Q4 2019 Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to Hey, ours fiscal 2019, the fourth quarter earnings call. We're joined today by John Holmes, President and Chief Executive Officer.
Sean 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 private Securities Litigation Reform Act of 1995 as noted in our news release and the risk factor section of the company's Form 10-K for the fiscal year ended May 31 2018.
In providing a forward looking statement.
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 Aaos, President and CEO John Holmes.
Hey, Thank you very much and good afternoon, everybody. Thank you for joining US we are pleased to be here to discuss our Q4 and full year 2019 results.
Our sales for the full year up 17% from $1.75 billion to $2.05 billion.
Adjusted diluted earnings per share from continuing operations increased 36% or $1.73 per share to $2 and 36.6 cents per share.
In Q4 consolidated sales grew significantly up 19% to a record of $563 million our growth in adjusted diluted earnings per share from continuing operations was even stronger at 33% from 48 cents a share to 64 cents per share. Additionally, we had solid cash generation again this quarter as we delivered $44 million of operating cash flow from continuing operations. We continue to see outstanding performance from our parts supply and government programs activities and MRO. We saw another quarter of sequential improvement. This improvement was driven by actions we have taken throughout fynineteen to address the site tight labor supply such as enhancing our recruiting efforts partnering with various schools and repositioning elements of our workforce across our network. Our customers have also continued to work with us to increase pricing, which was partially offset higher labor costs.
During F.Y. 19, we focused on implementing a number of new programs as well as executing on certain strategic initiatives.
Our government programs teams successfully insolent implemented both our US Air Force landing gear PBL contract as well as the Wassa Iron out program. Both programs were extremely large and complex implementations involving almost 1000, new employees and contractors. We are very pleased with the results of these implementations and more importantly, so our customers.
As part of our previously communicated strategy to shift to an asset light Gogo business model, we entered into a definitive agreement to sell certain assets in our cocoa business.
In addition to executing on these and other prior awards, we announced several new business wins throughout the year.
Most recently in the fourth quarter, we announced the extension of our engine support contract with them to you.
We also received certification from the Japan Civil Aviation Bureau, JCB that will expand our Japanese customer base and further strengthen the companys position in Asia.
Subsequent to the quarter end, we announced an exclusive distribution arrangement with Woodward to support the us military and a joint repair management contract with global Aerospace logistics or G.
We are focused on you a military fleets.
We feel very good about what we have accomplished in fynineteen and are particularly pleased with our record fourth quarter results with that I will turn the call over to our CFO Jon Gilligan.
Thanks, John before I comment on the financial results I would like to mention the 8-K, we filed this afternoon.
As noted the company retained outside counsel to investigate possible violations of the company's code of conduct the us foreign corrupt practices Act and other applicable laws relating to the company's activities in Nepal and South Africa.
Based on these investigations, we self reported these matters to the US Department of Justice The US Securities and Exchange Commission and the UK serious fraud office, we will fully cooperate in any review by these agencies. Although we are unable at this time to predict what action if any they may take.
Given that this that this is now an open matter with the government, we will not be able to offer further detail at this time.
With that I will discuss the company's Q4 and full year 2019 financial performance in more detail.
Our sales in the quarter of $562.7 million were up 19% or $89.2 million year over year, we experienced growth in both segments, including a $78.2 million or 18% increase in aviation services revenues, and an $11 million or 37% increase in Expeditionary services revenues. This significant increase in topline growth was primarily driven by sales in our parts supply activities along with the loss program.
Gross profit increased 11.8% or 10 million to 94.7 million gross margin was 16.8% for 17.9% in the prior year period, primarily due to the labor challenges in MRO and mix and Expeditionary services.
As you know the expenses were 11.2% of sales versus 13.1% in the prior period, which reflects the utilization of our existing infrastructure to support loss as well as other growth. However increased legal costs in the quarter did drive sq nay higher than initially expected.
Fourth quarter reported results include tax benefits related to refi reversals of state valuation allowances, which reduced income tax expense by $5.1 million or 15 cents per diluted share.
