TransDigm Group Inc (TDG) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 TransDigm Group earnings conference call. My name is Keith and I'll be your operator for 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, today's conference is being recorded for replay purposes. And I would now like to turn the call over to your host for today to Ms. Liza Sabol, Investor Relations. Please proceed, ma'am.

Thank you. I would like to thank all of you that have called in today and welcome you to TransDigm fiscal 2011 third quarter earnings conference call. With me on the call this morning are TansDigms' 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 presentation is available at our website, www.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 website.

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. 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 and at the end of the slide presentation for reconciliation of these measures to the most directly comparable GAAP measures.

With that, let me now turn the call over to Nick.

Good morning and thanks for calling in to hear about our Company. As usual, I'd like to start with some comments about our consistent strategy as well as our current sense of the status of the aerospace market as it applies to our Company. And I'll also give a short description of our recently announced acquisition of Schneller -- or contracts, I mean, for Schneller.

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 we believe this, about 90% or more of our sales are generated by proprietary aerospace products and most 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 come from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and have produced relative stability through the cycles. Because of our uniquely high EBITDA margins, typically in the high 40s% to 50% of revenue and relatively low capital expenditures, 2% or less of revenue, TransDigm has year-in, year-out generated very strong free cash flow.

We pay close attention to our capital structure and we view it as another means to create shareholder value. As you know, we have been in the past and continue to be willing to lever up when we either see good opportunities or view our leverages a 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 3 value drivers. Those are 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 for up and down markets and has allowed us to continually increase the intrinsic value of our business while steadily investing in new business and platforms.

We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace businesses with significant aftermarket content. We have acquired 36 such businesses, including 21 since our IPO in 2006. We have been able to acquire and improve proprietary aerospace businesses through all phases of the cycle.

To our consistent focus on our operating value drivers, a clear acquisition strategy, and a close attention to capital structure, we have been able to create intrinsic value for our investors for many years through up and down markets. As you may have seen, we recently announced the execution of a contract to buy Schneller LLC for $288 million to close a subject to typical closing conditions and regulatory approvals. But if all goes smoothly, this should close before our fiscal year end of September 30. We will utilize cash on our balance sheet to close this transaction.

Schneller is headquartered in Kent, Ohio, and is one of the very few companies in the world that design and supplies highly engineered laminates, primarily for commercial transport airplanes. The proprietary nature of the product, the significant aftermarket content, and the well established platform positions fit well with our strategy. Schneller's products are on almost all of the Boeing and Airbus planes in service as well as a high percentage of the regional jet fleet. The business is about two-thirds commercial aftermarket with a balance from commercial OEM. In calendar year 2011, revenues are currently running in the mid-$80 million per year range with EBITDA margins in the mid-30% range. We see upside in both the margins and the revenue. I can't say much more about this business at this time until we own it and also because we have a confidentiality agreement until such time as we own it.

The first 3 quarters of our fiscal year were active in the M&A area. In Q1 we closed on both the acquisition of McKechnie for approximately $1.25 million -- $1.25 billion and the Teleflex actuator business known as Talley Actuation for about $93 million. In the second quarter we completed the divestiture of the McKechnie fastener businesses through Alcoa for about $240 million on a pretax basis. In Q3 we completed the sale of the small McKechnie distribution business to Satair for $30 million, again, on the pretax basis. This completed our divestiture activities related to the McKechnie acquisition. The remaining businesses fit well with our business strategy.

As I already mentioned in Q4, we also announced a definitive agreement to purchase Schneller for $288 million. As of July 2, after closing on both divested business, we about $550 million of cash and about $240 million in undrawn revolver. Additionally, since we made a large tax and interest payment in Q3, we expect to generate about $100 million in operating cash in Q4. We also have more capacity under our credit agreement.

Our net debt-to-EBITDA is now a little under 4.5 times. And as in the past absent acquisitions or other capital market activity, we will continue to de-lever. As we mentioned last quarter, we repriced our $1.6 billion of bank debt and were able to make a meaningful reduction, around 1%, on the interest rate through a mix of lowered LIBOR floor and reduced spread. We were also able to eliminate the two maintenance covenants, interest coverage and net leverage. In Q3 we also instituted a debt swap or hedging activity to convert more of our floating rate debt to fixed rate debt.

