TransDigm Group Inc (TDG) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the quarter-three 2014 TransDigm Group Incorporated earnings conference call. My name is Kathy, and I will be your operator for today.

(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 of Investor Relations. Please proceed, ma'am.

Good morning, and welcome to TransDigm's FY14 third-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.

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 SEC available through the Investor section of our website or 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 for those measures.

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

Good morning, and thanks again for calling in to hear about the Company. Today, as usual, I will start off with some comments about our consistent strategy, an update on the capital allocation activities in the last quarter, an overview of the financial performance and a market summary from Q3, and an update on our full-year guidance.

Just to restate, 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 cycle. To summarize some of the reasons why we believe this: About 90% of our sales are generated by proprietary products, and around three-quarters of our sales come from products from which we believe we are the sole source provider. Over half of our revenues and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket sales and revenues have historically produced a higher gross margin, and have provided relative stability in the downturns.

Because of our uniquely high EBITDA margins and relatively low capital expenditures, TransDigm has, year in and year out, generated strong free cash flow. We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we had a simple well-proven value-based operating strategy based on our three value driver concepts.

Third, we maintain a decentralized organization structure and a unique compensation system with operating unit executives and officers who think, act and are paid like owners. Fourth, we acquire proprietary aerospace businesses with significant aftermarket content. And lastly, we view our capital structure and capital allocation as another means to create shareholder value. We have been in the past, and continue to be, willing to lever up when we either see good opportunities or view our leverage as suboptimum for value creation.

As I mentioned last quarter, we continually look at our likely needs for acquisition and internal investment, cash and/or debt capacity, as well as the capital market situations, all in context of our near- and mid-term needs and outlook. The Q3 credit market situation was uniquely favorable by most historical standards. From any longer-term perspective, the after-tax cost of debt capital was low, especially when compared to our stated equity return goals. In light of these market conditions, we accelerated our capital allocation calls for this year.

In Q3, we borrowed about $3.4 billion, almost half of which was used to pay a special $25-a-share dividend. Most of the balance was used to refinance our existing 7 3/4% bonds with lower interest cost and extended maturity.

We kept a modest portion of the proceeds for general corporate purposes, one of which has been to buy about $75 million of our existing shares. We may well buy additional shares over the next few months.

After completion of the financing, our weighted interest rate will be about 5.3% per year, including the cost of forward interest rate hedges. This is down from about 5.7% interest prior to the recent financing. Our actual rate starts lower than 5.3%, but will move up to 5.3% as the hedges kick in.

Our net leverage as of 6/28/14 is now 6.4 times EBITDA; about 50% of our debt is fixed, and another 20% is forward hedged beginning in 2015. Our maturities have been extended, we increased the size of our revolver, and the credit terms were favorably modified. All in all, we think this is a pretty good outcome.

At the end of our third quarter, based on the current capital market conditions and our new credit agreement, we believe we have adequate liquidity capacity to make about $1.5 billion of acquisitions without issuing additional equity. This includes around $730 million of cash. This capacity continues to grow each quarter. This does not imply anything about acquisition opportunities or anticipated acquisition levels for FY14 or FY15.

Overall, through our consistent focus on our operating value drivers, a very clear acquisition strategy, and close attention to our capital allocation, we've been able to create intrinsic value for our shareholders for many years, through up and down markets, and we anticipate continuing to do so in the future.

Now, with respect to the commercial aftermarket status: Next quarter, unless there's an unusual situation, I'll probably stop separately highlighting this, as I've been doing in the recent quarters. We have been seeing a market recovery for the last three to four quarters, and this has continued into Q3 of FY14.

The third quarter of FY14 commercial aftermarket revenues on a same-store basis were up almost 15% versus the prior Q3, and are up about 9.5% on the nine-month year-to-date basis. Just as an aside, we have seen minimal 787 provisioning orders or revenues at this point.

Our bookings or incoming orders are running about 6% ahead of revenues on a year-to-date basis, and they are up about 14% versus the prior nine-month year-to-date bookings. As I have said, the aftermarket recovery may not be linear, there could be quarterly ups and downs; our data now indicates even more strongly that the market is expanding. If the worldwide economy holds up, we would expect this to continue, though I do want to point out the rate of increase may slow down over the next few quarters.

