TransDigm Group Inc (TDG) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the TransDigm Group Incorporated first-quarter 2017 earnings conference.

(Operator Instructions)

As a reminder, this conference is being recorded. Now I would like to welcome and turn the call to Ms. Liza Sabol, Head of Investor Relations.

Thank you, Carmen. I would like to thank all of you that called in today and welcome you to TransDigm's [FY17] (corrected by company after the call) 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, Kevin Stein; and Chief Financial Officer, Terry Paradie. A replay of today's broadcast will be available for the next two weeks. Details are contained in this morning's release and on our website at transdigm.com.

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 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, EBITDA as defined, adjusted net income and adjusted earnings per share to those measures. With that, now let me please turn the call over to Nick.

Good morning and thanks to everyone for calling in today. It looks like we got a pretty good crowd here calling in now. Today, as always, I will start off with comments about our consistent strategy. I'd then like to give some color on both our military business and a few other topics relating to Q1. I'll then summarize the Q1 performance and update on the guidance. Kevin will then go through some of the operating specifics for Q1 and Terry will run through the financials.

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. About 90% of our sales are generated by proprietary products and about three-quarters of our sales come from products for which we believe we are the sole source provider. Over half our revenue and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket sales have historically produced higher margins and provided relative stability through the cycles.

Our long-standing goal is to give our shareholders over time private-equity-like returns with a liquidity of a public market. To do this we have to stay focused on both the details of value creation as well as careful management of our balance sheet. We follow a consistent long-term policy.

First, we own and operate proprietary aerospace businesses with significant aftermarket content. We have a simple well-proven, value-based operating strategy based around our three value driver concepts. Third, we maintain a decentralized organization structure and a unique compensation system that's closely aligned with our shareholders. Fourth, we acquire proprietary aerospace businesses with significant aftermarket content where we see a clear path to private-equity-like returns. Lastly, we view our capital structure and capital allocation as a key part of our efforts to create shareholder value.

As you know, we regularly look closely at our choices for capital allocation. To remind you, we basically have four and our priorities typically are as follows. Our first choice is always to invest in our existing business and our second is to make accretive acquisitions consistent with our strategy. These are almost always our first two choices. Our third choice is to give the extra money back to the shareholders, either through special dividends or stock buybacks and our fourth is to pay off debt. Given the low cost of debt, especially after tax, this is likely our last choice in current capital market conditions. Depending on the specific business and capital market conditions, we will allocate our capital and structure our balance sheet in a manner we think has the best chance to maximize returns to shareholders.

Now to update you on a few items of significance from the first quarter, because we've gotten a number of questions recently I'd like to give you a little color on our military business. In FY16, military revenues made up 30% of our reported sales. A relatively small portion of this was sold directly to the US government.

I'll break the 30% down a little based on our best estimates of 2016 reported revenues. About 12% of our total revenues were sold to domestic defense OEMs. This is a mix of sales primarily for both new airplane builds and aftermarket sales. These are companies like Lockheed, Boeing, Honeywell, Northrop Grumman, Raytheon, UPC, et cetera.

About 6% of our total sales were sold to foreign defense OEMs. This is also a mix of sales for both new airplane builds and some aftermarket. These are companies like Airbus Defense, [Dessault], Saab, Leonardo, [Fin Mechanica], et cetera. About 5% of our total revenues were sold to friendly foreign governments, either directly or through brokered distributors. These are generally users of US equipment. Some examples include UK, Saudi Arabia, Turkey, Israel, Japan, South Korea and Denmark, just to name a few. About 5% of our total revenue, or about $150 million, is sold directly to the US government through various agencies. The largest direct supplier by a significant amount is the Airborne military parachute business that we acquired in late 2013.

About another 2% of our total revenue, or somewhere around $60 million, is sold to the US government through various brokers or distributors. This is spread over many of our operating businesses and a number of our brokers -- and a number of brokers and distributors. A substantial part of this revenue is sold to small disadvantaged and/or women-owned brokers or distributors in response to government buys directed to these small businesses. We do not own in whole or part any broker distributor; our only relationship is as a supplier.

We've also had a number of questions about the impact of potential income tax law changes. We of course have no idea what, if any, tax changes may ultimately come to fruition. As I'm sure you all know, the rumors change regularly. However, based on estimates of both the so-called House and Trump plan, it appears to us that for our 2016 reported income tax, our income tax would be no higher and would likely be a bit lower under either plan. Terry will give you a little more detail on this. In any event, at least as we understand the various tax proposals today, I think it's very unlikely that any of these changes would materially impact either our business or our capital allocation strategies.

This quarter we were pretty active in the capital markets. In Q1 we raised about $1.2 billion of debt to both partially fund the special dividend and also to refinance some of our existing debt. We paid out a $1.4 billion special dividend for $24 per share to our shareholders.

We also plan to take advantage of a continuing strong credit market in early Q2 to refinance about $1.2 billion of our term loan's. Our debt was trading a little over par. The purpose was to slightly reduce interest rates and also to extend the maturity. We did not intend to raise any new money at that time. When the stock dropped 10% on Friday, January 20, the debt traded down to par or slightly below. As a result, the expense to do the refi did not make any sense with no interest rate savings, so we put the deal on hold and we will review the status regularly.

Access to the market was not and has never been an issue. We simply just did not see any savings and it was not worth spending the expense. As we have explained in the past, about 75% of our debt is either fixed or capped. The net result is to significantly reduce our exposure to interest rate movements through 2020 at least. Terry, again, will give you a little more detail on this.

We bought about $150 million of our stock back after the drop in price on January 20 at an average price of about $225 a share. Since we were in a blackout period, we were limited to this $150 million by the 10b5 plan we had in place. On December 31, 2016, that's the end of the quarter, our liquidity was strong. We had slightly under $1 billion in cash, about $600 million of open revolver and additional room under our credit agreement. We believe we have adequate capacity to make over $1.5 billion of acquisitions at this time. This grows steadily through the year. This does not imply anything about likely levels of acquisitions.

