TransDigm Group Incorporated (TDG) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 3 2014 TransDigm Group Incorporated Earnings Conference Call. My name is Cathy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Liza Sabol of Investor Relations. Please proceed, ma'am.

Good morning, and welcome to TransDigm's Fiscal 2014 Third 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. The company would like to remind you that statements made during this call which are not historical 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 SEC, available through the Investors section of 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, let me please now turn the call over to Nick.

Good morning, and thanks again for calling in to hear about the company. Today, as usual, I'll start off with some comments about our consistent strategy, an update on the capital allocation activities in the last quarter, an overview of the financial performance and a market summary from Q3 and an update on our full year guidance. Just 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. About 90% of our sales are generated by proprietary products, and around 3/4 of our sales come from products for which we believe we are the sole source provider. Over 1/2 of our revenues and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket sales and revenues have historically produced a higher gross margin and have provided relative stability in the downturns. Because of our uniquely high EBITDA margins and relatively low capital expenditures, TransDigm has, year in and year out, generated strong free cash flow. We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we have a simple, well-proven, value-based operating strategy based on our 3 value driver concepts. Third, we maintain a decentralized organization structure and a unique compensation system, with operating unit executives and officers who think, act and are paid like owners. Fourth, we acquire proprietary aerospace businesses with significant aftermarket content. And lastly, we view our capital structure and capital allocation as another means to create shareholder value. We have been, 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. As I mentioned last quarter, we continually look at our likely needs for acquisition and internal investment, cash and/or debt capacity, as well as the capital market situations, all in context of our near and midterm needs and outlook. The Q3 credit market situation was uniquely favorable by most historical standards. From any longer-term perspective, the after-tax cost of debt capital was low, especially when compared to our stated equity return goals. In light of these market conditions, we accelerated our capital allocation calls for this year. In Q3, we borrowed about $3.4 billion, almost 1/2 of which was used to pay a special $25 a share dividend. Most of the balance was used to refinance our existing 7.75% bonds, with lower interest costs and extended maturity. We kept a modest portion of the proceeds for general corporate purposes, one of which has been to buy about $75 million of our existing shares. We may well buy additional shares over the next few months. After completion of the financing, our weighted interest rate will be about 5.3% per year, including the cost of forward interest rate hedges. This is down from about 5.7% interest prior to the recent financing. Our actual rate starts lower than 5.3% but will move up to 5.3% as the hedges kick in. Our net leverage as of 06/28/2014 is now 6.4x EBITDA. About 50% of our debt is fixed and another 20% is forward hedged, beginning in 2015. Our maturities have been extended. We increased the size of our revolver, and the credit terms were favorably modified. All in all, we think this is a pretty good outcome. At the end of our third quarter, based on the current capital market conditions and our new credit agreement, we believe we have adequate liquidity capacity to make about $1.5 billion of acquisitions without issuing additional equity. This includes around $730 million of cash. This capacity continues to grow each quarter. This does not imply anything about acquisition opportunities or anticipated acquisition levels for fiscal year '14 or '15. Overall, through our consistent focus on our operating value drivers, our very clear acquisition strategy and close attention to our capital allocation, we have been able to create intrinsic value for our shareholders for many years, through up and down markets, and we anticipate continuing to do so in the future. Now with respect to the commercial aftermarket status, next quarter, unless there is an unusual situation, I'll probably stop separately highlighting this, as I've been doing in the recent quarters. We have been seeing a market recovery for the last 3 to 4 quarters, and this has continued into Q3 of fiscal year 2014. The third quarter of fiscal year 2014 commercial aftermarket revenues on a same-store basis were up almost 15% versus the prior Q3 and are up about 9.5% on a 9-month year-to-date basis. Just as an aside, we have seen minimal 787 provisioning orders on our revenues at this point. Our bookings or incoming orders are running about 6% ahead of revenues on a year-to-date basis, and they're up about 14% versus the prior 9-month year-to-date bookings. As I have said, the aftermarket recovery may not be linear. There could be quarterly ups and downs. Our data now indicates even more strongly that the market is expanding. If the worldwide economy holds up, we would expect