Q1 2022 TransDigm Group Inc Earnings Call

Thank you for standing by and welcome to the first quarter 2022 trains <unk> Group incorporated earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone as a reminder today.

This program May be recorded and now I'd like to introduce your host for today's program Jimmy Steven Director of Investor Relations. Please go ahead.

Yeah.

Thank you and welcome to <unk> fiscal 2022 first quarter earnings conference call presenting on the call. This morning are transient President and Chief Executive Officer, Kevin Stein, Chief Operating Officer, George valid Harris, and Chief Financial Officer, Mike Listen please visit our website at <unk> Dot com.

To obtain a supplemental slide deck and call replay information before we begin the company would like to remind you that the statements made during this call which are not historical in fact are forward looking statements for further information about important factors that would cause actual results to differ materially from those expressed or implied.

And 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 Dot Gov.

The company would also like to advise you that during the course of the call we will be referring to EBITDA, specifically EBITDA as defined adjusted net income and adjusted earnings per share all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable.

<unk> GAAP measures and applicable reconciliation I will now turn the call over to Kevin.

Good morning, and thanks for calling in today first I'll start off with the usual quick overview of our strategy and then a few comments about the quarter and a discussion of our fiscal 2022 outlook, then George and Mike will give additional color on the quarter to reiterate we are unique in the industry in both the consistency of our strategy in good and bad.

As well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.

To summarize here are some of the reasons why we believe this about 90% of our net sales are generated by proprietary products and over three quarters of our net sales come from products, which we believe we are the sole source provider.

Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturn.

We follow a consistent long term strategy, specifically, we own and operate proprietary aerospace businesses with significant aftermarket content, we utilize a simple well proven value based operating methodology. We are a decentralized organization structure and unique compensation system closely aligned with shareholders.

Next we acquire businesses that fit this strategy, where we see a clear path to PE like returns and finally, our capital structure and allocations are a key part of our value creation methodology.

Our longstanding goal is to give our shareholders private equity like returns with the liquidity of a public market.

To do this we stay focused on both the details of value creation as well as careful allocation of our capital as you saw from our earnings release, we had a good quarter considering the market environment. We continue to see recovery in the commercial aerospace market and are encouraged by the trends in air traffic among other factors our COO.

Q1 fiscal results show positive growth in comparison to the same period in fiscal 2021, as we are lapping the first quarter of 2021, which was heavily impacted by the pandemic and prior to the widespread availability of vaccines. Although our results have improved they continue to be unfavorably affected in comparison to pre pandemic levels.

As the demand for air travel remains depressed.

However, the continued improvement in global air traffic. Despite the emergence of a new COVID-19 variant in late 2021 is encouraging it further illustrates the pent up demand for air travel and bodes well for the momentum of the commercial aerospace recovery in 2022 to date. The recovery has remained primarily driven by day.

<unk> leisure travel, although we are optimistic for recovery of international travel as many governments across the world have soften travel restrictions, even the travel restrictions reimpose by certain governments during the months of December due to the omicron variant are now starting to ease which is again encouraging signs in our business we saw.

Another quarter of sequential improvement in our commercial markets with total commercial aftermarket revenues up 10% over Q4 of fiscal 2021 and bookings up more than 15% compared to Q4 commercial OEM bookings came in even stronger with almost 20% sequential improvement over Q4 I'm also.

So very pleased that despite the challenging commercial environment, our EBITDA as defined margin was 47, 3% in the quarter contributing to this better than expected margin is the continued recovery in our commercial aftermarket revenues as well as the careful management of our cost structure and focus on our operating strategy.

This was achieved despite the emergence of the omicron variance during the quarter.

Additionally, we continued to generate significant cash in Q1, we had strong operating cash flow generation of almost $280 million and closed the quarter with a little over $4 8 billion of cash we expect to steadily generate significant additional cash throughout the remainder of 2022 <unk>.

Next an update on our capital allocation activities and priorities. We are now at a decision point with regard to our sizable cash balance, which is now approaching $5 billion <unk>.

Consistent with our history, when we have a significant amount of cash available we aim to get that back to the shareholders in one form or another at this time, we are still in the process of evaluating our capital allocation options with regard to any significant acquisitions share buybacks and dividends. All three options are on the table each individually, but then.

Also potentially in some combination over the next 12 months any significant M&A share buyback <unk> dividend activity will still leave the company with substantial liquidity and the financial flexibility to deal with any currently anticipated capital requirements or other opportunities in the readily foreseeable future.

We continue to look at possible M&A opportunities and are always attentive to our capital allocation.

The M&A and capital markets are always difficult to predict but especially so in these times regarding the current M&A pipeline. We are still actively looking for M&A opportunities that fit our model. We continue to see a pickup in acquisition opportunity activity, but it's still slower than pre COVID-19 , we have a decent pipeline of possibilities as usual mostly in.

