AAR Corp (AIR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AAR Corp fourth-quarter fiscal-2011 earnings call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Greg Dellinger. Sir, you may begin.

Thank you, Shannon. Good morning, ladies and gentlemen, and thank you for joining our fourth-quarter fiscal-year 2011 earnings conference call. Before we begin, I would like to remind you that comments made this morning may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We ask that you refer to the disclaimer contained in our news release, as well as the Risk Factors section of the Company's May 31, 2010, Form 10-K. In providing forward-looking statements, the Company assumes no obligation to provide updates to reflect future circumstances, or the occurrence of anticipated or unanticipated events.

And now, at this time, I would like to turn the call over to our Chairman and Chief Executive Officer, David Storch.

Thank you, Greg, and good morning, everyone. Joining me today in Chicago is Tim Romenesko, our President and Chief Operating Officer, and Rick Poulton, our Chief Financial Officer. We reported our fourth-quarter fiscal-year 2011 results yesterday afternoon, and I hope by now that you've had a chance to review the press release. Sales for the fourth quarter were a record $479.8 million, up 32% compared to the same period a year ago; and income from continuing operations was also a record at $22.7 million, or $0.55 per diluted share.

For the full fiscal year, sales were just shy of $1.8 billion, an increase of 35% compared to the prior year; and income from continuing operations was $73.1 million, or $1.81 per diluted share. By all accounts, fiscal 2011 was a strong year, and was a result of solid execution by the AAR team on a number of fronts. Significant business wins across the Company helped drive sales growth more than the overall growth rate in the commercial airline industry. During the year, we brought on new MRO customers and Supply Chain programs that will benefit the Company as we enter the new fiscal year. We expanded our relationship with certain domestic carriers, such as Southwest and Delta, and we added UPS and Virgin America as new customers.

For Supply Chain, we entered into component-supporter programs with international carriers, Gulf Air and Finnair. Three weeks ago, we announced that we have been selected to be the exclusive worldwide distributor for Unison Industries -- and that's a wholly-owned subsidiary of GE -- to provide electrical components, sensors, and other systems supporting both commercial and defense customers. The agreement is valued at more than $600 million over a 10-year period, and we will begin to see revenues from this program toward the end of our first quarter of fiscal 2012, and will be fully ramped in fiscal 2013. It's a very exciting program for the Company.

For our Government and Defense business, in June we announced the winning bid to provide fixed-wing aircraft for USTRANSCOM, as we see steady demand for this activity and for this type of service that we provide. During the year, we successfully deployed 14 new aircraft since we made the acquisition last April -- or April 2010. Over the past 12 months, we have transported approximately 235,000 passengers, and carried approximately 38 million pounds of mail and cargo in support of our customers around the world. So you can see it's a very important service and a significant service that we provide to the customers.

In addition to new business wins, we completed the move of AAR Airlift to its new offices and hangers in Florida. And as you can see, we had in the period an expense -- a $2.2 million expense associated with the relocation, which was very similar to the expense we experienced in the third quarter. We do not expect any more relocation expenses going forward. And this move, aside from being in a better physical place of business, is also a very important step in the rebranding of the business as well.

Our balance sheet is strong, and we have substantial liquidity. Our total debt-to-capital ratio is just under 35%, compared to 37% at May 31 last year, allowing us operational flexibility.

I will now hand the call over to Rick, who will provide further details on our financial performance for the quarter.

Okay. Thanks, Dave, and good morning, everyone. As is customary, I would like to provide a little more detail on the performance in each of our operating segments, and then I'll conclude with some comments around interest, depreciation, and CapEx. Within our Supply Chain segment, sales increased 16% compared to the year-ago period, reflecting the improved industry conditions both here in North America, as well as the international markets that we serve. During the quarter, we negotiated and then subsequently signed letters of intent to sell 5 aircraft from our lease portfolio. Two of these aircraft are wholly owned, and 3 are owned through joint ventures.