We also announced two new key management changes in the first quarter. Kevin Stein was named President and Chief Operating Officer. Kevin is now responsible for most of our operating businesses. Bob Henderson was named Vice-Chairman. Bob continues to be responsible for select businesses but is also working with Bernie and I on business development and other issues. Our acquisition efforts remain active. The pipeline is, as usual, mostly small and midsize businesses and closings are always difficult to predict.

Now, Kevin's going to review a little detail on Q1 operating performance, but just to give a few comments, first keep in mind as you look at the Q1 versus the prior-year Q1 comps, there are about 3% less shipping days in this year's Q1 versus the last. Though it's hard to exactly quantify the impact, this likely impacts our commercial aftermarket revenue comps more than other sectors. In total, Q1 organic revenue was up 3.5% versus the prior-year Q1, roughly in line with our full-year guidance.

The commercial OEM revenues were a little soft. Commercial transport revenues were down modestly. Business jet revenues were down more significantly. Bookings were up year over year in the commercial transport sector. We're again soft in the jet business market. Commercial aftermarket revenue was up modestly versus the prior-year Q1. However, on a very positive note, commercial aftermarket bookings, or incoming orders, were very strong.

Bookings were also up significantly sequentially and ran well ahead of the Q1 shipments. This is a good sign for the balance of the year. The defense revenues were up about 2.5% versus the prior-year Q1. Bookings were down, but this appears to be timing. Operating margins were strong and up versus the prior year and we continue to execute on our steady value creation process.

Based on the Q1 full-year results, our 2017 guidance, assuming no acquisitions or additional capital market activity in the fiscal year, is adjusted as follows. The midpoint of the FY17 revenue guidance is now $3.55 billion. This is a slight increase of about $5 million versus the previous guidance. The midpoint of the FY17 EBITDA as defined guidance is now about $1.7 billion, an increase of $15 million from our previous guidance. This increase in guidance is due to the slight increase in revenue and a modest upward adjustment in our EBITDA margins.

The midpoint of the EPS as adjusted is now anticipated to be $12.16 per share, up $0.18 from our previous guidance. This increase in guidance is also primarily due to the same reasons as the EBITDA, slight increase in revenue and a modest margin improvement. Terry will go through that in a little more detail.

On a pro forma or same-store basis, the guidance is still based on the following growth rate assumptions. These are unchanged from our original guidance. Commercial aftermarket growth in the mid- to high-single digits. The strong bookings here are very encouraging. Defense and military revenue flat to slightly up versus the prior year as a percent.

Commercial OEM revenue growth in the low- to mid-single-digit percent range. We're still assuming commercial transport unit airframe shipments are up the low-single-digit percent for 2018. We remain cautious about 2018 rates. Business jet shipments and bookings bear watching. We have significant cash and available borrowing. These continue to grow through the year and Terry will expand on that.

In summary, Q1 was a good solid start to the year. Now, Kevin?

Thanks, Nick. I'm going to provide a little more color with respect to Q1 FY17 performance. First off, Q1 generally has about 10% less shipping days in the other three quarters of our fiscal year, but as Nick has stated previously, Q1 of this year, of 2017, had an additional 3% decrease in manufacturing days due to our holiday schedule and any planned shutdowns. As Nick stated earlier, the exact impact of this decrease is difficult to quantify across our operating units.

For Q1 details, total Company GAAP revenues and EBITDA as defined were strong, with revenue up 16%, EBITDA as defined up 21%. Organic revenue was up 3.5% for the quarter versus prior-year quarter and EBITDA as defined was strong at 47.3% of sales. The strength and EBITDA is defined as a percentage of sales was due to a mix shift to a higher aftermarket sales content.

Now let's review our revenues by market category, again on a pro forma basis versus prior year Q1. That is assuming we own the same mix of businesses in both periods like the measure for same-store sales. In the commercial market, which makes up about 70% of our revenue, our total commercial OEM revenues were down about 4% versus prior Q1. Commercial transport OEM revenues, which make up the vast majority of our commercial OEM revenue, were slightly down versus prior year Q1.

Bookings for this segment, and by bookings I mean incoming orders, increased modestly for Q1 versus prior year and outpaced FY17 Q1 sales. Booking fluctuations in the commercial OEM market are most likely timing related and have been recently impacted by the publicized wide-body rate reductions at Airbus and Boeing and any related inventory management in the supply chain. At this point in the year, we remain comfortable with the assumptions that let us to low- to mid-single-digit commercial OEM revenue growth.

Business jet revenues make up about 15% of our commercial revenues. In total, revenues in this market continued their downward trend in Q1 FY17, coming in well below prior-year Q1. Given the poor performance -- given the performance of this market recently, this result was not unexpected. Bookings for Q1 FY17 exceeded same-quarter sales. However, any optimism for this sector is tempered by business jet OEM forecasts.

For the quarter, total commercial OEM bookings were flat versus prior-year Q1 and nicely exceeded shipping levels in the current quarter. As we have said, inventory management by our OEM customers and rate reductions on some platforms have created some headwind in the commercial OEM market, but we believe this is all timing related and will return future quarters as our ship set content has not changed.

Total commercial aftermarket revenue was up approximately 3.5% for this quarter versus prior-year Q1. Commercial transport aftermarket revenues were up 5%, but this was tempered by business jet aftermarket revenues, which were down a bit. On commercial aftermarket bookings, commercial transport aftermarket bookings grew at slightly more than 12% and outpaced current-quarter sales by 12% as well. This was broadly based across most of our operating units.

