TransDigm Group Incorporated (TDG) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2013 TransDigm Group Incorporated Earnings Conference Call. My name is Allison, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Ms. Liza Sabol, Investor Relations. Please proceed, ma'am.

Thank you, Allison, and welcome to TransDigm's Fiscal 2013 Second 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. A replay of today's broadcast will be available for the next 2 weeks. Replay information is contained in this morning's press release and on our website at transdigm.com. It should be also noted that our Form 10-Q will be filed tomorrow and also can be found on our website. 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 filings 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. I will now turn the call over to Nick.

Good morning, and thanks again, everyone, for calling in to hear about our company. Today, I'll start off with some comments, as usual, about our consistent strategy. And then I'd like to talk a little about the status of the commercial aftermarket, our operating margins and then go into a review of the second quarter and 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 cycle. To summarize some of the reasons why we believe this, and this is on Page 4 of the slides, about 90% of our net sales are generated by proprietary products, 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 50% of our revenues and a much higher percent of our EBITDA as defined comes from aftermarket sales. Aftermarket sales have historically produced a higher gross margin and have provided relative stability in the cycles. Because of our uniquely high underlying EBITDA margins, somewhere around 50% of revenues and relatively low capital expenditures, typically less than 2% of revenues, TransDigm has year in and year out generated strong free cash flow. We pay close attention to our capital structure and capital allocation and view this as another means to create shareholder value. In keeping with that philosophy, due to a combination of suboptimum capital structure, a hot credit market and significant liquidity, we declared and paid a $12.85 per share special dividend in Q1 and still maintained significant borrowing capacity post-dividend. In Q2, we refinanced about $2.2 billion of senior secured debt. The goal and the net result was to reduce interest expense and to increase our flexibility under the credit agreement. As of 3/30/13, we have about $680 million of cash, $300 million in unrestricted and undrawn revolver and additional capacity under our new credit agreement. With no additional acquisitions or capital market activity, cash should be over $900 million at the end of our fiscal year, and net leverage a little under 4x pro forma EBITDA as defined. As usual, we will address our use of cash, borrowing capacity and capital allocation issues as the year proceeds to make a determination as to how best to proceed based on the 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. This consistent approach has allowed us to continuously increase the intrinsic value of our businesses while steadily investing in new business 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 such 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 April, we announced an agreement to acquire Aerosonic for about $39 million. This is a small public company. So we have to get through the various steps that entails. The revenue is roughly $30 million. Hopefully, this closes in the next 45 to 90 days. Aerosonic serves the commercial and military aerospace markets. The products are highly proprietary with about 55% of the revenues from commercial markets and 65% -- 60% of the revenue from the aftermarket. This is similar to the Aero-Instruments business we bought in September. Since we don't own the business and it's a small public company, we can't say much more at this time. I'd like to address 2 other issues: one, our thoughts on the commercial aftermarket; and two, some clarification of the EBITDA as defined margins. With respect to the commercial aftermarket, through Q2, we still have not seen clear signs of a sustained pickup. We, as many in the industry, are a bit surprised by how long this soft market has continued, especially in light of the decent underlying market trends. We are still hopeful of a pickup in the second half of the year, but suspect it may be more like the second half of the calendar year than the second half of our fiscal year. As the commercial aftermarket softness beginning last -- began last summer, we hired SH&E, a well-known aerospace consulting company, to go through a rigorous analysis on a product line by product line basis of our commercial aftermarket revenues and outlook by platform and give us a second position or opinion on our market position. They completed this work during our first quarter of fiscal year 2013. There are a few significant findings, mostly good over the mid-to-long term, but a few not so good in the short term. Specifically, I think the following is worth sharing. On the positive side, SH&E concluded that our mix of products and platforms were strong. As a result, over a longer period, say, 3 to 5 years, TransDigm's aftermarket revenue growth should outpace annual RPM or market growth by 1 to 2 percentage points per year if you include the new 787, CSeries and Airbus platforms and also should grow modestly above RPM growth or market growth even if you just look at the base fleet. That is excluding the new platforms. For the near future, TransDigm will likely continue to use RPM as a base planning tool until we see more actual market results. But this generally confirms our view. We feel positive about this conclusion and its longer-term implications. SH&E also noted that industry-wide, secondhand parts