TransDigm Group Inc (TDG) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2015 TransDigm Group, Incorporated Earnings Conference Call. My name is Crystal, and I will be the operator for today.

(Operator Instructions)

I would now like to turn the call over to your host for today, Miss Liza Sabol, Investor Relations. Please proceed.

Good morning, and welcome to TransDigm's FY15 second-quarter Earnings Conference Call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; Chief Operating Officer, Kevin Stein; our Senior Executive Vice President, Greg Rufus; and Terry Paradie, our new Chief Financial Officer. A replay of today's broadcast will be available for the next two weeks. Replay information is contained in this morning's Press Release and on our website at TransDigm.com.

Before we begin, the Company would like to remind you that statements made during this call which are not historical in fact are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed, or implied, in the forward-looking statements, please refer to the Company's latest filings with the SEC. These are available through the investor section of our website or at [westcore.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, now let me turn the call over to Nick.

Good morning, and thanks again, everyone, for calling in to hear about our Company. Today I'll review, as usual, our consistent business strategy. I'll do an update on our recent acquisitions. I'll go through the financial performance and the market summary for both this quarter and year-to-date. I'll review our guidance for 2015 and also introduced Terry Paradie, our new CFO.

To restate, we believe our business model is unique in the industry, both in its consistency and in 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, about 90% of our net sales are generated by proprietary engineered products and around three-quarters of our net sales from products for which we believe we are the sole source provider.

Over half are revenues, and a much higher percent of our EBITDA comes from after-market sales. After-market revenues have historically produced a higher gross margin and have provided relative stability in the downturns. Because of our uniquely high EBITDA margins, and relatively low capital requirements, TransDigm has year-in and year-out generated strong free cash flow. This gives us a lot of operating and capital structure flexibility. We follow a consistent, long-term strategy.

First, we own and operate proprietary aerospace businesses with significant after-market content. Second, we have a simple, well proven value-based operating strategy based around our three value driver concepts. That is steady cost reduction, profitable new business generation and value-based pricing.

Three, we maintain a decentralized organization structure and the unique compensation system of executives and senior managers who think, act and are paid like owners. Fourth, we acquire proprietary aerospace businesses with significant after-market content where we see a clear path to PE, or private equity, like returns. And lastly, we view our capital structure and capital allocation as another means to create significant shareholder value.

To remind you, we basically have four alternatives for capital allocations, and our priorities are typically as follows. First, invest in our existing businesses. Second, make accretive acquisitions, consistent with our strategy. These first two are almost always our preferred choices.

Three, give access back to the shareholders either through special dividends or stock buy-back, and lastly, pay off debt. Given the low cost of debt, especially on an after-tax basis, this is likely our last choice in the current capital market conditions.

With respect to financial capacity we have about $390 million in cash, roughly $325 million in unrestricted, undrawn revolver, and additional capacity under our credit agreement. We ended the quarter with a net leverage of 6.1 times EBITDA, well below our credit agreement limit.

At March 28, 2015, or, in other words, at the end of the quarter, based on current capital market conditions, and after all recently announced finance activities and M&A activities, including Pexco, we believe we have adequate capacity to make over $1.5 billion of additional acquisitions without issuing any more equity. This capacity grows as the year proceeds. Once again, this does not imply anything about acquisition opportunities or anticipated acquisition levels for FY15.

As you likely saw, we recently closed on two transactions. The Telair Cargo Handling Business for about $725 million subject to certain adjustments, we close this one right before the end of Q2. And the Franke Aerospace Faucet Business for $75 million, right after the end of Q2.

Starting with the smaller of the two, on March 31, we closed Franke. This business fits well with our Adams Rite Faucet Business. It has substantial positions on most of the Airbus commercial transport platforms, while Adams Rite has similar positions at Boeing.

The Business is located near Berlin, Germany, we intend to relocated to our Adams Rite business in Fullerton, California over the next 12 months or so. This business is almost all proprietary, sole-source and commercial aerospace, with over 60% after-market, all-in-all a good fit.