Business jet aftermarket bookings were up modestly versus prior-year Q1 but flat with current-quarter sales. On the freighter market, the business appears to have stabilized and bookings are trending in the right direction. For our fiscal year to date and notwithstanding any inventory reductions in the supply chain or bookings timing, we remain comfortable with our assumptions for the commercial aftermarket segment of growth in the mid- to high-single digits.

Now let me speak about our defense market, which remains relatively unchanged at about 30% of our total revenue. Defense revenues for FY16 Q1, which include both OEM and aftermarket revenues, were up slightly versus prior-year Q1. The story for Q1 is of strong defense aftermarket revenue growth combined, tempered by defense OEM declines due to program timing. Additional FY17 Q1 defense bookings were weak, coming in well below prior-year Q1 due to the timing of large defense orders in our Airborne Systems North America group.

As you know, this business delivers parachute to the US military and other global customers. These orders are historically very lumpy. If you adjust for this, our defense bookings were modestly up year over year. We remain comfortable with our market assumptions that led us to a flat to slightly up revenue growth forecast for the total defense segment in FY17.

Moving 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 refinancing plus non-cash compensation expense and acquisition-related cost and amortizations. Our EBITDA as defined of about $385 million for Q1 was up 21% versus prior Q1.

The EBITDA as defined margin was 47.3% of revenues for Q1. EBITDA margin excluding the dilution from the impact of acquisitions purchased in 2016 was over 48%, or up approximately 2.5 margin points versus prior period, indicating our base businesses continue to find opportunities to drive improvement within our value drivers and our recent acquisitions are coming up the curve quickly.

Finally, I thought it would provide a little color on one of our key value drivers for TransDigm, that of profitable new business growth. Frequently we update on key awards by business unit, but I thought I would provide a little more color on our engineering investment across TransDigm. As a combined entity, TransDigm invests fully 7% of our operating costs on engineering. For this purpose, we are defining operating costs as total revenue minus EBITDA. We are evaluating as a percent of cost, as we believe comparisons to revenue may be misleading due to differences in profitability.

This investment level has been relatively consistent over time and compares favorably to others in our industry. This engineering investment drives our product development and cost reduction initiatives and has allowed the following ship set growth on same-store comparative basis to ensure that design awards, not acquisitions, are driving this improvement. For the Boeing 787 platform, our ship set content now has grown significantly when compared with previous platforms. For the Boeing 777X, 737 Max and Airbus A320neo platforms, we are up modestly over prior platforms as the OEMs desire to minimize design changes to the platform.

For the Airbus A350, TransDigm has nearly doubled its ship set content when compared to prior platforms. A400 M has more than doubled ship set content when compared to competitive military freighters. Finally, the JSF program has also seen ship set growth over prior platforms.

Let me conclude by stating all in all, Q1 of FY17 was a good start to our year. With that, I would now like to turn it over to our Chief Financial Officer, Terry Paradie.

Thank you, Kevin. I'd like to expand on a few items included in our quarterly financial results and then provide some color regarding the impact from potential tax policy changes. First-quarter net sales were $814 million, up $112 million, or approximately 16% greater than the prior year. The collective impact of the acquisitions of Breeze-Eastern, DDC and Young & Franklin/Tactair contributed $88 million of additional sales for the period.

Our first-quarter gross profit was $444 million, an increase of 19%. Our reported gross profit margin of 54.6% was 1.2 margin points higher than the prior year. Excluding all acquisition-related nonoperating expenses, our gross profit margins versus Q1 last year improves approximately 2.5 margin points due to the strength of our proprietary products, continually improving our cost structure and favorable product mix.

Our selling and administrative expenses were 12.5% of sales for the current quarter compared to 11.7% in the prior year. Excluding acquisition-related expenses and noncash stock compensation, SG&A was about 11.2% of sales compared to 9.9% of sales a year ago. The higher SG& A was primarily related to higher selling and admin costs related to recent acquisitions.

We had an increased in interest expense of approximately $34 million, up 30% versus prior-year quarter. This is a result of an increase of 31% in the weighted average total debt to about $11 billion in the current quarter versus $8.4 billion in the prior year. The higher average debt year over year was due to borrowing an incremental $1.9 billion in June 2016 and $1.2 billion in November to primarily fund acquisitions, pay off our 2021 bonds and pay the special dividend.

Also during the quarter, we entered into a new $500 million interest rate swap fixed at 1.9% and a new $400 million interest rate cap at a cap rate of 2.5%. Including all interest rate swaps and caps, approximately 75% of our debt is fixed or capped.

We are currently assuming an average LIBOR of 1% for the current year which then yields a weighted average interest rate of approximately 5%. If LIBOR were to increase to 4%, our weighted average interest rate would increased 1% to 6%. This would increase our after-tax interest expense by approximately $75 million. We now expect our full-year FY17 net interest expense to be approximately $588 million. Refinancing expense in the quarter was $32 million from the financing completed in November.

Now moving onto taxes, in Q4 of FY16 we adopted a new accounting standard related to the accounting for excess tax benefits for share-based payments, including stock option exercises and dividend equivalent payments. As a result, our GAAP tax rate will now generally approximate our cash tax rate during an entire fiscal year. Our GAAP effective tax rate was14.4% in the current quarter compared to 21.1% in the prior year.

The lower effective rate in the quarter was primarily due to excess benefits from the dividend equivalent payments. We now estimate our full-year GAAP tax rate to be around 28%. Excluding the accounting standard change, our effective tax rate is still estimated to be around 31%. To remind you, this is the rate we use in calculating our full-year adjusted EPS.

Our net income for the quarter decreased $11 million, or 8%, to $119 million, which is 14.6% of sales. This compares to net income of $129 million, or 18.4% of net sales, in the prior year. The decrease in net income primarily reflects the refinancing cost and higher interest expense, partially offset by the increase in net sales and lower effective tax rate.

