TransDigm Group Inc (TDG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the quarter two 2010 TransDigm Group Incorporated earnings conference call. My name is Jeff. I will be your operator today. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jonathan Crandall of Investor Relations. Please proceed, sir.

Thank you. I'd like to thank all of you who that have called in today and welcome you to TransDigm's fiscal 2010 second quarter earnings conference call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus.

A replay of today's broadcast will be available for the next 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 Securities and Exchange Commission. These filings are available through the Investor Section of our website or through the Securities and Exchange Commission 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, 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 as defined, adjusted net income and adjusted earnings per share to thos measures. With that, let me now turn the call over to Nick.

Good morning. And thanks again, everyone, for calling in to hear about our Company. As usual I would like to start with some short comments about our consistent strategy, as well as the current sense of the status of the aerospace market as it applies to at least to our business. To reiterate, we believe that our business model is unique in the industry in both its consistency and its ability to sustain and create shareholder value through all phases of the cycle.

To summarize why we believe this, over 90% of our sales are generated by proprietary products and around three-quarters 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 our aftermarket sales. Aftermarket sales have historically produced a higher gross margin and provided relative stability in the downcycles. Because of our uniquely high EBITDA margins, roughly in the 49% of revenue area, and relatively low capital expenditure requirements, TransDigm has year-in, year-out generated very strong free cash flow. With about $190 million of cash as of April 3 and an undrawn revolver of about $200 million, an expected cash generation in the $40 million to $50 million per quarter, we feel we have adequate liquidity to meet our likely acquisition needs. Additionally, given current capital market conditions, we believe we still have access to significant additional capital if attractive larger opportunities become available.

We pay close attention to our capital structure. We view it as another means to create shareholder value. In support of this goal, to remind everyone, we paid -- we sold $425 million of high yield bonds in Q1 of this year and paid almost the entire amount out to our shareholders in the form of a $7.65 a share dividend and dividend equivalency payments. We have a well-proven value-based operating strategy, focused around what we refer to as our three value drivers, new business development, continual cost improvement and value-based pricing. We stick to these concepts as the core of our operating management method. This consistent approach has worked for us through up and down markets and allows us to continually improve and increase the intrinsic value of our businesses while steadily investing in new business and platform positions.

We have been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace products with significant aftermarket content. We have been able to acquire and approve these businesses through all phases of the cycle. We acquired five businesses in the last 19 months, including one so far this fiscal year. Through our consistent focus on our operating value drivers, this clear acquisition strategy and close attention to our capital structures we've been able to create value for our shareholders through -- for many years in up and down markets. As in prior downturns, in late 2008 and through 2009, we moved quickly to reduce our costs to stay out ahead of a softening market. We continue these cost reduction efforts through 2009 and continue to watch our costs versus the market conditions very closely. Additionally, as in past downcycles, we continued our active new business generation activities, as well as our value-based pricing initiatives. All these activities are reflected in the strong EBITDA margins.

With respect to our underlying markets, though the market outlook is still not fully clarified, we are starting to see much clearer signs of stabilization in many of our segments. In the commercial OEM area, industry forecasters are becoming more optimistic regarding the commercial transport OEM production cycle. In addition, both Airbus and Boeing have announced rate increases on a number of platforms. We don't know the future, of course, and we continue to be somewhat wary of what by historical measures would be an unusually moderate downturn, but it now appears that rate reductions by both Airbus and Boeing in 2011 are now much less likely than we thought six months ago. This could result in some modest volume increase in the latter part of our fiscal year 2010.

For the first time in awhile, we are starting to see in incoming order rates greater than shipments from the commercial transport higher tier manufacturers. All of the business jet OEM's implemented significant rate reductions and related inventory decreases in 2009. We believe this sector is starting to stabilize, though we are not sure it has bottomed out yet, we think it is getting close and the order rate may be recovering slightly. In the commercial aftermarket, we continue to see more positive signals in both worldwide passenger traffic, freight traffic, our incoming orders and other data. Exactly when this results in higher quarter-over-quarter revenue comps by PG remains unclear, though the trend surely appears to be turning.

