Q3 2020 Earnings Call

I'd also like to mention that in addition to reporting Financial results in accordance with generally accepted accounting principles or gaap during our call. We will also discuss several non-gaap Financial officers specifically adjusted income adjusted earnings-per-share adjusted ebitda free cash flow organic revenue and acquired Revenue a Reconciliation of these non-gaap metrics is included as an appendix to this a slide presentation, and in the earnings, press release on now turn the call over to Mercury's president and CEO Mark as well. Please turn to slide three

Thanks, Mike. Good afternoon.

Everyone and thanks for joining us. We hope you and your family is staying safe and healthy.

I'll begin today's call with the business update. Mike will review the financials and guidance and then we'll open it up for your questions. First. I'd like to say thank you to all the courageous healthcare workers on the front lines of fighting this pandemic our thoughts and prayers go out to all of them at this very difficult time.

Second. I like to express How Deeply thankful. We are to our employees. They're incredible resolve in the sheer. Will they've demonstrated in overcoming the challenges that were facing off like we roast these challenges very early on well before the coronavirus was declared a pandemic. We stood up a covert crisis team and defined three goals to guide our decisions and actions.

Number one was to protect the health safety and livelihoods of our employees second reduce and mitigate operational and financial risks in the business and third continue to deliver documents to both our customers and shareholders. Finally when the defense industrial base became designated essential. We added a fourth goal, which is to continue the mission critical Mercury. Every day to support the ongoing security of our nation.

We've used these goals along with our purpose culture and values. Is it touched down for setting our priorities as we transitioned our operating model to a daily crisis mode?

I think just made an enormous difference to our speed in communicating and taking action and then how effectively reduced and mitigated risk to our employees and to the business.

Mid-march Mercury was classified as critical infrastructure as defined by the Department of Homeland Security. This Exempted after us facilities from local state and federal stay-at-home Mondays.

Before that. However, we were impacted mainly in California by temporary shutdowns at some of our manufacturing sites. These closures would do to stay at home orders that buried from County to county jail.

What was my previous designated as an essential business? It's a national and state-level. We resume normal operations at those sites. Meanwhile everyone in the company who stood began working from home. And at the same time, we adjusted workplace conditions significantly for everyone else to create physical distancing and make things safer inside of our facilities.

Change the slide full all that was going on. We still ended up delivering a very strong quarter with record bookings record backlog 41.2 book-to-bill and 11% of Garlic Rose versus a strong Q3 last year total revenue net income adjusted ebitda EPs and adjusted EPS came in above the high end of our guidance office with all hitting new records for the quarter.

It was also a

Very strong quarter in terms of new design wins and free-cash-flow. So all-in-all an outstanding effort by the entire team

Looking ahead. We're aware of the risks that we Face especially around the supply chain or manufacturing facilities and hiring.

We Believe mercury has the strength and liquidity to enter a range of possible downside scenarios, we feel good about our strategy and the plans we have in place as well as our continued to build wage execute

Moving to slide five we've truly leaned in to take care of those employees who we deem to be most vulnerable is this crisis developed the feedback we received has been amazing and I'm very proud of what we've been able to do for our people.

Talk to you on the highlights. We continue to pay hourly employees working in our California sites that will shut down temporarily will do the same with other facilities that may be impacted as the prices continues.

We've increased overtime pay two times the regular rate and enhanced are sick leave policy.

In addition, we create a $1000000 emergency relief fund which will increase if need be.

Through this phone we made immediate payments to our hourly employees experiencing Financial burdens and hardship. We also gave manager's discretion to approve additional amount is necessary off these payments. We've learned met two kinds of needs initially. They helped out low-paid employees stock up on food and supplies as well as deal with other issues related to stay at home more recently. Although Mercury's employees are still gainfully employed many family members have lost their jobs creating a second wave of financial burden in worrying about the relief fund is now helping to buffer this secondary Financial impact while he wait for unemployment insurance and other Federal programs to kick in

Lucas purpose culture and values and not only about delivering results with customers and shareholders, but about helping and caring for one another.

The fiscal year revenue and adjusted ebitda guidance. We're providing today, which is unchanged from our previous guidance on the top-end reflects our confidence and Mercury's business as well as the resolve of our employees to overcome the challenges that may lie ahead.

Is Michael discuss in detail we expect the fourth quarter to include another year of double-digit growth in revenue and adjusted ebitda, including thirteen to fourteen percent. Organic Revenue agent.

Trying to slide six the new business conditions remain robust. The coronavirus is not diminished the threat environment and our nation's defense priorities have not changed.

Looking forward we don't expect the covid-19 has to have a near-term material impact on defense spending.

Majority of my trees business is Mission critical to our customers and end-users which are largely based we maintaining a dialogue with them and our engineering and operations teams are working hard to deliver on our commitments.