With respect to our underlying markets -- and you'll see slide 5 -- the market outlook is mixed but surely more positive than negative. We continue to see clear signs of an improving commercial aerospace market while the defense market remains much less clear. In the commercial OEM sector, industry forecasters and airframe manufacturers continue to be optimistic regarding the commercial transport OEM production cycle. As I've said before by historic measures, this has been an unusual moderate downturn.

Commercial transport rate increases are proceeding, if not accelerating, at both Airbus and Boeing. We still expect minimal if any 787 shipments for TransDigm in our fiscal year 2011. In general, though very platform specific, the overall BizJet OEM market appears to have stabilized and may be picking up a bit.

In the commercial aftermarket, we continue to see mostly positive data on worldwide passenger traffic, our incoming orders, and other items. The oil prices and worldwide instability bear watching, but so far at least still do not appear to be meaningfully impacting our business. This quarter we again saw significant year-over-year increases in our aftermarket revenues. Incoming orders, or bookings, continue to run above shipment levels in the aftermarket and well above the prior years levels and inventory of our major distributors appears to generally be in line.

In the defense business, given the uncertainties around defense budgets and recent trends, we are planning on a modest decline in this segment for fiscal year 2011. This can be tough to predict, especially given the current US political winds and the worldwide geopolitical situation.

Now let me turn to our latest financial performance. I'll remind you this is the third quarter of fiscal year 2011. Our fiscal year started October 1 and ends September 30. As I have said in the past, quarterly comparisons can be significantly impacted by differences in the OEM aftermarket mix, large orders, transient inventory fluctuations, modest seasonality and other factors. But in any event, our third quarter performance was strong.

Our GAAP revenues were up 52% versus the prior Q2 and 43% on a year-to-date basis. Organic revenue was up about 13% on a quarter-versus-quarter basis. This is the fifth quarter in a row of year-over-year organic growth, in spite of a decline in military revenues.

Reviewing the revenues by market category 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, commercial OEM revenues were up 20% versus the prior quarter and 15% on a year-to-date basis. Quarterly commercial transport and business jet OEM revenues -- revenue growth percents were both up in the high-teens to mid-20s compared to both the prior Q3 and on a year-to-date basis. The commercial aftermarket revenue was up about 25% on a Q3 versus Q3 basis and up about 23% on a year-to-date basis. The revenues are also up sequentially.

For the quarter, business jet aftermarket revenues were in the -- up in the high teen percent verse last quarter and commercial transport aftermarket was up in the high 20s. Commercial aftermarket bookings continue to run ahead of shipments.

In the defense market, which makes up around 30% of our revenue, the picture was less positive. The revenues are down about 2% on a quarter-versus-quarter basis and down about 3% versus the prior year-to-date. Incoming orders were soft this quarter and now on a year-to-date basis are just about even with shipments. We remain cautious about trends in this area. In total for the quarter, our revenues were a bit better than we expected.

Moving to profitability, and now on a reported basis, I'm going to talk primarily about our operating performance or EBITDA as defined. The major year-to-date as defined adjustments are related to the McKechnie acquisition, the divestitures and the large financing in the first half of the year. Our EBITDA as defined of about $161 million for Q3 is up around 53% versus the prior Q3 and the $418 million year-to-date is up about 41% versus the prior year.

The EBITDA as defined margin is almost 50% for the quarter and 48% on a year-to-date basis. The quarterly margin is approaching our pre-McKechnie margins. Our quarterly EBITDA margin versus prior year is negatively impacted by about 2% from the diluted impact of the acquisitions. Q3 continues to be a busy time for our operating team and Ray is going to expand on that a little. After 8 months of ownership, the McKechnie integration is on track and the business, with some puts and takes, generally look as good if not better than we expected.

