AAR Corp (AIR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the AAR Corporation third quarter fiscal 2008 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference call is being recorded.

I'd now like to introduce your host for today's presentation, Mr. John Bowman, Director of Investment Relations. Mr. Bowman, you may begin, sir.

Thank you, Howard. Good morning, ladies and gentlemen, and thank you for joining this morning's conference call. Before we begin, we would like to remind you that certain of the comments made today relate to future events which are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please refer to the forward-looking statement disclaimer contained in the press release issued last evening as well as those factors discussed on Item 1A entitled risk factors included in the Company's May 31, 2007, Form 10-K. By providing forward-looking statements the Company assumes no obligation to update the forward-looking statements, to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. At this time I'd like to turn the call over to our Chairman and CEO, David Storch.

Thank you, John, and good morning, everyone. Joining me today is Tim Romenesko, our President and Chief Operating Officer; and Rick Poulton, our Chief Financial Officer. Let me begin by saying that we had an exceptional quarter by virtually any measurement or dimension, where we experienced record quarterly sales, net income and earnings per share. Sales grew 39% to $376.6 million and income from continuing operations grew 31% to $20.3 million. Diluted earnings per share were $0.47 for the quarter which included a $0.01 loss per share on the early extinguishment of debt.

While acquisitions contributed meaningfully to the results for the quarter, organic sales, which excludes sales growth from acquisitions, grew an impressive 25% year-over-year. If you were to further back out aircraft sales from both periods our growth rate would have been 19%. We achieved 10.1% operating margins and if you were to back out the effect of the acquisitions and the aircraft sales, margins on our organic business would have been 10.4%.

Sales were $151.2 million in the Aviation Supply Chain segment, an increase of 11.5% from last year and gross margins improved 200 basis points to 24%. Gross profit increased 22% to $36.3 million, and during the period we generated sales from investments made in prior periods which contributed to the double digit sales increase.

Sales in our MRO segment grew 43% in the quarter to $74.8 million. Gross profit increased 53% to $11.1 million, resulting in a gross profit margin of 14.9%. Steady performance at our Indianapolis maintenance center and landing gear businesses resulted in market share gains which drove the exceptional sales and earnings growth in this segment.

At the conclusion of the quarter, or I should say at the beginning of the new quarter, the fourth quarter, we completed the acquisition of Avborne which will add a valuable dimension to our MRO position. The business is located at Miami International Airport, a very busy airport with a high traffic pattern and access to international routes, and rounds out our MRO services by adding wide body and Airbus capabilities. We look forward to the opportunities this business brings and along these lines just last week, there was an aircraft at MIA that required a return to service maintenance. The aircraft was brought over to our facility and this maintenance required a landing gear repair. Our folks from our landing gear operation, about 10 miles away from MIA Airport came over to the airport and provided the repair on the landing gear while our aircraft maintenance folks worked on the repair to the aircraft and we were successful putting that aircraft back up into the sky the same day. The customer who was not a current customer of our heavy maintenance operations was very pleased with the service we performed and next week, our folks will be meeting with this customer to talk about how we can capture more of their maintenance.

In the Structures and Systems segment our organic sales growth rate was 17%, fueled by strength in our Mobility Systems business, and the overall sales growth rate in this segment was 75% after the impact of Brown International and SUMMA acquisitions are included. Gross profit grew 84% to $16.4 million resulting in a gross profit margin of 14.8%. During the quarter, we announced that we signed a lease to occupy 90,000 square feet at McClellan Business Park, formerly McClellan Air Force Base in Sacramento, California for the manufacture of composite structures and parts and this is an area where we are seeing increasing demand. We expect the business to come on line during the first quarter of our Fiscal 2009. Just to clarify, McClellan Air Force Base was closed as a result of the BRAC, Base Realignment Act of 1994, and we have another operation at that airfield, and became aware of this opportunity and we were able to seize upon it in this quarter. We'll have a minimal investment and we expect to have a very dynamic business out of that facility.

Our aircraft Sales & Leasing segment delivered another strong quarter. As a reminder, results for our aircraft Sales & Leasing business are reported two ways. First, we purchase and sell aircraft for our own account, the results of which flow through our income statement as sales and cost of sales. Second, we enter into aircraft transactions with partners, which are characterized as unconsolidated joint ventures and are reported within the earnings from aircraft joint ventures line on our income statement. During the third quarter, operating profit for this segment increased $3.1 million compared to a year ago, even though you see a reduction in income on the face of the P&L from aircraft joint ventures. The increase in operating profit for this segment reflects the gain from the sale of two aircraft from our own account. As of February 29, we had a total of 37 aircraft, 29 of which are held in joint ventures, and 8 of which are held in AARs wholly-owned portfolio.

Further I'd like to comment as a result of the financial market turmoil, we do expect more opportunities to emerge in this market. SG&A costs for the Company increased in the quarter as a result of the acquisitions and as we continue to invest in our business; however as a percentage of sales, SG&A costs declined to 9.0% versus 9.1% in the prior year.

