VSE Corporation (NASDAQ:VSEC) Third Quarter 2022 Results Conference Call October 27, 2022 08:30 AMm. ET
Participating companies
Noel Ryan – IR Manager
John Cuomo – CEO and President
Steve Griffin, Senior Vice President and Chief Financial Officer
Conference Call Participants
Kenneth Herbert – RBC Capital Markets
Michael Ciarmoli – Truist Securities
Austin Moeller-Canaccord
Michael Louie DiPalma – William Blair
Joshua Sullivan – the reference company
Jeff Van Sinderen – B. Riley’s Values
Operator
Greetings and welcome to VSE Corporation’s third quarter 2022 earnings call. At this time, all participants are in listen-only mode. A brief Q&A consultation will adhere to the formal presentation. If someone wants the help of an operator, the convention, press asterisk and then 0 on your phone keypad. As a reminder, this convention is being recorded lately.
Now I must introduce you to your host, Noel Ryan. Thank you, sir. You can get started.
Noël Ryan
Welcome to VSE Corporation’s third quarter 2022 earnings convention call. The main call is our president and CEO, John Cuomo; and Chief Financial Officer Steve Griffin. The presentation we share is on our website, and we inspire you to move forward accordingly.
Today’s discussion includes forward-looking statements on long-term business and monetary expectations. Actual effects may differ materially from those projected in today’s forward-looking statements as a result of hazards and uncertainties, adding to the hazards described in our periodic reports filed with the SECOND.
Except as required by law, we assume no legal responsibility to update our forward-looking statements. We use non-GAAP monetary measures in our filing. The appropriate GAAP reconciliations are incorporated into our presentation, if applicable, which is posted on our website. The percentages in today’s discussion refer to year-over-year progress, unless otherwise stated. At the end of our ready comments, we will open the line for questions.
And with that, I’d like to pass the call to John Cuomo for his ready comments.
John Cuomo
Thank you, Christmas. Welcome to everyone joining us today. As detailed in our third-quarter earnings report, our business transformation continues to gain momentum. Recent acquisitions of new businesses and strategic advancements in each of our business segments have contributed to a continued successful expansion era of increased market volatility.
Now let’s move on to slide 3 of our convention call material.
During the third quarter, revenue, net income, adjusted EBITDA and lost money increased more and more particularly year-over-year, driven by a combination of new contracts, program execution and improved demand in our key ad finishing markets. Total revenue of $242. 5 million plus 21% year-over-year, driven by expansion in all 3 segments.
In the third quarter, the Aviation and Fleet segments recorded their year-to-date earnings in the company’s history. Adjusted EBITDA of $24 million for the third quarter increased 12% year-over-year, driven by contributions from our Aviation and Fleet segments.
Our aviation segment had another exceptional quarter with earnings of $102 million, an increase of 40% and adjusted EBITDA of 86% in the third quarter. The strong functionality of this segment was supported by balanced expansion among commercial, business and general aviation consumers and our MRO distribution and earnings channels.
Revenue in our fleet segment increased 7% in the third quarter, driven by expansion with advertising and e-commerce customers. Commercial fleet revenue increased 23% year-over-year and now accounts for 39% of overall fleet segment revenue. Adjusted Fleet Segment EBITDA increased 13% year-over-year in the 3rd quarter. The improvement in EBITDA benefited from the expansion of the advertising fleet, as well as normal contributions from the U. S. Postal Service. U. S.
During the quarter, federal and defense revenues increased 12% year-over-year, driven by the expansion of the U. S. Navy’s Foreign Military Sales Program. U. S. Finally, we generated positive loose money for the quarter of $11. 3 million.
In summary, our third-quarter effects highlight the many successes generated in resolving complex disruptions for consumers in a challenging chain environment.
Now let’s turn to slide four and an update on our key strategic priorities: first, create a developing foundation of recurring earnings; number two, generating an expansion of adjusted EBITDA; and number three, the optimization of legacy programs. We made steady progress during the quarter in terms of expanding new businesses and generating sustainable profits.
