TransDigm Group Inc (TDG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Second Quarter 2012 TransDigm Group Inc. Earnings Conference Call. My name is Colby and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to 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's Fiscal 2012 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 www.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 and EBITDA as defined, adjusted net income and adjusted earnings per share to those measures.

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

Good morning. And thanks for calling in to hear about our company, again. I would like to start with some comments about our consistent strategy, the acquisition of AmSafe, our current sense of the status of the aerospace market as applies to our business, and a few miscellaneous items.

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 you can look at page four of the slides, about 90% of our net sales are generated by proprietary products, and around three-quarters of our net sales come from products for which we are the sole sourced provider. About 60% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and have provided relative stability in the downturns.

Because of our uniquely high EBITDA margins, typically about 50% of revenues, and relatively low capital expenditures requirements, typically less than 2% of revenue, TransDigm has year in and 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 you know, 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 value creation. We typically begin to delever 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 has allowed us to continually improve and increase the intrinsic value of our business while steadily investing in new business and platform positions.

We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace businesses with significant aftermarket content. We have been able to acquire and improve proprietary aerospace businesses through all phases of the cycle. Through our consistent focus on our operating value drivers, a very clear acquisition strategy, and close attention to our capital structure, we have been able to create intrinsic value for our shareholders for many years through up and down markets.

The just completed quarter was active. We closed on the AmSafe acquisition for $750 million. To remind you, the AmSafe price includes tax benefits over the next ten years to TransDigm in the range of $70 million on a net present value basis. The tax benefits are front-end weighted, with about $20 million of them accruing to us in the first fiscal year of ownership.

AmSafe is a good, solid, proprietary aerospace business. It did about $260 million a year in calendar year 2011, with an EBITDA margin of about 25%. In the 7.5 months of our fiscal year 2012 ownership, we expect AmSafe to do about $175 million of revenue and about $50 million of EBITDA as defined. The commercial aerospace margins are higher than the average and the ground vehicle margins are substantially lower. About 90% of its EBITDA comes from commercial aerospace and military markets, of which the vast majority is commercial aerospace. We find the low military content, about 10% of the revenue, and very high commercial aerospace aftermarket content particularly attractive.

Excluding the commercial ground vehicle business, about 85% of the revenues are aftermarket, primarily commercial transport aftermarket. The major AmSafe product lines are seatbelts and airbags for commercial aircraft, primarily commercial transport. They are qualified, usually exclusively, on all major commercial transport and regional aircraft.

After two and one-half months of ownership, we are very comfortable with our ability to increase the value through a mix of all three of our value drivers. Though I don't know that this business can achieve EBITDA percents as high as TransDigm's average, we see significant upside, at least as good as our acquisition case assumptions.

We financed the acquisition with $500 million of incremental bank debt and from our cash on hand. The interest rate is LIBOR plus 3%, or the 1% LIBOR floor, or 4% as of today. We also increased our revolver availability to $310 million as part of the process.

We have now included AmSafe in our updated full year guidance. At March 31, 2012, we had about $200 million in cash, and over $300 million in undrawn revolver. We also, on average, expect to generate between $90 million and $100 million a quarter in additional cash for the last two quarters of fiscal year 2012. We have additional borrowing capacity under our credit agreement. We estimate our gross debt to EBITDA ratio, on a pro forma basis, at 3/31/2012, reflecting the AmSafe acquisition as about 4.7 times EBITDA. Our net debt to EBITDA is about 4.4. As in the past, absent acquisitions or other capital market activities, we will soon delever.

Changing subjects a little, you may have seen we recently prevailed in a litigation against Eaton Corporation regarding improper retention and possible use of our intellectual property in non-payment of certain aftermarket related obligations. Just to make clear, we have here and will continue to vigorously protect our intellectual property. We have not included the litigation award in any of our guidance, as we are unsure if or how much of it may be appealed, how we will fare on fee recovery issues, and a number of miscellaneous peripherals.

We also settled two retroactive contract adjustments with key customers, for a total of about $11 million. These have been booked about evenly in Q1 and Q2 as revenue and income.

Now, with respect to our underlying markets, and on a pro forma basis, that is assuming we owned the same mix of businesses in both periods -- the markets are a little bumpy but generally on track. We see continuing signs of strong commercial aftermarket. The defense aftermarket, though less clear, is so far holding up better than we outlined in our prior guidance.

Focusing a little bit on the different market segments. In the commercial OEM, industry forecasters and air frame manufacturers continue to be optimistic regarding the commercial transport OEM production cycles, rate increases are proceeding at both Airbus and Boeing, the 787 schedule is still unclear, but that won't materially impact fiscal year 2012. On a positive note, at least now there are some 787 air frame shipments. In total, our full year commercial transport OEM revenues, on a pro forma basis, are now expected to be up in the high teen percents versus the prior year.

In business jets, though the outlook is mixed by air frame manufacturer, we expect mid to high teen percent growth year-over-year.

