General Overview

We report our activities in two reportable segments: Aviation Services comprised of supply chain and maintenance, repair, and overhaul ("MRO") activities and Expeditionary Services comprised of manufacturing activities.

The Aviation Services segment consists of aftermarket support and services offerings that provide spare parts and maintenance support for aircraft operated by our commercial and government/defense customers. Sales in the Aviation Services segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and government and defense markets. We provide customized inventory supply chain management, performance-based logistics programs, customer fleet management and operations, and aircraft component repair management services. The segment also includes repair, maintenance and overhaul of aircraft, landing gear and components. Cost of sales consists principally of the cost of product, direct labor, and overhead.

The Expeditionary Services segment consists of primarily manufacturing operations with sales derived from the design and manufacture of pallets, shelters, and containers used to support the U.S. military's requirements for a mobile and agile force including engineering, design, and system integration services for specialized command and control systems. Cost of sales consists principally of the cost of material to manufacture products, direct labor and overhead.

Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on our segments and utilizes gross profit as a primary profitability measure. Gross profit is calculated by subtracting cost of sales from sales. The assets and certain expenses related to corporate activities are not allocated to the segments.

The accounting policies for the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended May 31, 2020.

Business Trends and Outlook

In late fiscal 2020, we began to see the impact of the COVID-19 pandemic on the commercial aviation industry. In response to the impact from COVID-19, we implemented significant actions to reduce fixed costs and overhead which included a freeze on new hiring, reducing or eliminating all non-essential spend, reducing compensation and benefits, furloughs, a reduction in force, and closure of an airframe maintenance facility. We have also exited underperforming contracts and assets across our operations and decided to exit our joint venture investment in a Malaysian landing gear wheel and brake facility.

Additionally, we sold our composites manufacturing business in the first quarter of fiscal 2021 which resulted in a charge of $19.5 million. The sale of Composites is consistent with our multi-year strategy to focus our portfolio on our core services offerings and the transaction will allow us to further prioritize our efforts in our principal operations.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in the U.S. in response to the COVID-19 pandemic. In the first quarter of fiscal 2021, we received $57.2 million from the U.S. Treasury Department through the Payroll Support Program under the CARES Act. This funding included a $48.5 million cash grant which is to be used exclusively for the continuation of payment of employee wages, salaries and benefits for employees of certain MRO facilities and a low interest 10-year senior unsecured promissory note of $8.7 million. The grant is being recognized as contra-expense on our Condensed Consolidated Statement of Operations as the eligible wages, salaries and benefits are incurred, with $7.7 million recognized in the first quarter of fiscal 2021.

Consolidated sales for the first quarter of fiscal 2020 decreased $140.7 million or 26.0% from the prior year quarter primarily due to a decrease in sales of $148.2 million or 29.0% in our Aviation Services segment. Consolidated sales to commercial customers decreased $160.9 million or 47.9% from the prior year quarter due to the continued impact of COVID-19 and the slow recovery in commercial passenger air traffic. Our consolidated sales to government customers increased $20.2 million or 9.8% driven by execution on recent government contract awards including the U.S. Air Force pallet contract award in our Mobility business.





                                       22

  Table of Contents

Over the long-term, we expect to see continued strength in our Aviation Services segment given its offerings of value-added services to both commercial and government and defense customers. We believe long-term commercial aftermarket growth trends are favorable although there is uncertainty in certain fleet types as commercial operators re-evaluate their structure. Our results of operations are affected by the amount of commercial aircraft flying and flight hours. The current COVID-19 pandemic has decreased the amount of commercial aircraft flying and flight hours and has created significant economic disruption.