Small midsize range I cannot predict or comment on possible closings. We remain confident that there was a long runway for acquisitions that fit our portfolio.

Now moving to our outlook for 2022, we are still not in a position to provide full financial guidance. As a result of the continued disruption in our primary commercial end markets. We continue to be encouraged by the recovery we have seen in our commercial aftermarket revenues and the strong bookings received for both commercial OEM and aftermarket.

In Q1, we will look to reinstate guidance reinstitute guidance, when we have a clearer picture of the future.

We continue to expect COVID-19 to have an adverse impact on our financial results compared to pre pandemic levels throughout the remainder of fiscal 2022 under the assumption that both our commercial OEM and aftermarket customer demand will remain depressed due to lower worldwide air travel, although recent positive trends.

In commercial air traffic could impact us favorably.

To reiterate what we said on the Q4 earnings call. Our teams are still planning for our commercial aftermarket revenue to grow in the 20% to 30% range. We expect our commercial OEM revenue to grow significantly as well, but at a rate slightly less than the commercial aftermarket as you know we aimed to be conservative and would be happy to.

Have both of these end markets rebound more strongly to reiterate these are planning assumptions for organizational purposes and not guidance.

As for the defense market, we still expect defense revenue growth in the low single digit percent range from fiscal 2022 versus prior year. Despite the slow start to the year George will provide more color on our defense end market.

We now expect full year fiscal 2022, EBITDA margin to be slightly north of 47% due to the rate of commercial aftermarket recovery. Please note that our Q1 EBITDA margin was stronger than anticipated and we may see less year over year margin improvement for Q2, and expect margins to move up throughout the second.

Half of the fiscal year as a final note. This margin guidance includes the unfavorable headwind of our Cobham acquisition of about <unk>, 5%. We believe we are well positioned for the remainder of fiscal 2022 as usual, we will closely watch the aerospace and capital markets.

As they develop and we'll react accordingly.

Mike will provide details on the other fiscal 2022 financial assumptions and updates.

Now shifting gears for a moment to non financial matters I would like to touch on our audit report, which was released in mid December as we expected and communicated the audit scope and results were similar to prior audits. The report found no legal wrongdoing on behalf of trans time or any of our employees.

<unk> asked for a purely voluntary refund of approximately $21 million, we disagree with many of the implications contained in the report as well as the methodology used to arrive at many of the reports conclusions. We also disagree with the use of arbitrary standards and analysis, which render many areas of the port.

Inaccurate and misleading.

Additionally, at the request of the House oversight and Reform Committee, we participated in the hearing on January 19th to discuss the results of the audit.

Going forward, we will continue to work with the IAG, the DLA and any other relevant parties to evaluate the results of this audit the U S government in the U S War fighter remain top priorities for transplant. At this time, we are engaged directly with the DLA and do not have any further update on whether or not we expect to pay all or a portion.

Of the $21 million voluntary refund request.

Finally, I wanted to announce the retirement of our Vice Chairman Bob Henderson.

He retired at the end of first fiscal quarter, Bob has been a key member of the Trans My management team for over 25 years and a significant partner in the Companys growth during the entire period. He served in a range of roles over his years with trans dime, including as president of several operating units executive Vice President.

Oh, a trans <unk> airframe business group and most recently Vice chairman, where he oversaw the integration of the operating units acquired as part of the Esterline transaction.

We wish Bob well in his retirement.

Let me conclude by stating that I am pleased with the Companys performance in this challenging time for the commercial aerospace industry and with our commitment to driving value for our stakeholders as always we remain focused on executing our operating strategy and managing our cost structure. As we continue on this journey to a full recovery of the commercial aerospace industry.

We look forward to the remainder of our fiscal 2022 and expect that our consistent strategy will continue to provide the value you have come to expect from US now let me hand, it over to George to review our performance in a few other items.

Thanks, Thanks, Kevin I'll start with our typical review of results by key market category for the remainder of the call I'll provide color commentary on a pro forma basis compared to the prior year period in 2021 that is assuming we own the same mix of businesses in both periods.

This market discussion includes acquisition of Cobham Aero connectivity. We began to include Cobham in this market analysis discussion in the second quarter of fiscal 2021. This market discussion also removes the impact of any divestitures completed in fiscal 2021, and the commercial market, which typically makes up.

Close to 65% of our revenue, we will split our discussion into OEM and aftermarket.

Our total commercial OEM revenue increased approximately 13% in Q1 compared with the prior year period bookings in the quarter were robust compared to the same prior year period and strongly outpaced sales.

Sequentially, the bookings improved almost 20% compared to Q4.

Although we expect demand for our commercial OEM products continue to be reduced in the short term. We are encouraged by build rates gradually progressing at the commercial Oems. We are hopeful that the narrow body rate ramps disclosed by Airbus and Boeing will play out as forecasted.

Now moving onto our commercial aftermarket business discussion.

