Mercury Systems Inc (MRCY) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Mercury Systems second-quarter fiscal 2015 conference call. Today's call is being recorded.

At this time, for opening remarks and introductions I'd like to turn the call over to the Company's Executive Vice President and Chief Financial Officer, Gerry Haines. Please go ahead, sir.

Good afternoon and thank you for joining us. With me today is our President and Chief Executive Officer, Mark Aslett. If you haven't received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at MRCY.com.

We'd like to remind you that remarks we may make on this -- 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 in 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 arising after the date on which such statement is made.

I'd also like to mention that in addition to recording 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 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 income from continuing operations. Free cash flow excludes capital expenditures from cash flow from operating activities. Reconciliation of adjusted EBITDA to GAAP income from continuing operations and free cash flow to GAAP cash flows from operations are included in the 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 thank you for joining us. I'll begin today's call with a business update. Gerry will review the financials and guidance, and then we'll open it up for your questions.

Mercury continued to deliver strong results from continuing operations in the second quarter of fiscal 2015. Revenue was up 12% from Q2 last year, approaching the top end of our guidance.

Demonstrating the operating leverage we've built in the business as a result of our acquisition integration efforts, adjusted EBITDA more than doubled to $10.7 million on less than $7 million of incremental revenue. Adjusted EBITDA was above the high end of our guidance and, at 19% of revenue, within our target business model.

We remain GAAP profitable, and we continue to generate positive cash flow from operations, which was up substantially from the sequential first quarter. Given this momentum, we're raising our earnings guidance for full-year fiscal 2015.

Looking at our Q2 growth metrics in detail, total bookings were down 7% year-over-year at $44 million, leading to a total book-to-bill of 0.8. Including our strong bookings in Q1, total bookings for the first half are up 39% year-over-year, with a 1.2 book-to-bill.

Our largest programs this quarter from a booking perspective were Global Hawk, Aegis, SEWIP Block 2, and Gorgon Stare. Total Defense bookings for the quarter were down 9% year-over-year to $41.2 million. For the first half, however, total Defense bookings were up 42%, driven largely by continued strength in our Mercury Commercial Electronics, or MCE.

Our Defense book-to-bill in Q2 was 0.8, compared with 0.9 in Q2 of fiscal 2014. Defense backlog and total backlog exiting Q2 were up 64% and 51%, respectively, year-over-year. International Defense bookings including FMS were 15% of total bookings, compared with 49% in Q2 of FY14.

Our total Defense revenues for Q2 were $53.5 million, up 10% year-over-year. International Defense revenues including FMS were 24% of total revenues, compared with 16% in Q2 of FY14.

Revenues from radar and electronic warfare accounted for 88% of total Defense revenues in the second quarter, versus 82% in Q2 last year. Radar Defense revenues, which make up the largest segment of MCE revenues, grew 14% year-over-year in the second quarter; and EW revenues grew 27%. Patriot, F-35, Aegis, and SEWIP Block 2 were our four largest revenue programs this quarter.

Mercury's success this past year in delivering bookings and revenue growth rates well in excess of industry growth demonstrates the strength of the business and technology strategies that we have pursued. Through innovation in our existing businesses as well as our recent strategic acquisitions, we've built a best-in-class portfolio of 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've acquired since FY12 have been instrumental to our success in growing the potential value of our franchise programs.

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 our acquisition integration efforts. We completed the integration as planned and budgeted during the second quarter.

The first of these five programs is Patriot, where in FY14 we received a total of $46 million in orders for the U.S. Army and certain FMS upgrades. These bookings will continue to translate to revenues over the next several quarters.

The second program is Aegis, where our bookings through the first half of FY15 are up nearly 200% year-over-year, primarily consisting of FMS-related development and production. Third is F-35, where we received orders in both Q1 and Q2, with the potential for additional bookings in the second half of FY15.

The fourth program is SEWIP Block 2, where we booked and shipped the remainder of LRIP2 Phase 2 in Q1 as anticipated, received a large order in Q2, and expect to see additional bookings as the year progresses. This growth is tied to our success in expanding our RF and microwave content on SEWIP Block 2, as well as the anticipation that Block 2 moves into full-rate production later this fiscal year.

The fifth program is Filthy Buzzard in Mercury Defense Systems, where we also had a major booking in Q1 and anticipate meaningful bookings in the second half of FY15. Each of these programs is well funded, currently in production, and precisely aligned with the DoD's new roles and missions.