Net interest expense increased to $6.1 million in the third quarter due to increased average borrowings and lower investment income. In February the Company issued $250 million of convertible notes through a private placement. Proceeds after acquiring the associated note hedge and transaction fees were $215 million and were used in part to pay off the outstanding balance on our revolving credit facility which largely related to the acquisition of SUMMA and the investments we've made in parts for our Aviation Supply Chain business.

In addition, during the third quarter the remaining balance of the 2004 convertible notes of $16.4 million were converted to 880,000 shares of our common stock. These shares were already included in our share count. Subsequent to the end of the third quarter, we bought back 13 million of our 8.39% notes due in 2011. As a result of these actions, we expect interest expense to decline in the fourth quarter.

In closing I might say that we achieved, to sum is it up, we achieved double digit sales growth in each of our segments, added a significant dimension to our Structures and Systems business mix, and strengthened our liquidity with the recent financing. As we assess risks and seek opportunities like the rest of you, we're paying very close attention to capital market volatility, the economic environment of the United States and abroad, and rising oil prices and their impact on our industry and customer base. With that I'd like to thank you for participating on the call today and open up the line for any questions you may have.

(OPERATOR INSTRUCTIONS) Our first question or comment comes from the line of Troy Lahr. Your line is open, Mr. Lahr.

Thanks. Structures and Systems had good margins. I guess you're seeing the favorable mix there towards containers. How much longer does that continue for? Does that run for three quarters, four quarters? Can you just give me some insight there?

Yes. The mobility business has a very strong backlog. The mix is favorable. We're continuing to see opportunities for new business for new products, so we feel good about the prospects there both from volume and mix for a while. Whether it's three quarters or nine quarters I don't know, but the backlog is good for at least another year.

Okay, thanks. And then just so I'm clear you talked a little bit about outsourcing opportunities, we've been kind of waiting for some time to hear other Mesa or Chautauqua size transactions. Is the activity there increasing now that we're kind of getting into a tightening environment? The ongoing negotiations that you've had, have those been accelerated with some airlines or can you just update us there a little bit?

I would say that there's a good amount of activity, some large, some medium, and some small, and they run the gamut from the various customers we support, so I think that at this point, I think that the activity level is good.

Has it been kind of accelerating or just kind of been about the same?

I'd say it's about the same. I think there are several opportunities that we're working on out there.

Okay. And then just lastly and then I'll jump back in the queue, can you maybe talk about the composite business that you acquired, how quickly do you think that ramps up? Maybe what markets are you targeting? Is this more commercial aerospace or defense type applications for composite work?

So this is not business we acquired. It's a facility that was fully equipped by the U.S. Air Force back in the 90s for composite manufacturing, so we are a lessee, if you will, of a facility. It's a long term lease and as the lease progresses, the equipment inside the facility becomes the property of the Company. The opportunities are in the commercial aerospace space, defense, as well as the business jet and general aviation segment, so it's pretty much across-the-board.

We have, as you know, a composite business already in existence, located in Clearwater, Florida. It's been very busy. It's somewhat limited by the number of of autoclaves, in this particular lease we pick up four additional autoclaves, two of which incidentally have never been turned on, so the reason that we expect a ramp up in our first quarter which is beginning in June let's say is because the facility needs to be reenergized and reopened basically. So we see a fair amount of demand or I should say accepted demand in this area. We have the talent we believe in house, and we've actually hired some additional folks to go ahead and build this into a very productive segment within AAR. To a certain extent I think one way of looking at this business is very similar to how you might look at Indianapolis for our MRO business. I think it's an opportunistic move by the Company in an area that appears to be chock full of demand.

Just so I'm clear then, is some of the Clearwater work getting off loaded to this facility? Or all of that work is going to stay at Clearwater.

No, the work that's in Clearwater will stay in Clearwater and this will be new work that we will attempt to attract. Now, we might get the plant started by shifting some work elsewhere from AAR into the facility and so that might be -- take up, at least get us off and running, but once we get over the early stages, we do expect to attract new business.

Great. Thanks, guys.

Our next question or comment comes from the line of Larry Solow from CJS. Your line is open, sir.

Good morning. Could you just maybe talk a little bit about the impact of you're seeing a lot of the major airlines cutting domestic capacity and recently Delta made an announcement yesterday. Would this capacity be switched to the international front or how is that going to play -- how do you think that will play out?

If you take a look at the growth that we've experienced in our aircraft sales and leasing segment, a lot of that growth has come from our ability to acquire aircraft in the U.S. market and then place those aircraft into international markets. The demand for air travel does not appear to be easing at this point in time, as I indicated in my comments. We're obviously watching this to see what the effects of the U.S. economy might have on domestic travel, so we expect, let's call it some of the older technology aircraft may be parked but we do believe that if newer technology aircraft get parked they will be placed elsewhere, and we view that as an opportunity both for our aircraft sales and leasing segment as well as for our supply chain segment and possibly for our MRO segment to put those aircraft back into service with another operator. So, we, although we believe that you might have some come down here in North America, we don't believe that worldwide travel or traffic numbers are declining.

