TransDigm Group Incorporated
Q2 2008 Earnings Call Transcript

Published: 6 May 2008

[Operator:]

Good day ladies and gentlemen and welcome to the second quarter 2008 TransDigm Group Incorporated earnings conference call. My name is Nikita and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operators Instructions]. I would now like to turn the presentation over to your host for today's call, Mr. Sean Maroney, Director of Corporate Accounting and Investor Relations. Please proceed sir.

[Sean Maroney:]

Thank you. I'd like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2008 second quarter earnings conference call. With me on the line this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; our 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 transdigm.com. Before we begin, the Company would like to remind you that statements made during its call which are not historical in fact are forward-looking statements. Forward-looking statements involve risk and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the 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 information regarding forward-looking statements and risk factors included in the Company's latest filings with the SEC. These filings are available through the Investors Section of our website or though the SEC's website at sec.gov. The Company would also like to advice you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined and adjusted net income, both 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 measure and a reconciliation of EBITDA as defined and adjusted net income to that measure. Now having taken care of the necessary disclosures, let me introduce Nick Howley, our Chairman and Chief Executive Officer, who will provide an overview of the business for the second quarter at fiscal 2008 year.

[W. Nicholas Howley:]

Good morning and thanks for calling in to hear about our company again this quarter. I'd like to start off this call with some comments about our stock price, our steady strategy and performance, the Company's consistence ability to create equity value through the cycle and our current sense of where the aerospace market stands as applies to our business. As you probably know, our stock price as of Friday had dropped to about 15% since the start of fiscal year, that is, on October 1st. Though there has been some upward movement today, we of course don't like this drop. We understand that it's directionally consistent with the decreases in valuation among the other aerospace companies. However, we believe our business model is unique in this industry. To summarize some of the reasons why we believe this, about 95% of our sales are generated by proprietary products; about 80% of our sales come from products for which we are the sole source provider; about 60% of our revenue and a much higher percent of our EBITDA come from aftermarket sales. Aftermarket revenues have historically produced the higher gross margin and provided significant stability in the down cycles. Because of our uniquely high EBITDA margins, which run 46% or more and relatively low capital requirements which typically run 2% plus or minus a little, TransDigm has year-in and year-out generated very strong free cash flow. This has given us the flexibility to either pursue acquisitions, optimize our capital structure or take whatever other actions we think are appropriate to maximize our value. We have a well proven, value-based operating strategy focused around what we refer to as our three value drivers of new business development, continual cost improvement and value-based pricing. We stick to these concepts as the core of our operating management methodology. This consistent approach has allowed us to continually improve and increase the value of our business. We've been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace component businesses with significant aftermarket content. We have in total acquired 22 such businesses and we've been able to buy and improve these businesses right through the cycles. For many years, the Company has performed in both up and down markets through our consistent focus on these operating value drivers, a clear precise acquisition strategy, close attention to our capital structure. We've been able to create real equity value for our shareholders through all phases. The performance after 9/11 for the EBITDA as defined grew right through the downtime was the most recent example. This consistency does not seem to us to be fully recognized and valued at this time. I suspect this may well be due to our newness in the public equity market. As you can see from our press release, in spite of a concerning economic outlook and excluding any acquisitions, we feel comfortable increasing our guidance from the previous EPS midpoint by about $0.24 a share. That's on an adjusted basis or about 10%. This improvement comes primarily from two areas

[Raymond F. Laubenthal:]