Compared with relying on new design wins, which continue to be few and far between in this environment, targeting this type of program is a low-risk content expansion growth strategy. As we described at our recent annual Investor Day, executing on this strategy over the past two years we've seen meaningful and quantifiable growth in the size and quality of our opportunity pipeline. Over the last two years, our possible pipeline value has more than tripled to $4.5 billion, and we've successfully converted possible value to probable value over the same period.

As a result of our recent acquisitions, we have doubled our potential RF and microwave opportunity value to $2.6 billion, or more than 50% of total pipeline value. Moreover, the opportunities in the pipeline are well aligned for our capabilities, split 65%/35% between radar and EW, and they're related primarily to naval and airborne applications, with very little ground exposure.

Longer term, we expect to benefit from four major industry growth drivers. One is the DoD's strategic pivot to the Asia Pacific region; the second is electronic upgrades for aging military platforms; another relates to the growing importance of FMS and international sales; and fourth, Special Operations Force's 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 opportunity is in specialized server-class computing beyond the sensor, including other onboard mission-critical computer applications that historically we haven't played in.

The industry is moving away from commodity commercial computing, as more and more of that design and production is moved offshore. At the same time, we've 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 addressable market and opportunities on franchise programs.

The second opportunity is 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 pre-integrated 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.

We believe that Mercury has pioneered a next-generation Defense electronics business model. As a result of our technology investments, our sales strategies, as well as our acquisitions, we've created a platform that positions us to continue growing organically as well as scale through future acquisitions.

As I mentioned, our acquisition integration activities were completed as planned during the second quarter. In just the past year, we've reduced our manufacturing footprint from six locations to two. We've co-located all of our people involved in subsystems manufacturing and integration at the Hudson, New Hampshire, AMC which many of you visited during our Investor Day in November.

In addition to creating a world-class, scalable RF and microwave manufacturing plant in Hudson, we've installed state-of-the-art integrated business systems. These new systems have allowed 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've built. We'll continue to drive innovation internally while also seeking to acquire companies that support the key pillars of the business: RF and microwave, along with processing.

As we do, we'll be looking for opportunities for revenue synergies as well as cost synergies that leverage the platform that we've created. Our goal is to continue moving the sensor-processing value chain, prioritizing deals that are accretive in the short term and drive long-term shareholder value.

So in summary, we feel good about the outlook for fiscal 2015. At a macro level, the approval of the Defense budget for government FY15 has approved industry visibility. At the Mercury level, delivering above-industry average revenue growth, combined with the benefits of our acquisition integration plan, should enable us to continue realizing the substantial operating leverage that we've built in our business.

This should allow us to achieve our target business model for the fiscal year, further strengthening Mercury's position to deliver significantly improved profitability, cash flow generation, and shareholder value as we move forward. With that, I'd like to turn the call over to Gerry. Gerry?

Thank you, Mark; and good afternoon again, everyone. Before we go through the financial results, please note that I'll be discussing the Company's financial results, comparisons to prior periods, and guidance this afternoon on a continuing operations basis, excluding Mercury Intelligence Systems, or MIS, unless otherwise noted. However, in accordance with GAAP, our statement of cash flows is inclusive of MIS.

In the fourth quarter of fiscal 2014, we decided to explore a sale of MIS and began reporting its financial results as discontinued operations at that time. As you may have seen in our press release, the sale of MIS closed earlier this month and will have a positive, but modest, impact on cash, net of transaction costs, in our third fiscal quarter.

Separately, we recorded a non-cash goodwill write-down within discontinued operations in the second fiscal quarter. The impact of the sale transaction itself will be reflected in our financial statements for the third fiscal quarter of 2015.

Turning now to Q2, as Mark said, Mercury delivered strong financial results for the fourth consecutive quarter, highlighted by adjusted EBITDA coming in at 19% of revenue, solidly in line with our target business model. The operating leverage that we anticipated from our restructuring and integration efforts is translating our above-market revenue growth into even stronger earnings growth.

Total revenues for the quarter grew $6.2 million or 12% year-over-year to $57.1 million versus our guidance of $54 million At a more detailed level, revenues from Defense customers for the second quarter increased $4.9 million or 10% year-over-year, while revenue from commercial customers increased $1.3 million.

In our largest reporting segment, Mercury Commercial Electronics, or MCE, revenues increased $7.7 million or 17% year-over-year to $52.7 million. In our Mercury Defense Systems, or MDS, reporting segment, revenues were down $3.6 million or 43% from the second quarter last year to $4.8 million, primarily due to program timing issues. These segment results exclude adjustments to eliminate $2.6 million of intercompany revenues in the second quarter of fiscal 2014 and $0.5 million in Q2 of fiscal 2015.

