TransDigm Group Inc (TDG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2011 TransDigm Group, Inc. earnings conference call. My name is Deanna, and I will be the operator for today. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Jonathan Crandall of Investor Relations. Please proceed.

Thank you, Deanna. I'd like to thank all of you that have called in today, and welcome you to TransDigm's fiscal 2011 second-quarter earnings conference call. With me on the call this morning at 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. New to TransDigm's earnings call, a presentation is available on our web site at transdigm.com, which together with our Press Release provides the basis for most of our remarks. 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 web site.

Before we begin, the Company would like to remind you that statements made during this call, which are not historical in fact, including statements about our guidance, are Forward-looking statements. Fur further information about important factors that could cause actual results to differ materially from those expressed or implied in 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 web site, or through the Securities and Exchange Commission's web site 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, adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and the related footnotes in the earnings release, and at the end of the slide presentation, for a reconciliation of these measures to their most directly comparable GAAP measures. With that, let me now turn the call over in Nick.

Good morning. Thanks again for calling in to hear about our company. As usual, I'd like to start with our comments about our consistent strategy. I'd also like to talk a little about the sale of the McKechnie fastener and distribution business, as well as our current sense of the status of the aerospace market, as it applies to our Company. To reiterate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons why we believe this, and this is on slide four, by the way, over 90% of our net sales are generated by proprietary aerospace products, and around three-quarters of our net sales come from products for which we are the sole-source provider. About 55% of our revenues and a much higher percent of our EBITDA comes from after-market sales. After-market revenues have historically produced a higher gross margin and have provided relative stability through the cycles.

Because of our uniquely-high EBITDA margins, typically in the high 40% to 50% of revenue, and relatively low capital expand chore requirements, 2% of revenues or less, TransDigm has year-in, year-out generated very strong free cash flow. We pay close attention to our capital structure and view it as another means to create shareholder value. As we have in the past and continue to be willing to lever up when we either see good opportunities or view our leverage as sub-optimum for equity value creation. We typically begin to de-lever pretty quickly. 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 methods. This consistent approach has worked for us through up and down markets, and allowed us to continually improve and increase the intrinsic value of our businesses, while steadily investing in new business and platform positions.

We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace products, with significant after-market content. We have been 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 investors for many years, through up and down markets.

The first half of our fiscal year was active in the M&A area. In December, we closed on both the accession of McKechnie for approximately $1.25 billion and the Teleflex actuator business known as Talley Actuation for about $93 million. In the second quarter, or very soon thereafter, we completed the divestiture of both the McKechnie fastener business to ALCOA for approximately $240 million, as well as the McKechnie AQS distribution business, for approximately $30 million to Satair. These are both on a pre-tax basis. These are both good businesses, but they fit much better with ALCOA and Satair's business portfolio than ours. This completes our divestiture activity related to the McKechnie businesses. The remaining businesses fit well with our strategy.

As of March 31, after closing on the fastener sale business, we have $505 million of cash and about $240 million in undrawn revolver. We also received $30 million of cash in early April on the sale of Bank US. On the other hand, we have about $80 million of cash taxes payable on these two divestiture's. Additionally in our current size, we expect to average about $60 million or a bit more per quarter in operating cash generation. We also have more capacity under our credit agreement. Our net debt to EBITDA is now about 4.8 times, and as in the past, absent acquisitions or other capital market actions, we continue to delever relatively promptly. We repriced our $1.55 billion of bank debt this quarter, and were able to make a meaningful reduction, about 1% on average, on the interest rate through a mix of lowered LIBOR floor and reduced spread. Interestingly, we were also able to eliminate the two maintenance covenants. That's the interest covenant and the net leverage ratio.

Now, as summarized on slide five and with respect to our underlying market, the market outlook is mixed. We see continuing clear signs of an improving commercial aerospace market, while the defense market is much less clear. In the commercial OEM world, industry forecasters and airplane manufacturers pin to be optimistic regarding the commercial transport OEM production cycle. As most of by historic measures, this has been an unusually moderate downturn. Commercial transport rate increases seem to be proceeding at both Airbus and Boeing. In general, the biz jet OEM market appears to have stabilized, and though we are planning on minimal, if any, 787 shipments, in total, our full-year commercial OEM rev news on a pro forma basis, we now expect to be up in the mid-teen percents. In the commercial after-market, we continue to see positive signs on worldwide passenger traffic, our incoming order rates and other items, the increasing oil prices, the earthquake in Japan and disruption in the middle east bear close watching, but so far at least, don't appear to be meaningfully impacting our business.