Last week, our Aviation segment announced several new distribution agreements with global OEMs for its product in the commercial and general aviation market. These agreements constitute a combined price of approximately $350 million and are expected to begin in early 2023 with contract terms ranging from 2 15 years.
These new contracts are intended to create a portfolio of constant and recurring revenues over several years and include: a new 15-year distribution agreement with Pratt
In the third quarter, we also announced significant investment to ensure continued expansion of advertising and e-commerce within our fleet segment. launch of an e-commerce distribution center in the Memphis, Tennessee area.
This new 425,000 square foot facility will stock more than 175,000 fleet SKUs once fully operational. This high-yield, low-capital expenditure biological expansion investment is expected to begin serving customers in the first quarter of 2023.
Our next strategic priority is the expansion of adjusted EBITDA. During the third quarter, the Aviation segment achieved record adjusted EBITDA due to the successful implementation and execution of the newly awarded distribution programs, as well as the expansion and scale of our MRO business. Segment margin 326 highest foundation issues year-over-year at 13. 2%, the point from the first quarter of 2020.
The fleet segment also increased adjusted EBITDA in the quarter. The 13% increase was driven by a combination of expanded advertising sales and a strong contribution from the U. S. Postal Service. U. S.
Our last strategic priority is the optimization of the legacy program, where all 3 segments demonstrated progress in the quarter. The Aviation segment secured 2 multi-year contract renewals in the quarter, offering sustained earnings and increased cross-selling opportunities. In addition, VSE Aviation announced a 5-year Agreement with Lufthansa Technik for next-generation 737 parts, as well as MRO service support, as a result of our new 737 usable fabrics contract with Southwest Airlines.
The fleet segment also saw strong legacy program functionality with a strong quarter of our visitor USPS, adding continued expansion of product offerings for all USPS vehicles.
Finally, our NAVSEA program in the Federal and Defense segment generated earnings opportunities during the quarter. During the quarter, our existing bridge contracts supporting overseas military sales for the U. S. Navy were not allowed to be able to do so. U. S. exports increased from $86 million to $185 million. This addition is expected to generate more bookings and backlog over the next 12 months with earnings earnings expected in 2023 and 2024.
In summary, our third quarter effects reflect monetary performance, significant new contracts and the continued execution of our multi-year business transformation strategy.
Before I pass the call to Steve, I have some final comments. In 2023, VSE intends to organize an investor day to share more main points about our trading strategy, platform capabilities, customer-supplier program highlights and long-term monetary outlook. We will check a date and percentage plus main points for Investor Day 2023 soon.
Finally, I need to honor a recent milestone. Earlier this month, VSE celebrated its 40th anniversary on the NASDAQ stock market. As we begin our fifth decade as a publicly traded company, we are doing so with momentum. We are well placed in the long run with our customer-centric pricing propositions. market-leading product and service offerings, and a portfolio of new business opportunities that are increasingly physically powerful.
But really, what sets us apart and sets us apart from our competition in all markets is the strength of our team. Our people, culture and determination for visitor excellence are a significant factor and our greatest asset. And the strong functionality this year and this quarter is indicative of that difference. I will now turn to Steve for a detailed review of our monetary functionality.
Steve Grifon
Thank you, Jean.
Now let’s turn to slides 5 and 6 of the convention call documents to see a review of our functionality in the third quarter. We reported earnings of $242. 5 million in the third quarter, an increase of 21% year-over-year period, driven by expansion in our 3 operating segments.
Aviation had a strong quarter with more than $100 million in revenue, driven by the successful implementation of new programs, portfolio expansion share, and continued end-market recovery in the commercial, general and advertising aviation end markets.
Growth in the fleet segment was driven by e-commerce execution revenue and ad fleets, as well as increased contributions from the U. S. Postal Service. U. S.