On March 26, we closed on the purchase of the Telair group of businesses for a purchase price of about $725 million. We financed this acquisition primarily through cash-on-hand.

The Telair Cargo Group annual revenues are expected to be about $300 million, with EBITDA margins approaching 20%. For the fiscal year ended 2015, Telair was a global leader in commercial transport OEM on board cargo-loading and handling systems. Over 80% of the revenues are from commercial aerospace market, with the balance from the military aero.

Approximately 45% of the revenues come from the after-market, primarily commercial transport and commercial cargo aircraft. Over 90% of the revenues are from proprietary products, with about 80% sold on a sole-source basis. The Business consists of three operating units Telair Europe and Germany, Nordisk Aviation Products in Norway, and Telair US Cargo Systems in North Carolina. The Business employs just over 600 people in it's various locations.

The Telair Europe business in Miesbach, Germany is the largest operating unit, accounting for roughly 60% of the revenues and a higher percent of the profit. It has long-standing relationships with Airbus and Boeing, resulting in a substantial install base of systems worldwide, as well as positions on a broad range of new aircraft. They are the primary supplier of on-board cargo handling systems to Airbus commercial transports, as well as Canadair and Embraer.

Nordisk, located in Norway, is a market leader in air transport cargo containers and related items. Nordisk's products are in service with nearly every airliner freight company in the world. Nordisk will report to our Amsafe Cargo Containment Net business in UK.

Telair US is headquartered in Goldsboro, North Carolina, is also a supplier on a broad -- of on-board cargo handling systems and components for a variety of commercial and military platforms, including passenger freighter conversions. Their largest platform is the A400M, the Boeing 767 freighters, after-market spares, also, and a bit of a modification work make up much of the remainder of the Business.

At this time, we do not expect this business in total, that being the Telair Business, can get up to the average TransDigm EBITDA margins. This is due to a number of factors including the more competitive container business and certain contractual commitments on some of the businesses.

As I mentioned in the Press Release, we currently anticipate that the run-rate for revenue will be relatively flat for the first 12 to 18 months of our ownership of Telair. This is due to a significant A400 shipments in FY15 that may not fully repeat in our FY16.

This should be offset by market growth in other areas in FY16. The ramp up in A350 shipments, on which we have significant content, should begin to contribute meaningfully beyond that. As with all our acquisitions, we expect to generate private equity-like returns on these.

Additionally, we recently announced the execution of an agreement to acquire Pexco from Odyssey Investment Partners for $496 million. This includes approximately $160 million of tax benefits spread over 15 years. We don't own this business yet, so we're very limited on what we can say, but we believe this will be a strong addition to our portfolio of companies.

The company's revenues are almost 100% commercial transport aerospace. They are a major supplier of Boeing commercial transport airplanes for interior plastic extruded parts. The after-market is about 35% of the revenue today, but over the next five years, should expand to about 60% as the high content 737 with Sky Interiors, and the Boeing 787, continue to grow as a percent of the fleet.

You may have seen we also just announced a new financing of about $900 million. This is currently intended to be used to both to both pay for the Pexco acquisition and also general corporate purposes.

Given the very strong credit market, we believe it makes sense to finance the deal this way, while maintaining substantial dry powder for future opportunities. As always, if we end up with more cash or capacity than we need, we'll consider other uses or capital allocations.

I'd also like to introduce Terry Paradie, our new CFO. Terry is a great addition to our team, I'm sure most of you saw his background in our Press Release so I won't repeat most of it, but Terry came to us from Cliffs Natural Resources, most recently as CFO, and prior to Cliff he was a partner at KPMG.

Greg Rufus will be around for another 15 to 18 months to assist in the transition and other projects. Greg will do this earnings call and Terry will pick up the next. So if you have something negative or positive to tell Greg, or to get out of your system, now is the time to do it.