This quarter, we again saw significant year-over-year increases in our after-market revenues, incoming orders or bookings continued to run above the shipment levels, and well above prior-year levels. Absent any further disruption, we now anticipate pro forma commercial after-market revenues to be up approximately 20% year-over-year. In the defense business, given the uncertainties around defense budgets, we are still planning on a flat to modest decline in this segment in 2011. We see nothing so far that changes our views. As I've said in the past, this segment can be tough to predict, especially given the current US political winds and the worldwide Geo political situation.

Now let me turn to our latest financial performance. You can see some of the summary items on slide six. I'll remind you this is the second quarter of fiscal year 2011. Our year started October 1, 2010, and as I have said in the past, quarterly comparisons can be significantly impacted by differences in OEM after-market mix, large orders, transient inventory fluctuations in the system, some modest seasonality and other factors, but in general, our second quarter performance was strong. GAAP revenues were up 51% versus the prior Q2, and 40% on a year-to-date basis. Organic revenue growth is about 12% on a quarter-versus-quarter basis. This is the fourth quarter in a row of year-over-year organic growth in spite of the decline in military revenues.

Reviewing the revenues by market categories, and again this will be on a pro forma basis versus the prior year, that is assuming we own the same mix of businesses in both periods. In the commercial market, which makes up about 70% of our revenue; in the commercial OEM revenues, we're up 16% versus the prior-year quarter and 13% on a year-to-date basis. Quarterly commercial transport, and business jet OEM revenue percent increases were both in the mid to high-teens percent versus the prior Q2 and modestly lower percentages on a year-to-date basis. The commercial after-market revenue was up 25% on a Q2 versus Q2 basis, and up 22% on the year-to-date basis. Strong quarter-versus-quarters comps but this is versus a relatively weak prior year quarter. The revenues were up 12% sequentially in the commercial after-market. For the quarter, business jet after-market was about flat versus last year, and the commercial transport was up around 30%. Commercial after-market bookings, as I mentioned before, continue to run above the shipment levels.

In the defense markets, which make up about 30% of our revenues, the picture was, again, mixed. The revenues are down 5% organically on a quarter versus prior-quarter basis and down about 4% versus the prior year-to-date. Incoming orders, however, continue modestly ahead of both the shipping rates and modestly ahead of the prior-year booking rates. So the picture's not clear, but we remain cautious about trends here. In total, our revenues were a little better than we expected.

Moving to profitability and on a reported basis, I'm going to talk primarily about our operating performance, or EBITDA as defined. The major as-defined adjustments are related to the McKechnie acquisition, the divestiture's and our large financing, and Greg will review this in some detail. Our EBITDA as defined of about $147 million per Q2 was up 47% versus the prior-year Q2 and about 36% on a year-to-date basis. The EBITDA as defined margin is around 47% for the quarter, and about the same on a year-to-date basis. The quarterly margin was diluted about 3 percentage points by the impact of the acquisitions.

Q2 continued to be a very busy time for our operating theme, and Ray Laubenthal's going to expand a bit on this. After five months of ownership, the McKechnie business with some puts and takes, is at least as good if not a bit better, than we expected. The McKechnie integration is proceeding well on track. With respect to acquisitions, as I mentioned, we completed the two divestiture's of the fastener and AQS business, for about $270 million. We continue actively looking at opportunities. We've been pretty busy closing, restructuring, and selling this quarter. The pipeline's a little light, but starting to rebuild. Closings are always difficult to predict, but we remain disciplined and focused on our strategy and value-creation opportunities.

Now, regarding fiscal year 2011 guidance, and this is on page or slide seven, primarily. There are a number of moving pieces impacting our new guidance. The major pluses are the improved operating performance of both the McKechnie business and our base business, and reduced interest expense with the repricing of our bank debt, or secured debt. The significant minuses are we divested the fastener and distribution business resulting in the reduction of sales of approximately $70 million from the previously disclosed guidance. Based on all of the above, we are again increasing the mid-point of our EPS as adjusted guidance by $0.16 a share from $3.89 a share to $4.05. The vast majority of this increase is due to improved operating performance with various other puts and takes. We now expect revenues for TransDigm to be about $1.2 billion, or down 2.2% from our prior guidance. This assumes no additional acquisition, but does reflect the divestiture of the fastener and distribution businesses. The 2011 EBITDA as defined is now anticipated to be in the range of $567 million, up about $13 million from our previous guidance. EBITDA as defined margins are expected to increase to about 45% -- 49% of revenue in the second half. These are moving closer to our previous levels.

