TransDigm Group Incorporated
Q3 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to today's Q3 2013 TransDigm Group Incorporated Earnings Conference Call, hosted by Liza Sabol, Investor Relations. My name is Chris, and I'll be your conference coordinator today. [Operator Instructions] At this time, I would like to turn the call over to Liza Sabol to begin. Please go ahead.

[Liza Sabol:]

Thank you, Chris. I would like to thank all of you that have called in today and welcome you to TransDigm's Fiscal 2013 Third Quarter Earnings Conference Call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. 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 at www.transdigm.com. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the Securities and Exchange Commission. These filings are available through the Investors section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the table and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA and EBITDA as defined, adjusted net income and adjusted earnings per share for those measures. With that, please let me now turn the call over to Nick.

[W. Nicholas Howley:]

Good morning and thanks again to everyone for calling in to hear about our company. Today, as usual, I'll start off with some comments about our consistent strategy, then a short discussion of our capital market activities, some information on our recent acquisitions, and then I'll move on to an overview of third quarter fiscal year '13, and an update on our outlook. To reiterate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the cycle. To quickly summarize why we believe this, about 90% of our net sales are generated by proprietary aerospace products, and around 3/4 of our net sales come from products for which we believe we are the sole source provider. Excluding the small non-aviation segment, about 57% of our revenues and a much higher percent of our EBITDA as defined comes from aftermarket sales. Aftermarket sales have historically produced a higher gross margin and provided relative stability in the downturns. Because of our uniquely high underlying EBITDA margins and relatively low capital expenditure requirements, TransDigm has year in and year out generated very strong free cash flow. We have a well-proven, value-based operating strategy, focused around what we refer to as our 3 value drivers, that is new business development, continual cost improvement and value-based pricing. This consistent approach has allowed us to continuously increase the intrinsic value of our business while steadily investing in new businesses and platform positions. We pay close attention to our capital structure and capital allocation and view it as another means to create value. This has been a very active area this year. I'll talk more about this later. We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace businesses with significant aftermarket content. We have acquired many such businesses and improved them through all phases of the market cycle. Through our consistent focus on our operating value drivers, a clear acquisition strategy and 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. We focus on these fundamental elements of value creation as the things over which we have some control. Let me expand a little bit on the capital structure and capital allocation. In keeping with our strategy, due to a combination of suboptimum capital structure, a hot credit market and significant liquidity, we declared and paid a $12.85 per share special dividend in Q1, and still maintain significant liquidity and borrowing capacity post dividend. In Q2, we refinanced about $2.2 billion of senior secured debt, the goal and the result was to reduce interest expense and to increase our flexibility under the existing agreement -- credit agreement. In Q3, we began the offering process, and in early July, borrowed another $1.4 billion and announced our intention to pay most of this out to our shareholders in the form of a $22 a share dividend. We also further improved the terms of our credit agreement. In deciding to pay out another special dividend this year, we looked very closely at our choices for capital allocation. We basically have 4

[Gregory Rufus:]