Growth in the Federal and Defense segment was driven through the US Navy programs, specifically for military sales in ongoing aftermarket services.
During the third quarter, we generated adjusted EBITDA of $24 million, an accumulation of 12% year-over-year. Consolidated adjusted EBITDA margin decreased 80 core issues to 9. 9% as margin expansion in the aviation and fleet segments was offset by margin compression in the Federal and Defense segments.
Let’s move on to slide 7. Aviation revenue of $102. 6 million increased 40% year-over-year in the third quarter. Our distribution and MRO businesses grew year-over-year, up 35% and 55%, respectively. Distribution continues to perform above pre-pandemic levels, while advertising MRO remains 10% below pre-pandemic levels.
Aviation adjusted EBITDA increased more than 86% year-over-year, while adjusted EBITDA margin increased 326 base emissions year-over-year to 13. 2%. Margin expansion driven through achieving scale in new programs advanced MRO effects and controlled value and disciplined charge across our diversity of offerings.
Within the aviation segment, we maintain our assumption of year-over-year earnings expansion as we look ahead to the fourth quarter. Distribution agreements recently announced and highlighted in the past will contribute to earnings starting in early 2023 as we ramp up systems. first part of the year.
We have updated our aviation adjusted EBITDA margin assumptions from approximately 10% to 11%, to 11% to 13% for the full year 2022. This improvement is due to stronger momentum in the commercial and general aviation market and increased MRO recovery, partially offset through approximately 25 to 50 basic dilution issues related to our acquisition last year. We have our long-term adjusted EBITDA margin expectations for the segment.
Let’s move on to slide 8. Fleet segment revenue increased 7% year-over-year on top ad sales and for ecommerce execution. was of the year and constitute 39% of the total profits of the segment.
U. S. Postal Service profits U. S. earnings increased 7% year-over-year, which is included in our other government earnings. Segment-adjusted EBITDA of $8. 7 million increased 13% compared to the third quarter of 2021, as Fleet continues to develop offers and responses for advertising clients. Higher adjusted EBITDA margin in the quarter as the business expanded while shifting to declining margin advertising earnings. Looking ahead to the fourth quarter, we continue to expect solid quarterly earnings to out-of-year as advertising earnings expansion compensates solid to decrease USPS’s seasonal earnings.
We assume an adjusted EBITDA rate of between 12% and 13% for the full year 2022. We remain focused on expanding the dollar’s contribution to EBITDA year-over-year, as this segment continues to drive earnings diversification as a key strategic initiative. .
Looking ahead to 2023, we expect the fleet’s new Commercial Center of Excellence to contribute to profits in the first quarter and gradually increase the year as we make the facility fully operational and build inventory. We expect EBITDA adjusted margins for the fleet segment to decline in the first quarter of 2023, due to the launch of this new facility with incremental innovations from there.
Let’s move on to slide 9. Federal and defense profits grew 12% year-over-year, driven by the expansion of U. S. Navy aftermarket services. UU. de our Army sales program. Adjusted EBITDA for the federal and defense sector was $2. 8 million in the third quarter, down 57% from a year earlier. Adjusted EBITDA margins decreased six hundred foundation issues year-over-year to 3. 7%.
As we continue to scale this business and expand a strong pipeline of potential opportunities with our government customers, the continued shift from fixed-price to higher-cost contracts had a negative impact on the segment’s adjusted EBITDA margin in the third quarter. Ownership and control contracts now make up 53% of federal and defense revenues, up from 40% at the same time last year.
For the remainder of the year, we continue to expect flat quarterly earnings year-over-year, as new rewards from our NAVSEA program offset the expiration of a contract with the U. S. Army. U. S. We continue to expect adjusted EBITDA for the federal and defense segment to be approximately 4% to 5% for the full year 2022, due to the combination of increased cost contracts rather than fixed-price awards.
Let’s move on to the slide 10. Al end of the third quarter, we had $99 million in unused money and commitments under our $350 million line of credit. Following the final touch of the third quarter, we effectively rigged and terminated our existing loan agreement. amfinishment benefits VSE in many ways.