Turning to our second-quarter of FY15 performance, I remind you this is the second quarter, our fiscal year started October 1. As that I've said in the past, quarterly comparisons can be significantly impacted by differences in OEM, after-market mix, large orders, transient inventory fluctuations, modest seasonality and other factors.

But the Company's total GAAP revenues were up 5% versus the prior Q2, and up 8% on a year-to-date basis versus the prior year. Organic revenues were up about 3% on both a quarter-versus-quarter basis, as well as on a year-to-date versus year-to-date basis.

Year-to-date bookings are running ahead of revenues in all major market segments. Reviewing the revenues by market category, and as usual, that's on a pro forma basis versus the prior year Q2 and prior year-to-date, pro forma meaning we own 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 1% versus the prior Q2, and 3% on a year-to-date versus prior year-to-date basis. On a year-to-date basis this is driven primarily by commercial transport shipments being up around 5%.

Our business jet OEM revenues were down in Q2, we believe this is just a timing issue, business jet bookings are running nicely at shipments. Though much less revenue, the commercial helicopters, both shipments and bookings, are down substantially in the quarter.

In total commercial -- in the commercial after-market revenues, in total, the commercial transport segment was up about 9.5% on a Q2 versus prior-year Q2 basis, but this was offset by a -- or partially offset, by a modest decline in the business jet/general aviation business and, again, though small in revenue, a very substantial decline in the commercial helicopter segment. Overall our commercial after-market was up about 7% on a Q2 versus prior-year Q2 basis, and about 6% on a year-to-date basis.

Bookings for the quarter and year-to-date are running out of revenues. Given the difficult comps in the back half of the year, soft business jet and a declining commercial helicopter revenues, unless we get a fourth quarter spike like we did last year, it will be tough to get the high single-digit growth for this year for the entire commercial after-market.

Moving on to defense, which makes up about 30% of our revenue. Defense revenues were up 2% versus the prior year second-quarter and about the same 2% on a year-to-date basis. The results continue to be mixed across businesses.

Bookings, however, ran well ahead of revenues on both the quarter and year-to-date basis. We should see some full-year revenue upside here.

Moving to profitability now on a reported basis, I'm going to talk primarily about our operating performance, or EBITDA as defined. The as defined adjustments in Q2 were made up of non-cash compensation expenses and acquisition related costs.

Our EBITDA as defined is about $288 million for Q2, this is up 10% versus the prior Q2, significantly more than the revenue. Year-to-date is $558 million, and also up about 10% versus the prior year.

The EBITDA as defined margin was about 46.5% of revenue in the quarter and year-to-date. That is up 2% from the prior year Q2 and 1% from the prior year-to-date.

The Q2 and year-to-date EBITDA margins, without dilution from the impact of the two acquisitions we purchased in 2014, that is Airbus and EME -- or Airborne and EME, we didn't buy Airbus, was approximately 48%. We expect this core group of businesses to be at about 49% for the full year.

With respect to acquisitions, we've been busy, as I discussed. We continue looking at opportunities, we still see a reasonable amount of activity, but closings are always difficult to predict. We remain disciplined and focused on value creation opportunities that meet our tight criteria.

Moving on now to the 2015 guidance. Based on our current view of the Business, excluding the Telair and Franke acquisitions, our full-year guidance for revenue and EBITDA as defined remains generally unchanged.

As I mentioned before, due to the tougher comps and other factors, we are concerned that the commercial after-market may fall a bit short by single-digit growth. However, at this time we think there is adequate upside in defense revenue and our overall EBITDA margins to offset any potential EBITDA impact.

We are, however, adjusting our total Company guidance upwards to reflect both our new acquisitions and a more favorable tax rate. As usual, our guidance does not include any additional acquisitions other than Telair and Franke, the ones we have closed. It does not include Pexco since we have not closed that yet.