With respect to acquisitions, we continue looking at opportunities. We're pretty busy in the first part of the year, closing, restructuring, and buying. The pipeline is in decent shape. We are clearing seeing more activity. The closes are difficult to predict but we remain disciplined and focused on value creation opportunities that meet our criteria.

Now, regarding the fiscal year 2011 guidance, which is on slide 6, as you can see from our press release, we increased our guidance from that given before the investor day. The significant pluses are the improved operating performance at both the overall McKechnie businesses and our base business and, to a lesser extent, a modest reduction in the full-year estimated tax rate of 35%. Based on all the above, we are again increasing the midpoint of our EPS as adjusted guidance by $0.21 a share from $4.05 to $4.26 a share. This again is primarily due to improved operating performance with some other modest puts and takes. We now expect revenue (inaudible) to be about $1.2 billion or up $10 million from our investor day guidance. This assumes no additional acquisitions but does reflect the divestiture of the fastener and distribution business.

2011 EBITDA as defined is now anticipated to be in the range of $582 million a year, up about $5 million from our previous investor day guidance. EBITDA as defined margin is now expected to be about 49% of revenue for the full-year. The margin increase is due to a combination of higher commercial aerospace volumes, a slightly better mix, in addition to improving operations at the McKechnie and base businesses.

Compared to 2010, we are now planning on full-year commercial aerospace OEM revenues to be up in the mid to high-teens. In the commercial aerospace aftermarket, we are planning on revenue growth versus the prior year to be up in the low 20%. That's based on worldwide traffic up 5% to 6% and some restocking or deferred maintenance recovery. For defense revenues, we now anticipate year-over-year revenues to be modestly down.

The first 3 quarters of 2011 were good. The commercial aftermarket continues to recover nicely, but the defense markets still remain unclear. In any event, I'm confident that by focusing on our consistent strategy we can continue to create intrinsic value for our shareholders through good and bad times.

And with that, let me hand this over to Ray Laubenthal who will give you a little color on our operations for the quarter. Ray --

Thanks, Nick. Overall, we had a very busy third quarter with good operational results. In addition to the continued commercial market recovery, we are quite busy with acquisition transitions and plant consolidations. At our operating units, we also continue to diligently work our value drivers and we continue to create shareholder value.

Let me explain or third quarter acquisition integration and operational activities in a little more detail as summarized on slide 7. Acquisition transition work continues to progress favorably. Recall last quarter, I reported we had 4 plant consolidations occurring in various stages. We just completed 2 of these consolidations. In June, we consolidated our production facility located in Mesa, Arizona with the Dukes facility located in Northridge, California. In July, we physically moved the Talley acquisition business that was -- actuation business, excuse me -- that was located in Simi Valley, California, to our aero fluids group in Painesville, Ohio.

Both of these consolidations will generate real productivity savings under their lower cost structure once they work through their learning curve period. The remaining 2 consolidations are also progressing well. These consolidations stem from our McKechnie acquisition.

The consolidation of our Avtech unit with the Tyee business is on track to finish this fall. To date, the front office operations have been physically moved. The factory safety stock is being built and the factory building modifications are well underway. Likewise, the consolidation of the Electromech/Welco Kentucky operations with the Matamoros, Mexico Rotronics facility is also progressing well. At present, the Mexico factory modifications are progressing nicely and we also expect to complete the consolidation this fall. All of these moves will start to show significant productivity results as we move into our fiscal 2012.

Now, let me turn the discussion to our base operating units and their recent value activities. Overall, the base TransDigm operating units are performing well. They have diligently controlled their cost structures and have added resources sparingly as this market recovers. We have come out of this recent downturn with an improved cost structure.

Our new business development continues to be quite active. We continue to invest in a broad range of engineered solutions for our customers. And to give this a little color, I'd like to showcase our success winning new business awards on a A350 platform. Some of them are shown on slide 8. Some of the engineering product applications we have secured so far include the cockpit security door module, which is composed of the intrusion resistant ballistic door and frame structure along with the electronically actuated door bolting mechanism and the electronic decompression release control.

Also, we have numerous exterior latch applications. These latches secure the APU access panels, various pressure release and de-depression panels, airframe fuselage maintenance panels and wing and fairing access panels. Inside the passenger cabin, we've been awarded all of the latches for the overhead luggage storage bin.

Now, on the A350 engine, which is the Rolls-Royce XWB, we have the ignition system, fuel valves, fuel connectors, and certain hold-open rods in the engine bay and the cell area. We also have over 160 aluminum and titanium rods used to support and stiffen the large belly fairing on the underside of the airframe. Additionally, we have articulating rods employed on the landing gear doors, passenger doors, wing fueling panels, and various other exterior access doors and panels. Airbus and its systems suppliers are still quite active finalizing the A350 design. We are working jointly with them on new designs and proposals and we expect we'll capture additional content on these once the sourcing decisions are finalized.

In total, we believe we have secured expanded, profitable OEM business on the A350 and, more importantly, secured future aftermarket revenue streams on Airbus' next new platform. We now expect that our content on the A3 platform will, in aggregate, be well ahead of the content on the platforms it replaces in the marketplace.

Now let me hand it over to Greg Rufus, our CFO. He'll review our third quarter and year-to-date financial results in more detail.

Thanks, Ray. As Nick mentioned, we have been quite active this year with acquisitions, divestitures, and financing as evident in our year-to-date reconciliation of EBITDA as defined, which we have discussed on prior calls and as we presented in table 2 of this morning's press release. This quarter we've completed a few more transactions I'd like to point out.

As previously mentioned, and as part of the McKechnie acquisition settling out, we've divested the fastener and distribution businesses for a combined total of $270 million, which had a positive impact after taxes of approximately $190 million. We also have recorded a year-to-date net gain shown in our income statement as discontinued ops of $16.8 million. In the quarter, we recorded a small loss on discontinued ops of $2.1 million, mostly relating to distribution divestiture.

In addition, on June 27, we entered into a 4 year interest rate swap agreement to hedge approximately $350 million of our term loans. This represents a little over 20% of our variable debt. Our current rate structure on our term loan will continue as is for the next 6 quarters. This rate is defined as LIBOR plus 3% with a 1% LIBOR floor, or the total rate of 4% to date. Beginning December 31, 2012, we will then lock into a fixed rate of 5.17% for the remaining 10 quarters on this portion of our variable term loan. At that point, assuming no other changes in our debt structure, our debt will be split approximately 60% fixed and 40% variable.

Now please turn to slide 9 for our quarterly financial results. Third quarter net sales were $325 million, up $111 million, or 52% from the prior year. This increase includes $83 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 $28 million over the prior year. The organic growth rate of 13.2% was led by an increase of $21 million in commercial aftermarket sales and an increase of $6 million in commercial OEM sales. As Nick discussed, the commercial aftermarket continues its strong growth. Defense sales were down slightly for the quarter.

Reported gross profit was $183 million, up $61 million, or 50% from the prior year. The reported gross profit margin decreased approximately one margin point versus the prior year. The dilutive of impact from acquisition mix was approximately 4 margin points for quarter of which approximately 2 points were due to acquisition related startup costs and purchase accounting adjustments to inventory. Higher volumes, favorable product mix, and the strength of our proprietary products in our base business improved margin points approximately 3 points which helped offset the dilutive impact of the acquisitions just mentioned.

Selling and administrative expenses were 9.7% of sales for the quarter compared to 10.9% versus the prior year. The absolute dollars increased $8 million. The dollar increase is primarily due to the recent acquisitions. We also have the benefit of a $3 million accrual adjustment in the quarter.

Amortization of intangibles was about $9 million higher versus the prior year. This line item reflects all the recent acquisition activity. Net interest expense was $50 million, an increase of $22 million versus the prior year quarter. This increase was primarily due to the McKechnie acquisition made in quarter one, which was financed entirely by debt.

As of the end of the quarter, the weighted average interest rate on total borrowings outstanding was approximately 6%. The effective tax rate was approximately 35% in both the current quarter and last year. We now expect the full year tax rate to be approximately 35%, which is a reduction from our previous expectation of 36%. We estimated -- we estimate our cash taxes to be about $100 million for the year.

