TransDigm Group Inc (TDG) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2014 TransDigm Group Inc. earnings conference call. My name is Regina and I will be your conference operator for today.

(Operator Instructions)

As a remainder today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Liza Sabol, Investor Relations. Please go ahead.

Good morning, and welcome to TransDigm's FY14 first-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.

The Company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the Company's latest filings with the SEC. These filings are available through the Investor section of our website or at SEC.gov.

The Company would also like to advise you that during the course of the call we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA and EBITDA as defined, adjusted net income and adjusted earnings per share to those measures. Let me now turn the call over to Nick.

Good morning, and thanks again for calling in to hear about our Company. Today I will start off with some comments about our consistent strategy, then an update on the commercial after-market, and also on the Boeing Partnering for Success program. I'll then give an overview of the financial performance and market summary in Q1 of 2014 and an update on the full-year guidance.

Just to restate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons why we believe this, about 90% of our net sales are generated by proprietary products, and around three-quarters of our net sales come from products for which we believe we are the sole source provider. Excluding the small non-aviation business, about 54% of our revenue, and a much higher percent of our EBITDA, comes from after-market sales. After-market revenues have historically produced a higher gross margin and provided relative stability in the aerospace cycles.

Based on our uniquely high EBITDA margins and relatively low capital expenditure requirements, TransDigm has, year-in and year-out, generated strong free cash flow. 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 also maintain a de-centralized organization structure, with operating unit executives who think, act, and are paid like owners. We stick to these concepts as the core of our operating management methods. This consistent approach has worked for us through up and down markets, while allowing us to steadily invest in new businesses and new platform positions.

We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace businesses with significant after-market content. We have been able to acquire and improve such businesses through all phases of the cycle. We pay close attention to our capital structure and view it as another means to create shareholder value. As you know, we have been in the past, and continue to be willing to lever up when we either see good opportunities or view our leverage as sub-optimum for value creation. We typically begin to de-lever pretty quickly.

With respect to capital allocation, we will look closely through the year at our choices for capital allocation. We basically have four. Our priorities are typically as follows -- one, invest in existing businesses; two, make accretive acquisitions consistent with our strategy -- these two are always our first choices; third, pay off debt, but given the low cost of debt, especially after tax, this is likely our last choice in the current market condition; and fourth, give the extra money back to the shareholders, either through special dividends or stock buy-back.

As the year proceeds we will look at our likely needs for acquisition and internal investment, our cash and/or debt capacity, as well as capital market situations, all in context of our near- and mid-term outlook. At this time, we are not prepared to speculate on what, if any, major actions we might take. We'll see what conditions exist as the year proceeds.

At the end of Q1, after closing the Airborne acquisition, based on the current capital market conditions, we believe we have adequate capacity to make about $1.5 billion of acquisitions without needing additional equity. This capacity grows as the year proceeds. This does not imply anything about acquisition opportunities or anticipated acquisition levels for 2014. Overall to our consistent focus on our operating value drivers, a clear acquisition strategy, close attention to our capital structure and allocation, we have been able to create intrinsic value for our shareholders for many years through up and down markets and we anticipate being able to do so in the future.

Now to address a few specific items that to have do with this first quarter -- as you know, on December 19 we closed on the acquisition of Airborne Systems for about $250 million. We bought this from Metalmark Capital. Airborne is the world leader in the design and manufacture of military personnel parachutes, cargo arial delivery systems, and related products. The company's proprietary products have significant, often sole-sourced positions with the government of the United States, United Kingdom and about 50 additional nations.

The primary product offerings include current-generation troop parachutes, late-generation steerable parachutes for tight drop-zone landings, RAM-AIR maneuverable parachutes used for special operation activities, and precision-guided cargo chutes that are used for high altitude GPS-driven cargo drops. Airborne is a unique company and asset in the industry, with most of its revenue from proprietary and sole-source sales, the company fits well with our criteria and value creation model. The large number of international customers generate a majority of the company's revenues. The international content is growing, and provides a buffer to the current uncertainties of the US defense spending environment. I do not anticipate that this is a business that gets to the TV average EBITDA margin but I believe it will generate significant shareholder value.

Now with respect to the after-market status -- to reiterate, again, in the second half of FY13 we began to see signs of a recovery. We believe the trend was roughly up about 4.5% year-over-year for the second half of 2013. This was after adjusting for certain items we discussed in prior calls. The first quarter of FY14 commercial after-market revenues, on the same-store basis, were up about 7.5% versus the prior year Q1. Sequentially, the revenues were up about 6% in spite of less working days. Additionally, the bookings were up about 14% versus the prior Q1 and up about the same percent sequentially.