In the commercial aftermarket, we continue to see growth in the worldwide passenger traffic, though not as high as last year's growth. To remind you, last year our commercial aftermarket was up almost 25% on a year-over-year basis. This was likely not a sustainable level. This quarter we saw modest increases over our prior Q2 in our commercial aftermarket revenue. Sequentially, commercial aftermarket revenues were about flat versus Q1 of this year. On a positive note, incoming orders or bookings picked up nicely, and are now running above our shipment levels on both the year-to-date basis and a prior Q2 basis, as well as sequentially. As I have said before, bookings can be lumpy.

We are still guiding pro forma commercial aftermarket revenues to be up about 10% versus last year. We are watching this carefully. The revenue comps, I will remind everybody, get tougher in the second half of the year.

In the defense business, though there are still major uncertainties around defense spending, we now anticipate defense revenues to be flat to modestly up in fiscal year 2012. Though Q1 and Q2 were better than anticipated, we remain cautious. As I mentioned before, regarding the commercial aftermarket, the defense comps also get tougher in the second half of the year. Military revenues are tough to predict, especially given the current US political wins and the worldwide geopolitical situation.

Now, let me turn to the latest financial performance. I will remind you this is the second quarter of fiscal year 2012, our fiscal year started October 1st, 2011. As I have said in the past, quarterly comparisons can be significantly impacted by differences in OEM aftermarket mix, large orders, and transient inventory fluctuations in the system, modest seasonality, and other factors. But the second quarter of fiscal year 2012 was a good quarter. GAAP revenues were up about 39% versus the prior Q2. Organic revenues were up about 15% on a quarter versus prior quarter basis.

Reviewing the revenues by market category, again on a pro forma basis versus the prior year -- and you can see this on slide five. This is assuming we owned the same mix of businesses in both quarters. I will note that these pro forma comps do not include the two most recent acquisitions, that is Harco and AmSafe, as we're still syncing their market reporting up with TransDigm's.

In the commercial market, which makes up about 75% of our revenue; commercial OEM revenues, as I said, were up 36% versus the prier Q2, and 28% on a year-to-date basis. Commercial transport OEM and business jet OEM revenue growth were about in the same range. Excluding the impact of the retroactive contract settlements, the increase in revenues was a little over 20% on a year-to-date basis in the commercial OEM sector.

In the commercial aftermarket, revenue was up about 7% on a Q2 versus Q2 basis, and about 13% on a year-to-date basis. Though the specifics are unclear, anecdotally, there seems to be indication of some inventory trimming at certain airlines and a generalized economic concern by European airlines. I can't, at this time, quantify this much further. As I mentioned, bookings are now running ahead of shipments on a year-to-date basis. We are watching trends here very closely and will update you as we proceed through the year. But so far, the commercial aftermarket is about what we expected.

In the defense markets, which make up about 25% of our revenue, the defense picture was again better than we expected. As an aside, I should probably stop forecasting this before I embarrass myself further. But on the other hand, I have to say something. The revenues are up 10% on a Q2 versus prior Q2 basis. On the year-to-date basis, we are up about 3.5% versus the prior year -- the full year average run rate. Incoming orders ran ahead of shipping again in Q2. We'll see how this plays out. As I said, the military picture is not clear. For obvious reasons, we remain cautious. In total, for the quarter our revenues were a bit 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 made up of acquisition and stock option expenses. Greg will review various other items on the income statement, also. For Q2, our EBITDA as defined of $203 million was up 39% versus the prior year Q2 as defined -- EBITDA as defined. The EBITDA as defined margin is 48% for the quarter, the same as the prior year Q2. The year-to-date EBITDA as defined margin is roughly 49% of revenue.

Now, there are number of moving parts that complicate the EBITDA margin a bit. And let me try and clarify that a little bit, at least on a year-to-date basis. If you break out the EBITDA margins a little more finely -- if you take the base business, including McKechnie, EBITDA revenues -- again EBITDA as defined, was about 50% of revenue. This is in spite of an OEM aftermarket mix down. The Schneller, Harco and AmSafe acquisitions combined diluted the EBITDA margin about 2% -- or 2% down. And the impact of the two retroactive contract settlements moved the EBITDA margin up about 1%. And I think that comes to the 49%.

With respect to M&A activity, as I said, we closed one acquisition in Q2 2012, that is AmSafe for about $750 million. We continue looking at opportunities. Al has been pretty busy working the AmSafe deal and various follow-on items, and the pipeline is a little light at the moment. Closings, on the other hand, are always very difficult to predict. We remain disciplined and focused on our clear value creation opportunity and strategy here.

Now, regarding the fiscal year 2012 guidance -- and this is on slide six. There are also a number of moving pieces increase -- affecting our guidance. The operations performed well in Q2 in the first half. The OEM aftermarket mix is continuing to run against us a little. The AmSafe acquisition is closed, and we have now resolved these $11 million in contract settlements year-to-date.

I'll refer to the midpoints in all of the following numbers. Again, the numbers now include AmSafe, but there is no additional acquisitions or settlements included in these. Based on all of the above, we have increased the midpoint of our EPS, as adjusted guidance, by $0.57 a share, from $5.83 to $6.40. Almost two-thirds of the increase is attributable to the AmSafe acquisition, net of the incremental interest.

