Mercury Systems Inc (MRCY) 2013 Q4 法說會逐字稿

Good day, everyone and welcome to the Mercury Systems' fourth quarter Fiscal 2013 earnings 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 Senior Vice President and Chief Financial Officer, Kevin Bisson. Please go ahead, sir.

Thanks, Kate. Good afternoon and thanks 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 www.mrcy.com.

We'd like to remind you that remarks that we 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, 2012. 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'd also like to mention that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP during our call, we will 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. 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'll turn the call over to Mercury's President and CEO, Mark Aslett. Mark?

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

Mercury closed fiscal 2013 with a very strong quarter for bookings and backlog as we anticipated. We made good progress in our most important programs and design wins were up substantially compared with Q3. Total revenue for the quarter grew by $1 million sequentially to $55 million versus our guidance of $48 million to $54 million.

We have a GAAP loss from continuing operations of $0.07 per share versus our guidance of a loss of $0.13 to $0.07. This last however included $0.03 per share in unforecasted restructuring charges related to our new advanced microelectronic center, which I'll discuss a little later.

Fourth quarter adjusted EBITDA was 7%, significantly above the high end of our guidance and we continue to generate positive cash flow in the quarter.

We were at or above guidance on all our key metrics and concluded FY'13 with positive momentum, despite the industry headwinds that have persisted all year.

It was five quarters ago, when we first talked about the potential adverse impact of a budget sequester beginning in January 2013, and a year ago when the pre-sequestration slowdown began having a material impact on our business. We responded aggressively through the fiscal year with a series of decisive actions to reduce our operating expenses, and minimize working capital.

We ultimately completed two restructurings that enabled us to continue driving improvement and successfully merge the business at the lower revenue run rate we anticipated. Taking a cautious and conservative stance, we focused on managing revenue primarily from backlog while relying less on book and ship in an effort to minimize working capital, preserve liquidity and reduce risk in a very tough industry environment.

We also made billing backlog a top priority for the year and the team executed well. We conclude FY'13 with our total backlog up 34% and defense backlog up 15% year-over-year, each at all-time Company record levels. Our total book to bill improve to 1.1 from 0.9 in FY'12 and our book to bill and defense increased to 1.0 from 0.9 last year.

Turning to our results for the fourth quarter and looking specifically at defense, total defense revenues were essentially flat sequentially at $49.6 million. Total defense bookings, however, were up 32% from Q3 two $58 million. This growth was in line with our expectations for the quarter and largely driven by our Mercury Commercial Electronics or MCE segment, both organically and in the form of Micronetics.

Our bookings in Mercury Defense and Intelligence Systems or MDIS showed strength sequentially also. Our MCE compute business continues to recover from the defense slowdown that we saw early in FY'13, delivering significantly improved bookings on a sequential basis. Excluding Micronetics, Q4 defense bookings were up 24% sequentially.

Our Q4 book to build was 1.2, compared with 0.9 last quarter. Our Q4 book to build in defense increased substantially to 1.2 from the 0.9 we reported for the third quarter. Defense backlog exiting the fourth quarter was up 8% sequentially and year-over-year defense backlog grew 15%.

Approval of the government's FY'13 defense budget seems to have improved the overall environ from a bookings perspective, at least for now. This was another strong bookings quarter for the Aegis program as expected, in part due to having a defense budget in place and also due to strategic considerations.

Given the geopolitical instability in the Far East, Aegis continues to be a stable for ballistic missile defense as part of the DOD's specific pivot strategy.

Foreign military interest in Aegis has increased as well. Our Q4 Aegis bookings were up more than 100% from strong bookings we reported for Q3. This increase was driven by our receiving the FY'13 portion of an Aegis multi-year award as well as foreign military sales. For FY'13 as a whole, Aegis bookings were up nearly 250% year over year.

In addition to Aegis, our major bookings this quarter were related to SEWIP Block 2, an electronic warfare program with [EXCELIS] and Gorgon Stare.

Finally, I'm pleased to report that we received an initial small order for U.S. Army Patriot upgrades that could lead to a materially larger order toward the end of FY'14.

In terms of our fourth quarter revenue, our largest programs were Aegis SEWIP Block 2, the B-1 bomber and Gorgon Stare. Aegis revenue was up nearly 7% sequentially and we continue to ship and recognize (inaudible) revenue from SEWIP Block 2.

With respect to Gorgon Stare, we crossed some key technical thresholds in the fourth quarter. It appears congress reinstituted funding for the program in their markup of the FY'14 Defense Appropriations Bill and as a result, we're more optimistic than last quarter by the potential for additional bookings and revenue in FY'14, albeit at a lower level than last year.

Revenues from our smaller run rate deals related to spares, maintenance and repair were up more than 20% on a sequential basis and we continue to see signs of stabilization. Our bookings for smaller run rate deals were roughly flat in Q4. As I mentioned, this was a good quarter for design wins, which we managed sequentially from a low point in Q3.

