AAR Corp. (AIR) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the AAR Corp. Second Quarter Fiscal 2013 Earnings Call. [Operator Instructions] As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Chris Mason, Director of Corporate Communications. Please go ahead, sir.

Thank you, Jonathan. Good afternoon, ladies and gentlemen, and thank you for joining our second quarter fiscal year 2013 earnings conference call. Before we begin, I'd like to remind you that comments made this afternoon may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We ask that you refer to the disclaimer in our news release, as well as the Risk Factors section of the company's Form 10-K for the fiscal year ended May 31, 2012. 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. At this time, we would like to turn the call over to our Chairman and CEO, David Storch.

Thank you, Chris. Good afternoon, and thank you for joining us today. Joining me in Chicago is Tim Romenesko, our President and Chief Operating Officer; and Mike Sharp, our Interim Chief Financial Officer. We have a good second quarter to report today. We've executed well, continued to integrate our Aviation Services platform and made ongoing operational progress in a number of key areas. To begin, I'd like to give you some of the financial highlights from the second quarter. Revenues in the quarter were $513 million, up 6.4% versus the prior year. Our revenue mix shifted towards the higher growth commercial markets, which now comprise 60% of second quarter sales, with government and defense now comprising 40%. Aviation Services revenues were up 4% with a number of areas showing improvement, including our airframe maintenance centers, aftermarket parts support businesses and improved operating performance from our Airlift business. Sales in the segment were negatively impacted by a reduction in program activity at our Defense Logistics business, which we had expected. Technology Products revenue grew by 16% versus prior year, driven by acquisition-related growth. This was partially offset, as expected, by pressure in Mobility Systems, which saw a $39 million sales decline on year-over-year basis and a $33 million sales decline on a sequential basis. Consolidated gross profit margin improved to 17% from 16.3% in the year-ago quarter. Aviation Services gross margin increased slightly from 17% the prior year to 17.2% this year. Technology Products gross margin improved to 16.4% versus last year's margin of 13.8%. There are a few moving pieces, but the key items were higher gross margins associated with our acquired businesses and reduced margins in Mobility Products. Total operating profit in the second quarter was up 10.2% to $38 million, and operating margin of 7.4%, up versus last year's margin of 7.1%. We made good profitability gains in many areas, but as previously mentioned, we also absorbed a significant reduction from our Mobility Systems business. Net income was up slightly from a year ago at $17.8 million in the quarter and diluted EPS was $0.44, which exceeded both our internal and consensus expectations. In summary, we're pleased with the final -- financial performance in the second quarter, which followed a good first quarter. We remain confident in our full year view of the business, and we've raised our earnings guidance for the full year. We continue to feel particularly good about our commercial aerospace business and our position. Our strength versus last year was driven by steady demand under new and existing contracts and customers, including business with Delta, Southwest, United and Air Canada. Our MRO business has benefited from our ability to execute. We've also seen a reduction in total industry MRO capacity in North America, which is a positive development. And we are benefiting from aircraft movement, which opens up opportunities for both our MRO and parts support businesses. With respect to the defense markets, we see 2 different factors. For our Aviation Services segment, we see potential opportunity as the geopolitical environment demands a high level of readiness be maintained while many existing platforms are aging and budgets are constrained. Our Aviation Services business enables government and defense customers to do more with less and to reduce their cost. This includes our MRO, supply chain and airlift activities. We believe our market position provides an opportunity to be part of our customers' solution in this very challenging budget environment. At the same time, we do have exposure, as you see with our mobility business. In general, we're managing through the environment well and were able to absorb the revenue decline in defense while increasing our earnings per share. As you know, we've consolidated 3 segments into one newly created Aviation Services platform. This reflects our managing this set of businesses as we look to drive operating efficiencies while providing our customers with more comprehensive solutions and attempting to give ourselves a competitive advantage. We believe this will create additional growth opportunities and lead to margin improvement. A good example of this is the recent contract we have entered into for the sale of 2 aircraft to the Colombian Air Force, which we expect to deliver in the second half of our fiscal year. We created a comprehensive solution for this new customer by bringing together capabilities in 8 different areas of our business. Also during the quarter, we announced the sale of 10 aircraft to MAS from our joint venture portfolio. This will reduce our aircraft leased portfolio to 8 aircraft, consistent with our stated goal to reduce our investment in aircraft leasing. We expect to further reduce our leased portfolio by 2 aircraft during the third quarter. While we have reduced our portfolio of leased aircraft, we will remain active in the aircraft sales and remarketing business, where we have established -- where we have an established market presence and a successful track record and where such activity helps connect many pieces of our organization to deliver solutions for our customers. In our Technology Products segment, our strategy is to build around the leadership positions we have established in the niches we operate, both in Cargo Systems and Mobility Products. In both of these businesses, we are close to the customer, either prime into DoD or Tier 1 into Boeing and Airbus. It's also key that we have a proprietary product and own the intellectual property. As we look to grow our Technology Products segment, we will focus on finding niche markets where we can add value to our customers in design; engineering; integration; and most importantly, aftermarket support. Our Technology Products business is generally healthy. The Telair and Nordisk additions are performing well. However, over the next couple of quarters, we'll continue to face tough year-over-year comparisons in this segment due to the reduction in sales volume in our mobility business. At this point, I'd like to turn the call over to Mike for a more detailed review of our financial performance in the quarter and the specifics on the guidance we're providing to you.

