Aug 6, 2013
Executives
Mark Aslett - President and Chief Executive Officer Kevin M. Bisson - Senior Vice President, Chief Financial Officer and Treasurer
Analysts
Tyler Hojo - Sidoti and Company Mark Jordan - Noble Financial Peter Arment - Sterne Agee Sheila Kahyaoglu - Jeffries Jonathan Ho with William Blair Michael Ciarmoli - KeyBanc Capital
Operator
Good day everyone and welcome to the Mercury Systems Fourth Quarter Fiscal 2013 Earnings Conference Call. Today’s call is being recorded.
At this time for opening remarks and introductions, I’d like to turn the call over to the Company’s Senior Vice President and Chief Financial Officer, Kevin Bisson. Please go ahead, sir.
Kevin M. Bisson
Thanks Kate. Good afternoon and thanks for joining us.
With me today is our President and Chief Executive Officer, Mark Aslett. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at www.mrcy.com.
We’d like to remind you that remarks that we 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 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 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 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 U.S.
Securities and Exchange Commission including its Annual Report on Form 10-K for the fiscal year ended June 30, 2012. The Company cautions readers not to place undue reliance upon any such forward-looking statements which speak only as of the date made.
The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statement is made. I’d also like to mention that in addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, during our call, we will discuss several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow.
Adjusted EBITDA excludes interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring expense, impairment of long-lived assets, acquisition costs and other related expenses, fair-value adjustments from purchase accounting and stock-based compensation costs. Free cash flow excludes capital expenditures from cash flows from operating activities.
Reconciliation of adjusted EBITDA to GAAP net income and free cash flow to GAAP cash flows from operations are included in the press release we issued this afternoon. With that, I will turn the call over to Mercury’s President and CEO, Mark Aslett.
Mark?
Mark Aslett
Thanks Kevin. Good afternoon, everyone, and thank you for joining us.
I’ll begin today’s call with a business update, Kevin will review the financials and guidance and then we’ll open it up for your questions. Mercury closed fiscal 2013 with a very strong quarter for bookings and backlog as we anticipated.
We made good progress in our most important programs and design wins were up substantially compared with Q3. So revenue for the quarter grew by $1 million sequentially to $55 million versus our guidance of $48 million to $54 million.
We had a GAAP loss from continuing operations of $0.07 per share versus our guidance of a loss of $0.13 to $0.07. This loss however included $0.03 per share in unforecasted restructuring charges related to our new advanced microelectronics center which I will discuss a little later.
Fourth-quarter adjusted EBITDA was 7%, significantly above the high end of our guidance and we continued to generate positive cash flow in the quarter. We were at or above guidance on all our key metrics and concluded FY '13 with positive momentum despite the industry headwinds that have persisted all year.
It was five quarters ago when we first talked about potential adverse impact out of budget sequestration beginning in January 2013, and a year ago when the pre-sequestration slow down began having a material impact on our business. We responded aggressively through the fiscal year with a series of decisive actions to reduce our operating expenses and minimize working capital.
We also completed two restructurings that enabled us to continue driving improvements and successfully manage the business at the lower revenue run rate we anticipated. Taking a cautious and conservative stance, we focus on managing revenue primarily from backlog while relying less on book and ship in an effort to minimize working capital, preserve liquidity, and reduce risk in this very tough industry environment.
We also made building backlog a top priority for the year and the team executed well. We concluded FY '13 with our total backlog up 34% and defense backlog up 15% year-over-year, each at all-time Company record levels.
Our total book-to-bill improved to 1.1 from 0.9 in FY '12 and our book-to-bill in defense increased to 1.0 from 0.9 last year. Turning to our results for the fourth quarter and looking specifically at defense, total defense revenues were essentially flat sequentially at $49.6 million.
Total defense bookings however were up 32% from Q3 to $58 million. This growth was in line with our expectations for the quarter and largely driven by our Mercury Commercial Electronics or MCE segment both organically and in the form of Micronetics.
Our bookings in Mercury Defense and Intelligence Systems or MDIS showed strength sequentially also. Our MCE computer business continues to recover from the defense slowdown we saw early in FY '13 delivering significantly improved bookings on a sequential basis.
Excluding Micronetics, Q4 defense bookings were up 24% sequentially. Our Q4 book-to-bill was 1.2 compared with 0.9 last quarter.
Our Q4 book-to-bill in defense increased substantially to 1.2 from the 0.9 we reported for the third quarter. Defense backlog exiting the fourth quarter was up 8% sequentially and year-over-year defense backlog grew 15%.
Approval of the government's FY '13 defense budget seems to have improved the overall environment from a bookings perspective, at least for now. This was another strong bookings quarter for the Aegis program as expected in part due to having a defense budget in place and also due to strategic considerations.
Given the geopolitical instability in the Far East, Aegis continues to be a stable covert big missile defense as part of the DOD's specific pivot strategy. For military, interest in Aegis has increased as well.
Our Q4 Aegis bookings were up more than 100% from the strong bookings we reported for Q3. This increase was driven by our receiving the FY '13 portion of an Aegis multiyear award as well as for a military assignment.
For FY '13 as a whole, Aegis bookings were up nearly 250% year-over-year. In addition to Aegis, our major bookings this quarter were related to SEWIP Block 2, an electronic warfare program with [XLS] (ph) and Gorgon Stare.
