BE Aerospace's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Executives

Amin Khoury - Co-Founder, Executive Chairman and Chief Executive Officer

Greg Powell - Vice President of Investor Relations

T. McCaffrey - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treausrer

Analysts

J. B. Groh - D.A. Davidson & Co.

Gautam Khanna - Cowen and Company, LLC

Eric Hugel - Stephens Inc.

Howard Rubel - Jefferies & Company, Inc.

F. Leake - BB&T Capital Markets

Richard Safran - Buckingham Research Group, Inc.

Robert Spingarn - Crédit Suisse AG

Noah Poponak - Goldman Sachs Group Inc.

Myles Walton - Deutsche Bank AG

Troy Lahr - Stifel, Nicolaus & Co., Inc.

David Strauss - UBS Investment Bank

Peter Arment - Gleacher & Company, Inc.

BE Aerospace (BEAV) Q2 2011 Earnings Call July 25, 2011 9:00 AM ET

Operator

Good morning. My name is Jessica Morgan, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the B/E Aerospace Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded this day, July 25, 2011. Thank you. I would now like to introduce B/E Aerospace's Vice President of Investor Relations, Greg Powell. Mr. Powell, you may begin your conference.

Greg Powell

Thank you, Jessica. Good morning, and thank you for joining us this morning. Today, we are here to discuss our financial results for the second quarter ended June 30, 2011. By now, you should have received a copy of the news release we issued earlier today. If you haven't received it, you will find a copy on our website.

We will begin this morning with remarks from Amin Khoury, our Founder, Chairman and Chief Executive Officer, and then we will take your questions.

For today’s call, we've prepared a few slides to help you follow our discussion. You can find our presentation on the Investor Relations page at the B/E Aerospace website at www.beaerospace.com. In addition, copies of the slides will be posted on our website for you to refer to after the call.

Joining us for the call this morning are Werner Lieberherr, President and Chief Operating Officer; and Tom McCaffrey, Senior Vice President and CFO. As always in our prepared remarks and our responses to your questions, we rely on the Safe Harbor exemptions under the various securities acts and our Safe Harbor statements in the company's filings with the SEC.

We will address questions following our prepared remarks. At that time, Jessica will provide instructions. Please limit your questions to no more than 2 at a time so that we can get to everyone. And now I will turn the call over to Amin Khoury.

Amin Khoury

Thank you, Greg, and good morning, everyone. We are very pleased to have been able to announce results, which were above earlier expectations. Our second quarter results included record quarterly bookings up 45%, representing a book-to-bill ratio of 1.3:1. In addition, revenues were up 26%, operating earnings were up 35%, earnings per share were up 46% and the free cash flow conversion ratio was in excess of 100% of net earnings.

The record bookings performance was driven by strong orders for a broad range of aircraft interior equipment for both new-buy and aftermarket programs. In fact, aftermarket programs accounted for almost half of the orders in the quarter. The 120 basis point expansion in operating margin was driven by margin improvements in each of our 3 businesses. Based on our record backlog, both booked and awarded but unbooked, of approximately $6.5 billion, our expectations for continued growth in passenger travel and attendant increase in capacity, and our expectation of significantly higher levels of wide-body aircraft deliveries, we expect the second half of 2011 to be stronger than the first half of 2011. And accordingly, we've raised our full year 2011 guidance to approximately $2.10 per diluted share.

Our current EPS guidance is now $0.20 per share or 10% higher than our original guidance of $1.90 per share.

I'd like to spend a few minutes discussing the current market environment, then we'll discuss our results for the quarter, and we'll complete our prepared remarks with a review of our financial guidance for 2011.

Let's briefly discuss the current market environment. The global economy and global passenger traffic continue to recover, notwithstanding the upward pressure on oil prices. Global airlines passenger traffic was up in excess of 8% quarter-to-date through May 2011 as compared with the prior year period. International passenger traffic was up 8.4% year-to-date. In addition, premium international travel is quite strong. May premium travel was up 9.5% and is now up 9% year-to-date through May.

Our airline customers have been carefully managing capacity and passing on cost increases in an orderly fashion. As a result, I ought to expect the global airline industry to turn in a solidly profitable year with approximately $4 billion of profits on a global basis.

