Q2 2020 Earnings Call
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Hi, Robert A. I era.
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Thank you joining you into your conference now you'll be in a listen only mode.
The event is now being recorded or business update provided on April 16th described the many actions we've taken to help successfully navigate near term economic headwinds created by the co with 19 crisis.
Yesterday, we reported earnings for the second quarter fiscal 2020, which provided more detail around the announced actions already implemented.
My comments today will provide additional color on these items and on our current market environment.
First I'd like to address the status of our employees our operations and the measures we've taken to ensure that we protect our colleagues to the greatest extent possible.
This has been our number one priority and will remain so.
Given our global footprint, we were faced with the need to develop safety protocols and remote work methods first in China when the virus erupted on a major scale early in the quarter.
Within refined and enhance these methods throughout the quarter is the virus spread to Europe and the United States.
These protocols have been highly effective and maximizing employee safety, while maintaining required continuity in our operations.
By following these procedures all of our production facilities have remained open throughout the pandemic with the only exception being the temporary shutdown of production by our contract manufacturer in China.
Well, we've been pleased with our ability to maintain support for our customers. The safety procedures adopted for the protection of our employees did impact our operational efficiencies decreasing our production capacity by an estimated 10% to 20%.
Yes, China has increasingly emerged from their shutdown in our third quarter, our employees have been able to return to a near normal operating routine while following all the recommended safety protocols guidelines and best practices. We plan to apply the same approach to our European and us operations as conditions improve in each of our specific areas of operation.
It's a testament to the diligence of our 3500 employees worldwide and we've had very few suspected cases of infection to date I want to thank every one of our MTS colleagues for their commitment to safety there thoughtfulness toward one another their dedication their flexibility and their continued focus on meeting our customer commitments throughout this Pam.
Demick.
They are attitudes and performance have been absolutely outstanding.
Second two are fantastic customers worldwide I would simply reinforce that we're here to support you in the same manner. We always have through so many crisis periods over the last half century by providing the highest quality in most innovative testing simulation and sensing solutions to meet your critical new product needs.
Third I'd like to speak to the actions we've taken to reduce our operating costs, Brian will be providing more financial detail on these actions in a few moments.
Despite record order levels within the quarter cost reduction actions were required in our test and simulation business to address both long term and short term headwinds in the business.
From a longer term perspective, our legacy test and simulation business in Europe has been increasingly challenging over the last several years, forcing us to revisit our operational footprint and market strategy from this analysis, we've taken action to rebalance our resources towards the fastest growing markets such as renewable energy entertainment.
And simulation and in doing so significantly reduce our cost structure.
While costly the actions taken to pursue a global restructuring effort and test and simulation were appropriate in order to right size and refocus the business for the long term improving operating efficiencies and helping ensure that we have a sustainable operations platform to support our customers in this important region of the world.
These changes were enabled in part by the investments we've made over the last two years in our operating infrastructure as well as the product mix and geographic shift in our businesses as we have purpose purposefully refined our test and stimulation in the market exposure.
These restructuring efforts are viewed as permanent changes to our cost structure and we'll bring benefits for years to come.
In addition to these restructuring actions. We also took incremental short term cost actions across the company, including reductions in discretionary spending temporary salary reductions furloughs extended paid time off and reduced work schedules. These actions while painful are intended to address the immediate impact of the virus.
Our customers suppliers and our own internal operations.
From a sensors business standpoint, with record order levels, a near record backlog and continuing strength in the end markets. We serve the impact of the virus has primarily been fell through an inability to maintain a full complement of assembly workers in our operations.
This stems from the safety measures, we've taken for our employees an important element of which has increased physical separation.
In spite of moving to a multi shift production schedule. Our factory output was materially impacted in the quarter with continuing strong demand for our sensing products, we would expect operational efficiencies to improve when the crisis subsides and there is a return towards normalcy in our operations.
Although significant cost savings actions have now been taken across the company to end to address the current crisis. We are prepared to take additional action. If these uncertain market conditions were to be prolonged or become more severe in order to position the company for continued future success.
Let me move onto described at current market environment for each of our business units.
Starting with test and simulation a number of conflicting themes plate across the test and simulation business over the course of the quarter.
Nascent orders momentum as we entered the quarter consistent with our strong second half orders forecasts that we mentioned in our last earnings call with truncated by the covert 19 crisis first in Asia, and then the rest of the world as the quarter progressed.
Coupled with soft orders in the last half of fiscal 2019 in the first quarter of 2020, we experienced lower than expected second quarter revenues exacerbated by the coven 19 induced production closures in China, and our contract manufacturing facility and inefficiencies in our global production facilities as the virus spread around the world.
While we still delivered record orders performance in the quarter by a wide margin.
The pandemic significantly weakened orders from our prior expectations in all regions of the world and in nearly all sectors of the business hitting flight simulation theme parks test services ground vehicles and materials sectors, particularly hard.
As customers restricted access to their facilities deferred capital expenditures and discretionary spending and furloughed. Their workforces, we saw an increase in order deferral rates within our opportunity pipeline a metric we monitor closely.
Order placement delays increase from the prior year and on a consecutive quarter basis, providing a clear measure of the dramatic turn in short term sentiment brought by the virus during the quarter.
Fortunately in spite of these headwinds our market diversification efforts from the last few years, we're still highly effective in delivering record orders performance fueled by strong growth in several of the markets comprising our structures category.
One particular project I'd like to tell you about this morning is the $70 million contract. We were awarded by 10 Gen University in China, the largest single order in our company's 53 year history.
Establish an 80 90 510 Ginnie universities, one of the oldest and most respected academic institutions in China. This expansion project has been several years and planning and is dedicated to research on building Enbridge designs that can better withstand the effects of earthquakes in tsunami events.
With the growth rate of China's infrastructure and their exposure to often violence seismic and tsunami events Chinese researchers for some time have participated in earthquake simulation studies that other universities, including those in Japan, Taiwan in the US the benefits of this research have been clear with survival rates, improving as large scale building collapsed.
Seismic events have been dramatically reduced in modern cities.
This new facility attention University will be the largest and most advanced of its kind in the world, enabling experts to study the combined effects of ground and water motion on infrastructure integrity.
MTS has been at the heart of these efforts for decades, providing the highest technology equipment and simulation software to researchers worldwide.
We're very proud of the benefits. This research will bring to mankind as newbuildings in bridges are design that will reduce the risk to thousands of people each day through the creation of safer more energy efficient buildings in cities around the world.
In addition to our seismic project win in the quarter.
Our R&D business in Denmark delivered strong wind energy orders in Europe, and our Arrow testing solutions performed very well in all regions.
As a result amidst a severely impacted baseline business test and simulation delivered record orders of $176 million in Q2, producing a near record backlog of $412 million.
Notably our goal of rebalancing, our test and simulation business from being a ground vehicles dominated portfolio a few years ago to a much more robust mix of ground vehicles structures materials and test services today.
Has proven to be very beneficial for our business as demonstrated in our record order performance this quarter.
The balance we have now attained not only from an end market perspective, but also with respect to our geographic exposure combined with our increased scale.
Creates a much larger and more diverse business capable of withstanding short term headwinds, while capitalizing on emerging growth opportunities wherever they may arise in the future.
In short our test and simulation business is better positioned than ever before with a balanced market geographic exposure critical mass market, leading technologies and an outstanding customer base in each of our sectors.
Looking ahead for our test and simulation business in spite of the Cobot 19 virus, we still anticipate increasing orders momentum in the second half of fiscal year compared to the first half.
Although more muted compared to our original projections, we would caution that the business outlook remains dependent on the ability of the global economies to begin recovering from the pandemic.
Inclusive in these forecasts as our belief that are easy to EMD business will be depressed due to its dependence on pilot training platforms and theme parks to markets undergoing unprecedented disruption.
However, R&D pipeline for turnkey projects, and particularly wind energy test solutions is anticipated to remain strong for the remainder of the year.
We also believe the test services, which was heavily impacted in the second quarter due to customer facility closures will begin a slow but consistent recovery as customers increasingly returned to work and allow access to their laboratories for service and installation of new equipment.
Regionally, we're seeing an uptick and strength in China, which we expect to be followed by Europe in the us as these regions begin to reopen in earnest in the coming weeks.
It's worth noting that R&D, our Danish acquisition that closed earlier. This year continues to perform very well in the face of the covert 19 virus, Denmark has weathered the crisis well and is now returning to normalized operating environment.
Specific to R&D business, they brought with them a strong backlog of projects in excess of $35 million with contract duration stretching into 2021.
The earnout associated with the acquisitions based upon achieving specific performance targets for this business with anticipated final payments occurring late in the fourth quarter of 2021.
R&D continue their positive momentum into the first quarter of ownership by MTS here in our second fiscal quarter, having a strong pipeline of opportunities ahead, and an ability to rapidly leverage MTS technology platforms and service infrastructure globally.
Now, let's turn to discussion of our sensors business.
As you know the three largest sectors for this business are the test sector, which includes laboratories, the test new products as well as our department of defense contracts.
Our industrial sector, which is primarily targeted toward machine automation and our position sector, which comprises both industrial automation and heavy equipment applications, such as earthmovers construction and forming equipment.
Sensors posted a record record orders of $101 million in Q2 up 27% from the prior year comparable quarter.
This strong performance was led by our sensors test sector driven by additional funding under the department of Defense program of approximately $16 million and significant contributions from the newly acquired in depth cooperations, which recorded exciting wins from both energy and military customers.
Orders within our industrial sector were weaker in the second quarter compared to a record performance last year. This orders declined was led by slower energy market demand and predictive maintenance business.
Geographically Europe saw the most significant declines in the industrial sector.
In terms of key markets within the position sector, while still weak mobile hydraulic orders were up but were offset by order declines and other and other industrial machine markets. We continue to see application expansion in this market with new design wins. However, we saw many of our large Oems start revising volume forecast down in the last month of the quarter.
Due to the cobot 19 crisis.
To summarize all of this then for the full company our prior expectations have certainly been dampened by the coven 19 and effects on our markets. The good news. However is that order rates reached record levels. In spite of these effects in our opportunity pipeline is extremely strong reflecting the long term robustness of our customer spend.
New product development.
Which is the source of our revenue.
The uncertainty of timing in the reopening of the global economies led us to withdraw our specific guidance for the year. We remain excited about our growth prospects as the world moves towards normalization more broadly in the months ahead.
We will continue to provide updates on market conditions as the opportunity arises.
Let me end by answering a question that we commonly receive an uncertain times, which relates to the risk of order cancellation by our customers.
Similar to the last recession cycle and the previous ones.
In spite of widespread customer impact we have seen no order cancellations of significance.
This reflects the financial strength of our customers and the importance they place on their long term research and development investments.
Instead, what we have seen is a slowdown of product deliveries due to close facilities and more difficult logistics.
And the slower placement of orders from our pipeline.
Our customers have long proven their commitment to invest in research and new product development. Even during these times of down markets in order to position themselves for the future when the crisis subsides.
A key element of our long term success is our ability to whether these storms with them and to be there for them long into the future.
We have further diversified our company and doubled the size of our revenue base since the great financial recession in 2008 nine.
We remain confident that our business will emerge even stronger as the current economic crisis winds down in the weeks and months ahead.
Now I'll turn the call over to Brian to discuss our second quarter results and provide more financial detail on our cost reduction actions as well as our balance sheet and liquidity position Brian.
Thank you, Jeff before I review second quarter in fiscal year to date financial performance I would like to provide more detail on our cost reduction in global restructuring actions.
Given the current level of economic uncertainty near term, we have significantly reduced our cost structure, both in permanent restructuring measures as well as temporary measures to address shorter term conditions.
In short through the actions we have taken we will realize in excess of $10 million in savings in the second half of this fiscal year and then in excess of $10 million in annualized savings going forward.
Savings. This year comprises a combination of permanent restructuring savings in addition to temporary cost reduction actions.
As previously previously announced we expect to incur total restructuring charges of approximately 8 million to $12 million during fiscal year 2020 in fiscal year 2021 based on notice period requirements.
We recognized $6.1 million of restructuring charges in the second quarter fiscal year 2020.
The majority of the remaining restructuring charges are expected to be recognized in the second half of fiscal year 2020, with a small portion recognized in the first half of fiscal year 2021.
The global restructuring was targeted towards our test and simulation segment and we expect these actions to yield annual cost savings exceeding $10 million once fully implemented by the end of fiscal year 2020.
Additionally, we have implemented temporary incremental cost reduction measures across our entire business that will provide further short term flexibility and will remain in place until we began to see marked improvement in the markets we serve.
These measures include reductions in cash compensation for our board of directors and executive management team.
Reductions in expected variable compensation benefits.
Carlos reduced working hours and significant reduction in discretionary spending.
These temporary measures will save greater than $5 million to the end of fiscal year 2020, and could be prolonged are made permanent depending on the strength of our business and pace of recovery.
While we expect these actions will be sufficient to provide the needed flexibility to whether the current economic environment. We continue to evaluate the ongoing impact of coded 19 and may take further cost reduction actions or other actions in the future.
Now onto the financial results.
Our second quarter consolidated revenue was 211 million point $5 million a decline from the prior year of 9.3%.
This brings our year to date revenue to $417.3 million a decline from the prior year of 4%.
Based upon our order trends, leading up to fiscal year 2020, we expected declines in year over year comparisons to the first half of the year predominantly in our test and simulation business.
Offset by continued growth and our sensors business.
Revenue was also impacted during the quarter by covert 19 related issues, although difficult to specifically quantifying.
Our sensors business grew revenue for the quarter by $3.8 million or 4.6%, providing the 11th consecutive quarter with quarter over quarter growth.
This brings the year to date growth to 7.1% compared to the same period last year.
Although difficult to definitively quantify covert 19 impacted the quarter with less revenue generated as the effected that pandemic progressed in severity.
Given the timing of the Endevco acquisition very late in our fiscal year 2019, and rapid integration of the Endevco product line into our sensors production facilities the growth in sensors for the six first six months was fairly split between organic and Endevco additional revenue.
Organic growth continues to be largely driven by the ramp of our DSD business.
Thats been simulation revenue declined 16.9% in the second quarter, mainly attributable to the previously mentioned slower orders profile in the last half of fiscal year 2019, and first quarter fiscal 2020.
Decline continued to be predominantly led by decline in the automotive portion of our ground vehicle sector and continued weakness in European market served.
These declines are being offset by the R&D acquisition contribution of $14.7 million in the quarter.
Gross margin rate was 33.7% for the quarter significant declined from 37.5% in the prior year.
Mainly attributable to onetime restructuring charges of $3.9 million.
Excluding these onetime charges, our gross margin rate would have been approximately 36% and closer to our expectations for the quarter.
Year to date gross margin rate was 35.4% a decline from the prior year, mainly due to the onetime charges in the second quarter.
Excluding these costs.
The rate would have approximated, 36.6% compared to 38% in the prior year same period.
The decline was due to mix shift in both businesses and the startup of Endevco production recently transferred into our sensors production facility.
Gross margin included $600000 of inventory fair value step up charges in the second quarter relating to the Endevco acquisition and $1.1 million year to date compared to $1 million of inventory fair value step up charges in the first half of last year relating to each of them acquisition.
Operating expenses of $63.3 million are flat from the prior year quarter inclusive of operating expenses from the acquisitions of each of them Endevco and R&D.
Operating expenses included $2.3 million of restructuring charges and $1.4 million of acquisition related charges.
Excluding restructuring and acquisition related charges, we've been able to implement cost containment programs to effectively reduced operating expenses within the quarter by $3.6 million inclusive of operating costs for the newly acquired businesses.
We continue to manage our operating cost structure to increase bottom line performance and selectively use some of these savings to make prudent investments for future growth of the company.
In addition, our restructuring and cost actions implemented will further reduce our operating expenses.
Net interest expense of $8.9 million increased by $1.5 million compared to the prior year quarter, primarily due to an increase that position related to the issuance of our senior unsecured notes in the fourth quarter fiscal year 2019.
We continue to expect interest expense to be within the range previously announced of approximately $8.7 million to $9.3 million per quarter.
For the remaining fiscal 2020 quarters.
The effective tax rate of 21.4% year to date was slightly higher than expected mainly due to the net loss incurred during the quarter from additional restructuring charges.
After a few years of unusually low tax expense due to tax reform and discrete tax benefits is important to note. The following tax rates in calculating earnings per share comparisons as we experienced a consolidated tax benefit of 9% in fiscal 2017, a benefit of 38.7% in fiscal year 2018.
Furthermore, we add consolidated tax expense of 11.4% in fiscal 2019, and we expect a more normalized rate for full year fiscal 2020.
We also continue to explore additional tax savings opportunities for our company, including the cares Act and additional discreet items that will help to lower our tax rate.
Second quarter, adjusted EBITDA of $31.5 million was down 16% from the prior year quarter, mainly due to the decline in revenue for the quarter.
This metric includes adjustments for $2.9 million of stock based compensation expense $1.4 million of acquisition related expenses.
$600000 of acquisition inventory fair value adjustments and $6.1 million of restructuring expenses.
For the six month to date, adjusted EBITDA was $61.2 million or 14.7% as a percent of revenue for the second quarter compared to $67.7 million or 15.5% of revenue in the prior year quarter.
We ended the quarter was $66.6 million in cash a slight increase from the end of the first quarter. This year.
Year to date, we have used $2.6 million of operating cash flow with a net outflow in the first quarter and a return to cash generation in the second quarter.
Year to date capital investments totaled $16.3 million to meet the growing demand in our sensors business and to address the long term needs of our facilities ultimately generating negative free cash outflow of $18.9 million year to date.
Cash flow improved in the second quarter after incurring acquisition related costs for R&D and the cost burden of moving Endevco manufacturing operations to our sensors production facility in the first quarter.
Moving forward, we expect improvement in free cash flow as we returned to a more optimal working capital profile lower our cost structure and improved bottom line performance.
In addition, we have significantly slowed our capital spending for the second half of the year as we work to preserve cash and liquidity measures for the company.
We ended the quarter with total debt of $612 million, an increase from the first quarter due to the acquisition of R&D.
Our current debt profile includes $171 million of term loan b debt due July of 2023.
$91 million on our revolving line of credit with the maturity of July 2023, and our senior unsecured bond of $350 million due in August of 2027.
The outlook for generating cash and managing debt is driven by expectations that each of our recent additions to the MTS portfolio will generate incremental free cash flow.
In addition to our legacy business generating free cash flow to pay down the existing net balance.
We ended the second quarter with a gross debt leverage ratio of 4.5 times and a net debt leverage ratio of four times. The current maximum leverage ratio covenant remains at five times and tell declining to 4.75 times for the fourth quarter fiscal year.
We estimate that we have the ability to draw additional cash up to $60 million on a revolving credit facility if needed and we expect to continue to maintain compliance with our existing covenants.
Based upon our existing cash position ability to draw additional cash from our revolving credit facility, if required and financial projections through the end of this year. We believed that this will provide adequate liquidity for our business to fund operations.
Our liquidity position remained sound with over $100 million, including our cash and Undrawn credit available through our revolving credit facility.
As previously stated we have suspended our guidance for the rest of the fiscal year. However, a field as important to note a few items within our adjustments from GAAP to non-GAAP measures.
Our adjusted earnings per share does not adjust out amortization expense for acquired intangible assets related to our multiple M&A transactions.
The amortization of purchased intangible assets decreased our earnings by 26 cents per share for the second quarter and 45 cents per share year to date.
Amortization expense is expected to impact earnings per share in the range of 80 cents to one dollar per share for the full year.
The quarterly increase in amortization expense from the first quarter to the second quarter is attributable to the acquisition of R&D.
In addition, adjusted earnings per share does not adjust out stock compensation expense, which is an approximate 12 cents per share on a quarterly basis.
In summary, we have shifted our priority is to be laser focused on the company and economic effects of cobot 19.
We have taken aggressive actions to deal with immediate disruptions. However, the impacts have the potential to be longer term in nature, and we have put in place steps to secure the company for the future.
In addition to the significant cost reduction efforts implemented we have additional levers in our cost structure to decreased spending and we are prepared to take further action when and if warranted.
We are continually monitoring order rates production in customer needs and adapting as quickly as possible our forecast and expectations for the near term to preserve cash flow and maintain adequate liquidity.
I'll now turn the call back over to Jeff.
Thanks, Brian Let me conclude with what we believe were the keys to navigating through this current these current economic conditions.
MTS is a complex business that employee some of the smartest most insightful engineers in the industry.
Although our story has become more complicated in the current market environment. It remains consistent.
First we're heavily backlog driven company, our strong backlog position has provided stability through crisis periods before and with our backlog at near record levels. Currently it will see us through once again.
Second liquidity availability and managing our cash flow will be essential for our success in these uncertain times, we're taking all necessary steps to ensure that we have adequate liquidity to meet our cash requirements over the foreseeable future.
Third we will continue to prioritize lowering our cost structure and executing well our integration activities, while supporting our customers our employees by doing so we'll be rewarded for this focus coming out of the current crisis.
Fourth we will leverage the strength of our non vehicle related test and simulation equipment and service opportunities to maintain a healthy orders balance and revenue profile, along with executing on our restructuring activities to expand margins and continually rationalize costs in our operations.
Fifth above all we must ensure our employees remain in a healthy supportive and safe environment. As we emerged from this crisis period, they are our greatest assets and our highest priority.
Executing well on these five ways will help ensure that we navigate through these uncertain times, creating a strong value proposition for our customers employees and shareholders alike.
While the world May never be the same as a was before the crisis, we will adapt to our new operating environment and continue as the leader in our markets, creating sustainable value for all of our stakeholders for decades to come.
With that Brian and I are happy to take questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure your mute function as turned off to allow your signal to reach our equipment again press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And again, ladies and gentlemen that is star one if you would like to ask your question.
The first question will come from John brand through with Sidoti and company. Please go ahead with your question.
Good morning, guys.
Hi, John would have waited a way to hold up in tough environment.
I guess I want to start with them.
The restructuring that you're doing.
You talked about $10 million, realizing the second half and $10 million on a go forward basis.
How should I be thinking about Adam I am I dropping my my cost structure by tenant and an additional 10 going forward oil or is that $10 million on a go forward basis.
Based on the total total operating business for the full year 2020, I'm kind of kind of confused how to think about that so.
Yes, sure John so the.
Moving to the restructuring actions the annual savings that we expect going forward once fully implemented.
I will be $10 million the way to think about the rest of the six months of our fiscal year here is the combination of both temporary as well as restructuring actions that we've taken so approximately $10 million for the rest of this year about half from temporary about half from restructuring and then the rest.
Into 2021 will be.
Permanent restructuring savings.
So John our embedded assumption there is the the $5 million piece for the rest of this year. This temporary we'll roll off as the world reopens. Thus the embedded assumption, we've given ourselves six months for that and that's an estimate on our case, but we were confident of the 10 million. This year, and then 10 million on an annualized basis going for.
Sure.
Thank you again that is star one if you have a question at this time.
We have a question from Joseph Thomas with Voya investment. Please go ahead.
Hi, good morning.
Can you talk a little bit about.
Autocam back locomotion detecting ending backlog stood at 500 out with Q2 or how long does it typically take thoughtfully of backlog on on deals and becomes any revenue.
Yes, so historical measures are about 70% of backlog turns in about one years time. It is a little bit slower at that time frame that were at right now closer to 60% of that churning within a year and part of that is due to some of the longer term projects that we havent backlog, so approximately 60% of backlog.
Today will turn on the next 12 months.
Okay. Okay. That's helpful and could you also talk a little bit about.
Orders orders that you've seen the pipeline I think in end in the prepared remarks.
Ooh you said.
Expectations, what orders in the debts business for the second half.
Significantly lower but.
He knows staining you expect improvement versus the first off is that I will.
That does that equate to understand it.
Yes, we're so we'd so we've been forecasting for some time to the second half would be stronger than the first half.
And we would begin seeing that in the second quarter. We just finished which we did now I have to say at the beginning of the quarter. We would have estimated even stronger orders performance, but we were pleased with the with hitting record levels. Obviously in the second quarter. The second half we continue to expect to be strong because our pipeline is very strong.
The question Mark is always the the.
Converted the deferral rate within the pipeline so what we see in our businesses customers virtually never stop planning for a project build just defer its placement so our pipeline is it clear record levels.
Going forward. The question is how fast will those those opportunities converted so hard orders they virtually all will over time questions win and we would anticipate the second half being a strong half for quarters.
Thank you and finally, a question on on free cash flow. So was good to hear that second half meet cash flows in I should be better than plus south.
And do you expect to introduce drawings under long Ryan and end the year fiscal year on on not lower level absolute debt net.
Yes. So at this point a lot of uncertainty into the future that we've talked about and partly why we pulled guidance. So its dependent upon that in the first case, but we do anticipate with other levers regards to additional free cash flow generation, which hadn't been there in the first half and any free cash flow that we generate would go.
Towards reducing debt.
Thank you thats on that.
Thank you.
Cells.
Did you break brand of this one effect as you have anything else wants to add on the orders question second half orders that would coveted okay branded go ahead.
Yes, Sir just a quick reminder, that star one if you have a question we have a follow up question from John Friendlier with Sidoti and company. Please go ahead go ahead.
Yes, I guess with tight talk a little bit about the cancellation risks and some of the jobs and okay kind of comment how frequently that happens.
Ill or some indices more vulnerable than others or is it just say.
Scenario, where you just see with deferrals and maybe some changes I'm not sure. If you just look commentary around that topic.
Yes, John I'd say, it's always a great question, though was so we see simple answer is we see virtually no order cancellation.
Of any material nature at all it's been that way through every prior recession is certainly that way now once a customer places an order they let it go through to fulfillment.
We are seeing some slight delays in delivery of that equipment, just due to facilities being closed with is a very short term issue.
And and by that point in project work, we've recognized most of the revenue. There's just some residual work to do as we install and revenue recognition. So so no. We see no no risk to cancellation I have no reason to think it's any higher than it ever has been in the past 50 years and we've seen nothing to date as we move through this.
In terms of customer commitments are projects, while there's always a risk around the world of customers deferring the placement of an order those tend to be more us oriented and more automotive oriented customers.
The rest of the world and even the other market sectors in the United States.
Our very inclined to continue their R&D spending even their capital spending for R&D, because usually a smaller piece of their overall cafs capital spending. So those projects are are very resilient and we see a slight increase in deferral rates, but they end up being very resilient and once place their virtually never cancel.
Thank you as a quick reminder, that star one to ask a question.
I'm showing nothing further I'll turn it back to Dr. Jeffrey graves for any further remarks.
Thank you Brandon.
So once again, let me thank you for participating in our call today and for your interest in MTS. We look forward to updating you on our progress again next quarter be well be say, thanks for calling.
Thank you ladies and gentlemen. This concludes today's event you may now disconnect your lines.
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Okay.
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