Results of Operations

Three Month Period Ended August 31, 2020

Sales and gross profit for our two business segments for the three-months ended August 31, 2020 and 2019 were as follows:






                             Three Months Ended August 31,
                             2020          2019      % Change
Sales:
Aviation Services
Commercial                $    169.6     $  330.5      (48.7) %
Government and defense         194.0        181.3         7.0 %
                          $    363.6     $  511.8      (29.0) %
Expeditionary Services
Commercial                $      5.7     $    5.7         n/a
Government and defense          31.5         24.0        31.3 %
                          $     37.2     $   29.7        25.3 %





                             Three Months Ended August 31,
                             2020          2019      % Change
Gross Profit:
Aviation Services
Commercial                $     16.3     $   53.5      (69.5) %
Government and defense          28.3         26.5         6.8 %
                          $     44.6     $   80.0      (44.3) %
Expeditionary Services
Commercial                $    (1.3)     $  (0.4)     (225.0) %
Government and defense           5.3          2.0       165.0 %
                          $      4.0     $    1.6       150.0 %




Aviation Services Segment

Sales in the Aviation Services segment decreased $148.2 million or 29.0% from the prior year period due to a $160.9 million or 48.7% decrease in sales to commercial customers. The decrease in sales to commercial customers was attributable to the impact of COVID-19 on commercial passenger air traffic which significantly reduced our volumes in our supply chain and MRO activities.

During the first quarter of fiscal 2021, sales in this segment to government and defense customers increased $12.7 million or 7.0% over the prior year period. This increase was primarily attributable to growth from new contracts recently awarded.

Cost of sales in Aviation Services decreased $112.8 million or 26.1% from the prior year period primarily related to the impact from the COVID-19 pandemic.

Gross profit in the Aviation Services segment decreased $35.4 million or 44.3% from the prior year period. Gross profit on sales to commercial customers decreased $37.2 million or 69.5% from the prior year period primarily due to the COVID-19 impact discussed above. The gross profit margin on sales to commercial customers decreased to 9.6% from 16.2% primarily from the reduced volumes resulting from COVID-19.





                                       23

  Table of Contents

Gross profit on sales to government and defense customers increased $1.8 million or 6.8% over the prior year primarily driven by recently awarded government contracts. Gross profit margin on sales to government and defense customers remained flat at 14.6%.

Expeditionary Services Segment

Sales in the Expeditionary Services segment increased $7.5 million or 25.3% over the prior year period primarily due to the execution on a recent contract award from the U.S. Air Force to produce and repair 463L cargo pallets within our Mobility business.

Gross profit in the Expeditionary Services segment increased $2.4 million or 150.0% over the prior period primarily due to increased volumes from the recent cargo pallet contract award. Gross profit margin increased to 10.8% from 5.4% primarily as a result of these increased volumes.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $12.8 million or 22.0% from the prior year period due to our early actions to reduce both our fixed and variable cost structure. As a percent of sales, selling, general and administrative expenses increased to 11.3% from 10.7% in the prior year period. This increase is primarily attributable to the significant decrease in commercial sales more than offsetting the favorable impact from the cost reduction actions.





Income Taxes

Our effective income tax rate for continuing operations was 21.5% for the first quarter of fiscal 2021 compared to 16.6% in the prior year period. The prior year quarter included excess tax benefits from stock compensation of $1.4 million which favorably impacted the effective tax rate.

Liquidity, Capital Resources and Financial Position

Our operating activities are funded and commitments met through the generation of cash from operations. In addition to operations, our current capital resources include an unsecured Revolving Credit Facility and an accounts receivable financing program. Periodically, we may also raise capital through common stock and debt financings in the public or private markets. We continually evaluate various financing arrangements, including the issuance of common stock or debt, which would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including the overall health of the credit markets, general economic conditions, airline industry conditions, geo-political events, and our operating performance. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital.

At August 31, 2020, our liquidity and capital resources included cash of $107.7 million and working capital of $679.9 million.

We maintain a Revolving Credit Facility with various financial institutions, as lenders, and Bank of America, N.A., as administrative agent for the lenders, which provides the Company an aggregate revolving credit commitment of $600 million and matures September 25, 2024. Under certain circumstances, we have the ability to request, but our lenders are not required to grant, an increase to the revolving credit commitment by an aggregate amount of up to $300 million, not to exceed $900 million in total.

Borrowings under the Revolving Credit Facility bear interest at the offered Eurodollar Rate plus 87.5 to 175 basis points based on certain financial measurements if a Eurodollar Rate loan, or at the offered fluctuating Base Rate plus 0 to 75 basis points based on certain financial measurements if a Base Rate loan.

