TransDigm Group Inc. (TDG) Q2 2021 Earnings Call Transcript

TransDigm Group Inc. (NYSE: TDG) Q2 2021 earnings call dated May. 11, 2021.

Corporate Participants:

Jaimie Stemen — Director, Investor Relations

W. Nicholas Howley — Executive Chairman of the Board of Directors

Kevin Stein — President, Chief Executive Officer, and Director

Mike Lisman — Chief Financial Officer

Analysts:

Myles Walton — UBS — Analyst

Robert Spingarn — Credit Suisse — Analyst

David Strauss — Barclays — Analyst

Carter Copeland — Melius Research — Analyst

Ken Herbert — Canaccord Genuity — Analyst

Hunter Keay — Wolfe Research — Analyst

Sheila Kahyaoglu — Jefferies — Analyst

Gautam Khanna — Cowen and Company — Analyst

Robert Stallard — Vertical Research Partners — Analyst

Kristine Liwag — Morgan Stanley — Analyst

Seth Seifman — J.P. Morgan — Analyst

Peter Arment — Robert W. Baird & Co. — Analyst

Michael Ciarmoli — Truist Securities — Analyst

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Presentation:

Operator

Thank you for standing by, and welcome to the Second Quarter 2021 TransDigm Group Incorporated Earnings Conference Call. [Operator Instructions] And now I’d like to introduce your host for today’s program Jaimie Stemen, Director of Investor Relations. Please go ahead.

Jaimie Stemen — Director, Investor Relations

Thank you, and welcome to TransDigm’s fiscal 2021 second quarter earnings conference call. Presenting on the call this morning are TransDigm’s Executive Chairman, Nick Howley; President and Chief Executive Officer, Kevin Stein; and Chief Financial Officer, Mike Lisman. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.

Before we begin, the company would like to remind you that statements made during this call which are not historical in fact are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company’s latest filings with the SEC available through the Investors section of our website or at sec.gov.

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

I will now turn the call over to Nick.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Good morning. Thanks everybody for calling in. As usual, I’ll start off with a quick overview of our strategy, a few comments about the quarter and then Kevin and Mike will expand and give more color. To reiterate, we’re unique in the industry in both the consistency of our strategy in good and bad times 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 sales were generated by proprietary products in over three quarters of our net sales come from products for which we believe we are the sole source provider. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins in over any extended period of time have typically provided relative stability in the downturns. We follow a consistent long-term strategy, specifically we own and operate proprietary aerospace businesses with significant aftermarket content.

Second, we utilize a second — a simple well proven value-based operating methodology. Third, we have a decentralized organization structure and a unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE like returns. And lastly, our capital structure and allocation of our capital are key parts of our value creation methodology. Our long standing goal is to give our shareholders private equity like returns with the liquidity of a public market. To do this, we have to 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 another decent quarter considering the environment. We see a bit more light at the end of the tunnel, but are still in a pretty tough commercial aerospace market environment. On a positive note, we saw another significant sequential increase in quarterly commercial aftermarket bookings in Q2. This is the second quarter in a row with a significant step up. The stalling of the air travel recovery that concerned us last quarter, though still potty, look somewhat better now, but may have pushed a ramp up a quarter or so out. The two most important operating items we have focused on through this downturn or on the themes we can to some degree control; one, tightly managing our costs and I think we have this well in hand; second, assuring substantial liquidity and this also seems well in hand. Absent some large additional dislocation or shutdown we should come out of this with substantial firepower.

We continue to look at possible M&A opportunities and are always attentive to our allocation. Both the M&A and the capital markets are always difficult to predict and especially so in times like these. But in Q2, we acquired the Cobham Aero Connectivity business for an enterprise value of $965 million. On the divestiture front, in the last 60 days we signed agreements to sell three additional less proprietary and mostly defense businesses for about $240 million. Collectively, these businesses have revenues of roughly $180 million and EBITDA margins in the low 20%. We expect to receive all the proceeds in Q3. We still have one primarily defense business that we are currently considering for sale.

At this time, I do not anticipate that we will make any significant dividend or share buybacks for the next three or four quarters or at least until the commercial market show stronger signs of a rebound and our leverage level settles down a bit, but we’ll keep watching and see if our view changes over time. We believe we are about as well positioned as we can be right now and we will watch for market developments and react accordingly.

And now let me hand it over to Kevin to review our performance.

Kevin Stein — President, Chief Executive Officer, and Director

Thanks, Nick. Today, I will first provide my regular review of results by key market and profitability of the business for the quarter. I’ll also comment on recent acquisition activity and fiscal 2021 outlook. During our Q2 fiscal 2021 quarter, there continued to be a significant unfavorable impact on our business as a result of the reduced demand for travel due to the pandemic. However, the commercial aerospace industry has continued to show signs of recovery in recent months with the distribution of the COVID-19 vaccine and increasing air traffic, especially in certain domestic markets, in our business, we saw another quarter of sequential improvement in commercial aftermarket revenues with total commercial aftermarket revenues up 12% over Q1. Additionally, I am very pleased that we continue to sequentially expand our EBITDA as defined margin as a result of careful management of our cost structure and focus on our operating strategy in this challenging commercial environment.

Now, we will review our revenue by market category. For the remainder of the call, I will provide colored commentary on a pro forma basis compared to the period — the prior year period in 2020 that is assuming we own the same mix of businesses in both periods. This market discussion now includes the recent acquisition of Cobham Aero Connectivity and removes the impact of any divestitures completed by the end of Q2. In 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 market revenue declined approximately 43% in Q2 when compared with Q2 of the prior year period. We continue to assume the demand for our commercial OEM products will be significantly reduced throughout the remaining half of 2021 due to reductions in OEM production rates and airlines deferring or canceling new aircraft orders.

