Good day, ladies and gentlemen, and welcome to the AAR Corporation Third Quarter Fiscal 2012 Earnings Call. [Operator Instructions] And as a reminder, this conference call is being recorded. And now I'll turn the conference over to your host, Greg Dellinger. Please begin.

Thank you, Tyrone. Good morning, ladies and gentlemen, and thank you for joining our third 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 Factors 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. As you know, we reported our third quarter fiscal year 2012 results yesterday afternoon. Sales for the quarter were $534.2 million, which represents a 17% increase over the prior year, and net income was -- came in at $20.7 million or $0.50 per diluted share. As we discussed in the release, third quarter diluted earnings per share were favorably impacted by $0.09 per share as a result of an income tax benefit. Rick will go into a little bit more detail on this later in his remarks. Overall, the company's third quarter operating results did fall short of our expectations. But I would like to start my comments by making certain that we capture the positives that happened in the quarter. First of all, we had 12% sales growth in our Supply Chain segment. The recent acquisitions of Telair and Nordisk are performing exceptionally well and made a solid contribution to the quarter's results. MRO sales increased by 13% when you exclude the Engineering Service business that we had in the prior period, and Rick will go into a little bit of that in his comments as well. And we enjoyed a 28% sales increase year-over-year coming from our Mobility Products business. But at the same time, we did experience some disappointments around execution at 2 of our businesses. As we signaled and discussed in our earnings release, the Airlift operation continued to be negatively impacted by aircraft shortages due to delayed receipt of 2 aircraft that were expected into our fleet earlier in the quarter. The aircraft are currently in theater. However, they have yet to go on our certificate, and…

Okay. Thanks, David, and good morning, everyone. As is customary, I'd like to provide some more detail on the performance in each of our operating segments, and then I'll conclude with some comments around interest, depreciation and CapEx. So as David mentioned, within our Supply Chain segment, sales increased 12% compared to the year-ago period. We saw an increased demand from our airline customers, mainly due to strong inventory positions that we had built up earlier in the year. Sales also increased during the period due to increasing sales under our Unison distribution agreement, which we had launched earlier this year. As we look ahead, we feel pretty good about our current inventory positions, and we exited the quarter with February being our strongest month yet from the Unison agreement. So we are encouraged by our momentum there. We also reported solid improvement in the gross profit margin in the Supply Chain segment, which increased to 19.8% in the quarter compared to 17.3% last year. This is our strongest margin performance in several years, and it reflects the favorable mix of inventories sold, particularly, around our engine parts business. In part, because of the recent Airbus Military win that David just mentioned, we made the decision to retain the Amsterdam component repair business, which had previously been reported as a discontinued operation. As a result, the operating results for Amsterdam were reported in continuing operations for all periods presented and will continue as such going forward. This change of classification had an insignificant impact on the year-over-year comparisons. In the Government and Defense Services segment, sales and gross profit margin declined due to the reasons David mentioned related to our Airlift business and our Defense Logistics business. It's important to reiterate that the weakness we experienced in the quarter at…

[Operator Instructions] First question is from Tyler Hojo of Sidoti & Company.

Yes. I was hoping you could maybe go into a little bit more detail on some of the issues in the precision machining business. Is that tied to the work that you won with Spirit on 7 series?

Tyler, it's Tim. It's a -- the Spirit is one area where we're not delivering as much as we had anticipated. We have a couple other programs that we're working through, both on the cost and pricing side, as well as delivery performance. So there's a few programs in addition to Spirit that we're working to improve. We have made some progress. We're working hard on the C-Series. We see some light there. But it's not just Spirit, but Spirit is one of the programs that we're working to improve.

Okay. And is there anything specific that you could point to that would help give us a little bit more confidence in seeing that this is more or less kind of a onetime issue and that things will improve next year?

I think we see progress here. We do expect that it's going to take a little bit of time to kind of fully implement the actions that we're taking. But we have confidence that we'll see improvement as we go into a new fiscal year.

