TransDigm Group Inc (TDG) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2014 TransDigm Group Incorporated earnings conference call. My name is Sheila and I am your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Liza Sabol, Investor Relations. Please proceed, ma'am.

Good morning, and welcome to TransDigm's FY14 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.

Before we begin, 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 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.

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

Good morning, and thanks, everybody, for calling in this quarter to hear about our company.

Today, I'll start off with comments as usual about our consistent strategy, then an overview of a busy FY14, a financial performance and market summary for 2014, and initial guidance for FY15. A fair amount to cover here today.

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 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 from which we believe we are the sole source provider.

Over half of our revenues and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and have provided relative stability in the downturns. Because of our uniquely high EBITDA margins and relatively low capital expenditures, TransDigm has year in and year out generated strong free cash flow. This gives us a lot of operating and capital structure flexibility.

We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we have a simple well proven value-based operating strategy based on our three value drivers concept.

Third, we maintain a decentralized organization structure and a unique compensation system, with executives and senior management who think, act, and are paid like owners. Fourth, we acquire proprietary aerospace businesses with significant aftermarket content where we can see a clear path to private-equity-like returns. And lastly, we view our capital structure and capital allocation as another means to create shareholder value.

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. In keeping with that philosophy, we returned about $1.6 billion to the shareholders in FY14 primarily in the form of a $25 per-share special dividend and some related payments, and also a modest share buyback.

This total payout was about 20% of the market equity value at the start of FY14. As part of this effort, we successfully refinanced our capital structure and borrowed approximately $3.4 billion. Almost half of this was used to pay the dividend I previously mentioned. The majority of the balance was used to refinance the 7 3/4% bonds to reduce the interest expense, extend the maturities, and increase flexibility.

In deciding to pay out another special dividend this year, as usual, we looked closely in our choices for capital allocation. To remind you, we basically have four and our priorities are typically as follows. One, invest in our existing businesses. Second, make accretive acquisitions consistent with our strategy. And, these two are almost always our first choices.

Three, give any extra back to the shareholders, either through a special dividend most often or at times a stock buyback. And last, pay off debt. But given the low cost of debt, especially after tax, this is likely our last choice in current capital market conditions.

After paying the most recent special dividend, buying back about $160 million of our stock, making two acquisitions for $310 million, we still closed FY14 with $820 million in cash, about $400 million in unrestricted and undrawn revolver and additional capacity under our credit agreement. We ended the year with a net leverage of about 6.2 times EBITDA.

At 9/30/14, based on current capital market conditions, we believe we have adequate capacity to make over $2 billion of acquisitions without issuing additional equity. This capacity grows as the year proceeds. This does not imply anything about acquisition opportunities or anticipated acquisition levels for FY15.

Interestingly, since the beginning of FY13, we have returned about $3.6 billion or almost 50% of the market equity at the start of FY13 to the shareholders. In that same timeframe, we made five acquisitions for a little under $800 million, we fully supported our existing businesses and maintained a healthy cash balance and significant dry powder for acquisitions.

As you may have seen, we announced a few significant management changes recently. Ray Laubenthal decided to retire after 21 years with TransDigm.

Ray has being involved with most major decisions and activities with me at TransDigm since the formation of the Company. He has been a key part of building the Company. Ray remains a significant investor in TransDigm, and we intend that he will move to the board early in calendar year 2015.

The board and I regularly discuss succession planning for the CEO, senior executives, and key operating unit managers. It's an essential part of our long-term value generation efforts.

As we reflected on our growth -- as reflected on our growth and long-term succession planning, the board and I thought that it would be advisable to add a few additional high-caliber executives to our senior management team. In keeping with that plan, we hired Kevin Stein to be a Chief Operating Officer of our power segment. This segment makes up about half of our business.

Kevin is an impressive senior aerospace executive with extensive operating experience. He comes from Precision Cast Parts, an aerospace company I respect. It's well-managed, and has consistently generated substantial shareholder value. We gave some additional background on Kevin in the recent 8-K and press release.

Kevin is a high-caliber upwardly mobile addition to our management team. He is coming into a job that will allow him to quickly learn both our business and also contribute meaningfully to our value generation activity.

Additionally, Bob Henderson, the new COO of the Company's Airframe business group, has been a key member of our team for the last 20 years. Bob has also been a significant partner in the Company's growth, and brings a unique understanding of our culture, history, and value creation process. Bob has been closely involved in most major decisions and activities at TransDigm for many years. He has been an executive vice president for years, and responsible for a broad range of the Company's businesses and many acquisition integrations.