It's too soon to declare victory, but we surely feel more positive. The recovery may not be linear. There may well be ups and downs in the quarters. Many forecasters, however, believe that our data now seems to suggest more strongly that the commercial after-market is now expanding. Time will, of course, tell on here.

I would also like to comment on the Boeing Partnering for Success program. Though we have a mutual confidentiality agreement -- and as I've said in the past, as a general rule, we don't share details of customer negotiations -- I can make a few general statements. In January, Boeing and TransDigm reached agreement on the Partnering for Success program and both signed a memorandum of understanding. We believe this agreement is mutually beneficial to Boeing and TransDigm.

As part of this agreement, TransDigm continues and maintains its long-standing position as a valued long-term supplier in good standing for future and existing Boeing air frames. We do not expect this will have any material impact on our financial performance as a result of this agreement. We are pleased to have this concluded and look forward to continuing our long and mutually beneficial relationship with Boeing. Due to our confidentiality agreement, this will be my only comment on that subject.

Turning to our Q1 2014 performance -- to remind you, this is the first quarter of our year. Our year began October 1. As I have said frequently, quarterly comparisons can be significantly impacted by mix, large orders, inventory fluctuations, a little seasonality and other things. Also to remind everyone, Airborne is not included in these numbers. We owned it for 10 working days, most of which were a holiday break period.

The first quarter of FY14 was generally a good quarter for TransDigm. Revenue, profits, and margins were all strong. GAAP revenue was up 23% versus the prior Q1. Pro forma revenue, that is, if we owned the same mix of businesses, was up about 9%, on a quarter versus prior-year quarter.

Reviewing revenues by market category, again on a pro forma basis, versus the prior Q1, that is assuming we owned the same mix, the commercial after-market -- or the commercial market, which makes up about three-quarters of our revenue, total commercial OEM revenues were up 10.5% versus the prior Q1. This is driven by commercial transport OEM revenues, which are up a bit more than that, and the business jet revenues were about flat. Total commercial after-market revenue comps, as I said before, were up about 7.5% versus the prior Q1. Our individual operating units continue to be a little spotty but most units are up this quarter.

The defense market makes up about a quarter of our revenue. Defense revenues are up in the mid single-digit percent versus a very low prior-year first quarter -- excuse me, mid-double digits versus a very low prior-year first quarter. More significantly, revenues were about 5% up versus the prior year 12-month run rate.

There were about $7 million of Tarian shipments, almost completing the order, but even without that removing it from both periods, the percent revenue in Q1 was still up a bit versus the prior year's average run rate. Incoming defense orders or bookings ran slightly ahead of shipments. Ray is going to give you a little more color on this. We are pleased with the military results so far. We hope that the recent budget agreement will provide some stability, but we remain cautious about trends in these markets.

Moving on now to profitability and on a reported basis, I'm going to talk primarily about our operating performance, or EBITDA as defined. The as-defined adjustments in Q1 were primarily due to acquisition-related costs and non-cash stock option expense. Our EBITDA as defined of about $244 million for Q1 was up 21% versus the prior Q1. The EBITDA as defined margin was 46% of revenue for Q1. Our base business EBITDA, that is excluding the three acquisitions we made in 2013, was about 48%. That's up about 1 percentage point versus the prior year's Q1 with a very comparable market mix of products.

With respect to acquisitions, we continue looking at opportunities. The pipeline of possibilities is pretty active, about the same mix of sizes as usual. Probably the commercial versus defense mix is a little more normal now. Closings are difficult to predict, but we remain disciplined and focused on value creation opportunities that meet our tight criteria.

Moving on now to 2014 guidance, and I think this is on slide 6 in the package we gave out, once again the military spending is unclear but so far so good. The rate of recovery in the commercial after-market seems to be proceeding, and the EBITDA margins are running slightly ahead. We are reflecting the Airborne acquisition in this revision. This is our best current estimate. As usual, we'll let you know if our views change one way or the other.

Based on the above, and assuming no additional acquisitions, 2014 revised guidance is as follows -- the midpoint of the revised guidance is now $2.3 billion versus a prior guidance of a little under $2.2 billion. This is up about 6% on a GAAP basis versus the prior guidance. The revenue increase is due to the Airborne acquisition.

The midpoint of the 2014 revised EBITDA as defined guidance is $1.05 billion, or about 45.5% of revenue for the year. It's up $32 million versus the prior guidance. This margin includes a 1.5% of dilution from Airborne, which will begin to show in Q2. This is offset partially by some operational improvements that we saw in Q1. The dollar increase in EBITDA is about three-quarters from the nine months of Airborne acquisition that we owned it, and about one-quarter from improved base margins.