Longer term, the commercial aerospace market is fluid and continues to evolve. We anticipate a depressed commercial OEM end market for some uncertain period of time when compared to pre-COVID levels. However, recent commentary from Airbus on potential A320 rate ramps in 2022 and beyond are certainly encouraging. On a positive note, Q2 bookings demonstrated strong sequential improvement of over 20% compared to Q1 bookings and solidly outpaced sales. As we mentioned last quarter, the bookings improvement we are seeing is likely an indicator of OEM destocking slowing.

Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenues declined by approximately 39% in Q2 when compared to prior year Q2. This quarterly decline was primarily driven by decreased demand in our passenger and interior submarkets. However, our commercial transport freight market returned to modest growth and slightly offset this decline. To repeat, sequentially, total commercial aftermarket revenues grew approximately 12% in Q2, another encouraging data point.

Commercial aftermarket bookings were still down this quarter compared to the same prior year period. However, the bookings declined less than the observed flight traffic declines with freight and business jet bookings continuing to improve. Q2 bookings sequentially improved almost 30% and solidly outpaced sales. This is likely the result of destocking slowing in airlines, increased flight activity and future planning.

To touch on a few key points of consideration, global revenue passenger miles are still low though off the bottom and now recovering. IATA’s most recent forecasts expects that calendar year 2021 revenue passenger miles will be 57% below 2019, but we are cautiously optimistic. There was an uptick in domestic air traffic in March and April and airlines are seeing strength in bookings that will drive summer flight schedules. Certain airlines have already announced domestic wide-body routes to serve the anticipated demand this summer. IATA does forecast a strong second half of calendar 2021 with the rebound in domestic travel in the U.S. back at 2019 levels of revenue passenger miles and China well above that level. There is also potential for international travel openings more as governments consider revising travel restrictions.

For cargo demand, this was weaker prior to the COVID-19 crisis as FTKs have declined from the all-time high in 2017. However, a loss of passenger belly cargo and the pickup in e-commerce has helped cargo operations to recover quicker than commercial travel. Business jet, utilization data has shown that activity in certain regions has rebounded to pre-pandemic or better levels. This is due to personal and leisure travel as opposed to business travel at this time. It remains to be seen if business jet utilization will continue to expand, but current trends are encouraging.

We believe there is a global pent-up demand for travel. We see evidence of this demand through the recovery in domestic travel, specifically in the U.S. and China, and the optimism of airlines for the summer season. Domestic travel is currently benefiting from international travel restrictions and could offset some lost international travel in the market. In due time with vaccine distribution and lifting of travel restrictions, passenger demand across the globe will increase. Historically, personal travel has accounted for the largest percentage of revenue passenger miles and forecast still indicate a more meaningful pickup in personal travel in the back half of this calendar year followed later by business travel and we are hopeful this will be the case.

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, grew by approximately 8% in Q2 when compared with the prior year period. Our defense order book remains strong and we continue to expect our defense business to expand throughout the remainder of the year.

Moving now to profitability, I’m going to talk primarily about our operating performance or EBITDA As Defined. EBITDA As Defined of about $519 million for Q2 was down 23% versus prior Q2. EBITDA As Defined margin in the quarter was approximately 43.5%. We were able to improve our EBITDA As Defined margin approaching 100 basis points sequentially despite the acquisition dilution from the recent Cobham acquisition of about 100 basis points as well.

Next, I will provide a quick update on our recent acquisition. The Cobham acquisition integration is progressing well under the leadership of one of our experienced EVPs, Joel Reiss. We have now owned Cobham a little over four months and we are pleased with the acquisition thus far. We have split Cobham into two operating unions — units Canyon AeroConnect located in Prescott, Arizona and Chelton Limited located in Marlow, U.K. Two experienced TransDigm presidents are leading the integration of these two operating units.

Now moving to our outlook for 2021. We are still not in a position to issue formal fiscal 2021 sales, EBITDA As Defined and net income guidance at this time. We will look to reinstitute guidance when we have a clearer picture of the future. We, like most aero suppliers, are hopeful that we will realize a more meaningful return of activity in the second half of the calendar year. For now, we are encouraged by the recovery in our commercial OEM and aftermarket bookings in the first half of our fiscal year, along with the improvement we have seen in our commercial aftermarket revenues.

As for the defense market and an update to our defense revenue growth comments on the Q4 and Q1 earnings calls previously, we now expect defense revenue growth in the mid-single-digit percent range for fiscal 2021 versus prior year. The previous expectation communicated for fiscal 2021 defense revenue growth was low to mid-single-digit growth. Additionally, given the continued uncertainty in the commercial market channels and consistent with our past commentary, we are not providing an expected dollar range for fiscal 2021 EBITDA As Defined.

We assume a steady increase in commercial aftermarket revenue going forward and expect full year fiscal 2021 EBITDA margin roughly in the area of 44%, which could be higher or lower based on the rate of commercial aftermarket recovery. This includes a dilutive effect to our EBITDA margin from aero — from the Cobham Aero Connectivity acquisition. Mike will provide details on other fiscal 2021 financial assumptions and updates.