The second half-margin increase is due to a combination of a sightly better market mix, improved operations and margins at both the McKechnie businesses as well as our base businesses, and the sale of the two lower-margin businesses. Compared to 2010, we are now planning on full-year commercial OEM aerospace, OEM revenues to be up in the mid-teen percents. For commercial aerospace after-market, as I said before, we are planning on revenue growth around 20%, based on worldwide traffic up 5% to 6% year-over-year. Some restocking and/or deferred maintenance recovery. We'll keep watching this closely. We could see some upside if the present trends continue, or we could see some downside in air travel if there's an impact from the oil prices, Japan or the middle east instability. For defense revenues, we are still planning year-over-year revenues to be flat to modestly down, but we could see some downside here.

In summary, the first half of 2011 was pretty good. The commercial market seems to be recovering nicely. In any event, I'm confident that by focusing on our consistent strategy, we can continue to create intrinsic value in good and bad times for our investors. Now let me hand this over to Ray Laubenthal, who will discuss some of the operating items for the quarter.

Thanks, Nick. As Nick mentioned, in total, we had a very busy second quarter, and we had good operational results. In addition to the continued commercial market recovery, we were quite busy with the acquisition transitions and two divestiture's. At our operating units, we also continued to diligently work our value drivers, and we continued to create shareholder value.

Let me explain our second quarter acquisition, integration, and operational activities in a little more detail, as summarized on slide eight. Recall late in fiscal Q1, we acquired McKechnie Aerospace and Talley Actuation. During Q2, we quickly went to work transitioning these businesses, we are well under way with our value-generation process. At present, we have four plant consolidations in various stages of their physical moves. The consolidation of our Avtech and McKechnie Tyee business is progressing well. The front office operations have been physically moved, and are up and running. Additionally, safety stock is being built in preparation for the physical factory move in fiscal Q4. The consolidation of the Electromech local motor operations located in Kentucky, with their Matamoros, Mexico rotronics facility is also progressing. At present, the Mexico factory mods are proceeding well, and we also expect to complete this consolidation in our fiscal Q4.

The Talley Actuation consolidation is also moving along. Safety stock is being built in the existing California location, and the physical move to the Aero Fluids Group in Painesville, Ohio is also on track to complete by the end of this fiscal year. We're also consolidating our production facility, located in Mesa, Arizona, with the Dukes facility in Northridge, California. This move is well underway, and is expected to complete next month. These moves will start to show significant results as we move into fiscal 2012. In addition to these physical moves, we've reorganized the acquired business operations into our product line structure. Each product line has a product line manager, responsible for the product line's P&L along with the underlying pricing, the new business generation and productivity improvement. We're also economically rationalizing the new business programs to focus only on the programs that will create real value. We are already starting to see value creation results and we expect our margins to improve in the second half of our fiscal year.

Now let me turn the discussion to our base operating units and their recent value-generation activities. Overall, the base trends on operating units are performing well. They have diligently controlled their cost structure and have added resources sparingly as the market recovers. Our new business developments continue to be active during the first fiscal first half. We continue to invest in a broad range of engineered solutions for our customers. To give this a little color, please refer to slide nine. I'd like to give a few examples of our larger new business programs. In the commercial segment, here are just a few examples. We continue to develop new applications and win new business awards. On the A350, we have completed the development and qualification of the cockpit security door system, and we've been awarded the main landing gear door rod mechanism.

On the Boeing 737, we have developed a sealed upgraded audio control panel that eliminates various failures in the cockpit. We have also developed a lighter-weight better performing galley water heater for the Boeing 737. And this new unit displaces the incumbent's OEM unit, and we will roll this out to the airline after market. Also on the 737, Lufthansa's now buying our new, energy-efficient white LED lighting system. This replaces the less efficient fluorescent lighting system. On the 747, a large commercial carrier is now buying our multicolored LED cabin mood lighting system. In the biz jet segment, on the new Learjet 85 biz jet we're developing composite fuel system components, the engine ignition system, a dozen control actuators and several motor applications of various hydraulic devices, actuators and fans. On the G650, we were awarded the parking brake controls and the exterior baggage door latches. On the rOlls Royce 500 engine, we were awarded the starter generator, and the generator control unit, and on the Eurocopter EC145, we were awarded the display and multifunctional control unit for the health, usage and monitoring system.

