Bert Subin: Thanks very much for the helpful color.
John Holmes: Thank you.
Operator: Thank you. [Operator Instructions] And that will come from the line of Michael Ciarmoli with Truist Securities. Your line is open. Michael if you are on mute, please un-mute. Okay. We will go on to the next question. [Operator Instructions] Our next question will come from the line of Ken Herbert with RBC Capital Markets. Your line is open.
Steve Strackhouse: Hi John and Sean. And John this is Steve Strackhouse on for Ken Herbert. Congrats on the acquisition today guys.
John Holmes: Hey. Great. Thanks Steve. Good to talk to you.
Steve Strackhouse: So, just following up on the margin outlook, probably to Rob’s question. With regard to your operating margins, adjusted operating margins were 8.1% in the quarter, I think at the Investor Day, you outlined about a 9% to 10% range. And I think you just talked about a little bit of pull forward. How should we think about the margins for the Triumph business? I think you outlined about 150 basis points of expansion in repair and engineering. Is that just additive to those outlines or was some of that M&A baked into that?
Sean Gillen: No. So, I would say that, that outlook given the past July was just organic outlook. And as you think about bringing a business like Triumph in, it just accelerates our ability to get to those. Their business from an operating margin standpoint is about 18%. And if you just look at kind of what we have done over the last 12 months and layer that on top, we are a little bit north of 9%. And then specifically in the R&D segment, where this will go, accretive to those margins as well. So, really bringing some differentiated capability, and that kind of shows up, and that does show up in the margin profile of the business.
Steve Strackhouse: Appreciate that. And then just switching gears to free cash. Free cash in the quarter was positive at about $10 million or so. Can you maybe discuss some of the puts and takes for working capital in the back half of the year? And then just any free cash flow expectations you have with regard to the Triumph acquisition. I realize it might be a little early to discuss those and get into those, but you said that that was a strong cash business. So, I just kind of wanted to dig into that a little bit deeper?
Sean Gillen: Yes. So, looking into the back half of the year, expect to be positive as we convert the inventory investments made in the first part of the year. I mean we will continue, as you heard John talk about with USM, more supply becomes available. We will continue to invest in that business. But in terms of cash flow conversion, we would expect the back half of the year to be positive. And then as you think about the Triumph business, one of the reasons we like the business is not only does it have strong margins, it has strong free cash flow. That’s because it’s less working capital-intensive than parts supply businesses. So, the working capital tends to be a bit more stable as you can grow the business. And then from a CapEx standpoint, the facilities operate well and CapEx is more in the $5-ish million a year.
So, when you think about kind of that $455 million of EBITDA and $5 million in CapEx, with working capital being relatively consistent, it’s a nice free cash flow generator.
Steve Strackhouse: Awesome. And then, if I could just squeeze in one more follow-up on the government customer. How are you guys thinking about – I know you kind of guided down a little bit more so to low-single digits for this year. How are you may be thinking about that with regard to the potential for an extended CR?
Sean Gillen: Yes. So, the guide for Q3 is high-single digits to 10% for this upcoming quarter.
John Holmes: And that’s just for the upcoming quarter, not for the back half of the year, just the upcoming quarter.
Sean Gillen: Right. Yes, right. And we, like anyone with government end markets are paying attention to the pending CR. The programs we are on are generally not impacted if that’s a short issue. If it becomes longer, of course, we like everyone else, could be impacted, but I think that’s expected. And I think the other area you could see it on the margin is that we rely on government workers to help do part supply into the government as you can see a little bit choppiness there. Those will be the two areas that you could see some impact depending on the length of the issue.
Steve Strackhouse: Awesome. I really appreciate all the color there. Happy holidays guys. Appreciate it.
John Holmes: Great. Thank you very much.
Operator: Thank you. [Operator Instructions] And that will come from the line of Michael Ciarmoli with Truist. Your line is open. Yes. That was Michael’s line. So, speakers, I am showing no further questions in the queue at this time. I will turn it back over to you for any closing remarks.
John Holmes: Great. Thank you very much. We really appreciate the time and the interest, everybody. And it’s been an exciting time at AAR and looking forward to being back here next quarter to talk more. In the meantime, I hope everybody has a happy holiday season. Thank you.
Operator: Thank you all for participating. This concludes today’s program. You may now disconnect.