First, it extends the expiration of our existing agreement from 2024 to 2025. Second, it reduces projected borrowing costs. And finally, it increases the availability of our line of credit. This amendment provides the flexibility to continue the transformation of our business, invest organically. in new business opportunities and remain opportunistic for strategic mergers and acquisitions.
As expected, we generated $11. 3 million in loose cash flow in the quarter, primarily driven by earnings expansion and successful execution of recent aerospace distribution awards. At the end of the third quarter, we had a remarkable net debt of $298 million. Adjusted EBITDA for the 12-month period ended September 30, 2022 was $86. 9 million. According to previous communications, net debt increased from 3. 7x in the current quarter to 3. 4x in the third quarter.
We maintain our positive outlook for loose cash flow for the full year 2022. However, we would likely decide to strategically invest in current capital to support the recently announced distribution agreements and our new center of excellence in Memphis before the end of the year if possible. It will definitely have an effect on revenue and margins in 2023. These strategic investments can also lose cash flow for the entire year, and we planned percentages of the main points during our fourth quarter convention call.
We are proud of the functionality in the third quarter and look forward to sharing our full-year effects in March.
With that, operator, we are now in position for the question and answer portion of our call.
Q&A session
Operator
Thank you. We will now continue with a response session. [Operator Instructions] The first one we have is from Kenneth Herbert of RBC Capital Markets.
Kenneth Herbert
Hello Jean, how are you?
John Cuomo
Hi John.
Kenneth Herbert
Good initiative obviously in the aviation segment. My first question, has a higher EBITDA forecast for the whole year. I was just wondering if I could provide a little more detail on where you see the added benefit. And more specifically, how do you manage inflation when you think about your suppliers’ emerging prices on the distribution side or emerging prices on the MRO side?Can you get the most out of that? It sounds like that, but it only helps us to better perceive the moving parts of inflation.
John Cuomo
Yes, I will start with inflation and let Steve communicate on the EBITDA forecast. As far as inflation is concerned, we’re in a largely transactional business. Be one hundred percent focused on the secondary market. Therefore, we have the ability, for the most part, to reduce the values for the end visitor when we see increases in value. We don’t see inflationary tension in curtain costs affecting our margins. Obviously, hard work has a little game there, but we do it. Don’t see curtain costs in — having that negative impact.
Steve, do you improve your margins?
Steve Grifon
Oui. Je I think the timing starts this year in terms of what we expected in the first place, I think the general aviation business has remained physically quite powerful and that has helped our expectations for the business. in the recovery of MRO, whether in the commercial and general aviation aspect as in the advertising aspect.
So, we’ve talked a lot about what we expect from the year for the industry’s recovery. We are now 10% below pre-COVID levels in our ad repair business, which took a step forward compared to the current quarter and continues to sustain the overall market recovery, and then our general aviation arrangements business has continued to grow in terms of the investments we’ve made through those businesses. And all of that, I think, has helped to turn expectations.
Kenneth Herbert
It’s great. And if you could, in the fleet area with the opening of the Tennessee Center of Excellence in Memphis, how can that contribute or what is the potential opportunity to generate profits from that?Or we think about it more as it retires. investments as more cumulative for margins?
John Cuomo
Both, however, will be the benefit first. Steve, do you want to give it some color?
Steve Grifon
Yes, of course. So, Ken, if you look at the execution rate of our advertising activities within the fleet right now, I would say, let’s call it about $100 million of ad activity right now. Contribution of up to $50 million in additional revenue, which is a vital milestone for us as we think about developing our business. And obviously, it will take some time to push the facility forward, develop our capacity, and we’ll be waiting for that to be a pivotal point as we think about the overall diversification of our U. S. Postal and Commercial Service revenues. U. S.