That said the code did have some impacts in Q3. We saw some slowdowns as customers began transitioning to work from home this result of in some brief delays in order approvals and Order flow the industry-wide suspension of travel affected new business activity as well since then we've seen these issues improve. Somewhat is everyone has become more attuned to working remotely against this backdrop Mercury performed very well on the top line in Q3. We continue to believe that we're targeting and participating in the wrong parts of the market the wave of modernization occurring in radar ew in see fi continues to drive growth in the business.

Bonded Weapons Systems space it'd be all X processing and Mission Computing as well as secure rocket service remains healthy.

Latrice strong bookings and design with activity in Q3 continue to be driven by the three major trends that we discussed in the past Supply Chain delayering by the government and the primes the pricing of the quality suppliers and the increased Outsourcing by our customers at the subsystem level.

He is now. We've invested enough people across the seas Technologies and trusted domestic manufacturing to support the continued organic growth in the business these Investments proving that worth now going forward. We we believe that there will be even more important given our national dependence on foreign Supply chains and Manufacturing.

We continue to deliver our products and services to our customers and the fundamentals that drive growth and our business have not changed.

We've been closely monitoring our supply chain, which is predominantly US based during Q3. We made some forward inventory buys and pre-ordered raw materials to mitigate risk in both short as well as the midterm thus far however, the pandemics impact on our supply chain suppliers has been relatively low.

The key supply chain issues that we're facing a two-fold. The first is this suppliers may be financially vulnerable this applies more. So to those suppliers that are heavily exposed to Asian. Martial Aerospace sector is you know, commercial Aerospace has been significantly more impacted by covid-19 defense.

The other major supply chain risk is the potential for covid-19 manufacturing disruptions that is temporary shutdowns that could affect the supply of us Source components. Mm.

We're also facing other operational risks the first being the potential for covid-19 disruptions within Mercury's own manufacturing facilities.

Closely monitoring the time to Peak infection and the effects the social distancing is happening in flattening the curve in communities around our manufacturing sites. We've done a tremendous amount of to communicate with and educate employees as well as to increase physical distancing and reduce the risk an event occurring inside one of our facilities that said this dog does remain elevated.

The other wrist relates to the hiring of new Talent Although our time to hire in metric is not changed that much our ability to hire in a timely manner could be affected if the covid-19 pack in use for a prolonged period of time.

The outcomes are hard to determine right now, but based upon the planning and the scenarios that we run the overachieving in Q3 and Mercury's record third-quarter backlog. We currently feel good about our ability to deliver against the goals and objectives. We set the fiscal twenty.

Is that light on slide seven? We're optimistic about Mercury's opportunities for continued growth driven by the trends. I just discussed at this stage. We have not changed our long-term Baseline forecast for low single-digit growth in overall defense spending that said, there are two risk factors to consider. What is the potential for a prolonged CR in government? Fiscal 12/31 related to the election. The second is that is we continue to see massive fiscal stimulus the potential for those dollars to crowd out discretionary spending increase in defense exists over the long term.

While recognizing these uncertainties, we're still focused on the goal of delivering organic Revenue growth at a rate that far exceeds the industry average and we have the balance sheet strength to supplement this organ with m&a.

From Lemonade perspective will continue to focus on the sensor in effect in mission systems and see fly markets looking for deals that are strategically aligned and have the potential to be accretive in both the issue long-term.

Not said the M&M Market is effectively shut right now given the charges Associated determining asset values pricing risk and conducting forecast diligence wage. You get through the crisis. We anticipate seeing more opportunities than before.

Certain companies may be motivated to sell in this environment. They're look for a partner that's fiscally sound as a great culture and values. There's done the right things for employees and has continued to do with other customers and shareholders. We're one of those companies.

As in the employer an acquirer of choice We Believe Mercury will emerge from this crisis stronger than before and we were already very strong. Our balance sheet is down. The business is performing well, and we've got an exceptionally talented and dedicated Workforce.

Activity resumes and we believe it will will be in a strong position to continue to execute on our strategy namely to deliver a strong margins while growing the business organically home and supplementing that organic growth with disciplined m&a and full integration.

We believe this drives you will continue to generate significant value for our shareholders over the long-term is we execute our plans in five areas.

First to grow our revenues organically it high single too low double-digits averaging 10% over time and to supplement this high level of organic growth with acquisitions.

The second is to invest in new technologies of facilities manufacturing assets and Business Systems as well as continuing to invest in our people.

That is manufacturing in sourcing as well as driving strong operating performance across our manufacturing locations.

For we're seeking to grow revenues faster than operating expenses. This will allow us to continue investing in organic growth while maintaining strong operating leverage in the business office. Finally. We're fully integrating the businesses. We acquire to generate cost and revenue synergies these synergies combined with other areas of the plan should produce a track returns rough shareholders.

This strategy has worked very well for mercury over the past five years given our ability to execute we're confident that mercury will extend this record of success.

We have a clear picture of where we think the risks are greatest. We've been diligent in working to reduce and mitigate those risks and we're committed to doing everything that we can to finish the job with a strong fourth-quarter without I'd like to turn the call over to Mike Mike. Thank you Mark and good afternoon. Again everyone. I'll begin by echoing Mark's comments and extending my appreciation to our employees for the outstanding work. They did this quarter thanks to their efforts. We were able to leverage Mercury strong financial position to adapt to the new environment and deliver record results in Q3.