We now expect TG's revenues to be about $1.68 billion, or up $194 million from our prior guidance. The vast majority is due to the AmSafe acquisition, with the balance split between contract settlement, improved commercial OEM revenues, and some slight improvement in defense.

The 2012 EBITDA as defined is now anticipated to be about $800 million, up $67 million from our previous guidance. Almost three-quarters of this increase comes from the AmSafe acquisition.

On a full-year basis, the EBITDA as defined margin of 48% is roughly made up as follows -- the base business, again including McKechnie, should run about 51% of revenues for the full year and it continues to move up. Again, this is in spite of the mixed down drag. Schneller, Harco and AmSafe full year dilution is about 3.5% down on the margin, and impact of the two Boeing contract settlements is up about 0.5% up on the full year basis. And that should settle you to the 48%.

Compared to 2012, and on a pro forma basis, we are now planning on full year commercial aerospace OEM revenues to be up in the high teen percents. For commercial aerospace aftermarket, on a pro forma basis, we are still planning on full year revenue growth at about 10%, based on a worldwide traffic up 4% to 5% year-over-year. We will keep watching this closely and adjust, if required, as the year proceeds. For defense revenues, on the same basis, we are now planning year-over-year revenues to be flat to modestly up. Again, I think I should probably give up handicapping this, but there I go.

In summary, the first quarter was a good start to the year and Q2 continued that. The markets seem to be roughly on track. But 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.

Now, let me hand it over to Ray Laubenthal, our COO, who will discuss a few operating items from the quarter.

Thanks, Nick. We had a busy second quarter and a good first half. We continued our consistent disciplined approach to value creation with our refinance position and our existing businesses.

We started with the quarter with a sprint to buy AmSafe. This was a good example of how we can move quickly. In December, we became aware of the potential sale of AmSafe, we immediately attended the management meeting and assembled a due diligence team, and in a short period, we visited their major operating sites in Phoenix, Elkhart, Anaheim, Erie, Bridport in the UK, Kunshan, China and Sri Lanka.

We conducted due diligence on their major customers and determined the strength of their proprietary product. The resulting data from our due diligence confirmed our original assessment that AmSafe was a good fit with TransDigm. And on February 15th we closed the deal. Again, this was a good example of our consistent acquisition strategy and of how we can move quickly and efficiently when a potential acquisition meets our stringent criteria.

Once we took ownership of AmSafe, we immediately launched our disciplined value creation process. To date, in less than 90 days, we restructured the AmSafe [spares] pricing, initiated several plant consolidations, and tightened up the cost structure with significant headcount reduction. We are now working to organize this business into our proven product line operational structure. Overall, the transition activities are progressing well.

On our other recent acquisitions, Schneller and Harco -- they are also progressing well. Schneller's (inaudible) building expansion is well underway and we are on track to close the Florida facility and consolidate it with the Kent operations next quarter. We have installed a new President at Schneller and we have moved our experienced sales and marketing director from our Avtech Tyee Group to be the director of sales and marketing at Schneller.

At both Schneller and Harco, the pricing has been restructured, and cost reductions have been implemented. In addition to these actions, we reorganized these two businesses into our product line structure. Each product line has a product line manager responsible for the product line P&L, along with underlying pricing, new business generation and productivity improvement.

Now, I would like to switch gears and talk about our senior management team. These acquisitions resulted in a significant number of management promotions. Our continual emphasis on succession planning and talent development paid off well for us. We were able to populate most of the key management positions with internal candidates. These proven candidates are steeped in our value-focused culture and value-creation processes.

In Q1, we promoted Jim Skulina to Executive VP. Jim has been with us since 1994, performing well in a broad range of assignments ranging from Division Controller, Director of Manufacturing, Corporate Controller and President of Aerofluid Products. Jim has led numerous acquisition consolidations and has fostered significant value creation during all of his assignments with TransDigm. In his current EVP role, Jim will have oversight of a number of our existing businesses.

In the second quarter, after our acquisition of AmSafe, we promoted Pete Palmer to Executive Vice President. Pete started with TransDigm in 1999 as a product line manger at our AdelWiggins unit. Pete then became the Director of Sales and Marketing there. He later moved to our corporate offices as Director of Mergers and Acquisitions. After we purchased CDA, Pete became the Operating Unit President there. He then moved on to become President of our CEF unit. And he has spent the last two years as President of our AdelWiggins unit. In his current Executive Vice President role, Pete will have a number of operating units reporting to him.

To replace Jim and Pete, we promoted two internal candidates to fill in as President at Aerofluid Products and at AdelWiggins. Both of these new presidents held a variety of managerial positions, creating value at TransDigm. And their replacements were also promoted from internal positions of product line manager and manufacturing manager. We believe the availability of promotable internal talent and our consistent succession development process effectively complements our disciplined value creation method and is a key to our ability to regularly acquire and integrate new businesses.

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

Thanks, Ray. And good morning to everyone. I hope everyone had an opportunity to read our press release, which was issued this morning. In typical TransDigm fashion, the current quarter and comparisons to the prior year are significantly impacted by recent acquisitions and financing activity.