The midpoint of the EPS as adjusted is anticipated to be $7.50 a share versus the prior guidance of $7.16. This is primarily due to the same items impacting the EBITDA as defined. At this time, our 2014 guidance is still based on the same market growth rate assumptions we gave with our original guidance. We're not yet comfortable enough to increase our full-year assumptions. We'll look at this again next quarter.

In summary, Q1 was a good start. Hopefully the strengthening market conditions will continue, but in any event, I'm confident with our consistent value-focused strategy and strong mix of businesses, we can continue to create long-term intrinsic value for our investors. Now let me hand this over to Ray, who will discuss some other high points in operating issues from Q1.

Thanks, Nick. As Nick mentioned, in total our first quarter was better than our expectations. However, we continued to tightly manage our cost structure and work our value drivers to create shareholder value.

Let me explain our 2014 first-quarter operational value creation in a little bit more detail. Right before their holiday shut down, we completed the acquisition of Airborne Systems Incorporated. The value creation transition of this business has started and we are presently working through various productivity projects and structuring the business into our product lines with their associated value creation metrics.

The three businesses we acquired last summer are also progressing well. At Arkwin, we have completed the first stage of our productivity restructuring, organized the business into product lines, focused the engineering, and installed a proven Sales and Marketing Director and a Controller, would both had come from our existing operations. The Arkwin margins are moving up nicely, and we expect them to eventually reach the average TransDigm EBITDA margins.

At our Whippany Actuation business, the transition activity has been more complex as we work through systematic decoupling from GE. However, progress to date is at or above expectation. As with Arkwin, we have completed the first phase of productivity restructuring, organized the teams and the product line, focused the engineering and installed our value creation metric.

To expedite the value creation and integration process, we added some proven TransDigm managers to the acquisition. Shortly after we acquired Whippany Actuation, we appointed Jack Stiffler as at the President. Jack previously was the President of our Marathon Norco unit. Jack then immediately installed a new Director of Sales and Marketing who also came from one of our existing units.

The Whippany margins are also moving up, albeit at a slower rate, due to the existing contracts, the nature of some of their government business and the draw-down of certain distribution inventory. We don't expect their margins to get as high as the TransDigm average. However, we do expect them to meet or exceed our acquisition model.

Lastly, our Aerosonic acquisition transition is also on track with similar progress as discussed with Arkwin and Whippany Actuation. In addition to the productivity improvements and product line, we appointed Joe Grote as President. Joe previously was the President of our CDA unit. Joe also drew on existing TransDigm talent and installed an internal manager as one of the new product line managers at Aerosonic. Aerosonic's margins are also expanding.

Our internal talent development continues to serve us well. The salting of TransDigm talent into these recent acquisitions generally augments their value creation transition. In fact, the vacancies created by moving the new President to managers into these acquisitions were also back-filled by internal TransDigm talent.

As I have said in the past, we believe our succession planning and value creation culture are key to growing TransDigm value. As Nick mentioned, our defense segment continues to outperform our expectations. I would like to give this a little color. Last quarter, we stated that our FY13 defense market revenues were up a healthy 7% over FY12 revenues, and that our defense market growth expectations for 2014 were flat, coming off of these rather strong 2013 results.

Our last two quarters of defense bookings have continued to be better than expected. Typically, defense bookings precede revenue by about three to nine months so this strong order rate gives us a good near-term backlog. We have upside in this segment for our first task. If this trend continues, we may also have upside in our defense revenues in all of 2014.

The strength in the recent six months defense segment has been more after-market than OEM. Generally the uptick in OEM has been for our new products and applications on the A-400M and the F-35 or the JSF. The significant after-market strength has been predominantly from our products on the active fleet of fighters, the F-15, the F-16, the F-18, the F-4, and the A-10 attack aircraft, and also cargo aircraft -- the C-130 and the C-17. We'll see how this continues as the year progresses, but so far so good. Now let me hand it over the Greg Rufus, our CFO who will review the first quarter financial results in more detail.

Thanks, Ray. As disclosed in this morning's press release and just discussed by Nick, our first quarter sales were $529 million and 23% greater than the prior year. Our organic sales were 9% higher than last year, and the growth in commercial OEM, commercial after-market, and defense were all positive. Our first-quarter gross margin was $284 million, an increase of 19% over the prior year. The reported gross profit margin of 53.7% was 1.7 margin points less than the prior year. The dilutive operational impact from acquisitions was a little over 2 margin points. Excluding all acquisition activities, our gross profit margins in the remaining businesses versus the prior year quarter improved approximately 0.5 a margin point.

