Liza Sabol - TransDigm Group, Inc. W. Nicholas Howley - TransDigm Group, Inc. Kevin M. Stein - TransDigm Group, Inc. Terrance M. Paradie - TransDigm Group, Inc..

Myles A. Walton - Deutsche Bank Securities, Inc. Carter Copeland - Barclays Capital, Inc. Sheila Kahyaoglu - Jefferies LLC Kenneth George Herbert - Canaccord Genuity, Inc. Noah Poponak - Goldman Sachs & Co. David E. Strauss - UBS Securities LLC Robert Stallard - Vertical Research Partners, LLC Matthew McConnell - RBC Capital Markets LLC Robert M.

Spingarn - Credit Suisse Michael S. Rednor - JPMorgan Securities LLC Bill Ledley - Cowen & Co. LLC Drew Lipke - Stephens, Inc..

Good day, ladies and gentlemen, and welcome to the TransDigm Group Incorporated Second-Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Liza Sabol, Investor Relations. Ma'am, you may begin..

Thank you. I'd like to thank all of you for calling in today and welcome you to TransDigm's fiscal 2017 second-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, Kevin Stein; and Chief Financial Officer, Terry Paradie.

A replay of today's broadcast will be available for the next two weeks and details are contained in this morning's press release on our website at transdigm.com. Before we begin, we would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements.

For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC, available through the Investors section of our website or at sec.gov.

We'd 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 or a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA, EBITDA As Defined, adjusted net income and adjusted earnings per share to those measures. With that, now, let me turn the call over to Nick..

Good morning. Thanks to all of you for calling in. Today, I'll start off as always with comments about our consistent strategy. Then, I'd like to give a little more color on commercial aftermarket business and few other topics relating to Q2. Then, I'll give a quick summary of fiscal-year 2017 Q2 performance and an update on 2017 guidance.

Kevin will review more specifics on Q2 and then, Terry will run through the financials. This may take a little longer than usual. To restate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the cycle.

About 90% of our net sales are generated by proprietary products and about three-quarters of our net sales come from products for which we believe we are the sole source provider. Over half our revenues and a much higher percent of our EBITDA comes from aftermarket sales.

Aftermarket revenues have historically produced higher gross margins and provided relative stability through the cycles. Our long-standing financial goal is to give shareholders, over time, private equity-like returns with the liquidity of a public market.

To meet our goal, we have to stay focused on the details of operating management, value creation as well as careful management of our balance sheet and allocation of our capital. We follow a consistent long-term strategy. We own and operate proprietary aerospace businesses with significant aftermarket content.

Second, we have a simple, well-proven, value-based operating strategy based around our three value driver concepts. Third, we maintain a decentralized organization structure and a unique compensation system that closely aligns us with the shareholders.

Fourth, we acquire proprietary aerospace businesses with significant aftermarket content, where we see a clear path to PE-like returns. And fifth, we view our capital structure and capital allocation as a key part of our efforts to create shareholder value. As you know, we regularly look closely at our choices for capital allocation.

To remind you, we basically have four; our priorities are typically as follows. One, invest in our current businesses; second, make accretive acquisitions consistent with our strategy and return requirements; third, give extra money back to the shareholders, either through special dividends or stock buybacks; and fourth, pay off debt.

Again, given the low cost of debt, especially after tax, this is still likely our last choice, at least in current capital market conditions.

Depending on the specific business and capital market conditions that exist at the time, we'll allocate our capital and structure our balance sheet in the manner we think has the best chance to maximize the return to our shareholders. We look at our stock as another potential investment alternative.

Depending on the price, specific other opportunities and the overall business environment, the returns from buying our own stock could be, at times, more attractive than other opportunities we may see. To that point, our stock price became very compelling in the last quarter.

As a result, we acquired about $340 million or 1.5 million of our shares at an average price of $224 a share. We expect the multi-year return here to meet or exceed our rigorous return requirements.

To update you on a few significant items in the second quarter, let me first address the commercial aftermarket, both for this quarter and also, more significantly, over a little longer-time horizon. For the quarter, the aftermarket revenue comp was down 1.5% versus a difficult comp in the prior year. This obviously isn't a great number.

However, the bulk of the negative impact is due to a few specific businesses. There are also some significant positive indicators this quarter. Specifically, most of our businesses showed decent year-over-year growth in the commercial aftermarket.

The overall softness is substantially due to 4 of our 34 businesses, our 2 more non-proprietary cargo net and container businesses and, recently, our 2 more discretionary interior businesses. Kevin will give you a little more detail on that.

Excluding these 4 businesses, the balance of our commercial aftermarket is up in the mid-single-digit percent, both versus prior-year Q2 and also on a year-to-date basis. Also, year-to-date, our commercial aftermarket bookings, in total, across all our businesses are running well above the shipments for the year.

Also, in Q2, our look-through distributor shipments picked up significantly versus the prior-year Q2. These factors make us feel more positive about the second half of the fiscal year, but they don't change the fact that first half was weak in this market – our sector.

I'd also like, and I think this is of more significance, to give some color on our commercial aftermarket and the trends we and the industry have been seeing over recent years. Commercial aftermarket revenues, in real terms, that is excluding price across our peer group, have been growing well below RPMs for a while now.

Just of interest, we do not include the commercial transport engine manufacturers as our peers. As we look at the publicly disclosed peer comps on commercial aftermarket and make some estimated adjustments for pricing, it appears to us that across the group, there has been almost no real or unit growth, on average, for the last five to six years.

The last three years look about the same. The largest segment of our commercial aftermarket, and that is a little under 70%, is driven by the commercial transport passenger planes. This piece has been growing in real terms. The other 30%, which I will explain, has not been growing.

We believe the TransDigm aftermarket growth, after adjusting for price, over this five to six-year period has been a little higher than the peer group. That is up in the low-single-digit percent. Again, that is excluding pricing.

We have heard the softness over this period, attributed to many factors, including pooling of inventories, surplus parts, PMA parts, deferred maintenance, et cetera. Though we can't speak for other companies, when we look at our businesses, some of these points are worth clarification.

One, we are comfortable based on a series of outside consultants and our own analysis that our aftermarket shipset distribution is just about market-weighted. Secondly, on pooling in inventory reductions, we don't see how this can be a significant factor over this extended time period. It's just been too long.

We also hear little mention of this from our operating businesses. Third, with respect to surplus part usage, based on our investigation, we believe penetration is minimal and we don't see any material changes or increases here. As we've discussed before, surplus parts for our type of products and price points don't seem to be a significant factor.

We understand that the unit price in the $7,500 to $10,000 per unit is sort of a rule of thumb for surplus parts usage. The vast majority of our parts are priced well below $5,000 a unit and well below the price points. We estimate the average price for our parts is far below $5,000. In addition, our quantities are low.

Fourth, with respect to third-party PMA parts, as I think you know, almost all parts of TransDigm's type require a PMA to sell into the aftermarket. TransDigm has a pool of well over 400,000 part numbers made up of end items, subassemblies and components available for sale under its numerous PMA approvals.