Good morning. Thanks, Nick and good morning again. Before we review the financials, we want to remind you again that this was a very active quarter on a number of fronts. Nick mentioned some of these items already, so I want to take a few minutes to review some of the unique items for the quarter and next quarter. We adopted segment reporting, we had an acceleration of option vesting, we raised $1.4 billion of debt to pay a $22 special dividend and we closed on 3 acquisitions, all in June. We will file Form 10-Q tomorrow. This will be the first quarter where we'll report segment information. Usually, there is a material-precipitating event which causes changes in segment reporting. We did not have such an event, but we have grown into a large company and it was time to make a change in our reporting structure. On a perspective basis, starting with this quarter, we will report a power and control segment, an airframe segment and a small non-aviation segment. The power and control segment includes operations that primarily develop, produce and market systems and components that predominantly provide power to or control power of the aircraft, utilizing electronic, fluid power and mechanical motion control technology. The primary customers of this segment are engine and power system and subsystem suppliers, along with the airline's third-party maintenance suppliers, military buying agencies and repair peoples, products are sold in the original equipment and aftermarket market channels. Year-to-date sales for this segment are $616 million, which represents 45% of our total sales. The EBITDA as defined is $328 million or 53% of sales and represents 49% of our total segment EBITDA as defined. The airframe segment includes operations that primarily develop, produce and market systems and components that are used in non-power airframe applications utilizing airframe and cabin structure technology. The primary customers for this segment are airframe manufacturers and cabin system suppliers and subsystem suppliers, along with the airline's third-party maintenance suppliers, military buying agencies and repair depots. These products are also sold in original equipment and aftermarket channels. Year-to-date sales for this segment are $695 million, which represents 50% of our total sales. The EBITDA as defined is $326 million or 47% of sales and represents 49% of our total EBITDA -- segment EBITDA as defined. The non-aviation segment includes operations that primarily develop, produce and market products for non-aviation markets. Primary customers in this segment are off-road vehicle suppliers and subsystem suppliers, child restraint system suppliers, satellite and space system suppliers and fueling system components, primarily for the mining industry. Year-to-date sales of this segment are $73 million, which represents 5% of our total sales. The EBITDA as defined is $16 million or 22% of sales, and this segment represents 2% of our total segment EBITDA as defined. I'd like to now take some time and talk about the acceleration of vesting of performance-based incentive stock options that were granted prior to October 1, 2011. This is somewhat complicated and has 3 distinct impacts in our reported financial results. To remind you, we have a somewhat unique incentive stock option program for a public company. All of our granted options are 100% performance-based, which aligns our management very closely to you, our shareholders. Historically, our option is to invest in 2 ways. One is the achievement of an internal rate of return on IRR target established at the award date and the other is when the market price of the stock exceeds a predetermined market price for 60 trading days. For options that just accelerated, that market price was around 2x the market price on the date when the market sweep was put into place. In other words, the stock price had to at least double during the period between when the sweep was put in place and the acceleration occurs. The details of the program are disclosed in our proxy statement. On June 26, the total of $2.4 million stock options vested on an accelerated basis due to this market sweep provision. $1 million of these stock options were scheduled to vest in just 4 months from now as of the end of this fiscal year, and the remainder were scheduled to vest in FY '14 and FY '15. Because of the market sweep trigger, we had to accelerate the noncash compensation expense of $24.5 million into this quarter. This expense will now step down in quarter 4 and the next 2 years. Full fiscal 2013 expense will now be approximately $49 million for this line item. The second item associated with the accelerated vesting and related expense is the acceleration of dividend equivalent payments for the past dividends of $7.65 paid to shareholders in the first quarter of FY '10, and the $12.85 dividend paid to shareholders this past November 2012. For financial statement reporting, the dividend equivalent payment is classified as a participating security, which is the reason we report our EPS under the two-class method for basic and fully dilutive EPS versus the more commonly used treasury method for basic and diluted shares. The cash payment associated with the prior 2 dividends paid is $38 million. Again, a little more than 1/2 of this amount was scheduled to be paid this coming November. Although this payment does not get expensed for accounting purposes, the payment must be deducted from reported net income before the calculation of quarterly EPS. You can see this on table 4 in this morning's press release. The third item associated with this sweep is an increase in shares outstanding for computing EPS on a