As you may know, I have recently extended my contract through 2019. TransDigm has no mandatory retirement age, nor do we have any specific timing for me to transition out of the CEO role. My contract does have a mechanism for me to become an active executive chairman, if that is appropriate at some time. At such time as my transition to executive chairman becomes appropriate, we will pick the best available internal or external candidate for the CEO job.

To be clear, we have no fixed time schedule for CEO transition, nor have we settled on a specific successor.

Now, to summarize FY14. 2014 was a busy year. As I said, we raised and distributed significant amounts of capital. We acquired Airborne Systems and EME for $310 million, and we continued the integration of our various other acquisitions. All the while, we [contribute] to generate real intrinsic value in our new and existing businesses and create shareholder value.

Turning to our 2014 performance. I remind you, this is the fourth-quarter and full-year summary for FY14. Our fiscal year ended in September 30 of 2014. As I've said in the past, quarterly comparisons can be significantly impacted by differences in OEM, aftermarket mix, large orders, transient inventory fluctuations, and modest seasonality and other factors.

After a bumpy 2013, the commercial aftermarket recovered nicely in 2014. The total Company GAAP revenues were up 19% versus the prior Q4, and 23% on a full-year basis. Organic revenues were up 10% on a quarter versus quarter basis, and 8% on a full year gross basis.

Reviewing the revenues by market category. Again on a pro forma basis versus the prior Q4 and prior full-year -- this is slide 5 by the way. That is assuming we owned the same mix of businesses in both periods. In the commercial market, which makes up about 70% of our revenue, total commercial OEM revenues were up 7% versus the prior Q4, and 8% on a fiscal year basis.

This is primarily driven by commercial transport OEM revenues, which were up 12% on a full-year basis. The commercial transport growth primarily reflects increasing production rates. Biz-jet, helicopter, and GA revenues were in total about flat year over year.

After a softer 2013, total commercial aftermarket revenues recovered well in FY14. On a Q4 versus prior Q4 basis, revenues were up 18%, and up 12% on a full-year basis.

For both the fourth quarter and the full year, commercial transport aftermarket revenues were up even higher percentages. However, this was offset by biz-jet, helicopter, and GE aftermarket revenues -- I'm sorry. Biz-jet, helicopter, and GA aftermarket revenues, which were up only very slightly. Sequentially, revenues were up modestly.

The defense market, which makes up about 30% of our revenue. Defense revenues were about as anticipated. Revenues were up 3% versus the prior year fourth quarter, and roughly flat on a fiscal year versus fiscal year basis. Excluding Airborne, defense revenues were up 6% for the full fiscal year. Defense revenues were spotty by unit, with no clear trend, though more were up than down.

Fourth-quarter defense bookings were down significantly versus the prior Q4. Year-over-year bookings were about flat. We saw weak Q4 military bookings in most of our operating units.

Though the world doesn't seem safe given -- doesn't seem too safe, given the uncertain political session and the lumpy bookings, we remain cautious about trends in the military.

In total, for FY14, our revenues for commercial aftermarket ended up a little better than we expected, while the commercial, OEM, and military revenues were about the same as we expected at the start of the year.

Moving on now to profitability. And on a reported basis, I am going to talk primarily about our operating performance or EBITDA-as-defined. The as-defined adjustments in Q4 were non-cash compensation expenses and some acquisition related costs.

Our EBITDA-as-defined of about $291 million for Q4 was up 17% versus the prior Q4. On a full-year basis, our EBITDA-as-defined was $1.07 billion, or up 19% from the prior year.

EBITDA margin was about -- as defined, was about 45% of revenue for both Q4 and the full year. The full-year margin without dilution from the impact of the five acquisitions purchased in 2013 and 2014 was approximately 48%, or up 1% versus FY13.

With respect to acquisitions, we continue actively looking at opportunities. The pipeline of possibilities is active and closings have been slow. We have seen a fair amount of activity recently, but the closings are always difficult to predict. We remain disciplined and focused on value creation that meets our tight criteria.

Moving now on to 2015 guidance, and I believe this is slide 6. Once again, the military situation is unclear. I know that sounds like a broken record, but that's how we see it.

The commercial aftermarket appears to be recovering nicely as we head into 2015. This is our best current estimate. As you know, we will update this is the year proceeds.

But, based on the above, and assuming no additional acquisitions in FY15, guidance is as follows. The midpoint of the 2015 revenue guidance is $2.53 billion, or up about 7% on a GAAP basis year over year. The FY15 Q1 is currently anticipated to be lower than the other quarters, roughly in similar percentage relationship as FY14.

