Q4 2020 AAR Corp Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to a ours to school 2024th quarter earnings call. We're joined today by John Holmes, President and Chief Executive Officer.
Sean Gillet 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 private Securities Litigation Reform Act of 1995.
As noted in the Companys news release, and the risk factor section of the company's form 10-K for the fiscal year ended may 31st 2019, and form 10-Q for the fiscal quarter ended.
February 29 2020.
And providing the forward looking statements. The company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events.
At this time I would like to turn the call over to a arts President and CEO John Holmes.
Great. Thank you and good afternoon, everyone I really appreciate you joining us today to discuss our fourth quarter in our full year 2020 results.
Before we get into those results I'd like to begin by thanking the a our team for its truly remarkable strength. During these unprecedented times in many cases, we've had to make difficult decisions in order to align our cost for the lower demand environment and I'm really proud of my teammates for their professionalism.
And resilient as we work through the impact of carbon 19.
I also want to think our customers for their unwavering support and for recognizing the unique value that a our continues to bring.
In addition, I'd like to comment on diversity and inclusion.
These imperatives have been part of the Aaas core values for decades, we'd have a long history, both internally and within our communities supporting promoting underrepresented group. However, the advanced in recent months have prompted us to broaden our efforts to try to understand systemic racism and discrimination and determine how we can continue to improve.
The company and as a society.
To that end, we are taking several additional steps that will enable us to rebuild our workforce when that even more diverse team as our industry recovers watches a our has played an industry leading role in addressing the storage skilled labor. So to can we play a role a leadership role in building a more diverse and inclusive.
And workforce at all levels any industry.
With that I want to turn to our results.
As you all know the commercial aviation industry has been significantly impacted by the code that 19 pandemic.
In light of the challenging environment I'm very pleased with our overall performance our sales for the year grew 1% or 2.5 billion to 2.07 billion and our adjusted diluted earnings per share from continuing operations decreased 12% from $2.44 per share to $2.15 per share.
Although our earnings for the year were down from 2019 levels. Our results reflect three quarters of record sales and earnings performance.
And a fourth quarter in which we were able to effectively navigate a historic decline in the commercial aviation industry due to the unprecedented grounding of the World fleet.
Sales for the fourth quarter were down 26% for 563 million to $417 million and adjusted diluted earnings per share from continuing operations were down 62% from 68 cents per share the 26 cents per share.
We took numerous cost reduction actions early in the quarter to offset the impact, which we described it on may 21st age 8-K, including facility closures and consolidations exiting unprofitable product lines and exiting or restructuring underperforming commercial programs contracts.
These resulted in a pretax charge in the quarter of 27.9 billion.
And bring our cost structure into much better alignment with the current revenue base. In addition, our agreement to divest our composites manufacturing operation.
Which we announced a few weeks ago was not profitable.
Well, it's not profitable enough why 20, and it's not quarter aviation services offering as a step towards further enhancing our profitability.
We had launched the sale process earlier this calendar year and a priest pleased to have agreed on the transaction that furthers, our multiyear strategy to focus on our industry, leading aviation services and reduce complexity in our operations. All of these actions along with the actions we are continuing to take into current quarter produce permanent changes in our cost structure, which.
We expect to improve margin as our revenue recovers.
Even in this environment, we continue to pursue and win new business and I want to highlight a few examples.
During the quarter, we announced an agreement with D.A.S. after distribute and maintain certain aircraft cabin air quality improvement products as well as $125 million Bill first contract with the U.S. Air force to produce and repair for Sixthree O'connor pellets.
Also announced the joint venture with Sumitomo to provide supply chain solutions to the Japanese defense market and to distribute parts from Japanese Oems to the global aftermarket. In addition, subsequent to the quarter, we announced an extension and meaningful expansion of our agreement with units in industry a subsidiary of GE aviation.
And this agreement we serve as its exclusive worldwide aftermarket distributor for aviation military civil and land vehicle products.
The agreement also includes repair services.
And is valued at more than $1 billion over 11 years.
This award demonstrates the value of a our distribution model and connected business the strategy as well as our ability to use our relative strength to extend and grow our business during the pandemic.
Before turning it over to Sean I also want to touch on the expected agreement, we announced yesterday with the U.S. Treasury under the air carrier workers support portion of the care that.