On the bottom line, Mercury reported second-quarter GAAP income from continuing operations of $2.9 million or $0.09 per share. This exceeded our guidance for the quarter of $0.01 to $0.05 per share.

For the second quarter last year, we reported a GAAP loss from continuing operations of $0.8 million or negative $0.02 per share. These income figures include $0.02 per share in restructuring charges and $0.03 per share of amortization of intangibles in the second quarter of fiscal 2015, and approximately $0.00 per share of restructuring and $0.04 per share of amortization of intangibles for the second quarter of last year.

Our adjusted EBITDA for the second quarter of fiscal-year 2015 increased $5.5 million year-over-year, more than doubling to $10.7 million or 19% of revenue. This also exceeded our adjusted EBITDA guidance for the quarter, which was $7.4 million to $9.8 million.

Mercury's improved profitability year-over-year was primarily due to improved operating leverage on higher sales volume. Operating expenses decreased by $2.5 million largely as a result of savings from facilities consolidation and headcount reduction as part of the recently completed acquisition integration plan.

As Mark said, we completed the integration program on time and on budget during the second fiscal quarter of this year and expect to realize our anticipated gross annual savings of $16 million a year as a result. As expected, we incurred approximately $1.2 million of restructuring and other charges in the second quarter of this fiscal year.

Mercury's gross margin for the second quarter was essentially flat year-over-year as we continued to achieve gross margins at a level consistent with our target business model.

Turning to the balance sheet, Mercury ended the second quarter of fiscal 2015 with cash and cash equivalents of $57 million, compared with $44.5 million in the same quarter last year. The Company generated $7 million of free cash flow during the quarter, with $8.2 million of operating cash flow, driven by cash earnings, being partially offset by $1.2 million of capital expenditures in the quarter.

I'll turn now to our financial guidance. As we said on our Q1 earnings call, we expect that our bookings will likely normalize over the course of this fiscal year, following three consecutive prior quarters of record Defense bookings.

We continue to anticipate that our book-to-bill ratio for all of fiscal 2015 will be at or above 1. The resulting backlog as we exit fiscal 2015 will give us a very solid foundation for fiscal 2016.

Mercury ended the second quarter with a strong total backlog of $192.1 million, up $65.1 million or 51% from the $127 million of a year ago. Of this $192.1 million in total backlog, $148.3 million or 77% of it is expected to be shipped within the next 12 months; $178.6 million or 93% of this total backlog related to Defense, representing 64% growth in Defense backlog year-over-year.

Based on Mercury's performance during the first half of this fiscal year, our strong backlog, and the near-term opportunities that Mark just finished describing, we are maintaining the increased full-year fiscal 2015 revenue guidance range that we established last quarter, but are raising our previous adjusted EBITDA and GAAP income guidance ranges for the full year. We expect -- we continue to project fiscal 2015 total revenues in a range of $228 million to $236 million, representing 9% to 13% revenue growth year-over-year.

At this forecasted revenue range, fiscal 2015 GAAP income from continuing operations is now expected to be between $0.33 and $0.39 per share. This includes $0.05 of restructuring charges and $0.13 per share of amortization of intangibles for the year.

Adjusted EBITDA for all of fiscal 2015 is now expected to be in the range of $41 million to $44 million, which would represent an improvement of 74% to 87% over fiscal 2014. At the upper end of this range, the Company would generate adjusted EBITDA approaching 19% of revenue, which is solidly in line with our target business model.

For the third of quarter of fiscal 2015, we are forecasting total revenues to be in the range of $56 million to $60 million, with 90% or more expected to come from the Defense side of the business. We're forecasting gross margin for the third quarter of approximately 48%, which is a slight improvement year-over-year and also in line with our target business model. We expect approximately $22 million to $23 million in operating expenses, with no meaningful restructuring charges for the third quarter.

On the bottom line, we expect to report third-quarter GAAP income from continuing operations in the range of $0.10 to $0.14 per share, based on an estimated diluted weighted average of 33 million shares outstanding. This includes the impact of approximately $0.03 per share of amortization of intangibles in the quarter.

This GAAP income from continuing operations forecast also assumes a provisional income tax rate of approximately 23% for the third quarter. Adjusted EBITDA for the third quarter is estimated to be in the range of $10.5 million to $12 million, representing approximately 19% to 20% of revenue and reflecting an increase of 35% to 54% over the prior year.

