Mercury Systems Inc (MRCY) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to Mercury Systems First Quarter Fiscal 2015 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 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.

Before we get started, we would like to remind you that remarks that we may make during this call about future expectations, trends and plans for the Company and its business constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of the words may, will, could, should, would, plans, expects, anticipates, continue, estimate, project, intend, likely, forecast, probable, potential, and 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 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 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 service and system 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 US Securities and Exchange Commission, including its annual report on Form 10-K for the fiscal year ended June 30, 2014. 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 statement to reflect events or circumstances 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 discuss several non-GAAP financial measures, specifically, adjusted EBITDA and free cash flow. Adjusted EBITDA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring expense, impairment of long-lived assets, acquisition costs, and other related expenses, fair value adjustments from purchase accounting, and stock-based compensation costs from GAAP net income. Free cash flow excludes capital expenditures from cash flows from operating activities. Reconciliation of adjusted EBITDA to GAAP net income and free cash flow to GAAP cash flows from operations are included in the press release we issued this afternoon. With that, I will turn the call over to Mercury's President and CEO, Mark Aslett.

Thanks, Gerry. Good afternoon, everyone, and thank you for joining us. I will begin today's call with a business update. Gerry will review the financials and guidance, and then we will open it up for your questions.

Mercury is off to a good start in fiscal 2015. Our results from continuing operations were significantly strong year-over-year. We delivered record Defense bookings for the third quarter in a row. Total bookings and backlog reached all-time record levels growing 88% and 57%, respectively. Revenue for Q1 was up 7%, while adjusted EBITDA more than doubled from the prior year to a level well above our guidance. We returned to GAAP profitability and we continued to generate positive cash flow from operations.

Mercury's success this past year in delivering bookings growth rates well in excess of industry growth demonstrates the strength of the business and technology strategies that we have pursued. Through innovation, our existing businesses as well as our recent strategic acquisitions, we built a best-in-class portfolio to secure processing products and capabilities across the entire sensor chain.

We successfully leveraged this portfolio to strengthen and expand our position with key customers on critical production programs in the right segments of the market. Together with the differentiated technology we developed internally, the businesses we have acquired since FY12 have been instrumental to our success in growing the potential value of our franchise programs.

Turning to our first quarter growth metrics in detail, total bookings came in at $85 million, reaching the record of $80 million set in Q4 of FY14. Our total book-to-bill for Q1 was 1.6. Total quarterly Defense bookings nearly doubled year-over-year to a Company record of $82.5 million driven largely by continued strength in our Mercury Commercial Electronics, or MCE, business.

Our Defense book-to-bill in Q1 was also 1.6, up substantially from the 1.0 we reported in Q1 of fiscal 2014. Defense backlog and total backlog exiting Q1 were up 67% and 57%, respectively, year-over-year. International Defense bookings including FMS were 30% of total bookings compared with 17% in Q1 last year.

Our total Defense revenues for Q1 were $51.3 million, up 19% year-over-year. International Defense revenues including FMS were 18% of total revenues compared with 21% in Q1 of FY14.

Revenues from Radar and Electronic Warfare accounted for 90% of total Defense revenues in the first quarter versus 83% in Q1 last year. Radar MUs, which make up the largest segment of MCE revenues, grew 34% year-over-year in the first quarter.

SEWIP Block 2 and Patriot were our two largest revenue programs this quarter. Among the other significant revenue programs were Aegis and F-35.

Looking forward, our forecast for improved revenue growth, higher margins and lower operating expenses is driven by our strong backlog and recent bookings on five key programs combined with the completion of our acquisition integration efforts.

Now in its final phase, our acquisition integration plan remains on track and on budget. During the first quarter we completed the Chelmsford headquarters' consolidation into our new Advanced Microelectronic Center, or AMC, by moving our digital operations team to Hudson, New Hampshire. This move co-locates all of our people involved in subsystems manufacturing integration. In addition, the Hudson AMC serves as our world class scalable RF and Microwave manufacturing plant which continues to improve our ability to rapidly drive advanced microelectronic solutions into the marketplace.

From a strategic perspective, the integration plan has enabled us to capitalize on the industry downturn by streamlining and retooling the business and creating a platform that we can continue to grow both organically and through future acquisitions. At the same time we are installing state-of-the-art integrated business systems. These allow us to centralize wherever possible administrative and manufacturing operations across the Company following our recent acquisitions. The resulting time and resource savings are enabling us to improve gross margins, reduce G&A expense, and drive greater efficiency through the organization.