Okay, and then on a similar question just looking on the international front, would you say -- I know we've discussed this before a little but would the continuing of the weakening dollar, would you expect maybe more opportunities for international airlines to actually be bringing their planes into North America for work?

Well, we have received some inquiries along those lines. We have yet to secure any business on the heavy maintenance side. We're hoping that having this Miami business will facilitate that opportunity and -- but time will tell. At this point in time, the exchange rate obviously is favorable in this regard and it might lead to certain volume -- opportunities for the Company. I would expect this incidentally more obviously wide body than narrow body. Narrow body don't tend to go across the ponds but we might see some opportunities along these lines.

We clearly are seeing some benefits on other businesses from the exchange rate, and we are working diligently on the structures and systems business in that regard. Keep in mind all of our manufacturing capability is here in North America, so we do have -- we do see that as a potential opportunity for the Company.

If you could just lastly, just discuss a little bit, I believe that the SUMMA acquisition if I'm not mistaken was I think like 100 million in annualized revenue, if you could just discuss that and then the Avborne acquisition and how Avborne maybe compares to Indianapolis? I know it's a small facility but I believe the capacity is probably not as small as it looks on a numbers basis so if you can just kind of compare what the annualized or potential revenues were for those two acquisitions that would be great.

SUMMA is a very exciting acquisition for the Company in that it puts another leg on our stool within our structures and systems group. Our structures and systems group today consists primarily of the mobility activity as well as specific manufacturing of products for cargo systems and then we have the composite leg, and the SUMMA gives us what we believe is the foundation for an aircraft parts manufacturing piece of our structures and systems group, so you're correct in terms of the annualized revenue base. We're hoping to be able to build from that. SUMMA has very good relations, very time tested relationships with some of the major OE's in the aircraft manufacturing business and we're hoping to capitalize on those and be able hopefully as a result of this move into McClellan. McClellan will be able to benefit from some of the deep ties SUMMA has with many of these OE's so the SUMMA acquisition, you're correct in terms of its size, but I just want to highlight the fact that it does bring us a dimension we didn't previously have within our structures and systems business. So SUMMA is not a bolt on. SUMMA is kind of adding a leg to our stool.

As it relates to Avborne, Avborne is similar in terms of basic fundamental capability with Indianapolis other than SUMMA has -- I mean Avborne has some success on Airbus airplanes and also wide body aircraft. The hangars are built in such a way that they can accommodate wide body aircraft and also Avborne gives us a location that we believe is a very important location as we round out our MRO capability here in North America. So Avborne is more of a bolt on than Summa might be, yet Avborne does bring us certain dimensions that we didn't previously have.

Okay, great. Thank you.

Our next question or comment comes from the line of Mr. Tyler Hojo from Sidoti. Your line is open, sir.

Good morning, guys.

Hi, Tyler.

I guess just a follow-up to the Avborne question. I guess, Rick, last conference call you provided kind of an annualized revenue figure for SUMMA. Would you be willing to do that for Avborne?

I think the number there is a little more challenging, Tyler, because of whether we decide to work narrow bodies, wide bodies, et cetera. So I think we've held back from providing that number now. I think the best thing you could do is you can interpret a little bit on the square footage pace and I think also you know what our acquisition price is and you can sort of hone in on as a multiple of revenue from that. As we get maybe a firmer mix on where we'll go with the work load, then maybe we'll be better positioned to give you better guidance.

That's fair, and I know you provided the square footage for Avborne, what is the current capacity utilization in that facility?

Tyler, Avborne's busy. They've got a lot of airplanes coming in and out of there but it's not a nose to tail shop like you're accustomed to seeing at Indianapolis, so -- and that's one of the things that we expect to bring in there is maybe not the whole place but allocate more of the capacity to nose to tail. So it's very busy, when I was there last week, they actually had 15 aircraft around the facility, some of them were in there for overnight checks, some are in for two day checks and some are in there for 60 days, so it's a little difficult to characterize it the same way you might characterize Indy.

Okay, thanks for that color, Tim. And just in terms of that -- kind of your longstanding longer term margin target that's been out there, 12.5%, I didn't hear you guys kind of reconfirm it. Is that still intact?

Yes.

Okay, great.

This is the aspiration.

Yes, as we make some of these acquisitions, some of these acquisitions have margins below even the 10% that we're looking at, and so we have some challenges yet we view them as opportunities to go ahead and get margin improvement.

Okay, good. And just a final one, a follow-up to the first questioner just in terms of the supply chain opportunities out there. I think last conference call, David, you mentioned that you thought something relatively meaningful could hit kind of in the back half of your fiscal year. You still sticking to that or has it maybe pushed a little bit further out to the right or any comment there would be helpful.

Well, of course half of that second half of the year has gone away and we didn't make any announcements, so obviously we're now in the last three months. We still -- there's a possibility of at least one of these hitting this quarter but I would push out some of the balance just based on the overall gestation period, I would push out the balance into next year, but suffice to say, as you recall last quarter in the supply chain, we had sales growth of less than 10%, it was eight and change I believe. This quarter we said we would come in above -- get into double digits and we came in at 11.5. There's no shortage of opportunities in that business segment, and some of them are program related, some are programs, but we're not calling them programs. But let's put it this way, the pace of business is very brisk.

