Mercury Systems Inc (MRCY) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to the Mercury Systems fourth 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've not received a copy of the 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 that we may make during this call about future expectations, trends, and plans for the Company and its business constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by 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 the US government's interpretation of federal procurement rules and regulations, market acceptance of the Company's products, shortages in components, production delays or unanticipated expenses due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings, or delays in realizing such benefits; challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, and various other factors beyond our control.

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

The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances 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 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, 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 flows from operating activities. A reconciliation of adjusted EBITDA to GAAP income from continuing operations and free cash flow to GAAP cash flows from operating activities, are included in the press release we issued this afternoon.

Finally, we'll be discussing the Company's financial results, comparisons to prior periods, and guidance on a continuing operations basis, unless otherwise noted.

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 concluded the solid fiscal year with a strong fourth quarter, and we're off to a good start in FY 2016. For fiscal 2015 as a whole, bookings and backlog reached record levels for the second year in a row, growing 9% and 19% respectively, and positioning us well as we head into fiscal 2016.

Total revenue for FY 2015 increased 13% year over year to $235 million, significantly above industry growth and at the top end of our guidance. Reflecting improved operating leverage in the business is a result of our acquisition integration efforts. Adjusted EBITDA for FY 2015 was up 89% year over year and at 19% of revenue, in line with our target business model. Operating cash flow increased by $18 million, up 126% from FY 2014; and our year-end cash balance grew by more than $30 million.

Moving to our fourth quarter results -- our total revenue was up 19% from Q4 last year and at the top end of our guidance. Adjusted EBITDA for the fourth quarter nearly doubled year over year to $14.2 million on only $10.4 million of incremental revenue. This was well ahead of our Q4 guidance and at about 22% of revenue, also at the top end of our target business model.

Mercury remained GAAP-profitable in the quarter. Our cash flow from operations continued to strengthen as anticipated, driven by improved profitability as well as strong collections.

Total bookings in Q4 were up a strong 45% from the sequential third quarter and up 3% year over year, at $82.5 million. Our total book-to-bill was $1.3, compared with 1.5 in Q4 last year.

Looking specifically at defense -- total defense bookings increased 6% year over year in Q4, to $81.4 million, largely driven by our Mercury Defense or MPS business. Our largest programs from a bookings perspective were Patriot, Aegis, and Filthy Buzzard. For FY 2015 as a whole, our largest bookings programs were Aegis, F-35, Patriot, SEWIP and Filthy Buzzard, as anticipated. Our defense book-to-bill in Q4 was 1.3, compared with 1.5 in the comparable period last year.

Defense backlog and total backlog exiting Q4 were up 24% and 19% respectively year over year. International defense bookings, including foreign military sales, were 16% of total bookings, compared with 26% in Q4 last year.

Our Q4 total defense revenue was up 21% year over year. International defense revenue, including foreign military sales, was 15% of total revenue compared with 27% in Q4 last year.

Revenue from radar and electronic warfare accounted for 89% of total defense revenue, versus 85% in Q4 a year ago. Radar defense revenue grew 35% year over year, and EW revenue was essentially flat.

Our largest revenue programs in defense this quarter were F-35, Patriot and Aegis. For the full year, radar revenue grew 31% and EW 11% versus fiscal 2014. Our largest revenue programs in fiscal 2015 were Patriot, F-35, Aegis and SEWIP, as anticipated.

Our fourth quarter and FY 2015 bookings and revenue metrics represent growth rates well in excess of industry growth. Leveraging organic innovation and strategic acquisitions, we've built a best-in-class portfolio of secured products and capabilities across the entire defense chain.

At the same time, we've developed a strong go-to-market model focused on strategic account management and solutions selling. Our customers pay us substantial sums for complex engineering services. Our IRAD investments coupled with these services ultimately result in high-margin annuity revenues from the sale of secure and sensor-processing subsystems on long-term production programs. Our average transaction size and the lifetime value of the programs we have won and are pursuing are also both increasing.