Let me remind you that we acquired Schneller in the fourth quarter, in August of 2011, Harco in December, in the first quarter of fiscal year 2012, and AmSafe in February, in our second quarter just closed. In addition, we financed the AmSafe acquisition with the new $500 million term loan and we used $250 million of cash during the quarter to complete it.

Before I begin, please reference slide seven for our quarterly financial results. Our second quarter net sales were $423.5 million, up $119.2 million or 39.2% from the prior year.

There are two significant explanations for this large increase. The first is the collective impact of the acquisitions of Schneller, Harco and AmSafe. These acquisitions contributed $73.8 million of additional sales versus the prior period, or almost two-thirds of the increase in sales. Not to be overshadowed by the impact of our recent acquisitions, our organic growth was 14.9% greater than the prior year.

All market channels contributed to this growth as follows; $30.5 million from commercial OEM, and this included the retroactive contract adjustment of approximately $6 million, $6.4 million from the commercial aftermarket sales, and $8.5 million from defense sales, driven primarily by OEM shipments.

Reported gross profit was $236 million or 55.7% of sales. The reported gross profit margin increased by approximately four percentage points versus the prior year.

Collectively, our gross profit percentage on our core businesses increased by approximately two margin points due to the following; the strength of our proprietary products and continued productivity improvements, along with positive leverage and our fixed overhead costs spread over a higher production volume, the favorable retroactive contract adjustment mentioned earlier contributed just over one-half a margin point at the gross profit line. And partially offsetting these favorable items was unfavorable OEM to aftermarket product mix.

In addition, the decrease of purchase accounting items and acquisition integration costs as a percent of sales increased the gross profit percentage by three margin points. This is primarily due to decreased inventory step-up and related start-up costs associated with the McKechnie acquisition in the prior year. These net increases were partially offset by the dilutive impact of Schneller, Harco and AmSafe by approximately one margin point at the gross profit line.

Our selling and administrative expenses were 11.7% of sales for the third quarter, compared to 10.9% for the prior year. The increase is primarily due to a higher run rate of selling and administrative expenses as a percent of sales from recent acquisitions. This run rate will continue to increase in the second half, but typically improves over time under TransDigm ownership.

Amortization of intangibles was $2.1 million lower versus the prior year, due to backlog related to McKechnie and [Tally] becoming fully amortized in quarter one of 2012. This drop off more than offset additional amortization from the recent acquisitions of Schneller, Harco and AmSafe.

Net interest expense was $52.3 million, a decrease of $1.8 million versus the prior year quarter. This decrease was primarily caused by a decrease in the total weighted average interest rate on total borrowings at the end of the quarter to 6.2% compared to 6.9% for the second quarter last year. The impact of the lower interest rate was partially offset by an increase in weighted average total debt to $3.39 billion in the current quarter versus $3.15 billion in the prior year. The increase in weighted average debt was due to the additional term loan related to the AmSafe acquisition in February of this year.

Our effective tax rate was approximately 35% for the current quarter, and we still expect our effective tax rate to be between 34% and 35% for the full year. We expect our cash taxes to be about $100 million for the full year.

Net income from continuing operations for the quarter increased $44.9 million, or 122.2%, to $81.6 million, which is 19.3% of sales. This compares to net income from continuing operations of $36.7 million in the prior year. Income from continuing operations increased by a significantly higher percentage versus the prior year than our overall increase in sales of 39.2%, due to the lower acquisition related costs and lower amortized -- amortization of intangible assets versus the prior quarter, leverage on our lower interest expense, which declined by 3.4% versus the prior quarter, and the lower effective income tax rate versus the prior year.

Net income from discontinued operations in the comparable quarter a year ago was $19.1 million, or $0.35 per share. This was related to the McKechnie fastener and distribution businesses that were sold in 2011.

GAAP earnings per share from continuing operations was $1.51 per share in the current quarter, compared to $0.69 per share a year ago, due to the increase in the net income from continuing operations that I just discussed.

The adjusted earnings per share was $1.65 per share, an increase of 72% compared to $0.96 per share. This percentage increase is higher than our sales increase of 39%, due primarily from leverage on the lower interest expense this quarter versus the prior year. he quarter adjustments to GAAP earnings per share were $0.14 per share. The adjustments, net of tax, are; acquisition related expenses of $0.08 per share, and non-cash compensation costs of $0.06 per share.

Cash flow from operations was strong at $165 million in the first half 2012. Despite using $333 million of cash on the balance sheet to help partially fund the acquisitions of Harco and AmSafe, we ended the quarter with almost $200 million of cash on the balance sheet.

Our net debt leverage ratio was 4.4 times our pro forma EBITDA as defined. We expect to continue to delever throughout the year and project that our net leverage ratio will be approximately four times EBITDA as defined on September 30.

Moving to guidance. We estimate the midpoint of our GAAP earnings per share to be $5.64. And as Nick previously mentioned, we estimate the midpoint of our adjusted earnings per share to be $6.40. The $0.76 of adjustments to bridge GAAP EPS to adjusted EPS includes the following assumptions; $0.06 from dividend equivalent payments paid in the first quarter, $0.23 from non-cash stock option expense, and $0.47 of acquisition-related expenses.