Total commercial aftermarket revenue increased by approximately 49% in Q1, when compared with prior year period growth in commercial aftermarket revenue was primarily driven by increased demand in our passenger submarket, although all of our commercial aftermarket submarkets were up significantly compared to prior year.

Our Q1 <unk>.

Sequentially total commercial aftermarket revenues grew approximately 10% and bookings grew more than 15%.

Commercial aftermarket bookings are up significantly this quarter compared to the same prior year period, and Q1 bookings strongly outpaced sales to touch on a few key points of consideration global revenue passenger miles remained low but continued to modestly improve throughout our Q1 IATA current.

<unk> forecast, a 39% decrease in revenue passenger miles and calendar year 2022, compared to pre pandemic levels. Within IATA is estimate is the expectation that domestic travel will be back to 93% of pre pandemic levels in calendar year 2022.

Despite the impact of the Omicron variant December global revenue passenger miles still improve month on month, which demonstrates the strong underlying demand and the willingness of passengers to travel countries that re imposed travel restrictions due to this variant are already announcing significant easing of those.

<unk> the limited impact from the Omicron variant on Air travel provides optimism for the pace of the recovery of air traffic in 2022.

The recovery in domestic travel has been more resilient than international.

Domestic air traffic for calendar 2021 was only down 28% compared to pre pandemic versus international which was still down 75%.

As the commercial aerospace recovery has progressed the U S and Europe have shown strong demand for domestic travel China has been more volatile due to its zero COVID-19 policies, which lead to localized lockdowns and rapid drop offs in air travel.

Though the pace of the international Air traffic recovery has been slow we are hopeful for improvement in international travel in 2022 as vaccination rates continue to improve globally and many of the government travel restrictions are softening.

Global cargo volumes continue to surpass pre COVID-19 levels and it is generally expected that airfreight demand will remain robust throughout 2022.

Business jet utilization remains strong commentary from business jet Oems and operators has been encouraging and these higher levels of business jet activity may be here to stay those time will tell.

Now, let me speak about our defense market, which traditionally is at or below 35% of our total revenue.

The defense market revenue, which includes both OEM and aftermarket revenues decreased by approximately 12% in Q1, when compared with the prior year period.

As we have said many times defense sales and bookings can be lumpy. This quarter Cobham was lapping a very tough prior year comparison as carbon columns defense sales accelerated in fiscal Q1, 2021, which was the last quarter prior to <unk> ownership. This.

Was the single largest contributor to the year over year decline. There are also some supply chain induced delays in fulfilling orders at certain operating units as Kevin mentioned earlier, we continue to expect low single digit percent range growth in fiscal 2022 for a defense market revenues.

Lastly, I would like to wrap up by stating how pleased I am by our operational performance in this first quarter of fiscal 2022. Despite the continued impact of the pandemic, we remain focused on our value drivers and executing with operational excellence with that I'd like to turn it over to our Chief Financial Officer, Mike Lisman.

Morning, everyone I'm going to quickly hit on some additional financial matters for the quarter and then our expectations for the full fiscal year.

First in regard to profitability for the quarter ebay.

EBITDA as defined of about 565 million for Q1 was up 19% versus our prior Q1.

EBITDA as defined margin in the quarter was approximately 47, 3%. This represents year over year improvement in our EBITDA as defined margin of about 450 basis points versus Q1 of last year.

Sequentially EBITDA as defined margin declined slightly by about 200 basis points during Q1 versus Q4 of last fiscal year. As you know this is typically the case for us given the higher volume levels in Q4, and lower number of working days in our fiscal Q1.

Now a few quick additional financial data points for the quarter organic growth was 9% driven by the rebound in our commercial OEM and aftermarket end markets.

On taxes, the slightly lower than expected GAAP rate for the quarter was driven by significant tax benefits arising from equity compensation deduction. This is just timing barring some deviations in the rates for this first quarter our tax rate guidance for the full year is unchanged from what we provided on our last earnings call.

Moving to cash and liquidity, we had another nice quarter on free cash flow free cash flow, which we traditionally define a trans time as EBITDA less cash interest payments capex and cash taxes was roughly $250 million.

We ended the quarter with about $4 $8 billion of cash.

During Q1, we also paid down our $200 million revolver balance, which was drawn at the onset of Covid in March of 2020 out of an abundance of caution.

The $200 million revolver Paydown is the primary reason that our cash balance ticked up much less than the $250 million of free cash flow we generated in Q1.

Our net debt to EBITDA ratio is now at six seven times. This ratio was down from eight two times at its peak.

We expect to continue running free cash flow positive and barring any additional capital markets activities. This ratio would keep coming down as we proceed through our fiscal 'twenty two.

From an overall cash liquidity and balance sheet standpoint, we remain in good position and well prepared to withstand the currently depressed, but now rebounding commercial environment for quite some time with that I'll turn it back to the operator to kick off the Q&A.