Net income from continuing operations for the quarter increased $14 million, or 33%, to $58 million, which is 18% of sales. The increase is primarily due to both organic and acquisition revenue growth, which is somewhat offset by higher interest expense and acquisition related costs.

Before discussing earnings per share, let me remind you TransDigm uses the 2 class method of calculating earnings per share versus the more commonly used treasury method. This has a slightly more dilutive impact of about 3% versus the treasury method. GAAP earnings per share from continuing operations was $1.10 per share in the current quarter versus $0.83 a share in the prior year. This is an increase of 32%. A $2 million loss from discontinued ops reduced earnings per share by $0.04 to arrive at a GAAP EPS of $1.06. Adjusted EPS was $1.21, an increase of almost 38%. This is compared to $0.88 last year.

The adjustments to GAAP EPS from continues ops totaled $0.11 comprised of acquisition related costs of $0.08 per share and noncash compensation costs of $0.03. Cash flow from operations was $143.7 million through the third quarter of fiscal 2011. And we ended the quarter with $549 million of cash on the balance sheet. This cash balance includes the tax -- the aftertax proceeds of $190 million from the 2 divestitures.

As Nick previously stated, we expect to generate $100 million of cash in the fourth quarter. At the end of our fiscal year, which is next quarter, we estimate our net debt leverage ratio to be approximately 4.1 times our pro forma EBITDA as defined. This excludes the potential impact from the Schneller acquisition. On the same basis, but assuming we close Schneller before 9/30, we expect our net debt leverage would be approximately 4.4 times, which is where this ratio is at the end of this quarter.

Now, let me hand it over back to Liza 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 2 per caller. If you have further questions, I'd ask that you reinsert yourself into the queue and we will answer those questions as time permits.

Operator, we are now ready to open the lines

(Operator Instructions)

Your first question is from the line of Myles Walton with Deutsche Bank. Please proceed.

Thanks. Good morning, guys, and good quarter. Wondering if you could talk a bit about realtime dynamics. Obviously, it's been a pretty rocky market. And curious if you're hearing, seeing anything with respect to your customers that is making your wander away from what would otherwise be pretty good confidence in your underlying business? Whether that's conversations with airlines or general buying trends that you're seeing through your realtime buying?

Myles, I'd have to say, no. Something could change tomorrow, of course. But as of right now, if we felt uncomfortable, we wouldn't have put the guidance we put out.

That's fair. And that's the answer I expect. For every rock --

Ask me tomorrow and maybe I'll go with something different.

No, that's fair. And then on the cash balance -- obviously great cash generation. Looks like you've got another $100 million in the operating cash flow in the fourth quarter. So even correcting for the transaction, the Schneller transaction, you'd still have $350 million, $370 million, something like that, of cash on balance at the end of the year. Is the pipeline still pretty rich? Is the desire still pretty high to close on more? Or will there be other deployments of capital as well?

As we've always said, our first choice to use our capital is to make accretive acquisitions to companies that meet our criteria. I would say the pipeline is in decent shape. Just about every couple of months here for all through this year, we've sort of been taking it and watching it, watching the pipeline, watching our cash and trying to make judgement as to what's the best thing to do to keep moving the equity value. We just made an acquisition. We think we have a decent pipeline but we're also building up cash. We'll keep measuring that. I'm not sure what we'll do is the real answer. We'll do, again, every 30 or 60 days we'll take a look at what we got, take a look at what we think might close, take a look at our cash and make another short term call.

Okay, gentlemen. Your next question is from the line of Ron Epstein with Bank of America Merrill Lynch.

Good morning. Can you speak to at all the supply chain itself? Your suppliers in terms of -- are you starting to see any lead time stretch out in terms of raw materials? And maybe the tier 3 guys and tier 2's who supply to you, are there any bits and pieces that are starting to get a little bit more shorter in supply given the impending ramp?

Do you want to answer that, Ray?