In effect, we're partnering more closely with our customers as they navigate defense [procurement] reform in a challenging defense budget environment. As a consequence, we've established ourselves on critical production programs in the right segments of the market. Our key programs appear to be well funded, are currently in or moving to production, and are precisely aligned with the DOD's new roles and missions.

We've been very successful in growing the potential value of these of these franchise programs. New design wins continue to be relatively few and far between in this environment. So targeting this type of program is a low-risk, content-expansion growth strategy.

For the long term, we are focusing on outsourcing opportunities in three main areas -- the first, secure processing, where our opportunity pipeline continues to grow. And we believe that we are significantly ahead of our competition. The activity level around radar and EW platform modernization is the highest that that we've seen in several years. We've made significant investments in our next-generation secure intel server class product line. Coupled with a mandate from the government to secure electronic systems for domestic and foreign military sales, these new products position us very well to capitalize on this opportunity set.

In addition to sensor processing-based platform modernization, these investments also position us to capitalize on demand for secure server-class computing applications beyond the sensor. These include other onboard mission-critical computer applications that historically we haven't played in.

The second outsource opportunity is 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. At the same time, larger players are going through significant restructurings, creating opportunities for us to gain market share.

The third outsourcing opportunity is in pre-integrated sensor processing subsystem sales, where our RF, microwave and digital product lines are well positioned. We now have world-class scalable RF and microwave manufacturing and subsystems integration capabilities at our Advanced Microelectronic Center, or AMC, in Hudson, New Hampshire.

The AMC is proving to be a valuable asset for Mercury at a time when the industry needs more capable suppliers. It's key to our strategy to provide our customers with industry-leading, outsourced, end-to-end subsystem solutions.

The AMC has also been crucial to our success in improving the operating leverage in our business model. The integrated business systems we've installed at the facility have allowed us to centralize wherever possible administrative and manufacturing operations across the Company, following our FY 2013 acquisitions. With our technology investments, sales strategies and acquisitions, we've created a next-generation business platform that should enable us to continue driving growth organically.

Our plan is to increase Mercury's enterprise value by scaling this platform through acquisitions, targeting companies that support the key pillars of the business -- RD, microwave and embedded processing. As we do so, we'll be looking for opportunities for both revenue and cost synergies. Our goal is to continue to assemble critical and differentiated capabilities across the entire sensor processing chain, and thus provide our customers with 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 -- new [rewards] are still experiencing protracted delays and increased competition. So the contract environment remains challenging. The President's GFY16 budget submission was encouraging and, if approved, would represent the first real growth in defense spending in years.

It was also encouraging to see the House and the Senate defense budget markups affirm the overall spend levels. That said, neither markup dealt with the GFY16 budget control at [caps]. Overall, in light of the continued uncertainty around the GFY16 spending levels, delayed funding flows and slower contract rewards remain the norm.

We believe that Mercury is well positioned to continue delivering above-industry average revenue growth and improve profitability in this environment. The business delivered a very strong performance in fiscal 2015. With our record year-end backlog and the benefits of integrating our acquisitions, Mercury remains on track for another strong performance in fiscal 2016.

For the year, we continue to anticipate approximately 5% revenue growth and 10% growth in adjusted EBITDA versus FY 2015. Gerry will discuss these expectations in more detail.

Before I turn the call over to Gerry, I'd like to welcome Mercury's newest director, Mark Newman, who was elected on June 1st and serves as a member of the Audit Committee. Mark is the former Chairman and CEO of DRS technologies, a defense electronics business he was instrumental in building over the years, both organically as well as through numerous acquisitions. We look forward to benefitting from Mark's experience and insight as Mercury pursues much the same path going 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, I'd like to once again remind everyone that unless otherwise noted, I'll be discussing the Company's financial results, comparisons to prior periods, and guidance on a continuing operations basis, which excludes Mercury Intelligence Systems, or MIS, which was sold in January of 2015. However, in accordance with GAAP, MIS is reflected in our statement of cash flows and balance sheet for periods in which it was owned by us.