In terms of margins, we referred to this earlier, but we will see some diluting effects on margins due to the investments we make to build the facilities and increase them, as well as the fact that advertising revenue comes with a lower margin rate. However, we are very positive about this opportunity because of the diversification effect it has, as well as our opportunity to grow EBITDA in dollars in the long term.
Kenneth Herbert
And can you quantify or at least help us put the potential margin effect in parentheses or sequentially, how we think about the first quarter of 2023 compared to how this year should come out in the fleet segment?
Steve Grifon
I do not believe that we are still in a position to give exact instructions. I think it will take us some time to master the ramp of production in terms of hiring other new people and exactly how that will translate into revenue. We’ve tried to give our most productive estimate at this stage, which is that we expect it to be dilutive in the first quarter. And at this point, I don’t think we can offer a quick range.
Kenneth Herbert
Very well. Hey, great neighborhood.
Operator
The next one we have is from Michael Ciarmoli of Truist Securities.
Michel Ciarmoli
Hi, thanks for answering the questions, John, Steve. Wonderful results. John, can you give us a little background on aviation? I mean, it turns out the trends are pretty favorable, but revenue has been down sequentially. Has there been any noticeable adjustment in demand? Anything else from consumers only 2T to 3T? Or any color you can provide in the sequential drop of income.
John Cuomo
Sí. No, just a little seasonality. We’re going through an integration with our Global Parts business, so sales are a bit slower there. But nothing, I wouldn’t say material.
On the advertising side of the company, we see a very consistent improvement from month to month, just a big incremental improvement and contributions in our MRO business and in the bookings of our distribution activity. The general aviation business tends to be a bit more driven through activity that is very engine-oriented. So, there’s a little more cyclical nature there. But nothing, I wouldn’t say anything special about the quarter, some one-off orders, but no. . .
Michel Ciarmoli
And then simply, I think he reached an agreement with Lufthansa and now has the capability with the agreement with the southwest. It turns out that here you have a kind of herbal sales channel. Can you give us an update on what’s happening?? And I guess, looking at this morning’s headlines, it looks like Southwest is getting its planes at a slower pace. I need to know if there is: does it have an effect on your expectations with this program to have access to this device on those older aircraft?
John Cuomo
Yes, there are not 250 aircraft. We had, I think we were a little more conservative in our internal forecasts than with the original proposal because we just assumed that things are going to go back more than they will be. We will put ourselves in a position to marry Southwest to be the largest supplier of used service aircraft for the 737, 700 and 800 as the aircraft begin to be scrapped. But we see wonderful activity in other geographies that support this product.
Michel Ciarmoli
It’s bien. me they gave it AND then, maybe to relate the same thing. He discussed the Memphis facility and potential investment in operating capital, but also announced the diversity of other deals. Will there be, some of them are extensions, some of them are new, but we deserve to think about possible start-up prices or additional investment in current capital, an investment action that can also be a small drag on money even as we enter 2023.
John Cuomo
Oui. Je will let Steve communicate about it. The return on investments in fleets is very fast because this stock is rotating and it will happen to obtain this stock and generate profits in the next 2 or 3 quarters.
Steve, do you want to give a little color about the type of investments and what it looks like?
Steve Grifon
Yes, of course. As you know, Michael, some are new programs, some are extensions. I would say overall if you take a look at all the announcements, adding the Memphis facility, there’s probably about $60 million in capital investments that we’re going to make in our business over the next 6 months or so and probably about $10 million of CapEx next year as a component of all the expansion we’re having.
I would say that of the $60 million in current capital, there is possibly as much as 0. 33 that may also be in the fourth quarter, depending on how things develop. I know we discussed this before, but let’s take a strategic look: potentially bringing stock to customers, in particular, collaborations with OEMs, and then seeing if there’s any chance of making a profit.