This quarter we saw signs of recovery in our revenues. Additionally, most forecasters anticipate commercial aftermarket revenues will pick up in the balance of 2010. We hope this is so, and we're beginning to feel better about these forecasts. On a positive note, incoming orders or bookings continue to run above shipment levels in this sector, we also believe we are at or close to the bottom of inventory reduction cycles for this segment, though the data, as in the past, is not very clear.

The business jet aftermarket impacts us to a much lesser degree, but utilization data is showing signs of recovery and we did see some pickup in incoming orders here. For fiscal year 2010 we are still planning on a pick-up and commercial aftermarket revenues in the second half of the year and a modest full-year revenue improvement in this segment versus the prior year. I'll remind you, the comps get much easier in the next two quarters in the commercial aftermarket sector. Although quarterly numbers can bounce around, over longer periods of time our real or unit commercial aftermarket volume has generally been able to track around the worldwide passenger traffic growth levels.

In our defense business, given the uncertainties around the defense budget, we're still not planning on growth in this segment in fiscal year 2010. We see nothing in the first half that changes our sense. This segment can be tough to predict, particularly given the current US political winds. We remain cautious regarding the market outlook but confident in the strength of our unique business model to continue creating intrinsic value and our Management team's ability to respond to the market conditions.

Now let me turn to the specifics of the latest quarter. I will remind you that this is the second quarter of fiscal year 2010. Our year started October 1. As I've said in the past, quarterly comparisons can be significantly impacted by difference in OEM aftermarket mix, large orders, transient inventory fluctuations in the system, some modest seasonality and other factors. But in spite of a continuing unclear economy and aerospace market, our second quarter fiscal 2010 was better than we anticipated. Revenues were up about 7% versus the prior Q2, pro forma revenue growth, that is assuming we owned the same mix of business, is about 3% down on a quarter-versus-quarter basis, less of a decline than we have seen in a while.

Reviewing the revenues by market segment, and again this is on a pro forma basis versus the prior year, that's assuming we own the same mix of businesses in both periods. In the Commercial segment, which makes up about 70% of our revenue, commercial OEM area, the commercial transport revenues were down about 5% versus the prior Q2 and up slightly on a full-year basis. Business jet OEM revenues were down almost 45% versus the prior Q2, and even more so on a year-to-date basis. The comps here are difficult since the severe drop-off last year didn't hit until our second half.

In the commercial aftermarket area revenue was down only 1.5% versus the prior Q2, the best quarter-versus-quarter comp we've seen in awhile. On a sequential basis in the commercial aftermarket, revenues were up about 10% versus the flat run rate we've seen for the previous few quarters. Both commercial transport and the regional biz jet segments were both up. Bookings were again up this quarter and running above the shipping level for the third quarter in a row. Three quarter are not definitive, but it is starting to look like a pretty good indication that the market might have bottomed.

In the defense segment, which makes up about 30% of our revenues, revenues are up 13% on a quarter-versus-quarter basis. However this is compared to a low prior-year Q2. Defense revenues were up sequentially but down versus the run rate of the second half of 2009. Incoming orders are running slightly below shipping rates. A few quarters are not indicative, especially in defense spending, but we remain cautious about this segment. In total for the quarter, our revenues were a bit better than we expected.

Moving on to profitability, and on a reported basis, I'm going to talk primarily about our operating performance, or EBITDA as defined, as defined adjustments were modest this quarter. Our EBITDA as defined of about $100 million for Q2 is up about 6% versus the prior Q2. On a year-to-date basis EBITDA as defined is up about 2%. The margin is 48.4% for the quarter, this is about even with the prior Q2. On a year-to-date basis, our EBITDA margin is about 49%. Both the first and second quarter margins were diluted a little over 1% each by the impact of acquisitions.

With respect to acquisitions, as I mentioned last quarter, we made one acquisition this year for $95 million. We acquired Dukes Aerospace, a manufacturer of primarily proprietary aerospace valving. Due to its heavy dependence on business jet, we don't plan on any revenue growth for 2010 for this business. Duke's integration is moving along well and so far it still looks we got as we expected.

We continue actively looking at opportunities. The pipeline of possibilities continues. We have more small than large, as usual. Closings are difficult to predict, but we remain disciplined and focused on value creation opportunities.