The midpoint of the 2015 EBITDA-as-defined guidance is $1.17 billion or about 46.5% of revenues. That is up 9% in total year over year. We anticipate EBITDA margins will move up throughout the year, as we've seen in previous years. The base business, that is excluding the same five most recent acquisitions I talked about just a minute ago, is anticipated to achieve an EBITDA margin of a little over 49%, or up a bit over one point.

The midpoint of the EPS as adjusted is anticipated to be $8.16 a share, or up 5% versus the prior year. This is negatively impacted primarily by higher interest rates and to a lesser degree the higher tax rates. Greg will go through some of the details with you on that.

On a pro forma or same-store basis, this guidance is based on the following growth rate assumptions. Commercial aftermarket revenue growth in the high single digits based on worldwide RPM growth in the 4% to 5% range. We are a little cautious here due to both tough comps as the year proceeds, and also some pretty heavy buying in the second half of FY14.

The defense and military revenue is estimated again to be about flat versus 2014. We'll continue to evaluate this as the political situation unfolds.

Given the world events, there could clearly be some variation here, but recent bookings have been probably weak and the military and political situation is unclear. In summary, this all leaves us pretty uncertain.

The commercial OEM revenue growth is anticipated to be in the mid-single-digit percent range, primarily due to 2015 and 2016 commercial transport production rates.

Without any additional acquisitions or capital structure activity, we expect to have almost $1.3 billion in cash, $400 million in undrawn revolver at year end 2015. Again, assuming no acquisitions or other capital structure activity, our net leverage is anticipated to be about 5.2 times EBITDA at the end of 2015. We also had additional capacity under our credit agreement.

In summary, 2014 was a good year. I'm confident that with our consistent value focused strategy and strong mix of business, we can continue to create long-term intrinsic value for our investors.

And now, let me hand this over to Ray, who will discuss some operating high points of FY14, and Ray will also sign off. To quote a famous politician, after this call, you won't have Ray Laubenthal to kick around anymore.

Thanks Nick.

As Nick mentioned, in total we had a good fourth quarter and the good finish to another very busy year. The consistent application of our value drivers and the successful integration of our recent acquisitions continue to add solid value to TransDigm. Let me explain in a little more detail our FY14 and fourth-quarter operational value creation.

Although the commercial transport market is on the upswing, we've continued to tightly manage our cost structure and we were able to continue to reduce our pro forma total headcount. Our continuing productivity efforts include consolidating certain acquired manufacturing operations; strategically sourcing material from efficient domestic and offshore sources; moving various manufacturing operations to Mexico, Malaysia, Sri Lanka, and China facilities; and investing in our existing manufacturing facilities, keeping them up to date and productive.

2014 was also another record year for new business orders. We continue to provide innovative new business solutions to our broad customer base. We have successfully expanded our platform content with significant new business in both the commercial and military markets.

I would like to briefly highlight one of the significant new business programs we were awarded during the second half of 2014. In the commercial transport market, we have continued to provide engineered solutions and expand our content on the new platforms.

On prior calls, I spoke in detail about our new business awards on the [H350] program. Those designed programs have continued to progress well. We are now bidding on and developing engineer products for the new engine options on the Airbus and Boeing [fleets].

On the H320 Neo, our [Hartwell] unit's providing the engine (inaudible) and engine [decel hold-open] rods. Our HARCO group is providing the engine fan case temperature sensors. Our Champion Aerospace group is providing the ignition system on the Pratt & Whitney pure-power PW 1100-G Gear turbo fan engine option, and on the [737 Max], Hartwell is also developing the engine [decel] latches and thrust reverser latches. They are also developing the pressure relief doors for the engine [panel].

And on the 777-X, its in the early stages and we're quoting many of the similar engine-related accessories, power products, and engine decel and cowling latches and hinge applications as listed above. We're being told by Boeing and Airbus -- We are being told Boeing and Airbus are targeting to primarily just upgrade the existing Boeing 737, Boeing 777, and the A320 platform with more fuel-efficient engine.

We expect the vast majority of the airframe configurations remain the same as the [legacy] aircraft. That being said, we expect our numerous existing engineered product applications on those platforms to remain in place, and our ship-site content to remain stable or increase modestly.

Also during the second half of FY14, we continued to supply the commercial airlines with interior upgrades. Our Schneller unit recently was awarded Boeing 777 cabin interior laminate and seat laminate refurbishments at KLM, Air France, Singapore Airlines, and China Eastern.