But there’s a hint of uncertainty in that as we play the rest of this year. But as we look ahead to next year, there are investments, as I mentioned, and we hope, as John mentioned, that they will start to turn into profits. shortly thereafter
Michel Ciarmoli
Gotcha. The last one, I will deviate here. In Memphis, I think you discussed $50 million in profit once everything is operational and operational, you’re not saying it’s $50 million in profit in 2023. Are you saying about a full operation fee once this facility is mature and complete, will it generate $50 million?
John Cuomo
No, we are saying $50 million in 2023. Je means that the year will increase markedly. Oui. Je I mean, just to give you a concept of what’s going on today, we have limited capacity. Therefore, we cannot load SKUs. So I talked about expanding the SKU at this facility. We are unable to upload SKUs to assist our consumers with ecommerce fulfillment or through our own ecommerce site at this time. So we’re ready. We’ve done the work, and the team just wants one installation and infrastructure to execute the plan. So, that’s what I was saying, the return on investment there is pretty fast.
Michel Ciarmoli
they gave it to me It’s okay. So comfortable with us for modeling, so are we going to see a kind of older teenager, a 20% expansion of fleet profits next year with that $50 million?
Steve Grifon
Yes, I mean a notorious refund, yes, a refund for that, which is the U. S. Postal Service. The U. S. , which we plan to be, we haven’t gotten it, let me put it that way. We have not given any indication of this for next year. But there is, probably diminishing as we continue to articulate.
And then, what we’ve been trying to articulate is that we expect to see some margin dilution. And as I mentioned, it will take us, certainly, the first quarter will have a bigger impact on margins, but it will take us a while to gradually get back to the full ramp rate and there is a combined change dynamic in the advertising revenue channel compared to the U. S. Postal Service. U. S.
Operator
The next one comes from Austin Moeller de Canaccord.
Austin Moeller
So my first question, in aviation which, we see on the advertising side, is it largely motivated by the airlines now coming to you with some of the deferred maintenance that you’ve postponed?
John Cuomo
Yes, I think it’s a bit of deferred maintenance. I think it is: earnings RPKs also continue from 2019 levels. So, I think it’s probably a balanced demand among our advertising airline customers. And again, we continue to see this kind of consistent mentality either in distribution and in MRO on the advertising side.
Austin Moeller
So, in the fleet segment alone, do we see an improvement in margin in any of the advertising sales?Or is it basically the biggest gain of USPS in the mix?
Steve Grifon
I’d say we’re starting to see some innovations on the business side, but it’s still detrimental to the overall mix of the company. So, regarding your point, there’s a detail of improvement with the U. S. Postal Service. In the US, which is higher between 6% and 7%. But there are also some innovations on the advertising side, but I would say it’s still dilutive.
Austin Moeller
It is ok. And then when we think about the multiple new wins that were just announced, between now and 2023, I know you said a gradual advent in the first part of the year, but we think about it like we did in the end. From the first quarter, to the beginning of the quarter of the moment?What is the timing of this slow advent?
Steve Grifon
Yes, I would say that this period will be placed in position. Therefore, it will not be completely affected in the first trimester. If you take a look at the aviation offerings we’ve announced, I’d say we’re looking at maybe, let’s call it, $10 million to $12 million in additional earnings for next year with opportunities so we can continue to help more customers, depending on the timing of the transition and stock transitions, etc. But during that period, Q2 is probably a smart approach, however, we’re going to provide more percentage updates when we get to the fourth quarter call and we’re really going to skip some of the implementation stages over the next few months.
Operator
The next one we have is Michael Louie DiPalma by William Blair.
Michael Louie DiPalma
Congratulations on the launch of the new Memphis facility. I wonder how vital capacity building of the new facility is compared to its existing facility.
John Cuomo
Approximately one hundred percent is built on top of our existing footprint.
Michael Louie DiPalma
Super. Et in relation to this installation, what kind of novelties does it have from the technological to the construction of productivity and, ultimately, margins?
