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Text: I appreciate you joining us today to discuss our third quarter fiscal year 2021 results.
I would like to begin the call by once again recognizing our employees.
Their unwavering commitment, professionalism and flexibility have allowed us to continue to support our customers without interruption over the past year.
Turning to the quarter.
Our sales decreased 26% year-over-year from $553 million to $410 million and our adjusted diluted earnings per share from continuing operations decreased 45% from $0.57 per share to $0.37 per share.
Our sales to commercial customers decreased 42% and our sales to government and defense customers increased 4%.
For the quarter sales and government -- to government and defense customers were 49% of our total sales.
As we mentioned on the last earnings call, we expected relatively stable revenue which is what we saw in this quarter with sales up 2% sequentially.
In MRO we did see a sequential increase in hangar activity due to increased demand supporting anticipated leisure travel.
In our commercial parts activities revenue was relatively stable but we were encouraged to see orders across a broader range of customers during the quarter than what we saw in Q2.
Our government businesses, which have performed very well over the past year, continued their strong performance delivering another quarter of year-over-year growth.
Regarding profitability, our adjusted diluted earnings per share from continuing operations were up 19% sequentially reflecting our continued margin improvement progress.
On an adjusted basis, which excludes the benefit of the CARES Act, our gross margin improved sequentially from 13.9% to 16.1% and our operating margin improved from 4% to 5%.
We have now more than doubled our adjusted operating margin over the past two quarters while operating in a stable revenue environment.
We are also proud to have fully reinstated salaries and 401(k) benefits at the beginning of the third quarter which had been a priority for us as we look to attract and retain top talent.
Even with the compensation restoration, we were able to still deliver a full point of adjusted operating margin improvement.
That improvement reflects the operating leverage that we have created through cost reductions, efficiency gains and portfolio reshaping over the last year.
Turning to cash, once again, we were cash flow positive in the quarter even while making investments in new business wins.
We generated $18 million from operating activities from continuing operations and remain in a strong balance sheet position with 1.1 times net debt to adjusted EBITDA.
Speaking of new business, we also continued to secure and execute new wins during the quarter.
We expanded our distribution relationship with GE subsidiary Unison on a five-year program from the US Air Force to provide and repair and overhaul of F-16 accessories and extended our support of the Navy's H-60 Seahawk platform for an additional seven years.
We also began operations on our previously announced Honeywell 737 MAX EBAS contract.
Our sales in the quarter of $410.3 million were down 25.8% or $142.8 million year-over-year driven by the reduction in commercial passenger flying activity due to COVID-19.
Sequentially sales were up 1.7% with commercial sales up 7% driven by MRO volumes and government and defense sales down 3.3% driven by the scheduled reduction in activity and our program to deliver two C-40 aircraft to the US Marine Corps.
Gross profit margin in the quarter increased to 21% from 11.8% in the prior-year quarter driven primarily by the CARES Act payroll support.
On an adjusted basis, excluding the CARES Act support and other items, gross profit margin was 16.1% consistent with the 16% in the year-ago quarter despite the significant decline in sales.
Sequentially adjusted gross profit was up meaningfully from 13.9% to 16.1% reflecting the actions we have taken to reduce our indirect costs and drive efficiency.
Regarding Expeditionary Services specifically.
Gross profit margin increased to 17% from 0.4% in the prior-year quarter, driven by the divestiture of the composites business and improved performance at the mobility operation.
SG&A expenses were $44.9 million for the quarter.
On an adjusted basis, SG&A was $42.8 million or 10.4% of sales down $9 million from the prior-year quarter, reflecting the reduction of our overhead cost structure.
With respect to our accounting for the CARES Act payroll support, we have fully recognized our deferred credit in Q3 and we will no longer have income associated with the CARES Act support.
We have an $8.8 million promissory note associated with the CARES Act, which we expect to repay during the fourth quarter.
Also, we continue to have certain foreign subsidiaries that are eligible for stimulus provided by foreign governments.
Consistent with prior quarters, government subsidies, including the CARES Act are reflected in our GAAP income primarily as a reduction in our cost of sales.
However, we exclude these benefits from our adjusted results.
Other adjustments during the quarter included $4 million of loss provision and exit costs for commercial programs contracts, $1.5 million of which reduced sales.
In addition, there was a gain of $4.3 million related to a legal settlement, which we have excluded from our adjusted results.
Also during the quarter, we reached a tentative agreement with the Department of Justice to settle the investigation of airlift under the False Claims Act for approximately $11.5 million.
As such, we recognized a charge in the quarter of $4.2 million in discontinued operations.
As a reminder, we completed the exit of our airlift business in the fourth quarter of last year.
In the quarter, we generated $17.6 million of cash in our operating activities from continuing operations.
We reduced inventories by $21 million from our second quarter as we continued to focus on working capital management.
Our net debt at quarter-end was $108.4 million, down from $112.1 million at the end of Q2 and from $171.1 million at the end of Q3 of last year.
In addition, our accounts receivable financing program has decreased by $37.2 million over the last year from $85.6 million at the end of the year-ago quarter to $48.4 million.
Our overall leverage and liquidity remain strong with net debt of 1.1 times adjusted EBITDA, unrestricted cash of $99.2 million and unused capacity under our revolver of over $400 million.
Overall, we are encouraged by the widely reported recent increases in demand for domestic leisure travel and we remain optimistic about the broader commercial market recovery.
We expect modest sequential improvement in Q4 and continued improvement thereafter as the vaccine is distributed and current travel restrictions, which are impacting some of our larger international customers, are lifted.
As that occurs and our revenue recovers, we remain committed to leveraging our current cost structure to drive continued margin improvement.
In addition, our balance sheet puts us in a very strong position to be able to fund growth.
We expect to make investments in our USM and distribution activities as well as to continue to invest in our technology and digital initiatives.
These actions along with the continued strength of our government business and the early signs of a recovery in our commercial markets give us increasing confidence that we will emerge from the pandemic as an even stronger and more profitable company.

user
compname posts q3 adjusted earnings per share $0.37 from continuing operations.
q3 adjusted earnings per share $0.37 from continuing operations excluding items.
q3 sales $410 million versus refinitiv ibes estimate of $412.4 million.
compname says q3 sales down 26% from prior year reflecting continued impact of covid-19.

assistant