Q3 2021 Mercury Systems Inc Earnings Call
The COVID-19 and more recently with the supply chain constraints in the semiconductor industry.
Turning to slide eight.
M&A remains an integral part of our strategy the environment remains active and we remain disciplined and our approach both in terms of the deal pursuits, and diligence as well as integration.
The integration of PSC is on track and the business is performing well the team is proving to be strong we've seen some great new design win opportunities and the feedback from customers is extremely positive.
Looking forward, we believe that we're well positioned to continue supplementing mercury's organic growth with accretive acquisitions.
Pipeline is robust with multiple opportunities of varying sizes and all in line with the core of our strategy.
We believe that mix will be seen as a great five given our purpose culture and values strategy and positioning and strong business performance.
And we're going to keep place in terms of our financial capacity and liquidity.
We intend to remain disciplined and pursuit of strategically aligned deals that can be accretive and both the short and long term.
Turning to slide nine overall, our strategy remains the same to deal with the strong margins, while growing the business of organically and supplementing the organic growth with disciplined M&A and full integration.
We believe the strategy will continue to generate significant value for our shareholders over the long term as we execute our plans and five areas.
The first is to grow our revenues organically at high single digits to low double digits and to supplement this high level of organic growth with acquisitions.
The second is to invest and new technologies, our facilities manufacturing assets and business systems as well as and our people.
Third is manufacturing and sourcing as well as driving stronger operating performance across our manufacturing locations.
For the seeking to grow revenues faster than operating expenses. This should allow us to continue investing and organic growth, while maintaining strong operating leverage and the business.
And finally, we're fully integrating the businesses that we acquire to generate cost and revenue synergies over time.
The synergies combined with other areas of the plan should produce attractive returns for our shareholders.
Turning to slide 10.
The five year outlook remains intact.
Target and high single digit to low double digit organic revenue growth, coupled with M&A and margin expansion.
We're in the right markets and the line with dominant and industry trends the <unk>.
Estimated lifetime value of our key programs and pursuits has increased substantially.
We're expecting strong conversion into bookings and backlog as these programs transition into production over time.
We have clear purpose and positioning and a unique business model sitting at the intersection of Tech and defense we.
We are of a highly engaged workforce and our COVID-19 related business continuity protocols of working well.
We continue to make growth focused investments and our people our technology and our trusted domestic manufacturing assets the room.
<unk> active and disciplined and our approach to M&A and Mercury's balance sheet is strong.
We believe the delivering double digit growth and revenue and EBITDA for fiscal 'twenty, one will be and extraordinary accomplishment by the Mercury team.
Especially given the COVID-19 and industry related challenges we faced this year.
We're very proud of the dedication the resilience of net unwavering commitment to our customers as well as drop brave men and women and uniform with that I'd like to turn the call over to Mike Mike.
Thank you Mark and good afternoon again, everyone.
Mercury delivered solid results and Q3 total revenue adjusted EBITDA and adjusted EPS all exceeded our guidance.
Total revenue and adjusted EBITDA were both records for Mercury.
And while the <unk> bookings were impacted by the factors Mark discussed our backlog remains healthy.
We're positioned for a strong fourth quarter and another record year in fiscal 'twenty one.
Looking further ahead, our recent design win activity and sole sourced designed in positions on well funded program set the stage for strong revenue growth and margin expansion going forward.
Let's turn now to our Q3 results on slide 11.
Total bookings for Q3 were $210 million down 16% year over year.
This compares to a strong Q3, 'twenty, where we had near record bookings and a book to Bill of one two.
Q3 bookings were flat compared to last quarter.
Our book to Bill for Q3 with eight two and for the.
The last 12 months, our book to Bill with one point of one.
And as Mark said Mercury bookings and book to Bill this quarter and year to date have been impacted by COVID-19 the change in administration and Fms delays.
Looking ahead and Q4, we expect the book to Bill above one and for the full year. We now expect the book to Bill approaching one.
Mercury ended the third quarter with backlog of $894 million up 16% from Q3 'twenty.
Backlog expected to ship within the next 12 months was $546 million equating to 61% of total backlog.
And over 95% of total backlog is expected to be delivered within the next 24 months.
Total company revenue increased 23% from Q3 last year to a record $257 million ex.
Exceeding the high end of our guidance of 245 and $255 million.
Our revenue base continues to be highly diversified.
Low single program represented more than 10 percentage of total revenue in the quarter.
POC, which had considered acquired revenue in Q3 performed well contributing $38 5 million of revenue during the quarter.
We're already seeing new opportunities as a result of the POC and part of Mercury.
Organic revenue grew 5% year over year in line with expectations.
Organic growth was driven primarily by the <unk> and radar markets.
The gross margin for Q3 was 41, 1% compared to 44, 9% and the third quarter of fiscal 'twenty.
And this reflected $2 5 million of direct COVID-19 related expenses charged to cost of goods sold as well as the inclusion of POC for a full quarter.
COVID-19 expenses and POC impacted Q3 gross margins by approximately 100 and of 180 basis points respectively.
The remainder of the difference was driven primarily by program mix.
Operating expenses in Q3 were up $17 million or 25%.
The inclusion of POC accounted for approximately 11 million of of the increase.
Q3, R&D was $30 2 million up 21% year over year on.
R&D as a percentage of sales was 11, 8% compared to 12% and Q3 'twenty.
Excluding POC, which has lower R&D as a percentage of sales R&D would have been 13, 2% of sales.
And this is up 120 basis points from Q3 last year, driven by opportunities and avionics and mission computers secure processing and greater of modernization as well as continued investment and our microelectronics business.
Q3, GAAP net income and GAAP, EPS were down, 34% and 35% respectively year over year.
These declines were primarily driven by onetime items, including a $2 $5 million increase and acquisition related expenses of <unk>.
$4 $3 million gain on an equity investment and Q3 last year discrete tax benefits of $1 9 million last year that we did not have this year and of $2 3 million increase and COVID-19 related expenses over the prior year.
Adjusted income and adjusted EPS, which add back most of these expenses were both up year over year and exceeded our Q3 guidance.
Adjusted EBITDA for Q3 was up 16% year over year to a record $54 8 million above the top end of our guidance of <unk> 52 to $54 5 million driven primarily by strong revenue growth.
Adjusted EBITDA margins for Q3 were 21, 3% in line with our guidance.
COVID-19 related direct expenses totaling $2 7 million were added back to adjusted EBITDA in Q3, primarily related to the employee health and safety protocols that Mark discussed.
We charged approximately $2 5 million of these expenses to cost of goods sold and approximately 200000 to operating expenses.
Operating cash flow and free cash flow for Q3 was $23, two and $13 2 million respectively.
Both were lower year over year, reflecting the continued investments we made this quarter and Capex R&D and COVID-19 derisking.
Slide 12 presents Mercury's balance sheet for the last five quarters.
We ended Q3 with cash and cash equivalents of $122 million up from $109 million and Q2, driven by the cash flow generated on the business.
We ended Q3 with $160 million of debt associated with the acquisition of PSC and Q2.
From a capital structure perspective, Mercury remains well positioned with continued flexibility and great access to capital.
Our net debt at the end of the quarter was minimal and $38 million.
We still have significant capacity to invest for organic growth as well as M&A.
As Mark said, our pipeline of M&A opportunities continues to be strong.
We were extremely active during the quarter and expect to continue to execute our M&A playbook, maintaining our disciplined approach to valuation and strategic fit.
Turning to cash flow on slide 13.
Free cash flow for Q3 was $13 2 million, representing approximately 24% of adjusted EBITDA.
We had approximately $6 million of nonrecurring cash outflows during the quarter, which reduced our free cash flow conversion by approximately 11 points.
These included $2 $7 million of direct COVID-19 related cash outflows.
Of $2 8 million, one time payment related to switching health care providers and 500000 of acquisition related expenses.
Cash flow from operations. This quarter was $23 2 million compared to $30 1 million and Q3 'twenty.
Capital expenditures in Q3 were $10 million or three 9% of revenue.
Year to date capital expenditures were $34 $7 million of five 2% of revenue.
And this capex is primarily related to facility build outs, and Andover, Massachusetts, and Cyprus, California, along with continued investment and our microelectronics business.
I will now turn to our financial guidance, starting with full year fiscal 'twenty one on slide 14.
Our guidance for both the full fiscal year and the fourth quarter includes estimates for PMC.
In addition, we've assumed no restructuring or acquisition related expenses as well as an effective tax rate of 26% and Q4.
Our updated guidance represents another year of record total revenue above industry average organic growth and double digit growth and adjusted EBITDA.
For fiscal 'twenty, one we now expect total company revenue of 910 of them to.
The $920 million. This represents 14% to 15% total revenue growth from fiscal 'twenty and organic growth of approximately 6%.
This guidance is slightly lower than our prior guidance, reflecting the outlook Mark discussed.
Total GAAP net income on a consolidated basis for fiscal 'twenty. One is expected to be 63, five to $64 9 million or $1 14 to $1 17 per share.
And this is down year over year as a result of approximately $21 million or <unk> 38 per share of non operating investment income and discrete tax benefits that we had in fiscal 'twenty and will not recur in fiscal 'twenty one.
Adjusted EPS for fiscal 'twenty, one is expected to be and the range of $2 35 to $2 37 per share.
This is up 2% to 3% compared to fiscal 'twenty as a result of both our organic performance as well as accretion from the PSC acquisition.
It is worth noting that the prior year adjusted EPS included a discrete tax benefit of approximately $8 million or <unk> 15 per share, which is not expected in fiscal 'twenty one.
Mercury's adjusted EBITDA for fiscal 'twenty, one is expected to be and the range of $201 million to $203 million.
And increase of 14% to 15% from fiscal 'twenty.
Adjusted EBITDA margins are expected to be approximately 22, 1%.
And this is an increase from last quarter's margin guidance, primarily driven by slower expense growth and the business.
We now expect capital expenditures for fiscal 'twenty, one to be approximately 5% to 6% of revenue as we continue to invest and growing the business.
Finally for the year, we expect free cash flow to be approximately 25% of adjusted EBITDA, which is consistent with year to date levels.
And this conversion level is primarily driven by our expansion Capex and COVID-19 investments.
I'll now turn to our fourth quarter guidance on slide 15.
Doing the math based on our actual results for the first three quarters, we're forecasting Q4 revenue and the range of $236 five to $246 5 million.
Representing growth of 9% to 13% compared to Q4 'twenty.
Q4, GAAP net income is expected to be 19, five to $20 9 million or <unk>, 35% to 38 cents per share.
The year over year decline as a result of $8 1 million or <unk> 15 per share of non operating investment income and discrete tax benefits that we had in Q4 'twenty that we will not have and Q4 'twenty one.
Q4, adjusted EPS is expected to be 66 to 69 per share.
Adjusted EBITDA for Q4 is expected to be 58, 1% to 60.0 million.
Representing growth of 17% to 21% compared to Q4 'twenty.
Adjusted EBITDA margins are expected to be 24 for the 24, 6% of revenue the.
The higher expected margins in Q4, primarily driven by program mix.
We expect free cash flow to adjusted EBITDA conversion and Q4 to reflect the continued investment and the business.
Turning to slide 16.
<unk> delivered solid results and Q3 with record revenues driven by outstanding execution by the team.
We continue to create value through M&A.
The POC and integration is progressing well and we're already seeing synergies we.
We have significant financial flexibility and a large pipeline of opportunities to continue to deploy capital for strategic M&A.
We're expecting to deliver a record total revenue and record adjusted EBITDA for fiscal 'twenty, one and our five year outlook and financial model remains unchanged.
We're targeting high single digit to low double digit organic revenue growth supplemented by strategic M&A and leading to above industry average growth and total company revenue and EBITDA margin expansion.
With that we'll be happy to take your questions. Operator, you can proceed with the Q&A now.
Thank you as a reminder to ask a question given the depressed star one on your telephone keypad withdraw your question press the pound key.
And I would like to allow as many callers as possible to ask a question management requests that you limit yourself to one question. Thank you.
And our first question will come from the line of Peter Arment with.
With the Baird equity research.
Thank you Hi, Mark and Mike.
Thank you.
Mark Mark So just I guess everyone's going to focus on organic growth. So I will just kick that off I mean can you just maybe talk about what we've seen the last several quarters has been kind of a deceleration and youre kind of alluding to it continuing.
But when we try to square that against kind of outsourcing delayering all of the kind of trends that you talk about maybe you could just provide us with any kind of more details of that get us the kind of square that all up.
Sure So as I mentioned.
Really what is top line from a bookings perspective throughout the year and it's clearly being more challenging than what we'd anticipated we've been impacted by COVID-19 delays and the change in administration and delays in SMS as well and is.
And now.
Customer program execution issues.
So we have been.
We now expect 60% of organic growth for fiscal 'twenty, one and which is lower than what we previously thought.
We saw some bookings delays in particular in the third quarter on a naval large naval EW.
And that's in production.
And that was run of 18 million, but basically slip from Q3 into Q4, but it didn't just affect.
Bookings in the quarter. It also low organic growth rate for the year.
Probably one of the other ones that I would kind of touch upon.
Is the.
As I mentioned.
We saw the until we've seen.
On a customer and in particular.
And on the execution program execution issue.
On a large add on program.
And itself lowered our organic revenue growth by about a point and the half of the whole year.
So just those two things of alone.
Accounted for two and a half point of organic growth.
<unk> to what we saw coming in and then of those Bakken and where bucket.
The goal of high single digit to low double digit organic revenue growth.
And as I've said the programs themselves.
Of fines of well funded programs.
The experiencing different delays actually for different reasons, so outlook going forward as I mentioned for fiscal 'twenty two.
Is now kind of.
The mid to high single digits of organic growth with 14 mid teens growth.
In total of next fiscal year, so fundamentally and.
And Theres, nothing really changed with respect to our outlook, but we are experiencing some delays.
I appreciate the extra color thanks Mark.
Yes.
Our next question and that's going to come from the line of Sheila <unk> with Jefferies.
And the time I mean, just thinking on that Mark I appreciate the color on that.
The airborne program and that the planting aircraft this year and somewhat coming back net can you maybe just talk about how you think about.
The accelerating growth and of thought leading budget environment.
And do you seen and your bookings and your design wins and can you maybe elaborate on that we'll get the confidence and the out here.
And for high single digit growth.
Yeah. So.
So I think as I said in the prepared remarks, we do expect that the environment that we're currently and is likely going to continue into the first half of next fiscal year, hence the guidance that we gave.
If I look at what's going to draw and organic growth next fiscal year.
To offset some of the headwinds that we faced it is really a number of different things. So we're expecting very assessed the mess programs.
To drive growth and if you remember back in the first quarter of fiscal year 'twenty, one we have a $35 million.
Fms sale that moved from Q1 into next fiscal year and.
In addition, we have.
So the very strong demand.
Related to our secure product.
Secure processing product line.
And we're involved in various radar upgrades.
The sum of which of moving into production for the Tech refreshes ex <unk>.
The <unk> Saba.
The Hawkeye of both expected drive growth next year.
Probably the largest driver of organic growth both next fiscal year as well as over the next five years.
It's growth that we're seeing and the C fly domain and that's really spread across multiple different programs in both C to.
Columns as well as platform and mission management and then finally, we're expecting continued.
Continued growth and EW.
Okay on likely on programs such as <unk>.
The last 69 as well as juice.
It's really across the board, but we do have some headwinds.
Notably this was coming into next the.
Not one program that the large add on program, where our customers seeing some tech delays as I mentioned is low at our organic growth by.
Two points next for the.
And it is encompassed in the mid to high single digit organic growth numbers that I kind of.
Thank you and our next question what kind of from the line of Peter the Kubicki with Alembic Global.
Yeah, good afternoon guys.
Evening.
So mark for fiscal 'twenty, two if we end fiscal 'twenty, one where the law.
And are approaching one book to Bill and Youre, saying the environment is going to be the same and the first half is it mid to high single digit organic growth in fiscal 'twenty, two is that still a pretty risky.
The target right now.
How should we think about the.
So.
Again, we haven't kind of finish.
Full of budget, but based upon the work that we've done today kind of going over.
All of the individual line items from the.
And the various programs and feel pretty good about the outlook that we've given and we're expecting the backlog exiting fiscal 'twenty, one will be up high single digits year over year. We are on some strong programs, we've got a number of programs.
And the.
Transitioning from the development phase into production.
And so low.
Do expect that the environment and the first half.
And it could be could remain somewhat challenging.
I think the guidance that we gave for at least the early outlook, we feel good about Pete.
Thank you and our next question will come from the line of Seth and then with J P. Morgan.
Thanks, very much and good afternoon.
Just a follow up quickly on on.
And on Pete's question on that outlook for next year.
And as there is there much risk to that from.
The continuing resolution.
So yes, we do believe that there's going to be a.
The relatively short continuing resolution, which we baked into account in terms of the outlook that we've given stuff.
Okay, and then just on the follow up with regard to semiconductors.
And more broadly and some of the shortages and that area.
And how if at all is that affecting and Mercury and.
And I get to what extent of it'll on China.
Sure.
So I think the the supply chain theme is kind of a pretty good job of really navigating too.
The two challenges and obviously the first is just the impact that we've seen with COVID-19 throughout the supply base and I think we've been able to manage the pretty effectively and it hasnt really impacted.
Yes.
The top line and.
And most recently the team has been very focused obviously on the semiconductor space and we're managing our way through that as well.
So the no specific impacts to date, but it's certainly something that they're working.
Literally every week.
Thank you and our next question will come from the line of Michael <unk> with Trust cash Securities.
Hey, good evening guys. Thanks for taking the question just to clarify FERC, the organic growth and <unk>.
And anything changed with the POC run rate or are you going to be negative.
And the negative year over year and the fourth quarter.
No we're expecting lots of organic growth in the fourth quarter, Mike largely true to the strong fourth quarter last year as well as the various program delays that I mentioned.
So the large naval EW program.
And as I mentioned is expected to impact.
The organic growth by.
More than the point.
Okay. Okay, and then just the yellow on the gross margin.
On.
And it looks like and all time low.
And I know you called out maybe the mix and POC, but and I know you do.
Youre focus more on EBITDA margin.
But and.
Anything as we think about the longer term trend here and.
Gross margins and may be.
Continuous decline there and any.
And any other thoughts or color on it that we should be mindful of there on the gross margins going forward into 'twenty two.
Hey, Mike Let me just jump in and just correct something I just said the.
The large natively on AWD program, and Brian mentioned is the delay and the what we've seen and the slight reduction and the order quantity.
And we will affect organic growth in the in the fourth quarter by around three points and not one as I previously stated.
So Mike do you want to talk about the gross margin yes.
So Mike I think.
And you hit and I don't think Theres anything specific in terms of gross margins that's fundamentally changing the two drivers.
During the quarter were POC.
The lower gross margins than us.
And I mentioned in my prepared remarks that as of 180 basis point impact to that 41 one.
And then the COVID-19 expenses, which had a 100 basis point impact. So if you kind of adjust for those you would have been <unk>.
And 343, nine and somewhere around that the the rest of it program mix. This quarter. We had the <unk> was up significantly year over year was up 18% organically. So excluding the POC and Thats whats really driving it.
And if you step back and like look at where we were of gross margins and.
The fiscal 'twenty and 44, eight I think when you look at the year level for us and.
And you take into account COVID-19, which we think of <unk> of about 100 basis point impact on gross margins for the year.
And you take into account POC, which will have about 100 basis point impact on gross margins for the year that youre going to be at very similar levels to where we were in fiscal 'twenty.
Thanks Scott.
Thank you. Our next question will come from the line of Jonathan Ho with William Blair and company.
Hi, Good afternoon, I, just wanted to I guess dig into your comment around potentially discretionary dollar competition moving to some additional outsource trends can you maybe elaborate a little bit more on what you're hearing out there and maybe what the potential could look like on if we were to start to see that Budd.
The pressure play out.
Sure. So yes, I think clearly we're all seeing just the continued stimulus on the.
The proposals under the New administration and I think overall, we were pretty.
Pretty pleased with the work the overall budget submission malls and the outlook there.
And over time, I think we could continue to see pressure on the defense budget.
Yes.
The offset by what happens from a national security.
Yes, I think the growth that we're seeing.
Is being continued to be driven by growth and sub systems will outsourcing of the sub system level and the third quarter, our sub systems revenue was actually up 55%.
And 76% of the total and.
And over the last 12 months, it's up 49% to 66% of the total so I think it's a.
It's reflecting what we're seeing and more generally happening Jonathan.
Our customers are seeking more rapid and more affordable and open solutions and with the investments that we're making.
In R&D, and we're able to do that more quickly and more affordably than they can then can do it in house. So if there are additional pressures on the defense budget. We think the outsourcing will continue and we think that the well positioned to be able to take advantage of that.
Thank you.
And our next question is going to come from the line of Noah <unk> with Goldman Sachs.
Hi, good evening everyone.
Bye now.
Mark maybe you can help me better understand how this came up on your seemingly kind of quickly because.
<unk> had some positive updates to the market recently and including the lost earnings period, and the categories of things, you're citing had been going on for a while COVID-19 delays the change of administration.
And we're not really seeing the impact other hardware companies.
So.
Just kind of better help me understand how the.
Maybe maybe snuck up quickly and if you could more precisely quantify these buckets and when you get them back I think that would be really helpful. Because.
Otherwise it kind of just looks and sounds like general buckets, while there is a deceleration happening and the end market. So if we could just put a little more detail around that that'd be helpful. And then Mike.
What are you spending on COVID-19 because the.
And the absolute dollar numbers and the margins and then you started the year with 40% to 45% on the free cash the EBITDA when you have that and the middle of the year.
So the rate of change there and in absolute dollar terms is pretty large for.
And what Youre attributing it to if you can if you can tell us what youre spending on there.
Sure. So let me, let me begin with the bookings and kind of maybe step back and so the second half of the of the year as we came into it was more second half weighted and.
Yes, I guess the challenge that we face with the bookings now is kind of build as the year progressed and right out of the gate.
And the first quarter and if you remember we had a challenge.
Related to Fms sweetheart of $35 million order and.
And move out of Q1 and.
Two next fiscal year.
As our customer ended up having to reengineer the solution with the end customer.
We saw.
The continued impact.
The year progressed, and particularly and the weapons systems Arena and.
As the new administration and reviewed the sale of various offense of systems into the middle East.
Not impacted.
The mass sales, but in weapon systems.
We've seen various delays.
And with the Navy not just the launch E. W enabled program that I mentioned.
But we saw some from.
<unk> and programs also get pushed.
From what was going to be the start of the year.
Q2, then it moved to Q3.
Now it's in Q4.
So that's been kind of of sliding and effect throughout the year.
The the one that.
I guess is for us somewhat new.
Is the impact that we saw around this large airborne program, where our customer was impacted by a delay from one of the suppliers.
Yes, not to put it to put a number on it and it was.
The reduction of $20 million of the year so.
And being one launch thing it's been a number.
And yes things that I guess the.
Builds as the year progressed and here we are at a point, obviously being in the fourth quarter were.
And it's unlikely that.
Some of these deals are going to pop up.
In the final quarter of the year. So some of them of moved into fiscal year 'twenty two.
And some of them.
Will we.
And we will impact us.
Yes, because the auto move to 23 and is up.
Large airborne program.
And in fact, what's happening is that we're skipping the which is why we've actually yes.
Reduced.
<unk> growth.
And by two points so not program.
To give the.
The mid to high single digit next fiscal year. So it is the number of different things.
All of which should move throughout the year and remained inside of it some of which have moved to the next fiscal year and that one, particularly one which as I mentioned is $20 million.
And to 23 for us.
And Mark what happened on that program.
So.
So the.
Yes.
Customer supplier.
Is substantially delay delay.
The delayed and providing.
Three different types of technologies that are associated with the major tech refresh there are two parts of it that affect us.
So yeah right.
Right now and we think it's.
And it's been pushing to the right pushing to the right pushing to the right.
They believe that.
And then making progress but the the.
The the refresh itself.
Pretty significantly delayed.
Okay and.
Mike can you can you help me out there and what youre spending on related to COVID-19 that youre, referring to.
Yeah.
Yes, I mean, so if you step back now and you mentioned, the 40% $40 to 45% guidance at the beginning of the year.
And you discussed that didn't include the COVID-19 expenses and Youre right Thats, one of the big aspects of our cash.
Cash use for the year.
I mentioned on the in my prepared remarks that we're expecting 25% conversion for the year. The expansion Capex is about 10 points. So it'd be 35% COVID-19 investments, we're looking at about $10 million to $11 million of cash outflow this year.
And that's primarily related to the.
On the testing the PCR testing and we're doing at our facilities.
That's the biggest piece of that we also have the employee relief fund and some other things this year that probably had a five point impact on the conversion of will have a five and back on the conversions for the year also related to COVID-19 and we've talked about we invested in inventory.
Derisk the supply chain. So that's really the COVID-19 investments and I know theres been a handful of.
Of the kind of one off items. This year, we've been and if you look at the acquisition expenses.
And in Q2 and Q3, we've been incredibly busy that's been a cash outflow and.
And then I've mentioned, a couple of the others.
Here and their payment for kind of the shareholders on the $1 million to $3 million, we changed our health care providers that was the $3 million. So just a handful of things, but the big two really.
The expansion Capex and the COVID-19 investments.
Okay. Thank you.
Once again, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our next question what kind of from the line of Austin Muller with Canaccord Genuity.
Hi, guys. This is Austin on for Ken.
Yeah.
All right.
So just a question from me and this sort of somewhat implied in a prior question. So obviously right now we've got the chip shortage going on and how are you.
The volume of administration.
And met with various officials from the.
