Mercury Systems Inc (MRCY) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to the Mercury Systems Third 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.

We'd like to remind you that remarks 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 other similar expressions.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks 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 or in the U.S. 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 product, service, or system integration engagements, and various other factors beyond our control.

These risks and uncertainties also involve such additional risk factors as are discussed in the Company's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 10-K for the fiscal year ended June 30, 2014.

The Company cautions readers and listeners not to place too much 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 reporting financial results in accordance with generally accepted accounting principles, or GAAP, during our call we will also 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 and other charges, impairment of long-lived assets, acquisition and financing 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 GAAP cash flows from operating activities. Reconciliation of adjusted EBITDA to GAAP income from continuing operations and free cash flow to GAAP 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 in the third quarter of fiscal 2015. Revenue was up 12% from Q3 last year, near the top end of our guidance.

We also delivered strong results on the bottom line. Reflecting the operating leverage we've built in the business, adjusted EBITDA increased by $3.7 million, or 48% year-over-year, to $11.5 million on only $6.2 million of incremental revenue. Adjusted EBITDA was at the high end of our guidance and was over 19% of revenue, approaching the midpoint of our target business model. Mercury remained GAAP profitable and our cash flow from operations continued to strengthen as anticipated.

We completed the sale of our MIS business in early Q3 as we had expected. The transaction has a positive but modest impact on cash net of transaction costs.

Looking at our Q3 growth metrics in detail, total bookings were $57 million, up 30% from the sequential second quarter, but down 23% year-over-year. Our total book-to-bill was approximately 1.0, compared with approximately 1.4 in Q3 last year. Including our strong bookings in Q1, however, total bookings for the first nine months of fiscal '15 are up 12% year-over-year with a 1.1 book-to-bill. We currently anticipate a book-to-bill of about 1.0 for FY15 as a whole.

Our largest programs this quarter from a bookings perspective were F35, Patriot, F16 Saber, and Predator Repo. We talked about Saber some time ago. Our customer, Northrop Grumman, recently won the F16 radar modernization for Taiwan. Northrop is pursuing other foreign military sales, as well as upgrade to the U.S. F16, which could provide additional potential longer term. Similarly, Raytheon has announced a number of recent FMS wins for Patriot, which could also translate into future bookings.

Total defense bookings for the third quarter were down 22% from the extremely strong third quarter last year to $56.6 million. For the first nine months, however, total defense bookings were up 13%, driven largely by continued strength in our Mercury commercial electronics, or MCE business. Our defense book-to-bill in Q3 was 1.05, compared with 1.49 in Q3 of fiscal 2014. Defense backlog and total backlog exiting Q3 were up 35% and 29%, respectively, year-over-year.

International defense bookings, including FMS, were 22% of total bookings, compared with 11% in Q3 of FY14.

Turning now to revenues, our total defense revenues for Q3 were $54 million, up 10% year-over-year. International defense revenues, including FMS, were 14% of total revenue, compared with 18% in Q3 of FY14. Revenues from radar and electronic warfare accounted for 87% of total defense revenues in the third quarter versus 76% in Q3 last year. Radar defense revenues grew 41% year-over-year, and EW revenues declined 5%.

Patriot, F35, 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, the sales, and technology strategies that we have pursued. Through innovation, 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've 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 body of our franchise programs.

Looking forward, our forecast of continued revenue growth, strong margins, and lower operating expenses, is driven by our strong bookings and backlog, combined with our acquisition integration efforts. Our recent bookings have been driven by five key programs - Patriot, Aegis, F35, SEWIP Block 2, Filthy Badger, and Buzzard. Each is well funded, currently in production, and precisely aligned with the DOD's new roles and missions.

Compared with relying entirely on new design wins, which continue to be relatively scarce in this environment, targeting this type of program is a low risk, content expansion growth strategy.

Our acquisition integration efforts were completed last quarter as expected and within budget. Our emphasis continues to be on creating greater efficiencies in our RF and microwave business through the optimization of our engineering and manufacturing processes. We intend to complete many of these improvements by the end of June in readiness for fiscal 2016.

Longer term, we expect a benefit from four major industry growth drivers. One is the DOD 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 the fourth growth driver is Special Operation Forces' quick reaction capabilities.