usage appears to be growing. However, due to the relatively low price points and lower percentage of rotable pool-type full assemblies sold by TransDigm, SH&E concluded that TransDigm's exposure to and risk from used parts and PMA is not a significant factor. This has generally been our view, but we're glad to have it confirmed. Of course, this bears continual watching. On the less positive note, SH&E concluded that the near term softer market and aftermarket revenues at TransDigm and possibly many other component supplier is due primarily to: One, softer European carrier demand as a result of attempts to draw down inventory and defer maintenance in response to the poor economic situation; and two, softer Asian-Pacific market carrier demand. Asian-Pacific carriers hold inventories, according to SH&E, that are quite high by North American standards, and many Asian carriers are making a concerted effort to both draw stocks down and to more carefully schedule maintenance cycles. SH&E also tended to be a bit more pessimistic on industry-wide longer-term RPM growth, more in the 4% range than the generally used 5% range. The net result of all this is it's hard to predict the inflection point with any specificity, but it's more likely later in the calendar year than earlier, and the European recovery at least could stretch into the next year. To remind you, TransDigm's fiscal year ends on 9/30. So on upturns, our fiscal year trend tends to lag the calendar year trends by a bit. Time will tell how accurate all this proves to be. Now with respect to our operating margins. We use EBITDA as defined as our best measure of operating performance. You will notice the reported EBITDA as defined margin for the first half of 2012 compared to the first half of 2013 is down, from 49% to 47%. There is a fair amount of noise in the comparable period numbers, and I'd like to try and sort this out a little. I'm going to review the first half of 2013 versus the first half of 2012. The longer the period you compare for this, at least in my judgment, the less distorted things get by cutoff issues, onetime events and the like. The comparable numbers are muddied by 3 significant items: one, is onetime scope change settlements in the 2012 period, mostly on the 787; two, differences in the mix of businesses owned in 2013 due primarily to the acquisition of the AmSafe businesses in February 2012; and three, product mix dilution with the slower commercial aftermarket revenues in 2013. As I believe you know, this is a high-margin portion of our business. In our view, a more consistent comparison between the 2 periods of the fundamental operating performance is generally as follows. If you look at the first half of 2012, the reported first half EBITDA as defined margin is 49% -- about 49%. If you remove the benefit of the onetime scope change settlement, you reduce the margin by about 1% to 48%. If you look at the first half of 2013, the reported first half 2013 EBITDA as defined margin is about 47%. If you add back the dilutive impact of the acquisitions, primarily AmSafe, you increase the margin by about 2.5%. If you add back the unfavorable OEM to aftermarket mix to make it consistent, you add about another 1 point. So you adjust the first half 2013 EBITDA margins on a comparable or normalized basis, we view at about 50.5%. That is a normalized increase from operations of about 2.5% or 50.5% minus 48%. This is how we look at the business operations and track the results internally. Interesting, on the same normalized basis over the same 12-month period, the older base businesses, that is pre-McKechnie margins, are up a little -- on the business we owned before we bought McKechnie, are up a little over 1%. And the recently acquired, that is McKechnie and forward business margins, are up between 4% and 5% over the same 12-month period. Hopefully, this is helpful. But in any event, it's the pieces we use internally to track performance, and you can shuffle them around however it makes sense to you. Moving on to our most recent quarter. I'll remind you this is the second quarter of fiscal year 2013. Our fiscal year began October 1. In total, the quarter, with market channel puts and takes, was roughly in line with our expectations. As I've said in the past, quarterly comparisons can be impacted by a whole range of onetime events. But as you know, we began to see commercial aftermarket softness in the back half of fiscal year 2012. As I just reviewed, the softness has continued into Q2 of fiscal year 2013, and the market status is still not clear. The total company GAAP revenues were up about 10% versus prior Q2 and 16% on a 6-month comparable basis. On a same store or pro forma basis, revenues, that is if we owned the same mix of businesses, was up about 3% on a Q2 versus Q2 basis and about the same on a year-to-date basis. Again on a same store or pro forma basis, year-to-date bookings continue to run ahead of revenues. Commercial aerospace OEM and defense are -- and total defense are booking significantly ahead of revenues. Commercial aftermarket is just booking slightly ahead, and our small non-aero business is about flat. Reviewing the revenues by market category and again on a pro forma or same-store basis versus the prior year Q2, and this is Slide 5. That is assuming we own the same mix of businesses in both periods. In the commercial aftermarket, which makes up about 3/4 of our revenue, total commercial OEM revenues were up 6% versus the prior Q2 and 5% on a year-to-date basis. This is modestly ahead of our original expectations. As a reminder, commercial OEM revenues were up 36% in the prior Q2 and 28% for the first half of 2012. So the comps are tough. Total commercial aftermarket revenues were about flat versus prior Q2 and up 1% on a year-to-date basis. Revenues