Operating under an approved defense budget instead of a CR seems to have led to the release of some budgeted customer R&D funds. This resulted in increased design wins for us this quarter as expected.

We received a total of nine design wins in the fourth quarter, all of them in defense. This compares with six designs in the immediately preceding quarter. The five-year probable value by design wins this quarter was approximately $42 million compared with approximately $22 million in Q3.

Our design wheels continue to focus on radar, electronic warfare and an electro optical infrared. The major design wins of note this quarter were from Aegis foreign military sale with Lockheed Martin, continued radar upgrades on the Predator Reaper with General Atomics and an important EW program with NRL, the Naval Research Laboratory.

Our success in winning new designs demonstrates that we continue to innovate, particularly in the processing dimension, as well as integrated security. Integrated security is becoming a very important theme as both an emerging priority for the DOD and a growing focus for area for the prime community, which is looking to export and expand internationally.

International defense revenues, including FMS, were 30% of total defense revenue in the four quarter, compared with 23% in the third quarter.

Micronetics, which we acquired in August, last year, is continuing to perform well. Mike Renedick's team, technology and future opportunities are all continuing to meet and in some cases exceed our initial expectations as we continue to integrate the business.

During the fourth quarter, we signed a lease for a 70,000 square foot microelectronics manufacturing facility in Hudson, New Hampshire, very close to our existing Micronetics location. Operating as the AMC, this new plant will allow us to consolidate the current Hudson operation and our existing Salem, New Hampshire plant. The state of the art facility, largely built out by the former owner, the AMC will add significant clean room manufacturing capacity for Mercury and a new level of microelectronics capability for our customers.

These will be important assets for us going forward, not only as we continue to win new additional new designs in our existing programs, but as we on the current trend toward greater outsourcing by our customers in RF and microwave. We see this trend as the next wave of major opportunity in our customer base.

Existing and prospective customers have already toured the AMC space and the feedback has been very positive. It's clear that even before the move-in the new building is inspiring customer competence in strategy for microelectronics. Combined with our existing advanced microelectronics center in New Jersey, the New Hampshire AMC will ultimately provide us with a world-class, scalable, redundant design and manufacturing facility, something that we know is a very important consideration for our customers in their decision-making.

It's close to our existing New Hampshire plant, so we're not expecting any significant personal disruption. And we're targeting late Q2 or early Q3 of FY'14 to have the AMC up and running

Additionally, as part of this plan in the fourth quarter we sold our existing Micronetics plant in Hudson to the property developer from whom we're leasing AMC. We'll use the proceeds from the sale, along with significant developer tenant improvement funds to prepare the new facility. In the interim we have a short term lease with the new owner of our existing Hudson facility.

In effect, we've obtained a new world-class microelectronics center for a fraction of the expense of modernizing our existing facilities. This should significantly strengthen our competitive position as an RF and microwave outsourcing partner to the primes.

It should also allow us to enhance delivery against existing programs, such as SEWIP Block 2, and growth programs such as SEWIP Block 3, should be Lockheed Martin and Raytheon team win this competition.

All in all we feel good about Mercury's progress and positioning as we begin the new fiscal year. However, we're by no means out of the woods from an industry perspective. We were pleased to see the approval of the FY'13 defense budget and we're not surprised that sequestration was triggered, which resulted in a $37 billion reduction in overall defense spending.

Last quarter we talked about our concern regarding the DOD asking Congress to reprogram a portion of the remaining RDTNE and procurement funds. This has not yet had a major programmatic impact as far as we can tell.

Looking forward, the defense budgets proposed by both the administration and both chambers of congress have basically ignored sequestration, requesting levels of funding that are higher than the spending cuts enacted in the 2011 budget control act. This makes it probable that we'll be starting government fiscal '14 under another continuing resolution while congress and the administration try to sort things out.

At the same time, the DOD recently completed its strategic choice management review, a comprehensive study of defense policies, programs and spending priorities in light of sequestration. Although this will likely lead to decisions that could primarily affect full structure and/or investment spending going forward, particularly in light of the budget gap with specifics that are still largely unknown at this time.

These uncertainties continue to cloud our visibility into FY'14 on a number of levels. There remains the potential for delays in orders and associated revenues, in new program starts or programs transitioning between phases, as well as risks to program timing, funding levels or cancellations.

We've been dealing with these same uncertainties and risks for more than a year. We believe that Mercury was in many ways a leading indicator for the industry. We saw the advanced impacts of sequestration very early on in our FY'13. We responded immediately and proactively and through the year managed the business very differently than in the past. We believe that on balance our strategy, technology, capabilities and ongoing programs and platforms align well with the DOD's new roles and missions.

Continuing to grow bookings remains the top priority for the near-term. We're working hard to leverage our relationships through the prize and drive bookings and ultimately revenue from our existing programs as well as new programs and platforms.