As Mark said we acted quickly to protect the health safety and livelihoods of our employees. We work to reduce and mitigate both supply chain and Manufacturing risk. We continue to fulfill our commitments to our customers in order to support our customers. We accelerated some of our product deliveries during the quarter helping them de-risk their businesses. We also acted quickly to identify and assess potential covid-19 impacts on our financial position early on the biggest risk. We saw was the potential for multiple site closures for an extended period of time as a result of government stay-at-home orders that were being implemented.

in response

We ran various scenarios looking at the impact of prolonged shutdowns on our cash flow.

We entered Q3 with an extremely robust capital structure with over $900 million of liquidity between cash on hand and our unfunded 750 million revolver in all the scenarios We examined including potential closure of our manufacturing company-wide. We determine that mercury would have ample liquidity to continue to fund the business for an extended period of time since we've been designated as an essential business extended shutdowns of our facilities as a result of government orders have not occurred nor do we think they are likely to Iraq.

Overall, we believe we are well-positioned to continue to execute our strategy while simultaneously managing risk related to covid-19 while this risk does remain elevated. We are maintaining the top end of our previous guidance for the fiscal year and raising the bottom end. Now that we are in the fourth quarter, I'll provide more detail around our guidance later in the presentation. I'm turning now to slide 8 and our third quarter results total bookings for Q3 increased 32% year-over-year to a record $250 million driving at one point two book-to-bill ratio as Mark mentioned we did see some covid-19 impact as our customers transitioned to working from home, but those issues did not have a material impact on our bookings or ending backlog in Q3 and so far in Q4. We've not seen a Slowdown in new business activity as a result of the ongoing Panthers.

In Q3 Revenue increased 19% year-over-year to a record $200 million exceeding the top end of our guidance of $190 to $200 off. This outperformance was primarily driven by timing of Revenue including the early customer deliveries that I mentioned organic Revenue was up 11% in Q3 off and we currently expect organic growth of Thirteen to fourteen percent for the full fiscal year. Assuming no material impact as a result of covid-19.

Adjusted ebitda for Q3 increased 21% year-over-year to a record 47.1 million this exceeded our guidance of forty-two to forty-four million thoughts in primarily by higher Revenue as well as higher gross margin due to program mix and increased manufacturing throughput adjusted ebitda margin was 22.6% for the office this Compares with our guidance of 22.1% again, reflecting program mix and increased throughput in Q3. We expanded our definition of adjusting to include an ad back for incremental covid-19 expenses, totaling approximately $400,000 for the quarter these costs related primarily to enhance compensation and benefits for employees. It also included incremental supplies and services to support social distancing and to maintain safe and healthy conditions inside our facility dead.

Slide nine presents Mercury's balance sheet for the last five quarters entering Q3 Mercury had cash and cash equivalents of $182 million. No debt and a 750 million unfunded revolver this gave us a great deal of flexibility as we Face potential negative Financial impacts associated with covid-19 in March the pandemic. In fact on the financial markets was uncertain and it looked like there was a chance that state and local governments could at some point close Mercury's facilities as a result. We decided to draw two hundred million from the revolver out of an abundance of caution will continue to evaluate the markets and the impact of covid-19 on our financials with an eye toward paying down the two hundred million web applications are favorable.

After tapping the revolver Mercury finished Q3 with cash and cash equivalents of 407 million. We had two hundred million of debt from the funded portion of the revolver and we still have the remaining $550 million available. So despite continued uncertainty. We remain extremely well-positioned from a liquidity standpoint.

During Q3. We also decided to advance purchase inventory in order to mitigate potential disruptions to the supply chain while materials were ordered. They were not delivered by the end of the quarter page was an immaterial impact to our inventory balance at the end of Q3. We do expect to be some impact to our Q4 inventory.

Turn into cash flow on slide. Ten free cash flow for Q3 was 19.2 million representing 41% of adjusted ebitda, which was slightly above our expectations. We saw 300,000 impact to Q3 free cash flow as a result of covid-19 expenses primarily related to the employee Relief Fund. We expect to see additional covid-19 expenses in Q4.

Capital expenditures in Q3 were ten point nine million or 5.2% of Revenue compared to eleven point three million or 5.8% last quarter Cafe took a slightly lower than we expected due to covid-19 as some equipment scheduled to be delivered in Q3 was delayed into Q4. We expect capex to increase in Q4 as wage continued to invest in the business including our custom micro-electronics build out in Phoenix. Year-to-date. Our free cash flow is a percentage of adjusted ebitda 43% off for we are expecting a lower percentage driven by increased Capital expenditures in an investment in inventory as a result of covid-19 for the year. We continue to expect free cash flow is a percentage of ebitda to be approximately 40%