We recorded a $5.4 million impairment charge on 1 of the wholly-owned aircraft, to reduce the carrying value to its net realizable value; and this charge is reflected in this segment's results. We expect to close on the 5 aircraft during the first half of fiscal 2012; and when completed, this will reduce the number of aircraft in our lease portfolio from 28 to 23. If you exclude this impairment -- aircraft impairment charge, the gross profit margin for the Supply Chain segment was 17.3%. This is down slightly from a year ago, mainly due to product mix, but largely consistent with the results we experienced in Q2 and Q3 of this year.

In the Government and Defense Services segment, sales doubled from a year ago, driven by sales at AAR Airlift, along with the strong growth at our Defense Logistics business. Gross profit margin for this segment was 20.4%, down slightly from the year-ago period, but up sequentially from 17.4% in the third quarter, due to very good operational performance both at Airlift and our Logistics programs. During the fourth quarter, 2 S-92 super-heavy-lift helicopters became fully operational, and these contributed to our fourth-quarter sales in the segment. Also, as David just mentioned, during the fourth quarter we did finalize the relocation of the business, and this required an additional $2.2 million of relocation-related costs.

In our MRO segment, sales increased 38% over the prior year, as we executed on new business awards that had been captured over the past year, at both our aircraft centers as well as our landing gear business. The gross profit margin in the MRO segment was 14.9% in the fourth quarter, compared to 13.3% in the year-ago period. This improvement was due to increased volumes, and improved efficiencies on our new programs. Looking ahead to Q1, I would like to remind everybody that this segment is customarily most impacted by the seasonality of the busy summer travel season, so we would expect Q1 sales in the MRO segment to be lower than our Q4 levels.

In our Structures and Systems segment, sales were down year over year due to lower volumes at our mobility products unit. On a sequential basis though, sales increased 19%, driven by higher sales at each of the business units in this segment. Looking ahead to Q1, we would also expect a seasonally lower level of sales in this segment compared to Q4, but with a return to higher volumes in Q2.

During the fourth quarter, the Company sold the assets of a non-strategic product line within our Maintenance, Repair, and Overhaul segment. Proceeds from the sale were $10 million, and the net carrying value of the assets that were sold was a little over $4 million, so this resulted in a pretax gain on the sale of the product line of $5.9 million. Revenues from this product line were only $3 million in fiscal 2011, and we have the opportunity to recapture some of that through our royalty agreement with the buyer. So, this sale of this line should not have any significant effect on future performance in this segment.

SG&A as a percent of sales was 9.8% in fiscal 2011, and this compared to 11.1% in the prior fiscal year. Leveraging our cost structure helped us report steady progress in our operating margins throughout the year, and these increased from 6.9% in Q4 of last year to the 8.2% we reported in fiscal Q4 that we just finished here. Improving operating margins remains a top focus for the Company.

Our net interest expense for the quarter was $8 million, an increase of just under $1 million from last year, and it reflects higher average outstanding debt, as well as the non-cash interest charge on our convertible notes. Our cash interest expense was $4.8 million, and this compared to $4.1 million last year. And the non-cash portion was $3.2 million, which compares to $3 million a year ago.

Depreciation and amortization for the quarter was $16.1 million, and CapEx for the fourth quarter was approximately $43 million, which included $26 million of investment in new aircraft at our Airlift business. Our fiscal-2012 CapEx plan is approximately $75 million, and this includes approximately $20 million for the final payment on the S-92 aircraft that we had previously deployed. So, as we've discussed on these calls in the past, our normalized capital spending is certainly coming down.

I will now turn the call back over to David, who will provide some closing remarks.

Thanks, Rick. I would just like to say that we enter our fiscal 2012 with momentum. We've recently announced new wins in both our commercial and defense businesses. We just announced a significant new product win for our mobility products business yesterday, as we enter a new category of shelters, in addition to the aforementioned contract for USTRANSCOM to provide fixed-wing support in Afghanistan. We are also bidding on additional rotary-wing support, that we expect to hear from the government in the next 30 days.

I might add that throughout the year, we saw improved sales, operating margin, net income, and return on capital on a quarter-over-quarter basis. So, as the year progressed, each quarter was better than the quarter previous. And then, as Rick mentioned, we expect fiscal-2012 CapEx to decline from fiscal 2011 levels, allowing us to get back on track, while generating significant free cash flow.

