Q3 2020 Earnings Call
Good afternoon, ladies and gentlemen.
Them to a ours, so school 2023rd quarter earnings call.
Joined today by John Holmes, President and Chief Executive Officer, and Sean and Guillen, Chief Financial Officer before we begin I would like to remind you that the comments made during the call may include forward looking statements as defined in the purpose securities.
It's district.
Page Litigation Reform Act of 1995 as noted in the company's news release and the risk factors to sections of the company's form same caring for the fast school year ended may 31st 2019, and form 10-Q, four the fiscal quarter ended February 29 2000.
20.
In providing before looking statements. The company assumes no obligation to provide updates to reflect future circumstances or anticipated or.
Unanticipated events.
This time, a light to turn the call over to a horse President and CEO John Holmes you may begin.
Great. Thank you very much and good afternoon, everyone I really appreciate your all joining us today to discuss our Q3 or 420 results.
Before I get into the details of the quarter I'd like to make some comments regarding code at 19.
First our thoughts are with all of those have been directly impacted and our appreciation goes out to the healthcare workers around the world. We're fighting the front lines on that.
As you know this is an unprecedented situation for the global aviation industry.
Our interest this uncertain period from a position of strength.
We have a diverse business mix with approximately 35% of sale from government customers and meaningful commercial sales to cargo carriers. We also have a strong balance sheet with less than one times that leverage significant liquidity and strong customer relationships.
That said, we expect the sizable impact to our commercial airline business as a result of the decrease in commercial or traffic.
In order to proactively address the anticipated impact of Cowen <unk> Co., but 19, we're taking steps to ensure the costs remain aligned with the decreasing demand.
These steps include a hiring freeze, reducing or eliminating all non essential span reducing executive compensation.
Unfortunately reductions in our workforce.
That said, we remain prepared to take additional action as warranted to respond to the evolving business environment.
With respect to potential government assistance I've been in direct contact with members of both the house and Senate as well as the administration regarding potential support not just for the airlines, but also for the broader aviation industry.
As you know we have worked diligently over the last several quarters to enhance our recruiting efforts develop training programs and partner with various schools to create a pipeline for technicians.
Given our focus and success and building and retaining a skilled workforce, we are particularly supportive of all government measured measures aimed at preserving jobs.
The safety and health of our people as well as our customers and vendors is a top priority. We're closely following CDC guidelines and have an acted remote working social dispensing and related business continuity plans across all of our offices and facilities.
These measures combined with the overall business climate create a great deal of uncertainty and stress for our people and I really want to take this opportunity to thank the employees today are for their hard work dedication and flexibility as we go through this difficult time I'm very proud to be part of the best steam and aviation.
Turning to our results, we had a record third quarter and I'm pleased with the overall performance.
Sales were 4% from 530 million to $553 million and our adjusted diluted earnings per share from continuing operations increased from 62 cents per share the 67 cents per share.
These strong results were driven by continued exceptional performance from our government programs parts supply and MRO activities.
In the quarter, we announced several new business wins, which demonstrate today our continues to be the partner of choice in the aviation services industry.
Specifically, we announced that we announced plans to expand our airframe maintenance services with air Canada to cover a day Threethirty fleet. Additionally, arrow control acts the large manufacturer of critical components to the aviation industry. So like today are to be its exclusive global distributor for the eighth you lose the pump product line.
We have strong aftermarket expertise in this particular products and are already seeing results from the significant growth opportunity.
Finally, we secured a $90 million sole source I'd ask you contract with the defense logistics agency, but specialized shipping and storage containers as well as accessories.
As described in the release there are several restructuring actions that we have taken and will take to continue to improve the performance and strength of a are.
As Weve previously discussed we've seen increased cost and certain commercial programs contract, which were adversely impacting our financial results. We've taken decisive action the exit one contract and restructure to others, which will allow us to free up capital improved cash flow and increased margins. These actions resulted in a one.
Time, predominantly non cash charge of $24.7 million.
We've also made the decision to pursue several additional restructuring actions in our fiscal Q4, which involve consolidating facilities to further reduce costs.
Before turning over to John I'm pleased to share the subsequent to the quarter end, we completed the sale of her final contract within the cocoa airlift business.
As previously discussed this completes the exit of that business as part of our strategic shift. We're pleased to have that element of our plan complete but that'll turn it over to Sean our CFO.