Tyler, I would add too, part of our challenge is, I think, we expanded capacity pretty aggressively. We have some inefficient capacity utilization right now, and I think we have seen opportunity to correct some of that as well.

Okay, got it. And then I just wanted to, secondly, just ask about aircraft sales in the quarter. I know last conference call, you mentioned expecting to pare down the portfolio a little bit. Where do we stand today?

Yes. There were no -- so let's start by saying there were no transactions during the quarter. So none of the results were impacted by that. We continue to work the portfolio. You should expect to hear more from us as those deals come to fruition. We have some LOIs right now that we're continuing to work towards finding agreements. But there's really no story during the quarter on aircraft right now.

Our next question is from Larry Solow of CJS Securities.

Wondering just on the issues in the Airlift business. It just sounds like there's 2 different buckets, I guess, so the delayed receipt of, I guess, those are the 2 S-92s and then the unscheduled maintenance. It sounds like at least the delivery pieces, I mean, the -- not delivery, but the airplanes are now going into service imminently. So I guess that piece is sort of resolved. And then in terms of the maintenance, where do you stand there? And give a little more color on that, that would be great.

Larry, it's Tim again. The aircraft while they're in theater, they're not on the certificate yet. We are optimistic that we're going to get them on the certificate in the next week to 10 days but -- and we're managing it closely, but they're not on the certificate now. So I don't want you to think that they're on, okay? In terms of the maintenance issues, we have an unacceptable number of aircraft that are out of service. Our teams both in Melbourne and in theater are working diligently to get those returned to service. As you know, it's a very difficult environment. But nonetheless, the number of aircraft that we have on the ground is a problem. We're moving parts into the theater to help us get those aircraft back up and running, but I guess, what I would say there is we've got all of our resources working to get those aircraft up and flying.

Because it almost sounds like it's gotten even a little worse because I know you addressed this -- you had certainly discussed this issue last quarter and how you guys were working on, at least, on the maintenance part or availability of the aircraft. So...

It has, it has. Some of it is maintenance-related specific kind of failures of the aircraft, and others of it is extra inspections that we've taken on as a result of the situation that we had in January. So but you're right. It has.

And Larry, business is still very profitable, and it's still exceeding what we started out with, but it's just not hitting the targets that we know are achievable, nor that we'd hit in the past as well.

Right. Well, I guess the positive is that, at least, it’s maybe more in your control. So hopefully, you can...

That's correct.

And Larry, one point of clarity, too. I think you mentioned S-92s. The S-92s are in service and performing extremely well for us. Yes, the aircraft that were -- have been slow to get in are actually S-61s, which is a smaller helicopter.

Okay, okay. And was there any particular reason why that's being so slow or is it just...

The aircraft came in, in lousy condition, and our people through the acceptance inspection rejected the aircraft. The aircraft then needed to change out some major components. We then were a little slow in going through the certification process with the FAA. We ultimately made the delivery date and shipped the aircraft into theater, but without having the aircraft on the certificate, with the goal of having the aircraft on the certificate shortly after arrival in Afghanistan. The aircraft are there now, ready to be -- operate. However, they're not on our certificate yet. And we've heard anywhere from 1 day to 10 days, but hopefully, we can get them on the certificate here very quickly. The aircraft will be in good serviceable condition and will be ready to operate the day we get the certification cleared.

Got you, got you. And if I may, just to switch gears real fast. Just on the decision to retain the Amsterdam component repair shop and then, obviously, the agreement with Airbus, could you maybe just talk about that agreement? And could it be a gateway to other deals with Airbus or similar companies? And does their retaining the Amsterdam business make you believe that -- should that imply that maybe you think there's more to this deal or other potential deals?

Yes, this deal is around the Airbus Military fleet of CASA aircraft, which is their backbone to the military fleet, and the -- our Amsterdam shop is configured to go ahead and handle parts similar to the parts that would be coming off of these type of aircraft. We believe and we've been led to believe that if successful in supporting Airbus on this program that there'll be further programs with Airbus. The jewel in the Airbus Military fleet would be the A400M once that aircraft gets into production.