That's fine, and actually just one more for you. It looked like the MRO segment, the results look terrific there. Actually one of your competitors came out late last week and they blamed some bad weather in Oklahoma for kind of a revenue miss in their Tulsa facility. Did you guys see any of that? Was there any negative impact in the number?

Well, we definitely saw the bad weather.

Okay.

But no, no significant impact on our operations.

Yes, we didn't have the magnitude that they seem to have had.

Very good. Thanks.

Let me just reiterate what you said incidentally and that is the growth rate within our MRO segment was truly exceptional. 43% growth rate, that's all organic. I believe it's around as we've talked about before, it's around execution. Our MRO team is executing I think beautifully and customers are very satisfied with the work load and looking for AAR to take on more work if we can and I really would like to just congratulate Tim and his team in this regard because they're doing a heck of a job. It's not like this business is just hanging out there for somebody to grab. I mean this is -- you're talking about 43% growth rate in a market that is relatively flat and my sense is that this is all about our team performing and getting that kind of growth rate.

Great. Thanks.

Our next question or comment comes from the line of Jon Braatz. Mr. Braatz, your line is open.

Last couple of weeks we've been hearing stories in the press about MRO work at Southwest or issues with maintenance operations at Southwest and then there's stories in Asia about Asian MRO work. How do you view that? Is that a positive maybe from a long term standpoint if the FAA gets a little bit tougher or are there some other issues that might develop in more paperwork or more work for your guys, but how do you view all this talk about MRO -- I mean, maintenance work on aircraft both domestically and internationally?

Yes, the MRO market is, the MRO business is a very detail oriented business. Obviously you're talking about safety of flight and we at AAR understand that. We've been in the MRO business through our Oklahoma operation for many years. We are very focused around the detail of the work that we do, having the paperwork, having the training in place as you'll recall. Each of our technicians receives training pretty much every year. The last three our four years we've received the Diamond Award from the FAA for having every technician at AAR goes through training. Now it's a very complex, putting an aircraft through a maintenance cycle is a very complex process. In the case of Southwest, managing a fleet as wide as they are is very complex, and you know, I think everybody has pretty much reiterated that the safety record of the world's airlines is truly remarkable.

There's a chain, if you will, a safety chain that AAR is a major part of and this is an area that we stay very focused on and pay a lot of attention to the details and the procedures and the processes and the paperwork and all of that kind of stuff, so I think if you look at the world that we're in as kind of a flight to quality, then I think quality providers will be in very good position to benefit if in fact there's some folks who are not necessarily as adept or as detail oriented as this business requires. So I feel very, our head is down if you will, and we're making certain that we have -- we're doing all the things we're supposed to do, and we're paying a lot of attention to this segment, and really no different than we always have. I mean, this is a, as I said it's a very detail oriented business and you got to pay attention to a lot of different things and there are from time to time, there are slips and the important thing is that the organization has processes in place to capture these slips before they become a problem. So yes, I believe overall that in the general flight to quality let's say, as long as we continue to execute the way we are, we should be a beneficiary.

Does the FAA have any I guess mandate or power to suggest that airlines move from one provider to another or is it -- or can it be sort of a mandatory type of call on the part of the FAA, say, this provider, MRO provider is not meeting the standards, you have to move?

I believe that's always a -- that's within the power of the FAA. The FAA has oversight on all of the licensed facilities that carry FAA designation. So they have the ability to monitor on a minute's notice. They have the ability to send staff and teams into facilities that have FAA certificates. They have the ability to go through their procedures to make sure they're operating within the regulations and if they deem them not to be operating within the regulations, they have the ability to pull their ticket.

Yes, okay.

From time to time over the years, they've exercised that privilege.

Right.

I think in terms of them officially recommending a vendor, one vendor versus another to their customers, it's probably not in their purview, but obviously, listen, when two guys are having a discussion, it probably might not be uncommon for somebody to give an opinion to somebody else and that can always happen.

Okay, thank you very much.

Okay.

Our next question or comment comes from the line of Alex Hamilton from Jesup & Lamont. Your line is open, sir.

Hi, good morning. Just can you provide some sort of color on the sales and leasing market given liquidity and credit concerns? Has there been any change to liquidity? Has there been any change to financing rates? That would be appreciated.

Well, the -- that's a complicated question. Let me try to answer it as succinctly as I can. Clearly, there is a, obviously at least in the U.S., maybe it's international liquidity crunch which we're very well aware of. We are -- currently our fleet is fully leased. We have recently renegotiated a couple of leases in our favor where the leases have rolled ever and the new rate is at a higher number than the old rate. In terms of the sales of assets in the quarter that we concluded, February 29, we were successful in selling two of our existing aircraft on a cash basis to the buyers who either had the money or financed it, and on the side of availability and I think what we're trying to signal in today's conference call and my comments was that we believe that the liquidity pressures on some of the players will create a certain amount of opportunity, and we are paying very close attention and talking with those who have been publicized that have liquidity problems and own aircraft and those who might not be publicized but may in fact have liquidity concerns. So we are fairly optimistic in this regard that as a result of some of the liquidity pressure, that there will be aircraft opportunities -- opportunities for our aircraft sales and leasing business.

