TransDigm Group Inc (TDG) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 TransDigm Group Inc. earnings conference call. My name is Regina, and I will be your conference operator for today. (Operator Instructions). I would now like to turn the conference over to your host for today, Ms. Liza Sabol, Investor Relations. Please go ahead, Ms. Sabol.

Thank you. I would like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2011 fourth quarter earnings conference call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. A replay of today's broadcast will be available for the next two weeks. Replay information is contained in this morning's press release and on our website at transdigm.com. It should also be noted that our Form 10-K will be filed tomorrow and also will be found on our website.

Before we begin, the Company would like to remind you that statements made during the 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 Securities & Exchange Commission. These filings are available through the on Investor section of our website or through the SEC commission's website at sec.gov.

The Company would also like to advise 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 a reconciliation of EBIT and EBITDA as defined, adjusted income, and adjusted earnings per share to those measures.

With that let me now turn the call over to Nick.

Good morning, and thanksfor calling in today to hear about our Company. I will start off as usual with some comments about our consistent strategy. I will then give an overview of a busy fiscal year 2011, and then a summary of our financial and market performance in 2011, and lastly some initial guidance for 2012. So we have a fair amount to cover here today.

To restate, we believe our business model is unique in the industry both in its consistently and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle.

To summarize some of the reasons we believe this -- and you can look at page four of the slides now -- about 90% of our net sales are generated by proprietary products. Around three quarters of our sales come from products for which we believe we are the sole source provider. About 55% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced a much higher gross margin and have provided relative stability in the downturns.

Because of our uniquely high EBITDA margins, running around 50% of revenue, and relatively low capital expenditures requirements, typically 2% or less of revenue, TransDigm has year end and year out generated very strong free cash flow. We pay close attention to our capital structure and view it as another means to create shareholder value. As you know, we have in the past and continue to be willing to lever up when we either see good opportunities or view our leverage as sub-optimum to equity value creation. We typically begin to delever pretty quickly.

We have a well proven value based operating strategy focused around what we refer to as our three value drivers; new business development, continual cost improvement, and value based pricing. We stick to these concepts as the core of our operating management methodologies. This consistent approach has worked for us through up and down markets and has allowed us to continuously improve and increase the intrinsic value of our businesses while steadily investing in new business and platform positions.

We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace businesses with significant aftermarket content. We have been able to acquire and approval aerospace businesses through all phases of the cycle. In fiscal year 2011 just ended we acquired three businesses making up nine operating units for a total price of about $1.6 billion. Additionally, about two weeks ago we announced an agreement to acquire Harco Laboratories for about $84 million. This is subject still to HSR antitrust review.

Through our consistent focus on our operating value drivers, a very clear acquisition strategy, and close attention to our capital structure, we have been able to create intrinsic value for our shareholders for many years in up and down markets. To summarize 2011 just quickly, it was busy, hectic, but a good year. We created a lot of shareholder value, and this was far and away our most active year for acquisitions.

Now to give a little more color. In the first half of the year we acquired the McKechnie business for $1.27 billion, our largest acquisition to date. McKechnie was a holding company with seven operating units. We raised $3.1 billion to refinance our existing debt and pay for the McKechnie acquisition.

We then acquired the Talley actuator business from Teleflex for about $93 million. We again refinanced the senior debt portion of our earlier financing -- thatwas about $1.6 billion of our debt -- in order to drop the interest rate and eliminate certain maintenance covenants. And lastly we began to integrate the four major McKechnie units and the Talley businesses into TransDigm. We also initiated three plant relocation consolidations, and we sold the McKechnie fastener businesses to Alcoa for more than we paid for them.

In the second half of the year we initiated a fourth plant relocation. We sold the McKechnie distributions about to Satair. Satair is a public Danish distributor of aerospace parts. We also acquired Schneller for $288 million, our third largest acquisition, and we continued the integration of the six new businesses in TransDigm. All the while we continued to generate real intrinsic value in our new and existing business and expand our operations to meet a rising market. As I said before, it was a pretty busy year.

Turning to our 2011 performance, I will remind you this is the fourth quarter and full year report for our fiscal year 2011. Our fiscal year ended September 30, 2011. As I have said in the past, quarterly comparisons can be significantly impacted by difference in the OEM aftermarket mix, large orders, transient inventory fluctuations, a lot of seasonality and other factors. By most any measure fiscal year 2011 was a good year for TransDigm.

Our GAAP revenues were up 54% versus the prior Q4 and 46% on a full year basis. Pro forma revenues -- that is assuming we own the same mix of businesses -- was up 16% on a quarter versus fourth quarter basis, and on the full year basis organic growth was about 12%.

Reviewing the revenues by major categories -- again this is on a pro forma basis versus the prior year -- turn to slide five by the way if you are trying to track. This is assuming we own the same mix of businesses in both periods. In the commercial markets, which make up about three quarters of our revenue, in the commercial OEM area, commercial transport OEM revenues were up about 19% in the fourth quarter versus the prior Q4 and up about 16% on a full year basis. This pickup primarily reflects the increasing air frame production rates. Bookings continue to run modestly, as have shipments in the sec sector.

Q4 business jet OEM revenues were up about 30% versus the prior Q4 and up about 25% on a full year basis, both versus a very depressed prior year comps. Full year bookings were modestly ahead of shipments. I will remind you that our business jet revenues in total are much lower than our commercial transport revenues.

Our commercial aftermarket revenue was up about 21% versus the prior Q4 and 23% on a full year basis. This level of growth is likely not sustainable. On a sequential basis our commercial aftermarket revenue was about flat. Full year bookings ran ahead of shipments, but softened a bit in Q4. Hopefully this isn't a trend, but time will tell.