Under that agreement, we expect to receive $57.2 million to pay salaries wages and benefits.
To the workforce currently employed in our U.S. airframe.
Landing gear MRO operations.
Of the $57.2 million 48.5 billion as a grant an 8.7 million as a low interest prepayable known.
As you know over the last two years, we have worked to successfully build a technical work force Bray are and we have launched initiatives to bring new talent into our industry. This grants health insurer that those efforts will continue and I really want to thank Congress and in particular, the Illinois, Oklahoma, Indiana, and Indiana delegations as well as the administration.
And recognizing the essential services at our employees provides the commercial aviation industry.
I'll turn it over to our CFO John Gilbert.
Thanks, John or sales in the quarter 416.5 million were down 26% for 146.2 million year over year, including a 7.5 million impact related to the exit of certain contracts.
Sales to government and defense customers were 47% of consolidated sales versus 35% in the prior year quarter as our commercial activities were significantly impacted by cold in 19.
Specifically, our commercial sales were down 40% year over year.
As John mentioned, we took a number of steps in the quarter to reduce our fixed cost and overhead, including closing our gold barrel and duluth facilities, and exiting or restructuring underperforming contracts and product lines, primarily in our commercial programs business.
These actions resulted in a predominantly non cash charge of 27.9 billion, which was recorded in the PML as a reduction in revenue of 7.5 million an increase in the cost of sales a 15.7 billion an increase in Sq nay of 2.8 million and a loss from joint ventures of 1.9 million.
We're continuing to take additional actions in Q1 to reduce costs and improve margins. These include the composites divestiture as well is continuing to address underperforming programs at additional footprint rationalization.
We estimate that all of our actions will reduce I have seen a by over 50 million on an annualized basis, and we will remain disciplined about maintaining these cost savings enabling margin expansion as demand recovers.
Gross profit margin in the quarter was 8.7% versus 16.8% in the prior year quarter.
Excluding the charges gross profit margin was 14.1% versus 17.0% in the prior year period, which reflects point 9 million of adjustments in the prior year period related facility repositioning costs.
Aviation services gross profit decreased 53.2 million, our government business across parts repair and integrated solutions remained relatively stable and we were able to emphasize our cargo end markets. However demand in our commercial airline businesses were down as a result of the pandemic, including a both parts and maintenance services.
Within our heavy maintenance business, although we began the quarter with full hangers work slowed throughout the quarter and remained at reduced levels, which we expect to continue during our seasonally low Q1.
In Expeditionary services gross profit decreased 5.1 million.
We expect performance in this segment will improve as mobility executes on the Air Force pellet contract and we complete the divestiture of composites.
Yes, you're in a expenses were 47.3 million for the quarter. Adjusted EPS. You know was 46.5 million down 10.8 million from the prior year quarter. This reduction was primarily driven by the covert 19 related overhead cost actions we took.
During the quarter, we elected to draw the remaining available balance under our revolving credit facility as a cautionary measure which resulted in net interest expense, increasing point 5 million to 2.6 million.
We expect to repay the facility this quarter such that we maintain cash on hand going forward consistent with historical levels.
In the quarter, we use 18.6 million of cash in our operating activities from continuing operations, primarily due to a decrease in accounts payable partially offset by a decrease in accounts receivable contract asset and inventory.
Also during the quarter, we returned 2.6 million to shareholders via dividend of 7.5 cents per share as a condition of accepting payroll funding from the U.S Treasury under the cares Act, we are not permitted to pay additional dividends through September thirtyth of 2021.
Our balance sheet remains strong with net debt of 197.3 million and net leverage of 1.3 turns.
We have no near term maturities and as of the ended the quarter, we had unrestricted cash of 404.7 million.
With respect to the cared that funding we expect to receive the funds during our fiscal first quarter. Upon receipt, we will record an increase to unrestricted cash and corresponding liabilities for labor cost pursuant to the grand portion and for the unsecured note.
The benefit will flow through the piano, specifically as we incur salary wages and benefit costs in our us airframe and landing gear operations, we will offset the expense on the income statement until the funds are depleted which is expected to take approximately two to three quarters.
Similar to other government workforce subsidies, we will exclude the income from our adjusted earnings.