Selling and administrative expenses were 10.8% of sales for the current quarter, compared to 12.8% for the prior year. The 2 percentage point decrease was primarily due to lower SG&A spending as a percent of sales relative to our sales growth and lower non-cash stock comp expense versus the prior year Q1. If you recall, we accelerated this expense in quarter three last year, which had the impact of lowering this year's expense.

Interest expense was $81 million, an increase of approximately $18 million versus the prior year quarter. This is a result of an increase in the weighted average total debt to $5.7 billion in the current quarter versus $4.2 billion in the prior year. The higher average of debt year-over-year was primarily due to the amount borrowed to distribute $1.8 billion of special dividends last year. Our weighted-average cash interest rate has decreased to 5.4%, compared to 5.6% in the prior year, due to the lower interest rates on the new debt. Our effective tax rate was 33.6% in the current quarter compared to 32.6% in the prior year. We still expect our effective tax rate for the full fiscal year to be around 34% and our cash taxes to be about approximately $190 million.

Our net income for the quarter increased $12 million, or 16%, to $86 million which is 16% of sales. This compares to net income of $74 million in the prior year. The increase in net income primarily reflects the growth in net sales, partially offset by higher interest expense. As I have discussed in the past, our earnings per share is calculated under the Two Class method versus the more commonly used Treasury method. We are required to use this method because of our dividend equivalent program.

As you can see on Tables 1 and 3 in this morning's press release, our GAAP EPS was $1.44 per share in the current quarter, compared to just $0.66 per share last year. The prior year quarter was significantly impacted by the dividend equivalent payment of $38 million, or $0.70 per share, compare to the $0.07 per share this period. The higher dividend equivalent payment was associated with the $700 million, or $12.85 per share, dividend paid in November of FY13.

Our adjusted EPS was $1.66 per share, an increase of 10% compared to $1.51 per share last year. The 10% increase is lower than our 16% increase of adjusted net income due to the higher weighted-average shares in the current period resulting from the accelerated stock option vesting mentioned early. Again, please reference Table 3 in this morning's press release which compares and reconciles GAAP and adjusted EPS.

Switching gears to cash and liquidity, after the purchase of Airborne, we ended the quarter with $411 million of cash on the balance sheet. The Company's net debt leverage ratio was 5.4 times our pro forma EBITDA as defined. We now expect to end the year with approximately $750 million of cash on the balance sheet, assuming no other acquisition activity or changes in our capital structure. We expect our net debt leverage ratio to be approximately 4.7 times EBITDA as defined at the end of our fiscal year.

Now let me hand it over to Liza to kick off the Q and A.

Thank you, Greg. Operator, we are now ready to open the lines.

(Operator Instructions)

And your first question today comes from the line of Noah Poponak with Goldman Sachs.

Good morning, everyone. Nick, on M&A and the M&A pipeline -- you provided some comments on what you could do right now, given where the balance sheet is, but you didn't really talk about the health of the pipeline as you see it today, which you normally do. Is that something you're willing to share with us right now?

You may find it unfulfilling, but I thought I said about the same thing I always do: That our pipeline is pretty active. We remain working. I think I said there's that a little more normal than we have been seeing in the commercial defense mix. The sizes in the stuff are about what we usually see.

When we see Airborne, which is essentially all military, should there be any part of us that interprets that to mean it's now proving more difficult to find reasonably priced aerospace, primarily commercial, assets that have the characteristics you're looking for, or was this more specific to what you saw in Airborne?

It's more specific to what we saw in Airborne. We are not -- as we've always said, we're looking for proprietary aerospace kind of products with a reasonable amount of after-market. If they meet our PE kind of return, we're an interested buyer.

We're not biased, necessarily, against defense, though I must say I wouldn't want to move -- we wouldn't want this to be a 50/50 defense business. But if the price is right and it has the right characteristics, we're interested in it. All things being equal, we'd probably pick a commercial business.

Okay.

But you deal with them as they come up, and this looks like a good, accretive transaction to us.

So, it doesn't sound like you're really finding it more difficult in any meaningful way to find good, reasonably priced, primarily aerospace assets, compared to 12 months ago, 18 months ago, or any time --?

I don't think so. You could always argue what reasonably priced means, but I would say the prices haven't changed substantively, as best I can tell.

You know, the hardest issue is always finding things that meet our -- our criteria is pretty tight. We want it to be proprietary. We want it to have a lot of sole-sourced stuff. That's always the issue -- is sorting through them to get the ones that really meet our criteria.

Okay. And then just a follow-up on the base defense business, where you commented that the shrink there is after-market, not original equipment. And I think you mentioned within that it's fighter and cargo. Is it possible, even if rough order of magnitude, to quantify how much of your defense after-market business is fighter versus cargo versus helicopter?

Because we've seen a number of other companies have pretty significant weakness in their defense after-market business, attributing it to helicopter. We've heard investors speculate that they would think that's something that would eventually impact TransDigm. Doesn't sound like that's happening, at least yet. So, if we could understand that mix a little better, I think that would be helpful.

Okay. This is Ray. First off, the government ordering patterns and so forth, and we've said this in the past, can be quite lumpy. So, it's tough to take a comparison from one period to the next and start drawing general conclusions. We just happen to see that the after-market was a little stronger than the OEM. That doesn't mean the OEM was way down.

We're kind of spread about a third, a third, a third on our platform. About a third of our applications are on the helicopter, about a third in the kind of fixed-wing fighter area, and about a third in the cargo aircraft. You know, helicopters were strong for us in prior years, a little bit more so, but they weren't as strong in the most recent period. We don't think that's any big trend, but that's just how they kind of were lumpy this time around.

Okay. Thanks very much.

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

Thanks. Good morning, guys.

Good morning, Myles.

The first one I have for you, to just maybe follow-up on the military question for a second. Was there a big difference in domestic versus international in terms of the strength of growth? And if there was a larger international booking you had last year -- I don't know if that's helping some of the near-term sales numbers.

That one is, I think as I said, Myles, in the lead-in, that was about $7 million in the quarter, which is just about the same as it was in the fourth quarter of last year. That order is almost finished. I want to say it was a $17-million or $18-million order, and now we've shipped about $15 million of it.

But even if you strip that out of both periods, the run rate for this first quarter was higher than the average run rate for last year. And I talk about the average run rate because the first quarter was very low last year. So, that's a meaningful comp, at least for us. We sort of look at the average run rate, just because otherwise the increase is a little distorted. But clearly better than we hoped -- than we thought it may be.

Okay.

And we feel decent about the next quarter.

Good.

And then, Greg, on the SG&A leverage, keeping your control on the cost growth lower than the sales growth, do you have a thought on the target range for SG&A as a percent of sales or how much more leverage you can get out of constraining costs there?

Well, this quarter was a good quarter. We're still planning on our total SG&A for the year to be about 11.5%.

Okay. And that's inclusive of the -- that's not an adjusted basis, that's inclusive of the comp?

Yes.

Okay. Great. Thanks so much, guys.

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

Good morning. Hi, guys.

Good morning, Rob.

Nick, you talked about the lower margins at Airborne, and maybe I got to factor in more when I look at incremental in the guidance between the added sales and the added EBITDA as defined, but I think by my math it's about a 25% EBITDA as defined margin for the contribution of Airborne this year. And that would seem to be a bit of a departure. Is this a one-off? Is it the nature of this military business and parachute business, or might we see some more deals at lower margins?

I'll do the math quickly.

I used the midpoints. And I know there might be other puts and takes in there.

You're not miles off. (inaudible) so you can figure it out.

It's not unusual that we bring businesses in substantially below our average. Bringing a business in 25% EBITDA is not unusual at all for us. I would suspect that's more the rule than the exception, to have a business come in like that. However, I will say: The nature of this business is such -- it's not going -- well, who knows what the future could bring, but I think it's unlikely this business gets up to 50% EBITDA.

Okay. I guess maybe the way to ask it: Is this the before or is this the after margin, or something in the middle?

Well, I hope the hell it's the before.

All right.

Then, you were very clear, Nick, on not wanting to talk about -- (multiple speakers)

I'd be very sad if it goes down from here, Robert.

Yes, we all hope not.

I don't want to ask you to specifically about -- any more about the deal you did with Boeing because you said you won't talk about it. But one thing I think we're struggling for is, just abstractly, in these deals, everybody says it's a win-win for everybody, but the presumption is that somebody has to give a little more than the other. Can you just talk from an abstract perspective of how the horse trading works on these things?

Rob, I just can't. This is a -- it's very sensitive to Boeing, and somewhat to us, that we maintain a confidentiality agreement with how this -- and we were very clear with them what we would and wouldn't say. And I really just can't go beyond it, other than to say, as we said, this is not going to have a -- we don't see this having a material impact on our financial statements or our performance. And obviously, we thought it was a worthwhile deal to make, or we wouldn't make it.

Okay. Fair enough. You were clear you weren't going to go there, so I just wanted to try.

Maybe if you asked it obliquely, I might miss the question.

That's too direct. I'll remember that next time.

