TransDigm Group Incorporated (TDG) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 TransDigm Group Incorporated Earnings Conference Call. My name is Chanel, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Liza Sabol, Investor Relations.

Thank you. Good morning. I would like to thank you all that have called in today and welcome you to TransDigm's fiscal 2013 first quarter earnings conference call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the Securities and Exchange Commission. These are available through the Investor section on our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA As Defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA and EBITDA As Defined, adjusted net income and adjusted earnings per share to those measures. With that, please let me now turn the call over to Nick.

Good morning, and thanks to everyone for calling in this quarter to hear about our company. Today, as usual, I'll start off with some comments about our consistent strategy, an overview of our Q1 fiscal 2013 performance, some comments on acquisitions and then I'll give an update on the 2013 outlook. To restate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons why we believe this, about 90% of our net sales are generated by proprietary products and around 3/4 of our net sales come from products for which we believe we are the sole source provider. Excluding the small ground transportation business, about 57% of our revenue and a much higher percent of our EBITDA As Defined comes from aftermarket sales. As most of you know, aftermarket revenues have historically produced higher gross margins and have generally provided stability in the downturns. Because of our uniquely high underlying EBITDA margins, typically in the 50% of revenue range, and relatively low capital expenditures, typically less than 2% of revenue, TransDigm year in, year out has generated very strong free cash flow. We pay close attention to our capital structure and view it as another means to create shareholder value. As you know, we have in the past and continue to be willing to lever up when we either see good opportunities or view our leverage as suboptimum for value creation. We typically begin to delever pretty quickly. In keeping with that philosophy, due to a combination of suboptimum capital structure, a hot credit market, significant liquidity and significant borrowing capacity post dividend, we declared and paid a $12.85 per share special dividend, or about $700 million for the dividend and related items, in Q1 of fiscal year '13. Coinciding with this, we raised $550 million of high-yield bonds and about $150 million of senior debt. After paying the special dividends, as of 12/29/12, we have $550 million in cash, $300 million in unrestricted and undrawn revolver and additional capacity under our credit agreement. With no additional acquisitions, cash should be over $900 million by fiscal year '13 year end and net leverage a little under 4x EBITDA as adjusted. As usual, we will address our use of cash as the year proceeds and make a determination based on acquisition opportunities, capital markets and other factors that exist at that time. We have a well-proven, value-based operating strategy focused around what we refer to as our 3 value drivers: new business development, continual cost improvement and value-based pricing. We stick to these concepts as the core of our operating management methodology. This consistent approach has worked for us through up-and-down markets and has allowed us to continually improve and increase the intrinsic value of our businesses, while steadily investing in new businesses and platform positions. We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace products with significant aftermarket content. We have been able to acquire and improve aerospace businesses through all phases of the cycle. Through our consistent focus on our operating value drivers, a clear acquisition strategy and close attention to our capital structure, we have been able to create intrinsic value for our shareholders for many years through up-and-down markets. In uncertain times like this, we focus on these fundamental elements of value creation as the things we can control. In October of 2012, we announced an agreement to acquire the Goodrich Pump & Engine Control business for about $235 million. This was subject to Department of Justice review under a consent agreement between UTC or United Technologies and the Department of Justice. We and UTC expected this to close in the late December time frame. Under the consent agreement, the process was overseen by an independent trustee, and we understand that we were prescreened by both UTC and the trustee for potential antitrust issues. In December of 2012, we were informed that the DOJ would not approve the transaction. The rationale used to reject this transaction is unclear to us. However, under the consent agreement, we understand that the DOJ has the authority to act in its sole discretion and there was no practical course of appeal, so we have moved on. Moving on to our most recent quarter. I'll remind you this is the first quarter of fiscal year '13. Our 2013 fiscal year began October 1, 2012. The quarter, with puts and takes, was roughly in line with our expectations. As I have said in the past, quarterly comparisons can be significantly impacted by differences in OEM aftermarket mix, large orders, transient fluctuations in the inventory and modest seasonality and other factors. As you may know, we began to see commercial aftermarket softness in the back half of fiscal year 2012. The softness appears to have continued into Q1 of fiscal year 2013. The market status is not clear. Now, there are some positive signs, there are also some less positive data points. Total company GAAP revenues were up about 22% versus the prior year Q1. Pro forma revenues, that is assuming we own the same mix of businesses in both periods, was up about 2% on a quarter versus quarter basis. On a positive note, bookings were up more with the book to ship ratio running a little ahead of 1.1x. Reviewing the revenues by category and, again, this is on a pro forma basis versus the prior year Q1. This is -- that is assuming we own the same mix of businesses in both periods. In the commercial market, which makes up about 3/4 of our revenue, total commercial OEM revenues were up about 5% versus the prior Q1. This is roughly tracking our expectation. As a reminder, commercial OEM revenues were up in the low 20% in both the prior year Q1 and the full year 2012, so the comps are tough. Total commercial aftermarket revenues were up about 3% versus the prior Q1. Prior Q1 was up 19%, so again, the comps are tough. The picture is mixed and airline buying still seems to be running below underlying demand. The bookings were slightly ahead of shipments but up about 5% sequentially from the prior quarter. This is in spite of less days of operation in Q1 of 2013 versus the prior quarter. On the other hand, discretionary items appear to begin to soften more in this quarter. The booking and shipment trends vary across the product lines with no clear picture. In the defense market, which makes up about 1/4 of our revenue, defense revenues continued better than we expected. Revenues are up about 2% on a quarter versus prior quarter basis. Surprisingly, bookings on incoming orders ran more than 30% ahead of shipments. A large onetime order from the United Kingdom Ministry of Defense for a new anti-missile netting system we developed for ground vehicles made up about half of this but the rest is bookings in our base businesses. Though the booking results were mixed by businesses, more units were up than down. Military revenue and bookings are holding up so far better than we anticipated, but we remain cautious about trends here. Our non-aero business, though quite modest, was down in Q1. Moving to profitability and again on a reported basis, I'm going to talk primarily about our operating performance or EBITDA As Defined. The As Defined adjustments in Q1 were made up primarily of noncash stock-based compensation expenses. Our EBITDA As Defined of about $201 million for Q1, was up around 15% from the prior year Q1. The EBITDA As Defined margin was about 47%. When you compare this to the prior Q1, EBITDA margin was diluted about 3% from the impact of the AmSafe, Harco and Aero-Instruments acquisitions. There was also about a 3/4 of a percent [ph] favorable margin impact in the prior year's Q1 from a onetime contract settlement. Adjusted for the acquisition mix and contract settlement, the underlying Q1 fiscal year '13 EBITDA margin is up about 1% versus the prior Q1. With respect to acquisitions. We continue to look at a lot of opportunities. The pipeline of possibilities is active, probably picked up a bit in the last quarter. Closings are always difficult to predict, but we remain disciplined and focused on value-creation opportunities that meet our tight criteria. Moving on now to the 2013 guidance, and I think this is on Slide 6 is that correct? The current economic and political environment remain unclear. Hopefully, the situation will clarify as the year progresses. But in the meantime, we remain cautious, and we're staying very careful with our spending levels. Based on the above and assuming no additional acquisitions, 2013 guidance is slightly revised as follows. Note that the midpoints for revenue and EBITDA are unchanged. The range has just tightened a bit. The midpoint of the 2013 revenue guidance remains at $1.85 billion or up about 9% on a GAAP basis. The midpoint of the 2013 EBITDA As Defined guidance is $888 million or 48% of revenue. This includes 3% of margin dilution from the last 3 acquisitions I mentioned above and there was also about 0.5% favorable margin improvement in the prior year from contract settlements. EBITDA is up about 10% on a GAAP basis. The midpoint of the EPS as adjusted is now anticipated to be $6.86 a share. This is up $0.10 from the prior guidance. This has primarily reduced taxes versus our original guidance. On a pro forma or same-store basis, this guidance is based on the following growth rate assumptions. Most of the underlying assumptions are unchanged from the last quarter. We'll continue to assess the impact of the market uncertainty as the year proceeds. We are sticking with a commercial aftermarket revenue growth of 5% to 10% based on worldwide RPM growth of 4% to 5%. Due to the continued industry-wide softening in the back half of 2012 fiscal year and the apparent continuation of this in our Q1, we're cautious. We'll have to see a pickup in the back half of the year to meet this. We'll watch this closely. This is the market segment that is most likely to move our EBITDA results one way or the other. Based on a strong Q1, we now estimate defense and military revenues to be flat versus 2012. This is an improvement versus our prior guidance, and this could in fact, be a bit better than this. This assumes no significant sequestration impact, and I will remind you the comps get a bit tougher in the second half. We'll evaluate this as the political situation unfolds. The commercial OEM revenue range remains in the low single-digit percent. As I said before, without any additional acquisitions or capital structure activity, we expect to have over $900 million in cash and $300 million in undrawn revolver at year end 2013. Assuming no additional acquisitions, our net leverage is anticipated to be a bit under 4x EBITDA at the end of the fiscal year, and we will still have additional capacity under our credit agreement. In summary, though there are some positive signs, it's still not clear that the market has settled out. Hopefully, the economy will start to pick up, and the political situation will stabilize as the year proceeds. But in any event, I'm confident with our consistent value-focused strategy and strong mix of businesses, as we continue to focus on the things we control, we can continue to create long-term intrinsic value for our investors. And now, let me hand this over to Ray.