As you saw in our press release, we've increased our guidance modestly for revenues, EBITDA as defined, net income and EPS as adjusted. This primarily reflects modest operating improvements in the second half. Our GAAP EPS is negatively impacted by the accounting treatment of the dividend equivalency payback and the two-class EPS methodology we discussed in some length last quarter.

In summary, Q2 was a good quarter. It is starting to feel like the commercial market is bottoming out, or at least pretty close to that. The defense market is less clear. We'll watch closely and adjust our guidance appropriately as the situation clarifies. And with that, let me hand it over to Ray to give a little more operating color.

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 Woodward Governor valve business from Pacoima, California, to our Aero Fluid Products facility in Painesville, Ohio. We are now starting to see operational savings from this consolidation. At our most recent acquisition, Dukes Aerospace, we have reduced their cost structure, and we are beginning to implement our other value drivers.

Now let me turn the discussion to our other operating units and their recent value generation activities. Overall, after a significant reduction in resources in 2008 and 2009, we are now holding our headcount, flat as revenues start to increase modestly. Going forward, we will continue to diligently control our cost structure and add resources sparingly as the market recovers. Our value-pricing actions have continued to be effective across our businesses and they also contributed to our solid first half results.

Even during this nacent recovery, our new business development continued to be quite active. We continued to invest in a broad range of engineered solutions for our customers. To give this is a little c olor, I'd like to give a few examples of the first-half new business activities. In the commercial OEM segment we continued to develop new applications and win new business awards. On the Airbus A350 and the A380 cockpit door structure and the associated cockpit security systems, we're making good progress. We have developed a series of complex working prototypes that are now going through a battery of tests ranging from volistics, intrusion impact loading, vibration and endurance. Our expanding expertise in this product category has served us well and we have just been awarded the cockpit security door module system on the Mitsubishi Regional Jet.

Additionally in the commercial OEM market, Boeing has selected our new water level sensing system for new production 777 and 747 aircraft water systems. These systems allow operators to optimize water weight on the aircraft, and we're also offering this system to the existing fleet as a weight-saving after-market upgrade. In the commercial aftermarket segment, we have traditionally gotten new business awards by supporting the existing fleet. These programs are not as numerous during these tough times, however, we find that we are able to win new business if we focus on providing real value to the customer by solving a product performance or safety problem. Often we get a premium price reflecting the improved value we provide. Here's a view examples. On the A340 we developed a technical solution for a failing engine cowling hold-open mechanism that is more reliable and safer. Airbus has adopted our new rod mechanism for the remaining production and has also issued a service bulletin requiring a change-out of the entire fleet with our improved mechanism. We have developed a new lightweight longer-life LED lighting system that replaces fluorescent tube-type lighting on Boeing aircraft. These products are just starting to roll out and so far, two commercial air carriers are buying our systems to upgrade their Boeing 767 and 757 fleets.

At ExpressJet, we're now providing them our longer-life micro-maintenance nickel-cadmium for their Enbraer 145 fleet. And on the GE CFM56 engine, we're now providing an expanded offering of upgraded engine ignition components. These new components compliment the longer-life engine igniters we rolled out last year. Combined this group of longer-life ignition products should continue to displace the competitors aftermarket ignition components on the widely used GE CFM56 engine, which is used on the Boeing 737 and A320 platforms.

In the Military segment, as with the commercial aftermarket segment, we continued to develop new equipment to enhance the capabilities or extend the life of existing aircraft fleets. We were awarded another helicopter engine inlet filtration actuator, this time on the CH-53 helicopter. These filtration actuators are deployed in dusty desert takeoff and landing situations to prevent abrasives from entering the helicopter's jet engine. We also won the award to develop a power supply to support the upgraded avionics on the Navy's P-3 Orion program and we developed another unit to add power to the EP-3 Aries Reconnaissance variant. We also won awards on the C-17 platform to upgrade the nickel-cadmium batteries, and upgrade the engine-to-cell hold-open rods.

The development spending associated with most of these new programs has been normal and is similar to the spending in prior periods. However, the ongoing development and testing on the A350 and A380 cockpit door module awards from Airbus are consuming development spending greater than most new programs. This higher spending was anticipated and is reflected in our guidance. Now let me hand it over to Greg Rufus, our CFO, who will review our second quarter and first-half financial results in more detail.

