Jul 31, 2012
Operator
Good day, everyone. And welcome to the Mercury Computer Systems Incorporated Fourth Quarter 2012 Conference Call.
Today's call is being recorded.
Operator
At this time, for opening remarks and introductions, I'd like to turn the call over to the Senior Vice President and Chief Financial Officer, Mr. Kevin Bisson.
Please go ahead, sir.
Kevin Bisson
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 the copy of the earnings press release you can find it on our website at www.mc.com.
Kevin Bisson
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.
Kevin Bisson
You can identify these statements by the use of the words may, will, should, would, plans, expects, anticipates, continue, estimate, project, forecast, intend, believe and similar expressions.
Kevin Bisson
Such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. These risks include but are not limited to 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, continued funding of defense programs, the timing of such funding, changes in 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 outsource components, inability to fully realize the expected benefits from acquisitions and divestitures or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies and difficulties in retaining key customers.
Kevin Bisson
Additional information regarding forward-looking statements and risk factors is included in the company's periodic reports filed with the SEC. We caution listeners on today's conference call not to place undue reliance on any forward-looking statement which speak only as of the date of this call.
We undertake no obligation to update any forward-looking statements.
Kevin Bisson
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.
Kevin Bisson
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.
Kevin Bisson
A reconciliation of adjusted EBITDA to GAAP net income from continuing operations and our free cash flow to GAAP cash flows from operating activities are included in the press release we issued this afternoon.
Kevin Bisson
I’m now pleased to turn the call over to Mercury's President and CEO, Mark Aslett. Mark?
Mark Aslett
Thanks, Kevin. Good afternoon, everyone, and thanks for joining us.
I’ll begin with the review of our accomplishments in our fiscal year ’12 followed by a fourth quarter update and finally, a perspective on our business outlook. Kevin will then review the financials and guidance, and then we’ll open it up for your questions.
Mark Aslett
During FY ’12, we delivered total company bookings and revenue growth of 14% and 7%, respectively, year-over-year. Strong organic revenue growth in defense and the addition of KOR more than offset a $33 million decline in our commercial business.
Mark Aslett
We delivered record defense revenues in FY ’12. Defense revenues grew 27% year-over-year including KOR and on an organic basis we grew defense revenues 16%.
Defense bookings and backlog also exhibited very strong growth, at 24% and 25%, respectively.
Mark Aslett
We grew operating income 21% for the year as a whole and our adjusted EBITDA grew 20%. The 20% of total revenue our adjusted EBITDA ended 200 basis points above the high-end of our current target model.
Mark Aslett
Given this over achievement, Kevin will discuss improvements to our long-term target model, which now seeks to deliver 18% to 22% on an adjusted EBITDA basis over the coming years. Obviously, this assumes that the industry returns to a more normal funding and contracting environment.
Mark Aslett
Fiscal 2012 was a strong year for our Mercury Federal Systems business, driven by Gorgon Stare and the addition of PDI, MFS revenues were up a 150% year-over-year and bookings were up 315%. Excluding PDI, bookings and revenue were up 201% and 82%, respectively.
Mark Aslett
As we expected, MFS went from operating loss in FY ’11 to a significant operating profit for FY ’12. At the market segment levels for FY ’12, revenues in our radar business were up 14% year-over-year and electronic warfare revenues were up 20%.
Revenues in EO/IR were up 97% and finally, C4I revenues were up over 500%.
Mark Aslett
Also in FY ’12, we successfully completed Phase I of our M&A agenda through the acquisitions of KOR, PDI and soon to be Micronetics. What we have created is a truly unique asset in the non-prime defense electronics industry.
Mark Aslett
We believe that we are the only commercial item company that has end-to-end capabilities along the entire sensor processing chain. We are very pleased with our integration efforts are proceeding, and how the acquired businesses are performing and projected to perform.
Mark Aslett
We had a great year from a design win perspective. Design wins are an important forward-looking indicator as the health and long-term growth potential in our business.
Mark Aslett
For the fiscal year as a whole, we have 50 design wins, 47 were in defense with the 5-year probable value of approximately $293 million. Excluding JCREW from the comparison, as deals of this potential size don’t typically repeat every year, in FY ’12 the 5-year probable value of our defense design wins increased 33% year-over-year.
Mark Aslett
This is a testament we believe to 3 things; first is the very successful product portfolio refresh we undertook several years ago, which is nearing completion. We believe we have the industry’s leading Intel and GPU product line.
This is significant differentiation with respect to processing density and embedded security.
Mark Aslett
The second is our services-led business model; thirdly Mercury is a systems oriented company. All 3 are proving to be major differentiators versus the competition is the primes outsource more sensor processing subsystems to best-of-breed commercializing company such as Mercury.
Mark Aslett
Finally, late in the year, Mercury’s headquarters facility was awarded a superior security rating by the U.S. Defense Security Services, which placed us off in the top 4% of all facilities reviewed.
Mark Aslett
So, in summary, we conclude a very strong fiscal year for Mercury in an increasingly challenging environment.
Mark Aslett
Moving to Q4, conditions in the industry did begin to take a toll on our defense revenues and bookings. However, despite a challenging top line, we continued to execute well on the areas that we could affect and as a result, our comparable Q4 GAAP earnings per share on adjusted EBITDA both came in at or near the high-end of guidance.