Semiconductor industry, the White house, and we're looking to figure out how to meet the strip shortage and then you had recent commentary within the last week from Intel CEO of that it could take key years or more.
Ramp back up to pre COVID-19 levels. So from Mercury perspective, obviously you guys.
No concerns about downward pressure on the top line so.
Potentially how could the mercury or could mercury used the the Arizona and the new Hampshire facilities to maybe provide some of the supply to meet the.
The demand and the consumer electronics sector.
And could that be done within the two year time frame.
Yes.
Probably not Austin, so the the focus on the trusted microelectronics.
So the and Phoenix is to be able to provide very specialized capabilities on for.
And for next generation applications, primarily for the use so.
It's not a high volume.
And yes facility that where we're providing silicon to the commercial applications.
And we're really of physician on ourselves at the intersection of Tech and defense to be able to Trump take the commercially available silicon and then trumpf forward for us.
And so applications.
Unfortunately, I don't think that were really going to be able to provide much assistance the.
Okay got it thank you guys.
And our next question comes from the line of Ronald Epstein with Bank of America.
From your line is open.
Hey, just a couple of questions for you guys, sorry about that I was on mute.
Okay.
And on.
R&D and <unk>.
And cash impact do you expect to see.
And the next fiscal year.
Given the change and the tax code, if it's not somehow reversed where you're going to amortize your advertiser R&D expense now over five years.
And what headwinds and represent for you guys.
Yes, so so wrongly.
And I think it's counter to what the U S and looking to encourage and which is investment and the U S.
So it may be reversed we'll see.
That having been said I assume the lost days as it's written we have to amortize the RMB over five years.
We estimate that it's at 30% to $40 million impact to our fiscal 'twenty the ratio of the law of billing effect, Inc.
Calendar 'twenty two of our fiscal year of taxpayers, so it would be.
$30 million to $40 million impact to fiscal 'twenty three of cash flow.
Got it and then some of the COVID-19 expenses, you've talked about a day.
Billable to the customer or do you guys to sort of the.
We really since we're selling most of our.
Our products on commercial terms, we're not billing the back to the the government where invest this is the investment that we're making and there is no.
Reimbursement from the 36 10 or anything like that got it got it and then.
Maybe a bigger picture question when you look at folks like Taiwan semi.
Potentially and it looks like.
Probability of potentially.
Building, a fab and Arizona.
And more how can say of more commercial.
Silicon and fabricated in the U S.
And what opportunity does that present for you guys to work with.
And the commercial manufacturers and the.
The defense and market right.
Because the end of it depends on market and sort of small compared to the broader silicon market is there a role that you guys can play as these companies start to onshore fabs.
Yes, absolutely will and so.
So even if they do bring back.
And more of the.
The fabs and the money of factoring here domestically Intel's obviously.
Doing not in Arizona TSMC is talking about it.
TSMC is obviously the five Paul on the companies such as Xilinx and others.
Yes the.
That doesn't have loans solve the problem.
Because I think the.
The.
And the capabilities for use and defense as you look at the way in which the market's evolving to more shipment based architectures means that there needs to be a a party that sits between those.
And silicon.
Manufacturers or developers as well as the the.
The defense end market and Mercury is kind of positioning ourselves to be the company.
So the partnering.
And with some of the biggest silicon companies and the industry getting access to.
And the raw silicon itself and.
And we're looking to be able to combine those silicon from different vendors.
And to secure using our IP and then packages here domestically.
The the specific and use cases in defense.
And so.
So we play a really important growth and <unk>.
Obviously, I think it would be and batteries.
The domestic manufacturing does come back and so we're able to get that silicon here domestically as opposed to coming off shore and enough just packaging it and securing it.
And the fit in the Phoenix facility.
So there is still absolutely a relative play even if they do build those pumps.
And Phoenix like the talking about on.
Got it alright, great. Thank you guys.
Thanks, Ron.
Mr asked but it appears there are no further questions. So I would like to turn it over to you for any closing comments.
Okay, well. Thank you very much for joining this evening, we look forward to speaking to you again next quarter. Thank you.
Once again, we'd like to thank everyone for participating in todays Mercury systems Conference call. We appreciate your participation and ask that you. Please disconnect. Thank you.
On that.
And.
Okay.
Yes.
Okay.
Okay.
And then.
And.
And.
[music] on.
Yes.
Okay.
And this year.
And.
We're on it.
Yeah.