Let's turn to Slide 2 and discuss our second quarter financial results. I'm pleased to report that all 3 of our operating segments performed well during the quarter.

The bar chart on Slide 2 reflects our second quarter 2011 financial performance compared to the second quarter of 2010. Revenues increased 26% to $609 million. Operating earnings of $107 million increased 35%. Operating margin expanded 120 basis points to 17.5%. Earnings per share of $0.54 increased 46%. Free cash flow at $59 million, represents the free cash flow conversion ratio of 108% of net earnings.

Let's review Slide 3, which summarizes our current bookings and backlog status. Second quarter bookings of approximately $800 million were a record for any quarter and were approximately 45% higher than the same period of the prior year. The book-to-bill ratio was 1.3:1 for the quarter.

Backlog at the end of the quarter was in excess of $3.4 billion, an increase of approximately 21% as compared with the company's June 30, 2010, backlog. Supplier furnished equipment awards expanded to $3.1 billion. As a result, total backlog, both booked and awarded but unbooked, expanded to a record $6.5 billion, an increase of approximately 20% as compared with June 30, 2010.

Second quarter orders were significantly helped by awards from Middle Eastern airlines for our Super First Class suites. Earlier this month, we announced that we'd been selected by 3 major Middle Eastern airlines to outfit their new wide-body aircraft with our next-generation Super First Class suite. These awards were initially valued in excess of $125 million. In addition to garnering the aforementioned awards from this important growing region of the world, our Super First Class team has won in excess of 90% of all airline awards for Super First Class suite over the past 18 months.

Now I'd like to briefly review the second quarter operating performance for each of our 3 business segments. Let's turn to Slide 4 and review the second quarter results for our Commercial Aircraft segment.

The Commercial Aircraft segment leadership team again turned in an outstanding performance during the quarter. Revenues of $308.5 million increased 30.5%, operating earnings of $51.9 million increased 41.8%. The operating margin of 16.8% expanded 130 basis points, primarily due to an improved revenue mix and ongoing operational efficiency initiatives.

The Consumables Management segment also turned in an excellent quarter. Let's turn to Slide 5 and review second quarter results for our Consumables Management segment.

The leadership team for the Consumables Management segment delivered a very strong quarter, as I mentioned, with revenues of $240 million, increasing by 24.2% and operating earnings of $48 million increasing by 26.4%. The operating margin of 20.1% increased 30 basis points, in spite of the margin drag from the recent acquisitions. Organic revenue growth, excluding recent acquisitions from both periods and excluding sales to military and biz jet customers, increased by 13%. Organic operating margins, excluding recent acquisitions from both periods, expanded by 140 basis points to 21.2%.

Let's turn to Slide 6 and review the second quarter results for our Business Jet segment. The Business Jet segment leadership team delivered a substantial improvement in results for the second quarter as compared to the same period in the prior year. Revenues of $60.5 million increased a little over 11%. Operating earnings of $6.5 million improved by 62.5%, and the operating margin of 10.7% expanded by 330 basis points, reflecting both the increase in revenues and an improved mix of revenues.

Let's briefly review our financial position on Slide 7. Second quarter free cash flow was $59 million and represents a free cash flow conversion ratio of 108%. For the first 6 months of 2011, free cash flow was $110 million, and our free cash flow conversion ratio was 104%.

As of June 30, 2011, cash was $193 million. Net debt, which represents total debt of $1.25 billion, less cash, was $1.05 billion. And the company's net debt to net capital ratio was 37.3%. As of June 30, 2011, the company had no borrowings outstanding on its $750 million revolving credit facility and has no debt maturities until July 2018.

Let's now briefly review our full year outlook. Based on our record backlog for booked and awarded but unbooked of approximately $6.5 billion, our expectation for continued growth in passenger travel and attendant increases in capacity and our expectation of significantly higher levels of wide-body aircraft deliveries, we expect the second half of 2011 to be stronger than the first half. We also expect comparisons to be strong in the third and fourth quarters as compared with the prior year periods. Accordingly, we've raised our full year 2011 guidance to approximately $2.10 per diluted share. Now let's go to slide 8 and review our financial performance -- financial guidance.