Well, that pretty much wraps up our prepared remarks. I'd like to thank you for joining us this morning. I would like to now open up the line for any questions you may have.

(Operator Instructions) Larry Solow, CJS Securities.

I'm wondering if you guys could just give a little more color on the Supply Chain and the commercial revenue -- just on the commercial trends, anything you're seeing sequentially during the quarter? I know last quarter, you had -- it looked like you had a strong performance, and basically improvement across the -- through the month. And I realize now it looks like you're, I assume, have good momentum, with a bunch of new contracts across the businesses. But anything -- outside of seasonality that you're seeing, in terms of customer behavior or trends that you saw during the quarter?

Hey, Larry. I think I would characterize the demand as steady. Our engine shops that drive demand for engine parts are busy. Our outlook for the MRO business on the commercial side, once we get through the summer, is solid. We're using these summer months to prepare for a busy fall, we're adding capacity at Indianapolis. So, I think I would characterize the demand on the Supply Chain and the MRO as pretty strong, actually.

Okay. And on the MRO, you had a fabulous performance, and I think some of that was enhanced by your engineering services revenues. Is that something that is a sustainable level? Is that potentially -- I know that's a little bit more a -- a lumpier business, so --

It's a little lumpier. But as you know, it's a business that we've been investing in and developing in, and we've had some success around. So, it will continue to be a little lumpy here. But we do have programs that we're working on, contracts that we've signed with good solid customers, that we know will continue to feed this line.

And just speaking of -- last question, just on the large new contract you have with Unison, that's more of a distribution agreement, right? So, a little bit different than most of your normal-type agreements, is that fair to say?

It's new parts distribution, yes.

Right. And is that -- you do have an existing distribution business, right?

We do. Yes, we do.

And margins in this, is that sort of similar to -- than what we would expect in a normal Supply Chain?

The operating margins here will be in line with our overall margins.

So, Larry, just to make sure you appreciate that, gross margins may be affected by that. We haven't guided that, but to reiterate what's Tim said, I think on an operating margin basis, we expect it to be helpful to our goals on the operating margin level for the Company.

Okay. And just to clarify, I think you -- the restatement on the Aviation Supply, is that just from the component repair shop that was closed? Is that what --?

Our Amsterdam component repair shop, we classified as discontinued operation.

Exactly, got you. Okay, great. Thanks, guys.

Ken Herbert, Wedbush.

First question, just specifically on the Government and Defense Services side, can you talk, for the airlift business, with the new contract win heading into fiscal 12, what kind of growth are you looking for in that business? I mean, you just mentioned there at the end of the comments about, David, about some [roto] opportunity within Afghanistan, but can you talk about the landscape now in terms of potential new contract wins or additional add-ons, like the recent announcement to existing contracts, and what we should be thinking about for growth, specifically within the airlift side of Government and Defense?

We're expecting steady growth in that business in this new fiscal year. We did announce the contract win in June, which added -- adds a couple of fixed-wing aircraft to our portfolio. We are bidding on a rotary-wing contract, which will be an extension, if you will, of some existing aircraft or helicopters that we have in theater, and then some additional helicopter lift as well. So, we're expecting -- for the year, we're expecting steady improvement in the operating results of that business.

Okay. And then --

Both from a sales and earnings perspective.

Okay. No, that's good. And then, for that business, any further commentary about expansion into or opportunity to go back into Iraq or other areas outside of Afghanistan? Is there any update on that progress?

I would say there's prog -- there's discussions, and there's progress and discussions. I wouldn't say that we have anything tangible to report at this stage, and obviously we will once we do. But I can tell you that the team is being very well-received by the customer base -- the existing customer base, as well as prospective new customers.

You know, the business is now headed up by Jeff Schloesser, who has now been with us approximately one year. Jeff is a retired two-star general of the US Army, and he commanded 101st Airborne in Afghanistan for 14 months. So, he is highly respected -- I should say, inside the Company; but also very highly respected inside the government community. So, he has built a nice team around him, and we're out there talking with folks like the UN, with NATO, to the State Department, and other potential users of our services. So, yes, I would think that we'll have some traction in this regard over the next year.

