Wesco Aircraft Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

Apr.29.13 | About: Wesco Aircraft (WAIR)

Wesco Aircraft Holdings (NYSE:WAIR)

Q2 2013 Earnings Call

April 29, 2013 5:00 pm ET

Executives

Mark Davidson

Randy J. Snyder - Chairman of the Board, Chief Executive Officer, President and Member of Nominating & Corporate Governance Committee

Hal Weinstein - Executive Vice President of Sales and Marketing

Gregory A. Hann - Chief Financial Officer and Executive Vice President

Alex Murray - Vice President of Global Operations

Analysts

Carter Copeland - Barclays Capital, Research Division

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Jonathan Raviv

Amit Mehrotra - Deutsche Bank AG, Research Division

Edward Marshall - Sidoti & Company, LLC

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Kristine T. Liwag - BofA Merrill Lynch, Research Division

Ryan Merkel - William Blair & Company L.L.C., Research Division

Operator

Hello, and welcome to the Q2 2013 Wesco Aircraft Holdings Inc. Earnings Conference Call. My name is Mayisha, and I will be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I will now turn the meeting over to Mark Davidson. Mark Davidson, you may begin.

Mark Davidson

Good afternoon, and thank you for participating in Wesco Aircraft's 2013 Second Quarter Earnings Call and Webcast. Presenting today will be Randy Snyder, Chairman and CEO; Hal Weinstein, Executive Vice President of Sales and Marketing; and Greg Hann, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will open the line for questions.

As a reminder, today's conference call includes statements regarding the company's anticipated financial and operating results as well as other forward-looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements may often be identified with words such as we expect, we anticipate, we believe, upcoming or similar indications of future expectations. Although Wesco Aircraft believes that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different.

Additional information relating to factors that may cause actual results to differ from our forward-looking statements can be found in the company filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the fiscal year ended September 30, 2012, as supplemented by our quarterly report on Form 10-Q for the period ended December 31, 2012. Wesco Aircraft undertakes no obligation to update or revise forward-looking statements except as required by law.

Now to begin the call,I would like to introduce Randy Snyder, who will deliver the opening remarks. Randy?

Randy J. Snyder

Thank you, Mark, and good afternoon. Please turn to Slide 4. I'm proud to announce Wesco Aircraft second quarter results with record sales of $225.9 million and EPS of $0.33. Our sales for the quarter were 24% greater than in the second quarter of 2012 with 14% of this growth being organic. Based on our growth during the quarter and the activities, we are comfortable revising our guidance for the year. Greg will discuss the specifics shortly.

For the past 18 months, I have been constantly asked the question, "When will the up cycle return for the market?" My patent [ph] reply has been, "I hear the train coming, but it hasn't arrived at the station quite yet." Wesco's strategy has always been not to sit idle and wait for the train to arrive but aggressively go out and pursue new customers and gain market share by offering value-added services and a supply chain...

[Audio Gap]

Even though our military customers are preparing for the effects of sequestration. Wesco has been working with them to provide additional services so they can reduce cost. These services would include quality control inspection, logistics support, inventory management and part presentation to the factory floor. These services allow our customer maintain their core competency in manufacturing for their future growth. This has allowed our military business to remain stable with a potential growth in the future.

Additionally this quarter, Wesco has signed 25 contracts [ph], and current contract activity is the highest level in the company's history. Our MRO business is steadily growing with hundreds of buyers now using our e-Commerce solution. Wesco's business jet sales are growing by adding new products to our existing customer base and being heavily involved on new post [ph] -- platforms that will produce upside for future growth. By adding new products and services to our existing customers as well as winning new contracts gives us the confidence Wesco will continue to grow faster than the market.

Growth means nothing if Wesco does not have the internal capacity to meet our customers' expectation on service levels. All through the recession, Wesco invested in technology and improving processes throughout the company. Our success has always been based on giving our dedicated staff the tools necessary to do their jobs more efficiently. Through these investments, we are confident that we are in a great position to take full advantage of the up cycle in the commercial aerospace industry.

Wesco is investing in products, services and infrastructure so that we are well prepared to provide the world-class service that our customers have always received from us no matter what the business cycle may be. Now I'd like to turn the meeting over to Hal.