Now, let me hand it over to Liza to kick off the Q&A.

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, please reinsert yourself into the queue, and we will answer your questions as time permits. Operator, we are now ready to open the line.

(Operator Instructions). Your first question comes from the line of Robert Spingarn with Credit Suisse. Please proceed.

Good morning, guys. This is Julie. Nice quarter and thanks for taking my question. With 15% organic growth in the first half of the year, what is the total organic growth you are assuming in the full year revenue guidance? And has that changed from what you were assuming in the prior guidance?

Just with the [stuff], it is up a little bit, it hasn't changed dramatically.

It has probably up a little. I don't have the number in my head, Julie. Commercial OEM is up a little bit. Defense is up a little bit. And commercial aftermarket is about the same. So a little bit.

Okay. But it was -- it looks like it might decelerate a little bit in the back half of the year and maybe be high single digits, low double digits? Does that sound about right?

I just don't have the number in my head. Greg, do you?

We have the second half, when you look at it on this basis, excluding some of the acquisitions, of being more are in the high --

You're right, Julie.

Okay. And then just a housekeeping for Greg; what was the interest expense you are embedding in your full year guidance number?

The interest and depreciation and amortization combined, Julie, was [$0.23] per share. I don't have the absolute number in front of me right now.

Okay. Okay. Great. Thanks, guys.

Your next question comes from the line of Mr. Carter Copeland with Barclays. Please proceed.

Hi, good morning, guys, and good quarter.

Thanks, Carter.

Thanks.

Just a couple of quick ones. Nick, I wondered if you might talk to what is driving the military strength? If you can see anything in the kind of granular data of whether or not it is helicopters or -- what is going on that it keeps surprising us?

First, Carter, I don't think we are the only one that it is surprising, I don't think. If you look across the product lines, it is fairly, broadly doing better. I would say, in specifics, a couple of things that do jump out is -- the helicopters are -- continue to do better. That is helicopter maintenance, spare parts, all that, upgrades, all that sort of thing. And we saw a couple of decent F-35 shipments here too, in this quarter. Those are probably the two things that might stick out, other than just generally it is not dropping as much as we thought.

Okay, great. And the second relates to M&A. I know you said the pipeline was a little light, but I wondered if you might comment on the types of deals you are seeing out there. If you are seeing any impact from looming tax changes and whether or not that has got sellers interested or not? What kind of deals are out there? Anything new? Or are you working the same list?Any detail would be helpful.

I can't talk anything specific, of course. And let me take your questions in the order you asked them, Carter. We do the tax change pitch all the time, trying to get them to sell. I honestly can say we haven't got a lot of biting on that. People listen but they don't seem to move much on it. We had the same thing in 2010. So I can't take much comfort in that.

I would say on the deals we are seeing -- I would say the type of things we are seeing right now are typically the smaller type of things that we traditionally saw. That being said, as you know, particularly bigger things can just pop up on you quickly. We are tracking them. But don't know of anything right now, that's popping up.

Great. Thank you, Nick.

Okay.

Your next question comes from the line of David Strauss with UBS. Please proceed.

Good morning.

Good morning.

Good morning, David.

Thanks for the additional color around adjusted EBITDA margins by business -- or by the base business. That is where my question is. You talked about 50% adjusted EBITDA margins for the base business with McKechnie, and 51% for the full year. Can you give us an idea, Nick, of the spread between the base in McKechnie, how McKechnie is tracking relative to the 50%, 51% number?

No, we really don't disclose that. But what I wanted to was -- I wanted to give you that number, so you could get a pretty good sense. McKechnie is a decent sized business and the base businesses were somewhere around 50% before we bought it. So you can do the math and see it has to be doing pretty well, right? Or you couldn't be getting in the 50% or 51%. But specifically, we don't disclose it.

Frankly, we don't even add up -- there is no such thing as a McKechnie. We don't even add that total up, David. We've incorporated corporate into our corporate headquarters. And we don't get any management benefit -- but it is moving up. And that was Nick's point, that it was doing good.

Maybe that is the best way to say it. It is not an identifiable entity any more.

And then on the AmSafe, you bought the business, it was 25% EBITDA margins, and now sounds like it is 30%, so moving up there. Can you talk about where that 5% is coming from? And then also where does it stand on an EBIT basis? I think you talked about the ability to stretch out the amortization period. Where does it stand on an EBIT basis?

Let me deal with EBIT -- Greg, you can address. On the tax, we gave you an indication how much tax benefit we get in this 7.5 month period. On the move in the margin, it is the normal stuff. We own the business. And we start to get in it, we start to -- we brought the costs down. We've adjusted the cost structure already. We are starting some consolidations and some plans. We are adjusting the pricing. It is the whole range of things we do when we buy a business. And it is starting to kick in.

David, in our guidance, and I don't know if this will help you or confuse you, but total depreciation and amortization for AmSafe, on an annualized basis, will be just a little over $15 million, now that we settled through everything. I don't know if that helps you or not.