Thank you, David, and good afternoon to everyone. Many of you do not know me, so by way of very brief introduction, I joined the company in 1996 as Controller and have been a Corporate Vice President serving as Controller and Chief Accounting Officer since 1999. So I have 16 years with the company in the finance organization. This afternoon, I would like to provide a bit more color on our financial performance, including comments around interest, depreciation, cash flow and capital expenditures, and I will be available the rest of the day to answer any questions that you might have. Consolidated revenues for the second quarter grew 6.4% to $513 million versus $482 million last year. In the Aviation Services segment, sales increased 4% to $391 million, which was essentially all organic growth. Within the Aviation Services segment, our airframe maintenance centers remained very busy, and we expect that to continue the balance of the fiscal year. Late in the second quarter, our consumer inducted the first aircraft in the recently opened Duluth MRO. However, the impact on Q2 sales was minimal. This past weekend, we redelivered the aircraft to the customer. The Duluth facility will add 4 maintenance lines at peak capacity or approximately 400,000 man-hours, which, to put in perspective, is slightly less than 10% of our overall hangar capacity. We also saw strength in our Engineering Services unit, as we delivered on a contract that began late in the fourth quarter of last fiscal year. Commercial parts sales increased due to strong program volumes, including the Unison distribution program, which saw its highest quarterly sales since the program started early last fiscal year. Airlift was up year-over-year due to steady improvement in operational readiness and increased flying hours. In June, our fixed wing contract was renewed for 1 year. And as expected, during the second quarter, 2 rotary wing contracts were renewed for the next 12 months. Flying activity during the second quarter was as brisk as we've seen at Airlift. Our Defense Systems, Logistics business was down year-over-year, largely due to the completion of one program and a reduction in activity in another program. We expect that -- this trend for this unit to continue for the balance of the fiscal year. Turning to the Technology Products segment. Sales increased 16% as we benefited from the Telair and Nordisk acquisitions. As David mentioned, we experienced an expected decline at our Mobility Products unit, and we expect third and fourth quarter sales to be similar with the second quarter level at this business unit. Our consolidated gross profit margin was 17%, up 70 basis points from a year ago, and compares favorably to consolidated margins for the past 4 quarters. SG&A expense in the second quarter as a percent of sales was 9.9% versus 9.3% last year and 9.7% in our first quarter. Although SG&A as a percent of sales is higher mainly due to the sharp decline in sales at mobility, in absolute dollars SG&A is down $2.4 million on a sequential basis. Net interest for the quarter was $10.5 million, which is up from $7.5 million last year. The cash portion of interest expense increased to $7.6 million from $4.2 million, largely as a result of the acquisition-related financing put in place last January. As we've been communicating for some time, we are very focused on cash with an eye toward generating free cash flow equal to our net income. During the second quarter, we generated $27.1 million of cash from operations and our capital expenditures were $8.1 million. We've now generated $60 million of cash from operations during the first 6 months of fiscal 2013. Our depreciation and amortization, including amortization of stock-based compensation, was approximately $22.2 million. And our EBITDA was $60 million for the second quarter. And lastly, with respect to the guidance, as you've seen, we've increased our full year guidance again this quarter. This reflects the stronger-than-expected second quarter performance and the increased visibility we have for the remainder of the fiscal year. We now expect diluted earnings per share in the range of $1.70 to $1.80 for the full fiscal year. Right now, we're expecting to see third quarter results largely in line with second quarter. And please keep in mind some of the seasonality that we have in our business. And we see results in our fourth quarter strengthening as we move to the historically stronger period for the company. Thanks for your attention, and I'll now turn the call back over to David for some closing comments.