Our AmSafe unit continues to get new applications of their airbag seatbelt restraint system, primarily used in the first class and business sections when the new seat configurations are pivoted or angled. And our Bruce Lighting group has been awarded energy efficient bi-color LED lighting at Delta on their Boeing 737 and 757 fleet. They are also providing new LED cabin lighting at Swiss Air and Canada Jet airlines -- CanJet Airlines, excuse me.

In the military market segment, our Arkwin unit was awarded the hydraulic system reservoir for the upper and lower rotors on the new joint multi-role helicopter that Boeing and Sikorsky are designing. On the predator drones, our Aero Fluid Products was awarded the extended range fuel valves.

On the C-130 J our Avionic Instruments unit is supplying an upgraded regulated transformer rectifier unit, and also a frequency converter system to supply hospital grade 230 Volt electrical power for essential Airborne medical equipment. And our recently acquired Airborne North America unit was awarded the reentry vehicle parachute system on the Boeing commercial crew transport capsule. They also continue to receive large orders for their new T-11 and MC-6 military parachutes.

The normal progression of their product sales are first to the US government, which occurred in prior years, and then they rollout their products to our allies. So far this year, Israel, India, and Jordan all placed order for the T-11 and MC-6 parachutes. All these orders will ship out in FY15.

Airborne's newest ram air parachute, the RA-1, had orders in 2014 totalling $24 million from the US government. The bulk of these new orders will also ship in 2015, and we expect the RA-1's will also eventually be sold to our allies. These new engineered solutions from our operating units and many others not discussed continue to expand our profitable product offering and add to our future growth.

In FY14, we acquired two proprietary aerospace businesses; Airborne Systems and Elektro-Metall Export. We quickly went to work transitioning these business into TransDigm's value creation mode.

To provide better product focus, we split the Airborne systems business into two separating operating units. One in North America, focusing primarily on the military personnel parachutes and cargo system parachutes; and one in the UK, focusing primarily on parachute aerial delivery systems and electric warfare.

As we have done with each prior acquisition, we applied our proven value creation processes. One, we restructured the business into product line focus groups, and implemented our value creation metrics, and we focused the engineering and new business efforts on winnable and profitable new business, and we tightened up the cost structure.

Lastly, I'd like to say my 21 years working with the team at TransDigm has been exceptional. I believe our TransDigm business culture is truly unique. We work hard, creating a lot of value, and have a hell of a lot of fun working with each other.

I intend to continue as a significant investor as I move on to the TransDigm board. I will enjoyed watching the continued growth and success of this great company.

Now let me sign off and hand it over to Greg, who will review our 2014 financial results in more detail.

Thanks, Ray.

Nick already summarized the key events that occurred in FY14, so I will now review the consolidated financial results, starting on slide 7, for our fourth quarter, and then give a brief fiscal-year summary.

Q4 sales were $642 million, and 19% greater than the prior year. Our organic sales were 10% higher than last year, driven primarily by strong growth in commercial aftermarket and, to a lesser extent, commercial OEM and defense sales.

Reported gross profit was $349 million, or 54.3% of sales. The reported gross profit margin was approximately 1.9 margin points higher than the prior year margin of 52.4%.

Although margins in the current quarter were negatively impacted by approximately 1.5 margin points by acquisition mix from Airborne and EME, this was more than offset by decreased nonoperating acquisition related costs versus the prior year. These costs consist primarily of inventory step up and start up expenses.

Excluding all acquisition activities, our gross profit margin in the remaining business versus the prior year quarter improved approximately 2 margin points. The base businesses continue to expand margins as a result of the strength of our proprietary products and continually improving our cost structure.

Selling and administrative expenses were 11.9% of sales for the current year -- for the current quarter, compared to 11.3% for the prior year. The current quarter was running a little higher than the prior period, primarily due to the acquisition mix, but was about flat for the full year after excluding stock comp expense and acquisition related costs.

Interest expense was $97 million, an increase of approximately $16 million or 20% versus the prior year quarter. This is a result of a 32% increase in the weighted average total debt to $7.5 billion in the current quarter versus $5.7 billion in the prior year.

The higher average debt year over year was due to the third-quarter dividend financing discussed earlier. The weighted average cash interest rate on the total debt at the end of the current quarter is approximately 4.9%, compared to 5.4% at September 30, 2013.

Our effective tax rate for the year was 31.6% for FY14, compared to 32.5% for FY13. The lower current year tax rate benefited from some favorable foreign tax credits.

Our net income for the quarter increased $30 million or 36% to $114 million, which is 18% of sales. This compares to our net income of $84 million in the prior year. The increase in net income primarily reflects the growth in net sales and lower nonoperating acquisition related costs, partially offset by the higher interest expense.

