TransDigm Group Inc (TDG) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 TransDigm Group Incorporated Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Liza Sabol, Investor Relations. Ma'am, the podium is yours.

Thank you, and welcome to TransDigm's Fiscal 2017 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, Kevin Stein; and Chief Financial Officer, Terry Paradie.

A replay of today's broadcast will be available for the next 2 weeks. In addition, please note, we expect to file our 10-K on Monday due to the observance of Veterans Day by the SEC tomorrow.

Before we begin, we'd 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, available through our -- the Investor Section of our website or at sec.gov.

We'd 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.

I will now turn the call over to Nick.

Good morning. Today, I'll start off, as always, with some comments about our consistent strategy. I'll then give a quick summary of '17, a quick review of the guidance for '18. Kevin will then review the key operational and market details for both years, and Terry will run through the financials for both years. We have a fair amount to cover here today.

Again, to restate, we believe our business model is unique in the industry, both in its consistency and its ability to 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 over 3/4 of our net sales come from products for which we believe we are the sole source provider.

Over half our revenues and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket sales have historically produced a higher gross margin and have provided relative stability in the downturns. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we have to stay focused on both the details of value creation as well as the careful management of our balance sheet. We follow a consistent, long-term strategy. We own and operate proprietary aerospace businesses with significant aftermarket content.

Two, we have a simple, well-proven, value-based operating methodology based on our 3 value driver concepts.

Third, we maintain a decentralized organization structure and a unique compensation issue, or a system, that closely aligns our management with the shareholders.

Fourthly, we acquire businesses that fit with our focused strategy and where we see a clear path to PE-like returns.

And 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 again, we basically have 4, and our priorities are typically as follows: first, invest in our existing businesses; second, make accretive acquisitions consistent with our strategy and return requirements -- these 2 are almost always our first choice -- third, give any extra back to the shareholders, either through especial dividends or stock buybacks; and lastly, pay off debt, but given the low cost of capital, especially after tax, this is still likely our last choice in current capital market conditions.

In the last 3 years, we've seen 3 different business conditions and related examples of how we manage our capital allocation. In '15 and '16, we saw a number of attractive acquisition opportunities. We acquired about $3 billion of proprietary aerospace businesses that met our strategic and shareholder return criteria.

In fiscal '17, attractive acquisition candidates were few and far between. Given the continuing attractive credit markets and a sharp but short drop in our share price, we chose to allocate about $3 million of our capital to return to the shareholders...

$3 billion.

$3 billion, excuse me. We did this through both special dividends and opportunistic stock buybacks.

In summary, over the last 3 years, that is since the beginning of fiscal year '15, we have returned about $3.2 billion to our shareholders. In that same period, we acquired about $3.2 billion of proprietary aerospace businesses. We fully invested in our existing businesses. We kept a healthy cash balance and maintained significant dry powder for additional acquisitions.

We'll see what '18 brings, but as we've done consistently in the past, depending on the specific business and capital market conditions, we'll allocate our capital and structure our balance sheet in the manner we think has the best chance to maximize the return to our shareholders.

Now to summarize '17. '17 was a busy year. In spite of some distractions in the first half of the year, we kept our eye on the ball. The company exceeded the midpoint of our original EBITDA As Defined guidance from our base businesses by about 1%, while revenues were about 1% lower than our original guidance. Versus the midpoint of our most recent guidance, revenues were a bit lower. Most of this was the result of moving Schroth revenue to discontinued operations. There was also a modest timing shortfall in some commercial OEM shipments. On the other hand, on the same basis, EBITDA was a bit higher than our recent midpoint guidance.

On the same-store basis, versus prior year -- versus the prior year on a -- versus prior year on a full year basis, OEM revenue was about flat. Commercial aftermarket revenues were up in the low to mid-single digits, and defense was up close to the mid-single digits. Kevin will expand and give you a little more color on this.

Our GAAP revenues for fiscal year '17 was up -- were up 10.5% versus the prior year. In general, commercial revenue growth was a little less than we expected, and defense revenue growth was a little better. All in all, pretty close.

EBITDA As Defined was up 14% versus fiscal year '16. Margins expanded versus the prior year, with minimal overall dilution impact from acquisitions. On a less positive note, though no HSR filing was required before the close, the Department of Justice challenged our Schroth seatbelt and restraint acquisitions -- acquisition, singular. After some discussion with the DOJ, given the small size of the deal, the unusual situation and our uniquely substantial position in aerospace seatbelts and restraints, we decided to sell the business and avoid any protracted dispute. We have identified a buyer and are in the process of finalizing the arrangement. We do not anticipate any go-forward impact on our overall acquisition strategy. You'll see in our 10-K, about $3 million of Schroth-related EBITDA was moved to discontinued operations. We will have a loss on the sale, though in the overall picture, it won't be financially material.