Mark Aslett
We said for the last 6 months that budgetary constraints of defense spending coupled with the DOD’s commitment to new roles and missions for the arm forces are likely to lead to a period of transition and reduce visibility for the defense industry that could last for 1 year or more.
Mark Aslett
On our last earnings call, we also talked about the potential adverse impact of a budget sequestered beginning in January 2013. We believe these impacts have in effect already begun to materialize within the defense industrial base.
Mark Aslett
It appears to us the defense industry is already operating under a form of sub sequestration. From our level, the uncertainties surrounding the defense budgets and the potential for major cuts and disruptions later in the year appear to be posing a pronounced slowdown in comments and associated program funding levels, the timing of funding and the overall contracting environment.
Mark Aslett
These effects were apparent in our weaker than expected defense books during Q4, as well as in our Q1 forecast. We responded to these challenges during the fourth quarter by focusing on areas that we could control.
We continue to tie the constrained operating expenses and complete the sizable restructuring action expected to result in approximately $5 million of annualized savings. As a result of these efforts, Q4 organic operating expenses were lower than in the fourth quarter last year and despite lower revenues we delivered strong EPS.
Mark Aslett
Now, looking at the business from a programmatic perspective for the full year, our major ongoing programs all performed well in FY ’12. Although, bookings from Lockheed Martin niches were down year-over-year revenues were up 24%.
Mark Aslett
Revenues in the Patriot program with Raytheon were roughly flat for the year largely due to the push out of Patriot Turkey during FY ’12. Overall, bookings were Patriot grew 89% year-over-year.
Mark Aslett
During the fourth quarter, we were very pleased to record a design win for the U.S Army Patriot which should have important bookings and revenue implications for FY ’13 if the timing holds.
Mark Aslett
Raytheon is also pursuing multiple addition opportunities in the Middle East. However, as we have discussed previously, the timing of SMS sales is notoriously difficult to predict.
Mark Aslett
Gorgon Stare was an important driver in fiscal ’12. Revenues from the program grew 180% year-over-year with a correspondingly strong bookings performance.
Various revenues associate with different sense of processing on Global Hawk for both Northrop Grumman and Raytheon were important in FY ‘12.
Mark Aslett
However, the previously announced cancelation of Global Hawk Block 30 in GFY13 budget was disappointing and removed approximately $12 million from our revenue plan for FY ‘13.
Mark Aslett
Finally, although, not currently one of our recurring top programs. Business with Raytheon and JSF was up substantially year-over-year.
However, due to the timing and the nature of the revenues, we don’t expect JSF to be a significant contributor in FY ‘13.
Mark Aslett
Likewise, for the classified airborne radar program we benefit from last fiscal year. This program update is effectively complete for now and we do not anticipate recurring revenues during FY ‘13.
Mark Aslett
We have 2 major new programs on the horizon that I’d also like to touch upon. First is JCREW I1B1, formerly known as JCREW 3.3.
As expected and discussed last quarter, we did not receive the PO for lonely time materials in Q4.
Mark Aslett
This timing issue in itself trigged reversal of the earn-out for the LNX acquisitions year ear-marked for December of this calendar year. Kevin will discuss this is in more detail in his prepared remarks.
Mark Aslett
Based upon what we know about an ongoing government program re-planning. We believe the program will remain in development longer than the previously planned milestone C highlighted in the GFY13 budget request.
Mark Aslett
As a result, we have decided to push all JCREW upgrade bookings and revenue into our FY ‘14. We remain positive about the programs status overall.
Our execution on the program has been very good with Exelis commenting that we have the best performing start.
Mark Aslett
JCREW I1B1 is the program of record to CID. The Marine Corps from what we are hearing like the capability and as we have discussed, they requested significant funding for JCREW in the GFY13 budget.
Mark Aslett
Our second major new program, the Navy Surface Electronic Warfare Improvement Program or SEWIP continues to move forward but the progress has been slower than we had anticipated.
Mark Aslett
We didn’t receive either the large PO from Lockheed Martin or the revenue from SEWIP Block 2 upgrade shipments that we had expected in the fourth quarter. However, we currently expect to receive the PO late in the current quarter based upon the current timing of government upgrade funding.
SEWIP is shaping up to be a significant bookings and revenue driver, as we move through the fiscal year.
Mark Aslett
Our services and systems integration or SSI business within ACS, continued to produce a significant proportion of our overall design wins in Q4. As we expected, Q4 was a strong conclusion to a strong year for design wins.
Mark Aslett
For the fourth quarter, we had a total of 15 design wins, all of them in defense. This compares with a total of 10 wins, 8 of them in defense in Q4 last year.
The 5-year probable value of our Q4 design wins was approximately $129 million, compared with $34 million in Q4 last year, a growth of 278%.
Mark Aslett
Our most significant design win this quarter was as previously mentioned with Raytheon for the U.S. Army Patriot.
Our other design wins included one that could designate us as the next-generation standard for radar processing for division of one of the major primes.
Mark Aslett
We also received a radar processing design win with Lockheed Martin for a wide bodied airborne platform that could become an important revenue driver over the longer term. As I said earlier, we continue to be successful in supplementing our organic growth in strategic M&A.
