AIR
#Thank you, sir, and good afternoon.
Thanks for all for joining us here today to discuss our third-quarter 2017 results.
We're pleased with the growth coming from our inventory program's activity supporting commercial airlines, and during the quarter we captured several important new contracts.
Let me start with Allegiant.
Allegiant has a fleet of A320 aircraft, currently 36, with a plan to expand up to 100, and we signed a contract with them to provide Power-by-the-Hour component support in support of that fleet.
Also SkyWest we built on our relationship that dates back to the 90s, whereby we signed a three-year agreement to provide landing gear overhaul and exchange services for SkyWest.
The agreement covers landing gear assemblies and sub-assemblies its fleet of more than 400 Bombardier CRJ aircraft.
It is a contract that has an option to expand up to five years.
Subsequent to the end of the quarter, we signed an agreement with India's largest airline, IndiGo, to provide landing gear overhaul services on their fleet of A320s which is 49.
These will be for full ship sets.
The agreement expands both our footprint in the Asia Pacific region and our relationship with IndiGo.
These contract awards build on the momentum from earlier in the year, as we were successful winning work across a broad geographic footprint in addition to expanding our customer base and the aircraft capabilities.
Last quarter, we announced a new five-year contract valued at $125 million with South African Airways to provide Power-by-the-Hour component inventory management repair services across their fleet of aircraft.
We also previously announced a new long-term contract with Air New Zealand to provide nose-to-tail, cost-per-flight-hour rotable inventory support for 15 of their fleet of B777s.
We have started providing services under these contracts, and are excited about the opportunity that these wins provide to the Company.
Our geographic reach expanded during the quarter, as we opened a parts warehouse at Dubai World Central Airport.
The supply chain hub closed the gap between essential aircraft components and a growing list of commercial and regional carriers operating in the growing Gulf States region.
The warehouse enables us to leverage our partnerships with industry-leading OEMs such as Eaton, Unison, UTAS, Meggitt and Lord to stock the warehouse with a wide array of factory new aircraft components.
So when an operator has an aircraft that is grounded, we can get them the needed part to the aircraft quickly.
We're starting to see an uptick in activity around our businesses that are impacted by the government's operational tempo.
We've had a pick-up in business in our pallets throughout the whole fiscal year and that work continues, and we are getting noise coming out of the commanders in the Middle East about need for support in the regions there as well.
Before we begin our financial recap of the quarter, I would like to give an update on the INL/A contract that awards AAR airlift by the US State Department.
The incumbent contractor continues to protest the award.
It is currently being heard by the US Court of Federal Claims for final resolution, and we expect the final decision from the court no later than August 2017.
We're highly confident that the court will dismiss the claims made by DynCorp, and will stand by the state department's decision to award AAR the contract.
You may recall, we were originally selected by state on September 1.
We cleared the first protest with a ruling by the GAO in December.
The lawyers in the COFC case remanded the decision back to the state department contracting officer who then reaffirmed his decision once again in the selection of AAR as the contractor for this contract.
And as I indicated, the ruling is now in front of the COFC and we do expect a ruling before August is out.
Now back to Q3 results.
We had another solid quarter, as diluted earnings per share from continuing operations increased 31% from $0.29 last year to $0.38 in the current period.
Revenue was up 8.4% or $34.6 million for the quarter, primarily as a result of increased sales in our Aviation Services segment.
We had considerable strength in our supply chain businesses to commercial airlines, partially offset by the downsizing of our Lake Charles facility and the reduction in sales from our phase out of the KC-10 program.
So as we sit here today, overall, we're very pleased with the progress during the quarter.
And we have strong momentum coming into our fourth quarter, and feel really good about our overall positioning in the market.
With that, I'd like to turn it over to <UNK> for a little bit more detail.
Thanks a lot, <UNK>, so I will give a little bit more detail on the quarter.
As <UNK> mentioned, we had a strong quarter with earnings per share of $0.38 compared to $0.29 last year, which is a 31% increase.
Good sales growth, 9.6% growth in Aviation Services.
Income from continuing operations was up by $3.2 million in the quarter.
The gross profit increased $4.8 million at Aviation Services segment due to the increased sales volumes.
And gross profit in Expeditionary Services increased $4.9 million, with improved profitability across our businesses there.
SG&A expenses increased $4.3 million in the quarter.
Reflecting increased legal fees related to the INL/A program that <UNK> talked about, as well as investments in other business development activities.
Interest expense in the quarter was $1.4 million, down a little bit from last year, primarily as a result of retirement of some of our convertible notes.
CapEx in the quarter was $9.1 million.
Depreciation and amortization $17.4 million.
Also during the quarter, we paid dividends of $2.5 million or $0.075 a share, and we repurchased approximately 52,000 shares in the open market for $1.7 million.
As of the end of the quarter, we had $66.1 million remaining available under our Board authorized share repurchase plan.