Good job, Mike. Before we move to Q&A, I'd just like to reiterate a couple of highlights. First, we had good financial performance in the second quarter. That said, we know we can do better, and we're pushing to improve margins and increase profitability through better execution and market share gains. Second, we made continued operational progress. Our Aviation Services businesses are well coordinated, and by going to market as one entity, we're able to deliver unique capability to our customers that can add tremendous value. The breadth and depth of our capability is what provides us our competitive advantage. Third, we're generating cash flow from the business that we're using to fund our growth to reduce our indebtedness and to repurchase our shares. Fourth, we've continued to position the company well strategically. Our recent acquisitions have added proprietary technology and higher-margin businesses to our products portfolio, and the integration of the Aviation Services business is enabling a deeper conversation and relationships with our customers. We believe we've positioned ourselves well for the balance of the fiscal year and beyond. So thank you, and I'd like to open up the floor to any questions you may have.

[Operator Instructions] Our first question comes from the line of Larry Solow from CJS Securities.

I'm wondering if you guys could just parcel out. Did the -- on an organic basis, I'm imagining government and defense was down, but was -- commercial, I assume, was up organically. Do you have that number?

Yes. Yes, Larry, commercial was up organically. It was up in a similar fashion as the first quarter.

Okay. Could you remind me what that was? I mean...

So if you -- so we had some aircraft transactions in Q1 of the -- I'm sorry, in Q2 of the prior year. So if you exclude that aircraft transaction, organic commercial growth was 13%.

13%. Okay, great. And you happen to have what the government declines, organically, government and defense?

It's all -- all the decline in government was organic.

Yes, the acquisitions we made last year had no defense component to it.

Got it. Got it. What -- okay, okay. Got you, okay. Second question. Duluth, I realize, just opened this quarter. Was there a negative impact? Usually, I know you ramp up with no revenues and you have like some front-running expenses. Could you give us a little more color on that? I imagine that should start to improve.

Yes, Larry, there was a kind of a modest to negative impact in the quarter. We expect just a couple of more months of the kind of investment, if you will. And then by the end of Q3 and going forward, when the second line comes in, we would expect to kind of have that -- all of that behind us. But the Duluth facility has gone very well. We are -- the team that we have up there has done a terrific job getting the facility ready. We've had a lot of support from the community and from the regulators. So it's really on track to do everything we thought it was going to do.

Our next question comes from the line of Julie Yates from Crédit Suisse.

The 15% decline in defense seems pretty steep. Can you talk about the primary drivers in the different parts of your business, and then what kind of full year growth number you're expecting out of defense?

Well, the decline is primarily due to 2 areas: one, the decline at Mobility Systems, where we've finished off a significant contract and the contract wasn't renewed, and then also on some of our supply chain programs, one of which is still in existence but operating at a lower level, and then the second one has been discontinued. So those were the 2 contributors to the decline. In terms of where we go from here, I think we're going to be in the same kind of general area as we go forward, with the possibility of modest growth. And then we have some special situations which are going to move the numbers around, like the aircraft transaction that David mentioned.

Okay. So the $33 million sequential decline from the first quarter, I mean, how do we think about the quarterly progression from here for this segment?

Yes, I think we're going to be -- like I said, I think we're going to be at these levels going forward out into the next few quarters, again, with the exception of that aircraft transaction. So I think the easiest way to look at it is flat going forward.

So, Julie, the mobility business, we're not expecting any further decline in the mobility business in Q3 and Q4.

Okay, understood. Great. And then you mentioned an increase in the commercial parts sales. Can you quantify what that was?