Okay. Great. And then, just finally within this segment, on the logistics side -- again, you mentioned that as doing well in the quarter. Can you -- how much of the growth in the quarter was logistics? And I'm assuming some of that is KC-10 ramp, and obviously ongoing JSTARS, AWACS, other work. But is there anything you can particularly point to within the logistics side? And then, again, looking out into 2012, what you see there in terms of opportunities for new contract wins or expansion of the business?

Well, we did experience, in our KC-10 program, very strong performance. The aircraft are being heavily utilized, which drives revenue. In terms of the outlook and the opportunity pool, we are chasing a number of opportunities that are out there. Probably nothing that I can point to that's going to be wrapped up here in the next weeks, but there are opportunities that we are pursuing right now.

Great. Thank you very much.

Troy Lahr, Stifel Nicholas.

When you talk about the new airlift work that you're bidding on, would that require you to go out and purchase more airlift assets, or can you just use that with the existing fleet that you have?

There is a portion of the contract that will be with our existing fleet, and then there's a portion that will require us to source aircraft from outside. We are in discussions to either acquire some of these assets or lease these assets, so we haven't made a determination yet in that regard. But yes, it will require some additional assets.

Is that reflected in your CapEx guidance, or does that change depending on how you win these contracts?

The business we've won to date, Troy, is reflected in our CapEx guidance. It's possible incremental business that we win could change that, but I want to reiterate what David has said -- we've had a lot of time to think about financing, and we have several potential lease options, as well.

Okay. And then, if you look at the margins, excluding some of the relocation costs, is that -- should we think about that business now as kind of sustainable at 21.5%, 22%, or is that going to bounce around with some of the new work coming online? How should we think about those margins trending?

In our Government and Defense Services segment?

Yes.

Well, you're up 300 basis points in one quarter, right? So, I think you need to keep perspective on that. We had a very strong operational improvement and very strong volumes during the quarter, as Tim just mentioned. I think we have said for a while we saw opportunity, particularly in airlift, as we improved our operational capability that would help drive margins. So, there's certainly a portion of it we expect to be sustainable. I don't expect significant change, Troy, but I think you rounded up to -- if I'm not -- I think you said 21% and above, right?

Right.

Yes. So, you're kind of going up from where we are, and I think you should appreciate what we've achieved so far. And I think we'll work hard to kind of keep it at these levels.

Okay. And are you -- last question -- are you seeing airlines or do you expect an impact starting in September, with airlines trimming in capacity? I think a lot of the domestic carriers, I think after the summer months, are talking about cutting capacity year-over-year. Are you seeing any of that? Do you think that impacts you guys?

We're not seeing it. The customers we're talking to still have heavy induction schedules, both for engines and aircraft. I mean, obviously, if it continues for an extended period, it will impact us; but our outlook right now is still strong.

For the commercial, for kind of --?

Yes.

Okay. All right, sounds good. Thanks, guys.

J.B. Groh, D.A. Davidson.

I had a question on the Supply Chain contract that you get guys just recently announced. What sort of -- is there a inventory purchase required there? And if so, how does that factor into your cash flow plans?

The Unison contract, J.B? Just so we're clear?

Yes.

There is some inventory purchase, it's not what we would call massive. And we do expect to have some pretty good turns on that inventory, even in the first year. So, at the core of your question, it's not CapEx, it's working capital for us.

Right, right.

But it's reflected in David's commentary on expectation of getting back to significant free cash flow generation.

Okay. And then, I just had a clarification on this USTRANSCOM deal. It's described as -- it runs through May of 2012, with three one-year renewal options. When you say it has a value of $240 million, is that a four-year deal or is that a one-year deal?

That's a four-year -- that's assumes options are exercised.

Okay, good. That's what I assumed. Okay, thanks a lot for your time, guys.

Thanks, J.B.

Eric Hugel, Stephens.

I just wanted to start off on the free cash flow question. Can you maybe provide us some targets in this regard? How do you think about significant free cash flow generation? Can you maybe throw out a dollar or a percentage of net income, is how we typically think about it. This is a pretty important question, I think, for the investor base. This is definitely -- in the last upturn, you tend to be a -- have tended to be very working capital intensive business. I guess, why is this time different?