Finally, I am pleased to report that we received an initial small order for U.S. Army Patriot upgrades that could lead to a materially larger order towards the end of FY 2014.
In terms of our portfolio revenue, our largest programs were Aegis, SEWIP Block 2, the B-1 bomber, and Gorgon Stare. Aegis revenue was up nearly 7% sequentially and we continue to shift and recognize LRIP revenue from SEWIP Block 2.
With respect to Gorgon Stare, we crossed some key tactical thresholds in the fourth quarter. It appears that Congress reinstituted bonding for the program in their markup of the FY '14 defense appropriations bill and as a result we are more optimistic than last quarter about the potential for additional bookings and revenue in FY 14 albeit at a lower level than last year.
Revenues from our smaller run rate deals related to spares, maintenance and repair, were up more than 20% on a sequential basis and we continue to see signs of stabilization. Our bookings of smaller run rate deals were roughly flat in Q4.
As I mentioned, this was a good quarter for design wins which we balanced sequentially from a low point in Q3. Operating under an approved defense budget in service and CR seems to have led to the release of some budgeted customer IR&D funds.
This resulted in increased design wins for us this quarter as expected. We received a total of nine design wins in the fourth quarter all of them in defense.
This compares with to six designs in the immediately preceding quarter. The five-year probable value of our design wins this quarter was approximately $42 million compared with approximately $22 million in Q3.
Our design wins continue to focus on radar, electronic warfare, and electro-optical infrared. The major design wins of note this quarter were from Aegis for our military sales with Lockheed Martin, continued radar upgrades on [indiscernible] with General Atomics, and then the important EW program with NRL, the Naval Research Laboratory.
Our success in winning new designs demonstrates that we continue to innovate particularly in the processing dimension as well as integrated security. Integrated security is becoming a very important theme as both an emerging priority for the DOD and the growing focus with various of the prime community, which is looking to export and expand internationally.
International defense revenues included FMS were 30% of total defense revenues in the fourth quarter compared with 23% in the third quarter. Micronetics which we acquired in August last year is continuing to perform well.
The Micronetics team, technology and future opportunities are all continuing to meet and in some cases exceed our initial expectations as we continue to integrate the business. Turning to fourth quarter, we signed a lease for 70,000 square-foot microelectronic manufacturing facility at Hudson, New Hampshire, very close to our existing Micronetics location.
Operating as the AMC, this new plant will allow us to consolidate the current Hudson operation and our existing sales in New Hampshire plants. This state-of-the-art facility was largely built out by the former owner, the AMC will add significant clean room manufacturing capacity for Mercury and a new level of microelectronics capability for our customers.
These will be important aspects for us going forward not only as we continue to win new additional new designs in our existing programs but as we capitalize on the current trend towards great outsourcing by our customers in RF and microwave. We see this trend as the next wave of major opportunity in our customer base.
Existing and prospective customers have already toured the AMC space and the feedback has been very positive. It's clear that before the move-in, the new building is inspiring customer's confidence and our strategy for microelectronics.
Combined with our existing advanced microelectronics center in New Jersey, the New Hampshire AMC will ultimately provide us with a world-class scalable redundant design in manufacturing facility, something that we know is a very important consideration for our customers and their decision-making. It's close to our existing New Hampshire plants, so we are not expecting any significant personnel disruptions and we are targeting late Q2 or early Q3 of FY '14 to have the AMC up and running.
Additionally, as part of this plan, in the fourth quarter, we sold our existing Micronetics plant in Hudson to the property developer from [indiscernible] leasing the AMC. We'll use the proceeds from this sale along with significant developer tenant improvement funds to prepare the new facility.
In the interim, we have a short-term lease with the new owner of our existing Hudson facility. In effect, we have obtained a new world class microelectronics center for a fraction of the expenses of modernizing our existing facilities.
This should significantly strengthen our competitive position as an RF and microwave outsourcing partner to the primes. It should also allow us to enhance delivery against existing programs which is SEWIP Block 2 and growth programs such as SEWIP Block 3 should the Lockheed Martin and Raytheon team win this competition.
All in all, we feel good about Mercury's progress and positioning as we begin the new fiscal year. However, we by no means are out of the woods from an industry perspective.
We were pleased to see the approval of the FY '13 defense budgets and were not surprised by sequestration this triggered which resulted in a $37 billion reduction in overall defense spending. Last quarter, we talked about our concern regarding the DOD asking Congress to reprogram a portion of the remaining RDT&E and procurement funds.
This has not yet having major problematic impact as far as we can tell. Looking forward, the defense budgets proposed by both the administration and both chambers of Congress have basically ignored sequestration requesting levels of funding that are higher than the spending caps enacted in the 2011 Budget Control Act.
This makes it probable that we'll be stalking government fiscal '14 under another continuing resolution while Congress and the administration try to sort things out. At the same time, the DOD recently completed its Strategic Choice Management Review, a comprehensive study of defense policies, programs, and spending priorities in light of sequestration.
Although this will likely lead to the decisions that could primarily affect fore-structure and/or investment spending going forward, particularly in light of the budget gap, the specifics are still largely unknown at this time. These uncertainties continue to cloud our visibility into FY 14 on a number of levels.
There remains a potential for delays in orders and associated revenues in new program starts or programs transitioning between phases as well as risk to program timing, funding levels or cancellations. We've been dealing with these same uncertainties and risks for more than a year.