GAAP EPS was $0.41 per share in the current quarter compared to $2.23 per share last year. The current quarter was significantly impacted by the $96 million of dividend equivalent payments, or $1.70 per share paid in the quarter, primarily due to the $24 per share dividend. This compares to $0.05 per share paid in the prior period.

Just as a reminder, the accounting retreatment requires this payment to be deducted from the actual net income before earnings per share is calculated. Our adjusted EPS was $2.57 per share, an increase of 13% compared to $2.27 per share last year. Please refer to table 3 in this morning's press release, which compares and reconciles GAAP EPS to adjusted EPS.

Switching gears to cash and liquidity, we generated $226 million of cash from operating activities and ended the quarter with $972 million of cash on the balance sheet. As Nick mentioned, in January we spent approximately $150 million to repurchase 667,000 shares. As a result, we now expect our full-year weighted average shares to decrease to approximately 56.1 million shares. Without any additional acquisitions or capital structure activities, we now expect our cash balance at September 30, 2017, to be between $1.4 billion to $1.45 billion. The decrease from the last quarter's estimate is primarily due to the share repurchases, timing of interest and principal payments and the escrow release of the purchase price associated with the Breeze-Eastern dissident shareholders. We also expect to have roughly $600 million in undrawn revolver in additional capacity under our credit agreement.

The Company's net debt leverage ratio at quarter end was 6.2 times our pro forma EBITDA as defined and the gross leverage was 6.8 times the pro forma EBITDA. We estimate our net leverage at of September 30, 2017, will be approximately 5.6 times, assuming no acquisitions or capital market transactions.

With regards to our guidance, we now estimate the midpoint of our GAAP EPS to be $9.29 and as Nick previously mentioned, we estimate the midpoint of our adjusted EPS to be $12.16. Increase in the adjusted EPS of $0.18 is primarily due to the increase in EBITDA as defined. The higher interest expense was offset by the decrease in weighted average shares outstanding. Please see slide 10 for the bridge detailing the $2.87 of adjustments between GAAP to adjusted EPS related to this guidance. In summary, Q1 was a good start to FY17.

Finally, I would like to spend a few minutes to expand on Nick's comments earlier related to the future income tax changes under the House plan. Again, to reiterate, we do not know what the ultimate outcome is going to be, but we wanted to get some perspective based upon our actual FY16 as a reference point.

First, the statutory tax rate is expected to decrease from 35% to 20%. I think most people understand the potential impact of the interest on our debt not being tax deductible. However, we suspect many people do not understand the impact of the border adjustment.

As you may know, based on our disclosure included in our most recent 10-K, we have over $1.1 billion of sales to foreign customers. A good portion of the sales are associated with our US-based businesses. Based on our understanding of the House plan, the foreign sales from our domestic subsidiaries would not be subject to the US income taxes. Based on the size of our foreign sales, you can see that the benefit would be more than offset the loss benefit to our interest deduction In summary, we believe that the House plan as it's currently proposed could be beneficial to the overall US tax position of the Company.

Now I will hand it back to Liza to kick off the Q&A.

Thanks, Terry. First I would like to ask everyone to please limit your questions to two and then reinsert yourself into the queue so that everyone will have the chance and opportunity to ask their questions. Operator, we are now ready to open the lines.

(Operator Instructions)

Carter Copeland, Barclays Capital

Good morning, all.

Good morning.

Nick, just wondered, we've gone now through several quarters on the weaker business jet helicopter segment there. I just wondered if you could give us some color. Are you seeing any destock there associated with the kind of next leg down in rates? When do you think if we don't see another reduction in rates 2018 versus 2017 that, that portion of the business reaches a bottom, sequentially speaking?

The truth of the matter is, Carter, I don't know. The good news is it's not a very big part of our business. I look at everything in the press and I look at everybody, I look at the earning releases and the statements by the biz jet manufacturers. It's hard to get a lot of confidence in that.

We think, at least last year, it was down fairly substantially and it's starting off this year down some. There's obviously some inventory draw going on there. But I'm reticent to forecast when that ends. I have to admit we have been singularly unsuccessful in calling a turn for the last three or four years.

Were you down sequentially Q1 versus Q4?

I don't remember the answer to that. We have the numbers here. Yes, it is.

Okay.

Frequently, you will be down -- you got the day issue between four and one, so you will always be down some.

Absolutely. On the days, you said 3%. That is two workdays, correct?

Yes. It's like (inaudible). The weighted -- if you weight it by operating unit you will get about the same number.

Okay. I know you said it is tough to size, but presumably you catch up that 3% at one of these other quarters in the remainder of year.

At some point, yes. Carter, I don't know what the exact quarter-for-quarter is in each quarter going forward, but as I said, it's hard to exactly pin that to what exactly did in the quarter. I would say it is more likely to impact the commercial aftermarket, where the turns are faster, plus, frankly, you have some buffer in distribution.

Okay. Thanks. I will let somebody else ask.

Ron Epstein, Bank of America.

Good morning, guys.

Morning.

Nick, a quick question for you, something we've been asked. If you look at some of the more recent acquisitions, it seems like you have had a bigger skew towards defence acquisitions as opposed to commercial acquisitions. Is there a trend there? Is just happened how they popped up? How do you think about the difference between making a defense acquisition versus a commercial acquisition?

We haven't made any conscious decision to move more aggressively in the defense world. That is just what we saw. We go through the same process. We go through, we forecast, we tried to see what we can do with the margins, we assume the capital structure just like a PE kind of buy. I would describe it as just the way the chips fell over that period. It is not a conscious attempt to change the defense content.

Okay, great. One last question, if I may. In the last month of year, we saw air traffic surge. Are you seeing those kind of trends continue into the beginning of this year? Was that sort of a end-of-the-year makeup or are we seeing a real pickup in air traffic?