per day in both periods are up a bit. To clarify this a little, on a Q2 versus Q2 basis, the actual reported revenues are down less than 1%. However, on a revenue per day basis, they're up about 2.5%. On a year-to-date basis, the actual revenues are up about 1%, and the revenues per day basis are also up roughly 2.5%. This to me at least -- this is somewhat unclear picture, so I'm calling that roughly flat. The booking and shipment trends continue to vary considerably across product lines. Ray is going to give you a little more color on this, but our more discretionary products continue to be particularly soft, while the other less discretionary, which make up the bulk of our revenue, appear to show more signs of stability. As I mentioned earlier, the market situation isn't clear though, given the underlying economics, we'd expect to see some pickup soon. In the defense market, which makes up about 1/4 of our revenues, defense revenues continue significantly better than anticipated at the beginning of the year. Revenues are up about 8% on a quarter versus quarter basis and 5% on a year-to-date basis. Again, Ray is going to add a little color here. The military and defense bookings and results are mixed by product line, but more are up than down. Military revenues are holding up better than we anticipated, especially in the aftermarket, but we remain very cautious about trends in this market. Our non-aero business, though small, was down about 7.5% in Q2 and year-to-date. About 70% of the non-aero business is the ground-based seatbelt business. Moving to profitability and on a reported basis. I already reviewed our operating performance on EBITDA as defined. The as defined adjustments in Q2 were made up primarily of refinancing expenses and noncash stock option expenses. Our EBITDA as defined of about $219 million for Q2 was up 8% versus the prior year and 11% on a year-to-date basis. The EBITDA as defined margin was about 48% for Q2 and slightly lower on a year-to-date. As I discussed earlier, adjusted for acquisitions, unfavorable mix and contract settlements, based on the way we look at operations that I described previously, we think the underlying margin is up around 2.5% versus the first half of last year. With respect to acquisitions, we continue active looking at opportunities. The pipeline is still pretty active. Closings are difficult to predict, but we remain focused and disciplined on our criteria and our value-creation method of analysis. Moving now on to 2013. The current economic and political environment is still unclear. Hopefully, it clarifies, but in the meantime, we remain cautious with our spending levels. Based on the above and assuming no additional acquisitions, the 2013 guidance is slightly revised as follows. I'll note that the midpoint for revenue and EBITDA is materially unchanged or EBITDA as defined. The range again has just tightened a bit. The midpoint of the 2013 revenue guidance is very slightly up at $1.86 billion or about 9% on a GAAP basis, up about 9%. The midpoint of the 2013 EBITDA as defined guidance is unchanged at $888 million or about 48% of revenues. This implies an EBITDA as defined margin approaching 49% in the second half of the year. EBITDA dollars are up about 10% on a GAAP basis. The midpoint of the EBIT -- EPS as defined is now anticipated to be $6.94 a share. That's up $0.08 from the prior guidance. This primarily reflects the lower interest expense as a result of our refinancing. On a pro forma or again same-store basis, the guidance is based on the following growth rate assumptions. We'll continue to assess the impact of the market uncertainty as the year proceeds. We are reducing our fiscal year '13 full year commercial aftermarket revenue growth estimates. Due to the continued industry-wide softening in the back half of 2012 fiscal year and the continuation in the first half of our 2013, we are cautious here. At this time, it appears unlikely that we will get to the low end of our 5% to 10% growth range. The second half of the fiscal year is usually a bit stronger, but we'd have to see a pickup in the back half of our fiscal year, that's April through September, of close to 10% year-over-year to get to the lower end of the range. This is possible, but seems like a stretch at this time. We'll continue to watch it closely. Based on the strong year-to-date revenues and bookings, we now estimate that defense or military revenues to be up in the low- to mid-single digits. This is an improvement versus our prior guidance. This assumes no cancellations or significant additional delays from sequestration in the balance of our fiscal year. Commercial OEM revenue growth we now estimate to be in the mid-to-high single-digit percentage growth range. This is also an improvement. So in summary, for fiscal year 2013, we now see commercial OEM and defense growth a little better than we originally anticipated, and commercial aftermarket a bit worse than we originally anticipated. As I said before, without any additional acquisitions or capital structure activity, we expect to have over $900 million of cash, $300 million in undrawn revolver. And assuming no acquisitions, no additional acquisitions, our net leverage is anticipated to be a bit under 4x EBITDA at the end of the year. We also have additional capacity under our agreement. It's still not clear to me that the market's settled out. Hopefully, the economy will start to pick up and the political situation stabilize. But in any event, I'm confident in our consistent value-focused strategy and the strong mix of our businesses. In times like this, again, we focus on the things we can control. We think that way we can continue to create long term intrinsic value. And for that, with that, let me hand this over to Ray, our Chief Operating Officer.