Looking ahead into fiscal 2014, we have the opportunity for a number of major new design wins should our customers be selected. There are a handful of programs that we believe will be important to restoring and growing Mercury's enterprise value on behalf of our shareholders. Among these programs are AMDR, the next generation Aegis radar replacement, SEWIP Block 3, F-16 radar modernization and upgrades, the E-2D Hawkeye and the US Army Patriot, on top of our existing programs, such as Aegis and SEWIP Block 2. These have the potential to be a franchise set of programs for Mercury and the recent developments have been very encouraging.

As I mentioned earlier, at the end of Q4 we received an initial order for the US Army Patriot that could lead to a much larger order late this fiscal year. Just last week Lockheed Martin awarded the F-16 AESA radar modernization and upgrade contract for the US Air Force and Taiwan to our customer Northrop. This win, along with future FMS pursuits by our customers, could be worth $90 million to $125 million to Mercury over time.

Looking forward, a decision on AMDR could be made within the next 90 days while SEWIP Block 3 could be decided by the end of calendar 2013. These are all exciting opportunities for Mercury that in aggregate could represent hundreds of millions in revenue potential over the life of the programs. We're in this favorable position as a result of two factors. First is the product's portfolio refresh and the acquisition strategy that we've implemented over the past five years. Second is the fact that we've been able to successfully position Mercury as the premier commercial ISR and EW subsystem outsourcing partner to the defense primes. We believe these strategies have created significant intrinsic value in our business despite the chaotic industry environment.

Over the longer term the primes will undoubtedly face greater pressure to outsource to companies like Mercury as they continue to reduce their engineering workforce and lower their own R&D spending. We believe that Mercury is well positioned to capture a significant share of this potential opportunity. In the meantime, we continue to manage the business to a conservative revenue and income statement forecast. We remain focused on execution in the areas that we cannot control and managing with an eye on maximizing our cash and continue to build backlog.

At the same time we've ensured that we have sufficient liquidity and financial flexibility not only to manage the ongoing needs of the business but also for future M&A purposes when visibility and conditions in our end markets are more favorable. We're confident that given that our focus on cash management and recent expense reductions the industry's ultimate recovery will generate substantial operating leverage their business. We believe this will lead to a significant improvement in Mercury's profitability, cash flow generation and enterprise value over time.

With that, I'd like to turn the call over to Kevin. Kevin?

Thank you, Mark. And good afternoon again, everyone.

Turning to our financial results, revenue for the fourth quarter of fiscal 2013 of $55.4 million was $1.3 million higher sequentially than revenue of $54.1 million for the third quarter and exceeded our stated guidance of $48 million to $54 million.

The Company incurred a GAAP net loss of $0.07 per share in the fourth quarter compared to GAAP earnings of $0.03 per diluted share in the third quarter of fiscal 2013. As noted previously, third quarter earnings benefited from the retroactive reinstatement of the Federal Research and Development Tax Credit that contributed $0.05 per share in earnings for the third quarter. In addition, included in the loss for the fourth quarter were restructuring charges that contributed approximately $0.03 per share to the quarter's net loss.

Adjusted EBITDA for the fourth quarter of fiscal 2013 of $3.8 million was lower than the $5.2 million of adjusted EBITDA for the third quarter, but exceeded our stated guidance of $100,000 to $3 million for the quarter. The Company generated free cash flow of $3.2 million in the fourth quarter, which was $2 million higher than the third quarter. The Company ended the fiscal year with $39.1 million of cash and cash equivalents and with no debt.

Reviewing the fourth-quarter performance in greater detail, total revenue for our largest segment, Mercury Commercial Electronics, or MCE, was $45.1 million, which was $1.1 million higher than the $44 million of MCE revenue generated in the third quarter, but $3.8 million lower than fourth quarter of fiscal 2012.

The sequential increase in MCE revenue derived from higher B-1 bomber program shipments and increased commercial revenue from a telecommunications equipment customer that were partially offset by lower F-15 Digital Electronic Warfare Suite or DEWS program revenue. It should also be noted that the strong level of Aegis and SEWIP shipments in the third quarter continued as well in the fourth quarter.

The fourth quarter year-over-year decrease in revenue was due primarily to lower Patriot and UAV related program revenue that were partially offset by higher SEWIP program revenue and the inclusion of revenue from Micronetics following that acquisition in early fiscal 2013.

Revenue from the Company's Mercury Defense and Intelligence Systems, or MDIS segment, for the fourth quarter was $13.2 million, which was slightly higher than the $13 million MDIS revenue in the third quarter, but $2.8 million lower than the fourth quarter of last year.

The year-over-year decrease in MDIS revenue is primarily due to lower revenue from the Gorgon Stare program. It should be noted that operating segment revenue for the fourth quarter of fiscal 2013 does not include adjustments to eliminate $2.8 million of inter-company revenue. Total defense revenue, including MCE and MDIS for the fourth quarter of $49.6 million was slightly higher than the $49.4 million in the third quarter, but $7.3 million lower than the fourth quarter of fiscal 2012.