Thanks, Nick. As Nick mentioned, in total our first quarter was roughly in line with our expectations. The commercial aftermarket softness was still lingering, so we continued to tightly manage our cost structure. We continued to diligently work our value drivers to create shareholder value, and let me explain our 2013 first quarter operational value creation in a little more detail. Two weeks before the fiscal Q1 started, we purchased Aero-Instruments. The value creation transition of this business is on track, and we are presently working through various productivity projects. So far, we expect this acquisition to meet or beat our value-creation expectations. Now let me turn to the discussion to our operating units and their recent activities. Overall, the TransDigm operating units are performing well given the uncertain economic environment. We continue to diligently control our cost structure. Our productivity initiatives have continued to yield savings, and we're able to modestly reduce headcount during the last 6 months. Our value generation activities have continued to be effective across our businesses, and they also contributed to our first quarter results. Our new business development continued to be quite active. We continue to invest in a broad range of engineered solutions for our customers. Each of our 50-plus product lines has many products in different stages of development each quarter. I won't do this every quarter but this quarter, I'd like to give a little color on some examples of our recent new business program awards for several of these product lines. If you recall a few quarters ago, I spoke about our new products on the Boeing 787, the A380 and the A350. Today, I'd like to talk about some of our new products' applications on other significant platforms. In the commercial transport segment, we have developed many new product applications, and here's a few examples. Our Champion group recently developed an upgraded V2500 engine igniter. This new igniter has superior performance and is now specified as the preferred OEM and aftermarket igniter on the A320 and MD90. In the cockpit area, our Avtech Tyee group qualified their upgraded sealed audio control panel for the Boeing 737 fleet. Several airlines are now retrofitting their fleets with these longer-life units. For the cargo area, we have received certification and initial orders for our cargo pallet fire containment cover system. We have also received orders for our cargo pallet thermal cover, which keeps perishable cargo cool during shipment. In the passenger cabin, we continue to get new business awards for safety, efficiency and aesthetic products. Our airbag-enhanced seatbelts continue to be specified in many of the new business class and bulkhead seating configurations. Throughout the rest of the cabin, airlines are starting to upgrade to our reduced weight seatbelt assemblies. Many more airlines have adopted our water weight saving, low flow faucets. Several more carriers are switching to our energy-saving LED mood lighting and our LED escape path aisle lighting strips. Our Schneller Group's engineering lamp -- engineered laminates continue to be specified on many of the new business class seat modules and interior wall and bulkhead surfaces throughout the cabin. On the new Bombardier composite CSeries narrow-body aircraft, we're also providing many product applications. For example, we are providing the ignition system on the CSeries Pratt & Whitney 1500G geared turbofan engine and the engine anti-ice valve. We are providing the APU lubrication pump, our AdelWiggins group is providing the composite fuel isolators and composite hydraulic isolators. We are supplying the engine thrust reverser on cowl latching mechanisms, along with various external access panel, specialty door and tail cone latch mechanisms. We're also providing the internal cockpit door decompressing latches. We are providing temperature sensors for the engine fan case, the environmental control systems and several air system check valves, and our AmSafe unit is providing the lightweight seatbelts. We've also been active developing product solutions for our military customers. After a significant and successful qualification and testing process, we recently received a large order from the United Kingdom's Ministry of Defense for a new anti-missile netting system. This system, called Tarian, is affixed to the vehicle's external perimeter and provides protection from rocket propelled grenades. It is significantly lighter and more effective than the typical heavy iron slat armor, which means our Tarian RPG protection can now be used on a variety of lighter ground vehicles, including the Humvee. Our AmSafe unit in the U.K. is now busy ramping up production for this big award. For the U.S. Military market, AmSafe is conducting additional qualification and testing for potential U.S. military applications. On the new Embraer KC-390 military transport, we are also providing many product applications here too. We are providing several flight control surface linear and rotary transformers and related resolvers. We are providing various electromechanical actuators for the APU, and we are providing electromechanical actuators for securing the cargo during flight and actuators used in releasing cargo during aerial cargo delivery drops. Our units have also been busy developing upgraded solutions for our military fleet. In spite of the difficult environment, the military so far continues to invest in our engineered solutions when they have an immediate need and they see a clear payback. Here's a few examples. On the MH-60 Blackhawk helicopter, we are providing an upgraded handgrip controller and electrical cable assembly for improved -- to improve the targeting of the forward-looking infrared missiles. On the UH-60, we are providing a DC motor to boost ammunition feeds to the 50-caliber machine gun. And on the Augusta 139, we are providing upgraded tail rotor and main rotor electrical cable assemblies, crew restraint belts and buckles and high-powered NiCad Micro Maintenance batteries. On the V-22 Osprey, we are providing the composite fuel isolators. And on the General Atomics Predator Drone, we are providing the coolant pumps. These new engineering solutions, and many others not discussed, continue to expand our profitable product offering and add to our future growth. Now let me hand it over to Greg Rufus, our CFO, who will review our first quarter financial results in more detail.

Thanks, Ray, and good morning again. I hope everyone had an opportunity to read our press release, which was issued early this morning. Before I begin, I'd like to remind you that Nick's narrative of the business, including some of the financial results, is mostly on a pro forma basis. That is, assuming we own the same mix of businesses in both periods. While my focus is on GAAP results, so there may be slight differences in our year-over-year comparisons. Quarter 1 net sales were $430 million, up $78 million, or 22% from the prior year. The collective impact of the acquisitions of Harco, AmSafe and Aero-Instruments contributed approximately 90% of the increase. In addition, our organic growth was slightly up over the prior year. Reported gross profit was $239 million or 55.4% of sales. The reported gross profit margin was approximately 1 margin point less than the prior year margin of 56.6%. There are several puts and takes, so let me walk you through these items. The total impact from acquisitions, that's both normal operating results and nonoperating costs, resulted in a dilution of a little over 1 point. The operational dilution impact of acquisition mix from Harco, AmSafe and Aero-Instruments was approximately 2 margin points. Partially offsetting this dilutive mix was a decrease in year-over-year nonoperating acquisition-related cost of approximately 3/4 of a margin point [ph] versus the prior year. The prior period also included a favorable customer contract adjustment that increased last year's margin 3/4 of a margin point [ph] and obviously, did not repeat this year. Excluding all acquisition activity in the prior year favorable adjustment, our gross profit margin in the remaining businesses versus the prior year quarter improved approximately 1 margin point despite unfavorable OEM versus aftermarket mix. Selling and administrative expenses were 12.8% of sales for the current quarter compared to 11.9% for the prior year. The increase is primarily due to, again, the mixed impact of the previously mentioned acquisitions, which increased SG&A by approximately 1 percentage point and higher stock comp expense as a percent of sales in the quarter. Partially offsetting these items was lower nonoperating acquisition-related costs. As a percent of sales, we expect this rate to gradually decrease over the next few quarters and should end the year closer to 12% in the fourth quarter. Interest expense was $63 million, an increase of approximately $14 million versus the prior year quarter. This is a result of an increase in the weighted average total debt to $4.2 billion in the current quarter versus $3.1 billion in the prior year. The higher average debt was due to the additional term loan of $500 million related to the AmSafe acquisition we made in February 2012 and the additional term loan and subordinated notes added to fund the dividend just paid in November, totaling approximately $700 million. Our weighted average cash interest rate has decreased to 5.6% compared to 5.9% in the prior year due lower interest rates on the new debt. Our effective tax rate was 32.6% in the current quarter compared to 32.3% in the prior year. We now expect our effective tax rate for the full fiscal year to be between 33% and 34%. Net income for the quarter increased $9 million or 14% to $74 million, which is 17% of sales. This compares to net income of $65 million in the prior year. The increase in net income primarily reflects the growth in net sales, partially offset by the higher interest expense. Based on our press release this morning, those of you who are relatively new to TransDigm may ask yourself the question how can net income be up 14% but GAAP EPS be down 43% and adjusted EPS be up 6%? The answer is a combination of several factors, but the key factors that influence this set of facts are: our compensation philosophy and program; the GAAP method of dilutive shares and EPS we are required to use; our acquisitive nature and how we disclose and report these costs to you; and our commitment to generate shareholder value as evidenced by the $12.85 per share dividend we paid in the first quarter. As most of you know, we have a compensation program that rewards increasing shareholder value. A significant component of that is our stock option plan, which is 100% performance-based and includes a dividend equivalent payment for vested options. For GAAP reporting, our dividend equivalent program requires us to use the two-class method for earnings per share, which impacts the reported net income that is applicable to common stock and the number of shares used for basic and [Audio Gap] more commonly used treasury stock method. Because of the complexity of the reporting our dividend equivalent program for GAAP earnings per share, along with impacts of acquisition and accounting rules, we believe that our presentation of adjusted earnings per share is a more understandable and consistent approach for comparative purposes. I'd like to reference you to Tables 1, 3 and 4 in this morning's press release, which compares and reconciles these items for you. With this rather long explanation, I can now give you a quick reconciliation of EPS. GAAP EPS was $0.66 per share in the current quarter compared to $1.15 per share. The current quarter was significantly impacted by the dividend equivalent payments of $38 million or $0.70 per share compared to $0.06 per share in the prior year. The higher dividend equivalent payment is associated with the dividend paid this past November. Adjusted earnings per share was $1.51 per share, an increase of 6% compared to $1.42 per share last year. The 6% increase is low compared to the 15.4% increase in EBITDA As Defined. The simple and by far biggest reason for this is the higher interest expense previously discussed. Hopefully, these explanations add some color to the press release tables and Slide 9. Switching gears to cash and liquidity. We generated $114 million of cash during the quarter and ended with $550 million of cash on the balance sheet. The company's debt leverage ratio was 5.1x our pro forma EBITDA on a gross basis and 4.5x on a net basis. As we expect to continue to generate over $100 million of cash each quarter and assuming no acquisition activity, we expect our debt leverage ratio to be approximately 4.8x EBITDA on a gross basis and approximately 3.8x on a net basis at the end of the year. As Nick discussed and as mentioned in this morning's press release, we have made some modest changes, which include narrowing the guidance range on sales and EBITDA but maintaining our previous midpoints based on our current market view. Our full year EPS guidance was raised due to a decrease in state taxes and the favorable impact of the extension of the R&D tax credit. The midpoint for our GAAP EPS is now $5.72, up $0.06 from the prior guidance, and adjusted EPS guidance is now $6.86, up $0.10 from the prior guidance. The $1.14 of adjustments to bridge GAAP earnings per share to adjusted earnings per share includes the following items: $0.70 for the dividend equivalent payments, $0.35 for noncash stock option expense, and $0.09 for acquisition-related expenses. Now, let me hand it over to Liza to kick off the Q&A.

