AAR Corp (AIR) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the AAR Corporation's second quarter fiscal 2012 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded.

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

Thank you, Tammy, and good morning, ladies and gentlemen, and thank you for joining our second quarter fiscal-year 2012 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 factor section of the Company's Form 10-K for the fiscal year ended May 31, 2011. 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 second quarter fiscal-year 2012 results yesterday afternoon. And I hope by now that you've had a chance to review our press release.

Sales for the second quarter were $475.9 million, up 8% compared to the same period a year ago, and income from Continuing Operations was $17.5 million or $0.43 per diluted share. As discussed in the release, these results include $1.4 million of transaction-related expenses for the acquisitions announced during the second quarter. Excluding the impact of these expenses, diluted earnings per share were $0.45.

The second quarter, we saw growth in both the commercial and government defense services markets. Sales to commercial customers increased 11% versus second quarter of last year, and sales to government and defense customers increased 5%. The commercial sales increase was led by growth in our Parts Supply business, and was driven largely by investments and assets to support our customers' spare parts requirements.

While sales to the MRO segment were down year over year due to an engineering service contract last year, we did experience sales growth at our airframe MRO centers during the period, and saw a significant gross margin improvement in the segment, with margins increasing 370 basis points on a sequential basis, and 230 basis points over last year. This improvement was due to operational efficiencies and a more favorable mix. We expect continued strength in our MRO segment as our hangars remain generally full through the end of the fiscal year, and as we ramp a new engineering service contract in the third quarter.

During the second quarter, we made further progress working down our aircraft portfolio. Consistent with plans we have discussed over the last several quarters, we sold three aircraft; and this leaves us with a portfolio of 23 aircraft at quarter end. During the third quarter, we expect to sell additional aircraft from our joint venture portfolio at modest gains.

In October, we completed the acquisition of Airinmar, and announced the Telair and Nordisk acquisitions, which closed subsequent to the quarter end on December 2. The Airinmar acquisition strengthens and complements our supply chain business by enhancing our high-value repair management capabilities, and giving us more robust product offerings as we assist airlines and others in lowering their maintenance spend. We completed the acquisition of Telair and Nordisk on December 2, and are working with the teams from both companies to ensure a smooth integration. The acquisition of Telair strengthens AAR's position as the leading provider of cargo-loading systems to the global aerospace market. Telair is a leading Tier 1 provider to both Airbus and Boeing in the commercial market, and complements AAR's leadership position serving the military market. Additionally, Telair systems are installed on more than 4,000 aircraft throughout the world, and represent a significant aftermarket opportunity. Nordisk designs and manufactures heavy-duty pallets and lightweight cargo containers for commercial airlines from facilities in Norway and China, and is a strong complement to our presence in the military container and pallets market.

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

Okay. Thanks, David, and good morning, everyone. As is customary, I'd like to provide 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 29% compared to the year-ago period. Our parts trading and repair component of the segment grew by 15% year over year, which continues to outpace the growth of the overall market. The balance of the sales growth in this segment came from the sale of the two wholly-owned aircraft that David referred to. The gross profit margin for the Supply Chain segment was 17.9%, compared with 17.4% last year, and was driven mainly by slightly favorable product mix. The gross profit contribution from the two aircraft was not material; and as a result, the transaction had a dilutive effect on segment margins by approximately 100 basis points during the period. We also disposed of one joint venture aircraft during the quarter; and as David said, our lease portfolio stands at 23 aircraft. We currently have six additional aircraft under signed letters of intent, and expect to close on three of those during the second half of this year.

Moving to the Government and Defense Services segment, sales increased by 6%, driven by growth at AAR Airlift, and at our Defense Logistics business. Our margins for the segment were at 16.8%, down from 18% in last year's quarter. Margins were under pressure primarily due to lower-than-expected aircraft availability at Airlift, and we expect that will continue for a bit in the third quarter, but will improve as we move into the fourth quarter.

In our MRO segment, sales declined 7% compared to last year, although gross profit had a very nice recovery, increasing from 12.4% to 14.7% this year. This improvement in margin is the result of efficiencies at the heavy maintenance facilities. I'd like to point out that while overall sales were down year over year, this was entirely attributable to engineering services volumes, as our airframe and landing gear centers produced steady, year-over-year sales results. Going forward, we would expect sequential sales growth in our MRO segment as we begin delivering on the engineering services contracts.