Mark Aslett
The deals to acquire Micronetics that we announced in June, is just one of 3 such milestones over the past 18 months, the others being KOR and LNX. The primes are responding to the funding and contracting uncertainties by downsizing their organizations, consulting their supply chains and actively looking to outsource at the subsystem rather than the component level.
This leaves the subsystems integration to best-of-breed commercial companies like Mercury.
Mark Aslett
With 2 quarters of integration behind us, KOR and PDI are performing well and shaping up to be great assets fully aligned to our strategy as we expected. LNX is being crucial to our success and design wins this past year.
These included another important naval second design win with Argon, as well as another large design wins with SEWIP Block 2 with Lockheed Martin.
Mark Aslett
Similar to the LNX and KOR transactions, acquiring Micronetics should move us close to building out a scalable RF and microwave business that complements our long standing capabilities in digital signal processing. We’re making good progress towards closing the transaction during the first quarter of FY ’13.
Mark Aslett
At the same time, we continued to be involved in discussions with numerous companies that like KOR, LNX and Micronetics, represents possible opportunities along the sensor processing chain. These are companies that fit our previously stated parameters, proven technology and capabilities, strong management, participation on the right programs and platforms.
Mark Aslett
We’ve also been talking with some of the major banks to discuss debt financing to facilitate future M&A and Kevin will discuss this more in detail later. So, with that as a background, I’ll conclude with some thoughts about the business outlook.
Mark Aslett
We believe that FY ’13 is going to be a challenging year for Mercury and for the defense industry as a whole, given the high likelihood of another CR and the potential for sequestration. We are expecting reduced forecast visibility and greater bookings and revenue volatility.
Mark Aslett
Our biggest risks during this transition period I believe are potential delays in new program starts, potential delays to programs transitioning between phases, as well as risks to the timing and level of program funding.
Mark Aslett
In turn, these risks could impact the number and volume of our design wins, as well as our bookings revenues, profits and cash flow. We’re going to take it one quarter at a time, focusing on executing well on the things that are within our control and remaining agile to adapt to the things that are outside of our control, as and when they occur.
Mark Aslett
Over the longer-term, we feel very positive about our prospects and the fact that we have and will continue to build intrinsic value in our business. We are in the sweet spot of the defense market, that being ISR, EW and Missile Defense.
And now with the addition of PDI, we are also doing business in the intelligence community for the first time.
Mark Aslett
We are on or have won many of the right programs, some of which are expected this transition to low rate initial production. We have built or acquired capabilities that are aligned with the new DOD roles and missions.
We have a contemporary, differentiated, industry leading product portfolio. We are winning a large number of high-value new designs.
Mark Aslett
Our services-led business model is aligned to the outsourcing needs of the primes. We are successfully executing on our M&A strategy to build capabilities along the sensor processing chain, as well as to grow revenues and adjusted EBITDA.
The timing of our M&A activity has and we expect will continue to help address potential program funding delays and other issues during this industry transition period.
Mark Aslett
Finally and probably most importantly, we have a smart dynamic management team and a very talented and hardworking employee base. We’ve proven over the last 5 years that we can not only restructure and turnaround a business, but also we have consistently delivered profitable organic revenue growth in our core defense business that we are now scaling with solid execution on the M&A front.
Mark Aslett
We are confident given all this that we have the where with thought to navigate this industry transition period, ultimately emerging on the other side with the potential for accelerated growth and improved profitability. We continue to expect that our total company revenue growth including M&A will be in the mid-teens on average over time, which should position Mercury as one of the winners in the defense industry in the future.
Mark Aslett
With that, I’d like to hand it over to Kevin. Kevin?
Kevin Bisson
Thank you, Mark, and good afternoon again everyone. Turning to the financial results, revenue for the fourth quarter of $60.9 million was essentially flat with revenue of $61.2 million for the fourth quarter of last year and was within our stated guidance of $60 million to $66 million.
Kevin Bisson
GAAP earnings from continuing operations of $0.19 per share were $0.05 per share higher than $0.14 per share in last year’s fourth quarter, and significantly exceeded company’s stated EPS guidance of $0.04 to $0.10 per share.
Kevin Bisson
However, GAAP earnings for fiscal 2012’s fourth quarter benefited from the reversal of an earn-out liability related to the LNX acquisition, which was partially offset by incremental expenses related to restructuring actions initiated in the fourth quarter and Micronetics related transaction costs.
Kevin Bisson
On a combined basis, these items contributed a net $0.09 per share in earnings for the fourth quarter, which placed the company's fourth quarter EPS, absent these items at the high-end of our quarterly guidance. I will discuss these items in more depth later in my remarks.
Kevin Bisson
Adjusted EBITDA for the fourth quarter of fiscal 2012 of $9.3 million was $800,000 lower than the adjusted EBITDA of $10.1 million for the fourth quarter of last year and was at the high end of the company’s stated guidance of $7 million to $9.5 million.
Kevin Bisson
The company ended the fourth quarter and fiscal year with $116 million of cash and investments, and with no debt, and generated $1.2 million of free cash flow in this year’s fourth quarter.
Kevin Bisson
Reviewing fourth quarter performance in more detail, total revenue for our largest operating segment, Advanced Computing Solutions or ACS was $54.3 million, which was $6.1 million lower than the $60.4 million of ACS revenues generated in last year's fourth quarter.