We're not seeing any jam-up in the supply chain. Generally, the lead times are long enough and this ramp up has been occurring over a good number of months. It's spread out. We're not experiencing anything that you might be asking there.

Okay. And then maybe one just follow up in terms of the world of M&A right now. Realizing you made the announcement Friday, when we look out on the landscape of what's potentially available out there. How does the M&A market look right now?

I would say it is reasonably active. We are seeing a reasonable amount of things.

Super. Thank you.

Your next question is from the line of Rob Spingarn with Credit Suisse. Please proceed.

Good morning.

Good morning, Rob.

You talked about a little softness on the defense side. Would you attribute that to the op tempo overseas? Is it the CR? Can you sense where that's coming from?

I don't know that I really can, Rob. As you know, we've been concerned about this all year. The revenue started to drop earlier in the year. But we were cautiously optimistic because the bookings were holding up. That's not been the case now for the last 90 days. I really don't know that I can attribute it to any one thing other than just an attempt to spend less money. I will say in -- by types of platforms, helicopter things continue to be pretty robust. Other stuff is shaky.

Okay. And then that makes it sound like it's therefore the op tempo is the driver because the --

That's my sense. Rob, my sense is this is becoming -- and I'd love to be wrong -- but it's becoming something like as the tide drops down all the ships drop a little.

Right. And then going back to Myles question on the realtime dynamics, have you seen any pricing behavior change on the part of the customer here? Are you still getting the pricing that you've been getting?

The dynamics haven't changed.

Okay. And on then the only other thing I would ask you is on your latest acquisition, at least as a multiple of sales, it looked like you paid a little bit less. Are prices coming in a little?

I don't know that I can say that. I think -- I mean you can pretty well figure out what we paid, right? I gave you the revenue and I gave you an approximate EBITDA margin. I would say it's not -- we didn't pay as much as we paid for McKechnie for sure, but it's more in the range we saw before McKechnie.

Your next question is from the line of Ken Herbert with Wedbush. Please proceed.

Yes. Hi. Good morning. Just want to first -- in the commercial OE side you -- looks like you sort of nudged up guidance a little bit there but you also indicated you're not -- specifically, on the 87 you're not seeing anything yet. Safe to say that the guidance [freeze] is driven more by legacy -- triple 7, 37 are the programs. And when might you -- or when are you expecting to start to see any material impact from the 87?

Well, the 7 -- I guess when they start shipping them. We're sort of reticent to forecast a lot until Boeing starts shipping some airplanes. There's inventory in the system. I think we'll speak to next year's guidance when we speak to it. But I would expect we will see some in next year's guidance.

Okay. And then in terms of the guidance raised -- is there any particular platforms you'd point to or -- I'm assuming it's more on the transport side than of course on the regional biz jet side.

Yes. The transport both. The summit, the OEM -- are probably more in the aftermarket.

But there's no specific platform. It's across the board.

And to some degree, this is the flip side of the military. The rising tied picks all the ships up.

Rising tide lifts all boats. Perfect. Thank you.

Okay, gentlemen, your next question is from the line of Joe -- JPMorgan.

Thanks. Good morning.

Good morning.

Just wondering about the Q4 guidance. Looks like you guys aren't looking for much improvement sequentially. You still have your actions underway with the McKechnie integration. It just seems like one would normally think with sequential growth and incremental margins and some of the integration further behind you that you might be looking for a stronger fourth quarter. Is that just conservatism?

Well, truth being, one, 49.7 is pretty damn high in my book. And I think if you recall, I said we had a favorable [accrual] adjustment of about $3 million, which is about a full margin point. So if I didn't have that accrual adjustment I'd be up a full margin point, Joe.

Okay. That's fair. Okay. Just one more on Schneller. This seems to be a slightly different type of business in terms of the things that they make compared to your existing businesses. Maybe just provide some commentary on how this is -- if you look at it that way or if you think it's sort of right down the fairway for you? Or if this maybe is a sign that you're opening the aperture a little bit in terms of the types of products you consider?