In our Structures and Systems segment, sales increased 3% year over year, and 21% on a sequential basis, as we started delivering on a new contract at our mobility products unit. Gross profit margins, though, were lower than expected, and came in at 14.3% during the period. The margin decline in the segment was attributable to poor performance at our Precision Machining business, as we recorded losses on certain programs and start-up costs on some new programs. We would expect gross profit margins to improve sequentially in the third quarter and fourth quarter, mainly as a result of adding Telair and Nordisk to the segment, and as we start to see improvement in our Precision Machining business.

SG&A as a percent of sales was 9.1% in the quarter compared to 9.3% last year, and it continues our steady run of good cost leverage. The results for the quarter also included the impact of merger-related expenses. Net interest expense for the quarter was $7.5 million, unchanged from last year. The cash portion of this interest expense declined to $4.2 million, compared to $4.5 million last year. And the non-cash portion was $3.3 million, which compared to $3 million last year.

We generated $30.4 million in cash flow from operations during the second quarter; and our CapEx, excluding the Airinmar acquisition, was approximately $13.4 million for the second quarter, leaving us with a significant sequential improvement in free cash flow. Our depreciation and amortization was $18.2 million for the quarter, and brings us to a total year-to-date of $35 million.

I would like to turn the call back now to David who will provide some wrap-up commentary.

Thank you, Rick. As we sit here today, we're at $0.84 after the first six months of our fiscal year; and that $0.84 includes $0.02 from the acquisition costs. As we look at Q3, we see modest sequential growth from our organic businesses, plus we expect to see positive incremental results from the acquisitions, notwithstanding the purchase accounting, which is yet to be determined, for these businesses. And hopefully we'll have a much better feel for that in the next couple of months.

As we move into the fourth quarter, we see things being even more robust than the third quarter; and again, we will see the benefits from the acquisitions that we've recently made. So, when we take a look at the overall economic environment, we take a look at the first half of our results, we take a look at some of the momentum, we feel very confident about the range that we communicated back in October. And that's pretty much how we see things at this point.

So, hopefully that provides some clarity, and I would like to, at this point in time, open the call up for any questions you may have.

Thank you. (Operator Instructions) Our first question comes from Troy Lahr of Stifel Nicolaus. Your line is open, sir.

Thanks. I'm wondering if you guys can expand upon some of the commentary on defense margins a little bit. Last quarter I think you mentioned that there was probably about 150 basis points of variability that we should expect; and I was thinking that that was maybe 19% margin business.

So why are we seeing more headwinds than what you saw last quarter on the margin side there? And should we still think about this as a 19% margin business or is it resetting down?

Troy, you're talking about our Government and Defense Services segment?

Yes, I'm sorry.

Yes, I think what we've tried to guide you is, it's somewhere between an 18% and 18.5% margin, so I don't want to quibble with you, but it's in that zip code, is what we believe is our steady state.

Clearly, we're below that this quarter; and the color I could provide is, just to reiterate what I said, is we had margins are highly impacted by aircraft availability at Airlift and being eligible to bill full amounts, entitled to bill under the contract, assuming the aircraft is available for use by the customer. When we have maintenance events, whether they be scheduled or sometimes unscheduled maintenance activities, that takes the aircraft out of service, that works against us in the contract and can lead to the opportunity for lower billings. And when that happens, that tends to have a high impact on margins.

So is that mostly what happened, that it was kind of maintenance-driven events or was it customer demand and the customer is using these less?

No, it's the former, Troy. Remember, the business model for the Airlift business is most of our economics are derived by having an available aircraft and available crew for the customer's use, and then the customer decides how much they use it. That usage does contribute incremental sales and incremental margin dollars. But when we look at it on a margin rate basis, it's most sensitive to having the aircraft available.

Okay. And I think you said that that gets back kind of continues in the third quarter. Should we think about 18%, 18.5% by the fourth quarter again?

Yes, that's our expectation.

Okay. And then lastly, at MRO, you had some pretty good quarter-over-quarter margin improvement. Do you continue to build off of this second quarter level or do you think that, again, 15% is a comfortable range for this MRO business next two, three quarters?