Hal Weinstein

Thanks, Randy. Good afternoon, everyone. As Randy mentioned, we're continuing to see increasing activity and opportunities in all areas of our business. I'd like to spend a few moments discussing Wesco's sales, what we're seeing in the market and how we're continuing to grow our business globally.

Revenue growth continued strong in Q2 with that growth consisting of a diversified mix of new customers, increased SKUs within our existing customer base, robust growth internationally and continued success within our electronic products business. As Randy mentioned, we continue to gain market share, which we expect will lead to new product penetration and increased opportunities as the market upturn gains traction.

As we mentioned earlier this year, we believe that governmental budget issues could lead to an increasing need for our military customers to reduce costs through outsourcing of both products and services. This has proven to be true as our share of both parts and services within our existing military customers continues to grow. Most notable among these customers are Bell, Raytheon and Northrop. Also, discussions are ongoing with a number of our larger military customers to substantially change our scope of work to include areas of performance that would have traditionally been done in-house by our customers. The need to find additional savings wherever possible is driving our customers to seek the efficiency gains that Wesco can provide. We believe that the upside potential is still considerable in this ever-changing portion of the market.

It's no surprise that the commercial market is currently driving the growth in the aerospace industry, and Wesco is very well positioned on virtually every commercial program globally. Of note, our new facilities in China, India and Mexico will play a significant role in our growth plans and are performing ahead of our expectations. This robust commercial market will allow us to grow with our customers and, as Randy indicated, expand at a rate greater than the market based on our wide range of product and service offerings.

Potent contract activity in Q2 continued to gain momentum from the strength of Q1. We're seeing robust activity levels in all parts of our business, inclusive of machine parts, MRO and electronics. Contract signings for the second quarter were also very strong. A few recent examples of our OEM business include the extension of our existing agreement with UTC Goodrich for their landing gear business, which was the legacy Interfast contract; a new contract with Raytheon in Canada in support of the Boeing Chinook program; Boeing in Winnipeg, Canada, which was also a legacy Interfast customer; an extension of an existing agreement with Parker Aerospace for their bearing [ph] products; KAI in Korea for a variety of Boeing [ph] programs; Singapore Aerospace Manufacturing for a variety of products and programs; Lockheed in support of their government integrated Prime Vendor program; as well as Boeing Military [ph] with continuing awards of new works [ph] to our existing contract. Additionally, our MRO business continues to grow as our sales team builds relationships, demonstrates our value and captures more contracts over time.

In Q2, we were able to win a number of long-term agreements with airline and MRO customers such as Lan Cam, Alaska Horizon Air, FedEx, WestJet, ANA, Jazz, and Air France, to name just a few. Also we displayed and efficiently rolled out our new e-Commerce systems at the recent MRO show in Atlanta. The response was very positive, and the system is functioning as we'd hoped in providing the customer an easy and efficient method of ordering and tracking products.

So to summarize, activity levels continue to be high in all areas of our business, contract signings remain strong and we're in a great position to grow our business for all commodities and services. So let me turn the call over to Greg for a detailed discussion of our financial results. Greg?

Gregory A. Hann

Thanks, Hal, and good afternoon, everyone. If you will please turn to Slide 5. As Randy and Hal have noted, our sales during the quarter were very strong as the company had record sales of $225.9 million. This is up 24% year-over-year for the quarter. Randy also noted that our organic growth was approximately 14%. We saw growth in all channels to markets and in all regions. Our Rest of World segment continued to perform very well and showed approximately 33% external sales growth year-over-year primarily due to the growth of contract revenues across most of our largest customers as well as new contract wins. Ad hoc sales made up 41% of our total sales, JIT sales for 25% and LTA sales for 34%. The mix has been relatively consistent between Ad hoc and contract business over the last 4 quarters.

The gross profit percentage for the quarter was 36%. This is slightly higher as compared to last quarter as well as Q2 2012. As we've said before, our gross profit percentage can fluctuate quarter-to-quarter due to our sales mix of the more than 500,000 SKUs we sell.