this to continue, though I do want to point out the rate of increase may slow down over the next few quarters. Turning to our Q3 2014 performance. I remind you this is the third quarter of fiscal year 2014. Our fiscal year began October 1 of 2013. And as I have said in the past, quarterly comparisons can be significantly impacted by OEM aftermarket mix, large orders, inventory fluctuations and the like. The third quarter of fiscal year '14 was a good quarter for TransDigm. Our GAAP revenues were up about 25% versus both -- the prior year Q3. On a year-to-date basis, the bookings continue to run ahead of revenues. Reviewing the revenues by market category, again, on a pro forma basis versus prior Q3. That is assuming we own the same mix of businesses in both periods. In the commercial market, which makes up about 70% of our revenue, total commercial OEM revenues were up 6% versus the prior Q3 and about 9% on a year-to-date basis. This is primarily driven by commercial transport OEM revenues, which were up 12% on a year-to-date basis. Business jet revenues are only up about 3%. Total commercial aftermarket revenue comps, as I said before, they were up about 15% versus the prior Q3, and they're also up about 8% sequentially. The defense market, which makes up about 30% of our revenue. The defense picture in Q3 was mixed. For Q3, the total defense revenues were down 7% versus the prior third quarter and about flat on a year-to-date basis. This number now includes the Airborne parachute business revenues, which are more lumpy than our base business. Without Airborne, our underlying defense revenues are down 2% versus the prior Q3 and up 5% year-to-date. The Airborne parachute bookings picked up substantially in Q3 versus the first half of the year due to 2 large U.S. military orders. The total defense bookings were strong in Q3, and year-to-date, they are running about 6% ahead of shipments in spite of delays in certain large international parachute orders. In our other businesses, we've seen good order activity from both domestic and international military buyers. We do remain cautious about the military markets. Moving along to profitability now. And on a reported basis, I am going to talk primarily about our operating performance or EBITDA As Defined. The As Defined adjustments in Q3 were primarily due to refinancing-related costs and noncash stock option expense. Our EBITDA As Defined of about $276 million for Q3 was up 19% versus the prior year Q3, and our year-to-date of $782 million is up about 20% versus the prior year. The EBITDA margin was about 45% of revenues on a year-to-date basis and roughly the same in Q3. The Q3 margin was reduced by over 2% by the inclusion of Airborne and EME acquisitions. Our base business EBITDA margins, that is, excluding Airborne, EME and the 3 we bought in June of last year, was about 48% on a year-to-date basis. This is up 1% versus the prior year for that same group of businesses. With respect to acquisitions, we've completed about $300 million of acquisitions so far this year. We continue to look at opportunities. The pipeline of possibilities is reasonably active with about the same mix of sizes as usual. We are seeing more European activity than we have seen in the past. The closings are difficult to predict, but we remain disciplined and focused on value-creation opportunity that meet our tight criteria. Moving on now to the 2014 guidance. The military market is still spotty and we think, hard to predict. The rate of recovery in the commercial aftermarket is proceeding, and the commercial OEM is roughly on track. The underlying EBITDA margins are running slightly ahead. Based on the above and assuming no additional 2014 acquisitions, our guidance is revised as follows: The midpoint of the revised guidance is now $2.36 billion or up $15 million versus the prior midpoint. The revenue increase is primarily due to a modest improvement in the commercial aftermarket full year outlook. The midpoint of the revised 2014 EBITDA As Defined guidance is now $1.07 billion or 45.3% of revenues, up $10 million from the prior quarter guidance. This margin includes 1.5% to 2% of dilution from Airborne and EME. The dollar increase in EBITDA is primarily due to the commercial aftermarket mentioned in the revenues. We are anticipating our base businesses, again, excluding Airborne, EME and the 2013 June acquisitions, to run at about 48% for the year. The midpoint of EPS as adjusted is anticipated to be $7.52 per share versus a prior guidance of $7.58. The range on this is plus or minus about $0.05 a share. The change is primarily due to the improved operating performance and some lower tax expenses more than offset by the higher interest expense from the recent financing and special dividend. At the midpoint, our 2014 guidance is based on the commercial OEM and defense revenue outlooks remaining unchanged from both last quarter and our initial guidance. The commercial aftermarket on a same-store basis is now assumed to be up slightly over 10% on a full year basis. This was corrected on the slides we originally sent out this morning. In summary, the first 3 quarters are modestly ahead of our initial expectations. Hopefully, these strengthening market conditions continue. But in any event, I'm confident, with our consistent value-focused strategy and strong mix of businesses, we can continue to create long-term intrinsic shareholder value for our investors. With that, let me hand it over to Greg, who will discuss the financial results.