Now, we are raising our hurdle rate to take into consideration the overall risk environment, so we would anticipate kind of looking at ourselves as maybe the option -- the last choice let's say because we're going to pay very close attention to the acquisition prices that we pay for these assets, keeping in mind our view at least of the risk profile of this market. So all of that, what I'm trying to say in as concise a fashion as I can say is that we are aware that there are owners of aircraft who have liquidity concerns, problems I should say and we believe we're in a good position to benefit from that.

Great, thank you.

Our next question or comment comes from the line of Stan Mann from EMS. Your line is open, sir.

First, congratulations on a great quarter.

Thank you.

It's fantastic. I have a couple of detail questions, financial. Can you give us the D&A, the regular D&A going forward and the acquisition D&A going forward? I have a couple of questions I'm trying to model.

So, D&A for the quarter was $10.4 million, which brings you, our year-to-date right at $30 million or just slightly shy of $30 million.

Okay.

That reflects a full quarter of all the acquisitions we made other than Avborne, which obviously just closed at the beginning of this quarter, so I think that rate for Q3 is a pretty good run rate. You got to adjust for current CapEx and you got to, and then layer on something for Avborne. I don't have that Avborne number right now but it tends to be a more labor intensive and capital intensive business.

So it's not major, 1 million, 1.2 million a quarter or something like that?

Yes, the only caveat to that is we do have purchase accounting to apply to the acquisition. That will create some amortization that wouldn't otherwise have been in their P&L, so I don't have that number handy but you could do, based on the purchase price and some general allocations you could probably estimate that pretty easily.

Okay, what about the net debt and the diluted shares going forward?

Diluted shares is something that, what you see right now in the current quarter should not change dramatically. You have a little bit of ups and downs for either stock repurchases on our part or some option exercises or things like that but that's pretty minor. It wouldn't be until we got to a much higher stock price than we are now that you would see any dilutive effects from the recent convert that we did.

Is that in the 35 area.

A little over 35, correct.

And the dilution at that point would be?

It comes in under a Treasury stock method of accounting so it's a function of what the actual stock price is at the time.

Okay.

So you shouldn't see any real share change until you get into the $35 plus stock zone and then it begins to come in slowly. On the net debt, you see from the press release what our recourse debt looks like at this juncture, as David mentioned earlier, we did contract to -- we entered into a repurchase agreement to buy back some money, some amount of our secured notes and beyond that, it's a function of what we do with our cash and how we invest in the business is I think I'm more comfortable telling you that gross debt, you can see that and then we have a fair amount of cash on hand at the end of the quarter and we'll deploy that as we see business opportunities.

Okay. What does it look like at Indy as far as buying and utilizing more space?

Did you say India?

Indianapolis, Indy.

Okay, what's the question?

Status, more space, activity, et cetera. There's some more bays that you were talking about.

They're a major contributor to the MRO results for the quarter. We are not at full capacity yet and we're getting good use out of the space that we currently occupy and there is some additional space for us to occupy. We are in discussions with the landlord about trying to figure out how to get more space at that air field in one way or another, so at this point in time, that business is strong. The demand is strong, I believe that some of your short-term capacity opportunities that we might see that we can't handle there, part of our plan is that some of that work would be done down in Miami, so yes, Indianapolis is strong. We're seeing some benefits with some of the sideline activities including engineering services. This is an area we highlighted, Stan, you might recall a couple years back we started to get some traction here this quarter. We hope to build on that segment of our business as well and sell more of our intellectual property to customer that is looking for those kinds of solutions.

Is UAL the leasing agent there? I mean, are they the owner of the rest of the facility?

No.

Oh, they aren't?

No. The owner of the facility and don't hold me to this, but the airport authority that is basically backed up by the State of Indiana, the City of Indianapolis, and there are some bonds, bondholders that obviously have a position now in that facility as well. So I mean, we deal with the airport authority and like I said, we're looking right now for ways to even take on more space in Indianapolis.

Beyond that facility? In addition?

Potentially. And potentially there's a couple of hangers in that facility that we do not control. That are controlled by others. A regional airline.

Okay, the recent announcements of some of the airlines paring, cutting their capacity domestically, is that what's giving you availability of aircraft to buy on your leasing and purchase segment?

We haven't seen that yet. We saw that. We've seen kind of a steady, that's kind of been a steady piece of the business let's say, if I go back to '03, so we saw some of the benefits back when the airlines were reducing capacity in the '03, '04, '05 time period so we made some investments in assets during that time period which we've been able to place elsewhere. In this current, let's say thrust, we have not seen aircraft that have actually -- serviceable airplanes that hit the market. We have seen airplanes for disassembly that hit the market and we have procured some of those in prior periods.

