TransDigm Group Incorporated (TDG) Q2 2022 Earnings Call Transcript

TransDigm Group Incorporated  (NYSE: TDG) Q2 2022 earnings call dated May. 10, 2022

Corporate Participants:

Jaimie Stemen — Director of Investor Relations

Kevin Stein — President and Chief Executive Officer

Jorge Valladares — Chief Operating Officer

Mike Lisman — Chief Financial Officer

Analysts:

Robert Stallard — Vertical Research Partners — Analyst

Noah Poponak — Goldman Sachs — Analyst

Robert Spingarn — Melius Reserch — Analyst

Myles Walton — UBS — Analyst

Gautam Khanna — Cowen — Analyst

David Strauss — Barclays — Analyst

Ken Herbert — RBC Capital Markets — Analyst

Matt Akers — Wells Fargo Securities — Analyst

Seth Seifman — J.P. Morgan — Analyst

Kristine Liwag — Morgan Stanley — Analyst

Peter Arment — Robert W. Baird and Company — Analyst

Peter Skibitski — Alembic Global — Analyst

Michael Ciarmoli — Truist Securities — Analyst

Ellen Page — Jefferies — Analyst

Presentation:

Operator

Hello. Thank you for standing by and welcome to the Second Quarter 2022 TransDigm Group Incorporated Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your speaker today, Jaimie Stemen, Director of Investor Relations. Please go ahead.

Jaimie Stemen — Director of Investor Relations

Thank you and welcome to TransDigm’s Fiscal 2022 Second Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm’s President and Chief Executive Officer, Kevin Stein; Chief Operating Officer, Jorge Valladares; 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 reconciliations.

I will now turn the call over to Kevin.

Kevin Stein — President and Chief Executive Officer

Good morning from Cleveland and thanks for calling in today. First, I’ll start off with the usual quick overview of our strategy, a few comments about the quarter and discussion of our fiscal 2022 outlook, then Jorge and Mike will give additional color on the quarter.

To reiterate, we are unique in the industry in both the consistency of our strategy in good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns.

We follow a consistent long-term strategy, specifically. We own and operate proprietary aerospace businesses with significant aftermarket content. We utilize a simple well-proven value-based operating methodology. We have a decentralized organizational structure and unique compensation system closely aligned with shareholders. We acquire businesses that fit this strategy and where we see a clear path to PE-like returns.

Our capital structure and allocations are a key part 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 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 good quarter considering the market environment. We continue to see recovery in the commercial aerospace market and are encouraged by the trends in air traffic among other factors.

Our Q2 results show positive growth in comparison to the same period in 2021 as we are lapping the second fiscal quarter of ’21 which was heavily impacted by the pandemic and then relative availability of vaccines. Although, our results have improved, they continue to be unfavorably affected in comparison to pre-pandemic levels as the demand for air travel remains depressed. However, the continued steady improvement in global air traffic is encouraging. There was a slight pullback in-flight traffic in January as a result of the Omicron variant after strong December holiday travel, but traffic has continued to progress forward since then. It further illustrates the pent-up demand for air travel and bodes well for the continued momentum of the commercial aerospace recovery throughout 2022.

To date, the recovery has remained primarily driven by domestic leisure travel though international travel is slowly improving as many governments across the world have softened or fully lifted travel restrictions. China continues to be a watchpoint as both international and domestic traffic in China is near COVID lows due to strict zero-COVID policies limiting travel.

In our business, we saw another quarter of sequential improvement in our total commercial aftermarket revenues and bookings, with both up approximately 10% over Q1 of fiscal 2022. I am very pleased that despite this challenging commercial environment, our EBITDA As defined margin was 47.7% in the quarter. Contributing to this strong margin is the continued recovery in our commercial aftermarket revenues as well as the careful management of our cost structure and focus on our operating strategy.

This was achieved despite the Omicron variant impacting travel in the beginning of Q2 and the sharp drop-off in China air traffic during the quarter. Additionally, we continued to generate cash in Q2. We had operating cash flow generation of almost $90 million and closed the quarter with a little over $4.2 billion of cash. We expect to steadily generate significant additional cash throughout the remainder of 2022.

Next, an update on our capital allocation activities and priorities. I am happy to report that during Q2, we opportunistically deployed $667 million of capital via our open market repurchases of our common stock. This equates to approximately 1 million of our shares at an average price of $637 per share. We view these repurchases like any other capital investment and expect this will meet or exceed our long-term return objectives. Mike will address this more later.

Also during the quarter, we agreed to acquire DART aerospace for approximately $360 million in cash. DART is a leading provider of highly engineered unique helicopter solutions that mainly service civilian aircraft. DART is expected to generate approximately $100 million in pro forma revenue for the calendar year ending December 31, 2022, and it fits well with our proprietary and aftermarket-focused value generation strategy.