On a more micro level, these industry dynamics translate into great outsourcing opportunities in the three main areas that form the basis of our plans for fiscal 2016 and beyond. The first outsourcing opportunity is in secure server class computing beyond the sensor, including other onboard mission critical compute 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 has moved offshore. At the same time, we've positioned Mercury as the leading U.S. owned, domestic designer, developer, and producer of secure embedded server class processing for defense and intelligence applications. This has significantly expanded the size of our addressable market and growth potential in franchise programs.

The second outsourcing opportunity is in RF and microwave, where the 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.

The larger plays 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 outsourcing opportunity is in pre-integrated sensor processing subsystem sales, where our RF and microwave and digital businesses are well positioned.

We believe that Mercury has pioneered a next generation defense electronics business model. With our technology investments, sales strategies, and acquisitions, we've created a platform that should enable us to continue growing organically, as well as scale through future acquisitions.

We now have a world class, scalable RF and microwave manufacturing plant in Hudson, New Hampshire. And we've installed state-of-the-art integrated business systems. These systems have allowed us to centralize wherever possible administrative and manufacturing operations across the Company following our recent acquisitions. The resulting efficiencies have enabled us to improve gross margins and reduce G&A expense.

The next phase of this strategy is focus on increasing Mercury's enterprise value by scaling the platform we've built. We will 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 so, 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 up the sensor processing value chain so we are able to provide our customers more affordable solutions. We will seek to prioritize deals that are accretive in the short term and drive long term shareholder value.

Moving to the industry conditions, the contracting environment remains challenging overall with new awards experiencing protracted delays and increased competition. Although the President's GFY16 budget submission was encouraging, and if approved would represent the first real growth in defense spending in years, we believe it's unlikely to pass as submitted.

We share the industry's view that base defense spending will likely comply with the Budget Control Act caps, with the delta from the Presidential budget submission likely being closed with OCO funding. At the Mercury level, despite the challenging environment, our business remains on track for a strong performance in fiscal 2015. We expect to grow our adjusted EBITDA more than 75% year-on-year on well above industry average revenue growth.

As we look forward to fiscal 2016, although our planning is still underway, we wanted to give you some perspective on the FY16 outlook as it currently stands and given the industry conditions I just mentioned. At a high level, we're anticipating approximately 5% revenue growth for the year and 10% growth in adjusted EBITDA, both strong compared to the industry average.

Gerry will discuss these expectations in more detail. So 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, I'd like to remind all of you that in the fourth quarter of fiscal 2014 we decided to explore a sale of Mercury Intelligent Systems, or MIS, and began reporting its financial results as discontinued operations at that time. As previously disclosed in our 10-Q for the second quarter of fiscal 2015, the sale of MIS was concluded in January of this year, yielding approximately $900,000 of cash net of transaction related expenses. Please note that I'll be discussing the Company's financial results, comparisons to prior periods, and guidance on a continuing operations basis excluding MIS unless otherwise noted. However, in accordance with GAAP, our statement of cash flows is inclusive of MIS.

Turning to Q3, Mercury again delivered strong financial results highlighted by double-digit revenue growth and adjusted EBITDA exceeding 19% of revenue, approaching the midpoint of our target business model. The operating leverage we have gained from our restructuring and integration efforts continues to translate 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 $59.4 million versus our guidance of $56 million to $60 million. Revenues from defense customers for the third quarter increased $5 million, or 10% year-over-year, while our revenues from commercial customers increased $1.2 million, or 26%.

In our largest reporting segment, Mercury Commercial Electronics, or MCE, revenues increased $7.5 million, or 16% year-over-year, to $55.1 million. In our Mercury Defense Systems, or MDS reporting segment, revenues were $6.7 million, down $2.2 million, or 24% from the third quarter of last year. These segment results exclude adjustments to eliminate $3.1 million of intercompany revenues in Q3 of fiscal 2014 and $2.2 million in Q3 of fiscal 2015.

On the bottom line, Mercury reported third quarter GAAP income from continuing operations of $4.7 million, or $0.14 a share. This was at the top end of our guidance of $0.10 to $0.14 per share for the quarter. For the third quarter of last year, we reported a GAAP loss from continuing operations of $0.3 million, or a lost of $0.01 per share. The GAAP earnings per share figure for Q3 of fiscal 2015 includes less than $0.01 per share of restructuring and other charges, and $0.03 per share of amortization of intangibles. The GAAP loss per share in Q3 last year includes $0.07 per share of restructuring and other charges, and $0.04 per share for amortization of intangible assets.