The improved year-over-year profitability that we are forecasting for the third quarter of fiscal 2015 reflects two anticipated drivers. First, higher sales volume, primarily driven by the Patriot and F-35 programs; and second, lower operating expenses, primarily due to the absence of restructuring charges and the completion of our integration plan.

In terms of the balance sheet, we expect to continue building our cash balance through positive free cash flow, driven primarily by cash earnings. This will be partially offset by a modest increase in capital expenditures as we continue to optimize and automate our capabilities in the consolidated operations and our Advanced Microelectronics Centers. In addition, the balance sheet remains pristine, with zero debt.

In summary, Mercury's double-digit revenue growth, our even more rapid expansion of adjusted EBITDA and GAAP income from continuing operations, and our ability to build backlog in the current Defense industry environment speak volumes about the strategy we've pursued. We've achieved above-industry average growth in this environment by building a best-in-class product portfolio and by carefully and consistently cultivating our portfolio of programs, as well as enhancing and expanding our contributions to those programs.

We've strengthened our relationships with the primes around the right programs in the right segments of the market. And at the same time, we've created a fully integrated business that we believe can continue to profitably grow organically and scale through acquisitions.

Our continued momentum, coupled with the operating leverage from our now-completed integration plan, reinforce our confidence in continuing to achieve our target business model as fiscal 2015 progresses. With that, we will be happy to take your questions. Operator, you can proceed with the Q&A now.

(Operator Instructions) Peter Arment, Sterne Agee.

Yes, thank you. Good afternoon, Mark and Gerry.

Hi, Peter. How are you?

We're doing all right; snowed in, but we're doing okay. Hey, congratulations on the leverage that we are seeing in the business. I guess a question on the sales volume starting to kick through; and it sounds like you've got confidence that you're going to continue to see growth into next year.

How do we think about it? Is this level of OpEx expenses sustainable, or will we have to see it tick up? Just curious of your thoughts on that.

Sure. I think we clearly do have operating leverage in the business, as you can see from the results that here we continue to post. So I think if you look at it from a business model perspective, we are currently operating inside of that business model.

And yes, we feel good about the range from an adjusted EBITDA perspective that is encompassed in that guidance. Gerry, I don't know if you would like to add anything to that.

Yes, I mean, I think at the bottom line folks are generally pretty familiar with our target business model. We expect to stay in that range.

So if you -- as you project that out, revenue is growing well. OpEx to the extent that it grows would grow to stay within that target range.

Okay. Then just to follow up, Gerry, on accounts receivable. It looked like it ticked up this quarter. Could you give us a little more color on that?

That's really reflecting a milestone achievement on some of our percentage-of-completion programs. So actually what you are seeing is some conversion of previously unbilled revenue into billed; and then that's also converting into cash. And that's helped, driving the cash generation for the business.

Okay. Just lastly, Mark, the fiscal 2016 budget is the middle of next week. Clearly you've seen some of the leaked numbers that have been out there. Have you had any chance to hear about any impacts that you'll see on Mercury's key programs?

Not at a very specific level. But given the portfolio of programs that we've built, really aligned with the roles and the missions, and because we don't anticipate any significant shift there, we continue to believe that our programs are going to be well funded, Peter.

Okay. Thank you. I'll jump back in queue.

Sheila Kahyaoglu, Jefferies.

Hi. Thanks, Mark; thanks, Gerry, and good afternoon. Just wondered; I know you mentioned for the first half bookings are still up. But the quarter was a little bit light.

It seems like it might have been maybe international orders or Patriot. Do you have any more color there and how we should expect it for the year?

Well, we don't guide international and FMS bookings at an annual level. As Gerry said in his prepared remarks, Sheila, we do anticipate that bookings will normalize relative to revenue as the year progresses, and we do anticipate bookings in total being at or above a 1.0 book-to-bill.

The comparison with prior periods, in terms of why bookings in FMS and international are slightly down, is that we had one very large booking for F-15 EW in the second quarter of last year. So FMS sales tend to be somewhat lumpy, as you know.

Got it. Then just a little bit more on acquisitions. I know you've been talking about it for a while, but do you have a preference for size and whether it's revenue synergies with a product that would really add to your offering, given your growth strategy? Or would it be on cost savings and leveraging your platforms?

Yes, we would actually like to get both. We've built a very strong platform that we believe that we can continue to scale, particularly around the two Advanced Microelectronics Centers that we have. Obviously, if we're able to find the right type of RF and microwave company there is going to be some cost synergies associated with that.