The decline in year-over-year defense revenue, as mentioned previously, derived from lower Patriot and UAV related program revenue, including Gorgon Stare, that were partially offset by the inclusion of Micronetics revenue. Of the total defense revenue in the fourth quarter, $15 million, or 30% derived from international customers compared to $8.1 million, or 16% in the third quarter and $16.1 million, or 28% for the fourth quarter of fiscal 2012. Revenue from international customers includes foreign military sales through our prime customers as well as direct sales to non-US-based customers.

Commercial revenue for the fourth quarter of $5.8 million was $1.1 million higher than the third quarter and $1.9 million higher than the fourth quarter of fiscal 2012. The sequential increase in commercial revenue was mainly due to higher product shipments to a telecommunications equipment customer for product that was designated as end of life.

The fourth-quarter year-over-year increase in commercial revenue stemmed largely from the inclusion of Micronetics commercial revenue in the fourth quarter of fiscal 2013.

Defense bookings for the fourth quarter of $58 million were $14.2 million or 32% higher than the $43.8 million of defense bookings in the third quarter and $2.5 million higher than the $55.5 million of defense bookings in the fourth quarter of fiscal 2012.

As Mark mentioned earlier, the substantial increase in sequential defense bookings was due mainly to higher bookings from the Aegis and SEWIP programs as well as increased bookings from the Suite of Integrated RF Countermeasures or SIRFIC electronic warfare program.

Compared to the previous year's fourth quarter, the increase in defense bookings stem from higher Aegis and SEWIP program bookings and the inclusion of Micronetics that were partially offset by lower MDIS bookings.

Mercury's total book-to-bill ratio for the fourth quarter of fiscal 2013 was 1.2, which exceeded the 0.9 book-to-bill ratio in the third quarter and the 1.0 book-to-bill ratio in the fourth order of fiscal 2012. Defense book-to-bill of 1.2 for the fourth quarter was similarly above the 0.9 and the 1.0 defense book-to-bill ratios for the third quarter of fiscal 2013 and fourth quarter fiscal 2012 respectively. It should be noted that the Company's total book-to-bill for fiscal 2013 was 1.1.

The Company ended fiscal 2013 with record total backlog of $140.3 million, which was $12.6 million or 10% higher than the third quarter and $35.7 million or 34% higher than total backlog at the end of fiscal 2012. Of the total ending backlog at the end of fiscal 2013, $113.2 million or 81% is expected to be shipped within the next 12 months. $117.2 million or 84% of the ending fourth quarter backlog related to defense, which was $8.5 million higher sequentially from the third quarter and $15.8 million or 15% higher than defense backlog at the end of fiscal 2012.

From a bottom-line perspective, the Company incurred a GAAP net loss of $2 million in the fourth quarter compared to GAAP earnings of $800,000 in the third quarter. As we noted in last quarter's earnings call, third quarter results were favorably impacted by the retroactive reinstatement of the Federal Research and Development Tax Credit that contributed $1.4 million of $0.05 per share in earnings for the third quarter.

In addition, during the fourth quarter, the Company incurred $1.6 million of restructuring charges, approximately $1 million net of tax, which contributed approximately $0.03 per share to the reported loss for the quarter. Absent these two items, the bottom line results between the third and fourth quarters were largely comparable as lower gross margin in the fourth quarter due to product mix was essentially offset by a higher recurring fourth quarter tax benefit.

As noted, the Company initiated restructuring charges totaling $1.6 million during the fourth quarter. These charges consisted of $1.1 million relating to the loss on the sale of the Company's Hudson, New Hampshire manufacturing facility with remaining charges principally related to severance costs in connection with headcount reductions. The loss on the building sale and the headcount reductions related primarily to the Company's decision in the fourth quarter to lease a new and larger facility in Hudson, New Hampshire. With this new advanced microelectronics center or AMC, the Company will be consolidating its existing Hudson, New Hampshire and Salem, New Hampshire facilities into the AMC later this fiscal year.

As Mark pointed out earlier this facilities consultation not only positions the Company to take advantage of the outsourcing of RF and microwave development and manufacturing but is also expected to generate operational efficiencies by eliminating two smaller facilities. Once operational, we expect the AMC to generate annualized savings of $2 million, compared to current operations.

On a year-over-year basis the fourth quarter net loss of $2 million compares to $5.7 million of earnings in the fourth quarter of fiscal 2012. Lower sales volume and product mix related gross margin and the inclusion of Micronetics operating expenses in the fourth quarter of fiscal 2013, were partially offset by nearly $5 million of lower base operating expenses resulting from the benefits of the restructuring actions taken in early fiscal 2013. It should also be noted that the fourth quarter of fiscal 2012 included a $4.9 million pretax benefit in connection with the reversal of the JCREW related earn-out liability in connection with LNX acquisition.