Thanks, Nick and good morning again. I'd first want to remind you, and as Nick mentioned, we raised $3.4 billion during the quarter, primarily to pay the $25 per share special dividend and refinance $1.6 billion of the notes that were due 2018. This activity impacted several line items significantly in the quarter. With that in mind, I'd like to expand on a few items included in our quarterly financial results. Please reference Slide 7 in this morning's deck. Sales were $611 million, 25% greater than the prior year. Our organic sales was 7% higher than last year, driven primarily by the growth in commercial aftermarket and to a lesser extent, commercial OEM. This growth was partially offset by a modest decline in the defense sales. Third quarter gross profit was $328 million, an increase of 22% over the prior year. The reported gross profit margin of 53.6% was 1.4 margin points less than the prior year. This quarter's margins were negatively impacted by the current year acquisitions of Airborne and EME and the acquisitions of Arkwin, Whippany and Aerosonic made in the prior year. The dilutive impact from acquisition mix and the acquisition-related costs was almost 3.5 margin points at the gross profit line. The prior year gross profit margin was also diluted approximately 1 margin point for noncash stock compensation expense due to the acceleration of certain stock options that did not repeat in fiscal '14. Excluding all the acquisition activity and stock compensation expense, our gross profit margins in the remaining businesses versus the prior year quarter improved almost 1 margin point. We have the benefit of favorable OEM and aftermarket mix, and the base businesses continued to expand margins as a result of the strength of our proprietary products and continually improving our cost structure. Selling and administrative expenses were 11.7% of sales for the current quarter compared to 16.9% in the prior year. The majority of the decrease in SG&A was related to lower noncash stock compensation costs in the current period. Stock compensation expense as a percent of sales was about 1% compared to 5.5% in the prior period. The prior period also included higher acquisition-related expenses. Excluding noncash stock compensation expense and acquisition-related expenses, SG&A was about 10.5% of sales in both periods. Interest expense was $88 million, an increase of approximately $25 million or 40% versus the prior year quarter. This is a result of a 43% increase in the weighted average total debt to $6.2 billion in the current quarter versus $4.3 billion in the prior year. The higher average debt year-over-year was due to the recent financing just discussed and the July 2013 financing associated with last year's $22 special dividend. As a result of our recent financing, our weighted average cash interest rate has decreased to 4.9% compared to 5.5% in the prior year. Including the newly incurred debt, we now expect our full fiscal 2014 net interest expense to be approximately $348 million. Onetime refinancing costs of $131 million were booked in the current period in conjunction with June's financing. $120 million of the costs were the premium to redeem the 7.75% notes and $10 million were for the writing off of debt issue costs. Our effective tax rate was 22.5% in the current period compared to 32.9% in the prior year. The current quarter rate was due to favorable foreign tax credits realized in our recently filed federal income tax return. We now expect our effective tax rate for the full fiscal year to be around 33% and our cash taxes to be approximately $125 million. Our net income for the quarter decreased $60 million or 79% to $16 million, which is 3% of sales. This compares to net income of $77 million in the prior year. The decrease in net income primarily reflects the onetime refinancing costs just mentioned and higher interest expense, partially offset by growth in net sales and lower noncash stock compensation costs. As I've discussed in the past, our EPS is calculated under the 2-class method versus the more commonly used treasury method. We are required to use this method because of our dividend equivalent program. As you could see on Tables 1 and 3 of this morning's press release, our GAAP loss per share was $1.66 per share in the current quarter compared to $0.71 income per share last year. You may be wondering how do we have positive net income but a GAAP loss per share. The loss per share was due to the inclusion of approximately $111 million or $1.94 per share of dividend equivalent payments paid in the current quarter primarily related to the $25 per share dividend. This compares to the $0.70 per share paid in the prior period. Please reference Slide 11 of this morning's earnings call, which shows all the details. Our adjusted earnings per share was $2.02 per share, an increase of 7% compared $1.89 last year. The 7% increase is lower than the 12% increase in adjusted net income due to the higher weighted average shares in the current period, resulting from the accelerated stock option vesting that occurred primarily in 2013. Note this dilution will be slightly offset going forward due to the purchase of approximately 420,000 shares of treasury stock in the current quarter. We now expect our weighted average shares to be 57 million for the full fiscal year of 2014. Again, please reference Table 3 in this morning's press release, which compares and reconciles the GAAP to the adjusted earnings per share. As Nick previously mentioned, the midpoint of our adjusted earnings per share decreased $0.06 to $7.52 per share. The increase in interest expense had a negative impact of $0.25 per share. This negative impact was offset by the following 3 items: favorable operating results which contributed $0.11 per share, a lower effective tax rate which contributed $0.06 per share and the decrease in the weighted average shares were $0.02 per share. Switching gears to cash and liquidity. We ended the quarter with $729 million of cash on the balance sheet. This includes the completion of the financing, net of the $25 per share dividend and related DEP payments, the repayment of the 7.75% notes and the related fees and the purchase of approximately $75 million of treasury stock. The company's net debt leverage ratio was 6.4x our pro forma EBITDA As Defined. We now expect to end the year with approximately $850 million of cash on the balance sheet, assuming no other acquisition activity. Absent any further changes to our capital structure or any stock repurchase, we expect our net debt leverage ratio to be 6.1x EBITDA As Defined by the end of the year. Now I'll hand it back over to Liza to kick off the Q&A.