The acquisition is currently expected to close during the second half of our fiscal 2022. Pro forma for the closing of the DART acquisition, we still expect to have a sizable cash balance of close to $4 billion. This assumes announced share repurchases and DART closing, which together allocates approximately $1 billion of capital for value-generating investments. We continue to evaluate our capital allocation options regarding additional acquisitions, share buybacks, and dividends. All three options remain on the table, each individually, but then also, potentially in some combination over the next nine months or so.

Any significant M&A, share buyback, and/or dividend activity will still leave the company with substantial liquidity and the financial flexibility to deal with any currently anticipated capital requirements or other opportunities in the readily foreseeable future. We continue to look at possible M&A opportunities and are always attentive to our capital allocation. Both the M&A and capital markets are always difficult to predict, but especially so in these times.

Regarding the current M&A pipeline, we are actively looking for M&A opportunities that fit our model. Acquisition opportunity activity continues to accelerate and is approaching pre-COVID levels. We have a decent pipeline of possibilities as usual mostly in the small and mid-size range. I cannot predict or comment on possible closings. We remain confident that there is a long runway for acquisitions that fit our portfolio.

Now moving to our outlook for 2022. We are still not in a position to provide full financial guidance as a result of the continued disruption in our primary commercial end markets. We continue to be encouraged by the recovery we have seen in our commercial OEM and aftermarket revenues and the strong bookings received for both thus far in fiscal 2022. At this time, we expect to reinitiate guidance on the November 2022 earnings call for our new fiscal year assuming prevailing conditions continue to evolve favorably.

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

With regard to internal planning, our teams are now resource planning for commercial aftermarket revenue to grow ahead of the 20% to 30% sizing range previously provided. We expect our commercial OEM revenue to grow significantly as well, but at a rate less than the commercial aftermarket rate of growth. As you know, we aim to be conservative.

As for the defense market, we still expect defense revenue growth in the low single-digit percent range for fiscal 2022 versus prior year despite the slow first half of the year. Jorge will provide more color on our defense end market. As you know this end market can often be quite lumpy on a quarterly basis. We now expect full-year fiscal 2022 EBITDA margin to be approaching 48% due to the rate of commercial aftermarket recovery. We anticipate EBITDA margins will continue to move up throughout the second half of our fiscal year. As a note, this margin guidance includes the unfavorable headwind of our Cobham acquisition of about one-half of a percent this year.

We believe we are well positioned for the second half of fiscal 2022. As usual, we’ll closely watch the aerospace and capital markets and see how they develop and react accordingly. Mike will provide details on other fiscal 2022 financial assumptions and updates.

Let me conclude by stating that I’m pleased with the company’s performance in this period of gradual recovery for the commercial aerospace industry and with our commitment to driving value for our stakeholders. We remain focused on executing our operating strategy and managing our cost structure as we continue on this path to a full recovery of the commercial aerospace industry. We look forward to the remainder of fiscal 2022 and the opportunity to continue to create value for our stakeholders through our consistent strategy.

Now, let me hand it over to Jorge to review our recent performance and a few other items.

Jorge Valladares — Chief Operating Officer

Thanks, Kevin. I’ll start with our typical review of results by key market category. For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior-year period in 2021, that is assuming we own the same mix of businesses in both periods. Any acquisitions are included in both periods, and the impact of any divestitures is removed in both periods.

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 revenue increased approximately 28% in Q2 compared with the prior-year period. Bookings in the quarter were strong compared to the same prior-year period and again significantly outpaced sales. Sequentially, bookings, improved almost 10% compared to Q1 with sales improving almost 15%. While we expect demand for our commercial OEM products to continue to be reduced in the short term, we are encouraged by build rates gradually progressing at the commercial OEMs.

Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 46% in Q2 when compared with the prior-year period. Growth in commercial aftermarket revenue was primarily driven by increased demand in our passenger submarket, which is our largest submarket, although all of our commercial aftermarket submarkets were up significantly compared to prior-year Q2.

Sequentially, total commercial aftermarket revenues and bookings both grew by approximately 10%. Commercial aftermarket bookings were up this quarter compared to the same prior-year period and Q2 bookings strongly outpaced sales. To touch on a few key points of consideration, global revenue passenger miles remain depressed. There was a modest sequential decline in revenue passenger miles in January due to the Omicron variant and a tough comparison to December holiday travel. However, revenue passenger miles have continued to improve since January. The limited impact on air travel from the Omicron variant along with the Russia-Ukraine conflict which began at the end of February, demonstrates the strong underlying demand and willingness of passengers to travel. This provides optimism for the pace of the recovery of air traffic in the remainder of 2022. IATA also recently stated that based on the current recovery momentum they expect passenger traffic to return to pre-pandemic levels in 2023, which is a year earlier than previously forecast.

The recovery in domestic travel continues to be more resilient than international. In the most recently reported IATA traffic data for March, domestic air travel was only down 23% compared to pre-pandemic while international travel was down about 50%. The US and Europe continue to show strong demand for domestic travel although China has been more volatile due to its zero-COVID policies, which cause localized lockdowns and rapid drop-offs in air travel. Though the pace of the international air traffic recovery has been slow, it is steadily progressing and we’re hopeful for improvement in international travel in the remainder of 2022.