Second the funds is not on do any of the cost actions taken in the fourth quarter.
Thank you for your attention and I'll now turn the call back over to John Great. Thank you Sean.
Despite the impact of the Coven 19 pandemic, we're pleased with our Q4 and full year results and I'm proud of the courage and dedication of our employees. Our government business continues to be healthy and growing and we're having success, placing more emphasis on our cargo end markets. When the environment continued to be very dynamic our commercial airline businesses have performed better.
Acted as a result of the early cost actions that we took in the quarter as well as our deep customer relationships.
In addition, our liquidity and balance sheet remains strong, which we view as a competitive advantage, allowing us to security business. Our units in one is a great example of the however, we remain very focused on generating cash to preserve and enhance our liquidity position.
We expect to continue to make structural changes to our performing portfolio, which when combined with the actions we have already taken will improve the margins of the company as we recover.
That said the duration of the requirement Rick crisis remains very uncertain and for that reason, we're not providing guidance for fr 21, we do expect sales in Q1, which is typically our lowest quarter based on seasonality to be down sequentially from Q4 consistent with prior years.
Overall, we are confident in our ability to navigate the current environment and we believe we have an opportunity to use our relative strength to emerge from the crisis, even stronger more profitable and better position for long term growth.
With that I'll turn it over to the operator for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press star one on your telephone and again that's star one on your touched on telephones ask a question to withdraw your question press the pound key please standby, while we compile the Q and a roster.
First question comes from the line of Robert Spingarn of Credit Suisse. Your line is open.
Hey, good afternoon, John and Sean.
I understand it this is a dynamic time, yes, and obviously very difficult.
One of the things I think would be helpful for the for investors to see if we could figure out where trough is.
And so in the context of your 40% decline in commercial.
We think about the months in the quarter and then you talked about this sort of seasonality on a sequential basis, but have you troughed and can we talk about that separately for an MRO versus parts.
Yeah.
Sure. Good question, so from a part standpoint.
I felt the decline very early in the quarter and I think the levels. The level that we're at now which are again better than where we expected have been holding the last several weeks and.
Given the dynamic environment, it's difficult to call anything a trough, but we saw a decline and they have been holding steady for the last several at the last several weeks now obviously, there's a lot of movement out there, particularly with the North American carriers in terms of.
The results of the recent surgeon changes they may be making to their their fleets.
So far the last several weeks the the.
The parts businesses, both distribution and trading of have held in there.
For MRO throughout the quarter, we started the quarter with full hangers and then throughout the quarters. We delivered aircraft in many cases those aircraft were not replaced by an additional aircraft. So we did see decline through the quarter.
We are at a a depressed level heading into the summer from where we would normally be but seasonally it typically a low quarter for us.
As it relates to MRO.
We have a lot of dialogue with the customers right now about what the fall is going to look like and I would say that's a very dynamic discussion.
We're not yet clear on what the fall maintenance schedule will will be.
But you know we.
We're confident that the customers are focused on keeping our facilities as full as possible because they want to make sure that.
There are available to them as they see a recovery.
Okay, and then ill. Thank you for that wed like to dig in a little bit in terms of.
How the customers you're thinking about this one the ways that we look at it is the size of the parked fleet. So.
I guess the park fleet got up to about 16 17000 aircraft early on in this thing and now has dipped below 10. So that's good news as that translated into more business or are those aircrafts that are coming back in not in need of maintenance.
We havent seen to translate yet, but we do expect that there is a backlog of maintenance requirement that building out there and as the airline look to manage their cash we expect those those maintenance events. The convert we do view that the with respect to.
Potential retirements and the introduction of new aircraft into the fleet and I think those dynamics are still playing out.
Okay and then there is one of the thing I wanted to ask about was part outs and what if anything is happening there.
Yes, so haven't seen a havent seen a tremendous amount of activity there, but certainly that's something we're looking at closely.
About the growth and our trading business in particular over the last several years.
The constraint really to growth has been and we we did grow but the constraint to further growth has been availability of material. So we are looking.
Looking forward to opportunities to depart out aircraft and and bring more material to the market and capture a greater percentage there.
The other thing that we expect to see as we go through this and our Salesforce is working very hard on that as airlines that may not have been historical users of used serviceable material given the pressures on cost we may see more conversions of customers that typically had an OEM buyers.
