Mercury Systems Inc (MRCY) 2011 Q4 法說會逐字稿

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  • Operator

  • Good day and welcome everyone to the Mercury Computer Systems fourth quarter fiscal year 2011 conference call.

  • Today's conference is being recorded.

  • At this time for opening remarks and introductions I would like to turn the conference call over to the Senior Vice President and Chief Financial Officer, Mr.

  • Bob Hult.

  • Please go ahead, sir.

  • Bob Hult - SVP, CFO, Treasurer

  • Good afternoon and thank you for joining us.

  • With me today is our President and Chief Executive Officer Mark Aslett.

  • If you have not received a copy of the earnings press release you can find it on our website at www.mc.com.

  • We would like to remind you that remarks that we may make during this call about future expectations, trends, 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, should, would, plans, expects, anticipates, continue, estimate, project, intend, likely and similar expressions.

  • Such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.

  • These risks include but are not limited to 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 in delivering technological innovations; continued funding of defense programs; the timing of such funding, changes in the US government's interpretation of federal procurement rules and regulations; market acceptance of the Company's products; shortages in components; production delays due to performance quality issues with outsourced components; inability to fully realize the expected benefits from acquisitions and divestitures or delays in realizing such benefits; challenges in integrating acquired businesses and achieving anticipated synergies; and difficulties in retaining key customers.

  • Additional information regarding forward looking statements and risk factors is included in the Company's periodic reports filed with the SEC.

  • We caution listeners of today's conference call ask to not place undo reliance upon any forward-looking statements which speak only as of the date of this call.

  • We undertake no obligation to update any forward-looking statements.

  • I would also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principals, or GAAP, we will discuss several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow, during our call.

  • Adjusted EBITDA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring expense, impairment of long-lived assets, acquisition and other related expenses, fair value adjustments from purchase accounting and stock-based compensation costs.

  • Free cash flow excludes capital expenditures from cash flows from operating activities.

  • Reconciliation of adjusted EBITDA to GAAP net income from continuing operations and the free cash flow to GAAP cash flows from operating activities are included in the press release we issued this afternoon.

  • I am now pleased to turn the call over to Mercury's President and CEO, Mark Aslett.

  • Mark Aslett - President, CEO

  • Thanks, Bob, Good afternoon, everyone and thanks for joining us.

  • I will begin with the fourth quarter business update.

  • Following that Bob will review the financials and guidance, and then we'll open it up for your questions.

  • Q4 was a strong finish to an excellent year for Mercury, albeit in a challenging defense environment.

  • For the quarter total revenue, gross margin, GAAP EPS and adjusted EBITDA all exceeded the high end of our guidance range.

  • Most importantly we made substantial progress during the quarter in rebuilding our backlog in defense.

  • And in just the past month, the first in our new fiscal year, we booked three major deals totaling roughly $40 million that were delayed by the government's continuing resolution and late approval of the defense budget in FY 2011.

  • For the whole of FY 2011, Mercury's total revenue grew by $29 million or 14% from FY 2010, driven by the highest defense revenue in the Company's history.

  • Operating income for FY 2011 was up 44% year-over-year.

  • Adjusted EBITDA was up 37%, reaching the high end of our target business model of 18%, and free cash flow was up 170%.

  • We produced solid results in FY 2011 on the basis of our strong backlog and good execution.

  • Defense bookings were weak in Q2 and Q3 in FY 2011 because of the defense continuing resolution.

  • Although we continue to see the lingering impacts of the CR, we still had a strong bookings rebound in the fourth quarter including an $18 million booking for Aegis.

  • As a result we are now starting to rebuild our backlog and we're expecting another strong bookings quarter in Q1.

  • As I said, in the first month of the new quarter we closed three major deals that were pushed from FY 2011.

  • In ACS we recorded close to a $10 million booking for Saudi Patriot and an $18 million order for the Joint Strike Fighter.

  • In our Mercury Federal Systems business we received a $12 million PO relating to phase two of its major program.

  • This single booking is essentially equivalent to total MFS revenues for all of FY 2011.

  • Even though Q1 of FY2012 is shaping up well for Mercury from a bookings perspective the industry faces challenges.

  • Due to the lingering effects of last year's CR and the impact for defense procurement reform, bookings are taking longer than they have historically.

  • We still feel good about how we have positioned the business, and we are optimistic about FY 2012, but we feel it is prudent to be cautious due to what is happening in Washington around the deficit, federal spending and the FY 2012 budget particularly as it relates to defense spending.

  • Nonetheless, our involvement on existing defense programs and platforms will continue to provide Mercury with a solid foundational revenue base in FY 2012 and for the years ahead.

  • We believe our business with Lockheed Martin on the Navy's Aegis ballistic missile defense system will continue to be an important bookings and revenue driver for us over the long-term.

  • Just last week Lockheed and the Navy successfully demonstrated the Aegis Spy 1 Radar and the Multi Mission Signal Processor, or MMSP, of which Mercury is a part.

  • The MMSP combines next generation ballistic missile defense and anti-air warfare capability in an open combat system architecture.

  • We are very proud to be part of this important effort and capability.

  • Patriot also continues to be an important program.

  • We have received the Saudi Patriot booking as I mentioned, which was delayed from financial year 2011.