Kevin Bisson
The year-over-year decrease was due to a $3.8 million decrease in commercial revenue and a $2.3 million decrease in ACS defense revenue. The decline in ACS defense revenue related to lower program revenue from Northrop Grumman classified airborne program that was partially offset by the revenue derived from the company’s acquisition of KOR in December of 2011.
Kevin Bisson
Revenue from our Mercury Federal Systems or MFS operating segment for the fourth quarter was $10.5 million, which was $7.9 million higher than the $2.6 million of MFS revenue for the fourth quarter of fiscal 2011.
Kevin Bisson
Consistent with last quarter, this exceptionally strong revenue growth was driven by higher revenue from the Gorgon Stare program, as well as the inclusion of revenue from Paragon Dynamics or PDI, which was acquired as part of KOR. It should be noted that operating segment revenue for the fourth quarter of fiscal 2012 does not include adjustments to eliminate $3.9 million of inter-company revenue.
Kevin Bisson
Total defense revenue, including ACS and MFS for the fourth quarter of $57 million was $3.5 million or 6% higher than defense revenue of $53.5 million for the fourth quarter of last year. Excluding the addition of KOR and PDI revenue, fourth quarter defense revenue declined $5.9 million year-over-year, reflecting the slowdown in current defense procurement in light of the threat of sequestration.
Kevin Bisson
Defense bookings for the fourth quarter of $55.5 million were $2.8 million lower than the $58.3 million of defense bookings in the fourth quarter of last year. As Mark alluded to in his remarks, the company's bookings performance in the fourth quarter is mainly attributable to a more discernible slowdown in purchase order activity from large customers due to the lack of clarity relative to defense spending.
Kevin Bisson
Mercury's total book-to-bill ratio for the fourth quarter of fiscal 2012 was 1.0, which matches the 1.0 for the fourth quarter of last year. Defense book-to-bill of 1.0 for this year's fourth quarter was slightly below the 1.1 ratio generated in the fourth quarter of last year.
Kevin Bisson
Company ended fiscal 2012 with $104.6 million of total backlog, which was $17.7 million or 20% higher than the $86.9 million of backlog at the end of last year's fourth quarter.
Kevin Bisson
Of the total ending backlog in the fourth quarter, $91.9 million or 88% is expected to be shipped within the next 12 months. $101.5 million of the ending fourth quarter backlog relate to defense, which is $20 million or 25% higher than last year's defense backlog.
Kevin Bisson
From a bottom line perspective, GAAP earnings from continuing operations of $5.7 million was $1.4 million higher than the $4.3 million of comparable earnings in last year's fourth quarter.
Kevin Bisson
Lower gross margin due to the inclusion of KOR and PDI revenue that carry lower than historical Mercury margins was more than offset by lower year-over-year operating expenses.
Kevin Bisson
The reduction in operating expenses was due to the reversal of an earn-out liability related to the LNX acquisition. And significantly lower base operating expenses that were partially offset by a restructuring charge incurred in this year's fourth quarter, Micronetic’s related transaction costs and the inclusion of KOR and PDI operating expenses.
I will talk about several of these separately.
Kevin Bisson
First, the $4.9 million reversal of the earn-out liability stand from the company's assessment at year end that it was probable that the earn-out related to the January 2011 LNX acquisition would not be achieved.
Kevin Bisson
The reversal of this liability resulted in a corresponding reduction to operating expenses for this year's fourth quarter. While the earn-out was not achieved, we continue to be pleased with the performance of the RF product line acquired from LNX, as it ramps up production and revenue for several important programs.
Kevin Bisson
Second, the company recorded a $2.8 million restructuring charge related to severance costs in connection with the reduction of 41 employees in the fourth quarter, primarily in engineering and manufacturing functions.
Kevin Bisson
The charge was taken to proactively address the slowing defense procurement environment by reducing headcount expenses, as well as manufacturing costs via outsourcing a portion of the company's manufacturing of digital products to a third-party.
Kevin Bisson
The company expects to generate annual pre-tax savings of $5 million from this cost cutting action. However, these projected savings exclude incremental costs associated with the pending absorption of Micronetics, which I will discuss later in my remarks.
Kevin Bisson
Third, the company incurred in the fourth quarter approximately a $0.5 million of transaction costs in connection with the previously announced Micronetics acquisition. We expect this transaction to close within the next 2 weeks.
Kevin Bisson
Finally, when excluding the above mentioned operating expense items, base operating expenses declined $2.5 million dollars between this year’s fourth quarter and the fourth quarter of last year. This decline was achieved despite absorbing $2.6 million of KOR and PDI operating expenses in this year's fourth quarter.
Kevin Bisson
Base operating expense reductions, excluding the KOR and PDI impact were the result of increased customer funded R&D and lower headcount related expenses. The company has done an admirable job of proactively managing operating expenses as a means to counteract the difficult current top line environment.
Kevin Bisson
While reported earnings in this year's fourth quarter were higher than last year's fourth quarter, adjusted EBITDA of $9.3 million for the fourth quarter was $800,000 lower compared to the fourth quarter of fiscal 2012.
Kevin Bisson
The exclusion of the earn-out reversal and a lower add back of income taxes more than offset higher year-over-year add backs for restructuring, amortization and Micronetics transaction related expenses. Despite a very challenging fourth quarter, the company's financial performance for all of fiscal 2012 was extremely impressive.
