TransDigm Group Incorporated
Q3 2011 Earnings Call Transcript

Published: 9 Aug 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 TransDigm Group Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, to Ms. Liza Sabol, Investor Relations. Please proceed, ma'am.

[Liza Sabol:]

Thank you. I would like to thank all of you that have called in today and welcome you to TransDigm's Fiscal 2011 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 Financial Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. A presentation is available at our website, www.transdigm.com, together with our press release, provides the basis for most of our remarks. A replay of today's broadcast will be available for the next 2 weeks. Replay information is contained in this morning's press release and on our website. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, including statements about our guidance are forward-looking statements. For further information about important factors that could cause actual results to differ materially, from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the Securities and Exchange Commission. These filings are available through the Investors section of our website or through the Securities and Exchange Commission's website at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically, EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release and at the end of the slide presentation for reconciliation of these measures to their most directly comparable GAAP measures. With that, let me now turn the call over to Nick.

[W. Howley:]

Good morning, and thanks for calling in to hear about our company. As usual, I'd like to start with some comments about our consistent strategy, as well as our current sense of the status of the aerospace market as it applies to our company, and I'll also give a short description of our recently announced acquisition of Schneller -- or contract signing for Schneller. To reiterate, we believe our business model is unique in the industry, both in its consistently and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons we believe this, about 90% or more of our sales were generated by proprietary aerospace products, and most of our net sales come from products for which we are the sole source provider. About 55% of our revenues, and a much higher percent of our EBITDA, come from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and have produced relative stability through the cycles. Because of our uniquely high EBITDA margins, typically in the high 40s to 50% of revenue, and relatively low capital expenditures, 2% or less of revenue, TransDigm has year in, year out generated very strong free cash flow. We pay close attention to our capital structure, and we view it as another means to create shareholder value. As you know, we have been in the past and continue to be willing to lever up when we either see good opportunities or view our leverage as suboptimum for equity value creation. We typically begin to de-lever pretty quickly. We have a well-proven value-based operating strategy focused around what we refer to as our 3 value drivers. Those are new business development, continual cost improvement and value-based pricing. We stick to these concepts as the core of our operating management methods. This consistent approach has worked for us through up and down markets, and has allowed us to continually increase the intrinsic value of our business while steadily investing in new business and platforms. We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace businesses with significant aftermarket content. We have acquired 36 such businesses, including 21 since our IPO in 2006. We have been able to acquire and improve proprietary aerospace businesses through all phases of the cycle. Through our consistent focus on our operating value drivers, clear acquisition strategy and a close attention to our capital structure, we've been able to create intrinsic value for our investors for many years through up and down markets. As you may have seen, we recently announced the execution of a contract to buy Schneller LLC, for $288 million. The close is subject to typical closing conditions and regulatory approvals, but if all goes smoothly, this should close before our fiscal year end of September 30. We will utilize cash on our balance sheet to close this transaction. Schneller is headquartered in Kent, Ohio and is one of the very few companies in the world that design and supply highly engineered laminates, primarily for commercial transport airplanes. The proprietary nature of the product, the significant aftermarket content and the well-established platform positions fit well with our strategy. Schneller's products are on almost all of the Boeing and Airbus planes in service, as well as a high percentage of the regional jet fleet. Business is about 2/3 Commercial Aftermarket with the balance from Commercial OEM. For calendar year 2011, revenues are currently running in the mid-$80 million per year range, with EBITDA margins in the mid-30% range. We see upside in both the margins and the revenue. I can't say much more about this business at this time until we own it and also, because we have a confidentiality agreement until such time as we own it. The first 3 quarters of our fiscal year were active in the M&A area. In Q1, we closed on both the acquisition of McKechnie for approximately $1.25 billion, and the Teleflex Actuator business known as Talley Actuation for about $93 million. In the second quarter, we completed the divestiture of the McKechnie Fastener businesses to Alcoa for about $240 million on a pretax basis. In Q3, we completed the sale of the small McKechnie Distribution business to Satair for $30 million, again, on a pretax basis. This completed our divestiture activities related to the McKechnie acquisition. The remaining businesses fit well with our business strategy. As I already mentioned in Q4, we also announced the definitive agreement to purchase Schneller for $288 million. As of July 2, after closing on both divested businesses, we have about $550 million of cash and about $240 million in undrawn revolver. Additionally, since we made a large tax and interest payment in Q3, we expect to generate about $100 million in operating cash in Q4. We also have more capacity under our credit agreement. Our net debt to EBITDA is now a little under 4.5x. And as in the past, absent acquisitions or other capital market activity, we will continue to de-lever. As we mentioned last quarter, we repriced our $1.6 billion of bank debt, and we're able to make a meaningful reduction around 1% on the interest rate through a mix of lower LIBOR floor and reduced spread. We're also able to eliminate the 2 maintenance covenants