Next, I'd like to discuss our SG&A expenses. For the second quarter, we reported a year-over-year increase of $7.2 million. This increase was primarily due to the addition of Interfast-related SG&A costs and payroll-related costs associated in part with headcount increases. These headcount increases occurred mostly for additions to our sales and sales support organizations in order to meet our growth and our customers' growing requirements. We continue to remain focused on increasing our productivity in all areas of the business that will allow us to continue to get operating leverage as the business grows. As a percentage of sales, consolidated SG&A expenses were 15.5% in the second quarter as compared to 16.4% in Q1 2013 and 17.2% in Q4 2012.

Adjusted EBITDA as a percentage of sales at 22.8% grew by 2.2% as compared to last quarter and was 1.8% greater than Q2 2012 due primarily to the continuing leveraging of our sales growth.

Now if you'd please turn to Slide 6. Adjusted net income for the second quarter was $31.2 million, resulting in adjusted diluted EPS of $0.33. This compares to adjusted net income of $20.8 million, an increase of 50%, and adjusted diluted EPS of $0.22 in Q2 2012.

Our effective tax rate for the quarter was 32.6%, and we expect it to be between approximately 33% to 34% for the full year. Our effective tax rate continues to decline primarily as our Rest of World segment grows. We also had some foreign exchange benefits during the quarter, which represented approximately $0.01 in EPS.

The number of fully diluted shares in the quarter was 95.6 million.

Moving on to cash flow, we generated $27.3 million of free cash flow during the quarter. Cash flow from operations was $27.99 million, and capital expenditures were $600,000. The company also paid down $13.5 million in debt during the second quarter. We continue to feel very comfortable with the strength of our balance sheet to support our business growth.

Now if you'd please turn to Slide 7. Now let's discuss our outlook for fiscal 2013. As we've discussed, our performance in the second quarter was strong, both in terms of revenue and earnings. Based on our results and the activity levels we are seeing worldwide, we are raising our guidance for the year. We now expect that our revenue for the year to be between $880 million to $900 million, and our adjusted diluted EPS is now expected to be between $1.17 and $1.21. We are certainly optimistic about how we are positioned in the market for the second half of the year and beyond.

Let me take a moment at this time to discuss the Interfast integration. We are very close to completing the integration process. Our most important objective after the acquisition was to make sure that we had no disruption in service to our customers, which we have been able to accomplish. We have continued to get our expected synergies, remain very excited about the people that have joined Wesco and our combined prospects for the future.

For some closing comments, I'd like to hand the call back over to Randy. Randy?

Randy J. Snyder

Thank you, Greg. As you can tell, we are very pleased with our second quarter results and excited about where the business is headed. Wesco is investing in products, services and infrastructure so that we are well prepared to provide world-class service that our customers have always received from us no matter what the business cycle may be. We will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is Carter Copeland.

Carter Copeland - Barclays Capital, Research Division

Just a couple of quick questions. First, on the guidance. It looks like the change in the tax rate was worth about $0.02 of the $0.025 raise at the midpoint. It looks like you're sort of implying higher sales, slightly higher sales and slightly lower margins. Is that the right way to think about it? And with respect to the sales, you got kind of a -- it implies kind of a reasonable deceleration in growth in the latter part of the year. Is that just lack of visibility? Or is there anything specific in terms of sales trends worth noting? Any color you could just sort of provide to break that down would be great.

Gregory A. Hann

Yes, as far as looking at the rest of the year, I mean, as you know, the visibility is a little tough for us. So we feel very comfortable with the guidance we've given and the rise in the guidance from a revenue standpoint. Your comment about the tax is -- I'd -- it's not quite $0.02. It's less than that, $0.015, $0.0175. But that has been factored in. Once again, when you look at the revenue, what we expect the margins to be, relatively consistent with where we have been. And the continued leverage that we're going to get, I think, with the guidance we're giving, we feel very confident in being able to meet that guidance.

Carter Copeland - Barclays Capital, Research Division

Great. And to build on that a little bit, with respect to the margin, you made a comment about the mix in any given quarter, given the large number of SKUs, can influence it. Was it -- we noted in prior quarters that the pricing on some of the Ad hoc sales had come down relative to the kind of premiums you had seen in the past. Did some of that reverse in this quarter? Or was it simply a sort of mix of the SKUs themselves that caused the margin to go up on basically the same sort of sales split we saw, both sequentially and year-over-year?