Well now turn to our financial guidance starting with the full year fiscal twenty on slide eleven as we've discussed our outlook for fiscal twenty remains strong. Although remains elevated due to the uncertainties around covid-19. The full year guidance were providing assumes no major supply chain disruptions know extended shutdowns of any of our facilities and no material change in customer behaviour. None of which have occurred to date while our guidance assumes no major disruptions due to covid-19 are guiding a strange does incorporate some room for temporary disruptions in the event they were to occur.

for the

Fiscal year, we now expect revenue of $785 to $795 million representing growth of twenty to twenty 1% from fiscal. Nineteen. This is consistent with our previous guidance and reflects our outlook for thirteen to fourteen percent organic growth. Total gaap. Net income for fiscal twenty is expected to be 76.1 to 78.3 million or a dollar thirty eight to a dollar forty two per share adjusted EPS is expected to be in the range of $2 and 12 to $2.16 per share wage increase of fifteen to Seventeen percent compared to fiscal nineteen results are fiscal twenty guidance for adjusted. Ebitda is 173 to 176 million month approximately 22.1% of Revenue. This is an increase of nineteen to twenty 1% from fiscal 19.

Finally, we expect capex for fiscal twenty to be approximately six to seven percent of Revenue and free cash flow to be approximately 40% of adjusted ebitda.

I'll now turn to our fourth quarter guidance on slide 12.

This guidance reflects our outperformance in Q3 coupled with our belief that Mercury's actions in response to covid-19 have de-risked Q4 to some extent it also incorporates as I mentioned room for temporary disruptions. Should they occur during the quarter?

Doing the math based on our actual results for the first three quarters were forecasting Q4 Revenue in the range of 205.8 to 215.8 million month increase of 16 to 22% compared with Q4 last year Q4 gaap. Net income is expected to be 17.6 to 19.8 million - 32 to 36 cents per share adjusted EPS is expected to be $54 to $0.58 per share and finally adjusted ebitda for Q4 is expected to be 46.5 to 49.4 million representing approximately 22.5 to 22.9% of Revenue.

Turning to slide 13 in summary. Our record Q3 results are a testament to the phenomenal employee team. We have at Mercury We Believe Mercury's business remains aligned with fundamental Trends in our industry and our record revenue and bookings highlight that the company's strong cash flow and capital structure position as well. Not only in this time of uncertainty but also to continue to execute on our strategy meanwhile during this time of unprecedented Challenge and change the four goals that Mark outlined will continue to serve as a touchstone for our decision-making and actions and as we come out of this period of uncertainty we're confident in our ability to continue executing on our long-term value-creation strategy of margin expansion and organic growth supplemented with strategic. M&a.

with that will be happy to

Take your questions operator. You can proceed with Q&A now.

Thank you, sir. As a reminder to ask a question. You would need to press star one on your telephone to withdraw your question, please press the pound key. Please stand by while we compiled the Q&A roster.

I show our first question comes from skipping ski from Olympic Global, please go ahead. Yeah. Hi guys. Very nice Corner guys. I think that on a strong bookings in the corner. I know you talked about not having any any big problems there, but I'm wondering if you sense it all the DDX you tried to accelerate bookings in the quarter to help who just seeing them take a lot of actions to help out subcontractors. I think both from a bookings perspective and then changing, you know progress payments and obviously some of the oems have been very public about helping out subcontractors. So I'm just wondering if you thought things may have had even a little bit better this quarter had not taken some of some of these actions

I don't believe so Pete. Yeah, we didn't really see, you know, too much change in terms of customer behavior during the quarter, you know, once we got beyond the period of them transitioning to work from home, so I don't believe the actions that DOD took to accelerate, you know paid performance payments, uh or uh, you know had an impact emerging as well bookings.

Okay, and the expectation for bookings in the fourth quarter?

Right. Now we think that the full court is going to be another strong quarter.

Okay, great. Thanks guys.

Thank you. My next question comes from Sheila from Jefferies, please go ahead. Good afternoon, Mark and Mike. Thank you for the time. So just my first question, you know did some risks around covid-19. Can you talk about some opportunities? Does it put pressure on some smaller suppliers? So are the Prime's coming to you guys a bit more, you know what sort of new business wins. Does this open up a bank? So it's a good question Sheila. I think probably in the short-term there. Yeah, it's hard to transition to different suppliers. Yeah, when do it in in the near period of time that you know that you're talking about. How do I do believe that you know over the mid to long-term? I do think it's going to open up more opportunities and you know potentially result in Mercury continuing to take share from some of the companies that maybe aren't as well positioned from a capability or from a you know, balance sheet perspective, uh, you know, like we are dead.

I also think that as you as you look forward our business model is very well positioned, right? So the fact that we're spending very high levels on our own now the uh, yeah, when our customers need to get access to Technologies and capabilities more quickly and more affordably I think plays well in this environment and I think there's always going to be off a chain days is there's a discussion, you know, I think we'll that I believe will continue around. Uh, you know, is it capacity or is it more capability that we need and I think from a capability perspective would very well positioned. So we're going to continue to focus on the areas that uh that we have been cuz we think that that's where the money is flying but I don't think that's going to be more opportunities, you know is a result of what's happened. Thank you and you gave some very candid remarks in your prepared dialogue in terms of risks longer-term as dead.