Thanks, Ray. Good morning to everyone who called in to hear about our Company. I hope everyone had an opportunity to read our press release, which was issued this morning. Nick just gave a very thorough description of TransDigm's revenue stream and our market conditions, and as Ray just discussed, we are active with controlling our costs, acquisition integration and new product development.

Let me touch on our operations on a GAAP basis. Nick gave a good analysis of what went on operationally this quarter, but mostly on a pro forma basis, which includes all acquisitions in both years. Let me point out a few more specific items on our reported numbers, but on a GAAP basis. Second quarter sales were $206.1 million, up $13 million, or 6.7% from the prior year. Increased sales of $19.6 million resulted from the acquisitions of ACME and the Woodward Governor product line made in fiscal 2010 and Dukes Aerospace which was acquired in our first quarter.

Organic sales declined $6.6 million, primarily due to a drop of $9.6 million in commercial OEM sales. This drop was primarily from the impact of the significant decline in production rates in the business jet market year-over-year. Along with this, we also had a $2.5 million decrease in the commercial aftermarket sales, reflecting the worldwide airline traffic softness and industry-wide destocking of inventory, which has already been discussed. Partially offsetting the decline in organic sales was an increase of $4.5 million in defense sales across most of our product lines. Reported gross profit was $115.2 million, or 55.9% of sales. The reported gross profit margin decreased half a percentage point versus the prior year. However, the current quarter included about $1.7 million of additional acquisition-related costs and the current margins were also reduced by the dilutive impact of the previously mentioned recent acquisitions by approximately 2 margin points at the GP level. Adjusting for these items, the underlying profitability of TransDigm remains very strong, despite a modest decrease in our organic volume.

Selling and administrative expenses for the quarter increased $3.2 million or 0.8 margin points greater versus the prior year. The increase is primarily due to the higher research and development expenses primarily relating to the Airbus A350 and A380 platforms, which Ray just mentioned, some higher professional fees and incremental selling and admin expenses relating to recent acquisitions and some other minor changes.

Amortization of intangibles was about flat versus the prior year. This line item reflects all the recent acquisition activities. Net interest expense was $28.4 million, an increase of $6.8 million versus the prior-year quarter. This increase was primarily due to the interest expense of approximately $9.4 million attributable to the October 2009 note offering, partially offsetting the increase was lower interest rates on the senior-secured credit facility. The average interest rate decreased to 6% for the quarter, compared to 6.1% a year ago. Our effective tax rate was 36.2% in the current quarter, the same as in the prior year. Net income for the quarter was $38 million, which is 18.5% of net sales, and down $2.3 million versus the prior year, the result of which is a combination of all the items I just discussed.

As a reminder, last quarter TransDigm determined that the two-class method of calculating EPS was the proper GAAP accounting treatment instead of the more commonly used treasury method. This morning's press release included several tables. Please reference table four, which lays out the calculation of the two-class method of EPS. For the quarter our adjusted diluted earnings per share was $0.78 on 52.9 million diluted weighted average shares outstanding. Remember that the application of the two-class method as compared to the treasury stock method requires the inclusion of approximately 2 million additional shares outstanding for the quarter. This results in dilution of earnings per share by approximately 3% to 4% on a fully-diluted basis.

Cash flow from operations was solid, at $83.8 million in the first half of this year. We ended the quarter with $187 million of cash on the balance sheet. As a reminder, this cash balance reflects the Duke acquisition, which we paid $96 million in cash in the first quarter. Our net-debt leverage ratio was 4.1 times our pro forma EBITDA as defined.

Given the current credit market, we believe our current cash position, together with our undrawn revolver of almost $200 million, is more than adequate for our operating needs. As Nick discussed, and as spelled out in this morning's press release, we have made some modest changes to our full-year adjusted diluted earnings per share guidance, which has the impact of increasing the mid-point of our guidance to $3.10, up a $0.05 from the prior guidance. Now let me hand it over to Jonathan to kick off the Q& A session.

Thank you, Greg. In order to give everyone the opportunity to ask questions, I would ask that you limit your questions to two per caller. If you have further questions, I would ask that you reinsert yourself into the queue and we will answer those questions as time permits. Jeff, we are now ready to open the line for questions.