Thanks, Nick. As Nick mentioned, in total, our second quarter was roughly in line with our expectations. However, the lingering economic softness still has us tightly managing our cost structure. We have not implemented an across-the-board headcount reduction, but we have, adjusting for acquisitions, steadily reduced our headcount each quarter during the last 6 quarters. Our overall headcount is about 4% lower than it was at this time last year. This tight control across is particularly challenging with the stronger OEM revenues and softer aftermarket revenue mix that we're currently experiencing. Generally, our OEM sales are at a lower margin than our aftermarket sales. Therefore, this mix of sales requires more labor wages and effort per dollar shipped that makes improving headcount with regard to revenue particularly challenging. Despite this, we believe our operations are doing a good job of managing their cost structure during the current market conditions. As Nick said, we have been looking closely at the prolonged softness in the commercial aftermarket and the unexpected strength in the defense revenue. We have over 50 different product lines, and bookings and shipments do vary quite a bit from one product line to the other, but we have seen some trends. In the commercial transport aftermarket, we continue to see particular softness in the sales of discretionary spares items. We estimate these product sales make up in the range of 5% to 15% of our annual commercial transport spares revenue, depending on the different customers' definition of discretionary and their unique maintenance practices or procedures. These discretionary products are typically things like cabin interior cosmetic items or discretionary product upgrade. The discretionary cabin interior spares products would include items such as the refurbishment portion of our engineered laminates business and non-textile flooring, some lavatory faucet components, luggage bin latches and a portion of our lighting components. As I said, sales of these discretionary products continue to be weak. And as Nick said, we still expect to see our second half commercial aftermarket improve. But operationally, we'll continue to proceed cautiously until the market recovers. In our defense business, we continue to see stronger-than-expected sales. I remind you that defense sales make up almost 1/4 of our revenue. Here also we see bookings and shipments vary quite a bit from one product line to the other, but we have seen some trends. For instance, military spares sales, especially foreign military spares, continue to be stronger than expected. We estimate the foreign military sales to be roughly 25% of our total defense revenue. Of particular note, our foreign spares sales of our Patriot missile products, fighter jet products and C-130 spares are strong. Additionally, both domestic and foreign military helicopter spares continue to be strong. Our defense OEM programs are also, on balance, more up than down. Our A400M component sales are starting to ramp up as Airbus increases their production rates. On the A400M, we provide a range of products including composite fuel isolators, the main and auxillary propeller feathering pumps, the engine ignition system, the landing gear kneeling manifold and flow regulator, a range of cargo area actuators and a variety of cargo-related products. Additionally, our Joint Strike Fighter and military helicopter OEM products are also seeing sustained solid sales. However, somewhat dampening the above OEM sales, for example, is the ramp down of the C-130 production rates and the related inventory drawdown associated with it. As we look forward, we're concerned that the military's reduction in aircraft utilization due to sequestration and the reduced operating tempo could reduce future demand for military spares. Overall, the TransDigm operating units are performing well, given the uncertain economic environment. We continue to diligently control our entire cost structure. Our value-generation activities have continued to be effective across our businesses, and they also contributed to our first half results. Now let me hand it over to Greg, our CFO, who will review the second 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 this morning. I'd also 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. Before we begin, I want to remind you that we refinanced our $2.2 billion senior secured credit facility during the second quarter. We are happy that we were able to take advantage of a good credit market and make the following improvements: We reduced our total interest expense. We extended the maturity on $1.7 billion of the term loan and additional 3 years out to 2020, and we modified certain covenants to increase our overall flexibility, which aligns with our philosophy to also use our debt structure to help increase shareholder value. Now let me review the quarterly financial results. Our second quarter net sales were $466 million, up $42 million or 10% from the prior year. The collective impact of acquisitions, primarily AmSafe and Aero-Instruments, contributed the vast majority of the increase. Our organic sales growth was up about 2% over the prior year, primarily due to the commercial OEM and defense markets, which was already discussed in detail. Reported gross profit was $259 million, up $23 million or 10%, which is in line with our sales growth versus the prior year. Gross profit margin is 55.7% of sales, which was flat when compared with the prior year. As Nick reconciled the few significant items impacting the EBITDA as defined margin compared to the prior year, these same items impact the gross margin between the 2 periods also. The current quarter margin is closer to 58% after adjusting for the dilutive impact of the acquisition mix and unfavorable OEM to aftermarket mix. This 58% compares to a margin of about 54.5% in the prior year quarter when adjusted for the impact of inventory purchase accounting adjustments in the prior year and the onetime settlement for scope changes that Nick discussed. This comparative illustrates that the base business continue to expand margins as a result of the strength of our proprietary products and continually improving our cost structure. Our selling and administrative expenses were 9 point -- or 11.9% of sales for the current quarter compared to 11.7% the prior year. This was a sequential improvement compared to the first quarter SG&A rate of 12.8%. We expect to run at a rate closer to 12% in the second half of fiscal '13 as we continue to pay close attention to our cost structure. Interest expense of $64 million, an increase of approximately $12 million versus the prior year quarter. This is the result of an increase in our weighted average total debt to $4.3 billion in the current quarter versus $3.4 billion in the prior year. The higher average debt was due to the additional term loan of $500 million related to the AmSafe acquisition made in February of last year 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 5.5% versus the 5.7% in the prior year. Refinancing cost of $30 million that was previously capitalized from our 2010 credit agreement when we acquired McKechnie were written off during the quarter in conjunction with the refinancing of our senior secured credit facility in February this year. Our effective tax rate was 31.9% in the current quarter compared to 34.7% in the prior year. The quarter rate was primarily reduced by the retroactive reinstatement of the R&D tax credit. We continue to expect our effective tax rate for the full year to be between 33% and 34%. Net income for the quarter decreased $14 million or 17% to $68 million. This compares to net income of $82 million in the prior year. The decrease with net income primarily reflects the onetime refinancing cost and the higher interest expense, partially offset by higher sales volume and the lower effective tax rate. Our GAAP earnings per share was $1.25 per share in the current quarter compared to $1.51 per share. The current quarter was significantly impacted by the onetime refinancing cost just mentioned, which is an impact of $0.38 per share. Adjusted earnings per share was $1.74 per share, an increase of 6% compared to $1.65 per share last year. The increase in adjusted earnings per share was lower than the increase in sales, due primarily to the higher interest expense, partially offset by the lower effective tax rate. The quarter adjustments to bridge GAAP and adjusted EPS are the following: The refinancing cost was $0.38 per share, the noncash compensation cost was $0.09 per share, and acquisition-related expenses were $0.02 per share. Switching gears to cash and liquidity. We generated $240 million of cash during the first half of this year and ended with $680 million of cash on the balance sheet. The company's debt leverage ratio was 5.1x at pro forma EBITDA on a gross basis and 4.3x on a net basis. As we expect, we continue to generate over $100 million of cash each quarter, and assuming no acquisition activity, we expect our debt leverage ratio to be 4.9x EBITDA on a gross basis and 3.9x on a net basis at the end of the year. With regards to our fiscal '13 guidance, we have made some modest changes, which include slightly raising the midpoint of sales by tightening our guidance range and maintaining the midpoint of EBITDA. Our full year GAAP EPS guidance decreased to reflect the onetime refinancing cost, but adjusted EPS increased as a result of interest expense savings from the refinancing. The midpoint of our GAAP EPS is now $5.40, down $0.32 from the prior guidance, and adjusted EPS guidance is now $6.94, up $0.08 from the prior guidance. The $1.54 of adjustments to bridge GAAP EPS to adjusted EPS includes the following items: $0.70 from dividend equivalent payments, $0.38 from refinancing cost, $0.35 from noncash stock option expense and $0.11 from acquisition-related expenses. With that, let me turn it back over to Liza to kick off the Q&A.