fully diluted basis. Under the two-class method, vested options are included in the weighted average of shares we use to calculate EPS. This is the major difference versus the treasury method computation for basic and fully diluted shares. Thus, our full fiscal 2013 weighted average share count will now be approximately 55.1 million and fourth quarter will be 56.9 million. I'm now going to switch to the third topic, which is our new debt and the $22 dividend announced in July. On July 1, we raised $1.4 billion of additional debt to pay a $22 special dividend on July 25. We were able to take advantage of what we believe to be relatively low interest rates. On the new $900 million term loan, we obtained a rate of LIBOR plus 300, with a 75 basis points floor maturing in 2020. We also issued $500 million senior subordinated notes with a fixed interest rate of 7.5% with a maturity in 2021. Immediately after the financing, our fixed-to-variable debt ratio was split approximately 50% fixed and 50% variable. So we recently entered into a forward starting interest rate hedge for $1 billion and a fixed rate of about 5.4%. The fixed rate starts October 1, 2014, and ends in fiscal 2019. This hedge will increase our fixed-rate debt from around 50% to approximately 70%. One additional note regarding the $22 dividend. We estimate the tax treatment of this most recent dividend will be at least 90% or more our return of capital. That is your taxes will be deferred and then the remaining difference will be dividend income. We plan to post a preliminary Form 8937 on our website in early September, and the final determination will be available after we file our tax return for fiscal 2013, which is around June 15, 2014. And finally, the last item occurred in June was the successful closing of 3 acquisitions for a total purchase price of about $475 million. We paid cash for all 3 acquisitions. And with that, let me now review the consolidated quarterly financial results, which is also shown on Slide 7. Q3 net sales were $489 million, up $27 million or 6% from the prior year. Our organic growth was up 4.5% over the prior year, primarily due to the commercial OEM and defense markets, which Nick has already discussed in detail. Reported gross profit was $269 million, up $16 million or 6% versus the prior year and is in line with our sales growth. Gross profit margin was 55% of sales, which was flat when compared to the prior year. The current quarter margin would be closer to 57% after adjusting for the dilutive impact of acquisition mix, unfavorable OEM to aftermarket mix and higher stock compensation expense. This 57% compares to a margin of approximately 56% in the prior year when excluding the impact of the acquisition-related costs. Selling and administrative expenses were 16.9% of sales for the current quarter, compared to 12.2% in the prior year. A majority of the increase in SG&A was related to the noncash stock compensation expense I previously discussed. Stock compensation expense as a percent of sales increased to 5.5% this quarter, from 1.1% in the prior quarter. Transaction-related expenses from our recent acquisitions also increased our current SG&A percentage by about 1 percentage point. If you normalize SG&A by excluding these 2 items, the rate as a percent of sales would have been about 11%, which is similar to the prior year. Full year fiscal 2013 SG&A rate will now be closer to 13% with all the above expenses. Interest expense was $62 million, an increase of approximately $7 million versus the prior year quarter. This is a result of an increase in the weighted average total debt to $4.3 billion in the current quarter versus $3.6 billion in the prior year. The higher average debt was due to the additional term loan and subordinated notes added to fund the dividend paid in November, which totaled approximately $700 million. Our weighted average cash interest rate decreased to 5.5% compared to 5.7% versus the prior year. Please note that since we closed on the dividend financing in July, the third quarter did not include any impact for the newly incurred $1.4 billion of debt. We now expect our full fiscal year 2013 net interest expense to be approximately $272 million. Our effective tax rate was 32.9% in the current quarter compared to 30.7% in the prior year. The prior quarter rate was favorably impacted by discrete items related to an IRS settlement and adjustments resulting from the filing of the previous year's federal tax return. We now expect our effective tax rate for the full year to be closer to 33%. Net income for the quarter decreased $14 million or 15% to $77 million. This compares to net income of $90 million in the prior year. The decrease in net income primarily reflects higher stock compensation and interest expense, partially offset by higher sales volume and lower acquisition-related expenses. GAAP EPS was $0.71 per share in the current quarter compared to $1.68 per share in the prior year. In addition to increased stock compensation and interest expense previously mentioned, the current quarter was also significantly impacted by dividend equivalent payments paid on the accelerated options vesting to amounts of -- to $0.70 per share. Please reference page 12 of the slide deck. Adjusted earnings per share was $1.89 per share, an increase of 1% compared to $1.88 per share last year. The increase in adjusted EPS was lower than the increase in sales, primarily due to the higher interest expense in the current quarter and the lower effective tax rate in the prior quarter -- prior year quarter. As presented on page 9, the quarterly -- the quarter adjustment to bridge GAAP to adjusted EPS were the following