Let me conclude by stating that I’m pleased with the company’s performance in this challenging time for the commercial aerospace industry and with our commitment to driving values for our stakeholders. The commercial aerospace market is recovery is underway and current trends are encouraging. There is still uncertainty about the pace of the recovery, but the team remains focused on controlling what we can control. We are closely monitoring the ongoing developments in the commercial aerospace industry and ensure that we remain ready to meet the demand as it returns. We look forward to the remaining half of 2021 and expect that our consistent strategy will continue to provide the value you have come to expect from us.

With that, I will now turn it over to our Chief Financial Officer, Mike Lisman.

Mike Lisman — Chief Financial Officer

Good morning, everyone. I’m going to quickly hit on a few additional financial matters for the quarter and then also the full fiscal year. For the quarter, organic growth was negative 20%, driven by the declines in our commercial end markets and despite some healthy defense growth in the quarter. I won’t rehash the results for revenue, EBITDA and EPS as you can see all of that info in the press release.

On taxes, our expectation for the full year is unchanged. That is we still anticipate our GAAP cash and adjusted rates to be in the 18% to 22% range. Regarding tax rates out beyond FY ’21, we’re monitoring potential changes in the U.S. tax code under the new administration and we’ll provide some guidance on our future rate expectations once any legislation is finalized.

On interest expense, we now expect the full year charge to be $1.06 billion reduced from prior guidance primarily for the refinancing activity completed this year. You can find this revised interest expense guidance and then a few other updated financial assumptions on Slide 6 of today’s supplemental presentation.

Moving over to cash and liquidity, we had another quarter of positive free cash flow. Free cash flow which we traditionally define at TransDigm as our EBITDA As Defined less cash interest payments, cash capex and cash taxes was roughly $146 million. For the full fiscal year, we expect to continue running free cash flow positive as we define this metric. In line with our prior November guidance, we still expect this amount to be in the $800 million area, maybe a little better for our fiscal ’21. We ended the second quarter with $4.1 billion of cash, down from $4.9 billion at last quarter’s end. Note that last quarter’s $4.9 billion balance was prior to the Cobham acquisition for an enterprise value of $965 million that closed on January 5.

Pro forma for the closing of this acquisition, our Q2 net debt-to-LTM EBITDA ratio was 8.2 times. With our last pre-COVID quarter now having rolled out of the LTM EBITDA computation, we believe that the net debt-to-EBITDA ratio as of our second quarter end is at or very close to its peak. And subsequent quarters, it should at worst remain relatively stable, but more likely start to show gradual improvement as our commercial end markets rebound. From an overall cash liquidity and balance sheet standpoint, we think we remain in good position and well prepared to withstand the currently depressed commercial environment for quite some time.

Lastly, and shifting gears from financial matters, I’d like to provide a quick update on our ongoing U.S. DoD IG audit. We’ve been actively engaged with the IG office with some ebbs and flows and continue to work through the audit process. And our best assessment and based upon what we see, this ongoing audit appears to be similar in scope to our prior audits. While it’s difficult to know exactly when a final report could be issued publicly, we expect that this might happen sometime during Q3 or Q4 of our fiscal ’21.

With that, I’ll turn it back to the operator to kick off the Q&A.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Myles Walton. Your question please.

Myles Walton — UBS — Analyst

Great, thanks. Good morning. Nick, you made a comment around likely not doing repurchase or dividends for the next several quarters, I’m just curious why you take it off the table given you can’t predict the outcome of the M&A environment and you generally thought about not retaining cash drag for too long.

Mike Lisman — Chief Financial Officer

Yeah. I think Myles…

W. Nicholas Howley — Executive Chairman of the Board of Directors

Mike, you want to take it?

Mike Lisman — Chief Financial Officer

Yeah. Now, as we’ve mentioned a couple of times in the past, until we see a couple more months and quarters of recovery here, I think the bias is just to be conservative with the cash and what we do with it and hold larger balance for now until the situation in the commercial end markets improves. So it’s not much more than that.

Myles Walton — UBS — Analyst

Okay. And then maybe a clarification, is the OEM, do you think that has also troughed I think sequentially it’s declined again, is there — as the bookings strength looks like it probably is indicative of that troughing, but can you just confirm with the sequential decline was there?

Mike Lisman — Chief Financial Officer

I think the bookings seems — that seems to indicate that we’ve troughed I would believe, but we’ll see how it plays out. I don’t anticipate any future revisions to production rate down. So I would assume that.

Myles Walton — UBS — Analyst

Was there a particular unit that you’re seeing is it…

Mike Lisman — Chief Financial Officer

No.

Myles Walton — UBS — Analyst

I imagine wide-body focused out of air frame, no.

Mike Lisman — Chief Financial Officer

No.

Myles Walton — UBS — Analyst

Okay, all right. I’ll leave it there. Thanks.

Operator

Thank you. Our next question comes from the line of Robert Spingarn. Your question please.

Robert Spingarn — Credit Suisse — Analyst

Hey, good morning. In terms of the bookings strength, especially as it comes through sequentially here and focusing on the aftermarket, Nick or Kevin, do you have any sense when that will translate into some spike in sales. I know you’ve said you don’t have enough here to guide, but between your conversations with your customers and the bookings, is there any sense of which quarter we’re going to see an improvement in sales that’s notable aftermarket.

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. I think that we’ve seen strong sequential improvement in aftermarket bookings, we’ve also seen some in OEM booking, I think what we need to see is more flight activity that will give us a breakout quarter. I think we’re just starting to see ourselves come out of this. I’ll remind you that our thoughts when we went into this year were somewhat flat Q1 and Q2 with a slight uptick in the second half, nothing dramatic. I still think we’re on that pace, but for a real breakout which I think is what you’re driving at and when do these…

Robert Spingarn — Credit Suisse — Analyst

Yes.