That is this year or a full year run rate?

A full year run rate.

That helps. What is the latest thinking on what to do with the ground vehicle business?

As we have said before, that doesn't fit with us, particularly. Its just a question of whether we think we can get a price that makes sense to us. And we are sort of going through the process now of trying to sort that out.

Great. Thanks, guys.

Your next question comes from the line of Noah Poponak with Goldman Sachs. Please proceed.

Hi, good morning, everybody.

Good morning.

Just on the commercial aftermarket, I recognize you didn't change the full year target, but it sounded like you made a few incrementally cautious comments there -- what you said on inventory destocking in Europe. Maybe there is a few other incremental positives that you just didn't mention. Traffic has been strong here to date. Load factors still high. So just very simply, would you say on the margin you feel better, worse or the same about commercial aftermarket today versus the last time that you spoke to us and why?

We feel about the same. We reconfirmed the same number as our guidance. On the down side, we get some anecdotal evidence, as I said, of some inventory adjustments and frankly some more kind of hammering in from the European airlines. That is on the down side. On the upside, as I said, the bookings for the quarter were pretty good.

Right.

So we sort of look at the two of them and parse them out -- and we don't have a crystal ball -- and say that feels about the same to us.

Okay. That is helpful. Can you tell us -- I know you don't like to get very granular on pricing, but can you say what the core aftermarket volume growth -- so total aftermarket, exclusive of price in the quarter, was is that positive or negative?

You mean did we get positive price?

No, I'm asking did you grow aftermarket, exclusive of price, just on volume?

We don't -- I'm not going to -- frankly, I am not going to get backed into that. I'm not going to get backed into figuring out the price from the real volume.

Okay. Yes -- no, I know you don't want to do that, which is why I was just trying to ask positive or negative.

Which is why you asked it a different way.

And it still don't work. That's all right.

One of these days it will work.

Yes. Maybe I will try one more then. Just the likelihood, in your view, that we see more of these retroactive contract adjustments in the remainder of 2012? I know that can be lumpy.

Let me say I don't know, this is none hanging fire that I know of that will drop in the second half.

Okay.

That being said, we got a lot of LTAs around the ranch. And there is frequently some kind of disputes going on. But I don't know of any right now that I expect to drop in the second half.

I would say, as I pointed out, we had this Eaton litigation resolution. It is in our favor with a -- not a huge but a decent award in our favor. There is enough smoke around that that we are not going to book it yet. But that could clear out in the second half of the year. The smoke could clear and we could have a positive booking.

Great. Okay. Thanks a lot.

Your next question he comes from the line of Gautam Khanna with Cowen Inc. Please proceed.

I wanted to explore the aftermarket comment. You said bookings -- last quarter I think you said the book to bill was basically EBIT one, but this quarter its running ahead. Was there something kind of late in the quarter that picked up? And if so where were you seeing that strength?

I don't -- let me just look at the last quarter. I don't remember what the last quarter numbers were. But I think that sounds about right. I just don't remember.

I think you said orders were about in line with sales. But here we're seeing that they are running ahead a few months in. So that was a month -- ?

As I said, the bookings in the second quarter were good, so we are up. We ran ahead in the shipments, we ran ahead in the previous quarter, and we're up above our shipping level on a year-to-date basis. I don't know that I can -- excuse me, let me restate that. I can't attribute that to any one thing. But it makes us feel better rather than worse. I would say that to draw much conclusion off a quarter of bookings -- it is hard to draw a lot off of that. But it is better to be up than down.

Was there any commonality to the products?

No, I can't say there was.

There wasn't, okay.

We have a lot of different products. I can't tell you that I could focus it in on fuel systems or interiors or anything like that.

Okay. And then on the contract adjustments, could you give us more color on kind of what this was related to? You mentioned there was two of them -- two different --

Can you speak up? I can't hear the question.

On the contract adjustments, I think you mentioned there were two of them that totaled the $6 million or $5.5 million. Were they different from what you saw last quarter? Were these different contracts? And just a little more color.

What they are -- what both of them are, and there is a bunch of details, but it doesn't make all that much difference. Essentially, they are settlements of scope differences on the 787 contracts.

Okay. And was that what they were last -- ?

Each one has some different wrinkles in the exact details. But at the end of the day, they're economic impacts of changes in scope, as we were going through the development process.

Got it. And this is what they were last quarter, as well?

And this quarter.

Okay. Thank you very much.

They were both independent.

They are independent, by the way. Not the same contract. They are independent product lines.

But on the 787?

Yes.

Got it. Thank you.

Your next question comes from the line of [Rama Bundatta] with Royal Bank of Canada. Please proceed.

Good morning. Kind of going back to Dave's question, earlier. When we think about McKechnie, where are we at in the integration timeline there, in terms of operational integration and pricing changes that you guys normally implement with your newly acquired companies?

Why don't you speak to the integration activities?