So the opportunities you're seeing are taking it on from the existing leasing companies because we, air is more liquid and stronger than the current leasing agent?

I think that was part of the strategy behind our offering in February was to give us additional liquidity and put us in a stronger position to benefit from kind of this movement and I think the results are bearing out. Clearly, these markets are not growing at the growth rate that this Company is achieving, so we think we're in a unique position. Our niche continues to expand. We're looking at different opportunities in this regard and I think having a strong balance sheet obviously positions us to take advantage of those opportunities, but at the same token, we're trying to do things that don't require balance sheet. The Indianapolis business, we have a very small investment in Indianapolis, yet it's a major contributor today to our growth rate both sales and earnings, and I signaled earlier about the moving to McClellan Air Force Base. That also is a very minimal investment on our part, because we have a strong balance sheet. Sometimes when you have a strong balance sheet you don't need to use it to go ahead and get some opportunity, so I think that's part of our strategy as well.

Last question. Do we have anything going on in Asia as far as MRO?

We have a landing gear venture in Malaysia.

Right.

That is just coming into its own more or less. Not fully online. It's more or less today more of a store front that eventually will be a full service repair facility, but no, other than that, Stan, at this moment we do not have other physical facilities in that region. We do have sales offices throughout Asia that are managing the relationships with the different Asian accounts, but for the most part we're servicing those customers from our North American facilities.

But that could be a stepping stone, a physical stepping stone into Asia?

In time we need to have more Asian content, more Asian mix in our business, and it's something we're focused on, with the flip side to the weak dollar is the inability to move into some of these markets advantageously, so for today at least, we're able to get some growth servicing these businesses from North America but long term, you're correct. The Company is going to need more capability in that region.

Good job, thank you.

Thank you.

Our next question or comment comes from the line of Mr. J.B. Groh. Mr. Groh, your line is open, sir.

Good morning. Thanks for taking my call. I hopped on late so if you addressed this just defer and I'll dig it out of the transcript, but you adjusted lease rates a little bit. Could you maybe talk about trends there or do you still see those going up holding firm? You mentioned one renewal that you had that was at a higher rate but could you maybe make more general comments on overall lease rates?

My sense is that with all of the stuff going on in the world today that lease rates will probably stay fairly steady to where they are today. Some of the opportunities that we've recently experienced are from aircraft where the leases are maybe three to five years old and they were rolling over and keep in mind, five years ago at least was in the depths of the kind of aerospace recession or whatever you want to call it, and lease rates were historically at very low levels so you're seeing some reset in that regard coming out of that '03, '04 time period, maybe even '05, and as those mature and turn over I should say, the lease rates are more attractive, but I think from this point forward, I believe that the lease rates, once you come off the bottom of that period, I just identified, I think the lease rates stayed fairly constant. Now, that's assuming that things stay relatively constant. So if things were to get worse again, then you would see a reduction in lease rates but I think for right now, the world is in, aircraft are in short supply worldwide at this point in time, and the more efficient the aircraft is, the more in demand the aircraft is, so we've been focused on more efficient aircraft and making sure that we can keep those aircraft out with good credits and so far we've been pretty successful in that regard.

So what I hear you saying is older lease rates rolling over you probably get a positive bump up but as far as current rates are going you look to those to be steady and maybe you've got the fuel headwind that's probably causing those rates to sort of stay in the same rage they're at now?

I think that pretty much says it.

Maybe you could talk about the market for used aircraft and I would assume that that moves not in lock step but same sort of trends as maybe overall commercial production and what your strategy is there? I'm guessing it's A320 family, 737 NG type acquisitions?

Yes, I mean, I think we haven't yet moved into the NG arena. We are looking today at opportunities in that market but yes, the A320 is something that we're trafficking in and most of our activity has been in the 737 classic family, like for instance, the acquisition of 18 aircraft from Malaysian Airlines System, those were 737-400's that were 1992 to 1997 vintage aircraft. And so if you look at the majority of our portfolio, it would be in that vintage, yet there's a movement for us at least to move that a little bit more current, if you will.

What's the average lease period that you have on the books?

I mean, the average lease of the kinds of deals that we're entering are mostly in the three to five year range, and we do from time to time, we are acquiring or we at least are looking at aircraft that have longer lease periods, maybe coming off of some of the maybe 25, 20 year leases where we come in after the fifth year or something like that, so but I would say generally speaking, the lease rates for the aircraft that we're trafficking in are in the three to five year range.

Great. Thank you for your time and congratulations on the quarter.

Thank you.

Our next question or comment comes from the line of Mr. [David Ratlis] from [Dulcet Company]. Your line is open, sir. Mr. Ratlis, you may need to unmute your phone, sir. Okay we'll return him to the queue. Our next question or comment is from Mr. Eric Hugel from Stephens.

Good morning, guys, good quarter.

Thank you.

Can you talk about -- I know in the past, Dave, you've talked about the Aviation Supply Chain margin sort of typically bouncing around in the 22 to 24 range. For now this is like the second quarter in a row that we've been at the 24 sort of the high end of that range. Is there something structurally that you've changed, you've improved in this business or are we susceptible to sort of those numbers dropping back down?