Turning to our Q3 2014 performance, I remind you: This is the third quarter for FY14; our fiscal year began October 1 of 2013. As I have said in the past, quarterly comparisons can be significantly impacted by OEM/aftermarket mix, large orders, inventory fluctuations and the like.

The third quarter of FY14 was a good quarter for TransDigm. Our GAAP revenues were up about 25% versus both the prior-year Q3. On a year-to-date basis, the bookings continue to run ahead of revenues.

Reviewing the revenues by market category, again, on a pro forma basis versus prior Q3 -- that is assuming we owned the same mix of businesses in both periods. In the commercial market, which makes up about 70% of our revenue, total commercial OEM revenues were up 6% versus the prior Q3, and about 9% on a year-to-date basis. This is primarily driven by commercial transport OEM revenues, which were up 12% on a year-to-date basis. Business jet revenues were only up about 3%. Total commercial aftermarket revenue comps -- as I said before, they were up about 15% versus the prior Q3, and they are also up about 8% sequentially.

The defense market, which makes up about 30% of our revenue -- the defense picture in Q3 was mixed. For Q3, the total defense revenues are down 7% versus the prior third quarter, and about flat on a year-to-date basis.

This number now includes the Airborne parachute business revenues, which are more lumpy than our base Business. Without Airborne, our underlying defense revenues are down 2% versus the prior Q3, and up 5% year to date. The Airborne parachute bookings picked up substantially in Q3 versus the first half of the year, due to two large US Military orders. The total defense bookings were strong in Q3, and year to date they are running about 6% ahead of shipments, in spite of delays in certain large international parachute orders.

In our other businesses, we've seen good order activity from both domestic and international military buyers. We do remain cautious about the military markets.

Moving on to profitability now, and on a reported basis, I'm going to talk primarily about our operating performance, or EBITDA as defined. The as-defined adjustments in Q3 were primarily due to refinancing-related costs and non-cash stock option expense.

Our EBITDA as defined of about $276 million for Q3 was up 19% versus the prior-year Q3, and our year to date of $782 million is up about 20% versus the prior year. The EBITDA margin was about 45% of revenues on a year-to-date basis, and roughly the same in Q3. The Q3 margin was reduced by over 2% by the inclusion of Airborne and the EME acquisitions.

Our base Business EBITDA margins -- that is excluding Airborne, EME, and the three we bought in June of last year -- was about 48% on a year-to-date basis. This is up 1% versus the prior year for that same group of businesses.

With respect to acquisitions, we've completed about $300 million of acquisitions so far this year. We continue to look at opportunities. The pipeline of possibilities is reasonably active, with about the same mix of sizes as usual. We are seeing more European activity than we had seen in the past. The closings are difficult to predict, but we remain disciplined and focused on value-creation opportunity that meet our tight criteria.

Moving on now to the 2014 guidance: The military market is still spotty and, we think, hard to predict. The rate of recovery in the commercial aftermarket is proceeding, and the commercial OEM is roughly on track. The underlying EBITDA margins are running slightly ahead.

Based on the above, and assuming no additional 2014 acquisitions, our guidance is revised as follows. The midpoint of the revised guidance is now $2.36 billion, or up $15 million versus the prior midpoint. The revenue increase is primarily due to a modest improvement in the commercial aftermarket full-year outlook.

The midpoint of the revised 2014 EBITDA as-defined guidance is now $1.07 billion, or 45.3% of revenues, up $10 million from the prior-quarter guidance. This margin includes 1.5% to 2% of dilution from Airborne and EME.

The dollar increase in EBITDA is primarily due to the commercial aftermarket mentioned in the revenues. We are anticipating our base Businesses -- again, excluding Airborne, EME, and the 2013 June acquisitions -- to run at about 48% for the year.

The midpoint of EPS as adjusted is anticipated to be $7.52 per share versus a prior guidance of $7.58. The range on this is plus or minus about $0.05 a share. The change is primarily due to the improved operating performance and some lower tax expenses, more than offset by the higher interest expense from the recent financing and special dividend.