Borrowings outstanding under the Revolving Credit Facility at August 31, 2020 were $224.5 million and there were approximately $20.6 million of outstanding letters of credit, which reduced the availability of this facility to $354.9 million. There are no other terms or covenants limiting the availability of this facility.

In the fourth quarter of fiscal 2020, we elected to draw down our Revolving Credit Facility as a precautionary measure in light of economic and market uncertainty presented by COVID-19. We have elected to repay these additional funds in early fiscal 2021 and return to our normal level of cash on hand.



                                       24

  Table of Contents

In the first quarter of fiscal 2021, we received $57.2 million from the U.S. Treasury Department through the Payroll Support Program under the CARES Act. This funding included a $48.5 million cash grant which is to be used exclusively for the continuation of payment of employee wages, salaries and benefits for employees of certain MRO facilities and a low interest 10-year senior unsecured promissory note of $8.7 million.

As of August 31, 2020, we also had other financing arrangements that did not limit our availability on the Revolving Credit Facility, including outstanding letters of credit of $11.6 million and foreign lines of credit of $10.0 million.

We maintain a Purchase Agreement with Citibank N.A. ("Purchaser") for the sale, from time to time, of certain accounts receivable due from certain customers (the "Purchase Agreement"). Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million and Purchaser may, but is not required to, purchase the eligible receivables we offer to sell. The term of the Purchase Agreement runs through February 22, 2021, however, the Purchase Agreement may also be terminated earlier under certain circumstances. The term of the Purchase Agreement shall be automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term.

We have no retained interests in the sold receivables, other than limited recourse obligations in certain circumstances, and only perform collection and administrative functions for the Purchaser. We account for these receivable transfers as sales under ASC 860, Transfers and Servicing, and de-recognize the sold receivables from our Condensed Consolidated Balance Sheet.

During the three-month periods ended August 31, 2020 and 2019, we sold $129.0 million and $199.0 million, respectively, of receivables under the Purchase Agreement and remitted $147.6 million and $199.0 million, respectively, to the Purchaser on their behalf. As of August 31, 2020 and May 31, 2020, we had collected cash of $6.4 million and $19.8 million, respectively, which was not yet remitted to the Purchaser as of those dates and was classified as Restricted cash on our Condensed Consolidated Balance Sheets.

At August 31, 2020, we complied with all financial and other covenants under our financing arrangements.

Cash Flows from Operating Activities

Net cash provided by operating activities-continuing operations was $39.8 million in the three-month period ended August 31, 2020 compared to a use of cash of $30.1 million in the prior year period. The increase from the prior period of $69.9 million was primarily attributable to a reduction in inventory levels and the proceeds of a $48.5 million grant from the Payroll Support Program of the CARES Act. These items were partially offset by a $25 million license fee paid to Unison Industries for our expanded and extended exclusive distribution agreement.

Cash Flows from Investing Activities

Net cash used in investing activities-continuing operations was $1.7 million during the three-month period ended August 31, 2020 compared to $3.5 million in the prior year period. The decrease from the prior period was primarily related to net proceeds of $1.6 million from the sale of our Composites business.

Cash Flows from Financing Activities

Net cash used in financing activities-continuing operations was $347.9 million during the three-month period ended August 31, 2020 compared to cash provided from financing activities-continuing operations of $52.8 million in the prior year period. The decrease was primarily related to the repayment of our additional draw down on our Revolving Credit Facility. These funds were was originally drawn in late fiscal 2020 as a precautionary measure in light of the economic and market uncertainty presented by COVID-19.

Critical Accounting Policies and Significant Estimates

We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K for a discussion of



                                       25

  Table of Contents

our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the first quarter of fiscal 2021.





Forward-Looking Statements

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of our management, as well as assumptions and estimates based on information available to us as of the dates such assumptions and estimates are made, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors set forth under Part I, Item 1A in our Annual Report on Form 10-K for the year ended May 31, 2020. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

© Edgar Online, source Glimpses