Look for alternative sources like like us the you'd like us them. So it's more material comes on the market as well as we can convert more customers take advantage of the cost savings that come with buying U.S.M.
We expect to see.
Growth in recovery there.
And on that point on material coming to the market you just said that the supply materials and important driver is that just not happening yet because those who own the aircraft aren't yet sure what they want to do with them.
That's correct.
Yeah, I think Thats, a fair assessment and you know just because aircraft or park to retire does not necessarily mean, they're going to go straight to part out that takes time.
And there is a only a certain amount of available capacity out there in the market depart out aircraft. So.
There's a there's a lot of factors at play in terms of how that new material hit or how that use material hits the market.
Okay. Thank you very much I'll step out.
Sure.
Okay.
Thank you. Our next question comes from Joseph Denardi of Stifel. Please go ahead.
Hey, good afternoon.
John just to maybe along lines of Rob's question can you just maybe level said, where things are now what was the commercial business down in in June or kind of whereas it running now.
Yes, I don't know that we now one of the sincerely comment on individual months, but.
We saw throughout the quarter, we saw 40% decline in total.
Certainly that.
You know accelerated.
Between March and May.
But the levels that we're seeing in June.
Our flight or saw in June and are seeing in July our slightly better than what we saw in April and may but still at a depressed level.
So we're we're.
We're holding at the current at the current position for the time being.
Okay.
Okay.
And then maybe just kind of the.
Some more clarity around kind of than the nature of your conversations with some of the airlines I would imagine that some of them, obviously now under greater financial pressure would be more interested in shifting risk and capital onto your balance sheet and taking advantage of that.
Has that is that starting to present itself as an opportunity or are not yet do you see that eventually as as becoming one.
Definitely see that.
Potentially coming out coming out from the airlines, we actually already are seeing it from from the Oems.
Some of the distribution business has been a lot of discussions with Oems at all levels in the supply chain on.
Looking to to your point to.
You know to take advantage of our relative strength in exchange for for long term distribution agreements. We are exceptionally focused on our liquidity position and our cash position.
So we're considering those deals very carefully, but we do view that as an opportunity to add strength to the distribution business, which has been a great success story for the last few years.
Okay, and then maybe along the lines of the MRO business.
Coming back are you getting any kind of unusual requests from airlines in terms of how that work is financed are they asking you to extend them unusual terms given their liquidity relative to yours.
We went through.
We went through a number of those discussions several months ago early in the early in the in the quarter in terms of I'm looking at extended terms for our airline customers and that was pretty much I wouldn't call that necessarily unusual it was pretty much a universal request.
From a from all of our partners out there.
And we you know it turned we.
Slowed that down to our supply base as well.
So yeah, we have we have extended terms the to our customers are we received extended terms from our our supply base.
And beyond that we havent.
Seen any request that I would consider unusual.
Okay. Thank you.
Thank you. Our next question comes from Michael Ciarmoli of Suntrust. Your question. Please.
Hey, good evening, guys, John Sean Thanks for taking the questions here.
I know maybe I'm not sure. If this is John or Sean I know you guys aren't going to get.
Any specific revenue guidance for the year, but I think you talked about taking $50 million of SGN, a additive business probably implies 170 million.
Is it fair to say your your sizing the business for maybe a 1.6 billion revenue run rate just thinking about kind of how you've been running it SGN areas is that a fair bogey to think about.
I wouldn't think about the DNA target necessarily in the context of of revenue sizing I would think about the f. DNA target and.
Really around improving our margin.
You can tell we're taking a lot of action. During this period of time and we're taking a quick action.
To really changed the structure of our a of our cost base.
Sean mentioned in many cases on a permanent basis going forward, we've had a number of margin improvement targets for a long time and.
We're really using this time to accelerate our efforts in the in that regard.
Sean if you want to yeah, I'd just add Mike.
My comment was over 50 million and it's across I asked you today, so indirect spend as well as that should I just wanted to clarify that got it got it.
And then just talk about.
He kind of talked about some of the conversations with the airlines, but can you maybe talk to some of the.
Integrated program the power by the hour contracts I mean, it it seems like we're going to be in environs here of reduced flying hours for quite some time I think.