Certainly ladies and gentlemen, once again, if you have a question. Please press Star then one our first question comes from the line of Myles Walton from UBS. Your question. Please thanks.

Thanks, Good morning.

Comment content.

Servicing target for aftermarket growth for fiscal 'twenty.

We can do two mile sorry, we can't hear you.

Apologies can you hear me now.

Hugo perfectly headset.

Yes, exactly the battery's dead.

Can I ask about the range of aftermarket growth that youre looking forward for fiscal 'twenty two given the.

A strong number in <unk>.

Ah you're comfortably at the top very top of that sales range at this point.

<unk> was there anything in particular that was driving aftermarket that wouldn't keep this pace for the rest of the year.

I don't think we see anything thats keeping the pace.

We know about that's really the issue with sticking our neck out and.

Giving guidance is that there is still a lot of unknowns omicron variants pop up.

It's.

We're just communicating our planning.

<unk> that we're using to staff accordingly, we hope that it's conservative.

Okay.

And I know, Mike you said that the trends on defense business.

Was including column on your organic calculation down year on year.

Giving you didn't own cobham in the first quarter of last year, what did the transplant business ex Cobham look like on a year on year basis.

I think youll see that some of the details in the Q. It was down about 5%, 6% ballpark, Okay. All right I'll leave it there. Thanks.

Thank you. Our next question comes from the line of Ron Epstein from Bank of America. Your question. Please.

Hey, good morning, its actually its Elizabeth answer Ron.

Two questions. One can you talk to the trends you're seeing in banking and Destocking and then secondly, as a follow up to Myles just to confirm that the 5% to 6% decline that you saw ex Cobham is that all attributable to supply chain and are you seeing any improvement there or how are you thinking about that through the rest of the year.

George you want to take the Destocking question for sure.

I think as most of you know we don't have insight into the specific inventory levels at our airline customers that being said, we're hopeful we're cautiously optimistic we're at the end of any significant destocking activities at the airlines.

And then on the second part of your question the specifics of what drove the remaining 6% decline in the base Trans time defense business. It's a mixed bag of both supply chain issues, but then also our.

Planning to have been down this first quarter, we knew some of this was.

Coming.

For us in that Q1 would be a little bit weaker this year, but I don't think we want to get into the specifics of exactly what drove it but it was a combo of the two.

I mean, what are you thinking for the rest of the year in terms of improvement are you seeing any signs of improvement already.

We are still in defense, we still feel good about the low single digit growth target for the year.

Okay, so expectations around supply chain has not changed.

That's right at this time, yes, I don't think they need to watch it we have seen this is Kevin we've seen some inflationary pressures we've seen some supply chain issues I think in the.

Electronic components and castings in.

But it's.

It's not across the whole industry, yet, but it's something we're watching closely.

Okay. Thank you to our teams have been very active and engaging with the supply chain.

We would suspect that was probably still have a couple of quarters of activities related to supply chain issues, but theyre engaged in mitigating as best as I can.

Thank you.

Thank you. Our next question comes from the line of David Strauss from Barclays. Your question. Please.

Thanks Margaret.

Hi, Good morning. Good morning. Good morning, I think you you noted George noted the strongest part of the aftermarket was passenger or can you just give a little bit of color.

Yet the 10% sequential improvement you saw in the quarter, how that broke out.

And in tears passenger.

Yes, I don't think I have the specifics in front of me, but as a reminder, passengers are largest submarket it constitutes anywhere between 60 and 65% of our overall commercial aftermarket sales.

But as I noted, we saw strength across the board in all of the Submarkets within the commercial aftermarket.

Okay. A quick quick follow up Mike you, obviously have a decent amount of floating rate debt can you talk about.

How are they a higher interest rate environment might impact your overall rate I know, you've got caps and swaps, but what kind of sensitivity are you looking at in terms of the impact of higher rates.

We don't expect too much of an impact when you factor in the current caps and swaps were about 84% fixed going out for the next two or three years.

So not a sizeable impact as things pick up here, we do factor in the latest LIBOR curve. When we give you guys. The interest rate guidance the consensus market curve. So that's all taken into.

Account, but given the fact that we're close to 85% fixed rate anyway.

Even if interest rates were to surge by quite a bit there's not too much pain to be felt.

At least during the period of those hedges before they run out.

Thanks.

Thank you. Our next question comes from the line of Ken Herbert from RBC capital markets. Your question. Please.

Hey, Thanks, good morning.

Mike.

Just ask I wanted to first ask on cash flow and good cash generation in the quarter. How do you think about cash conversion relative to your EBITDA as defined moving forward and with all the cost actions could that framework b b, perhaps a little higher than you've talked about it in the past.

I don't think we expect any material deviation from the close to 50% conversion of our EBITDA to free cash flow that we've always relayed in the past and that's again based on the definition of free cash flow that I mentioned in my in my script over time as you know.