Kevin Stein — President, Chief Executive Officer, and Director

Orders come through, it’s going to take more flight activity. I think we’re just at the beginning of the take-off, I think, and we need more positive signs of that that lends itself to Mike’s answer for the last question as well. We just need to see more stability here, more consistent performance for us to feel comfortable with the future quarters. We know that we book up to two years out on OEM and so it’s harder to predict when OEM orders will come in. Aftermarket orders tend to be more book and ship. You would expect that there will be more good news on the closer horizon, but there’s still a lot to be seen.

Robert Spingarn — Credit Suisse — Analyst

Okay. And then Kevin, just as a follow-up, you have done very well managing the business through the downturn. But I wanted to see if you could talk a little bit about your playbook for managing through this upturn when it comes and how you deal with input cost pressures and then potential, I suppose, labor shortfalls?

Kevin Stein — President, Chief Executive Officer, and Director

Well, I think it’s the same approach and attack plan as always. We are very disciplined in adding back costs. We will do so in a very disciplined manner. We will pass along, of course, increased costs in terms of inflationary pressures. We will practice the same playbook as always as we go through this. I think this will work very well for TransDigm as we come out of this. We will see improved, I think, margin position as we come out of this given the cost reductions that we’ve done as well as what has happened with some value pricing.

Robert Spingarn — Credit Suisse — Analyst

And is labor available if you needed?

Kevin Stein — President, Chief Executive Officer, and Director

As — what is going to return first in this market is aftermarket and that requires less labor. It’s OEM builds that drive OEM demand, that drives labor need quite significantly. I’m not saying that we won’t need to hire. But the aftermarket recovery is less labor intensive.

Robert Spingarn — Credit Suisse — Analyst

Okay. Thanks very much.

Operator

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

David Strauss — Barclays — Analyst

Thanks, good morning.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Good morning.

David Strauss — Barclays — Analyst

The 12% sequential improvement in the aftermarket that you highlighted, can you maybe just directionally talk about it Kevin from the perspective of engine versus interiors versus passenger what you’re seeing.

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. I would say, in general, our sales in the aftermarket, we’ve seen strength in aftermarket freight. We have seen some general strength in business jet. Our transport business is sort of on-par and some of our interiors which tend to be a little more discretionary lag. Does that answer your question?

David Strauss — Barclays — Analyst

Yeah. I guess on the more discretionary side of things, the interior side, maybe some of the passenger stuff, are you starting to see any pickup there at all or is it mainly concentrated on the less discretionary engine side of things?

Kevin Stein — President, Chief Executive Officer, and Director

I think it’s more concentrated on the less discretionary. But we are seeing some uptick from some of our more discretionary businesses that have seen some need to refurbish planes around the world. I think we’ve seen some orders and interest from unknown corners of the world. So it’s — the discretionary side is doing okay, but it is weaker than the other piece. I think that makes sense given that as airlines are recovering they’re more worried about putting people in the seats than some of the look and feel just yet, but we’re starting to see that ever so slightly change.

David Strauss — Barclays — Analyst

Okay. And then following up on Rob’s question, so from a cost reduction standpoint, I know you’ve highlighted the the headcount reduction, but can you give us some, I guess, specific examples of what maybe you’ve done for more of the structural cost standpoint, any facilities that you’ve taken out during this or things that for sure aren’t going to come back when we get to the other side?

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. We have fundamentally looked at some of our businesses, some of their locations. They have satellite facilities and offices that we have looked to close, consolidate, underperforming business segments for them, we’ve taken this opportunity to streamline, combine effectively to lower cost. There’s also been a number of of course cost productivity programs automation that we’ve been able to implement. This has been an ongoing effort. We’ve continued to invest at the same or on an even accelerated rate in some of our facilities for automation and cost reductions during this time. So it continues to bear out for us.

David Strauss — Barclays — Analyst

All right. Thanks very much.

Operator

Thank you. Our next question comes from the line of Carter Copeland. Your question, please.

Carter Copeland — Melius Research — Analyst

Hey, good morning, guys.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning.

Carter Copeland — Melius Research — Analyst

Nick, I know you hate to guess, but I want to sort of put you on the spot and ask you. You’ve seen several cycles at this point and watched how M&A goes, and I know people don’t want to sell assets at the bottom because the EBITDA is depressed, but now as we start thinking about recovery and when we get to a point where assets could trade on EBITDA numbers that feel a little bit firmer, would you guess a 2023 is one of those sort of recovered years where you begin to close the bid-ask spreads because people have a bit more conviction in the EBITDA or is that still too early? Just from historical perspective applied, what do you think.

W. Nicholas Howley — Executive Chairman of the Board of Directors

I would sure hope so, Carter. I would sure hope so. I’d be surprised to see a lot of it in ’22, just on the same — maybe you get lucky and something comes along, but I’d say again probably, if you don’t have a reason to sell and you have a good commercial business, you’re probably not. Now, there could be things that are attractive enough and get close enough to the edge that were willing to pay a little more to try and make them happen, but that’s very — I just can’t predict that right now.

Carter Copeland — Melius Research — Analyst

Yeah. Okay. And then one for Kevin. Just on the biz OE front, how much of the lead — is it too early to have conversations with OEM customers about potential production rate increases there, have you had any of those yet, any color you can give us on that end market.