Turning to our results -- Q4 was a strong finish to a successful fiscal 2015. Mercury delivered double-digit growth in both revenue and backlog for the fiscal year. Revenue for the full year grew 13% over fiscal 2014 and, as anticipated, our book-to-bill for all of fiscal 2015 was positive, coming in at 1.3 for Q4 and 1.14 for the year as a whole.

We closed the year with record total backlog of $208 million, up $33.8 million or 19% from $174.1 million a year earlier. Of this total backlog, $198.9 million, or 96% of it, related to defense, representing 24% growth in defense backlog year over year. Approximately $166.5 million, or 80% of our total backlog, is expected to be shipped within the next 12 months. The bookings and backlog growth we delivered in fiscal 2015 leaves us very well positioned as we entered fiscal 2016.

Looking at Q4 specifically -- total revenue grew $10.4 million or 19% year over year, to $64.1 million, slightly ahead of our guidance of $62 million to $64 million. Revenue from defense customers for the fourth quarter increased $10.3 million or 21% year over year, while revenue from commercial customers increased $0.1 million or 2%.

In our largest reporting segment, Mercury Commercial Electronics, or MCE, revenue increased $8.1 million or 17% year over year, to $55.6 million in Q4. In our Mercury Defense Systems, or MDS reporting segment, revenue was $10.6 million for Q4, up $1.6 million or 18% from the prior year's fourth quarter. These segment results exclude advertisements to eliminate $2.1 million of intercompany revenue in the fourth quarter of fiscal 2015 and $2.8 million in Q4 of fiscal 2014.

We continued to translate our revenue growth into even stronger gains in profitability. Mercury reported fourth quarter GAAP income from continuing operations of $6.1 million or $0.18 per share, well above the top end of our guidance of $0.10 to $0.13 per share for the quarter. For the fourth quarter last year, we reported a GAAP loss from continuing operations of $0.7 million, or a loss of $0.02 per share.

GAAP income for Q4 of fiscal 2015 includes approximately $0.01 per share of restructuring and other charges and $0.03 per share for amortization of intangible assets. The GAAP loss from continuing operations for Q4 of last year included $0.04 per share of restructuring and other charges, as well as $0.04 per share for amortization of intangible assets.

Reflecting the benefits gain from our restructuring and integration efforts, plus a favorable sales mix, adjusted EBITDA for Q4 of fiscal 2015 increased 97% year over year, to $14.2 million, also exceeding the top end of our guidance of $11.7 million to $13.2 million for the quarter.

Our operating expenses for Q4 of fiscal 2015 were down $1.4 million year over year, to $23.3 million, primarily due to lower SG&A expense and lower restructuring charges thanks to the completion of our acquisition integration, which was finished in the second quarter of fiscal 2015. Savings from the integration have materialized as expected, and we saw the full financial benefit of those efforts for the second half of fiscal 2015. At approximately 36% of revenue for Q4, this proportion was an all-time low for Mercury, as we saw the significant benefits of both the integration and our ongoing cost control efforts.

As anticipated, we recorded a $0.7 million charge for restructuring and other charges for the fourth quarter of fiscal 2015. These charges related primarily to the continued optimization of our RF and microwave operations on the heels of our integration activity, as well as our utilization on more efficient infrastructure and administrative support systems across the business.

Mercury's gross margin of 49% for the fourth quarter was up modestly year over year and near the top end of our target business model of mid- to high 40s, primarily as a result of a favorable product mix in Q4. The Company generated $10.2 million of free cash flow during the fourth quarter, with $12.7 million of operating cash flow, driven by cash earnings, being partially offset by $2.5 million of capital expenditures in the quarter. For fiscal 2015 as a whole, Mercury's free cash flow was $26.2 million, up from $7.5 million in fiscal 2014.

Turning to the balance sheet -- Mercury ended fiscal 2015 with cash and cash equivalents of $77.6 million, up 64% compared to the $47.3 million of a year earlier.

I'll turn now to our financial guidance. Based on Mercury's performance in fiscal 2015, our strong year-end backlog and the growth opportunities that Mark described, we expect fiscal 2016 to be another year of growth for Mercury on the top and bottom lines.

As I mentioned earlier, of Mercury's total backlog of $208 million at the end of fiscal 2015, $166.5 million or 80% of it is expected to be shipped within the next 12 months. Given this historically strong level of backlog as we entered fiscal 2016, we believe Mercury is well positioned to deliver revenue growth under any of the defense budgetary scenarios that can be realistically expected to unfold during the year.

For the first quarter of fiscal 2016, we're forecasting revenue in the range of $54 million to $59 million, with 90% or more of that expected to come from the defense side of the business. We're forecasting a gross margin of approximately 47% for the quarter, which is up roughly 300 basis points year over year and close to the middle of our target business model. And we expect approximately $23 million to $24 million in operating expenses in Q1 of fiscal 2016.

GAAP income from continuing operations for Q1 is expected to be $1.5 million to $2.6 million, or $0.05 to $0.08 per share. This forecast assumes a provisional income tax rate of approximately 38% for the quarter.

Adjusted EBITDA for the first quarter is estimated to be in the range of $9 million to $10.8 million, representing approximately 17% to 18% of revenue based on the forecasted revenue range and an increase of about 12.5% to 35% from Q1 of fiscal 2015. Once again, the improved year-over-year profitability that we're forecasting for Q1 primarily reflects the impact of sales growth and the gains in operating leverage.

As we await further developments from Congress and the administration with respect to the government fiscal year 2016 defense budget, we continue to expect that revenue will increase approximately 5% for the full fiscal year, with adjusted EBITDA growing approximately 10% over fiscal 2015. With the operating leverage gained from our acquisition integration plan yielding its full benefit, we also expect to once again achieve our target business model for the year.

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 for the year. Finally, the balance sheet remains pristine, with zero debt.

In summary -- our success in growing our bookings, backlog, revenue and adjusted EBITDA in today's defense environment demonstrates that our strategy continues to work very well. As a result, we believe that Mercury's fiscal 2016 will be another year of solid revenue growth, higher operating income, and stronger profitability overall.

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

(Operator Instructions) Sheila Kahyaoglu, Jefferies.

Thanks for taking my question, and good quarter.

Hi, Sheila.

I guess -- do you mind reconciling a bit the robust bookings and backlog that you had in the quarter and the 5% revenue growth for the year you're forecasting?

Sure. I think at the end of the day, there's still a lot of water that's got to flow under the bridge in respect to the government fiscal 2016 defense budget. So we've tried to take that into account in terms of our guidance going forward. And as you know, they've still got to deal with sequestration prior to it kicking in again in January of next year.

And in terms of the major programs -- is there a shift -- I mean, would you see more Patriot work in 2016 over 2015? How do we think about your program mix?

Sure. So I think next fiscal year, we expect to deliver revenues really from a broader base of programs than what we saw during fiscal 2015. We do expect to see probably some declines of revenue associated with both the F-35 and Patriot. But given that, we still expect that our top revenue programs for the year will be actually very similar to this year, meaning SEWIP, Aegis, Patriot, Buzzard, Reaper, as well as the F-35.

Great. That's very helpful.

And then, just one last one, if I could sneak it in -- in terms of just your operating margin runway -- again, I feel like the adjusted EBITDA guidance of up 10% seems a bit conservative, if you look at what you did in the second half. Is there a gross margin mix headwind or anything we should be considering for 2016?

So I think as you know, our EBITDA is really bring driven by gross margin. And the gross margin is very much dependent upon program mix. And that can move around quarter to quarter and year to year.

Okay. Thanks.

Peter Arment, Sterne, Agee.

Mark, good quarter. Could you give us a little more color, I guess, on -- thinking about -- your backlog growth was really impressive this year, and the bookings that you've been able to really secure. How do we think about kind of the way the backlog looks for 2016? I mean, you still seeing the same kind of bookings opportunities? Obviously, the international is a big piece that's volatile. But should we expect similar level of backlog growth? Or are you seeing any changes in the market?

So I'm not going to necessarily forecast growth in backlog. Obviously, we ended fiscal 2015 very strongly. Our book-to-bill for MCE and MBS was 1.15 and 1.2 respectively.

We do currently anticipate revenue growth in both MCE and MBS year over year. And we do anticipate positive book-to-bill for 2016 in total. But I'm not going to get into a mode this early in the year of forecasting the growth in backlog.

Okay. I figured I'd try.

(Laughter)

Maybe you could at least give us kind of how you're viewing the opportunities on the M&A front. I mean, obviously not specifically, but just in general. I mean, it's generally been considered a relatively seller's market in defense; multiples have come up. I mean, how are you seeing things? Are you still seeing still healthy opportunities?

Yes. I mean, I think we believe that we're actually seeing more opportunities than what we've seen in the past. And we are continue to look at a range of opportunities that are in line with our core target markets, which, as I described on the call, are RF, microwave and embedded processing.

Okay.

And just if I could sneak one last in -- Gerry, the tax rate for this year -- you said 35% is first quarter -- is that going to be fairly linear throughout the year, you think?

I actually said 38% for the provisional rate for the quarter, Peter. And broadly speaking, absent the possibility of discrete items, is probably going to be pretty consistent.

Okay.

That's about all I can say. And obviously, things like R&D credits and so on occasionally pop in. But you can never predict when those are. So we kind of just roll with it.

Right. Thank you.

Yes.

Mark Jordan, Noble Financial.

Just wanted to expand on the tax rate issues. I look back at my notes, and I think our initial guidance you gave for fiscal 2015 was 39%. Came in at about 23% for the year. What were the specific items that drove that down? And do you have that same opportunity for events to occur that would materially move down that 38% rate that you mentioned in fiscal 2016?

Yes. So the short answer is it was all driven by a handful of discrete items, the R&D credit being probably the most significant of them. That remains a possibility, of course. Every year it comes up, and every year they appear to be willing to reinstitute it. But of course, you always have to play wait-and-see. And then sometimes, if it's delayed, it's going to accumulate, and then pop at a certain point.

Apart from that, I don't think that we see large items in terms of the discretes that could pop through. There's always a chance of something. But again, we don't have what I'd call the traditional things like overseas tax planning issues and things like that that we can use to -- or, for that matter, that revenue balance can change rates on for us and so on.

So again, we plan what I said. And I think that's where we are for now.

Okay.

Do you have a CapEx expectation for 2016?

We do have one. It's, as I said, probably going to be a little lower -- I'm sorry, a little bit higher than the low rate that we saw in fiscal 2015. But again, I don't think we'll go above -- into the double digits.

Okay.

Talking again about the M&A market -- in terms of Hudson, now that you've got that fully integrated -- what would you term is your capacity utilization there? And do you think it's reasonable that you'll be able to find something to tuck in and obtain some significant operational efficiencies at that site in fiscal 2016?

Yes. So we haven't necessarily talked about the capacity utilization of the facility. It is beginning to [ramp], however, particularly as we've got more programs in the EW domain that are moving in production. Couple of key programs that we think about going to be important in EW next year are programs such as SEWIP, Buzzard, and the DEWS program, which is BAE's Digital Electronic Warfare Suite.

However, we do think that we've got a substantial opportunity, potentially acquiring companies and integrating their manufacturing assets, if they have them, into that facility, which will obviously continue to improve the efficiency and the overhead absorption.

So we're pretty excited about the AMC. I think it's a critical part of our long-term growth strategy. It clearly differentiates us versus other players in the industry. And it's going to be an asset that I think, when you look back in time, will be important in terms of supporting the Company's growth.

Okay.