In the defense markets, which make up about a quarter of our revenue, we continued with a mix picture. Revenues were up 2% on a quarter over prior quarter -- prior fourth quarter basis and down about 2% on a full year basis. Incoming orders are recently running a bit ahead of shipments. Almost 60% of our military revenues come from fixed wing or helicopter sector and freighter and tanker platforms. This 60% is close evenly split between these two categories.

We're hopeful that these two more stable categories, combined with our very broad base of other platforms, will partially dampen the likely military spending slowdown. A few quarters are not indicative of future trends, especially in defense, but we remain quite cautious about trends in the military market. In total for the quarter and the year, our revenues were a bit better than we anticipated.

Moving onto profit profitability, and now on a reported basis, I am going to talk primarily about our operating performance or EBITDA as defined. The major as defined adjustments were the costs associated with the large refinancings -- that was about $70 million -- and the acquisition related costs and accounting resulted from the recent large acquisitions -- that was about $30 million. Greg will discuss this in more detail.

Our EBITDA as defined of about $172 million for Q4 was up almost 49% from the prior Q4. EBITDA margin was about 50% of revenues for Q4. On a full year basis our EBITDA margin was just about 49%. The full year margin was also -- was almost back to the pre-McKechnie acquisition levels in spite of about a 2% dilution from the acquired businesses. This rapid margin recovery is the best indicator of the progress we're making integrating the various new operating units.

With respect to acquisitions, we continue actively looking at opportunities. There is a pipeline of possibilities, mostly smaller. It seems a little lighter in the last few months than it was before that, but this generally goes in fits and starts, so I don't draw any conclusion from that. Closings are always difficult to predict. We remain disciplined and focused on value creation opportunities that meet our strict criteria.

Moving onto the 2012 guidance now, and you will find this on slide six. Let me start off by saying that there is considerable uncertainty in the overall economy,and maybe even more so in military budgets,but we realize we need to put a stake in the sand, so here we go. For fiscal year 2012 this is our best current estimate in these uncertain times. We'll adjust this guidance through the year if and when it looks appropriate.

But based on the above and assuming no additional acquisitions -- in other words, also excluding Harco -- 2012 guidance is as follows. The midpoint of the 2012 reported revenue is $1.45 billion, or up about 20% on a GAAP basis.

The midpoint of the 2012 EBITDA as defined is $715 million, or up about 21% on a GAAP basis. EBITDA as defined margins are anticipated to be close to or about 50% of revenues. This is almost back to the pre-McKechnie acquisition level.

The midpoint of the EPS as adjusted is anticipated to $5.51 a share, or up about 23% versus the prior year. 2012 adjustments to EBITDA and EPS primarily reflect acquisition related costs, noncash compensation, and some dividend equivalency payouts.

On a pro forma basis this guidance is based on the following market assumptions. We assume the commercial transport revenue will be about 10%, based on worldwide RPM growth in the 4 to 5% area. Due to the apparent catch-up in fiscal year 2011 in inventory and/or deferred maintenance, we may see some soft quarters during the year. The business jet aftermarket growth we anticipate to be in the mid-single digit percent. Again, I remind you this segment is much smaller than the commercial transport segment.

In the commercial OEM we expect revenue growth in the mid-teen percent range, with commercial transport productions rates generally as announced by Boeing and Airbus, 787 shipments in the range of 15 units in 2012 and [50] in 2013. This is all offset in part by both component inventory in the system, as well as varying lead times for our products. Though not consistent across manufacturers, in total we expect roughly comparable percent growth in our BizJet OEM revenues. In the defense and military revenue we expect to see low single-digit percent declines.

We are somewhat concerned that the economy may start to stall out. If this happens, we could see an impact on commercial after market orders and shipments, and if so we'll adjust our guidance accordingly. Without any additional acquisitions or cap and structure activity we expect to have about $700 million of cash and $240 million in undrawn revolver at year end 2012. Our net leverage is anticipated to be about 4.4 times EBITDA on a gross basis and about 3.4 on a net basis at the end of 2012. We will watch both the capital markets and the acquisition markets very closely through the year and determine when or if any capital structure activity is appropriate.

In summary, 2011 was a good year. Hopefully the economy will hold up, and 2012 will be a good year also. But in any event, I am confident with our consistent value focused strategy and our strong mix of business, we can continue to create long-term intrinsic value for our investors.

Now let me hand this over to Ray Laubenthal. Our President and Chief Operating Officer will just give you quick summary items for fiscal year 2011.

Thanks, Nick. As Nick mentioned, in total we had a good fourth quarter and good finish to a very busy fiscal 2011. Our operating value drivers and acquisition integration continues to add solid value. And let me explain our 2011 and fourth quarter operational value creation a little more detail.

Again, this was a big year operationally. The rising market drove an underlying pickup in operational activity, and on top of this market growth we piled on our biggest acquisition year ever. We acquired nine operating units, sold off three, netted six separate new businesses. Integrating these six businesses created a flurry of integration and value creation activity, and let me add a little color on this.

After acquiring the McKechnie businesses and the Talley Actuation products in our first quarter, we quickly went to work transitioning these businesses into the TransDigm value creation mode. As we have done with each prior acquisition, we restructured the businesses in the product line focus groups and implemented our value creation metrics. We focused the engineering and new business efforts on winnable and profitable new business. We tightened up the cost structure, and we applied our value based pricing and productivity processes at each new entity.

Several of these newly acquired operations were consolidated with our existing operations. Over the remainder of 2012 we physically consolidated our Avtech business with the acquired Tyee business in Everett, Washington. The physical move is now complete, and we're in the process of marketing the former Avtech buildings and property.