Kevin Stein — President, Chief Executive Officer, and Director

Well, I think we’re starting to hear from Airbus of rate readiness, notifications of ramp in narrow-body rates, seems to make sense. It seems like there’ll be a hole in the market that they need to fill. We will be ready to fulfill that as it comes to pass. Makes sense that there’ll be some of that need though.

Carter Copeland — Melius Research — Analyst

What about on the business jet side?

Kevin Stein — President, Chief Executive Officer, and Director

Business jet has been really robust both in aftermarket OEM activity, in general. I’m encouraged there, although we’ll have to see how it plays out that is it just leisure and or is it business jet use — what happens here. But right now it’s been a brighter segment for us. Now, it’s only 10% to 15% of our business. So it’s not a massive driver on just the business jet side, but it’s still interesting.

Carter Copeland — Melius Research — Analyst

Great. Thanks for the color, guys.

Operator

Thank you. Our next question comes from the line of Ken Herbert. Your question please.

Ken Herbert — Canaccord Genuity — Analyst

Yes, hi, good morning.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Good morning.

Ken Herbert — Canaccord Genuity — Analyst

Kevin, I first wanted to ask on your defense sales. I mean, you called out OEM revenue growth better than aftermarket. Can you parse those out and can you comment specifically on the defense aftermarket and are you may be seeing any trends there that are at all worrisome?

Kevin Stein — President, Chief Executive Officer, and Director

We’re not. If — I think we’re really bullish about the order book on the defense side. We always see lumpiness and I’ve talked about it in the past. APKWS, parachute orders on lumpiness on OEM sometimes those orders ship, sometimes the bookings are delayed. We’ve seen strength in aftermarket, recent bookings in aftermarket, defense aftermarket has been strong. So I’m not feeling like there is any weakness, any program concerns. As you know, the defense budgets are coming through right now and I think TransDigm is in a great position, because we are on the capability extension, the technological advancement curve. We’re not boots on the ground so to speak. So it puts us in a good place for the market in the future. So both short-term and long-term, I’m reasonably optimistic about the defense budget and situation for us.

Ken Herbert — Canaccord Genuity — Analyst

Okay, very helpful. And if I could, on the commercial aftermarket, you grew in your fiscal first quarter, 5% sequentially, now 12% this quarter, was any part of that step up attributable to or can you comment on maybe average order sizes you’re seeing or maybe any urgency around the orders expedited shipment costs or benefits or anything of that nature.

Kevin Stein — President, Chief Executive Officer, and Director

We don’t offer volume discounts. So we’re not — in our aftermarket, we don’t give you a better price if you buy 100 pieces versus one, generally speaking. So there is not the market drive to get ahead of anything. What we’re seeing is that this is not overly discretionary driven. It’s a lot of consumable parts that they need and there is some urgency coming out of it. We’re starting to hear of some urgent need, urgent orders. I will tell you that our POS with our distribution is running very similar to what we see. So all indicators are that the business is generally starting to recover, like you said 5% sequential in Q1, 12% now, and an order book that continues to expand.

Ken Herbert — Canaccord Genuity — Analyst

Great. Thanks for the color.

Kevin Stein — President, Chief Executive Officer, and Director

Sure.

Operator

Thank you. Our next question comes from the line of Hunter Keay. Your question please.

Hunter Keay — Wolfe Research — Analyst

Thank you. Good morning, everybody.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Good morning.

Hunter Keay — Wolfe Research — Analyst

Good morning. Do you have a preference of a greater mix of leased versus owned aircraft in the global fleet?

W. Nicholas Howley — Executive Chairman of the Board of Directors

I don’t that we do. Generally speaking, leased folks might — historically have had more restrictions on PMA and other things, but generally speaking to us it doesn’t matter.

Hunter Keay — Wolfe Research — Analyst

Okay. And then we know that you’re pretty well protected on the demand side from inflation in pricing passing through costs. You have a pretty clear track record of that, but what about the supply side of the house? Can you remind us how you’re structured there with your suppliers and how you might protect against raw material increases? Thank you.

Kevin Stein — President, Chief Executive Officer, and Director

Well, we won’t be able to protect against raw material increases. We will have to pass them along through our indices and price increases that we have in the mechanisms. There is no way to protect yourself unless you’re willing to buffer with huge amounts of inventory, which generally we don’t like to do. We also don’t see the need to go really long on some of these ingredients. We have a tenancy to have a lot of specialty products that we sourced from our supply chains around our facilities. I don’t see this as a huge issue of supply yet. It doesn’t mean that it won’t get to that point as people struggle with possibly re-laboring their facilities. But right now we’re not in any danger position on raw material supply or supplies in general.

Hunter Keay — Wolfe Research — Analyst

Okay. Thanks, Kevin.

Kevin Stein — President, Chief Executive Officer, and Director

Sure.

Operator

Thank you. Our next question comes from the line of Sheila Kahyaoglu from. Your question please.

Sheila Kahyaoglu — Jefferies — Analyst

Thank you, guys. Good morning.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning, Sheila.

Sheila Kahyaoglu — Jefferies — Analyst

Maybe on commercial OE, you guys were down 50% in the quarter. I think your peers are trending down 40%. Any sort of puts and takes on where you guys are in rates on destocking or when do you expect that business to start flat lining or just return to positive territory?

Kevin Stein — President, Chief Executive Officer, and Director

I assume we’re making that. We’re crossing some threshold as we move through this now. Defense, I’m sorry, commercial OEM bookings can be lumpy. We haven’t lost any positions. They’re simply working through inventory and the mix that they have today. I’m confident this will shake out in the coming months and quarter.