Well, I think what we're saying is that organically, our organic growth in the commercial aviation pieces of our business were in the 13% range.

Okay. So it was...

And that would include MRO and supply chain.

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

Just firstly, if we could talk a little bit about Airlift. David, in kind of past quarters and years, you've been pretty optimistic about kind of the sustainability of that business, and I guess now that we've seen a couple of sustainment contracts come in, in the last couple of months, you do have pretty decent visibility over the next 12 months. I was hoping perhaps you could talk in a little bit more detail about what your longer-term expectations are. I mean, would you expect to see a decline in that business ultimately beyond the next 12 months? Or how do you look at it?

Well, we're looking at that business in a few different ways. I mean, clearly right now, we have a high degree of concentration in the Afghanistan theater. We have had a little indication from the customer of a reduction in demand. However, we are anticipating that as we get towards the end of this sequence of business, that there will be a reduction in demand. Although we're not seeing that and we've not been told that, we're kind of thinking that's the case. We have a plan then to go ahead and adjust the fleet if necessary and solicit other customers for this type of service. And as I said in the past, there's other DoD-type opportunity, there's State Department opportunity, there's UN opportunity, and there are numerous opportunities around the world that the team is looking at. So when you look at the progression of the business, you'll recall last year, we were having a hard time keeping aircraft up in the sky. This year, we're doing a really good job of executing on the business. The customer has taken note of our performance, and we continue to believe that the revenue opportunity and margin opportunity for the business continues to be there.

Okay. I mean, would you need to see some -- at what point would you need to see some of the incremental opportunities hit to keep you a little -- well, to make you a little bit more positive on the prospects of the business?

I think it's reasonable that we get some additional business away from the current theaters in the next 6 months.

Okay, all right, great. And then just a follow-up to Julie's last question on mobility. Could you give us an idea of where we are relative to kind of peak sales volumes and perhaps where the last trough was? I'm just trying to gauge kind of where we are in this kind of call it the cycle and how much potential downside there is.

Well, we don't believe there's much downside from here. I mean, the business is off significantly from its peak. But I think we've indicated here that the revenues on a year-over-year basis are down $36 million or $35 million, $33 million from a sequential basis. Tim indicated that we worked our way through a few contracts. So I don't think you'll see much more decline at this stage. Keep in mind, there are 3 pieces to this -- there are 4 pieces to this business. There's the manufacture of the 463L Pallet, where we're the exclusive provider to the U.S. Air Force. There's the container business. And just to give you a sense, we booked some orders for the activity in Turkey. And then you have your shelter business, which is more of a larger-cycle -- a longer-cycle business that relates to the replacement of these shelters, typically in a 20-year cycle, and there's a regular flow of activity that supports that replenishment, replacement cycle for the shelters. And the fourth piece is the service business, where we repair the pallets, containers and shelters. And we have no reason to think that, that business will decline at all. So we clearly -- we think at this time we had -- we were beneficiary of various surges that were taking place around the world. And I think we performed very well through that period, and now we're getting down to, say, a more normalized, peaceful environment level of activity.

Okay, great. Now typically during these peacetime levels of activity, would you anticipate seeing the service business pick up? Or how does that work?

Yes, service business does fairly well during this period. You have the return of the equipment. It needs to be put back into serviceable condition. And so typically, we've done fairly well in that regard, yes.

Okay. And just last question for me on Duluth. Is it a maximum of 3 lines? Or that's what you're currently targeting in terms of additional capacity?

No, we expect to have 4 lines of work in Duluth. And that's pretty much the max. So you can still -- you could get -- do some work out on the ramp and things like that, but it's basically 4 lines max.

Our next question comes from the line of J. B. Groh from D.A. Davidson.

I don't want to beat a dead horse, but on your government decline, you mentioned brisk Airlift. Did you give a -- Did you give kind of a organic growth rate for Airlift to offset the weakness in some of the other areas?

Yes. So what -- percentage-wise, what...

Yes.

So on a year-over-year basis, the sales increase at Airlift was up about 30%.

Okay, good. And then I noticed the SG&A came down pretty significantly from last quarter. And is that kind of a run rate that we should expect? Or is there -- was there onetime things in there that caused that to come down from last quarter?