Adjusted income from continuing operations was $22.3 million or 64 cents per diluted share. This compares to $16.7 million or 48 cents per diluted share in the prior year.
Note that Q4 adjusted income from continuing operations and diluted EPS exclude the aforementioned state tax benefits. Additionally, full year adjusted results exclude these Q4 state tax benefits as well as the Q3 federal tax benefits discussed on the previous call. This change in presentation is to more clearly reflect the underlying performance of the business.
As John mentioned in the quarter, we took action to reposition certain elements of the workforce across our network. We incurred after tax costs of zero point $7 million associated with these actions, which we have excluded from our adjusted results.
Capital expenditures for the quarter were $5.1 million and depreciation and amortization was $11.5 million.
Net interest expense was $2.1 million compared to $2.2 million last year.
During the quarter, our cash flow from operating activities from continuing operations was 44.1 million, which is net of a 13.3 million reduction in our IR program.
Also we repurchased 291000 shares for $9.5 million.
Switching to full year results.
Our sales for the full year were $2.05 billion up 17.4% or $304 million year over year.
Aviation services sales grew 17.4% or $285 million, our sales increases were driven by our parts supply activities as well as government programs Expeditionary services sales grew 16.6% or $19 million due to volume growth for our mobility products.
Gross profit for the year increased 11.8% or $35 million to $330 million.
Gross profit in aviation services increased 13.8% or $38 million, primarily due to parts supply and government programs sales flow through.
Gross profit in Expeditionary services declined, 16.1% or $3.1 million due to changes in product mix.
Actually in a expenses were 10.5% of sales versus 11.9% in the prior period adjusted income from continuing operations was $83.1 million or $2.36 per diluted share compared to $60.6 million or one dollar and 73 cents per diluted share in the prior year.
Capital expenditures for the full year were 17.4 million depreciation and amortization were $42.8 million.
And net interest expense for the year was $8.5 million compared to $7.9 million last year due to an average increase in the underlying interest rate, we feel very good about the strength of the balance sheet and the strong cash flow generation.
Net debt decreased $26.2 million to $121.6 million, resulting in net leverage of 0.7 times.
Additionally, we returned $20.8 million to our shareholders through dividends of $10.5 million and share repurchases of $10.3 million.
I will now turn the call back over to John Thanks, Sean.
As we enter FY 20, we are really excited about the opportunities ahead of us and the outlook for all of our businesses as indicated in our release, we are providing F Y 20 guidance for sales to be between 2.1, and $2.2 billion, which represents a growth rate of 5% at the midpoint.
We expect diluted earnings per share from continuing operations to be in the range of $2.45 a share to $2.65 a share which represents a growth rate of 8% at the midpoint of the range as part of this guidance, we expect SDMA to be approximately 10, and a half a percent of sales and to have an effective tax rate of 24%.
This guidance reflects continued growth in our port supply business, which is coming off of a very strong year, a partial recovery in MRO and growth in programs that reflects the full ramp of contract that has already occurred and fynineteen.
Regarding loss, while we have added a new site and anticipate adding more sites, we expect the financial performance and operational tempo of the loss program to be consistent with last year, our estimate for SGN as a percentage of sales reflected reflects anticipated investments to support the growth of our business, including sales quality compliance and IP resources.
Regarding the effective tax rate, we want to note that last year's effective tax rate adjusted for one time items in Q3, and Q4 was 18.5%, which compares to an anticipated tax rate of 24% for F y 20.
Overall, we are very excited as we answer as to why 20, our markets are strong we have a robust pipeline of opportunities and we have significant liquidity to fund our growth. We look forward to discussing all of this in more detail at our Investor Day next week in New York on July 17th at this point I will turn it back over to the operator for questions.
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Our first question comes from the line.
I have Rob Spingarn of credit Suisse. Your line is open.
Good afternoon, everybody, Hey, Rob how are you.
Good Thanks, and nice numbers from you guys I wanted to ask you Jon to talk a little bit more about some of the strength in the quarter, particularly expeditionary it sounds like programs coming online and is that sort of a.