Our next question is from Ken Herbert of Wedbush.

First, you mentioned, David, about a -- or Rick, about a $0.10 impact in the quarter from both Precision and the Airlift business. How do you parse that out? I mean, how much down in the quarter was the Airlift business relative to a year ago?

Well, I mean, Ken, appreciate we don't usually talk about specific contributions on a business level. I think suffice it to say though, you can look at the segment results year-over-year, and you'd see that a pretty good chunk of the falloff year-over-year is attributable to Airlift, okay? That's the GDS segment, sorry, Government and Defense Services segment. So that will give you some sense to the second part of your question. I think the $0.10 is meant to give you a sense of we believe the rehabilitation of both of these kind of deficiencies is within our control, and it gives you a sense for what the magnitude is. And in terms of the relative split, you could think of them as pretty close to equal opportunities, so slightly more on the Airlift side.

Okay, all right. That's helpful. And the earlier comment seemed to allude to either some restructuring or something other, perhaps, in terms of a change of the business to expect within structures. Is that -- is there any more detail you can provide on that? And I'm alluding specifically to David's comments in his opening remarks.

Yes, I mean, I'd reiterate what we've said. It's one of the questions, too, as well, Ken. I mean, fundamentally, the business has had a little bit of executional challenges with some start-up programs, but we also, I think, are suffering from some inefficient capacity utilization right now. And I'm not sure if restructuring is the right word, but you should look for us to continue to execute profit improvement initiatives that could include some footprint rationalization as well.

Okay. So I guess that's, based on the comments, something we may hear about this quarter or certainly as you look to position it heading into fiscal '13?

Yes.

Okay, great. And just finally, on the MRO segment, I mean, good sales. You talked about pricing, I guess, rationalization or holding up there. Obviously, in the last few months or the last few weeks, there's been a lot of competitive change with one of your competitors filing for Chapter 11, and then most recently, Avios, and it seems like there could be some capacity coming out of, at least, the heavy maintenance side. Can you talk about what sort of your expectations are for the fourth quarter and heading into next year for MRO specifically, and then opportunities to maybe get better pricing and how some of the recent competitive situations may ultimately impact the business?

So when we look at the capacity issue that you've clearly articulated, we view that as a real positive for the company. We believe that there will be ample capacity taken out of the industry. There is a little bit of a flip side to that, and that is that you may have some airlines paring some capacity if fuel prices continue to be as high as they've been. But I think net-net -- when you look at the pros and you look at the positives and the negatives, I believe net-net, it should improve the pricing environment for us, and we are seeing some of that. So if you look at our engineering -- I'm sorry, if you look at our MRO segment and if you were to take the engineering piece out, if you look at purely our heavy maintenance piece of the business, you will see margin improvement. And as we come into this quarter, we're expecting not only a contribution from the engineering piece of that business, but we're also expecting the margins in MRO to strengthen as well.

Great. And just one final question on MRO. I know you're facing some difficult comparisons on the engineering side within that segment from the Delta contract. How has the -- is the outlook getting better for the engineering work heading into fiscal '13? Or is there any commentary you can provide on that part of the business specifically?

Yes, the outlook is good actually. We'll start delivering on an existing contract in the fourth quarter here, and it'll continue through next fiscal year. So -- and then we'll be looking to add some business behind that. So the outlook is good here.

The next question is from J. B. Groh of D.A. Davidson.

I think you might have addressed this, Rick. But just within like Supply Chain and the demand on the commercial aftermarket side, can you sort of address the trend throughout the quarter? It seems like the guys that reported on December quarter had very, very strong aftermarket, and then one that had a January close had a little bit lower aftermarket sales. And so I'm just trying to figure out sort of what the trajectory was for demand for aftermarket sort of going through the quarter.