In the military segment, we continue to develop new equipment for the OEM production and also develop engineered solutions to enhance the capabilities or extend the life of the military fleet. On the C130, we were awarded the infrared landing light. On the P8, we were awarded the cockpit audio system, the anti-icing boot compressor and the electrical power frequency converter. We have also been awarded several gun motors on the Pave Hawk automatic gun system and we are developing motors for the helicopter-mounted GAU-19 gun system. These new engineered solutions, and many others not discussed, continue to expand our profitable product offering and add to our future growth. Now, let me hand it over to Greg Rufus, our CFO, and he'll review the second-quarter and first-half financial results in more detail.

Thanks, Ray, and again, good morning to everyone. I hope everyone had an opportunity to review today's earnings release, along with the related supplemental tables and the new slide presentation. At the risk of getting into too many details, I don't want you to lose focus on our very good operating results this morning. As you can see on slide 10, we have been very active the first half of our fiscal year. As a consequence, there's a significant amount of accounting activity relating to this. They are the McKechnie and Talley acquisitions and the related purchase accounting associated with it, our new debt structure and the sale of the fastener businesses.

These transactions and the related accounting impacts are masking some very good operating results. I will walk you through some of these significant items. In March, we completed the divestiture of the McKechnie fastener businesses to ALCOA for approximately $240 million, as mentioned in our Press Release. The sale of the fastener businesses is presented as discontinued operations. The income statement activity has been excluded from all line items and condensed to a new line item in the income statement. It's labeled income from discontinued operations, net of tax. This income of $19.1 million is primarily the result of the after-tax gain on the sale of the fastener business. See table one in our Press Release for more details.

You will also notice that on table two and table three of the Press Release, the $19.1 million of income from discontinued operations is excluded from EBITDA as defined, adjusted net income, and adjusted earnings per share. Also, as we have consistently done in the past, this quarter's acquisition-related expenses of $14.5 million that are added back to EBITDA as defined includes activity for purchase price accounting, primarily the write-off of inventory step up. It also includes costs incurred to integrate acquired businesses and other acquisition-related costs. Again, all adjustments are well-defined and in adherence to our credit agreement, which defines these add-backs.

For those of you who are new to TransDigm and for those of you who have followed us for a while, hopefully our consistent approach to discussing EBITDA as defined and adjusted net income, along with the supporting schedules in our Press Release, will help you follow our comparative results focusing on the underlying performance of our operation. In February, we also initiated and completed a repricing of $1.5 billion senior term loan. The new rate is LIBOR plus 3% with LIBOR having a floor of 1%. This loan matures in February, 2017. Additionally, we were able to remove the two maintenance covenants, a net debt to EBITDA leverage ratio, and an interest coverage ratio. As Nick alluded to, this action will save us approximately $15 million in interest expense on an annual basis under the current market conditions.

Now, finally, switching to the quarterly results found on slide 11. Second-quarter net sales were $311 million, up $105 million, or 51% from the prior year. This increase includes $81 million related to the acquisitions of Semco in fiscal 2010 and McKechnie and Talley Actuation, which were acquired during the first quarter of fiscal 2011. Organic sales also increased by $24 million. The organic growth rate of 11.7% was led by an increase of $18 million in commercial after-market sales, and increase of $6 million in commercial OEM sales. Both increases are due to improved demand in the commercial aerospace market. These increases were spread across most of our product line. Defense sales on the other hand, were down slightly for the quarter.

Reported gross profit was $158 million, up $43 million or 38% from the prior year. The reported gross profit margin decreased 5 margin points versus the prior year, from 56% down to 51%. There are three drivers in this decrease. First, we had a favorable product mix and the strength of our proprietary products in our base businesses allowed us to improve approximately 3 margin points, which help offset the second item, which was the dilutive impact from acquisition mix, which was approximately 5 margin points, and we also recorded increased acquisition-related expenses, which diluted the margins another 3 margin points.

Selling and administrative expenses were 10.9% of sales this quarter, compared to 11.4 versus the prior year. The absolute dollars increased $10 million. This increase is a combination of higher sales volume in the base business along with the acquisitions of Semco, McKechnie and Talley Actuation. The amortization of intangibles was about $8 million higher versus the prior year. This line item reflects all of the recent acquisition activity. We also recorded additional refinancing costs of $1.6 million in the second quarter, as a result of the redemption of the remaining $31 million outstanding of 2014 notes that were not redeemed until January 15, 2011.

Net interest expense was $54 million, an increase of $26 million versus the prior year quarter. This increase was primarily due to the McKechnie acquisition, which was financed entirely with debt, and also by refinancing our existing debt. As of the end of the quarter, the weighted average interest rate on total borrowings was approximately 6%. The effective tax rate was approximately 36%, in both the current quarter and last year. We also expect the full-year tax rate to be approximately 36% as well. Net income for the quarter increased $18 million, or 47% to $56 million. Excluding the gain on sale from discontinued ops, net income was about flat compared to the prior year. Higher interest expense and acquisition-related costs were the main reasons net income was flat. Again, our sales were up 51%, and our EBITDA as defined was up 47%, reflecting the strength of the operation. As a reminder, TransDigm uses the two-class method of calculating EPS versus the more commonly-used treasury method. This has a slightly more dilutive impact of about 3% to 4% versus the treasury method.

Our GAAP earnings per share from continuing operations was $0.69 per share in the current quarter versus $0.72 a share in the prior year. Adjusted earnings per share was $0.97, an increase of almost 25% compared to $0.78 per share last year. The adjustments to GAAP earnings per share from continuing operations were significant this quarter, and totaled $0.28. Acquisition-related costs were $0.24 with non-cash compensation and refinancing costs totaling $0.04. Cash flow from operations was $129 million in the first half of fiscal 2011 and we ended the quarter with $505 million of cash on the balance sheet, which includes $240 million of proceeds from the fastener sale.

As a reminder, this cash balance does not reflect the $30 million for the sale of the distribution business, or the approximate $80 million of taxes payable for both divestiture's. As Nick mentioned earlier, our average quarterly cash flow is approximately $60 million per quarter, however, please keep in mind that in the third quarter, we kill be significantly impacted by the taxes due on the sale of the fasteners, as well as the semi-annual interest due on the $1.6 billion of senior subordinated notes. Now, let me hand it back over to Jonathan to kick off the Q&A.

Thank you, Greg. 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, I'd ask that you reinsert yourself into the queue, and we'll answer those questions as time permits. Operator, we are now ready to open the lines.

(Operator Instructions). And the first question will come from the line of Joe Nadol of JPMorgan.

Hi, good morning, guys, actually it's Seth on the line for Joe this morning. I was wondering if we could go into a little bit more detail about the restructuring activities at McKechnie and sort of where you'll be in terms of where you need to be when the two facilities consolidations are done? If there's anything more on that front, and what the next steps are after those two?

As I think I told you, the McKechnie integration is going just as bad as we planned or frankly maybe a little ahead. Probably the best way for you to get a bead on that is to -- you'll look and see in the second half of our year, we're presently guiding for our EBITDA margins to be up at 49%. That's compared to our EBITDA margins pre-McKechnie of somewhere around 50%. We told you, we thought we could get the businesses back up into the 50% or low 50%s. You can see we're making pretty good and pretty quick progress on that.

Okay. Are there -- and I would assume that once those, consolidations are done, we head into fiscal year 2012 with the margins headed higher from that 49% level, and are there, is there more to do at McKechnie after that?

I guess I'll just repeat. We thought -- the information we gave when we bought the business is it would draw our margins down.

Right.

In the 45% to 46% and we fought over a few years we'd get back up to historical levels. We seem to be making good progress on that. We'll put out the 2012 guidance when we put it out.

Okay. Thanks very much.

And the next question will come from the line of Robert Spingarn, Credit Suisse.

Good morning. Hey, guys, just to clear things up a little bit, could we talk about, Greg, do you have a pro forma 2010 figure that we could use as a starting point with all these growth rates that excludes what was just sold and includes what was just bought?

In all the pro forma information, are you talking from a top line revenue?

Yes from a top line perspective.

Nick's comments were reflective on a pro forma basis, excluding the divestitures. I mean, we restate it when he comes out and talks, he says on a pro forma basis, as if we owned the same set of businesses now that we did last year. So he gave you our --

No, I know he did, and I've done the math, and I'm coming up with $1.060 billion, and I wanted to just see if that number sounds right.

I don't have anything in front of me to give you some specifics for 2010 on a pro forma basis.

Okay. Well, that being the case --

It sounds in the ballpark, Rob, but I just don't have the number in front of me.

The reason for the question is a lot of moving pieces here, particularly because you did the divestitures. Let me ask you this. You changed the growth rate assumptions a little bit from last time. I think you touched on this in your monologue, Nick, but could you go into a little more detail, because it definitely does look like after market is rising at a greater rate. You spoke to the book to bill. What's going on with the airlines? What's behind this acceleration, and also on the OE side?