Our adjusted EBITDA for the third quarter of fiscal year '15 increased 48% year-over-year to $11.5 million, or approximately 19.3% of revenue. This was also near the high end of our adjusted EBITDA guidance of $10.5 million to $12 million for the quarter.

Mercury's improved profitability year-over-year was primarily due to two factors. First, strong performance on several franchise programs, such as Patriot, Aegis, and F35, the joint strike fighter. And second, lower operating expenses, which were down by $4 million year-over-year, primarily due to lower SG&A expenses and the absence of restructuring charges. Last year's Q3 results included restructuring charges related to our acquisition integration plan. As Mark said, those integration activities were completed in the second fiscal quarter of this year and we are now seeing their full impact as planned.

Mercury's gross margin of 47% for the third quarter was up slightly year-over-year, due to product mix, and again, well within our target business model of mid to high-40s.

Turning to the balance sheet, Mercury ended the third quarter of fiscal 2015 with cash and cash equivalents of $66.5 million, compared with $45.7 million in the same quarter last year. The Company generated $7.8 million of free cash flow during the quarter, with $9.1 million of operating cash flow driven by cash earnings, being partially offset by $1.3 million of capital expenditures.

We ended the third quarter with a strong total backlog of $189.9 million, up $42.3 million, or 29%, from the $147.6 million of backlog a year earlier. Of this $189.9 million in total backlog, $150.5 million, or 79% of it, is expected to be shipped within the next 12 months. $180 million, or 95% of the backlog, related to defense representing 35% growth in defense backlog on a year-over-year basis.

I'll turn now to our financial guidance. As we expected, our bookings have normalized over the course of fiscal 2015 following three consecutive prior quarters of record defense bookings. With a book-to-bill in Q3 of approximately one, as Mark said, we continue to anticipate that our book-to-bill ratio for all of fiscal year '15 will be above 1.0. The resulting backlog as we exit fiscal 2015 will give us a very solid foundation and represents a strong position as we head into fiscal 2016.

Based on Mercury's performance during the first nine months of this fiscal year, our substantial backlog, and the opportunities that Mark described, we're refining our full year fiscal 2015 guidance ranges for revenue, adjusted EBITDA, and GAAP income from continuing operations, with the result that the midpoint of each of those ranges is being raised. We are now projecting fiscal 2015 total revenues in the range of $233 million to $235 million, representing 11.6% to 12.6% revenue growth year-over-year. At this forecasted revenue range we anticipate fiscal 2015 GAAP earnings of $0.35 to $0.38 per share. This includes $0.06 per share of restructuring charges and $0.13 per share of amortization of intangible assets for the year.

This guidance includes a modest restructuring charge of less than $1 million that we expect to record in Q4. The charge relates to the continued optimization of our RF and microwave operations now that they have been consolidated into our Advanced Microelectronics Centers.

Adjusted EBITDA for fiscal 2015 is expected to be in the range of $42 million to $43.5 million, representing an improvement of 79% to 85% over fiscal 2014. At the upper end of this range, Mercury would generate adjusted EBITDA approaching 19% of revenue for the year, which is solidly in line with our target business model.

Translating these numbers to the fourth quarter of fiscal 2015, we are forecasting revenues for the quarter to be in the range of $62 million to $64 million, with 90% or more of that expected to come from the defense side of the business. We are forecasting gross margin for the fourth quarter of approximately 45%, which is roughly flat year-over-year and also within our target business model range. We expect approximately $22 million to $23 million in operating expenses, again, including a restructuring charge of less than $1 million for the fourth quarter.

GAAP income from continuing operations for Q4 is expected to be $3.4 million to $4.3 million, representing $0.10 to $0.13 per share, again including the impact of approximately $0.01 per share for restructuring. This forecast assumes a provisional income tax rate of approximately 39% for the fourth quarter.

Adjusted EBITDA for the fourth quarter is estimated to be in the range of $11.7 million to $13.2 million, representing approximately 19% to 20.5% of revenue, an increase of roughly 60% to 80% over the prior year.

The improved year over year profitability that we are forecasting for Q4 primarily reflects the impact of sales growth and the continuing effects of improved operating leverage.

In terms of the balance sheet, we expect to continue building our cash balance through positive free cash flow, driven primarily by cash earnings, and offset in part by a modest increase in capital expenditures.

Finally, the balance sheet remains pristine with zero debt.