Well, we have a leading position in this market, we've been in this business since our founding so we understand the aircraft parts market as well as anybody else in the business. We've been able to benefit from our strong balance sheet position. We talked about back in the second quarter in particular where we acquired a fair amount of inventory and that inventory is starting to flow through our system. We have meaningful sales coming out of the investments we made in the second quarter, we continue to make investments in the third quarter and we even continue to make investments in the fourth quarter in this business, so I believe that we've been able to make pretty attractive acquisitions of equipment and I think you're seeing some of that benefit there in the margin. So how long that sustains itself is a tough question. We're very pleased with the performance of that group, and the 24, you're correct is the upper end of the margins yet there's still some elements of that business.

Our component repair shops for instance can really see some opportunities there to improve performance. We recently announced a contract for some Army helicopter component repairs that should contribute to improved margins in that business, but I think on balance, I think you pretty well said it. I think we can fluctuate between that 22 and 24. We're running at the high end. How long it stays at 24, I can't really say. I think the trend, I'm not -- we haven't seen a change in trends but it doesn't mean there can't be a circumstance or situation that may cause that to dip down.

Okay, fair enough. Can you talk about, I guess in terms of your overall operating margin, you're at that now for the second quarter in a row. You've achieved that 10% sort of target that you had set out. You've got SUMMA now in the mix and I'm assuming that there was some nice purchase accounting associated with that in this quarter yet you still maintain that. You got Avborne coming online. I mean, is it your expectation that with some of these headwinds coming out I guess additional purchase accounting that you'd be able to maintain that 10% operating margin going forward?

Yes. Listen, as we make these acquisitions, they've been a little bit of drag on the margin so as we try to normalize the business, my opening comments that the sales growth was 39%, if you back out the acquisitions so if you just looked organically sales growth was 25% and if you back out the year-over-year aircraft transactions, sales growth was 19%. We reported 10.1% operating margins but if you backed out the acquisitions and you backed out the aircraft transactions, operating margins would have been 10.4%. So the acquisitions we've made have been a little bit of a drag on operating margins for some of the reasons that you identified, and over time it would be our goal to, as we integrate these businesses, it would be our goal to see the operating, these be contributors to our operating margin business. It might be a little tougher for the Avborne business because by nature, the MRO business has tougher margins, operating margins, but also keep in mind there's less investment in those businesses, so return on capital has been a better measurement for the MRO businesses, but nevertheless, we would expect, Tim has numerous initiatives going on around the Company. We have lean initiatives in our Indianapolis business, in our landing gear business and our component shops in New York and hopefully eventually in Amsterdam, so we're looking for ways to drive efficiency through the Company.

Going back to the performance goals of the Company, we recognize that the growth that we're getting today is largely, we believe, due to taking market share and we're taking that market share because we're performing. We're performing for the customer but we also recognize we need to perform for the shareholder so in that process, we hope to continue down that path of getting to that 12.5% target. It will be, it goes in and goes out, and as we absorb these acquisitions at first blush, they're a drag and then hopefully, we're able to execute and get these margins going in the right direction.

With regards to SUMMA was there a significant amount of sort of inventory sort of step up that sort of hit you this quarter that would pretty much wash out during this quarter and you really wouldn't have that headwind going forward?

No, no, Eric, nothing that is isolated on a quarter.

Okay. With regards to Southwest, I guess in the mix of all of the sort of maintenance troubles that they're sort of going through, one of the interesting things that they sort of announced was that they were planning on moving four lines of maintenance to El Salvador which now they've shelved those plans. Can you sort of talk about, and they said all of those lines were outsourced in the U.S. To providers. 1) were any of those sort of planned lines of maintenance anything you guys were doing with them at Indy, and 2) are there potential discussions, is there an opportunity that you potentially see now that they're killing those plans to outsource those lines to El Salvador, they're going to keep them domestic to get some more additional business there?

So, Eric, the lines that were going to go were not coming out of Indy. Southwest is a good customer and we're working with them every way we can to support them. We've helped them get some of their aircraft back into to service and we're constantly talking to them about ways to be more helpful.

The Southwest issues in terms of their sort of maintenance lapses and check, that's all internal to Southwest. That has nothing to do with third party MRO providers, does it?

Correct. As David mentioned, it's largely around the paperwork.

Okay. Also, United, they're a sizeable customer at Indy. They're talking about taking 15 to 20 aircraft out of the mix, they're talking about older, domestic aircraft which to me means their 737s, 300s and 500s, their oldest aircraft in the fleet, domestic and you're the exclusive provider of all of that maintenance. I mean, are there sort of plans right now, are you in discussions about sort of reducing the number of lines and then you'd have to sort of fill in some additional lines or I know they're flying about 95 37's right now, so reducing 15 to 20 is not the end of the world but is there potential here that as we get into the back half of the year that you're going to see a line reduction?