Let me -- this is Nick Howley. If I confused anybody, apparently once or twice, I used the wrong EBITDA margin for the second quarter. 47% was the reported EBITDA as adjusted margin if there was any confusion there.

Thank you, Nick. [Operator Instructions] Allison, we are now ready to open the lines.

[Operator Instructions] And your first question comes from the line of Myles Walton of Deutsche Bank.

Nick, could you comment on what the aftermarket growth second half over first half in fiscal '13 is now implied to be? And also the kind of how -- what's your -- it kind of sounded like you were counting more on the not this quarter recovery, but kind of a fourth quarter, your fiscal year recovery and then first quarter next fiscal year recovery. So just kind of -- so that our expectations are in line, how much of a hockey stick is it for this year still within that aftermarket guidance?

Let me start off, Myles, by saying, in case it's not transparently obvious, I don't know when the pick up's coming. I would say for the first half versus second half, as I think I said, I mean, it's essentially just math. We're up 1% the first half. To be 5% for the year, over 5%, we've got to be 9% or 10% for the second half.

Sorry, I meant sequentially, second half over first half, not year-on-year.

Oh, yes, I don't know what that number is. I looked at it year-on-year is what I do know. But it's definitely up. It's got to be up to get there. The -- I guess we could -- Liza, we could figure that out. I just don't know the number as I sit here. What was your other question? Are you figuring to pickup more in the fourth -- our fourth quarter than our third quarter?

Yes.

Yes, I don't -- I surely -- it feels to me like it's slipping out further. And I hear everybody else talking about the second half of their year, and the second half of their year starts in our fourth quarter. The further out I go, the better I feel about it. I think that's probably about the best I could tell you. I don't want to get into speculating about the next quarter yet.

Okay. And then on the M&A pipeline, Nick, just maybe a quick comment on....

Yes, decent.

What you said was -- you said was active. But what -- I mean, what kind of size of deals are you looking at?

A range, a range. Not real big, but not real little ones either. We have some decent stuff in the pipeline.

And your next question comes from the line of Noah Poponak of Goldman Sachs.

Maybe just as a follow-up to the last question there. Last quarter, I think you pretty definitively said the M&A pipeline had picked up pretty noticeably, but I guess there's been -- I think there's been less activity than many of us would have expected. Can you maybe talk about where the breakpoints have been in conversations and what is it that's holding things up? Or is it just that the pipeline didn't pick up until 3 or 4 months ago, and it takes longer than that to make something happen?

I think it's more like that. I would say the things -- some of the things we've been working on, frankly, have been moving along slower than I might have hoped. You can't always control the speed of motion -- speed of movement on them. Well, I guess you can. You can give up on everything. But generally, we've seen some things moving. It's a little slower than we hope, but I just -- I'm very wary, and I'm very cautious about speculating on the rate of close on anything. But I would tell you, we're still pretty busy.

Okay. And then just to follow up on the margin detail you gave, which was very helpful.

Yes.

I guess you've had AmSafe for over 1 year. I guess maybe the way to ask the question is, you talked about how you would be a little over 50%, call it 50.5% EBITDA as defined if you adjusted -- if you made all those adjustments. Maybe talk about when you think the timing is that you could crossover that on a reported basis.

Well, I think what we did tell you is, to meet our EBITDA goal for the year, we have to get close to 49% for the second half of the year. So that's, I would say, starting to get close to 50% again. I don't want to get into speculating what next year's quarters might look like, but I think we tried to give you a little bit of guidance in that our base business, the pre-McKechnie EBITDA margins if you would normalize for noise, in our view, are still moving up in the 1%, little over 1% a year. So you can almost take -- if you've got any -- wherever we stand, you'd expect, even it stopped sort of a significant improvement, you'd expect -- you could move the things 1 point a year. So 49% in the second half of the year starts to make you feel pretty good, all things being equal, and the next year you ought to be able to get there.

And to put that timing in perspective, we closed on AmSafe in about the middle of February of last year. So when you look at the first half, we only owned them for about 40 days last year.

By the way, let me just back up on whoever asked me on the -- I think it was you -- I think it was Myles. The second half would have to be up. To get to the 5%, second half will have to be up 8% versus the first half. Now which I would say is not -- I wouldn't say that's impossible, but it's starting to feel like a pretty good stretch to me.

And your next question comes from the line of Robert Spingarn of Crédit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: Nick, could you just clarify something you said earlier, which was about the pre-McKechnie margin expansion? You said it was up about 1%. Did I catch that right, and what was the time periods in?

The same 12-month period, first half '12 to first half '13, that's always what I'm talking about when I do that margin analysis. Robert Spingarn - Crédit Suisse AG, Research Division: And why might the pricing not have a bigger impact than that on those businesses?

I don't -- I'd have to think about that. The answer is a little over 1%.

But you clearly still have the OEM aftermarket, and that's working against you.

Rob, I normalize that out, but I'm not sure we normalized all the pricing out of it. Robert Spingarn - Crédit Suisse AG, Research Division: But I figure this is mature business lines for you. You're very efficient. You get more efficient every year.

Yes. Robert Spingarn - Crédit Suisse AG, Research Division: And you got pricing. So I just thought the 1% would be higher on the most mature stuff.