We now expect -- we actually continue to expect increasing aftermarket demand for Consumables and Commercial Aircraft segment spares, driven by the continuing growth in passenger traffic and capacity. In addition, the company expects an increase in orders in revenues arising from the expected acceleration in deliveries of new wide-body aircraft. 2011 revenues are expected to be approximately $2.5 billion or approximately 25% higher than 2010 revenues. 2011 earnings per diluted share guidance is increased by $0.10 per share to approximately $2.10 per diluted share or approximately 48% better than 2010 earnings per diluted share. 2011 earnings per diluted share guidance has been increased by approximately $0.20 per share or 10% from initial 2011 guidance, which was approximately $1.90 per share. The 2011 free cash flow conversion ratio is expected to be approximately 100% and to generate approximately $210 million in free cash flow. And with that, I'll now turn it back over to Greg for our Q&A.

Greg Powell

We're now ready for the question-and-answer question. Again, please limit your questions to 2, so that we can get to everyone. Jessica, can you explain the instructions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Robert Spingarn with Crédit Suisse.

Robert Spingarn - Crédit Suisse AG

Amin, can we talk a little bit about your big sequential increase in the booked and unbooked backlog, the $6.5 billion. I think that $500 million increase from March doubled the increase from December, maybe some of that's nonorganic. But can you talk about the trends there, how you think that will increase throughout the rest of the year and perhaps give us a window into 2012?

Amin Khoury

Sure. The backlog -- the orders for the quarter were truly outstanding. We did not expect to be able to beat the record quarter in bookings that we had in the first quarter. And surprisingly, almost half the orders are aftermarket orders. So we're -- basically, we're at the beginning of a new retrofit cycle here. RFP activity is as strong as we've ever seen it. We're looking at about $1.5 billion of RFPs. It is very much keeping our marketing, our program management, our engineering organization, really going 7/24 at the current time. So orders are very strong. The aftermarket is particularly strong, which is surprising given how much wide-body aircraft deliveries are beginning to grow. So the combination of the new OE delivery cycles, particularly wide-bodies, which is driving both RFP activities and orders as well as shipments and the beginning of the new retrofit cycle here has really got everybody hopping. Is that helpful to you?

Robert Spingarn - Crédit Suisse AG

Yes. And just a follow-up to that, would you say that this quarter marks the peak in bookings, the $800 million, just because of Hamburg falling in April? Or can you actually accelerate from here based on everything you just said? And then secondarily to that, could you comment on the difference in strength within the aftermarket on discretionary and the nondiscretionary?

Amin Khoury

Well, I think most of the spending is discretionary spending. I think most aftermarket spending is discretionary spending. I can't put a number on it. And I couldn't imagine putting myself in a position where I would actually predict orders on a quarterly basis. So I'll go back to what we said earlier that we expect solid growth in the backlog this year, the book-to-bill ratio well above one after the full year leading to a strong 2012.

Operator

We'll move now to Gleacher & Co.'s Peter Arment.

Peter Arment - Gleacher & Company, Inc.

Maybe just following on Rob's question on the bookings trend. What are -- the RFPs, you mentioned $1 billion, how do you characterize what you're seeing, I guess, on a global basis by region? Any particular regions that standout or how balanced is it?

Amin Khoury

RFPs are about $1.5 billion not $1 billion. And there is no longer any one strong region. I mean all the regions are now participating. Even the U.S. is beginning to participate, North America. The Middle East is very strong. Asia is very strong. Even Latin America is strong. So no, there is no particular region of the world, which is particularly stronger than others. Europe and the U.S. are now very much a part of this.

Peter Arment - Gleacher & Company, Inc.

Okay. And then just quickly, a second question on M&A, LaSalle Lighting. Maybe you could just give us a little color on this tuck-in acquisition and what else you're seeing out there in terms of M&A activities. I know you guys have been very patient and diligent over the last 3 or 4 years.

Amin Khoury

LaSalle is very tiny, if you notice the net investment of $17 million in acquisitions at the end of the first quarter. It's just a product line expansion. And we really didn't want to talk about it publicly until right now for both operational and competitive reasons, but it's going well. In terms of other activities, we continue to look for bolt-on transactions, which would strengthen any of the 3 segments in which we're currently involved. We are seeing a lot of activity and a lot of opportunities, but as you mentioned, we are being patient, and we are looking for transactions where we can significantly add to either the strength of the business or it's solidly accretive to both growth and margins over time. The smaller transactions within the context of the cash that we've got on the balance sheet or the cash that we expect to generate over the course of the year with the hopes that we don't have to dig into our revolver. But if so, then we'd like to replace that with cash flow from operations as soon as possible. So smaller transactions supporting our 3 segments.

Operator

And we'll hear a question now from Troy Lahr with Stifel, Nicolaus.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Amin, I wonder if you can talk about the margins as we go into the back part of the year, relative to what we saw on the second quarter. It looks like your guidance is implying margins might be kind of flattish a little bit. Is that correct? Or should they trend up as the volume starts to pick up in the back half?

Amin Khoury

Well, margins have trended up dramatically. I mean, we're at 17.5% for the company now. And incremental margins are expanding as we speak. So our plan is to -- in October, when we have our face-to-face with you and all the other folks, investors and analysts, is to talk about our incremental margin for 2012 when we get to October. So I just choose not to talk about it now on a day in point as of today because the margins have expanded in the first quarter and expanded in the second quarter. We're now at a very healthy margin rate. And so margin expansion here depends on mix. Obviously the Consumables business, which has the highest margin as the revenues as its share of total revenues increase, then margins for the corporation increase. And also, as we get through the -- any variation of the acquired businesses, Satair and LaSalle, et cetera, which are now a drag on margins. If the margins in the Consumables segment should go up and margins and revenues from the segment should increase its percentage. So we'll talk a little bit about incremental margins in October as we talk about 2012 in aggregate.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Okay. And when does the Super First Class work start? I mean, does that start in the back of the year, the new Super First Class work that you just booked?

Amin Khoury

The orders that we just booked don't start at all in 2011. But as we mentioned, I think, in response to a question at the end of the first quarter, the backlog for the Biz Jet segment, driven primarily by Super First Class orders, is at a very healthy level, which looks to very strong 2012 and '13 for the Business Jet segment, driven primarily by Super First Class seating activity rather than the Business Jet cycle recovery.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Okay. And then just a point of clarification back on Rob's question. How much of that $800 million in bookings was organic?

Amin Khoury

I don't know the answer to that question, organic. I mean, that $800 million in bookings, it's all organic.

Troy Lahr - Stifel, Nicolaus & Co., Inc.

From the recent acquisitions? I mean, did the recent acquisitions help?

Amin Khoury

They're miniscule. I mean, I'm sure that they helped somewhat, but, I mean, they're relatively small. We did a very, very strong order -- quarter in terms of orders.

Operator

And we'll take a question now from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc.

Amin, when I look at the pacing of quarterly EPS that your guidance now calls for in the back half, it's very close to a 50-50 split first half versus second half. And in prior, normal looking years, you have a reasonably back-end loaded earnings profile. This year you have SFE layering in, in the back half that's nonexistent in the first. You just talked about why margins could be better. The bookings trends, coming out of last year into the beginning of this year, would imply a pretty strong second half versus first half. Is there an offset to anything I just said that I'm missing or anything else to look for in the back half?

Amin Khoury

No. I think -- Tom, I think they want to talk math, Tom. I think we're at $1.03 for the first half. And $2.10 implies a 7% better performance in the first half, right, Noah? But no, there are no offsets. Tom, do you want to take a crack at this question?

T. McCaffrey

Sure. And, Noah, I think your math is correct. Notwithstanding that, we do expect the second half of 2011 is going to be stronger than the first half of 2011. And we expect the comparisons to be strong in the third and fourth quarter as we compare them with the prior-year periods. So with our $0.10 guidance increase that we announced today, that brings the year-over-year earnings up about 48%, just under 50% as compared with 2010 earnings per share. And on a sequential basis, the second half will be stronger. The first half was $1.03. It'll be $1.07. And no, you're not missing anything. There's -- you know how we try and set guidance that we are comfortable with, and we'll just see how we do.

Amin Khoury

And, Noah, I did not forecast that the second half margins would be higher than the first half margins or the second quarter margins. What I said was that in October, we'll talk with you about the increase, and what the incremental margin will be in 2012. It's just we do not forecast specific margin numbers in the third and fourth quarters here.

Noah Poponak - Goldman Sachs Group Inc.

Okay. And you're not saying that the margins will be lower necessarily. You're just saying you're not forecasting it.

Amin Khoury

Right. I'm not saying anything about margins at this point for the second half of the year.

Noah Poponak - Goldman Sachs Group Inc.

Yes. On the free cash flow numbers, last quarter, you guys, I believe, correct me if I'm wrong, specifically said second half free cash will be better than the first half. The outlook that you're giving us now for the full year implies second half lower. Did you pull something forward? Or what are the dynamics there?

T. McCaffrey

Noah, it's actually -- it's relatively straightforward that one of the vendors that's doing some work to help us build at some capacity to support our record backlog didn't get their invoices in on time to get paid. And in the cash flow statement, you back out the unpaid payables, so the CapEx is a true number. So it's just a timing difference. We continue to expect that free cash flow for the year will be about 100% of net earnings. Cash flow was strong. It was $59 million for the second quarter. And there was a free cash flow conversion ratio of about 108%. For the 6-month period, it was a $110 million, and free cash flow conversion ratio was 104%. And I think, Amin went through a lot of the other statistics on the call. Cash was at $193 million. Net debt to net cap -- net debt to net capital ratio was 37%. And we remain undrawn on our $750 million revolver. So our liquidity position is as good as the company has ever been in. And the outlook is very strong.

Noah Poponak - Goldman Sachs Group Inc.

So just specifically on the change in the back half versus first half, you've had CapEx slide out of the second quarter into the third?

T. McCaffrey

That's correct.

Noah Poponak - Goldman Sachs Group Inc.

And that $85 million to $90 million for the full year, is that still a good number? It implies a pretty large number in the back half?

T. McCaffrey

That's what we believe right now. And if it's going to -- if it looks like it will shift any, then we'll talk about that at the end of the third quarter.

Operator

We'll hear now from Deutsche Bank's Myles Walton.

Myles Walton - Deutsche Bank AG

I was wondering if you could comment a bit on the sequential improvement in the Commercial Aircraft's segment margins, obviously, extremely strong. And also what it bodes for the longer-term profile of that business if we're going into a retrofit cycle in the aftermarket.

Amin Khoury

As we talked about before, the margins on end items, whether the end items are sold for utilization in a new airplane or for a retrofit that will have the same price and have the same margin. The difference is that you get more revenues within a more concentrated period of time because you tend to get retrofit programs completed over 1 to 2 years. Whereas new aircraft build order of the airplane can be shipped over a much longer period of time than that, but the margins there are essentially the same. The margins in the Commercial Aircraft segment continue to expand because of the quality of the backlog. So it's not only backlog quantity, it is the quality of the backlog and the quality of the programs that we book. It's the discipline with which the Commercial Aircraft segment selects those customers and those orders which it wants to select and then target those aggressively. It is the continuous improvement initiatives. It's the supply chain initiative. It is a lot of really outstanding blocking and tackling, which is enabling that business to grow at a rapid rate, to maintain gold and best performance ratings from both Boeing and Airbus and continues to expand margins. So it's just an outstanding performance by an excellent management team.

Myles Walton - Deutsche Bank AG

And is this -- and is there anything anomalous [ph] in the quarter? Is this a run rate you can sustain for the rest of the year?

Amin Khoury

Well, as I mentioned, Myles, we don't want to talk about making projections of margins by segment on a quarterly basis. The business is operating very strongly, and we expect to continue to do so and to have an excellent year in 2012 as well.

Myles Walton - Deutsche Bank AG

That's great. And then just 2 cleanups for Tom. The outlook for cash taxes and also the tax rate for the full year, is it still 33% or are we now at 32%?