  • And with the cancellation of the MEADS program, which was due to replace the US Army's existing Patriot missile system, the long-term outlook for Patriot has also brightened considerably.

  • We are well positioned for long-term bookings and revenue related to the Joint Strike Fighter, or JSF, we're in multiple programs on Global Hawk, we're seeing a flow of bookings related to radar upgrades on the Air Force's existing long-range bomber, and we expect to see the first LRIP bookings from SEWIP, the Navy's Surface Electronic Warfare Improvement Program in FY 2012.

  • All of these programs appear to be well funded as we head into our new financial year.

  • Taking a closer look at the result for the fourth quarter total defense revenue including ACS and Mercury Federal was $53.5 million, up 12% from Q4 of FY 2010.

  • The major programs driving the revenue were classified airborne radar program, Aegis, and Global Hawk.

  • On the commercial side as anticipated, the loss of KLA Tencor and ASML is beginning to have an impact on our results as commercial revenue for Q4 declined to $7.7 million from $15.8 million in the fourth quarter last year.

  • For FY 2011 as a whole, total defense revenue was up 14% year-over-year and revenue in commercial was up 17%.Turning to bookings, total bookings for Q4 were up 21% year-over-year.

  • Bookings in commercial for Q4 last year were $24.5 million whereas this quarter commercial bookings were $4.3 million, again driven by the decline in the semiconductor business.

  • In defense, including the Aegis order I mentioned, our Q4 bookings were up 81% sequentially and up 115% year-over-year.

  • In addition to Aegis we booked large orders for our classified airborne radar program as well as the Air Force's current long-range strategic bomber.

  • We also booked a number of smaller orders related to radar and electronic warfare applications.

  • Looking at bookings for the full fiscal year, total bookings were down 2% from FY 2010, reflecting the decline in commercial as well as delays in defense.

  • We said last quarter that for FY 2011 as a whole we expected our defense bookings to increase more than 20% year-over-year.

  • The actual increase was slightly greater at 22%.

  • Commercial bookings for FY 2011 were down 55% year-over-year, again due to ASML and KLA Tencor.

  • Turning now to backlog, we conclude FY 2011 with total backlog and 12 month backlog down 17% and 20% respectively compared to a year ago driven by the decline in commercial.

  • The good news is we made excellent progress in rebuilding our defense backlog in Q4 which grew 13% sequentially and 6% year-over-year.

  • Reflecting the strong bookings quarter in defense as we expected our defense ending backlog in the fourth quarter was higher than where it ended at the same time last year.

  • Our continued growth in defense despite the challenging industry environment demonstrates the success of our strategy to focus Mercury on specific areas in the defense market, namely ISR, electronic warfare and missile defense, that we believe will see robust funding and growth going forward.

  • The services and systems integration business we have developed within ACS positions us to capitalize on these market opportunities.

  • As we expected, SSI revenue was down year over year in FY 2011, following a strong FY 2010.

  • For Q4 SSI's revenue was down 48% from the fourth quarter last year while bookings were up 64%.

  • With SSI still being a relatively new and therefore lumpy business, we believe the best measure of its current contribution is the number and value of Mercury's design wins where SSI's involvement is now a key driver.

  • We won ten new designs in the fourth quarter of 2011, eight of them in defense and two in commercial.

  • This compares with a total of 11 wins, all of them in defense, in Q4 of last year.

  • The five-year probable value of our Q4 design wins was $34 million.

  • This compares with $75 million in Q4 of last year.

  • The decline in large part was due again to funding delays associated with the continuing resolution.

  • For the whole of FY 2011 we had four design wins in commercial versus eight in FY 2010.

  • In defense, however, we had 41 design wins in FY 2011 versus 32 in FY 2010.

  • The five-year probable value of our FY 2011 design wins in commercial was $7 million compared with $25 million last year.

  • The FY 2011 five-year value in defense was $497 million, more than double the $203 million we reported for FY 2010.

  • The volume of Mercury JCrew content is included in our FY 2011 design win numbers, but excluded is the contribution from the recently acquired LNX business.

  • Our design wins continue to focus on radar, electronic warfare and EO/IR applications.

  • The largest wins this quarter include an additional design associated with Lockheed Martin's SEWIP program, a classified radar program with Northrop Grumman, a next generation Naval radar program with Lockheed Martin and an EO/IR wide area surveillance program, again with Lockheed.

  • Turning to Mercury Federal, Q4 turned out much as we expected.

  • Extensive usage has shown that the technology and capability we provided in phase one at the airborne persistent ISR program appear to be working extremely well and producing valuable results.

  • We were highly focused in FY 2011 in positioning ourselves for phase two which is much more sophisticated technology than the first phase and our $12 million booking in Q1 of FY 2012 represents the first fruits of that effort.

  • Looking at the fourth quarter of FY 2011 specifically, MFS recorded $1.7 million in bookings compared with $1.5 million in Q4 of last year and revenue was up 14% to $2.6 million.

  • For FY 2011 as a whole, MFS bookings grew 41% to $10.5 million compared with FY 2010.

  • With the $12 million booking for phase two of the persistent ISR program already in hand we see additional potential associated with the development of the next generation and believe there could be sales of additional systems for the first generation based upon their success to date.

  • Mercury Federal is still highly concentrated on the signal program, but we believe it is a high priority capability and has now become the program of record for wide area airborne surveillance, so it should be well funded going forward.

  • Our the interim strategy for MFS remains focused on excellent performance on this program.

  • Longer-term, given the fact that we have proven out the MFS the business model and believe that the business will be difficult to scale organically, we will be working to find the right company to acquire in order to accelerate its growth.

  • In this regard, we are very pleased to be welcoming Admiral Edmund Giambastiani, the former Vice Chairman of the Joint Chiefs of Staff, who as we announced yesterday, has been elected director of MFS.

  • We are honored to have a military leader of such distinction contributing insight and experience to the Mercury organization, and we look forward to his bringing an important new dimension to MFS and its board.

  • Turning now to our M&A strategy.

  • At this point we are not prepared to discuss the timing of any possible future acquisitions other than to say that we are in active discussions with a number of companies.

  • As I said previously, we have typically focused primarily on smaller, private business that are performing well, particularly in certain areas of the electronic warfare market place.

  • Our goal is to build our capabilities along the entire signal processing chain, but we also want to acquire companies that are on the right programs and platforms.

  • In conclusion, we feel good about the progress we have made in positioning Mercury for growth.

  • We are gaining ground in specific areas in the defense market place, ISR, electronic warfare and missile defense, that we believe will be relatively well insulated from budgetary pressures going forward and in some cases are entering favorable upgrade cycles.

  • We have developed a business model that aligns well with defense procurement reform.

  • We continue to add good opportunities to our new business pipeline, and we are capitalizing on these opportunities with a consistent flow of new design wins.

  • With our ACS services and systems in MFS, we have positioned ourselves as the premiere commercial outsourcing partner to the primes as they seek the rapid development of more open and affordable ISR subsystems solutions.

  • And, we have both the right strategy and the liquidity necessary to supplement Mercury's organic growth through acquisitions.

  • Our fourth quarter results and results for the full year were excellent in terms of both revenue and profitability.

  • Looking ahead to FY 2012, Mercury is off to a good start as we begin the new year.

  • Strong bookings this past quarter enabled us to start rebuilding our backlog, and we are expecting strong bookings in Q1 as well.

  • As we move through FY 2012, the key challenge as always will be related to the timing around quarter.

  • Another major factor this coming year is JCrew 3.3.

  • We continue to believe that JCrew 3.3 has the potential to have a major positive impact on our 2013 fiscal year and beyond.

  • Based on the government's presolicitation, we are still modeling LRIP bookings to start during our financial year 2012 with revenue beginning during the first quarter of financial year 2013.

  • Bob will conclude his prepared remarks with both our guidance for the first quarter and a summary of how we see FY 2012 unfolding during the course of the year.

  • With that I would like to hand it over to Bob.

  • Bob?

  • Bob Hult - SVP, CFO, Treasurer

  • Thank you, Mark.

  • This was another quarter of solid results for Mercury.

  • Total revenue for the fourth quarter of fiscal 2011 was $61.2 million which is well above the top end of our guidance range of $57 million to $59 million.

  • This compares with $59.9 million in revenue for the sequential third quarter and $63.6 million in the fourth quarter of fiscal 2010.

  • For the full 2011 fiscal year total revenue increased 14% to $228.7 million from $199.8 million in fiscal 2010.

  • GAAP income from continuing operations for the fourth quarter of fiscal 2011 was $4.3 million or $0.14 cents per diluted share on approximately 30.1 million shares outstanding.

  • This exceeded the high end of our original Q4 guidance of $0.11 to $0.13 per share.

  • For the fourth quarter last year Mercury reported GAAP income from continuing operations of $18.0 million or $0.77 cents per diluted share.

  • You may recall that FY 2010 earnings per share were positively influenced by the partial reversal of the valuation allowance against certain tax assets in an effective tax rate benefit of approximately 5%.

  • The upside from guidance this quarter was driven by higher revenues and favorable product mix delivering higher gross margin.

  • Only partially offset by higher operating expenses.

  • For fiscal 2011 as a whole GAAP income from continuing operations decreased to $18.5 million or $0.71 cents per diluted share from $28.1 million or $1.22 per diluted share with fiscal 2010.

  • Again, FY 2010 results were positively influenced by the partial release of our valuation allowance and an effective tax rate benefit of approximately 5%.

  • Breaking down our results by operating segment, revenue in ACS including both defense and commercial for the fourth quarter of fiscal 2011 was $60.4 million, down 3% from $62.6 million in Q4 of last year.

  • Please be reminded that Q4 FY 2010 results included approximately $19 million of Aegis program revenues.

  • Half of which were originally scheduled for delivery in Q3 of FY 2010.

  • For the full fiscal year, ACS revenue increased to $223.7 million from $193.7 million in fiscal 2010.

  • Revenue in our services and systems integration business within ACS for the fourth quarter of 2011 was $2.5 million compared with $4.7 million in Q4 last year.

  • As we have said SSI is still an emerging business capability with lumpiness in both bookings and revenue.

  • For full year fiscal 2011 revenue in SSI was $12.9 million compared with $24.4 million in the prior fiscal year in.

  • In our Mercury Federal Systems business, Q4 fiscal 2011 revenue was $2.6 million, up from $2.3 million a year ago.

  • As we said entering Fy 2011, given that our bookings and revenue in MFS remained concentrated on a single large program, we expected MFS revenue for the full year FY 2011 to be relatively flat compared to FY 2010.

  • Actual FY 2011 MFS revenues came in with a modest increase of 4% compared to FY 2010.

  • Please note that revenues by operating segment do not include adjustments to eliminate inter-Company revenues of $1.8 million in Q4 FY 2011, which are included in those operating segments.

  • Total defense revenue for Q4 including ACS defense and MFS was $53.5 million, up 12% from $47.9 million in Q4 of fiscal 2010.

  • Mercury's commercial revenue was $7.7 million for the fourth quarter, down 51% from $15.8 million in Q4 of last year, reflecting declines in KLA Tencor end of life program buys.

  • For the full 2011 fiscal year commercial revenue was $49.6 million, an increase of 17% compared with $42.3 million in FY 2010.

  • Total defense revenue for FY 2011 was $179.1 million up 14% from $157.5 million in fiscal 2010.

  • Turning to bookings, total bookings for the fourth quarter of fiscal 2011 were $62.6 million up 21% from $51.6 million in Q4 last year.

  • Compared with the sequential third quarter, bookings are up 57%.

  • Commercial bookings declined from $24.5 million in Q4 FY 2010 to $4.3 million due to the fall off in business with KLA Tencor and ASML.

  • It was a strong bookings quarter in our defense business, however.

  • Total defense bookings for the fourth quarter of fiscal 2011 including ACS and MFS were $58.3 million.

  • This is up 81% compared with defense bookings of $32 million in the sequential third quarter of fiscal 2011 and up 115% compared with $27.1 million in Q4 of last year.

  • For the full 2011 fiscal year total bookings were $202.3 million, a 2% decrease compared with $206.2 million in fiscal 2010.

  • Again reflecting lower commercial semiconductor bookings.

  • Despite the effects of the delayed DOD budget approval and the continuing resolutions, full year FY 2011 defense bookings increased 22% to $173.4 million from $142.3 million in fiscal 2010.

  • Mercury's total book to bill ratio for the fourth quarter including ACS and MFS was 1.02.

  • This compares with 0.67 in the sequential third quarter of fiscal 2011 and 1.03 for full year FY 2010.

  • Our Q4 total backlog including deferred revenue was $86.9 million.

  • This compares with backlog of $85.5 million at the end of Q3 2011 and $104.6 million for Q4 last year.

  • Approximately 94% of our current backlog relates to defense.

  • In addition, 81% or $70.6 million of our total Q4 backlog relates to shipment scheduled within the next 12 months.

  • Our defense book to bill for Q4 including ACS and MFS is 1.09, up from 0.73 in the sequential third quarter of fiscal 2011 and 0.57 in Q4 of last year.

  • Our backlog in defense for Q4 increased to $81.5 million from $71.9 million in Q3 of fiscal 2011.

  • Defense backlog in Q4 last year was $76.8 million.

  • Mercury's adjusted EBITDA for the fourth quarter of fiscal 2011 was $10.1 million.

  • This compares with $12.4 million for the fourth quarter of fiscal 2010.

  • Adjusted EBITDA for Q4 fiscal 2011 excludes the impact of approximately $5.8 million in net benefits as follows.

  • $0 interest income and expense, a $2.3 million tax expense, $1.7 million in depreciation, $0.7 million in amortization of acquired intangible assets, $0.2 million in charges for impairment of long lived assets, a gain of $0.4 million in fair value adjustments from purchase accounting and $1.4 million in stock based compensation charges.

  • For the full year adjusted EBITDA grew 37% to $40.9 million from $29.9 million in the prior year.

  • In terms of our adjusted EBITDA margin, we are now performing near the high end of the range of our long-term pro forma target model of 17% to 18%.

  • A reconciliation of adjusted EBITDA to GAAP net income from continuing operations is included in the earnings press release we issued this afternoon.

  • Turning to our tax rate for Q4 FY 2011, we used an effective tax rate of approximately 34% for discreet items.

  • We continue to expect 33% to be our effective rate for full fiscal year 2012.

  • This rate assumes that the federal R&D tax credit will be extended at the end of this calendar year.

  • Our gross margin for the fourth quarter of fiscal 2011 was 57%, slightly above our guidance of 56% due to product mix.

  • For fiscal 2011 as a whole, gross margin was 56.8%, up from 56.3% for fiscal 2010.

  • This performance places our FY 2011 gross margin at more than 200 basis points higher than our target model gross margin of 54%+.

  • Operating expenses for the fourth quarter of fiscal 2011 were $28.5 million compared with $25.4 million in Q4 last year and up sequentially from $25.9 million in Q3, driven by R&D product development activities and year-end incentive compensation accruals.

  • Operating expenses for the full fiscal year increased to $104.9 million from $95.2 million in fiscal 2010.

  • This does include OpEx from the LNX acquisition last January.

  • As we have stated in the past, we believe operating leverage remains available as the business scales.

  • We are continuing with our long-term effort to improve the underlying operations of the business.

  • Thanks to the work we have done to strengthen our engineering and supply chain methodologies and processes, our new products continue to be launched at a faster pace.

  • With delivery and enhanced product quality and cost effective time to market benefits to our customers while generating healthy free cash flows from operations with a scalable working capital platform.

  • Inventory, including LNX at Q4, was down sequentially to $18.5 million from $19.3 million in Q3 of FY 2011.

  • Inventory turns for the fourth quarter improved to 5.7 turns from 5.6 in the third quarter of fiscal 2011.

  • For fiscal year 2011 as a whole inventory turns improved to 5.1 from 5.0 in fiscal 2010.

  • DSO's in the fourth quarter of fiscal 2011 were 67 days.

  • No change from the sequential third quarter and an increase from 62 in Q4 last year.

  • This was a function of the nonlinear shipment pattern we experienced during the recent quarters.

  • Again lingering effects from program booking delays associated with the interim continuing resolution.

  • Mercury's ability to generate cash from operations continues to improve.

  • Operating cash flow for the fourth quarter of FY 2011 was $8.6 million compared to $3.4 million in Q4 of last year.

  • Free cash flow was $5.1 million in Q4 compared to $1.0 million in the same period last year.

  • For fiscal 2011 as a whole, free cash flow totaled $22.6 million compared with $8.4 million for fiscal 2010, a 170% increase.

  • We closed the fourth quarter of 2011 with a total of $162.9 million in cash and cash equivalents.

  • Recapping the year, we entered FY 2011 with $74 million of cash, disbursed $31 million for the LNX acquisition, netted $94 million in proceeds from the follow on offering, we quoted $3 million in other investments and proceeds from employee share based programs and generated $23 million of free cash flow.

  • At the end of the fourth quarter, our total employee head count, excluding contractors, was 602 compared with 612 at the end of Q3, FY 2011.

  • Mark discussed our strategy relevant to future acquisitions.

  • Mercury continues to be well prepared to execute on that strategy from a balance sheet and liquidity perspective.

  • We have zero short and long-term debt, and we also have a $35 million operating line of credit with Silicon Valley Bank.

  • Additionally, earlier today we filed a $500 million universal shelf.

  • As stated in our form S3 registration statement, the proceeds raised through the sale of securities under any future perspective supplements are intended to be used for general corporate purposes which may include the acquisition of other companies or businesses, the repayment and refinancing of debt, capital expenditures, working capital and other purposes as described in the prospective supplement.

  • Finally moving on to guidance.

  • For first quarter of fiscal 2012 we currently expect a revenue range of $54 million to $56 million.

  • We anticipate Q1 gross margin to be approximately 58%.

  • Our first quarter operating expenses are currently anticipated to be about $28 million which is essentially flat from the sequential fourth quarter.

  • We expect to report first quarter GAAP income from continuing operations in the range of $0.10 to $0.12 cents per diluted share on approximately 30.4 million shares outstanding.

  • CapEx for Q1 of fiscal 2012 is projected to be approximately $3 million.

  • Turning to Mercury's adjusted EBITDA guidance for the first quarter of fiscal 2012, our estimate excludes the following approximate amounts.

  • $0 interest income and expense, depreciation of $1.9 million, $0.8 million in amortization of acquired intangible assets, a gain of $0.1 million related to fair value adjustments from purchase accounting, $2.0 million in stock based compensation costs and as I said, an estimated FY 2012 effective tax rate of approximately 33% for discreet items.

  • As a result, adjusted EBITDA for Q1 FY 2012 is currently expected to be in the range of $9 million to $10 million.

  • Looking farther ahead, as Mark said, the underlying growth rates in our defense business are strong, positioning Mercury for another good year in FY 2012.

  • Consistent with the outlook we provided last quarter of the whole of FY 2012, we currently expect a roughly high single digit to low double-digit overall organic growth rate year-over-year.

  • We currently expect our FY 2012 operating margin to be roughly in line with the low end of our current target business model range of 12% to 13%.

  • And our adjusted EBITDA as a percentage of revenue to come in roughly in line with the target model's high end of 18%.

  • Due to the impact of the new shares issued in FY 2011 we currently expect EPS for FY 2012 to be approximately flat year-over-year.

  • To further assist with your modeling for the year we expect approximately 47% of our full year FY2012 revenue to be recognized in H1 and 53% in H2.

  • Please note that Mercury's business does evidence lumpiness on a quarterly basis.

  • With that, we will be happy to take your questions.

  • Operator, you can proceed with the Q&A session now.

  • Operator

  • Thank you, sir.

  • (Operator Instructions).

  • We will take our first question from Tyler Hojo of Sidoti & Company.

  • Tyler Hojo - Analyst

  • Hi.

  • Good evening, guys.

  • Mark Aslett - President, CEO

  • Hi, Tyler.

  • Tyler Hojo - Analyst

  • Hi.

  • First question, I was hoping that maybe you could just talk a little bit about what the fiscal 2012 full year guidance assumes just in regards to seeing another continuing resolution in the next fiscal year.

  • Mark Aslett - President, CEO

  • Yes, I think our expectation is that there will likely be another continuing resolution in financial year 2012.

  • But it is also our expectation that it's not as long as the one that we experienced during FY 2011.

  • I think right now speaking to our advisors, I think our expectation is that the budget will be approved prior to or on December 24.

  • Tyler Hojo - Analyst

  • Okay.

  • That sounds good.

  • In light of the shelf that you filed this evening, you talked about a full pipeline on the acquisition side of things.

  • Just kind of wondering if you could maybe talk about how large you are looking to go in terms of deals.

  • And also in light of some of the budgetary pressures that have kind of been in the news, if you have seen any changes in the valuation multiples of the companies you are looking at.