Kevin Bisson
Our total revenue of $244.9 million was up $16.2 million or 7% higher than fiscal 2011. Defense revenue of $229.9 million was $49.5 million or 27% higher in comparable revenue from last year.
Kevin Bisson
Despite, total organic revenue declining by 2% in fiscal 2012, defense revenue excluding KOR and PDI was up 16% for fiscal 2012 relative to fiscal 2011, based on strong revenue growth in the significant programs that Mike mentioned, such as Aegis and Gorgon Stare.
Kevin Bisson
Similarly, defense bookings of $215.9 million were 24% higher than in fiscal 2011 driven by the addition of KOR and PDI, as well as strong bookings from the Patriot and Gorgon Stare programs.
Kevin Bisson
Bottom line performance for fiscal 2012 was equally impressive. Net income from continuing operations of $22.6 million was 22% higher in fiscal 2011 earnings of $18.5 million.
In a similar fashion, adjusted EBITDA for all of fiscal 2012 of $48.9 million was 20% higher than adjusted EBITDA for the prior fiscal year.
Kevin Bisson
Adjusted EBITDA as a percentage of sales was 20% for fiscal 2012, well above our 17% to 18% target business model. All-in-all fiscal 2012 operating results made for an extremely successful year.
Kevin Bisson
Turning to the balance sheet, the company ended fiscal 2012 with cash and investments of $116 million and no debt, which was $1.1 million higher than the $114.9 million of cash and investments at the end of fiscal 2012 third quarter. The increase in cash and investments for the fourth quarter was driven by $4.2 million of operating cash flow derived from GAAP earnings performance for the quarter adding back non-cash depreciation, amortization and stock compensation expense.
Kevin Bisson
Partially, offsetting operating cash flow for the quarter was nearly $3 million capital expenditures in the fourth quarter. As Mark mentioned in his remarks, due to the lack of clarity within overall defense funding and contracting largely due to the sequestration threat, the company will only be providing quarterly financial guidance.
Kevin Bisson
In addition, since we have not closed the Micronetics’ transaction, we will be providing first quarter financial guidance excluding Micronetics. I will then provide general commentary on the anticipated impact of Micronetics on the company’s financial guidance for the quarter.
Kevin Bisson
With that, for the first quarter of fiscal 2013, we are targeting total revenue in a range of $51 million to $57 million, which assumes continued challenges in order activity that we saw in the fourth quarter. Consistent with prior quarters, we expect the split in first quarter revenue to be 92% defense and 8% commercial.
Kevin Bisson
At the mid-point of our guided revenue range, we expect first quarter defense revenue to generate low double-digit year-over-year growth for the quarter driven by the inclusion of KOR and PDI and increased Gorgon Stare revenue that are partially offset by lower JSF related revenue.
Kevin Bisson
Within our stated revenue guidance, we are projecting gross margin to approximate 48% for the first quarter reflecting a higher proportion of our revenue deriving from KOR, PDI and our RF products, which carry gross margins lower than those generated by the company in previous quarters.
Kevin Bisson
Operating expenses are estimated to be $27 million in the quarter, which is up slightly from the $26 million of operating expenses in the first quarter of last year. Increased operating expenses from the inclusion of KOR and PDI, restructuring cost related to the completion of actions initiated in the fourth quarter and Micronetics transaction expenses are forecasted to be largely offset by headcount savings from the fourth quarter of restructuring action.
Kevin Bisson
As we have done over the last several quarters, we will continue to judiciously manage operating expenses as a means to address the uncertain revenue environment. From a bottom line perspective, we are targeting GAAP EPS at break-even to a loss of $0.05 per share for the first quarter based on an estimated weighted average share count of $30.7 million shares.
Kevin Bisson
Within this GAAP EPS range, we are projecting a $0.04 per share impact from the combination of amortization of acquired intangibles, restructuring and acquisition related costs. Adjusted EBITDA is estimated to be between $4 million and $6.7 million for the first quarter of fiscal 2013.
Kevin Bisson
With regard to the impact of Micronetics on first quarter financial guidance, we anticipate the acquisition to close on or about August 8, which based on this timing will include approximately half the quarter of Micronetics financial results.
Kevin Bisson
Under this assumption, the company would anticipate its first quarter revenue to increase $4 million to $5 million with the inclusion of Micronetics. At this assumed revenue, we would tentatively assess Micronetics bottom line results to be dilutive to the company’s first quarter earnings forecast by $0.02 to $0.03 per share largely the result of forecasted purchase accounting adjustments for the quarter.
Kevin Bisson
These are obviously high level assumptions, which will have more clarity once the transaction is completed. Also consistent with prior statements, the acquisition of Micronetics is expected to be accretive on a GAAP basis within 12 months of the closing date.
Kevin Bisson
With the onset of a new fiscal year, the completion of 2 acquisitions and the third pending within the last two years, and the fact that we exceeded our adjusted EBITDA target business model for fiscal 2012, we thought it would be appropriate to update the company’s target business model. But of most importance, the new model increases our target adjusted EBITDA as a percentage of sales from a range of 17% to 18% to a new range of 18% to 22%.
Kevin Bisson
As Mark noted in his remarks, this target range assumes the industry returns to a more normal funding and contracting environment. However, some individual income statement components have changed to arrive at the new adjusted EBITDA range.