Yes, well, I mean, J. B., I guess here would be my response to that. So what I said was -- I made a comment with regard to our Unison distribution agreement, which, as you know, is scaling up, and so in the grand scheme of the full results for the segment is a small contributor, but the trend there is nevertheless very positive for us. We exited the quarter with the strongest month yet under that agreement. So we're very encouraged by that. Our trading businesses, engine and airframe trading businesses, which would be more larger contributors to the overall segment results, tend to skew later in the quarter anyway. So it's not -- it may not be as pure of a read as you would like, but we had extremely strong February in both of those businesses.

Okay, that's helpful. And then on the SG&A, that was up a little bit sequentially. Is that just a reflection of the acquisitions? Or is that a run rate we should look at -- look toward going forward? Is there any deal-related costs in there?

There's no onetime deal-related costs, J. B., but you do pick up some amortization from purchase accounting. And so that's with us to stay for a little while. I think we, for a long time, targeted getting our number below 10%. We had a couple of pretty good quarters there where it was closer to 9%, but I think kind of mid-9s is where we're targeting right now.

Our next question is from Eric Hugel of Stephens Inc.

Rick, you talked about some onetime issues in Miami. Can you sort of elaborate and maybe sort of give us some numbers around that so we can look at sort of what the underlying profitability in the group was?

Yes, I just -- there's just -- we had some write-offs that we had to take during the quarter, and it's just a couple of, again, what I'd just call onetime charges, Eric. Nothing -- there's not really a bigger story to it than that. What the real point I wanted to leave you with is I don't expect to experience them in the fourth quarter. And if you correct it for those in the quarter, you'd see -- you'd definitely see a couple hundred basis point lift, and so between that and -- we had a tough comp with Engineering Services. That will change as well. So we're feeling pretty good. Even absent any improvement to the pricing environment, we're feeling pretty good about a lift in margins there. And if we get some lift on pricing as well, that could even look better.

But are you talking about a lift versus sort of this 11.8% number, which really isn't much high…

I would orient you back to -- 11.8% is clearly disappointing to us. I would orient you towards what you saw more in the first 2 quarters and then hopefully...

Rick, first quarter was 11%.

Okay. So last quarter, Eric.

Okay. So a lift versus, let's say, that 14.7%.

Yes, let's say, look, we've always -- this is a segment that has always bounced and, by our target, between kind of 14% to mid-15%, as high 16%. And what I'm saying to you is we should be comfortably within that range with, hopefully, upside potential.

Okay, fair enough. Can you talk about, in terms of the Airlift business, maybe some metrics with regards to sort of how many aircraft these maintenance issues are impacting, maybe some metrics about how many aircraft are deployed versus how many aircraft are sort of available to do missions?

I don't think I'd really have any figures for you there. We'll have to probably think about that a little, Eric, and get back to guys. I mean, the fleet, the operating fleet, as you know, approximates roughly 50 fixed and rotary wing aircraft. We've tried to build up a spare complement around that operating fleet to try to booster -- or bolster, I should say, aircraft availability. The unplanned maintenance events tend to occupy those spares and then some. And that's what we’ve been suffering so far, so that leaves us in a position where we're not able to deliver the ready aircraft that our customers are looking for. In terms of giving you more numbers or guidance on that, I think we'll have to think about that and get back to you.

Can you talk about, I guess, as you look in the industry and you look at some of your customers, I mean, I guess, it was referred to maybe in another question a little bit, but I guess there are some issues with some of your customers, maybe Pinnacle being one of them, potential that there's talk about them maybe potentially having to file for bankruptcy. Can you talk about sort of how you're sort of conducting sort of operations, sort of what you do when you sort of start to see some of your clients that you have sizable exposure to sort of maybe getting on the ropes and, on the flip side, opportunities like American and Avios, how you react to those?