A one or two quarter event and then it moderates and then if you could then extrapolate into next year and maybe a little bit further color on the route on the relative business line sounds like Mros low single digit growth in and other things are above that 5% rate.
Yes sure.
Just on the quarter. Thanks, we're really happy with the way.
For the year ended very very strong result result from from the businesses across the company as it relates to various Expeditionary services, we've announced a few.
Wind in the mobility business throughout the year and we're starting to perform on those wins in produce and ship product. So we saw the benefit of that in Q4 and ensuing quarters, we expect to see.
Additional benefit as we ship off against those those wins.
Thinking about the year ahead.
MRO as I mentioned, we expect a partial recovery.
We're encouraged by the results that we're seeing both in terms of the.
The labor attraction and retention.
As a result of the initiatives that we implemented throughout the year and we also feel good about the loading in the hangers heading into this year as well.
And you're right I mean, as you think about.
The growth rate that the midpoint of 5% certain businesses are above that certain businesses are below that but that.
Represents our best view of the blended rate from where we sit today.
John before you go further how do we factor in India.
And it is Sam Morrow.
Outlook.
Yeah our.
Indian JV I think we indicated last quarter that we expected construction to be completed this calendar year.
Based on what we know right now we we still look for that we're working to finalize the.
Agreement with the customer and.
Once all that's done we'll be able to give more color on.
On on how that will play into the results.
Is there any revenue from that.
Joint venture in the guide.
No we're not anticipating any.
Okay.
Okay.
Just.
With regard to the EPS guidance that the.
Is the 10.5% SGN, a maybe a little higher than you. Originally expected is there anything there may be tied to this legal situation, we thought it might have been closer to 10%.
Yes, it is a little higher than we than we anticipated.
As it relates to the the the matter that Sean mentioned in the 8-K, we havent factored in the costs. There are there we did see some costs that came through in the in the fourth quarter. The 10.5% is is really based on.
You know investments that were making around sales resources to to promote the continued growth, particularly in the parts businesses and that we are adding.
Some it resources were making a number of investments around the digital space and we saw some nice returns from those investments and Fynineteen. So we want to continue.
To fund that growth and then additional quality and compliance resources as well.
Okay, and then just to finish up Sean on the cash flow for this coming year, how should we think about either operating cash or free cash, especially off of what looks like a bit of an inventory build in this past year. Yes, we do expect for this upcoming year to have a nice cash flow year to be cash flow positive, but we're not giving any specific guidance as it relates to either free cash flow or operating cash flow for this upcoming year.
What are the moving pieces that prevent you from doing that.
I'd say just.
The part of our business, if we're going to if we see opportunity, which we think will continue to do so to invest either support parts supply in inventory or new business wins in distribution or other programs, we're going to do that and so we don't want to limit our ability to grow the business by boxing ourself in on cash flow.
So then that you can't even provide a range a conversion range.
We're not providing any guidance on cash flow.
Okay, all right. Thank you guys.
Other than to say, we expect to be cash flow positive, yes, yes.
Right.
Great.
Thank you our next question.
On the lot of Larry Solow CJS Securities Your line is relevant.
Great. Thanks. Good afternoon, guys can you I don't know if you could maybe give us a little more granularity just on the on the aviation services.
18% growth, maybe just help parse this out is the lost contract sort of similar sequentially. That's been running out like 50 million plus or minus top on is it fair to say, yes, thats the thats the Thats a fair range Jeff.
Right. So excluding that you had essentially low double digit it looks like gross and MRO itself in the quarter was that actually.
So it sounds like it recovered sequentially. It was still down year over year. It was down year over year, but we did see sequential improvement.
Got it again for next year, you're looking still continued sequential improvement and a little bit of I guess.
Growth for the full year basis on a moral you said right that's correct.
Correct and then on the Expeditionary side.
Obviously, a nice bump up sequentially and year over year, and I know the margin basis, a little bit of an improvement sequentially.
Well, how come I guess to pressure year over year is that also labor related and it's considering.