GAAP earnings per share was $1.91 per share in the current quarter, compared to a loss of $0.20 per share a year ago, or an increase of $2.11. Three quarters of this increase is attributable to the dividend equivalent payments made in the prior year. The current quarter included dividend equivalent payments of $0.11 per share, compared to $1.67 paid in the prior year.

Our adjusted earnings per share was $2.21 per share, an increase of 26%, compared to $1.75 per share last year. The increase in adjusted earnings per share is higher than the increase in EBITDA-as-defined of 17%, primarily due to the benefit of the lower effective tax rate in the current quarter. Again, please reference table 3 in this morning's press release, which compares and reconciles GAAP to adjusted earnings per share.

Since this is our fiscal year end, let me take a minute to quickly summarize some significant items. Net sales for the year increased $449 million, or by 23%, to end our year at $2.4 billion in revenues. Acquisitions contributed approximately 65% of the increase in sales, and our organic sales were strong at 8% above the prior year.

Reported gross profit increased 21% to $1.27 billion, and was 53.4% of sales, compared to 54.5% in the prior year. Excluding all acquisition activity and stock compensation expense, our full-year margin versus the prior year improves approximately 1 margin point.

Selling and administrative expenses of 11.7% of sales for FY14 is lower than the 13.2% of sales in FY13, due primarily to lower non-cash stock compensation expense. Additionally, the current year includes lower acquisition related costs. Excluding non-cash compensation expense and acquisition related costs, selling, general, and administrative expense was about 10.5% of sales for both periods.

Net interest expense increased $77 million due to the additional debt incurred to fund the quarter third dividend of $25 dividend -- I'm sorry. Of the 2014 $25 dividend discussed earlier, and the July 2013 financing associated with last year's $22 special dividend. Despite increasing total debt, we decreased our weighted average cash interest rate for FY14 to 5.3%, compared to 5.6% in the prior year.

Adjusted EPS was $7.76 per share this year, up almost 13% from $6.90 per share a year ago. The increase in EBITDA-as-defined of 19% was partially offset by higher interest expense and share count.

Switching gears to cash and liquidity, the Company generated $540 million of cash from operating activities, and we closed the year with $820 million of cash on the balance sheet. The Company's gross debt leverage ratio at September 2014, was approximately 6.9 times pro forma EBITDA, and 6.2 times on a net basis. All things considered, we believe FY14 was another great year for TransDigm and our shareholders.

As we look forward to FY15, we estimate that the midpoint of our GAAP earnings per share to be $7.64, and as Nick previously mentioned, we estimate the midpoint of our adjusted earnings per share to be $8.16. As we disclose on slide 9, there are $0.52 in adjustments to bridge GAAP EPS to adjusted EPS.

In addition, here are a few other items for FY15. Depreciation and amortization -- that's including backlog amortization of approximately $2 million -- is expected to total $83 million in 2015, compared to $96 million in 2014, which included backlog amortization of approximately $17 million.

Interest expense is expected to increase 15% to approximately $400 million in FY15. We used a weighted average cash interest rate of approximately 5.1%. Interest expense includes an additional $20 million related to interest rate swaps.

Our effective tax rate for FY15 is expected to be around 33%. Our cash taxes will be approximately $180 million.

We expect our weighted average shares outstanding will decrease slightly to be approximately 56.6 million shares, reflecting the shares we repurchased in FY14. As a result of these items, our adjusted earnings per share of $8.16 is approximately 5% greater than FY14.

Finally, with regards to our liquidity and leverage, we expect to generate $475 million of cash, which includes higher capital expenditures of approximately $60 million or 2.4% of sales. This is higher than our historical run rate. The increase supports two significant capacity related projects at Schneller and AmSafe.

Again, assuming no other acquisition activity, we expect our gross debt leverage ratio to be approximately 6.3 times EBITDA-as-defined, and our net leverage ratio will be nearly 5.2 times our EBITDA-as-defined at September 30, 2015, or deleveraging approximately 1 full turn.

Now, 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've asked that you limit your questions to two per caller. If you have further questions, please reinsert yourself into the queue, and we will answer those as time permits.

Operator, we are now ready to open the lines.

(Operator Instructions)

Robert Spingarn, Credit Suisse.

Good morning.

Good morning, Robert.

I have a question -- well, first, best wishes to Ray. I will start with that. I wanted to ask I have a question for Nick and for Greg.