Hal Weinstein

It's Hal. Yes, in reality, this really all has to do -- as we've talked about in the past quarter, this really was a reflection of a different mix than the previous quarters. So yes, I don't think we're seeing anything different at this point relative to Ad hoc margins, but it's just, in some quarters, maybe more hardware, less electronics, that type of thing.

Gregory A. Hann

Yes, I mean, I think Hal is right that there's really no kind of big structural shift that we're seeing right now.

Hal Weinstein

Right. Yes.

Operator

Our next question is Joe Nadol.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Starting out just on the Ad hoc side, Randy you had said that you're doing things in advance of a pickup, not waiting around for things to pick up. It does look like Ad hoc grew 10% sequentially, which is pretty decent growth. Is this the beginning of a bigger pickup, in your opinion? What are you seeing so far this quarter? Or is this just kind of bumping around a little bit?

Randy J. Snyder

This is Randy. I think it's just bumping around a little bit. I think our growth is really based on going out and securing new business either for a new customer base, new contracts or add ons to our existing customers. And I don't think you'll see it, and if you do see it, it'll really be a gradual pushup. So I think it's way too early to see that -- to see if it's to start.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay. On the MRO side, you guys have said in the past this is going to be pretty small for a while. It sounds like, though, a pretty good list of customers. Could you help us size that business or either what you saw in the quarter? Or maybe, let's revisit where you expect this to go in the coming quarters.

Randy J. Snyder

Although I can't give you specifics, Joe, relative to what those awards were in terms of revenue yet, I can tell you that it is going about as expected, maybe a little quicker. The awards that we mentioned are, and to be candid, not huge, huge awards. The customers we talked about earlier is doing a bit of testing with us. We're new to the game. They're giving us a bit here and a bit there, testing the water. If we perform, and, of course, we will, then it will expand over time. So it's doing about where we expect it, to be honest.

Operator

Our next question is Jason Gursky.

Jonathan Raviv

It's actually Jon [ph] Raviv in for Jason this afternoon. Just kind of curious what your -- a little more color on the military discussions. And previously, you have said that any military upside could drive further upside to your guidance. I'm wondering how much military growth is built into your refresh sales outlook.

Hal Weinstein

No.

Gregory A. Hann

Not yet. Nothing, no. We -- our assumption is what we've said before that military will be consistent. And, I mean, once again, as Hal and Randy spoke about, we think there is the potential for upside there, but it certainly wasn't factored into the guidance that we gave.

Jonathan Raviv

Are you seeing any notable slowdown given where we are with sequestration and the uncertainty out there?

Randy J. Snyder

Not yet. Not to say, I guess, maybe a year from now we may see something a little different. But as of now, business as usual, so to speak.

Hal Weinstein

Yes, for those, so that's going to be our strategy, is to go out and help the customer save money through some of the services that we can offer. And with that, we can pick up more business. So if there's going to be slowdown, our goal is to obtain enough business that we won't show the effect of a slowdown. But then, at the same time, as it picks up, we'll be in a great position to get a larger share of the business.

Operator

Our next question is from Myles Walton.

Amit Mehrotra - Deutsche Bank AG, Research Division

Deutsche Bank. It's Amit Mehrotra here for Myles Walton. Just one follow-up question on the MRO market. If I remember correctly, you had mentioned on the last call that you're looking to sign 5 to 7 long-term contracts. Can you just update on how many actually you signed in the quarter? And any expectation through the course of the year on incremental contacts on the MRO side?

Hal Weinstein

Yes, I don't have a specific information on exactly the number, but I can tell you that we are ahead of the schedule that I indicated in the last call as far as numbers of contracts signed.

Amit Mehrotra - Deutsche Bank AG, Research Division

Okay. Just one more question on the incremental margin on the quarter that -- and it was really nice, especially on the gross margin line. I understand there was a positive mix, but I'm assuming there's obviously some operating leverage benefit as the sales come back. Can you just talk a little bit about that? And how should we think about the operating leverage in the business once the volumes come back to the business?

Gregory A. Hann

Yes, I mean, absolutely. I mean, just the fundamental structure of our business, that is, we're so driven by people. And with the work that we're doing on productivity improvements and trying to get more efficiencies in the business, that we will see operating leverage as the sales increase. Over the last couple of quarters, and the reason I reference Q4 2012, Q1 and Q2 2013 is because that links in with the Interfast acquisition, and they have a little bit of a different cost structure. So when you look at over the last couple of quarters, you can see that we are starting to get the leverage as the sales are increasing.

Randy J. Snyder

And also, usually, when build rates move up, volume of each pick drives the efficiencies higher. So instead of selling 10 pieces of a part, we might be selling 15 pieces of a part. But it takes the same amount to pull that same item. So that's where we also get a lot of efficiencies.

Amit Mehrotra - Deutsche Bank AG, Research Division

Right. Okay, that's helpful. The last question is just, Greg, on the free cash flow. It was pretty strong in the quarter. Can you just give us some indication on where you think the free cash flow conversion will be for the full year?

Gregory A. Hann

I think it's going to be pretty consistent on what we've -- we talked about last quarter as well. I still expect us to be in the range of 60% of our net income.

Operator

Next question is from Edward Marshall.

Edward Marshall - Sidoti & Company, LLC

It sounds like to me that -- first of all, good quarter, but it sounds like to me that there's not much change in the commentary that you're providing today, that there are signs continuing to build, but you're not willing to kind of say that the floodgates have opened. Is that a right -- a fair assessment of what's being said?

Randy J. Snyder

Pretty much. In our industry, the floodgates don't just open immediately. It's all based on capacity and build rates. So as the new programs come out, as the builds rate increases, then it gets closer to when the floodgates get opened.

Edward Marshall - Sidoti & Company, LLC

But this is the same momentum that we've been seeing over the last few quarters that's now just starting to look more impressive.

Gregory A. Hann

Well, I think part of that also is the fact that we're continuing to go out and we're signing new contracts. We're clearly growing greater than market growth. So whether or not the Ad hoc comes or not or when it comes, we're still focused on continuing to grow the business at a rate greater than what the market is.

Edward Marshall - Sidoti & Company, LLC

Okay. Go ahead.

Randy J. Snyder

Also the reason why [indiscernible], right now a lot of the customer bases are trying to secure contract pricing so long term with a supplier that has a history of being a great supplier. So that's where we're benefiting also because our history is that we perform. So that's what's also happening with our growth.

Edward Marshall - Sidoti & Company, LLC

Now have -- as I look at kind of the Ad hoc sale, and you've covered this a few different ways, but I want to see if I can ask the question a little bit different, the sequential or year-over-year pickup, depending upon how you want to look at it or how you can answer it, was it driven mostly by volume or by price?

Gregory A. Hann

I mean, I guess, obviously, it's pretty part by part specific. I would say given the fact that margins over the last year have kind of contracted a little bit from an Ad hoc perspective, I would say that it's mostly on volume versus pricing.

Edward Marshall - Sidoti & Company, LLC

Okay. And then -- and finally, looking at the other income line, it was noticeably changed in the quarter. What was in -- what ran through that line particularly?

Gregory A. Hann

Yes, that's really the foreign exchange that I was talking about. It's worth about $0.01. And what that is, it's really the revaluation of the balance sheet in the Rest of the World segment, back to U.S. dollars. And so that can kind of fluctuate up and down depending on how the pound is moving or the dollar is moving against the pound.

Edward Marshall - Sidoti & Company, LLC

That makes sense.

Operator

Our next question is from David Manthey.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Could you remind us of the margin profile of the MRO business versus the core business? And then if you could talk about any positive scale or purchasing effects that are over and above the raw differential and profitability?

Hal Weinstein

Yes, we -- again, we're just kind of learning this market, David, but our belief is that MRO margins are going to be similar to our normal contract and perhaps a little bit higher. But they'll -- kind of we're going to learn that as we certainly get into it. What the MRO business does do for us, and you kind of touched on it, from a purchasing leverage standpoint, it will allow us to buy more of the same type of product we already have, potentially get better opportunity to go deeper on products and, hence, get greater margin opportunity. So those 2 things will combine, hopefully, to actually drive up the margin on both sides of the business.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay. And with MRO, it sounds like you're saying that, that's typically a contract that's set up ahead of time, not an Ad hoc purchase. Is it ever Ad hoc on the MRO side?

