May 5, 2009
Executives
Sean Maroney - Investor Relations W. Nicholas Howley - Chairman and Chief Executive Officer Raymond F.
Laubenthal - President and Chief Operating Officer Gregory Rufus - Executive Vice President, Chief Financial Officer and Secretary
Analysts
Robert Spingarn - Credit Suisse Fred Buonocore - CJS Securities Carter Leake - Davenport & Company Benjamin James - SMBC
Operator
Good day ladies and gentlemen and welcome to the Second Quarter TransDigm Group Incorporated Earnings Conference Call. My name is George, and I will be your coordinator for today.
At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.
(Operator Instructions). I would like now to turn the presentation over to your host for today's call, Mr.
Sean Maroney, Director of Corporate Accounting and Investor Relations. Please proceed sir.
Sean Maroney
Thank you. I would like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2009 second quarter earnings conference call.
With me on the line this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; our President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. A replay of today's broadcast will be available for the next two weeks.
Replay information is contained in this morning's press release and on our website at www.transdigm.com. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements.
For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company's latest filings with the SEC. These filings are available through the Investor section of our website or through the SEC's website at www.sec.gov.
The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA As Defined and adjusted net income, both of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measure and a reconciliation of EBITDA As Defined and adjusted net income to that measure.
With that, let me turn the call over to Nick.
W. Nicholas Howley
Good morning. And thanks for calling in to hear about our company.
I'd like to start off again as I have in the last two quarters with some comments about both our consistent strategy and our current sense of a very fluid aerospace market as it applies to our business. To reiterate we believe our business model is unique in the industry, both in its consistency and in its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle.
To summarize a few of the reasons why we believe this, almost 95% of our sales are generated by proprietary products, and about 80% of our net sales come from products for which we are the sole source provider. About 60% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales.
Aftermarket revenues have historically produced high gross margins and provided relative stability in the downturns. This, assuming we control our costs, can also contribute to our EBITDA margins improving in spite of declining overall revenues.
Even in difficult market environments, the annual worldwide growth in air travel rarely goes negative for any extended period of time. In fact, those reports I have seen forecast modest declines in worldwide traffic in 2009 in spite of a very difficult economic situation, with some possible recovery at the end of the calendar year.
Because of our uniquely high EBITDA margins, about 48% as a percent of revenues, plus or minus, and our relatively low capital expenditure requirements, about 2 to 3% of revenues, TransDigm has year-in and year-out generated strong free cash flow. We have significant liquidity and no near term debt issuance.
We have about 155 million in cash and approximately 200 million of undrawn revolver. We have no principal payments due under our credit agreements until 2013, and we believe we currently have access to additional debt if we so desire.
We have a well proven value based operating strategy focused around what we refer to our three value drivers. That is new business development, continual cost improvement, and value based pricing.
We stick to these concepts as the core of our operating management methods. This consistent approach has worked for us through up and down markets in the past and allowed us to continuously improve and increase the intrinsic value of our business while continuing to steadily invest in new business and platform positions.
Ray Laubenthal is going to give you some recent examples of our typically very active new business process. We have been successful in regularly acquiring and integrating businesses.
We acquire proprietary aerospace products with significant aftermarket content. We've been able to acquire and improve aerospace component businesses through all phases of the cycle.
Though our consistent focus on our operating value drivers, a clear acquisition strategy and close attention to our capital structure, we've been able to create intrinsic value for our shareholders for many years. To remind you the performance after 9/11 for the EBITDA As Defined grew and margins expanded both on a GAAP and pro forma basis right through the downturn was the most recent example.
During that very trying period, all our value drivers contributed. We quickly reduced costs, we continued our value based pricing model, and we generated new businesses -- new business and improved our acquisitions, all activities which we are repeating in this current downturn.
As we have in the past in Q4 last year, we moved quickly to reduce our costs and get out ahead of a softening market. We have continued this cost reduction effort in the first half of 2009.
This is reflected in our Q1 and Q2 margins. Additionally as in the past cycles, we continue our active new business generation as well as our value based pricing initiatives.
This consistency still to us does not seem to be fully recognized in value at this time. Now with respect to our underlying markets, in general, we see a lot of uncertainty in the second half of fiscal year 2009.