I'll try this one. On the after-market, we've gotten some sense that used aircraft are being extended a little bit more than before. Aircraft coming off lease are being re-leased -- maybe having a little bit easier time getting re-marketed than even six months ago.

Does this explain any of the strength you're seeing? Do you get a sense, in talking to your customers, that the mix of the fleet is not shifting quite as quickly to new as we thought? Not because the new aircraft aren't delivering, but because the old ones aren't retiring as quickly.

Rob, I also have heard that anecdotally, but I honestly can't tell you that I can give you any good numbers or I have any numbers that give me any particular comfort in that. But I have heard that anecdotally also.

Okay. Thanks very much.

Your next question is from the line of David Strauss with UBS.

Good morning, guys.

Good morning, David.

Just following up on that question on the after-market: Off of the levels that you saw in Q1, what kind of sequential growth do you need to hit your high-single-digit target for the year?

We didn't really give quarterly guidance.

I'm just talking, maybe if you take Q4, whatever you could give -- (multiple speakers)

We haven't given that miles by quarter, and I don't want to speculate on it now, but you could figure it out pretty well. (multiple speakers)

I'm not -- the reason I ask is it doesn't seem to apply much in the way of any sequential growth, or not much sequential growth.

We'd have to get there. If we said 8% to 9% for the year, if everything was linear, if you get 7.5% in the first quarter, we'd need to get whatever that comes to, 10.5% in the fourth quarter.

Yes, but I'm just talking sequential off the run rate where you are today.

We haven't given that, and we'd prefer to stay away from -- we don't care to give quarterly guidance on it.

Okay.

We did give you some data on the bookings.

Yes. I think Ray mentioned that -- or maybe it was Greg, about the increase in guidance on the EBITDA side. There's about 25% of it from the base operations. Is that some of the upside? I assume it's not upside on some of the recent acquisitions. Where exactly is that coming from?

It's just the underlying business; however you want to define it. We bumped up, I want to say, $32 million, is that the number?

Yes.

$32 million. We wanted to give you some sense how much of that was Airborne and how much was the margins. We're a little -- feel a little better about the margins.

Okay. And I'll try another one on this Partnering for Success.

Good luck.

Okay. I'll give it a shot.

Is the agreement that you were able to reach with Boeing -- does it change anything fundamentally about your business model, in terms of the kind of upside you can get from the after-market once you're spec'ed into an aircraft? Thinking about new aircraft that are still to come and your position on that -- does it change anything from that? (multiple speakers)

I just don't want to -- as I said, I do not see a material impact on our Business.

Okay.

We have a -- I'm just going to repeat myself now. We've been pretty clear with Boeing, and Boeing with us, that we'll say what we agree to say, and no more.

Okay. Last one: Greg, what is the D&A assumption for the year? Does amortization step down as we go through the year?

Well, boy, not with Airborne now, right?

Okay.

It won't. We had it going -- hold on. Our prior guidance -- where are we at? This is D&A and depreciation? Okay. D&A and amortization goes up about $6 million, and backlog goes up about $6 million.

Off the prior guidance?

Off the prior guidance.

Okay. Great. Thanks.

Your next question is from the line of John Godyn with Morgan Stanley.

Hello, thanks for taking my question.

Nick, in the prepared remarks, you mentioned buybacks as one of the options. Of course, you haven't really used that in the past. I'm just curious: Has the thinking evolved at all on buybacks versus special dividends?

I think it is mostly, so far with us, been a question of magnitude. The magnitude of the give-backs to the shareholders have been very big. The first one was 20% of the share value; the ones we did last year were about 25%. Our thinking on those has been: With such big numbers, we'd be better off to get a dividend and get it over with, for a [short-eve] execution and the like.

If the numbers were smaller, it wouldn't be so clear to us what made sense. We're not opposed to a buyback. It's just -- it's a very fact- and circumstance-specific thing.

Okay. That's helpful.

If I could ask a question about after-market, certainly the recent trends have been strong, the guidance for the full year looks good, but I was hoping that you could offer maybe some bigger-picture commentary around it. As you read the tea leaves for different product lines, what you're hearing from customers, and maybe your own top-down view, what can you tell us about the sustainability of this inflection in after-market that we're seeing? Does this have legs?

Well, as I told you, it feels to us that our data seems to indicate, and everybody else's seems to indicate, that this market is now expanding and rising. We think it is. Now, I would say, as I said, a lot of times these things aren't linear. They don't always go up in a straight line; there could be bumps along the road. But it feels to us like this is a rising market that's got some legs to it.

Okay. And just last one on Partnering for Success, but just a clarification. I'm assuming your best estimate of that agreement is in the 2014 updated guidance. Is that true?

Oh, yes.