We also moved the Talley Actuation business across country, from LA to our aero fluid products group in Northeast Ohio. The Electromech operations consolidated several Kentucky and Mexico facilities into a new expanded Mexican manufacturing facility in Matamoros, Mexico. We consolidated our two Dukes Aerospace facilities acquired during 2010. We moved the Phoenix operations to the main Dukes facility in North ridge, California. All of these consolidation moves will generate productivity savings as they settle and mature over the next twelve to 24 months.

Looking forward to 2012. Last quarter we acquired Schneller. So far this looks to be another good acquisition. We have just begun to transition our product line structure and metrics center. We also plan on consolidating the Florida facility with the main Kent, Ohio, manufacturing site. After some modest building expansion and some delay from the Cleveland winter, we expect this move will occur next summer.

I would like to switch gears and talk about the management team. These acquisitions drove a significant number of management structure changes. Our continual emphasis on succession planning and talent development paid off well for us. We were able to populate most of the key management positions with internal candidates. These proven candidates are steeped in our value focus culture and value creation processes.

In Q1 we promoted Bernie Iversen to Executive Vice President. Bernie has been with us since our founding, performing well in a broad range of marketing, engineering and general management positions, most recently as President of the Champion Aerospace unit. The upon this promotion we gave Bernie oversight of five of our existing businesses.

Our two other existing Executive Vice Presidents, Jim Riley and Bob Henderson, added the newly acquired units to their responsibility. We added five new division Presidents. Four of these were internal promotions. Below the division president level we added 13 senior operational function managers, primarily at the new units, themajority of which were also internal promotions.

We believe our succession planning and talent development system is working, and we have a good pipeline of talented people exposed to our value creation method and our defined training programs. We believe the availability of promotable internal talent and our consistent succession development process effectively complements our disciplined value creation method and is a key to our ability to regularly acquire and integrate new businesses.

Now let me hand it over to Greg, who will review the fourth quarter and 2011 financial results in more detail.

Thanks, Greg, and good morning again. I hope everyone had an opportunity to read our press release, which was issued early this morning. Nick and Ray did a very good update of our business, the market, and what lies ahead of us. I will focus primarily on our GAAP results for the fourth quarter compared to the prior fourth quarter, commenting on major line items with a little more color. Before I begin, please reference slide seven for our quarterly financial results.

Fourth quarter net sales were $343 million, up $119.9 million or 53.7% from the prior year. The increased sales growth includes $89.2 million as a result of the acquisitions of Semco, which we acquired late in the fourth quarter of fiscal 2010, and the McKechnie, Talley and Schneller businesses we acquired during fiscal 2011.

Aside from the robust growth from acquisitions, our organic sales growth was also very strong at 13.7% over the prior year quarter. Each market channel contributed to this growth. $18.7 million came from commercial aftermarket sales, $6.7 million from commercial OEM, and for the fourth quarter our organic defense sales also increased $3.9 million versus the prior year quarter.

Reported gross profit was $193 million or 56.3% of sales. The reported gross profit margin at decreased by 3 percentage points versus the prior year. However, the dilutive impact from acquisition mix was approximately the three margin points in the quarter, of about half was due to acquisition related start-up costs and purchase accounting adjustments to inventory, and the other half due to straightforward basic acquisition mix dilution, which we have continually talked about.

Selling and administrative expenses were 11.2% of sales for the quarter, compared to 11.4% versus the prior year. The absolute dollars increased $13 million. The dollar increase is primarily due to incremental selling and administrative expenses related to acquisitions we have been discussing all along and higher noncash compensation costs. Amortization of intangibles was about $9 million higher versus the prior year due to the acquisition activity during the current year.

Net interest expense was $48.7 million, an increase of $21.7 million versus the prior year quarter. This increase was primarily due to the McKechnie acquisition, which was financed entirely by debt in the first quarter of this year. At the end of the year the weighted average interest rate on total borrowings outstanding was approximately 6%.

Our effective tax rate was approximately 33.6% for the fiscal 2011 year, compared to 34.8% for fiscal 2010. The decrease in the effective tax rate was primarily due to nonrecurring adjustments to our estimated deferred state tax positions, along with an increase in research and development tax credits.

Net income from continuing operations for the quarter increased $13.7 million or 27% to $64.3 million, which is 18.8% of net sales. The increase is primarily due to both organic and acquisition revenue growth, somewhat off set by higher interest expense and acquisition related costs.

Switching to earnings per share. And again, I would like to remind you that TransDigm uses the two class method for calculating EPS versus the more commonly used Treasury method. The two class method has a slightly more dilutive impact of about 3% versus the Treasury method.

The GAAP earnings per share from continuing operations was $1.20 per share in the current quarter, versus $0.96 per share in the prior year quarter. This is an increase of 25%. Adjusted earnings per share was $1.45 per share, an increase of 42% compared to $1.02 per share last year. This percentage increase more closely follows the quarterly improvement of EBITDA as defined.

The adjustments to GAAP from continuing operations total $0.25 per share, which is comprised of acquisition related costs of $0.17 per share and noncash compensation costs of $0.08 per share. Income from discontinued operations of $3 million increased EPS $0.06, for a total GAAP earnings per share of $1.26 per share. The activity from discontinued ops was related to finalizing all the tax activity from the divestures made this year.

Now let me take a minute to quickly summarize the fiscal year on a GAAP basis. Net sales increased by 45.7% to $1.2 billion. As we have discussed, the increase in sales was primarily from acquisitions as well as over 12% organic growth, which includes flat defense sales for the year. Reported gross profit absolute dollars increased by 39.8% to $661.2 million, but decreased as a percent of sales to 54.8% from 57.2% in fiscal 2010 as a result of the 4 percentage points of dilution from acquisitions during the year, which we discussed.

Selling and administrative expenses at 11.1% of sales in fiscal 2011 compares favorably to 11.5% of sales in fiscal 2010. Also, earlier in the year associated with the refinancing of our debt structure in quarter one we recorded the refinancing costs of $72 million, which is unique to the year. Net interest expense increased $73 million, primarily due to the McKechnie acquisition financing, which occurred in December 2010.