T. McCaffrey

Myles, I think that if you were to think between 32% and 32.5%, that you'll be at the right -- hit the right spot. And our -- the mix of our cash taxes versus total cash expense or total income tax expense shouldn't change significantly from 2010 through 2011.

Operator

And we'll take a question now from David Strauss with UBS.

David Strauss - UBS Investment Bank

Amin, if I take your $2.5 billion revenue guidance, and again, another math question, back into what that implies for second half revenues, it looks like that you're implying an accelerating rate of organic growth somewhere around 15% or even a little bit north of that. I guess my first question is, is that math correct? And second of all, should that trend carry into 2012?

Amin Khoury

As we mentioned, we're going to give guidance for 2012 in October. And your math is more or less correct. I think that the organic growth rate is somewhere between 13% and 15%.

David Strauss - UBS Investment Bank

You mentioned on the order side that half of your orders in the quarter were associated with the aftermarket. Could you give us a sense of, kind of, how that kind of breaks out between spares orders on the Commercial Aircraft side versus Consumables? Have you seen a pickup on the Consumables side relative to the Commercial Aircraft side?

Amin Khoury

Orders for both are up. As we mentioned, orders for Commercial Aircraft segment spares were blowout [ph]. I mean, they're up usually. And the aftermarket in total accounted for just under 50%. It wasn't quite at 50%. It was just under.

David Strauss - UBS Investment Bank

On the defense side, I know it's a relatively small portion. It's gotten a little bit bigger now with TSI. But could you talk about what you're seeing on the defense side of your businesses, specifically?

Amin Khoury

Yes. It's flat as a pancake. We -- biz jet activity is ever so slightly better. It's almost -- it's just slightly better. And just -- and the military side of the business, it's absolutely flat as a pancake.

David Strauss - UBS Investment Bank

Including on the -- from TSI?

Amin Khoury

Yes, yes.

Operator

We'll hear now from Gautam Khanna with Cowen and Co.

Gautam Khanna - Cowen and Company, LLC

Can you make any observations on kind of just-in-time Consumables business trends through the quarter? So was June better than May and April? And how is July tracking so far?

Amin Khoury

You're talking about the aftermarket activity in the Consumables business?

Gautam Khanna - Cowen and Company, LLC

Yes.

Amin Khoury

Yes. I mean, orders have steadily improved. I think getting in the -- I think it was the fourth quarter of last year. So we've now had 3 successive quarters of strong orders for what we call our transactional business rather than programs. So we've had 3 solid quarters in a row. Clearly, it's a trend, and it's a strong trend. And the outlook looks pretty good here with the expected increase in revenue passenger miles and capacity and MRO activities, so solid growth in bookings and solid growth in revenues.

Gautam Khanna - Cowen and Company, LLC

That's also not just across quarters, but within the quarter you saw kind of a continued improvement?

Amin Khoury

What do you mean within the quarter? You mean -- in April? And June better than May?

Gautam Khanna - Cowen and Company, LLC

Yes. And July better than the preceding 3 months. I mean, on a run rate basis.

Amin Khoury

I actually don't know the answer to your question, but it was solid right through the quarter. So there's nothing -- there would be nothing for me -- there's not much to comment on there. There's nothing remarkable about the revenue trends in the -- within the quarter.

Gautam Khanna - Cowen and Company, LLC

Got it. And just a follow-up on some earlier questions about the CAS segment margin being really, really strong and the observation you made in the past, that kind of the CAS spares recovery was a little bit earlier in coming out of the downturn than we saw Consumables. Are you expecting any moderation in that growth rate at CAS spares, or do you think this is something where you still have...

Amin Khoury

Well orders in the backlog are still strong in the Commercial Aircraft segment spares business that our expectation is that we're going to have a really good 2012 for the Commercial Aircraft spares business.

Operator

Howard Rubel with Jefferies has our next question.

Howard Rubel - Jefferies & Company, Inc.

How are you managing this continued ramp up, Amin? And what are you doing in terms of looking ahead at your schedules and also in terms of hiring people?