Thanks, Nick. As Nick mentioned, second quarter results were better than expected. Our acquisition, integration and productivity improvements continue to add solid value. Our new business order activity was strong and new product development activity made good progress. We continue to price our products to reflect the value we provide to our customers and lastly as Nick mentioned, we expect to close within the next few days on the acquisition of another operating unit, CEF Industries. Let me explain each of these areas in a little more detail. The vast majority of the physical integration activity associated with the businesses we acquired in 2007 is nearing completion. The associated margins continue to expand as our productivity efforts and pricing actions take hold. Looking forward, our latest acquisition CEF will become our next integration project. Located in Chicago, CEF designs and manufactures specialized highly engineered mechanical and electro-mechanical actuators, compressors, pumps and related components. The majority of the company's revenues are military related with the C-130 production program and the associated large worldwide installed base being their single biggest platform. Other CEF platforms include the A380, the A320, the A330 and 340, the Joint Strike Fighter, the F-15, C-17, V22, as well as certainly regional jets and biz jets. At CEF, we expect to integrate our three value drivers of productivity improvement, value pricing and focus profitable new business growth to create future value. At our operating units, productivity projects continue to progress favorably. Of significance, we continue to improve operational efficiency. And in the last six months, our total headcount has reduced over 2.1%, while revenues have continued to increase. We continue to be very active finalizing our Boeing 787 designs and manufacturing processes. The development activity and spending continues to be particularly high on our new composite fuel and hydraulic isolator products at AdelWiggins and on our digital flight audio systems at Avtech. The development and expense on these projects should begin to reduce during our fiscal fourth quarter, assuming there is no schedule push-outs or significant design revisions by Boeing. And in addition to these new programs across our businesses, pricing at our operating units is improving steadily and in fact it's running slightly better than we originally anticipated. Now let me hand it over to Greg Rufus, our CFO who will review our second quarter financial results in more detail.

[Gregory Rufus:]

Thanks, Ray. Good morning, everyone, and again, thanks for calling in. As you've just heard, Nick's comment centered on pro forma revenues and EBITDA as the prime comparable results, and Ray gave a brief summary of our value drivers and the integration of acquisitions we made in 2007 and the CEF planned acquisition. For those of you who have listened to prior calls, you are aware of the various accounting charges associated with our past acquisition activity. Halfway through fiscal 08, we still have purchase price amortization for both backlog and inventory step up along with some start up expenses that are still with us in 2008. As these expenses lined out, we will then shift to include new acquisition expenses associated with CEF. Consistent with our past practice, these adjustments will be fully disclosed in detail in our press releases and our SEC filings. As you know, for acquisitive company like TransDigm, all of these items come into play when looking at GAAP financial results compared to prior year comps for any given quarter and throughout the year. Today, my comments will focus around our second quarter GAAP reported results. It is a pleasure to continue to report to you that we had a very successful second quarter. In a nutshell, the second quarter sales were what we expected, the base margins are very strong, the acquisition margins although diluted, continue to improve and the cash flow was very strong. Let me explain in some more detail. Quarter 2 sales were a $175.3 million, up $30.8 million or 21% from the prior year. Organic sales were $13.9 million or about a 10% increase over the prior year. This quarter organic sales came from strong defense sales, primarily defense aftermarket across all product lines, an increase in commercial OEM and an increase in commercial aftermarket sales. In other words organic sales growth came from all markets. Our recent acquisitions ATI and Bruce contributed to the balance of the growth. Reported gross profit was $93.9 million or 53.6% of sales. This $18.8 million increase is 25% greater than the prior year and it is also greater than our sales growth of 21%. The reported gross profit margin increased approximately 160 basis points versus prior year. The primary driver for the improved margin was due to the decrease in purchase price accounting charges between the two periods. Excluding purchase price accounting, gross profit margins were flat. This included the dilutive impact of the ATI and Bruce acquisitions, which are included in all three months of the current year. Selling and admin expense was 10.5% of sales for the quarter compared to a prior year expense of 10.1%. Research and Development expense, which Ray just spoke to, is the primary driver of the increase and expense as the percent of the sale. As Ray mentioned, we expect this costs to reduce in our fourth quarter as the 787 development finalizes. Amortization of intangibles decreased by $600,000 to $2.8 million for the quarter. This is primarily due to a decrease in order backlog amortization resulting from the prior year acquisition. Net interest expense was $24 million, a net increase of $1.4 million or 6.2% versus the prior year's quarter two. For the quarter, our weighted average level of borrowings is approximately $1.4 billion, versus approximately $1.2 billion a year ago. The increase in average debt was due to the ATI acquisition made during the second quarter of 2007. The average interest rate decreased to approximately 7.3% this quarter compared with 7.6% last year. We anticipate a further reduction in the average interest rate to approximately 6.5% for the remainder of the year. Regarding our tax provision, our effective tax rate was 34% for the quarter compared to a prior year effective tax rate of 37.7%. This current quarter tax rate reflects the favorable impact of our legal entity restructuring, which took place in the fourth quarter of last year and a favorable resolution of a prior year's state tax refund claim of about $900,000. We are forecasting our '08 effective tax rate at 36% now. We anticipate our '08 cash tax payments to be approximately $40 million, of which we've paid $13.6 million midway through the year. Quarter two net income was $32.2 million or 18.4% of net sales compared to $21.5 million, or 14.9% in the prior year. This is a 49.5% improvement versus the prior quarter. The combination of strong EBITDA as defined growth of 19%, a decrease in non-operating and acquisitions costs, an increase in interest expense of only 6% and a lower effective tax rate just discussed all contributed to the significant increase in net income over the prior period. With the net income improvement on a GAAP basis, quarter two diluted EPS was $0.64 per share compared to $0.45 per share a year ago, a 42% improvement in this quarterly comparison. Our adjusted diluted EPS was $0.68 in the second quarter, which was 28% improvement versus the prior year. These improvements were dampened somewhat by higher common shares outstanding versus the prior year. Cash generation continues to remain strong. We ended the quarter with $194 million of cash on the balance sheet. For the year, we've had a positive net increase in cash and cash equivalence of $88 million halfway through our fiscal year. Excluding acquisitions, we expect our year end cash on the balance sheet to be in the range of $280 million to $285 million. As you know, however, we've used approximately $83 million of cash upon closing of the CEF acquisition, which will reduce the forecasted year end balance to approximately $200 million. At the end of the second quarter, our net debt leverage ratio to EBITDA as defined was 3.8 times compared to 4.3 times this past September. I am now going to shift from quarter two financial results to a new subject. As announced in our pres release this morning, along with Nick mentioning it earlier, we are increasing our guidance halfway through our year. We give full guidance on five items

