Transdigm Group Incorporated (TDG) — Q2 2015 Earnings Call Transcript

Good morning and welcome to TransDigm's fiscal 2015 second quarter earnings conference call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; Chief Operating Officer, Kevin Stein; our Senior Executive Vice President, Greg Rufus; and Terry Paradie, our new Chief Financial Officer. A replay of today's broadcast will be available for the next two weeks. Replay information is contained in this morning's press release and on our website at transdigm.com. 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 SEC. These are 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, now let me turn the call over to Nick.

Good morning and thanks again to everyone for calling in to hear about our company. Today, I'll review as usual our consistent business strategy. I'll do an update on our recent acquisitions, I'll go through the financial performance and the market summary for both this quarter and year-to-date, I'll review our guidance for 2015, and also introduce Terry Paradie, our new CFO. To restate, we believe our business model is unique in the industry, both in its consistency and in its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons why we believe this, about 90% of our net sales are generated by proprietary engineered products and around three-quarters of our net sales come from products for which we believe we are the sole source provider. Over half our revenues and a much higher percent of our EBITDA come from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and have provided relative stability in downturns. Because of our uniquely high EBITDA margins and relatively low capital requirements, TransDigm has year in and year out generated strong free cash flow. This gives us a lot of operating and capital structure flexibility. 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 centered around our three value driver concepts, that is, steady cost reduction, profitable new business generation, and value-based pricing. Third, we maintain a decentralized organization structure and utilize a unique compensation system with executives and senior managers who think, act, and are paid like owners. Fourth, we acquire proprietary aerospace businesses with significant aftermarket content where we see a clear path to private equity-like returns. Lastly, we view our capital structure and capital allocation as another means to create significant shareholder value. To remind you, we basically have four alternatives for capital allocations, and our priorities are typically as follows: First, invest in our existing businesses. Second, make accretive acquisitions consistent with our strategy. These first two are almost always our preferred choices. Third, give back to the shareholders either through special dividends or stock buybacks. Lastly, pay off debt. Given the low cost of debt, especially on an after-tax basis, paying off debt is likely our last choice in the current capital market conditions. With respect to financial capacity, we have about $390 million in cash, roughly $325 million in an unrestricted undrawn revolver, and additional capacity under our credit agreement. We ended the quarter with a net leverage of 6.1 times EBITDA, well below our credit agreement limit. As of March 28, 2015, at the end of the quarter, based on current capital market conditions and after all recently announced finance activities and M&A activities, including Pexco, we believe we have adequate capacity to make over $1.5 billion of additional acquisitions without issuing any more equity. This capacity grows as the year proceeds. Once again, this does not imply anything about acquisition opportunities or anticipated acquisition levels for fiscal year 2015. As you might have seen, we recently closed on two transactions: the Telair cargo handling business for about $725 million, subject to certain adjustments, which we closed right before the end of Q2, and the Franke aerospace faucet business for $75 million right after the end of Q2. Starting with the smaller of the two, on March 31, we closed Franke. This business fits well with our Adams Rite faucet business. It has substantial positions on most of the Airbus commercial transport platforms, while Adams Rite has similar positions at Boeing. The business is located near Berlin, Germany. We intend to relocate it to our Adams Rite business in Fullerton, California, over the next 12 months or so. This business is almost exclusively proprietary, sole source, and commercial aerospace with over 60% aftermarket. Overall, a good fit. On March 26, we closed on the purchase of the Telair Group of businesses for a purchase price of about $725 million. We financed this acquisition primarily through cash on hand. The Telair Cargo Group's annual revenues are expected to be about $300 million with EBITDA margins approaching 20%. For the fiscal year ending 2015, Telair is a global leader in commercial transport OEM, onboard cargo loading and handling systems. Over 80% of the revenues are from the commercial aerospace market, with