As a reminder, when a top assembly is approved by the FAA, the components making up that assembly that are included in the component maintenance manual are also approved by reference. Over 300,000 of these part numbers sell with some regularity.

Almost all of these PMA-approved part numbers are for our proprietary parts, originally designed in the new OEM aircraft or as field retrofits of some kind, often for plane interior programs.

For the last five years, we have been averaging over 20,000 new PMA end items, that is subassemblies, components or parts per year, for sale into the aftermarket. We estimate that third-party PMA penetration into our, that is TransDigm's aftermarket, is less than 2%.

We believe this has been flat to down as a percent of our commercial aftermarket over the last five to six years and, therefore, has not materially impacted our year-over-year growth. It appears that other factors have been influencing real or unit demand. I'm going to talk about unit growth here.

Again, I'm always excluding price over the last five to six years. The last three-year trend has been similar. We found it difficult to make much sense out of changes over shorter periods of time.

In total, due to the high percent of new airplanes and the overall mix of our aftermarket, RPM growth doesn't appear to be the right overall metric, at least at this point in the OEM cycle. Commercial passenger transport aftermarket, as I said, makes up a little under 70% of our commercial aftermarket revenues.

The unprecedented length of the commercial transport production cycle has resulted in a lower growth rate in the out-of-warranty fleet. We define out-of-warranty as planes over five years old. These planes, the under five years or five years and under, consume far less of our parts and services.

Due to the large number of new airplanes, the growth in fleet size of planes over five years appears to be growing at roughly 3% a year for the last five years or so. These planes also tend to fly less hours per day, likely exacerbating the impact. This growth rate should increase as new production rates slow down or decline.

Most forecasts we've seen expect a slow increase in the growth rate for this group over the next several years. TransDigm's real or unit growth, again, without price, in the commercial transport passenger segment has been in the low to mid-single digits per year, generally in line with the fleet growth in planes over five years old.

The balance of our commercial aftermarket, that is a bit over 30% of the aftermarket revenue, is made up as follows. Cargo handling and freight make up a little over 15%; freight traffic over the last five years or six years, depending on what index you use, appears to be flat to slightly up; freight capacity looks to be flat to slightly down.

Our freight aftermarket has been impacted by this and, exclusive of price, has been slightly down in real terms. The less proprietary container and net businesses have been quite soft. The aftermarket in the proprietary cargo systems has been slightly up.

As a reminder, our cargo systems are sole-sourced on every Airbus airframe, except the A380, and also sole-sourced on the Boeing 747 freighters. We also provide passenger and freight conversion on a range of airframes. As an aside, in total, our acquired Telair Cargo businesses are running well ahead of our acquisition value-creation model.

Business jets are the next largest piece. Again, exclusive of price, the business jet aftermarket over the period has been roughly in line with takeoff and landings. That is flat to very slightly up. Helicopter and GA combined make up the balance and they're, in total, a little less than business jet revenues; this is in the aftermarket.

In real terms, these have been down in the mid-single-digit percent per year over this last five to six-year period. Over this period, this has netted out to a low-single-digit real unit growth rate for TransDigm's commercial aftermarket. As best we can estimate, excluding price, this appears a little better than the industry average.

Though there will always be some cyclical swings by quarter or individual years over the next three to five years, we'd expect the percent of the fleet over five years old should slowly pick up. The freight aftermarket, though too early to be sure, appears to be mildly picking up and I hope the business jet and helicopter markets have bottomed out.

This should bode well for commercial aftermarket over the period that the pick-up could be gradual, especially if the commercial transport production rates continue to grow. As you probably know, we've gotten a fair amount of publicity last quarter about our U.S. Government business. To remind you, direct sales to the U.S.

Government make up about 7% of our revenue. This is including sales through distributors or brokers. Two congressmen have written almost identical letters to the DoD Inspector General, asking him to review TransDigm's government contracting practices, following a report published on the Internet by a research firm.

We have not received notice from the Inspector General Office that it has commenced any investigation or audit at this time. If they do begin any audit or investigation, we will cooperate fully as we have in the past. A 2006 IG review and audit of certain government agency purchasing practices included the review of purchases made from TransDigm.

Inspector General audits or investigations of contracting parties are not unusual in this industry. Over time, many suppliers, both large and small, become involved one way or another in some type of IG audit or investigation.

As we do for acquisitions, going forward, I'm not going to discuss or comment on this topic unless the company determines to make a public announcement. This quarter, we were again active in the capital markets. As I mentioned, we invested $350 million to buy back our own stock..

$340 million..

Oh, $340 million, excuse me. We also raised $300 million of high-yield debt to reload, to take advantage of a good price for fixed debt and to confirm our ready access to the market. Last quarter, Standard & Poor (sic) [Standard & Poor's] (19:29) upgraded both our fixed and variable rate debt as well as our overall corporate ratings.

We also amended our credit agreement to allow us over a 12-month period to either buy about $1.5 billion of our stock or payout $1.5 billion of special dividend. We have about $1.3 billion of this authorization still unused. As we have explained in the past, 75% of our debt is either fixed or capped.

The net result is to significantly reduce our exposure to interest movements through at least 2021. At April 1, 2017, our liquidity was strong. We had slightly under $1 billion in cash, about $600 million of open revolver and additional room under our credit agreement. We believe we have adequate capacity to make over $1 billion of acquisition.

This grows steadily through the year. This does not imply anything about likely levels of acquisitions for the year. In Q2, we completed the acquisition of Schroth Safety Products and certain other aerospace assets from Takata Corporation for about $90 million.

This business primarily manufactures multi-point restraint harnesses in Germany and the U.S.A., used primarily in commercial pilot and flight attendant restraints as well as certain military and racing applications. The products are primarily proprietary and have significant aftermarket. Our acquisition effort remains active.

The pipeline is, as usual, mostly small and mid-sized businesses. And closings, as always, are tough to predict. Kevin is going to review the Q2 operating performance and a few other items, but a few comments.

Year-to-date, all of our market segments are booking ahead of shipments with the commercial aftermarket defense segment bookings are running well ahead of shipments. On the same-store basis and assuming we own the same mix of business in both periods, commercial OEM revenues were up modestly in Q2 versus the prior year.

Commercial transport revenue is up more, but slower business jet and helicopter revenues pulled the overall down. As I said before, commercial aftermarket revenue was down 1.5% for the quarter. I already spoke about this, but Kevin will give a little more color. Defense revenues were up versus both the prior-year Q2 and year-to-date.

Defense bookings were up very substantially in Q2 versus the prior year. EBITDA As Defined operating margins were strong and up 2% versus both the prior-year Q2 and year-to-date as we continue to execute on our steady value-creation process.

Based on the year-to-date results, full-year 2017 guidance, assuming no acquisitions or additional capital market activity, is adjusted as follows. The midpoint of fiscal-year 2017 revenue guidance is now $3.55 billion, a slight increase of $5 million versus the previous guidance.

This is due to the Schroth acquisition, partially offset by a modest decrease in the base business forecast. We anticipate 3.5% to 4% organic revenue growth for the year. As usual, the fourth-quarter revenues should be higher than the third quarter. The midpoint of fiscal-year 2017 EBITDA As Defined guidance is $1.7 billion.

This is an increase of about $5 million from our previous guidance. The modest increase is due to both the Schroth acquisition and a slight margin improvement in the base. We have now increased the full-year EBITDA by $20 million from our original 2017 guidance. The vast majority of this increase was from improved operating performance.

The midpoint of our EPS as adjusted is now anticipated to be $12.21 a share, up about $0.05 a share from our previous guidance. This increase is due to the increased EBITDA, a lower share count, offset in part by higher interest expense. And Terry will expand on that a little bit.

On a pro forma or same-store basis, the revised guidance is based on the following growth rate. Commercial aftermarket growth in the mid-single-digit percent versus the prior year; the strong bookings are encouraging, but the first-half revenue was light. This is a modest decrease from our original guidance.

Defense or military revenue is up-low-single percent versus the prior year. This is a modest increase from our original guidance. Commercial OEM revenue growth in the low to mid-single-digit range, this is unchanged. We have significant cash and available borrowing and these continue to grow throughout the year. Terry will expand on this.

The first half of 2017 was solid. We look forward to a good second half. In summary, at this point, it looks like, for the year, the commercial aftermarket could be a little lower than originally anticipated and this is mostly offset by a modestly higher defense sector. And with that, let me turn it over to Kevin..

Thanks, Nick. Now, let me touch on the details of the quarter. For Q2, total company GAAP revenues and EBITDA As Defined were strong, with a revenue up about 10%, EBITDA As Defined about over 14%. EBITDA As Defined was strong at 48.2% of sales.

The strength in EBITDA as a percentage of sales was due to the continued realization of our value-driver concepts across our base businesses and from the continued integration of recent TransDigm acquisition. Now, let's review our revenues by market category.

For the remainder of the call, I will provide color commentary on a pro forma basis versus prior-year Q2; that is assuming we own the same mix of businesses in both periods, similar to a same-store sales metric. In the commercial market, which makes up about 70% of our revenue, we will split our discussion to OEM and aftermarket.

In the commercial OEM market channel, revenues were up approximately 2% versus prior Q2. Commercial transport OEM revenues, which make up the majority of our commercial OEM revenue, were up about 4% versus prior-year Q2.

Bookings year-to-date for this segment have increased modestly versus first half of prior year and have outpaced fiscal-year 2017 sales by a similar modest amount. Business jet and helicopter revenue make up about 15% of our commercial OEM revenues.

In total, year-to-date revenues in this market are down modestly compared to the first half of fiscal year 2016. Given the performance of this market recently, this result was not unexpected. However, bookings grew sequentially in Q2 and have outpaced shipments by over 5% for the first half of 2017.

However, any optimism for this sector is tempered by business jet and helicopter OEM forecasts. We see that inventory management by our OEM customers and rate reductions on some wide-body platforms have created headwinds in the commercial OEM market, but we believe this is all timing-related as our shipset content has not changed.

We will continue to watch OEM booking trends for any indication of weakness, which will allow us to further modify our cost structure as necessary. Now, moving on to commercial aftermarket, total commercial aftermarket revenue was down approximately 1.5% for Q2 fiscal-year 2017 when compared to prior-year Q2.

As Nick previously stated, this was a difficult comparison quarter, as our commercial aftermarket revenue demonstrated 13% growth a year ago in Q2 fiscal-year 2016. For the current quarter, commercial transport aftermarket revenues were down less, with a slightly larger decline in business jet aftermarket.

Again, a difficult quarter to compare, as Q2 fiscal-year 2016 demonstrated a significantly higher revenue growth rate than the rest of fiscal-year 2016. As Nick commented previously, the vast majority of our business demonstrated Q2 revenue growth in commercial transport aftermarket.

Four businesses make up the bulk of the decline and these can be grouped into two categories, partially non-proprietary freight products from Nordisk and AmSafe nets. Here, they serve as a competitive market segment, which has experienced oversupply and pricing levels we have occasionally been reluctant to match.

And secondarily, our more discretionary interiors business at Schneller and Pexco, these businesses, who largely support cabin aesthetics, have recently experienced some market softness. For commercial transport aftermarket, year-to-date bookings now exceed shipments by approximately 8.5%.

This strength in commercial transport aftermarket bookings was met for the first time in a while, with the business jet and helicopter segment displaying bookings in excess of shipments by over 6% year-to-date. We remain cautiously optimistic on the commercial aftermarket for two simple reasons.

First and foremost, bookings have outpaced shipments year-to-date in the high-single digits for the entire commercial aftermarket segment. And point-of-sale information from our distribution partners or look-through sales demonstrated well into double-digit growth in Q2 of fiscal-year 2017.

Now, let me speak about our defense market, which remains relatively unchanged at about 30% of our total revenue. Total defense revenues for fiscal-year 2017 second quarter, which include both OEM and aftermarket revenues, were up about 3% versus prior-year Q2 and year-to-date.

The story for Q2 continues to be one of strong defense aftermarket revenue growth, tempered by slower defense OEM shipments, which are timing-related.

However, total defense bookings provided an encouraging narrative as bookings have exceeded shipments by over 8% year-to-date, led by a strong rebound in OEM order book in Q2 and continued defense aftermarket expansion.

It should be noted that Q2's defense OEM order book was bolstered significantly by a large multi-year order for Whippany Actuation Systems on a confidential platform. Lumpy bookings and shipments like these are common in the defense market and caution must be used in forecasting off a few data points.

Moving to profitability and on a reported basis, I'm going to talk primarily about our operating performance or EBITDA As Defined. The As Defined adjustments in Q2 were non-cash compensation expense, acquisition-related cost, amortization and refinancing costs. Our EBITDA As Defined of about $421 million for Q2 was up 14% versus prior Q2.

The EBITDA As Defined margin of 48.2% of revenues for Q2; EBITDA margin, excluded the dilution from the impact of acquisitions purchased since 2016, was over 49% or up approximately 2 margin points versus prior period, indicating again our base businesses continue to find opportunities to drive improvement within our value drivers and recent acquisitions are coming up the curve quickly.

As I transition to discussing some operational details, I thought I would articulate one of our business goals. Operationally, our goal is to always supply our customers with well-engineered reliable products and, of course, these products must be delivered on time. This is the real value of TransDigm to our customers. Operationally, we perform.

In recognition of this, I thought I would finish off by providing a little color on two of our key value drivers for TransDigm, that of driving productivity and achieving profitable new business across the company. As we have previously discussed, TransDigm invests fully 7% of our total costs on engineering.

We define total costs as total revenue minus EBITDA. This engineering investment drives our product development and cost-reduction initiatives and here are a few examples of this investment bearing fruit.

Across TransDigm, through our focus on productivity and investment in our businesses, we have been able to strip out just under 4% of our head count fiscal year-to-date.

Re-engineering our methods, capital investments in new processes and equipment, outsourcing procurement initiatives and plant consolidations at Elektro-Metall and Airborne Systems North America are a few examples of what has driven this cost reduction.

This means we have removed 8% to 9% of our head count over the last 18 months while maintaining our engineering programs and effort. For the profitable new business development, at AeroControlex, the team has developed a portable, quick-turn water disinfection cart for all major aerospace platforms.

This product allows treatment of the onboard water supply to sanitize the system without the need for harsh chemicals. This product is seeing acceptance across the globe as more than 50% of the world's largest airlines have already adopted this product and more are in current evaluation.

At Aerosonic, the team has recently received a large award from the U.S. Coast Guard to outfit the search and rescue Eurocopter MH-65E Dolphin with a new retrofit glass cockpit instrument display. This system, called Oasis (34:02), replaces multiple mechanical gauges with only highly reliable, highly accurate display systems.

The system is lighter, easier to install and eliminates much of the maintenance calibration for older mechanical gauges.

At Nordisk, our freight cargo container manufacturer, they have recently designed and received a large, new business award from Amazon for the production of a new, robust, lightweight specialty cargo container for use on all of Amazon's internal freight shipments.

This could have considerable future additional volume opportunities as Amazon continues to grow its delivery capability. At Adams Rite Aerospace, the team developed and manufactured the complete lightweight ballistic cockpit door module for the A350.

This award represents significant shipset expansion for Adams Rite and is beginning to bear fruit as the A350 build rates accelerate. This system now includes the controller, the keypad, door deceleration devices, ballistic door itself, door posts and intrusion-resistant locking mechanism.

Finally, AdelWiggins has made a significant investment to develop composite lightning isolators. This investment has resulted in AdelWiggins winning significant shipset content on many new aircraft. These aircraft include the A400M, 787, C-Series and the new 777X and Global Express 7000, 8000.

The composite product line has grown quickly and is now AdelWiggins' largest product line. As illustrated by these examples, our engineering investment, coupled with our rigid, new business tracking process by business unit and platform, has allowed a culture of innovation to prosper and realize consistent growth opportunities into the future.

So, let me conclude by stating, all-in-all, Q2 of fiscal-year 2017 was another solid quarter for TransDigm. With that, I would now like to turn it over to our Chief Financial Officer, Terry Paradie..

Thank you, Kevin. I will now review our financial results. Second-quarter net sales were $873 million or approximately 10% greater than the prior year. The collective impact of the acquisitions of DDC, Young & Franklin/Tactair and Schroth contributed $70 million of additional sales for the period. Our organic sales were up approximately 1%.

Our second-quarter gross profit was $491 million, an increase of 15%. Our reported gross profit margin of 56.2% was almost 3 margin points higher than prior year. Gross profit margin increased almost 1 margin point due to the lower non-operating acquisition-related expenses.

Excluding these costs, our gross profit margins in the remaining businesses versus the prior-year quarter improved almost 2 margin points due to the strength of our proprietary products continually improving our cost structure. Our selling and administrative expenses were 11.7% of sales for the current quarter compared to 11.9% in the prior year.

Excluding acquisition-related expenses and non-cash stock compensation, SG&A was about 10.2% of sales compared to 9.7% of sales a year ago. The higher SG&A was primarily related to higher selling and admin costs related to recent acquisitions. We had an increase in interest expense of approximately $37 million, up 33% versus prior-year quarter.

This is a result of an increase of 33% in the weighted average total debt to $11.2 billion in the current quarter versus $8.4 billion in the prior year. The higher average debt year-over-year was due to borrowing an incremental $1.9 billion in June 2016, $1.2 billion in November and $300 million in February.

The proceeds were used primarily to fund acquisitions, pay off our highest-rate 2021 bonds, pay a special dividend and repurchase our own stock. We are currently assuming an average LIBOR of approximately 1% for the current year, which then yields a weighted average interest rate of approximately 5.2%.

If LIBOR were to increase to 4%, our weighted average interest rate would increase by just under 1% to 6.1%. This would increase our after-tax interest expense by approximately $70 million. We now expect our full fiscal 2017 net interest expense to be approximately $600 million.

Moving on to taxes, in Q4 of fiscal 2016, we adopted a new accounting standard related to the accounting for excess tax benefits for share-based payments, including stock option exercises and dividend equivalent payments. As a result, our GAAP tax rate will now generally approximate our cash tax rate during an entire fiscal year.

Our GAAP effective tax rate was 27.7% in the current quarter compared to 29.4% in the prior year. The lower effective tax rate in the quarter was primarily due to higher adjustment for the excess benefits from the option exercises. We still estimate our full-year GAAP tax rate to be around 28%.

Excluding the accounting standard change, our effective tax rate is still estimated to be around 31%. To remind you, this is the rate we use in calculating our full-year adjusted EPS. Our net income for the quarter increased $14 million or 10% to $156 million, which is 17.8% of sales.

This compares to net income of $142 million or 17.8% of net sales in the prior year. The increase in net income primarily reflects the increase in net sales and lower acquisition-related costs, partially offset by higher interest expense versus the prior period. GAAP EPS was $2.78 per share in the current quarter compared to $2.52 per share last year.

Our adjusted EPS was $3.02 per share, an increase of 5.6% compared to $2.86 per share last year. Please refer to Table 3 in this morning's press release, which compares and reconciles GAAP EPS to adjusted EPS. Now, switching gears to cash and liquidity. We ended the quarter with $985 million of cash on the balance sheet.

There were several items Nick's previously reviewed that impacted our cash balance in the quarter. We opportunistically completed a financing for an incremental $300 million of senior sub notes due in 2025 at a rate of 6.5%. As for uses of cash, as Nick previously mentioned, we repurchased 1.5 million shares during the quarter.

As a result, we now expect our full-year weighted average shares to decrease to approximately 55.6 million shares. In March, the board authorized a new $600 million share repurchase program to replace the existing program. At the end of Q2, we had $410 million available for additional repurchases under the program.

We also paid approximately $90 million for the acquisition of Schroth. Without any additional acquisitions or capital structure activities, we still expect our cash balance at September 30, 2017 to be around $1.4 billion to $1.45 billion.

We also expect to have roughly $600 million in undrawn revolver and additional capacity under our credit agreement. The company's net debt leverage ratio at the quarter-end was 6.2 times of pro forma EBITDA As Defined and gross leverage was 6.8 times.

We estimate our net leverage at September 30, 2017 to be approximately 5.7 times, assuming no acquisitions or capital market transactions. With regards to our guidance, we now estimate the midpoint of the GAAP earnings per share to be $9.28 and, as Nick previously mentioned, we estimate the midpoint of our adjusted EPS to be $12.21.

Increase in adjusted EPS of $0.05 is primarily due to the increase in EBITDA As Defined and lower weighted average shares outstanding, partially offset by higher interest expense. Please see slide 10 for a bridge detailing the $2.93 of adjustments between GAAP to adjusted EPS related to our guidance.

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

Thanks, Terry. Before we start, I'd like to just ask that all of our analysts only ask initial, two questions at a time and then please reinsert yourselves into the queue, so that we can get through everyone's initial questions. Operator, we are ready to open the lines..