It might take away from defense funding.

I guess you're on track to grow double digits this year. How do we think about fiscal 21 and Beyond?

Yeah, we're not going to guide, you know fiscal 21 on this call, you know, we'll do that on the next call. Yeah, we haven't adjusted as I said in my prepared remarks the outlook for growth right now, you know our view for quite some time is that it's been low single-digits, uh, you know, in terms of the the growth overall as we discussed with the growth in the defense budget is actually not the primary driver of our growth. Uh, yeah. What is the predominant driver of our growth is really more Outsourcing by our customers package, which we think is going to continue as well as us transitioning to more subsystems and Country more content. So, you know, yes the potential exists over the long-term potential crowding over discretionary spending. However, I think you know, we're pretty well-positioned all things considered. Thank you. Thanks so much.

Thank you. My next question comes from Peter arment from Baird, please go ahead. Yeah. Good afternoon, Mark Mike was just to maybe follow up on that on that comment. Just page thirteen to fourteen percent organic growth this year. Is there a way to parse out how much of that is coming from Outsourcing. I mean, I know in the past you've talked about certainly, you know, affect our basis points or so that was added on top of you outgrowing the budget but it seems like a trend obviously accelerating. Yeah. I mean, it's it's always hard to actually wash your paws. Because again, there's not a tremendous amount of of publicly available information or research that are that that you can point to one of the areas that we have discussed in the past is, you know the growth in subsystems and the majority of our Revenue, uh, you know, the outsourced for this coming from our customers associate wage.

As well saying is it the subsistence level and you know our subsystems Revenue was up 22% in the third quarter year-over-year and is up 27% over the last twelve months. So, you know, we think that the Outsourcing trend is continuing and you know, we're uh, it's a core part of the strategy as you know, ya know for sure and then just just at following up on your comments on m&a that you made in your prepared remarks obviously understand the pause and activity in the short term, but we've certainly heard about some disruptions from on the private-equity world about doing deals in this environment. Do you think that's going to prove to be an advantage for you?

I I I believe that there's going to be more opportunities, you know, once we get out of this. From an m&a perspective, I think it could be a capitalist certain companies that you know, maybe push them over the edge in terms of whether they were on the fence of deciding to sell are not uh, you know, if they do I truly believe they're going to want to join a company that you know, he's done the right thing, you know during this crisis is well-positioned for continued growth that is fiscally sound and growing and it's got great cultures and values. So I do believe that there's going to be more opportunities and it was very interesting in terms of the quarter itself. I mean, you know, the very start of the quarter was very very active from Lemonade perspective birthday when the crisis, uh, you know, really took a whole we saw things, you know, really grind to a halt, uh, you know, almost mid-quarter. So we do think it's going to come back it's harder to age.

exactly when

Yeah in Peter, I would just add to that. You know, we we do have an incredibly strong balance sheet and with the market for for private Equity as you mentioned in terms of the capital markets and raising financing. I do think our balance sheet and capital structure are going to be a competitive Advantage for us and I do think we'll see some good opportunities coming out of this, which is the, thanks.

Thank you. My next question comes from Seth siphon from JPMorgan, please go ahead.

Thanks very much good afternoon, and and and the results just curious, you know, you touched on this in the near-term with regard to the capex, Thursday. When when we think about some of the expansion efforts that you guys have underway that you know takes them some time to to build out including micro-electronics. Do you see this having any impact on on the timing of you know, how those projects get done, you know projects that involve capex and Facilities movement and stuff like that. So we saw some delays in the in the third quarter staff with respect to I trusted micro-electronics initiatives in Phoenix, and it was largely, you know a slow down in some of the equipment deliveries, uh, just because of obviously the The Cove it's situation. I don't think it's going to really impact. However, you know, the you know when yep

Step box the overall opportunity settle with the ceiling. We actually did receive our first award, uh, you know contract of purchase order during the the the quarter which was pretty exciting, you know, given the the stage of where we're out. So I don't think it changes the big picture but we did see some, you know delays in the you know, during Q3. Yeah, and it says we talked about we for for The Trusted micro-electronics that wasn't a you know, Revenue item in fiscal twenty. That's a growth opportunity for fiscal 21 and Beyond so just Echo what Mark said in terms of we don't see it having a an impact for the the short delay of the capex.

And then to follow up, I mean the answer to this question might be kind of obvious. But just to maybe put a little fine point on it, you know, you called out the code related expenses in the quarter. I think it was four hundred a month, you know, mostly related to employee support. So, you know the actual cost of implementing distancing measures throughout your offices and Facilities, I totally understand why you're separating out and it makes sense but also seems like it was not very significant and it also assume that maybe since the start up of that happened in March, that would be the. Where those costs might be, you know relatively elevated as they're starting up and so the you know, this is something that all of us are thinking about for the first time. So when we think about the implementation of that going forward, I mean, would you expect that to grow significantly from the dead?