the balance from the military aero. Approximately 45% of the revenues come from the aftermarket, primarily for commercial transport and commercial cargo aircraft. Over 90% of the revenues are from proprietary products, with about 80% sold on a sole source basis. The business consists of three operating units: Telair Europe in Germany, Nordisk Aviation Products in Norway, and Telair U.S. Cargo Systems in North Carolina. The business employs just over 600 people in its various locations. The Telair Europe business in Miesbach, Germany, is the largest operating unit, accounting for roughly 60% of the revenues and a higher percentage of the profit. It has long-standing relationships with Airbus and Boeing, resulting in a substantial installed base of systems worldwide, as well as positions on a broad range of new aircraft. They are the primary supplier of onboard cargo handling systems to Airbus commercial transports, as well as Canadair and Embraer. Nordisk, located in Norway, is a market leader in air transport cargo containers and related items. Nordisk's products are in service with nearly every airline or freight company in the world. Nordisk will report to our AmSafe Cargo Containment Net business in the UK. Telair U.S., headquartered in Goldsboro, North Carolina, is also a supplier of onboard cargo handling systems and components for a variety of commercial and military platforms, including passenger to freighter conversions. Their largest platform is the A400M, the Boeing 767 freighters, while aftermarket spares and a bit of modification work make up much of the remainder of the business. At this time, we do not expect this business in total, that being the Telair business, to achieve the average TransDigm EBITDA margins. This is due to a number of factors, including the more competitive container business and certain contractual commitments on some of the businesses. As I mentioned in the press release, we currently anticipate that the run rate for revenue will be relatively flat for the first 12 to 18 months of our ownership of Telair. This is due to significant A400 shipments in fiscal year 2015 that may not fully repeat in our fiscal year 2016. However, this should be offset by market growth in other areas in fiscal 2016, and the ramp-up in A350 shipments, on which we have significant content, should begin to contribute meaningfully beyond that. As with all our acquisitions, we expect to generate private equity-like returns on these. Additionally, we recently announced the execution of an agreement to acquire Pexco from Odyssey Investment Partners for $496 million. This includes approximately $160 million of tax benefits spread over 15 years. We don't own this business yet, so we're very limited in what we can say, but we believe this will be a strong addition to our portfolio of companies. The company's revenues are almost 100% commercial transport aerospace. They are a major supplier of Boeing commercial transport airplanes for interior plastic extruded parts. The aftermarket is about 35% of the revenue today, but over the next five years, it should expand to about 60%, as the high content 737 with Sky Interiors and the Boeing 787 continue to grow as a percent of the fleet. You may have seen, we also just announced new financing of about $900 million. This is currently intended to be used to both pay for the Pexco acquisition and also for general corporate purposes. Given the very strong credit market, we believe it makes sense to finance the deal this way, while maintaining substantial dry powder for future opportunities. As always, if we end up with more cash or capacity than we need, we'll consider other uses or capital allocations. I'd also like to introduce Terry Paradie, our new CFO. Terry is a great addition to our team. I'm sure most of you saw his background in our press release, so I won't repeat most of it. But Terry came to us from Cliffs Natural Resources, most recently as CFO. And prior to Cliffs, he was a partner at KPMG. Greg Rufus will be around for another 15 to 18 months to assist in the transition and other projects. Greg will do this earnings call and Terry will pick up the next one. So if you have something negative or positive to tell Greg or to get out of your system, now is the time to do it. Turning to our second quarter of fiscal 2015 performance, I remind you, this is the second quarter. Our fiscal year started on October 1. As I've said in the past, quarterly comparisons can be significantly impacted by differences in OEM aftermarket mix, large orders, transient inventory fluctuations, modest seasonality, and other factors. The company's total GAAP revenues were up 5% versus the prior Q2 and up 8% on a year-to-date basis versus the prior year. Organic revenues were up about 3% on both a quarter versus quarter basis, as well as on a year-to-date versus year-to-date basis. Year-to-date bookings are running ahead of revenues in all major market segments. Reviewing revenues by market category, and as usual, that's on a pro forma basis versus the prior year Q2 and prior year-to-date, pro