Kevin Bisson
Most notably, as we’ve discussed we have lowered our target business model gross margin from 54% to a range of 45% to 50%. This reduction reflects the buildout of our RF business, be it the acquisition of LNX and the pending acquisition of Micronetics.
And the growing importance of our services-led businesses, which include SSI, KOR and PDI, which carry gross margins that are lower than the historic norm from Mercury.
Kevin Bisson
This decline in gross margin is being more than offset by R&D as a percentage of revenue decreasing from a high-teens percentage of revenue business model to our new model, which pegs R&D between 11% and 13% of revenue. This reduction in R&D as a percentage of revenue stems from future top line growth delivering -- deriving from the RF and services-led businesses and attract significant customer funded R&D.
This serves to lower R&D for these businesses by shipping these costs into costs of sales and ultimately a corresponding reduction to gross margin.
Kevin Bisson
From a GAAP perspective, our target business model for operating income remains at 12% to 13%, as the 2 percentage point net benefit of lowering the R&D target compared to the new gross margin target, is largely absorbed by increased amortization expense related to the company’s recent acquisition. This 2 percentage to 3 percentage point impact from amortization is essentially added back to our previous adjusted EBITDA target of 17% to 18% of revenue to arrive at the new range of 18% to 22%.
Kevin Bisson
As the final point, with the closing of the Micronetics transaction expected within the next 2 weeks, the company’s available cash will lowered by approximately $75 million. While we believe there is sufficient liquidity to operate the business after the completion of the Micronetics acquisition, there is insufficient liquidity to pursue the company’s M&A agenda, which as Mark as pointed out many times is a critical aspect of the company strategy.
Kevin Bisson
Therefore, we have actively investigated financing alternatives to support the company’s M&A objectives. In our proceeding towards replacing our $35 million revolving credit facility with a significantly larger one.
We expect to finalize this new credit facility shortly, which we believe we put the company in a position to sufficiently finance its next acquisition if and when that time arrives.
Kevin Bisson
With that, we’ll be happy to take your questions. Operator, you can proceed with the Q&A now.
Operator
[Operator Instructions] Now, we’ll go first to Peter Arment with Sterne Agee.
Peter Arment
A first question I guess Mark, is on the -- on whatever you can discuss regarding the first quarter guidance range. And I guess I’m just particularly talking about the defense portion, I guess the 92% kind of what you’ve outlined within that $51 million to $57 million guidance.
What are the kind of the puts and takes there or what are you seeing given what you have in backlog and what you need to close to kind of fill out that range?
Mark Aslett
Sure. So, we did have some deals that basically moved out of Q4, a portion of which basically moved into Q1.
Probably the most notable is SEWIP, where we didn’t actually receive the PO during Q4, and hence we didn’t recognize the revenues.
Mark Aslett
We’re currently expecting to receive the PO later in Q1. And so we do anticipate some revenues from the program.
So, there is number of puts and takes, but that’s probably that the important one. We are also expecting a certain level of book shipment as we do -- as we have seen in other quarters.
Kevin Bisson
Peter, I also remind you too that historically, the first quarter has been one of the lighter quarters within the year and I think to that is probably true in terms of our assessment of the quarter this year as well.
Peter Arment
Okay. And then question for Mark, are you just talking I guess and big picture on capital deployment but also your M&A strategy.
So, you indicated and this, I guess this includes the Micronetics transaction that Phase I is essentially complete building out the end-to-end capabilities. So how do we think about Phase II.
Is it just building a more critical mass or what kind of color can you give us there?
Mark Aslett
Yes. Sure.
It’s a good question. So, we feel really good about the asset that we acquired in terms of the capabilities and that the work that we’ve done on integrating them and their performance today as well as their expected performance.
Phase II for us is going to continue with the same around sense of their -- sense processing chain, but it’s really about scaling the platform here on out. So that’s really the goal going forward.
Peter Arment
Okay. And just I guess against that as a capital deployment strategy, you’re currently when you look at your own valuation and what you have to out there in the M&A.
You are still seeing some decent multiples. So, how do you weigh that against deploying that capital now in kind of the uncertainty versus when you look at your own valuation?
Mark Aslett
Yes. That’s a good question.
We still think M&A is a really important part of the strategy. I think as we’ve looked at other downturns in the defense industry as well as other industries that have gone through a period of significant transition.
The companies that continue to acquire and build scale, when the industry transition has ended have been the once that are basically have slingshot effect out of that.
Mark Aslett
We do anticipate that as the industry goes through the transition period, the multiples are going to start to contract. And we hope, that this going to be some interesting assets that become available and hence as Kevin discussed, discussions with some of the banks in terms of putting in place a large revolving debt facility.
So, we do think the prices are basically going to come down during this period.
Peter Arment
Okay. And then just one last one, regarding the outsourcing, I think Kevin you mentioned, the 41 employees.
Mark, what do you -- was that something that you have been looking at or just accelerated because of the weaker environment or are there other opportunities going forward?
Mark Aslett
So, it’s a little bit of both. As a primary driver with -- as I said in my prepared remarks, we do anticipate that FY '13, it’s going to be a tough year not only for Mercury, but also for the industry as a whole, largely due to what is very high likely heard of a continuing resolution as well as the potential to sequestration.