At the midpoint, our 2014 guidance is based on the commercial OEM and defense revenue outlooks remaining unchanged from both last quarter and our initial guidance. The commercial aftermarket, on a same-store basis, is now assumed to be up slightly over 10% on a full-year basis. This was corrected on the slides we originally sent out this morning.

In summary, the first three quarters are modestly ahead of our initial expectations. Hopefully, these strengthening market conditions continue. But in any event, I'm confident with our consistent value focused strategy and strong mix of businesses we can continue to create long-term intrinsic shareholder value for our investors.

With that, let me hand it over to Greg who will discuss the financial results.

Thanks, Nick, and good morning again. I first want to remind you, and as Nick mentioned, we raised $3.4 billion during the quarter, primarily to pay the $25-per-share special dividend and refinance $1.6 billion of the notes that were due 2018. This activity impacted several line items significantly in the quarter. With that in mind, I would like to expand on a few items included in our quarterly financial results. Please reference slide 7 in this morning's deck.

Sales were $611 million, and 25% greater than the prior year. Our organic sales were 7% higher than last year, driven primarily by the growth in commercial aftermarket, and, to a lesser extent, commercial OEM. This growth is partially offset by a modest decline in (inaudible) sales.

Third-quarter gross profit was $328 million, an increase of 22% over the prior year. The reported gross profit margin of 53.6% was 1.4 margin points less than the prior year.

This quarter's margins were negatively impacted by the current-year acquisitions of Airborne and EME, and the acquisitions of Arkwin, Whippany and Aerosonic made in the prior year. The dilutive impact from acquisition mix and the acquisitions-related costs was almost 3.5 margin points at the gross profit line.

The prior-year gross profit margin was also diluted approximately 1 margin point for non-cash stock compensation expense due to the acceleration of certain stock options that did not repeat in FY14. Excluding all acquisition activity and stock compensation expense, our gross profit margins in the remaining businesses versus the prior-year quarter improved almost 1 margin point. We had the benefit of favorable OEM and aftermarket mix, and the base businesses continue to expand margins as a result of the strength of our proprietary products and continually improving our cost structure.

Selling and administrative expenses were 11.7% of sales for the current quarter, compared to 16.9% in the prior year. The majority of the decrease in SG&A was related to lower non-cash stock compensation costs in the current period. Stock compensation expense as a percent of sales was about 1% compared to 5.5% in the prior period. The prior period also included higher acquisition-related expenses. Excluding non-cash stock compensation expense and acquisition-related expenses, SG&A was about 10.5% of sales in both periods.

Interest expense was $88 million, an increase of approximately $25 million or 40% versus the prior-year quarter. This is a result of a 43% increase in the weighted average total debt to $6.2 billion in the current quarter versus $4.3 billion in the prior year. The higher average debt year over year was due to the recent financing just discussed and the July 2013 financing associated with last year's $22 special dividend. As a result of our recent financing, our weighted average cash interest rate has decreased to 4.9% compared to 5.5% in the prior year. Including the newly incurred debt, we now expect our full FY14 net interest expense to be approximately $348 million.

One-time refinancing costs of $131 million were booked in the current period, in conjunction with June's financing. $120 million of the costs were the premium to redeem the 7.75% notes, and $10 million were for the writing off of debt issue cost.

Our effective tax rate was 22.5% in the current period, compared to 32.9% in the prior year. The current quarter rate was due to favorable foreign tax credits realized in our recently filed Federal Income Tax Return. We now expect our effective tax rate for the full fiscal year to be around 33%, and our cash taxes to be approximately $125 million.

Our net income for the quarter decreased $60 million, or 79%, to $16 million, which is 3% of sales. This compares to net income of $77 million in the prior year. The decrease to net income primarily reflects the one-time refinancing cost just mentioned and higher interest expense, partially offset by growth in net sales and lower non-cash stock compensation cost.

As I've discussed in the past, our EPS is calculated under the two-class method versus the more commonly used treasury method. We are required to use this method because of our Dividend Equivalent Program. As you can see on tables 1 and 3 of this morning's press release, our GAAP loss per share was $1.66 per share in the current quarter compared to $0.71 income per share last year.