Let me deal with the after market first, Rob. As you know, it's always tough to get a bead on what the inventory situations and exactly what the deferred maintenance situation is at the airlines, however, and we discussed this a lot on the other side of this cycle, it seemed to drop faster than we would have expected. We appear to be seeing the flip side of that. I can say that at the distribution layer in our after market, we know the inventory is about in line. So we know there's not a whole lot going on there. If you take the 5% to 6%, maybe traffic assumptions we're using, put some pricing on it, you'll still see that doesn't account for all of the growth.

We believe, and we get it anecdotally, that there's some inventory going back in, and there's clearly some deferred maintenance being done, but it's hard to put a number around it. But the numbers are clear, Rob, and they're hanging in pretty well, and we see them both in the revenue and in the incoming orders. I frankly, would have expected to see a little more disruption from the oil situation, from Japan, from this sort of Mideast instability but we just haven't seen it, or the other items are pushing right on through it.

Right. Well, the other question would be there, is there a behavioral change that you've seen? While we're on that note, in other words, do we live with a lower amount of stock on the shelves going forward because the airlines have learned how to do this more in a just-in-time manner and have you seen any reversal from oil prices? In other words, have people who started to order at the front end of the quarter maybe backed up a little bit, and on the military side, to what extent is fuel crowding out after market there?

As I said, Rob, I see no indication in the numbers from that. As you, sort of anecdotally, I would have expected to see had some of that, but we don't see any indication yet.

And no early signal, because we've just started to see indications from the Air Force that fuel has become a crowding-out problem.

I can't, I'm probably two or three weeks behind, on our incoming orders in the military. Just because that's how often we update it. We have not seen or heard that before. Again, that's not to say that won't happen, and I'm wary of it.

Okay. Thanks.

The next question will come from the line of Eric Hugel of Stephens.

Good morning, guys.

Good morning.

Could you give us any indication, you talked about the businesses that you divested. I guess maybe, the AQS business, was that also placed in discontinued operations for this quarter?

No, that sale actually took place on a week or two into April, so our quarter obviously ended before that. That's a much smaller sale, by the way, and it should have minimal impact to the accounting in the third quarter, we hope right now, but we've got to wait for final valuation from the valuation groups we use.

Sure. With regards to, I guess, the numbers for the quarter, can you give us a sense, the business that you sold, I see there was like sort of an operating loss associated with it and I'm assuming that revolves around just sort of some accounting things going on, because my understanding was that was a relatively-profitable business. Can you give us a sense sort of the earnings, sort of, what the earnings impact, what was sort of coming out with regards to that? And with regards to the two sold businesses, sort of what was your plan for the year in terms of earnings generation of that $70 million sales?

Specifically, I can tell you within the quarter of the businesses we sold, their EBITDA was profitable, and the loss was offset because during the purchase price accounting issues, we had the inventory step-up which goes through costs of sales and those kind of things. That's what made it look like a loss for the quarter. But we only owned it for about 45 days, don't forget, and some of that was actually in December. So we owned it a minimal amount of time, but the EBITDA was positive, offset by those simple accounting adjustments. What we said with the guidance was, we gave the detail that the sales coming out of the guidance was $70 million. We don't disclose individual locations for a lot of reasons, even though we divested of it. But as we told you, those businesses were operating at a lower margin than our core businesses.

But you can't sort of talk about the EPS --

No, we prefer not to disclose that for a couple reasons.

I think what we did disclose is, when we bought the group of McKechnie businesses, they were running at somewhere in the low 30s EBITDA margins, and as we disclosed in time, these two businesses or I think we disclosed the fastener business, the AQS business was quite small, but the fastener business was running at a, significantly lower margin than that.

Fair enough. Thanks a lot, guys.

The next question will come from the line of Myles Walton, Deutsche Bank.

Thanks, good morning. Nick, when I went through the numbers for your implied cash balance at the end of June, probably right around where we are today, given all of the puts and takes, and it sounds like you've got a lot of consolidation that you're working your way through, through the remainder of the fiscal year. Are you looking to pull the trigger on acquisitions, near-term or how should we think about the capital allocation over the six to 12-month period?

I would say we're always looking to pull the trigger on acquisitions, if we can find the right one. Our first priority continues to be to make accretive acquisitions with the money. If some time passes and we see that's -- at least that doesn't look likely or we're piling up more money, or borrowing capacity than we need, then we'll do what we've done in the past. We'll do what makes sense in our capital structure to try and keep the equity value moving along. It's hard to make a call here today, other than to say, our first choice continues to be accretive acquisitions. We also have no interest, as you've seen in the past, we have no interest in piling up cash just to feel comfortable.