Greg, I want to start with you. When I think about the gross margin improving in the quarter and the EBITDA-as-defined declining, it sounds like the difference there is the SG&A, I guess, associated with the acquisitions to some extent, because you don't have acquisition costs in the quarter.

And is that the basis for the improvement, the 100 basis point improvement in margins next year, the absence of that SG&A? Or is it pricing? Or both? That's the question for Greg.

I know our SG&A consolidated is lower as a percent of sale in 2015. I think it's 11.9%, and it's going to drop to 11.3% or 11.4% next year, so we'll get improvement in SG& A. It was up a little bit because of acquisition mix.

The other part of the question Rob?

I wanted to understand if I got that right, that the SG&A is the reason you got one margin rising and the other one falling, and then also is there any pricing component to the improvement in margins next year?

Rob, I'm not following. I don't know if you go quarter-to-quarter or year-to-year here --

That's the point. It's odd to see gross margins improve and EBITDA-as-defined margins decline in Q4 to begin with. Especially in a quarter where you're citing lower acquisition related costs, which would go into the -- I assume into the SG&A.

Rob, this is a lot of reconciling. Maybe we can take this after the call or off-line--

Okay. Let me just ask the back half of that one again. The 100 basis points next year. Is that the absence of this SG&A, or is it pricing, or is it both?

It's both.

Okay.

Can I just stop a minute? 100 basis points -- I threw a couple margins around, so let's be sure were talking about the same one.

EBITDA-as-defined goes up about 100 bps into the low 46%'s.

Got it. The other one I threw around, Rob, was, if you pull out the five acquisitions most recent, I gave you the margins for the base businesses that we had going into 2013, how they did year-to-year-to-year. I was trying to give you a sense of what the base was doing.

Right. No, and that's fair Nick. What I'm trying to figure out is what pricing is doing?

The pricing is the normal kind of pricing. There is no change in our pricing patterns.

Okay. Then that being the case, the 18% was mostly volume in the quarter, on the aftermarket?

Well the 18% is -- as you know Rob, we don't disclose the pricing in our different segments. The 18% is a mix -- it's the normal mix of unit and price.

Okay but it sounds like --

You're trying to back me into a price. It isn't going to work.

Fair enough, Nick.

High-level question. This next one was intended to be the question for you. Since this spring, we've seen public aerospace valuations all over the map, largely on cycle noise and the like.

You guys have held up very well, but some of the others haven't. Are depressed valuations in the sector making certain assets more attractive now?

I can't say that's true. I think the answer is no to that, Rob. At least none that I specifically know of.

Okay. Thanks.

[Gautam Khanna], Cowen and Company

Good morning and congratulations, Ray.

Thanks, good morning.

I just wanted to know if you could give us some more flavor on the aftermarket? That growth rate is high and higher even than last quarter, which also was high. Can you talk a little bit about any sort of trends within that aggregate number? Are you seeing any regions that are particularly strong? Any types of products, either discretionary or non-discretionary?

I can't say there's significant difference between the discretionary and the nondiscretionary. It's a rising tide right now. If you look at our units, almost -- not all, but almost all of our units are up. As I said I think in the press release a little bit when I talked about the guidance for next year, I'm a little concerned that we're running out ahead of ourselves.

15% and 18% is not a sustainable number. I don't think. And, if you peel back, as I mentioned, and you look at the commercial transport, which is where the bulk of the numbers are, that's rising even faster. Because as I said the biz-jet, helicopter, and GA stuff is about flat or slightly up.

So, I think it could be a little ahead of itself. It's pretty broad.

Broad regionally as well?

Yes.

Okay. And maybe if you could just give us some flavor on -- you authorized a share buyback, but you also talked a little bit I think a little bit more positively about some of the M&A prospects, and maybe you could just give us some flavor on how that pipeline has changed if it has relative to three months and six months ago?

Are you seeing more stuff, and maybe more internationally? However you want to answer it.

Let me first answer on the stock buyback. All we did there was we had $200 million of authorization, of which we've used about $160 million of it, So all we did there was we just refilled the availability. I wouldn't draw anything from that.

We had [2 million] before -- I think I now have $250 million, that's just reflective of the Company's a little bigger, so we approved a little more. We have no specific plan with that other than we may well opportunistically buy things from time to time. So that answers that.

The M&A activity, yes. We see a little more activity now. We see clearly more activity in Europe, but we see some in the US, too. I have no ability to predict when or if any of them will close. But, we're more active now than we were, say, three, four months ago.

Could you comment maybe on the size of the --

It's not a heck of a lot different. We've seen some, not real big, but we've seen some a little bit on the larger size. I'm not talking hundreds of millions of EBITDA, but most are more in the normal range.