You may be wondering: How do we have positive net income, but a GAAP loss per share? The loss per share was due to the inclusion of approximately $111 million, or $1.94 per share, of dividend equivalent payments paid in the current quarter, primarily related to the $25-per-share dividend. This compares to the $0.70 per share paid in the prior period. Please reference slide 11 of this morning's earnings call, which shows all the details.

Our adjusted earnings per share was $2.02 per share, an increase of 7% compared to $1.89 per share last year. The 7% increase is lower than the 12% increase in adjusted net income due to the higher weighted average shares in the current period resulting from the accelerated stock option vesting that occurred primarily in 2013. Note: This dilution will be slightly offset going forward due to the purchase of approximately 420,000 shares of treasury stock in the current quarter. We now expect our weighted average shares to be 57 million for the full FY14. Again, please reference table 3 in this morning's press release, which compares and reconciles the GAAP to the adjusted earnings per share.

As Nick previously mentioned, the midpoint of our adjusted earnings per share decreased $0.06 to $7.52 per share. The increase in interest expense had a negative impact of $0.25 per share. This negative impact was offset by the following three items: favorable operating results, which contributed $0.11 per share; a lower effective tax rate, which contributed $0.06 per share; and a decrease in the weighted average shares for $0.02 a share.

Switching gears to cash and liquidity, we ended the quarter with $729 million of cash on the balance sheet. This includes the completion of the financing, net of the $25-per-share dividend and related DEP payments; the repayment of the 7.75% notes and the related fees; and the purchase of approximately $75 million of treasury stock.

The Company's net debt leverage ratio was 6.4 times our pro forma EBITDA as defined. We now expect to end the year with approximately $850 million of cash on the balance sheet, assuming no other acquisition activity. Absent any further changes to our capital structure, or any stock repurchase, we expect our net debt leverage ratio to be 6.1 times EBITDA as defined by the end of the year.

Now I'll hand it back over to Liza to kick off the Q&A.

Thank you, Greg. In order to give everyone the opportunity to ask questions, I ask that you limit your questions to two per caller. Then you can re-insert yourself back into the queue.

Operator, we are now ready to open the lines.

(Operator Instructions)

Please stand by for your first question, which comes from David Strauss of UBS.

Nick, looking at your revised guidance for the full year, it seems like you're implying Q4 about sequentially flat in terms of sales and adjusted EBITDA margins. When we see the adjusted EBITDA margins potentially move up with another strong aftermarket quarter and the acquisitions being there for another quarter, why wouldn't we see them --

We are looking it up, I didn't think that was the case. We're just looking it up. It has gone up a little. It has gone up about a half a point I think.

I think its gone up half a point if we're doing the math here right. But I get your point. About half a point is what we have got cranked in there. It's probably getting lost in the about's.

Yes. It looks relatively flat to me but that might be in the noise. On the aftermarket, could you talk a little bit about--I don't know if you specifically said, I may have missed what bookings were like in the quarter sequentially and where did you see the improvement? Was it more on the discretionary aftermarket side or really what drove the improvement?

I would say it was sequentially up 8%. It is -- we are clearly seeing where there is business and where there is discretion, it looks like we are seeing orders picking up. We are, we're up 15% year-over-year, the combination of RPMs and pricing is not 15%.

There is some discretionary buying and quite likely maybe some stocking into the airlines. We know the distributors are in decent shape so we know that is not moving a whole lot. I did point out, one thing I did notice and a few other people have announced, we have not seen any significant provisioning orders for 787.

Last one for me, how are you feeling about the cycle overall? Appears there's a lot more skepticism or nervousness in the market overall about the sustainability --

You mean the OEM or the aftermarket?

OEM.

I don't know that I have a good enough view on that David to drift off of what sort of the conventional wisdom has been. I don't know any other reason to think 15% is going to drift subsequently to off of what people have been forecasting so far. It would take a pretty significant dislocation to change the next twelve-month outlook or so.

The next comes from John (inaudible) of Morgan Stanley.

Nick, I think you used the word "reasonably active" for the M&A pipeline. I was just hoping that you could contextualize that for us, exactly what that might mean?