Adjusted EBITDA of $3.8 million for the fourth quarter of fiscal 2013 was $1.4 million lower than the $5.2 million of adjusted EBITDA in the third quarter and $5.5 million lower than the $9.3 million of adjusted EBITDA in the fourth quarter of fiscal 2012.

Relative to our stated financial guidance for the fourth quarter, we are pleased to report that the Company was at or above the high end of its guidance in all key financial measures. Fourth quarter revenue of $55.4 million exceeded our guidance of revenue between $48 million and $54 million. Reported loss per share of $0.07 for the fourth quarter, inclusive of unforecasted restructuring charges of approximately $0.03 per share was at the favorable end of our guidance of a loss between $0.07 and $0.13 per share. Excluding the restructuring charges, the Company's fourth quarter loss was favorable to our guidance range. Finally, adjusted EBITDA of $3.8 million for the fourth quarter easily exceeded guidance of $100,000 to $3 million.

Turning now to the balance sheet, the Company ended fiscal 2013 with cash and cash equivalents of $39.1 million and no debt, which was $4 million higher than the third quarter's cash and cash equivalents of $35.1 million. The Company generated $3.2 million of free cash flow during the fourth quarter as $4.8 million of operating cash flow, driven by cash earnings and improved working capital, was partially offset by $1.6 million of capital expenditures.

Reflecting on the Company's full-year fiscal 2013 financial performance, the industry headwinds we encountered a year ago had a dramatic impact on our top line and margin performance compared to fiscal 2012. Revenue for all of fiscal 2013 was $208.8 million, which was 15% lower than fiscal 2012. With the year-over-year decline in revenue cushioned somewhat by the Micronetics acquisition, the more significant revenue decrease in our organic MCE business caused the sizable gross margin decline between years.

As Mark noted, the Company met these industry headwinds had on with restructuring actions that reduce the Company's annualized operating expenses by approximately $25 million. More importantly these expense reductions, combined with efficient working capital management, resulted in a modest $3 million decline in the Company's cash position, excluding the Micronetics acquisition from the beginning of fiscal 2013. Considering the significant revenue and margin decline between years, we view this preservation of liquidity to be a substantial accomplishment during fiscal 2013.

In addition, despite the year-over-year revenue decline in fiscal 2013, total bookings of $220.6 million for the year were down only 4% from fiscal 2012, resulting in a book-to-bill ratio of 1.1 for all of fiscal 2013. This bookings performance allowed the Company to a fiscal 2013 with a record backlog of $140.3 million, which was 34% higher than backlog at the end of fiscal 2012. Combined with the recovery in the organic MCE business in last year's second half, the Company enters fiscal 2014 in a much stronger position than a year ago.

Now turning to the first quarter fiscal 2014 guidance, while the Company saw market improvement in the defense industry environment and hence its overall financial performance in the second half of fiscal 2013 compared to the first half, there still exists a good deal of industry uncertainty as we begin fiscal 2014. As Mark alluded to in his remarks there is little likelihood that the DOD will have a budget appropriation in time for the beginning of the government's fiscal year on October 1st, resulting in the DOD operating under a continuing resolution for some period of time.

In addition, none of the proposed DOD budgets for government fiscal year 2014 include the impact of sequestration. Finally, the details underlying the Secretary of Defense's strategic choices in management review have not been publicized. With this environment as a back drop the Company continues to believe that the prudent course of action is to continue managing the business conservatively, meaning forecasting revenue primarily from backlog in order to minimize the build up of working capital and ultimately preserve liquidity. As such, we are continuing the practice from the last several quarters of providing only quarterly financial guidance.

With that in mind for the first order of fiscal 2014 we are forecasting total revenue to be in the range of $48 million to $54 million, which is comparable with the last two quarters. The estimated revenue range for the quarter is highly dependent on the customer controlled timing of previously booked Aegis shipments this quarter. The high end of the revenue range assumes shipment of most of the Aegis product while the low end of the range assumes none is shipped.

Consistent with prior quarters, we expect the split of first quarter revenue to be approximately 90% defense and 10% commercial. Within our stated revenue guidance we are projecting gross margin to be in the range of 40% to 41%, which is in line with gross margin in the fourth quarter of last year.

Operating expenses are forecasted to be $27 million for the first quarter, which is higher than the fourth quarter of fiscal 2013, due primarily to lower customer funded research and development expenses and higher non-cash stock compensation expense. From a bottom-line perspective we anticipate a GAAP loss per share in the range of $0.08 to $0.14 for the first quarter based on an estimated weighted average share count of 30.7 million shares. The loss per share forecast assumes an income tax benefit of approximate 40% for the first quarter. The loss per share range forecasted for the first quarter also includes an approximate $0.04 per share impact from the amortization of intangible assets.