Okay, thanks.

-- is from the line of Robert Stallard with Royal Bank of Canada.

Good morning. Just a couple of quick ones on the after-market. First of all, I was wondering if you could tell us if after-market volumes are actually up in the quarter?

Up against what? You mean up against the (inaudible), or do you mean if you strip the price out?

Yes, if you stripped out the price. I think in prior quarters you've said that -- you talked -- you haven't given us a number, but you've said if it's up or down.

You mean what is it in unit sales, Rob? Is that what you're after?

Actual units, that's a good way of putting it.

You mean if you stripped out the price. They're absolutely up. It's up. That rise is greater than the average price increase.

Okay. And then a second one: Last quarter you talked about this whole issue of normalized growth. There were some issues in the distribution chain. Has that all sorted itself out now?

It is not a material impact or a significant impact on this quarter. When we looked at it, it's kind of puts and takes, what was all in one direction, some of the other quarters. Now, whatever movement there is sort of all canceled each other out. So, it looks to us like a pretty clean number.

Then, just finally on your OEM guidance for the year, it was a bit down from where you are in the first quarter. How do you think this is going to play out? Because I'd imagine you have pretty good visibility on (inaudible) and Boeing and (inaudible) want to take their volumes over the next 12 months.

What did we say -- it was 10.5% in the first quarter? That's roughly -- what's our year? I wouldn't draw anything from that other than it's just timing on when some things happen to ship. If it starts to look like it's a likely annual change, we'll update it next quarter.

Okay.

But we don't know anything other than some timing. I don't know anything about the shipment or production rates or inventory swings that would make me change something right now, in the OEM world.

Great. Okay, thank you.

Your next question is from the line of [Herenhark Keariner] with Oppenheimer.

Good morning, guys. Congrats on the good results.

First question: On the guidance, based on the first quarter, it seems like you might have even raised it a little bit more. I was just wondering: To what extent, if some of the macroeconomic perturbations here in the last week or two maybe stayed your hand a bit? And if not for that, would've guidance been a bit higher perhaps?

You know, possibly. I would say the defense business is better than we expected, and as Ray said, probably the first half of the year is better than we expected. If that continues, that clearly could be an upside.

The commercial after-market is a good quarter. It's just too soon for us to feel comfortable moving our yearly number up. I don't know that I can attribute that to one thing or another, just that we don't have enough data yet. On the commercial -- on the OEM business, commercial OEM business, I have no basis really at this point to change it and to think it's other than just timing between the quarters.

Got it. And I guess a related question: I don't think many of us would have expected that tapering would actually cause interest rates to come down a bit. But assuming that tapering ultimately gets interest rates heading in the opposite direction, to what extent do higher interest rates out in the market impact your capital allocation plans? In other words, if interest rates begin to go up, does that put a little bit more incentive on you guys to maybe pay back some of the debt over time?

Well, at some point, of course it does. But, you know, I would say in the range of likely movements in the next 3, 6, 9, 12 months -- and this is always risky to say that, say what likely movements in the capital market could be -- but in the range of what I think is likely, it probably doesn't change our mind a lot.

Our average interest is, Greg, I want to say 5.4%? Let's say that average went to -- which would be very hard to do if you look at our mix -- but let's say it went to 6.5% or 7%. I doubt that changes our decision significantly, particularly when it's after-tax money.

And in the short run, by the end of 2014, we have some contracts that will fix the variable. It will be closer to 70% fixed at the end of 2014.

As of the end of 2014, for the next four or five years, 75% of the debt is fixed.

I was also thinking about the fact that if you know that down the line you're going to have to refinance that debt at some point, would you want to take some exposure down, even if your rates are fixed?

I don't -- I would just say I don't want to speculate. We are not working on that right now. We're forever getting people in, giving us pitches on restructuring it. We did a fair amount of restructuring last year. At least right now, that's not in our gun sight.

Got it. Then just one modeling question. Can you just walk through the bridge between the GAAP and pro forma EPS this year? Thank you.

You know what, rather than bore you to death, I think that's on page 9 -- that slide that takes the EPS down and it shows the differences. When you look at our original guidance, dividend equivalent payment stays the same, non-cash stock comp's about the same, a little more; and the acquisition-related costs are up, reflecting Airborne, because there's some severance and re-organizational costs that will be associated with that acquisition.

Got it. Thank you.

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

Thanks. Good morning.

Nick, I was wondering on the commercial after-market if you might be able to provide a little more color, like you did with defense, on what types of products or what types of platforms are doing better or worse? Or is it really just random and spotty, like you said in your comments?