With respect to acquisitions, we continue actively looking at opportunities. The pipeline of possibilities is reasonably active. We've looked at a number of opportunities recently. Closings are always difficult to predict, but we'll remain disciplined and focused on the value-creation opportunities that meet our tight criteria.

Moving on now to guidance for fiscal year 2018. As we head into 2018, we continue to have some concern about the duration of the commercial transport OEM cycle. However, flight hours and the commercial transport plane backlog in the industry continue to look very positive, which gives us some comfort. But we remain cautious, and we're ready to move quickly if the situation changes.

For fiscal year '18, as usual, we've given a range around the key financial metrics like, revenue, EBITDA As Defined, EPS As Defined. As long as our full year outlook continues to be in the range, we don't intend to adjust our guidance quarterly. Based on the above, and assuming no acquisitions in fiscal year '18, the midpoint of our guidance is as follows. The midpoint of the fiscal year '18 revenue is $3.69 billion or up 5% on a GAAP basis year-over-year. This is almost all organic growth. As in the past years, Q1 of fiscal year 2018, the revenues are anticipated to be lower than the other 3 quarters. As a percent of revenue, Q1 revenue looks about the same percent of the total as the prior year's Q1.

The midpoint of fiscal year 2018 EBITDA As Defined guidance is $1.83 billion. The range is a 6% to 9% growth versus the prior year on a constant currency basis. Currency impacts, as you know, are generally immaterial. We do anticipate that margins will move up throughout the year, as we've seen in the previous year, with Q1 being the lowest, and the move should be roughly in line with the prior year.

2017 acquisitions were modest, so the EBITDA growth, like the revenue growth, is almost all organic. The midpoint of EPS as adjusted is anticipated to be $13.10 a share, up 6% versus the prior year. Terry will go through the details with you on that.

On a pro forma or same-store basis, the guidance is based on the following growth rate: commercial OEM revenue growth in the mid-single-digit percent; commercial aftermarket revenue in the mid-single-digit percent, with the commercial transport aftermarket a little higher than that; and the business jet and helicopter revenues about flat in the aftermarket. Though difficult to quantify exactly, we still believe the commercial transport aftermarket demand is impacted somewhat by the high number and utilization of 5-year and younger aircraft.

Defense and military revenue growth should be up in the low to mid-single digits. Without any additional acquisitions or capital structure activity, we expect to generate about $900 million in cash from operations.

In fiscal year '17, for a number of reasons, we gave considerable additional detail on our various submarket segment -- sections, especially in the commercial aftermarket. Kevin will close out fiscal year '17 with some color on these subsections. However, we do not intend to continue to give the level of additional detail. Through fiscal year '18, we'll comment quarterly if the subsections look materially different than we originally indicate.

In summary, 2017 was a good and a busy year. I'm confident with our consistent, value-focused strategy and the strong mix of our business, we can continue to create long-term intrinsic value for our investors.

And now let me hand it to Kevin, who will expand a bit on '17 and '18.

Thanks, Nick. As you've seen, Q4 fiscal year 2017 was a strong quarter operationally. And for that matter, all of 2017, which had some significant challenges, shaped into another good year.

Now let's review our revenues by market category. For the remainder of the call, I will provide color commentary on a pro forma basis versus prior year of 2016.

In the commercial market, which makes up about 70% of our revenue, we will split our discussion into OEM and aftermarket. In our commercial OEM market, revenues were about flat when compared with Q4 of fiscal year 2016 and similarly about flat year-over-year. Commercial transport OEM revenues, which make up most of our commercial OEM revenues, were up about 1% versus prior year Q4 and by a similar amount for the year.

As we explained last quarter, inventory management by our OEM customers, much of which appears due to rate reductions on wide-body platforms or simply slower ramp-ups on new wide-body platforms, have created headwinds in the commercial OEM market. So 2017 was an up-and-down year for commercial transport OEM bookings. But at the core, no significant changes and shipset content have occurred. So any softness is simply timing-related.

Speaking of shipset content, and in reference to a program that has been in the press recently, the Bombardier C Series is an interesting program for the future, as our shipset content is significantly greater on this platform than current narrow-body platforms.