Many of the government-imposed travel restrictions have softened or lifted entirely which is encouraging. Global cargo volumes continue to be strong although freight demand has tempered a bit recently. This trend could continue as the year progresses due to unfavorable impacts on air freight from the lockdowns in China and the Russia-Ukraine conflict. Time will tell.

Business jet utilization remains robust. Commentary from business jet OEMs and operators remains positive and these higher levels of business jet activity appear likely to continue in the near term. Now, let me speak about our defense market, which traditionally is at or below 35% of our total revenue. The depth — the defense market revenue, which includes both OEM and aftermarket revenues, decreased by approximately 2% in Q2 when compared with the prior-year period. As we’ve said many times, defense sales and bookings can be lumpy.

Similar to Q1, our teams continue to be challenged with supply chain-induced delays in fulfilling orders. The supply chain issues primarily surround the lack of availability of electronic components. Our operating units are actively pursuing mitigating actions to overcome these issues. Our defense order book remains strong and bookings this quarter improved 30% sequentially versus Q1. We expect our defense business to expand throughout the remainder of the year. As Kevin mentioned earlier, we continue to expect low single-digit percent range growth in fiscal 2022 for our defense market revenues.

I’d like to finish by recognizing the strong efforts of our teams in continuing to overcome the negative impacts of the pandemic and supply chain disruptions. We remain focused on our value drivers and meeting the increased demand for our products.

With that, I’d like to 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 some additional financial matters for the quarter and also our expectations for the full fiscal year.

First, in regard to profitability for our second quarter, EBITDA As Defined of about $633 million for Q2 was up 22% versus prior Q2. EBITDA As Defined margin in the quarter was approximately 47.7%. This represents year-over-year improvement in our EBITDA As Defined margin of about 420 basis points versus Q2 of last year. Sequentially, the margin increased by 40 basis points versus last quarter and we expect this improvement trend to continue for the balance of the fiscal year.

Next, a few additional comments on select financial metrics for the quarter, and again, also the full year. Organic growth was 15% for the quarter, driven by the rebound in our commercial OEM and aftermarket end markets. On taxes, we are revising our expected adjusted tax rate for this fiscal year downward slightly to a range of 24% to 26%.

Our GAAP and cash tax rates guidance is unchanged and still expected to be in the 21% to 23% range. 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 EBITDA As Defined less cash interest payments capex and cash taxes was roughly $222 million. As noted in the press release, this amount was slightly lower this quarter, but this is just timing. Specifically, due to the quarter-end date of April 2, we picked up an extra cash interest payment that was made on April 1. In addition, we had higher cash tax payments in the quarter.

As we’ve mentioned before, cash tax payments and cash interest payments can be lumpy across the quarters. For the full fiscal year, our free cash flow guidance is unchanged from the November earnings call, that is, we still anticipate free cash flow to be in the $1 billion area for the fiscal year, maybe a little better. As Kevin mentioned, we used $667 million of cash to repurchase shares during the quarter at a weighted average purchase price of about $637 per share and ended the quarter with $4.2 billion of cash.

In total, we repurchased about 1.05 million shares and did it through an open market repurchase program. We view and model these share repurchases just like any other capital investment, such as the acquisition of a new business, and expect a similar rate of return. Additionally, in the 10-Q that was filed later today, you’ll see that our strong sales rebounded — strong sales rebound resulted in net working capital being a $130 million use of cash this quarter. This resulted in less cash being booked to our balance sheet than in prior quarters.

As mentioned previously, we have the cash to fund this investment and we’re glad to see our primary commercial end markets rebounding and therefore driving this need. As we continue to recover from COVID’s impact on air travel and recover to 2019 global activity levels, we would expect an additional $200 million to $275 million of cash to go back into net working capital. The timeline over which this will happen remains uncertain but should generally track the recovery.

Moving on to leverage levels. Our net debt to EBITDA ratio is currently at 6.6 times, down from 8.2 times at its peak at the end of our fiscal ’21 second quarter. We expect to continue running free cash flow positive for the balance of our 2022 fiscal year. Barring any additional capital markets activities such as dividends or share repurchases, our net debt to EBITDA ratio will keep ticking down as the year progresses. We are watching the rising interest rate environment closely. We remain 85% hedged on our $20 billion gross debt balance through a combination of interest rate caps and swaps that go out through calendar year 2025. This provides us adequate cushion against any rise in rates.

We have included a supporting sensitivity table in today’s slide deck that shows you what our annual cash interest expense will be at a range of three-month LIBOR values. In summary, from an overall cash liquidity and balance sheet standpoint, we remain in good position and well prepared to withstand the still depressed, but now rebounding commercial aerospace environment for quite some time.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Robert Stallard with Vertical Research. You may proceed with your question.