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

[Operator Instructions] Your first question which comes from the line of David Strauss of UBS.

Nick, looking at your revised guidance for the full year, it seems like you're implying Q4 about sequentially flat in terms of sales and adjusted EBITDA margins. When we see the adjusted EBITDA margins potentially move up with another strong aftermarket quarter and the acquisitions being there for another quarter, why wouldn't we see those margins...

Just a sec, we're looking it up. I didn't think that was the case, so let me just look it up. Where's -- yes, it's gone up a little. Yes, it's gone up about 0.5 point, I think. I think you're talking about 0.5 point, if we're doing the math, and you're right. But I get your point. We -- about 0.5 point is what we got cranked in there. It's probably getting lost in the abouts.

Okay. Yes, it looks about -- it looks relatively flat to me, but it might be in the noise. On the aftermarket, could you just talk a little bit about -- I don't know if you specifically said, I may have missed it, what bookings were like in the quarter sequentially. And where did you see the improvement? Was it more on the discretionary kind of aftermarket side? Or really, what drove the improvement there?

Yes. I would say it was -- we're sequentially up 8%. The -- it is -- we are clearly seeing -- whether it's the business or whether it's discretion, it looks like we're seeing more [ph] orders picking up. If we're up 15% year-over-year, the combination of RPMs and pricing is not 15%. So there's some discretionary buying and quite likely, maybe some stocking even at the airlines. We know the distributors are in decent shape, so we know that's not moving a whole lot. I did point out -- one thing I did notice that other -- a few other people have announced that we have not seen is significant -- we have not seen any significant provisioning orders.

For 787.

For 787.

Right, okay. And last one for me. How are you feeling about the cycle overall? It appears there's a lot more skepticism or nervousness in the market overall about the sustainability of this.

You mean in the OEM or the aftermarket?

Yes, OEM.

I don't know that I have a good enough view on that, David, to drift off of what's sort of the conventional wisdom has been. I don't have any reason to think that '15 is going to drift substantively off of what people have been forecasting so far. I mean, it would take a pretty significant dislocation to change the next 12-month outlook or so.

The next question comes from John Godyn of Morgan Stanley.

Nick, I think you used the word reasonably active for the M&A pipeline. I was just hoping that you could contextualize that for us, exactly what that might mean.

I was trying to make a distinction between lethargic and wildly active. I mean we're doing the same thing we always do. We're out making calls. We're visiting people. We see proposals coming through. I don't think it's substantively different than it's been for the last 12 or 15 months. But I did want to make that lethargic distinction.

Okay, loud and clear. And then a follow-up on aftermarket. You gave a little bit of color on discretionary versus nondiscretionary and even made a comment -- I thought I heard about some restocking at airlines. I was hoping that -- maybe another layer, just talking about any products that sort of stand out, anything as we try to kind of read the tea leaves here and just understand what's going on a bit better.

Yes. I think the only -- as I say, I don't know that I can draw any particular conclusion from products other than more discretionary things seem to be picking up in orders, where they were lagging behind for a while. And the shipments rate and the booking rate is up more than RPMs and pricing would account for.

Okay, helpful. And then just last one on the general defense outlook. Of course, we all appreciate sort of why there is some uncertainty out there. On the other hand, you highlighted some positives and certainly have had some good trends in the past. I'm just curious if you're seeing literally anything in the numbers that drive the uncertainty or questioning of the defense trend. Or is it just a reflection of the general notion of uncertainty that we all worry about?

I think more of that, more about the general uncertainty. As I said, the revenues were down some in the last quarter, but that's offset by the bookings being up. So it's a mixed picture. But mostly, you're just seeing a reflection of just uncertainty about the political situation.

The next question comes from Robert Spingarn of Crédit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: Could you talk a little bit more about the buyback that you mentioned, the share repurchase activity?

Rob, I'm not sure what else to say. We bought 75 million more shares back in the last prior month?

No, in the quarter.

Yes. In the third quarter, yes. And as I said, it wouldn't surprise me if we continue to do some of that. Robert Spingarn - Crédit Suisse AG, Research Division: Yes. And is there a change in thought there as you go forward, just from what you've done in the past?

I don't know. I can't say that there is necessarily. We did decide -- we've used all the money to pay out -- not all the money, but I mean all the shareholder return money to pay out special dividends. This time, we decided we'd buy a little back. I -- we'll make the call on a situation-by-situation basis, but it wouldn't surprise me if we buy some more back here. Robert Spingarn - Crédit Suisse AG, Research Division: Okay, all right. And then just a clarification, Nick. Did you say earlier in your monologue, on the aftermarket growth, you were going to stop parsing some element of that out?

No. I usually talk about it in the overall summary of the markets. For the last year, I've made sort of a separate section on it, as I did the lead-in. I'll probably stop doing that. But if there's anything special to point out, I'll try and do it. Robert Spingarn - Crédit Suisse AG, Research Division: Nevertheless, we should still expect the data that you've been giving.

Absolutely, absolutely. Robert Spingarn - Crédit Suisse AG, Research Division: Okay, just wanted to clarify that. And then just the last thing is I just noticed the slide -- you talked about Airborne and some delays in orders, and you also mentioned that there's 1.5% to 2% margin dilution from the acquisitions. This compares to, I think, 1.5% a quarter ago, when you spoke about it. Could you talk a little bit about both the sales and margin contribution from the recent acquisitions and the extent to which these are meeting your plans?

Did we change the dilution? I think it may be just in here for another quarter, so it's in another quarter. Robert Spingarn - Crédit Suisse AG, Research Division: That's all it is. It's just...

Yes. But it's in another quarter and their lower margin is going to pull the year-to-date down a little bit. So there's no reason to think there's any margin degradation in those, other than what we know when we bought it. I would say the Airborne business, we actually -- it is lumpy, but we had a very strong booking quarter here in the last quarter. And we have some big international orders that are hanging fire there, which we can't tell will this wrap before the year's over, in the beginning of next year. But there are jobs to get, we believe. Yes, I think that answers your question probably, Rob. Robert Spingarn - Crédit Suisse AG, Research Division: Well, are you getting that replacement bow wave you were hoping for when you bought it?

That -- well, the international orders -- we are getting some, but the international orders are closing slower than we thought. But we -- I mean they're active. We're actively negotiating with them. But I think the closure on bookings is, frankly, even lumpier. The first quarter we owned it, we booked very little. That's the first quarter of this year. The second quarter was pretty strong, and the last quarter was very strong. And we have a fair amount of stuff in the gun sight, so...

The next question comes from Carter Copeland of Barclays.

Just a couple of quick ones. First, on the -- just to clarify a bit on Airborne. By my math, it looks like, for the impact you called out, that's probably down kind of 20% year-on-year quarter on an apples-to-apples basis. Is that the kind of right scale of how lumpy this business can be?

I don't know.

We don't have your math in front of us.

Yes, I don't have your math in front of us. But it can be lumpy. It can bounce around from quarter to quarter.

I mean, if it's got a 5% impact on the defense revenues, it's probably $8 million, $9 million of revenue delta. So we're just kind of trying to calculate that off of a quarterly run rate, but it sounds like...

Yes. I don't know the answer, other than I do know, Carter, that it is lumpier than our other businesses tend to be. And they can be lumpy good and lumpy bad.

Yes, exactly. And then on the 787 provisioning that you mentioned a couple of times, how significant -- could that be significant to next year's aftermarket growth, in your view? I mean, is this a couple hundred basis points kind of thing? Or is it...

I don't -- the real answer is, Carter, I'm not sure. We are not -- we'll give next year's guidance when we give it, but we're not planning on a lot of provisioning. We typically look at that as sort of -- we just -- sort of something fell out of the sky and hit us in the head. We're not planning on a lot of it.