Our revised guidance for the total Company is as follows. Revenue, and this is to the midpoint, is $2.68 billion, up about $140 million versus the prior midpoint. EBITDA, as adjusted guidance, is now $1.21 billion to the midpoint, up about $32 million versus the prior.

EPS, as adjusted guidance, is $8.62 a share to the midpoint, that's up 46% -- $0.46 to the midpoint from the previous guidance. Of the increase in adjusted EPS of $0.46 at the midpoint, the majority of the increases from the recent acquisitions, with much of the balance due to a more favorable tax rate.

By market segment excluding, the most recent acquisitions, we are using the following assumptions. Commercial OEM, mid-single-digit growth, this is unchanged; commercial after-market, mid-single-digit growth, this is modestly down from our prior guidance; defense, low to mid-single-digit growth, this is modestly up from our prior guidance.

As usual, we'll look at this again next quarter and update you if we see things changing. All-in-all a good quarter, our operating results were strong, we closed on two solid acquisitions, and we expect Pexco to close soon. When Pexco closes, we will have invested about $1.3 billion in good, solid aero businesses with strong value generation prospects over a 90-day period.

And with that let me hand this over to Greg.

Okay, thanks, Nick. I'd like to correct one of Nick's earlier statements about our CFO transition. I'm only listen to the positive comments, the negative comments we will direct to Terry. I'm very pleased with the addition of Terry to our team, and I can assure you we'll have a seamless transition.

As disclosed in this morning's Press Release, our second-quarter sales were $619 million and approximately 5% greater than the prior year. Our organic sales were approximately 3.5% higher than last year, primarily driven by growth in the commercial after-market, offset by lower growth rates of commercial OEM and defense.

Our second quarter gross profit was $342 million, an increase of 11% over the prior year. The reported gross profit margin of 55.2% was 3 margin points higher than the prior year. Excluding all acquisition-related accounting adjustments, our gross profit margin in the Business, versus the prior year quarter, improved approximately 2 margin points.

The operations continue to expand margins as a result of the strength of our proprietary products and continually improving our cost structure. Also, there was a decrease in nonoperating acquisition-related costs versus the prior-year, and this contributed an additional one margin higher to the reported margin.

Selling and administration expenses were 12% of sales for the current quarter compared to 12.1% in the prior year. Excluding acquisition related expenses and non-cash stock compensation expense, the SG&A was about 10.3% of sales, compared to 10.5% of sales a year ago.

Interest expense was $100 million, an increase of approximately $18 million, or 21% versus the prior-year quarter. This is a result of an increase in the weighted average total debt to $7.5 billion in the current quarter, versus $5.7 billion in the prior year.

The higher average debt year-over-year was primarily due to the amount borrowed to fund the $25 per share special dividend paid in the third quarter of last year. Also, in conjunction with that dividend, we refinanced $1.6 billion of existing notes to a lower interest rate. This refinancing helped lower our weighted average cash interest rate to 5.1%, compared to 5.4% in the prior year.

Our lower effective tax rate in the quarter was primarily due to the impact of our foreign earnings been taxed at a lower rate, resulting from the new structure formed in conjunction with the Telair and Franke acquisitions, as well as, favorable discrete adjustments relating to finalizing our IRS audits for both FY12 and FY13. We estimate that our current tax structure will help lower our effective rate, for FY15 our effective tax rate will be below 32%. We now expect our cash taxes to be approximately $175 million for FY15.

Our net income for the quarter increased $20.5 million, or 23%, to $110.9 million, which is 18% of sales. This compares to net income of $90.4 million, or 15% of net sales, in the prior year.

The increase in net income primarily reflects the increase in net sales, improvement in base margins, the decrease in acquisition-related costs and amortization expense, and a lower effective tax rate. These items were partially offset by the higher interest expense just discussed.

Our GAAP earnings-per-share was $1.96 per share in the current quarter, compared to $1.49 per share last year. The current EPS growth of 32% is higher than net income growth, due to the dividend equivalent payment made in the comparable quarter last year that did not repeat.