(Operator Instructions). Our first question comes from the line of David Strauss with UBS. Please Proceed.

Good morning.

Good morning, David.

Could you just talk a little bit about what you are seeing on the aftermarket side, your distributors versus just direct, any differences there. And also by product line, where you are seeing strength relative to other areas.

Yes, David, in the distributors situation isn't significantly different from what we're seeing directly, which is just another way of saying we're not seeing big inventory changes, that they're seeing the same sort of thing we are. I think across the product lines, David, I don't know that I can make a big distinction between them. We are generally -- we are seeing similar patterns in most of our products.

Okay. And then just one housekeeping item. Greg, I think last quarter you were looking for about $21 million in EBITDA as defined adjustments ex the dividend payment, looks like that number's now around $19 million. Is that right?

David, I don't have that in front of me, to be honest with you. It is in our press release but go ahead with your -- you just want to confirm the number?

I just want to confirm that are you now looking at $0.23 of adjustments ex the dividend payment.

I don't have the number in front of me. Jonathan can call you back if you have any questions.

Is there any reason we would have changed the dividend?

No change. No, there is no major structure, other than our -- just we're halfway through the year. The dividend payment had nothing to do with it, to be honest with you.

Okay. Thanks, guys.

Our next question comes from the line of Fred Buonocore with CGS Securities. Please proceed.

Yes, good morning.

Good morning, Fred.

Just wanted to drill down into the guidance a little bit as it relates to what you were saying on the commercial OEM, where it seems like you might see a bit of a pick-up or at least less of a decline than you had initially been anticipating. So if you could -- and you may have actually done this earlier this the call and I might have missed it, but have you changed your outlook for the year on what you are expecting from commercial OEM and how much of that has really flowed into your guidance, if you will? And does this offer an opportunity for an up upward guidance revision a little bit later in the year? Thank you.

Well, as far as could it be an opportunity for upward, I guess it always is possible. We're giving you our best -- the best shot right now, trying to be -- with a reasonable level of conservatism. We did, as we said in each of the other calls, we were wary and, frankly, going into the year, expected that there was going to be some turndown in OEM production rates in 2011, which could impact the end of our 2010, we feel this is much less likely now. And so a little -- primarily we're feeling a little stronger or a little better about the OEM business in the second half of the year.

Got it.

The aftermarket and the defense, I don't know that our views are significantly different than they were at the start of the year.

Okay. And then my follow-up just relates to Ray's discussion of new product opportunities. Is this development activity that you discussed on the call kind of indicative of what you usually have going on, or would you say that maybe these new opportunities are a bit more robust than average or what you've typically had historically and, if so, does this offer an opportunity where you will see maybe a stronger rate of growth in aftermarket at some point a little bit down the road than just the kind of RPM growth plus your price increases? Thank you.

Fred, let me just -- the rate of new business awards is indicative of what we historically have seen. I wanted to add some color to it, that even during this downturn, we've been pretty busy securing new business throughout the cycle.

With regard to aftermarket, this new business, will that make the aftermarket stronger or more robust than the out years? Primarily our aftermarket comes from the 20,000 some-odd aircraft that are in the fleet and servicing the repair and overhaul and repair items for that fleet. The new business that we get on the increment, by developing better solutions for the installed fleet in some areas is a little bit of gravy, but that's much more the tip of the tail, not the dog.

Got you. Okay, thanks very much.

And what is a little unusual is the cockpit security job on the A350, that's also going into the A380, is a pretty big project with a fair amount of development expense. That is a little larger than we generally see.

Yes. And in prior years we had the audio system on the 787 and that was a big program. Okay?

Great. Thanks a lot.

Our next question comes from the line of Rob Spingarn with Credit Suisse.

Good morning.

Good morning.

Just to follow up a little bit on where Fred was going with the RPM growth, Nick, do you -- how would you think about the growth rate now in the aftermarket as we proceed here with regard to restocking versus straight end market growth? Where do you see the restocking -- what are the customers actually saying about that?

So as you know, Rob, they've been underbuying. If you look back at this historically probably in 2007-2008 they were overbuying and end of 2008 and 2009 they were underbuying, and so I have to think that they probably overshot, and at some point we'll start to see demand exceed the RPMs for --

Is there any chance, Nick, that they didn't overshoot and we're actually at equilibrium and we're looking for a restocking that does not need to happen?