The next question comes from Michael Ciarmoli of KeyBanc Capital Markets.

Just to continue on that provisioning line of thinking. I think, Nick, you kind of called out that the aftermarket rate of growth will perhaps be slowing. I mean, there are, I guess, tougher comps coming up, but I would think the 787, even the A350 provisioning. But it sounds like, if we should think about those provisioning items, that would just be kind of gravy on top of your base growth. I'm just trying to get a sense of...

That's the way I would think about it, and my sort of core kind of products, my experience has been it's tough to predict.

Okay. But if -- I mean, you're clearly talking about the market expanding, more discretionary. Is the rate of deceleration, I guess, just tougher comps?

Yes. I'd just -- I don't think you can sustain a 15% quarter-over-quarter growth. You may sustain it for a quarter or 2, but you're not going to sustain that over an extended period of time. And eventually, the comps get tougher.

Right, okay. And then just one other one. You mentioned, on deal activity, maybe a little bit more active in Europe. Are you seeing better multiples over there? I mean, there's more, I guess, carriers struggling with profits. I mean, is it just a more attractive marketplace and are the multiples simply cheaper? Or is there any other rationale for why you're more active in Europe or seeing more activity there?

I really -- we are -- frankly, we're hitting the territory harder. We also put a new guy on to cover the territory, and we're kicking up more leads. So I don't know whether there's more for sale or whether we're just more attentive to it. I would say it's not clear to me that the multiples are significantly lower.

The next question comes from Joe Nadol of JP Morgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Nick, just thinking about -- big picture about the capital structure and looking forward. We're probably going to get into a situation here next year where rates -- short-term rates start going up. We haven't had that, obviously, for a long time. And as you mentioned, you guys have been really eagerly taking advantage of the markets, including this past quarter. How, conceptually, should we think about what you might do differently, if anything at all, when rates are going the other way, just in terms of leverage level? Anything else you want to mention?

Yes. That's -- well, first, I would not -- our fundamental leverage strategy, I would not expect that to change within any realistic range of interest rate moves. Now if interest rate -- interest costs get up higher than the cost of equity, which will be up in the 20s or something, we might rethink that. But in the likely movements over the next couple of years, I wouldn't expect our view to change. Now we did stretch out ahead on some of these dividends because we thought the credit markets were so attractive. If interest rates go up, we probably would be a little more cautious about that. But I don't -- a 1- or 2-point move, I don't think would substantially change what we do. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just looking at OE for a moment. A lot of the growth in the next 2 or 3 years is going to be A350. I unfortunately missed your Analyst Day, and I don't know if you provided an update there on content. But a few years ago, we talked a lot about 787 and what you got on that. Could you just update us on...

Yes. We have -- I don't think we gave the number out. Did we, on the A350 content? But it's good content. We gave the comparison to the planes we thought it was replacing, and the content is up nicely. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just finally, a nit [ph] here. Is Tarian impacting your defense outlook at all? That was a lumpy item you called out 2 quarters ago.

Yes, it is in the comps, yes.

It shipped out...

Yes, it shipped. There wasn't any in this quarter, but if I look at -- yes, it was -- I think it was in the prior quarter, right?

Year-to-date, we had $10 million of Tarian come out in the first half of the year.

Yes. So yes, it was $10 million in the first half of the prior year.

The next question comes from the line of Yair Reiner of Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: First, a quick follow-up on the M&A question with regard to Europe. Is there any difference in terms of trying to implement your value-creation drivers in Europe versus the U.S. and then implementing your management and compensation strategy there?

The -- we said we've been able to work through our way on the compensation. It was a little trickier, but we think we've been able to work through that and get something that's pretty close. I would say on the pricing side of it, I don't see any substantive difference. Obviously, the employment restructuring is more expensive there and a little more culturally difficult.

It takes longer.

Yes. So yes, right, so it -- that converts into a little more expense and it takes longer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it, got it. And then in terms of the aftermarket dynamics, sometimes, in the past, you've given us a little more color about what's happening regionally. Would you say that there was particular strength anywhere particular in the world? Or is it kind of broad based?

I would say reasonably broad based. I mean, as usual, I would say the European business is not as bullish as the rest of the world. But I don't know if -- frankly, for the quarter, I don't have the numbers off the top of my -- just my fingertips. But I don't view this -- the mix of RPMs, which is ultimately orders, I don't think -- I know has not changed substantively. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Right. And then just one more quick modeling question. Is 33% tax rate the right one to use going forward?