forma meaning, we own the same mix of businesses in both areas. In the commercial market, which makes up about 70% of our revenue, total commercial OEM revenues were up 1% versus the prior Q2 and 3% on a year-to-date versus prior year-to-date basis. On a year-to-date basis, this is driven primarily by commercial transport shipments being up around 5%. Our business jet OEM revenues were down in Q2. We believe this is just a timing issue. Business jet bookings are running nicely ahead of shipments. Though much less revenue, the commercial helicopter segment's both shipments and bookings are down substantially in the quarter. In the commercial aftermarket revenues, in total, the commercial transport segment was up about 9.5% on a Q2 versus prior year Q2 basis. However, this was partially offset by a modest decline in the Business Jet/General Aviation business and again, though small in revenue, a very substantial decline in the commercial helicopter segment. Overall, our commercial aftermarket was up about 7% on a Q2 versus prior year Q2 basis and about 6% on a year-to-date basis. Bookings for the quarter and year-to-date are running ahead of revenues. Given the difficult comparisons in the back half of the year, soft business jet, and declining commercial helicopter revenues, unless we see a fourth quarter spike like we did last year, it will be tough to achieve high single-digit growth for this year in the entire commercial aftermarket. Moving on to defense, which makes up about 30% of our revenue, defense revenues were up 2% versus the prior year second quarter and about the same 2% on a year-to-date basis. The results continue to be mixed across businesses. Bookings, however, ran well ahead of revenues on both a quarter and year-to-date basis. We should see some full year revenue upside here. Moving to profitability now; on a reported basis, I'm going to talk primarily about our operating performance or EBITDA as Defined. The as-defined adjustments in Q2 were made up of non-cash compensation expenses and acquisition-related costs. Our EBITDA as Defined is about $288 million for Q2. This was up 10% versus the prior Q2, significantly more than the revenue. Year-to-date is $558 million and also up about 10% versus the prior year. The EBITDA as Defined margin was about 46.5% of revenue in the quarter and year-to-date. That was up 2% from the prior year Q2 and 1% from the prior year-to-date. The Q2 and year-to-date EBITDA margins, without dilution from the impact of the two acquisitions we purchased in 2014, was approximately 48%. We expect this core group of businesses to be at about 49% for the full year. With respect to acquisitions, we've been busy, as I've discussed. We continue looking at opportunities. We still see a reasonable amount of activity, but closings are always difficult to predict. We remain disciplined and focused on value creation opportunities that meet our tight criteria. Moving on now to the 2015 guidance. Based on our current view of the business, excluding the Telair and Franke acquisitions, our full-year guidance for revenue and EBITDA as Defined remains generally unchanged. As I mentioned before, due to the tougher comparisons and other factors, we are concerned that the commercial aftermarket may fall slightly short of high single-digit growth. However, at this time, we believe there is adequate upside in defense revenue and our overall EBITDA margins to offset any potential EBITDA impact. We are, however, adjusting our total company guidance upwards to reflect both our new acquisitions and a more favorable tax rate. As usual, our guidance does not include any additional acquisitions other than Telair and Franke, the ones we have closed. It does not include Pexco, since we have not closed that yet. Our revised guidance for the total company is as follows: revenue – and this is to the midpoint – is $2.68 billion, up about $140 million versus the prior midpoint; EBITDA as adjusted guidance is now $1.21 billion to the midpoint, up about $32 million versus the prior; and EPS as adjusted guidance is $8.62 a share to the midpoint – that’s up $0.46 to the midpoint from the previous guidance. The increase in adjusted EPS of $0.46 at the midpoint, the majority of the increase comes from the recent acquisitions with much of the balance due to a more favorable tax rate. By market segment, excluding the most recent acquisitions, we are using the following assumptions: Commercial OEM, mid-single-digit growth. This is unchanged. Commercial aftermarket, mid-single-digit growth. This is modestly down from our prior guidance. Defense, low to mid-single-digit growth. This is modestly up from our prior guidance. As usual, we'll re-evaluate this next quarter and update you if we see changes. All in all, a good quarter. Our operating results were strong, we closed on two solid acquisitions, and we expect Pexco to close soon. Once Pexco closes, we will have invested about $1.3 billion in solid aerospace businesses with strong value generation prospects over a 90-day period. With that, let me hand it over to Greg.