But I think we've also been -- what we've also demonstrated is the fact that we've got an extremely strong channel into our prime Defense contractor customers. And the growth that we've seen in the opportunity set in the RF and microwave domain, and the fact that we've been able to pull through the products and capabilities of both LNX and the former Micronetics into our existing customers, I think is a testament to those relationships.

So we are going to look to continue to acquire I think in the two primary pillars of the business, particularly RF and microwave, as well as processing. Looking, as I said, for both revenue and cost synergies.

Got it. Thank you. I'll jump back in the queue.

Tyler Hojo, Sidoti.

Yes, hi. Good evening, everyone. I was hoping that we could talk a little bit about your initiatives to expand into the RF and microwave space. I know it's difficult to quantify exactly how much progress you are making. But maybe, Mark, you could talk a little bit anecdotally about how customers are, in real time, receiving some of your initiatives there.

Sure. We've had over 50 customer visits to the new AMC facility, which is a pretty significant uptick since the last quarter. We are seeing, I would say, a lot more opportunity. I think word is getting out around the investments that we've made, clearly the capabilities that we've built not only in RF and microwave, but the fact that we've got a unique set of capabilities across the sensor processing chain that other companies in the space don't have.

We also announced this past quarter an initiative called OpenRFM. This is, we believe, a very important set of innovations and capabilities that we are working on, that will strive to combine RF and microwave and digital technologies together into open systems architectures, which will ultimately lead to improved affordability and the more rapid upgrades of EW and radar subsystems. And we are getting some great reviews on that, to the extent that one of the industry trade magazines basically described it as probably the best innovation they've seen in the last 30 years in the EW space.

So we feel really good about the pipeline build that we see, the opportunity set that we are gaining access to, the leverage that we've created with the channel, as well as our ability to innovate in the space, Tyler.

Okay, wonderful. Maybe just as a follow-on, how about the blade center business? I know that seemed to be one of the more intriguing data points that you guys rolled out at the Analyst Day. Any updates there?

Yes. I mean, I think we feel really good about that opportunity. As we've talked about, it takes us out beyond just providing the processing for the sensor, which is what Mercury has historically provided, into other mission-critical computer applications onboard military platforms -- in particular, areas like battle management as well as mission computing -- and replacing commodity commercial computing from players like IBM, that recently sold its blade center business to Lenovo.

And we think that we've created a very compelling value proposition. We are a US Company that's doing all the design, development, production, support of those capabilities. We're already very well known to provide very high performance computing.

And we are seeing the number of opportunities related to that technology set that we just introduced continue to grow. So I would say that, as ever in Defense, things take a little time to gestate; but we are very, very pleased with the initial reception of that technology.

Okay, great. Thanks for that. Maybe if I just may, just one for Gerry. I think you gave the provisional tax rate for the next quarter, but what is it for the full year?

We are looking at something in the high 30%s for the full year.

Okay, great. That's all I had. Thanks a lot, guys.

Mark Jordan, Noble Financial.

Thank you. Going back to the previous question here, if I'm correct, did you say that the Q3 was to be 23%? And to get it for the year at a high 30%s you would have to have an exceptionally high tax rate in the fourth quarter.

Could you review your expectations please? And why have we had significant tax benefits in the first half?

It's for the full year we expect. We don't get a lot of tax advantage out of it; we get some bump for the recently enacted R&D tax credits. There was a little bit of catch-up, and we'll see some continued benefit to that for the balance of the year.

But we don't generally see the tax rate move around a ton, course of the year.

Okay. I'm sorry, but could you confirm? Did you say that you're expecting a 23% tax rate in the third quarter?

Effective tax rate in the quarter, yes. So our ETR would be in, as I said, the high -- and estimated for the year would be in the high 30%s.

Okay. I think you said that -- you were implying that the second-half bookings would be slightly below revenue, bringing your book-to-bill down to 1 to 1-plus. You have had about a couple quarters, three quarters of weaker. Would you expect then a seasonal period of strength in the first half of fiscal 2016?

Yes, we are not going to guide fiscal 2016 at this point in time, Mark. I think we anticipate a stronger bookings quarter in Q3, but as Gerry -- because we had some deals move during the second quarter that moved into the third. But the year as a whole we do anticipate, as Gerry mentioned, it normalizing; but with a book-to-bill at or above 1 for fiscal 2015 in total.

Okay. A final question for me, it's good to see you've completed your restructuring. I know at the end of the first quarter you had estimated full-year restructuring charges of $3.1 million. Now you're saying it's going to be -- things are completed and virtually $2.6 million is what you expect.