As we rebound out of Covid, we expect to get back and close to that kind of 45% to 50% ballpark of EBITDA that we've operated at historically right now we're a little bit lower just given the fixed nature of the interest charge and the fact that the EBITA is still depressed, but once we rebounded and come out of this we expect to go back to that same ball.

Mark.

Okay.

And if I could just on the aftermarket.

I know in the past you've talked about a fairly significant percentage of your business Thats book and ship there has that mix changed as you think about.

Sequentially, what we should expect through the next few quarters I guess, it sounds like Youre still a 10% sequential improvement through the rest of the fiscal year as a fair starting point correct.

Correct I think as we look across the balance of the fiscal year, we would expect a gradual ramp up in the commercial aftermarket as Kevin noted we are a little bit conservative here, just with the different variance of COVID-19.

<unk>, providing a temporary disruption.

So we hope we're on the conservative side, but we saw a 10% sequential growth was a good start and we would anticipate that to carry throughout the balance of the year.

Excellent. Thank you very much.

Thank you. Our next question comes from the line of Robert Spingarn from Melius Research. Your question. Please.

Hey, good morning.

But I wanted to ask a question about looking at the business from the different end markets narrow body wide body biz jet so forth and where you are relative on sales to pre pandemic in those areas and to what extent that affects your factory implant in other words.

So idle that it's going to be problematic to get it back up and running.

No wide body is not so little that it would be problematic to get it up.

Narrow body has done better than wide body.

And business jet has been very good.

I think that's generally how we would describe it but theres nothing more specific about wide body that would make it difficult to bring the manufacturing up George do you want to anything you want to add to that yes, I would agree I mean, typically and as you know we're market weighted in terms of the fleet.

From an aftermarket perspective supporting the wide bodies is not an issue of the majority of the labor and the higher volume production comes on the OEM side. So we don't anticipate any issues with the depressed OEM environment impacting the commercial aftermarket support.

And George would it be fair to say that Biz jet is the most recovered or narrow body.

I would say biz jet Biz jets, the most recovered absolutely okay. Thank you.

Thank you. Our next question comes from the line of Robert Stallard from vertical research. Your question. Please.

Thanks, so much good morning.

Good morning, good morning.

I think it's maybe for Kevin <unk>.

Very strong Q1 after market, but are there any indications that airlines pulling forward work.

It would otherwise have done later in the year and therefore, the sequential growth might ease as the year progresses.

I would tell you that Q1 was strong and the order book was strong.

Was it stronger than we anticipated, maybe a little bit but.

I don't think theres any indication that things will slow down necessarily.

<unk> necessarily I don't have any indication that people are frontloading maintenance work or buying spares ahead, that's usually not the way the industry operates.

I think this will continue as long as flight activity continues.

Alright, and then Kevin on the M&A front, you said things are a bit slow at the moment I'm wondering if you might want to comment on what the cause of that might be and whether youre seeing any differences in the commercial versus defense end markets.

Yes.

With the defense surging over the last couple of years that we saw a lot more defense opportunities in M&A space.

With the commercial market being so depressed right now I think there hasnt been as many commercial.

Opportunities that have come along on the M&A front, but that's starting to change we're starting to see more of the commercial properties that we we cover so we will look for more of those.

As we go forward, it's always difficult to predict when things will close.

We frequently are looking at businesses and don't get to the point of closing for some reason, but we're optimistic right now.

That's great. Thanks, so much.

Thank you. Our next question comes from the line of Peter Arment from Baird. Your question. Please.

Hi, Thanks, Good morning, everyone, Kevin George Mike. Good morning interval. This is Kevin George just on the just on the defense your confidence around the low single digit growth just given the slower start to the year, but just also how you factored in are you seeing any impact from the continuing resolution and if it did go full year, how does that impact your thinking.

Yes, I don't know that we can pinpoint any direct or quantifiable impacts from the continuing resolution.

I think as I mentioned, the largest single driver in the defense market for this quarter was some of the lumpiness related to the Cobham acquisition.

Quote volumes in general continue to remain strong at the teams. So we're cautiously optimistic that those will convert over to orders as we would expect for the balance of the year.

Okay. That's helpful and just Kevin I, just wanted to circle back to your comments about you made some comments in the fourth quarter call about you thought the supply chain disruptions might get a little worse on the electronic component side did that get any worse in the quarter or is it still kind of neutral.

I think they did in some places get worse.

<unk> definitely struggling on some of the electronic components, we're seeing inflation supply chain issues on those but right now I think limited to <unk>.

Electronics and casting the casting industry has definitely.

Been hurt coming back up after the slowdown.

I appreciate the details thanks.

Sure.

Thank you. Our next question comes from line of Matt Akers from Wells Fargo. Your question. Please.

Hey, good morning, everybody. Thanks for the question.

Can you talk about what's the kind of the biggest area of uncertainty that gives you pause in terms of giving guidance for this year.

The OE build rates or what will you have to see to get the confidence to give that.

I think it's OE build rates, our largest customers still haven't given guidance still haven't given us a forecast this matters to us because as George alluded to all of our hiring and staffing is really related to OEM build rates. So it's really difficult to forecast that if you're not getting any guidance.

Aftermarket we also feel.

Im very optimistic that it's moving in the right direction, we're seeing more takeoff and landings revenue passenger miles by any metric it continues to improve but it is lumpy around the world.

I think that's what gives us pause in issuing guidance is really a lack of clarity on the market.

We saw <unk> come out of nowhere in Q1 in our first quarter.

Largely out of nowhere and saw it really impact so.

It's difficult for us to forecast the future when there are so many unknown, so that's where we come down.

Got it thanks, and then I guess on the defense business.

The hearing and its proposed new legislation can you just talk about how that did that impact your business at all in the quarter or does that have any effect on sort of how has your relationship with ctrip.

I'll be happy to talk to that one we have not seen any material impact from the <unk> audit release or the hearing.

Again, we're touching base with the teams.

As we've mentioned in prior calls we continue to be directly engaged with the Dod and the DLA.

And we've formed this working group, we think that has been beneficial to both parties over last two years.

So we have not seen any material impact as a result of either of those two activities.

Thanks.

Thank you. Our next question comes from the line of Michael Chairman Li from <unk> Securities. Your question. Please.

Hey, good morning, guys. Thanks for taking my questions. Good morning, maybe.

Maybe just good morning, maybe just to go back to Rob's question on the aftermarket with wide body.

Okay.

That growth I mean perfectly.

She is still running pretty light.

The planning range that you've given assume any any wide body recovery have you seen any I guess uptick in bookings to support wide body aftermarket activity.

We don't have that split out by dish.

Different segments in our bookings, it's too difficult to see that we just look at ourselves as market weighted.

As wide bodies start to fly more in our utilized more.

Certainly we'll have to.

Upgrades are manufacturing there, but I don't think we see it as a as a concern for us right now.

Got it and then just back to the $5 billion of cash you've talked dividend you talked buyback M&A obviously.

Debt Paydown entered the equation at all I mean, you guys have basically been operating as a public company.

Free money environment.

Seemingly inversely correlated with rising rates you could probably add.

A lot to EPS accretion I mean is that is that even in the cards at all and I know you're hedged and you just mentioned that the 84%, but I mean, we really don't know how this is going to shake out I mean is that.

Is that in your thinking or the thought process for use of cash now.

Sure we always say.

Look at all uses of cash and I think we've always communicated that the first and primary use is to invest in our own businesses secondarily is M&A.

Next comes.

Capital allocation back out to our shareholders and then the last priority would be paying down debt I don't think the debt environments have changed enough for us to modify our strategy. It may happen, one day, but its certainly not yet.

And if you look at just on cost effective from a cost of equity versus cost of debt standpoint that set even at forecasted interest rates, it's still a much better way to finance your business absolutely.

Okay fair enough thanks, guys.

Thank you. Our next question comes from the line of Seth Sigman from Jpmorgan. Your question. Please.

Okay.

Thanks very much.

Morning, sorry.

Sorry for kind of a small bore question here, but just noticed from the slides the significant increase in stock comp this year.

What is that due to you and B should we expect you guys to file the proxy.

Sure. So first on the stock comp add back this is GAAP accounting rules as they pertain to how we do the computation of our stock comp expense in the GAAP P&L. It's a noncash expense, we're not handing out any more stock options the management team or anything this year than we have in prior years what drove the.

And I think it was about last year, we had $120 $29 million of stock comp expense. This year, we're stepping up to a midpoint of $1 45 rough Justice is the target. We gave you the driver the driver of that increases that we changed the best criteria back from the temporary criteria. We had during COVID-19 , which was an EBITDA margin in <unk>.

Target and we flip it back to the metric that we've always had since <unk> was founded which is the 17, 5% growth target on the intrinsic equity value per share that switch just drove a bit of a change in the way you do the GAAP stock comp expense computation, but going forward, we're going to adhere.

Year to the same methodologies, we have always had and again no no increase in the number of options that are being handed out to executives or anything as part of our incentive plans.

On the proxy filing you probably saw that we filed the 10-K, a last week, which included a lot of our content will be unusual proxy, we won't expect the proxy to come for.

A couple of months, probably may or June timeframe.

So a little bit later than would typically be the case, but much of the content. That's in that was released last week and the 10-K.

Got it great. Thanks.

And then just a.

A couple of quick clarifications on stuff that you guys have talked about for the remainder of the year.

Get to that kind of.

Low single digit growth for the defense business that implies that we should be seeing.

A return to sort of mid single digit growth.

For the remainder of the year or is it much more.