Expedition was predominantly mobility, which I know historically has been a very high margin business.
But I realize some high fixed costs in there. So I would think that would pretty good bump up in revenue. Your your gross margin would improve there any thoughts on that yes, I think I think you hit on it.
A couple of moving parts. There one is one is labor and we highlighted that in the third quarter and that continues to be.
One element impacting the results there going forward and then also there is a mix of.
There is a mix issue there as it relates to the margin on different product lines and certain of those where we've won and are producing our.
Lower margin product that you might we might have otherwise seen.
Okay, and then the caused us to extend the agreement to sell the Coke losses. I know you had good announced that last quarter. So is that still sort of set to close sometime mid COVID-19.
Any update on that or yes, thats correct.
Okay and on the loss as we look out.
Sort of.
Similar to this year or do we get incremental growth from Costa Rica, and potentially additional sites.
Yes, yes, good question.
We are expecting similar performance in Fytwenty to what we saw in Fynineteen and.
As we have been on the program now we we've learned more about how it operates and.
We we added a new site, we anticipate adding more sites, but.
New sites does not necessarily.
Correlate with growth of the program as you do have some up and downs between sites throughout the year.
Okay in the long run would you expect as you add more sites that you would get some growth or.
Dennis I would think that would equate with growth over the line.
If if you look historically you know still the program is historically low from where it was a few years ago.
And so we we believe that there is potential for the program to grow from where it is but as we as we look out over the next 12 months just based on what we what we see we expected to be consistent with the prior 12 months.
Okay and then just lastly, just fall throughout the question on the SGN A. I know long term you know you had sort of this like 10% goal. It looked like we were sort of getting close to that.
It looks like obviously, perhaps a little bit of a reset expectation there for some required investments.
Would you view some of this stuff is onetime in nature is that our recurring type thing and how should we kind of any way to sort of parcel that out.
Yes, I mean based on some investments that we're making that's what's driving the tenant a half percent that we're forecasting for this year, but it is still a long term goal to get.
To get to the 10% or below level and we did make meaningful progress. If you look at if you look at where we were last year to this year. We made some really nice progress towards that that long term 10% goal.
Given some of these are resources that we want to bring on during the year that puts us at the 10.5% estimate now and that doesn't really you're not taking into account or will you sort of called out outlet in legal expenses or add to the to the extent we see.
Legal expenses related to the item in the 8-K, we would well call that out and is there any that you mentioned I know in the prepared remarks, there was some of that already in Q4, not significantly elevated to where you do you need to call. It out or there was a there were expenses related to that and in Q4.
But that said your operating numbers right you left out in there. It's left in there we did not we did not call it out.
Okay.
Potentially next year, maybe you don't pull it out but at least you might be able to call. It out. So yes, we want to see how it goes but right.
Likely will highlight that.
Fair enough great. Okay. Thanks, guys appreciate it.
Thank you. Our next question comes from the line of Ken Herbert of Canaccord.
Your line is open.
Hey, Ken.
Mr. Herbert please make sure your line is muted speakerphone lift your handset.
Yes, hi, good afternoon, John and Sean.
Hi, Ken.
Hey, I just wanted to follow up on the guidance for.
Fiscal 20 on on the topline.
Are you seeing specifically within within the parts supply side, it looks like maybe growth slows there a little bit and I'm just wondering within distribution and parts trading are you seeing any sort of sequential shift in those markets or is it really just up against some some very difficult comps from fiscal 19.
I think it's the latter yeah, we had as we've highlighted throughout the year, we had really.
Really substantial growth throughout fynineteen in both.
The trading business as well as the new parts distribution business and we're very pleased with that we anticipate more growth in both of those business.
And we're really happy with our market position in each one of those.
But but you're absolutely right you get up against some pretty significant comps as you go throughout the year.
Okay, and if I could on the on the trading side I mean, we all follow retirements are down pretty significantly which is maybe lowering your access to some material that but probably more than offset by by better pricing. Just can you talk a little bit more John about about some of the dynamics, you're seeing in that market and how with with retirements and access to material. How we should think about maybe some of the changes are dynamics of that market here and.