Our adjusted earnings per share was $2.11 per share, an increase of 13%, compared to $1.87 per share last year. Again, please reference table 3 in this morning's Press Release, which compares and reconciles GAAP to adjusted EPS.

Switching gears to cash and liquidity, first, I want to remind you that during the quarter we paid $725 million for Telair, and borrowed $75 million on our existing revolving credit facility as part of that transaction. After these activities, we ended the quarter with approximately $393 million of cash on the balance sheet.

A few days after our quarter ended, we closed on the Franke acquisition and paid $75 million in cash. Adjusting our cash balance for the acquisition of Franke, our adjusted cash balance would be approximately $318 million. The Company's net debt leverage ratio was 6.1 times our pro forma EBITDA as defined, including both Telair and Franke, and gross leverage was 6.4 times on a pro forma EBITDA.

As Nick mentioned, this morning we announced our plans to finance $900 million with the proceeds to be used to pay for the acquisition of Pexco for approximately $496 million, and almost $400 million added to the balance sheet to be used for general corporate purposes. Assuming the completion of these transactions, and absent any further acquisitions or capital market transactions, we expect to end the year with over $900 million of cash on the balance sheet, and our net leverage to be near 5.8 times pro forma EBITDA as defined.

With regards to our guidance we estimate the midpoint of our GAAP earnings-per-share to be $7.69 and, as Nick previously mentioned, we estimate the endpoint of our -- or the midpoint of our adjusted earnings-per-share to be $8.62. The $0.93 of adjustments to bridge GAAP to adjusted earnings-per-share, includes the following assumptions: $0.06 from the dividend equivalent payments, $0.41 from non-cash stock option expense, and $0.46 from acquisition related expenses. The large increase is due to the recent acquisitions of Telair and Franke.

Just of note, both acquisitions just closed and will require transition service agreements, which will include certain accounting activities we will require from the sellers for a period after ownership. Because of this we will be on a one-month reporting lag for both Telair and Franke. Our current plan, as they have two months of activity in our third-quarter results, and catch-up and have the four months of activity in our fourth-quarter.

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

Thanks, Greg. In order to give everyone opportunity as questions, I'd ask that you limit your questions to two per caller. If you further questions, please re-insert yourself into the queue and we will answer those as time permits. Operator we're now ready to open the lines.

(Operator Instructions)

Carter Copeland, Barclays.

Good morning, Nick and welcome, Terry, and Greg, thanks for helping us all this time and congratulations on not having to put up with us anymore. (Laughter)

Not quite, he's got to hang around 15 months.

Yes, no, he just doesn't have to listen to us on this every quarter.

I still have to listen to Nick. (Laughter)

A couple of questions, one from a high level, Nick. When you look at the three recent transactions and compare them to some of the others you've seen, whether it's Airborne, EME, I wonder if you might compare and contrast those, and how you feel about these? They certainly look like some of the transactions we've seen in the past, obviously Franke and Adams Rite, or Pexco and Schneller, I wonder if you might just give us some color about how you think about these acquisitions versus some of the others you've done in the past couple years?

Oh, if I compare that to say Airborne, these are more right down the middle of the plate acquisitions, proprietary Aerospace, commercial aerospace things. I would describe them as, I think that's the best way to do it, right down the middle of the plate. I would say -- which, by the way, is what Arkwin was like, and what the GE business was like, which are the previous ones we bought. As I mentioned to you, I think there's the -- let me stay off Pexco, I think that's just because we don't own it yet and we're restricted on what we can say.

That's fair.

But I think it's a significant value generator. The Telair one, I think there's good upside, though as I said, Carter, I don't know that it gets up to the average at least for the next three years or so. There's some contractual issues there.

Are those basically agreed-to long-term prices?

I don't want -- I can't really talk, you know confidentiality agreements with your customers, but that would be a pretty good guess. I don't know what else would do it. (Laughter)

Exactly. A quick follow-up, on last quarter you talked about some distributor de-stocking. I don't know if you signed more of that, or if you were past that?