Yes, I would say it's a little different than we've bought in the past if you look at the products. But the fundamental characters that we look for, which is a proprietary aerospace business with significant aftermarket content, is right down the pike. We see the same kind of characteristics that we like. When we buy it, we bought it on the same basis. I think we've told you we have to see private equity kind of returns on our equity in a business. We see the same opportunities here. It's not a hard component. In other words, it's not a pump. But we think it has the same characteristics. And I think, by and large, when we see proprietary aerospace businesses with significant aftermarket content. If we can get comfortable with the proprietary content and the security of their platform positions, we're going to be interested in them.

So you consider these products to be as protectable as proprietary and the pricing power to be as strong as your existing business.

Well, I think to give you a sense, we told you it's got a mid-30s EBITDA margin, which is pretty good. And we see movement in that. We've got -- if you spent -- if you pay a decent price for these things, you got to change the economics to get your return. And we see the same opportunities we see at most of our acquisitions.

Okay.

Your next question is from the line of Fred Buonocore with CJS Securities. Please proceed.

Yes. Good morning.

Good morning.

So I realize you're kind of moving into the process where you do all your business reviews. And as you're going through that process I'm just wondering --

Can you speak up a little, Fred?

Yes. Sorry about that. Just wondering if in the course of starting your quarterly business reviews and the information -- or your year-end business reviews and the information that you're gathering in that process, if you -- all things being equal -- assuming no major change in the environment -- if you'd be able to give us some sort of outlook for 2012 if you had to give it a go this year.

Fred, it's premature. We're in the middle of it, as you said, and we'll give the guidance out when we're ready to give it out. It'd be premature to do that, especially what we're in the middle of.

I figured you'd say that but --

(Laughter) Nothing wrong with taking a shot at it. Who knows, the guy might trip over himself and spit a number out.

Exactly. Okay. You got me. Then my next question is, Nick, back at the analysts day in June you talked about potentially widening the envelope on your acquisition criteria as you kind of absorbed a lot of the really attractive aftermarket businesses. Just wondering if you're starting to add that into your process where you're looking at maybe some businesses that maybe are a little bit less aftermarket, a little bit more OEM? Is Schneller kind of falling into that type of category where --

I would say Schneller is more aftermarket. I don't know -- I think it's been a while since we bought a business that was close to 70% aftermarket. We like that. We also like the fact that we have a business that's got almost no defense, which is, frankly, hard to find. Most people have 25%, 30% defense when we look at these component businesses. I don't think we'll run out of the traditional component businesses. But we're bigger. Most -- as I've always said, if a proprietary aerospace business with significant aftermarket content that meets our return criteria, we're going to be interested in it. We're not hung up on whether it's a fuel system component or hydraulic system. It's got to meet those -- it's got to meet our criteria and have the private equity kind of return.

Okay. Sorry to make your repeat yourself.

(Laughter) I like to repeat myself, Fred. I don't know that many things to say.

Your next question is from the line of Eric Hugel with Stephens. Please proceed.

Good morning, guys. Good quarter.

Good morning.

Nick, maybe you can just clarify when you were talking about the commercial aftermarket in the terms of the shipments, you said your inventory at distributors looked to be in line with demand. Are you sort of implying there that -- because you're talking about seeing restocking going into the future. Are you implying that we're not seeing a restocking? Or is that inline with running above shipments.

Our distributors have a stocking requirement based on -- it's different months of inventory based on some of them -- it's the rolling 90 days average, some it's 6 months, some it's less. They all have -- mostly have rules for what they have to stock. And sometimes they can drift over or under where the stocking requirements are, which means you can get a spurt or cut down or cutback on orders. What I was trying to say is we don't see that. So we don't think there's a significant bubble either direction at distribution. The airlines, on the other hand, do appear to be ordering above their consumption rate.

Perfect. Thank you for making that clear. In terms of cash flow, the numbers that you have in the cash flow page I think on page 10, that's year to date, correct?

Yes it is.

So how much was the one time sort of payment this quarter? I think you said there was a large interest payment, tax payment or something?

What was that about 40 -- (Inaudible) -- cash interest?