The next phase of this strategy is focused on increasing Mercury's enterprise value by scaling the platform that we have built. We will continue to drive innovation internally while also seeking to acquire businesses that align closely with our strategy and present revenue and cost synergies.

We strengthened our M&A team to help execute this next phase. Following Gerry Haines' appointment as CFO in September, and as announced on October 20, Mike Ruppert will be joining Mercury as senior vice president, Strategy and Corporate Development, reporting directly to me. Mike's in-depth knowledge and experience with M&A in the aerospace and defense industries will make him an invaluable member of our senior leadership team.

Last quarter and earlier in my remarks I mentioned that there were five key programs that were important to us achieving our goals for fiscal 2015. I am pleased to report that we continue to make great progress on these programs. The first of these programs is Patriot, where last quarter we received a $39 million order for the US Army and certain FMS upgrades. This will continue to translate to revenues over the next several quarters. The second program is Aegis, where this quarter we received a $30 million booking that primarily consisted of FMS-related development production. Third is F-35, where we received a $27 million booking during the quarter following major bookings in FY14. The fourth program is SEWIP: Block 2. As anticipated, we received additional bookings in Q1 associated with LRIP Phase 2 that had been delayed from FY14. We expect further bookings and revenues for SEWIP as the year progresses. The fifth program is Filthy Buzzard in Mercury Defense Systems, where we also had a major booking in Q1. With some of our largest forecasted FY15 bookings coming in Q1 and earlier than we have anticipated, our visibility for the year continues to improve.

Moving now to the longer term. We expect to benefit from four major industry growth drivers. One is the DOD strategic pivot to the Asia Pacific region; the second is electronic upgrades to aging military platforms; another relates to the growing importance of FMS and international sales; and fourth, special operations for quick reaction capabilities.

At a more micro level, these industry drivers translate into greater outsourcing opportunities in three main areas that form the basis of our plans for fiscal 2015 and beyond. The first outsourcing opportunities in specialized server class computing beyond the sensor including other onboard mission-critical computer applications. This historically we haven't played in. The industry is moving away from commodity commercial computing as more and more of that design and production has moved offshore. At the same time, we have positioned Mercury as the leading US-owned domestic designer, developer and producer of specialized embedded server class processing for defense and intelligence applications. This has added significantly to the size of our overall adjustable market and opportunities on franchise programs.

The second opportunities, RF and microwave outsourcing. The RF and microwave industry continues to reshape itself at a rapid pace. Smaller companies are having a hard time dealing with defense funding delays. This has created major supply chain risks that our customers are seeking to resolve. Larger players are also going through significant restructurings causing additional supply chain disruption. Both of these issues have created opportunities for us to gain market share.

The third opportunity is in preintegrated sensor processing subsystem sales. Our RF and Microwave acquisitions and AMC investments have been well received by our customers. This has positioned us to take share competitively and to expand our content on key programs and platforms.

So, in summary, we continue to believe that Mercury's strategy, technology, capabilities and ongoing programs and platforms align well with the DOD's new roles and missions. Our focus for the near term remains to leverage our relationships with the primes to drive bookings and revenues from existing programs as well as new programs and platforms in foreign military sales. Given our bookings and backlog momentum in the second half of 2014, which continued in the first quarter, we are confident in our outlook for fiscal 2015.

Sustaining our revenue growth at above industry average levels while completing the final phase of our acquisition integration plan should enable us to continue realizing the substantial operating leverage that we are building in our business. This should further strengthen Mercury's position to deliver significantly improved profitability, cash flow generation, and shareholder value as we move forward. We will be discussing all of this in detail at our upcoming investor day on November 12. We will be hosting this year's event at the Hudson, New Hampshire AMC, and we sincerely hope that you can join us. With that, I would like to turn the call over to Gerry. Gerry?

Thanks, Mark, and good afternoon again, everyone. As a reminder, before we go through the financial results, in the fourth quarter of fiscal 2014, the Company began reporting the financial results of our Mercury Intelligence Systems, or MIS subsidiary, as discontinued operations as a result of this strategic decision to explore the sale of that business. Accordingly, I will be discussing the Company's financial results, comparisons to prior periods and guidance this afternoon on a continuing operations basis excluding MIS unless otherwise noted.