[Liza Sabol:]

Thank you, Greg. Operator, we are now ready to open the lines for questions.

[Operator:]

[Operator Instructions] Our first question today comes from the line of Joe Nadol from JPMorgan.

[Seth M. Seifman:]

Actually, it's Seth on for Joe this morning. If I can maybe ask about the aftermarket, in terms of what's changing, you highlighted that there were areas of strength and weakness, but maybe you can talk a little bit about the 2, what we'll see tomorrow when the Q comes out, how the aftermarket fared in each of the 2 aerospace segments? How it fared maybe geographically relative to what you told us last quarter about areas of strength and weakness? Any additional color would be helpful.

[W. Nicholas Howley:]

We won't see how it fared geographically. We don't -- that's not part of what we disclosed. I don't think the trends changed significantly from last quarter. Where the softness is there's softness in Europe and you're not seeing as much growth as we would've anticipated in China. Now that being said, obviously, it looks like they all may be getting a little better. With respect to the 2 segments, I don't think you'll see anything significantly different in them, and if it is, it's just a quirk in the timing. The airframe segment, just by the nature of the products, has a little less aftermarket. So its margins will always be a little lower. It just has some of the products in there going in an airplane and staying on longer, so you don't have quite as much aftermarket in that segment.

[Seth M. Seifman:]

Okay. And if I can follow-up with just one more, you talked about maybe having a little bit more confidence incrementally regarding the outlook for defense. What's giving you that confidence? What's changed relative to the past?

[W. Nicholas Howley:]

Well, maybe a little more confidence. I think you might be overstated there. I think, I said I feel a little less negative about kind of the degree of the downturn. I mean, very simply, everything I read from other aerospace companies, and I look at our underlying numbers and they're hanging in better than I expected. And that happens 3 or 4 quarters and it starts to influence a little bit your view of it.

[Operator:]

Our next question is from the line of Michael Ciarmoli from KeyBanc.

[Michael F. Ciarmoli:]

Nick, maybe on the -- can you comment a little bit about the pricing environment in the aftermarket around the OE side? Boeing's Partnering for Success, a lot of the larger Tier 1 suppliers looking to get cost out of the business. Is that having any sort of impact on your ability to kind of get price and execute on the value-creation process?

[W. Nicholas Howley:]

Well, I would say there's no -- I can't say there's any substantive change in the pricing environment. Surely, that's true in the aftermarket. Many of the large OEMs are around seeking to get their cost down. I don't -- I'm not going to comment on any customer relationship specifically, but I would be surprised if it materially impacts the company at the end of the day, whatever sorts out on those issues.

[Michael F. Ciarmoli:]

Okay. And then, just one other follow-up on the aftermarket, you've got this sort of the mix here with OE and aftermarket as a little bit of a reason for the margin pressure. What kind of improvement do you need to see in aftermarket to maybe help offset that OE strength? I mean, is it just getting back to a more normalized sort of...

[W. Nicholas Howley:]

I would say, as you can see, you can almost look at the differences in growth this year between the 2, the OEM grew faster than the aftermarket, or we have the aftermarket almost flat, the OEM up whatever we said, I'm saying this from memory now, about 10%. That generated about a 1-point margin movement. You can sort of work backwards on that.

[Operator:]

Our next question is from the line of John Godyn from Morgan Stanley.

[John D. Godyn:]

I just wanted to follow-up on the M&A pipeline. Nick, I think you said that you had the ability to do $1 billion in deals. When we look out 12 to 18 months, of course, we don't know what deals are going to pop, like you mentioned, it's difficult to predict but should we be surprised to see $1 billion of deals? If you could just help add some clarity on the pipeline.

[W. Nicholas Howley:]

Yes. That is purely -- all that is just a math calculation to say how much we could do. That's not speaking at all to what may or may not be available. We wanted to be sure, and want to be sure our shareholders knew, that after we paid this dividend out, that it didn't materially impact our ability to buy. That was the point of that.

[John D. Godyn:]

Got it. And could you add some color on this sort of pace or nature or activity levels around M&A conversations going on in the background? Of course, it's difficult for us to quantify but any kind of qualitative commentary would be helpful.

[W. Nicholas Howley:]

Yes. I can't say it has significantly -- if I say the chatter, well, I can't say it's particularly higher or lower than it was over the last 3 or 4 months. Obviously, there's 3 less companies on the list than there were a month ago because we bought them. But other things fill in.

[Operator:]

Our next question is from the line of Gautam Khanna from Cowen & Company.

[Gautam Khanna:]

Gautam Khanna here. Nick, can you comment on your comfort going above your 6x -- that number, you throw out sometimes as 6x as your comfort zone on leverage. Given the aftermarket seems to be strengthening, are you comfortable going to 7 or perhaps above that?

[W. Nicholas Howley:]

Well, I would say that -- we don't have a hard rule here. Our general range is in the 4x to 6x. We've said and continue to say that we're willing to be outside of that range for short periods of time as the circumstances dictate, I could envision a situation that you got -- that you were willing to go below it if there was either something pending or you have some particular concern. And we surely, as you see here, we went up -- where do we jump up here, 6 2 or 6 3?

[Gregory Rufus:]

Yes.

[W. Nicholas Howley:]

Something like that. But we expect we'll be down in relatively short order into the range we typically run. I don't -- I think we gave you the rough range. When we move outside of it, there's usually some transient reasons that makes sense to do for a short period of time.