Well, it's a little over 1%. It's a little over 1%, but not -- it's a little over 1% is what I said, but that's about what it is, Rob. And I think an old business that we've had for a while, they're not going to hit infinity. So they're not going to hit 100%. These things are running at pretty high margins. It takes a fair amount to move them. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And then is it fair just -- you've already talked a lot about the aftermarket trends and how this is pushing to the right, so you're not seeing any improvement in the bookings or the behavior very recently?

I don't want to get -- I don't want to talk about this quarter, Rob. I just don't -- I mean, I can't talk about this quarter and things that we haven't come out with yet. But I mean, you hear -- I guess you hear what I'm saying is, I hear everyone else talking about the second half of the calendar year, which is -- starts in our fourth quarter, and that sort of seems like it makes more sense to me. Robert Spingarn - Crédit Suisse AG, Research Division: All right, and then you mentioned what SH&E told you, and they talked about Europe and Asia trends there. What's your relative exposure? I guess it tracks the fleet.

It tracks the fleet, Rob. We could take the installed base or the hours flown or something like that, and I would guess the 2 of them are -- I'm just going to say this from memory, 55% or something like that. Robert Spingarn - Crédit Suisse AG, Research Division: And have they given you some sense in doing this study, you talked about how you think Europe's recovery goes. What about Asia? What's the view on when you start to see that?

Their view on that, again, for what it's worth -- but I think, Rob, you probably know those guys. They're fairly knowledgeable. I mean, they do... Robert Spingarn - Crédit Suisse AG, Research Division: I do know them.

Yes, they do a lot of work on it. They keep a lot of track of it. Their general view for us was by next year, the Asian ones are pretty well sorted out and cranking along. They're a little more nervous about Europe. Robert Spingarn - Crédit Suisse AG, Research Division: Okay, okay. Just a last question for you on defense, with regard to the fact that you don't have sequestration in there, you've talked about the risk profile. But with the focus from DoD on maintenance and on pulling back flying hours and so on, don't you think you might be a little bit more conservative in the guidance there than what you're looking for here? It seems to me that could change sharply even in a quarter.

It could. Rob, I would say we are probably booked out now. Not booked out to the end of the year, but on defense, I'm going to say this. We're probably booked out more than 3 and less than 6 months, which doesn't get us all the way to the end of the year, but gets us close. Now they're -- as I said, there is always risk. Defense Department can cancel things. I'm assuming they don't cancel things. So that's what gives me a little more comfort. Usually, not never, but it's fairly unusual for them to start canceling orders they already placed.

And your next question comes from the line of J. B. Groh of D.A. Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: Just playing off that last question, do you get a sense there's any sort of pull forward of aftermarket purchases, particularly in defense?

That's awful hard to know. It's obviously better than we expected. I would say that we're getting a pretty good pop from the 25% of our military business that's non-U.S. That's going along pretty well. But the orders are higher than we expected. So I don't exactly know why. J. B. Groh - D.A. Davidson & Co., Research Division: Does the profitability vary on the international business versus the domestic?

Yes, I don't know that it's material.

Not material, not material, yes. J. B. Groh - D.A. Davidson & Co., Research Division: And then I just had a point of clarification. I think I heard you say, I was writing down, of 2% organic growth, but I saw in the press release it says flat. So what was the acquisition contribution?

This is -- you're talking about the aftermarket now? J. B. Groh - D.A. Davidson & Co., Research Division: Oh, okay, that was just aftermarket.

Well, what I said about the aftermarket is it was on a reported basis for the quarter, the aftermarket revenues were down less than 1%, but there were less days than the previous quarter. If you adjusted it per days, it was up about 2.5%, and it was the same sort of relationship for the first half of the year. It's just -- it's the way holidays fall in our quarterly cutoffs. J. B. Groh - D.A. Davidson & Co., Research Division: Got you. But overall, organic was flat if you don't adjust for the days.

Yes, definitely. So what I said, you've got one little up and the other a little down. I call that about flat.

You were just talking aftermarket.

The aftermarket I'm talking about, commercial aftermarket.

And your next question comes from the line of Robert Stallard of Royal Bank of Canada.

Nick, to follow-up on the acquisition front, I was wondering if you could comment on what sort of prices you're seeing potential sellers are trying to get at the moment, but also if you're seeing any more competition for these assets than you'd normally see.

I really can't say I see a substantive change in the market dynamics, either people in or pricing levels. I mean, good stuff typically sells at a pretty good price, but I can't say I've seen some significant difference in market participants. Probably the only way that realistically happens would be to get a bunch of PE guys jumping in on the deals, and we haven't seen a lot of that.

Okay. And then on the aftermarket. I was wondering if you could comment on your pricing environment if there's been any changes there, and if you strip out pricing that if -- whether your aftermarket volumes were actually down year-on-year?

No, there's no change in the pricing environment. If you strip out pricing, they are down.

And your next question comes from Yair Reiner of Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: So just a follow-up call on the work you've done to try to understand the weakness in the commercial aftermarket. You mentioned that you see a long-term positive in some of the new platforms you're on. Any findings in terms of weakness in some of the more important platforms for you today? In other words, is your platform mix an incremental headwind here?