Thank you. Our first question comes from Myles Walton with Deutsche Bank. Your line is open..

Thanks. Good morning..

Morning..

And thanks for the color on the aftermarket. Looks like you hired some good consultants. I know you're tracking ahead of sales in terms of orders by 8.5% year-to-date on bookings for aftermarket.

Can you give us some color on year-on-year first half versus first half in 2016?.

I don't know.

Liza, do you have it?.

Sure.

On the bookings (43:56)?.

Myles, let's move on. We'll look it up for you.

Okay?.

Okay. Yeah, no, that's fine. And then, the commentary you provided on the restructuring, the 8% reduction in head count, I imagine that's a pro forma basis of what you acquired over the course of the 18 months.

Can you give us some color as to kind of excluding the acquisitions, what the level of productivity you're able to still get out of your core business? And obviously, there'd be low-hanging fruit in some of the acquisitions.

So, I'm just trying to get at what's kind of still there on the core business that's run for an extended period of time already..

Yeah. I would say, Myles, we still look at the – our goal in these businesses is to squeeze inflation out of the cost structure every year, even the old ones. And what we mean by that is to try and squeeze about 3% of the cost out. Now, I don't say we hit it on every one, but on average, we still get that out of most of the businesses..

Okay..

And I would also say, if the market turns down, I'm pretty comfortable – this is primarily, I would say, the commercial OEM market. If that turns down, I'm pretty comfortable that we can move our cost structure down in line with that, assuming some reasonable turndown..

Okay. Okay. I gave you two. So, I guess I'll stick there..

Okay..

Thank you. Our next question comes from Carter Copeland with Barclays. Your line is open..

Hey. Good morning, all..

Morning..

Nick, I wondered if you could expand a little bit on the commentary around the discretionary stuff in Schneller and Pexco and maybe tell us if that was anything related to particular models or market segment. I would assume that Schneller is more wide-body value oriented, but Pexco, I thought was primarily sky interiors on the 737.

So, anything you can tell us about what you saw there?.

Yeah. I would say Schneller is wide-body-only, because it's just a function of square footage. They got more square footage on wide-body. I mean, it's on all the platforms. You just got more wall space on a wide-body..

So, the weakness you saw there is wide-body related sort of by definition?.

No. We have just seen slowdowns in a number of programs. Honestly, I can't peg them for you, not because I'm not willing, just because I don't know the answer..

Okay..

But you are right that Schneller in dollar volume – well, no, I'm not even sure of that. Per plane, it's more impacted by wide-bodies, but in dollar value, I think, they're pretty market-weighted. I think it's pretty market-weighted.

Pexco, the best growth opportunity is those blue sky, that's where most of the growth come, but they're across all Boeing airplanes; not Airbus by the way, Boeing..

Okay. And then, clearly, you scrubbed the data on the aftermarket pretty hard.

I don't know if you got a sense in going through that analysis, how your parts that were more cycles-based versus usage-based in terms of the replacement decision there; was there any difference and just in general terms about how those parts trended in growth in your analysis?.

Over the period, I can't say there were. I can't say there were. I mean, I felt – again, I'm going to talk now about the commercial transport passenger stuff, which is the big chunk of it. I think what we found – as I said, Carter, that the closest proxy at least looking back is the growth rate in the out-of-warranty fleet..

Okay. Great. Thanks. I'll stick too..

Yeah..

Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is open..

Thank you very much. Nick, thank you for the aftermarket color.

Can you just expand on the dynamics with the ages of fleet and maybe where you're seeing certain model weakness and maybe where you're seeing a pickup with the 787s? Are they starting to see some overhauls or not yet?.

Not significantly, not significantly. I mean, I think, you can go back and do the same math. I mean, you can look at where our production airplanes are growing and where they're not. That's where we're seeing it too..

Okay..

787, I can't see – you're not kicking much in yet. There is not enough of them getting outside of the window, well, I'd say the five-year window..

Okay. Got it. And then, just a quick one for Terry.

Given you expect the cash balance to go back to $1.4 billion for year-end, are you taking a little break for the remainder of the year and just letting that cash balance build up or how should we think about the capital deployment?.

I think we are always looking at our pipeline from an acquisition standpoint. And again, you can't determine when these deals will close, but we want to deploy the cash as efficiently as possible. So, again, not knowing when the potential acquisitions could close, that's where we would be at the end of the year. That's how I qualified my comments..

Okay. Thank you..

I think I might add, as usual, as we move through the year, we'll look at our pipeline. Frankly, we'll look at the price of our stock. We'll look at what other opportunities and we'll decide, decide whether we keep the money or whether we get some back out to shareholders in some fashion..

Makes sense. Thank you..

Thank you. Our next question comes from Ken Herbert with Canaccord. Your line is open..

Hi. Good morning, everybody..

Hello..

Good morning..

Nick, I appreciate all the aftermarket color. Just wanted to follow up.

I mean, I guess, implied or what wasn't said was as you look at the analysis you've done that you don't see much of an impact from, I guess, any sort of changes in airline behavior or all of the anecdotal evidence we've heard about in terms of airline just getting more cost conscious.

Is that a fair statement? It sounds like it's really just your commentary really is just a reflection of (50:35)..

Yeah, Ken, what I tried to do is – and hopefully I made myself clear – was knock off some of the things that we have seen hypothesized at least for our business. Again, you have to remember, as I said, the unit price of our stock is pretty low. We don't get a lot of volume. There's no significant concentration. There is a ton of part numbers.

So, we don't see the surplus of any significance. We don't see the PMA. As I said, the pooling, i.e. the inventory drawdown, I think that may be a viable explanation, though I don't have any good date on that for a year or so. It can't be for five years, I don't think. So, I think that's probably the best answer I can give you..

Okay. No, that's helpful. And just as a follow-up to that, I mean, obviously, you've been into this market a lot longer than a lot of us.

I know you really, I mean, looked over the last five to six years, but do you think the last five to six years you saw a step change relative to periods prior to that or difficult to say at this point?.

I think the primary thing – and I'm now, to some degree, in the hypothesis mode, backfitting the answer to the data, I think, for TransDigm, the two significant things are, one, whatever it is coming on 14-year run up of our new airplanes, production rates, has interjected an unusually high percent of airplanes in the under five-year life, which depresses, I think, the rate of growth or the rating usage for spares and repairs.

I think that is probably number one. And I think the second is, the mix of TransDigm's aftermarket, whereas if you went back 10 years ago, I don't know, but I would guess it was 80%, 90% commercial transport per passenger, is now 70%. There is more other stuff in there. I think those are probably the two factors..

Okay..

I do think, if you had a more traditional expansion contraction cycle and production rates, they maybe ran up five years, ran down five years, up five years. I think you drift back closer to the RPM number..

Okay, no, that's very helpful. And if I could, just finally, on the defense side, DDC in particular, can you just comment on how that's performing now? We're coming up obviously close to the anniversary for that.

It seems like it's been doing well and should benefit from a lot of the fundamental backdrop, but can you specifically highlight that acquisition?.