Well I was trying to make the distinction between lethargic and wildly active. We're doing the same thing we always do. We are out making calls, we are visiting people, we see proposals coming through. I don't think it's subsequently different than it's been for the last 12 or 15 months.

Got it. Very helpful

But I do really make that lethargic distinction.

Loud and clear. A follow up on aftermarket, you gave a little bit of color on discretionary versus non-discretionary and you even made a comment I thought I heard about some restocking at airlines. I was hoping that maybe another layer, just talking about any products that stand out, anything as we try to read the tea leaves here and try to understand what's going on a bit better.

I think the only, as I say, I don't know that I can draw any particular conclusion from products other than more discretionary things seem to be picking up in orders, where they were lagging behind for a while. The shipment rates and the booking rate is up more than RPMs and pricing would account for.

Last one on the general defense outlook. Of course we all appreciate why there's some uncertainty out there. On the other hand, you highlighted some positives and certainly have had some good trends in the past. I'm just curious if you are seeing literally anything in the numbers that drive the uncertainty or questioning of the defense trend or is it just a reflection of this general notion of uncertainty that we all worry about?

I think more that, more about the general uncertainty. As I said, the revenues were down some in the last quarter but that's offset by the bookings being up so it's a mixed picture. You mostly are just seeing a reflection of uncertainty about the political situation.

Next question comes from Robert Spingarn of Credit Suisse.

Could you talk a little bit more about the buyback that you mentioned, the share repurchase activity?

Rob I'm not sure what else to say. We bought 75 million more shares back in the last --

In the third quarter.

In the third quarter, yes. As I said, it wouldn't surprise me if we continue to do some of that.

Is there a change in thought there as you go forward, just from what you have done in the past?

I don't know. I can't say that there is necessarily.

We did decide, we've used all the money to pay-- not all the money--but all the shareholder return money to pay out special dividends. This time we decided we'd buy a little back. We will make the call on a situation-by-situation basis. But it wouldn't surprise me if we buy some more back here.

Just clarification Nick, did you say earlier in your monologue on the aftermarket growth you were going to stop parsing some element of that out?

I usually talked about it in the overall summary of the market. For the last year I've made a separate section on it as I did the lead-in. I will probably stop doing that but if there's anything special to point out I will try and do it.

We should still expect the data that you been giving?

Absolutely.

Just wanted to clarify that. Last thing is, I just noticed a slight, you talked about Airborne and some delays in orders and you also mentioned that there's 1.5% to 2% margin dilution from the acquisitions, this compares to I think 1.5% a quarter ago when you spoke about it. Could you talk a little bit about both the sales and the margin contribution from the recent acquisitions in the extent to which these are meeting your plan?

Did we change the dilution? I think it's maybe just in here for another quarter. [ Indiscernible - multiple speakers ]

That's all it is?

It's in another quarter and a lower margin, it is going to pull the year-to-date down a little bit. There is no reason to think there's any margin degradation in those other than what we know when we bought it.

I would say the Airborne business we actually -- it is lumpy but we have a very strong booking quarter here in the last quarter and we have some big international orders hanging fire there which we can't tell whether they'll drop before the year is over and the beginning of next year but there are jobs to get, we believe. I think that answers your question probably.

Are you getting that replacement bow wave that you were hoping for when you bought it?

The international orders we are getting some but the international orders are closing slower than we thought. We -- they are active, we are actively negotiating with them but I think the closer on bookings, its frankly been lumpier.

The first quarter we owned it we booked very little. That's first quarter of this year. The second quarter was pretty strong an the last quarter was very strong and we have a fair amount of stuff on the gun site.

The next question comes from Carter Copeland of Barclays.

Just a couple quick ones. First, just to clarify a bit on Airborne. By my math it looks like for the impact you called out that's probably down 20% year-on-year quarter on an apples-to-apples basis. Is that the kind of right scale of how lumpy this business can be?

I don't know I don't have your math in front of us but it can be lumpy. It can bounce around from quarter to quarter.

If it is got a 5% impact on the defense revenues, it is probably $8 million to $9 million of Revenue Delta, so we just trying to calculate that off a quarterly run rate but it sounds like --

I don't know the answer, other than I do know Carter, that it is lumpier than our other businesses tend to be. [ indiscernible - multiple speakers ]

Then, on the 787 provisioning that you mentioned a couple of times, how significant -- could that be significant to next year's aftermarket growth in your view? Is this a couple hundred basis point kind of thing?