Sheila Kahyaoglu — Jefferies — Analyst

Okay. And then maybe on EBITDA margins, you guys were at 43.2% for the first half. Your full-year guidance is about 44%, implies the second half is 45%, but you also have 100 to 150 basis points of dilution from Cobham. So what are some of the underlying assumptions if you could give us some color there?

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. I guess the underlying assumption we have is that people will fly more in the second half. There’ll be more commercial aftermarket activity and a continued improvement. Not dramatic, we have said from the beginning, we had a modest uptick in the second half that — it was in our thinking and I still think that’s where we’re at to get to the 44% with, as you pointed out about a 1 percentage point of headwind is, yeah, that is going to be the feat that we have ourselves dialed in to achieve right now. I don’t see — there is always headwinds to that continued cost reductions that we continue to look at, but I think we feel okay about that right now as our forward forecast.

Sheila Kahyaoglu — Jefferies — Analyst

Okay. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Gautam Khanna. Your question please.

Gautam Khanna — Cowen and Company — Analyst

Yeah, thanks. Good morning, guys.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Good morning.

Gautam Khanna — Cowen and Company — Analyst

Wanted to get your perspective on how things moved on the aftermarket sequentially within the quarter? So to be up nearly 30% was…

Kevin Stein — President, Chief Executive Officer, and Director

That’s an interesting question. We saw…

Gautam Khanna — Cowen and Company — Analyst

Like very, very strong…

Kevin Stein — President, Chief Executive Officer, and Director

We saw some real change in the last month, last six weeks of the quarter. Clearly, the month of March was very different than January and February. And I think that’s — you can see that in flight activity, in interest, in people traveling to websites. I mean there’s so many trackers that all of you out there follow that I religiously read every day that show — sometime in the March time frame there was an uptick in activity and that translated to an uptick in activity for us as well.

Gautam Khanna — Cowen and Company — Analyst

And would you say that’s continued in April? That level of…

Kevin Stein — President, Chief Executive Officer, and Director

I can’t comment on April whether that’s continued. But the — I think the flight activity and interest as we have seen continues.

Gautam Khanna — Cowen and Company — Analyst

And is there any way to gauge whether the uptick in aftermarket activity is — as parked — is it for parked aircraft coming back into the active fleet and therefore it’s sort of an unnaturally high bump relative to what the underlying consumption might actually be. I’m just wondering if there’s any way to parse all of the data you guys get to figure out like, if this is a…

Kevin Stein — President, Chief Executive Officer, and Director

I guess, if I was leasing that I would say that, yes, some of it must be for returning aircraft. Although the parked fleets has slowed as to what’s coming back out of parked until there is more revenue passenger miles flown. So I think they continue to pull out capacity. They then have to get it ready to fly. So there is a little bit of that. I don’t say that there is a whole lot of it is getting planes ready. I think it’s actual usage, having inventory stage where you’ll need it, it’s just the return of flight activity and maybe there was some harvesting of available hours on different planes or ship sets that they needed to manage now. Now, I’m just kind of get into speculation.

Gautam Khanna — Cowen and Company — Analyst

Right. Last one from me, you mentioned the dividends and buyback hiatus, but on the M&A front, what is the pipeline like these days? Are there any actionable things? Is it a low?

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. I’d say it’s actionable at the small to medium size end of the range. It continues to wait — the opportunities we see continue to wait more towards defense. To Nick’s comments earlier, we’ll see what comes if there is a big good commercial business that comes down the pike, we’d like to see that, but currently active as we always are and waiting more towards defense.

Gautam Khanna — Cowen and Company — Analyst

Thank you very much guys.

Kevin Stein — President, Chief Executive Officer, and Director

Sure.

Operator

Thank you. Our next question comes from the line of Robert Stallard. Your question please.

Robert Stallard — Vertical Research Partners — Analyst

Thanks so much. Good morning.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning.

Robert Stallard — Vertical Research Partners — Analyst

Nick or Kevin, first one for you on the OEM bookings. I was wondering if you could give us any additional detail on what’s in there? Is it coming from narrow-body, is it coming from restock, we may be seeing some offset from wide-bodies, just some color if you could.

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. There’s not a lot of color I can offer on that except we’re delivering on the order book of today, which is, as you know, is more slanted to narrow bodies right now. Yeah, I don’t have a lot of insights there as to whether one ship-set is in a better inventory position or anything like that. I just don’t have that color.

Robert Stallard — Vertical Research Partners — Analyst

And if Airbus were to firm up this speculated rate of 53%, when do you think you will get a sort of lead notice on that?

Kevin Stein — President, Chief Executive Officer, and Director

Probably later in the fall, f they were going to go for a 2022 rate change. It’s usually six months or so ahead of time, I think.

Robert Stallard — Vertical Research Partners — Analyst

Okay. And then just finally, to follow-up on Gautam’s question, if things were to improving aerospace land in say the next 12 months or so, would you be willing to look at a scale acquisition like Esterline if someone were be there?

Kevin Stein — President, Chief Executive Officer, and Director

Sure. I think…

W. Nicholas Howley — Executive Chairman of the Board of Directors

Yeah. It’s awful hard to predict.

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. I mean we’d consider looking at.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Yeah, of course.

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. I mean we have the capital to deploy and we’d like to be out there in it to — putting it to, but we can’t putting it to work, but we can’t make those things happen. So we remain at the ready to take advantage of it if the opportunity happens.