So, Eric, on the specific situation you're asking about, they are -- we're doing a fair amount of work for them. We don't have a significant exposure. So we've taken care of that part of the risk. We do expect that requirement, that utilization of that fleet to continue no matter what actually happens with Pinnacle. But I think, as David mentioned, we are seeing other opportunities out there, including American as you mentioned, but we see robust demand for MRO services across -- really across the market. So we're watching it very closely. We keep very close tabs on the customer performance. We do have, though, a blue chip list of customers in our MRO business. So we feel good about our position there, and we feel good about the opportunities for additional work.

Lastly, just in terms of the Supply Chain, I believe you guys acquired Airinmar in what, was it the second quarter or something like that? Is that number -- that number that you have there, can you talk about how much sales Airinmar contributed, sort of what the underlying organic growth in that business was?

Yes, we bought Airinmar in October, Eric, just to clarify. Airinmar's sales -- remember, Airinmar is primarily about obtaining a capability that we think we can both leverage across our existing businesses that we own and then market it on a third-party basis to airlines, et cetera. The answer to your question is they had low single digit, a $1 million sale contribution.

The next question is from Jon Braatz of Kansas City Capital.

David, you mentioned in your prepared remarks about monitoring the defense budget and the impact on the Structures and Systems division. Can you talk a little bit about maybe what you think maybe the size of any impact would be? Or is it just too premature? And when do you think we might begin to see and feel a little bit of the impact of cutbacks in the defense budget on that segment?

So first of all, if we look at the entire -- across the spectrum of AAR activities, I believe that there are positives and negatives. So I do believe that there will be a series of positives related to ways that we can help the Defense Department reduce its expenses. They have been in contact with the company to ask us to share best practices around commercial -- our experience in the commercial world, recognizing that we've been faced with customers who have been financially challenged for decades. They see some of our skill sets as being able to assist them in achieving their missions while doing it within a compressed budget environment. At the same time, we, of course, are a manufacturer of certain products for the DoD, which we have some concern around how those get impacted by budget actions. And so we'd be probably looking at the Structures and Systems group a little differently than we'd be looking at the, say, MRO and Supply Chain and Government Services segments of our business. So the comments are around going ahead and making certain that we get ahead of the trend and not get behind it. And so therefore, do the best we can, and Rick alluded to looking -- taking a look at our capacity and ways to go ahead and streamline capacity. So hopefully, that's helpful.

Okay. Specifically on some of the products, are we talking about Mobility and shelters?

Yes, the Mobility Group would be the group that would be largely focused around 100% of our business is a government orientation. So yes, they would be the most dramatically impacted by budget cuts.

And I don't know if you can tell me this, but what's the revenue size of that segment?

Yes, that piece of our segment? It's a meaningful piece of the business. I don't -- we prefer not to disclose that for competitive purposes. But that being said, it's an important part of our Structures and Systems segment.

Okay, and that wouldn't -- when you look at the defense budget, that wouldn't go away entirely, would it?

No, no, no. That business will remain very profitable. It'll be a very healthy business. They will continue to -- their backlog is still fairly -- is pretty strong. The current inputs are strong. Well, I'm just giving you kind of my view in terms of what may happen with defense budgets. I view it as a potential neutral for the corporation, but I think it could be negative for our Systems and Structures business group.

If -- I know you're trying to be proactive on this, in this regard, but when would we might -- when might we see the first impact of these cutbacks as it relates to this particular segment?

Well, I can't really -- I don't think I really have a crystal ball in that regard. There's a lot of moving parts around the defense budget. Keep in mind that the services that we offer are fairly critical to the operation of the Defense Department. So as I've indicated they -- this is not a "falling off the cliff" situation. I think that what all I'm alerting you to is the fact that the defense budget cuts are real and, I believe, will impact our Structures and Systems group. I do believe, though, at the same time, that we will see certain benefits as a result of dialogue we've had with the Defense Department that we will see benefits elsewhere in the company as they look to go ahead and streamline their operation. They've got a major hurdle in terms of -- they're faced with the following scenario. The world is about as unsettled as it's ever been. The equipment that they operate is of an aging nature, and yet, their budget is coming under immense pressure. So they must be in a position to deliver against multiple fronts though, and they have to have their equipment up and running, and they have to do that all while they are operating under a reduced budget environment. So kind of very similar how the airlines have operated for the last 30 years. And we have a lot of experience in helping the airline community in navigating through tough times, and the DoD recognized that we have that skill set that can be helpful to them as well.