The real answer Carter is I'm not sure. We are not logging next year's guidance when we give it. But we are not planning on a lot of provisioning. We typically look at that as -- something fell out of the sky and hit us in the head. We are not planning on a lot of it.

The next question comes from Michael Ciarmoli of KeyBanc Capital Market.

Just to continue on that provisioning line of thinking. I think Nick you called out the aftermarket rate of growth will perhaps be slowing. There are tougher comps coming up but I would think the 787--even the A350 provisioning but it sounds like if we should think about those provisioning items that would just be gravy on top of your base growth.

I am just trying to get a sense of --

That's the way I would think about it and my-- for our kind of products Mike, experience has been as tough to predict.

You are clearly talking about the market expanding more discretionary. Is the rate of deceleration just tougher comps?

Yes, I don't think you can sustain a 15% quarter-over-quarter growth. You may sustain it for a quarter or two but you are not going to sustain that over an extended period of time. And eventually the comps get tougher.

And then just one other one. You mentioned on deal activity, maybe a little bit more active in Europe. Are you seeing better multiples over there? There's more--I guess carrier struggling with profits, is it just a more attractive marketplace and are the multiples simply cheaper or is there other rationale for why you're more active in Europe or seeing more activity?

I really-- frankly we're hitting the territory harder. We also put a new guy on to cover the territory and we are picking up more leads. I don't know whether there's more for sale or whether we are just more attentive to it. I would say, it's not clear to me that the multiples are significantly lower.

The next question comes from Joe Nadol of JPMorgan.

Nick, just thinking about big picture but the capital structure and looking forward, we are probably going to get into a situation here next year where rates--short-term rates start filling up. We haven't had that obviously for a long time and as you mentioned, you guys have been really eagerly taking advantage of the markets including this past quarter. How conceptually should we think about what you might do differently if anything at all when rates are going the other way just in terms of leverage level, anything else you want to mention?

That's -- our fundamental leverage strategy I would not expect that to change within any realistic range of interest rate moves. If interest cost get up higher than the cost of equity--which would be up in the 20s or something--we might rethink that but in the likely movements over the next couple of years I wouldn't expect our view to change.

We did stretch out ahead on some of these dividends because we thought the credit markets were so attractive. If the interest rates go up, we probably would be a little more cautious about that but I don't -- a one or two point move I don't think would substantially change what we do.

Just looking at OE for a moment, a lot of the growth in the next two or three years it's going to be 350. I unfortunately missed your Analyst Day and I don't know if you provided an update there on content but a few years ago we talked a lot about 787 and what you got on that, could you update us?

Yes. I don't think we give a number out did we on the A350 content? But it's good content. We gave the comparison to the planes we thought we were replacing in the content is up nicely.

Just finally, is [Tarian] impacting your Defense? I look at all that as a lumpy --

Yes. It is in the comps. There wasn't any in this quarter but if I look at it I think it was in the prior quarter year-to-date.

We had $10 million in Tarian cost in the first half the year.

Yes. There was $10 million in the first half of the prior year.

The next question comes from (inaudible) of Oppenheimer.

First, a quick follow up on the M&A question with regard to your Europe. Is there any difference in terms of trying to implement your value creation drivers in Europe versus the US and implementing your Management and Compensation Strategy there?

We think we've been able to work through a way on the compensation. It was a little trickier but we think we've been able to work through that to get something that is pretty close.

I would say on the pricing side of it, I don't see any substance indifference. Obviously, the employment restructuring is more expensive there and a little more culturally difficult.

It takes longer.

That coverts into a little more expense and it takes longer.

In terms of the aftermarket dynamics, sometimes in the past you've given us a little more color about what's happening regionally. Would you say there's particular strength anywhere particular in the world or is it broad-based?

I would say reasonably broad-based. As usual, I would say the European business is not as bullish as the rest of the world but I don't know if -- frankly for the quarter I don't have the numbers on top of my fingertips. But I don't view the mix of RPMs, which is ultimately orders. I know it's not changed substantively.

