TransDigm Group Inc (TDG) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter TranDigm Group, Incorporated, Earnings Conference Call. My name is George and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr. Sean Maroney, Director of Corporate Accounting and Investor Relations. Please proceed, sir.

Thank you. I'd like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2009 Second Quarter Earnings Conference Call. With me on the line this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; our 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 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 information regarding forward-looking statements and risk factors included in the Company's latest filings with the SEC. These filings are available through the Investor section of our website or through the SEC's website 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, and adjusted net income, both 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 measure and a reconciliation of EBITDA as defined and adjusted net income to that measure. With that, let me turn the call over to Nick.

Good morning, and thanks for calling in to hear about our Company. I'd like to start off again, as I have in the last two quarters, with some comments about both our consistent strategy and our current sense of a very fluid aerospace market as it applies to our business.

To reiterate, 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 a few of the reasons why we believe this, almost 95% of our sales are generated by proprietary products and about 80% of our net sales come from products for which we are the sole-source provider.

About 60% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced higher gross margins and provided relative stability in the downturns. This, assuming we control our costs, can also contribute to our EBITDA margins improving in spite of declining overall revenues. Even in difficult market environments, the annual worldwide growth in air travel rarely goes negative for any extended period of time. In fact, most reports I have seen forecast modest declines in worldwide traffic in 2009 in spite of a very difficult economic situation, with some possible recovery at the end of the calendar year.

Because of our uniquely high EBITDA margins -- about 48% as a percent of revenues, plus or minus -- and our relatively low capital expenditures requirements -- about 2% to 3% of revenues -- TransDigm has, year in and year out, generated strong free cash flow. We have significant liquidity and no near-term debt issues. We have about $155 million in cash and approximately $200 million of undrawn revolver. We have no principal payments due under our credit agreements until 2013, and we believe we currently have access to additional debt if we so desire.

We have a well-proven value-based operating strategy focused around what we refer to as our three value drivers -- that is new business development, continual cost improvement, and value-based pricing. We stick to these concepts as the core of our operating management methods.

This consistent approach has worked for us through up and down markets in the past and allowed us to continuously improve and increase the intrinsic value of our business while continuing to steadily invest in new business and platform positions. Ray Laubenthal's going to give you some recent examples of our typically very active new business process.

We have been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace products with significant aftermarket content. We are able to acquire and improve aerospace component 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.

To remind you, the performance after 9/11, where the EBITDA, as defined, grew and margins expanded both on a GAAP and pro forma basis right through the downturn, was the most recent example. During that very trying period, all our value drivers contributed. We quickly reduced costs, we continued our value-based pricing model, and we generated new business and improved our acquisition, all activities which we are repeating in this current downturn.

As we have in the past, in Q4 of last year we moved quickly to reduce our costs and get out ahead of a softening market. We have continued this cost-reduction effort in the first half of 2009. This is reflected in our Q1 and Q2 margins. Additionally, as in the past cycles, we continue our active new business generation as well as our value-based pricing initiatives. This consistency still to us does not seem to not be fully recognized and valued at this time.

Now, with respect to our underlying markets, in general we still see a lot of uncertainty in the second half of fiscal year 2009. I surely still don't know how this cycle is going to unfold, but our current sense of the market as it applied to TransDigm is as follows.

In the commercial OEM world, the Boeing strike concluded but we still expect to lose at least three months of effective Boeing production in our 2009 fiscal year from the strike. In addition to the recent Boeing 777 rate reductions, we suspect there may be other rate reductions announced by both Airbus and Boeing in the next six to 12 months. Depending on when and if these announcements occur, we could see some more, or less, negative volume impact in the second half of fiscal year 2009.

Almost all of the business jet OEMs have announced significant rate reductions in the last 120 days. This, along with the related system-wide inventory adjustments, will definitely have a negative effect on our second half volume.

All in all, for our commercial OEM business, we are now assuming this will be down about 10% versus the prior year, rather than the flat year-over-year comps we estimated originally, though I will say this still remains quite unclear. The business jet portion is, of course, down significantly more than this overall average.