Our next question is from Michael Callahan of Auriga Securities.

I was hoping we could talk about the MRO segment a little bit and just your maybe capacity constraints. We talked about the industry as a whole, I guess, already. But for you guys, when you're at that kind of $112 million run rate, what does your facility utilization look like? And does upside from here really come from price? Or is there more space available?

So the existing facilities are very busy. There is additional upside on yields, we believe, through process improvement and other initiatives. In terms of capacity, there are other facilities that we can move into fairly rapidly, and we're positioned to do that. So we can grow this business beyond our existing footprint in relatively quick fashion. And so as we see some of the opportunities that are emerging, and we're talking to our customers about some of this incremental capacity that's available to us. So I guess, to summarize, we're pretty well booked up at our existing facilities, but we have other alternatives to talk to customers about once they're ready to move.

Okay. So if you took out a new facility, is that through a long-term arrangement? Or is that just kind of to satisfy the peak?

; It would be very, very flexible for us. So we could have it for a long time. Or if there was a peak, we'd be able to size it to whatever the requirement is.

Okay. And then lastly, on MRO segment, on the $112 million, is that -- is there pretty much 0 contribution from engineering services in that number?

It's modest, yes.

Okay. And then just to shift gears a little bit to the Airlift business. I guess, since you guys have owned the company, there's not a lot of history there yet, and the history that we do have was kind of during a time of -- a time when you were picking up several contracts, so the growth rates looked strong. But as we kind of stabilize a little bit specific to the maintenance issues, not the new aircraft issues, but on the maintenance side, as we get more history behind us, should we expect to see this happen from time to time? I mean, it seems a little bit more just part of the ongoing business, the maintenance issues like that would pop up. Or is this really kind of onetime sort of issues?

Well, I think to your point, it's hard to say precisely only because, like to your point, we've only owned the business for 2 years. But I think if you look at the airline business in general, I think there are kinds of peaks and the valleys in the maintenance cycles of the aircraft. We happened to hit a high peak here in terms of the maintenance requirement for the fleet. We also though, have had a fair amount of unscheduled maintenance, which I would venture to say is unusual. However, could it happen again? The answer probably would be yes.

Okay. Just lastly, on that topic, what drives the unscheduled maintenance issues? Is it just something breaks on aircraft or...

Yes. Yes, you pull into a station, and a radio is out, or you do your line station inspection, you find a crack. So there's any variety of reasons. The one thing I would like to make sure though that is captured here is the business is still highly profitable and is still ahead of our expectations when we made the acquisition. So just keep things in perspective. We set a high target in terms of what our expectations were. We did achieve some of those targets in prior periods like last year this time of year. But we have had some things not go our way, let's say, and hopefully, we can get back to where we had been in terms of performance on this business.

Okay, is it fair to say that unscheduled maintenance puts aircraft out of service a little longer given where the location of the aircraft is and how long it takes to get the repair equipment?

Yes.

Yes.

Our next question is from Doug Carlson of Bank of America.

Just kind of broader question. You've answered most of my questions already. Just Afghanistan outlook, widely publicly phasing out by the end of '14 and kind of they’ll be transitioned in '15 potentially to other government commercial opportunities. Can you just see -- has there been any update on that? Do you have any change in view? How do things feel in that area from a kind of outlook perspective?

Yes, so the demand remains very strong, but we're also receiving demand from other sources outside of that market, and we're kind of trying to figure out how to go ahead and either reposition assets out of that market into new markets or go ahead and augment our position with newer assets. So this is an ongoing opportunity/challenge for us that we continue to work. But the short-term needs inside of that market remain very robust and very strong, and we see no signs of any falloff in demand for our products and services. As a matter of fact, we're anticipating that as there is a little bit of drawdown that the organic equipment will leave first, and the demand for our product will be as strong as we've experienced here in the 2 years that we've owned the business.