Robert Stallard — Vertical Research Partners — Analyst

Yeah. Thanks so much and good morning.

Kevin Stein — President and Chief Executive Officer

Good morning.

Mike Lisman — Chief Financial Officer

Good morning.

Robert Stallard — Vertical Research Partners — Analyst

Kevin, just wanted to sum up on your comments on China and what sort of percentage revenue exposure you are having there or you have there already at the moment? And also if there is any sort of short-term impact that you’ve already experienced in terms of bookings and this impact of the COVID lockdowns?

Kevin Stein — President and Chief Executive Officer

So China and bookings commentary. China — well, China is in our numbers now. Obviously, we’ve seen depressed flight activity in China, although Asia is starting to show some green shoots of activity in the Rest of Asia. So, remain encouraged there. This should be some sort of upside for us. Hard to gauge how much as the future unfolds as China starts flying domestically and internationally.

On bookings, I think we remain encouraged on — our aftermarket bookings continue to increase and so do OEMs, so does the defense. Defense at very strong bookings as you heard Jorge comment on. It’s why we remain confident and optimistic on the year for defense spending.

Robert Stallard — Vertical Research Partners — Analyst

That’s great. Thank you.

Operator

Thank you. Our next question comes from Noah Poponak with Goldman Sachs. You may proceed.

Noah Poponak — Goldman Sachs — Analyst

Hi. Good morning, everyone.

Kevin Stein — President and Chief Executive Officer

Good morning.

Jorge Valladares — Chief Operating Officer

Good morning.

Noah Poponak — Goldman Sachs — Analyst

Your aerospace aftermarket growth has now exceeded the industry average for a few quarters in a row coming off the bottom and that was after declining — very in line with the industry average on the way down. Can you — and also I guess compared to flight activity, that’s true as well. So, can you spend a little bit more time on why your aerospace aftermarket business is growing faster than the end market right now and how sustainable that is?

Kevin Stein — President and Chief Executive Officer

I think that orders and shipments can be lumpy, the supply chain is not efficient. I don’t have any exact commentary on why we might be outperforming today. I know at times we can appear to outperform and at times underperform. It’s just the inefficiencies of the market.

Noah Poponak — Goldman Sachs — Analyst

Okay, fair enough. And Kevin, could you spend a little bit more time on how you’re thinking about capital deployment at the minute? I mean, I know you touched on it in the prepared remarks, but with the share repurchase, how do you — how do you think about the size of that that’s appropriate and how do you balance the decision of that versus the special dividends that you’ve done in the past?

Kevin Stein — President and Chief Executive Officer

Well, we’ve historically done share repurchases. It has happened in the past, sizable repurchases. We’re looking at this, as I said in my comments, opportunistically as a way to get capital back out to the shareholders. We’re not thinking about it any differently, we’re evaluating all options on the table. There are M&A opportunities, and when we determine that the time is right, we will move forward with other capital deployment in terms of M&A deals or share repurchase dividends. There is no magic formula to decide which will do. It’s kind of as we decide as we go. But everything’s on the table right now.

Noah Poponak — Goldman Sachs — Analyst

Are there prospects for sizing that up given you’ve brought the leverage down and in the scenario where there is not deal activity, say, through the end of the year would you look at even larger repurchases?

Kevin Stein — President and Chief Executive Officer

Well, we have pre-authorization from the Board to go do I believe $2.2 billion in share repurchases. We’ve used $667 million of that. I think it depends on the opportunities that come along. Again, we model this just like an acquisition and we see similar returns. We’re evaluating all options. I can’t comment much more than that. We want to ensure we have enough dry powder to do any deals that we see coming along of any sizable extent.

Noah Poponak — Goldman Sachs — Analyst

Okay, thank you. Appreciate it.

Operator

Thank you. Our next question comes from Robert Spingarn with Melius. You may proceed with your question.

Robert Spingarn — Melius Reserch — Analyst

Hey, good morning.

Kevin Stein — President and Chief Executive Officer

Good morning.

Jorge Valladares — Chief Operating Officer

Good morning.

Robert Spingarn — Melius Reserch — Analyst

Kevin, what’s the latest on the labor side both recruiting and attrition, and to what extent is this a constraint?

Jorge Valladares — Chief Operating Officer

Yeah, I’ll take that, Rob. From our perspective, we’re seeing some pressures at the lower levels of direct labor, in general. As most of you know, most of the labor requirements really are driven by the commercial OEMs. So, we think we’re properly resourced to support the improvement in the commercial aftermarket. I wouldn’t say that we’ve seen any significant uptick in turnover on the engineering staff. It’s a little bit more of a competitive marketplace. But as always, we’re going to be cautious in adding back resources as it’s still a little bit of a dynamic situation.

Robert Spingarn — Melius Reserch — Analyst

Okay. And then just, Kevin, at a high level on defense has your long-term outlook for defense sales growth in the low single-digits changed given the latest defense budgets and obviously the evolving national security environment in Europe and elsewhere?