Our average diluted share count for the quarter was 34.2 million, compared to 34.4 million in the third-quarter last year.
Net debt increased $22.4 million from the second quarter, as we continued to make strategic investments in our business, including access to support our new multi-year supply chain management programs supporting our customers.
Thanks again for your interest, and now I will turn the call back over to <UNK> for concluding comments.
Well done, <UNK>.
Once again, good quarter, and what I'd like to do now is open up to any questions that you may have out there.
So we're getting traction from some of our program wins, but I believe we're doing really good job across all the different businesses in that segment.
Nothing that stands out.
I think we had good results throughout the businesses.
I think we're starting to benefit from some of the investments we have made and some of the actions we've taken in prior periods.
So yes, I think you can see, hopefully continued performance coming from our parts businesses.
Right.
<UNK>, so there's a lot of noise coming out of the market that is indicative of demand about to come.
We haven't seen it yet, but we're getting a sense that there may be some positive stuff out there for us.
We have had that before, but at least currently at least there is some noise indicating there may be some interest in our services.
Yes.
That's correct.
We've had legal expenses throughout on this program, but we are pointing it out.
And that's correct, that's already absorbed in our results.
We are very driven to get ---+ to bring our SG&A down to historical levels below 10%.
So we would be happy being in the 9% and 9.5% range, today we are 10.6%.
If you take out the legal expenses, you get a few basis point reductions.
But basically, what we're counting on right here is to get some sales growth.
Yes, I would say so.
We have been led to believe no, but obviously the current planning is outside of our purview, if you will.
But we've been led to believe that there will be little to no impact.
I think you what you're seeing from our vantage point is more of a market share grab on our part.
You have seen some new wins and growth with new customers.
So I think the spending patterns with our customer base ---+ there hasn't been anything noticeable in that regard.
I just think in AAR's case I think what you're seeing is growth in our market share.
We made a significant investment in BD capability around this program activity, and you are seeing some of the fruits of that effort in energy.
And I think we're just doing a better job geographic dispersion of our ---+ the balance of our supply businesses.
There is a reason for opening up a plant in Dubai, and I think our guys and gals are executing beautifully.
Our relationship with Boeing, which would be similar to some of the other large OEs, would be in some cases we compete, in some cases we supply, and in some cases we purchase.
So to date, our relationships with Boeing have not really been impacted by any of their announcements in any meaningful fashion and we would anticipate ---+ we don't see much in the way of change.
We're very cognizant of their statements, and we are focused on execution here at the Company and expanding our capabilities and continue doing our thing.
So yes, we are aware of them, we are aware of their ambitions, but yet we have not seen any change in terms of our relationship with them.
Let me first start by saying that I think what you're seeing in our announcement is a bullish attitude around our aviation service business, particularly supporting commercial customers.
We also see opportunities supporting government customers, and awaiting hopefully some positive news on a few different fronts that we are working on.
In terms of our expeditionary service work last year, you may recall that we expanded with the search and rescue contract down in the Falklands in support of the British MOD, and we continue to look for opportunities of that nature pretty much around the globe.
Our BD team is working fairly aggressively.
I'm not a position today to report on any progress per se, but I would be hopeful that a year from now or so that we would have some successful stories to communicate.
We would be hopeful that most of ---+ in terms of the contracts that we've announced, that most of the spend has already taken place.
So we would anticipate positive cash flows coming from those investments.
That said, I wouldn't want to limit us to the ---+ around new contracts that might be in the pipeline as well.
So we have been growing at a fairly significant clip, some of these programs through prior capital, some programs require less capital.
But we are, to answer your question in terms of the current order book, we would anticipate positive cash flows, and then we may be making similar investments if we're successful in other contracts of this nature.
Yes, I think that's a good way to look at it, yes.
Hello, <UNK>.
Yes.
So the IndiGo contract is more of a labor contract.
So it's a maintenance contract to support their landing gear, and that would have been a business we won away from competition.
I believe we have 16 at the end of the quarter, and I'm not sure what we had in 2016.
We can get back to you on that, <UNK>.
We will get back to you on that.
So there is a little bit of volatility quarter to quarter just based on how the other businesses within that segment performed.
So I would say plus or minus, we should be in that range.
It is.
Yes.
So we haven't seen the details of the budget related to spend on the type of things we produce.
We are seeing an uptick in activity around some of our container product lines, and there's noise elsewhere in that business as well.
But the influx of orders ---+ we have had steady flow, not a huge influx of orders for that business.
In terms of the mobility, the airlift business which is the other part of our expeditionary services, there is where we are seeing noise coming out of the theater from commanders looking for support.
No.
That would be stuff that we would own, and that would be in the operational budget of the DOD.
Thank you.
Thank you very much and thank you for your participation today.
And I wish everybody a pleasant afternoon.
Thank you.