I mean, I guess it would be three months instead of one but

I would also have done a lot of the basic work. So how do we how do we think about that?

Yeah, so I mean fortunately, you know in terms of what could have been a major expense which is preparing to work from home. We already took the infrastructure in place for quite some time. It's been an important part of you know are uh kind of growth initiative to put a video-based collaboration infrastructure in place, which enabled us to very rapidly transition, you know, nearly sixty percent of the workforce to move, you know, to operate from home most of the the funds that I spend. We're really about helping out our hourly paid employees and trying to take care of them, you know in the initial phase and then is the unemployment rate spiked and as they were being impacted, you know via other family members and you know the burden that they put on the family. I don't think that we're going to see a

Yeah significant increase in the you know, that expense that said yeah, it all depends on what happens. And so to go back to you know, the office sorry. I was that uh, yeah might kind of referred to in his prepared remarks and where we think the risk is, you know, one of the risk is that if we saw uh-huh get a temporary shot, uh of, you know, various facilities then obviously, we'll be tapping into the use of that emergency relief fund to continue to take care of employees. So, you know right now we don't see that it's going to increase but you know, it depends on what happens and it might if you would like to to add anything the yeah. I mean, it's it's a good question Seth in terms of the cost. I mean, you mentioned the fact that we were, you know, most of this was within 1 month of March and we will have three months in Q4 birth.

The biggest portion of that 400k expense was the employee Relief Fund which was about $300,000 of the $400,000 Mark talked about that is a a million of relief fund and we would like to get the that money into the hands of our employees. So we hope to see that pick up in in Q4, but but we'll see the other thing. I thought that uh, we say is some expenses associated with work from home and social distancing as you mentioned that while we had some in Q3, we expect those in Q4 as well. Mark said it's really hard to forecast. One thing I would point out is if you look at our guidance, we did not forecast anything associated with those costs because we don't guide discreet expenses, uh from an adjusted EPS adjusted net income perspective that will be added back as we do incur them. I will tell you from a gap EPs and gab name.

perspective that could be

A little diluted to our Q4 results. But but overall our goal is to do what's right for the employees and we hope we can spend as much of the fund as possible.

Thanks. Appreciate the car.

Thank you. I'll next question comes from Ken Herbert from canaccord, please go ahead.

Hi, good afternoon, Mark and Mike.

Okay. Yeah, just Mark. Just wanted to be clear. It sounds like the guidance doesn't and fly or doesn't factor in any sort of material delay either finger supply chain or at your own facilities. I just be as a result of of kobuk correct. That is correct. So is Mike says his prepared remarks it, you know, we can absorb some temporary delay that but nothing major significance.

Okay, and is it I mean, you mentioned you've helped mitigate the risk a little bit through a little inventory build and it sounds like you're working with suppliers maybe where you could potentially see a little more wage. I'm just not like these are our big steps necessarily so fair to say with how things look now. It shouldn't be I mean obviously who knows where thoughts and Inspirations here, but but you're not expecting any sort of material step down in terms of the impact either on your operations, but I guess more specifically your supply chain.

I believe that's correct Ken. So I think if you you know, you kind of go back to what I said in the prepared remarks. It's really I think you know three risks that we see, you know, the 1st is a potential. Uh, yeah impact to our supply chain. Yeah. We began focusing on our supply chain actually in January off here. The initial Focus was on Asia. It's very then very quickly then morphed into other International particularly Europe. And then the US Bank know we've got 80% of our Spenders with roundabout 81 suppliers. We're all over it. So we know exactly what's happening. You know with those supplier who have been impacted who are back online, you know, the parts that we need for the next several quarters, and we're tracking it daily. So we've done a tremendous job.

This is my name's uh, you know, literally beginning in January to I think, you know by down risk to you know often on Shield plant. The second page area is obviously risk to our own manufacturing facilities and I would say that as a company we reacted much sooner than many months, you know, many companies in terms of the options that we took and you know, we were certainly ahead of some of our customer locations as well. You know, the the, you know, the high-impact was obviously we cease travelling very very early on and then on March 13th, that was the last day of the in the office for the majority of those employees that you know could could work from home and say we transition 60% of the uh, the employees to work from home literally over a weekend because we already had the infrared

to replace uh

They would allow us to do that effectively and not you know, created significant distancing in our facilities, which compared to you know, large manufacturing facility such as in the Aerospace industry are nowhere near as dense anyway, cuz we're dying, you know, uh, electronics manufacturing which just by its very nature, you know honors off on this, uh, people intensive then we did a tremendous amount inside of those facilities to you know, improve the the distancing itself and we've continued to communicate with and educate, uh, you know, not only all of our managers weekly on an all manager call, but all of our employees weekly their toes and thumb, yeah and and text-based Communications to continue to educate them on what we need them to do to protect, you know, their health and safety as well as all of our livelihoods dead.