In the commercial aftermarket, we continue to see a slowdown in traffic growth as the worldwide economic conditions continue to take their toll. Based on the various industry published reports, worldwide RPM, or traffic, appears to be down in the mid-single digits for the first half of our fiscal year, with recent months being down a bit more. We believe we also continue to see some system-wide airline inventory reductions.

Though we understand many forecasters anticipate a recovery in the second half of the calendar year -- and we hope this is so -- we are a bit more pessimistic about the second half of our fiscal year commercial aftermarket revenue than we were originally.

Though impacting us to a much lesser degree, business in general aviation usage is down much more substantially than commercial traffic. We remain uncertain about the second half of the year but believe it is now likely that our commercial aftermarket revenues could be flat to very modestly down year over year. I'll just remind you that the quarterly numbers can bounce around; over longer periods of time, our real, or unit, volume in the aftermarket has generally been able to grow at or ahead of overall worldwide passenger travel.

In the defense business, on the other hand, this segment continues to look very good. Q2 revenues and bookings were again better than anticipated. Based on what we know today, defense should be closer to a low double-digit year-over-year growth versus the mid-single digits we anticipated earlier. The second half year-over-year comps are tough in the defense business, by the way.

We remain very cautious regarding the market outlook. The confidence and the strength of our business model continue to create intrinsic value, and our management team's ability to respond and perform in these tough market conditions.

Now let me turn to our latest financial performance. I'll remind you, this is the second quarter for our fiscal year 2009. Our year started October 1, 2008, so we're now halfway through.

As I've said in the past, quarterly comparisons can be significantly impacted by differences in the OEM aftermarket mix, large orders, transient inventory fluctuations, modest seasonality, and other factors. But in spite of a weak economy and market, we had a good second quarter and first half.

Our revenues were up 10% and 11% versus both the prior Q2 and the first half. Pro forma growth -- that is, assuming we owned the same mix of businesses, like a same-store basis -- is up about 2% on a year-to-date basis and about flat on a quarter-versus-quarter basis. In a nutshell, or very simply, the overall commercial business is down and the defense business is up significantly.

If you look at the revenues by market segment, again on a pro forma basis versus the prior year -- that's assuming the same mix in both periods -- in the commercial segment, which makes up about 70% of our revenue, commercial OEM revenues were down about 10% versus the prior second quarter. If you look at the first half of 2009 versus the average 2008 quarterly run rate, commercial OEM was still down about 10%. This is reflective of both the Boeing strike in the first quarter and the beginning, in Q2, of the significant business jet production rate cuts.

The commercial aftermarket revenue was down about 2% in Q2 -- this is versus the prior Q2 -- and about 3% on a year-to-date basis. Of interest, the commercial transport aftermarket was up very slightly on a sequential Q2 versus Q1 basis. This was more than offset by a very sharp decline in business, regional, and general aviation demand. Though tough to quantify, we still believe we are seeing some inventory reduction at the airlines.

The defense segment, which makes up about 30% of our revenue-- in this segment, our revenues were up 15% on a quarter-versus-quarter basis and 17% on a year-to-date basis. We continue to see strength across most of our product lines. As I said before, our defense revenues appear likely to be above our original expectations for the full year.

In total, for the quarter our revenues were close to our expectations, with a shift in mix between commercial and defense revenues and a modestly richer mix.

Moving to profitability, and on a reported basis now, I'm going to talk primarily about our operating performance, or EBITDA as defined. The total adjustments to EBITDA are quite modest, by the way, this quarter.

Our EBITDA as defined of about $94 million for Q2 and $186 million for the first half is up 17% versus prior Q2 and 19% versus the prior year to date. The EBITDA as defined margin at 49% in the quarter was a very strong margin performance. This continues to reflect the impact of our cost reductions, a richer mix, as well as our ongoing pricing activities.

As you saw in the press release, we have modestly decreased our full-year revenue guidance but slightly increased our profit guidance. The revenue adjustment is the result of a combination of the reduced business jet revenues, our concern over both the commercial transport production rates and the commercial aftermarket volume, offset in part by the higher defense revenues. This results in a very modest increase in second half revenues compared to the first half of 2009.