Well, I don't think -- we're down, I want to say this Q-over-Q was down 1.5% in the commercial aftermarket, I don't think that's equilibrium, Rob.

Fair enough.

I mean I don't think that equilibriums are declining still.

But on the other hand we've had a capacity list recovery at this point, right? And so at some point they should have to raise capacity. We're not going to keep raising --

I think so. I think so. I think so. I meanly, we would -- I do not know what the timing would be, but as you know, historically on the upswing you overgrow for a year or two.

Well, and what kind of lag might you expect? I know that you tie to RPMs, we do it a little more to ASMs, but if they start putting in extra capacity for seasonal travel this summer and then some of the actual economic recovery, I mean how much should the parts lag then?

I wouldn't think a lot, Rob, unless there's some inventory dynamic going on here that we still don't understand.

All right.

I would think that -- I don't believe -- I surely don't believe that the airlines are overstocked. And I'm quite confident that the distributors are not overstocked.

And the last question on this. When they come back in, do you expect them to scramble a bit to get ahead of one another and therefore we could see a bit of a surge? Or do you think this is gradual?

Typically, and let me just -- I'm always wary of predicting the future, Rob, but typically what's happened is they -- when things get bad, they overreact on the downside and when things get good they overreact on the upside, and so I guess that's sort of like a scramble.

Yes, I guess so. And then just quickly for Greg, on SG&A, Greg, you've been running, I think, a little bit higher than your guidance, which I believe is 10% to 10.5% on a percentage basis. Does this have to do with the flat headcount that was mentioned earlier and is just anticipating better absorption later?

We will get that a little bit later, obviously, because our second-half sales are up over the first and Ray mentioned our headcount is flat. But versus a year ago we are spending a little more in R&D where we thought that that would taper off when the 787 quieted down, but the cockpit security looks very promising and so we're spending a little bit ahead of what we thought at the beginning of the year.

I might have missed it, but did you explain why you did not pick up the top-end of the range, on the adjusted?

The top-end of the range? Are you talking the sales or the EBITDA?

I'm talking the EPS guidance went up. I think that you just tightened lower end up as opposed to taking up the entire range, but on the GAAP side you took everything up.

Yes, because that's our best guess right now.

Okay, thanks, Greg.

Rob, we kind of look at it as we moved the midpoint.

Fair enough. Thanks, guys.

That's sort of how we look at it.

Okay.

Our next question comes from the line of Eric Hugel with Stevens. Please proceed. Good morning, guys.

Good morning.

Just to follow up on Rob's question real quick, on the SG&A. Should we be thinking about SG&A dollars basically flat as we move into the second half as what you did in the first half? Or coming down?

I think it's going to be more flat. And then we'll get a little better improvement as the percent of sales but, I mean, the numbers are close.

Okay. Fair enough. And also, is there any way to -- I know as a percentage of aftermarket business, Biz jets is not a hugely meaningful number, but you're down 1.5%, was Biz jet better or worse in terms of large commercial?

I -- this is Nick. I can't remember on a GAAP basis, just because it get a little confused from acquisitions, that's why I gave the information on a pro forma which I think is more meaningful.

Right, exactly.

And on the pro forma they were both up.

On the commercial? So what was down? If your overall commercial aftermarket was down, what was negative if it was all -- if it was down 1.5%.

Oh, excuse me, I'm talking sequentially, not year-over-year. You are asking the question Q2 versus, Q2, not sequentially.

Yes.

Q2 versus Q2, I don't -- there wasn't a huge difference, but I don't recall it, is the answer.

All right. And just follow-up in your sequential answer, is there normally a sequential pickup if you look Q4 to -- sorry, Q1 to Q2?

Let me just think a minute. Q1 to Q2, which is the fall through the --

Well, I mean I'm just trying to figure out, would we normally be seeing a sequential pick-up around this time, maybe price increases?

I can't answer you in great detail, whether there -- if I went back and looked at the last ten years, but in general, it's not significant.

Okay, great.

There was a point or two, I just don't know. But it is not significant and it gets even dampened more when you put distribution in the middle of some of the product lines.