John Cuomo
Oui. Je means that we will get the site up and running with the new warehouse control formula and a new ERP formula. Therefore, we will put this new formula online in the coming weeks. In 2023, we will move to a more robotized garage formula. We may not do this at launch because we need the site to be up and running and make sure the ERP and WMS communicate with each other. But as we get to the end of 2023, we’ll start rolling out more. Robot storage that is in the queue and in the pipeline to aid productivity as well as order accuracy.
Michael Louie DiPalma
Or will you run either simultaneously?
John Cuomo
Therefore, our existing facility in Pennsylvania, just outside of Pittsburgh, will remain the distribution center and headquarters of the fleet company. Only e-commerce, direct fulfillment, and e-commerce through our fulfillment partners.
Michael Louie DiPalma
Impressionnant. Et to aviation, announced an extension of its partnership with Pratt
John Cuomo
Oui. Je means, Louie, from a strategic point of view, we are very national. We have a team in Europe and we have plans, other plans in 2023 to continue expanding there. But the opportunity with Pratt
And then, for Honeywell’s JetWave program, this will also be done through our existing infrastructure. Therefore, there are not many upfront costs. But we see a lot of cross-selling opportunities as we attract new consumers in regions we don’t have today, especially in the commercial and general aviation market.
Michael Louie DiPalma
Super. Et one last one. What effect does the extension of your NAVSEA contracts have on the renewal of long-term contracts?
John Cuomo
Therefore, the expansion is basically aimed at our Egyptian customer. So the overseas army sales program we have with NAVSEA is a U. S. -based program. But we, the military, went through it. And our clients throughout Egypt necessarily need the scope of their jobs to be completed. So, we’re expanding the ceiling of this program, and it’s basically for Egypt. We expect an award for events and renewal in early 2023.
Michael Louie DiPalma
It is ok. And on the slides, he discussed that part of, I think, the Bahraini frigate is not recurring. Will it contract, will there be expansion in 2023 instead of 2022?Or is the maximum of the non-recurring gain in 2022 such that there is a headwind to. . .
John Cuomo
So, there’s a shipping movement: when the U. S. makes a shipping move, we have a great ability to access it through our NAVSEA contract, and this is a wonderful opportunity for us for that program. These are not coherent systems, they are one-outside of systems. These are large systems and a great source of income and non-repeatable. Therefore, the NAVSEA program will not have a minor source of income in 2023, much more in line with the steady income we have had in recent years. .
Michael Louie DiPalma
It is ok. And I think in his 10-K, he says in the last few years, I think, it’s been about $100 million.
John Cuomo
We haven’t finished the forecasts for this program yet, but I’d say that’s the diversity within which you look at it.
Michael Louie DiPalma
And how much did it generate in 2022?
Steve Grifon
We don’t necessarily percentage it, but I would say that the transfer of vessels to Bahrain in the particular quarter increased by about 86%. It represents about 0. 33 of the activity, so this deserves to give us an approximation.
Operator
[Operator Instructions] The next one we have is from Joshua Sullivan of Benchmark Company.
Jose Sullivan
Right in the new Memphis facility, the best location for biological businesses. But are you curious to know to what extent the resolution was aimed at capturing consumers of perhaps larger fleets that could operate in the region?I guess the choice of location was opportunistic. Or are there larger potential consumers who may have participated, which may be just that $50 million goal?
John Cuomo
No, it wasn’t based on that. It actually relies on the ability to launch ecommerce parts as expired as possible. This activity is evidently highly transactional. We need to be able to take overdue orders on the imaginable day and ship them the same day. We also need to be in a city that has moderate hard work prices and moderate rental rates in warehouses and put ourselves in a position where we have the existing infrastructure in a city like that, and Memphis just checked all the boxes. But we looked at several places.
Jose Sullivan
And then, on the aviation side, what are your desires to hire technicians to continue growth?Or what excess capacity built into existing infrastructure before it needed to expand?
John Cuomo
I would say in distribution, we still have: we’ve built the capacity to continue to grow and hopefully we can scale this business a little bit faster. I would say that when we look at MRO activity when it starts. to close at pre-pandemic levels, we are in a position where we don’t want to raise SG dollar for dollar.