I surely still don't know how this cycle is going to unfold, but our current sense of the market as it applies to TransDigm is as follows. In the commercial OEM market, the Boeing strike concluded, but we still expect to lose at leas three months of effective Boeing production in our 2009 fiscal year upon the strike.
In addition to the recent Boeing 777 rate reductions, we suspect there may be other rate reductions announced by both Airbus and Boeing in the next six to twelve months. Depending on when and if these announcements occur, we could see some more or less negative volume impact in the second half of fiscal year 2009.
Almost all of the business jet OEMS have announced significant rate reductions in the last 10 to 20 days. This along with the related system wide inventory adjustments will definitely have a negative effect on our second half volume.
All in all, our commercial -- for our commercial OEM business, we are now assuming this will be down about 10% versus the prior year, rather than the flat year-over-year comps we estimated originally. Now I will say this still remains quite unclear.
The business jet portion is, of course, down significantly more in this overall average. In the commercial aftermarket, we continue to see a slowdown in traffic growth as the worldwide economic conditions continue to take their toll.
Based on the various industry published reports, worldwide RPM or traffic appears to be down in the mid single digits for the first half of our fiscal year, with recent months being down a bit more. We believe we also continue to see some system wide airline inventory reductions.
Though we understand many forecasters anticipate a recovery in the second half of the calendar year, and we hope this is so, we are a bit more pessimistic about the second half of our fiscal year commercial aftermarket revenue than we were originally. Though impacting us to a much lesser degree, business in generally the Asian usage, is down much more substantially than commercial traffic.
We remain uncertain about the second half of the year. We believe it is now likely that our commercial aftermarket revenues could be flat to very modestly down year-over-year.
I'll just remind you that our quarterly numbers can bounce around over longer periods of time, our real or unit volume in the aftermarket has generally been able to grow at or ahead of overall worldwide passenger traffic. In the defense business, on the other hand, this segment continues to look very good.
Q2 revenues and bookings were again better than anticipated. Based on what we know today, defense should be closer to a low double digit year-over-year growth versus the mid single digits we anticipated earlier.
The second half year-over-year costs are tough in the defense business by the way. We remain very cautious regarding the market outlook, the confidence in the strength of our business model to continue to create intrinsic value and our management's team ability to response and to perform in these tough market conditions.
Now let me turn to the latest financial performance. I'll remind you this is the second quarter for our fiscal year 2009.
Our year started October 1st 2008, and so we're now half way through. As I said in the past, quarterly comparisons can be significantly impacted by differences in the OEM aftermarket mix, large orders, trends in inventory fluctuations, modest seasonality and other factors.
But in spite of the weak economy end market, we had a good second quarter and first half. Our revenues were up 10 -- 11% versus both the prior Q2 and the first half.
Pro forma growth that is assuming we own the same mix of business like a same-store basis, is up about 2% on a year-to-date basis and about flat on a quarter versus quarter basis. In a nutshell and very simply, in overall, commercial business is down and the defense business is up significantly.
If you look to revenues by market segment, again on a pro forma basis versus the prior year that's assuming the same mix in both periods, in the commercial segment, which makes up about 70% of our revenue, commercial OEM revenues were down about 10% versus the prior second quarter. If you look at the first half of 2009 versus the average 2008 quarterly run rate, commercial OEM was still down about 10%.
This is reflective of both the Boeing strike in the first quarter and the beginning in Q2 of the significant business jet production rate cuts. The commercial aftermarket revenue was down about 2% in Q2; this is versus the prior Q2, and about 3% on a year-to-date basis.
Of interest, the commercial transport aftermarket was up very slightly on a sequential Q2 versus Q1 basis. This was more than offset by a very sharp decline in business, regional and general aviation demand.
Though tough to quantify, we still believe we are seeing some inventory reduction at the airlines. The defense segment, which makes up about 30% of our revenue, in this segment, our revenues were up 15% on a quarter-versus-quarter basis and 17% on a year-to-date basis.
We continue to see strength across most of our product lines. As I said before, our defense revenues appear likely to be above our expectation -- our original expectations for the full year.