The United just said that they expect 65% you know.
Capacity.
Through this third quarter here what are the implications on moves you know existing contracts you have with with your broad airline customers.
Yeah.
So we we also are prepared for an extended period of the depressed line and Thats. The way, we're modeling that business in the way, where we're sizing the business as it relates to.
Commercial programs in particular, you know that's a business that you did see significant decline in that business right away because just by by definition you Bill based on flight hours than many of those customers at grounded.
All nearly all of their fleet during the period of time.
As Sean mentioned, we did take some charges in that area because.
Those those contracts to the extent that.
They are they are flexible enough to work in this environment, we leave them in place to the extent that the contract will not match.
The customers operation or our requirements going forward, we're looking to restructure and stay with that customer, but in some cases, we've chosen to exit been agreement and.
As we've talked about for the last couple of quarters that business, even before co that had been under pressure due to market dynamics and changes in cost in the supply chain and once again, we're taking this opportunity to restructure that business. So that when we come out of this it's much more profitable going forward.
Okay got it Thats helpful. Then I got one more here and I'll jump back in the queue inventory levels were up if I think about.
Just the total lack of flying someone like United's capacity is going to be down 65%. How do you think about burning down inventory.
If theres just a complete lack of flying hours a lack of pull on you know any inventory in the broader supply chain is distributors are fully stocked I mean does this become a little bit problematic to move inventory. If there's just not a lot of consumption out there I mean, how are you guys thinking about.
Maybe converting that inventory into cash under this this depressed environment.
No no great great question and converting inventory to cash is a a visit.
Very top priority for us.
You saw the inventory come up because the pre co that there were a number of agreements that were signed.
That had a that had investment requirements and we.
In almost all cases lived up to those commitments through our partners, particularly in the distribution business. So that drove a lot of inventory increase we feel good about the position that we have we feel good about the parts that we carry.
The parts in particular in the commercial programs business those are by definition for those parts.
Higher moving higher consume parts just the way those contracts work. So it is a material in a normal environment that would be high demand, but as you point out we're not in a normal environment. So we are redoubling, our efforts to the market that material very effectively get creative in terms of trading material that we have.
Against other services that may be required from the customer base and looking to move it.
As best we can but.
There is still.
There's still as we keep saying a great deal of uncertainty out there in terms of how.
The overall fleet will will unfold and we may see certain asset classes, where we would have expected.
You know a shorter life.
To actually get extended.
Because because new aircraft deliveries aren't.
Are going to occur so we're watching that as well and I do want to mention the point of it that I made a to Rob spring Ron's question just around another effort. We have underway is to convert customers to use them. This is a great time to windows material available.
Particularly on our sheltered in the market.
Second to really tout the benefits the buying used material that is often available at 30 60, 70% of list.
The customers that they actually do have demand.
Got it.
Just one more point on that.
We are seeing if we look across different markets, we have seen a meaningful uptick in Asia. We are starting just in last few weeks to see.
More activity out of the out of Europe.
Certainly you've seen a major changes here in North America, but that's another another avenue is to take over the action is and right now were redoubling our.
Efforts in the market that are further ahead on the recovery as we look to a as we'd like to move that material.
Got it and any pricing pressure on that material John either on your existing parched trading or just you know, presumably a flood of parts out there where you kind of said, you're getting new creative and doing different things to market that material is pricing eroding in the marketplace.
We've definitely seen pricing at the whole aircraft level decline and we've seen some trades out there at meaningful.
Discounts from where we thought three coated.
Certain higher dollar L.R. use we've seen a bit of that but.
And we expect to see that but nothing.
No.
You know kind of macro specifics I could give you at this point in terms of the value that the at the parent level.
Thanks, guys I'll jump back into queue.
Thank you. Our next question comes from Josh Sullivan of Benchmark. Your line is open.
Hey, good afternoon, John Sean.
Hi, Josh.
On the cargo business, how sustainable is declining strength.
Maybe if you could just talk about what the pipeline or lead times look like for cargo conversions.
Yeah, I mean, there's obviously, there's a lot of.
Action out there in that market and you certainly have through the traditional cargo carriers have we talk about our focus on it we've got sales resources that previously had been covering dozens of commercial passenger accounts.