In the integration activities -- it is Ray Laubenthal. The big moves there were to combine our Avtech facility and the Tyee facility. And the Electromark business with McKechnie had multiple units that were being shut down and moved to Mexico. And both of those physical moves have occurred,a lot of activity combining plants, moving plants and so forth. After you put two plants together, there is a settling out period and so forth. And we expect -- and those businesses are settling out as we expect, the temps that we hired to help with the moves and so forth are let go. But the new people hired at the new location have got to come up the learning curve. The physical pieces, I think that has gone a little better than we expected, but that has gone well and that is done for the most part.

With the other value creation, the pricing and so forth, we follow the same playbook as we do with every acquisition we buy. And that has moved along, as we expected, in the commercial aftermarket. And as the OEM LTA contracts expire, we will work be on those as those come up. And there is a few of those to expire in the coming years.

And what is the average length of those LTAs?

Typically, in this industry, at least for our products, the LTAs average between three and five years.

So it'd be a rolling event that will be occurring over the next couple of years still?

Correct.

Kind of looking out over the next couple of years, when we think about margins, and assuming -- and obviously this is a theoretical, we know that you guys will continue doing acquisitions. But if you weren't doing any acquisitions, how quickly do you think you could get back to the 45% to 46% EBIT margins that you guys had before McKechnie?

I don't know what the -- this is Nick. I'm more conversant with EBITDA margins and I think we are about there.

So even including AmSafe and Harco and Schneller?

No, excluding those. In the base business, with McKechnie, we are about there.

Okay.

On the other ones, I would say -- we will give a forecast out for are next year when we give it. But I would expect the margins would start to move back up.

Normally, it just -- your integration timeline with companies, would it be one year or two years? Every company is different.

All of them are different. We model them over three to five years.

Okay.

Frequently, we can exceed that.

Okay. Great. Thanks a lot.

Ladies and gentlemen, your next question comes from the line of Mr. Joe Nadol with JPMorgan. Please proceed.

It is [Stef Siefen] on for Joe this morning. A question about margins. The performance in the quarter in the base business was quite strong, despite an adverse mix shift. I wonder, either on a sequential basis or year-on-year, if you can quantify the margin head wind that came from mix at all or even ballpark?

We can't quantify that exactly. We can make -- as I have told you before, it is unusual for a mix shift from period-to-period to move it more than a point or two.

All right. And as we look out for the rest of the year, you are obviously looking for improvement in the margin in the base business, despite the fact that mix could get a little tougher with the strong growth in OE. Is there any one particular thing you would point to that is driving that? Or just a combination of the stuff you usually do?

You mean driving the margin increase or driving the mix change?

Driving the margin improvement.

Just the normal stuff. The normal -- we work on the price, we work on the cost every quarter and every year. But there is nothing unusual on that.

Given our operations, it is rare for one event to move margins one point. It is just usually going with the tide of everything going on.

Great. Okay. Thanks very much.

Your next question comes from the line of Myles Walton with Deutsche Bank. Please proceed.

Good morning. Just a follow up on the margin mix, for a second. The EBITDA margin year-on-year 48% on an adjusted basis, and if I -- thanks for the walk on the gross margin perspective. If I layer that over on to the EBITDA comparison -- EBITDA as adjusted, I'm getting to like one point of dilution from the acquisitions, roughly offset by the favorable contract, still ending up at about the same EBITDA as defined margin year-on-year, despite the mix. So is there any other thing to think about, in terms of what was driving that performance?

Myles, I walked you through the EBITDA as defined, not the gross profit. And it was -- was there some confusion?

Slide seven walked through the gross profit year-on-year.

Myles, you are asking reconciling versus the prior year. And what we tried to do is give you color for this year. Because with all of the acquisitions, you could imagine all of the puts and takes that go on. So we were just trying to give you color on the current year margin at EBITDA. And I wanted to give you a little color of gross profit. Because we dilute a little more in SG&A with the acquisitions.

Let me also add there, Myles, the thing I was trying to do is show you if we throw McKechnie into the base, the base is now back at or above where it was before we bought it.

It is more striking to me in terms of trying to back into the mix, apparently not really working against you this quarter. And I'm just kind of curious if is anything we're missing in terms of trying to back out to see just what that mix impact may have been.

I think it is working against us this quarter. Which is another way of saying the 50% EBITDA -- or further in the quarter, excuse me. I talked about year-to-date, sorry.

Versus second quarter last year the mix is working against us. Our OEM growth was substantial versus our aftermarket.

So Greg -- or on the slide seven, where it says core businesses contributed two margin points. It seems like the favorable item was about [1.5] points. And then unfavorable versus aftermarket, it has a negative arrow, but I'm just not sure that it actually played out that negatively.

The $6 million -- you can do the math on that. That is only about one-half a margin point there. The aftermarket OEM mix in the quarter was between 1% and 2%. It was in that range.

Okay. Okay. The other question was on cash per quarter. I think maybe it is just rounding, but last quarter you were talking about $80 million a quarter. And I thought I heard $90 million to $100 million. Would that be taxes?

One, we own another business that we didn't have before. And the other is we tend to be a little conservative on it.

Okay. That's great. Thanks so much.