Amin Khoury

We are -- we had been hiring and are continuing to hire with a significant emphasis on engineers. And every one of our businesses is adding people and every one of our businesses is adding engineering talent, particularly the manufacturing businesses, both the Commercial Aircraft segment and the Biz Jet segment. We are spending, as you referred -- Tom mentioned earlier, we'll spend between $85 million and $90 million on CapEx this year. And a lot of that CapEx is expansion CapEx either to handle the increased volumes or to handle products that we're manufacturing for the first time, which are part of the unbooked backlog or even actually to handle the booked backlog, I mean both are at records here. So I would say, it's going well. We seem to be out in front of it. I mean, I think, we are spending at a rate, which hopefully will keep us from having any issues regarding on-time delivery or quality. So as I mentioned in response to an earlier question, notwithstanding the growth rate, we've maintained our gold rating at Boeing and Best Supplier at Airbus. And I think we're doing a really good job in terms of both on-time delivery and quality. So there's not much specific that I can tell you, except that we are hiring people, and we are spending money and we'll continue to do that right through this year and next.

Howard Rubel - Jefferies & Company, Inc.

So if I were to make a stab at the headcount gains, they're probably in the 5%, 6% range because you're getting some decent margin and other productivity benefits?

Amin Khoury

I don't have that number right in front of me. I can calculate it. I've got the numbers. Tom, you want to take a look at that and try to answer Howard's question quantitatively? We'd have to go to a forecast and see what number of people we had at the end of 2010, and what do we have in the middle 2011. And that data is not audited data, Howard. So it's going to be roughly correct. Tom, you want to take a quick look at that?

T. McCaffrey

Howard, it looks like it's on a, I think, on a comparable basis, which should give you the closest to it, is the fourth quarter.

Howard Rubel - Jefferies & Company, Inc.

That would be fine.

T. McCaffrey

Yes, it's about 5% or 6%, which is -- yes, that reflects the acquisitions in large part.

Howard Rubel - Jefferies & Company, Inc.

And then just as a follow-up. Your inventory growth was very modest in the quarter. Could you talk a little bit about and address a little bit what you're doing to keep that in check despite the fairly decent organic growth? I mean, is it...

Amin Khoury

Inventory is going to start to grow here, Howard. We are -- I do expect inventory growth in the third and fourth quarters. And I don't like to talk about what's going to happen in any quarter, as you know. But we are going to have to [indiscernible] as we are increasing our hiring and increasing our capital spending. We're going to have to increase our investments in inventories here as well. So we have done, I would say, a terrific job up until now, holding working capital where it is in spite of the growth and generating a lot of cash. We will have some increased inventory spending Q3 and 4.

Operator

We'll take a question now from J.B. Groh with D.A. Davidson.

J. B. Groh - D.A. Davidson & Co.

Amin, you mentioned that roughly half the bookings this quarter were aftermarket. Could you kind of characterize that $3.4 billion in backlog in terms of back -- aftermarket versus new build?

Amin Khoury

I can't because I don't have the data readily handy here. But I've got to say that what's merged here is the beginning of a retrofit cycle with first orders having been placed, and the RFP activity now in the retrofit area is [indiscernible]. So this kind of looks like what happened in 2001 and then again in 2006. It looks like here in 2011 and '12, we're going to have a very big retrofit cycle, and that's what it's all about.

J. B. Groh - D.A. Davidson & Co.

Are a lot of those retrofit customers, guys that are due for new build aircraft? I mean, is the retrofit cycle kind of leading new deliveries?

Amin Khoury

Yes, they go together. They're hand in hand. All the guys that are buying new wide-bodies, especially, are planning to or beginning to retrofit or have RFPs out to retrofit for existing airplanes.

J. B. Groh - D.A. Davidson & Co.

So that being said, I think the term you talked about a lot in the past, which I haven't heard you use recently, is kind of shadow backlog. Could you kind of address that given the big retrofit programs that you're seeing?

Amin Khoury

No. I'll try to do that for you on the October call. It's a really good question and one that we're not prepared to answer. So we will make a note of it and express the shadow backlog question in October when we talk with everybody. I'm sorry were not prepared to answer it today.

Operator

We'll move now to Stephens' Eric Hugel.