I don't think we saw any meaningful change there this quarter.

Great. Thanks, and congratulations on the deals.

Noah Poponak, Goldman Sachs.

Good morning, everyone. Greg, congratulations on the retirement and the run you had here.

Thanks. Feel old. (Laughter)

Can you walk us through why cash from ops was negative in the quarter, and how you see it playing out the rest of the year?

Terry, want to handle this one?

I think the biggest driver for cash from ops being negative is three areas. There was a big income tax payments made during the quarter of over $80 million, as well as, you're also seeing interest payments of over $140 million during the quarter, and then just plainly the working capital changes during the quarter, which drove the negative cash from operations for the quarter. But it's just timing, I think we're comfortable and confident that we'll generate the planned free cash flow for the full-year.

And can you remind us what that plan is?

By the end of the year, we'll have $900 million in cash on the balance sheet.

Assuming we put $400 million from the financing.

Okay.

So $500 million without the financing, $400 million because we'll probably throw on there from the financing.

Can you tell us how much of the commercial OE and after-market revenues that you report are helicopter?

I don't know the exact percent, it's a small percent. It's surely in this single digits, well in a single digits. And the only reason that they register on the meter is because the dropped off so much.

Yes. And that's all oil and gas I assume?

I think so. Nobody gives us a reason when they don't order, but that's surely what we surmise.

And then in the full-year commercial after-market growth target revision, is there any change to the large commercial aerospace piece of that?

I don't know that I can call it exactly that close. I mean, clearly the trends in the commercial transport look good, however, the comps get pretty tough. If you remember the second half of last year was up 17%, 18%.

Right.

So the comps get tough. It's clearly going in the right direction, and absent anything else, it might will get there. But we're getting some down drags on the other pieces of it. And just when I put them all in a stew, it makes me feel like that high single-digit number is a little risky.

Got it.

We didn't spike like we did last year at the end of the year, we'll be fine, but that seems to me more of a hope than a plan.

Okay. Thanks very much.

Myles Walton, Deutsche Bank.

Thanks, good morning. I wanted to pick up on the cash flow question, just a second, so I think the guidance had been for $75 million; cash taxes are now about $5 million lower, and then you have another $32 million of EBITDA. So is free cash flow going to be closer to $500 million? If that's the case, it seems like your year-end cash balance should be closer to $1 billion then $900 million?

I don't reconcile all of the pieces, but I can tell you that our cash flow is what it is, and our operating capital is pretty good. Our DSOs are in good shape, our inventory's in good shape. It's in the noise range, but we may spend like $10 million in transition service agreements, which won't be part of EBITDA, because that's only like $10 million with the two acquisitions. So, I don't know if it's your starting point, or we have so many moving pieces with everything we just threw at you, but we think it's more like $900 million and everything's pointing in the right direction.

Greg we don't foresee any, other that acquisition stuff, but we don't see any difference in our operations and cash flow.

No.

From a cash flow.

On the free cash flow side?

Yes.

Okay. And then Greg, you also mentioned the tax structure improvements that you're making, and it sounds like some of those may actually be more permanent and sticky, so is that 32%? I couldn't quite discern what was discrete from prior years and what was more permanent in terms of tax structure going forward?

The discrete items, you know we finished up an audit and we did that, that was only $0.06, the discrete items, and then as we go forward we think the rate will be below 32%. Of this tax structure stuff, we won't give you an effective tax rate that we're going to forecast in 2015, but we think it's, on an annualized basis, between $10 million and $12 million of tax savings from this restructuring, or from this new structuring we set up with the (inaudible) operations.

Okay, good deal. I'll take the two, thanks.

Robert Stallard, Royal Bank of Canada.

Thanks so much, good morning. And congratulations on your timing: great.