I don't have the exact number with all the pieces. I don't have the exact number in front of me. Is this it here? Cash interest? We paid about $78 million in interest and about $45 million in taxes in the third quarter.

Great. And just lastly, the $100 million that you're talking about for fourth quarter? Is that a free cash or is that cash flow from operations number?

Can you repeat the second half?

The $100 million cash that you said you were going to generate in the fourth quarter. Is that a free cash flow number or a cash flow from operations number?

That is the ultimate cash that will go on the balance sheet. There's different definitions for free cash flow. Given where our balance is at the end of third quarter, I expect us at -- when we close -- to have at lease $100 million more, minus the acquisition for Schneller.

Okay, great. Thanks, guys.

Your next question is from the line of J.B. Groh with D.A. Davidson. Please proceed.

Good morning, guys. Thanks for taking my call. I just had a couple quick ones. On this ramp-up in OEM, could you kind of talk about what sort of margin drag that could represent if you get OEM growing at a faster rate organically than aftermarket, given your leverage to aftermarket?

I mean, it's sort of math. If one grows substantially faster than the other, you'll get some margin swing. I would tell you, historically, rarely over a year has it been more than a couple of margin points. And you can do the math. It depends how much you believe each one is going to grow. I doubt -- and we'll give the guidance when we give guidance, but I'd be surprised if it's a big impact on next years margin.

Okay. That's real helpful. And then I think I know the answer to this question but in Schneller it sounds like there's virtually no product overlap with what you're doing with what you're doing, correct?

No.

Okay. That's helpful. Thanks a lot. Congratulations on the quarter.

(Operator Instructions)

And your next question is from the line of Michael Ciarmoli KeyBanc Capital Markets. Please proceed.

Good morning, guys. Nice quarter. Nick, just to follow up on Schneller, these products appear maybe not to be as flight critical as some of your other products. And looking at it, maybe they're more bound by interior cabin retrofits where maybe there's a 5 to 7 year cycle there. Does that make it easier for those products to get displaced? Or is that a sort of new market for you guys to learn?

Well, let me address the flight critical. We make other things in the interiors that aren't flight critical. We make a goodly chunk of the faucets. We make a fair amount of overhead bin latches. I guess cockpit security systems are now flight critical but they don't make the airplane fly. This business has similar characteristics to the one we have. We think it's -- we think the products are very sticky, not just to the walls by the way. (Laughter) Also to the customers. There is an element of refurbishment in this business that's probably a little bigger than some of our others that gives us -- gives it maybe a little more exposure to the cyclicality but not less than you'd think. At least as big is the repairs and spares that are -- when things get nicked and dented and need a quick fix -- that's at least as big in the aftermarket as the refurbishment business.

Okay that's fair. And then just on the aftermarket for the remainder of the year here. Are you guys thinking that based on what you're seeing today, you could see further acceleration into the fourth quarter? Do you think we're sort of at a peak growth environment and you'll see this sort of growth rate with tougher comps begin to level off?

Mike, I think I'd have to stick with our guidance. I think you can figure out from our guidance what we're saying, which is we're sort of about at the growth rate we're running. I would like -- it would be great if it picked up more. But I don't think I can give you any better feel than we did with our full year guidance.

Fair enough. Thanks, guys.

Your next question is from the line of Jason Rogers with Great Lakes Review. Please proceed.

Hello. I wonder if you could talk about the whole process for getting new products approved through the FAA and if there's been any changes there as far as getting those approved.

Can you speak up a little? You're hard to hear there.

Sure. Just wanted to know about the whole process of getting new products approved through the FAA, if there's been any changes there?

I would say, one, we don't do a whole lot of that. It's a very small part of our business. But I would say in general, if anything, the approval through the FAA is slower and more cumbersome. General rule of thumb, as with many government processes, each year it's a little slower and more cumbersome than it was the year before.

Okay. Thank you.

Okay, there are no other questions at this time so I'd like to turn the call back over to Ms. Liza Sabol 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 third quarter of our fiscal year 2011 no later than tomorrow. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect and have a great day.