Yes, when I say spotty, I'd say spotty, but mostly up. But everything's not up. I can't tie this to one platform or another. I can say: Some of the discretionary things that weren't moving as well in last year, started to move this quarter. We'll see whether that's a pattern or not.

Okay. And then just over on Airborne, understanding that we've already talked about the military versus commercial and the margins, but just stepping back, the product type seems very different than almost everything else that you have in your portfolio. I'm just looking at a page in your annual report right now, and something you've had on your slides with all the different types of hardware. Most of it -- it's bolted onto something that flies.

This is kind of its own -- my understanding -- it's its own kind of self-contained system. When you think about pricing power and all the things that you guys typically go after, channel to market, the competitive landscape, how would you characterize -- how do you get comfortable with something that's a little different in that respect?

We had to go through to try to understand it as best we could on any, and model it. We think there is our value drivers, which are new product development, cost reduction, and pricing opportunity. We think there's some of all here.

So, when we go through and do the math, even at a constant multiple, we see our private equity-like return on it, which we, as I think you know how we do that. We define that as we roughly capitalize something about at our average, our long-term average, and assume the rest is equity. So, we saw a pretty good return even in a constant multiple, and also, frankly, we are -- we bought it at a pretty good price. So, I mean, it has a fair amount of the attributes that we like to see in a business.

When you think about your pricing power, in the competitive landscape specifically -- maybe if you could just characterize the competition? Is this something you go out and you're able to raise the price every year?

It's different in the different segments, but we see opportunity there, frankly, or we wouldn't have bought it.

Okay.

And I don't want to start speculating on where it might make sense and where it might not. But I would say the opportunities in the domestic market may not be as good as they are in foreign markets, but this is a business that is majority outside the US, and growing outside the US.

Okay. Thank you.

Your final question comes from the line of Michael Ciarmoli with Keybanc.

Good morning, guys. Thanks for taking my question.

Good morning.

Nick, maybe just one more on Partnering for Success. Can we assume that any future acquisitions that you guys make are going to be incorporated into this sort of contract, or is there any renegotiation that has to happen?

I have to say, for Partnering for Success, I think you've got about all you are going to get.

Fair enough. I figured I'd try.

Then, on the after-market, as you look at the airlines, can you guys point to any -- are there re-stocking trends? Are you seeing maybe the average dollars spent on shop visits ticking higher? Can you give us any kind of qualitative color as to maybe what you're seeing from the behavior of the airlines?

Well, I can say that if you go through and look through at the distribution, we were having all kinds of inventory movement around. That seems to have settled down, so, as I said, sort of the puts and takes sort of cancel each other out. We still have the situation at the GE business we acquired that we knew we were going to have to draw down inventory, but that's not material and it's offset by some other things.

I can say we saw more activity in the discretionary product, which isn't a big part of our Business, but what it is -- we saw more activity this quarter than we had in the past, which would lead us to think that people must feel better. As far as average order size, I don't know that I can speak to that with any specificity, though presumptively it's a little higher.

Okay, that's helpful.

Then last one, you guys mentioned it a couple times, just the EBITDA margins, and you went back and referenced the core TransDigm margins. Should we be thinking about, in aggregate, your EBITDA margins or that target coming down as you continue to make these acquisitions? Airborne is going to be a part of the Business. You guys are acquisitive. Structurally, should we think about your EBITDA margins coming down a couple hundred basis points?

I really don't want to speculate on that because it's very dependent on what we buy, the rate at which we buy them, and the rate at which they can be improved. Generally, if we slow down the acquisitions -- when things slow down, the margins start to expand quicker. I think for the full year this year, if you strip out the three acquisitions last year, and Airborne, I think the rest of the Business, we think will expand about 1.5 margin points.

Okay.

So, maybe that will give you some sense.

Yes, no, that's helpful. Thanks a lot, guys.

You have an additional question that has queued up from the line of Gautam Khanna with Cowen and Company.

Yes, thank you. Just wondering if there's any difference by geography you can speak to in the after-market, regionally.

You mean, are we seeing different trends in -- geographically? I don't know. Truthfully, I don't know enough to -- I don't know the answer to that for this past 90 days. I mean, I can -- I would speculate that it's probably more movement in the Pacific Rim than Europe, but I don't know the number.

Okay. Just any change by channel distribution versus direct MRO?

No.

Nothing. Okay. Thank you very much.

There are no further questions in queue at this time, so I will turn the call back over to management for any closing remarks they'd like to make.

Thank you, everyone, for calling in this morning, and we plan to file our 10-Q sometime tomorrow.

Ladies and gentlemen, thank you so much for your participation today. This will conclude the presentation, and you may now disconnect. Have a great day.