Operator
The next one we have is from Jeff Van Sinderen of B. Riley Securities.
Jeff van Sinderen
The next query we have is from Jeffrey Van Sinderen of B. Riley Securities. Let me extend my congratulations on the consistently sound overall measures. He just wanted to keep the $350 million in contracts he announced and wonder if there’s anything remarkable about margins?
John Cuomo
Steve, do you want to communicate about it?
Steve Grifon
No, I think we maintain our longer-term projections that this activity is a fringe activity for teens. I don’t think the agreements we announced replace that in terms of our expectations.
Jeff van Sinderen
It is ok. So, I think you discussed some of the considerations around the new Memphis facility and why you chose them. I was wondering if you could tell us about the manpower for these facilities, how you think about that. And then, I guess, In general, what do you see at most recently in general on the hard work front?
John Cuomo
Oui. Je means we’re starting to see a little bit of stabilization, I would say, in terms of the workforce. We have our control team for Memphis facilities hired and incorporated and we necessarily go through a recruitment. procedure at this time to prepare for the beginning of the first trimester. But we maintained the wonderful domain and it gave us massive support. And we felt very comfortable being able to hire staff on location.
Jeff van Sinderen
It is ok. So, I wonder if you can provide an update related to your acquisition process, maybe the last one you see there?
John Cuomo
Oui. Je, the M&A portfolio still looks strong, and we share most commonly in the aviation sector. Obviously, now with our announcement on the fleet sector, you can see why that wasn’t the area of precedence, we have a huge biological pipeline there. Therefore, we continue reading about MRO and distribution activities. And the pipe looks solid. The markets are a bit, I would say, slower in terms of agreement than probably expected, yet we are still very focused on biological and inbiological growth. all the criteria we can —
Jeff van Sinderen
It is ok. I’ll disconnect the rest. Good with the fourth trimester.
Operator
The next one we have is a follow-up to Michael Ciarmoli of Truist Securities.
Michel Ciarmoli
I guess, John, maybe the only negative here in the quarter. Federal EBITDA margins looked like a multi-year low, perhaps even an all-time low. I mean, is there anything?Are those bad contracts still in place?, I realize that there are many more prices. I mean, it’s that —
John Cuomo
So, Mike, the main driving force of this is the bridge contract for the NAVSEA program. So, essentially, when this bridge contract was signed last year for $100 million and now the addition of $80 million, the contract without delay changes to a reimbursable cost-program with decreasing margin.
Now, over time, you can work to move constant value work orders and work on a margin improvement plan. Since a new contract will necessarily be signed in early 2023, it is very difficult to get recruitment officers through this process. Lately we’re in a position where we’re necessarily, where almost this entire program has gone from a balanced program of constant value and reimbursable fees to all out-of-pocket expenses. This is the biggest driving force of this.
Michel Ciarmoli
I guess I’m still surprised. I mean, it’s low for an additional cost. And, presumably, you can get all your inflation. So it’s. . . I mean, is it fair. . . Isn’t that a wonderful contract?I mean, it’s just hard. . .
John Cuomo
It’s an exceptional contract. If you take a look at many of those cheap and technically acceptable deals on the market, historically they have a very low risk, however, they are essentially. . . You’ll see many of them well below the 5% operating margin. This is where those contracts have a tendency to be negotiated. This one works better than that. But it is; Again, without the ability to move, to [ask owners] at a constant price, it certainly puts pressure on margins in that segment.
Operator
Thank you, sir. At this point, there are no further questions, I would like to turn my back on John Cuomo, President and CEO, for closing remarks.
John Cuomo
Thank you for participating in our third quarter phone call and I look forward to speaking with you in early 2023 to let us know about the full year and our forecast for 2023. May it have an excellent end to the day.
Operator
Thank you, sir. Ladies and gentlemen, this concludes today’s conference. Thank you for us. You can now disconnect your lines.