Final question for me, if I may -- you mentioned that obviously 2015 was in line with your -- or well within your business model. Do you see a situation where that target model would be increased? Or do you think that that's a -- given all your business that you do, that's probably going to be the long-term model that you work within?

I think the model is the model until we change it. If you look at our results for fiscal 2015, Mark, we ended up at 19% adjusted EBITDA. That's kind of in the midpoint of our current model. Obviously in Q4, with higher revenues and a stronger program mix, we're towards the high end of that range.

But we were extremely pleased with the performance year over year, and the model stands as it is for now.

Okay. Thank you very much.

Thanks.

(Operator Instructions) Michael Ciarmoli, KeyBanc Capital.

Mark, just on the bookings in the quarter -- I mean, I think you guys said, after what had been several strong quarters, you're going to get back to a normalized environment. It came in at 1.3 times. So that would appear to have exceeded that normalized environment. I mean, could you give us any color? Was that above your expectations for the quarter? And maybe, can you give us a sense of what was strong in the quarter, from a bookings perspective?

Sure. So it was slightly above where we thought we were going to come in, at a quarterly level. I think as we said somewhat consistently throughout the year -- that bookings are lumpy and that we did expect it to kind of normalize.

Our book-to-bill ratio for fiscal 2014 in total was 1.14. So it was slightly ahead of what we thought, but not too much. If you look at the -- sorry, fiscal 2015, I apologize.

If you look at the major programs that drove the bookings in Q4, Aegis was obviously an extremely strong program. We did close to or slightly over $14.5 million of bookings. We had another really strong quarter for Patriot that was associated with Korea, some spares; as well as ongoing business for the US Army.

We had strength in Buzzard, the Filthy Buzzard program in Mercury Defense Systems, which is beginning to ramp and will be an important driver of growth in that business. And we also saw some strength in the P8 business, where we're providing some of the radar processing.

So we hired a number of really important programs that we were pleased to deliver some great numbers.

Got it.

And if I were to look at the backlog -- I know you guys probably won't give the full color by program, but is it pretty similar, from some of those programs you just mentioned, with your other top programs? Is that kind of the bulk of the backlog? Or has anything new kind of jumped in there that's kind of accounting for a significant piece of that exposure in the backlog?

I don't think we typically break down our backlog by program, Mike. As I mentioned, for fiscal 2016, we anticipate our top revenue programs to be SEWIP, Aegis, Patriot, Filthy Buzzard, Reaper, as well as the F-35. And we're also expecting some growth next year on DEWS, which I mentioned; P8, and maybe Triton. So we've got a broader mix of programs heading into fiscal 2016 that will drive some of the growth in the business.

Got it.

And then, you wouldn't give directionally -- you wouldn't give the specifics, but it sounds like you're expecting a positive book-to-bill. So it sounds like we should expect backlog to grow through 2016. And just -- you mentioned CapEx. Free cash flow was very strong for the year. Can you give us any sense, or would you be willing to give a free cash flow forecast for 2016?

I don't think we'll forecast it. But as I said, CapEx is going to be relatively contained. It's not a capital-intensive business. 2015 was probably just slightly light. Even at the increase at 50%, you're still only hovering around $10 million. So not too significant an offset there. And that's probably where I'll leave it.

Fair enough.

I think that's it for me. I'll jump back in the queue, guys. Thanks.

Michael French, Drexel Hamilton.

Congratulations on the strong performance.

Thank you.

I apologize if you went into this a little bit. I was wondering if you could update us on the process of optimizing the RF and microwave manufacturing, and the impact it had on margins during the quarter, and what you think the impact is going to be on the margins going forward.

So during the quarter, we did do a small restructuring. It was around about $700,000. It was a few handfuls of people. It was more related to the ongoing efficiencies that we've identified in terms of liening out the engineering and the manufacturing operations. The benefits associated with that are baked into our guidance for fiscal 2016.

Very good. Thank you.

Welcome.

(Operator Instructions)

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, we'd like to thank you for your interest in Mercury, and we look forward to speaking to you again next quarter. Thank you.

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