Nick, I know we kicked it off on the acquisition front. With Telair having a lower margin, and Pexco having a higher percentage of OEM sales, does this indicate that you're not seeing as many of your classic targets out there as you maybe would've seen in the past?

I don't know that I can say that. We, as I've always said, we're at-bat every day, on the ones that look like they work we take a swing at. I would say on after-market, Telair is a pretty hefty after-market, Franke's pretty hefty after-market. I think, as we told you, the Pexco one is about 35% now, but just by natural occurrence, it's going to drift up to 60%, just because the planes going in have much more content than the planes coming out. So, I don't know that I would say that. They're proprietary aerospace businesses with a fair amount of after-market; if they don't now, they see a clear path to that.

Okay, and secondly you mentioned that biz jet after-market was a bit weak in the quarter. What's the driver of that? Is it lower flight activity or some de-stock?

I don't know enough. I really am not sure. I think it's in transient because the bookings were pretty good.

Okay, so we should expect that to accelerate maybe in the second half?

You know, we give a guidance in total, we don't give it by each one of those segments. With the bookings good, you would hope to see some pickup.

Great. Okay that's all for me, thank you.

Robert Spingarn, Credit Suisse.

Good morning. Welcome. Terry. Congratulations, Greg. Nick, on helicopters, since it's so weak, is there a way to frame where it is relative to its peak and its trough? How much more downside could there be both OE and/or after-market?

I don't have the number in front of me, Rob, I don't think it's big enough to have a material impact on the Business through the year, but it drops off enough it can make some quarterly comparisons look funny. But I don't know the -- as I sit here, I just don't know the exact numbers. But it is far and away, it's way smaller than commercial transport, as I'm sure you know, and it is significantly smaller than business jet.

But it could continue to impact? In other words, we could see similar commentary next time?

Yes.

Okay. And then going over to Telair and the three years until the margins -- I want to make sure you understand you correctly. Are you saying you can get there eventually, it's three years away, or you're not going to get there?

No I'm saying, right now, as I sit here today, we are not figuring we can get there.

Okay.

Now it has - as contracts run out over time, our view on that may change, and hopefully, we tend to be somewhat conservative in our acquisition models, so hopefully we can do better. But we want to be sure we have a model we can meet and get our PE-like returns without making too many wild assumptions. So, I figure it doesn't get there right now.

Okay, and just the last thing on the air transport after-market, or large aircraft after-market, and your comments earlier, understanding part of it's helicopter, part of it's biz jet. But just what the airlines are doing, do you think that just flight activity is so robust that we may be seeing a slower sales demand, or spares sales demand, that we might see at some point? You mentioned a spike last year; is there at bow wave that might be out there?

I mean, that's always a possibility, right? Because if you take the, probably the last couple quarters, add them up, and adjust for price, it probably isn't quite keeping up with RPM's. Now you also have the confounding variable of the six months before that. It was up 18% or something like that. So, I don't exactly now cross that out, but Rob clearly there's some chance, as I said. I mean, we get a fourth quarter spike like we did last year, all will be well, but we're just not figuring on that.

Now I don't -- I have -- whether that comes or doesn't come along, we'll have no effect on impact on that, either it will or it won't. Okay thanks very much, Nick.

Ken Herbert, Canaccord.

Good morning and congratulations, Greg, and welcome, Terry, again. Just wanted to first follow-up on the defense market, if we could, now do you get a sense, Nick, this is the second quarter in a row where you've talked about better bookings, obviously you raised the guidance a little bit, have -- you get a sense that we've hit an inflection point and this is sort of not what to expect moving forward? Or you get a sense there's still some one-time issues, perhaps, that you're seeing in this market?

I'm very reticent to speculate on that since, for the last three or four years, I usually have been too pessimistic and it's done better. I will say if you look through the data, it's still not clear. You've got product lines all over the map, some up some down some sideways. I think I just have to stick with sort of the guidance we gave you. I feel pretty good looking six months out, because we've been shipping pretty well and our bookings are hanging in pretty well. I just -- it's very difficult for me to speculate beyond that.