Well, we don't give out numbers on individual operating units, but I can tell you that we are still tracking just fine our value-creation model. We buy it. We have to see a PE-like return and we put together a model that does that and that's tracking that nicely..

Great. Thank you very much. I'll stop there..

Thank you. Our next question comes from Noah Poponak with Goldman Sachs. Your line is open..

Hi. Good morning, everyone..

Hey, Noah..

Nick, this may sound like splitting hairs, but is it possible to actually give us the precise start time of the window, the multi-year window, that you analyze there?.

Yes.

You noticed that I kept saying five, six years?.

Yeah..

But you might have noticed that five, six years was not one number..

That's right..

What we did, Noah, is we did it over six years and we did it over five years. And depending where you made the cut-off, you got a somewhat different answer. So, we just averaged the two..

Okay. Yes, I mean, the reason I ask is your business had such a high growth rate in the sixth year ago, that comparing your total growth to what you're talking about for volumes, ex-price, makes a big difference in trying to make that comparison. So....

Well, we averaged the two. Though I have to say, I'm just looking at the data right now, as you talk, Noah, if I look at 2011, almost everybody was up above the mid-teens..

Yes, right..

So, anyway....

But if you're giving me an industry number for that window on units or your number for that window on units and then I wanted to compare your total growth to that, your average, it's makes a big difference if I'm using five or six. And therefore, that variance is different..

And that's why we took the whole industry, Noah, and averaged them too. We took five and six, added them up, divide by two..

Okay. That helps..

It's just because you had a funny number when you did one or the other..

Noah, I'll say again, I'm just looking at this chart, the numbers that everybody are way up in that first year..

Yes. Well, I think, you're still coming off global financial crisis at that point in time..

Could well be..

It seemed a little bit removed from it, but I don't know..

Could well be..

On the cash flow statement, I guess, year-to-date has been a little better than the normal first-half seasonality.

What are you guys looking for, for the full year for free cash flow?.

Well, I think we guided to, it was around $750 million to $800 million at the beginning of the year and I think our expectations are still there. We haven't come off of that and at this point in time, I think we're still in that line. Last quarter, we guided $1.4 billion to $1.45 billion for end-of-year cash balance.

You can back out the free cash flow to-date and you can do the math on the back half of that, it will get us there..

When I'm doing that math, should I have literally zero between CapEx and the bottom of the cash flow statement? Just because there's so many line items in there that are extremely hard to predict and I don't know what you guys have in getting to that cash balance.

Do you know what I mean?.

Yeah, the way to look at it is – I think what we talked about is take our EBITDA number and we like to be over 50% on conversion to cash after cash interest, which we have said that it should approximate cash taxes, cash interest. Cash tax will approximate the GAAP rate and then you can determine your free cash flow.

Then, you have a couple – a little bit of working capital to that, but we still expect to be that free cash flow around $800 million for that year..

Okay..

Yeah, year-to-date, I think we're just at around $350 million something. So, you can see it back-end loaded as it typically is..

Is getting to $1 billion of free cash flow next year in the scenario analysis?.

We're not going to comment on next year quite yet. We've got to finish up this year. So, you'll know that when we come out with our forecast for next year in Q4..

Yeah, okay..

But I would guess, Noah, I don't think, you've kind of pays your money and takes your choice on what next year's EBITDA forecast is..

Yeah..

I don't think the percent cash spin-off changes substantially. If anything, as the net goes down a little, you might get a little more..

Yeah, if you take our midpoint and grow that EBITDA by 9%, 10% (58:19) and then do the 50%, you'd probably get to where it would be..

Yeah..

Right, except the EBITDA growth, as you were, at least historically on average has been much better, but, yes, now I got you. Okay. Thanks so much..

Thank you. Our next question comes from David Strauss with UBS. Your line is open..

Thanks. Good morning. Interesting data, Nick..

Thanks..

Want to touch on the EBITDA margin guidance. I think you're 47.8% in the first half, calling for 48% for the full year. So, some improvement in the back half of the year, but, yeah, between more volume and based on your guidance, it looks like a better aftermarket mix.

Why don't we see even better adjusted EBITDA margins than what you're calling for in the back half of the year?.

Yes. We got a little bit of a down-pull from Schroth. So, that isn't real big, but it pulls you down a little bit and that's our best judgment now. We'll see how it plays out. I mean, if you take out Schroth, it's not inconceivable to be a little better..

Okay.

And then, on the aftermarket bookings running ahead of shipments for the year, how good of an indicator are – is that bookings number of what we're going to see on a go-forward basis? In other words, kind of how much visibility does that provide you versus how much do you have to just so short-cycle that you don't really ever see it in your bookings number?.

Yes. We're surely not booked up. We're not booked up for the balance of the year. So, there is some risk.

There is some risk, but when we put the combination of the bookings running ahead and we're also – we think it's a positive that when we look at our major distributors, their point-of-sale is picking up or has picked up pretty significantly through the quarter, the mix of those two gives us some confidence.

But I mean, I don't want to be deceptive here, we're not booked out through the end of the year yet..

Okay, got it. All right. I'll stick to two. Thank you..

Thank you. Our next question comes from Robert Stallard with Vertical Research. Your line is open..

Thanks very much. Good afternoon. Nick, you did mention pricing in the quarter and I imagine you had your usual calendar-year price increases. I was wondering, if you could comment on whether anything unusual had occurred there..

I don't – I think the price dynamics in our business and in our markets, in our segments is – there's nothing odd about this quarter..

And that goes to defense versus civil versus biz jet?.

That was across the company. Honestly, Rob, I can't tell you segment by segment by segment if there's any variation, but in total, the pricing dynamic is not different than it typically is..

Okay. And then – and secondly, in the past, you've commented about inventory destocking perhaps being one of the issues in the aftermarket. Now, you've done more analysis of that.

Do you think that's no longer an issue and this concept of younger aircraft being more efficient is much more important?.

No, I didn't say necessarily more efficient. What I said is, well, I guess, I did, but I said they are in the, what I call, warranty period and during that period, they consume very few parts, at least of our kind of parts. They're either covered by warrant. Here, they just – frankly, just don't use this stuff.

I would expect, as they come out of that five-year period, they would start to pick up their consumption. Now, could there be a little bit of efficiency? Maybe, but I don't have a good sense of that yet. I don't think it's substantial once they get out of that sort of a happy window..

So, generally, less concerned about spares on the shelves of the airlines or the distributors then?.

Yeah, that's right. At least over this time period – Rob, what I tried to say is I just don't see how that could be a significant factor over a five-year period..

Okay..

There couldn't be that much inventory in the system. Then also, I have to say, we don't hear that from any of our operating units..

All right. Thanks for everything..

Thank you. Our next question comes from Matt McConnell with RBC Capital Markets. Your line is open..

Thank you. Good morning..

Hey, Matt..

So, again, appreciate the insight on the commercial aftermarket volume drivers. Could you touch on whether there are comparable structural issues impacting price? And I guess, you can back in commercial aftermarket price in the, I guess, low-single digit kind of range over the past five years.

Can you touch on whether there are big factors driving that either direction?.