Our next question is from Dan Goldberg of RBC Capital Markets.

Just some housekeeping. Could you tell me how recourse debt ran up to $820 million from the roughly $500 million of the quarter before? I expect the 10-year bond deal you did plus perhaps borrowings off the credit line?

Yes, I mean, that's how we funded it. That's correct. So recognize, we -- the acquisitions that we closed in the first week of December had a price tag of $280 million, and so we had prepared ourselves to fund that by upsizing our revolving credit facility, and then we followed on with the bond offering in January to reload some of that credit facility. But that's your big driver to the debt increase.

Our next question is from Shawn Mann [ph] of Mann Family Investors [ph].

David, a couple of questions. One, how do you feel currently about your 10% operating margin target? Do you feel stronger than the past as you're hitting higher gross margin levels?

Yes, I think we've kind of communicated here that we have a couple of operations that are not executing to our standards and executing to the standards that they've achieved before. So we've got to fix those 2 businesses to get back on the path, let's say, to get that margin objective. But if you take a look at the businesses that we brought into the company since we've established that objective and you take a look at the Airlift business, even though it's not giving us the maximum contribution, it is helping us to achieve that 10% target, and then the recent acquisition of the, particularly the Teleflex and Telair business, has very healthy margins and adds to our margin mix. So we continue to drive the business in that fashion, and hopefully, we'll be able to overcome some of the internal challenges that we have in these 2 businesses and get back on that path.

So if you look at the negative $0.10 and add it to what you did in the quarter, you would have pretty well a record quarter of $0.61?

That's correct.

Do you see us coming to that near term?

Well, I think what we're saying, Stan [ph], is that we're going to see some improvement in these businesses in Q4, but that we expect a lot of these improvements to kick in -- start seeing the benefit as we get in to the next fiscal year. So it depends on how people define near term, but I think, hopefully, you'll see some steady progress in this regard.

What's your view on use of cash? Stock buys, more acquisitions, debt paydown, could you speak to that?

Yes, I think the first use of cash will be to pay down debt. As we generate more cash, we'll take a look. But I think right now if you're asking me near term, I would say that as we generate cash, we'll be paying down our debt.

All right. Last question. You mentioned that you thought the Defense Department, similar to our U.S. airlines, would start moving to outside or outsourcing their MRO, and that leads me to the question, are we in the correct locations to process Defense Department MRO? Or do we need new locations?

Well, there's 2 ways that we can assist the Defense Department -- 2 or 3 ways that we can assist the Defense Department. One is around MRO. One is around spare parts and logistics and availing them of some of our IT capability, and then we also have our -- the Airlift operation, which has proven to the Defense Department that we can lower their operating expenses. If I had to zero in on the areas of most impact, I would start with Supply Chain. I would then go to MRO. I would then go to the third piece. So I think the greatest ability for us to impact DoD budgets or the quickest way would be through the Supply Chain, where we have -- where the location is not critical.

Okay. So it's not location critical?

Right.

Our next question is from Andrew Berg of Post Advisory Group.

Just a couple of questions going back to Airlift for a second. How much of the issues that you're experiencing there are related to the environment and mechanical problems? And how much is related to your own self-imposed inspections that you alluded to earlier in terms of doing more maintenance on the aircraft, which is slowing down the process?

I think you have both. So I can't quite -- I wouldn't be in a position right now to quantify that. We can -- we probably could be in a position to quantify that. I don't know if we are on this call, but I would say you probably have a little bit of both. You clearly have environmental challenges, which is why the margin is as strong as it is, and at the same token, we have imposed certain maintenance requirements that would be self-directed. So probably a little bit of each. And if you want to get more granular, we can get back to Rick, and we can provide that in short order.

Okay. And can you quantify the benefit from the 2 additional aircraft? Are you guys willing to say what you think that can generate for you in the quarter once they come online?