In total for the quarter, our revenues were close to our expectations with the shift in mix between commercial and defense revenues and our modestly richer mix. Moving to profitability and on the reported basis now, I am going to talk primarily about our operating performance or EBITDA As Defined.
The total adjustments to EBITDA are quite modest by the way this quarter. Our EBITDA As Defined of about 94 million for Q2 and 186 million for the first half is up 17% versus prior Q2 and 19% versus the prior year-to-date.
The EBITDA As Defined margin at 49% in the quarter is a very strong margin performance. This continues to reflect the impact of our cost reductions, our richer mix as well as our ongoing value pricing activities.
As you saw on the press release, we have modestly decreased our full year revenue guidance but slightly increased our profit guidance. The revenue adjustment is the result of the combination of the reduced business jet revenues, our concern of both the commercial transport production rates and the commercial aftermarket volume, offset in part by the higher defense revenues.
This results in a very modest increase in second half revenues compared to the first half of 2009. Based on our market assumption, we anticipate a modest decrease in EBITDA margins for the second half of 2009, though I want to reemphasize, this margin is very dependent on the ultimate mix of OEM versus aftermarket shipments.
In total for fiscal year 2009, we now expect revenue growth will be driven by recent acquisitions with organic growth about flat give or take a little. On the other hand, we expect our increase in 2009 EBITDA As Defined to be a result of both organic and acquired growth.
With respect to acquisitions, as I think you know, we made one additional acquisition in December, our starter generator business we bought from General Electric. We continue actively looking -- the pipeline possibilities -- still has more smaller than larger opportunities.
We've seen some pickup in activity, but closings are always difficult to predict. We've remained disciplined and focused on value creation in our acquisition activities.
And with that, let me turn it over to Ray Laubenthal.
Raymond F. Laubenthal
Thanks Nick. As Nick mentioned, in total, we had a good second quarter and first half.
Our operating value drivers and acquisition integration continued to add solid value. Let me explain our second quarter operational value creation in a little more detail.
We're making good progress integrating our two most recent acquisitions. As planned, last quarter, we completed the physical move of the GE Unison magneto business from Rockford, Illinois to our Champion Aerospace facility in South Carolina.
And we're now starting to see operational savings from this most recent consolidation. The other acquisition GE Unison Aircraft Parts Corporation or APC, was acquired on December 16 and is also progressing through its integration into our operation.
APC designs and manufactures starter motor generators and electronic generator control units. We'll be moving the APC business into our facilities during the next six to nine months.
Now let me turn the discussion to our other operating units and their value generation activities last quarter. We continued to make cost reductions during the second quarter.
Year-to-date we have reduced head count by an additional 4%. Recall we enacted a 9% head count driven cost reduction in our fourth quarter of 2008.
These cost reduction actions served us well in the first half of our fiscal 2009 as the market softened. Going forward, we'll continue to fine tune our cost structure as market demand dictates.
Although the market has been softening, our new business development continues to be active. We typically do not discuss at length our development activity during these calls, but we thought it would be worthwhile to discuss our continued investment in the business during this down market.
To give this a little color, I would like to give a few examples of the new business activity so far this year, and let me remind you there is typically a gap between when we award a new business and when we develop and ship the resulting new products. In the commercial OEM segment, we continue to see significant new business activity.
On the A350 and A380, we were awarded the entire cockpit door module. This award includes the entire door structure and the associated cockpit security latching system.
Once we complete this development activity, we will have expanded our security door revenue content per airplane by over five times on these two platforms versus the other existing Airbus platforms. Additionally, on Embraer 170/190 regional jet platform, we were awarded the cockpit door security latching system and on Embraer MSJ, we were awarded the compact water delivery system for the lavatory and galley.
In the commercial aftermarket segment, we have traditionally gotten new business orders by supporting the existing fleet. We only focus on the aftermarket new business if we can provide real value to the customer by solving a product performance or product safety problem.
Even in tough times we can find some of these opportunities, and here are a few examples. At Delta and FedEx, we are now providing them our longer life micro maintenance NiCad batteries for the 757 fleet.
And also at FedEx, they are now ordering our longer life ignition systems for use on their fleet of Cessna Caravan cargo planes. For the 747 fleet, we've designed and upgraded latch mechanism for the emergency escape slide.
This new latch is presently being rolled out across the entire 747 passenger fleet. And on the Boeing 777 cargo conversion program, we're developing and delivering the cargo door bolting system.
And lastly, we continue to upgrade igniters on the CFM56 engine by providing a longer life igniter solution. In the military segment, as with the commercial aftermarket segment, we continue to develop new equipment to enhance the capabilities or extend the life of the existing aircraft fleet.
We recently received an order to supply low distortion power transformers on both the CH-46 Sea Knight and the CH-53 Sea Stallion helicopter fleet. These low distortion transformers provide enhanced power to the avionics and flight computer, and they provide filter power that greatly reduces pilot and crew radio transmission static.
We also received an order to upgrade the power inverters on the Bell H-1 helicopter. These upgraded inverters have been enhanced to withstand harsh environmental conditions of water exposure and higher temperatures.
And on the Eurocopter and OH-58 Kiowa helicopter platforms, we developed and received an order for engine inlet filtration actuators. These filtration actuators are deployed in take-off and landing situations to prevent braces from entering the helicopter's jet engine.
We also secured orders to provide newly designed cockpit avionic components on the C-130 Avionics Modernization program, and we developed and were awarded the compressor motors on the new styled F-18 missile launchers. These compressor motors will greatly improve our servicemen safety, because they're used in place of pyrotechnic devices and used on launchers.
The development spending associated on the above program is normal and similar to the spending in recent prior period. Our development spending on the 787 was modestly lower than expected during the second quarter.
Recall our 2009 Boeing 787 development spending is expected to be lower compared to 2008 as the work on these projects winds down. At present, we expect our 787 spending to be about as expected in 2009.
We may begin to see some modest spending pick up in A350, A380 development in the back end of the year, depending on the exact timing of the projects and the awards. We're also making modest favorable progress settling the 787 projects scope change issue with Boeing.
Our pricing actions have continued to be effective across most of our businesses, and they also contributed to our strong first half margins. Now let me hand it over to Greg Rufus, our CFO, who will review the second quarter financial results in more detail.
Gregory Rufus
Thanks Ray and Nick. Good morning to everyone who's called in to hear about TransDigm.
Nick just gave a very thorough description of TransDigm's revenue stream and our market condition. And as Ray discussed, we are active in controlling costs, acquisition integration and new product development.
As you have seen, TransDigm was able to accomplish those items just mentioned, generate cash and announce solid result in a difficult market environment. Let me review the second quarter results now.
Second quarter sales were $193 million, up 17.8 million or 10.1% from the prior year. The increase in sales was primarily driven by the acquisitions of CEF and the Unison product line made in fiscal '08 and the APC acquisition made at the end of the first quarter this year.
Total amount of revenues from acquisition this quarter was $20.3 million. Sales, excluding acquisitions, decreased by 2.5 million and represented a 1.5% decrease from the prior year.
The decline in organic sales was primarily due to a decrease of 6.3 million of commercial OEM sales. The two main contributors to the decline in sales was Boeing due to the strike and a sharp decline in production rates in the business jet market.
Along with the OEM dip, the commercial aftermarket sales decreased 1.4 million versus the prior year quarter. Partially offsetting the decline in organic commercial sales was an increase of 6.4 million in defense sales, primarily due to increased demand for aftermarket spare parts and repairs across most of our product lines.
Reported gross profit was 108.8 million or 56.4% of sales. This $14.8 million increase is 16% greater than the prior year and significantly higher than our sales growth increase of 10%.
The reported gross profit margin increased almost 3 percentage points versus the prior year. This expansion in margin was attributable to the following: continued productivity efforts especially from the company wide cost reduction initiative implemented during the fourth quarter of '08 and the first half of '09; the strength of our proprietary products which allow favorable pricing and to a lesser extent, positive operating leverage on higher sales with favorable product mix versus the prior year.
This higher margin was also just achieved despite a modest downgrade in margins due to the dilutive impact of the previously mentioned acquisitions. Selling and administrative expense for the quarter was consistent with the prior year on a percent of sales basis.
Our net interest expense was 21.6 million, a decrease of almost 10% versus the prior year quarter. The level of debt was the same for both quarters.
The average interest rate, however, decreased to 6.1% for the quarter compared to 7.3% a year ago. Our effective tax rate for the quarter was 36.2% versus 34% in the prior year.
The prior year included some state tax refunds which were not repeated in '09. Net income for the quarter was 40.3 million, which was 21% of net sales and up 8.1 million versus the prior year.
The 25% improvement versus the prior year compares well given the sales growth of 10%. Our cash flow from operations was solid, 79.5 million in the first half of '09.
We ended the quarter with $155 million of cash on the balance sheet. And during the second quarter we used 74 million of cash for both income taxes and the interest payments.
Our net debt leverage ratio was 3.2 times our EBITDA As Defined. Given the credit crisis the country is going through, we believe our current cash position together with our undrawn revolver of almost 200 million is more than adequate for our operating needs.
Turning to earnings per share, our press release includes all the EPS calculations and supporting tables. I'll focus on our adjusted diluted earnings per share for this call.
For the quarter, adjusted diluted EPS was $0.85 per share, up 25% from the prior year. This increase mirrors the 25% improvement in net income.
As Nick discussed and as spelled out in this morning's press release, we have made some modest changes to our full year adjusted diluted earnings per share guidance. The modest changes have come from the impact of increasing the midpoint of our guidance to $3.25, up $0.02 from the prior guidance and up 16.5% from the prior year and EPS of $2.79.
This concludes our prepared remarks, and we will now open the line for questions.
Operator
(Operator Instructions). Our first question comes from the line of Robert Spingarn from Credit Suisse.
Please proceed.
Robert Spingarn - Credit Suisse
Good morning.
W. Nicholas Howley
Good morning Rob.
Robert Spingarn - Credit Suisse
Greg, I think you just said that the SG&A as a percentage of sales is pretty consistent. But I've noticed if I look back at the last several quarters, it's actually declined despite acquisitions.
Is there any reason to stop declining on a percentage basis?
Gregory Rufus
No, there's a little bit of lumpiness. We had a little more professional fees in this quarter.
But it wasn't a major increase, Rob, but even as you saw the trend it has been coming down. We're leveraging our fixed costs a little bit better than we did in the past.
Robert Spingarn - Credit Suisse
Okay. Nick, to the segment performance, I think both you and Ray and Greg actually all of you talked about the moving pieces.
But could you speak a little bit again? I didn't catch the percentage increase in defense.
I think I got the dollar amount, but what's going on there with little bit more specificity in terms of the defense aftermarket, why the strength, why the comps get topped to the back end of the year?
Gregory Rufus
Well the numbers -- Rob just our -- let me just, I think it's 15% for the quarter-over-quarter and 17% year-to-date. Yes those are just the rough numbers.
I would say Rob it is the helicopters, a lot of demand for helicopters and ground vehicle parts and repairs. But I can't -- it's a rising tide.
If you look across almost all our product lines it's rising. We're just spending more (ph) --
Robert Spingarn - Credit Suisse
And this started in the middle of the prior fiscal year, so that's why see the comps --
Gregory Rufus
Talking about the comps, if you look quarter by quarter you would see the second half of last year was significantly higher from the first half. So...
Robert Spingarn - Credit Suisse
And so it sounds like you are looking for a kind of mid to high single digit defense growth in the second half to average out, I don't know it sounds like about 12 or 13.
Gregory Rufus
What we said was low double digits, and what we said -- you kind of have to do your own math there.
Robert Spingarn - Credit Suisse
All right. Well that's kind of in that I get to, so.
Gregory Rufus
The reason you get little bit of funnier arithmetic is because of the half-over-half comps.
Robert Spingarn - Credit Suisse
Right. How did pricing work in the quarter?
Let's talk a little bit about the aftermarket declining, and Greg, I think you just mentioned some numbers. But the percentage decrease in aftermarket on a unit basis and then the offset from pricing.
Gregory Rufus
Well, as you know Rob, we don't disclose that. But numbers are down 2 to 3% year-over-year or quarter and year full basis
Robert Spingarn - Credit Suisse
On a revenue basis.