Turning to the outlook for fiscal 2016, in light of the current environment we are presently anticipating top line growth of roughly 5%. Gross margins are expected to trend toward the lower end of our target model range based on the anticipated revenue mix. With operating expenses growing at a modest pace, adjusted EBITDA is expected to grow at roughly 10% year over year. We currently expect that adjusted EBITDA for fiscal 2016 will be around the midpoint of our target range of 18% to 22% of revenue.

Finally, we expect fiscal 2016 to play out similarly to fiscal 2015 in terms of the overall pattern of the first and second halves of the year. We anticipate providing more detailed guidance on our expectations for fiscal year 2016 during next quarter's regularly scheduled earnings call.

In summary, Mercury's double-digit revenue growth and continued expansion of operating income and adjusted EBITDA provide a solid foundation as we enter the fourth quarter of fiscal 2015. Our success in growing our backlog and delivering above industry average revenue growth in today's defense environment demonstrates that our strategy is working and working well. We've built a best-in-class product portfolio, we've strengthened our relationships with the primes around the right programs and in the right segments of the market, carefully cultivating and increasing our contributions to those programs.

At the same time, we have created a fully integrated business that we can continue to profitably grow organically and scale through acquisitions. With our top line growth and the operating leverage gained from our acquisition integration plan now yielding its full benefit, we remain confident in our ability to achieve our target business model for fiscal 2015. With that, we'll be happy to take your questions.

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

Thank you. (Operator Instructions) Peter Arment, Sterne Agee CRT.

Yes, good afternoon, Mark, Gerry.

Hi, Peter. How are you?

Good. Very well. Mark, could you give an update on just your latest thoughts on SEWIP? Obviously in the quarter there was an award of the--or a development award to Northrop. Could you just give us your latest thoughts on how you kind of envision that program? I know it's quite stable for you right now with LRIP2.

Sure. So as you know, there are really three different parts of SEWIP. There's block 2 where our continued content expansion over time has basically grown the estimated lifetime value of the program while reducing the overall range. Today SEWIP block 2 bookings are actually up more than 27% year over year to close to $13 million. And we anticipate, as you just mentioned, that SEWIP block 2 should move into full rate production sometime early in fiscal 2016.

As it relates to block 3, obviously we were disappointed that Lockheed was not awarded the block 3 contract. From what we can gather, it appears that Northrop had a pretty innovative solution, and we assume that the particular capabilities that they were providing is likely more affordable than the competition.

Now the good thing from our perspective, I think, is that we've actually developed an extremely strong relationship with Northrop. And our goal, as we've done in the past, basically will be to recapture the SEWIP block 3 program over time. So that's what we're focused on. But to be clear, given the timing of the program, the loss doesn't affect our financials in the current planning period.

So at a high level, we're clearly disappointed with the block 3 loss, but we're going to go to seek to recapture it, meantime see where block 2 will begin to run.

Right. Okay. And then maybe just give us your latest thoughts on M&A. You continue to have a kind of very robust balance sheet. Any updates there on what you're seeing right now?

So it feels like things are beginning to loosen up a little bit. We are seeing some potentially interesting opportunities. Obviously I won't go into what they are other than to say that they are in line with what we stated from a strategy perspective, which is looking to scale both our processing as well as our RF and microwave business. It could be related to the fact that if you look at the GFY-16 Presidential budget submission, it looks like maybe that fiscal 2015 or government fiscal 2015 could represent the floor in terms of defense spending. So we'll see. I mean, there are things that are starting to appear that could be somewhat attractive to us.

Okay. That's helpful. And just lastly, and Gerry, the comments that you made on 2016 guidance, that you thought it would be similar in terms of probably more second half weighted than--similar to 2015. But in 2015 you had about--it looks like you're going to have about 70% of your earnings in the back half of the year. That seems a little extreme when we're looking at 2016. Is that fair?

I think it's--what I would say is it's going to follow a similar step progression, and frankly it followed a similar progression in 2014 as well. There were two halves of the year. 2015 was two halves of the year. And we think 2016 is going to represent the same kind of step function. We won't comment yet because we're not really through our planning process on what the relative proportions are, but again, we think it's going to--if you just looked at it on a chart it's going to look--follow that same kind of pattern.

Okay. Thanks. I'll jump back in the queue.

Thanks.

Mark Jordan, Noble Financial.