Kevin Stein — President and Chief Executive Officer

Well, I think we’re optimistic about defense budgets in the future. It obviously takes a while for that to trickle down to us as a component supplier, but we do see a favorable environment shaping up for us in the future on defense.

Robert Spingarn — Melius Reserch — Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Myles Walton of UBS. You may proceed.

Myles Walton — UBS — Analyst

Hey, good morning. I was wondering, Kevin, you said that your commercial aftermarket would track ahead of the targeted 20% to 30% range. It looks like if you just maintain flat for the rest of the year, you’re closer to 40%. Do you want to put a new bogey out there or is it just greater than what you previously said?

Kevin Stein — President and Chief Executive Officer

Yeah, I think I said all that — we want to say on that, we’re not giving guidance. I did say in my prepared remarks that we would — we see outperforming that 20% to 30% resource planning target. We are not — the market isn’t so stable right now that we’re going to go out on a limb and communicate higher. We tend to be conservative in our guidance and there is still book and ship that has to happen. So, we’re sticking with — we’re going to outperform the 20% to 30% that we initially gave at the year, but not put a finer point on it right now.

Myles Walton — UBS — Analyst

Okay. Okay, any reason to think sequentially you can’t [Phonetic] grow? And then the other question is just on pricing, what’s the base level inflation you’re currently passing through? I’m not asking about your net price, just sort of your base level inflation benchmark. Thanks.

Kevin Stein — President and Chief Executive Officer

Well, pricing, we don’t comment on specifics. Our goal is that we need to overcome inflation. Inflation as you’ve seen from CPI values is running very high historically over many decades. It is a focus and what we — part of our job is to evaluate and pass along the inflationary pressures that we see. So far we have been successful in doing that.

Myles Walton — UBS — Analyst

Okay, all right. I’ll go. Thanks.

Operator

Thank you. Our next question comes from Gautam Khanna with Cowen. You may proceed.

Gautam Khanna — Cowen — Analyst

Hey, thanks. Good morning, guys.

Kevin Stein — President and Chief Executive Officer

Good morning.

Jorge Valladares — Chief Operating Officer

Good morning.

Gautam Khanna — Cowen — Analyst

I’m wondering on the defense side, you saw the big pickup in bookings and was it sort of broad-based? Was it isolated to a couple of product areas.? I know you’ve talked about it as being lumpy in the past, but how representative of ongoing demand do you think the quarter’s bookings were?

Jorge Valladares — Chief Operating Officer

Yeah, we think it was in general broad-based in nature. There wasn’t one or two specific programs driving that. In general, we saw the pickup with the passage of the DoD budget throughout the quarter. So, we expect that there may be a little bit of catch-up and that the DoD and DLA are playing there with that delay.

Gautam Khanna — Cowen — Analyst

Interesting. And then, do you then expect that you know because some of these funds have to be put on contract by the fiscal year-end and the government will see sustained bookings — in the next, are you still seeing that, if you will, that trend has continued into that third fiscal quarter and would you expect it to?

Jorge Valladares — Chief Operating Officer

In general, these can be lumpy. So we’re not in a position to comment on whether we’re seeing any increases right now — and what — we hope we’re being cautious here but time will tell.

Kevin Stein — President and Chief Executive Officer

I think we’re seeing an uptick in aftermarket defense —

Jorge Valladares — Chief Operating Officer

Little bit weighted towards the aftermarket. That’s fair.

Kevin Stein — President and Chief Executive Officer

Yeah.

Gautam Khanna — Cowen — Analyst

Okay, I’ll leave it there. Thank you.

Operator

Thank you. Our next question comes from David Strauss with Barclays. You may proceed.

David Strauss — Barclays — Analyst

Thanks. Good morning. Kevin, just to level set is — I — there have been some acquisitions, some divestitures, is your commercial transport aftermarket still down about 15%, 20% from kind of pre [Indecipherable] levels, is that the right level?

Kevin Stein — President and Chief Executive Officer

We aren’t splitting out the pieces. All of the end market segments have gone up and are doing better. We’re not splitting out the segments. That activity though has I think increased the most of any of the submarkets so far.

David Strauss — Barclays — Analyst

Okay. And what about — you talked about passenger being the strongest. What are you seeing on the interior side?

Kevin Stein — President and Chief Executive Officer

Interiors has also improved quite surprisingly. The only — I think as Jorge touched on, the only sector that’s still growing but it’s starting to slow its growth a little bit was the freight. As we’ve already heard, there would be some slowdowns but interior is all of the sub-markets are up into the right. It’s the first time I think we’ve seen something that pronounced across all of the sub-markets.

David Strauss — Barclays — Analyst

Okay. And, Mike, yeah, the loss amortization, how does that play out over the next year? Does it kind of hold at these levels or does that start to bleed off?