When engineering services has its peaks and troughs, Troy, it's going to cause a little bit of variability around that. But I think the segment has shown, historical, when things are clicking, we're usually anywhere between 14% and 16%. I think that's, kind of, the same place you should assume.

Thanks.

Thank you. Our next question comes from the line of Tyler Hojo of Sidoti & Company.

Yes, good morning. I was just curious. I guess you're reaffirming the guidance for the full year. But just in regards to the acquisitions that you made, are we still on track to see $0.20 to $0.25 in accretion next fiscal year?

Yes. Yes, Tyler. Embedded in that number has always been an assumption about purchase accounting, and we have to go through that exercise. So as David alluded to, that takes a while, unfortunately. So we don't have a final picture on that, but we've made what we think is a pretty educated estimate and don't expect any material changes from that at this point in time. And so, assuming that holds, then, yes, that is definitely still our outlook for those businesses.

Okay. That sounds good. And just to expand a little bit in regards to the aircraft sales, what was the benefit, if any, just in terms of earnings this quarter?

Well, I said it was not material, Tyler, and I'd just -- that you should equate that to kind of $1 million or less zip code.

Okay. That's fair. And then the six aircraft that you currently have LOIs on, that's all incremental relative to what you discussed last quarter, correct?

Most of it is incremental. Most of it is new activity. I'm not sure it all is. I think there may have been one of them. We talked about having a few under LOIs last quarter, and I think one of these was under LOI at that time.

Great. Okay. Thanks a lot.

Thank you. Our next question comes from the line of Julie Yates with Credit Suisse. Your line is open, ma'am.

Good morning. Thanks for taking my question. When you announced the Telair acquisition, you mentioned terming out half of the drawn amount with a longer-term solution. What are your latest thoughts there?

Still the plan, and now with numbers out, we have the ability to be a little more active in that regard. So we're still expecting to term-out the facility. Whether it's half or whether it's a little more than half, Julie, will be kind of a function of specific market conditions. But our goal is certainly to take some of what is now a pretty good bubble of short-term bank debt and term it out.

Okay. And then a follow-up, just can you update us on the relationship with Spirit and how that's tracked; and was that charge related, on the Precision Machining business, was that related to the work that you've picked up from them?

No, Julie, it wasn't related to the Spirit work. The Spirit work continues to ramp, maybe a little bit slower than we had originally hoped; and we are incurring costs associated with that ramp. But we're still optimistic about the opportunity with Spirit and bringing on additional work in the third quarter and the fourth quarter and then into next fiscal year.

Okay. Great. Thank you.

Thank you. Our next question is from Larry Solow, CJS Securities. Your line is open, sir.

Quick follow-up on the Telair and Nordisk acquisitions. I realize it's a little early in the game, but any way to just characterize, do you think you'll have a fairly neutral impact on overall fiscal '12 results or is that fair to say? Or do you think it could be accretive or dilutive or is it too early to say?

No, Larry, I mean, in isolation, Larry, it will definitely be modestly accretive. That's our expectation. So David gave kind of a full picture in his comments about the outlook but, yes, in isolation, it is. The business has very nice momentum right now.

Okay. And then looking at aviation supply, obviously you had had another pretty solid quarter, 15% growth organically. Looking out, do you expect this to slow down some? And I guess obviously you have the Unison contract. Is that beginning to ramp so maybe that would help growth on the offset?

Larry, it's Tim. We see continued opportunity for growth in our supply chain business, both with some of the things that you're talking about, as well as some prospective, new business as well as some pretty good demand for the parts in our key product line. So we're optimistic and encouraged by our prospects in the supply chain business.

Okay. And I think you mentioned last quarter, Unison I think was pretty insignificant impact, about $1 million in sales. Did that have more of a significant impact this quarter or is it something that's going to take a while to ramp?

It's tracking to -- against our expectation, it is contributing. It's modest, but there is excitement around it; and we think it's going to be an excellent program for the Company.

And then just lastly, on the issue with the Airlift availability, could you just elaborate a little bit more on that? And I thought you, when you acquired that, I know overall you had improved sort of efficiencies and availability.

Is this something that is more of something that you can't control? It's just a random thing or is there a thing that you can do to improve efficiencies there?

The nature of the issue that we're talking about, Larry, is probably similar to what we've talked about since we acquired and we also see as an opportunity. But you have to start with recognizing the nature of the operating environment these aircraft are operating in. It's a very austere environment and the operating profile that you might expect off of some of these aircraft parts is challenged by the harsh conditions.

So we had more maintenance events. We had a fair amount of maintenance events scheduled; and then on top of that, we had some unscheduled maintenance events and that's what leads. So we are continuing to refine our investment in spares and trying to position those spares in the most advantageous way possible to try to boost aircraft availability, but it's definitely probably the most difficult operating challenge for that business.

Right. So it sounds like even though the overall needle has moved up more efficiently, there's still things that unfortunately nature of the business you're still going to see some volatility there; is that sort of a good way to characterize it?

I think that's a very good way to characterize it.

Excellent. Thanks a lot.

Thank you. Our next question comes from the line of Ken Herbert of Wedbush. Your line is open, sir.

Yes, hi, good morning. Thank you. First, just wanted a couple of quick questions on MRO. I know you're facing a headwind at least from a margin as well as a revenue standpoint, as the engineering contract with Delta rolls off. How's the pipeline look for filling up the backlog with the services, engineering services-related work, within MRO?

Ken, we're ramping up now a new engineering services contract, which will start to impact us beginning in the third quarter. You saw the decline in the top line second quarter versus last year and that was all related to engineering services. Each of the -- we had a good performance out of each of our heavy maintenance centers in the second quarter. The operations are clicking. The shops are fairly full.

And we expect the operational performance of the shops to continue into the third quarter; and then we expect the benefit of the ramp-up of the engineering services contract. So I think the outlook for MRO as we finish off the balance of the fiscal year is encouraging.

Is the MRO contract you're going to be ramping similar in scope to the previous one?

Yes. A little smaller, but similar.

But to your point, Ken, on headwind, just so everybody understands, you're right, third quarter of last year had a very significant contribution for engineering services. While we are ramping, we don't expect that much of a contribution in our third quarter that we're just starting here.

So it will be a little bit of a challenge in Q3 for that piece of it, but that will flip in Q4.

Okay. Great. And two more questions on MRO. First, you mentioned, and it's consistent with what you've said in that, you're pretty much sold out through the rest of your fiscal year. Has the discussion with the airlines at all changed in the last few months, with your confidence in that backlog, first? Second, how can you handicap -- I know we're early in the process, but how can you handicap the opportunity for potential work with American if its situation is like prior bankruptcy? And you start to see some significant outsourcing from their Tulsa location here over the next three to six or 12 months?

Yes, I would say that it's a little early for us to start handicapping what's going to happen out of American. We hear the conversations, but I think there's still some time to go there. We do think that ultimately there will be some opportunity actually across our businesses, but probably not anything in the very near term.

Ken, this is David. I'd look for a greater opportunity in spare parts and component support world than I would in the airframe maintenance world, coming out of American.

Okay.

American is a relatively small account for AAR. I think you noted that when they filed for bankruptcy, they owed us less than $500,000. So for the size of airline and the breadth of our capability, it's a fertile area for opportunity as we look forward.

Okay. Great. So that's -- I guess then just one final question, on aviation supply chain, the 11% I think it was you said, Rick, or growth in the quarter, excluding the aircraft sales, how do you see that over the next -- at least through the rest of this fiscal year and into 2013?

Yes. So for start, Ken, it was 15%.

Okay.

Was without that. As Tim indicated earlier, Ken, we see continued, very good momentum in that business and I think should bode well for good, year-over-year comparisons, we think, for the balance. But sequentially, I don't know if we'll have the kind of -- we had very good first quarter. That was impacted by aircraft. We have a little aircraft impact here, so when you exclude those aircraft impacts, I think we'll see some sequential improvements as well, but in general, momentum feels good in those businesses.

Great. Okay. Thank you very much.

Thank you. And our next question comes from Eric Hugel with Stephens. Your line is open, sir.

Hi, good morning.

Good morning, Eric.

Hi, Rick, I just wanted to make sure. You said in the aviation supply chain, you said it was 15% year-over-year growth in the parts trading business. There's lots of different parts there. Or was that 15% growth, was that ex-aircraft sales for the whole segment or was that just the parts trading business?

I said parts trading, Eric, as well as component repair -- (multiple speakers)

Okay.

As well. So you should equate that to basically ex-aircraft.

Okay. Fine. Can you give us an update, Tim, as to where things stand in terms of the margin profile of the tanker program and sort of the trajectory there? I mean, are we still climbing up the curve there; and when do we get to that mid to high, single-digit plateau range?

I think the program operationally is where it needs to be. We're performing for the customer, the customer's delivering aircraft. And now it's a matter of continuing to drive efficiencies, purchasing efficiencies, on our end; and so with our Airinmar acquisition, they're helping take a look at additional opportunities for margin expansion.

So I'd say that we're not finished yet, Eric, in terms of getting to the plateau from a financial performance perspective. But we do believe that we're performing operationally.

Can you talk about the S-92s in Afghanistan? They came in, for the first full quarter, last quarter. Can you give us an update as to how things are going there? Are they responsible for maybe any of the margin degradation there, maybe there's some teething issues?

The aircraft, they're generally performing very well. We did have a transmission issue towards the end of last quarter, which caused the aircraft to come out of service for about a week, so it did have an impact on our availability. We did get some concessions and some support from Sikorsky, which does not equal the impact to our earnings. But the aircraft in general, Eric, are performing very well.

Okay. And I think one of the things that you talked about in that business, in the Airlift business, last quarter was some impact from moving the headquarters from, was it, North Carolina down to Florida? There was some issues with moving some certificates to a different FAA office. Was that washed out this quarter and it's just all the maintenance issues or is that still impacting you?

Clearly, it was a major hurdle and accomplishment for the business. It was completed in August. The transition took a fair amount of work and there was some pain associated with it. But now that's fairly, pretty much behind us. The issue around the maintenance was, as some of these aircraft got in some maintenance, where we're anticipating 30-day turns, we ended up in some cases with 60-day turns, and just one of those things.

I mean, airlines run into that quite frequently. We were a little disappointed with the turn times coming out of maintenance, but nevertheless we understand it. And that impacted the results in the quarter. There will be some of that tailing into Q3. As we come out of Q3, we should be in very strong position.

Q3 also for this business is considering that most of the aircraft are operating in Afghanistan, it's a tough environment during the winter months in Afghanistan so the aircraft receive a little less utilization. But as we come out of the third quarter, the demand from the customer is more robust, and our fleet should be in much better position.

So the business is performing quite well, still way ahead of what we had originally anticipated when we first bought the business. As we got into the business a little bit, we were hoping that we would get more utilizations at this point in time that we just haven't been able to achieve, some of which was maybe unrealistic on our part. But as we move into the second half of the year, this business should continue to perform very well for the Company.

Should we expect margin improvement in that business next quarter or is it still going to be down at these levels and then just pop up to that 18%, 18.5% that you were talking about in Q4?

Yes, I think you're going to see relatively consistent performance into Q3, slightly up or slightly down. But I think as we go into Q4, I think you'll see a nice improvement in margins.

Lastly, Rick, can you talk about what you're thinking in terms of free cash flow for the rest of the year? You had a nice, free cash flow generation this quarter. Is that still going to persist or is it still going to be lumpy?

No, you should expect good, free cash flow over the balance of the year. Eric, you may recall we provided some outlook on that at our Investor Day as well; and we're still projecting that kind of performance.

So first quarter was, as you're well aware, we were a big user of cash. We're happy to see that improve dramatically on a sequential basis but we still have a ways to go to get to our range that we had guided for the year, but we expect to get there.

Great. Thanks a lot.

Thank you. Our next question comes from JB Groh of DA Davidson. Your line is open, sir.

Hi. Thanks for taking my call. I'm just curious on the guidance front, the guidance you gave back in early October obviously didn't include these three deals. And the range of revenue you gave there and the range of EPS, those sorts of things, was fairly tight when you consider what these transactions should add in terms of revenue in the third and fourth quarter.

So I'm just curious as to whether you could give us a little help on top end of the range or has something weakened in the core that caused you to keep that range or maybe just help us out there.

Yes, JB what you're seeing is we had a couple of challenges that we've described quite a bit on this call. One at Airlift and that Airlift not only impacted us in Q2, but also, as we've said, will be with us probably into Q3, which is all around aircraft availability. And our Precision Machining business, inside structures really helped put a dampening effect on margin performance in the quarter there.