Well, the composition of the Company -- let me start with the end of your question, I'll try to come back to the beginning of it. The composition of the Company is a bit different than -- depending on what historical period you're looking at, Eric. But the -- let's just talk, since talked about Airlift on a few of the questions preceding you -- that requires a fair amount of capital up front, but once you spend that capital, you have a very nice cash profile out of that business, and --as an example. We've grown a lot in our Defense Logistics businesses. Those also have very nice cash profiles to those businesses.

So, the composition of the Company with the growth around some of the government business, and even the growth in our MRO business, changes what used to be a very working capital hog-oriented company of the parts trading. So, I think that's a -- my starting commentary. To your question of what's our goal, what do we think is significant? Our goal would be to create free cash flow somewhere between 80% and 120% of net income.

That's great. But I guess getting back to maybe your point before, aren't we effectively just sort of seeing a shift now, in terms of what was working capital into CapEx?

Well, you saw it certainly this last year, but these -- unlike the Supply Chain trading businesses, where you have to constantly recede new parts to kind of sustain the sales volume, here you buy the airplane once and you get a pretty nice cash flow stream after you've paid for it. So, you've seen all the outflow, and now we get to reap the rewards of it.

So, we should -- beyond -- as we move into this year, a normal sort of CapEx, sort of X buying any new aircraft, should be around that $50 million level?

Yes, that's what we're looking at for fiscal '12, Eric. I think I've, on previous calls, I've said somewhere in the $60 million ZIP code is probably right. As the Company gets bigger, we'll potentially continue to fine-tune that number; but yes, that's the way to think about it.

Okay. And in terms of any sort of guidance for this year, I guess last year you guys came out and you gave some guidance metrics in terms of growth for the businesses or whatever. I don't know if maybe you'll do that later on, if you're going to have an analyst day or whatever. But can you give us some maybe top-line and earnings growth expectations for what you're seeing for this year, and what's driving that?

I'll just say this. We are planning an analyst day, Eric, and we'll do that in early October again. We'll obviously give more details on that at that time, and I think we'll have more to say then. But I think you've heard the comments here today about how we feel about the year. We just progress the momentum we have going into the new year et cetera. So, I think that's the level of guidance we're comfortable with right now.

All right. In terms of the M&A environment, can you give us some visibility there? What's going on, what are multiples looking like, what kind of areas are you focused on?

We're looking at a few different areas, Eric, and we'll stay very disciplined in our approach. Our goals remain consistent, in terms of looking for accretion and looking at either build-out capabilities or look for new and interesting markets to fit into our -- let's say our capability profile. So, yes, there's a fair amount of activity in this regard. We, in terms of multiples, I think the multiples that we're looking at, like I said, would be at levels that would be accretive to our results.

Okay. Rick, tax rate for next year? What should we be thinking about?

You should expect a more normalized rate, Eric, around 35%-ish.

And I guess lastly, can you update us on the KC-10 tanker, on the profitability there? I know you had some bumps in the road getting the profitability up. I think there were some problems in the hand-off with Boeing, or something like that. But are you at that high-single-digit, low-double-digit margin target? And if not, when should we expect you guys to get there?

Eric, the program has definitely stabilized. I think we've seen an improvement, as I said earlier, in terms of the revenue, which obviously helps the bottom line and the yield. I would say that we still have opportunity for improved performance and yield through some efficiencies that we're driving. So, it's -- I'd say that we're at maybe our first level of margin performance, and we see some opportunities for further improvements.

So, would you say that program is in maybe mid-single-digit up margin type of territory?

Little bit better than that.

Okay. All right, great. Thanks a lot, guys.

Tyler Hojo, Sidoti & Company.

First question, just on the aircraft leasing side of the business. Of the 23 aircraft that I guess you will have in the portfolio after you sell the five that you mentioned, do any of those come up on lease next fiscal year?