Okay, sure. Great. Thanks a lot, guys.

Our next question comes from the line of JB Groh with DA Davidson. Please proceed.

Good morning, guys.

Good morning.

Thanks for taking my call. If I'm -- if I missed this, I apologize. What sort of organic growth is embedded in your revenue number?

For the year or year-to-date?

Just for the year, for the year's fine. Full-year guidance.

This is about flat for the year.

I just don't remember the number.

Yes, first half is down a bit, second half is up a bit, and so for the year it is about flat.

And so you've kind of lapped the easy comps in the second half? Okay.

Yes. The comps definitely get easier.

Right, right. And sort of an eventual goal -- EBITDA margins obviously run very, very high for you guys. I mean, have you thought about sort of how good they can get?

The -- we keep working away every year. We work on our value pricing, we work on our costs, we work on new business. That tends to move it up. On the other hand, each time we buy something we average down. So we don't really put out any guidance on that. But we don't -- we still think there's opportunity.

Specifically we don't have a goal that says it has to get to X% because we could have a deal that comes by that generates a ton of value and you could mix down. So we could not look at it in terms of numerical goals, we look at it in terms of generating shareholder value.

As long as your three levers are still available to pull.

Actually we would love to find a big acquisition of proprietary product doing 10% EBITDA margin.

Right, right. I'm not sure that the customers would be all that happy.

We have not found one of them, by the way.

Right. Did you give a backlog number? I did not see that.

No, we do not publish a backlog number.

That goes in the Q. Okay, okay. Thank you very much.

Our next question comes from the line of Carter Leake with Davenport & Company Please proceed.

Good morning. Given the proprietary nature of the products and the lack of any negative commentary on in-service military platform utilization rates, I'm actually a little surprised at your seemingly cautious commentary on defense segment. Any commentary or color on defense?

Well, the comps get very tough in the second half of year. In our business, the second half is -- we're comping to the easy quarters now. But we're just wary. I mean we are -- I would say that the book-to-bill isn't great, it's probably running slightly below, not way below, but slightly below, and we just -- we remain wary just given the sort of political wind in the country and the big run-up we've seen in defense over the last few years. We would love to be wrong.

Does that suggest that it's OE, because aftermarket , I don't think -- unless you see something I don't, it seems that say rotary wing trends or in-service utilization rates, it would bode well for you given your aftermarket and proprietary

I would say -- this is very judgmental and I would say -- I would like to be wrong but if you told me that it was 10% lower than we are forecasting or 10% higher, I would just tell you I don't know.

And then sort of the same on the commercial aftermarket side, eurozone concerns aside, all of the traditional metrics you saw, as well as the drivers -- traditional drivers that you are quoting as far as internal order rates are tracking well, as well as other aftermarket suppliers seem to suggest that we're calling a bottom on go-forward aftermarket. I guess any color would be helpful as to why there is sort of a seemingly -- we have a very cautious -- wariness keeps getting repeated. Is there any color, are you just being conservative or is there something more that you can help us out with on why you seem to be more pessimistic that others?

I hope we're conservative. I mean, I don't -- I have no unique insight here into this market. We're -- in the commercial world, we're very well-distributed across the platforms. I would say the inventory in the system, I think, is pretty close to bottom but I will tell you that everyone has been wrong, including us, for the last six to nine months on that, so I'm a little wary there.

Okay. Thank you.

Our next question comes from the line of Ron Epstein with Bank of America. Please proceed.

Yes, good morning, guys.

Good morning.

Nick, could you give us a view on what you are seeing in terms of the M&A pipeline, what's going out there?

We don't comment specifically on that. And we won't comment. I would say there seems to be more activity. I wouldn't say it is a step change. But I would say we are seeing more opportunities than we saw a year ago, for sure. I can't say that the prices have changed. Or at least they surely haven't gone down on the things we see.

Right.

But there does seem to be more people now starting to think about selling their businesses. Both in the commercial world and defense, so it's probably more pronounced in the defense world.

Yes. Now if you think about a scenario where the Euro remains a little bit weaker for a while, kind of given everything that is going on in Europe, does that open up opportunities in Europe for you or companies like you?