Mike Lisman — Chief Financial Officer

Sorry, the last contract amortization from the [Speech Overlap] acquisition.

David Strauss — Barclays — Analyst

Yeah, exactly. Yeah.

Mike Lisman — Chief Financial Officer

It starts to bleed down. I think you probably remember when we came out with it, we expected something in the area of 30 million to 40 million bucks a year or so and it trails off. So as we get farther out, you’re right, that amount will continue coming down. The — and then it ends about five years post-deal completely.

David Strauss — Barclays — Analyst

Okay, great.

Mike Lisman — Chief Financial Officer

And you’ll see that continue to trend down a bit.

David Strauss — Barclays — Analyst

Okay, got it. Thank you.

Operator

Thank you. Our next question comes from Ken Herbert with RBC Capital Markets. You may proceed.

Ken Herbert — RBC Capital Markets — Analyst

Yeah. Hey, Kevin, good morning. I just wanted to follow up on the aftermarket bookings comment. Is it fair to assume from your comments that you probably saw some of the softness in cargo-related bookings in the quarter relative to transport or business jets and helicopters, or can you parse out the bookings for the aftermarket in the quarter any further?

Jorge Valladares — Chief Operating Officer

Hey, Ken, this is Jorge. I’ll take this one. Yeah. In general, as we’ve noted, we saw decent recovery across all the sub-markets. There wasn’t any specific concentration in any particular market and — we’re cautiously optimistic that that will continue. As you know, we don’t get any visibility to the inventory levels at the airlines.

Ken Herbert — RBC Capital Markets — Analyst

And how are you viewing inventory levels maybe across the industry either with your own operations, at distributors, and then of course at the airline? It sounds like airlines, you don’t have much visibility. But how do you view inventory levels at the distribution and your own shop floors?

Jorge Valladares — Chief Operating Officer

Yeah, we have limited views on inventory at distribution. I think, in general, we believe that the destocking cycle is kind of running out of gas and everyone is hopeful with the commentary from the airlines on a busy summer travel season and trying to prepare accordingly.

Ken Herbert — RBC Capital Markets — Analyst

Great. Thanks, Jorge.

Operator

Thank you. Our next question comes from Matt Akers of Wells Fargo. You may proceed.

Matt Akers — Wells Fargo Securities — Analyst

Hey, good morning. Thanks for the question. Can you talk about the defense, so the full-year guidance implies kind of a big acceleration in the back half on a year-over-year basis, can you talk about what that looks like sequentially, like Q2 versus second half? Just wondering if there is like a year-over-year comparison that makes that look bigger than it really is.

Kevin Stein — President and Chief Executive Officer

Yeah, I think we don’t want to get into given quarterly guidance on defense revenue outlooks. But generally, as Jorge mentioned there, with such strength in the booking and as we look out over the next two quarters, that we feel pretty confident that we’re going to be able to hold the low single-digit range for the year. So Q3 and Q4 will be quite a big ramp-up to your point. But in terms of forecasting how big each quarter, I don’t think we want to get on the quarterly expectations.

Mike Lisman — Chief Financial Officer

But with defense bookings up 30%, clearly that’s why we’re still sticking with what we communicated at the beginning of the year. As Jorge alluded to, the budget just being signed, things are opening up a bit. We’ll see.

Matt Akers — Wells Fargo Securities — Analyst

Got it, thanks. And then, I guess the supply chain disruption there within the fact that you kind of touched on this earlier, but are those — are there signs that those are easing? And does that need to kind of get fixed to hit that guidance or is there upside there if those get better?

Jorge Valladares — Chief Operating Officer

Yeah, I mean, as I noted, primarily, what we’re seeing are difficulties on the electronic components. We would anticipate there’s probably still some headwinds, excuse me, and challenges in the second half. But we do expect — with six months to go that we’ll be able to clear a fair amount of those. The teams are working the details daily and communicating with the customer base. So we think we can get there by the end of the year.

Matt Akers — Wells Fargo Securities — Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Seth Seifman with JP Morgan. You may proceed.

Seth Seifman — J.P. Morgan — Analyst

Hey, thanks very much. And good morning.

Kevin Stein — President and Chief Executive Officer

Good morning.

Jorge Valladares — Chief Operating Officer

Good morning.

Mike Lisman — Chief Financial Officer

Good morning.

Seth Seifman — J.P. Morgan — Analyst

When you think — how should we think about the role of being opportunistic in terms of the amount of share repurchases you’re going to do from here. I — gather that probably your outlook for the company probably hasn’t changed very much from what it was in the March quarter and the stock market’s just doing all kinds of weird stuff right now. So, I’d imagine that return proposition and your guys — probably, it looks better today. So should we expect you to continue to be very opportunistic in that regard, or is there just a lot more to think about in terms of balancing that with other potential uses of the cash?

Kevin Stein — President and Chief Executive Officer

I think we — I’ll let Mike chip in on this as well. We will be opportunistic. We will keep all the options on the table. As we said, clearly the return would be better at this share price. We remain very bullish on the business. So, as we see the market recovery.

Mike, do you want to add anything?

Mike Lisman — Chief Financial Officer

[Speech Overlap] We’re always looking at all options every week, everything’s on the table.

Seth Seifman — J.P. Morgan — Analyst

All right. Okay. Okay, great. And then, I guess just as far as M&A opportunities, you guys have made at times acquisitions in Europe and with the increase in defense spending there, does that become a place where you might spend a little bit more time looking for opportunities or not so much?

Kevin Stein — President and Chief Executive Officer

We actively look for opportunities around the world. Certainly in Europe, we’re always evaluating opportunities. I don’t think we want to be — grow defense exposure. We’re a commercial aerospace company and we will continue to look for those opportunities and value them generally higher than defense opportunities. But all options are open and on the table, including in Europe where we’ve had excellent luck doing acquisitions.

Seth Seifman — J.P. Morgan — Analyst

Great. Thank you very much.

Operator

Thank you. Our next question sir comes from Kristine Liwag with Morgan Stanley. You may proceed.

Kristine Liwag — Morgan Stanley — Analyst

Hey. Good morning, guys.

Kevin Stein — President and Chief Executive Officer

Good morning.

Jorge Valladares — Chief Operating Officer

Good morning.

Mike Lisman — Chief Financial Officer

Good morning.

Kristine Liwag — Morgan Stanley — Analyst

When we start looking at air traffic, it seems like it’s starting to pick up. International travel starting to open up too. And in this quarter, we saw the engine guys post aftermarket growth of above 20%, 30%. How are you guys thinking about the opportunity in other parts of the aftermarket where you’re not as present. For example, the opportunities in engine PMAs? How are you thinking about those things and do those become more attractive in environments like today?

Kevin Stein — President and Chief Executive Officer

We are not a big PMA player. We are a heavily engineered product developer. So I’m not sure we’re looking at getting out of our comfort zone or the products that we make to get into other areas of aerospace unless acquisitions lead us there.

Kristine Liwag — Morgan Stanley — Analyst

I see. That’s really helpful context. And maybe if I could do a follow-on. I mean, Kevin, in a rising interest rate environment, if we’re going to be here for longer, how do you think about the sustainable leverage for the business. Do you have a target in mind?

Kevin Stein — President and Chief Executive Officer

I would just say and I’ll let Mike jump in that even in this rising interest rate environment, it’s still historically very low-interest rates. So, there is a long way for us to go. It’s not changing my mentality around capital allocation or debt. Mike, do you have –?

Mike Lisman — Chief Financial Officer

I think that’s right and we’re hedged as you guys know too, so the near-term impact of any rise in rates is somewhat muted just by the impact — the offsetting impact of the hedges.

Kristine Liwag — Morgan Stanley — Analyst

Great. Thanks, Kevin. Thanks, Mike.

Kevin Stein — President and Chief Executive Officer

Sure.

Operator

And your next question comes from Peter Arment with Baird. You may proceed.

Peter Arment — Robert W. Baird and Company — Analyst

Yeah. Good morning, everyone. Mike, maybe just a clarification on the working capital comment you made? The $200 million to $275 million kind of going back into net working capital is — you’re saying it kind of tracks the commercial market. So, we’ve seen a big recovery for you. How — what’s the right way to be thinking about that? Is it spread over multiple quarters or we see that come in stronger in the second half of this year?

Mike Lisman — Chief Financial Officer

I think it will be spread over multiple quarters and it’s hard to say, right. It sort of tracks the revenue and where we go with the end markets, and things have been so lumpy there that it’s hard to pinpoint exactly where working capital is going to go. But there is still $200 million sum [Phonetic] that will have to go back into working capital when you look at the receivables, inventory and payables balances. That’s how we look at it. From peak to trough, we were down about $400 million during COVID, so somewhere on the order of like a $130 million or so — or $150 million or so has gone back in, to date, but we’ve still got $200 million to $275 million more to go. In the pace over which it happens, we’ll see, right. It depends on how commercial recovers.

Peter Arment — Robert W. Baird and Company — Analyst

That’s really helpful. And then just related to that, I guess, Kevin, do you see yourself just more strategically carrying a little more inventory just because of the supply chain comments you guys have talked about with the electronic side?

Kevin Stein — President and Chief Executive Officer

We’ve certainly encouraged our teams not to skimp on inventory in this environment that not having necessary inventory and not being able to complete a sale is not acceptable. So, if we need a little bit extra to help us bridge through this time, we’ve certainly told our teams to look at those options.

Peter Arment — Robert W. Baird and Company — Analyst

Appreciate all the color. Thanks.

Operator

Thank you. Our next question comes from Peter Skibitski with Alembic Global. You may proceed.