Mark Aslett
So, we took the opportunity of basically lowering the capital intensity of the business. We outsourced a small digital manufacturing capability that we hired in our Huntsfield facility to our current contract manufacturing partner, who is Benchmark Electronics as well as taking out additional expenses across the business.
So, I think in overall, we did a really good job at managing our expenses during FY '12 and we proactively took at cost at the end of the fourth quarter.
Peter Arment
Okay. And then just on the last one, just regarding your adjusted EBITDA.
You finished the year at $48 million, thinking through all the moving parts and the incremental impact from Micronetics, is your belief that you will be able to still grow adjusted EBITDA in fiscal '13?
Mark Aslett
So we’re actually in the one quarter at a guidance -- one quarter at a time guidance right now. So we didn’t knew the guidance for the first quarter.
And as Kevin discussed in terms of the update to the new pro forma target business model, we do anticipate once we get back to a more normalized environment been able to actually expand our adjusted EBITDA over the long-term in the 18% to 22% range but that’s a longer term target model.
Operator
We’ll go next to Brian Ruttenbur with CRT Capital.
Brian Ruttenbur
Yes. Thank you very much.
Couple of questions, first of all, if I take your $4 to $5 million of revenue from acquisitions this quarter and that’s for 50% of the quarter roughly. Can I then annualize and say that’s about $35 million for this fiscal year?
Is that the right way to look at it?
Mark Aslett
So, we’re not giving guidance again on an annualized basis, Brian. We, kind of, laid out what is our guidance for the first quarter.
Kevin Bisson
Brian, we don’t even own the company. It would be not appropriate to even talk about what their forecast is, beyond just the color we gave for the quarter until we’ve closed this deal.
It’s just inappropriate.
Brian Ruttenbur
Okay. The other question I have then on -- you've mentioned, Mark, several times about the normalized environment.
That normalized environment, you’re saying is what, that there is no sequestration and their core defense grows at 2% or 3% a year. Is that a normalized environment?
What is a normalize environment?
Mark Aslett
So certainly not the environment that we’re currently in. If you look at, we believe that there is going to be a clearly a continuing resolution in FY ‘13.
I think the expectation is probably a 6 month a year. We’ll see what happens with sequestration itself which obviously could have a pretty damaging impart on the defense industry and the defense industrial base.
Mark Aslett
So I think we’re hoping that once the new administration is in, that we’re kind of move back to something that we’re seeing prior to say the last few years.
Operator
We’ll take our next question from Michael Ciarmoli with KeyBanc Capital Markets.
Michael Ciarmoli
Mark, I know you’re not in the business. I guess, of providing an outlook for the full year but you’ve got this mid-teen growth target out there, combination organic and acquired, safe to say given this industry in transition, this does not apply to this current year?
Mark Aslett
So that growth rate and target that we talked about was really on average over time, and so a longer term number. I think if you look back, Mike, we basically delivered 15% compounded annual growth rate in our defense business from FY ‘08 through FY ‘12.
Mark Aslett
Last year, we grew 27% year-over-year including KOR 16% on an organic basis. We’re excited about the Micronetics acquisitions, and which should close in August.
And we think the timing of this deal in the addition of Micronetic’s bookings and revenue couldn’t be better as we head into the transition period itself.
Mark Aslett
So however, that is offset by the challenges that we see with respect to the potentials for a continuing resolution as well as the sequestration. So that mid-teen’s revenue growth rate on average over time including M&A is really a long-term target.
We’re not specifically pushing that into our FY ‘13 numbers.
Michael Ciarmoli
Okay. And I’m assuming then on an organic basis for ‘13, you guys are probably going to remain under pressure.
So again, probably the importance of Micronetics?
Mark Aslett
So again we’re not going to talk about our organic growth rate at the year level. We do believe that is a business we positioned ourselves extremely well, given some of the programs that we have as well as the timing of the certain acquisitions that we’ve done of late.
Mark Aslett
But we’re in an industry environment where the visibility from a forecast perspective is somewhat murky right now. And I think we’re seeing clearly a sore in our fourth quarter and it’s reflect in our Q1 guidance, some of the charges that we’ve seen with respect to funding delays.
Mark Aslett
So we’re going to basically take it one quarter at a time. We’re going to focus on executing well the things that are within our control.
And we’re going to be agile enough to react to the things that we may need to react to as the year unfolds.
Michael Ciarmoli
Okay. How about the growth trends in KOR?
I mean, you bought that. It was high single-digits, low-double digits, is that on track?
Mark Aslett
KOR is actually performing pretty well. We’re pleased with that performance to-date.
That booking is an example in Q4. We’re close to $9 million.
So they are doing well. I think we’re very, very pleased with that business and the potential going forward.
Michael Ciarmoli
Okay. And then last one and I’m sorry for asking this again on ‘13.
But can you even given us a sense in terms of those major programs. You’ve kind of did a good job outlining for us.
How they trended for the year and I’m thinking Gorgon Stare, Patriot, Aegis, I mean, can you give us a sense as to whether or not those programs, how they track in the coming year?
Michael Ciarmoli
I mean do you expect growth in all those programs, some of those programs. We obviously -- you talked to us about what to expect with JCREW program and any other color you can give us?