Back half weighted than that and then secondly, what is it about the second quarter. It seems like you're expecting a little bit less.

Margin expansion in the second quarter, and then acceleration later in the year.

What is it about the second quarter, where there is a particular headwind.

Well on the margin side, we don't we don't want to give quarterly guidance, we're not there yet so I don't want to give margin guidance on a per quarter basis.

I don't I don't see anything out there.

<unk> me about Q2 and as we go forward.

We just arent issuing guidance and we had a very strong Q1.

So it's just the normal conservatism in our commentary.

Okay, Okay, and then on defense and kind of.

The application is kind of mid single growth the remainder of the year.

Yes, I think thats, what we would have to get to so the math will share what given the slow start.

This will be more of a of a stretch for us for the year, but we still feel confident enough to leave it there.

As.

The business generally recovers as Cobham starts to grow I think this will.

Rectify itself.

And as you guys know that defense is always lumpy too. So we're not going to go and give quarterly guidance there either because it's hard to forecast with precision.

Okay.

Thanks very much.

Thank you. Our next question comes from the line of Hunter Keay from Wolfe Research. Your question. Please.

Good morning, Thank you.

Good morning, good morning.

So we know that M&A is your preferred means of capital deployment, but.

All else equal, it's tough acquisition environment as you said, but would you be more inclined to maybe overpay, a little bit for a really quality business, it fits well or maybe bend a little bit.

On the mix of the business that youre acquiring if the answer is neither how do you know when its time to cut a special dividend I guess the nature of the question is.

It's really just an art versus science type question as you evaluate our menu of options, none of which might be 100% appealing.

Yes.

It is a lot of art and not science on that so we do look.

As we go forward of if we pay a dividend today, how could we finance anything that we see coming along on the horizon or sometimes there are surprise acquisitions that come up how could you deal with them. So.

As always a bit of art and looking at what's happening as we go forward given that we're starting to recover in the commercial markets and we're starting to see more commercial opportunities.

It may be that we want to be a little more thoughtful about paying out a huge dividend today and looking at the.

Opportunities that are coming this is all in our thought process right now as we're evaluating what we should do over the next 12 months to get this excess cash out as.

I said, some combination of M&A share buybacks and dividend.

Will be utilized as we always have you can go back and look at our previous history, we did buybacks we've always.

We've been very engaged in dividends, we do a lot of M&A transactions. So nothing has changed the market is very volatile right now there's a lot happening.

Okay.

As you are to that as you are.

Due diligence process changed at all has it hasnt lengths and have you raised your internal return thresholds for deals I mean or is it really just about a lack of willingness to sell.

It's really a lack of willingness to sell it as a lack of opportunities of properties that you are interested in.

There is.

Yes, there's not a lot of them when the commercial market is so depressed people would not be able to sell at the same price. They could have before COVID-19 . So theyre trying to see things get back to that space as far as paying up on transactions I never like to speculate I think if things match our criteria for business matches our.

Criteria.

We would look very strongly at it and so.

For us it is staying disciplined in our M&A process.

Our M&A models are the same.

We are looking at businesses the same way as always.

Great. Thank you.

Thank you. Our next question comes from the line of Cristina <unk> from Morgan Stanley . Your question. Please.

Hey, guys good morning.

Good morning, good morning.

What would the tightening credit environment, how do you think about your maximum leverage going forward and you guys are at eight 2% net debt to EBITDA. Just as you said last year and you are quite comfortable there and there is no special strategy.

So do you think that the new Mac in terms of where you would go or should you do a special dividend or do an acquisition.

Yes, practically Kristina I don't think it will change very much from where we've operated historically if you looked at the three years pre COVID-19 for Trans time, the net debt to EBITDA was averaged about 6.0 times almost exactly in a kind of oscillates between like 555, or so up to six five.

Maybe you could do an acquisition or dividend or something that drives it towards the top end of the range, but the average was about six zero I think we're comfortable staying in kind of that range going forward to Kevin's earlier comments, we always want to leave some capacity there to do a big acquisition. If something comes along that you Werent expecting you don't ever want.

To dial it up so much to the high end of the range that you are tapped out because M&A is the biggest value driver for us.

As a company, we don't want to not have the flexibility to do that and practically for a company like us even though we've proven through COVID-19 that we can probably withstand more depth in the six times, we run at the markets are only willing to give you. So much. So I think we'll likely stay around the six zero times and we feel really comfortable operating.

That kind of level I mean, you guys saw we went through the worst commercial aerospace downturn in history, we stayed <unk> free cash flow positive throughout and as long as we keep the maturities out to the right I don't see any big obstacle or issue that could come from the.

The leverage level.

Thanks, that's helpful color and maybe on the Dod AIG audit.

Had a few of these now and they've all resulted in voluntary refunds I mean, nothing more major than that.

At what point do these audits stock or is this just kind of a continual thing we'll see every few years.