Thank you. Question relative to 2016 around taxes. Obviously in the current fiscal year they bounced around a lot from 0% to 39%. Could you give us some kind of guidance as to what rough range we should expect for 2016 from taxes?

Yes. So it's quite likely to be overall similar. Our effective tax rate is hovering around 39%. That's been very consistent period to period. The difference is in discrete items, things like renewal of the R&D tax credit, which they go through the ritual each year. It hits in whatever period they finally get the work done. And that's one of the items that has modulated us.

There have been some other discrete items, and the variation has been purely a matter of that as opposed to real change in our tax planning or other tax related processes.

So plan at 39%.

Yes.

And then we'll be happy if something happens. When you talked earlier about a key part of your strategy is to grow relationships organically by moving up the food chain, could you talk a little bit, and if you have an example or two, where you are able to move from more of a component or a processor base into a subsystem relationship and increase the content?

Sure. So I think it happens in a couple of different ways, Mark. I think what we've been very successful doing, say on a program like SEWIP, is starting out in one part of the architecture and expanding our content footprint to consume more of the RF and microwave content that's available that ultimately, when you look--step back and look at it, it looks like a subsystem sale.

So we're doing that pretty regularly across a number of different programs. We've got a number of examples where on say newer programs where our customers are looking to gain more affordable capabilities where they are actually putting out to bid, having worked with Mercury for a period of time, a complete sensor processing solution that combines not only the RF and microwave, but the digital and the processing. And I'm thinking right now of a next generation UAV radar program that we bid to one of our customers.

We've got obviously the Gorgon Stare program, where literally we are providing the full up sensor processing subsystem that's a very sophisticated processing solution. So we've got a number, but net-net you can get to it in one of two different ways. One, just expanding your content over time on an existing program and I think we've demonstrated our ability to do that. And then, on newer programs, basically bidding for the whole thing.

Okay. One other question from me relative to the F35. In your corporate presentation you have the program table where you have the current status of the major programs.

Sure.

Under the F35 the processing and RFM you have down as potential revenue starting in fiscal '16. Those are both under bid. When do you expect to hear something on those bids?

So if you look at the F35, right, the work that we're currently doing on that program, we've seen huge growth to date. So our bookings are up--actually up 300%, or up more than $36 million year-over-year. And in fact, F35 is actually our largest single bookings program and second largest revenue program through the third quarter of fiscal '15.

What you're describing is--and those bookings will continue to translate into revenue for us well into fiscal '16. We--the opportunities that you're describing are both in the RF and microwave domain where the programs are beginning to ramp, moving from LRIP into full rate production. We're seeing opportunities to pick up more work given the new AMC in Hudson to provide some of that capability.

The processing one is slightly longer term, and that's where I think they're going to look to provide new capabilities on the F35. But if you look at the investments that we've made in our processing capabilities and the relationships that we've established with the companies that we believe are probably the best positioned, I think we've got a great opportunity to transition our existing business, which is more of a licensing intellectual property into the sale of product, meaning that the size of that opportunity could go up materially over time.

So hard to comment specifically in terms of just the timing of when these things are going to happen in terms of the new stuff. But we believe that the opportunities are substantial and we're pursuing them aggressively.

Okay, thank you.

Sheila Kahyaoglu, Jefferies.

Hi, Mark. Hi, Gerry. Good afternoon. Thanks for taking my questions.

Hi, Sheila. How are you?

Good. Thanks. So just on the AMC facility, I know we were there a few months ago. Could you maybe provide an update of just the productivity within the facility and maybe give us an idea of capacity utilization and how many shifts you are currently running?

Sure. Well, we haven't really talked about the capacity utilization, other than to say that we believe that we've got substantial opportunity to push more business through that facility. The interest remains very high to date. Since we've opened it, we've had 60 customer visits. We see the potential of picking up more RF and microwave work largely in the EW domain, given that's where we think the money is flowing. And that part of our business is going to continue to grow.

We're still running one shift. I think as I mentioned in my prepared remarks and as Gerry alluded to in his, we continue to work on making both our engineering and manufacturing processes more efficient. And hence the small restructuring charge that we took this quarter that will continue to play out in terms of improved profitability in fiscal '16.

Thank you. That was very helpful, Mark. And then, just in terms of the Patriot awards that are upcoming, the international, how should we think about the timing of those? And would there be any content differential for Mercury, whether it's South Korea or Poland or Qatar? Should we think of it--I guess, could you comment on timing and content?