Robert Stallard — Vertical Research Partners — Analyst

Yeah. That makes sense. Thanks so much.

Kevin Stein — President, Chief Executive Officer, and Director

Sure.

Operator

Thank you. Our next question comes from the line of Kristine Liwag. Your question please.

Kristine Liwag — Morgan Stanley — Analyst

Hey, good morning, guys.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Good morning.

Kristine Liwag — Morgan Stanley — Analyst

Mike, earlier on, you mentioned that the IG audit is similar to previous audits. I want to clarify, is that on the audit process or does that also include the size and scope of what they’re looking at?

Mike Lisman — Chief Financial Officer

Both, the process and then also the scope in terms of auditing and reviewing profitability on a set number of of contracts. That’s what we saw on the 2006 audit, it’s also what we saw on the audit that generated the 2019 report and it’s what we’re seeing now as well.

Kristine Liwag — Morgan Stanley — Analyst

Great. And a follow-up to that would be, how do you guys think about the underlying businesses that are driving these audits. At some point, I mean, it could be pretty distracting or with the time that you spent in 2019, do you view these businesses as core or would you consider exiting them just to keep the distraction at a minimum from the rest of the business?

Kevin Stein — President, Chief Executive Officer, and Director

I say, I’ll take this one and Nick you can jump in. I think these are still great businesses, core businesses. This is part of the process of doing work with the government. You have to go through this process. The U.S. is a military DoD fantastic customer. We understand that they are trying to get the best deal for their constituents as well. So it’s a natural part of the process. I don’t think we are afraid of it. We’ve spent more time integrating into it. We now have regular reviews and meetings with the DoD, the DLA. We’re very connected and it’s very different today than 5, 10 years ago in terms of our connection. So, if your question is will we eventually want to get rid of these businesses because of the nuisance of military, I don’t see that happening yet at all. These are still great businesses, core to us. These are products developed in a commercial environment. These are fantastic products and businesses for us.

W. Nicholas Howley — Executive Chairman of the Board of Directors

I mean, all I’ll add to your point on the commercial environment, they’re very frequently intertwined and very similar products. It’s not that there separable from, yeah, they’re very close to the same product in many situations, if not the exact same product.

Kevin Stein — President, Chief Executive Officer, and Director

And we have very few businesses that are just 100% military into we’ve been talking about some of those offloading, some of those from the Esterline side of the house. So we continue to look at this and work on it.

Kristine Liwag — Morgan Stanley — Analyst

Great. Thank you, guys.

Operator

Thank you. Our next question comes from the line of Seth Seifman. Your question please.

Seth Seifman — J.P. Morgan — Analyst

Thanks very much and good morning, everyone.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Good morning.

Seth Seifman — J.P. Morgan — Analyst

I think you mentioned some more M&A opportunity on the defense side, which makes sense given the environment. Do you have any hesitancy about that just given where the mix is for the company right now? Is there a certain point beyond which you would not want to see the revenue mix tilt toward defense?

Mike Lisman — Chief Financial Officer

Historically, we’ve always had, as Kevin mentioned in this comments, a defense mix in a non-COVID environment that’s 35% of revenue or slightly less. I think we see ourselves kind of stay in that ballpark. With some of the divestitures that happened out of the Esterline portfolio as well as some of the ones that could be coming in near-term months, we actually weight down on the defense side a little bit when you run rate for a foreign environment that’s not impacted by COVID. So we’re looking at defense opportunities and when we look on the M&A side for companies, we look for products that hit our criteria, not so much narrowing in on a specific end market and just looking at commercial and not focusing on defense. We look at the defense stuff that’s out there now and size up the products to see if it fits our criteria and we’re active as we mentioned. So shouldn’t keep us out of that market and looking at opportunities in the future.

Seth Seifman — J.P. Morgan — Analyst

Okay, thanks. And then I think you mentioned, Kevin, on the last call that most of the cost out actions you kind of completed for the year and there were still some COVID restructuring during the quarter, I think fairly similar to the level in Q1. Were their new sort of cost out opportunities that came up during the quarter and I guess how do you see that kind of playing out?

Kevin Stein — President, Chief Executive Officer, and Director

I guess it’s two. There is some new things and then that’s continuation and paying for the actions that we already started.

W. Nicholas Howley — Executive Chairman of the Board of Directors

The majority of the COVID actions have now been completed in Q1 and Q2…

Kevin Stein — President, Chief Executive Officer, and Director

Yeah, completed.

W. Nicholas Howley — Executive Chairman of the Board of Directors

You’ll see a little bit in Q3 and Q4 but at a far diminished rate versus what you’ve seen in these past two quarters.

Seth Seifman — J.P. Morgan — Analyst

Okay. And then….

Kevin Stein — President, Chief Executive Officer, and Director

We’re never done looking at our cost position. So you shouldn’t ever anticipate things completely cease there.

Seth Seifman — J.P. Morgan — Analyst

Yeah, yeah, that makes sense. And then just to put a fine point on Kristine’s last question, it would the DoD audit the extent that you see the scope and kind of the scale of the of the audit being similar to prior ones is that mean you expect a similar result as well.

W. Nicholas Howley — Executive Chairman of the Board of Directors

It’s hard to say or forecast any kind of result. We don’t have good insight into that. To us, it seems just based on the activities we’re doing and the dialog and discussions we’re having, it seems a lot like those prior audits. But to make a claim on what the outcome might be that’s not under our control. So I don’t want to speculate.