Thanks, John ourselves in a quarter of 553.1 million were up 4.5% or 23.6 million year over year.
This included a 33 million or 6.6% increase in aviation services revenues, primarily driven by execution on government contract, which represent approximately 35% of our revenue.
Improvement in Navarro volumes and strong demand in our parts supply activities also contributed to the increase.
As John mentioned in our commercial programs business, we terminated one contract and restructured to other contracts during the quarter.
These actions resulted in a onetime predominantly noncash charge of 24.7 million, which shows up in the piano as a reduction in revenue of 9.8 million and the establishment afford loss reserves and other related charges in cost of sales for 14.9.
Aviation services gross profit decreased to 16.5 million, which was driven by the onetime 24.7 million charge. Excluding this charge our profit would have increased by 8 million.
Each of government programs MRO and parts supplies gross profit increased year over year.
Gross profit within Expeditionary services decreased 3.5 billion.
Well, we had expected a recovery in the segment. This quarter, we continue to experience a delay in a large contract award and certain operational challenges.
We are taking restructuring actions in Q4 to reduce reduced fixed costs and overhead.
Then expeditionary services, we will consolidate facilities, which will improve production efficiencies eliminate excess capacity and significantly decrease our overhead and fixed costs.
We expect these restructuring actions along with our current backlog to result in improved performance going forward.
Additionally, as John discussed in the fourth quarter, we have initiated cost reduction actions in light of Cobot, 19, which included hiring freeze, reducing or eliminating all non essential span, reducing executive compensation furloughs and reductions in force.
In total we expected facilities consolidation and cobot 19 related steps to result in onetime costs of approximately 15 to 20 million pre tax in the fourth quarter with the payback on these actions realized within one year.
In the quarter SDMA expenses were 10.5% of sales versus 10.3% in the prior period with the increase largely driven by investigation and compliance related costs.
Excluding investigation and severance costs from both periods fashion, they would've been 9.9% of sales in the current quarter compared to 10.1% in the prior year quarter.
Interest expense was 2.3 million compared to 2.4 million last year due to lower borrowings in the current near partially offset by higher rates.
During the quarter, our cash flow provided from operating activities from continuing operations was 9.7 million.
We continue to invest in inventory to support our parts supply activities. Additionally, as we performed under a certain government program contract that paid and advanced last year, we significantly reduced our deferred revenue on the program, which resulted in less cash flow than the prior year period.
During the quarter, we returned 2.6 million to shareholders via dividend of seven and a half centsper share our balance sheet remains strong with net debt at 171.1 million and net leverage 0.9 times.
Earlier this year, we upsized, our revolver by 100 million to 600 million and extended the maturity to September 2024.
Our only other maturity as a 23 million dollar term loan due November 2021.
As of the ended the quarter, we had total liquidity, a 432 million, which included unrestricted cash of 37 million and revolver availability of 395 million in.
In addition, we had net capacity available under our accounts receivable facility of 92.
Thank you for your attention and I'll now turn the call back over to John Great. Thank you Sean.
While we are pleased with our Q3 and year to date results, which are tracked ahead of our previously raised guidance due to the effects of covert 19 on the commercial airline market. We believe it is prudent to withdraw our fiscal year 2020 guidance at this time.
No question that Cobot 19 will have a meaningful impact on a commercial airline business that said volumes from our government customers are strong and are expected to continue to grow and we have a substantial cargo business, which we see potentially expanding in this environment.
As for Airlines Air travel will return and grow and aircraft will return to service and demand for aftermarket purchase parts and services will be required.
On that note, we believe there will be opportunities for a our capital constraints combined with low fuel prices will likely cause airlines to cancel orders for new aircraft and possibly extend the utilization of existing aircraft. Additionally, there will be greater demand for use material as airlines look to save money using aftermarket parts and we.
The largest aftermarket parts supplier in the world will benefit from increased supply as aircraft are retired. Moreover, we believe the competition in the aftermarket which had grown in recent years do the length of the upcycle will decrease as our competitors struggled to survive or increasingly focus on their core activities.
I want to reiterate today hours and a strong position we are diversified across end markets and geographies and we have an exceptional balance sheet.
One day are just before 911 and I've seen what this company can do in times of diversity and we are an even better positioned today heading into this event I'm proud to be part of such an amazing team and I'm confident that we will emerge even stronger but that I'll turn it over the operator for questions. Thanks.