Play in many cases their account base as a stronger is just not as active as it once before and we're redeploying those resources to focus on the on there and the cargo markets, but that's just not that's not parts. That's also heavy maintenance as well as well we actually saw our first 747 cargo aircraft.
In our Miami maintenance facilities first time, we've done work on the 747 and in a really one time in that facility and we just completed one and shifted off and we're looking to do more with that particular customer. So it's an area of focus and Ah and I think at opportunity for US again, not just on the on the maintenance.
Side, but also on the part side as well.
Yes.
And then just the conversation going to airlines on their long term MRO needs.
One point pre cobot market was very tight for labor books again in the airlines internally, but as far as the MRO outsourcing model is the airlines restructure you having those longer term conversations about maybe what outsourcing can bring them.
Yes, yes I.
I would say that that is.
As a very dynamic environment and definitely tracks with the with what.
What do you see out there in terms of their maintenance requirements are going to be aligned with the flying that they expect to do.
And so.
Certainly no no one is talking about bringing at least to my knowledge of that we're talking to you know when talking about bringing on work in house everybody is committed to the outsourced model and there is a real interest and focus on the part of our customer base of making sure that.
Top tier providers like a are are around to service the aircraft when demand recovers.
That.
Spectator than I would say a given recent events here in the U.S. as pushed out to the right versus where I.
I think people were thinking it was going to be a month or six weeks ago.
But everybody expects the recovery.
Different customers have different expectations of the timeline of that recovery and they all recognize though that they're going to need and outsource maintenance provider.
And keeping.
Our facilities full and running as best they can to make sure that we retain the workforce.
So that it ready when they start to need maintenance at a greater scale is also a major focus of theirs.
Got it.
Then just one last one following up on.
On a grabs questions part outs, just with regard to your relationship with.
The Pier Park are you anticipating the material usage that joint venture.
As those parts material become available and then how large do you think that could potentially yet.
That is a great question. We are very excited about the partnership that we have with me here.
We've deployed only a fraction of that capital to date and so there's a great deal of dry powder to go out and look for opportunities.
That said there is theres still so much moving in the market. It's difficult at this moment to tell what a good deal really is and so we're paying very close attention to it.
But we're also mindful that what we see today may look a lot different in a month and we're we're approaching that market.
For acquisitions that ultimately could go to tear down or short term lease very cautiously.
Okay. Thank you.
Thanks.
Yes.
Thank you. Our next question comes from Ken Herbert of Canaccord. Your question. Please.
Hey, John and Sean Good afternoon.
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Hey, John.
Wanted to ask if sitting here today as you look at your fiscal second and third quarters for the MRO business.
Can you provide any any quantification or commentary on how your backlog for Morrow looks this year, maybe just relative to prior years, specifically for the second what sort of fiscal quarters.
Yeah.
The backlog less.
Than it was a you know called a year ago.
We.
Were again not to repeat but we're encouraged by the dialogue that we're having from our customers and as much as theres going to be less works to go around but they want to make sure that.
Their top tier providers.
Like a are.
At the work that we can keep our operations running.
We have both through obviously, we closed our facility into Lou.
And we have shrunk our footprint utilization at certain other facilities and unfortunately had to reduce our workforce, we have sized our MRO operation for a much smaller.
Labor utilization going into this fiscal year than we would've had last fiscal year and so against that smaller footprint as a percentage we're actually sold out.
Proximately the same percentage that we would at a normal year, it's just on a much lower base.
Got it and if my calculations are correct. It looks like from with the facility closures from a man hour basis, you've maybe taking their capacity down by somewhere in the 10% to 20% range.
Yeah.
Yeah closer the higher into that range yep. Okay. Okay. Okay very helpful and can you just remind us the split of your capabilities and MRO between wide bodies narrow body you mentioned before seven doniger Miami facility and are you seeing any opportunity yet to maybe take share from cargo carriers. This history.
Barkley have said you know the wide body aircraft for tomorrow over to.
Asian or other lower cost markets.
That is a dialogue, we're having you know we the certain of our facilities are still in Iraq or facility in Miami for example that.
Our widebody facilities and we have had.
Interest and.
We have that interest in a.
Repatriating that work has been a dialogue is out there for a long time, but there definitely I've given the current environment I'd say renewed interest to bring that some of that work back.