Yes. Tyler, we do have several of those that come up in fiscal '12. We're working some of that as we speak. In fact, coincidentally, we got a deposit today from somebody that may be re-leasing a few of them or potentially buying a few of them. But there are some that come up, much like this time last year, we had a bunch of aircraft that were coming up in fiscal '11, and we dealt with them pretty early in the year. That would be our expectation for this year as well.

Okay. And in regards to the aircraft that you took the impairment on, what type of aircraft was that? And do you have any more in the portfolio?

That was a owned, roughly 20-year-old A320 aircraft. And with motors that were not very attractive by current standards. So, it had some unique characteristics to it. We don't -- when we complete these transactions, we'll only have three aircraft in our own portfolio, and one of those is coming off lease, coincidentally, later this year and we expect to part it out. So, the invested capital in our owned aircraft will be very small after this, Tyler.

Okay. And in regards to how you look at that business, do you still kind of target a 20% loss return on investment? Is that a fair way of looking at it?

Yes. I think our hurdle rate for most of the investments we make in our commercial businesses would be in that area.

Okay, fair enough. In regards to the Spirit opportunities that we've talked about over the past few conference calls, could you give us an update there?

We're doing well, we are actually delivering product now on the earliest contract awards, and we are in development on a series of new parts. So, it's going quite well, actually.

Do you still think that that opportunity is kind of on track to get as big as -- kind of how you were first talking, I guess back at your last analyst day?

Yes.

Okay. All right, great. And last question for me, just kind of a follow-up to some of the other questions. But just strategically, when you look at the business, first if you could just comment on what the current business mix is today, defense versus commercial? And kind of what the direction probably will look like as we look move ahead here?

If you look at the business mix today, it's approximately 50%/50%, it's in that ZIP code. And we're very comfortable with that relationship. I believe that over time, based on demands within those different segments, will drive possibly five- to seven-point variations, but I believe at this stage we're very comfortable with this mix.

Great. Thanks a lot.

Yes.

Thank you. (Operator Instructions) Ken Herbert, Wedbush.

Just wanted to follow-up within Aviation Supply Chain. You've seen some good -- obviously, some good volume increase on the top line with margins, when I add back, obviously, the impairment charge. How should I think about margins heading into fiscal '12? Do you start to get back up into that maybe low 20s% range? Or with the taking on of inventory in some of the new programs, should I think about this as sort of a high teens business, where it's been the last few quarters?

I think, Ken, it's -- I think we'll have some potentially competing forces, in terms of the gross margin levels. As we mentioned earlier, I think you've seen pretty consistent level here for a few quarters in a row -- but that is consistently below kind of historical levels. So, we do believe there is intrinsic upside, when you just think about the core business that is there.

But working against that a little bit will be -- we also talked about a little earlier -- as we onboard this larger distribution agreement, which will be classified in a segment, again, that has an operating margin profile that's attractive and will help us achieve some of our operating margin goals. But at a gross margin level, it is likely to be lower. So, we need to probably sort that out a little more and give prospectively -- maybe we'll have a little more to say about that. But I think -- I just want you to appreciate those two things, kind of competing against each other.

Okay. So, excluding -- if you were to back out the Unison opportunity you've recently taken on, if you were to think of the core business with the volumes you're seeing, without that obviously pressure on the gross margin, getting to a more normalized, what we've seen historically, in the low 20s%, would be probably much more achievable, if I understand what you're saying, Rick.

Yes. I'd say, Ken, there's structurally nothing different about the business than there was historically. I think we've talked over the last several quarters about a decision on our part to do a little more work on a consignment basis, rather than invest capital, take the capital risk, and resell it. And we think that's been a smart decision, we continue that. That does create a little bit different margin profile, but we don't -- that's something we're executing in the current environment. I don't think that'll necessarily always be the case. So, as we get back to more normal market conditions, then I think the old historical opportunities should show themselves again.

Okay, great. And just one final question, back to the Airlift business -- as you look out over the next couple of years, at higher probability that we see some fairly material reductions in deployments over there, specifically in Afghanistan, how does that change the business or impact the business in the near term or long term? Or does it change at all your thinking about the business?