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

Thanks for taking my question. Playing off of Myles question; how should we think about the -- and I know you don't want to give specifics, but the margin differential between aftermarket and OEM? I know you are not going to give numbers, but I'm sure it varies by company. Some you are essentially selling at zero margin to OE and getting massive margins on aftermarket and then there is the continuum. With the way the mix was, it seems like there is not this huge gap that we thought there was. Is that fair?

There is a pretty big gap.

A big gap.

Okay. Just a housekeeping item. On the contract adjustment, no expenses related to that, right?

That's correct.

And I guess you wouldn't have contemplated contract adjustments in the guidance?

No, as Nick said, these are the two we know about and we don't see anything in the horizon to put in the guidance for the second half.

And we didn't have it in the original guidance.

Okay, good. Thanks for your help and congratulations on the quarter.

Thank you.

Thanks.

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

Good morning, guys. Thanks for taking my question. When we think about AmSafe relative to other acquisitions you have done in the past, given the very high aftermarket content, should we think about the margin expansion accelerating much faster than other acquisitions?

I would not. There is some portions of the business that down drag a little, too. That is why I think I said I don't know that this business gets to the average.

I know it might not get to the average. But you let's say the recovery -- your ability to implement pricing is much quicker because it is such higher aftermarket?

I get your point. But we think about these on a three to five year basis, when we give you a sense of what we can do when we buy them. And I think about it the same way. And hopefully you will be conservative.

Fair enough. And in terms of the intangible amortization, because you have that put and the take of some of the businesses running off. So what should we be thinking of, in terms of the run rate on a go-forward basis, somewhere in, say, the $11 million to $12 million range -- would we get a full year -- a full quarter of AmSafe in there?

When we give our guidance out, we will give you a clear picture because the amortization I gave you, or I gave David, it doesn't include [cash log] amortization and stuff, which is at a more rapid rate. I just don't have what -- after the rapid amortization, what the run rate is right now. That will come when we do our guidance for next year.

Okay. Thanks.

Your next question comes from the line of Michael Ciarmoli with Key Banc. Please proceed.

Good morning, thank you guys for taking my questions. Nice quarter.

Good morning.

Nick, if I could just back to Noah's question. If I look at your commentary from these results with revenues sequentially flat in commercial aftermarket, last two quarters you talked about them being sequentially flat. So that is three quarters in a row of aftermarket sequentially flat. I'm assuming you get a little bit of bump there with 787 and 747 provisioning. So again, maybe getting back to that core business -- I'm also assuming over the past nine months there has been some pricing. It would seem like volumes are under a bit of pressure, I guess.

A couple of things. One, we have no provisioning in there.

Okay.

As you know, we could get some provisioning and I hope we do. Someday we will get it. But we have none in the second half. So I just take issue with that.

Okay.

We are just -- we are are not going to back into the pricing this way. I'm not going to comment on what the real volume is. I will say -- I'll just remind you again, the 25% year-over-year growth the year before was, in our judgment, not a sustainable number. So at some point, you are going to give some of that back.

No doubt, okay. What about are you seeing anything from any of the string of bankruptcies out there? I know you talked about some of the cautious comments and some of the more positive comments. Anything else that would be creating a sequentially flat environment for you guys?

Other than just general economic concern.

Okay.

I don't know of anything systematic. The positive is the bookings picked up. Again, I don't want to overplay that. But you that is surely --- that's a better fact than the thing went the other direction.

No doubt. Okay. Perfect. That's all I had. Thanks, guys.

Your next question comes from the line of Carter Leake with BB&T Capital Markets. Please proceed.

Thanks for taking my call. You gave us sequential commercial aftermarket. Any chance of getting that for commercial OEM and defense, as well, sequential?

Obviously, we don't have it here.

We don't have them all memorized. We thought we gave it but we didn't.

Just at OEM and any color on that, what is driving it and what you are seeing it, what platforms?

The same story on bus jet that everybody sees. The top of the market is doing better than the bottom of the market. That is the Gulfstream -- Big Canada Air, kind of stuff.

Moving to the Eaton settlement, I think the public number we see there is around $8.5 million. Is that correct what the award is?

That was offset by a counterclaim, so it's more in the $7 million, $7.5 million range. As I said to start off -- there is a couple of thing there. The big issue there was intellectual property. And we prevailed completely on that and have all our intellectual property back with an order. The dollar claim, that is going to jostle around. We have some more ongoing prejudgment interest claims, thereis argument about the fees -- how much of the back fees do they owe us? And on the other hand, they may appeal some of it. I don't exactly know where that sorts out.

And where is Eaton right now, as far as a customer? Are they still a current customer?

Yes, they are a current customer. They are not in our top ten. They are a good customer, but they are not one of our big customers.

Because their counterclaim sort of speaks to underperformance, et cetera. But you see them continuing as a customer -- the relationship?

Yes.

Okay. All right. That's all I have. Thanks.

At this time, there are no further questions in queue. So I will return the call to Management for any closing remarks.

Thank you. I would like to thank you all for participating on this morning's call. And I would like to let you know that we expect to file our second quarter 10-Q sometime tomorrow.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.