Hal Weinstein

Oh, yes. But -- very much so. It's -- as with any of the business that we do, it is a combination of the 3 entities, maybe less so JIT but certainly LTA and certainly Ad hoc. But again, the overall is probably similar to what we're seeing today.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then the final question is along a similar line, is that as you look at the changes in the mix between these 3 relationship types, are you actually seeing customer movement or graduation from Ad hoc on to contracts? Or is it mainly sort of mix plus differential in the growth rates of how your existing customers are buying under the same contracts?

Randy J. Snyder

Truly hard to say. I don't know if I have a great answer for that. I don't know. What do you guys think? Unless we've gone that beat.

Gregory A. Hann

Yes, I don't know how to answer that one.

Randy J. Snyder

Yes. I don't want to give you the wrong information. I'm just -- we're not sure.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay. But you clearly have examples of where you're taking existing Ad hoc relationships and then moving those to some form of contract, correct?

Randy J. Snyder

That happens constantly.

Hal Weinstein

It happens constantly.

Gregory A. Hann

All right, all the time.

Randy J. Snyder

Usually, those customers that have contracts with us that have parts that are Ad hoc that they buy as needed, and they're putting those on the contract so they can take advantage of the savings that are done with having a JIT contract.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

I see, okay.

Operator

Our next question is from Michael Ciarmoli.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Can you guys maybe elaborate just a little bit or help us quantify how big the MRO business is right now as a percent of your revenues?

Gregory A. Hann

A couple of percentage points, yes. Yes, really small.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay. And then in terms of the e-Commerce platform, I mean, what kind of order, daily order volume are you guys getting now? As you bring on more customers, what sort of -- I mean, are there capacity constraints? Do you have to make any new additions from either a technology standpoint to facilitate clearly what's a more unpredictable kind of purchasing environment with a pure MRO market?

Alex Murray

It's Alex here. I mean, from a capacity constraints, we haven't seen anything that's challenged those yet. We've got a lot of work on as we introduce the technology to make sure that we have the processes and methods within the warehouse to keep pace. In terms of measuring order intake and looking for the increase in the volume, I don't think we've dug into that level of detail or in a position to share that level of detail yet.

Hal Weinstein

I can tell you the activity is higher. It's working day by day.

Randy J. Snyder

Yes.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

And then just on Interfast, the run rate we saw in this quarter revenues. I mean, what are the expectations going forward? And just further on, on the Interfast revenues, if we look going back, I think Joe asked the question on the Ad hoc sequential growth of 10%, I mean, is Interfast a meaningful contributor to those Ad hoc revenues?

Gregory A. Hann

Yes, absolutely. One of the things we talked about last quarter is it's becoming a little bit more difficult to isolate the Interfast revenues anymore. We very quickly have tried to integrate as quickly as possible the sales side. Obviously, it will be fully integrated here very, very shortly. So we'll certainly begin to lose that visibility here within the next couple of weeks. As far as the makeup, it's relatively similar to the makeup from a contract Ad hoc is what we have. It doesn't substantially skew the numbers one way or the another.

Operator

Our next question is from Sheila Ieogoyu [ph].

Unknown Analyst

A few quick ones for me. In terms of -- can you break down the proportion of sales that was from commercial against military markets for the quarter and maybe the growth rate?

Gregory A. Hann

No, we -- so we only look at that once a year. So it's really -- it's a very long process for us to work through because we have so many customers that do multiple different kind -- different platforms at the same kind of facility, so it's a really difficult thing for us to do. So we only do it at the end of every year.

Unknown Analyst

Okay, that makes sense. And maybe I could ask this a different way. I know you said that you're not seeing any decline in the military business, and you don't really expect it. You haven't really changed your guidance for the military business, but can you talk about what you're seeing in the different subsectors or maybe trends in the military supply chain?

Gregory A. Hann

Again, it's -- everybody is kind of feeling their way around at this point. To be candid, it seems as if we have a bit of confusion at the major contractor level. People like us are doing, for right now, business as usual. We're not seeing anything of a huge shift change. And again, not to say a year from now we won't, but as of now it really has been kind of business as usual. You hear a lot of things, you read a lot of things, but nothing of magnitude at this point for day-to-day.