Sure. So let me step back a little bit, because Patriot is clearly an important program. Our bookings rebounded extremely strongly in fiscal '14 after a pretty disappointing fiscal '13. We booked close to 46 million last year alone on Patriot and actually received our largest single program bookings ever in the fourth quarter at 39 million. Most of those awards were related to either upgrades for the U.S. Army or for FMS related sales for countries such as Kuwait, Qatar, and Saudi. And we've seen the substantial benefit of those bookings translate into revenue for us during fiscal '15. Through the first three quarters, Patriot is actually our top revenue program with $32 million of revenue--sorry, up--approximately $32 million of revenue and it's up $27 million year-to-date.

The--if you look at say Q3, we received $7 million of new orders this quarter. And when you look at just some of the recent announcements by Raytheon, we do anticipate additional follow on bookings probably in Q4 related to additional business for the U.S. Army, and then other countries as well. Clearly, the--Raytheon was selected by Poland, which could translate into business for us during fiscal '16. And they're in competition right now for Germany, which again, could be fiscal '16 also.

So net-net, it's a really important program. And I think not only Raytheon continuing to win more opportunities, but we actually see the opportunity of expanding our content on the Patriot system, both in terms of on the processing side, as well as in the RF dimension longer term. So it's a great program. It's going really well for us right now.

Great. Thanks. And just one last one, if I could slip it in. I was just curious. I know you mentioned it in your prepared remarks, your strategy to take shares. There are supply disruptions. And at the Analyst Day, you mentioned the sale of the IBM blade business. Could you maybe point to or disclose a specific example where Mercury has taken share?

Yes. So we actually had a brand new design win this quarter where we displaced an IBM blade center for a naval application that I can't go into in too much detail. But we see it happening. We've received our first order. We've delivered the first capability and we're pretty excited about the potential long term.

Thank you very much.

Thank you.

Thank you. (Operator Instructions) Michael Ciarmoli, KeyBanc Capital.

Hey, good evening, guys. Thanks for taking my questions.

Hey, Mike. How are you?

Good. Maybe on--just to--Mark, just to stay on the Patriot topic. How should we think about Raytheon trying to introduce more of their gallium nitrate technology into future upgrades? Is that a risk? I mean, is that something where they could take some share back for you guys? Or just how do we think about it as some of their organic technology sort of evolves and they look to push that out to some of their platforms?

Sure. It's not a risk. It's an opportunity, Mike. I think in the short term, as Tom Kennedy mentioned on the call, we are going to look to introduce a 360 degree Acer radar using their gallium nitrate capabilities. And so, that's going to likely require great processing capabilities, as well as we potentially see the opportunity longer term of providing some RF and microwave capability as part of that solution. So we actually view the enhancement opportunities or the introduced--introduction of new technology on the Patriot program as actually an opportunity, not a threat.

Okay, perfect. And then, just on the guidance for both the remainder of this year and even the preliminary guidance you've given for '16. You've got fourth quarter revenues going up. What's driving down the earnings sequentially? I mean, just trying to get a sense of what the puts and takes are to the fourth quarter earnings numbers versus what you guys just did in the third quarter.

I think as you've probably seen historically, Mike, right, probably the one of the parts of the P&L that move around a lot is gross margin, right? And it's very much driven by program mix. So I wouldn't read too much into that in the short term. It literally depends on what products and capabilities tie to what programs we're delivering.

Okay. And then, maybe I'm sure this could be the answer for next year. But as we look at the preliminary guidance, what you guys have been run rating on the trailing three quarters in terms of your EBITDA margins, basically 19.5% or so. I know the first quarter was pretty weak this year. But next year doesn't seem like there's too much EBIT margin expansion given all the integration work. Presumably you get better volumes and utilization at that AMC facility. I mean, is this a case of program mix and what you were just alluding to, the gross margins are just bumping around?

Yes, I think that's certainly a part of it. I mean, if you look at the preliminary outlook to fiscal '16, 5% revenue growth just given the margin profile and expenses growing more slowly than the topline will result in adjusted EBITDA growing at twice the rate. So we think that's pretty healthy in this environment.

Yes, no doubt. Perfect. I will jump back in. Thanks, guys.

Thanks, Mike.

Okay.

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

Okay. Well, thank you very much for taking the opportunity of listening to our third quarter results. We look forward to speaking to you again next quarter. Take care.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.