Thank you, Nick. I'd like to correct one of Nick's earlier statements about our CFO transition. I'll only listen to the positive comments; the negative comments can go directly to Terry. I'm very pleased with the addition of Terry to our team and I can assure you we'll have a seamless transition. As disclosed in this morning's press release, our second quarter sales were $619 million, approximately 5% greater than the prior year. Our organic sales were about 3.5% higher than last year, primarily driven by growth in the commercial aftermarket, offset by lower growth rates in commercial OEM and defense. Our second quarter gross profit was $342 million, an increase of 11% over the prior year. The reported gross profit margin of 55.2% was three margin points higher than the prior year. Excluding all acquisition-related accounting adjustments, our gross profit margin in the business versus the prior-year quarter improved approximately two margin points. The operations continue to expand margins as a result of the strength of our proprietary products and continually improving our cost structure. Additionally, there was a decrease in non-operating acquisition-related costs versus the prior year, contributing an additional one margin point to the reported margin. Selling and administration expenses were 12% of sales for the current quarter compared to 12.1% in the prior year. Excluding acquisition-related expenses and non-cash stock compensation expenses, the SG&A was about 10.3% of sales compared to 10.5% of sales a year ago. Interest expense was $100 million, an increase of approximately $18 million, or 21% versus the prior-year quarter. This is a result of an increase in the weighted average total debt to $7.5 billion in the current quarter versus $5.7 billion in the prior year. The higher average debt year-over-year was primarily due to the amount borrowed to fund the $25 per share special dividend paid in the third quarter of last year. Also in conjunction with that dividend, we refinanced $1.6 billion of existing notes to a lower interest rate. This refinancing helped lower our weighted average cash interest rate to 5.1% compared to 5.4% in the prior year. Our lower effective tax rate in the quarter was primarily due to the impact of our foreign earnings being taxed at a lower rate, resulting from the new structure formed in conjunction with the Telair and Franke acquisitions, as well as favorable discrete adjustments related to finalizing our IRS audits for both fiscal years 2012 and 2013. We estimate that our current tax structure will help lower our effective rate. For fiscal year 2015, our effective tax rate will be below 32%. We now expect our cash taxes to be approximately $175 million for fiscal 2015. Our net income for the quarter increased by $20.5 million, or 23%, to $110.9 million, which is 18% of sales. This compares to net income of $90.4 million, or 15% of net sales in the prior year. The increase in net income primarily reflects the increase in net sales, improvement in base margins, the decrease in acquisition-related costs, and a lower effective tax rate. These items were partially offset by the higher interest expense just discussed. Our GAAP earnings per share was $1.96 in the current quarter compared to $1.49 per share last year. The current EPS growth of 32% is higher than net income growth due to the dividend equivalent payment made in the comparable quarter last year that did not repeat. Our adjusted earnings per share was $2.11, an increase of 13% compared to $1.87 per share last year. Again, please reference table three in this morning's press release, which compares and reconciles GAAP to adjusted EPS. Switching gears to cash and liquidity, first, I want to remind you that during the quarter, we paid $725 million for Telair and borrowed $75 million on our existing revolving credit facility as part of that transaction. After these activities, we ended the quarter with approximately $393 million of cash on the balance sheet. A few days after our quarter ended, we closed on the Franke acquisition and paid $75 million in cash. Adjusting our cash balance for the acquisition of Franke, our adjusted cash balance would be approximately $318 million. The company's net debt leverage ratio was 6.1 times our pro forma EBITDA as Defined, including both Telair and Franke, and gross leverage was 6.4 times on a pro forma EBITDA. As Nick mentioned this morning, we announced our plan to finance $900 million worth of proceeds to be used to pay for the acquisition of Pexco for approximately $496 million and almost $400 million added to the balance sheet for general corporate purposes. Assuming the completion of these transactions, and absent any further acquisitions or capital market transactions, we expect to end the year with over $900 million on the balance sheet and our net leverage to be near 5.8 times pro forma EBITDA as Defined. Regarding our guidance, we estimate the midpoint of our GAAP earnings per share to be $7.69. As Nick previously mentioned, we estimate the endpoint of our adjusted earnings per share to be $8.62. The $0.93 of adjustments to bridge GAAP to adjusted earnings per share includes the following assumptions: $0.06 from the dividend equivalent payments, $0.41 from non-cash stock option expense, and $0.46 from acquisition-related expenses. The large increase is due to the recent acquisitions of Telair and Franke. Note that both acquisitions just closed will require transition service agreements which will include certain accounting activities we will require from the sellers for a period after ownership. Because of this, we will have a one-month reporting lag for both Telair and Franke. Our current plan is to have two months of activity in our third quarter results and catch up with four months of activity in our fourth quarter. Now, I'll hand it back over to Liza to kick off the Q&A.

Thanks, guys. In order to give everyone the opportunity to ask questions, I'd ask that you limit your questions to two per caller. If you have further questions, please reinsert yourself into the queue and we'll answer those as time permits. Operator, we are now ready to open the line.

Hey. Good morning, Nick, and welcome, Terry and Greg. Thanks for helping us all this time and congrats on not having to put up with us anymore.

Not quite. He's got to hang around for 15 months.

Couple of questions. One from a high level, Nick. When you look at the three recent transactions and compare them to some of the others you've seen, whether it's Airborne, EME, I wonder if you might compare and contrast those and how you feel about these. They certainly look like some of the transactions we've seen in the past, obviously, Franke and Adams Rite or Pexco and Schneller. I wonder if you might just give us some color about how you think about these acquisitions versus some of the others you've done in the past couple of years.

Well, if I compare that to say Airborne, these are more right down the middle of the plate kind of acquisitions, proprietary, aerospace, commercial aerospace, kind of things. I would describe them as the best way to do it, right down the middle of the plate. I would say – which by the way is what Arkwin was like and what the GE business was like, which were the previous ones we bought. As I mentioned to you, I think there's the – let me stay off Pexco. I think that's just because we don't own it yet and we're restricted in what we can say.

That's fair.

But I think it's a significant value generator. The Telair one, I think there's good upside, though as I said, Carter, I don't know that it gets up to the average at least for the next three years or so. There's just some contractual issues there.

Are those basically agreed to long-term prices?

I don’t want to – I can’t really talk – confidentiality agreements with your customers. But that'd be a pretty good guess. I don’t know what else would do it.

Yeah, exactly. Just a quick follow-on. Last quarter, you talked about some distributor destocking. I didn't know if you saw any more of that or if you were past that or...

I don't think we saw any meaningful change there this quarter.

Great. Thanks, guys, and congrats on the deals.

Hi. Good morning, everyone.

Morning.

Morning Noah.

Morning Noah.

Greg, congrats on the retirement and the run you had here.

Thanks. I feel old.

Can you guys walk us through why cash from ops was negative in the quarter and how you see it playing out for the rest of the year?

Terry, you want to handle this one?

Yeah, Noah, I think the biggest driver for cash from ops being negative is kind of three areas. There was a big income tax payment made during the quarter of over $80 million, as well as you're also seeing interest payments of over $140 million during the quarter and then just plainly the working capital changes during the quarter, which drove the negative cash from operations for the quarter. But it’s just timing. I think we're comfortable and confident that we'll generate the planned free cash flow for the full year.

And can you remind us what that plan is?

Well, in my numbers, by the end of the year, we'll now have $900 million in cash on the balance sheet.

Assuming we'll put $400 million from that financing....

That's right.

Okay.

So $500 million without the financing and $400 million because we'll probably throw in there from the financing.

Got it. Can you tell us how much of the commercial OE and aftermarket revenues that you report are helicopter?

It's a small percentage. I don't know the exact percent. It's a small percent. It's surely in the single digits, well in the single digits. And the only reason that they register on the meter is because they drop off so much.

Yeah. And that's all oil and gas I assume?

I think so. I think so. Nobody gives us a reason when they don't order, but that's surely what we surmise.

And then in the full year commercial aftermarket growth target revision, is there any change to the large commercial aerospace piece of that?

I don't know that I can call it exactly that close. I mean, clearly, the trends in the commercial transport look good. However, the comps get pretty tough. If you remember, the second half of last year was up 17%, 18%.

Right.

So the comps get tough. It's clearly going in the right direction. And absent anything else, it might well get there, but we're getting some down drags on the other pieces of it. And just when I would put them all in a stew, it makes me feel like that high-single-digit number's a little risky. Now we get a spike like we did last year at the end of the year, we'll be fine, but that seems to me more of a sort of a hope than a plan.

Okay. Thanks very much.

Thanks. Good morning. I wanted to pick up on that cash flow question for just a second. So I think that the guidance had been $475 million. Cash taxes are now about $5 million lower and then you have another $32 million of EBITDA. So is free cash flow going to be closer to $500 million? Because if that's the case, it seems like your year-end cash balance should be closer to $1 billion than $900 million.

I don't reconcile all of the pieces, but I could tell you that our cash flow is what it is, and our operating capital is pretty good. Our DSOs are in good shape, our inventory is in good shape. It's in the noise range, but we may spend like $10 million in transition service agreements, which wouldn’t be part of the EBITDA, but that's only like $10 million with the two acquisitions. So I don't know to your starting point, or we have so many moving pieces with everything we just threw at you, but we think it's more like $900 million and everything's clicking in the right direction.

I just think we don't foresee any other acquisitions; we don't see any difference in our operations than we have...

No. No.

...on the cash generation.

On the free cash flow side?

Yeah.

Okay. And then, Greg, you also mentioned the tax structure improvements that you were making and it sounded like some of those may actually be more permanent and sticky. So is that 32% – I guess I couldn't quite discern what was discrete from prior years and what was more permanent in terms of tax structure going forward.

Well, the discrete items were – we finished up an audit and did that. That was only $0.06, the discrete item.

Okay. Yeah.

And then as we go forward, we think the rate will be below 32%. Of this tax structure stuff, we won't give you an effective tax rate that we're going to forecast in 2016, but we think on an annualized basis, it’s between $10 million and $12 million of tax savings from this restructuring.

Okay. Good deal. I'll take the two. Thanks.

Thanks so much. Good morning.

Good morning.

And congratulations on your retirement, Greg.

Thank you.

We didn't plan that very well, did we?

Nick, I thought we'd kick it off on the acquisition front. With Telair having a lower margin and Pexco having a higher percentage of OEM sales, does this indicate that you're not seeing as many of your classic targets out there as you maybe would have seen in the past?

I don't know that I can say that. As I've always said, we evaluate every day, and the ones that look like they might work, we take a swing at. I would say on aftermarket, Telair is a pretty hefty aftermarket. Franke's a pretty hefty aftermarket. I think as we told you, the Pexco one is about 35% now, but just by natural occurrence, it's going to drift up to 60% just because the planes going in have much more content than the planes coming out. So I don't know that I would say that they're proprietary aerospace businesses with a fair amount of aftermarket. They don't – now, they see a clear path to that.

Okay. And then second, you mentioned that bizjet aftermarket was a bit weak in the quarter. What's the driver of that? Is it lower flight activity or some destocking?

I don't know enough – I really am not sure. I think it's a transient issue because the bookings look pretty good.

Okay. So we should expect that to accelerate maybe in the second half?

We give guidance in total. We don't give it by each one of those segments. But with the bookings good, you would hope to see some pickup.

Great. Okay. That's all from me. Thank you.

Good morning. Welcome, Terry. Congrats, Greg.

Thanks, Rob.

Thank you.

Nick, on helicopter, since it's so weak, is there a way to frame where it is relative to its peak and its trough? I mean, how much more downside could there be both OE and/or aftermarket?

I don't have the number in front of me, Rob. I don't think it's big enough to have a material impact on the business through the year, but it drops off enough it can sort of make some quarterly comparisons look funny. But I don't know the – as I sit here, I just don't know the exact numbers. It is far and away – it's way smaller than commercial transport, as I'm sure you know, and it is significantly smaller than business jets.

But it could continue to impact? In other words, we could see similar commentary next time?

Yes.

Okay. And then going over to Telair and the three years until the margins – well, I want to make sure I understand you correctly. Are you saying you can get there eventually, it's three years away, or you're not going to get there?

No. I'm saying right now, as I sit here today, we are not figuring we can get there. Now as contracts run out over time, our view on that may change, and hopefully – we tend to be somewhat conservative in our acquisition models, so hopefully we can do better. But we don't – we want to be sure we have a model that we can meet and get our private equity-like returns without making too many wild assumptions. So I would figure it doesn’t get there right now.

Okay. And then just the last thing, on the air transport aftermarket, or large aircraft aftermarket, and your comments earlier, understanding part of it's helicopter, part of it's bizjet. But just what the airlines are doing, do you think that just flight activity is so robust that we've maybe seen a slower sales demand or spares sales demand than we might see at some point? You mentioned a spike last year. Is there a bow wave that might be out there?

I mean, you know that's always a possibility. Right? Because if you take probably the last couple of quarters, add them up and adjust for price, it probably isn’t quite keeping up with RPMs. Now you also have the confounding variable of the six months before that, it was up 18% or something like that.

Right.

So I don't exactly know how to parse that out. But, Rob, clearly there's some chance. But as I said, if we get a fourth quarter spike like we did last year, all will be well, but we're just not figuring on that. Now whether that comes or it doesn’t come along, will have no effect or impact on that. It either will or it won't.

Okay. Thanks very much, Nick.

Hi. Good morning, and congratulations, Greg, and welcome Terry again. Just wanted to first follow up on the defense market, if we could. Now, do you get a sense, Nick – I mean this is the second quarter in a row where you've talked about better bookings. Obviously, you raised the guidance a little bit. Have you got a sense that we've hit an inflection point and this is sort of now what to expect moving forward? Or do you get a sense there's still some one-time issues perhaps that you're seeing in this market?