[Operator:]

[Operator Instructions]. Your first question comes from the line of David Strauss of UBS. Please proceed.

[David Strauss:]

Good morning. Thanks

[W. Nicholas Howley:]

Good morning

[David Strauss:]

Nick, you talked about some softness in the aftermarket and some product lines. Can you give us a little bit of detail of what product lines specifically?

[W. Nicholas Howley:]

I can't say its specific. What I'd say is if you look across all the product lines we have, if you look at it 18 months ago or 15 months, when everything was booming, it's sort of a rising tide was a picking… where all the ships were coming up with the tide. If you look at it now, you don't necessarily see everyone rising. There's kind of a puts and takes for month-to-month and quarter-to-quarter. The net is still a good number, but it's somewhat indicative of… in my view of a market that get little shaky.

[David Strauss:]

Okay. And in terms of… Greg, you talked about increasing the guidance by about $0.12 for improved operating result. Obviously, you talked about the aftermarket maybe being a little bit softer. That's your highest area of profitability. What's the offset? Is that the defense aftermarket being stronger than expected?

[Gregory Rufus:]

Yeah. As Nick mentioned, the defense aftermarket is coming in really strong plus we're quick [ph] and all those cylinders with our value drivers at the core locations and with the acquisitions, David.

[David Strauss:]

Okay. Thanks, guys.

[Operator:]

Your next question comes from the line of Carter Copeland of Lehman Brothers. Please proceed.

[Carter Copeland:]

Hi. Good morning, guys. Good quarter.

[W. Nicholas Howley:]

Thanks.

[Gregory Rufus:]

Thanks.

[Carter Copeland:]

I wanted to shift to the order book a little bit, Nick. I wonder if you could sort of provide some color on what the book-to-bill look like both in aftermarket and in the military business, presumably military was pretty good, but I am wondering what you saw in terms of book-to-bill in aftermarket relative to past couple of quarters?

[W. Nicholas Howley:]

I don't think we generally disclose that. Are we, Sean?

[Sean Maroney:]

No.

[W. Nicholas Howley:]

And I don't have that at the tip of my fingers. Carter, I don't know what the number is exactly. But I would say, generally the bookings give a same type of a picture as you might see in the revenues. I mean, it's still okay but it gives you some concern about the go-forward outlook for the market.

[Carter Copeland:]

And you mentioned this cockpit security sort of drag against the aftermarket growth.

[W. Nicholas Howley:]

Yes.

[Carter Copeland:]

Is there a reversal of this at some point that benefits the numbers in '09? Or how should we think about the future impact.

[W. Nicholas Howley:]

Yes, maybe a little bit. This is Carter still?