No. That's what I tried to say, just to be clear. If you strip out the new platforms, which I'll define as CSeries, 787 and new Airbus A380, not too much A350 because it's not all defined yet. But if you strip that out, at least the conclusions that we got on the base aftermarket business was still that the positions were such that you could expect to grow slightly above the RPM growth rate, which says you have a pretty good distribution of parts. If you add the new ones on, the estimate was you'd grow a bit above the RPM rate. Now that says to me you've got a decent portfolio mix, and that was one of the main goals we gave them or a scope definition in the job, by the way. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it. Got it. And then just a follow-up question also on the pricing dynamic. I know you're limited on what you can say about Aerosonic, but it does seem that, at least on the EBITDA basis, it looks pretty pricey. Maybe you can help us understand how maybe it's not as pricey as it looks.

It's -- I just simply can't talk about that. It's a public company. And they're going through the tender process, and I just can't say anything about it.

And your next question comes from the line of Joe Nadol of JPMorgan. Seth M. Seifman - JP Morgan Chase & Co, Research Division: It's Seth on for Joe this morning. Just had one question, maybe about commercial OE and the strength in the quarter on a very strong quarter last year and the increase in the guidance. Last quarter, you seemed quite concerned about the 787 inventory overhang and the flattening OE production profile. How's your thinking about the commercial OE market changed since last quarter?

I don't know that our view has changed a lot since the last quarter, and I don't know that I can make any judgment from one quarter on the OE production rates and inventory drawdown. That's more like a multiple year issue than a 3- or 6-month issue. Seth M. Seifman - JP Morgan Chase & Co, Research Division: Okay, so you still have that similar outlook for flattening production and a lot of 787 inventory out there?

Yes, I think we go through that sort of once a year what our view is of the subsequent year production rates. I think I will address that when we do the next -- when we do our next year's guidance.

Your next question comes from Gautam Khanna of Cowen and Company.

It's Lucy in for Gautam, who sends his regards. I just have a follow-up on your defense business. What was the revenue trend sequentially and was there any change in the order trends in April?

Well, we can't talk about anything beyond the published information at the end of March. We'll talk about the next quarter when we talk about it.

Sequentially.

Sequentially, I don't...

She's asking revenues, right?

Yes, sequential revenues in defense I think she's been asking. I mean, generally, it's going better than we anticipated. I don't remember the exact number.

And then can you just refresh my memory on...

We did tell you that the bookings continue to run ahead of the shipments, and we're going to figure out the sequential number here in a minute. Go ahead.

And can you just refresh my memory on the contingency for sequestration, your outlook, your defense outlook?

We are assuming that -- the biggest assumption is that we will not get any cancellations. In other words, we are probably booked out for a good part of the year. It's more than 3 and less than 6 months we're booked out, and we only got 6 months left in the year. So I think we're pretty comfortable if we don't start to get cancellations or things don't just stop. I don't know if I can give you a number on that.

Okay, is there any cancellations that's out of the ordinary so far?

Yes. I would say I don't think -- surely, I can't tell if it's you 0 across the company, but I can tell you there has been no substantive or material cancellations from the government. We have not seen them do that. Generally, they do not, but they have the right to. Defense contracts can almost always be canceled for convenience, which means they have to pay you whatever money you have in it and a negotiated markup. They typically don't do that because they'd rather have the product and pay half the money and not get the product. Of course, they can do it, but they can -- they have the right to do it.

Right. And finally, just in broad terms can you talk about any discussions you may have with Boeing regarding their partnering for success initiative, and are the discussions on a business by business basis or a company-wide basis?

Both. And I really don't -- yes, we're a supplier like all other suppliers are to them. Yes, they're discussing with us also. I really am not willing to get into -- I don't want to get into details of our discussion with individual customers. By the way, what is it, sequentially that shipment? Defense is high-single digits increase sequentially. That's a percentage.

Your next question comes from the line of David Strauss of UBS.

Nick, going back to the margin discussion. I guess my question is around AmSafe and how AmSafe is doing. I think I would have thought even with the dilution from AmSafe and the aftermarket mix hurting going against you, I would have thought, given some underlying improvement in AmSafe, that the margins will be a little bit better than what we're seeing today. So can you just talk about how AmSafe is progressing maybe relative to what you saw with McKechnie.

AmSafe is -- you're not going to get as rapid an increase like McKechnie because you do have at least a net business. It's not going to change as much. It's not as good a business. The...

The net and cargo.

The net and cargo business, which is the smaller, smaller portion. I would say the big chunk, which is the seatbelts, is moving along very nicely and is starting to look a lot like a TransDigm business. I think that's probably about the best I can tell you on it. That's the big chunk is the aerospace seatbelts, and that's looking very good to us. The net business is not -- is looking fairly good, too. It's just the margins that are low. So you're moving a -- you're trying to move a 10% margin to a 20% or something, it doesn't look as dramatic when you add it all up. And the ground business is about flat.

And at this point, you're still -- you're thinking that you're still going to hold on to that business or is it...

Yes, it'll be -- we're surely going to hold onto it for another year. It's really not a big enough business to make much impact on anything when you take the revenue times the EBITDA. So it's sort of a value call after a while. Does it make any sense to sell something if you have to substantially discount what the EBITDA is valued at? You know what I mean? Plus you get the tax leakage. Usually it's easiest to do them all bang, bang, bang right around the time of the acquisition.

Right. And then cash. It sounds like the cash balance is going to be a little bit higher than what you were seeing earlier by the end of the year. I guess given this, what you highlighted slow progress on the acquisition side, I mean, how long do you sit around with this much cash on the balance sheet?