Adjusted EBITDA for the first quarter is estimated to be between $100,000 and $3.2 million, which is comparable to the forecasted range the Company provided for last year's fourth quarter. Relative to liquidity, we anticipate ending the first quarter with cash and cash equivalents flat to slightly higher than the $39.1 million at the end of fiscal 2013. Operating cash flow generated from cash earnings and lower net working capital is anticipated to be offset by a higher level of capital expenditures than previous quarters due to the build out and equipment purchases related to the new Hudson, New Hampshire facility.

With that, we'll be happy to take your questions. Kate, you can proceed with the Q&A now.

(Operator Instructions) Tyler Hojo, Sidoti & Company.

Just first question just in regards to the guidance. I get the continuing along the line of just basically guiding based on what's in backlog. But just in regards to kind of book and ship sort of expectations, what are you currently anticipating? Something similar to what you did in Q4? How do we think about that?

So I think probably the best way of answering it, Tyler, is really at the year level. So if you look at what we did from a book ship perspective total Company, we ended up FY'13 that on average it was approximately 20% of revenue versus slightly over 30% in FY'12. And so I think that trend is likely going to continue going forward. It could change obviously on a per quarter basis, but on average that's a good number.

And then Mark, just in regards to further restructurings planned in fiscal '14, is there anything planned? And the follow-on to that is I know one of the reasons why you felt confident in terms of taking the knife to costs as aggressively as you did is because you just went through a product refresh. Where do we stand? At what point are you going to need to kind of reinvest in a new product suite?

Sure. So there are no other planned restructurings at this time. The small restructuring that we did in the fourth quarter as I alluded to and Kevin alluded to in his prepared remarks was very much due to the continued integration of the Micronetics acquisition. Specifically, we had overlapping facilities and some overlap in personnel in New Hampshire that, in essence, we restructured in the fourth quarter.

So I don't foresee any additional restructuring actions. We clearly are looking to continue to look for synergies in the business, but nothing specific at this time.

As it relates to R&D. I think if you look at the R&D numbers it's up slightly on a quarter over quarter basis. Most of that is due to the fact that we got lower customer funded nonrecurring engineering expenses in the first quarter that's very much driven by Gorgon Stare. We feel that the investments that we're making are appropriate given the opportunities that we see. And so I wouldn't foresee any significant changes, Tyler.

And just lastly for me, I know the commercial business isn't very large Tuesdays but if you look at the backlog, I mean it something like seven or eight fold over this time last year. Just wondering if there's anything notable there to talk about?

Yes, so I think there's a couple of things. One as Kevin mentioned in his prepared remarks, we did have an end-of-life order associated with a telecommunications customer. However, we also honored commercial revenue largely on the RF component side with the introduction of Micronetics. And finally, I would say that we've got a customer in the commercial world that's doing some interesting things in Homeland Security and we have seen some increases in backlog associated with that.

Mark Jordan, Noble Financial.

A couple of EBITDA questions. I was wondering if you could give us some full-year guidance as to what you think the stock comp expense will be and also amortization.

Well, we're not giving full-year guidance, Mark, on that or any other financial measures. I think we've included in the release what our expectations were for stock comp, which was roughly about a little over three main dollars in Q1.

All right, so that's up in essence 39% from the first quarter of last year. Should we use that kind of ratio when sort of penciling in what might be reasonable through the balance of the quarters?

Well, that makes the assumption that there aren't any changes in headcounts and forfeiture rates and things like that. But I think that's probably being somewhat conservative from that standpoint.

Now I know it'll be in the K, but could you give the full-year amortization assumption?

Relative to what? SOC op?

No, amortization of purchased intangibles. That will be in the K shortly.

I think you can take what we have in our Q1 assumptions and annualize that and that's as good an estimate.

Well, just a clarification question. Are you talking for FY'13 or the year past or the FY'14?

I was talking for FY'14 again. The amortization. That number will be in the K for the full-year, so I was just wondering if it was available.

A final question relative to AMDR. Is that program, as they move forward with that, will that be for basically new builds or will there be any opportunity to retrofit that system on existing platforms?

So it's a good question. I think if you look at the GAO report that currently has scheduled -- there's going to be 22 AMDRs and it starts with the Flight III Arleigh Burkes that are going to be introduced in FY'16. However, I think our customer does believe that there's going to be the potential for significant retrofits as well as maybe some (inaudible) opportunities also, Mark.

As it stands now, it's initially for new builds, but there is the opportunity for that. That could be integrated back into an existing platform?

Yes, I think that's our current understanding, so obviously there's a lot of water that needs to go under the bridge, but that's a really important program for us. I mean, based upon I think our assumptions regarding the system configuration, the average selling price, the new builds, as well as retrofits and we think that it could be in the hundreds of millions of dollars of potential to Mercury over its lifetime.

Peter Arment, Sterne Agee.

Mark, you mentioned in the release that you've received an additional small order for the Patriot missile system from the U.S. Army. Obviously that's been out there for quite a while but there needs to be a big refresh there. How do you -- could you give us a more color on how you expect the timing of that?