We believe that Mercury was in many ways a leading indicator for the industry. We saw the advanced impact of sequestration very early on in FY 13, we responded immediately and proactively, and through the year, managed the business very differently than in the past.
We believe that on balance, our strategy, technology, capabilities, and ongoing programs and platforms align well with the DOD's new roles and missions. Continuing to grow bookings remains the top priority for the near-term.
We are working hard to leverage our relationships with the price and drive bookings and ultimately revenue from our existing programs as well as new programs and platforms. Looking ahead into fiscal 2014, we have the opportunity for a number of major new design wins should our customers be selected.
There are a handful of programs that we believe will be important to restoring and growing Mercury's enterprise value on behalf of our shareholders. Among these programs are AMDR, the next generation Aegis radar replacement, SEWIP Block 3, F-16 radar modernization and updates, the E2D Hawkeye and the U.S.
Army Patriot on top of our existing programs which is Aegis and SEWIP Block 2. These have the potential to be a franchise set of programs for Mercury and the recent developments have been very encouraging.
As I mentioned earlier, at the end of Q4, we received an initial order for the U.S. Army Patriot that could lead to a much larger order late this fiscal year.
Just last week, Lockheed Martin awarded the F-16 AESA radar modernization and upgrade contract for the U.S. Air Force and Taiwan to our customer Northrop.
This win along with future FMS proceeds by our customers could be worth $90 million to $125 million to Mercury over time. Looking forward, a decision on AMDR could be made within the next 90 days while SEWIP Block 3 could be decided by the end of calendar 2013.
These are all exciting opportunities for Mercury that in aggregate could represent hundreds of millions in revenue potential over the life of the programs. We are in this favorable position as a result of two factors, first is the product portfolio refreshing the acquisition strategy that we have implemented over the past five years, second is the fact that we have been able to successfully position Mercury as the premier commercial ISR and EW subsystem outsourcing partner to the defense primes.
We believe these strategies have created significant intrinsic value in our business despite the chaotic industry environment. Over the longer term, the price will undoubtedly face greater pressure to outsource to companies like Mercury as they continue to reduce their engineering workforce and lower their own R&D spending.
We believe that Mercury is well-positioned to capture significant share of this potential opportunity. In the meantime, we continue to manage the business through a conservative revenue and income statement forecast.
We remain focused on execution in the areas that are within our control and managing with an eye on maximising our cash and continue to build backlog. At the same time, we have ensured that we have sufficient liquidity and financial flexibility not only to manage the ongoing needs of the business but also for future M&A purposes when visibility and conditions in our end markets are more favorable.
We're confident that given our focus on cash management and recent expense reductions, the industry's ultimate recovery will generate substantial operating leverage in our business. We believe this will lead to a significant improvement in Mercury's profitability, cash flow generation, and enterprise value over time.
With that, I'd like to turn the call over to Kevin. Kevin?
Kevin M. Bisson
Thank you, Mark, and good afternoon again everyone. Turning to our financial results, revenue for the fourth quarter of fiscal 2013 of $55.4 million was $1.3 million higher sequentially than revenue of $54.1 million for the third quarter and exceeded our stated guidance of $48 million to $54 million.
The Company incurred a GAAP net loss of $0.07 per share in the fourth quarter compared to GAAP earnings of $0.03 per diluted share in the third quarter of fiscal 2013. As noted previously, third quarter earnings benefited from the retroactive reinstatement of the federal research and development tax credits that contributed $0.05 per share in earnings for the third quarter.
In addition, included in the loss for the fourth quarter were restructuring charges that contributed approximately $0.03 per share to the quarter's net loss. Adjusted EBITDA for the fourth quarter of fiscal 2013 of $3.8 million was lower than the $5.2 million of adjusted EBITDA for the third-quarter but exceeded our stated guidance of $100,000 to $3 million for the quarter.
The Company generated free cash flow of $3.2 million in the fourth quarter which was $2 million higher than the third quarter. The Company ended the fiscal year with $39.1 million of cash and cash equivalents and with no debt.
Reviewing the fourth quarter performance in greater detail, total revenue for our largest segment, Mercury Commercial Electronics or MCE, was $45.1 million which was $1.1 million higher than the $44 million of MCE revenue generated in the third quarter but $3.8 million lower than the fourth quarter of fiscal 2012. The sequential increase in MCE revenue derived from higher B-1 bomber program shipments and increased commercial revenue from a telecommunications equipment customer that were partially offset by lower F-15 Digital Electronic Warfare Suite or DEWS program revenue.
It should also be noted that the strong level of Aegis and SEWIP shipments in the third quarter continued as well in the fourth quarter. The fourth quarter year-over-year decrease in revenue was due primarily to lower Patriot and UAV related program revenue that were partially offset by higher SEWIP program revenue and the inclusion of revenue from Micronetics following that acquisition in early fiscal 2013.
Revenue from the Company's Mercury Defense and Intelligence Systems or MDIS segment for the fourth quarter was $13.2 million which was slightly higher than the $13 million of MDIS revenue in the third quarter but $2.8 million lower than the fourth quarter of last year. The year-over-year decrease in MDIS revenue was primarily due to lower revenue from the Gorgon Stare program.