Based on our market assumption, we anticipate a modest decrease in EBITDA margins for the second half of 2009, though I want to re-emphasize this margin is very dependent on the ultimate mix of OEM versus aftermarket shipments.

In total, for fiscal year 2009, we now expect revenue growth will be driven by recent acquisitions with organic growth about flat, give or take a little. On the other hand, we expect our increase in 2009 EBITDA as defined to be a result of both organic and acquired growth.

With respect to acquisitions, as I think you know, we made one additional acquisition in December, a starter generator business we bought from General Electric. We continue actively looking. The pipeline of possibilities still has more smaller than larger opportunities. We've seen some pickup in activity, but closings are always difficult to predict. We've remained disciplined and focused on value creation in our acquisition activities.

And with that, let me turn it over to Ray Laubenthal.

Thanks, Nick. As Nick mentioned, in total we had a good second quarter and first half. Our operating value drivers and acquisition integration continued to add solid value. Let me explain our second quarter operational value creation in a little more detail.

We are making good progress integrating our two most recent acquisitions. As planned, last quarter we completed the physical move of the GE Unison magneto business from Rockford, Illinois, to our Champion Aerospace facility in South Carolina and we're now starting to see operational savings from this most recent consolidation.

The other acquisition, GE's Unison Aircrafts Parts Corporation, or APC, was acquired on December 16, and is also progressing through its integration into our operation. APC designs and manufactures starter motor generators and electronic generator control units. We'll be moving the APC business into our facilities during the next six to nine months.

Now, let me turn the discussion to our other operating units and their value generation activities last quarter. We continued to make cost reductions during the second quarter. Year to date, we've reduced headcount by an additional 4%. Recall we enacted a 9% headcount-driven cost reduction in our fourth quarter of 2008. These cost reduction actions served us well in the first half of our fiscal 2009 as the market softened. Going forward, we'll continue to fine-tune our cost structure as market demand dictates.

Although the market has been softening, our new business development continues to be active. We typically do not discuss at length our development activities during these calls, but we thought it would be worthwhile to discuss our continued investment in the business during this down market. To give this a little color, I'd like to give a few examples of the new business activity so far this year, and let me remind you there's typically a gap between when we're awarded new business and when we develop and ship the resulting new products.

In the commercial OEM segment, we continue to see significant new business activity. On the A350 and A380, we were awarded the entire cockpit door module. This award includes the entire door structure and the associated cockpit security latching system. Once we complete this development activity, we will have expanded our security door revenue content per airplane by over five times on these two platforms versus the other existing Airbus platform.

Additionally, on the Embraer 170/190 regional jet platform, we were awarded the cockpit door security latching system; and on the Embraer MSJ, we were awarded the compact water delivery system for the lavatory and galley.

In the commercial aftermarket segment, we have traditionally gotten new business orders by supporting the existing fleet. We only focus on the aftermarket new business if we can provide real value to the customer by solving a product performance or product safety problem.

Even in tough times, we can find some of these opportunities; and here are a few examples. At Delta and FedEx, we are now providing them our longer-life micromaintenance NiCad battery for the 757 fleet. And also at FedEx, they're also ordering our longer-life ignition systems for use on their fleet of Cessna Caravan cargo planes.

For the 747 fleet, we've designed an upgraded latch mechanism for the emergency escape slide. This new latch is presently being rolled out across the entire 747 passenger fleet. And on the Boeing 777 cargo conversion program, we're developing and delivering the cargo door bolting system.

And lastly, we continue to upgrade igniters on the GE CFM56 engines by providing a longer-life igniter solution.

In the military segment, as with the commercial aftermarket segment, we continue to develop new equipment to enhance the capabilities or extend the life of the existing aircraft fleet. We recently received an order to supply low-distortion power transformers on both the CH-46 Sea Knight and the CH-53 Sea Stallion helicopter fleet. These low-distortion transformers provide enhanced power to the avionics and flight computer and they provide filter power that greatly reduces pilot and crew radio transmission static.

We also received an order to upgrade the power inverters on the Bell AH-1 helicopter. These upgraded inverters have been enhanced to withstand harsh environmental conditions of water exposure and higher temperatures.