[Raymond Laubenthal:]

Thanks, Nick. Overall, we had a busy third quarter, with good operational results. In addition to the continued commercial market recovery, we are quite busy with the acquisition transitions and plant consolidations. At our operating units, we also continue to diligently work our value drivers, and we continue to create shareholder value. Let me explain our third quarter acquisition integration and operational activities in a little more detail, as summarized on Slide 7. Acquisition transition works continues to progress favorably. Recall, last quarter I reported we had 4 plant consolidations occurring in various stages. We just completed 2 of these consolidations. In June, we consolidated our production facility located in Mesa, Arizona and the Dukes facility located in Northridge, California. In July, we physically moved the Talley acquisition business that was -- Actuation business, excuse me, that was located in Simi Valley, California to our Aero Fluid's group in Painesville, Ohio. Both of these consolidations will generate real productivity savings under their lower cost structure, once they work through their learning curve period. The remaining 2 consolidations are also progressing well. These consolidations stem from our McKechnie acquisition. The consolidation of our Avtech unit with the Tyee business is on track to finish this fall. To date, the front office operations have been physically moved. The factory safety stock is being built, and the factory building modifications are well underway. Likewise, the consolidation of the Electromech/Welco Kentucky operations with the Matamoros, Mexico Rotronics facility is also progressing well. At present, the Mexico factory modifications are progressing nicely, and we also expect to complete the consolidation this fall. All of these moves will start to show significant productivity results as we move into our fiscal 2012. Now let me turn the discussion to our base operating units and their recent value-generation activities. Overall, base TransDigm operating units are performing well. They have diligently controlled their cost structures and have added resources sparingly as this market recovers. We have come out of this recent downturn with an improved cost structure. Our new business development continues to be quite active. We continue to invest in a broad range of engineered solutions for our customers. To give this a little color, I'd like to showcase our success winning new business awards on the A350 platform. Some of them are shown on Slide 8. Some of the engineering product applications we have secured so far include the cockpit security door module, which is composed of the intrusion-resistant ballistic door and frame structure, along with the electronically-actuated door-bolting mechanism, and the electronic decompression release control. Also we have numerous exterior latch applications. These latches secure the APU access panels, various pressure release and decompression panels, airframe fuselage maintenance panels, and wing and fairing access panels. Inside the passenger cabin, we've been awarded all of the latches for the overhead luggage storage bin. Now on the A350 engine, which is the Rolls-Royce Trans [ph] XWB. We have the ignition system, fuel valves, and fuel connectors, and certain hold-open rods in the engine bay in the cell area. We also have over 160 aluminum and titanium rods used to support and stiffen the large belly fairing on the underside of the airframe. Additionally, we have articulating rods employed on the landing gear doors, passenger doors, wing fueling panels, and various other exterior access doors and panels. Airbus and its system suppliers are still quite active finalizing the A350 design. They are working jointly with them on new designs and proposals, and we expect we'll capture additional content on these once the sourcing decisions are finalized. In total, we believe we have secured expanded profitable OEM business on the A350 and more importantly, secured future aftermarket revenue streams on Airbus' next new platform. We now expect that our content on the A3 platform will, in aggregate, be well ahead of the content on the platforms it replaces in the marketplace. Now let me hand it over to Greg Rufus, our CFO, who will review our third quarter and year-to-date financial results in more detail.

[Gregory Rufus:]