GAAP net income of $172.1 million increased $8.7 million or 5.3% from FY 2010. Net income included $19.9 million of income from discontinued operations related to the divestures of the fastener and the AQS business.

GAAP full year EPS under the two class method was $3.17 per share, compared to $2.52 per share a year ago. On an adjusted basis, which primarily excludes the refinancing costs, acquisition related costs, noncash comp costs, and dividend equivalent payments, earnings per share under the two class method finished the fiscal 2011 at $4.48 per share, up 33.7% from $3.35 per share a year ago.

When comparing GAAP EPS from continued ops of $2.80 per share in the current year to adjusted net income of $4.48 per share, the difference of $1.68 is comprised of the following items. $0.90 for refinancing costs we've previously mentioned, $0.05 related to the dilutive equivalent -- to the dividend equivalent payment in the first quarter, $0.16 for noncash compensation expense, and $0.57 for acquisition related expenses, including acquisition integration costs such as start-up and acquisition expenses, inventory purchase accounting adjustments, and backlog amortization.

Switching gears to cash and liquidity, the Company generated $260.6 million of cash from operating activities per our cash flow statement during fiscal year 2011. We closed the year with $376 million of cash on the balance sheet. We ended the year a net cash increase of $142 million as mentioned. Although we financed McKechnie with debt, we acquired Schneller and Talley Actuation from cash on the balance sheet. The Company's net debt leverage ratio for fiscal year 2011 was approximately 4.3 times our pro forma EBITDA as defined.

As we look forward to fiscal 2012, we estimate the midpoint of our GAAP EPS to be $5.11, and as Nick previously mentioned, we estimate the midpoint of our adjusted earnings per share to be $5.51. The $0.40 in adjustments to bridge GAAP EPS to adjusted EPS includes the following assumptions. $0.06 from dividend equivalent payments, compared to $0.05 this year; $0.17 from noncash option expense, compared to $0.16 this year; and $0.17 of carry forward activity for acquisition related expenses from our reported acquisitions.

Some additional assumptions in 2012 guidance are; the effective tax rate will be approximately 35%, cash taxes to be slightly lower than our recorded tax expense, average interest rate is forecasted at approximately 6%. We also expect to generate an additional $325 million of cash. This would reduce our net leverage ratio to approximately 3.4 times EBITDA. These above assumptions do not include the impact of the anticipated Harco acquisition.

In summary, FY 2011 was a hectic but very rewarding year. The combination of continued exceptional operational performance in our core businesses, the execution of our M&A strategy, the integration of acquired businesses into our culture, and the favorable financing and debt restructuring collectively summed up to a very good year for TransDigm and our investors.

With that let me hand it back over to Liza to kick off the Q&A.

Thank you, Greg. In order to give everyone the opportunity to ask questions, I would ask that you limit your question to two per caller. If you have further questions, I would ask that you reinsert yourself into the queue, and we will answer the questions as time permits.

Operator, we are now ready to open the lines.

(Operator Instructions). Your first question is from Carter Copeland with Barclays Capital.

Good quarter.

Thanks, Carter.

A couple quick questions for you. The first one, Nick, I really appreciate the commentary on the aftermarket and the bookings and shipments. I wondered if you might give us color on how far out you can see in your current order book? Is this a one to two quarters out is about the visibility you got, and beyond that we're kind of guessing?

Yes. I think that's a fair point. One to two quarters. Surely no more than that.

Okay. On the margin, I know there is a lot of moving pieces here. It sounded like the acquisition impact was -- the dilution from the M&A was 4% for the year but 3% in the quarter, and then I think you said McKechnie was 2% for the year. I am just looking at next year's margin -- the EBITDA as defined margin that you are showing as 43 -- 49.3% at the midpoint, and you guys were north of 50% this quarter. I am assuming that -- at least it looks like the trend in that acquisition dilution is going down, and you'd think McKechnie would be even smaller next year. So I am just wondering if part of this is mix between OE and aftermarket, or part of it is just a little bit of conservatism given what you can't see in the back half?

Probably really the answer is all of the above. The things you can measure are the OEM is growing faster than the after market, and as you know, Carter, that naturally mixes you down a little bit. The defense is pretty good margin, and it is -- we're assuming drops a little, so you have the same phenomena going on there. You also have Schneller coming in. We just bought it at the end of the year, and Schneller comes in at a lower margin than the average and dilutes us down. Those are probably the two significant factors that mitigate some of the underlying rise.

And do you have a sense -- you said McKechnie was 2% for the year. Do you have a sense of what you're expecting that dilution to be next year?

Carter, we had a couple measure points. This is Greg talking. When we said a total of four, it included both normal operating margins. But then don't forget during the year we have to write up inventory, wehave to write up backlog, and those what I call purchase price accounting adjustments accounted for the other two. So your four is a combination of what I will call accounting and operational, so sorry to confuse you there.

But if you compare to EBITDA as adjust that had we talk about, it is about 2%.

About 2%, that's correct. So hopefully that helps you a little bit there.

And next year -- that does help. And next year how much do you anticipate that falling?

We'll continue to have amortization from that and other acquisitions. I think I said that was about 17% on an EPS basis -- $0.17 on an EPS basis, and quite frankly we don't -- we haven't -- we don't look or measure as McKechnie in total year-over-year. I mean, they're all going through our value drivers, and they're all improving margin position. So we lose that comparison pretty quick.

Carter, I'll just -- the three things to think about when you think about this, isagain, the commercial OEM business is growing faster than -- the much faster than the defense business and faster than the commercial aftermarket, and that's the lowest margin. We do still have some residual from the McKechnie business, but that's getting better, but we've added the Schneller business also, and that's a significantly lower margin.