And while we expect that to improve, those are a couple of variables sort of heading in the wrong direction. Telair and Nordisk acquisitions and Airinmar has always been a small acquisition. That's more of a capability play than it is a -- (multiple speakers)

Right.

Contribution. But those two businesses are performing very well. We're not backing off of our expectations of those two businesses in any way. But when we talk about they have a small, stub period effect for us this year, and when we think about a couple of those items I just mentioned heading the wrong way, we just like to leave our guidance the way it is right now.

Okay. I think you mentioned that both Telair and Nordisk businesses have a pretty nice growth trajectory, so it probably isn't appropriate to just take five months worth of the 2013 guidance and put it into 2012?

That's correct.

Okay.

And our guidance for next year certainly assumes growth in the business.

Okay. That's helpful. Okay. Thanks a lot.

Thanks.

Thank you. Our next question comes from Jon Braatz of Kansas City Capital. Your line is open, sir.

Good morning, gentlemen.

Hi, Jon.

Rick, could you just, maybe for us, review again a little bit? If you look at Telair in isolation, what the cash flow profile of that acquisition might be in terms of CapEx and maybe working capital needs or whatever you can help us in that regard.

Well, Jon, it's a business, let's just start with, that doesn't have a lot of CapEx requirements, so we should see cash flow -- and as a result, doesn't have a lot of DNA either. Small, working capital requirements, but basically what you predict for net income should be pretty close to its free, cash flow contribution.

So I think that's the general model of that business. In terms of what to expect for that, I know we've talked a little bit about its top line impact, and that it would be margin accretive. I think our preference is not to get too much more deeper into that specifics of the business at this point.

Okay. Rick, secondly, with regards to --

I'm sorry. I apologize, Jon. Just at the risk of sounding -- I don't want to confuse you, because that's the core business. Now, we do have purchase accounting that comes into play here.

Yes.

And we do expect to have a fair amount of intangible assets that will be set up as part of purchase accounting that will have to be amortized.

Right.

So as that picture becomes a little clearer, we'll try to refine the message to you guys about marginal cash flow performance relative to income performance on that.

And then secondly, regarding aircraft availability, you talked about maybe having better parts availability and spare parts availability. How much can that change the profile of that business if you have better access and more timely access to spare parts and to keep those planes flying? What type of investment, sizable investment, might that take to do something like that?

Well, we've invested already, Jon, and it's not just parts. It's actually -- it goes up the whole chain of large components that we invest in, such as spare engines, spare gears, landing gears, things of that nature. David referred to a transmission earlier. But also, frankly, just whole aircraft as spares as well.

You have a whole spectrum of what spares can look like; and that can change the investment dollars quite a bit as well. The opportunity -- it's a cost benefit analysis that we're constantly doing for ourselves. We can size pretty specifically what the opportunity lost is, not being able to bill.

Yes.

What it takes to solve that or capture that is less easy to get your hands around, because it's not only what you're investing in, but where you place it. And then you have to wrap that around the operating profile of the business, because you have a lot of unplanned activities that happen as well. So it's the core of the operational challenge. We've invest -- we've owned the business a little over a year and-a-half. We made investments in this regard already.

And I think we've captured some of the opportunity that had been lost the day we acquired the business, but the business has doubled in size and it's also gotten more complex with more outposts that we're serving the customer at, so the challenge continues to -- it's a dynamic challenge that we continue to get, trying to get, our minds around.

All right, Rick. Thank you very much.

Thank you. Our next question comes from Stan Manne of Manne Family Investments. Your line is open, sir.

Hi, gentlemen. Several questions. One, David, (audio difficulty) the [option] operating margins, once these acquisitions are absorbed, is there a feel you can get to the 10% number near term?

Yes, I mean, it's definitely our goal, Stan. The key here is we have a few more moving parts right now than we'd like to have, mostly external, but there are some internal moving parts as well. But I think for the most part, yes, that's still out there. We still have our plans and we're still tracking in that direction.

And these acquisitions, especially Telair, could help on that movement?

It will definitely help in that regard, yes.

Yes, yes.

Second question, use of cash. Can you talk to your plans on the use of cash, acquisition, stock buy back, debt pay down, et cetera?

So, Stan, on the acquisitions, if you take a look at the recent acquisitions, which took place -- first one took place in October and that was in the mid $20 million range, and then the acquisitions we closed on December 2, where we spent $280 million, clearly our focus is -- our cash has been going toward these ways of growing the Company.