It should be noted that operating segment revenue for the fourth quarter of fiscal 2013 does not include adjustments to eliminate $2.8 million of inter-Company revenue. Total defense revenue including MCE and MDIS for the fourth quarter of $49.6 million was slightly higher than the $49.4 million in the third quarter but $7.3 million lower than the fourth quarter of fiscal 2012.
The decline in year-over-year defense revenue was mentioned previously derived from lower Patriot and UAV related program revenue including Gorgon Stare that were partially offset by the illusion of Micronetics revenue. Of the total defense revenue in the fourth quarter, $15 million or 30% derived from international customers compared to $8.1 million or 16% in the third quarter and $16.1 million or 28% for the fourth quarter of fiscal 2012.
The revenue from international customers includes foreign military sales through our prime customers as well as direct sales to non-U.S. based customers.
Commercial revenue for the fourth quarter of $5.8 million was $1.1 million higher than the third quarter and $1.9 million higher than the fourth quarter of fiscal 2012. The sequential increase in commercial revenue was mainly due to higher product shipments to a telecommunications equipment customer for product that was designated as and of life.
The fourth quarter year-over-year increase in commercial revenues stemmed largely from the inclusion of Micronetics commercial revenue in the fourth quarter of fiscal 2013. Defense bookings for the fourth quarter of $58 million were $14.2 million or 32% higher than the $43.8 million of defense bookings in the third quarter and $2.5 million higher than the $55.5 million of defense bookings in the fourth quarter of fiscal 2012.
As Mark mentioned earlier, the substantial increase in the sequential defense bookings was due mainly to higher bookings from the Aegis and SEWIP programs as well as increased bookings from the suite of integrated RF countermeasures or SIRFC electronic warfare program. Compared to the previous year's fourth quarter, the increase in defense bookings stemmed from higher Aegis and SEWIP program bookings and the inclusion of Micronetics that were partially offset by lower MDIS bookings.
Mercury's total book to bill ratio for the fourth quarter of fiscal 2013 was 1.2 which exceeded the 0.9 book to bill ratio in the third quarter and 1.0 book to bill ratio in the fourth quarter of fiscal 2012. Defense book to bill of 1.2 for the fourth quarter was similarly above the 0.9 and the 1.0 defense book to bill ratios for the third quarter fiscal 2013 and fourth quarter fiscal 2012 respectively.
It should be noted that the Company's total book to bill for fiscal 2013 was 1.1. The Company ended fiscal 2013 with record total backlog of $140.3 million which was $12.6 million or 10% higher than the third quarter and $35.7 million or 34% higher than total backlog at the end of fiscal 2012.
Of the total ending backlog at the end of fiscal 2013, $113.2 million or 81% is expected to be shipped within the next 12 months. $117.2 million or 84% of the ending fourth quarter backlog related to defense which was $8.5 million higher sequentially from the third quarter and $15.8 million or 15% higher than the defense backlog at the end of fiscal 2012.
From a bottom-line perspective, the Company incurred a GAAP net loss of $2 million in the fourth quarter compared to GAAP earnings of $800,000 in the third quarter. As we noted in last quarter's earnings call, third quarter results were favorably impacted by the retroactive reinstatement of the federal research and development tax credit that contributed $1.4 million or $0.05 per share in earnings for the third quarter.
In addition, during the fourth quarter the Company incurred $1.6 million of restructuring charges, approximately $1 million net of tax, which contributed approximately $0.03 per share to the reported loss for the quarter. Absent these two items, bottom-line results between the third and the fourth quarters were largely comparable as lower gross margin in the fourth quarter due to product mix was essentially offset by a higher recurring fourth-quarter tax benefit.
As noted, the Company initiated restructuring charges totaling $1.6 million during the fourth quarter. These charges consisted of $1.1 million relating to the loss on the sale of the Company's Hudson, New Hampshire manufacturing facility with the remaining charges principally related to severance cost in connection with headcount reductions.
The loss on the building sale and the headcount reductions related primarily to the Company's decision in the fourth quarter to lease a new and larger facility in Hudson, New Hampshire. With this new advanced microelectronics center or AMC, the Company will be consolidating its existing Hudson, New Hampshire and Salem, New Hampshire facilities into the AMC later this fiscal year.
As Mark pointed out earlier, this facilities consolidation not only positions the Company to take advantage of the outsourcing of RF and microwave development and manufacturing, but is also expected to generate operational efficiencies by eliminating two smaller facilities. Once operational, we expect the AMC to generate annualized savings of $2 million compared to current operations.
On a year-over-year basis, the fourth-quarter net loss of $2 million compares to $5.7 million of earnings in the fourth quarter of fiscal 2012. Lower sales volumes and product mix related gross margin and the inclusion of Micronetics operating expenses in the fourth quarter of fiscal 2013 were partially offset by nearly $5 million of lower base operating expenses resulting from the benefits of the restructuring actions taken in early fiscal 2013.
It should also be noted that the fourth quarter of fiscal 2012 included a $4.9 million pre-tax benefit in connection with the reversal of the [indiscernible] related earn-out liability in connection with the LNX acquisition. Adjusted EBITDA of $3.8 million for the fourth quarter of fiscal 2013 was $1.4 million lower than the $5.2 million of adjusted EBITDA in the third quarter and $5.5 million lower than the $9.3 million of adjusted EBITDA in the fourth quarter of fiscal 2012.