I can't really talk about things in our business that went past the quarter, but I would say, as Kevin pointed out numerically and I talked about it directionally, the bookings -- the commercial aftermarket bookings are up substantially. Both sequentially they ran above shipments and up year over year, and I suspect that's reflective of some of that.

Okay, great. Thank you very much.

Robert Spingarn, Credit Suisse.

Good morning.

Morning.

Nick, following up a little bit on aftermarket, I wanted to peel the onion a little bit and maybe get a sense of your guidance bridge from really from this first quarter plus 3.5% to the mid- to high-single digits for the year. Let's throw out a couple things. You've said that the commercial transport was stronger in the quarter than the average at about plus 5%. Biz jet obviously is still weak, holding that back. Fewer shipping days in the quarter, so seems like we should add about 3% to all of these numbers. But doesn't the second quarter have a tough comp and also fewer shipping days with leap year last year and so does this mean all of the real strength is in the second half of the year, Q3 and Q4? How do we think about the cadence on aftermarket growth as we go through the year?

I would say the quarterly days for the balance of the year comp the other. I'm sure if you counted them, Rob, that's probably right. I just don't know the answer to that. I would say the main thing that gives me comfort, one, it is not unusual to start up a little slow in the first quarter, but I mostly take comfort from that the bookings are so strong. The bookings are up very substantially and that's what gives me the best comfort.

Don't those only give you about a one-quarter look? In other words, what you saw in the December quarter gives you a sense for the March quarter?

Yes, I don't know if that is an exact cutoff but I think three or four months is probably reasonable number. If your question is, do I know it's going to ship in the fourth quarter, I do not. We do not have the black backlog yet, but if I look at the metrics we see, which is air travel, which is we don't see distributor inventories out of whack, that's not to say there could not be some in airlines, we don't see it at distributors and we see the incoming bookings in coming in coming quite strong. The gives us the comfort. Obviously, we don't know yet.

Okay. As my follow-up, what is the latest on the M&A side? How does the pipeline look?

Pipeline is decent and I think pretty good. It is, as usual, it usually it's small and midsize stuff. We'd always like bigger, bigger things within reason. We don't want them too big because we don't want to place all of our chips on one bet. I would say it's reasonably active if I look at it versus other the time frames.

From a number of properties out there versus pricing, again, has that changed at all?

I don't think the pricing has changed, at least the next thing that closes, of course, I don't know what the price will be but I don't see any indication that the pricing has changed. It's good proprietary sole-source stuff with a decent amount of aftermarket is pricing.

Okay. Thanks, Nick.

Myles Walton, Deutsche Bank.

Thank you and good morning. Nick, last year I think you had a 300 basis point headwind in your aftermarket from biz jet, helo and freighter versus air transport. I think in the quarter you said it's about 150 basis point headwind. What is baked into the full year in that mid- to high-single-digit growth? Does the headwind dissipate through the course of the year or is this kind of 150 basis point going to be with us for the duration?

We did not forecast any significant growth in that in our base forecast. I don't remember whether it was a little lower or not but it wasn't a significant -- it wasn't significantly up or significantly down. I just don't remember if it was zero or 1% one or something like that. We were figuring on anything here in the business jet world.

I'm just kind of curious, the underlying growth last year in air transport was 9.5%. I'm just curious what your assumption is for underlying air transport in the aftermarket for this fiscal year is, if you have that.

I think we told you -- oh, I see. You're trying to pull them out, right?

Yes, I am.

I mean, you could probably look at it -- I'd probably figure commercial transport's probably 85% of the volume.

Okay.

And figure business jet is maybe zero, 1%, maybe down 1% or 2% on the low side, up 1% or 2% on the high side. Somewhere around zero and you can kind of back into it.

Okay. The other question I got asked recently a fair amount was your sales in the military channel. How much is on commercial terms versus straight up military terms? Do you happen to know that?

I don't know the exact number there. One of the reasons I don't know the exact number is it sometimes is a little informal rather than -- the bigger the order gets, the more formal that gets and the smaller ones are a little more informal. But I would guess if you took all our sales to the military -- to the US military direct into the brokers, I think you are probably in the 20% to 30% range. Could be a little plus or minus in that.

Okay. Great, thanks.

Noah Poponak, Goldman Sachs.

Good morning, everyone.

Morning.

Nick, just as a follow-up to that last question there, are your margins different when selling through a distributor versus direct, in a sort of all else equal like-for-like sale?

I don't -- the answer is I don't exactly know that answer but I do not believe there is any substantial difference. I mean, we essentially sell for the same price in the vast majority of the cases.

Okay. Got it. Makes sense. In the commentary about bookings being substantially ahead of revenue in the aftermarket, can you quantify that, like how fast did bookings grow year over year or how much further ahead of revenue were the bookings?

I'm not -- the answer as I sit here is I do not know that. Let me take a look. I'm going to look, Noah, in our magic cheat sheet here. About 12%.

Sorry, bookings grew 12%?

In other words, if you shipped $100, we booked $112, or thereabouts.

Okay. Great. One last one, obviously, or seemingly, if you were to lose interest expense deductibility on new debt, that would that would be an offset to a lower corporate rate. But if I just asked you hypothetically if you just lost interest expense deductibility on new debt and that was the only change to your tax policy, would that change how you ran the business?

No. No. Now, if you hypothesized that interest rates went up to 20%, I might answer that differently, but anything -- any realistic range of rates that I see, I do not see that changing anything we do. I don't see anything that we've seen talked about here that would change our fundamental business or capital market strategy.

Is that just because for every $1 of additional debt you take on the accretion from deploying that towards an acquisition is a much larger number than the loss of -- okay.

Or conversely, or in other words, not conversely, but another way of putting that is if we used it to buy stock or payout dividends, I would look at it as the cost of our equity is 15% to 20% and that is after tax and there is almost no interest rate I can think of that would make that a bad swap.