Turning to our results for the first quarter of fiscal 2015, as Mark said, Mercury delivered a very solid first quarter highlighted by all-time record bookings of $85.1 million, and a total backlog of more than $205 million. Adjusted EBITDA more than doubled year-over-year on 7% annual revenue growth, and the Company returned to GAAP profitability for the first time since the end of fiscal 2012.

Total revenues for the quarter grew $3.4 million, or 7% year-over-year, to $54.1 million, versus our guidance of $50 million to $55 million. Looking at the top line in greater detail, revenues from defense customers for the first quarter increased $8.2 million, or 19% year-over-year, while revenues from commercial customers decreased $4.8 million.

Defense revenues in our largest reporting segment, Mercury Commercial Electronics, or MCE, increased $9.2 million, or 25% year-over-year to $46.2 million. In our Mercury Defense Systems, or MDS reporting segment, revenues were $5.5 million, down $2.4 million from the first quarter of last year. These first quarter fiscal year 2015 reporting segment revenue amounts exclude adjustments to eliminate $1.8 million of intercompany revenues in Q1 of fiscal 2014, and $0.5 million in fiscal 2015.

On the bottom line, Mercury reported GAAP net income from continuing operations of $700,000, or $0.02 a share, versus our guidance of a net loss of $0.01 to $0.06 per share. This compares to a GAAP net loss from continuing operations for the first quarter of fiscal 2014 of $2.3 million, or $0.07 per share. These GAAP net income and loss figures include $0.03 per share in restructuring charges for Q1 of fiscal 2015 compared to zero in Q1 of last year.

First quarter fiscal 2015 adjusted EBITDA increased $4.7 million year-over-year to $8 million, or 15% of revenue, versus our adjusted EBITDA guidance of $4.2 million to $7 million.

Mercury's improved profitability year-over-year was primarily due to higher sales volume, a slight increase in gross margin, and lower operating expenses largely due to the ongoing acquisition integration plan Mark described. Gross margin was higher year-over-year due to a program mix favoring higher margin, embedded multi-computing and core digital signal processing business. Operating expenses decreased largely as a result of savings associated with the facility's consolidation and headcount reduction as part of the acquisition integration plan.

We continued to execute on time and on budget on our acquisition integration plan during the first quarter. We expect the remaining parts of the plan to be completed in the current quarter resulting in gross annualized expense savings of $16 million. Through the end of Q1, we have completed actions yielding more than 90% of the total targeted savings. This puts us on track toward achieving our previously stated savings goal during the first half of fiscal 2015. The remaining integration activity centers on completing the last of our facility consolidations and some additional business systems integration. As a result, we expect to incur approximately $1.1 million of restructuring charges in the second quarter of fiscal 2015.

Looking quickly at the balance sheet, Mercury ended the first quarter of fiscal 2015 with cash and cash equivalents of $48.9 million compared to $40.1 million in the same quarter last year. The Company generated $1.3 million of free cash flow during the quarter with $2.2 million of operating cash flow driven by cash earnings being partially offset by $0.9 million of capital expenditures. I will turn now to our financial guidance starting with some perspective on our bookings outlook.

In addition to Q1 of fiscal 2015 being our third conservative quarter of record Defense bookings, it represented an all-time record for total quarterly bookings for the Company. As a result, Mercury ended the first quarter with total record backlog of $205.2 million, up $74.7 million, or 57% from the $130.5 million of total backlog a year ago. Of this $205.2 million in total backlog, $180.3 million, or 88%, is expected to be shipped within the next 12 months. $186.3 million, or 91% of the total backlog, relates to Defense, representing 67% growth in Defense backlog year-over-year.

This bookings performance demonstrates that we have done well in [a] difficult industry environment by building a best in class product portfolio and by carefully and consistently cultivating our portfolio of programs as well as our contributions to those programs. At the same time, we have strengthened our relationships with the primes around the right programs in the right segments of the market.

Having some of the major bookings anticipated for fiscal 2015 coming in earlier than expected solidifies our forecast for the year. While we are really pleased with the extremely strong bookings we have seen over the last three quarters, in light of the current DOD budgetary environment, we expect bookings to normalize relative to revenue for the remainder of fiscal 2015. However, based on our Q1 performance and strong backlog, we are confident in the outlook and are narrowing our previous revenue and earnings guidance ranges for the year.