That makes sense then. It just seems as if near-term, given obviously the acquisition you made with McKechnie, and the work that's underway here and the margin potential from focusing on that, I imagine that's where the thrust of the organization is. There might be an opportunity to return some of that capital in the relatively near term.

Obviously, we'll keep evaluating that. It's clear to us, just like it is to you, that we're getting a good pile of money here.

Fair enough. The other question was more on pricing. Are you seeing any piece of your business that, having any change in terms of receptivity of price at this point, or is the model essentially with standing the test of time, and you're not seeing any pushback in the piece of your business that's unusual?

We haven't seen any change in the dynamics. We didn't particularly see them in the last down cycle that we're just coming out of, and I can't say we're seeing any now.

Fair enough. Thanks again.

And the next question will come from the line of Ken Herbert, Wedbush. Please proceed.

Yes, hi. Good morning.

Good morning.

Just wanted to dig a little further, if we could, into the defense side. You've held your guidance steady now again at flat to moderately down. And this quarter, it seems like you had down 4% to 5% this quarter. Can you just comment, Nick, on what you're seeing? It sounds like you continue to talk about a book-to-bill rate greater than one, and ahead of where you were last year. Just your -- I know obviously it's very uncertain, but your confidence level here for the rest of 2011 on this market and anything you're seeing right now in particular?

I think I probably said about as much as I can meaningfully offer to it. I'm uncertain. I don't feel particularly comfortable with the, sort of the political situation. No one, clearly there's no great desire for the government to be spending more on defense. On the other hand, the world doesn't look like a real safe place. We look underneath our numbers, and it's a very mixed picture. The bookings are -- the incoming numbers are a little, not a lot ahead, but the revenues are down.

If you look at it if I went back over the last three or four quarters, it's sort of spotty. One quarter the bookings were up. Another one, the shipments were down a little. Then they reversed. It's not a clear trend, and we just feel uncertain. I can't give you a whole lot more specific than that. As I've said in the past, if you told me that the revenues, in the defense revenues were going to be 2% or 3% or 4% up, I couldn't argue with you. If you told me they were going to be 5% or 6% down, I couldn't argue with you.

Okay. But that's fair enough. It sounds like, though, it's maybe held in a little better than you'd expected six or nine months ago.

Solely the bookings. As I said, our guidance was flat to modestly down on revenues. I would have to say, our revenues are modestly down. On the other hand, the bookings are a little better than that.

Okay.

I would just calibrate it as mixed. I'd like to give you a little more specificity and comfort on that, but frankly, I don't have it.

Okay. That's helpful. Just one follow-up on the commercial after-market. I can appreciate everything you've said and sort of where we are at this point in the cycle. Is there anything you would say that we're seeing differently in terms of, and you commented on this in terms of the distribution channel? Your exposure from an inventory restocking standpoint, anything you're seeing different from distributors as compared to what you're selling direct to OEMs?

OEMs in the after-market, the main options are distributors are direct to the airlines.

Yes, I'm sorry, direct to the airlines as compared to the distribution channel.

Let me deal with that in two pieces. Our major distributors, our largest of which are, by the way, Aviall and Satair, tend to have contracts where they have to stock at certain levels of their shipping rate, and it's usually on a two-month average or three-month average or four-month average. Depends on the product line of the business. They are almost all at or very close to their contracted levels. As the outflow picks up a little bit, over a three or four month period, their inventory has to pick up a little bit, but none of it looks significantly out of line. I would say my sense is, and this is sense. I don't have real good numbers. My sense is the airlines are ordering a little faster than that.

Okay, that's helpful. Thank you very much.

(Operator Instructions). The next question will come from the line of Fred Buonocore, CJS Securities.

Yes, good morning. First of all, I want to give a shout out to the slide show on your web site. That's a good add to your earnings process. So thank you for that.

Fred, it's making me feel kind of redundant here.

Well it's good for those of us who have problems listening and taking notes to keep up with you, so we appreciate it.

We stopped short of putting our faces on there, though.

Please don't, no. Anyhow, my first question relates to your change in outlook on the OEM, the commercial OEM, where you increased what you're looking for in terms of year-over-year growth there. I kind of thought you had pretty good visibility into that end market, just given expected production rates. Can you talk to us a little bit about the dynamic, as to how this could actually exceed your expectations?

I have to honestly admit, Jonathan, what was our previous guidance? I know what it is now. What was it before?

High single digits.