Thank you, Greg. Operator, we are now ready to open the line for questions.

[Operator Instructions] Our first question comes from the line of Robert Stallard, Royal Bank of Canada.

Nick, I thought I'd kick off on the acquisition front. I was wondering, you said that the pipeline was still pretty robust but obviously, the disappointment with the DOJ is now behind us. I was wondering if you can maybe characterize what sort of properties you're still seeing out there in terms of perhaps size and if you're still seeing the right quality of assets in terms of the exposure to the aerospace aftermarket?

I would say the size, interestingly, is all over the map, kind of a small, mid and fairly good size. I would say the small and mid, which is what we've more typically done, tend to be -- the ones we're seeing tend to be pretty well right on point. Sort of the bigger they get, the more sort of dilution you get. That's sort of the lay of the land right now. I would say we've been pretty busy the last few days.

Okay. What are you seeing on the pricing front? Has there been any changes there?

No, I can't say there's been any change. The things that have closed around the industry have continued to close at pretty hefty prices.

And then on the aerospace aftermarket, you've mentioned that there are some puts and takes there. One of the things the industry's been struggling with is airlines deferring maintenance activity. Are you seeing any signs that it's started to come back or that this could last longer than we expect?

I don't know that I can draw any conclusion. As I said, our quarter was kind of mixed. On one hand, the bookings were up, and they were up in the commercial aftermarket versus the prior quarter. In a quarter when there's less days so you'd expect, all things being equal, they'd be down. So that was a positive. On the other hand, we saw a little softening in -- little more than we had before in the discretionary items. So I don't -- I think it's still mixed. I don't know quite how to draw a conclusion there. I mean, you will note we are continuing with the forecast that we'd anticipate a pickup in the back half of the year.

Our next question comes from Carter Copeland, Barclays.

Just -- I wondered if you might speak to your comments around constrained spending. I know, Ray, you made a comment about headcount reduction. I wondered if you could size that for us. But in general, I just -- I noticed in the proxy, you noted that you would finish 2 facility relocations and reduce the headcount. You're talking about constraining spending. I'm wondering if you might just give us a bit more color about the scale of how you're thinking about some of the stuff on the cost front given the uncertainty you're highlighting again this quarter.

Well, all of our units are concerned, and we are uncertain, it's across the board. So -- and it's been so since the softening in the second half of our fiscal year last year. So our units, not just the ones that have done some consolidation work for acquisitions, but all the base units have run their costs tightly, and they've squeezed out some headcount. Overall -- some are more than less. But overall, they took some out and it's been in the low-single digit. I don't want to start giving exact numbers and have somebody tracking this and that. There's many factors that occur with headcount fluctuations. But the overall point is we've been managing it very tightly, not just at the places we've consolidated, but at each of the base businesses. We're just concerned about the economy, and we don't want to get overcapacity during this tight time.

Well, let me just expand on that. To be clear, it means low-single digits across the whole company, not in every operating unit. And anyway, we have not -- as we did in '08 and '09, we didn't go -- we have not gone and said every -- we need a step-down change of 10%, 12%. We've just let each operating unit deal with it as their backlog sort of indicates.

Yes, that's right.

But if you look at the components of cost, it sounds like your infrastructure-related costs, as a result of some of the relocation, should be down year-over-year. If you just roll forward the headcount, your headcount should be down year-over-year. It sounds like there's a little bit more in SG&A, but it sounds like the cost base is a tailwind for the remainder of this year that -- just based on the things you had from last year.

That's sure our hope, Carter. That's sure our hope.

Yes.

Our next question comes from the line of Yair Reiner, Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: So you'd cautioned us 3 months ago that some of your revenue may get pushed out from Q1 to Q2 because of the disruptions stemming from Hurricane Sandy. Was that the case and hits? If so, how much revenue was pushed out to the current quarter?

It was de minimis. We were able to recover within the quarter. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it, got it. And then one more, if I may. Your assumptions for the guidance mentioned 787 inventory overhang just as they did 3 months ago. At that time, of course, the 787 was still flying. To what extent does the grounding now exacerbate the overhang? And have any of your companies gotten word that Boeing has begun to pull inventory a little bit less aggressively?

I would say it's too early to know. But I would not, absent some real dislocation, very substantial and more than people are talking about so far. I would not expect it to have a substantive impact on our performance for the year, maybe some revenue impact if the numbers come down. But I remind you, the front end of a program like this, you don't make a lot of profit on it anyway. So if the number changes by 10, 15 ship sets or something, it likely doesn't materially impact the EPS or the EBITDA much.

Our next question comes from the line of Robert Spingarn, Credit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: Nick, I was wondering if you could help us, or maybe Greg, on the organic growth in the acquisitions in the quarter. You told us that they accounted for about $70 million, I think, of the overall revenue increase. That's 90% of the total. But how did they grow relative to the rest of the business on a pro forma organic basis?

Well, acquisition and organic are kind of opposed to one another. When Nick talks about his pro forma growth, that includes all of the locations, Rob. And there wasn't anything that was abnormal with their trend versus our other ones on a pro forma basis, Nick.

I don't think so. I don't know the exact number, is the real answer, but I... Robert Spingarn - Crédit Suisse AG, Research Division: But I guess what I'm getting at is, shouldn't they outgrow? I was talking about the recent additions as though you own them in both periods, should outgrow because you're applying your value metrics.

Yes, you're right. Though they should outgrow -- yes, they probably should have. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And they did -- they were positive growth?

They were surely positive. I just don't know the number, Rob. But surely, we're positive. I guess by the -- well, Rob, it's a combination of what the mix of the their products are. If somebody is heavily weighted towards one product that got particularly hit, that can be tough. So I can't give you one answer. But in general, you're right. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And then on the defense side, you mentioned you had very strong bookings there. Half of that strength was this U.K. order. Is the other half maybe timing ahead of sequester? They were obligating maintenance funds before they lost them?

Who knows. Who knows, I think that clearly is a possibility. But Rob, nobody gives you an order and tells you that's what we're doing. But it does seem curious. Robert Spingarn - Crédit Suisse AG, Research Division: Right. And then just a clarification. You talked about going back to this pro forma growth. I think you said pro forma overall was 2%.

Yes. Robert Spingarn - Crédit Suisse AG, Research Division: How do I -- I just want to make sure I'm understanding, to reconcile this. On Slide 5, when I look at the right side, is that a different metric? This is the pro forma by segment.

No. That's the same metric so you're going to ask -- the question is, how can you have 5%, 3% and 2% add up to 2%, right? Robert Spingarn - Crédit Suisse AG, Research Division: That's the question.

Because we left off one called other that I said in my -- that's negative. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. That's the industrial stuff?

Yes, non-aerospace, Rob.

Yes, non-aerospace industrial stuff was significantly negative. Not a big number, but it was significantly negative. Robert Spingarn - Crédit Suisse AG, Research Division: Great. Lastly, Greg, the tax rate over the rest of the year, how should we think about that?

By the way Rob, I myself had that same question.

I think I said for the year, we're expecting our effective tax rate to be between 33% and 34%, Rob. Robert Spingarn - Crédit Suisse AG, Research Division: While I'm talking about the quarter, I mean, if you're applying a tax credit or something, is it different in the quarters as we go forward?

You'll get some discrete items, like if we get an audit adjustment, we'll get a discrete item in that quarter. But then, we try to blend it versus our effective tax rate short of the discrete.

Our next question comes from David Strauss, UBS.

Nick, so on the sales guidance, I guess, why did the top end of the range come down? You talked about defense being a little bit better, flat now versus down and maybe even a little bit better than that. So why did the top end of the range come lower?

There's a couple of answers. This is Greg, David. One is, and we've historically done this, when you're finished with the quarter of actuals, you have one quarter in the book, so you don't have as big a range to deal with. And we're comfortable with the midpoint, so we're going to tighten both ends of the range.

Okay. I mean, does it have anything to do with the weakness in the non-aero businesses?

No. That's not material enough to impact it.

Okay. And then on the aftermarket...

Hopefully, it's not.

Yes. On the aftermarket, Nick, you talked about the sequential pickup in orders. Obviously, the comps get much easier as we go from here. But in terms of your forecast, can you give us an idea, are you assuming a sequential pickup from here as we go through the rest of the year?

Well, I mean you have to, right, if you just do the math. Right? If you're up, what is it, 3%? Moving 3%. If we're 3% the first quarter and we say we're going to get up in the 5% to 10% -- 5% and 10% range, right, you got to see some increase.

Yes, but it's on much easier comps as we go from there.

Yes, that's right. No, absolute dollar. You have to see some absolute dollar increase though.

Okay. And last one on this U.K. defense order that you said was 50% of bookings, does that deliver this year? Or how does that flow through?

I don't remember how much.

50% of the increase, and the bulk of that's going to ship in calendar '13, and in our fiscal '13, probably 70%, 80%. I mean, it's a big ramp-up. So, I mean they'll take it as fast as we can ship it, but it's a big ramp-up.

Our next question comes from Noah Poponak, Goldman Sachs.

Nick, does what happened with Goodrich Pump & Engine Control indicate to you in any way that it is now harder for TransDigm to make acquisitions than it has been in the past?

No. The answer is I hope not. I mean, the real answer is you'll know when you run one through again. This is a very unusual situation. You did not have to run the normal Hart-Scott-Rodino routine. There was no course of appeal. There wasn't a defined rule for thumb up or down. It was a consent order from UTC, Department of Justice. They didn't have to make any market argument or anything. They just said, "We don't approve it." So we don't believe it's an issue. But obviously, we wish it didn't happen.

Okay. So it sounds like you think this was fairly unique and fairly one-off in the industry.

Yes, yes.

Are you at all concerned that this draws more attention than -- more attention to your overall process versus had this not ever happened at all?

Obviously, no. I wish it didn't happen. If I could write the script, I wouldn't have written it into the script.

Yes. Okay. And related to that, can you provide us any color on how your M&A leadership transition has been going thus far?

I think that's going fine. The -- Bernie, who is -- Bernie Iverson is the point guy in that now and I'm also always very involved in it. Bernie has been with us for -- since the beginning. He has the whole cultural story down. He's been involved with probably half of our acquisitions. He's coming up to speed quickly. And then as I say, I'm very involved in this also.

Okay. Great. And then just one more, following up on the last aftermarket question. What are your specific inputs for the better back half? Because I know you've talked in the past about reasonably limited forward visibility, but presumably you have something mathematical in here, whether it's the length of time of historical inventory, destock periods or something along those lines. Can you just dive a little deeper into the bigger input there?

I can't give you -- honestly, I can't give you a whole lot of specificity on that. We went through a business planning process where every business went through every product line, and rolled them all up by market segments and we came up with a number kind of in that range. As we look back at that again and have people take a look at it, and have a dual roll-up and people give us their views, all our product line managers, we don't see their views being significantly different. All that being said, it is ultimately a call on whether you think the economy picks up some as the year proceeds. And I don't know how to calculate that, other than, I think it's reasonably likely.

Our next question comes from the line of Myles Walton, Deutsche Bank.

Hey, Nick, on the defense side, you talked about the growth in orders. Is there a breakout between the aftermarket buying versus the OEM buying you can see in the bookings in terms of just getting a sense of...

I think it's more meaningful to look at the total. And the reason I say that is the channels to market in defense to the OEM and the aftermarket are less clear. Lockheed tends to overbuy and sell-through. Some people buy their FMS requirements through the government, some buy them through the -- yes, through the OEM. But I would say the OEM business is more predictable, other than inventory fluctuations. In the near term, that stuff's pretty much on autopilot, right? I mean, they get the contracts, they're cranking it out. It's more of a longer-term risk. So I don't -- I would say the fluctuations are -- what you see are mostly in the aftermarket requirements. And I don't know that I can give you a significant or meaningful distinction between the 2.

And I mean, this is one of those questions as to when [ph]. But do you have any sensitivity that you kind of think about if the full brunt hits, how it would impact the last 6 months of your year?

I don't have a good sense of that, I just don't. It's such a moving target, and every day, you hear a different rumor. I just don't know.

The other question I had was on the acquisition drag on margins, on EBITDA margins, still about 300 basis points, I guess, in the quarter. And I think it was the similar drag last quarter and for all of last year. And I guess most of those acquisitions get anniversary-ed in the current quarter. How much of this acquisition drag is structural versus we'll see this bleed off in short order?

What do you mean structural? You just -- I mean, it just fundamentally mean it's a lower EBITDA run rate, correct?

Yes. Well, I mean, your citing it as a 300 basis point drag caused by the acquisitions. Those acquisitions will no longer be acquisitions next quarter effectively.

Do they roll off next quarter -- is that when they roll off?

Yes.

AmSafe was in Q...

AmSafe was in the middle of February. But fundamentally -- I mean, there's still -- when we talk about the dilution, we're not talking about the economy. We're just saying, hey, if we didn't unlynch [ph] that for the year, those -- they would be that mix. So it may be a little different definition than when we give you the GAAP definition. We're just saying, hey, if we didn't have these 3 items in our base business, the margins would be 3% higher.

That's what I think, Myles, your question is, is this your question: when everything settles out, are they just businesses that aren't going to get as profitable as your base business?

That's usually...yes.

That's the question. I think that's the question. Yes, so let me -- where we are we listed -- it's right, the impact. Yes, I would say Aero-Instruments and Harco probably get up to our average. I would say AmSafe probably doesn't. As we consistently said, that probably doesn't get all the way up there because you've got this less proprietary netting business. And the netting business and you have a little ground transportation business in there. So that doesn't get up quite as high. But they still have room to go in them. I don't know if that gives you an answer. I guess, if you took all those 3 and priced them out, you probably would come up with something a little less than 50% EBITDA steady-state, but not way off. And if you pulled out the ground transportation, you'd probably get pretty close. But unfortunately, you can't pull out what you want to pull out. You got to deal with what you got.

Our next question comes from Michael Ciarmoli, KeyBanc.

Nick, just on the -- kind of the OE transport side, you've got the business growing at low-single digits here. Your peers are probably growing at a 10% rate. You talk about flattening. Are we going to be flat here at this low-single-digit rate? And maybe can you walk us through kind of -- is there pressure on some of the legacy programs there? I would think, with still ramping on the '37 and '87, you'd be able to grow that business a little faster.

Now remember, we separated out the 787 from the rest when we gave you guidance. I think we gave you guidance of an average shipping rate for the next 2 years of 1,140 -- was that the number? That, x 787. Now remember, the back half of our '13 is going to start to reflect the '14's shipping rate. It's a call for when you think it'll start to flatten out. We could be conservative. We are pretty well distributed across the airplanes and we're market weighted. As I think I said last time, if you think that's a low number, you can adjust the forecast, we wanted to give you our basis. We are probably more conservative than most in when this starts to flatten out. That's on the rest of it. On the 787, I think we used -- I think we told you an average shipment of 75 to 80 planes over the next 2 years. I don't know, as I sit here today, and say and I look at what Boeing's saying, I don't know if that's such a conservative number. And I also remind you, in '12, there were some number of onetime settlements, mostly on 787 scope issues. But I don't know what percent that made. But it's all a call on whether you -- what you think of the production rates and what you think '13 and '14 looks like. We could be conservative, I hope we're conservative.

Okay. That's helpful. And then just 2 other quick ones. In terms of the M&A pipeline, I mean, do you guys have a desired size of the deals you'd like to close? I mean, you're obviously a bigger company. The last couple of transactions have been bigger. I mean, are you still open to the smaller tuck-ins? Or just how should we be thinking about that in terms of...

We will buy -- now I guess there's some size at the bottom we wouldn't do if it -- unless it was a perfect fit. But I mean, by and large, we're looking for proprietary aerospace businesses with significant aftermarket content. We're not screening them out because they're less than $20 million of revenue or something like that. And we're not screening them out really on the top side either. So it's -- we have to deal with what comes across the plate, or what we can convince people to sell, more than what we might exactly like theoretically.

Okay, okay. And then if I can just sneak one last in. In terms of the EPS cadence for the year, I mean, should we expect maybe more back-end loaded, just given kind of your commentary on aftermarket strengthening? I mean, are the next quarter or 2 going to be a struggle to grow that bottom line on a year-over-year basis?

Well, the EPS will expand quarter-over-quarter. We don't give EPS guidance, but the first quarter is historically, and this year should hold true, to be our lowest EPS for the quarter.

Our next question comes from the line of Joe Nadol, JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: My question is maybe tough to answer, but have you guys looked at your -- at used aircraft, and in fact, retired aircraft that are being chopped up? Are you seeing that become, at all, a competition for you in any kind of systematic way? Or is it something that you haven't really addressed because the number of aircraft that are being retired and chopped are obviously growing quite a bit in recent quarters?

No, we don't believe we see that substantively. In the main, not -- this isn't 100% true, but in the main, our parts tend to be lower dollar value parts, and they typically don't work their way back into the used market much. We may be seeing a little of it, but I don't think it's a substantive issue. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then this quarter, you had, it seemed, sort of an unusual headwind from the very small non-A&D portion of your business. As we look forward to the remainder of the fiscal year, is that not an issue in future quarters or...

I think I'd use the guidance we gave you for the year. We kind of gave you guidance on the revenue and I think I'd use that. You're not going to see a material -- I'd be very surprised if we see a material difference off of our guidance driven by that one way or the other. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Yes, what I'm getting at is if we take the 3 core markets and average those roughly because they're each 1/4 [ph] to 40-something percent. If we average those in future quarters, are we going to get to the actual number for the company? Or is there going to be a headwind?

We are not planning on that yet.

Yes, yes. I'm not sure what we have in that for our guidance. You can almost do the math and figure it out, but it wasn't a big up or down. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Yes. Finally, AmSafe, it's been a year now almost and there is a, you guys have referenced it a few times during this call, a piece, the netting that doesn't really look a lot like other things you do. I think you had indicated you might look at selling it when you acquired AmSafe. You didn't do that. Is that something that you've committed to yourself to keeping? Or are you still looking at divesting if you get the right price?

You got the wrong business. The netting business, the margins are lower than we typically -- but we like that business. That's an aerospace business. That's the one that we just got that big military order on. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: I meant the vehicle business.

Yes, the vehicle business. I would say we sold it -- we were out to try and sell, we didn't like the price. We're holding it ourselves. We'll make that call in a year or 2. We'll see how it does. I mean, it may well be that as we improve it, it's worth more as far as TransDigm than it is to sell, then we'll deal with that. I mean, we wouldn't sell it just to sell it, just because we didn't like the picture in our annual report. It's clearly not a business that we're -- we wouldn't have picked it, but it's a decent industrial business.

Our next question comes from the line of Gautam Khanna, Cowen and Company.

I thought I heard you say early on that there was some incremental softness in the discretionary aftermarket products.

Yes.

Okay. Could you remind us again sort of a ballpark what percentage of your aftermarket portfolio you perceive to be...

It's a relatively small percent of our aftermarket. It's far less than the majority, far, far less. I don't know the exact number. But it's things like our engineered laminates, our business is broken into 3 parts: OEM; repairs, which you can think of like spares; and refurbs. Refurbs is when you decide to redo the whole interior of the airplane. The refurb portion of that seemed to soften up some. And our Adams Rite business where we make things like bin latches and lavatory faucets and things like that. Sometimes they can let them be -- get a little ratty for a while before they replace them. That seemed to soften a little. So that's the kind of thing. This is -- it's more sort of an indication of where the market might feel than a big dollar impact. And I don't want to overdraw a conclusion from one quarter. But in the prior quarter, I think someone had asked me that and I think I had said we had not seen that. The discretionary, nondiscretionary stuff was behaving about the same. We saw a little different in the quarter just completed.

Okay. And maybe could you comment on whether there are any differences in the aftermarket with respect to your distributor customers versus the airlines directly. Is one -- are the lower consumption levels reflected in both?

Yes. We think -- the distributors, we know pretty well. And we know the -- all the big ones, we know the inventory levels. In general, with puts and takes across product lines. In general, they are in pretty good shape based on the level of outflows that are going on now. So it doesn't seem to be there. They are seeing the same thing we are seeing, that airlines seem to be buying less than they believe their underlying demand, which indicates there had been some in your [indiscernible] or inventory drawdowns. But not at distribution, we don't believe.

Okay. Maybe 2 other quick ones. We hear a lot more noise about some of the OEMs going after royalties in the aftermarket and I just wanted to get your perspectives on whether that's something that is a real threat or something that is more conceptual than anything else.

The answer is I don't know. As I said in the last conference call, Boeing has begun to ask for it on new contracts. How successful they've been, I don't know. That's about the only place that we have seen it. And we'll see how that unwinds over time. Generally, I would say, if it is not a substantive percent, and you'd probably just pass it on. But so far, we haven't had to deal with it or we haven't had to deal with anything yet concluded on it.

And when would that actually kick in? I mean, this is just on next-generation airplane?

I don't know, probably the next generation. But the truth is, it's sort of when will something happen that hasn't happened yet. I mean, I would guess next generations may be, but the truth is I don't know.

Okay. Last one, you said the M&A pipeline has gotten a little bit busier and I just wanted to get your sense on some of the mid- or larger potentials. Are they different from a defense versus commercial mix or aftermarket versus OE? Or is there any skew to them relative to what you've done historically?

I don't -- I mean, I have no idea what we may or may not end up closing. But I would say of the stuff, the cross-section of businesses we've seen or have been recently looking at, I can't say they're materially different than we've looked at in the past. Some have more defense than we'd like, but if the price is right, they could make sense. Some are all after -- almost all aftermarket, we tend to like that a little better, but maybe those don't come to fruition. I can't say in total there's a big difference.

Our next question comes from the line of Kenneth Herbert of Imperial Capital.

Just wanted to ask, you provided some additional information on some of your share wins on CSeries and V2500 for instance. Similar to what you did with the other platforms, can you provide any more detail for us or quantification on these share wins on an organic basis, just as we think about the OE side of the business and the evolution?

Did we give percenting on the 787, A380, A350? I don't think we did. We just generally said we were doing better. Yes, and we haven't -- the CSeries is going to compete with the 737, A320. The CSeries aircraft is in there. I haven't done a rack up of our ship set content on the CSeries versus the A320 and the 737, if that's what you're asking. But we think we're doing a good job, and we're getting a decent amount of the business we're quoting on those new platforms.

I would, for modeling purposes, the way that I would think about it, if I were you, is figure we're pretty evenly distributed across the platforms. In other words, we're sort of market-weighted in the commercial transport. I would say we think we've done a little better on the 787 and the A380. We think we -- on the A350, but that won't materially impact anything for a long time. So the best way to model this is decide what you think about production rates, and that's kind of the rate of increase I'd think about for our commercial OEM.

Okay. But it is fair to say that you are -- I mean, I can infer from what you're saying that on an organic basis, because obviously you're adding a lot of content just through the acquisitions, but on an organic basis, you are continuing to take share and, I guess, CSeries would...

We think so, yes, we think so. We know we organically picked up in the 787, the A380, the Joint Strike Fighter, the A400M if any ever sell.

We got a lot of content that's going on that one.

We got a gazillion dollars times 0.

Yes. Okay. And then you've talked in the past, when you typically look out over the life of a program over 10 years and your 50% EBITDA margin goals and I know we talked on the 787 on this, but as we think about the margin ramp for these new programs or the wins recently, has anything changed in that ramp? Or how we should think about it? Or is it consistent with prior wins?

I think it's consistent. I think if you take the new platforms -- and by the way, this is out there 10 years or so before they get to equilibrium or more. When we take them and price them out in total, that 787, A380, Joint Strike Fighter, et cetera, it looks to us like that mix of products gets up around 50% EBITDA as the aftermarket kicks in, which says to us they're roughly comparably priced, if you follow me.

At this time, there are no further questions. I'd now like to turn the call back over to management for closing remarks.

Thank you again for calling in this morning, and please note that we expect to file our 10-Q tomorrow.

Thanks, everybody.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.