I'm not sure I follow your question, Matt, but I'll give it a try. I would say the pricing dynamic in the commercial aftermarket has not changed materially over that period.

Is that your question?.

Yeah, essentially. I mean, there are a lot of important factors impacting your volume once you shared a lot of good insight into.

But, I guess, is the pricing component of your revenue growth in commercial aftermarket over the past five years, is that moving higher or lower within that?.

I don't think it's changing substantively..

Okay, thanks..

And I don't want to be cute about that, just to be clear. The pricing dynamic in the commercial aftermarket and our ability to get results has not changed..

Okay, great. Thanks. And then, just a quick follow-up. Did you repurchase stock since the end of the second quarter? I guess, it was around $220 million (01:04:58) in April. I don't know if that would have triggered your 10b5-1, but....

I can't talk about anything, Matt, beyond the quarter..

Yes. We did $190 million. We talked about $150 million, that's last quarter, so $340 million is the total number we purchased during the quarter..

Yeah..

Yeah. As you probably know, during these blackout periods, we have to set a formula and buy under a 10b5 plan. So, once we kind of launch it, our ability to modify it is limited..

Almost zero..

As a matter of fact, it's exactly zero..

Yeah, but if your average price in the quarter was $224 and the stock was below that early in 3Q, I mean, I'm assuming you might have bought more if the terms weren't changed, but I guess we can wait..

We can't change it..

We're locked into, we need to put a little baskets and ranges and so we have to execute to that. So, we don't have the hindsight to be able to select (01:06:05)..

Yeah, right. Okay. Understood. Thanks..

Thank you. Our next question comes from Robert Spingarn with Credit Suisse. Your line is open..

Hey, guys..

Hi, Rob..

So, Nick or Kevin, back to David's question on the bookings, book-to-bill was, I think, over 1.1 last quarter, 1.08 this quarter in the aftermarket.

How big a piece of the business did those book-to-bill numbers represent that we haven't seen anything like that translate through here?.

Well, I guess, I'm not sure of your question, Rob..

Well, I mean, if your bookings are up, like 10%, but your aftermarket's up low, low-single digits, are those bookings just a small piece of the aftermarket?.

I mean....

Are we going to have 10% growth – what's that?.

I think we've told you what we think the growth is for the year and you can pretty well back into that.

Rob, you could take it – what is it year-to-date? 1-ish or something like that?.

Aftermarket volume..

Yeah. 1-ish, we've given you a forecast for the year, so you can pretty well figure out what the second half is..

But, Nick, if you have a quarter like this one, where your book-to-bill is 1.085, right, there should be a future quarter with 8.5% growth if those bookings represent a full quarter of aftermarket..

Yeah, obviously, what we book, we will ship. I mean, what makes us feel comfortable about the second half of the year is that the bookings are coming in higher and the distributors are selling through..

So, I mean, I know what you've said for the year, but it would seem that these robust bookings in the first two quarters should do better than that for the second half..

I hope they do, but I mean, the number we're giving you as guidance is mid-single digits. And you do the math. Now, also....

Well, you're right, you're up 1% so far..

But let me finish, Rob. Rob, the book-to-ship, the denominator's not the same. The book-to-ship against the first half, you're rising. So, the relationship between the two isn't the same..

Okay, but, I guess, what you're telling us is we're going to see something around 10% in the second half..

Well, I guess, I'm exactly – I mean, you can figure out exactly what I'm telling you, right? I mean, you can take – you could take where we are year-to-date and you could take 5% for the year or, say, mid-single digits or something like that, you can average it up and you figure out exactly..

Except you're not fully booked for the....

That's right. You're not fully booked. There's some risk to it..

Okay. I just want to get an idea of how comfortable you are.

And while we're on that, for question two, what would you say the biggest risk in the guidance is and where is the greatest conservatism?.

Rob, I don't want to give – we put these in and we make our best judgment on the number.

I mean, I can give you – I think there's very little risk in the commercial OEM business and I think there's very little risk in the defense OEM business, just because those platforms are – somebody, I guess, could do some inventory restocking, but I think we probably would have seen that by now. The risk is where it always is.

The risk is in the aftermarket. That's the shorter cycle stuff and it's the higher-margin stuff..

Okay. I'm just trying to reconcile the guidance to what you saw in the first half and the fact that you're not fully booked and just understand the confidence level on all that..

Yeah. I think the way you might think about it is if you use – right, if you're up 1% for the first – and this doesn't – math doesn't work exactly, Rob, because the denominators aren't the same.

But if you're up 1% or 1.5% for the first half of the year and you're booking at 8.5%, if you assumed 8.5% was the second half of the year and you added the two up and divide by two, you'd be....

Mid-single digits..

...kind of mid single-digits..

Yeah..

If you add to that – but I also realize, Rob, as I say again, the denominators aren't exactly the same, because they're rising, but that sort of give you a general sense and I think when you add that to the fact that we go out and we look at our distributors picking up, it makes us feel better.

Now, can I tell you that's what it's going to look like in July, how the (01:11:03) distributorship grew? Of course, I can't. But as we sit here today, look at those two – those kind of couple of facts, it makes us feel like this is a reasonable number..

Okay. All right. Well, thank you..

You're welcome, sir..

Thank you. Our next question comes from Seth Seifman with JPMorgan. Your line is open..

Hi. This is actually Mike Rednor on for Seth. So, my question is around the defense and kind of the growth that's going on there. What changed kind of in your outlook to drive sales higher? And was it one specific thing or can you offer some color around just the defense business? Thanks..

Kevin, you want to take that (01:11:54)?.

Yeah, sure. We've seen an increase in requests for quote activity across the ranch. Not all of it has translated into orders yet. I think there's pent-up demand possibly. So, we're seeing strong inquiries across the business, some strength in defense aftermarket and a nice rebound in OEM, some of which was the large program I talked about.

But even without that, we would have seen defense OEM orders pick up.

Does that answer your question?.

Yes. Thanks..

(01:12:33) can't point to discrete platforms. It's kind of across the board, except for the one large defense OEM booking that I called out. That tends to be across the ranch..

Okay, great. Thanks..

Thank you. Our next question comes from Gautam Khanna with Cowen & Company. Your line is open..

Hey guys good morning. This is Bill Ledley on for Gautam. Had a quick question about second sourcing initiatives. Boeing is talking a lot about their own proprietary parts business, especially in the actuation side.

Have you seen any increased encouragement second sourcing on the OEM side or the aftermarket?.

You mean, on – the things that we have seen them do have been for items where they own the IP. Essentially, they've been giving the work out on a make-to-print basis. That is, there's very little of our business that is subject to that. Vast majority is our own IP and we have not seen any intrusion into that..

Okay, thanks.

And then, could you just remind us when your partner for success agreement ends and when you have to start negotiating for the next round?.

It ends in 2019. It ends in 2019 – 2018, end of 2018, excuse me, end of 2018. And I suspect fairly soon, we will..

Okay.

And just one last quick one, when did the comps in biz jet and helo start to flatten out?.

I don't know the answer to that.