[Carter Copeland:]

Yes

[W. Nicholas Howley:]

Yes. What this is, is we have… as you know, we have all these cockpit security systems out, and we put a bunch of them out there after 9/11 and we had a bunch of upgrades and improvements to them and things like that. The FAA decided to extend the hard life on them. Now there were some of the components and I am giving you approximate, I am not sure exactly the year is what they used to say, replace every three years. They changed it every five years, which has the impact. What happens then is people won't buy for a couple of quarters, but they also have adjust down. What happened here is they did it once at the end of last year, which we expected and then they extended the life again at the end of calendar '07 or the beginning of calendar '08. So it happened twice to us. We expected to happen once. I would say Carter, yeah, you would adjust down and I'd expect some time out, maybe '09, you'll see a little bit comeback. That's what you'd expect to normally happen in something like this.

[Carter Copeland:]

Of course. So, but right now, I mean, is there a risk if it gets extended again or I mean presumably this is, I mean, it's quite a drag if we go from 5% it would have been double digits, I mean, it's 500 basis points so--?

[W. Nicholas Howley:]

Yes. We think not quarter, we think we've captured… we've given you guidance for the year. We think we've captured the risk in that guidance, but there is always clearly some risk to that. But we don't know of anything that's going on now.

[Carter Copeland:]

Okay. Great. Thanks, guys and good quarter.

[Operator:]

Your next question comes from the line of Robert Spingarn of Credit Suisse. Please proceed.

[Robert Spingarn:]

Hi, guys. Can you give the… when you went public, we talked about your three real sources of revenue growth. We've all been kind of hyper focused on the end market trends and, of course, you have the external growth from acquisitions. But the other one that we don't talk about as often is market share. Could you talk Nick or Ray about any upcoming market share opportunities that may actually be noticeable? I think at the time of IPO, you had just come off a 767 retrofit that added to the growth rate, anything like that out there?

[W. Nicholas Howley:]

You mean that we changed the sort of historical growth pattern?

[Robert Spingarn:]

Not necessarily change it, but contribute to the growth rates you're looking for or perhaps offer some upside?

[W. Nicholas Howley:]

Well, I would say as you know… as I think you know, Rob, our content on the 787 and the A380s is significantly higher than it was on the predecessors. So as they come up, I would expect to see a little pick-up. On the other hand, as you also know, that's not a lot of volume for a while and it's also not a lot of profitability. Ray, I'm trying to… as I said you, I don't think of anything that disrupts the usual pattern here. I mean, I think.

[Robert Spingarn:]

Nothing that's added. I'm thinking in terms of things like the cockpit work you've talked about. So, in other words, not tracking the ASM or RPM growth, but something that might be mandate driven that comes forward here on one of your platforms.

[W. Nicholas Howley:]

We're always out chopping away at new business and we're always working on some retrofits. But I honestly, as I sit here today, I don't know of any that would make a step change in your sort of calculation or tracking.

[Robert Spingarn:]

Okay. Okay. Turning for a moment to margins. Your gross margins continue to be quite strong, little bit off the first quarter but better than last year. What are the pricing trends and to what extent does this very… let's say limited or just appearing softness in the commercial aftermarket affect pricing, if at all?

[W. Nicholas Howley:]

Not at all. So far we've not seen any impact and we would not expect to see any impact. As I think Ray said in his part of the presentation; actually our pricing is running a little ahead of our expectation.

[Robert Spingarn:]

The airlines at any point historically come to a point of pressure where they come to you and ask for some help?

[W. Nicholas Howley:]

We've had requests on and off through the years. But generally, we're pretty comfortable with our positions and absent some real mitigating circumstances, we're not termly receptive to that.

[Robert Spingarn:]

Okay. And then just going back to the aftermarket growth, you talked about… if I got this right, kind of a 10% number for the full year?

[Raymond F. Laubenthal:]

Yes.

[Robert Spingarn:]

And was that commercial aftermarket or is that overall?

[W. Nicholas Howley:]

That happens to be both about. Commercial aftermarket, we said 10% overall, I think we said slightly above 10.

[Raymond F. Laubenthal:]

Yes.

[W. Nicholas Howley:]

Yes.

[Robert Spingarn:]

And maybe this gets a little bit to Carter's question, but looking at what we've seen in the first half, it does imply a higher growth rate in the backend of the year because again that 10% doesn't factor in any of the adjustments we might make to exclude the one-time factors.

[Raymond F. Laubenthal:]

That's right.

[Robert Spingarn:]

Are you looking for a 12% or 13% type of rate in the back?

[Raymond F. Laubenthal:]

As you know Robert, it has to be or those numbers won't work.