Unknown Analyst

Okay. And then just to go back to Joe's question and ask this differently on the Ad hoc growth of 10% sequentially, can you give us a sense maybe of was it 5 customers driving that or was it spread across both commercial and military or just spread across a number of customers?

Gregory A. Hann

When you look at the growth and, in fact, if you look at it like a -- as a percentage of sales, we've been relatively consistent for the last year. So it's really all of our different channels to market have grown at almost about -- almost the same rate because the percentages have been so consistent.

Unknown Analyst

Okay.

Gregory A. Hann

And your comment about Ad hoc-specific customers, things like that, I mean, we're just across-the-board.

Unknown Analyst

Got it. And the last one, can you quantify what pricing was in the quarter?

Gregory A. Hann

What? I'm sorry?

Unknown Analyst

Pricing was.

Gregory A. Hann

Pricing?

Unknown Analyst

Yes, pricing year-over-year. Was it positive? Negative?

Gregory A. Hann

Well, the Ad hoc margins declined -- had been declining over the last few quarters. So that -- there was probably some small pricing declines there. But I think from a contact contract perspective, relatively consistent.

Randy J. Snyder

Yes.

Operator

Our next question is from Ronald Epstein.

Kristine T. Liwag - BofA Merrill Lynch, Research Division

This is actually Kristine Liwag calling in for Ron on this afternoon. I guess kind of going back to the defense question a little bit. In the quarter, most of the defense contractors said that they didn't see sequestration effect, but they also adjusted their outlook for the full year to account for downside risks. So I was wondering if -- how you factored in sequestration with your updated guidance for the full year.

Gregory A. Hann

Well, remember, our -- we're a September 30 year. So it's really, we're looking forward 6 months. So from our perspective, we held to our belief that the military will be relatively flat this year.

Kristine T. Liwag - BofA Merrill Lynch, Research Division

Sure. And then second question. It looks like you guys are going from more business there in the signs with different customers. Can you kind of give us any color on the margin profile of those businesses as they kind of try to cut their costs?

Gregory A. Hann

I -- could you -- can you repeat that?

Randy J. Snyder

You know what? I can...

Gregory A. Hann

Okay.

Randy J. Snyder

From a margin standpoint, when you're talking about cutting their costs, one of the benefits we do is we have the services that kind of cut their internal costs to the supply chain. So by adding the different functions that we give and by taking parts that they usually would manage themselves and put it on our side where we manage it, it saves them a tremendous amount of costs in administration and logistics support for the factory. So that's when we talk about cutting -- helping them cut their costs.

Kristine T. Liwag - BofA Merrill Lynch, Research Division

And then the margin profile of those businesses compared to like your Ad hoc or regular contracts, how do those compare?

Gregory A. Hann

Yes, I mean, just Ad hoc margins in general are higher than the contract. I mean, it's the nature of the fact that when somebody is looking to buy a product, unplanned demand, they need it right now. So it's just worth -- the inventory is worth more to them than on a contract that we've priced 3 or 5 years.

Randy J. Snyder

Yes, but also -- but it's not a big deal between what we're charge for Ad hoc today versus contract. You're talking about...

Gregory A. Hann

Yes, but generally margins are higher on the Ad hoc side.

Randy J. Snyder

Yes. When the market changes into a buyer's -- into a seller market versus a buyer's market

Operator

Our next question is from Carl Olshwager [ph].

Unknown Analyst

One of the things you've talked about was the kind of year-over-year increase in SG&A being driven by workforce headcount addition. Sequentially, it's pretty much level or -- how should we be thinking about adding headcount there going forward? Are you pretty much through that now? Or are you going to continue to do as you sort of grow these markets?

Gregory A. Hann

I mean, it'll continue to grow as we grow the market. I mean, we're doing -- headcount isn't purely variable. It's more kind of step function. So you -- we hire people and then the business can grow with that additional headcount growth. And then once again, as we do more from a productivity, efficiency standpoint, that core group of people can do more and more. But yes, I mean, headcount is going to continue to grow as our business grows. It's just the cost just -- we're not going to grow it as quickly as the sales growth.

Randy J. Snyder

And also, growth in headcount dollars is usually to support customers on-site, and -- which is revenue for us. And also in sales to promote more sales, to promote more sales growth.