Ladies and gentlemen at this time, if you have any questions you can press star one on your telephone keypad.
If you don't have.
If you would like to withdraw your question you press the pound or Heskey, please standby well be come path when compared with Q may roster.
Again that is star one.
Our first question comes from your line of Robert Spingarn.
Good afternoon.
Hey, Rob.
John and Sean obviously this is very challenging times. So of course, we wish you the best as you work through this.
I wanted to start by asking you if there's any way to frame, maybe perhaps on what you've seen so far through March or what you're hearing from your customers and based on these fairly heavy.
Declines in capacity there that have started if you have some sense for what the SM decline looks like and how that relates to your business for the various businesses is there any.
Algorithm that we can come up with.
Well.
Not sure if there was an algorithm, but let me let me try to ticket piece by piece across the company is you always we mentioned on the government side.
In the past quarter in the third quarter, we saw significant growth on the government side and at this point, we see that are continuing or we see that government business remains strong and we expect continued growth there cargo as well a cargo that through contracts that we have in our parts businesses. The supply engine providers are ended.
Overall providers with a with parts for cargo customers as well as some activity in the MRO business, we expect the cargo business to to that to hold up.
And potentially expand as I mentioned.
In terms of airline customers that MRO, we're in constant contact with all of our major customers and this is a very dynamic environment and really does change daily.
Right now we have a fair amount of work in the hangers, they're largely full but we anticipate a meaningful decline and that work.
As we head towards the summer, we're getting different information out of different customers. At this time in terms of the schedules that they are putting together the one encouraging part at all of that is that we for many of our MRO customers are the main maintenance provider and they recognize the importance of keeping solid lines of work with companies like.
Like us and us in particular and the messages then we'll do everything we can to keeping fall now that said, we are expecting a a meaningful decline in maintenance activity across the facilities as we head into the summer.
And then in terms of the airline parts businesses, both new or parts sales, both new and used we would suggest that those it's early to tell and the business actually has been holding up a up until just the last few days, we did see some decline out of Asia, and the third quarter and.
And Thats continued.
But the business is on holding up but we have seen a decline just in the last few days and we are anticipating that that business tracks the parts business.
Tracks with parts business and commercial PBH business.
Track for them.
Okay could you just refresh us on the percentage of the business that is cargo I guess of the overall topline.
Yeah, it's not something we typically put out but it fluctuates, but typically we see it between 10 and 15% of the commercial business.
The commercial business, Okay, and the other thing I wanted to ask you as we think about all these various pressures.
Is how would you describe your cost structure I know if this is for you or if it's for Sean.
But maybe the right way to ask it is your fixed versus variable cost given the labor intensity at least part of your business.
Yeah.
Given the nature of our business you think about most of our cost is variable because if you think about.
You know the parts supply activities.
Our cost of sales is obviously the inventory that we procure they're going to have the shelf or we buy in the market and the other parts of it are shipping and and sales right. So it's really variable costs associated with activity.
Where do you have some greater fixed cost is on the.
Infrastructure to support obviously, the hangers and the Mros.
Again, a lot of the labor there is more variable in nature in terms of contracts and the people that support the activity and then in commercial programs in some of the infrastructure to support the supply chain has a more fixed nature to it but so it's I think we have a highly variable cost structure across the whole company, there are pockets, where a little bit more variable parts appliance.
Some fixed costs and behaviors and other areas.
Okay and then just the last one for me is.
How we should think about working capital trends from here you obviously have parts inventory.
Given the decline in activity do you draw that down do you continue to be active in parts. How do we think about working capital for the next few quarters to the yes, if you give us some so I think.
Yeah, No and I think.
Sure because you're indicating there. This is definitely an evolving situation. We're certainly not mode right now, where we are drawing down on existing parts inventories and as we see.
Things settle out and as we see opportunities arise.
We would look to potentially make investments, but right. Now we are very focused on be a liquidity required to operate the to operate the business and.
Using the ER the stock that we have to satisfy demand.
Okay. Thank you both for the color.
Okay.
Our next question comes on the line of Ken Herbert.
From Canaccord.
Hi, good afternoon, John in Sean.
Okay.
John I just wanted to first ask about the commercial programs business I mean, you called out.
Obviously, one contract you've exited two you've restructured how do we think about that business now in terms of what's left and.
How do you view the risk now that Youve taken this action in these businesses and is it pretty well level set moving forward.