$20 million.

Yes, I think it's probably.

An artifact of doing business with.

The U S government the Dod.

There are many audits that happen constantly amongst defense contractors and suppliers to the government of all kinds. I think this is part of the nature of doing business and we have to get used to it.

I think that the work that George has done with the working groups with the Dod.

We'll certainly helped us.

It's a communication gap I think.

And we will.

Continue to work this issue and improve it I think as we go forward.

Thank you guys.

Thank you. Our next question comes from the line of Noah <unk> from Goldman Sachs. Your question. Please.

Hi, good morning, everyone.

Good morning, good morning.

How wide is that bell curve.

Possibilities that you plan the business for around that 20 to 30 aftermarket.

With still limited visibility I'm, just curious how you manage and plan the business.

What what could you handle to the downtown what's even possible to deliver on to the upside.

Yes, I think we're not as worried.

Upside comes remember aftermarket is more.

As less labor dependent than is the OEM side I think the bell curve is pretty wide and expectations were just trying to guide to what are some of the possibilities. So that people can plan accordingly for us to be successful in this environment, we must be nimble, we must react quickly and.

That's what we're good at so I.

I think the $20 to 30% planning.

As appropriate it was difficult for us to think that we would have to plan for something larger than that at the time that seemed like a huge growth from where we were with what we knew.

I think in general we're less worried about the the aftermarket curve ramp up than we are about the OEM side.

It's why it's difficult again for us to give guidance without that OEM knowledge plan.

Okay that makes sense.

<unk>.

The margin in the quarter.

Have sort of stranded costs related to the decline in defense revenues because at least the supply chain part of that is maybe.

You can't react to.

Compared to the aerospace revenues may be having a clean incremental margin to them. So I'm curious if that makes the margin in the quarter actually.

No no.

Alright.

Really going through the business.

No I don't think so.

Okay. Okay.

I know you don't want to guess.

Defense business is generally.

Lower profitability. So it all goes with the mix.

We make less money on defense, we make less money on the OEM side, its aftermarket where we make our our dollars.

Herschel aftermarket so all of these things lead to the stronger margin performance in the quarter.

So it's a mix that's positive.

Yes.

I know you don't want to you say you don't want to go to the quarters in that sensible, but just for sort of calibration purposes in a month into it.

Fiscal.

<unk> here.

Should we expect the defense business to be down again year over year in the second quarter. It just would be a big sequential lift I think to have it be I think they were not guiding on a quarter by quarter basis, where we're looking at it for the year and we're comfortable with low single digits and in defense.

And we'll see how it plays out.

Okay. Thank you.

Thank you. Our next question comes from line of Pizza Kubicki from Alembic Global your question. Please.

Yes, good morning, guys.

Just one for me a little bit of a follow on Kevin in your opening remarks, you talked about some of the restrictions in global Air travel trying to come in it seems like over the last month or so that's kind of accelerated and they're really starting to come down. So I'm. Just wondering early days here in the second quarter. If you kind of if it's floodgates.

<unk> type of effect that youre seeing the orders come in as a result of that or maybe it's just too soon right now.

Yes, I can't comment on this quarter.

We're just into it.

I think you can look at last quarter and see the improvement in.

OEM bookings in aftermarket bookings.

The fact that we're booking more than we're shipping in our shipments are up 49% in the aftermarket. These are all encouraging signs to momentum building.

Okay. Thank you.

Thank you. Our next question comes from the line of Sheila <unk>.

From Jefferies. Your question please.

Good morning, guys. How are you good morning, good morning, good morning.

Maybe if you could talk about inflation, how youre seeing that across your desk.

I think perspective have you changed the way you price at all just given inflation as permanent everywhere.

And then if you could talk about.

Our cost inflation is low.

Yes in general we saw a little bit of an increase in inflation in Q1, primarily on electronic components.

Not so much on labor, although we would anticipate obviously given the macro.

Indications that labor will feel that inflationary pressure throughout the year in general our goal with pricing is to institute price increases above inflation. So real price increases that philosophy has not changed in this environment ultimately with the higher <unk>.

<unk>, we've got to pass on some of that to the customer base and that's done at the operating unit level and the teams are doing their best shot to get in front of that knowing that the inflationary pressures will likely continue to increase throughout the balance of the year.

Great understood and then maybe on the aftermarket if you could comment from our 49% was really strong and you noted.

Obviously that came in December 1st So can you talk about how you thought trends in October November and maybe in December .

Yes, I don't have the specific monthly data.

Really we looked at it across the quarter the aftermarket recovery can be lumpy in nature as well and we saw good sequential improvement quarter over quarter.

Okay, great. Thanks, guys.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Jamie Stevens for any further remarks.

Thank you all for joining US today. This concludes today's call. We appreciate your time and have a good rest of your day.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Yes.

Yeah.

Okay.

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