Right. Great. Thanks very much.

Sheila Kahyaoglu, Jefferies.

Good morning. I was just wondering, can we follow up on the M&A question, just because it is been asked a lot? You'll have about $1.4 billion to $1.5 billion of cash at the end of the year. How are you thinking about that, deploying that a little more shorter term. Over the long term, is there anyway you could quantify or talk about your addressable market and how you think about attractive deals out there?

On the what I do if we have $1.5 billion or $1.4 billion at the end of the year, I really don't want to speculate on that. That is a long way off. We will do what we always do. We will look at our borrowing capacity and we'll look at the backlog of deals and we'll look at the credit market and the equity market and we'll decide what to do with it.

I mean, basically our choices are, right, hold it for some future acquisitions that we have not seen yet maybe or start to pay back out to the shareholders. I mean that's pretty much what we always do. As I said here today, I just don't know how to speculate on where we go other than I think you can -- I think you know pretty well how we think about this and I don't see any change in the way we look at it. What was your other question?

Just on the longer term addressable market. Has the size of deals changed or the number of deals being offered changed?

I don't think so. As you know, this is a big market. There's lots of companies out there. The problem -- it's not identifying companies we like, it's finding ones that are willing to sell. That's just a continual, continual sort of churning and beating the bushes effort.

Got it. If I could ask one more on the pro forma revenue growth versus the organic growth for the quarter, could you maybe recap how that works and just the delta between the two of them, with the commercial OE being down 4%, aside from biz jets, where there's specific platforms that are driving the softness and where do you expect a pickup?

I'm going to pass to Terry on the pro forma versus GAAP growth, because I'm not sure I understand it. I use same-store.

What we do from a pro forma standpoint is we look at the businesses, assuming that we've owned them for 12 months. We'll go back on the acquisitions and look at their sales in the past and add that in and the growth of that, our pro forma growth, was 3.5%. The GAAP number, I'm not sure that you have that yet. GAAP was 3.5%. We haven't given pro forma on that number, but it's pretty close to the same.

Simplistically, the GAAP number only reflects the portion of the year that you own the business. The pro forma number assumes we own the businesses the whole year.

Right, so the underlying business was essentially a little bit better. I was just wondering what the drag was, if there was one. But maybe the difference is irrelevant.

I don't know the answer

Okay, and just the commercial OE pick up throughout the year?

You mean why does it grow?

Yes, what start (multiple speakers) the pickup.

It is a reflection of our ship set content. Our ROE forecast is pretty simple. I mean, we know our ship set content. We know the production rates for 2017. There is a little bit of an estimate because you don't know if there's a cut in 2018 that could ripple back into 2017 and you have a little bit of a guess on whether there will be inventory movement. I mean, our ship set content has not changed. We don't -- the production rates, we think we were conservative going into the year. We still think we're conservative. That's our logic.

Thank you

David Strauss, UBS.

Nick, at the beginning you talked about, as usual, sole-source proprietary percentages there. Can you compare that, how that looks commercial versus defense, what the overall competitive environment looks like in commercial relative to defense?

David, I don't think it's materially different. I'd use roughly the same percents.

Okay. I guess the question I always get, why do you think, your view on why you don't generate more in the way of competition, given the returns that obviously you guys have put up over time, I guess both on the commercial and the defense side.

If you're not already in these businesses, it's tough to get in them. As you know, it's a pretty long gestation period to get into this and product for product, they are pretty small market segments. So I think developed from scratch, it is relatively almost very small risk. I mean, the other is, you mean in the M&A world?

Yes, exactly.

In the M&A world, they tend to be smaller businesses so one by one they get where I mostly think of as a PE. They tend to be small so that they're not as exciting for the bigger PE firms, or even the midsized ones when they first come up. Frankly, it's tough to compete against us. If you are a PE firm that is looking at a proprietary aerospace business and you're outbidding us, you've got to be pretty worried, right, because the only way you're going to do that is to be making a higher bet on the margin improvement. The other thing is that a couple have started it and frankly we bought them. Odyssey started to roll up and we bought it. McKechnie JLL started to roll up and we bought it with McKechnie.

Okay, thanks. Then the follow up, the bookings rate that you saw on the aftermarket side, any way you, Nick, you can slice and dice that, discretionary, nondiscretionary how much might be a boost from initial sparing on the 350 or Max or --

I don't think there is -- I don't know the exact number on the provisioning, but I do not think it's very significant. We did not see much for the 787 and I don't believe there's much to it there. I think if you look at the details it's a pretty broad-based booking pickup across the vast majority of our businesses.

Okay. Thanks a lot.

Ken Herbert, Canaccord.

Good morning.

Morning.

Nick, I just wanted to follow up -- I just wanted to confirm, for your military business, it's about 55% aftermarket, 45% OE? Is that --

Something like that. That is the total average. I don't think the military's way off of that. I don't have the exact number here. Oh, actually, excuse me. It is a little higher. It is more like 60%, 30% or 65%, 35%.

Okay.

Everybody is waving their hands at me. It is still 55%, like I thought. When I said 55%, Ken, the whole place started waving their arms.

So about two-thirds, one-third, then, aftermarket versus OE.

No. Roughly 55%, 45%, just like the overall business.

Okay, thanks. On the -- appreciate the comments that Terry put color on your short of ship set content changes on some of the programs. Can you just provide any color on -- for these increases, I'm assuming obviously the organic and factor in acquisitions, but how much of these -- any color on the price versus volume shift or how you think about sort of your additional content on particular programs and maybe a little bit behind what is helping you win some of that in the marketplace.

First, just I'm not sure I got a question right, but just the numbers Kevin gave, they were like-like, same-store. They were organic growth. It's not the 787 content did not go up because we bought the content. We compared the before and after with the same mix of businesses, so if you follow.

Yes.