So I feel good about the actions that we took to address those contracts. They had been a headwind for us as we've indicated last couple of quarters. So.
Those were in response to restructurings that occurred within our customers and so I'm happy that we were able to take those actions.
And they will as we said they'll provide an improvement in margin and an improvement of cash flow as a result of those actions.
You know in the context, though of covert 19 power by the hour contracts as the naval supplies are built on flying hours of the airlines and we have seen reductions across all of the fleet.
We support and.
Certain of those contracts have got minimum flight hour protections in there, although we're certainly and uncharted waters in terms of how those how those.
Protections will be enforced and so we're in a dialogue with all of our customers about.
You know how our program support.
Going forward will look as they assess the impact to their own fleets as a result of covert 19.
Okay. That's great. Thank you and if I could.
Just to follow up on the earlier question, maybe one we just to help US think about this is as you look across specifically the parch parts supply and MRO businesses.
Obviously, the airlines seem to be cutting discretionary spending pretty aggressively I'm just curious from a timing standpoint, I would imagine you see that impact certainly.
On the parks trading and purchase distribution fairly soon maybe your comment earlier, maybe on the MRO side, there's a bit of a lag, but then coming out of this I would imagine you'd see it on the trading a distribution sites fairly quickly, but maybe can you just talk about how we should think about on those two parts of the business the MRO and on the part side.
The timing and how the sort of rolls through the organization.
Yeah on the part side I I think you Havent right.
We really just in the last few days have started to see a decline involved it was actually declining volume that was actually holding up fairly well just into the last couple of days and and we would expect you know as airlines ground fleets.
And look to cannibalize parts from aircraft that are on the ground.
We would expect.
Meaningful decline in those day to day parts activity both in terms of trade.
Typically in terms of trading the distribution business, that's that's largely consumables expendable so.
That's not those aren't parts that necessarily that would be cannibalized, but as airlines go through what they have on the shelf, we'll see a slowdown in that we could see some replenishment orders there, but I expect overall that volume on the new parts side to decrease as well.
On the maintenance side again those are provided the aircraft come back those our maintenance deferrals and we would be working closely with our customers to.
To make sure that we're in a position to handle the maintenance events when they start to put aircraft back into service and I would expect that activity I would expect that activity to pace ahead of a recovery in the parts business.
Okay, Great and just finally can you just comment on on what you're seeing specifically out of China, or maybe Asia, I mean, theres been some speculation that parts of the economy, there and air travel at least within China seem to be picking up or are you seeing that with your customers there and how does that outlook specific.
Yes, great question in the answer is we have in the last few weeks, we have seen some activity, particularly out of China.
Going into a about halfway through the third quarter.
We started to see a meaningful decline and in order volume.
Out of China in particular, and a bit less impacted across all of Asia.
But in the last two weeks we have seen.
Some increased activity. It's a matter of fact last week, we received a multimillion dollar purchase order for landing gear up from the Chinese carrier.
Thats, a big order in any environment, particularly in this environment. So there definitely are signs of life with that market returning.
Great. Thank you very much and good luck.
Thanks, Ken.
Okay, and ladies and gentlemen, if you haven't questions. At this time you can seem to press star one of your telephone keypad.
Next question comes from line of Joseph Denardi.
Stifel.
Hey, good evening guys.
John can you can you just quantify a little bit more how much of the business you expect to track with Asms. The PVH in parts is that embedded billion dollars or so a year from right.
If we you know we typically don't split out those.
Those those elements of the aviation services segment, but.
If you look at aviation services is roughly a third a third a third.
Third our MRO.
A third party.
And then a third.
Programs and in the program Thats roughly split between government and commercial so we would see the commercial power power by the hour programs.
Tracking with the with Asms and then inside the parts business with the exception of the the government portion of that business.
And the cargo portion of that business, which I would put it.
A bit more than half, we would see the remaining half of the parts business tracking with.
With ad sense.
Okay, and when you say tracking, let's say a sands and some of the U.S. Airlines are talking about 70% to 80% declines. The next couple of months is that.
Ballpark of what you would expect.
Yes.
Okay.
And then on the commercial piece, how much of the commercial businesses with foreign Airlines versus Us airlines between the.
MRO parts and.
PVH.
Yeah, our commercial business is roughly about 40% international so when we talk about Asms I would look I would I would.
Wait that by geography, so call it 40% international and 60% domestic and as you know in there.
You know into hangers, that's five in the U.S., which services the domestic narrow body market to in Canada similar dynamic there and then some landing gear facility in Miami and into component repair facilities in New York in Amsterdam. So.
Within our MRO, specifically its overweight towards.
Domestic U.S. market in Canada.
Got it Okay, and then Sean can you just talked about kind of liquidity how much you think you have access to and.
And when you would look to access some of that.
Yeah. So.
As I mentioned in my script.
We have about 435 million of of liquidity.
The revolver, we upsized back just from a fall so the maturity as until the fourth half years from now in the fall 2024, and we Upsized to 100 million to 600 million a total at that time.
And that the available liquidity. The company has we also put in and they are financing program a couple of years ago, and there's some availability under that so in terms of where we sit today on liquidity. Yeah. I think we feel good razzie contingency planning and discussions with our banks to make sure that that stays the same.
But feel good about the actions that we've taken over the last call it six months and where we sit today.
Okay.
Just one more.
I had.
The actions were obviously taking.
Both in terms of overhead and fixed costs are all with an eye to improve in the cost as well the cash position of the company.
Okay, and then John as Sean can you just kind of frame that cost reduction actions you you put in place.
Good how much of that was Coca 19 versus the underperforming contracts and then what sort of revenue environment is there.
Does that assume and when would you maybe look to to do more things get worse.
Yes so.
The the Q3 charges of 24.7, that's obviously civic to the restructuring actions in the programs the $15 million to $20 million range. The estimate we provided for Q4 are for the Q4 actions was at the facility.
Actions as well as.
The people in overhead action, that's split roughly evenly between kind of facility actions and people actions and I'd say that that reflects a demand environment with.
Tracks to some of things we've talked about here in terms of activity in the hangers and ask them.
Should things.
Deteriorate, Washington situation closely it's still relatively early as we've mentioned in the script you know we would be ready to take additional action if needed.
Thank you.
Okay.
Okay, and ladies and gentlemen, if you have any questions at this time.
Star one of your telephone keypad.
Next question comes on the line of Michael.
Really.
[music].
From Suntrust.
Hey, good evening guys. Thanks for taking my questions here.
But maybe.
Sean or Sean just go back the.
The two underperforming contracts on the commercial side can you give us a little background as to.
What went wrong there may be what what kind of prevents that from happening going forward I always thought once you got those contracts locked and loaded they would be pretty pretty well off and good performing over the life of the program. So can you give us a little background there.
Yeah I'm in both situations you had a you had fleet changes that occurred at the customer that drove a pretty significant.
Difference between what was impacted or what was expected when we signed the contract versus what we what we actually felt and we you know we've had negotiations with those customers in recent months to try to to correct for that and ultimately we ended up.
As a physician and wherever needed to restructure the contracts and take charge.
That's that's the element of the customer side of it on our side.
We we had a pretty rapid expansion into that business. As you recall, we signed up a lot of contracts and with a lot of different operators and a lot of different environments and it was a pretty stretched supply chain and these were some of the earliest agreements that we signed a as we got into that business and our.
Our pricing our operation and the contractual protections that we look for and in those agreements.
Evolved over that period of time, but these were one of these were earlier earlier agreements in that in that regard.
Got it that's helpful and maybe maybe that's a good segue I'd kind of hit task the silver and question, but as you guys look you have a better view than us as you look at your customer list, specifically carriers on a global basis. I mean have you guys done any sort of analysis on bankruptcy analysis or you know how many of these.
Carriers might be forced to consolidate I mean, just said you had some rapid expansion. There I mean is are you looking at customer by customer and seeing who might be at risk here and where some of these long term contracts might might not proved to be a proved to be valid anymore I.
I would say, we're taking a look at the liquidity position of all of our customers and I wouldn't limit that statement to jetstar commercial power by the hour contract orders were looking across the whole portfolio, having said that our largest customers.
We feel very good about their their own financial management.
And we've got very.
We've got very close relationships with them and aren't very active dialogue with them in terms of our exposure and and their plans. So.
Overall, I feel I feel good about our a our portfolio having said that we're certainly in an environment, where you are going to see some failures and weve.
Done our own analysis on where those may occur and we're going to do everything we can to limit our exposure.
Got it got it or if there is a silver lining thinking about porch trading distribution I mean do you guys you, maybe Sean do you envision sort of a counter cyclical.
Sort of cash tailwind here I mean, if you guys do in fact.
Good day to inventory you might be re sizing in the near term for for much lower volumes I mean can we expect.
You know maybe some some improved cash generation.
Youre clearly not investing on the part side of the business.
Yeah, I think as you mentioned, obviously over the last few years in a growth environment, where weve not only been outgrowing the industry are taking share as part of that.
It's been a somewhat capital intensive business in terms of the inventory in the Roadable assets, we've invested into support tech growth.
You sit here today with the balance sheet, we have in the inventory position to your point, we're obviously very very focused on on turning the inventory position the investments we've made in free cash.
So I think you'll see baby higher conversion on inventory as you put less on the shelf and monetize what we have as we've talked about here I do think that in the environment and that will be what we're driving too and then in terms of some of the other levers on the balance sheet, you know a aren't APC, specifically, we're going to manage both.
The those.
Given the current environment.
Got it.
Yes.
Sorry about that was going to add that you know, we do expect to see opportunities as a result of this market dislocation and we see opportunities in terms of potential asset acquisition opportunities in terms of potential talent acquisition, and we do see clearing out the Sean point of some of the competition that has come into the.
The market both from a small players a that may exit completely and very large players that may decide they want to focus on other things so.
We've been here a long time, we've seen versions of of the things before and you know a big reason why we maintain such a strong balance sheet. So that we can come out of situations like this even stronger.
Yeah, No I would agree John I think that makes a lot of sense. The at the last one just on the.
The parts trading I mean, I generally agree that we might see some older inventory older planes in service longer, but we still might see a reduced fleet, we could even see.
Older planes, Spi retired and excess parts in the marketplace, which which may pressure pricing do we have to think about.
The prices of somebody inventory, you're carrying and did you guys ultimately view that as a longer term opportunity would you be opportunistic if you see some some really attractive parts out there for some of the popular platforms. Whether there are three twentys. Your 737 would you go after them you know if there is a little bit about near term dislocation.
Pricing in the marketplace.
Yes, definitely they answer that is absolutely we want to time that correctly, because we're in a mode here, where we need to see how things are going to shaped up but absolutely and I would mention that we've talked about this for several quarters now the demand for aftermarket material has far far exceeded the supply in the last several quarters and.
So.
Obviously, you're going to have a meaningful decline in demand and an increase in supply, but given our position and given the relationship that we have in the network, we have to get our hands on the best material out there.
We're.
We should be in a position do you know, even though it might be lower demand.
Fulfill more of it as a percentage and we had been able to as a path in the past as a result of more material coming on the market and that's our job is to make sure that we time that correctly and make the right investments and get our hands on on that choice materials, you referenced before anyone else.
Got it helpful. All I'll jump back in the queue. Good luck your desk.
Thank you.
Next question comes from the line of Robert Spingarn from Credit Suisse.
Thanks, I wanted to come back in with two things one just on the back of Mikes question there.
Maybe the opposite take might some models.
Essentially go out of service here older models that might obsolescence some of the inventory.
Yes that could happen that could happen and are you exposed anything in particular that that would be notable if you had to write that off.
I wouldn't I wouldn't cite any asset class in particular at this point.
[music].
But that's certainly something we're we're paying close attention to and it's a lot of the.
A lot of the inventory that we carry is tied to long term contracts and you know again, there was a bow wave of maintenance events that where the demand outstrip the the amount of inventory that we could find so even if you do see some early retirements or an overall decrease in demand.
We feel pretty good about the inventory position that we've got right now.
Okay and then the other thing I just wanted to go back to and you mentioned this earlier.
It was what a potential spike in aircraft retirements might mean for the business. If you could elaborate on that a little bit and you know.
How you guys fit into that because I think it's a less discussed area of the business at least recently and then how customer behavior might be changing in terms of acceptance of USM.
Yeah, I think it's important to remember that U.S. and has a lower cost solution and and and environments. Like this where airlines are really managing their cost much more closer to that may have been before.
You may see greater adoption of new FM, and that's that would be a fortunate development to the extent that we see greater U.S.M. on the right platforms become available on the market.
So you know that is that is a dynamic that we could see play out and we've seen that play out and pathway that locations as well.
Okay. Thank you very much.
Next question comes from the line of Joseph Denardi from Stifel.