That's great. Thank you very much for helping --

Those are the two things --It ends up almost -- the increasing improvement is sort of offset about I them, and time will tell. We'll see how that mix works out through the year.

Great. Thanks. And congrats on a great year.

Thanks.

Your next question comes from the line of Robert Spingarn with Credit Suisse.

Good morning, guys.

Good morning.

I wanted to dig a little bit into the organic growth embedded in the guidance. When I do the math, and I get a little twisted up between pro forma organic growth and regular organic growth, but I am coming up with about 7.5%. Does that sound right?

That's a low.

This is in revenue?

Organic growth.

Revenue you're talking about now?

Yes, I am talking about revenue. I am just assigning your guidance from slide six across the businesses so up mid-teens in OE, et etcetera.

We gave you the pieces in the mix. I just didn't do the math.

I was doing the math, but maybe not quite right, or maybe it is how to treat -- how you define organic. But, Greg, do you think that's low, 7.5?

I was thinking -- I am in EBITDA space. I would have to see your math, because I don't want to turn people off. Again, we try to give you all the details here, Rob, and --

Right, and it is the way we assign it; X percent of the business is OE versus --

Let me give you the pieces again, Rob, andI think that -- and you can assign the mix you want. Commercial transport aftermarket is about 10% up, business jet aftermarket, mid-single digits. The commercial OEM business, all of it is mid-teen percent up, and defense is down low single digits.

We're talking 2012.

What I want to say --

And that's pro forma.

Yes. I want to say --

That's all pro forma.

I will check with Rob after the call, because when you do GAAP versus pro forma, you get a little balled up.

But everything I just gave is our attempt at same-store basis.

And that's the best way to look at the business.

And then a couple things on that. How do we think about that units versus pricing, particularly with regard to the aftermarket business?

Rob, you asked this question every quarter. Every quarter we say we don't disclose the pricing.

But, Nick, it is a valid question.

Of course it is a valid question. It is a valid answer.

Well, let me -- in 2011 did you say what the organic aftermarket growth was in 2011? You gave us a lot of terrific information there, but wasit in there?

No, I gave total. [Not] just aftermarket. The amounts I gave for organic for 2011 were total?

Can you do that for aftermarket?

(Inaudible -- multiple speakers).

We gave it to him. It was up 21%. 21%

Organic?

Yes..

That was prior [to Q4] --

Same store.

Okay, so my question --

(Inaudible -- multiple questions).

Rob, just a second. 21% on quarter-over-quarter basis. 23% on a full year basis.

Right, so what are you --

So that's our best guess at same-store sales.

Okay. You have got RPM growth about 4% or 5%, just down a couple hundred bips from this year, but commercial aftermarket growth is halving from 2011 to 2012.

Yes, that's right. As I think I said in my comments, we don't think the 20% plus is sustainable.

No, I see that, but itis very sensitive. You have talked about in the past being very correlated with that RPM growth.

Yes, but, Rob, as I think you know, at inflection points in the market it disconnects. In the downturn year it disconnects, and the upturn year it tends to disconnect.

Okay, I will leave it with -- I guess I am hoping that aftermarket guidance a little conservative.

Yes. I mean, I will say we are clearly -- we have some concern about the economy. And where you will see that -- if the economy softens a little, where you will see that first is in commercial aftermarket revenues.

Where we could be a little balled up, too, we're talking about total organic growth here. That includes our defense, [which we're] calling flat. We have been focusing on commercial.

No, specifically talking to me -- I'm specifically talking about --

Yes, I am trying to isolate the commercial aftermarket.

Okay. But there is inventory swings also in the system.

Okay. Thanks, guys.

Your next question comes from the line of Joe Nadol with JPMorgan.

Good morning.

Good morning.

One more question on that aftermarket. Since you do have -- combining the prior two questions, since you do have one or two quarters of visibility. You have been running over slightly above 20% commercial aftermarket organic growth all year in 2011. Do you have visibility for that to decline all the way to 10% in Q1, or are you basically saying it is going to start to slide, and do you have more concerns about the back half of the year?

I think we just leave our guidance for the year where it is. We don't give quarterly guidance.

Okay. Turning to the margins, I guess a couple of things. There is obviously some major muscle movements that happened during this year with McKechnie coming in diluting early in the year, and then taking a lot of cost out and getting the margins up through the year. As we think about seasonality in the business, is it fair to say that maybe Q4 net -- putting aside the acquisition impact, as we think about I guess adjust adjusted EBITDA margins, that there really isn't a heck of a lot of seasonality and that this past year was just really just impacted by McKechnie?

I would say -- no, there is not a lot of seasonality in the business. The impacts in margins -- typically when you look at this business, and this year is no different, it is impacted by two things primarily, the OEM aftermarket mix in that particular quarter and acquisitions. That's what impacts it. And usually when you see a point or two swing, when you strip out the acquisition impact, it is almost exclusively the aftermarket OEM mix generally.

Well, on that point and just finally, if we look at Q4 in isolation, your gross margins were flat if you exclude the impact of acquisitions, because you were down 300 bips and you said that was all acquisitions, half operational and half mix. And since your commercial aftermarket growth was so strong in Q4, why weren't margins -- why weren't organic margins, if you will, up a little bit in the quarter?

I lost all of that. I don't know the question.

If you were coming from prior year or sequentially?

Well, margins were flat. Gross margin year-on-year in the quarter, if you strip out the acquisition impact, because you were down 300 bips, you said? That was all acquisitions. So since mix improved year-on-year, because the aftermarket growth was so strong, why weren't margining up a little bit?

As we said, we're a always cautious on straight quarter to quarter pure comparisons. When we discussed last year's fourth quarter, it was a record quarter which we said allthe stars were aligned and this isn't sustainable. Having said that, our full year margins have improved year-over-year, and we're pretty proud about that.