It is like-like, same-store. Why does it go up? Because I think we do a good job. I think we service the account, we are all over the engineering department, I think we're reliable delivers, the stuff works and we chase it pretty aggressively.

Okay. I mean --

Sort of the same reason you sell anything. I think the -- you are asking me how much is price and how much is volume units, I think.

Not so much units. Maybe just share gain. Obviously share gain versus price.

I don't know the answer to that. I can tell you it's not a whole lot of price because it's tough to get price at the OEM. It is some, but not a whole lot. Presumptively, that means there is some share gain but I have to admit I don't know what the number is.

Okay. Okay, that's helpful. Okay, thank you very much.

Hunter Keay, Wolfe Research.

Thank you. Nick, I saw in the proxy filed last month that your Board extended the deadline for naming Kevin CEO from December 2017 to December 2019 along with a few other changes to his comp metrics. Can you talk about what drove that change and maybe the timing of it? Thank you.

Nothing changed with my contract, as you may or may not know. My contract presently runs through 2019 and my contract presently anticipates that at some point I could become an executive chairman. I think we changed it because Kevin became President and CEO here, as you know, and I think it more likely fits with our current thinking, though it mostly just gives us more optionality.

Okay, good. In terms of the bookings, is there anything -- you said you're obviously bullish about the outlook for the year based on the strong bookings and I get that, but is there anything that you're seeing in terms of the nature of the bookings that are changing? Are you seeing airlines buying things maybe a little bit further in advance maybe in fear of limited parts availability or just better demand trends overall, if you're seeing that at all? Anything to give you even more incremental -- (multiple speakers)

I don't think so. There's nothing that I can really point out that I have any confidence in, in that. I just want to be sure, I'm not -- we're saying we feel comfortable now with our forecast, our guidance for the year, which is the same as we started the year off with. We're not suggesting it looks far more bullish, just the strong bookings give us additional confidence.

Right, okay. Then one point of clarification, that 12% bookings over revenue, that's on a year-over-year change basis, right?

On a what?

When you said bookings were 12% ahead of sales, that was on a year-over-year change basis, right?

Yes, that is correct.

Thank you very much.

I think we are mixing questions. If you compare the bookings -- so let me say it in case I got you mixed up. If you look at the bookings this quarter against the bookings last quarter in the commercial transport aftermarket, they are up about 12%. Just coincidentally, coincidentally if you look at the bookings this quarter against the shipments this quarter, they also were up somewhere around 12%. It is to say coincidentally around the same number, which may be a little confusing.

Sure. So what are bookings up year over year, then?

12%

I thought you just said sequentially. That's fine. 12%, got it. Will follow up later if I need to. Thank you.

Michael Ciarmoli, SunTrust.

Good morning, guys. Thanks for getting me on here. Nick, can you just talk about pricing is obviously one of the value drivers. Have you guys seen any change in the marketplace in regards to your pricing? Obviously we've got some OEM involvement. The airlines are always looking to get a better price. Just in addition to that, is there any difference in your pricing policy when you're selling a product exclusively through a distributor or direct to a customer?

Let's see. Let me answer that in a couple of ways. I could say in total, that's not to say it couldn't be account by account, but when you roll the thing up in total, the pricing dynamics and the pricing numbers have not changed substantively for a number of years. It's still roughly we get the same answer. Maybe one unit this year is a little better than another one, but they all tend to put and take and weight up to about the same number which is one we tracked very closely. The other question was distributor versus direct?

Yes.

In the military, we sell to distributors and brokers where they get the same price. There is no difference there. In the commercial, I don't -- I'm not sure of the answer to that. I think it's pretty close. I don't think there's a material difference.

Okay. Okay, that's helpful. Just a last one on the -- still some conservatism on the OE side. Have you guys made any changes or do you plan on to headcount for your overhead?

I think we -- as you know, we sort of preemptively adjusted the headcount about a year ago. I think we may have moved it down a little bit this quarter but not by -- Kevin, is that right? Down a little, but not on across the board, just units adjusted as it looked to them like they were a little softer or not a little softer.

I think right now this is mostly around the commercial transport cycle and when it might start to soften up. I think right now we think we've made about what adjustments we think are appropriate, but we will keep watching it. Our concern is how long does the commercial transport OEM cycle hold up, when does it start to soften and when it does, how is does that reflect back into this year? So far we see no indication and we think, frankly, the numbers we use, which we think are still conservative.

Got it. Okay, perfect. Thanks guys

Matt McConnell, RBC Capital Markets.

Good afternoon.

Welcome.

Thanks very much. I appreciate it. Following up on a prior question about margin improvement on deals, how much of that comes from price changes and what are the other key levers for profit improvement besides price when you are integrating a business?

That means essentially it's not consistent across deals. I mean, it's essentially we get the margin improvement essentially three ways, some price adjustment, some cost adjustment and hopefully we have, if we bought into something that's growing, we get a little bit of an operating leverage by the business growing. If not, the other way we can get it is by looking at the product lines and seeing if we want the profitable ones and the unprofitable ones. But the vast majority of it typically comes from natural market growth, price adjustment and cost adjustment.

Okay. Okay, great. You bought back a bunch of stock at $2.25. Should we assume that was just one-time opportunistic or what are the expectations here now that you are, after the quarter, out of a blackout period?

We will decide that. The capital allocation is something we will decide based on how things look when it comes time to make that decision. I'd say the bye through the quarter, frankly we would have bought more, but we were stuck with a 10b5 plan that it essentially you have to put it on automatic pilot and it was on automatic pilot when we made the buys and what amount we could buy. If we had it to reset, we frankly would have put more -- we would have set more in it.

Okay. Okay, great. Thanks

Peter Arment, Baird.