And on the Eurocopter and OH58 Kiowa helicopter platforms, we developed and received an order for engine inlet filtration actuators. These filtration actuators are deployed in dusty desert takeoff and landing situations to prevent abrasives from entering the helicopter's jet engine.

We also secured orders to provide newly designed cockpit avionic components on the C-130's avionics modernization program, and we developed and were awarded the compressor motors on the new-style F-18 missile launchers. These compressor motors will greatly improve our servicemen's safety because they are used in place of pyrotechnic devices in use on the launchers.

The development spending associated on the above programs is normal and similar to the spending in recent prior periods. Our development spending on the 787 was modestly lower than expected during the second quarter. Recall, our 2009 Boeing 787 development spending is expected to be lower compared to 2008 as the work on these projects winds down. At present, we expect our 787 spending to be about as expected in 2009.

We may begin to see some modest spending pickup in A350/A380 development in the back end of the year, depending on the exact timing of the projects and the awards.

We're also making modest favorable progress settling the 787 project scope change issue with Boeing. Our pricing actions have continued to be effective across most of our businesses and they also contributed to our strong first half margins.

Now let me hand it over to Greg Rufus, our CFO, who'll review the second quarter financial results in more detail.

Thanks, Ray and Nick. Good morning to everyone who has called in to hear about TransDigm. Nick just gave a very thorough description of TransDigm's revenue stream and our market conditions; and as Ray discussed, we are active in controlling costs, acquisition integration, and new product development. As you have seen, TransDigm was able to accomplish those items just mentioned, generate cash, and announce solid results in a difficult market environment. Let me review the second quarter results now.

Second quarter sales were $193 million, up $17.8 million, or 10.1%, from the prior year. The increase in sales was primarily driven by the acquisitions of CEF and the Unison product line made in fiscal '08 and the APC acquisition made in at the end of the first quarter of this year. Total amount of revenues from acquisitions this quarter was $20.3 million.

Sales excluding acquisitions decreased by $2.5 million, and represented a 1.5% decrease from the prior year. The decline in organic sales was primarily due to a decrease of $6.3 million of commercial OEM sales. The two main contributors to the decline in sales were Boeing, due to the strike, and a sharp decline in production rates in the business jet market.

Along with the OEM dip, the commercial aftermarket sales decreased $1.4 million versus the prior-year quarter. Partially offsetting the decline in organic commercial sales was an increase of $6.4 million in defense sales, primarily due to increased demand for aftermarket spare parts and repairs across most of our product lines.

Reported gross profit was $108.8 million, or 56.4% of sales. This $14 million increase is 16% greater than the prior year and significantly higher than our sales growth increase of 10%. The reported gross profit margin increased almost 3 percentage points versus the prior year.

This expansion in margin was attributable to the following -- continued productivity efforts, especially from the Company-wide cost reduction initiative implemented during the fourth quarter of '08 and the first half of '09. The strength of our proprietary products, which allowed favorable pricing. And, to a lesser extent, positive operating leverage on higher sales with favorable product mix versus the prior year.

This higher margin was also achieved despite a modest down-drag in margin due to the dilutive impact of the previously mentioned acquisitions.

Selling and administrative expense for the quarter was consistent with the prior year on a percent of sales basis. Our net interest expense was $21.6 million, a decrease of almost 10% versus the prior-year quarter. The level of debt was the same for both quarters. The average interest rate, however, decreased to 6.1% for the quarter compared to 7.3% a year ago.

Our effective tax rate for the quarter was 36.2%, versus 34% in the prior year. The prior year included some state tax refunds, which were not repeated in '09.

Net income for the quarter was $40.3 million, which was 21% of net sales, and up $8.1 million versus the prior year. The 25% improvement versus the prior year compares well given the sales growth of 10%.

Our cash flow from operations was solid -- $79.5 million in the first half of '09. We ended the quarter with $155 million of cash on the balance sheet. And during the second quarter, we used $74 million of cash for both income taxes and interest payments. Our net debt leverage ratio was 3.2 times our EBITDA as defined. Given the credit crisis the country's going through, we believe our current cash position, together with our undrawn revolver of almost $200 million, is more than adequate for our operating needs.

Turning to earnings per share, our press release includes all the EPS calculations and supporting tables. I'll focus on our adjusted diluted earnings per share for this call. For the quarter, adjusted diluted EPS was $0.85 per share, up 25% from the prior year. This increase mirrors the 25% improvement in net income.

As Nick discussed, and it's spelled out in this morning's press release, we have made some modest changes to our full-year adjusted diluted earnings per share guidance. The modest changes have come from the impact of increasing the midpoint of our guidance to $3.25, up $0.02 from the prior guidance and up 16.5% from the prior year-end EPS of $2.79.

This concludes our prepared remarks and we will now open the line for questions.

(OPERATOR INSTRUCTIONS) Robert Spingarn, Credit Suisse.

Good morning.

Morning, Rob.

Greg, I think you just said that the SG&A as a percentage of sales is pretty consistent, but I've noticed if I look back at the last several quarters, it's actually declined despite acquisitions. Is there any reason it stopped declining on a percentage basis?

No, there's a little bit of lumpiness. We had a little more professional fees in this quarter, but it wasn't a major increase, Rob. As you saw the trend, it has been coming down. We're leveraging our fixed costs a little bit better than we did in the past.

Okay. Nick, to the segment performance -- I think both you and Ray, and Greg -- actually, all of you talked about the moving pieces. But could you speak a little bit-- again, I didn't catch the percentage increase in defense; I think I got the dollar amount. But what's going on there? And a little bit more specificity in terms of the defense aftermarket. Why the strength, why the comps get tough in the back end of the year?

The numbers, Rob, just are-- I think it's 15% for the quarter, quarter over quarter, and 17% year to date. Those are just the rough numbers. I would say, Rob, it is-- the helicopters, a lot of demand for helicopters and ground vehicle parts and repairs. But I can't-- it's a rising tide. If you look across almost all our product lines, it's rising. They're just spending more.

And this started the middle of the prior fiscal year, so that's why we see the comps?

(Inaudible) the comps. If you look quarter by quarter, you'd see the second half of last year was significantly higher from the first half.

So it sounds like you're looking for kind of a mid- to high single-digit defense growth in the second half to average out -- I don't know -- it sounds like about 12 or 13.

We said low double digits, is what we said, so you kind of have to do your own math there.

All right. Well, that's kind of the math I get to.

The reason you get a little bit of funny arithmetic is the half-over-half comps.

Right. How did pricing work in the quarter? Let's talk a little bit about the aftermarket decline again, Greg. I think you just mentioned some numbers but the percentage decrease in aftermarket on a unit basis, and then the offset from pricing.

Well, as you know, Rob, we don't disclose that. But the numbers are down 2% to 3% year over year on a quarter and full-year basis.

On a revenue basis.

On a revenue basis. That's apples to apples -- same store kind of-- same mix of business pro forma kind of thing.

Okay. And then, if you could just talk a little bit again about the acquisition pipeline -- what you're seeing in terms of multiples, and is more on the market today? Less? How are things evolving?

Let me deal with the quantity first. It seems to me like we're seeing a little more activity. I don't know, Rob, whether I draw any conclusion from that other than we seem to be busier looking at things now over the last month or so. But I don't know that I can make any broad statement at all from that.

I would say, of the things that closed, so far the prices haven't come down. It seems surprising to me. There are some things that don't close. But of those that close, they still seem to close at pretty high prices. I'm talking now about proprietary stuff.

If you go out of the proprietary world and go into the nonproprietary kind of businesses, I think you can get some pretty low prices there.

Okay. And then just lastly, in terms of trends, this is maybe a little bit of a 30,000-foot question -- but I think you're clearly cautious on the commercial side, both on OE; you've talked about the aftermarket, the sensitivity of mix, the Company. You mentioned the global-- the forecast from third parties -- particularly we saw IATA come in maybe a month ago and double its negative forecast from down 3% on traffic to down almost 6%. And I suspect that's part of what's behind your adjustment.

But do you get any kind of optimism out of what we see from some of the domestic airlines? Do you see their behavior changing for the positive here as they talk, a few of them talk, about slightly better bookings?

I see the same things you see, Rob, and I also noticed, I think it was Lufthansa last week, said that they thought their go-forward bookings-- they'd sort of bottomed out and their go-forward bookings look better. I'd like to believe that, and I want to believe that, but just to be very practical, I've got to say, the last couple of months RPMs are tougher than we thought they were going to be.

Is there any rule of thumb for when an airline starts booking better to when it starts buying more inventory?

If there is I don't know it, Rob.

Okay (chuckles). Thanks, guys.

Fred Buonocore, CJS Securities.

Hi; yes, good morning, gentlemen. Nice quarter.

Thank you.

Ray went through quite a litany of new business opportunities there. I just wanted to get a sense for, is this sample kind of your normal level of activity on any given quarter and you just elected to talk about it this quarter, or was this kind of a spike in activity?

It's the former. This is generally what we normally see. With the downturn in the market, we thought we'd reinforce that we continue to invest in our business, and we thought we'd add some color to it.

No, absolutely; it was very helpful. I was just wondering on that. And then, also Ray, you kind of mentioned that the pricing actions were taking hold or staying tight across most markets. Are there some areas where you're seeing pushback on pricing that you may have to give in? If you can give some sense for what's happening there.

Let me answer that one, Fred. There's no change in, I'll say, the market structure, the pricing pattern, than the past. If we gave that impression-- we didn't mean to give that impression. It's generally the same kind of patterns as we've seen historically.

Got it. And then, on the 777 production cut, I would imagine that that's not a huge impact for you, just at least to profitability, given it's two planes a month, it's an OEM program. But can give you a sense for the magnitude, or how you think about that?

We think we've captured it in the guidance we've given you, Fred. There's a lot of moving parts in the OEM world. The business jets, as everybody probably knows, are knocked off the rails and the inventory is fluctuating all over the place in that segment. The commercial transport -- you have the 777 coming down and frankly, we're a little concerned about the timing of what other cuts we might see. And whether first-tier people start to squeeze their inventory earlier. We made our best guess at capturing that, but sort of if you asked me what each piece is in there, I'd have to tell you it's very judgmental in total.

Of course. And then, kind of in that same vein, business jet trends-- I mean, where you see things now, how does this compare to, say, the last down cycle in that segment?

I don't remember the business jet went very well. I mean, that's just mathematical -- I just don't remember. But I'm pretty sure we haven't seen the bottom of this one yet.

And I looked at it a little bit. It's faster than the last cycle, but it's almost like the spigot turned off this time around.

Got it. So your guidance should factor in some continued deterioration there.

We suspect-- it wouldn't surprise me if we see some going into next year, too.

Okay, great. Thanks very much; that's helpful.

Carter Leake, Davenport and Company.

Good morning. You may have just answered that, but I want to confirm the fiscal year guidance. It does take into account, obviously, known production cuts, but we don't anticipate, I don't think, any large commercial production cuts by the end of your fiscal year. Are you assuming any in your fiscal year guidance?

I said, again, there's a lot of moving parts in the OEM world. The business jets have stepped down substantially. It's hard, exactly, to predict how all that inventory ripples through the system. The 777 has come down. We're expecting to see some commercial transport rate cuts some time over the next six to 12 months -- I don't know exactly when. You do start to see some higher-tier people start to get nervous about their inventory as that gets closer and closer.

It's difficult for me to say exactly which piece we have. We've taken our best judgment and given you guidance for the year. I don't know that I can slice the onion a lot thinner than that.

I would say that we are not anticipating any substantial impact in the balance of this year for, say, a big 737 rate cut or something like that. If that came about relatively quickly, that could be problematic.

Thank you. How about any guidance on CapEx for the balance of the year? Any changes there?

No. Halfway through the year, we've spent about $6 million and we'll probably spend that or a little more. It depends on the timing and the progress of some of the acquisitions and when they move into the new location, but we're within the normal guidance of about 2% of our sales. But it could be a little lumpy based on the timing of the acquisitions as they move into location.

Thanks. Just one more -- you had mentioned, obviously, that if-- you can keep these margins up, assuming you can control costs. Can you give any color on what keeps you up at night on not being able to do that?

We will and can control our costs. But the margins are a function of mix. As OEM goes down, we mix up mathematically. Just so we're clear on the record there, we manage the business that generates the dollars and the mix will dictate, sometimes, what the margins--

Yes, assuming we keep our costs. If the OEM comes down, we've got to get the costs down proportionately, and then you'll get a mix up.

Yes. But I don't want to give any impression we're operating at a 50% margin going forward, with EBITDA.

Yes, we gave you some guidance.

All right; thank you.

[Randy Griffman], Baird Capital.

Good morning guys, how are you?

Fine, Randy.

Good. I just wanted to dig in a little bit more on the defense side of the business. Did you say that the increases were mostly driven by defense aftermarket?

Yes.

Okay, as opposed to new builds.

Yes. The new build rates don't change that fast.

That's right; okay. And in terms of understanding what's driving that aftermarket demand now, when I guess off tempo's down a little bit in Iraq. We're probably seeing a little bit of a pull-back. How do you guys gauge that going forward? Are there any hints in the DOD budget? Are there kind of resets or inventory builds that you guys see in terms of how the stuff, the equipment, may move going forward over the next year?

Randy, the real answer to that is it's very uncertain and I don't know. I think we're in pretty good shape for the balance of this year. I think defense spending is something we all have to look at warily as we move into the next couple of years.

What we are seeing now is we are seeing strength almost across all our product lines. Helicopters, particularly, are strong. As I told you, ground vehicles, rehab and refurbishing them--

C130s strong.

C130s strong. But across the product lines, it's up almost on all of them. But as you know, this will be a political call over the next couple of years. I think we're fine for the balance of this year. Beyond that, you sort of pays your money and takes your choice.

Right; okay. And do you guys disclose the mix of aftermarket versus OEM in the defense side of the business?

No, we don't. But I would tell you as in the commercial, the lion's share of the cash flow, or profit, comes out of the aftermarket.

Okay. Thank you, guys.

(OPERATOR INSTRUCTIONS) [Benjamin Gen], SNBC.

Good morning, guys. Just a couple of quick questions. Are there any LCs on top of the revolver?

Minor. A couple of $2 million or $3 million for workers comp. The full amount we could go is, like, $197 million. There's a little bit we have to carve out--

De minimus.

Okay. And then, senior secured leverage -- is that about 2.2 times?

I don't have the exact number, but that sounds about right.

But that's a disclosed number.

Yes. You know the senior debt and you know the EBITDA.

Okay.

It's 2.1.

Oh, okay. Thank you.

Sir, there are no more questions at this time. Actually, we have Carter Copeland, Barclays Capital.

Good morning, guys. This is [Meyer Manwassing] stepping in for Carter. I just had a quick question concerning the margin forecast going through the rest of the year. The first two quarters have had some pretty strong margins. Just kind of thinking through the guidance as well as the comments given, it seems to suggest a moderation of the margins looking forward. And I just wanted to get an understanding as to just sort of the makeup of the changes. The changes in the margin -- would it be coming from changes in terms of the mix? Are there other concerns that you see that can help moderate the margin (inaudible)?

No, the primary thing that'll impact the margins from here for the balance of the year is what the exact mix to the shipments are. That's the primary impact. We'll control the costs. I don't expect that we'll have any issue with the cost control. It'll be a question of exactly what ships in the third and fourth quarter, and frankly, that's a little tough to call exactly.

And in the first half, the mix, you discussed that part of the margin improvement was because of some corrected better military mix during the first half?

No, we just said richer mix. The military surely helped, but throughout the business the mix of products was better. We also had the Boeing strike in the first quarter such that those shipments were way off in the first quarter; it helps the year to date. That's probably the lowest-margin products.

Okay. All right, thanks a lot, guys. Good quarter.

Thanks.

Mr. Maroney, there are no questions at this time.

Okay. Thanks, everyone, for calling in today and for participating in this morning's conference call. Lastly, you can expect to see our 10-Q filed later today.

Thanks a lot, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This will conclude the presentation; you may now disconnect. Good day.