Sure. Well we as you say received an initial PO, which was small in nature in the fourth quarter. And we believe that there's likely going to be a follow-on order in Q1. However as we looked towards the back half of the year I think that's where we're currently anticipating a much larger order to occur. And again it's kind of linked to the U.S. Army Patriot missile system upgrade. So this could be a restart to see increased bookings for the program overall.

And I think we talked about it on the last call it's down significantly year-over-year. In fact we booked and recognized less than $1 million of Patriot in fiscal 2013 versus the $14 million that we recognized in revenue in the prior year. So we are anticipating that Patriot come back in this fiscal year, but it's probably going to be more towards the back half of the year.

And Peter, to add to that there is sizable opportunities from an FMS standpoint for the Patriot as well. I think Raytheon has been very forthright in terms of talking about those opportunities at their recent routes calls.

Right, no I understand. But it also I guess ties into my next question. You said, Mark, I think it was 30% or maybe, Kevin, you did about 30% in international. Is that correct?

Yes.

And is it -- I mean I assume Patriot and a lot of those other programs that you've -- your legacy programs that you've done well and are part of that, but are you seeing -- what kind of opportunities are using further to see that percentage increase?

So I mean clearly one of them is the F-16 program that we've talked about in the past. And we were thrilled that just last week, Lockheed Martin selected our customer, Northrop Grumman as part of the upgrade of not only the US Air Force's F-16 AESA radar or -- to upgrade the radars to an F-16 AESA, but also for Taiwan. So we definitely see opportunities around the world associated with that. One of the big programs that we acquired when we did the acquisition of Micronetics is associated with EW upgrades on the F-15 platform Patriot that we mentioned. And were also seeing more opportunity now associated with FMS sales for AEGIS. So we've got a number of important programs that we think are just going to continue to give us a strong base of business from the international markets.

And just lastly, you mentioned that in there were some examples where the integration was going well at Micronetics and they were kind of exceeding expectations. Can you just give a little more color there, Mark?

Sure. I think probably the one that we're most excited about is the SEWIP program. And SEWIP, as you know, Block 2 we've been involved with that for some time. In November of '09 the Navy competitively awarded the SEWIP Block 2 upgrades to Lockheed to upgrade the SLQ-32s. And I think we built a great recent glacier ship with Lockheed and really be have become an important partner in the RF and microwave dimension.

I think we're continuing to win more content on that program and I think based upon the configuration, the potential for future design wins, that are largely linked to Micronetics, sales price, et cetera, we believe that's another program that is worth in the hundreds of millions of dollars to Mercury over its lifetime.

And then even beyond that clearly there's the SEWIP Block 3 and Raytheon has teamed with Lockheed and we believe that's a very, very strong team to beat. And we've recently been selected as really a teammate to both of those companies largely in the RF and the microwave domain. So there's a lot of opportunity and I think that's really a great example of our relationships in our channel and Micronetics technologies and capabilities.

Peter, I would add as well from a financial standpoint bookings this quarter for Micronetics are up over 50% sequentially from the third quarter and from a bottom-line perspective their adjusted EBITDA is well ahead of our target business model of 18% to 22%. So to top off what Mark pointed out from a business and an operational standpoint, they continue to perform very, very well financially.

Sheila Kahyaoglu, Jefferies.

Can you tell us what the organic growth rate was in quarter? Year over year.

Are you talking about for the MCE core business?

Yes, for the total Company, ex Micronetics, what revenue growth was in the quarter?

I'm not sure that's actually a metric that we've got to hand. I know that the revenue growth rate of the MCE core -- core compute business, which is the one that we talked about historically, revenue growth was basically 2% up on a sequential basis, and it -- and then total bookings were up 35% sequentially for the business. So that's the core compute part of the business, excluding the acquisition of Micronetics.

So this is for revenue was up 2% sequentially.

Revenue is up 2% sequentially and bookings, excluding Micronetics were up 35% sequentially.

And then I mean in terms of just given your current bookings run rate, when do you expect organic growth to on a year-over-year basis become positive? Or can you give us some idea there? I know you're guiding on a quarterly basis.

Yes, we're really just sticking with the quarterly guidance, Sheila.

And then on SABR you mentioned overall it's a $90 million to $120 million opportunity for Mercury. Does that mean your content is about 150,000? Does that sound right?

No, because a lot depends upon your assumptions around the configuration as well as the number of both US systems and Taiwanese systems that's going to be upgraded. And also the potential for future FMS awards. So we haven't been specific regarding the ASP of the system, but we believe over time, the F-16 SABR opportunity could be worth approximate mentally $90 million to $125 million to us.

And then I guess when do you expect that business to start contributing to the top line?

So it's a little too early to tell. I mean, we're still not under contract. We could see some initial bookings towards the back end of the year, but I don't think it's going to be kind of in the first half, let's put it that way.

Jonathan Ho, William Blair.