And right now that's going exceptionally. Well, you know, we haven't had any uh-uh, you know covert, uh confirmed code cases inside of our facilities, uh, and you know, everyone is continuing to work with all of our facilities remaining open and so we're very focused on on trying to keep it that way but, you know, you know, we could be impacted but we've done everything that we possibly can we believe to reduce the risk, you know to the business and we're going to continue to do so

The third one is a mentioned is really hiring and right now yeah, we haven't seen any any, you know any changes to our hiring metrics wage, you know, we've got a hundred open positions. So we are still hiring cuz we're still growing we expect to continue to grow, you know, we still hiring people but you know, just given the uncertainty, you know, we could see those hiring metrics, you know change over time. But right now we haven't so those would be the kind of the three, you know risks that we see and yeah, we're working them, you know walking them all hard.

Appreciate the color. Thanks Mark.

Yep. Thank you. My next question comes from Michael from SunTrust, please. Go ahead.

Hey, good evening, guys. Nice quarter. Thanks for taking the question. Glad to hear everybody is safe and healthy Mark maybe just to stay on that initial life questioning where it work can was asking, you know talking about building inventory to absorb some delays. You know, where are you seeing specifically the most risk in the supply chain. I mean what what types of products our inventory have you built up, you know, and and are you comfortable that you know some additional supply chain strain might not material with with do you think you have enough buffer on hand?

Yes.

Through the inventory and then I'll I'll kind of you know, talk about what we're uh, you know what we've been done.

Yeah, sure. So Mike in terms of the the the inventory impact in Q4 that we talked about in the by four words. You know, what we we talked about was, you know in Mark mentioned that early on this was you know, something that was in Asia then went to Europe and we were on top of the supply chain early and we worked two jobs identify our critical suppliers. We looked at our top 80% of inventory or our supplier spend we went through and specifically analyzed are critical suppliers, even if they weren't in that top group and we went out and we looked to advance purchase materials where possible from a financial perspective that didn't have a material impact on Q3 as I mentioned. My prepared remarks. We do expect to see some and Q for those you know the authors

Is that we put in have promise dates in Q4, but but some roll into the first part of fiscal twenty one as well and we're working to expedite that as much as as we can. But overall I would say that we're doing everything we can can to mitigate risk, but at this point the supply chain and our suppliers are continuing to deliver. We're keeping an eye on all the critical suppliers. We're having our Ops Team and purchasing team or talking to our critical suppliers every single day to track the package the key delivery. So we haven't seen anything yet, but we are doing everything we can to to mitigate and make those Advanced purchases. Yeah, so what so it's just

I was just going to say I was going to say the one who really boils down to is those component parts where there are limited sourcing option. Like that's what we are, you know, very very focused on and yeah, there's obviously a number of those as we kind of look out over the next several quarters and looking at off times and working with a different suppliers. So some of that is, you know, pulling in material early. Uh, yeah, so we get the supplies that we need, you know, in some instances am looking for, you know, pasta part Alternatives, you know, we've done that very effectively and then we're just literally on it on a daily basis. So the purchasing is done an amazing job. I think, you know really reducing the risk, uh, you know to our our financial forecasts, but it's obviously not zero.

Yeah, no, I appreciate that and all the color. I was actually just wondering what what specific parts and components. I mean, are you guys seeing pressure on circuit board switches, you know any kind of Graphics capability. You know, what what specifically are you guys what specific components and parts? Are you seeing the most risk around that you've had to buy excess inventory? Yeah. I'm not I'm not going to get into this specifics. Uh, yeah, but I can tell you there's a hundred and twenty five different parts from 27 different suppliers that that we're working on a daily basis. So we're all over it might.

Okay.

And just you know, I I know you talked about, you know, having another strong bookings quarter in the fourth quarter, you know, what's the line of sight look like, you know faith in terms of I guess that the go forward pipeline. Do you do you envision that you know any of the you know potential programs that might be in the midst of a downselect, you know, they could be delayed whether it's due to social distancing, you know, if there are competitive bake off's or what have you do you do you think that has an impact on your your bookings? I mean certainly it sounds like no thank you for but anyway to tell you know, how much risk there is in the pipeline of seeing a slide out of a wart.

No that we see right now doesn't mean that it couldn't change going forward, but I can tell you that the the sales team are very focused. They're very active. I think everyone has become attuned much more to working from home and get business is still getting done. You know, it's more challenging obviously, but you know, I think right now we haven't seen any impact got it. Thanks guys.

Thank you on next question comes from John from City, please. Go ahead.

Hey, thanks everyone and good to hear from you all on the internet question. I just guess I'm kind of trying to sort out. When do you see that market unsticking so to speak just a matter of you Mike when you can get on a plane. Is it a matter of just telling the market coming down? Cuz I imagine you had some things in the pipeline, you know before all this hit so I'm kind of wondering are those frozen or reviewed eel sauce Frozen Disneyland what color on m&a and what you're looking to do cuz you guys really have a lot of balance sheet to allow them to to pull on here.