One more quick modeling question. Is 33% tax rate the right one to use going forward?

For the remainder of this year. Then we'll update our guidance next year when we give it out.

The next question comes from Gautam Khanna of Cowen Company.

Stepping back to the provisioning questions. I was curious if you had a sense of what percent of your aftermarket sales generally are from initial provisioning and if you can comment if you've had much in the way of 787 provisioning in prior years that's all on the come?

I'm not sure I get the question but I'll try to give you the answer. The provisioning in our experience is difficult to predict. We've seen very little so far from the 787. I would not -- at least for our go-forward planning -- we are not planning on much of that.

We may well see some and that would be upside but I would -- if you are looking at how to model this, I would primarily focus on RPMs and price and then maybe a little swing one way or the other depending on how you feel about the market direction.

Do provisioning sales carry a different margin or pricing characteristic than typical aftermarket sales?

It's mixed but not substantively usually.

Talking about the M&A pipeline, can you characterize what the size, the typical size range of the Companies you're looking to acquire potentially?

The kind of stuff we typically see. Which is $40 million transactions to $300 million transactions. Occasionally we have bigger ones come by or come up opportunistically and we look at them but at least generally they haven't made sense on a value basis.

Would you say -- stepping back to the question earlier about how you think people feel about the cycle -- are you seeing more such books now, or are you seeing more willingness to sell properties? Have you seen any change in that?

I can't say I've seen any change.

The next question comes from Robert Stallard, Royal Bank of Canada.

First of all, on the aftermarket, I was wondering if you can comment on if you have seen any change in the patent of parting out cannibalization out there in the market?

Rob, I don't think we have. Remember for the dollar value parts we have. It's a pretty minimal impact.

Honestly if there was a change I don't know if we even notice it for a while. It's a very small -- the cannibalization impact on our sales are very small. That's primarily because of the dollar value of the stuff we tend to sell.

And in related aftermarket vain, have you seen any impact of the Afghanistan drawdown starting to roll through maybe in helicopters?

We have not -- I would say so far this year the helicopters were the hot thing last year. The helicopters have not been the hot thing this year but traders and fighters have sure picked up the difference. I don't know that I can draw much conclusion from that other than that is sort of rotation where you spend your money.

Greg, a quick one on the dividend equivalency payment. Any idea what this is going to be in Q4?

It's a pretty small in amount. How many? $6 million or $7 million, for some options that will come through. So it's a relatively small amount.

It is a going to stay about that run rate for the next 12 months or so?

No, in fact I think it will be pretty much cut off by the end of this fourth quarter.

The next question comes from Ken Herbert, Canaccord.

I just wanted to follow up one more time on the commercial aftermarket. I know its relevancy is maybe limited. But you to report from at least a GAAP standpoint, a financial reporting standpoint, operating segments -- the Power and Control Airframe.

Either in relation of these segments or in general, have you seen any change in your aftermarket by either engine and power related, relative to other parts of the airplane or has it been sort of consistent growth?

I can't say we've seen any substance difference in one versus the other. Margins are little higher on the power side just primarily because the aftermarket content is a little higher on that side.

If your total sales -- that's maybe at least on a run rate about 43% to 44% but correct me if I'm wrong, engine-specific if I remember well, tends to be about 20% of your aftermarket business?

I don't remember that exactly. I just don't -- engines tend to be 20% to 25% the cost of the Airframe so that wouldn't surprise me but I just don't remember that exactly. There is other things in power other than engines in that power segment. There is (multiple speakers) power, hydraulic power, things like that.

Just finally, any concern or are you seeing anything again on the aftermarket as now that we're into it a little further with some consolidation here. Any different behavior from the US airlines as a result of consolidation of the purchasing patterns or anything you can point to there?

I can't say I see anything yet. The market is picking up and if anything they may be buying a little ahead of the market pick up. I don't know that I can draw any trend from three to six months but the numbers might suggest that.

Thank you for your questions. I'd now like to turn the call back over to Liza Sabol for closing remarks.

Thank you everybody for participating in this morning's call and please look for our 10-Q that we expect to file tomorrow.

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