Unknown Analyst

Okay. Then on -- it looks like DSOs might have picked up slightly. Is there anything going on there in terms of the, your customers? Or is it more sort of the timing when the revenues came through?

Gregory A. Hann

Yes, it's 2 things. One is the timing on when the revenue came through, more near the end of the quarter. But the second is the growth in the Rest of World. Typically, the terms for those customers outside of North America are typically longer than they are in North America. So as you see the growth in the Rest of the World, it has a tendency to make DSO stretch out a little bit.

Operator

Our next question is from Ryan Merkel.

Ryan Merkel - William Blair & Company L.L.C., Research Division

So first question, what inning are we in as far as the new capacity you're building out?

Gregory A. Hann

Yes, I'm sorry, Ryan, are you just talking about what we're doing from like an automation standpoint? Are you asking about automation?

Ryan Merkel - William Blair & Company L.L.C., Research Division

Yes, I think -- yes, that's right. I think last quarter, Randy might have mentioned you're thinking of doubling capacity and doubling your ability to service customers unless I heard that wrong.

Randy J. Snyder

Well, we're -- from a space perspective, we're almost -- we'll probably, in the next 12 weeks, be -- being able to use the new building that we have and allow this -- the building we're presently in to be completely used for operations. So that's going to add. And I wouldn't know what inning we're in, but we're investing quite a bit to automate -- to improve the automation that we have as well. So this is -- will be -- this is something that will be continuing on for the next 2 or 3 years to be able to double our capacity.

Gregory A. Hann

I mean, we -- certainly, right now, the way we're structured, we do not feel capacity constrained.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Got you, okay. And then a second question. It sounds like the sales growth in the quarter was fairly broad based across all the product lines, new contracts, growing with existing accounts. Is that a fair assessment?

Gregory A. Hann

Absolutely.

Randy J. Snyder

Exactly what happened.

Ryan Merkel - William Blair & Company L.L.C., Research Division

Okay. And then it sounds like you expect that to continue as we go forward here as well.

Randy J. Snyder

Yes, we do and we're hoping.

Operator

[Operator Instructions] You have a follow-up from Joe Nadol.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Just a couple. One is a real quick one. I want to ask the margin question in, I think, a slightly different way, which is last quarter, you had cited the lower gross margin as a function of mix that was below average. I was wondering if you could characterize the mix this quarter. Is this an average mix the way you look at it? Or is it better than average or still below?

Gregory A. Hann

Yes, Joe. I guess I would say it's average. It's very difficult to say. I would say that there were no, once again, like structural shifts that we saw. So I guess I would say average. But once again, average for us bounces around a little bit. So I...

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

That helps. I understand. Secondly, just a bigger picture. You guys don't talk about your presence on Airbus aircrafts much. We've talked a lot about Boeing in the past, and I'm just wondering if you could characterize kind of where things stand with your overall content in Airbus aircrafts and how's that been progressing?

Randy J. Snyder

Yes, we are -- let's just say -- and I think that's partly our fault for not delving a little more deeply sometimes into the discussion of Airbus because we're here. But the reality is we have in the past and have currently tremendous success with Airbus at the contractor level. Airbus as well directly, we do have some significant business. But I guess you could liken it to Boeing subcontractors here. We have the same with Airbus subcontractors all over the world. The difference is we do tend to do a little more business directly with Airbus themselves than we do with Boeing commercial directly. Does that kind of make sense?

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

No, it's great. And could you characterize directionally how this is all kind of moving around? Or is that -- you talk a lot about you're gaining penetration in defense. Boeing, it's been a little bit more challenging for a variety of -- a couple of different reasons, but you're hanging in there. Is the Airbus business growing faster than the deliveries?

Alex Murray

Joe, it's Alex. I think if you look at the increases that we've seen in the Rest of the World, I mean, it's fair to say that a significant part of the increase has been due to Airbus-related business, more or less direct with Airbus or with Airbus subs.

Operator

We have no further questions at this time. I would like to hand it back to Greg Hann for closing remarks.

Gregory A. Hann

Once again, thank you, everybody, for participating on the call, and we look forward to talking to you next quarter, if not sooner. Thanks.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you all for participating. You may now disconnect.

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