Okay. Thank you.

Robert Stallard, Royal Bank of Canada

Thanks so much. Good morning.

Good morning.

Nick, how about we kick off talking about the leverage situation. Obviously ending the year above your normal historical level at 6.2 times EBITDA-as-defined. Are you comfortable up at this level? Could you potentially take it higher, or do you see it moving down towards more normal historical levels going forward from here?

Rob, I think that's very dependent on the capital market situation, what our outlook is for acquisitions. I don't think over the long haul our kind of range is changing, but as you know, the credit markets have been uniquely accommodating for the last 12 to 24 months.

So, we'll take a look at that over the next three, four, five, six months, and see what the future looks like and see what it looks like. I wouldn't want to get committed into a band or a number one way or the other just because the market has been so accommodating.

Some of these financial discussions opened to them moving the leverage even higher. Again, dependent on the market?

Say that again?

So you said you are constantly looking at the market, but is it possible that you have discussions that allow you to raise your leverage above the current level as you talk to potential lenders?

Oh, it's both. We could lever up. The market would allow for us to lever up higher than the current level. The market would allow us.

Our credit agreement would allow us to go up 7 1/4. That's not to say that we want to do it, but that's what the situation is.

Okay. And then secondly on the aftermarket, you mentioned that things might've got a little bit ahead of themselves in 4Q. Do you detect that some of your airline customers are starting to restock or complete some deferred maintenance that they put off?

A combination of those. A combination of those. We were 15% and 18%. So what's that average, 16.5%? And if you throw out the business jet and helicopter business, it was up higher than that. The underlying consumption is not that high.

There's a mix in which I can't exactly draw a bead on it, but there's some mix of some deferred maintenance and some stocking in there. You know there was clearly a destocking and a [defarrow] in 2013, so we likely are just catching a little of that back up.

That makes sense. Thanks a lot, Nick.

Joe Nadol, JPMorgan.

Hi, good morning. It's Seth on the line for Joe this morning. Wanted to ask a question about defense.

You've guided to flat, which I think you've guided around there in the past, and you guys typically take a pretty conservative approach, I think, based on what's gone on in the market there. But, it sounds like there's some tough trends with regard to bookings in the fourth quarter.

What sort of gives you confidence in getting to flat? Are there sort of some good things that are happening in defense this year that should offset maybe some of what you're seeing now on the bookings front?

Well, it's only one down quarter, and we've seen down quarters before in the bookings, so we don't want to overreact to it. But I will clearly say, it's uncertain and unclear. If you look at what's going on in the world, you would expect you may see some pick up in defense ordering activity for repairs and spares and replenishment and things like that.

So, we were a little surprised that we haven't seen them. And that makes us cautious. But, I would tell you, if you told me it was 5% one way or the other, I would say I can't call it that close.

Okay. Thanks and just a quick follow-up on the biz jets, and helicopter, and GA. I guess particularly the biz jet flat on the OE, and it sounded like modest growth in the aftermarket.

Very modest. Very modest.

What's baked into your expectations for 2015? In both the OE and the aftermarket side.

A continuation of the normal. Not much recovery.

You are not seeing much biz jet recovery at all?

We are not. Maybe a little bit, but not a lot. Someday we will see a pickup in that, but it's been out in front of us every year for the last three or four years, so we are little wary of it.

Understood. Thanks very much.

Ken Herbert, Canaccord Genuity

Hi. Good morning.

Good morning, Ken.

I wanted to first ask just, again on the aftermarket, what percentage of your business is for engine versus other parts of the plane? And when I look at the segments that we really don't ever talk about, but when you look at the power side, is that largely all engine related, or is that other parts of the plane as well?

It's all kinds of power; it's not just engine. I don't know the exact number.

Frequently, they say a engine makes up -- and the claptrap that goes with it makes up 25% to 30% of the plane. I suspect we're somewhere in that kind of range.

Okay. Would it be fair to say you've maybe seen those products from a volume standpoint doing a little better than other products in the aftermarket?

No, I can't say that. Could be, but that's not clear to me. I don't know that that is the case.

Okay. That's helpful.

If I could, the slight step up in investment to support some of the new programs in FY15. Does that roll back down again in 2016 or are you maybe looking at a couple years here of a little more investment, considering some of the wins or incremental opportunities you had specifically on A350 and some of the other programs that Ray outlined?

I don't know that I would change the go forward forecast. Frankly, I don't know of anything discontinuous in 2016, but honestly we haven't looked very closely at it.

It won't materially change the cash flow one way or the other. I don't think we're setting a new level, but I just can't tell what 2016 is yet.

Okay. Great. That's helpful and great quarter. Thank you.

Kevin Ciabattoni, KeyBanc.

Good morning, guys, and congratulations, Ray.

Thanks. Good morning.

Just aftermarket again. Nick, any changes you see over the next year in maybe airline purchasing behavior? Especially given if oil prices stay down here at current levels? And, maybe any thoughts on where provisioning heads next year, especially with the A350 certification yesterday?

On the oil, you know the traditional rule of thumb is if the oil prices drop down, they keep the old planes running longer, and that would tend to give you a little more aftermarket.

Whether that will happen, I have no idea how to speculate on that, but that's the traditional wisdom. I don't have a good view for the A350 provisioning, and we clearly don't have anything baked into our forecast.

Okay. Thanks. That's helpful. And then, you talked a little bit about M&A. I guess just looking at the other side of that, anything you are looking at -- is there any potential for portfolio reshaping from your side, looking at non-core assets within the portfolio right now?

You mean for selling things?

Yes.

I don't think so. We don't have any immediate plans. That's not to say we couldn't sell something small that didn't fit, but we have no immediate plans to sell anything.

Okay. Thanks.

David Strauss, UBS

Good morning. Congratulations, Ray.

Good morning.

Nick, your adjusted EBITDA guidance. I knew you guys target 10% to 12%. Today, you've put 8% to 10%. Is this just conservatism? Is there anything out there that you see stopping you from getting to kind of the normal 10% to 12% adjusted EBITDA growth?

Other than the guidance we gave you? I mean, I think the guidance we gave is the guidance we gave.

Could there be some upside? Of course there could. Could there be some downside? There could, but I have to stick, David, with the guidance we gave.

Okay. And just along those same lines, I think you said in your prepared remarks that the base business, kind of excluding acquisitions, the adjusted EBITDA margins are going to be up 100 bps, which is in line roughly with the overall guidance for adjusted EBITDA. What are you therefore implying for the recent acquisitions? Are the adjusted EBITDA margins there flattish?

They are moved up some, too. Frankly, I haven't solved back into that math. Have you, Liza? I haven't solved back into it.

I don't have it either.

I know they are up some.

Okay. Greg, on the cash flow side, are there any major moving pieces on the working capital side that we should be aware of next year?

Not from operating working capital. I think you will notice, though, our cash taxes will be higher next year than this year, and a little color on the CapEx. Our normal DSO's and inventory turns should be as normal.

Okay, you said cash taxes next year $180 million? Where did they come in this year?

We're thinking under $100 million. This year as a percent of the provision, it was, like, 70% and next year is 80%. So I thought I was working those out.

Okay. Thanks guys.

Myles Walton, Deutsche Bank

Thanks, good morning, guys.

First one was on the core margin expansion into next year, the 100 basis points ex the five acquisitions. Is it similar ex margin expansion between power control and the airframes segments, or is the implied EBITDA of incremental margins, which look really good, more indicative that you're going to have faster growth in power control and faster expansion there?

I wouldn't draw any particular distinction. They are both picking up. I don't think there's a particular distinction to be drawn their, Myles.

Okay. And the cautionary tone on 1Q in defense, how much of that is the really tough comp you have in defense in 1Q versus what you see as a deterioration in the underlying demand?

I don't know how to parse that out. Clearly, the fact we have a bad comp coming into the year is not a plus. I don't know how to parse those two out, Myles.

Okay, but sequentially the bookings are deteriorating this quarter?

Yes. In defense. Yes, defense bookings were surprisingly down this quarter and broadly down.

Okay.

Not just a big giant order before and now it went away. It's broadly down from Q3. We've seen that before and have it just remedy itself 90 days later.

Yep. Yep. That makes sense.

The last one, though, is -- so you are starting the year at a high single digit guide for aftermarket, and in prior years where you've had a tough comp, you've usually started in mid-single-digit range, but it sounds like the same time, like you have you are running superheated in the second half. You must have pretty good site line into the first-half continuing to be superheated?

I don't want to comment on the quarterly -- what I would say is we are a little concerned that we're coming out of the year heated up.

Okay. Good enough. Thanks guys.

And we have no more questions. I would like to hand back for closing remarks. Thank you.

Thank you all for calling in today, and I'd just like to note that please look for our 10-K that we expect to file sometime tomorrow. Thanks.

Thank you for your participation in today's conference. This concludes the presentation.

You may now disconnect. Have a great day.