Was the $0.5 million lower level just a fudge factor you had? Or did you find economies as you were bringing this to close?

Well, I mean, the numbers worked out as they worked out. There were some slight shifts around -- there will be an immaterial amount that flows through, but it won't be enough to actually be visible, and it's just some adjustment around estimates for sublease of space that we vacated that we are lessees of, and so on. So you have to make periodic adjustments.

But again, on an EPS basis that won't even have $0.01 of impact. So it was just a little bit of shift in the total cost as we wrap things up in the final days.

Thank you.

(Operator Instructions) Jonathan Ho, William Blair.

Hi, good afternoon. Hey, so just wanted to start out with the timing around MDS revenue. I know you guys said that it was a little bit lumpy in terms of that business. Just wanted to get some sense from you how we should be thinking about that for the rest of the year; and just from a modeling perspective how we should look at the linearity of that business.

So, it is lumpy, Jonathan, unfortunately, like -- we are operating in the Defense industry. We saw some delays in bookings in the third quarter, and it was related to needing to get a DCAA ordered.

We do anticipate that bookings will pick up somewhat materially in the second half. So we don't think there's anything really going on there other than just timing.

Got it, got it. Then you guys talked about some of the smaller Defense contractors maybe struggling in this environment, as well as the larger Defense primes now relooking at their cost allocations. Can you maybe give us a sense of how you guys are taking advantage of this? Or maybe some examples of where you see the opportunity I guess starting to materialize at this point.

You guys have talked about this in the past. But just want to get a sense of how that's been tracking and what those opportunities look like today.

Sure. I think we continue to believe that the RF and microwave industry is going through pretty significant transition.

One of our largest competitors is shutting down a very significant facility probably about 10 or 15 miles along the road from us. Another RF microwave business that's part of a much larger, widely diversified industrial business is also shutting down a significant facility in Massachusetts. Both of those actually create opportunity for Mercury, because our customers are very worried about the supply chain disruption that those facility closures can cause.

At the lower end of the market, I think we've demonstrated on programs like SEWIP that we are able to take share from the smaller companies who don't have the wherewithal in terms of the manufacturing assets and capabilities as programs such as SEWIP Block 2 transitions into full-rate production. So I think we done a great job basically taking away those production revenues from the smaller companies in the industry.

In the processing dimension I think the other significant shift that we see occurring is really related to some of the specialized or security capabilities that we've been building into our products for some time now. As we discussed at Investor Day, we are significantly ahead of the industry.

And as I look at the growth that's occurring inside of our processing business, it's very much related to that trend, whether it be for domestic upgrades, where due to DoD mandates security and protection become more important; or through foreign military sales and international sales, where again there is a requirement associated with protecting intellectual property and capabilities. We are very well positioned there, and I think we are taking share in that dimension also, Jonathan.

Thank you. Then just one final one. As we look at the AMC facility, it looked like there was a lot of opportunity from a utilization standpoint there. I know it's still relatively early, but how do you guys think about raising capacity utilization?

Where do we stand in terms of that, in terms of what inning? And can you maybe just give us a sense of timing as to how you think about raising that utilization rate?

As we talked about at Investor Day, we're currently running one shift. We have got a tremendous amount of opportunity, I think, to continue to push more business through that facility.

Obviously, we built it for programs such as SIWIP Block 2 that are moving into full-rate production towards the back end of this fiscal year. And we certainly hope that our customers, Lockheed and Raytheon, are successful in their bid and proposal for Block 3.

So we've got a lot of opportunity, I think, to continue to grow in the existing facility by adding additional shifts. And we also feel that as we look at M&A I think there is going to be an opportunity potentially, if we find the right sorts of companies, to be able to take out some costs and to consolidate facilities that way as well, which will improve the utilization rates still further.

So, great facility. The customers love it. And I think it's going to continue to support the growth in the business.

Great, thank you.

One quick correction for everyone who's on the line. I wanted to come back to the tax issue where I think I misspoke. I believe I said high 30%s; I meant to say high 20%s, approaching 30% as the ETR for the full year.

Again, roughly 23% for the quarter and approaching 30% on a full-year basis. Apologies for that.

Mr. Aslett, it appears there are no further questions, therefore I would like to turn the call back over to you for closing remarks.

Okay. Well, thank you all for listening. Hopefully everyone is safe and warm, digging out from under the snow. Gerry and I certainly have been today.

We look forward to speaking to you again next quarter. Take care. Bye-bye.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.