Well, I think -- I guess, Ken, I'd reiterate some of the things we've said previously. So, first and foremost, I think it's perspective on how big our operation is, relative to the size of the operation that the military is conducting in Afghanistan. We gave you some data earlier about the number of people we carried through 2011. When you compare that to the overall size of what's happening there now, there's a lot of opportunity, even if all of the reductions that you've heard about in the press occur. Let's start with that.

Then, secondly, we've talked for some time about what we believe are opportunities with customers, beyond the current customer that we serve, as well as geographical regions beyond the customer we serve. And obviously, David commented earlier on some of the business development prospects we've had there. So, we are -- the core of your question, Ken, was the number-one issue we diligenced before we decided to buy this Company, and we got very comfortable that we believed is a long-term strong demand for the services we provide.

Great. Thank you very much for the color.

Thanks.

Gregory Macosko, Lord Abbett.

Just so I understand the government business, I know that on an adjusted basis for the acquisition, how would you say it grew in the quarter, year-over-year?

Well, Greg, I know that sounds like a simple question, but I just want to just parse it for you so we make sure we're -- I answer what you're really talking about. The business that we bought, okay, had a revenue contribution rate of about $45 million a quarter, okay? And that was something we had almost entirely -- we didn't have entirely in the fourth quarter, we had about two-thirds of that last year. So, you could think about -- we picked up $15 million this year that you didn't have last year, just based on the business we bought. And so, your growth rate would be still quite high on a year-over-year basis.

The business has grown organically under our ownership significantly as well. So, if what you're really asking me is to eliminate the entirety of that business, then obviously that would impact the growth -- year-over-year growth rate a bit more. But it -- you'd still have a pretty strong government growth rate, because our logistics business has grown pretty significantly, as well.

Okay. But you mentioned good outlook, strong outlook, in Aviation Supply Chain. I'm assuming that Government, given your comments about the Airlift and the like, looks pretty good as well?

Yes, I mean -- Greg, again, we just won some growth business that'll go online a little later this year. We're -- David also talked about bidding on a contract that we expect to hear -- where we stand on that in the next 30 to 45 days. And that also would represent possibly new additional business coming online. So, yes, I mean, as we sit here today, we feel pretty good about the demand profile for this business.

Tyler posed some good questions on the aircraft. You mentioned briefly during the CapEx discussion potential lease options. Are we talking about additional aircraft that may be acquired in the lease portfolio, or was this relative to the Airlift?

Totally relative to Airlift, Greg.

Okay. So, basically -- when's the last time you were at 23 aircraft?

Probably '07, possibly '06.

Okay. So, we're continuing to head down, is that a fair statement?

Yes, that's a fair statement.

Okay, good.

The sale of the five assets, other than the one we made an adjustment on, are at a profitable level. The other -- there was unusual characteristics around the one, and that was on the one aircraft, this was an aircraft that was on a lease with the carrier, and we had to repossess the asset. We do have a claim against that carrier; unfortunately, they're in bankruptcy, we're not certain how we're going to collect on that claim. And we factored that in at -- we have not factored that into our numbers in any fashion; so that's the unusual characteristic, if you will, around that aircraft.

Good, good. Thank you, David. So then, just looking at the operating margin, we've -- in the past, you've talked about a kind of a 10%-ish goal, and there's -- every quarter, especially relative to the leasing, there are some one-time things, et cetera. But if you kind of looked at the adjustments made on an all-in basis, it was kind of 8.9%, versus 6.9% last year. Are we -- I mean, what would you look at if you backed out, I suppose, the $2.2 million and the different pieces? Where do we stand right now? Do we still -- can we still look at that goal on a long-term basis, particularly in light of the Unison and some of the other contracts that have come on?

Greg, I'll start with that. That is still absolutely our goal, it's still a focus. And Unison, as I said earlier, while it may have some impact on gross -- reported gross margins, it will assist us in achieving our Company operating margin goals. The -- to get there, we have -- you did the math, you're right. We have made good progress, but we still have a ways to go.

And we've outlined how we get there -- continued growth through some of our higher-margin areas, continued improvement in some of the execution of areas. And we've talked about what some of those opportunities have been -- Airlift, KC-10, and some other businesses, and then continued leveraging of our cost base. So that's the formula, and I think on all fronts we've made progress, but we need to continue to make progress to get to that goal.