Thanks. Good afternoon, everyone. Thanks for your time. Nick, just a quick question. Thanks for all the color on the military side. Just in general with your guidance flat to slightly up this year and you have -- again, I think you mentioned 55% tied to aftermarket. Any thoughts on the sensitivity around if readiness spending really ramps up and how that impact your business?

Ramp up and readiness spending is good. I don't -- at this point, I'd be very cautious about predicting any significant change in this year. They got to get the budget, they got to place the orders then it takes a while to ship it. It is always hard to guess when the military starts to buy but I'd be reticent. In the near term, which I define as this year, I'd be cautious about assuming any significant change, just because of the inertia and time lag.

Okay, but over the longer term you obviously would see --

I would think so. Readiness is a -- typically, readiness means buy more repairs parts, buy more services, buy more repairs, all that sort of thing, which is generally good for us.

Terrific. Thanks for all the color.

Gautam Khanna, Cowen and Company.

Thanks. Good morning, or afternoon, I guess. A couple questions. Nick, you've remarked about the resilience of the portfolio and it has been. I just wonder, do you see any increasing risk of maybe non-economic motivated actors kind of coming in and trying to second source? Specifically, I think of folks like Boeing or the DOD where maybe an immediate profit motive isn't the desire to kind of second source more. Obviously, you have not been hit by PMA parts in a big way, so it's not economics that would drive disruption.

I can't -- obviously, I can't -- I don't know what somebody might do in the fullness of time. I can say it's a long effort if it was to happen and we haven't seen it. At least typically with the OEMs, our contracting basis still looks similar to what it has in the past, generally. I just don't know what someone might do. We have not seen it. I don't think the math works. I think it's unlikely, but I can't be certain of that. I will say again, I don't see it and I have not seen any significant sign of it.

Okay. Maybe just a follow-up on that. We understand your strategy post acquisition. Some of the spot sales get repriced higher and the like in the contracts as they roll off. How much remaining pricing power is there in years two, three, four post an acquisition? I mean, I just wonder, have you -- do you still have more price inelasticity that you could exercise if this actually became a threat so that in year two and three you just don't have modest inflation type pricing adjustments but rather more significant ones? Do you have unexploited pricing power within the portfolio still?

That is -- I can't answer that generically. That is very fact and circumstance specific. I think if you, and particularly as we get bigger this gets -- when you roll everything up, our overall prices are pretty consistently above inflation. Not miles above, but above.

Thank you

Seth Seifman, JPMorgan.

Thanks very much. Good afternoon. Terry, maybe if you could -- thanks for the information about the tax law changes. Do you guys have significant sourcing the comes from outside the of the US or is there any light you can shed on that?

I think that is quite difficult. We are decentralized. We have 33 business units. Where they get their sourced from is difficult to estimate at this point in time. We haven't gotten that level of detail. We're just taking this at a very high level. We don't want to spend a ton of time analyzing something that certainly is going to be debated for a long period of time as they put the new law, if they ever change the tax law plays. We haven't gotten to that level of the inputs but the exports are pretty significant to us.

I think, Terry, it is safe to say that when you did the calculation, you assumed a reasonable deduct for that.

Yes

If you take the $1.1 billion, what's the interest? Is about $580 million? Interest is about $580 million.

Last year it was under $500 million but this year --

Say it's $580 million. If you take the $1.1 billion, I would also say, depending how they treat distributors, that could be higher. You can deduct a fair amount from that and still be above $580 million.

Right

That is correct

As a follow up, do you guys expect at some point for F-35 to become one of your top 15 programs and if so, roughly when?

It's a good platform. Top 15? I don't want to answer that because I don't -- I mean it's -- I just, I haven't done the math; I don't know the answer. It's a good platform. I would expect that someday it would start to show up on our top 15 or 20 platforms, but it don't know when and I don't have the math on it.

Great, thanks.

Rajeev Lalwani, Morgan Stanley.

Thanks for the time. Just a simple question for you as it relates to organic revenues. If you look over the last couple of years, what's been the breakdown between volume and price?

We don't disclose the price. We just don't disclose --

Directionally (multiple speakers).

As I told you, the prices, the weighted-up prices are higher than inflation. We think of inflation as 3%. But it's not miles higher.

Okay, helpful. Then another just relatively quick question for you. As we look forward and to the extent that aircraft retirements start to pick up or even go down, how does that impact your business, if at all? Is it a risk, is it an opportunity?

We all think of us as we're -- when you look at our aftermarket and the commercial aftermarket, which I presume is what you are mostly talking about, you can pretty well think of us as market weighted. Different people have different definitions of legacy aircraft and what the retirement rates are, but you can almost think of us as the market. That's about how are weighted. So if you think 727s are going to run off at a certain rate, that is how we will run off.

Remember, we are interjecting new airplanes into the mix every year, too, so as that runs off, something else moves into that old window, as long as the ship set keeps going. That is the best way to calibrate it. Figure we are about market weighted.

Very helpful. Thank you, sir.

Hunter Keay, Wolfe Research.

Sorry to belabor this. Just want to clarify. I have some people emailing me, interpreting the comment that the pro forma aftermarket revenue growth is tracking up 12% quarter to date despite last year's tough comp. Is that kind of what you were trying to communicate with that 12% comment?

I'm not sure I'm not sure what it is. I'm not sure of your question. We're trying to get a very specific -- the very specific thing we are communicating is, the incoming orders, or bookings, are 12% higher than they were for the same quarter the previous year. That's one. Number two is, coincidentally, the bookings in Q1 are also somewhere around 12% higher than the shipments, or the revenues in Q1.

Okay, that's fine. Thank you very much.

I got mixed up in what the pro forma you were talking about was.

That's fine. Thank you. Appreciate it.

Ladies and gentlemen, this concludes our Q&A session. I would like to turn the call back to Liza Sabol for final remarks.

Thank you again for calling in today and please look for our 10-Q that we will be filing tomorrow.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect.