A – Kevin Stein: Good morning.
Q – Robert Stallard: It’s probably a question for Sarah. On the debt issuance, I was wondering if you could comment on why you did it now, given it could be still some time until the Electron Devices acquisition closes?
A – Sarah Wynne: Yeah. I mean we’re always going to be proactive at having cash ready for pending acquisitions. We want to be opportunistic on that front. And we don’t want to be obviously up against any time line except the markets weren’t open.
Q – Robert Stallard: Okay. And then as a follow-up, we’re probably in a changing interest rate environment, and rates could be coming down over the next 12 months. How do you think you’re going to be adjusting the balance sheet and the interest rate derivatives you have in place to try and make the most of that?
A – Sarah Wynne: Obviously, we’re always looking at the market and trying to be opportunistic with that debt structure. We do have the benefit of hedges. So from that perspective, we’ve fortunate enough to have 75% hedged. We’ve got some stuff coming up, and we’ll continue to look and be opportunistic as long we can with our debt comes forward.
Q – Robert Stallard: Okay. Thanks so much.
Operator: Our next question comes from the line of Gautam Khanna with TD Cowen. Your line is open.
Q – Gautam Khanna: Hey, good morning, guys.
A – Kevin Stein: Good morning.
Q – Gautam Khanna: I was wondering if you could talk a little bit about the things in the M&A pipeline, you mentioned small to midsize? Is there — is it still kind of skewed to hardware-oriented stuff? Or are you also entertaining some of these service assets? And maybe if you could just give us an update on how Calspan has done relative to what you guys were thinking originally given that…
A – Kevin Stein: Yeah. In pipeline of small, medium-sized businesses mostly in hardware, although we’re looking also at some services businesses, if they would meet our criteria. It’s not always clear that some of those do. But we’re open as long as it’s within aerospace and defense. I don’t think we see the need of going outside of aerospace and defense, not for a while. There’s still so many great targets to go after in this business. On Calspan, I’ll let Joel comment.
A – Joel Reiss: Yeah. So I think we’re encouraged by where we’re at, at this point in the integration. We’ve got our leadership team in place. We’ve put our business unit teams, structure in place. We’re going through the value generation strategy that we employ. And as of right now, I think we’re running a bit ahead of the model, and we’re encouraged by what we’re seeing.
Q – Gautam Khanna: Just as a follow-up in the M&A hardware pipeline, is it mostly defense-oriented stuff? Is it — I mean, just is there any skews or…
A – Kevin Stein: No, it’s actually a blend of commercial and defense assets. It’s not only just defense. It’s hard to control. You can’t really dictate what the pitches will be throttled at you. So you just have to react to them when they come along. Right now, we see a nice balance. That isn’t always the case, let’s say it is.
Q – Gautam Khanna: Okay. And just my last one. In the commercial aero aftermarket, any discernible differences between growth rates into the distribution channel versus direct to customer? Thank you.
Kevin Stein: So distribution represents about 20% to 25% of our commercial aftermarket shipments. As we look at — at the point-of-sale that our distribution partners are seeing in comparable markets is pretty close to one another. There’s no significant difference.
Q – Gautam Khanna: Thank you, guys.
Operator: Our next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is open.
Q – Kristine Liwag: Hey, good morning everyone.
Kevin Stein: Good morning.
A – Mike Lisman: Good morning.
Q – Kristine Liwag: Kevin, another question on the pipeline, you’ve mentioned the target-rich environment and assets are coming up that weren’t available before. In the past, you’ve mentioned that you’re open to doing deals that have some industrial exposure. Can you update us on your current thinking? And what proportion maximum industrial would you be willing to entertain at this point based on what’s available?
A – Kevin Stein: Yes. It’s interesting question and gets me into speculation. I don’t know if there’s a certain percentage that would kick a deal out. We want to be in aerospace and defense. If there are non-aerospace and defense products or business, that’s okay. We don’t thumb our nose at it, but we look at a business in its totality, can it achieve our 20% plus internal rate of return for that acquisition. Yes, we don’t look scantily at those businesses, but we don’t want to go after anything that industrial only. So I would guess it has to be, predominantly aerospace.
Q – Kristine Liwag: Great. Thanks for the color. And maybe in aftermarket, if I could have a follow-up question, with customer behavior, I mean, there’s clear scarcity of aircraft assets out there. How much of the volume that you’re seeing, are coming from an Ad Hoc, break-and-fix type thing versus airlines potentially proactively purchasing product?
Joel Reiss: I don’t think we have any real meaningful way to understand that. The vast majority of our commercial aftermarket orders are booked to ship. They come in over the trends of they’re typically not advanced bookings. And we don’t get a color in terms of why they’re buying. We try to watch and make sure there’s no inventory significant moves, but hard to get that kind of level of granularity.
Q – Kristine Liwag: Great. Thank you, guys.
Operator: Our next question comes from the line of Matt Akers with Wells Fargo. Your line is open.
Q – Matt Akers: Yeah. Hey, guys. Good morning. Thanks for the question.
A – Kevin Stein: Good morning.
Q – Matt Akers: I guess the M&A deals that you’ve looked at that haven’t closed. What’s the main thing preventing the valuation? Is it strategic ticket, because it seems like you’re looking at the deals and you get the balance sheet to do more.
A – Kevin Stein: Yeah. It’s — do they meet our disciplined criteria. We want to see aftermarket content. We want it to be, aerospace and defense. We prefer Commercial over defense, but the biggest reason is whether they really have IP, whether they’re highly engineered intellectual property, that’s the key. So that’s what we look for. And that’s what we screen against. And when deals fall apart, it’s because things aren’t as proprietary as we would like them to be. And so we walk away from — we’re not interested in being in the me-too product space like everyone else. I mean, we’re not trying to build the print business. We want high IP, high engineering content in aerospace and defense that has access to the aftermarket.
Matt Akers: Got it. Thanks. And then, I guess back to your comments on some of the aerospace OE supply chain issues. Is that more around your supply chain and your suppliers are more just sort of Boeing and Airbus in general slowing down? And is it possible to comment kind of what you’re assuming for 737 MAX for this year?
Joel Reiss: Yes. So, it’s not specific for us the comments around the supply chain. I think that’s just what we’re generally hearing from others. I think our supply chain team has done a really solid job of working through the challenges that have persisted for the last couple of years. Last year, we were talking about castings and then electronic components. I think largely, those have gone away. I do think we’re in some level of a new normal where there’s more kind of issues that pop-up randomly in comparison to where we were from a pre-pandemic level. I think that too is getting better, but likely that’s going to persist for the next couple of years. I don’t think any of that’s material. I think right now, our assumption is based not so far off of what Boeing’s current stated rate is in terms of what the FAs numbers are.