Relative to our stated financial guidance for the fourth quarter, we are pleased to report that the Company was at or above the high end of its guidance in all key financial measures. Fourth quarter revenue of $55.4 million exceeded our guidance of revenue between $48 million and $54 million.
Reported loss per share of $0.07 for the fourth quarter inclusive of un-forecasted restructuring charges of approximately $0.03 per share was at the favorable end of our guidance of a loss between $0.07 and $0.13 per share. Excluding the restructuring charges, the Company's fourth quarter loss was favorable to our guidance range.
Finally, adjusted EBITDA of $3.8 million for the fourth quarter easily exceeded guidance of $100,000 to $3 million. Turning now to the balance sheet, the Company ended fiscal 2013 with cash and cash equivalents of $39.1 million and no debt which was $4 million higher than the third quarter's cash and cash equivalents of $35.1 million.
The Company generated $3.2 million of free cash flow during the fourth quarter as $4.8 million of operating cash flow driven by cash earnings and improved working capital was partially offset by $1.6 million of capital expenditures. Reflecting on the Company's full-year fiscal 2013 financial performance, the industry headwinds we encountered a year ago had a dramatic impact on our top line and margin performance compared to fiscal 2012.
Revenue for all of fiscal 2013 was $208.8 million which was 15% lower than fiscal 2012. With the year-over-year decline in revenue cushioned somewhat by the Micronetics acquisition, the more significant revenue decrease in our organic MCE business caused this sizable gross margin decline between years.
As Mike noted, the Company met these industry headwinds head on with restructuring actions that reduced the Company's annualized operating expenses by approximately $25 million. More importantly, these expense reductions combined with efficient working capital management resulted in a modest $3 million decline in the Company's cash position excluding the Micronetics acquisition from the beginning of fiscal 2013.
Considering the significant revenue and margin decline between years, we view this preservation of liquidity to be a substantial accomplishment during fiscal 2013. In addition, despite the year-over-year revenue decline in fiscal 2013, total bookings of $220.6 million for the year were down only 4% from fiscal 2012 resulting in a book to bill ratio of 1.1 for all of fiscal 2013.
This bookings performance allowed the Company to end fiscal 2013 with a record backlog of $140.3 million which was 34% higher than the backlog at the end of fiscal 2012. Combined with the recovery in the organic MCE business in last year's second half, the Company enters fiscal 2014 in a much stronger position than a year ago.
Now turning to the first-quarter fiscal 2014 guidance, while the Company saw a market improvement in the defense industry environment and hence its overall financial performance in the second half of fiscal 2013 compared to the first half, there still exists a good deal of industry uncertainty as we begin fiscal 2014. As Mark alluded to in his remarks, there is little likelihood that the DOD will have a budget appropriation time before the beginning of the government's fiscal year on October 1 resulting in the DOD operating under a continuing resolution for some period of time.
In addition, none of the proposed DOD budgets from government's fiscal year 2014 include the impact of sequestration. Finally, the detailed underlying the Secretary of Defense's Strategic Choices and Management Review have not been publicized.
With this environment as a backdrop, the Company continues to believe that the prudent course of action is to continue managing the business conservatively meeting forecasted revenue primarily from backlog in order to minimize the buildup of working capital and ultimately preserve liquidity. As such, we are continuing to practice from the last several quarters of providing only quarterly financial guidance.
With that in mind, for the first quarter of fiscal 2014, we are forecasting total revenues to be in the range of $48 million to $54 million which is comparable with the last two quarters. The estimated revenue range for the quarter is highly dependent on the customer controlled timing of previously booked Aegis shipments this quarter.
The high end of the revenue range assumes shipment of most of the Aegis product while the low end of the range assumes none is shipped. Consistent with prior quarters, we expect the split of first-quarter revenue to be approximately 90% defense and 10% commercial.
Within our stated revenue guidance, we are projecting gross margin to be in the range of 40% to 41% which is in line with gross margin in the fourth quarter of last year. Operating expenses are forecasted to be $27 million for the first-quarter which is higher than the fourth quarter of fiscal 2013 due primarily to lower customer funded research and development expenses and higher non-cash stock compensation expense.
From a bottom-line perspective, we anticipate a GAAP loss per share in the range of $0.08 to $0.14 for the first-quarter based on an estimated weighted average share count of 30.7 million shares. The loss per share forecast assumes an income tax benefit of approximately 40% for the first quarter.
The loss per share range forecasted for the first quarter also includes an approximate $0.04 per share impact from the amortization of intangible assets. Adjusted EBITDA for the first quarter is estimated to be between $100,000 and $3.2 million which is comparable to the forecasted range the Company provided for last year's fourth quarter.
Relative to liquidity, we anticipate ending the first quarter with cash and cash equivalents flat to slightly higher than the $39.1 million at the end of fiscal 2013. Operating cash flow generated from cash earnings and lower net working capital is anticipated to be offset by a higher level of capital expenditures than previous quarters due to the built out and equipment purchases related to the new Hudson New Hampshire facility.
With that, we'll be happy to take your questions. Kate, you can proceed with the Q&A now.
Operator
(Operator Instructions) Our first question comes from the line of Tyler Hojo with Sidoti and Company. Your line is open.
Tyler Hojo - Sidoti and Company
Just first question just in regards to the guidance, I get the – continuing along the line of just basically guiding based on what's in backlog but just in regards to kind of book and ship sort of expectations, what are you currently anticipating, something similar to what you did in Q4, how do we think about that?
Mark Aslett
So I think probably the best way of answering it Tyler is really at the year level. So if you look at what we did from a book and ship perspective, total Company, we ended up FY '13 on average it was approximately 20% of revenue versus slightly over 30% in FY '12, and so I think that trend is likely going to continue going forward.
It could change obviously on a third quarter basis but on average that's a good number.
Tyler Hojo - Sidoti and Company
Okay, that's very helpful. And then, Mark, just in regards to further restructuring spend in fiscal '14, is there anything planned, and the follow-on to that is, I know one of the reasons why you felt confident in terms of taking the knife to cost as aggressively as you did is because you just went through a product refresh, where do we stand, at what point are you going to need to kind of reinvest in a new product suite?
Mark Aslett
Sure. So there are no other planned restructurings at this time.
The small restructuring that we did in the fourth quarter, as I alluded to and Kevin alluded to in his prepared remarks, was very much due to the continued integration of the Micronetics acquisition. Specifically we had overlapping facilities and some overlapping personnel in New Hampshire that in essence we restructured in the fourth quarter.
So I don't foresee any additional restructuring actions. We clearly are looking to continue to look for synergies in the business but nothing specific at this time.
As it relates to R&D, I think if you look at the R&D numbers, it is up slightly on a quarter over quarter basis. Most of that is due to the fact that we've got lower customer funded nonrecurring engineering expenses in the first quarter.
This is very much driven by Gorgon Stare. We feel that the investments that we are making are appropriate given the opportunities that we see, and so I wouldn't foresee any significant change at this time.
Tyler Hojo - Sidoti and Company
Okay, wonderful. And just lastly for me, I know the commercial business isn't very large these days but if you look at the backlog, I mean it's up something like seven or eight-fold over this time last year, just wondering if there's anything notable there to talk about.
Mark Aslett
So I think there's a couple of things. One, as Kevin mentioned in his prepared remarks, we did have an end of life order associated with a telecommunications customer.
However, we also added commercial revenue largely on the RF component side with the introduction of Micronetics. And finally, I would say that we got a specific customer in the commercial world that's doing some interesting things in homeland security and we have seen some increases in backlog associated with that.
Operator
Our next question comes from the line of Mark Jordan with Noble Financial. Your line is open.
Mark Jordan - Noble Financial
A couple of EBITDA questions, I was just wondering if you could give us the full year guidance just to what you think the stock comp expense will be and also amortization?
Kevin M. Bisson
We're not giving full-year guidance Mark on that or any other financial measures. I think we've included in the release what our expectations were for stock comp which was roughly about a little over $3 million in Q1.
Mark Jordan - Noble Financial
Alright, so that's up in essence 39% from the first quarter of last year, should we use that kind of a ratio in sort of pencilling in what might be reasonable through the balance of the quarters?
Kevin M. Bisson
That makes the assumption that there aren't any changes in headcounts and [forfeit] (ph) rates and things like that but I think that's probably being somewhat conservative from that standpoint.
Mark Jordan - Noble Financial
Now, notably in the K but could you give the full year amortization assumption?
Kevin M. Bisson
Relative to what, stock comp?
Mark Jordan - Noble Financial
No, amortization of purchased intangibles.
Kevin M. Bisson
I think you can take what we have in our Q1 assumptions and annualize that, that's as good a comment.
Mark Aslett
Mark, just a clarification question, are you talking for FY 13 or the year past or FY 14?
Mark Jordan - Noble Financial
I was talking for FY 14, again the amortization, that number will be in the K for the full year but just wondering if it was available. My final question relative to AMDR, is that program as we move forward will that be for basically new builds or will there be any opportunity to retrofit that system on existing platforms?
Mark Aslett
So it's a good question. I think if you look at the [indiscernible] report, currently it is scheduled that there's going to be 22 AMDRs, I mean it starts with the Flight III Arleigh Burke that are going to be introduced in FY '16.
However, I think our customer does believe that there's going to be the potential of significant retrofits as well as maybe some incremental opportunities also, Mark.
Mark Jordan - Noble Financial
Okay. [indiscernible] it's essentially for new builds but there is the opportunity for that could be integrated back to existing platforms?
Mark Aslett
Yes, I think that is our current understanding, so obviously there is lot of water that needs to go under the bridge but that's a really important program for us. I mean based upon I think our assumptions regarding the system configuration, the average selling price, the new build as well as retrofits, we think that it could be in the hundreds of millions of dollars of potential to Mercury over its lifetime.
Operator
Our next question comes from the line of Peter Arment with Sterne Agee. Your line is open.
Peter Arment - Sterne Agee
Mark you mentioned in the release that you received an initial small order for the Patriot missile system from the U.S. Army, obviously that's been out there for quite a while that there needs to be a big refresh there, can you give us some more color on how you expect the timing of that?
Mark Aslett
Sure, we did receive the initial CR which was small in nature in the fourth quarter and we believe this is likely going to be a follow-on order in Q1. However, as we look towards the back half of the year, I think that's where we are currently anticipating a much larger order to occur, and again, it's kind of linked to the U.S.
Army Patriot missile system upgrade. So this could be where we start to see increased bookings for the program overall.
I think we talked about on the last call it's down significantly year-over-year, in fact we booked and recognized less than $1 million of Patriot in fiscal 2013 versus the $14 million that we recognized in revenue in the prior year. So we are anticipating that Patriot comes back in this fiscal year but it's probably going to be more towards the back half of the year.
Kevin M. Bisson
And Peter to add to that, there was a sizable opportunity from an FMS standpoint for Patriot as well, I think Raytheon has been very forthright in terms of talking about those opportunities at their recent earnings calls.
Peter Arment - Sterne Agee
Right, I understand. But it also I guess ties into my next question, you said Mark I think it was 30% or maybe Kevin you did, 30% is international, is that correct?
Mark Aslett
Yes.
Peter Arment - Sterne Agee
And I assume Patriot is in a lot of those other programs, your legacy programs, that you have done well and are part of that but are you seeing – what kind of opportunities you're seeing further to see that percentage increase?
Mark Aslett
So I mean clearly one of them is the F-16 program that we talked about in the past and we were thrilled that just last week Lockheed Martin selected our customer Northrop Grumman as part of the upgrade, not only the U.S. Air Force's F-16 AESA radar or to upgrade the radar to an F-16 on AESA, but also for Taiwan.
So we definitely see opportunities around the world associated with that. One of the big programs that we acquired then we did the acquisition of Micronetics is associated with EW upgrades on the F-15 platform, Patriots that we mentioned, and we're also seeing more opportunities now associated with FMS sales for Aegis.
So we've got a number of important programs that we think are just going to continue to give us the strong base of business from the international markets.
Peter Arment - Sterne Agee
And just lastly, you mentioned that there were some examples where the integration was going well, Micronetics never kind of exceeding expectations, can you just give a little more color there Mark?
Mark Aslett
Sure. I think probably the one that we're most excited about is the SEWIP program and SEWIP as you know Block 2, we've been involved with that for some time.
In November 09, the Navy competitively awarded the SEWIP Block 2 upgrade to Lockheed to upgrade the Slick-32s, and I think we've built a great relationship with Lockheed and they really have become an important partner in the RF and microwave dimension. I think we are continuing to win more content on that program and I think based upon the configuration, the potential for future design wins, are largely linked to Micronetics, set those price, et cetera, we believe that's another program that is worth in the hundreds of millions of dollars to Mercury over its lifetime.
Then even beyond that, clearly there's the SEWIP Block 3 and Raytheon has teamed with Lockheed and we believe that's a very, very strong team to beat and we've recently been selected as really a teammate to both of those companies largely in the RF and the microwave domain. So there's a lot of opportunity and I think that's really a great example of our relationships in our channel and Micronetics' technologies and capabilities.
Kevin M. Bisson
Peter I would add as well from a financial standpoint, bookings this quarter for Micronetics went up over 50% sequentially from the third quarter, and from a bottom-line perspective, their adjusted EBITDA is well ahead of our target business model of 18% to 22%. So, to top off what Mark pointed out from a business and an operational standpoint, they continue to perform very, very well financially.
Operator
Our next question comes from the line of Sheila Kahyaoglu with Jeffries. Your line is open.
Sheila Kahyaoglu - Jeffries
Can you talk what the organic growth rate was in the quarter year-over-year?
Mark Aslett
Are you talking about the MCE core business?
Sheila Kahyaoglu - Jeffries
Yes, for the total Company, ex Micronetics, what revenue was in the quarter?
Mark Aslett
I'm not sure that's actually a metric that we've got at hand, I know that the revenue growth rate is the MCE core compute business which is the one that we talked about historically, revenue growth was basically 2% up on a sequential basis, and then total bookings were up 35% sequentially, all of the business. So that's the core compute part of the business excluding the acquisition of Micronetics.
Sheila Kahyaoglu - Jeffries
So this is for revenue was up 2% sequentially?
Mark Aslett
Revenue is up 2% sequentially and bookings excluding Micronetics were up 35% sequentially.
Sheila Kahyaoglu - Jeffries
Okay. And then in terms of just given your current bookings run rate, when do you expect the organic growth to on a year-over-year basis become positive or can you give us some idea there, I know you're guiding on a quarterly basis?
Mark Aslett
Yes, we're really just sticking with the quarterly guidance, Sheila.
Sheila Kahyaoglu - Jeffries
Sure. And then on SABR, you mentioned overall it's $90 million to $120 million opportunity for Mercury, does that mean that your content is about 150,000, does that sound right?
Mark Aslett
No, because a lot depends upon your assumptions around the configuration as well as the number of both U.S. systems and Taiwanese systems that's going to be upgraded, and also the potential for future FMS awards.
So, we haven't been specific regarding the ASP of the system, but we believe over time, the F-16 SABR opportunity could be worth approximately $90 million to $125 million to us.
Sheila Kahyaoglu - Jeffries
Okay, and then I guess when do you expect that business to start contributing to the top line?
Mark Aslett
So it's a little too early to tell. I mean we are still working the contract, we could see some initial bookings towards the back end of the year but I don't think it's going to be kind of in the first half, let's put it that way.
Operator
Our next question comes from the line of Jonathan Ho with William Blair. Your line is open.
Jonathan Ho with William Blair
Just wondered first of all with Aegis Block 2, when do you expect to go in full rate production and how big of a ramp is that from sort of the low rate initial production?