Gregory Rufus
On a revenue basis. So --
Robert Spingarn - Credit Suisse
Okay.
Gregory Rufus
So that's just the -- that's apples to apples. Seems to work on a same extra business pro forma context.
Robert Spingarn - Credit Suisse
Okay. And then if you could just talk a little bit again about the acquisition pipeline, what you're seeing in terms of multiples and is more on the market today, less -- how are things evolving?
W. Nicholas Howley
Let me fill the quantity first. I mean it seems to me like we're seeing little more activity.
I don't know Rob whether I draw any conclusion from that, other than we seem to be busier looking at things now over the last month or so. But I don't know that I can make any broad statement at all from that.
I would say of the things that closed so far, the prices have come down. Seems surprising to me, there are some things that don't close, but of those they closed, they still seem to close at pretty high prices.
Now this is -- I'm talking now about proprietary stuff. If you ground to the proprietary world and go into the non-proprietary kind of businesses, I think it gives some pretty low prices there.
Robert Spingarn - Credit Suisse
Okay. And then just lastly in terms of trend, and this is -- maybe little bit of a 30,000 foot question.
But I think we -- you're clearly cautious on the commercial side both on OE, you've talked about the aftermarket, the sensitivity mix of the company, you mentioned the global -- the forecast from third parties, particularly we saw IATA come in maybe a month ago and doubled its negative forecast from down 3% on traffic to down almost 6.
W. Nicholas Howley
Right.
Robert Spingarn - Credit Suisse
And I suspect that, that's part of what's behind your adjustment. But do you get any kind of optimism out of what we see from some of the domestic airlines?
Do you see their behavior changing for the positive years -- they talked -- a few of them talked about slightly better bookings.
Robert Spingarn - Credit Suisse
I mean I see the same things you see Rob. And I also notice -- I think it was Lufthansa last week said that they thought their go forward bookings -- and they sort of bottomed out their go forward bookings or better.
I would like to believe that, and I want to believe that. But just to be very practical I got to say the last couple of months RPMs are tougher than we thought they were going to be.
Robert Spingarn - Credit Suisse
Is there any rule of thumb for when an airline starts booking better to when it starts buying more inventory?
W. Nicholas Howley
No, if there is I don't know it, Rob.
Robert Spingarn - Credit Suisse
Okay, thanks guys.
Operator
Ladies and gentlemen, your next question comes from the line of Fred Buonocore from CJS Securities.
Fred Buonocore - CJS Securities
Hi, yes. Good morning gentlemen.
Nice quarter.
W. Nicholas Howley
Thank you.
Fred Buonocore - CJS Securities
Ray went through quite a litany of new business opportunities there. And I just wanted to get a sense for -- is this sample kind of your normal level of activity on any given quarter and you just elected to talk about it this quarter or was this kind of a spike in activity?
Raymond Laubenthal
Yeah, it's the former. This is generally what we normally see with all the negative...
with the downturn in the market we thought we'd reinforce that we continue to invest in our business, and we thought we'd add some color to it.
Fred Buonocore - CJS Securities
No, absolutely it was very helpful. I was just wondering on that.
And then also Ray, you kind of mentioned that the pricing actions were taking hold --you're staying tight across most markets, are there some areas where you are seeing pushback on pricing that you may have to give in? If you can give some sense for what's happening there.
Raymond Laubenthal
Let me answer that one Fred. There is really -- there is no change in the -- I'll say the market structure and the pricing pattern in the past.
I would --
W. Nicholas Howley
And we gave that impression -- that we didn't mean to give that pressure and it's generally the same kind of patterns as we saw -- as we have seen historically.
Fred Buonocore - CJS Securities
Got it. And then on the 777 production cut, I would imagine that that's not a huge impact for you just at least to profitability given it's two planes a month, it's an OEM program.
But can you give us the sense for the magnitude or how we should think about that?
Raymond Laubenthal
We think we captured this in the guidance we've given you Fred. You know there's a lot of moving parts in the OEM world.
You know exactly the business jet is, as everybody probably knows are knocked off the rails. And the inventories fluctuating all over the place in that segment, the commercial transport, you have the 777 coming down and frankly we're little concerned about the timing of the what other cuts we might see, and then whether first tier people start to squeeze their inventory earlier.