There's always the potential but right now that's not the nature of the conversations we're having with United. So we're prepared for that if that were to happen, but that's not what we're hearing.

Okay. Tim, can you give us an update on where things stand with the component repair business and getting those margins up? We've been, I guess, slower than hoped for for the last couple of quarters on the trek up from breakeven up to high single digit operating margins. Can you sort of give us sort of a trend of sort of where things are and how much farther we have to go?

So David touched on it in his comments. We've got a good start in that we have won some business recently, some meaningful business and I think you probably saw that release.

Yes.

We've strengthened the leadership of that business recently that we think is also going to have an impact. We're investing in some process improvement initiatives there, so as David said, I think there's still plenty of upside there, but we're, I think starting at the early stages of seeing some improvement.

Would you say that right now that sort of business in terms of operating margins is mid single digit?

Yes.

Okay, great. And lastly, just sort of a numbers question. Do you have CapEx for the quarter?

Eric, I'd say mid single digits or less, okay?

Okay.

CapEx, is just under $8 million for the quarter.

Great. Thanks a lot, guys, good quarter.

Thanks.

(OPERATOR INSTRUCTIONS) We have a follow-up from Mr. Troy Lahr from Stifel. Your line is open, sir.

Thanks. Just a follow-up question on Indy. You guys talked a lot about still seeing good customer interest there, looking to expand the facility. How has the labor market been? Have you seen improvements there?

Some, I'd say modest improvement, but still I'd say relatively tight.

Okay. So are wage rates still pretty high or have you seen wage rates come down a little bit?

Well, it's not so much around the wages I wouldn't say. Wages have not come down. I think it's an industry wide, maybe even beyond industry wide problem, getting, attracting skilled technical labor.

Okay, and--?

Certainly not unique to Indianapolis.

Sure, okay. And then regarding SUMMA Technology, the integration, are you fully done with the integration or can you just maybe update us on that? Did you see any surprises once you actually acquired the business? Kind of maybe what you experienced with Rebaire how it cost you more to integrate? Anything like that going on at SUMMA?

I think the integration has gone quite well. There's been some real solid positives that we've seen and really not any significant negatives.

Troy, I would just add to that as David said, it's an additional leg on the stool, so the level of integration I think it's fair to say was a lot lower than it would have been at our Hot Springs acquisition.

Okay. And then lastly, at the MRO business I guess a couple quarters ago you had some problem aircraft contracts come through, some problem aircraft. Any more of that, do you think that's kind of behind you and you kind of understand what happened and you're on the same page with the customer now about what aircraft is coming through your facilities?

Yes.

Can you elaborate or just--?

No, I mean those issues are well behind us. I think they were a point in time a couple quarters ago and we're not experiencing those difficulties with those airplanes.

Okay, are you working, are you reworking any additional MRO contracts trying to get better pricing on any of those? I think you went through that in the past on one contract, just wondering if that's ongoing?

There's, no, no, there's no specific kind of contract renegotiations going on. As we look at Avborne and bring on new customers but no, I don't think there's anything going on right now in terms of renegotiating any contracts.

Okay, thanks, guys.

Our next question or comment is a follow-up from Mr. Tyler Hojo. Your line is open, sir.

Two quick follow-ups. Just in regards to Indianapolis facility, how many bays are you currently utilizing?

Tyler, it changes fairly frequently but I think at last count, we were working out of eight bays.

And lastly--?

We're getting ready to bring the paint bay on as well.

Okay. And lastly, just in terms to your aircraft portfolio, I believe the last time you commented just in terms of the number of aircraft purchased pre-9/11 was the first quarter when there were six. How many are on the books as of today?

Three. The question is how many pre-9/11 aircraft are on the books, three.

Okay, great. Thanks.

Our next question or comment comes from Arnie Ursaner from CJS Securities.

Hi, good morning. Two very quick questions. One is on the cash that you have on your balance sheet. Can you give us a feel for if you have any exposure to auction rate notes and what sort of rates you're getting on the cash?

No auction rate notes.

No exposure, Arnie, and what earnings on that cash? Somewhere between 300 and 375 bps.

Okay, and just to be clear on Southwest, did you receive any emergency repair work on this recent announcement and if so, did it displace other work that you already have in hand?

Arnie, we helped Southwest in some of their out-stations doing remote overnight inspections so it didn't displace anything.

But if you did work in their sites you had to obviously take some of your key personnel to their site to do it.

It was not disruptive to our operations in any way.

Okay, thank you very much.

Our final question will be from Mr. Larry Solow. Mr. Solow, your line is open.

Just one real quickie. Any update on the Airbus A400 contract and is there any potential to see revenues in calendar 2008?

It looks like it's going to be early '09, Larry.

Okay.

When deliveries, begin. We're continuing to work with our prime contractor and with Airbus to get the cargo system design finalized and the manufacturing ramped up so it looks like it's going to be early '09 when it starts to impact revenues for us.

Great. Okay, thanks.

Gentlemen, we have no additional questions or comments in the queue at this time.

Okay, well, thank you very much for participating and hopefully we were helpful here today so have a nice day, good bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.