Yes, Thanks, John just on the on the defense business. It sounds like it's more or less business as usual there is that right or are you seeing some degree is labor disruption just from so it's not being able to get where they need today. Thank you.
Sure no. It's been as I mentioned, we had it we had a very good quarter and our defense or government programs revenues were up meaningfully in the quarter and so it's a it's largely businesses your usual I'd add that the pipeline for us on the government side has continued to grow.
Those awards take a long time.
Due to the procurement process as well as the protests process inside of the government, but we've built a great franchise, we're able to bid on more contracts than we ever had been before because of our broad based past portfolio or past performance portfolio and I would expect to continue to see growth there, but it's going to come in chunks.
As these contracts are awarded over time.
Thank you.
Okay.
Next question comes from a line of Michaels.
From Suntrust.
Hey, Thanks again for taking this one.
John just a follow up you were kind of hitting on it would be USM. This is lower cost and could see greater adoption.
What are your thoughts on on MRO right now given given what you're seeing with the domestic carriers. You guys are usually a lower cost option do you think some of your customers reevaluate what they're doing in house right now or do you think there's more.
They are trying to support their workforce and their employees, how do you think that evolves in the MRO side.
I think you could I think that's it that's a good point I think you could see you know some net new work come onto the market.
Given the environment as airlines look to if they if they are.
Looking to alter a union agreement or another contract at night allow them to outsource work you know this would certainly be a backdrop to do that so we could see net new work them on the market I would also expect that you may seem some of the domestic competitors.
That makes us through so you could see.
At least for a period of time, a contraction in the amount of available hangar space.
And why we're very focused and as I mentioned, we've been a dialogue with the government about potential aid to preserve our workforce to the extent that are our new mechanics that are on the market, we could be in a position to bring on a workforce to.
Expand capacity to the extent that's necessary, but there's so many moving parts right now so it's difficult to forecast how all that is going to play out and right. Now we just want to make sure that we've got our cost base rightsized.
To support the demand that we see over the next few quarters.
Got it and what should we be thinking about labor rate I mean, obviously this is a pretty fluid environment right now, but do do we see a quick downtick in labor rates or you know how do you guys think that plays out.
I think it's I think it's a little early to speculate on that I do think that a lot of that does have to do with what the government what action for government takes and what potential aid may be out there to preserve workforce to the extent that theres not eight available.
There you may see a supply of labor come out into the market that we haven't seen in several years and that could impact labor rates, but right now it's pretty early to tell.
Got it all right. Thanks guys helpful.
Thank you.
Next question comes from the line of Ken Herbert from Canaccord.
Hey, John I appreciate follow up.
And then last couple of quarters, you've talked about Pmeight, specifically is maybe a growth opportunity or area of investment.
This does the recent developments change your thinking on that.
No not as a long term strategy, we continue to believe that that as well as the inclusion of of all.
A lot of the inclusion of greater intellectual property generally defined in our portfolio, whether that's pmeight E ours.
Digital et cetera, all of that as part of the long term strategy that said as.
As you can imagine we are taking a look at all of our investment projects right now and we're going to moderate those are pace those with how we see the demand for the core services unfolding.
Okay and as we as we follow.
The sort of the various scenarios on on potential bailouts for the airlines and other parts of sort of the ecosystem are there any specific aspects of that youre youre watching or that wouldn't be particularly helpful for for a our weather beyond the parts supplier. The MRO side I mean as you watch this development.
What would you specifically be be pushing for lobbying for as part of some sort of bailout package.
Our conversations with the government again I've been personally involved in a lot of these over the last the last several days.
Our points or that you know a bailout or aid package needs to address more than just the airlines that needs to address the broader aviation services industry because companies like ours, particularly around heavy maintenance are vital link.
Wrapping the aircraft the United States line, and many airlines have outsourced those activities and they no longer have the capability.
And given that the tightening given the tightness in labor that we've seen over the last few years, we want to make sure that to the extent that there is a decrease in demand and technicians are you know let go from various companies, including our own that we're able to or that.
As other industries recover faster than aviation might we don't lose those technicians. The other to other industries and we want to make sure that we preserve that heavy maintenance capability in particular, a in America. So our conversations have been largely around providing aid to companies like ours either in the form a brand.
Or loans with forgiveness that would be directed towards preserving the workforce.
Great. Thank you very much.
At this time, we have no questions on the phone line.
Okay, well again, thank you everybody for your interest in a support.
And we really appreciate the time.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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