I'm very reticent to speculate on that since for the last three years or four years, I usually have been too pessimistic and it's done better. I will say, if you look through the data, it's still not clear. You got product lines all over the map: some up, some down, some sideways. I think I’d just have to stick with sort of the guidance we gave you. I feel pretty good looking six months out because our book – we've been shipping pretty well and our bookings are hanging in pretty well. I just – it's very difficult for me to speculate beyond that.

Okay.

I think the chances – let me back – I think if you asked me four years ago, me and many people would have said, you could be looking at a 25% dislocation. I don't – I think the risk of that is likely behind us.

Okay. So it sounds like, at least moving forward here, with the bookings you've seen, there's a little more confidence perhaps in the outlook than certainly – I mean, I know you outperformed relative to your pessimistic expectations. But it sounds like there's just more confidence or visibility in the business.

Surely for the next six months.

Yeah. Okay. That's great. And if I could, just on the commercial aftermarket, did you see – throughout the quarter, did you see any trends where maybe the year started a little softer and picked up through March that's continued into April? Or was there any noticeable difference coming out of, calendar-wise, coming out of the fourth quarter December into January within commercial, specifically on the transport side with commercial aftermarket purchasing?

Yeah, I don't think I can sort of slice the onion that thin. March always looks better to us because it's a five-week month for us in our accounting system. Plus, we have all the holidays in the first quarter.

Additionally, we have all the holidays in the first quarter.

Yeah. In the first quarter, as you know, we're about eight to 10 days short on shipping days. So it always – the first quarter always looks a little worse. And the last month of each quarter looks good to us. It always looks good because we're on a 4-4-5 schedule. So I don't know that I can parse that out and give you anything definitive.

All right. That's helpful. Thank you very much.

I'd just like to ask if you can comment on the M&A pipeline now. After all these deals, do you still have a number of such opportunities?

Well, one thing I can say for sure is the pipeline today has three less businesses in it than it had 90 days ago. I think that's about the only thing I can say with certainty. We're still active. We're still looking at things. I have no ability to predict whether we are done buying or not done buying here for the year. Obviously, we think there is – we don't think we're dead or we wouldn't be looking to borrow more than we need to pay out, but time will tell.

Okay. And could you comment – the comment on defense bookings up significantly. Was this pretty broad-based? Before it was mostly Airborne Systems, right?

Yeah. I would say it is across businesses, though the Parachute business is the biggest pickup. That one's up very substantially. Others are up, but not to that degree. And it's still – I don't want to say it's a tide rising and all the ships are coming up still. I mean, it's still a mixed picture.

Okay. Thank you very much.

Hey. Good morning, guys. Thanks for taking my question.

Morning Mike.

Morning Mike.

Congrats, Greg. Maybe, Greg, just for clarity, the $900 million in financing, I'm assuming that's not embedded in the outlook, and I think maybe even perhaps more so I'm asking on maybe the right interest expense for the year. I don’t think you gave an interest level for the year.

No, that's not embedded in the forecast right now. I mean, as a general rule, until we actually own it, we don't put it in. We were just giving you a little color on leverage.

Got it.

So neither Pexco nor the additional debt. Neither one are in there.

Are in there. Right.

Got it. Just maybe on Pexco and Telair, is there any – you mentioned obviously the margins. Have both of those entities worked out their sort of Partnering for Success agreements with Boeing?

Pexco, yes. Telair is primarily an Airbus business.

Right.

And they don't have the same situation at Boeing.

Okay. Okay. That's fair. And then just the last one maybe on Telair. Structurally, is it going to be harder to implement your value creation just given a lot of their European operations and labor laws there? And I guess maybe just an add-on to that, how much of a FX tailwind do you guys expect to pick up from Telair this year?

I don't know what the tailwind is on FX, but it's a tailwind, not a headwind obviously.

I don't know exactly...

We're only putting on for half the year from when we bought it.

Yeah, yeah.

And it's the change from when we bought it until the end of the year. A lot of the tailwind you saw already. So it isn’t a big number. On the European productivity or cost situation, that's one that we understand we're in a different environment, and I think we've – we hope we've reflected that appropriately. We're a little more conservative than we might be in a different situation.

Got it. All right. That's all I had. Thanks, guys.

Okay.

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