[Robert Spingarn:]

Okay. Just want to make sure my logic was right.

[Raymond F. Laubenthal:]

Yes. Your logic is right. Now, I would say that is an area there could be some risk in the forecast, but we think we've pretty well captured all the risk in the numbers we've given you.

[Robert Spingarn:]

And you seem to be fairly confident in the military side. It sounds like that that's provided a very good offset so far?

[Raymond F. Laubenthal:]

Yes, it has.

[Robert Spingarn:]

Okay. And then, just a final one for Greg. Any receivables on the books from impaired carriers or Chapter 11 filers?

[Gregory Rufus:]

No. We're in good shape with that. And especially, don't forget, Rob, with the end users, because of aftermarket sales, your exposure is really only about one months worth of sale and we keep a prototype private limit on them and make sure we got the cash. So, at any given time you have a month worth of sales with your larger carriers. And with the margins we have, you know having a month of sales out there isn't too bad.

[Robert Spingarn:]

Great. And then is the mechanical..

[Gregory Rufus:]

We also, Rob, about half of our volume distribution remember…

[Robert Spingarn:]

Right

[Gregory Rufus:]

So that cuts down your risk by half.

[Robert Spingarn:]

Right. Plus if I understand it correctly, those carriers that have filed, for example, a frontier, there can then be some kind of an arrangement post filing or you do get paid on new business?

[Gregory Rufus:]

Absolutely.

[Raymond F. Laubenthal:]

Absolutely.

[Gregory Rufus:]

Yes, you get paid. Yes.

[Robert Spingarn:]

So, in other words, there is some kind of a new contract get structured and really all that it risk is what was on the books at the time of the filing?

[Raymond F. Laubenthal:]

That's right.

[Gregory Rufus:]

Correct.

[Raymond F. Laubenthal:]

That's right. That's all that catches you. So, if you start watching it closer and closer, historically we've able to keep that pretty low. Even after 9/11, we didn't get hit too hard with it.

[Robert Spingarn:]

Okay. That's helpful. Last thing, just you talked about your exposure on the oldest platforms, which is very helpful I think. Just to understand the dynamics of work here. Can you talk about your highest content platforms? You mentioned 787 and A380, but I am thinking more from an aftermarket perspective, maybe it's A320 or your 737 next Jan. Can you give us some sense of your percentage of sales? I think you've done this in the past in those areas.

[W. Nicholas Howley:]

I think as we've disclosed in the past, our biggest platforms are 737, the A320… what's number three? I can't remember what's the number three.

[Raymond F. Laubenthal:]

777

[W. Nicholas Howley:]

777. Again, it goes 737, A320, 777, I cant remember what's the fourth… I'm getting those or see if I can find the list up here. But it's pretty well distributed, Rob, on the high use platforms have made content on those. So, as you can see by the percent that I gave you, the 3% on those older platforms are content on the new ones are just higher. Otherwise, you couldn't only have 3% on the ones that I mentioned because they make up a much higher percent of the installed base than 3%.

[Robert Spingarn:]

Clearly, and I would suspect you're doing probably double-digit growth in aftermarket on those higher content platform.

[W. Nicholas Howley:]

Surely, significantly higher.

[Robert Spingarn:]

Excellent. Thank you, guys.

[Operator:]

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

[Fred Buonocore:]

Yes. Good morning, guys. Great quarter.

[W. Nicholas Howley:]

Good morning, Fred.

[Fred Buonocore:]

Nick, on the last call you had pointed out that, there was downside risk to your guidance in the event of continued general economic slowdown. I noticed you didn't make that statement at all with this guidance, should we take that as impulsive in your guidance or you're just feeling confident enough about the year based on what you're seeing now that kind of goes away?

[W. Nicholas Howley:]

We feel a lot pretty confident with the guidance numbers we've given you now. Now, that being said, what we won't have in the backlog in any six-month period is we won't have all the aftermarket booked and that's where the highest margin is.

[Fred Buonocore:]

Great.

[W. Nicholas Howley:]

A significant economic downturn could affect that. Now, we think we've captured the risk in our guidance, but that assumes a certain level of economic downturn doesn't get worse than a certain level.

[Fred Buonocore:]

Of course.

[W. Nicholas Howley:]

We feel pretty good about the guidance. But, again, with that kind [inaudible] I'll give you, the commercial aftermarket is the thing that we typically have the shortest turnaround cycle, so the least booked.