Greg?

For the remainder of this year. And we'll update our guidance next year when we give it out.

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

Stepping back to the provisioning question. I was curious if you had a sense for what percent of your aftermarket sales generally are from initial provisioning and if you can comment if you've had much in the way of 787 provisioning in prior years. Or is it -- that's all on the comp?

I'm not sure I get the question, but I'll try and give you the -- the provisioning, in our experience, has been difficult to predict. The -- we have seen very little, so far, from the 787. I would not -- at least for our go-forward planning, we're not planning on much of that. Now we may well see some, and that would be upside. But I would -- if you were looking at how to model this, I'd primarily focus on sort of RPMs and price and then maybe a little swing one way or the other depending on how you feel about the market direction.

And do provisioning sales carry a different margin or pricing characteristic than typical aftermarket sales?

It's mixed but not substantively, usually.

Okay. Just back to talking about the M&A pipeline. Can you characterize what's kind of the size -- the typical size range of the companies you're looking to acquire potentially?

The kind of stuff we typically see, which is $40 million transactions to $300 million transactions. Occasionally, we have bigger ones come by or come up opportunistically, and we look at them. But at least, generally, they haven't made sense on a value basis.

And would you say -- I mean, just stepping to the question earlier about how you think people feel about the cycle. Are you seeing more such books now? Are you seeing more willingness to sell properties? Have you seen any change in that?

I can't say I've seen any change.

The next question comes from Robert Stallard of Royal Bank of Canada.

First of all, on the aftermarket, I was wondering if you could comment or whether you've seen any change in the pattern of parting out or cannibalization out there in the market?

Well, I don't think we have, no. Remember, for the dollar value parts we have, it's a pretty minimal impact. So I -- honestly, if there was a change, I don't know we even notice it for a while. It's a very small -- the cannibalization impact on our sales are very small. And that's primarily because of the dollar value of the stuff we tend to sell.

Yes. And then related aftermarket vein, have you seen any impact of the Afghanistan drawdown starting to roll through, maybe in helicopters?

We have not -- well, I would say, so far this year -- the helicopters were the hot thing last year. The helicopters have not been the hot thing this year, but...

They're not bad.

No, but freighters and fighters have sort of picked up the difference. So I don't know that I can draw much conclusion from that, other than it's just sort of rotation of where you spend your money.

Okay. And Greg, just a quick one on the dividend equivalency payment. Any idea what this is going to be in Q4?

It's a pretty small amount. $4 million? It's $6 million or $7 million for some options that will come due, so it's a relatively small amount.

And is it going to stay about that run rate for the next 12 months or so?

No, no. I think that'll -- it will be pretty much cut off by the end of this fourth quarter.

The next question comes from Ken Herbert of Canaccord.

I just wanted to follow up one more time on the commercial aftermarket. And I know its relevancy is maybe limited here, but you do report, from at least a GAAP standpoint or financial reporting standpoint, operating segments, the power and control and airframe. Either in relation of these segments or in general, have you seen any change in your aftermarket by either engine and power related relative to other parts of the airplane? Or has it been sort of fairly consistent growth?

I can't say we've seen any substantive difference in one versus the other. The margins are a little higher on the power side just primarily because the aftermarket content is a little higher on that side.

And I know that [ph] of your total sales, that's maybe, at least on a run rate, about 43%, 44%. But correct me if I'm wrong, engine specific, if I remember well, tends to be about 20% of your aftermarket business?

I don't remember that exactly. I just don't. Engines tend to be 20%, 25% of the cost of the airframe, so that wouldn't surprise me. But I just don't remember that exactly. There's other things in power other than engines in that power segment. There's fluid power, hydraulic power, things like that.

Sure, sure. Okay, that's helpful. And then just finally, any concern or are you seeing anything, again, on the aftermarket as now that we're sort of into it a little further, with some consolidation here? Any different behavior from the U.S. airlines as a result of consolidation, the purchasing patterns? Or anything you could point to there?

I can't say I see anything yet. The market's picking up. And if anything, they may be buying a little ahead of the market pickup. I don't know that I can draw any trend from 3 to 6 months, but the numbers might suggest that.

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

Thank you, everybody, for participating in this morning's call. And please look for our 10-Q that we expect to file tomorrow.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.