We are now projecting total revenues in the range of $228 million to $236 million for fiscal 2015, representing 9% to 13% revenue growth year-over-year. At this forecasted revenue range, fiscal 2015 GAAP net income from continuing operations also narrows to a range of $0.26 to $0.32 per share. These figures include $0.06 per share restructuring charges and $0.13 per share of amortization of intangible assets for the year. Adjusted EBITDA for fiscal 2015 is expected to be in the range of approximately $39 million to $43 million, representing an improvement of 66% to 83% over fiscal 2015. At the upper end of this range, the Company would generated adjusted EBITDA of 18% of revenue, which is in line with our target business model.

For the second quarter of fiscal 2015, we are forecasting total revenues to be in the range of $54 million to $58 million, with 90% or more expected to come from the Defense side of the business. We are forecasting gross margin for the second quarter of 47% to 48%, which is essentially flat year-over-year. We expect approximately $25 million in operating expenses for the second quarter, including $1.1 million of the restructuring charges.

On the bottom line we expect to report second quarter GAAP net income from continuing operations in the range of $0.01 to $0.05 per share based on an estimated diluted weighted average of 32.7 million shares outstanding. This GAAP net income estimate includes the impact of approximately $0.02 per share from restructuring charges and $0.03 per share of amortization of intangibles in the quarter. This GAAP net income forecast also assumes the effective income tax rate of approximately 40% for Q2. Adjusted EBITDA for the second quarter is estimated to be in the range of $7.4 million to $9.8 million, an improvement of 42% to 88% over the prior year. The improved year-over-year profitability that we are forecasting for the second quarter of fiscal 2015 reflects two anticipated drivers. First, higher sales volume primarily driven in Q2 by the Patriot program and, second, lower operating expenses primarily due to lower headcount and an increase in customer-funded R&D.

In terms of the balance sheet, we expect to continue building our cash balance through positive free cash flow, again driven primarily by cash earnings. This will be partially offset by capital expenditures largely related to the final stages of our integration plan.

In summary, a year ago we set a goal for the next 18 months of creating a fully integrated business that we can continue to profitably grow organically and also scale through acquisitions. As demonstrated by the results that Mercury has delivered since then, we are on track toward achieving that goal. Our acquisition integration plan will be concluded by the current quarter. With increasing operating leverage anticipated from both our restructuring and integration efforts, we are in a good position to translate our backlog, forecasted bookings and revenue growth into even stronger earnings performance over the course of fiscal 2015. With that, we will be happy to take your questions. Operator, you can proceed with the Q&A now.

(Operator Instructions) And our first question comes from Tyler Hojo, Sidoti & Company. Your line is open.

I want to talk about bookings a little bit, in a little bit more detail first. Obviously, very, very strong results here in Q1, and I get the commentary about kind of a normalization as we move through the year. But could you maybe just talk maybe just in generalities? I mean, do you think backlog has peaked here or do you expect that kind of book-to-bill ratios to be maybe at 1 or maybe a little bit north of it as we move through the fiscal year?

As Gerry said on the call, Tyler, we have had basically three quarters in a row of record Defense bookings, and this is, I think, the highest backlog and the highest bookings we have seen in the Company's history. I would love to continue at 1.6 book-to-bill, but it's probably not realistic. We are targeting basically having a positive book-to-bill for the remaining quarters of the year, but I'm not going to forecast what we expect the bookings to be at a total year level.

Okay, that's fair. That is more than helpful. And just from a program perspective, you mentioned kind of expectations for additional SEWIP Block 2 orders through the remainder of the year. Is there anything else maybe worth highlighting in terms of kind of being the key drivers there?

As I said on the call, the top program -- I said this last quarter and I kind of repeat it again this quarter. From a bookings perspective, there are really five major drivers for the year -- Aegis, SEWIP, F-35, Patriot, and then Filthy Buzzard in the Mercury Defense Systems business.

As you probably remember we had a very, very strong year in Patriot in fiscal year 2014, and after a very weak fiscal 2013, and we did $45 million of bookings in 2014 alone. We do anticipate some bookings for Patriot as the year proceeds largely related to certain FMS sales, but I think what we are going to see is really a bleeding off of that, those bookings that we previously booked.

SEWIP, we do expect to see additional bookings as the year progresses. That is tied to our success on increasing or expanding our content on that particular program, as well as later in the fiscal year the anticipation that Block 2 moves into full rate production.

Aegis, we also anticipate continued bookings probably towards the back end of the year. We basically already over-achieved the bookings in the first quarter than what we did in the whole of fiscal 2014, so we are off to a very, very strong start there.

And then F-35 I think has the potential for additional bookings, again, given the very strong performance in the first quarter. We do anticipate ongoing bookings as the year progresses. And then finally Filthy Buzzard, I think we'll see a couple of other meaningful bookings throughout the year. So, net-net, I mean, those five programs made up roughly 83% of our bookings in Q1, and they are really what is driving our performance at a year level.

Okay, got it. Thanks for that, Mark. And maybe just lastly, I certainly don't want to steal any thunder from your investor day next month, but maybe you can just talk a little bit about, kind of, some of the progress made in the AMC?

Sure. So, we have had over 40 customers literally go through the facility now. We had a group of executives in from one of our largest customers here literally yesterday and today discussing not only the processing part of our business but also the RF and Microwave. And like we've seen in other customer visits, they are all very suitably impressed with the capabilities that we have built in that particular facility. And that is really the reason why we are holding this year's investor day conference up at the AMC in New Hampshire. I think it is a great opportunity for investors and shareholders, as well as the analyst community to see this facility, which is very important to drive the growth in the business, particularly in some of the larger EW programs that we've been successful on.

Great. Thanks so much.

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

I guess can you talk a little bit about international mix this quarter? It was slightly lower than it's been in prior quarters. Was that just timing or was it higher SEWIP sales?

Yes. So, if you look at it on a bookings basis, Sheila, bookings for international defense bookings as percent of total with 30% in Q1 versus approximately 17% a year ago, the largest driver there in terms of the increase was actually the Aegis program, where we are involved in a number of different foreign military sales. Revenue as a percent international and FMS sales as a percent of total revenue, we are down 3 percentage points, but it really comes down to program mix at the end of the day.

Okay. And then just on M&A, it is clear that you have -- the increased visibility is maybe putting you back on that track. Can you maybe discuss what you are looking for in potential targets? Is it program mix? Is it a certain software, certain capabilities that you are looking for? Maybe if you could give us an idea.

Sure. So, I think as we mentioned, I've shuffled the team a little bit. So, Gerry, who as running our M&A activities, has moved over to the CFO role. And as we announced on October 20, we just hired Mike Ruppert, who will start November 20, to run M&A activities. Mike is a very experienced M&A professional, having worked at UBS, Lazard and Lehman, all in the aerospace and defense sectors, and done some pretty large deals.

As it relates to our target areas, we think that our strategy really works, and so we are focusing in on RF and Microwave, as well as across the sensor processing chains. So, really sticking closely with the strategy but looking for synergies both from a cost and from a revenue perspective. And I think we've been able to demonstrate that when we find a target we are able to generate those synergies with the deals that we have done since fiscal 2012.

Very helpful, thank you.

Thank you. And our next question Peter Arment of Sterne, Agee and Leach. Your line is open.

Mark, I was wondering if I could just dig back in a little bit into the backlog. You have had a lot of progress and a lot of the wins have been in your, kind of the key product categories, you know, your traditional processing, or it seems like. How about on the RF and the Microwave side? I mean, I know this was a big focus of building that out and it comes with a lot more of an opportunity to build out the content in the future. Are you seeing -- are we beginning to see that kick in to expand you backlog at current levels or we haven't even touched upon that yet?

No, absolutely we are. If you look at the SEWIP program, we have been hugely successful growing our content and expanding our position on Block 2 into a derivative program as well as expanding on Block 3. And that is pretty much all RF and Microwave, and that program is hundreds of millions of dollars of revenue potential over its life to Mercury. And so at our investor day on November 12, up at the Hudson AMC, we are going to lay out what we believe to be the proof points around the success of the strategy in not only RF and Microwave, but also in the processing dimension. But SEWIP is probably the best example given the enormity and the fact that is probably the next big program that is going to drive growth in the business.

Okay, that's helpful. And is the RFP sell, would that not begin to show up initially? Is it more of a book-and-ship type business or would you see that initially continue to flow through to the backlog?