You mean if we looked at our quarterly OEM shipments?.

Yeah. I think you called out some green shoots of life in that business in terms of orders in the quarter. Just kind of wondering when the revenue starts to kind of pick up on a year-over-year basis..

I think we gave you our forecast for the year and we gave it to you in the segments. I'm not going to break it down. I don't want to break it down any finer than that..

Okay. All right. Well, thanks so much..

But I would say it's hard. Yes, we saw some decent booking numbers for business jets for the quarter or the first half, but if you also – if you look at all the noise around the business jet and the forecast production rates, it's hard to get too excited about that..

All right. Thank you so much..

Yep..

Thank you. Our next question comes from Drew Lipke with Stephens. Your line is open..

Hey, guys. Thanks for taking the time..

Hey..

You just underwent this commercial aftermarket study and I'm curious, you mentioned the commercial aftermarket mix.

If you look at the – just isolating commercial aftermarket and large transport there, I'm curious what platforms currently generate the most revenue for you in that segment right now?.

We are almost market-weighted. Matter of fact, we are just about market-weighted. So, I mean, you could go through and figure it out yourself. I mean, what I, frankly, haven't done it, but we generally track, I mean, probably seat miles by platform or something like that is going to be our distribution. We're more pretty much market-weighted..

Okay.

And on the better defense outlook, I'm curious with – how quickly should we see an increase in defense aftermarket with – the spare parts focused and spare parts funding focused and addressing those critical readiness needs?.

That's tough. I mean, the truth is, I don't know. The speed – when the government releases money, when it bubbles down to us is awful hard to predict. As Kevin said, we are starting to see some modest pickup, but I mean, I can't tell you whether that will spike up or flatten out. I mean, we feel reasonably good about it from the balance of this year..

All right. Thanks, guys..

Thank you. Our next question comes from Noah Poponak with Goldman Sachs. Your line is open..

Noah?.

Hey, can you hear me?.

Yes. Noah, I think this is quite disciplined, to ask two questions and get back in the line, I'm impressed..

Some would dispute if my first round was two, but it was – it was As and Bs under one and two..

I see, I see, we are keeping the track now..

Yeah.

So, the aftermarket bookings ahead of shipments, it's 8.5% in the first half?.

Yes..

And I believe that was 12% in the first quarter.

So, is it 12% in the first quarter and 5% in the second quarter?.

It's less. It's less..

I'm not looking at the number, but it averages 8.5%..

Okay. And so, is the reason that the 12% doesn't immediately flow through to a similar revenue growth rate that, that 12% is comparing to 1Q revenue in the denominator..

Right..

Whereas 2Q revenue growth is the year ago, which was a higher absolute revenue?.

Yes. The denominators aren't the same..

Okay..

Right. So, 12% over the lowest Q1 doesn't reflect the 12% growth in Q2, you know what I'm saying..

Got it. I got it. And what is that number....

I think the best way to look at that, Noah, is at least the way I look at it is, it's not mathematically perfect, but if you're bringing in work at 8.5% higher than you're shipping it out, that's a reasonably positive indicator..

Right.

What is that number on a trailing 12-month basis? Do you know?.

I don't know the number. It's probably – I don't know it's a public number or not, but I don't know the number..

Yeah, I don't know if you guys give it quite every quarter.

And what is the sort of time it takes to extinguish bookings in that business?.

You mean – yeah, yeah..

Like, when does it all convert?.

Yeah. It's not consistent by – across our businesses, but it's surely less than six months on average..

Less than six months, okay..

I would guess, Noah, and I'm giving you a rough estimate, I don't know this number now, but I would guess, it's three to four months backlog..

Okay. So, some in the first quarter, some in the quarter after that, maybe a little bit..

Right..

Okay..

Right. I mean, again, what makes us feel positive is that – (01:19:40) feel some confidence in the second half is we see the bookings running ahead. And even though a lot of our business doesn't go through distributors, that's our best look. That's another good look. And we see that pick up and that gives us a positive deal..

Yeah, that makes sense. And then, just last one.

Did you guys quantify defense aftermarket growth in the quarter and also there the bookings versus revenue?.

No. We just give a total number for defense..

Do you have that aftermarket breakout? (01:20:16).

But I would tell you, I didn't give you the growth rate, because I don't know it, but the – basically, the aftermarket split versus OEM is about the same in defense as it is in the overall business..

A little over half aftermarket..

Right. Okay. So, it doesn't sound like the growth rate in the – doesn't sound like that's been – like the aftermarket has been growing much faster than OE there and necessarily. Just curious of the shorter-cycle piece of that business..

No, no. For the year, the OE has been growing faster than the aftermarket..

In defense?.

In defense, in total, for the six-month period. And that's somewhat influenced by some quite a big order in the second quarter..

That's right. This is Kevin. (01:21:16).

Oh, hold it, hold it, never mind, Noah, I'm looking at the bookings..

Yeah, you're right. You're right, year-to-date, the aftermarket's up, Noah..

Can you precisely quantify it if you're looking right at it?.

No, I can't precisely quantify it. I don't know how to figure it out..

Okay. That's fair enough. I got it directionally then. Thank you..

But the bookings are going – I gave you the bookings. I told you the bookings are the other way..

Yeah..

Yeah. So, by the way, just to be clear, the aftermarket is up. It's not – for the bookings, it's not declining, it's just the OEMs jumping faster..

Yeah. Okay. Thank you..

Okay..

Thank you. Our next question comes from Myles Walton with Deutsche Bank. Your line is open..

Hey. So, I was disciplined too, so I get one more..

Here's another disciplined soul..

The distributor commentary you had on look-through sales, I just want to make sure I understand what you're saying.

Are you saying that the distributors selling your products were up double-digit in terms of the sales that they're seeing and you were down 1.5%?.

Yes. We are saying that the – if you compare our dollars sold and primarily we look at that, there may be all (01:22:41), because that's where we get the best information. The odds and ends are little wounds, but they're just as good (01:22:45), but they're quite good, the data.

What we're saying is, if you take the Q2 sales, for this Q2 against Q2 of the previous year, they're up significantly and up well above the price increase..

Okay. Were your sales into the distributors different? You said it's down 1.5% on an organic basis.

Was there a big difference between what your sales in the distribution was year-on-year versus your sales on a non-distribution year-on-year?.

I don't know the answer to that. I don't know the answer to that..

Okay. And then....

I just had one number for commercial aftermarket. I don't know the....

Yeah. Okay, I just wanted to know the definition of look-through, because it would, obviously, imply that they might liquidate their inventory..

Yeah. I mean, well, anyway, I don't know the answer. I know where you're going..

Yeah, yeah. Okay.

And then the other one on the denominator, how much of your aftermarket sales are first half versus second half historically in terms of weighting? Is it proportional to sales, the overall company sales; is that best way to guess?.

Yeah, that's probably a decent estimate. That's probably a decent estimate..

All right, good. Thanks..

Okay..

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Liza Sabol for closing remarks..

I'd like to thank you all for calling in today and please look for our 10-Q that we will file sometime tomorrow. Thanks, again..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day..