We've made our best guess in capturing that but sort of if you ask me what each thesis in there, and I have to tell you it's very judgmentally total.
Fred Buonocore - CJS Securities
Good of course and then kind of in that same vein, business jet trends, I mean where you see things now how does this compare to say the last down cycle in that segment?
Raymond Laubenthal
You know I don't remember the business jet went very well, that's just mathematical, I just don't remember.
Fred Buonocore - CJS Securities
Yeah.
Raymond Laubenthal
But I'm pretty sure we haven't seen the bottom of this one yet.
W. Nicholas Howley
And I look at it a little bit, it's faster than the last cycle. It's almost like the spick that turned off this time around.
Fred Buonocore - CJS Securities
Got it, so your guidance should factor in some continued deterioration there?
Unidentified Company Speaker
Yes.
W. Nicholas Howley
We suspect we'll, wouldn't surprise me if we see some going into next year too.
Fred Buonocore - CJS Securities
Okay great. Thanks very much.
That's helpful.
Operator
Our next question comes from the line of Carter Leake from Davenport & Company. Please proceed.
Carter Leake - Davenport & Company
Good morning. You may have just answered that but I want to confirm the fiscal year guidance.
It does take into account obviously the known production cuts. But we don't anticipate I don't think any large commercial production cuts by the end of your fiscal year.
Are you assuming any in your fiscal year guidance?
W. Nicholas Howley
I say it again. There's a lot of moving parts in the OEM world.
The business jets have stepped down substantially. It's hard exactly to predict how all that inventory ripples through the system, the 777 has come down.
We are expecting to see some commercial transport, rate cuts some time over the next six to twelve months. I don't know exactly when.
You do start to see some higher tier people start getting nervous about their inventory, as that gets closer and closer. It's difficult for me to say exactly which piece we have.
We've taken our best judgment in giving you guidance for the year. I don't know that I can slice the onion a lot, a lot thinner than that.
I would say that, we are not anticipating any substantial impact in the balance of this year for say a big 737 rate cut or something like that. If that came about relatively quickly, that could be problematic.
Carter Leake - Davenport & Company
Thank you. And just kind of -- how about any guidance on CapEx for the year, for the balance of the year, any changes there?
Gregory Rufus
Now we're half way through the year. We spent about 6 million and we'll probably spend at or a little more.
It depends on the timing and the progress of some of the acquisitions and when they move into the new location. But we are within the normal guidance of about 2% of our sales.
But it could be a little lumpy based on the timing of the acquisitions as they move into location.
Carter Leake - Davenport & Company
Thanks. Just one more -- you had mentioned obviously that if you can keep these margins up assuming you can control costs, can you give any color on what keeps you up at night on not being able to do that?
Unidentified Company Speaker
First of all what we have said --
W. Nicholas Howley
We will and can control our costs.
Gregory Rufus
But the margins are a function of mix. As OEM goes down we mix up mathematically.
So just so we're clear on the record there. We manage the business that generates the dollars and the mix will dictate sometimes what the margin is
W. Nicholas Howley
Yeah, assuming we keep our costs --
Gregory Rufus
Assuming we keep our cost in control --
Unidentified Company Speaker
The OEM is down, we got to get cost now proportionately and then you get a mix up.
Unidentified Analyst
But I don't want any leave any impression we're operating at a 50% margin going forward
Unidentified Company Speaker
Yeah, right we gave you some guidance on that.
Carter Leake - Davenport & Company
Yeah, all right. Thank you.
Operator
Ladies and gentlemen our next question comes from the line of Randy Glicksman of Barrington Capital. Please proceed.
Unidentified Analyst
Hey good morning guys, how are you?
W. Nicholas Howley
Good morning, fine Randy.
Unidentified Analyst
Good, I just wanted to dig in a little bit more on the defense side of the business. Did you say that the increases were mostly driven by defense aftermarket?
W. Nicholas Howley
Yes.
Unidentified Analyst
Okay, as opposed to newbuilds.
W. Nicholas Howley
Yeah, the newbuild rates don't change that fast.