You know into fiscal 20.
I think that's a great question I think you you highlighted the two most important elements there retirements are down in certain.
Areas the the.
The material availability is tight, but you're able to make up for that in price and we have a market leading position in the aftermarket parts business and our team has done an exceptional job over the last several quarters dealing with that tight market and really outmaneuvering, our competition to get our hands on the best material when it becomes available and that come through in the results and we feel very good about our position there we feel very good about the availability of material that we believe we'll be able to get our hands on versus our competitors and.
Really I think where our ground game is a lot better there and.
Even in a tight market were able to get the best stuff and sell it at a premium.
Okay No that's helpful.
And just just finally as I as I think about the balance sheet and leverage and you're obviously you could argue under levered and you've got plenty of capacity how should we think about you know maybe capital allocation. This year and is there anything else you can say or anything in the guidance regarding potential step up in the buyback and or the M&A pipeline. I know you have continued to invest for organic growth and I know thats thats clearly a priority, which is great, but how do we think about maybe other changes in allocation moving here as you've got very favorable.
Balance sheet position.
Yes, I think as you highlight we feel good about the balance sheet and where it is and it gives us flexibility to invest I think priority number one we're going to continue to invest in the business.
To grow the business that we have but as it relates to capital allocation. After that you saw some increased repurchase activity in Q4.
I think given the balance sheet and cash flow will continue to look to deploy capital that way to return capital to shareholders.
And on M&A, we will we do see some opportunities out there and.
Ability for us to add to our portfolio.
And we're going to look to do that.
Over the next year or so.
Okay and can you just remind us Sean what you've got left or what's outstanding on the buyback authorization.
Yeah, we've got about two to 230 left on the buyback.
The current authorization.
Great all right well, thank you very much.
Thank you. Our next question comes from Joseph Denardi of Stifel. Your line is open.
Hey, good evening everybody.
John when you look back at your kind of tenure at A.R. and the MRO business.
What's the range of margins that that business has produced over time over a cycle where are they now and it feels like there may be towards the lower end and what's the strategy for for improvement there.
Yes.
You are absolutely right I mean, there is there is a cycle.
You know the MRO business and we've talked about this.
Historically is a is a single digit.
Margin business.
And you know it ranges from very low single digits to high single digits, but you.
We've definitely seen that I would characterize us right now at.
At the low end of that range.
We did a lot in F Y 19 to improve that that patient both in terms of getting more price from the customer as well as as well as launching a whole series of different recruiting efforts in partnership.
To develop our own proprietary pipeline of Powerade and we're starting to see the benefits of those are those now and we've got a market leading position in MRO, we got a blue chip customer base, we've got great facilities, and we've got very supportive customers and everybody in the industry is aware of this this tightening some mechanics and so we're getting as I as I said in the prepared remarks, we are getting a lot of support as it relates to pricing to help yield.
Tightness in supply.
So I am encouraged by the progress that we made an F.Y. 19, I am encouraged by the sequential improvement that we saw in the fourth quarter I'm encouraged by the loading in the hangers that we have.
Going into this summer versus where we were a year ago.
And so all of those are positive thing so.
I think again getting back to your original question about the about the cycle, while we're at the low end.
These are all favorable.
Favorable results from the initiatives that we started over the last 12 months to move us back to the higher end of the range.
John is that an area that business, where you're looking at M&A to maybe get get yourself, some some better pricing power.
You know, we're looking at a number of different things there.
More specifically about our own footprint and and rationalizing the workforce across that footprint.
And we took as we noted in the prepared remarks, we took some steps during the first quarter to do that and we're seeing the benefit of those things now.
But.
As it relates to M&A.
You know, we we we were always open to ideas and we will continue to look at creative.
Creative solutions to.
To deal with the overall labor challenge.
Okay, and then John can you just walk us through maybe the pipeline of opportunities do you see an IDE hopped on the call are late so apologize if you did this already but the pipeline of opportunities on the on the government business.