Now it's mid, yes. I guess, Fred, the real answer is, I'm not sure. That being said, I will attempt to answer it. I think probably a combination of maybe a little conservativeness in our original guidance.

Yes.

As we've continually said, for a while, we were skeptical. We were skeptical of the shallowness of the downturn, and we were probably a little guarded on the rate of increases that people were announcing. And also, I know people have announced some additional increases in 2012 and 2013. That reflects itself a little bit. I think the combination of all those things bumps it up a bit.

Okay. Fair enough. Then secondly, just to follow up on Ken's earlier question on the defense end market. Are there specific platforms, programs where you're seeing, maybe the bookings get juiced a little bit more than you had expected, or is it sort of across the board?

In defense? You're talking about the defense?

Defense, yes.

I would say in general, the tide's kind of flat to down and most of the ships go down a little. The exception to that, I would say, is typically things having to do with helicopters are doing pretty well.

Yes.

Particularly products having to do with jacking up the power requirements.

Okay.

And helicopters continue to do pretty well. The flip side of that is things having to do with ground vehicles, particularly Bradley vehicles, are doing pretty poorly. I think the things in the middle are kind in the middle, but those are the two outliers.

That's helpful. Thank you.

And the next question will come from the line of Mike Ciarmoli, KeyBanc.

Hey, good afternoon, guys. Thanks for taking my questions. Just a follow up, Nick, on Fred's questioning. On defense, have you guys broken out or would you be willing to break out your percentage of revenues maybe exposed to helicopters versus fixed wing?

We have not and I don't know it off the top of my head here.

Fair enough. Just shifting to the commercial OE growth rates for the year, what are you guys assuming for 787? I mean, are we kind of -- should we expect sort of, that you're assuming the 2.5 rate of production at that Boeing's been talking about?

I think for 787 for this year, I think I said this, but that we are expecting minimal if any shipment in our guidance.

We only have six more months to go.

We only have six more months to go, and there's inventory in the system. I wouldn't also tell you at the front end of the program like that, you don't make a heck of a lot of money on the original shipments. It's not going to make a lot of difference.

Okay. Fair enough. Last one, just on McKechnie, I guess the margin expansion in the second half, can you break down for us, is that coming more from pricing as you're going through the McKechnie product lines, trying to put in the value creation model or is it coming more from consolidating the facilities or is it split fairly evenly?

I think it's a mix. It's also coming some from the after markets picking up. I think a combination of the after markets picking up nicely. We're making progress on the value pricing and we're getting some of the costs out. I think it's a mix of all of them. Excuse me, and we sold the lowest margin businesses.

Right, right.

Yes.

Fair enough. Thanks, guys.

And we have a follow-up question from the line of Robert Spingarn, Credit Suisse.

Yes, hi guys. I just want to take another crack at this growth, this top line growth. If we do the math, this is comparing to your old guidance, but it looks like you took revenue guidance down about, 2.5% when the actual divestiture would have taken you down about 5% or 6%, and yet at the same time, your adjustment in your growth rates on the commercial side, sitting on a blended basis, raise you about 5%. So are there a couple percentage points -- I'm sorry, you rose 2.2. Might you have risen by more?

We have second half growth originally in our forecast, too.

I'm just not following the numbers, Rob.

I'm not sure I said them right but basically what I'm trying --

I understand the point, you're saying, you would have lost $70 million, which would have been about 6%, but you are reporting.

And you took it down 2.5%. At the same time, you are raising everything else 5% or so?

Could there be, Rob, if you just go to the mid-point from the old guidance to the new, and you take the $70 million out, your 2.5% is really more like 3.6% increase, not 2.5%. If you just adjust the prior mid-points for the $70 million in revenues.

That's what I did.

And that's 3.6% for the second half of the sales on full-year revenues. Take those revenues in half and double your percentage.

Yes, yes, yes that's right.

You with me?

Yes, I see what you're doing.

I'm not exactly following your math, Rob --

I said 2.2% plus. I should have said minus 2.2%, but I'm thinking you could pretty much offset the divestitures with the higher growth rates, yet you're down 2.5%. But I see Greg's point. You're saying one's a half-year number, and one's a full-year number.

That's a good answer.

We didn't come to that conclusion.

Okay. Thanks.

And there are no more questions in the queue at this time. I'd like to turn the call back to Mr. Jonathan Crandall for closing remarks.

Thank you. I'd 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 2011 no later than tomorrow. Thank you again.

Ladies and gentlemen, thank you for your participation. You may now disconnect and have a great day.