So no particular deals in place there yet, but it as a conversation that were never having the one a the one just to go back to your previous question one point I would want to make.
Our capacity in the MRO business is really thought is is driven by the amount of labor available available to us.
Not necessarily our footprint, so even though we've reduced our footprint to the extent that we have demand and are able to.
Secure labor to support that demand, we could actually see the same level of production off of this reduced footprint as we saw pre coated and.
As John said, a number of the changes that we make like rationalizing our footprint position us to be more profitable coming out of this once we see demand recur.
Return.
Okay. That's helpful.
And if you look job relative to I know this time is obviously very different important as you look at the downturn now.
A lot of speculation that as demand from the airlines for them. Our all in parts and services does start to come back there will be significant green time availability, primarily on engines and other other more capital intensive assets how much of a lag do you expect that to be order or to create in the recovery is that isn't it.
It or weeks could it be a matter of quarters. How are you thinking about that as you think about MRO and park screening and other parts of your business.
I would think about it you know at most a matter quarters, but a lot of the airlines have they've already started to burn that green time, right I mean, they're moving engines from all of them.
We start customers went.
Very quickly into a cash conservation mode, and so rather than sending engines to overhaul the swapping engines out on parked aircraft et cetera to the extent that theres removable argues that they can cannibalize so that's already occurring.
You know.
Some ways, we think of it the opposite as there is actually a very significant amount of deferred maintenance that's building out there so that when we see a a return to flying.
You might actually see a much quicker and more dramatic.
Uptick in parts requirements and maintenance requirements, because that green time.
Being burned as we speak.
Okay very helpful. Just one final question congratulations on the unison our renewal there as I look at your distribution business, both on the military and commercial side.
With that new contracts you've added in over the last couple of quarters and renewals like this and potential for.
Obviously talked about new potential OEM relationships in this climate can that business in fiscal 2001, the flat relative to fiscal 20 or can you just give any more sort of color around expectations for that business.
We expect the government half of that business to be up in fiscal 20, even with the new additions.
Pending on the timing I would still say the commercial.
Portion of that business, even with new win.
I would likely not being enough that do revenue to get.
The commercial business flat.
Yes.
Okay. That's helpful Alright, well, thank you very much I'll pass it back there.
Thanks.
Thank you. Our next question comes from Joseph Denardi of Stifel. Your line is open.
Hey, John just just along the lines of the product question as it takes airlines until 2023 to get back to pre Cove. It levels of flying and revenue, perhaps do you get back there before them the same time or after.
I think it depends on how ultimately.
The fleet shakes out so to the extent that.
You have more retirements and.
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We.
The more new aircraft deliveries and more retirements, we could lag to the extent that you see.
Airlines recover and either differ or cancel new aircraft deliveries and they've built up as I said before a pretty deferred a pretty significant amount of deferred maintenance you could see a you can see an increase well before.
Got it and win win when you look about when when you look across your exposure to aircraft type kind of across the business. Obviously their aircraft types being exited in the U.S. pretty pretty quickly when it when you look at what's being retired or are there any surprises and do inventory levels on on the balance sheet.
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Reflect some of those risks currently.
Yes, so first of all no surprises.
I think what a larger ones American was that was that was announced you know many months ago and expanded a little bit but that was a kind of articles out there so no surprises and certainly.
Whether it's the 747.
You've seen a lot more retirements, obviously in the wide body triple Sevens et cetera.
That's less significant to us so.
Not as a not concerned about that and then you've got MD 80, or MDM denied issues that have been retired again no surprises there. So I think I think so far we're we're we're not seeing what we're seeing a tracking with what we would expect and again.
We're very eager based on the particularly the engine support contract, we have with certain shops to get our hands on material that previously prior to the prior to co that would not have been available to us. So we can support demand and albeit the overall demand will be depressed but.
We expect to be able to support a greater percentage of that demand as things recover.
Got it thank you very much.
Thank you. Our next question comes from Robert Spingarn of Credit Suisse. Your line is open.
Hey, just follow up to Joes question, there on the I mean, when I look at the 600 plus million in inventories.
And on the books here, what you're saying John is not.