Just wanted to see first of all you just -- Block 2 -- when do you expect to go into full ray production and how big of a ramp is that from sort of the low rate initial production?

Did you say SEWIP Block 2?

Aegis Block 2.

Are you talking -- so there is no Aegis Block 2 per se. There's AMDR, is that the program you're talking about?

I think there was something mentioned about Block 2 low rate initial production swinging to full rate.

Yes, that's SEWIP. So I think full rate production is actually not for another couple of years. So I think we are anticipating additional bookings and revenue this year and I think there's the potential to see maybe some full rate production bookings in the latter half of fiscal '14, although at this point in the year it's still a little too early to tell.

And just in terms of the significant improvement in backlog, I just wanted to get a sense from you in terms of how this impacts your visibility and your ability to plan out for 2014. I mean, does this sort of increased you were comfort ability level or do you feel like we should just sort of maintain the current stance in terms of visibility for the remainder of the year?

Yes, we're still taking a pretty conservative approach, Jonathan, again, largely due to what's going on from a macro perspective. The budget situation is such that the House, the Senate and the President have got very, very disparate numbers and there's a tremendous amount of work we think that needs to be done in a relatively short space of time to end up with an approved defense appropriations bill.

So I think we set out in fiscal '13 to really preserve liquidity, given the industry environment that I think we clearly achieved that. So we also set out to action growth of backlog to help lower the risk on a quarter by quarter basis, and I think the fact that we actually grew backlog by 34% is also I think a testament to the team's efforts. But in the short term we're kind of taking it still from a conservative perspective, just given the overall environment.

And just finally, is there any way that you can provide a sense of the linearity for revenue this year? I mean, should we just sort of assume it similar to prior years or is there any sort of inflection points that you think it could be up or down?

Yes, I think we're really just going to stick with the one quarter at a time guidance, Jonathan.

(Operator Instructions) Michael Ciarmoli, KeyBanc Capital Markets.

Just to maybe elaborate, you mentioned the goal of increasing the bookings in backlog. What sort of targets or plans do you have for fiscal '14? Can we assume that you're going to try and build the backlog again this year or do you have a booking expectation that you could share with us?

Not specifically, Mike, at the year level because, again we're really only focused on providing guidance on a quarterly basis. I can tell you though that as we talked about there are certain programs that are going to be decided within our fiscal '14 timeframe that are very important, probably the largest of which is the AMDR program. And a decision on that could be made within the next 90 days. That could have an impact, a materially large impact on our bookings to the op side should Lockheed be selected.

There's also, as I mentioned earlier upside potential on programs such as Patriot with the US Army if that -- the first part of that large award were to come in. We think there's upside potential on SEWIP. But again, I think most of these are towards the back end of the year and so I kind of think the way in which we're viewing it is this could be the year where we're growing bookings and backlogs, but it may not all drop from a revenue perspective, given the timing.

What's usually your timeframe? You get design wins, how long are those usually converted into orders? I know obviously the contracting environment's a mess right now, but do you have any new design wins or recent design wins that are factoring into sort of your bookings plan?

We do, but I don't think they're the major drivers. I think the major driver is the ones that we just talked about, so we were obviously extremely pleased that Northrop was selected on SABR program or their SABR program was selected for the US Air Force upgrades as well as Taiwan.

We talked about the incumbents really having an advantage in this environment. It's really been a key part of our strategy to invest in capabilities ahead of time and to align ourselves really with industry leaders who've got a very, very strong incumbent position on programs and really on platforms that matter going forward. And we think in the case of F-16, in the case of Patriot, in the case of AMDR, they're all great examples of us being able to do that.

So I think that FY'14 is going to be a year where some of these really important programs are selected and hopefully we're on the winning side of the equation.

And then just on any meaningful cancellations or delays? I know the Space Fence has been kind of in the crosshairs, but anything else in the portfolio that's giving you guys and an elevated level of concern?

No, I mean Space Fence we've heard the rumors that it may be delayed. We're working with a couple of different companies on that. I wouldn't say it's really material to our growth plans. It's not one of their five programs that we keep talking about, meaning AMDR, Patriot, F-16 upgrades, E-2D, et cetera. So it's really not in that category.

The one that where we are anticipating. I think declines year-over-year is really on the Gorgon Stare program and we kind of mentioned that in our prepared remarks. It was interesting during the FY'14 markup of the Defense Appropriations Bill, the future funding for GS got lined out and then it got re-instituted largely because Congress was basically saying that it's the only wide area motion imagery program that's out there and you were kind of coming to the end of development of that. And we feel that once the program or the capability is deployed in theater, then we may see some additional bookings and revenue this fiscal year, but it's probably going to be at the lower level than what it was in fiscal '13.

Mr. Aslett, it appears there are no further questions, therefore I'd like to turn the call back over to your for any closing remarks.

Okay. Well, thanks very much for dialing in and listening to the call. We look forward to speaking to you again next quarter. Thanks.

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