Okay. All right. Thanks.

Your next question comes from the line of Michael Ciarmoli with KeyBanc Capital Markets.

Good morning, guys. Nice quarter. Thanks for taking my questions.

Thanks.

Just to follow up still on this aftermarket growth. Nick, what -- the growth rate last year or even next year, was there any provisioning for the 787 or 747-8 that added to the growth or that is expected to add to growth for 2012?

That's a good question. It is hard to say there was none in 2011, but there was nothing significant, and I can't think of any, and there was surely nothing of any significance that's impacting that number much. In 2012 we really have not considered provisioning orders. They're awful difficult to predict, andthey're very dependent on what airlines buy, and who provisions and who doesn't when they buy. You might have upside on that.

Okay. Just on the softness in the bookings, I mean, are you seeing -- can you break this down geographically? I mean, I know if you look at certainly what the US carriers, European carriers are saying about capacity plans for next year -- I think Lafonza had significant cuts, and it seems like the only reason some capacity is even increasing modest is from new deliveries coming online. But are you seeing specific areas of softness in certain geographies, or you don't have that kind of visibility?

I don't -- as I sit here, I don't know if I can give you the specifics on that. My general sense is we saw softening almost every where. Not softening, I will say flattening is a better way to put it. I also would say I would not draw a lot of conclusion from that. A couple of months, particularly in booking space when you are running hot, don't mean a whole lot. But you would rather -- you prefer to see it up than flat. But I wouldn't draw much from that. I would say if we come talk to you next quarter and say the same thing, then I would be starting to draw more of a conclusion.

Okay. That's helpful. And then the last one. Your defense expectations for next year, what are you assuming pricing wise? I mean, do you have to reign back on your pricing policies with the defense? I mean, can you give us any color there in terms of what -- I am assuming you are getting pressured on price increases from the defense end market.

Yes, I would say there is always some pressure there and always has been. I don't anticipate any significant change in our procedure in our pricing policies.

Okay. That's helpful. Thanks a lot, guys.

Yes.

Your next question comes from the line of Myles Walton with Deutsche Bank.

Hi. Good morning.

Good morning, Myles.

It is actually [Mitt Muratra] here for Myles Walton. Can you give us some impact on revenues in 2012 from divesture -- fasteners and AQS? What impact that has -- the divestures -- in 2012?

Minimal. We did own the fasteners for about 45 days during our fiscal year, and the AQS wasn't that big. It is obviously excluded from our guidance already in 2012, but the year-over-year wasn't that big. In fact, actually, you don't even see it because of discontinued [ops] --

I thought we had that discontinued?

[Discontinued ops is part of] sales for both years.

So it is not in either of the numbers.

Okay. Just looking, Nick, looks like you guys are going to end 2012 with about $600 million of cash and, that's pro forma for the Harco expenditures.

Got you. You see, it's the [700] I gave you andbacked off 80 or so.

Right. And how long do you think you will wait for the pipeline to fill up before you make any more cash deployment decisions?

I just don't know. I mean, that -- in the past we have moved on that when it made sense. It is very hard to say. We will watch the capital markets, we'll watch the acquisition markets, andwe'll make a call by call -- almost a quarter by quarter call on that.

Okay. Just a last question on the defense market guidance. Can you give us some color on the growth assumptions you have for both the aftermarket and the OE within defense?

We just give the one. I would say one of the issues always in the defense is it is a little harder to separate them out, because more the aftermarket than happens in the commercial business, more of it is sneaks through the OEMs, and sometimes it is harder to sort out. That's why we give it as one number.

Okay --that's fine. Thanks, guys. Good quarter.

Your next question comes from the line of Carter Leake with BB&T Capital Markets.

Thanks for taking my question. On the guidance on defense you say you are quite cautious, and wecan all guess why. But can you tell, is this related more to general macro concerns super committee, or are you looking at specific ops tempo trends on legacy platforms?

It is mostly just concern about the overall budget and theoverall defense spending.

So it's not --

I would say it is not -- no, in fact, as we tried to give you a little sense, if you take the helicopter or helicopter/fixed wing platforms and the tanker and transport platforms, which are probably -- I think most people would say about as -- maybe the most stable -- that's about 60% of our business. So that makes us feel okay. But we can't get by the fact that we are very uncertain as to where the spending levels go. And it is -- I would mostly describe it as we're concerned about the receding tide drops all ships sort of phenomena.

So what would it number a negative super committee scenario? The 60% I agree with you. I think we all feel comfortable at those platforms. What -- any I color on what it would be specifically to TransDigm that we could look to? What in super committee discussions, if it went against us, would concern you?

Carter, I have no idea how the -- I just have no idea how to call that.

Okay.

We have looked at everything we see now, everything we know now. We've had our operating units take their best guesstimates, and we tried to put our little bit of judgment to it at the corporate level, and this is the best number we can come up with now. But I will tell you, if you ask me what my level of certainty around it is, I would say not real great. If you wanted to tell me it was 5% more than I said or 5% less than I said, I wouldn't argue with you. I don't know.

Okay. Let me ask this, because we have already had several questions on aftermarket -- organic aftermarket growth, and I am still will have to go through machinations to get there. Is there any way that you -- we could request that we do get some kind of -- a much clearer organic -- at least year-over-year organic growth rates on commercial aftermarket OE and military, at least for -- just putting the request in, rather than us doing backwards math and stuff?Is there any --

We gave it to you, didn't I? I am trying to follow --

Well, I don't know. Sometimes it is hard -- I don't know. You can tell by the questions, sometimes it is difficult in getting to true organic rates, but maybe I am --

Well, do you want -- you mean you want us to -- are you asking if we will strip the price out and make it [unit sales]?