I don't know that I can say it has. We generally are just very value-driven. If we see a product that meets our requirements and meets our proprietary with a lot of aftermarket and we see a path to create value on the deal, we're going to do the deal. We're probably not going to make a call on the exchange rate. We're going to look at it on sort of the underlying intrinsics. Okay.

And when you think about creating value with a deal, like if we look at Dukes for a minute, it seems kind of out of the box at what has been dilutive at first, just given what's going on in the biz jet market. Is that okay, given the way that you look at it, as long as --

Absolutely.

Okay.

Absolutely. As long as it -- we look at it over a four-, five-year time frame and we look to get a pretty significant IRR on our equity and that's how we do it. As I think that most of you know, and it is in our proxy, we essentially get paid on a 20% IRR growth in the equity.

Sure.

So I can give you a pretty good idea of what our target is on an acquisition.

Got you. Great, cool. Thank you very much.

Our next question comes from the line of Ken Herbert with Wedbush. Please proceed.

Good morning.

Good morning.

Just to clarify, I think that you said for the quarter the book-to-bill in both the commercial OE as well as the commercial aftermarket was over one, orders greater than deliveries. Is that correct?

Yes.

Can you comment, was that also the case in the first quarter and can you give any more specifics in terms of how much over one or, especially in the aftermarket sequentially, how strong that delta was for the quarter?

No, we don't give that specifically, but I can say that it's the third quarter in a row that it has run ahead, which is good. If the -- and I don't mean half a percent, or something like that. I mean a reasonable amount. In the commercial OEM on the other hand, this is different. On the commercial OEM, the bookings had been running significantly below the shipping levels from almost all the higher-tiered manufacturers. So this is a change there.

Okay. So a nice -- sequentially on the OE side, a nice move into the over-one then for the quarter.

Yes.

And then I guess you've talked about the defense side and the caution and the uncertainty. It seems like -- just to drill down on this a little bit, the comps must be very difficult in the second half of the year. Just -- can you provide any more detail on, for the defense side, on the OE versus the aftermarket in terms of where the comps are the most difficult or any other color there? Because it looks like, obviously, for the full year still looking for maybe down low-single-digits but the first two quarters have been both up 9% and up 13%, respectively, pretty nice quarters.

The second-half comps are quite difficult, I will say. As far as the OEM versus aftermarket, that is not as clean a cut as you might like in that in this world, in the defense world, more of the aftermarket ends up leaking through the OEMs. For instance people will buy their F-16 parts from Lockheed sometimes rather than just the government, particularly the foreign users, so you get a little -- the line is not as clear. I would say in -- what's really OEM, in other words production rates, they don't change very fast. I mean we're not going to miss them much in a year. It is the direct aftermarket and the ultimate aftermarket that goes through someone else where the fluctuations can occur.

Okay. Okay. Very good. Thank you very much.

Our next question comes from the line of of Lucy Guo with Macquarie. Please proceed.

Good morning, it is Lucy calling for Rob Stallard. Just another way to ask about the aftermarket. You saw the 1.5% decline organically year-over-year, I was wondering how much of that was pricing versus volume and did mix play a part in that?

Surely pricing was up. We continue to get our prices and you can make your own estimate of that. I don't know that it was a significant mix difference. I don't believe there was anything of significance, or at least nothing I know about.

Okay. And just to clarify. Did you actually see orders growth in the quarter when you say book-to-bill was above one?

Say that again?

Did you see order rate growth in the quarter?

In the commercial aftermarket?

In commercial aftermarket, right.

Yes. It was up a fair amount last quarter and up again this quarter.

Okay, great. Thank you.

Our next question comes from the line of Greg Halter with Great Lakes Review. Please proceed.

Good morning, guys.

Good morning.

Everything's been asked, I have one little small question. Do you have the equity balance for the March 31 period -- I guess I should say April 3 period.

Well, I don't have that in front of me but the Q will go out tomorrow morning.

Okay. Tomorrow morning. Look forward to seeing you at your Investor Day.

Okay, great.

Ladies and gentlemen, I would now like to turn the call over to Mr. Crandall for closing remarks.

Thank you. I would like to thank everyone for participating on this morning's call. We expect to file our 10-Q for the second quarter of our fiscal year 2010 no later than tomorrow morning. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.