No. I mean, I won't say, J. B., there was any onetimers in there. We did adjust some of the infrastructure in Q1, as we talked about in December. So more of that benefit fell through in Q2. Q1 has a tendency to be a little higher with some of the year-end expenses and so on and so forth. But there was really no unusual items in the Q2 number.

Okay. So there's just a little seasonality sequentially from Q2. So using like a number like 52 is probably okay.

Yes.

Our next question comes from the line of Jon Braatz from Kansas City Capital.

Given the decline in the mobility segment, is that segment operating profitably at this moment?

Yes, it is. And it's not a segment, just to clarify. It's a business...

Yes, right.

Okay, okay. Yes, it is. It's still a terrific business, Jon. It's just operating at significantly lower volumes.

Okay. Is there an opportunity to move the needle on the bottom line a little bit? Given the decline in revenues, are there more things you can do to improve the profitability?

We're always looking at those kinds of things. The team has done, I think, a good job sizing the cost structure of the business to reflect kind of the new reality. It's the kind of business that we have to make sure that we maintain our flexibility because we can get a phone call at any moment, actually, and be asked to produce significant quantities of pallets, shelters and containers relatively quickly. So we don't want to skinny it back too much. But I would say that they've done a good job making sure that the cost structure is sized properly.

Okay, okay. Second question, the new breakout in the revenue, Aviation Services and technology, can you give us a sense as to how much commercial and defense business is in each of those revenue items?

Yes, we have it in our presentation that we just made in Florida. Do you have that?

Jon, I don't have that with me, but I can give you a call.

It should be on our website, right?

On our website.

[Operator Instructions] Our next question comes from the line of Dan Mannie [ph] from Mannie Family Investments [ph].

Gentlemen, I have several. One, can you kind of discuss your priorities for use of cash? And specifically, do you expect any more buybacks? What's left on the -- open on the buyback?

Yes. So there's $42 million left on the buyback. The priorities would be to fund our growth in the business to continue to pay down debt and then to acquire shares.

Okay. Two, I noticed that your operating margins continue to improve slowly. Do you have a feel for, directionally, the movement over the next several of quarters of the year?

Well, directionally, we're looking at continuing to improve the margins, Dan [ph]. So you know -- you've been following the story long enough -- we've had better margins in the past and where our goal is to get our margins going in the right direction. And I think this quarter showed progress over the prior quarter, and hopefully the next couple of quarters will show some slow but steady improvement.

Okay. Third question. What do you see as growth opportunities in 2013 and 2014? And do you see the Telair profit model somehow spreading in the organization or the modeling -- or helping the organization improve margins?

Yes. So first of all, to answer your question, what do I see, I really like our position in the commercial markets. If you look at our Aviation Service sector, I like the opportunities that we're looking at and the position that the company has relative to those opportunities. I also believe that the service offerings we have for the U.S. DoD, as well as other DoDs, will be a positive for the company. The Telair acquisition, as you can see, has been a nice addition to our family. And actually, the CEO of that business unit happens to be in the room here right now. He's done a fine job prior to AAR's ownership as well as continuing through AAR's ownership and making that a nice contributor to our company. There will be meetings next month with our existing legacy cargo business to look for ways that we can -- look for synergies both from the cost side as well as from the market development side. So yes, I view that acquisition in a very positive light. I think you're seeing some of the contributions that they've made to the company's consolidated results in a positive light, and I see that continuing.

Okay. Last question. The U.S. Air merger with American looks more real every day. Is that possibly a very positive phenomenon for the company over the next couple of years if the merger occurs?

Well, I don't have a view. I don't have a handicap that from happening, Dan [ph]. Actually, you and I held a -- had a conversation on this about 9 months ago or so. I think it's too hard for me to count on that. I do believe that as the American fleet seeks a more efficient solution, that AAR will benefit from it.

Okay. So it's a positive possibility.

I think as the -- as American moves from its current mode into its next mode, I think the company would be well positioned to support that entity. But I wouldn't tell you that we have any dialogue of any nature, of any significance going on with them at this moment. But U.S. Air is a good customer of the company, and we touch them in numerous places. So we'll see what happens.

Okay. Last comment is the stock itself on all measuring metrics is extremely cheap, P/E, EBITDA ratio. Any comment at all?