Yes, you would have a table. I mean --

Yes, we don't -- no, we don't disclose our pricing, butI can go back through -- I mean, if that's unclear, I can go back through our organic growth rates for 2012.

Let's do -- I know it is probably printed on the transcript.

We gave you pro forma, same store. It is our best shot at organic growth.

Okay. And then let's just do it again one more time for commercial aftermarket OE and military? Just want to print it one more time.

Commercial transport aftermarket, which is the big bulk of our aftermarket, 10%. Is this just -- just hold on one second. Liza, isthis on one the slides?

Slide six.

Is it? I thought it was in one of the slides.

It is.

Slide six.

If it is all out on slide six, don't go through it. That's fine. I don't want to (inaudible -- multiple speakers) --

Yes, exactly. That's what I was just going to read again.

All right. If it's on slide six, my fault. All right, that's all I have. Thank you.

Your next question comes from the line of Eric Hugel with Stephens Inc.

Hey, good morning, guys.

Good morning.

Can you talk about -- your defense numbers were up 2% in the quarter. They've have been down all year. Was there something that just hit, or can you talk about what drove that, or is it just timing versus last year?

I wouldn't draw any conclusion. I would call that random fluctuation in the data.

All right. With regards to -- you went through the adjustments that you're expecting, I guess the dividends and the noncash and the acquisition. Is there any specific timing we should think about? I know the dividend equivalency thing hits in the first quarter, but what about the other, the [217 cent] -- the noncash? Are those -- should we spread out evenly, or timing items in there?

You're right. The dividend thing is the first quarter. The noncash compensation is ratable over the year, and the acquisition stuff is going to be front end loaded, most of it done by the first six months. Because some of it tied to acquisition, as you have to peel off inventory -- off of an inventory turn backlog twelve months, so it is going be front end loaded.

Okay. And your 35% tax rate, is that assuming or does it even matter for the R&D tax credit extension?

That includes the -- no, for the extension. We didn't include -- we don't include the extension when we do, that do we?

[Not until] --

Yes, not until it is passed by law.

If it was passed, what would be the benefit that you would get around?

Less than $1 million right now as we look at next year.

Okay. Great. Thanks a lot, guys.

Your next question comes from the line of Christopher Chun with Rudman Capital. Mr. Chun, your line is open.

Hello. This is Errol Rudman for Chris Chun. I wanted to ask what the -- could you give us an estimate of -- you gave us an estimate of what the revenues are in the quarter from the acquisitions, because you gave unit growth. But can you give us an indication of what the margins were on the acquisitions?

No -- Errol, this is [Nick]. We don't break that out, butI think you can see the margins on the acquisitions are moving up. We average down when we bought them, and we are starting to come pretty close to approaching the margins on our full business before we made all of these acquisitions. But we don't break them out separately.

The purpose of the question is to understand better how much room or how much potential there is of those acquisitions to get to the corporate average.

Yes. There is more. They're not juiced out yet.

Errol, this is Greg. I would like to point out our goal when we make an acquisition isn't to get it to the corporate averages. Our goal is to, whatever we buy it, to create the shareholder value. So in an absolute or theoretical example here, I love to buy something that is 5% or 10%, and if I took it to 35% or 40%, we would all be happy. So we don't have a firm goal to say whatever we buy has to get to a TransDigm average. Our goal is whatever we buy has to create shareholder value.

I understand. Thank you.

Your next he question is from Ken Herbert with Wedbush.

Good morning, everybody.

Good morning.

Just wanted to ask a question on the original equipment guidance for the year. You talk margins being impacted by the greater mix and up mid-teens. Can you talk, Nick, about the visibility in this segment? Seems like the initial outlook specifically on the 787 certainly seems to be lower than what Boeing is talking about in terms of shipments as they try and ramp production, even if I apply a fairly significant hair cut to what they talk about. How does the visibility look, and what are you seeing on the original equipment side heading into 2012?

Let me separate the 787 from the rest of the commercial transport business. The rest of the commercial transport business we have a fair amount of visibility. I mean, we're -- as opposed to the aftermarket, where as I think it was Carter Copeland started off asking me whether we had one or two quarters of visibility, and I said surely no more than that. In the OEM world -- and again I am separating 787 -- we have more like three to four quarters of visibility, or pretty well locked in. So if you separate out the 787, we know it pretty well,absent some disruptive event that makes everybody slow down.

The 787, frankly we're just waryWe've had so many false numbers through the last four or five years, and we are unsure exactly how much inventory there is in the system, or how much they're going to leave in the system. It makes it a little bit difficult call. Now, that's the bad news on it. The good news on it is particularly in the beginning of a program like that you don't make a whole lot of money, so whether you call it wrong by five or 10 or 15 airplanes isn't going to make much difference in the answer this year.

Okay. So I know in the bigger scheme of things it is a very small piece of the pie so --

That's right.

So it sounds like then good visibility on the legacy of the mature Boeing programs. How --

And Airbus.

And Airbus of course as well, certainly. Can you give any perhaps book mark or way to think about how opportunities are for your content on the OE side in your discussions with Boeing, specifically on the 737 MAX?

I think it is too early to really say much about that, and thereis not much we can say. In general, which 79 -- which plane did you say again?

The MAX. The new narrow body.

The new one.

Not the reengine. The brand new.

Well, it is a reengine, yes.

Yes, okay. I didn't know if you were making a distinctions between a reengine and a brand new airplane. A brand new airplane I was going to say I have no idea. On the reengine one, in general -- this isn't 100% true, but in general as much as possible they try to stick with the suppliers they have on the base platform. So you expect to be fairly close and maybe hopefully you pick up a little. But in general it isn't a big disruptive event. That's probably about the best I can say.