Unidentified Analyst
That's right. Okay, and in terms of understanding what's driving that aftermarket now when I guess op tempo's down a little bit in Iraq where we're probable seeing a little bit of a pullback.
How do you guys gauge that going forward? Is there some -- are there any hints in the DOD budget?
Are there kind of reset or inventory builds that you guys see in terms of how the stuff decode when they move up going forward over the next year?
W. Nicholas Howley
Randy, the real answer to that is it's very uncertain and I don't know. I think we're in pretty good shape for the balance of this year.
I think defense spending is something that we all have to look out really warily -- as we move into the next couple of years. What we are seeing now is, we are seeing strength almost across all our product lines.
Helicopters particularly are strong, as I told you ground vehicles, rehab and refurbishing them...
Unidentified Analyst
C130 Strong.
W. Nicholas Howley
C130 Strong, but across the product lines, it's up almost on all of them. But this -- as you know this will be a political call over the next couple of years.
Unidentified Analyst
Great and --
W. Nicholas Howley
I think we are fine for the balance of this year. Beyond that, sort of pays your money and take your choice.
Unidentified Analyst
Great, okay. And what -- did you guys disclose the mix of aftermarket versus OEM and the defense side of the business?
W. Nicholas Howley
No we don't, we don't but I would tell you that as in the commercial the lion share of the cash flow or profit comes out of the aftermarket.
Unidentified Analyst
Okay, thank you guys.
Operator
(Operator Instructions) Our next question comes from the line of Benjamin James of SMBC. Please proceed.
Benjamin James - SMBC
Good morning guys. Just a couple of quick questions, are there any LCs on top of the revolver?
Gregory Rufus
All minor, there are a couple of two or three million now for workers' comp, the full amount we can quote is like 197 million.
Benjamin James - SMBC
Okay.
Gregory Rufus
There is a little bit we have to carve out the de minimus.
Benjamin James - SMBC
Okay, and then a senior secured leverage, is that about 2.2 times?
Gregory Rufus
I don't have the exact number, and but that sounds about right.
Benjamin James - SMBC
But that's a close number.
Gregory Rufus
Yeah, I mean you know the senior debt, you know EBITDA.
Benjamin James - SMBC
Okay, that's it.
Gregory Rufus
It's 2.1.
Benjamin James - SMBC
Okay, thank you.
Operator
Sir there are no more questions at this time. Actually we have a follow-up question.
Our first question -- sorry from Carter Copeland from Barclays Capital. Please proceed
Unidentified Analyst
Good morning guys. This is Mir Lansing (ph) asking for Carter.
I just had a quick question concerning the margin forecast going through the rest of the year. The first two quarters had some pretty strong margin.
And just kind of what -- thinking through the guidance as well as the comments given, it seems to suggest the moderation of the margins going -- looking forward. And I just wanted to get on the planning as to -- to sort of the make up or the changes like the changes in the margin ought to be coming on changes in terms of the mix.
Are there other concerns that you see that can help moderate margin --
Unidentified Company Speaker
The primary thing that will impact the margins from here for the balance of the year is what the exact of the shipments are. And that's the primary impact.
We will control the costs. I don't expect that it will have any issue in the cost control.
It will be a question of exactly what ships in the third and fourth quarter and frankly that's a little tough to call exactly from here.
Unidentified Analyst
And then in the first half the mix, you described that part of the margin improvement was because of some kind of better military mix during the first half?
W. Nicholas Howley
No, we just said -- we just said richer mix. Not just the -- the military surely helped but throughout the business, the mix of products was better.
We also had the Boeing strike in the first quarter. Such that those shipments were way off in the first quarter helps the year-to-date, that's probably the lowest margin products.
Unidentified Analyst
Okay, all right. Thanks a lot guys.
Good quarter.
Unidentified Company Speaker
Thanks.
Operator
Mr. Maroney there are no questions at this time.
Sean Maroney
Okay, thanks everyone for calling in today and for participating on this morning's conference call. Lastly you can expect to see our 10-Q filed later today.
W. Nicholas Howley
Okay great. Thanks a lot everybody.
Operator
Ladies and gentlemen thank you for your participation in today's conference. This will conclude the presentation.
You may now disconnect. Good day.