  • Mark Aslett - President, CEO

  • Okay.

  • Sure.

  • So the filing of the shelf I don't think is related necessarily to anything that we are looking at.

  • I think it is generally good corporate housekeeping.

  • And nothing has really changed as it relates to the size of deals that we have discussed on a historic basis.

  • So really nothing has changed from that perspective.

  • As it relates to the valuations that we are seeing in relation to what is happening with the defense budget, at this point we haven't seen any major change.

  • It may change further down the line, but right now I think things seem to be relatively consistent.

  • Bob Hult - SVP, CFO, Treasurer

  • Yes, Tyler, just a little more on this shelf.

  • A quick reminder, the shelf that we filed just over two years ago is effectively exhausted.

  • And again as Mark said, we strictly view this new filing as housekeeping, a necessary tool in the corporate finance tool kit, if you will, and we have gone out and looked at market practice, and we seem to line up quite well with that.

  • You can see companies of our size typically putting a shelf in place that approximates 100% of the market cap.

  • Tyler Hojo - Analyst

  • Okay.

  • That makes sense.

  • Thanks for the clarification.

  • I will get back into the queue.

  • Thanks a lot.

  • Operator

  • We will take our next question from Peter Arment with Gleacher and Company.

  • Peter Arment - Analyst

  • Yes.

  • Good afternoon, Mark and Bob.

  • Mark Aslett - President, CEO

  • Hi Peter.

  • Bob Hult - SVP, CFO, Treasurer

  • Hi Peter.

  • Peter Arment - Analyst

  • So I guess a question on SSI.

  • Mark, what are you seeing regarding the whole acquisition reform and kind of being an outsource partner to the defense primes?

  • Are you seeing any changes there regarding -- was it more timing related on that business?

  • Mark Aslett - President, CEO

  • So I think we have -- we feel really good about the progress we are making in SSI.

  • As we anticipated the revenue is down in the business based upon a strong financial year 2010.

  • However, if you look at our bookings performance on a year-over-year basis, bookings in our service and systems integrations business is actually up 80%.

  • And some of the deals that were actually pushed out of FY 2011, based upon the continuing resolution, were SSI-led deals.

  • So I think we feel pretty good about that.

  • In addition, one of the things that we kind of point to is to the success of our service and systems integration initiative is our design win activity.

  • And so if you look at our design wins on a year-over-year basis, we had 41 defense design wins in FY 2011 compared with 32 last year.

  • And the five-year probable value of those defense design wins excluding the recently acquired LNX was actually up 144% to $497 million.

  • So although we were somewhat impacted by funding delays associated with the CR, that part of the business continues to do very well for us.

  • Peter Arment - Analyst

  • Yes, no question.

  • Tracking the design wins, you are making tremendous progress there.

  • Maybe could you talk a little about -- you said you expanded your opportunities with SEWIP a little bit.

  • What is going on there that you can talk about?

  • Mark Aslett - President, CEO

  • So we continue to get really close to Lockheed Martin.

  • I think we are doing a very good job from a technology perspective on that program.

  • And as you know it is the same division of Lockheed that we are working with on the Aegis program.

  • So we picked up another design win which again is part of our strategy.

  • We are looking to continue to penetrate the most important programs and platforms with more content.

  • I am not going to go into detail in terms of what it is just due to the sensitive nature of the program itself.

  • But we continue to do well.

  • The program is on track, and we are expecting our first LRIP bookings during this financial year.

  • Peter Arment - Analyst

  • That's great.

  • And then if I could just ask one more.

  • You have seen a lot of the discussions, and I think Tyler mentioned it earlier regarding the CR for fiscal 2012, but you have seen a lot of the longer range projections.

  • Do you think you are going to see any impact here on C4-ISR and in particular the areas that you are playing in, or is this with radar and all of the different areas that you are involved in missile defense?

  • What are you expecting on the growth there?

  • Mark Aslett - President, CEO

  • Yes, I think we have done an extremely good job basically positioning the Company in the right part of the market, those being ISR, missile defense and EW.

  • Clearly we are in an upgrade cycle which will benefit Mercury.

  • The debt deal that has just recently been passed doesn't really change the impact of the defense spending for now.

  • I think if you go back to what was anticipated back in April with President Obama who is expecting a cut of roughly $400 billion in defense spending through 2023.

  • Right now with the debt proposal that looks like it is trimming $350 billion through 2024 which basically gives the DOD an additional $50 billion of spending over that planned period.

  • So I think net-net it seems to be that it is better for the Department of Defense than what was previously anticipated.

  • Peter Arment - Analyst

  • Okay, and then just one last one.

  • Regarding last year you closed with LNX and building in some RF capabilities.

  • Is the M&A squarely focused on the MFS, or is there -- are there other areas that you still see opportunities in ACS?

  • Mark Aslett - President, CEO

  • I think right now we see there is a lot of opportunity in the ACS business.

  • If I were probably to prioritize the two I would say that ACS is a higher priority largely because we are seeing opportunity in the RF domain which is an area that is of particular interest to us given that we see that there is going to be growth in the electronic warfare marketplace going forward.

  • So our strategy really hasn't changed too much.

  • We are looking to continue and look at companies in both ACS and MFS, but we see a fair amount of opportunity in ACS right now.

  • Peter Arment - Analyst

  • That's great.