[Gautam Khanna:]

Got it. But you're not structurally comfortably running well above 6?

[W. Nicholas Howley:]

Yes, depending on the facts and circumstances. We haven't changed our fundamental idea of where we target.

[Gautam Khanna:]

Okay. And just to switch subjects so I understand the share count better. Have both of the tranches, the 1 70 originally before dividend adjustments, and the 1 60 is clearly coming to the share count, but is the 1 70, the other stretch target, has that also...

[Gregory Rufus:]

No, that's still open.

[Gautam Khanna:]

How many shares, do you have the numbers for that?

[Gregory Rufus:]

Well, how many shares is the 1 70? About 5 million? No, 500,000 shares would be impacted by the 1 70.

[Gautam Khanna:]

Okay. So conceptually, we could have -- the 56.9 going forward could rise by 500,000?

[Gregory Rufus:]

That would take place -- it could take place in FY '14.

[Gautam Khanna:]

Okay. And just given -- obviously, you guys have done a great job and well-earned, no criticism there. My question is what are you guys going to do to kind of realign kind of longer-term interest with the shareholders? Are you guys going to issue a similar plan, 5-year option vests, what have you? What's going to be new in this year's proxy relative to what we've seen recently?

[W. Nicholas Howley:]

I don't know if I'm following your question.

[Gautam Khanna:]

Well, just...

[W. Nicholas Howley:]

Let me see where at least I'm coming from all that. I don't see anything disconnecting. I mean, we are still primarily compensated on our equity. The company will continue to do that. So I guess I'm seeking what is you're after here on this.

[Gautam Khanna:]

Well, I guess, I'm asking, if I recall, you had a 2-year extension to the existing plan, right? So 2015 on the option grants? Is there a new plan in the works that runs out for a longer period of time that we can expect to see?

[W. Nicholas Howley:]

Okay. I get it. Typically, what we do, and I'll speak now to the senior management and we typically do this also for the operating management, we renew -- we give a new award -- let me put aside, assuming someone isn't promoted into a new job, because then that's handled differently, but in the existing job, what we typically do and at least anticipate continuing to do is every 2 years, a person gets a new 2-year award that they vest in the fourth or fifth year out in front of them. So the idea is they always have 4 or 5 years of performance-based vested options in front of you. If you follow that, we used to, some number of years ago, let them -- up until about 3 or 4 years ago probably, we gave out 5 years at a time, then we let them run down to almost zero then reload everybody. We decided to smooth that a little more. I think you get to the same place, but we didn't want this cliff thing going on.

[Operator:]

Our next question is from the line of Amit Mehrotra from Deutsche Bank.

[Amit Mehrotra:]

It's Amit here for Myles. Nick, just another question on the commercial aftermarket inflection point comment on the press release, maybe you can provide the book-to-bill for commercial aftermarket in the quarter and also how defense order trends are maybe looking into the end of the fiscal year?

[W. Nicholas Howley:]

Yes. I would say the book-to-bill in the commercial aftermarket was a little better in the quarter. It's up about, what did I say, 4% for the year. And it's up a little less than that for the quarter. So I wouldn't -- I'd draw more conclusion from the full year book-to-bill. The book-to-bill for the year is running in defense ahead, I want to say -- did we publish that number, how much ahead?

[Gregory Rufus:]

It's running -- I don't remember the exact number. That's just a quarter of it.

[W. Nicholas Howley:]

If I can find it here before we get done, I'll tell you.

[Gregory Rufus:]

It's running about -- it looks like it's running -- that's against bookings?

[W. Nicholas Howley:]

It's running ahead, it looks like almost 10%. So actually, in this last quarter, it was below. So I wouldn't take any -- I wouldn't draw much from that just because it's running strongly ahead for the year.

[Amit Mehrotra:]

Okay. Just one question follow-up on the M&A. Just one question on the pricing environment. Obviously, general economic conditions are getting better, I'd just be curious if deals are getting tougher to do because of price expectations?

[W. Nicholas Howley:]

I can't say I've seen that, I can't say that it's changed materially.

[Amit Mehrotra:]

Okay. One last question, just a follow-up on Gautam's question on the share count. If the stock stays where it currently is, stock price stays where it currently is through September, is there any dilution that we should expect beyond what was reported in the third quarter? I was under the impression that may be another slug of accelerated vesting but...

[W. Nicholas Howley:]

Not in the fourth quarter. If that other suit takes place -- it will come probably more ratably in FY '14. We don't anticipate any in the first quarter either. This is Nick Howley. Let me back up a minute. I had the wrong number. The bookings to shipments for defense for the year is 7%, about, not 10%. It's always a danger just pulling the number quickly off the chart.

[Operator:]

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

[J. B. Groh:]

On aftermarket, is there any product line differentiation or is there -- are the pockets of strength associated with any, say engine or anything like that or is there any discernible patterns there give you some clarity?

[W. Nicholas Howley:]

I mean, I would say subject -- and this is subjective, I don't have a good number for you though. So Ray and I have been doing next year's business plan review, so we've been sort of getting a pretty good subjective feel here. I would say the discretionary type product lines or the guys running them are still not feeling so good. Ones that are less discretionary, are feeling a little more upbeat.

[J. B. Groh:]

So that would be maybe interior product not as strong as something in engine would be an example.

[W. Nicholas Howley:]

Yes, that would be an example. Now it depends on the interior product, but that would be -- an example might be faucets, interior faucets. If the faucet gets ugly and just drips a little bit, you can not replace it. Or fin latches, you can let them get sloppy.

[J. B. Groh:]

Got you. Okay. And then, in defense, same sort of thing, is it aftermarket or OE that's really driving the unexpected strength there?

[W. Nicholas Howley:]

I would -- I don't know that I can draw a clear distinction there, probably both a little better than we thought.

[J. B. Groh:]

Okay. And then, a quick one for Greg. What should the run rate on SG&A be inflated this quarter for the reasons you mentioned?

[Gregory Rufus:]

The full year, it will be a 13%, and that will have some of these unusual charges I just talked about.

[J. B. Groh:]

So on a GAAP basis, 13% for the full year?

[Gregory Rufus:]

13% on a GAAP basis with both charges.

[Operator:]

Our next question is from the line of Karl Oehlschlaeger from RBC Capital Markets.

[Karl Oehlschlaeger:]

Nick, you talked about capital deployment to the shareholders and cash versus buybacks. Can you maybe talk about how you evaluate between the 2? And maybe related to that, is it fair to think about special dividends making up maybe a similar percentage of cash deployment going forward as it has over the last couple of years?

[W. Nicholas Howley:]

Well, let me ask to go forward first. I just can't make any prediction there. That's just a function of how much cash we think is available based on how much we're generating and what we see and what our needs are. I mean, to some degree, that's what we handle in the special dividends. But we do generate a lot of cash and to the extent that we have extra cash, we'll continue to do things with it or we'll continue to give back to the shareholders. I would say, as far as the special dividend versus buyback, if -- I would say we will look at that on a case-by-case basis. As a general rule, and again, many times, the specifics of the situation overrule it, but as a general rule, a significant payout like we just did, 10%, 15%, 20% of the value that would make you buy back in 10%, 20% of the shares probably would concern us about the -- that we could get that done quickly and we wouldn't have a lot of execution risk on the price. As the number drop down lower, we're probably more inclined to do a buyback. We view them as the same thing, just going one way or the other.

[Karl Oehlschlaeger:]

Okay. And then maybe can you talk about the...

[W. Nicholas Howley:]

Also, by the way, I would add, there was -- at least now and there could be in the future, there were some tax advantage due to the return of capital calculation of the dividend.

[Karl Oehlschlaeger:]

Right. Now on the -- defense has been stronger than expected I guess and maybe this is difficult to kind of get a sense of given where that market has been going. But if you think about defense aftermarket, like over the next 12 months with this sequester and maybe OCO spending coming down, like how are you seeing that or do you have any good sense?

[W. Nicholas Howley:]

Well, I think, we'll wait and forecast '14 when we give the guidance out for '14.

[Operator:]

Our next question is -- I do apologize, we have no further questions in the queue at this time. I would like to turn the call back to Liza Sabol for closing remarks.

[Liza Sabol:]

Thank you again, Chris. Thank you, everyone, for calling in and for participating in this morning's call and I'd like to remind you to look for our 10-Q that will be filed tomorrow.

[Operator:]

Thank you. Okay, ladies and gentlemen, that does now conclude your conference call for today. You may now disconnect your lines. Have a great day. Thank you very much for joining.