Hi, there in significant piece of that would be the red programs when I say red sometime at the some of the programs you just mentioned so anything with four engines.
MD Eightys Ninetys 75, so yeah, it's a correct the wide body exposure is very limited and we actually in the quarter, we wrote down our positions on the MD 80, 90, we wrote those physicians off there was an 80 our material that we wrote off as well. So anything you know, it's really read we've we've already taken action on.
Just curious what do you think of something like these triple Sevens. It came out a delta that are 10 years old I mean, what's going to happen airplanes like that I understand the nap specific case, they all of them they'll have to release, some but is there going to be a market market for something like that.
At least on a positive say, yes, I mean, there could be I.
I think about I don't know five or six years ago win win a 767 was dead and we couldn't give away do you see too material than all of US on Amazon started flying in the became one of the hottest asset types around.
There's no question I mean, that's a great aircraft and.
It's hard to predict where they might find a home but.
We certainly would the.
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Yeah.
It's hard to predict where that find a home, but we certainly would expect.
Use for an aircraft for that type.
Okay, and then I just Sean I have one for you and it touches on some of things that have already been discussed but in looking at the cash flow in the quarter. So the working capital accounts move differently than I might have expected, specifically receivables and payables.
And then more.
The other thing I wanted to ask you about this is how do we think about breakeven operating cash flow what level of revenue supports a breakeven operating cash flow.
Yeah on the first part in terms of the.
Balance sheet and networking capital items in the quarter.
Accounts receivable given the decline in the topline yeah, we were able to worked that down pretty significantly it had to be a big provider of cash items I'd say some of that was in line with just activity declining and that kind of new a are being put in.
Good work down in the quarter and then on accounts payable I'd say in a similar way you know there was a lot less new purchasing activity because we tried to really focus on cash flow generation. So this was taking you know things that were age, but the payable that were coming due and and manage to managing them at the ended the fiscal year.
So that's the two biggest from then on contract asset to the activity in the hangers comes out and that that kind of comes down in line with with some of those activity.
Which is a net provider of cash because of that dynamic.
In terms of kind of where did the topline need to be in terms of breakeven.
For us what kind of that give guidance on that but when we think about.
Where the balance sheet is in the amount of inventory, we have and focus on turning the inventory into cash.
I'd say, there's not a kind of bright line of where sales for the whole company needs to be as long as we can kind of continue to focus on inventory and limit.
New buys.
Caveat being that as we take advantage of our relative position of strength for things like you to send and other items that come up we're going to want to put some capital to work on on new positions to expand our market share in this period of time.
Okay, all right thanks very much on.
Thank you next question comes from Michael Ciarmoli of Suntrust. Your line is open.
Hey, Thanks for the follow up Sean just to.
Look I know, you're not giving guidance again, but how are you guys thinking about the level of adjustments or charges on a go forward basis, you know anything that we should expect in the coming quarters, whether it's the ongoing facility severance, obviously hard to predict the customer contract and customer.
Bankruptcies, but.
Just trying to get a sense so.
What we should expect you in terms of all you know and non operational or or non repeatable charges.
Yes, good question, and we will kind of stay away from.
Forecasts youre guiding on that but there are activities that continue to take place in Q1, one composites.
Included in AK as mentioned previously that that'd be about 20 million charge associated with the divestiture that business.
I would expect there's other kind of activities whether the.
Headcount or facility.
And then we're reviewing the portfolio in some of these contracts, but I can't say today, what that would look like.
Okay and we.
We expect done.
Sorry, I would just add that we're very focused on any action that we take that results in a a onetime event.
At.
That action is going to have a meaningful improvement on the profitability of the company going forward.
Got it should we should we think about sequentially, obviously tough environment, but given some of the cost actions to gross margins improve sequentially I mean, it's going to be a lower volume quarter, but but how should we think about maybe the gross margin profile here.
I I would say that it overtime it will improve but I would not I would not expect sequential improvement and you know again. The reason, we're not giving guidance is because we are in such a dynamic environment right now.
Turning to understand got it thanks guys.
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Thank you this time I'd like to turn the call back over to management for any closing remarks.
Great well. Thank you. Thank you everybody for for the time, an interest today, we really appreciate it and we hope everyone stay safe out there and we look forward to talking about our Q1 results and 90 days. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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