If there any big ones pending thank you yes.
For competitive reasons I wouldnt disclose a specific bids that we have that we have out there.
But what I will say is that there are some significant bids out there both that have already been submitted and also those that are that are in the works I think it's important to note that that.
In the guidance.
We.
While we have a very strong pipeline of government opportunities. These deals take a long time to award and we are anticipating that even if we see some significant awards during the year, it's likely that implementation wouldn't occur to have a meaningful impact on the F. Y 20 results and we could talk a little bit more about the pipeline and the type of things that we're looking at at the Investor Day next week.
Got it thank you very much.
Thank you. Our next question comes from the line of Michael Ciarmoli.
Of Suntrust. Your line is open.
Hey, good evening guys. Thanks for taking the question on next quarter to close out the year here.
Hey, maybe just to stay on that topic John .
When you.
These government deals and having.
Them, taking time I think you just want a sizable fee 130 contract for the Afghan Air Force.
Should we expect is that is that going to be a contributor at all modest contributor this year or is that more of a 21 event.
It's actually it's a recompete so we're on that contract today so.
Best way competed to retain that contract.
And so yes, we had we had that yes, so we have that.
We had we had we were confident in our ability to retain it and so thats included in the in the guidance got it.
Got it and then maybe Sean just.
Your first time going through establishing a framework for guidance, maybe could you just give a little color on what maybe you did differently, establishing the guidance. This year or did you guys make any philosophical changes to how you establish the guidance and any color you know kind of given your prior experiences and what may be brought to the table.
Yes.
Yes, I'd say no major shift in kind of how we came about guidance in terms of the planning of the organization and budgeting process for the year, obviously, we're giving guidance at a different point in the fiscal year than the previous guidance. So I think that allows us to have a little bit more insight into what we're seeing over the next 12 months rather than at 18 month period.
But other than that I think largely consistent with how the company has not about creating its plan and budget and communicating to the street.
Got it got it and then John just overall you know.
Airline customer behavior, I mean, we're looking theres some theres definitely been some profit pressure for some of the carriers Traffics decelerating just in general what are you seeing from a behavioral standpoint from from your customers and even kind of weaving in what's happening with the Mac, presumably thats, creating some more opportunities for you guys, but maybe just if you can just a little bit of color on the overall market conditions and how you're looking at them as we.
Wrap up this summer here and get into the fall.
Yes, I think.
You know overall and I think about our most transactional businesses, where we're in day to day contact with the customer.
Notwithstanding the macro factors that you mentioned the pace of activity that we're seeing.
On a day to day basis is is as robust as we've ever seen and.
That that.
But that is enhanced by what I said earlier about our market position and the fact that we're able to get material that others cannot and.
As it is it is it relates to the Max.
You know, we talked about that in the third quarter and we've seen.
We've seen some shifting in the MRO schedule as a result of the Mac and we have seen.
Flight I'd say increased in in parts demand as a result of the Max but nothing.
Nothing that really influence the results.
At least at least in the fourth quarter, but certainly that's something that we're we're monitoring closely.
Got it and then just the last one for me.
The labor pressure and you guys talking about pricing and getting support from your customers. I mean in short are you guys able to increase your pricing on on existing contracts to pass through some of those higher labor rates you might have to be a b offering out there yes, we have.
We have been able to renegotiate or not we have not been able to pass a dollar for dollar, but we have been able to get some relief.
Okay, and then all of your customers have been open to that renegotiation I mean, they obviously I understand the dynamics in the marketplace. So it sounds like they're being receptive to that.
Yes, the customers are being so right.
Got it got it all right great. Thanks, guys.
Great. Thank you.
Thank you at this time I'd like to turn the call back over to John Holmes for any closing remarks, Sir.
Okay. Thank you for your time and interest in the company. We are really proud of what we accomplished UNEV why 19 and very excited about the opportunities ahead of us than why 20 and look forward to seeing everybody at the Investor Day next week.
Thank you.
Thank you, Sir ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may disconnect. Your lines at this time.