I agree.

Our next question comes from the line of Dan Rutter from Paragon Investment Management.

I'm wondering if you could give a little bit of color perhaps on what to expect for tax rate in the back half of '13. You've got some pretty difficult comps, it looks like.

Yes. Dan, last year included both in the third and fourth quarter a couple of adjustments. We're not anticipating that type of adjustment to occur right now in Q3 or Q4. So we would expect the tax rate for the back half of the year to be right in that 34.5% to 35% range.

Okay, okay, that's great. And I'm curious, could you just kind of walk us through the accounting behind one of the aircraft that got sold, for example, in this November 29 press announcement regarding the MAS? What do you lose in terms of maybe revenue from the lease? And how does the gain go through? And how is the joint venture accounted for in that?

So yes, back at the end of November, we announced that we'd reached agreement to sell 10 737-400s to the lessee. Those aircraft were acquired by AAR and our joint venture partner back in 2007 or -- I believe it was 2007. And those joint ventures are nonconsolidated joint ventures. So they're owned by the joint ventures. So when the joint venture sells the aircraft, the sale does not go through our top line. The gain on the transaction will go through the line on the P&L that addresses earnings and aircraft joint ventures.

The income from the existing leases has been minimal to 0.

Yes.

Think of that transaction as a cash generator. So we reduce our obligations in the venture that was supporting the assets, and then we recaptured our cash basically that we have invested.

Okay. And then real quickly, have you commented much about where you think CapEx is going to come in for the year?

We were right around $8 million for Q2, Dan, and I would expect that Q3 and Q4 is going to be a similar dollar amount, right in that roughly $8 million range.

Where was 1Q? I'm sorry, I lost that number.

Hold on a second.

$10 million -- $11 million.

$11 million.

Our next question is a follow-up from Larry Solow from CJS Securities.

I just have a quick follow-up. You mentioned the Unison deal, the agreement doing better. I think when you first announced that program, it was targeted at reaching somewhere in that level of $60 million over the next few years. Is it anywhere near that? Or is it, I imagine, continuing to ramp?

It's continuing to ramp. It's ramping very, very well. And we're still -- we still believe we're going to achieve our target.

Okay. How about the precision manufacturing business? I know that there were some issues over the last couple of quarters back and some operating inefficiencies. Any color there on how that's progressing?

Larry, yes, we've talked a little bit about Precision Systems the last few quarters. And we continue to see steady improvement in that business. There was a nice improvement in Q2, and we expect that to continue in the back half of fiscal 2013.

Okay. And then just last -- actually, 2 more random questions. The equity in JV line, you had a couple -- it's a small number, but I'm just curious. It was like $1 million in the last couple of quarters, but what is that from? Is that from existing leases still? They're down to so little? Or is that something else? And where will that go from here?

Yes, no, I mean, that's from the existing leases as -- there's actually been -- as many of these aircraft are nearing the end of the lease, there's some, I guess, for lack of a better way to put it, some settling [indiscernible] with the lessee. And it's generally been favorable for us the last couple of quarters. And there might be a little bit more that bleeds into Q3. That basically is what accounts for the -- for what you're seeing.

Okay. So it will likely go back down to the, whatever, 200 -- $150,000, $200,000, whatever it was, run rate, or...

Yes.

All right, okay. Just the last question. The component shop in Amsterdam that you guys reopened, is that anything -- any updates there?

Well, we never actually closed it. We...

Right. You decided not to sell.

Yes, we attempted to sell. We weren't happy with the possibilities there. We've kept the business open. The business, actually, has had a nice resurgence. So we're fairly -- feeling pretty good, much better about that business today than we felt, say, 2 years ago.

Right. Well, you added -- I guess you added one new customer there, right, which sort of helped your decision not to sell it, I guess, too, right? Wasn't that...

That's right.

Our next question comes from the line of Tom Lewis from High Road Value Research.

First off, you mentioned the importance of fleet turnover. I would think that thinking as to how it's been a year ago, we were, I guess, still holding our breath, wondering if Boeing, whatever, shipped the 787, and now that seems to be providing a lot more certainty to fleet planning and such. Do you have any comment on that? I mean, is that a part of where some of this activity is coming from, that customers can plan better now that, that's going ahead, no longer -- well, I guess it's still 4 years behind plan, but you know what I mean.