David, I think you've seen before, we don't sit around too long so.

Right. I guess typically when you paid special dividends have been end of the calendar year. I mean, could something happen earlier than that?

I don't want to -- now I'm being evasive, of course. I would say in the capital markets, something could happen whenever it seems right. I would suspect it would be more towards the back end of the year, though. I mean, I think we probably keep looking and wringing our hands for a while before we do it.

And your next question comes from the line of Ken Herbert of Imperial Capital.

I just wanted to follow up specifically on the work that SH&E did. How is that perhaps changing 2 things, either your approach to acquisitions as you look at opportunities there or perhaps the existing product portfolio. And I'd expect maybe there's some rationalization or other output of that that may ultimately happen. But just a little bit on sort of how you're going to use that moving forward from those 2 standpoints would be helpful.

I wouldn't expect that to drive any kind of product rationalization or selling things off or anything like that. The main scope we were trying to understand is, is there anything, I'll say, discontinuous or unusual about our portfolio that's making this aftermarket stay down longer than we might have hoped? The biggest part of the scope was to go through and figure all our parts, which we thought we knew, and gave us a second set of eyes to figure out all our products on the chipsets, then extend that by the hours of flight and things like that on each of the chipsets, and tell us whether we have a portfolio that's better weighted, the same as or a little worse than the market. That was probably the biggest part of it. And the second was, can you give us any sense as to why this market's staying down? And those are the 2 things that I tried to talk to you about. I think the summary we got is, we feel pretty good about the portfolio of products we have. So I wouldn't see us doing anything significantly different with them. On acquisitions, we'll buy what we always buy. We'll buy proprietary aerospace businesses with significant aftermarket content. We're not trying to fill a hole in or something like that. It's hard enough to find good ones without getting put too many boundary conditions on it.

Okay. That's helpful. So it's safe to say then that you didn't find anything in the research that was TransDigm-specific in terms of the impact right now?

No, no.

From a negative standpoint?

No.

And then if I could just -- you've talked about, and I know you've mentioned the 4 count -- 4% headcount reduction and the puts and takes you're facing with better-than-expected strength on the OE side relative to aftermarket and implications for the resources you need to put in play here. If that continues, is that a significant barrier to your ability to continue to look at the cost structure? Or how should we think about the puts and takes of that as we go through the rest of the year?

Yes, we give you -- headcount is a sort of one -- it's a proxy for cost structure. It's not perfect, right, there's other things and specifically there's outside buys is the other thing. But if the OEM mix continues to get higher, this is just the same -- it's another way of saying that there's a mix impact. You need more people and more effort to produce a part for OEM than you do a part for the aftermarket per dollar of revenue just because they're priced differently. So if the difference kept going on for a period of time, it would get increasingly difficult to get the headcount balanced up with the revenue or the volume. We do not see that as a problem now. Historically, we have been able to -- it hasn't slowed so drastically that we have not been able to get the cost structure adjusted. And I don't see that in the foreseeable future right now.

And your next question comes from the line of Michael Ciarmoli of KeyBanc Capital Markets.

Maybe, Nick, just on the SH&E, did you guys learn anything regarding your pricing power or the pricing environment? Do you think that will be sustainable? And then I guess the other kind of part to that with SH&E is, they're forecasting some pretty big military headwinds on parts purchasing. How do you guys think about dealing with that headwind on the portfolio over the next, beyond sort of next 6 months?

Well, just to be clear, I only spoke about the commercial business. Anything having to do with SH&E, as I talked about, was only to do with the commercial business, not the defense business.

Okay, so you didn't get an opinion on military. Okay.

What I spoke about was the commercial business.

Got you.

I thought they may or may not be on -- the defense business is separate from that. We didn't ask them to opine, particularly on our pricing capabilities, but we don't see nor have we seen any change in the dynamics there.

And your final question comes from the line of Noah Poponak of Goldman Sachs.

Yes, just a couple of follow-ups. On the parting out discussion within the aftermarket specifically, is that something where you're able to actually locate in the customer data that that's not happening or where you have some hard concrete evidence that that's not happening, or is it just that the consultant agreed with your logic and intuition as to why that wouldn't happen to you?

Well, what they know is they have a pretty good idea of what is getting parted out, because people are forever hiring them to study that and study what they can part out and sell. So they know the kind of things that are. I can't tell you they know every part number, and they know sort of the dollar price points and the type of things people are buying, and their conclusion is somewhat the same ours has been. For relatively low dollar value items, people tend to not do it.

So they see the actual parts. It's not just -- they weren't just making it a higher level...

No. They got -- they see the prices, the unit prices and things like that for us when they go through it. And they don't meet their criteria for the kind of things they've been seeing parted out. Now the answer is never 100% or 0, but it's not a significant factor. Either the PMA stuff you can get a little bit better beat on because you can look up what's been or hasn't been approved by the FAA. So we have a pretty good idea that, that's de minimis.

Got it. And then did you give your expectation for interest expense for the full year?

The absolute dollar or the rate?

Absolute dollar.

About $250 million for the year, yes.

Got it.

You woke Greg up with that one. He thought he was gone for the day.

I'd now like to turn the call back over to Liza Sabol for closing remarks.

Thank you. That concludes our call for today. And we'd like to thank you, everyone, for your participation.

Thanks.

Thank you, ladies and gentlemen. This concludes your presentation. You may now disconnect, and good day.