect that given the updated guidance that we provided that we now anticipate, landing inside the revised target business model, albeit at the lower end of that range which gives you the opportunity over time to harvest additional synergies from the investments that we're making as the business continues to grow in future years. So it's all about creating, a 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.

Good afternoon, Mark, Gerry

Hi, Peter, how are you doing?

Good. Nice quarter. Hey, I guess I just really want to focus on kind of the legacy, MIS, the precision guidance business. You know, is this an area where, you know, 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 munitions 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, how should we be thinking about that?

Yeah. We do think it's going to be an area of growth. I don't think there are really legacy programs there that are rolling off. You know, the program that the acquired businesses are involved with or programs such as MAL which is the miniature air launch decoy, they're on small diameter bomb 2 which is really just getting going. They're also, involved in the transition basically large caliber dumb munitions into slot 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. We've made significant investments through the acquisitions of core NEW as well as, you know, certain acquisitions in the RF and microwave domain and we're also seeing a lot of opportunity in that space.

Okay. And then just regarding I think you mentioned LRDR. Could you just give us an update of what's going on there?

Yeah. So the LRDR program is basically ramping. We expect it to be a significant driver of growth. We got a substantial booking during fiscal 2016, and that is beginning to turn to revenue, this fiscal year. So that's right on track and it's progressing as we expected, Peter

Terrific. Thanks, guys.

Thank you.

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

Thank you very much. Couple questions. First of all, it's my first quarter on with you guys after awhile so congratulations.

Welcome back.

Thank you. Just a couple question around the tax GAAP, tax 35%. Why the lower tax? And moving forward I assume that tax can be maintained in the fiscal 2018 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 a 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's anything unusual going on there. There was some benefit in Q1 that brought the rate down a little bit. Again but those 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 benefited from passing the CR quicker or delayed? If you just mention one or two, I'm just wanting to track some of those programs out there if there's an acceleration and passing the CR sooner or a delay in the CR.

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

Great. Thank you very much.

You're welcome, Brian.

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

Good afternoon, gentlemen.

Hi, Mark.

On CapEx, you talked about first quarter $6.2 million, peaking at the second quarter at $13 million, obviously being driven by investments and your headquarters. Could you talk about what you expect for the full year in terms of CapEx and how much of that is really non-recurring, again tied to, the headquarters move or sort of one type investment that are not repetitive.

So, we said it was really driven by three items, one of which you mention is the Andover headquarters build-out which started in Q2 and will continue into Q3 and we'll sort of be diminished by Q4. The other two items were the obviously the incremental addition of the new business. So there's just a 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 you is that we expect it to as I said peak in Q2. H2 as a whole will be lower than H1 and Q4 we expect to be a normalized rate as we go over hump on a couple of these one time items.

Second question for me. Could you talk a little bit about the order flow at the acquired Microsemi operations? Typically how do those orders, book and ship business? Is there backlog or how long is the average duration of orders that the Microsemi businesses receive?

So they've got more book ship than what, you know, the organic businesses has. And that's largely because since fiscal 2013 we worked very hard to grow our backlog and less reliance on book ship. That said, yeah, I think they've got a strong diversity of programs. We're going to continue to do with them what we have done with ourselves, seek to grow that backlog over time. And the business actually performed very strongly from a bookings perspective during the first quarter so the businesses that 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 $100,000 type range moving forward or are there other items that could flow through there?

Yeah, we don't expect anything significant in the way of other income, i.e, non-operating items. You know, there's -- the real change that I think that you see are for the first time we've got things like interest income and expense coming through. That was driven by the acquisition. There's a little bit of foreign exchange activity but it's really not significant so I wouldn't really focus too much on it.

Okay. Thank you.

You're welcome.

Thank you. Again, ladies and gentlemen, (Operator instructions). Our next question comes from the line of Sheila Kahyaoglu from Jefferies.

Hi, good afternoon guys. Do you have the core bookings and organic bookings and backlog for the quarter?

We don't break out the bookings and 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 bare. Second is that as Mark said, I think what the important thing was from our perspective is the bookings performance 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 first three months that we owned them in Q1. So they've actually come in line with organic Mercury and that's really what we want to see and that was pretty amply illustrated by the 1.1 book-to-bill for the quarter on a combined basis. Bottom line is we're very happy with the way they've come around.

Sure. And I apologize if I missed this earlier but it seems like the core business is driving the revenue guidance range. Can you maybe get a little bit more granular on what is. And also with the Japan Patriot upgrade, is that expected to be converted into revenue in 2017, or is that a 2017 item?

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 2016 meaning we had owned it for the full year, that would translate into a pro forma growth rate of between 5% to 8% 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 result in increasing growth versus where they were last -- the 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 forecasts for the Patriot program versus where we were last quarter.

Okay. And then on Paveway, is that a new program, and how do we think about maybe your content on a Paveway versus a Patriot or other missile?

Paveway is an 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 Raytheon that we're very pleased about. I'm not going to comment specifically, about the content per program or per missile. But we are providing some innovative technology across several of the programs that I previously discussed.

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 you at our investor day in New York City on November 8, 2016. That concludes the call.

Thank you.

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.