Kevin Stein — President, Chief Executive Officer, and Director

But we take this seriously. We’re very engaged. We’re working closely with the IG on the audits. We meet with them regularly. This has, yeah, it’s been something that we’ve continued to work much like in the past. So the conclusions are similar.

Seth Seifman — J.P. Morgan — Analyst

Okay. Thanks very much.

Operator

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

Peter Arment — Robert W. Baird & Co. — Analyst

Yes, good morning, Nick, Kevin, Mike. Hey, Kevin, it’s been count up on a lot of calls about supply chain shortages and maybe you could just give us a little color what you’re seeing on your end on the supply chain side.

Kevin Stein — President, Chief Executive Officer, and Director

We are hearing of some critical raw materials, some critical materials, some materials that have gone up dramatically in price. So far we haven’t seen any dramatic supply disruptions because of the supply chain being stressed. We have seen prices go up in some spot market buyers on certain metals and other components, but as a whole we’re able to pass along inflationary costs, surge pricing, expedite pricing. The one area that we’re looking very closely at of course is electronic components. We do consume those in a number of our businesses, whether they’re chips, resistors, sets and alike and making sure that we have the supply of those that we need, that continues to be a focus. Again, we make a lot of what we need and consume. So we are not overly exposed, but it’s something that we have to continue to watch closely.

Peter Arment — Robert W. Baird & Co. — Analyst

I’ll leave it at that one. Thanks. Thanks for the color, Kevin.

Kevin Stein — President, Chief Executive Officer, and Director

Sure.

Operator

Thank you. Our next question comes from the line of Michael Ciarmoli. Your question please.

Michael Ciarmoli — Truist Securities — Analyst

Hey, good morning guys. Thanks for taking my question here. Maybe Nick or Kevin just to go back to the aftermarket bookings, can you provide a little bit more color from what you’re seeing in terms of geography. I’m assuming the platforms are narrow-body driven. But even what are you seeing from distributors? Are they starting to pull more? Was there anything for provisioning for the max in the quarter and pricing? If we look sequentially from last quarter, are you getting any pricing in there in those bookings numbers?

Kevin Stein — President, Chief Executive Officer, and Director

So we are always on regular intervals looking at pricing our business and putting — passing along inflationary and expedited increases. As far as the CAM bookings or any color on geography, we don’t track our business that way per se. Many of our customers are global. So I don’t have geographic information. My expectations are that certainly what I’m seeing — what we’re seeing in the U.S. is driving business, but also China, the domestic flights surge there. We are anticipate that we see that activity, but we’re — we don’t see any concrete geographies in our results.

Michael Ciarmoli — Truist Securities — Analyst

Got it. And then just on — from an organic aftermarket revenue standpoint, do we need to see traffic to get back to pre-pandemic levels for you guys to get back to that pre-pandemic quarterly revenue run rate?

Kevin Stein — President, Chief Executive Officer, and Director

I think we track and kind of follow the take-offs and landings. So I think in time as the take-offs and landings jump back up to where they used to be. We expect our aftermarket to do the same.

W. Nicholas Howley — Executive Chairman of the Board of Directors

Yeah. I think, because the the price that we’ve been able to drive, I think the new products, programs and the like, I think we’ll be in a better position when the volume returns, but we’ll have to see how that unpacks.

Michael Ciarmoli — Truist Securities — Analyst

Got it. Thanks a lot guys.

Operator

Thank you. Our next question comes from the line of Ronald Epstein. Your question please.

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Yeah. Hey, good morning.

Kevin Stein — President, Chief Executive Officer, and Director

Good morning, Ron.

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Parsing out one of the end markets freight is doing quite well you guys mentioned that and we’ve seen that in the numbers. Are there any organic or inorganic opportunities that are more focused on freight that you guys are considering?

Kevin Stein — President, Chief Executive Officer, and Director

Yeah. We’re always considering opportunities. We look at the passenger to freighter conversion business. We’re looking at a number of opportunities there. I don’t know on the inorganic side that I can comment there. But on the organic side, we’re constantly looking at new product innovations to better service that market, because it seems like one that is evolving very quickly and there is a lot of players, a lot of interested parties.

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Got it, got it. And then kind of following back up on M&A, would you guys — do you want to do anything outside of A&D, if it fit the criteria that you guys provided? Sole source, proprietary IP, that kind of thing, highly engineered, would you be willing to look at something in an adjacency or does it have to be in A&D?

W. Nicholas Howley — Executive Chairman of the Board of Directors

I can try this, I would say, you never say never, but we would be — it would be a significant hurdle for us to get over. I mean it — we have a very strong preference to stick to our knitting.

Kevin Stein — President, Chief Executive Officer, and Director

There is still lot of opportunities…

W. Nicholas Howley — Executive Chairman of the Board of Directors

Yeah.

Kevin Stein — President, Chief Executive Officer, and Director

In aerospace.

W. Nicholas Howley — Executive Chairman of the Board of Directors

I think it’s the best way I’d answer and it’d be very high hurdle, but you never say never.

Ronald Epstein — Bank of America Merrill Lynch — Analyst

Got it. Fair enough. Thank you.

Kevin Stein — President, Chief Executive Officer, and Director

Sure.

Operator

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Jaimie Stemen for any further remarks.

Jaimie Stemen — Director, Investor Relations

Thank you all for joining us today. This concludes today’s call. We appreciate your time. And thanks again for joining. Have a good day.

Kevin Stein — President, Chief Executive Officer, and Director

Thanks.

Operator

[Operator Closing Remarks]