  • Thanks again.

  • Nice quarter.

  • Operator

  • We will take our next question from Michael Lewis with Lazard Capital Markets.

  • Michael Lewis - Analyst

  • All right.

  • Thanks a lot.

  • Mark, if we look at SEWIP, do you think that this could be a revenue contributor in excess of say 5% by late fiscal year 2012 and moving into fiscal year 2013?

  • Mark Aslett - President, CEO

  • I am not going to get that specific, Mike.

  • I think it could be an important program for us.

  • I am not going to forecast what it could be in this financial year, but we do think it could over the longer term be a roughly 5% revenue program.

  • But I'm not going to predict what year that occurs.

  • Michael Lewis - Analyst

  • But we are experiencing an acceleration in the opportunity there?

  • Mark Aslett - President, CEO

  • Yes, so I think during financial year 2011 we anticipated that we would start to get the first LRIP bookings in revenue during our financial year of 2013.

  • We now believe that that first LRIP bookings and early revenues are going to begin during this financial year, 2012.

  • So it does appear that the program has moved forward, which is obviously a good thing, and as we are continuing to work with Lockheed, as I mentioned earlier, we have won a new design win on that program just this past quarter.

  • So I think we continue to make some progress on that particular program.

  • Michael Lewis - Analyst

  • And then if we could just discuss the bookings for fiscal year 2012, what is your expectation for the ramp in bookings as we progress through the rest of your fiscal year?

  • And do you have a target or an internal plan on your expectation for book to bill in fiscal year 2012?

  • Mark Aslett - President, CEO

  • I do.

  • We expect that the bookings I think are going to progress relatively linearly throughout the year.

  • As we expect revenue to as well.

  • I think Bob gave the break down roughly of 43% of revenue in the first half, and --

  • Bob Hult - SVP, CFO, Treasurer

  • 47%.

  • Mark Aslett - President, CEO

  • 47% sorry.

  • 47% in the first half and 53% in the second.

  • So yes, I think bookings and revenue probably should be pretty close to one another.

  • We are expecting strong bookings growth this financial year, again driven by strength in our defense business.

  • And I think to some extent you can see that in literally booking $40 million of bookings in the first month of the first new quarter.

  • I am not going to give a book to bill target.

  • Obviously we've got one internally.

  • Bob Hult - SVP, CFO, Treasurer

  • Yes, I think, Mike, to just throw a little color on that without any numbers, we are looking to build -- rebuild the backlog a bit, if you will.

  • So we've got pretty direct revenue guidance out there.

  • You can couple that up with our desire to build backlog out.

  • Michael Lewis - Analyst

  • Okay.

  • Thank you so much.

  • Mark Aslett - President, CEO

  • Sure.

  • Operator

  • We will take our next question from Michael Ciarmoli with Keybanc Capital Markets.

  • Michael Ciarmoli - Analyst

  • Hi, good afternoon guys, thank you for taking my questions.

  • Real nice quarter.

  • Mark Aslett - President, CEO

  • Thank you.

  • Michael Ciarmoli - Analyst

  • Guys -- maybe Mark, just on some of the potential programs that you are looking at, I know you have talked about it in the past, do you still have an opportunity on the eMARS platform?

  • Mark Aslett - President, CEO

  • We do, but I don't think it is going to be a major revenue driver for us just based on the content that we have.

  • I don't know.

  • My guess is that could be a program that is at risk longer term just based on the environment in which we find ourselves.

  • Michael Ciarmoli - Analyst

  • Okay.

  • Are you -- looking out to fiscal 2012, are you seeing any 10% programs in the portfolio or the addition maybe of some programs that creep up into that range?

  • Mark Aslett - President, CEO

  • I think the one that clearly is likely to be a 10% will be Aegis again.

  • I think that there are others that could come close, but I think we need to wait and see how the year progresses, Mike.

  • Michael Ciarmoli - Analyst

  • Okay And then on the -- I guess you mentioned a Joint Strike Fighter booking of $18 million.

  • How do we think about that booking in terms of what that covers?

  • Does that cover specific lots?

  • I know we have seen some awards from other contractors starting to get LRIP five through nine.

  • Can you sort of characterize what that booking covers in terms of JSF production?

  • Mark Aslett - President, CEO

  • Yes, it does cover future -- obviously cover future production lots.

  • I don't think it is wholly clear as to exactly what those lots are.

  • But we are anticipating recognizing the majority of the revenue from that this financial year based upon the way in which the PO was constructed.

  • Michael Ciarmoli - Analyst

  • Okay.

  • Perfect.

  • And just -- your performance I think was probably pretty surprising given what we have seen from some of the other defense contractors out there.

  • Are you seeing or hearing any signs as sort of off-tempo winds down, [for] structure gets re-evaluated.

  • Do you foresee any programs in your portfolio that might be at risk of maybe getting pushed out to the right?

  • The one I think about, it obviously hasn't hit yet, but Crew3, if you think about when that program is supposed to ramp versus when the troops are coming home, do you get any sense of sort of where the risk lies in your overall program portfolio?

  • Mark Aslett - President, CEO

  • We don't feel that we are at risk at this point.

  • Clearly the question, Mike, is going to be around JCrew.

  • Right now there is really no new information based upon what was previously released in the government's presolicitation.

  • We still think that that's a really important program based upon the new capabilities that it provides.