Yes, we prefer not. We don't get into that specifically, but suffice it to say that the category, the S-61 category, is a very profitable aircraft for the company.

But Andrew recognize, those 2 aircraft are part of a broader puzzle. We have a few other aircraft that we think will come back in the service that have been out on inspections, and we have a longer list of pipeline of spare aircraft as well. So the ultimate resolution of airlift's portion of our, what I quantify as a $0.10 per share shortfall is addressed by all of those events, not just the 2.

Okay. And on the precision side, kind of a similar thought process on the question. How much of the issues you’re having is a result of not manufacturing product to the level that you would like it to be coming out at? And how much is related to some of the inefficiencies you guys talked about in terms of the layout that you can address a little bit more easily?

I think, in this case, you have a combination of issues. We kind of have a -- and I prefer not to get too deep into some of these issues only because they do have competitive implications, but we do have a series of initiatives going on to address all these efficiencies. It addresses the types of product that we're producing. So there's a series of pipes, if you will, that are being addressed, and our team is pretty much all over this at this stage.

Okay. Two final questions. The Airbus contract, can you guys put any numbers around that for us in terms of what you think that can generate?

The Airbus Military contract that we’ve talked about in the call and then announced last week is -- will be worth -- it's approximately $5 million a year to start. And as you've heard a couple of occasions, we think that's a platform for potentially more from them.

Okay. Well, it's a nice start. And then lastly, just housekeeping. What was the availability in your revolver at the end of the period?

We had available liquidity of north of $300 million.

Our next question is from Ken Herbert of Wedbush.

Yes, just a quick follow-up. On Telair and Nordisk, looks like they had a good quarter. Can you provide anymore granularity specifically on their performance in OE versus aftermarket, and was there anything in particular now that you've been into these businesses about 3 months that has surprised you either positively or negatively?

On the mix, we have strong aftermarket coming out of Telair, which is kind of one of the motivations in buying -- in acquiring the business. So we were pleased with the progress there. We are working on a fairly large program in that business that would be a pleasant surprise and something that we had not previously anticipated. The Nordisk business is pretty much as we had expected. It's kind of a -- it's a business -- kind of a grind-them-out kind of business, and I don't think we're going to see much excitement or unexpected positives or negatives coming from that business. So the focus inside our company is largely around the Telair opportunity, and that's the one that we zeroed in on when we made these acquisitions, and that one is far more positive than we had anticipated.

[Operator Instructions] Next question is from Eric Hugel of Stephens Inc.

Rick, can you talk about -- I gather in the quarter from Telair and Nordisk, there was a sort of a headwind to margins from the sort of just the normal purchase accounting step-up of inventory that you then sort of sell it at the 0 margin. Can you maybe sort of give us some visibility as to what the impact there was? And are we pretty much through that burn given that we've gone through pretty much a whole quarter now with the business?

Yes. So let me first start by, Eric, it's not as harsh as 0%. We are able to book some margin, but it's not what a full spare’s margin might look like. So you're correct in that there is a little bit of dilution relative to what a full run rate of spare would look like, but not 0. And then the answer to your question is we think we'll have it still in Q4, but then once we get by Q4, it should probably have burned through most of the inventory.

And just lastly, any update to your, I guess, your EPS guidance for the year, $1.85 to $2.05? Are you sort of keeping that intact but just now including the $0.09 from the tax benefit? Is that how we should think about it?

Yes, I think we've just -- we're trying to give you some color on how we feel about the fourth quarter, some of the good things and the bad. And with that, we'll let you guys do your own updates. We're not going to formally update the ranges we had out there.

And actually one more. In terms of the margins in the Government and Defense Services, and it does look like we're going to have these S-61s come back into service, should we expect some incremental, at least, improvement in terms of the top line, as well as the margins in the Airlift business?

In Q4?

In Q4, yes.

That's our expectation, yes.

I'm showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Well, thank you very much for your participation today, and look forward to having another call in a few months to discuss the fiscal year. Be well.

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