Yes, no, I think that there's some of that in there, Tom. But basically, you've had decisions by Delta, you've had decisions by Southwest, you've had decisions by other carriers that may not be necessarily tied to the 787. But I do believe that as the 787 does stabilize in its delivery, that you will see more aircraft movement.

Okay. And as far as your sale of -- out of your leasing portfolio and your stated intent to come down, but you talk about having a -- while you've got -- you've been there for a long time. My impression is that this is a -- this has been -- business has gotten to be, frankly, pretty mature, and I'm wondering exactly what it is that you think you've got as a relatively small player in what's become a business of great, big players that is -- what is your edge in this game at this point?

Yes. So I think what we've said is that we have been consciously reducing the size of our portfolio because we are too small of a niche player. We are -- however, at the same time, we've been in the business of trading and creating value around aircraft for decades now, and that activity will continue. And I think the trade we had during the quarter where the actual aircraft will be delivered second half of the year is indicative of the kind of capability that we have as a company. So it's very hard for us to be in front of our customers with the kinds of business we have and not be in a position to discuss whole aircraft transactions at the same time. We just don't think that we have an opportunity in the leasing end of the business.

In a way that arguably you did 10 years ago, sure. Okay. Final question. With respect to the operation that you're opening in Duluth, a few quarters back, we were talking a lot about skill shortages and such. Can you speak to what it is about Duluth that this is going to be less than a problem than is generally the case? And can you kind of talk -- I mean, I guess we can assume that's still a generic problem for you out there -- or for the industry, more generally.

Yes, I would say that continues to be a problem. We have worked very closely with the state and the local authorities up in Duluth to reopen the facility. The facility has sat vacant for 5 years. It was built by Northwest in the middle of the '90s. It's a very modern type of facility. There are -- there is a supply of mechanics that remained in the Duluth area, and there are many mechanics that migrated away from Duluth when the facility closed who are eager to get back in town. We expect a steady ramp in labor. We've had good -- we've been able to pull people from some of our other MROs to fill some of the voids, and we have a robust search and training and hiring process that we expect to continue.

Yes. Well, I would think as long as you still have a lot of those folks there from before that are willing to come back, it makes all the sense in the world. So that's it for me.

We're creating -- within the company, we've created the one MRO strategy, where we're creating a similar look and feel across our network, and I think it's very exciting for mechanics to know that they have the flexibility to join us in any number of locations.

[Operator Instructions] Our next question is a follow-up from J. B. Groh from D.A. Davidson.

So if it's not cold enough in Indianapolis, you can move to Duluth.

Yes.

Okay. I just had a couple of questions on the defense. You guys mentioned that a couple of supply chain contracts were lower, but you didn't give really details on which ones they were. And you said, I think, one was discontinued and one was kind of under plan. Which are those specifically?

Well, the contract that discontinued was our JSTARS contract. And that ended, as you recall, last October. So we had some impact in the last year's numbers that we weren't able to replace this year. And then you've had a reduction in volumes around the KC-10 program.

Okay, okay. That was my guess, okay. And then looking at what's left in the JV portfolio, kind of what -- I know timing is hard to predict, but when would you expect that you'd be out of that completely?

Well, we're expecting to sell -- complete the sale of 2 aircraft in this quarter. And then we're hopeful that we can -- that'll bring us down -- well, we'll have 2 737s remaining from the MAS fleet. We would hope that we find places for those aircraft over the next year, keeping in mind our investment is fairly minimal once we get to that point. And then we have a couple of 767s on lease with United, which right now are doing well. And we see no reason to sell them, other than if somebody comes along and offers us a price.

What are the 2 that are going to be sold in the quarter?

737s.

Okay. And would you expect sort of a similar financial dynamic as this quarter, where it's like not a big needle mover from a financial standpoint but good cash flow generator?

Not as good a cash flow generator because we get paid over time. But it will be -- in time, it will be a good cash flow generator, yes.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Let me just wish everybody a happy holiday and a safe holiday and a very happy new year. And look forward to revisiting with you folks after we finish the February quarter, during our March phone call. So thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.