Okay.

I think the chances -- coming back, I think if you ask me four years ago, me and many people, would have said you could be looking at a 25% dislocation. I think the risk of that is likely behind us.

Okay, so it sounds like, I mean, at least moving forward here, with the bookings you've seen there's a little more confidence, perhaps, in outlook than certainly -- I know you outperformed relative to your pessimistic expectations, but it sounds like there's just more confidence or visibility in the Business?

Surely for the next six months.

Yes, okay. Okay, that's great.

And if I could, just on the commercial after-market did you see, throughout the quarter, did you see any trends where maybe the year started a little softer and picked up through March, that's maybe continued into April? Or was there any noticeable difference coming out of, calendar-wise, coming out of the fourth quarter December into January within commercial, specifically on the transport side, with commercial and after-market purchases?

Yes, I don't think I could sort of slice onion that thin. March always looks better to us, because it's a five-week month for us in our accounting system.

Plus you have all the holidays in the first-quarter.

Yes, and the first quarter, as you know, were about eight to ten days short on shipping days, so the first quarter always looks a little worse, and the last quarter -- the last month of each quarter looks good to us, always looks good because we're on a 4/4/5 schedule. I don't know that I can parse that out and give you anything definitive.

All right, that's helpful, thank you very much.

Gautam Khana, Cowen and Company.

I would like to ask if you can comment on the M&A pipeline now. After all these deals do you still have a number of such opportunities?

One thing I can say for sure is the pipeline today has three less businesses in it than it had 90 days ago. (Laughter) I think that's about the only thing I can say with certainty. We're still active, you know we're still looking at things, I have no ability to predict whether we're done buying, or not done buying, here for the year. Obviously, we think there is -- we don't think we're dead, or we wouldn't be looking to borrow more than we need to pay out, but time will tell.

Okay, and could you comment, the comment on defense bookings up significantly, was this pretty broad-based? Before was mostly Airborne Systems, right?

Yes, I would say it is across businesses, though the parachute business is the biggest pick-up. That one's up very substantially. Others are up but not to that degree. And it's still -- I don't want to say it's a tide rising and all the ships are coming up still, I mean it's still a mixed picture.

Okay, thank you very much.

Michael Ciarmoli, KeyBanc Capital Markets.

Good morning. Thanks for taking my question. Congratulations, Greg. Maybe Greg, just for clarity, the $900 million in financing, I'm assuming that's not embedded in the outlook? And I think more so, I'm asking on the right interest expense for the year? I don't think you gave an interest level for the year.

No, that's not embedded in the forecast right now. As a general rule, until we actually own it, we don't put it in. We're just giving you a little color on leverage.

Got it.

Neither Pexco nor the additional debt, neither one are in.

Got it. Just maybe on Pexco and Telair, is there any -- you mentioned, obviously, the margins, have both of those entities worked out their partnering for success agreements with Boeing?

Pexco, yes. Telair is primarily an Airbus business, and they don't have the same situation at Boeing.

Okay, that's fair. And then just the last one on Telair. Structurally, is it going to be harder to implement your value creation just given a lot of their European operations and labor laws there? And an add-on to that, how much of an FX tailwind you think you are going to pick up from Telair this year?

I don't know what the tailwind is on FX, but it's a tailwind not a headwind, obviously. I don't know exactly what the term -- yes, and it's the change from when we bought it to the end of the year, and a lot of the tailwind you saw already. So it isn't a big number.

On the European productivity, or cost situation, that's one that we understand. We're in a different environment, and I think we've -- we hope we've reflected that appropriately. We're a little more conservative than we might be in a different situation.

Got it, all right that's all I had thanks.

I have no further questions I would like to turn the call back over to Liza for closing remarks.

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

Ladies and gentlemen, that concludes today's presentation, you may now disconnect. Have a great day.