Not necessarily book-ship. We did $8 million of bookings for SEWIP in Q1. As we talked about, we had seen some delays on LRIP 2 Phase 2 in fiscal 2014, so we got the booking as we anticipated, and actually SEWIP was our largest revenue producing program in the first quarter. It was over $9.5 million. So, I think we are already showing that we've got a pretty significant and healthy growing RF and Microwave business.

Okay, that's great. And, Gerry, just quickly, what is the tax rate assumed for the year for your GAAP earnings projection?

The ETR, as I mentioned, at least for Q2 is 40%. I think that is going to move around for the year. There are a few different things going on and it was very low in the first quarter. For the year on balance it should not be 40%, it will be a little lower than that, probably more normalized rate in the mid-30s.

Okay, great. Thank you.

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

Mark, maybe just a little bit more on kind of the M&A environment. Are you guys going to be looking to sort of -- you know, you've got two big competitors out there, I guess. Are you guys going to be looking to consolidate this market at all? Is that part of the strategy for synergies, or is it, you know, is the the driver going to be more looking for key technologies that can get you onto key programs and platforms?

So, if you look at the first phase of the acquisition strategy, the way in which we described it, it was really a capability and program-driven strategy. And I think we very successfully found companies that were nonoverlapping that gave us the complete capability end-to-end to build pre-integrated sensor processing subsystems.

What we have been focused on as part of our acquisition integration plan is really creating a platform that we can scale. And so I think the dimensions of that will be in processing, where if we do see the opportunity of looking to continue to acquire in that dimension, but also in RF and Microwave. So, those are probably the two primary pillars, Mike, of kind of what we are focused on, because we believe that we have built a business platform that will allow us to profitably scale. And we are going to be looking for deals that have got both revenue as well as cost synergies.

Okay, perfect, that is helpful. And then just obviously you guys are getting tremendous strength and growth here from these five programs. Can you give us a sense, I mean, should we think about the backlog being diversified maybe around those same kind of five programs? And I'm kind of looking at the concentration here. Is that something you guys are looking at as you are maybe looking to develop new products, you've got these big anchors out there, but clearly there is going to be some concentration, some risk around those programs. So, maybe what else are you doing to try and diversify some of that risk?

Yes. I mean, I would look at it from a slightly different perspective, Mike, and say our strategy has been to target programs that are very well funded, that are in production, that are right in the middle of the DOD's new role in missions. Because, if anything, I think those programs represent lower risk than trying to go after new design wins, of which there are probably few and far between in this environment. And I think that strategy is serving us extremely well. We have grown the backlog substantially and I think we've reduced the volatility in the business, and we still see more opportunity for growth. So, we are clearly pursuing other programs, but the strategy that we've been pursuing is working very, very well for us.

Got it, that makes sense. Last one for me. Can you comment maybe on sort of the cadence or even the run rate on your kind of book-ship business, if you're seeing any changes there with kind of your level of bear activity or even the mid kind of current (inaudible)? Are you getting more confident in that business? Are you seeing a pickup at all?

Yes, I don't think there has really been any change, Mike, versus the last few quarters. I mean, it kind of moves up and moves down a little. As you know, given the impact that we saw in fiscal 2013, a key strategy was to basically build the backlog so we were actually less dependent upon book-ship that would help us manage and navigate through this difficult environment more effectively. And you can see that in our backlog numbers and so we are less reliant on book-ship than what we have been in years past, and I think that is generally a good thing.

Got it, perfect. That is all I had. Nice quarter, guys. Thanks.

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

Just given the visibility that you guys now have from some of these larger programs, is there any lumpiness that maybe we should expect from a revenue perspective? I mean, it seems like some of the bookings came in a little bit earlier than expected, so just want to get a sense from you whether the seasonality pattern might change at all for the balance of the year?

We don't believe so. I think we've obviously, we have delivered the results for Q1 and we guided for Q2, so you kind of get a perspective on what H1 versus H2 looks like, and the year is progressing as planned other than the fact that we got some of the bookings earlier, which we view as a good thing, not a bad thing. So, we are on track and we are confident in our ability to deliver the year.

Got it. And then can you talk a little bit about what was the reason why the Commercial business was down? Was this just sort of a tough comparison and how should we be thinking about sort of the level of activity for Commercial going forward?