Okay. Great. But I imagine though that as -- on these mature programs you have got opportunity for margin improvement over the course of the year from the existing businesses, correct?

Well, we -- I am want sure whether it is unique to the mature programs or not, but wegenerally -- between the mix of pricing and cost reduction, we generally think we have margin expansion opportunities almost every where.

Okay. I was trying to make more of a distinction between the established versus, say, the 787.

Because the volume is going up?

Exactly. Volume versus cost and productivity.

I really wouldn't get too hung up on the 787. It isn't a big deal. It is not going to impact the 2012 number much, almost no matter what happens to it.

Okay. Perfect. Yes, thanks again, and a great quarter.

Your next question comes from the line of Greg Halter with Great Lakes Review.

Hello and good morning.

Good morning.

You provided some commentary on tax rates and so forth. Just wonder what your thoughts are on the share count for fiscal 2012.

Share count?

That's on the slide.

It is? Okay, good, because I don't have that memorized.

It was 53.9 million.

For next year also.

Yes (inaudible -- multiple speakers).

And where is that? What page?

[Or maybe] (inaudible -- low level) --

It is a small amount that it is going to go up.

The amount is going to be 53.9 million.

We have to make an assumption of people exercising options, but it is not a material increase.

All right. And the previous question I think was surrounding the organic growth on page six. Is that -- what the question was was fiscal 2011 or fiscal 2012? BecauseI think 2012 what is presented on page six of the presentation.

Page six is 2012.

Okay.

Now, page -- I don't know the pages, but [which page is that?]Page five is 2011.

Okay. I know you approved a share repurchase program. Curious if you bought any in the quarter?

Yes, a small amount did kick in under that program, but it was small.

It was de minimus.

We're talking fourth quarter, right?

Correct.

Yes, fourth quarter, yes, a small amount. You will see it all in tomorrow's Q, but it was a small amount.

Very small.

And for the year fiscal 2011, what were the international revenues to the total, if you have that?

What I tell most people is when you look at the GAAP numbers, the GAAP numbers reflect the destination of the sale. The best example is, if we sell to Airbus, it looked like a sale going to Germany and France, but then Airbus sells back to the United States and every where. If you want to think about how our sales are, you have to look at where the installed base is across the world, because that's ultimately where our sales are consumed and our products are consumed. And I know that's a tough answer, because when you look the our GAAP statements, we look like we're predominantly selling within the states. But when you sell to Boeing, Boeing exports to Singapore. Think of our sales as the install base.

Yes, the other way to make that even more obvious is Aviall to Boeing is one of our biggest customers. The vast majority of those sales get recorded as though it is going to Dallas, Texas. Well, almost none of that ends up in Dallas, Texas. It ends up all over the world.

Okay. And one last one. What are your expectations for capital spending for fiscal 2012?

Fiscal 2012 will be right or around 2%, just a bit under. We range between 1.5% and 2%, and we think we'll be closer to the 2% than the 1.5% for fiscal 2012.

Thank you very much.

We have a follow-up question from the line of Joe Nadol.

Thanks. Just a couple of these. You noted that 60% of defense sales were fixed wing, helicopter, and tanker transport. What's the other 40%?

Very, very broad range of platforms. Very -- almost -- we'reon almost everything.

Right. That includes almost everything except for unmanned. Is this ground vehicles? Is this --

No, it doesn't. It doesn't include any fighters. Doesn't include any [inaudible -- multiple speakers].

Okay, I thought that was fixed wing. Okay.

Fixed wing. Helicopter or fixed wing -- did I say fixed? I am sorry. I didn't mean -- I apologize, I started --I meant helicopter and rotary wing. If I said fixed wing, I am sorry. That confused everybody.

No, not at all. It could have been my mistake.

No, it did. It probablyconfused me.

The second follow-up, though, is at the same time you guys are --

Let me just resay that again for everybody, becauseI am looking at my script. I said fixed wing and helicopter. I meant rotary wing and helicopter. In other words,helicopters and freighters and tankers.

Okay. That's helpful. The second thing is a bit more strategic. Nick, going into the last -- into this downturn a few years ago, you guys were very quick to react to the financial crisis, et cetera. And you said you're cautious going into next year and the economy. There is a lot of uncertainty, but -- I mean, you're growing a lot. You're investing a lot. You're making all of these acquisitions. You're promoting all of these people. At the same time you're cautious. I am just -- I know that we're looking for a nice growth next year and everything, but I am just wondering where you put your caution level on the spectrum of thinking about three years ago.

We're nowhere near that nervous yet. I would say when Ray talks about the promotions and -- that is mostly to fill holes that we found in acquisitions. In other words, that's not new hires. That's replacements. I would say in general on adding costs and adding people we're wary. Frankly, we're trying to be as careful as we can on that right now and just buy time to see how things develop.

Okay. Fair enough. Thank you.

You have a follow-up question from the line of Michael Ciarmoli -- excuse me.

Hey, guys. Thanks. Nick, what are you anticipating from Schneller for next year? I know you had it for I guess it was maybe just about a month. It is fair to say that's going to add about $70 million or so for the full year?

I think we don't disclose that, but I think you can -- I think we gave the revenue, didn't we? Didn't we disclose revenue in that division?

Yes, I think it was about (inaudible -- multiple speakers) --

And as you know, Mike, we only owned it for two weeks. Something like that. So you can do the math and come --

All right. Perfect.

There is a little market growth, and you can do the math and come close.

Okay. Great. Thanks.

Ladies and gentlemen, this concludes the question and answer pouring of today's event. I would like to turn the call back over to management for some closing remarks.

Thank you. I would like to thank everyone for participating on our -- on this morning's call, and just as a reminder, we expect to file our 2011 10-K no later than tomorrow.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation, and youmay now disconnect. Have a wonderful day.