Peter Skibitski — Alembic Global — Analyst

Hey. Good morning, everyone. Just one for me. Can you guys talk a little more just about kind of the relative risks and opportunities with regard to your adjusted margins next year or so? Because it seems like now for this year, you’re only call it a point or so below prior peak, and certainly, you’ve got volumes on your side going forward, maybe you could talk about the magnitude or the mix shift necessary to keep margins flat or should we be pretty confident that you’re going to breakthrough prior peak?

Mike Lisman — Chief Financial Officer

It’s hard to say. And I think we’ll give guidance when we go back to giving guidance as far as next year goes. But generally, you guys know the way we like to run the business. We should always see our margins given some stability in the end markets march upward each year. By exactly how much it’s just hard to say, given where commercial aftermarket is and how the mix shift there can impact your margins. But generally, obviously, should trend upward. But at this point, I don’t think we want to say by how much. Hard to do.

Peter Skibitski — Alembic Global — Analyst

Okay. No, thanks for the color.

Kevin Stein — President and Chief Executive Officer

Operator? Did we lose our operator? Did we lose the call? Is anyone there?

Operator

Thank you. [Speech Overlap]

Kevin Stein — President and Chief Executive Officer

There we go.

Operator

From Michael Ciarmoli with Truist Securities. You may proceed.

Michael Ciarmoli — Truist Securities — Analyst

Hey. Good morning, guys. Nice results.

Kevin Stein — President and Chief Executive Officer

Good morning. Sorry about that.

Michael Ciarmoli — Truist Securities — Analyst

No. No worries, no worries. Maybe, Kevin, just to kind of go back a little bit to Noah’s line of questioning and even maybe dovetail kind of Myles’ questioning on pricing. I mean do you guys think you’re outperforming due to having better pricing practices than your peers? And there has been some chatter out there, I guess, from some of your customers that you guys are considering a mid-year price hike. Do you think if that’s the case, do you think you’re seeing some ordering ahead of that price hike? And I don’t know if it’s called restocking, but maybe airlines customers? Just trying to get in under that if that’s — if you can comment?

Jorge Valladares — Chief Operating Officer

Yeah, Michael, this is Jorge. I’ll take that one. In general, we don’t provide specifics about our pricing. Our long-standing approach has been to get real prices above inflation. Obviously, we’re generally in a higher inflationary environment and the goal is still the goal. So, we’re trying to get some real prices — increases above that inflationary level and that’s how we approach it.

Michael Ciarmoli — Truist Securities — Analyst

Got it, got it. And then, any thoughts on — I know it kind of came up, but thoughts on airlines restocking? I mean it seems with supply chain tightness, everybody is looking to have some inventory on hand, so not necessarily over-ordering, but do you think there is a little bit of that going on in the marketplace to kind have that buffer stock available?

Jorge Valladares — Chief Operating Officer

I think in general terms as supply chain issues arise in any industry, right, and any good buyer would try and get some inventory on the shelf. To what extent airlines, distributors are doing that, we just don’t have enough visibility there.

Michael Ciarmoli — Truist Securities — Analyst

Okay, fair enough. Thanks, guys. I appreciate it.

Jorge Valladares — Chief Operating Officer

Sure.

Operator

Thank you. [Operator Instructions] Our next question comes from Ellen Page [Phonetic] with Jefferies. You may proceed.

Ellen Page — Jefferies — Analyst

Hi, guys. Good morning.

Kevin Stein — President and Chief Executive Officer

Good morning.

Jorge Valladares — Chief Operating Officer

Good morning.

Ellen Page — Jefferies — Analyst

On commercial OE, you were up pretty significantly quarter-over-quarter, but when we look at with the OEs, it’s same [Phonetic], been saying [Phonetic] with particularly Boeing with the MAX it’s expected pretty steady around 31 per month. And ongoing headwind for the 787. Is there opportunity for sequential improvement from here or how do we think about that business?

Jorge Valladares — Chief Operating Officer

Yeah, I think, in general, as Mike commented earlier, we don’t provide any guidance on a quarter-to-quarter basis. Obviously, Boeing recently announced their expectations in terms of increasing the 737 MAX production rate I think later this quarter, and they continue to work with the FAA in resolving the outstanding issues on the 787. But across our entire business space, everyone has different lead times and where they may enter and see those future rate increases depends by business.

Ellen Page — Jefferies — Analyst

Okay. And just on supply chain in the commercial side of the business, is there any area where longer lead times may limit growth?

Jorge Valladares — Chief Operating Officer

Right now we don’t see any issues supporting the growth on the commercial side. It’s been a little bit more concentrated on our defense businesses and, again, towards electronic components. The teams have been pretty active over the prior couple of quarters, trying to adapt and adjust their MRPs as they need to plan for additional supply and anything that might happen. But we do not see that limiting our growth prospects at all.

Ellen Page — Jefferies — Analyst

Thank you. That’s it.

Operator

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Jaimie Stemen for any further remarks.

Jaimie Stemen — Director of Investor Relations

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

Operator

[Operator Closing Remarks]