Okay, good. Thank you very much.

Larry Solow, CJS Securities.

On these LMS, these lightweight shelters, it sounds like -- I think it's part of a newer -- new operation for you guys. Is this something where there's opportunities, larger opportunities out there?

Yes, we see, actually, significant follow-on opportunities. We have some new manufacturing processes associated with this. This was a big win for the Company, it's a new shelter platform for us. And while the initial award was kind of, I guess you would say, modest in the grand scheme of things, it's a very widely used shelter, with lots of different customers that deploy this. So, we're really excited about this win.

Okay. And the FMTV, the tactical vehicles -- I know you -- that had switched to Oshkosh. Is that now -- is that ramping back up, or what's the status?

Yes, it is, yes. We are in full -- we're in production on those units.

Okay. So, it's pretty much -- maybe not fully ramped, but it's on its way?

Right.

And just to clarify, on the Unison contract, I think you said it would be fully ramped sometime during fiscal '13? Is that -- can we look at that as sort of a $60 million a year run rate, or is that the simple math, or is there more to it than that?

I don't know if we'll be quite at $60 million by fiscal '13, Larry. But part of how the math works to get to the total contract value over 10 years is, you do have OEM list pricing continuing to rise through that period, so it's not just purely a volume game. But I think your thinking is sound in that we think volumes will be at a normalized level by fiscal '13; and so, we'll ride that through the rest of the contract period.

And you mentioned contributions -- they will actually begin in the first half of fiscal '12? Is that what you said on that contract?

Yes.

Okay. Great. Thanks again.

Eric Hugel, Stephens.

You talked earlier about some new capacity coming on at Indy, you're investing. Can you talk about what's going on there -- how full is Indy, and why you are adding the capacity?

We're adding capacity to make the plant as efficient as we can. We have -- one of the hangers is a wide-body hanger with a docking station in it. We are investing capital to remove the docking station so that we can put multiple narrow-body aircraft in there, so that we can generate more revenue off of that one hanger. And that should be online in September at the latest.

And I'm assuming Indy is pretty full? What were there -- 10 bays at Indy, if I remember it correctly?

Yes, Indy is pretty full, given the slower summer months, so the hours are down a little bit now. But we expect to be very busy as we go into the fall.

The Virgin and UPS work, is that at Indy, or is that at Avborne?

The UPS work is at Indy, and the Virgin work is in Miami.

Great. In terms of new Supply Chain logistics, sort of opportunities, are you seeing more on the commercial or the military? And I guess maybe on the military side, are they your traditional -- as a sub to a guy like a Northrop Grumman, or are they contracts that you might be the lead contractor on?

Well, we're seeing some of each, some of all of those. On the commercial side, I'd say that we have a nice pipeline of Supply Chain programs that are in various stages of development. So, we are encouraged about that pipeline. I think, as I said earlier on the Government and Defense side, I think it's maybe a little bit farther out in terms of sizable new programs. But we are working programs as prime, and also as subcontractors, with some of the large OEMs.

And lastly, Rick, can you remind us in terms of the converts that you have right now, what's the stock price that starts triggering -- or how should we start thinking about triggering additional share count into the EPS base? Where does the stock price need to be at, and how does that work?

Sure. The -- we have three tranches of convert, so I think you know. The one -- the first tranche is for $120 million, is already in our fully diluted EPS calculation. So, that has the lowest convert right -- that's just under $29.50 that that starts to come into the money. But again, those shares have been in our fully diluted calculation since we issued those bonds, so you won't have any incremental impact there. The next two tranches have strike prices that are closer to $36; but we did put a bond hedge around both of those as well, so we have actually an effective conversion price that's more like $42, $43.

So, we don't have to worry about any additional shares coming into the share count until it gets up to that $42, $43 level? Or $36 level?

Not until the market responds to these wonderful earnings we had today.

Okay, guys. Thanks.

Thank you. I'm showing no further questions at this time.

Great. Have a great day, everybody. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.