Mark Aslett
Sure. The programs that we expect to do well from a revenue perspective this year include various programs in KOR associated with both electronic warfare as well as their radar stimulation business.
We anticipate Lockheed Martin SEWIP as well as Lockheed Martin Aegis are going to be important programs.
Mark Aslett
We’re expecting continued good progress with Gorgon Stare with Sierra Nevada, Raytheon Patriots is another program that we’re expecting good growth in. And then there is a couple of new ones.
The first is a dismount radar with Northrop Grumman as well as additional upgrades to both the Predator and the Reaper.
Mark Aslett
So beyond that, I think as Bill Swanson talked about on the Raytheon earnings call, there is clearly a lot happening with Raytheon Patriot, particularly in Middle East with countries such as Kuwait and Turkey, which does appear to be delayed a little again.
Mark Aslett
However, there is also among Qatar and Kuwait. And as I mentioned in my prepared remarks, we also booked or recorded the design win for the U.S.
army patriot this quarter. I think beyond that we would say that we’re pretty excited about the potential for the F-16 radar upgrades for both Taiwan as well as potentially North Korea.
Mark Aslett
Clearly, this potential opportunity is a competitive scenario where it’s Northrop Grumman SABR versus Raytheon SABR, sorry Raytheon’s racer program. But if Northrop successful and the timing is right, these could also be important opportunities for us.
Operator
[Operator Instructions] We’ll go next to Michael Lewis with Lazard Capital Markets.
Michael Lewis
Okay. First and foremost, I just want to ask you about 10% tax rate in the quarter.
What is your full expectation for the year, Kevin, and I guess, the question is, did the restructuring and the reversal on LNX had that implication on lower tax rate?
Kevin Bisson
Definitely the earn-out, there was no tax impact associated with that. So we get the full benefit droppings in the bottom line.
Also the acquisition costs, Mike, related to Micronetics are not taxable article. So they are not factored in as well.
But essentially, it’s the earn-out. It’s a one-quarter impact.
I think you can assume our tax rate will revert back to a more normalized level going forward.
Michael Lewis
Okay. That’s fair.
And then on the restructuring, was there any specific facility that was reduced or was it headquarters, was it one of the other outside facilities. Can you give us a little more detail there?
Mark Aslett
Sure, Mike. The largest part of the restructuring was respect to our Huntsville facility.
And it was -- as I described where we decided to outsource what was ineffective, vertical integrated money manufacturing capability to our contract manufacturer Benchmark Electronics. We also took out heads in both engineering as well as other G&A across the business.
Michael Lewis
Okay. And then, I want to circle back on the debt.
What are the pros and cons of using a revolver versus some type of note structure and how large do you think you like to go on that debt, Mark?
Mark Aslett
Sure. So I’ll give you my perspective and then I’ll throw it over to Kevin.
We think it’s the most appropriate form of capital at this point in time for us. It gives us the most flexibility from a capital structure perspective with the least negative carrying cost associated with the debt.
Mark Aslett
So I’ll hand it over to Kevin for his perspective in terms of where we are at and why we decided to go with that beyond what I’ve just said.
Kevin Bisson
Obviously, Mike, debt markets were fairly attractive in terms of rate, in terms of structure. So obviously, debt was the primary alternative that we looked at, in terms of, why a revolver again.
Cost and flexibility were the 2 parameters that we value the most.
Kevin Bisson
And obviously, cost is the best from a revolver perspective versus say high yield or a institutional term loan and then obviously flexibility from the standpoint of -- the revolver allows us to use the money when we need it as oppose to placing it under balance sheet immediately and then having that interest cost impact the both earnings and cash flow while waiting for the next deal to be financed.
Kevin Bisson
So from that standpoint, that was really the two parameters that we value the most and got us still revolver.
Michael Lewis
That’s fair. Let me just ask you an additional question there.
I guess, part of the mandate when you did the secondary, was the use of those proceeds for acquisitions and we’re almost through those proceeds, so that mandate -- that mandate could possibly kind of move away. Now, if you have a low cost debt-type structuring in the portfolio or in the fire power here, dry powder, what you consider doing things like buybacks for example, considering that EPS hasn’t had such significant lift especially as we progress into fiscal ‘13, uncertainty on the budgets.
Kevin Bisson
Well, obviously that’s a board decision number one but I think that we will as part of any financing package we’ll preserve enough flexibility to allow for things like that but there are no plans at this point with regards to a buyback.
Mark Aslett
And I think, our primary agenda remains to basically continue to grow in scale the company in terms of capability as well as our EBITDA. And to take advantage of what we think is going to be a depressed pricing environment.
So when the industry returns to a more normalize structure.
Michael Lewis
Okay. And then I apologize to my peers but one more question, did you say that KOR, PDI added about $9.5 million in the quarter.
Mark Aslett
They say roughly $9 million of bookings in the fourth quarter.
Michael Lewis
Do you have a revenue number?
Mark Aslett
I do but…
Kevin Bisson
I mean, for the 6 months as we had them is about $20 million. So roughly about $10 million per quarter.
Operator
And with that, we have no further questions in the queue. I'd like to turn the program back over to Mr.
Mark Aslett for any additional or closing comments.
Mark Aslett
Okay. Well, thanks very much for listening.
We look forward to speaking to you all again next quarter. Thank you.
Operator
And that does conclude today's call. Thank you for your participation.