[Fred Buonocore:]

Got it. And kind of relative to commercial aftermarket and what Carter was asking about before… I mean, are there other components that you have at risk of being extended or having the life extended by the FAA that maybe lurking out there or--?

[W. Nicholas Howley:]

Not that we know of or not that we know. I remind you this cockpit security is a relatively new program of which we put tons of them out in the field in the '03, '04 timeframe and people are just starting to accumulate enough maintenance history and to make a judgment on them.

[Fred Buonocore:]

Got it. And then on the defense side, pretty impressive growth there and impressive expectations. Are there particular programs that you could talk about that are driving that that drove that this quarter and for next year?

[W. Nicholas Howley:]

No I really…you know I have to say we looked at that in considerable detail here. It's almost a crossover our products and across most to the platforms. It's just a significant step up in buying activity. And as I said, we somewhat get nervous as to will that continue, but it looks to us like we have enough booked up in the backlog that we should have a better year than we thought.

[Fred Buonocore:]

Excellent. And then, finally, just on the 787 and the associated R&D expense, as we look to the next quarter, I know you mentioned that it should kind of fall off a bit in Q4, just directionally in Q3 is there any reason that that R&D expense would increase in Q3? Or is it kind of running flat line and then just falls off as we get into Q4 and beyond?

[W. Nicholas Howley:]

Ray?

[Raymond F. Laubenthal:]

I think your last statement captured it. It's kind of flat line and then fall off in Q4.

[Fred Buonocore:]

Great. Okay.

[W. Nicholas Howley:]

And that all assumes Boeing doesn't stretch again.

[Fred Buonocore:]

Right. Well --?

[W. Nicholas Howley:]

If they stretch again all the development activity likely stretches too.

[Fred Buonocore:]

Yes. I don't know what the under over is on that but--?

[W. Nicholas Howley:]

Yes. I don't know either.

[Fred Buonocore:]

Yes. I am not stepping you there. Anyhow, thanks a lot guys, and again, great quarter.

[W. Nicholas Howley:]

Okay.

[Operator:]

Your next question comes from the line Brian Gesai of Helm Partners. Please proceed.

[Brian Gesai:]

Hi, guys. Nice job this quarter.

[W. Nicholas Howley:]

Thanks.

[Raymond F. Laubenthal:]

Thanks.

[Brian Gesai:]

A pro forma for the CEF acquisition, it looks like you'll have about $200 million of cash at the end of the year about $4 a share. Your leverage ratios are obviously coming down. You had previously said you feel like four times a greater is the right leverage ratio for this business. In the absence of more acquisitions, do you expect to return any of that to the shareholders? And if so, in what timeframe?

[W. Nicholas Howley:]

As I've said before and I'm shocked that you have come up with this question. One of the issues out now is credit market isn't very good. So its not… you can't get a lot of comfort on how much you can borrow. I'd also say… I don't know that I said that our target leverage ratio was four. I said it's sure not below four. I mean we're comfortable… we're not uncomfortable with levels up above four. Yes, I would say with our cash and as I said before, the management is a significant owners, Warburg is still a significant owner. We'll try and do what we think is the right thing to maximize the equity value. Our first choice is to find accretive acquisitions and the extent that we can find them will do nothing. We mean other than buy them and improve them. To the extent that we can't, we're going to have to do something. Now, I would say, I'd feel better if the credit market was better, which it isn't right now, but we won't just pile up cash just to pile up cash upfront. I mean if it continues a long enough, we'll do something in the capital structure.

[Brian Gesai:]

Got you. Thanks. Again, just one quick follow-up. I'm not sure if I heard you correctly but do you say that there were two one-time items impact in the commercial aftermarket this quarter or was it just the cockpit securities?

[W. Nicholas Howley:]

It was two in the first half.

[Raymond F. Laubenthal:]

I talked about last quarter and it was cockpit security, primarily this quarter.

[Brian Gesai:]

Thank you.

[Operator:]

[Operator Instructions]. It appears there are no further questions at this time. I will now turn the presentation back over to Mr. Sean Maroney for closing remarks.

[Sean Maroney:]

Yes. Thank you for joining us on today's conference call. We will be filing our 10-Q in the next few days, and I'll be available for phone calls this afternoon. Thank you very much.

[Operator:]

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