Thanks, Ray. As Nick mentioned, we have been quite active this year with acquisitions, divestitures and financing as evident in our year-to-date reconciliation of EBITDA as defined, which we have discussed on prior calls and as we've presented in Table 2 of this morning's press release. This quarter, we've completed a few more transactions I'd like to point out. As previously mentioned, and as part of the McKechnie acquisition settling out, we've divested the Fastener and Distribution businesses for a combined total of $270 million, which had a positive impact after taxes of approximately $190 million. We also have recorded a year-to-date net gain shown in our income statement as discontinued ops of $16.8 million. In the quarter, we recorded a small loss on discontinued ops of $2.1 million mostly relating to the distribution divestiture. In addition, on June 27, we entered into a 4-year interest rate swap agreement to hedge approximately $350 million of our term loan. This represents a little over 20% of our variable debt. Our current rate structure on our term loan will continue as is for the next 6 quarters. This rate is defined as LIBOR plus 3% with a 1% LIBOR floor, for a total rate of 4% today. Beginning December 31, 2012, we will then lock into a fixed rate of 5.17% for the remaining 10 quarters on this portion of our variable term loan. At that point, assuming no other changes in our debt structure, our debt will be split approximately 60% fixed and 40% variable. Now please turn to Slide 9 for our quarterly financial results. Third quarter net sales were $325 million, up $111 million or 52% from the prior year. This increase includes $83 million related to the acquisitions of Semco in fiscal 2010, and McKechnie and Talley Actuation, which were acquired during the first quarter of fiscal 2011. Organic sales also increased by $28 million over the prior year. The organic growth rate of 13.2% was led by an increase of $21 million in commercial aftermarket sales and an increase of $6 million in commercial OEM sales. As Nick discussed, the commercial aftermarket continued its strong growth. Defense sales were down slightly for the quarter. Reported gross profit was $183 million, up $61 million or 50% from the prior year. Reported gross profit margins decreased approximately 1 margin point versus the prior year. The dilutive impact from acquisition mix was approximately 4 margin points for the quarter, of which, approximately 2 points were due to acquisition-related start-up cost and purchase accounting adjustments to inventory. Higher volumes, favorable product mix and the strength of our proprietary products in our base business improved margin points approximately 3 points, which helped offset the dilutive impact of the acquisitions just mentioned. Selling and administrative expenses were 9.7% of sales for the quarter, compared to 10.9% versus the prior year. The absolute dollars increased $8 million. The dollar increase is primarily due to the recent acquisitions. We also had the benefit of a $3 million accrual adjustment in the quarter. Amortization of intangibles was about $9 million higher versus the prior year. This line item reflects all the recent acquisition activity. Net interest expense was $50 million, an increase of $22 million versus the prior year quarter. This increase was primarily due to the McKechnie acquisition made in quarter 1, which was financed entirely by debt. As of the end of the quarter, the weighted average interest rate on total borrowings outstanding was approximately 6%. The effective tax rate was approximately 35% in both the current quarter and last year. We now expect the full year tax rate to be approximately 35%, which is a reduction from our previous expectation of 36%. We estimate our cash taxes to be about $100 million for the year. Net income from continuing operations for the quarter increased $14 million or 33% to $58 million, which is 18% of sales. The increase is primarily due to both organic and acquisition revenue growth which is somewhat offset by higher interest expense and acquisition-related cost. Before discussing earnings per share, let me remind you TransDigm uses the 2-class method of calculating earnings per share versus the more commonly used treasury method. This has a slightly more dilutive impact of about 3% versus the treasury method. GAAP earnings per share from continuing operations was $1.10 per share in the current quarter versus $0.83 a share in the prior year. This is an increase of 32%. A $2 million loss from discontinued ops reduced earnings per share by $0.04 to arrive at a GAAP EPS of $1.06. Adjusted EPS was $1.21, an increase of almost 38%. This is compared to $0.88 last year. The adjustments to GAAP EPS from continuing ops totaled $0.11, comprised of acquisition-related costs of $0.08 per share and non-cash compensation cost of $0.03. Cash flow from operations was $143.7 million through the third quarter of fiscal '11, and we ended the quarter with $549 million of cash on the balance sheet. This cash balance includes the after-tax proceeds of $190 million from the 2 divestitures. As Nick previously stated, we expect to generate $100 million of cash in the fourth quarter. At the end of our fiscal year, which is next quarter, we estimate our net debt leverage ratio to be approximately 4.1x our pro forma EBITDA as defined. This excludes the potential impact from the Schneller acquisition. On the same basis, assuming we close Schneller before 9/30, we expect our net debt leverage would be approximately 4.4x, which is where this ratio is at the end of this quarter. Now let me hand it over back to Liza to kick off the Q&A.

[Liza Sabol:]

Thank you, Greg. [Operator Instructions] Operator, we are now ready to open the line.

[Operator:]

[Operator Instructions] Your first question is from the line of Myles Walton with Deutsche Bank.

[Myles Walton:]

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

[W. Howley:]

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

[Myles Walton:]

And then on the cash balance, obviously great cash generation, it looks like you got another $100 million in operating cash flow on the fourth quarter. So [ph] even correcting for the transaction, the Schneller transaction, you'd still have $350 million, $370 million, something like that, of cash on balance at the end of the year. Is the pipeline still pretty rich? Is the desire still pretty high to close on more or will there be other deployments for capital as well?

[W. Howley:]

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

[Operator:]

Our next question is from the line of Ron Epstein with Bank of America Merrill Lynch.

[Ronald Epstein:]

Can you speak to it all, the supply chain itself? I mean, your suppliers in terms of -- are you starting to see any lead time stretch out in terms of raw materials? And then maybe the Tier 3 guys and Tier 2s who supply to you. Are there any bits and pieces that are starting to get a little more shorter in supply, given the impending ramp?

[W. Howley:]

Want to answer that, Ray?

[Raymond Laubenthal:]

Yes. No, we're not seeing any jam up in the supply chain. Generally, the lead times are long enough, and this ramp up has been occurring over a good number of months. It's spread out. We're not experiencing anything that you might be asking there.