Yes. I mean, it's such a small part of our business overall, Jonathan. It is really not a driver at this point. And depending upon what happens with some of the legacy business in the Commercial segment, you know, it can be up a little, it can be down a little. I wouldn't read too much into it.

Fair enough. And just in terms of the actual AMC cost savings, you guys talked about sort of being able to realize the rest of the cost savings. Is there anything else that we should be looking at in terms of revenue synergies maybe driving the rest of the business over the course of the year as well, or some type of margin improvement that you see from the facility?

You are just trying to steal my thunder from investor day, right? No, so, seriously, I think on investor day we are going to lay out what we believe to be the proof points and the success around the acquisitions that we have done, the investments that we have made in the AMC. We are going to tie that back to key programs and to enumerate the potential volume associated with some of those key programs over time. And you've got to come to see the numbers, but it should be pretty cool.

Great, looking forward to it. Thank you.

Thank you. (Operator Instructions) And our next question comes from Noah Steinberg of G2 Investment Partners. Your line is open.

It is actually Josh Goldberg for Noah. So, I guess just a couple quick questions. Obviously, your bookings have been very strong and seems like you are having quite a bit of visibility into this year. Just curious, with the amount of backlog that you are going to ship this year, what is the reason why your revenue growth even at the high end will just be, call it 10% to 12%? I mean, your bookings and especially you backlog is up north of 50% year-over-year, and to me it would seem like those numbers should come a little closer to each other.

So, well, our guidance is our guidance. It is our best estimate at this point in time and clearly you saw a narrowing of our revenue guidance range in the first quarter, and if we continue to be successful we are hoping that that guidance range will continue to narrow as the year progresses. But the guidance that we gave for the year is what we believe right now.

Right. I guess your comments about book-to-bill to be above 1 also gives you confidence that you're not going to see a big falloff in your bookings for the back half of the year.

So, we have had three great quarters in a row. We are expecting, as Gerry said in his prepared remarks, that bookings start to normalize relative to revenue. So, we aren't anticipating the 1.6, 1.5, 1.4 book-to-bills that we've seen for the past three quarters.

Of course.

And remember, Josh, the 12-month backlog ratio that I gave you is, it's a rolling 12 months, so not all of that is going to ship in this fiscal year.

Sure. But with it being called $64 million above last year's number, even if you take a big haircut, you're still pretty comfortable into the year with just the backlog right now.

Yes. So, I think -- hopefully, we expressed that we feel good about fiscal 2015. We are executing against the plan, we have narrowed our guidance range for the year, and we believe we are off to a very strong start in Q1.

Yes, I would agree. Just one last one for me. When you were doing $40 million of EBITDA a couple years back, you stock was $18 to $20 a share, today it's closer to $12. Obviously, there seems to be an evaluation disparity now versus then. Why aren't we seeing any more aggressive buyback in place, especially since you are generating so much cash and you have $50 million of cash on you balance sheet?

So, we have been generating positive free cash flow literally since the second quarter of fiscal 2013, but it is in the low single digits. I think as Gerry said in his prepared remarks, cash flow year-over-year is up $8 million. And we feel that we've got enough cash to run the business, and looking forward we believe that the primary use of the cash will likely be further M&A once we get through our acquisition integration plan, then as the EBITDA continues to build in the business as the year progresses.

Gotcha. Just one last one for me. I mean, obviously, a few years back your gross margins were in the high 50s and now they are closer to 44%. I know obviously some of that is because of acquisition, but do you think that as you grow your Company and your time line, your gross margins can sort of get back to maybe the 50% level in the near future?

So, if you look at our annual pro forma target model, the gross margin range is in the 45% to 50%, and I think we are within that range this past quarter. I think that is the range that we see right now.

And, Josh, one thing to keep in mind there is that you pointed out there our margin profiles kind of blend now from the historic Mercury and the acquisitions. As applied to gross margin, that is a little bit of a geography issue, so don't be misled by just the gross margin, because in the RF side of the business you see a lot more customer-funded R&D effort, which moves it up into cost of goods sold, which will depress gross margin but it washes out at the operating income line.

I see. Okay, thanks so much and congratulations again.

Thank you, and Mr. Aslett, there are no further questions. Therefore, I would like to turn the call back over to you for closing remarks.

Okay. Well, thank you for taking the time to listen to our call today. We hope to see you at our investor day at the Hudson AMC on November 12. That concludes the call. Thank you.

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