So as it is, we're trying to figure out the right, long-term solutions around financing these deals. But for now, the cash from the business has basically gone towards paying for these acquisition.

Okay. So the stock buyback was an anomaly?

Stock buyback was -- we try to have a -- we've kept a policy of acquiring shares equal to the number of shares we issue for stock options or stock grants, so we've tried to be, over the years, we've tried to be consistent in that regard. We haven't necessarily gone after the shares for any reason other than that.

And that will not change?

That should not change, right.

Last question. There's been consolidation in the industry. You, of course, have gone on an acquiring mode. But we've seen others, like Goodrich, acquired. How do you see a consolidation in your industry, buying, selling, are you a target? Are you a consolidator? Can you give us a little color on your thoughts?

Well, we're here to maximize shareholder value, so we obviously as a public Company, we're interested in building shareholder value. The path that we've taken to date has been to round out our portfolio, to have a good balance between commercial and defense capability.

With the latest acquisitions, we've expanded our platform to not just, let's say, focus on aftermarket activities, but now on OE activities and try to get into the build cycle. So the Company, we believe we've diversified the portfolio in an intelligent fashion. We believe that over time we will create shareholder value. But at the same token, similar to I'm sure the folks at Goodrich, that we have an obligation to assess any opportunities that come our way and we will do that.

Okay. But do you see the industry consolidating from your point of view?

My view is that all industry has a tendency to consolidate. I think that it's not uncommon over time for businesses to be bought and sold and industries to consolidate and in many cases then deconsolidate. If you look at our customer base, you take a look at the airlines, you've seen a fair amount of consolidation over the last few years; and I would imagine that you'll see the emergence of some new carriers as market niches get created through those consolidations.

I believe the same thing takes place in the supplier universe. So with Goodrich being acquired from UTC, there will be some businesses within the Goodrich universe that UTC will probably look to divest; and I think that's an ongoing process in every industry.

The reason I ask is if you look at your upcoming metrics, EBITDA ratio, PE, it sure looks like we've become a target because our values have, relative to measured value, have gone down. That's why I ask that question. Are we a target? I think we are.

Okay. If you're asking me for a target, I'm not aware of any overtures, so could we be a target? I imagine it's possible.

Okay. Because our metrics have come down, especially with coming on in the next couple of years. But good job. Thank you.

Okay. Thank you.

Thank you. (Operator Instructions) And our next question is from Tom Lewis of High Road Value Research. Your line is open, sir.

Good morning. Had the opportunity two days back to read your comments addressing your labor availability issues on the A&P side. I was wondering the extent to which you might be similarly challenged on the manufacturing end of your business, specifically would you consider the ability to find -- it sounds like you were having some of these issues in fact in your Structures and Systems business in your starting up some new business there.

But would you consider that challenge, the challenge of finding skilled labor on the manufacturing side, a gating factor as far as your inclination to grow there?

I don't think so, Tom. I mean, it's clearly a factor. It's clearly a challenge. We're short welders, for instance, in North Carolina. But we've been working closely with local schools and training institutes to go ahead and fill the pipeline. We've had some success and I would anticipate we'll continue to have success.

It's more of a factor inside of our airframe maintenance business. But we're fighting that good fight too. So, yes, I think this is an issue. I don't think it's just an issue for AAR. I think it's an issue for other people, again, not just in this industry, but other industries too. There is a mid skills gap that exists in this country.

Yes, it seems like it's been at least a low grade issue for quite a long time, that, as you articulated in the report, got more so in the last few years. Is there any indication that this is something that, at least with respect to where your operations are located, you can actually move the needle on this or is it just going to be one more thing we have to fight against for years to come?

Yes, I believe we can move the needle and we're working in that regard. So I would expect that this Company will continue to attract and retain very talented people.

Okay. Thank you.

Thank you. (Operator Instructions) Gentlemen, I'm showing no further questions. I'd like to turn it back to you for any closing remarks.

Thank you very much. I'd like to wish everybody a very happy and healthy and safe holiday season and look forward to chatting again as we get into calendar year 2012. Thank you.

Thank you, ladies and gentlemen, that does conclude the conference. You may all disconnect at this time.