  • And even if we pulled out, it is a capability that as a nation that we need.

  • And so we think that the program is very strong and that it is going to continue -- or it will be an important revenue driver for us going forward.

  • But we need to get a little bit through the year here, and hopefully we will get the first bookings associated with a long lead time items, closely followed by the LRIP booking which is going to give us a much better sense of where we are at.

  • But right now there is no new information, Mike.

  • Michael Ciarmoli - Analyst

  • Okay.

  • Great, thanks, guys.

  • Mark Aslett - President, CEO

  • Okay.

  • Bob Hult - SVP, CFO, Treasurer

  • Yes.

  • Operator

  • We will take our next question from Steve Levenson from Stifel Nicolaus.

  • Steve Levenson - Analyst

  • Thanks, good afternoon.

  • Mark Aslett - President, CEO

  • Hi, Steve.

  • Steve Levenson - Analyst

  • Since you are getting to the top of your expectations for EBITDA, do you have any plans to revise the target?

  • Is there an opportunity to go higher going forward?

  • Bob Hult - SVP, CFO, Treasurer

  • I think on probably the last couple of calls we indicated that we thought we could be in a position to update our target business model here at the end of FY 2011.

  • The big driver there was our earlier expectation going back some time now that there might be JCrew revenues in fy12.

  • Given that we have now positioned those Crew revenues in 2013, I kind of view that as a positive disruption should that have occurred in 2012.

  • We are going to leave the model as it has been actually for the last three years now at those levels, so still looking to drive for 12% to 13% Op income and 17% to 18% adjusted EBITDA recognizing that the Op income line, we are at the low end of the range, and the adjusted EBITDA, we are at the high end of the range.

  • So there is always potential, but I think we better stick with our guidance right now, Steve.

  • Steve Levenson - Analyst

  • Okay, thanks.

  • Second item is over the last year or so, a few of your customers have been acquired by larger firms.

  • Is that turning out to have no impact, to be an opportunity, or are there any negatives?

  • Mark Aslett - President, CEO

  • I think it is an opportunity for us longer term.

  • If you look at say Argon as an example.

  • We think that the thesis of the deal was to take some of Argon's advanced capabilities into the airborne domain, via the Boeing platform and that is certainly something that we are working on.

  • So I think it could work out in the longer term and net positive for us.

  • Steve Levenson - Analyst

  • Got it, thank you.

  • Operator

  • We will go next to Jonathan Ho with William Blair & Company.

  • John Weidemoyer - Analyst

  • Hi, this is John Weidemoyer for Jonathon.

  • Can you hear me okay?

  • Mark Aslett - President, CEO

  • Yes.

  • John Weidemoyer - Analyst

  • Okay.

  • Great.

  • So you gave a little bit of the break down of the linearity in FY 2012.

  • We are just curious, what kind of a September quarter budget flush are you expecting from the government?

  • Are you expecting it to be above normal, below normal, about average?

  • Mark Aslett - President, CEO

  • In the past few years we actually haven't seen much of a flush at all, and that may be a Mercury phenomena, and it may not be.

  • So right now we are not really anticipating much of a flush from our perspective.

  • John Weidemoyer - Analyst

  • Okay.

  • And also just one last question.

  • Broadly, can you talk about your outlook in fiscal 2012 for foreign military sales?

  • Mark Aslett - President, CEO

  • So we think that there is more opportunity there.

  • Clearly I think one of the major drivers is Patriot and the fact that we just received approximately a $10 million PO from Raytheon on the Patriot program for Saudi Arabia is a positive.

  • So I think we do expect that FMS sales are going to continue to grow and be an important part of our revenue string going forward.

  • John Weidemoyer - Analyst

  • Okay.

  • That's all from us.

  • Thank you.

  • Operator

  • (Operator Instructions.) We will go next to Brian Rutenberg with Morgan Keegan.

  • Brian Rutenberg - Analyst

  • Okay.

  • Thank you very much.

  • Good quarter.

  • The question -- I know you have been hit with this so many times, JCrew 3.3, last question I'm sure that will come up on this.

  • The question I have is, if you do this five years versus three years is there a margin differential?

  • Can you remind me of that?

  • Do margins get much better?

  • I assume if you do it in a short period of time.

  • Mark Aslett - President, CEO

  • I don't think we have got the visibility of three versus five.

  • But I don't think that's (inaudible - multiple speakers.)

  • Bob Hult - SVP, CFO, Treasurer

  • We haven't actually spoken to that in the past, Brian.

  • Brian Rutenberg - Analyst

  • Okay.

  • Do you have any update -- I don't believe you do, but I thought I would just ask when you would get an update on the Army's plans for this.

  • Mark Aslett - President, CEO

  • Yes, no news from our perspective at this point.

  • I don't think there is any information that is publicly available.

  • Brian Rutenberg - Analyst

  • Okay.

  • Thank you very much.

  • Mark Aslett - President, CEO

  • Okay.

  • Operator

  • We have no additional questions.

  • I would like to turn the call back over to Mark Aslett for any closing remarks.

  • Mark Aslett - President, CEO

  • Okay.

  • Well thanks to everyone for joining the call, and thanks for listening.

  • We look forward to speaking to you again next quarter.

  • This concludes the call.

  • Operator

  • That concludes today's conference.

  • We thank everyone for their participation.