Yeah, I mean you're right and it's Mark said the you know coming into the quarter the the pipeline was quite strong and it was incredibly busy period of time before it hit in terms of the timing for a rebound. It's hard to know right now. We think most buyers are really focused on the same things, you know, we are which is taken care of their people and off, you know, honoring their commitments that our customers and shareholders and and sellers are doing the the same thing. You know, I think John the key is going to be getting to an environment where there's some predictability to near-term earnings as well as future earnings and you know, luckily for us defense appears to offer more visibility than a lot of the the other other sectors, but I do think as states begin to open up employees star returning to the workplace travel as you say, you know starts again. I think you're going to see dead.

The the activity pick back up and I think we're going to be you know, really well positioned once it does.

Thank you for that. And then you know you brought up earlier Mark both in prepared remarks in response to a question earlier about, you know, potential crowding out and then various sort of spending kind of a side burner crowding out budget thing. You know, how does mercury position itself for a world in which national priorities could at least expand so you have swap requirements for defense applications, but also swap requirements for medical and Health Care applications. I know you guys used to be medical previously and you got out of it for a structure reason and you know good for you on that but going forward, how do you think about the the sort of big-picture very long-term opportunity set for the company heading into a postcode the world? Yeah. It's a good question John I think for now. Yeah, we're going to continue to just do what we've been doing. I think there's still an enormous opportunity around, you know, just the modernization of the different Electronics inside of the defense in dog.

Say what you were primarily focused and I think there's still a tremendous opportunity from it having a perspective. You know, as I said earlier, I think it's probably even more opportunity through innominate perspective, So, you know that could be additional opportunities as things continue to progress then you know, and we'll obviously pursuing, you know, a significant one right now in the Trust Em microelectronic space which is, you know, a a major area of road. We believe in the long-term, but we want to stick it what we're good at. You know what we know and you know not necessarily to diversify.

They thanks for humoring me on that one mark.

Seriously, thank you.

Thank you, as a reminder to ask a question. You would need to press star one on your telephone to which are your question, press the pound key.

I sure our next question comes from Jonathan Howe from William Blair, please go ahead. Hi. Good afternoon. Can you maybe give us a little bit of additional color on how your acquisition integration efforts are going and you know with particular with some of the recent acquisitions and you're just covered, you know, potentially slow down anything relative to your prior plans there. Yeah. So, uh, I would say that, you know, we have done a pretty good job in the only one that's really outstanding at this point is Alpharetta, uh, you know, which is the APC acquisition. We began to go through the work to transition them to that business systems. And you know, we did the kickoff but then obviously we've got impacted, you know with not with the inability to travel so it has moved to the right a little bit that said, you know, the business is performing extremely well, and the team is very excited to be paid off.

Mercury what was very interesting to me is we

The kind of stepping back as we've addressed the code price has the business model is really come into play in a couple of different ways. You know, we talked a lot about deploying and Matrix organizational structure that gives us scalability as the business continues to grow. Well that Matrix, you know, uh, organization actually really helped us very very quick deploy a set of capabilities and responses across the business that I think helped mitigate a lot of risk, you know much sooner had we not been a full ended up and said the fox that you know, we've got an organizational structure in a model and we believe in full integration is actually helped us, you know respond to a crisis not only create value through an m&a. So, you know, it's another good uh-huh good reason to continue to do what what we have been doing and you know, we'll get back on track once we're able to travel again, but it's not impact wage.

Not Super Bowl, it's Jonathan. And then just as a quick follow-up, you know more in a big picture level. Do you think maybe accelerate some of the trends that you already been seeing around the layering, you know particularly given the risks now of having you know, multiple, you know sub crimes and subcontractors having to work in different facilities on a single project. If you could maybe consolidate that down to you know, Thursday that truly are adding value. Just just wondering if you know again from a big picture perspective your you think that maybe play out over the long run. Yeah. So do you think that the industry Trends we talked about delayering a small enough, you know, it's continue to happen. We see it. Uh, you know, what I think is probably going to be the the more dominant theme around the macro-level trends is that flight to Quality suppliers is a result of uh, you know, just the the, you know, the impasse that code is hard. I think it's exposed some vulnerabilities from a supply chain perspective around. Yep.

With small businesses that aren't necessarily as well capitalized, uh, you know or able to deal with the you know, the the risks and the challenges that code is as long as presented and so, you know, I think I think people are going to you know, step back and figure out you know, who are the the companies that within their supply chain that they really need to deal with and partner with in the long-term. And you know, we've been doing that very well. I think over the last five years and I think we're going to see even more of it going forward the other thing but obviously this is exposed is just the you know, the domestic supply chain and yeah the need to bring back some of that capability, you know in in, you know mm Us and the you know, we have invested in our own domestic trusted domestic manufacturing facilities for quite some time and I think that's going to play out as well.

I think we're well-positioned, you know just

Given everything that we had previously been doing with a strategy that is even more important with what is just happened.

Great to hear. Thank you. Thank you. Miss. It appears. There are no further questions. I'd like to turn the call back over to you for any closing remarks wage. Okay. Well, thank you very much for taking the time to listening today. We look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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