Mark Aslett
At the SEWIP Block 2?
Jonathan Ho with William Blair
Aegis Block 2.
Mark Aslett
So there is no Aegis Block 2 beside as AMDR, is that the program you're talking about?
Jonathan Ho with William Blair
I think there was something mentioned about Block 2 initial production swinging forward.
Mark Aslett
That's SEWIP. So I think full rate production is actually not for another couple of years.
So I think we are anticipating additional bookings and revenue this year that I think there's the potential to see maybe some full rate production bookings in the latter half of fiscal '14, although at this point in the year it's still a little too early to tell.
Jonathan Ho with William Blair
Got it. And just in terms of the significant improvement in backlog, I just wanted to get a sense from you in terms of how this impacts your visibility and your ability to plan out for 2014?
I mean this has sort of increased your comfortability level or do you feel like we should just sort of maintain the current stance in terms of visibility for the remainder of the year?
Mark Aslett
Yes, we're still taking a pretty conservative approach, Jonathan, again largely due to what's going from a macro perspective. The budget situation is such that the [indiscernible] in the present who got very, very desperate numbers and there is a tremendous amount of work I think that needs to be done in a relatively short space of time to end up with an approved defense appropriations bill.
So I think we set out in fiscal '13 to really preserve liquidity given the industry environment, and I think we clearly achieved that. We also set out to actually grow the backlog to help lower the risk on a quarter by quarter basis and I think the fact that we actually grew backlog by 34% is also I think a testament to the team's efforts.
But in the short term, we're kind of taking it still from a conservative perspective just given the overall environment.
Jonathan Ho with William Blair
Got it. And just finally, is there any way that you can provide a sense of the linearity for revenue this year, I mean should we just sort of assume it's similar to prior years or is there any sort of inflection points that you think it could be up or down?
Mark Aslett
Yes, I think we are really just going to stick with that one quarter at a time guidance, Jonathan.
Operator
(Operator Instructions) Our next question comes from the line of Michael Ciarmoli with KeyBanc Capital. Your line is open.
Michael Ciarmoli - KeyBanc Capital
Just to maybe elaborate you mentioned the goal of increasing the bookings and backlog, what sort of targets or plans do you have for fiscal '14, can we assume that you are going to try and build the backlog again this year or do you have any bookings expectations that you could share with us?
Mark Aslett
Not specifically, Mike, at the year levels, because again we're really only focused on providing guidance on a quarterly basis. I can tell you that as we talk about it, there are certain programs that are going to be decided within our fiscal '14 timeframe that are very important, probably the largest of which is the AMDR program and a decision on that could be made within the next 90 days.
That could have an impact, materially large impact on our bookings to the upside should Lockheed be selected. There's also, as I mentioned earlier, upside potential on programs such as Patriot with the U.S.
Army, we've got the first part of that large award which will come in, we think there's upside potential on SEWIP, but again I think most of these are towards the back end of the year, and so currently the way which we are viewing it is this could be where growing bookings and backlog but it may not all drop through from a revenue perspective given the timing.
Michael Ciarmoli - KeyBanc Capital
Okay, fair enough. And then what's usually your timeframe, you get design wins, how long are those usually converted into orders, I know obviously the contracting environment is a mess right now, but do you have any new design wins or recent design wins that are factoring into sort of your bookings plan?
Mark Aslett
We do, but I don't think those are major drivers, I think the major drivers are the ones that we just talked about, so we are obviously extremely pleased that Northrop was selected on SABR program was selected for the U.S. Air Force upgrades as well as Taiwan.
We've talked about the incumbents really having an advantage in this environment, it's really been a key part of our strategy to invest in capabilities ahead of time and to align ourselves really with industry leaders who have got a very, very strong incumbent position on programs, and really on platforms that matter going forward and we think the case of F-16 and the case of Patriot and the case of AMDR, they are all great examples of us being able to do that. So I think that FY '14 is going to be a year where some of these really important programs are selected and hopefully we are on the winning side of the equation.
Michael Ciarmoli - KeyBanc Capital
Okay. And then just on any meaningful cancellations or delays, I know the space has been kind of in the crosshairs but anything else in the portfolio that's given you guys an elevated level of concern?
Mark Aslett
In [indiscernible] we've heard the rumors that it may be delayed. We care working with a couple of different companies on that, so I wouldn't say it's really material to our growth plans, it's not one of the five programs that we keep talking about, meaning AMDR, Patriot, F-16 upgrades, E2D, et cetera, so it's really not in that category.
The one where we are anticipating I think declines year-over-year is really on the Gorgon Stare program and we kind of mentioned that in our prepared remarks. It was interesting during the FY '14 markup of the defense appropriations bill, the future funding for GS got lined out and then it got reinstituted, largely because Congress was basically saying that it's the only wide area in motion imagery program that's out there and you will kind of come into the end of the development of that, and we feel that once the program or the capability is deployed in [theater] (ph) then we may see some additional bookings and revenue this fiscal year but it's probably going to be the lower level than what it was in fiscal 2013.
Operator
Mr. Aslett, it appears there are no further questions, therefore I'd like to turn the call back over to you for any closing remarks.
Mark Aslett
Okay, thanks very much for dialling in and listening to the call. We look forward to speaking to you again next quarter.
Thanks.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.
Everyone have a great day.