[Ronald Epstein:]

And then maybe one just follow-up in terms of the world of M&A right now. Just realizing you made the announcement Friday. When we look out on the landscape of what's potentially available out there, I mean, how does the M&A market look right now?

[W. Howley:]

I would say it is reasonably active. I mean, we're seeing a reasonable amount of things.

[Operator:]

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

[Robert Spingarn:]

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

[W. Howley:]

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

[Robert Spingarn:]

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

[W. Howley:]

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

[Robert Spingarn:]

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

[W. Howley:]

The dynamics haven't changed.

[Robert Spingarn:]

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

[W. Howley:]

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

[Operator:]

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

[Kenneth Herbert:]

Just wanted the first -- on the commercial OE side, you looked like you sort of nudged up guidance a little bit there, but you also indicated you're not, specifically on the 87, you're not seeing anything yet. Safe to say that the guidance raise is driven more by sort of legacy 777, 37, other programs and when are you expecting to start to see any material impact from the 87?

[W. Howley:]

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

[Kenneth Herbert:]

And then in terms of the guidance raised. Is there any particular platforms you'd point to? Or I'm assuming it's more on the transport side than, of course, on the regional biz jets side.

[Gregory Rufus:]

Yes. The transport, some at the OEM, but probably more in the aftermarket. There's no specific platform, it's across the board.

[W. Howley:]

To some degree, this is the flip side of the military. The rising tide picks all the ships out.

[Operator:]

Gentlemen, your next question is from the line of Joe Nadol with JPMorgan.

[Joseph Nadol:]

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

[W. Howley:]

Well, two things. One, 49.7% is pretty damn high in my book. If you recall, I said we had a favorable accrual adjustment of about $3 million, which is about a full margin point. If I didn't have an accrual adjustment I'd be up a full margin point, Joe.

[Joseph Nadol:]

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

[W. Howley:]

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

[Joseph Nadol:]

So you consider these products to be as protectable and as proprietary, and the pricing power to be as strong as your existing businesses?

[W. Howley:]

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

[Operator:]

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

[Fred Buonocore:]

So I realize you're kind of moving into the process where you do all your business reviews. And as you're going through that process, I'm just wondering, if in the course of starting your quarterly business reviews and the information that -- or your year-end business reviews and the information that you're gathering in that process, if you -- all things being equal, assuming no major change in the environment, if you'd be able to give us some sort of outlook for 2012. If you had to give it a go this year.

[Gregory Rufus:]

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

[Fred Buonocore:]

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

[W. Howley:]

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

[Operator:]

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

[Eric Hugel:]

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

[W. Howley:]

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

[Eric Hugel:]

Just in terms of cash flow. The numbers that you have in the cash flow page, I think on Page 10, that's year-to-date, correct?

[Gregory Rufus:]

Let me take a -- yes, it is.

[Eric Hugel:]

So how much was the onetime sort of payment this quarter? I think you said there was a large interest payment. Tax payment or something?

[Gregory Rufus:]

No, I don't have the exact number with all the pieces. I don't have the exact number in front of me. We paid about $78 million in interest and about $45 million in taxes in the third quarter.

[Eric Hugel:]

And just lastly, the $100 million that you're talking about for the fourth quarter. Is that a free cash or is that cash flow from ops number? The $100 million cash that you said you were going to generate in the fourth quarter. Is that a free cash flow number or a cash flow from operations number?

[Gregory Rufus:]

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

[Operator:]

Your next question is from the line of J.B. Groh with DA Davidson.

[J. B. Groh:]

I just had a couple of quick ones on the sort of this ramp up in OEM. Can you kind of talk about what sort of margin drag that could represent if you get OEM growing at a faster rate organically than aftermarket, given your leverage aftermarket?

[W. Howley:]

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

[J. B. Groh:]

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

[W. Howley:]

No.

[Operator:]

[Operator Instructions] And your next question is from the line of Michael Ciarmoli with KeyBanc Capital Markets.

[Michael Ciarmoli:]

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

[W. Howley:]

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

[Michael Ciarmoli:]

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

[W. Howley:]

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

[Operator:]

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

[Jason Rogers:]

I wonder if you could talk about the whole process for getting new products approved through the FAA and if there's been any changes there as far as getting those approved. Just wanted to know about the whole process of getting the products approved through the FAA, if there's been any changes there?

[W. Howley:]

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

[Operator:]

There are no other questions at this time, so I'd like to turn the call back over to, Ms. Liza Sabol, for closing remarks.

[Liza Sabol:]

Thank you. I'd like to thank everyone for participating on this morning's call. We expect to file our 10-Q for the third quarter of our fiscal year 2011 no later than tomorrow. Thank you.

[Operator:]

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