For business jet and helicopter OEM revenues, which make up about 15% of our commercial OEM revenues, revenues in this market were down mid-single digits in Q4 and by a similar percent for the year, as overall global business jet market demand has not consistently improved. Q4 bookings were up modestly and brought the year-end flat with 2016 in bookings. Key design wins have positioned TransDigm for growth in the future in this section with platforms such as Cessna Longitude, General Dynamics G500, 600 and Bombardier Global 7000, 8000.

Now moving on to our commercial aftermarket business. Total commercial aftermarket revenues grew by just under 5% in the quarter and brought the year up to about 3% revenue growth. Bookings, which can be lumpy on a quarterly basis, expanded faster than sales in 2017, and provided -- and provide some comfort for fiscal year 2018.

Now I'll be providing a little color on our commercial aftermarket business and the submarket segments. We have previously offered additional information on our submarkets to help better explain our commercial aftermarket business. Going forward, we will no longer provide this additional information unless it changes materially from our expectations. As we have discussed recently, we split the total commercial aftermarket into 4 pieces in an effort to provide some additional color and clarity on this important market for TransDigm.

Commercial transport passenger aftermarket revenue is the largest market segment in our commercial aftermarket revenue, at about 60% of sales. For the current quarter, this slice of the commercial aftermarket business grew by mid-single digits when compared with the same quarter in fiscal year 2016, and for the year, have expanded by upper single digits, roughly in line with our previously reported 3-year average for this submarket.

For the commercial transport interiors aftermarket, which accounts for about 10% of our total commercial aftermarket revenue, Q4 revenues declined significantly and by a similar mid-teen decline in the fiscal year. This discretionary interiors market has had a very difficult year-to-date after experiencing robust growth year-over-year for the last 3 years. Softness in this market appears due to a decline in various fleet refurbishment projects, not unlike others who have recently reported in this space. Although we continue to win refurbishment and repair orders for the future, recent push-outs have challenged this submarket. To date, we have seen no appreciable changes in our market share in these businesses.

For the commercial transport freight aftermarket, which accounts for about 15% of our average revenues in total commercial aftermarket, Q4 demonstrated strong growth year-over-year and helped drive a second half of the year recovery in revenue growth, finishing fiscal year 2017 up mid-single digits. This is encouraging, as it would appear the freight aftermarket is finally showing signs of a recovery. Our proprietary Telair products continue strong performance, and our nonproprietary containers and nets businesses have begun to stabilize.

Finally, for the business jet/helicopter aftermarket, which accounts for the final 15% of revenue of our total commercial aftermarket, sales were down low single digits in Q4 of fiscal year 2017, and by a similar amount for the fiscal year of 2017.

Year-to-date, our bookings are about flat with the same period a year ago. There is some indication that this market could improve in the future, given business jet takeoff and landing cycles improvement in recent quarters. But as of yet, we are not seeing any recovery. The aftermarket in this segment tends to go through the OEM, and as such, we do not have the same insight into this piece of the market.

So to summarize on our total commercial aftermarket, the passenger segment demonstrated continued strength. The freight segment now showing some solid signs of recovery for all our business units. Our discretionary interiors markets have shown no clear signs of recovery but do appear to be stabilizing. And finally, the business jet, helicopter favorable usage metrics are not yet translating into revenue growth.

Now let me touch on our defense market, which remains relatively unchanged at about 1/3 of our total revenue. The defense market, which includes both OEM and aftermarket revenues, which were up modestly versus prior year Q4 and demonstrate a clear improvement of about 4% growth for the year. A solid story in both OEM and aftermarket segments of the defense market. Previously, in the year, this strength was due to only a few businesses. But as the year has come to a close, revenue strength appears to be coming from most businesses in the total defense segment for TransDigm.

Total defense bookings continue to provide an encouraging narrative, as bookings have expanded for fiscal year 2017. Fiscal year 2017 OEM bookings have been bolstered significantly by large multi-year new product bookings for Whippany Actuation Systems on a confidential platform and for Airborne Systems' parachute business. As always, lumpy bookings and shipments like these are common in the defense market, and caution must be used in forecasting off of a few data points.

Moving to profitability, and on a reported basis, Terry will provide more detail on the numbers, but let me touch on operating margin for TransDigm. The EBITDA As Defined margin came in at about 49% of revenues for fiscal year 2017, an improvement year-over-year of almost 2 percentage points. This represents a significant accomplishment for the company and indicates that our base business continues to find opportunities to drive improvement within our value drivers, and our 2016 acquisitions continue to integrate into TransDigm.

Finally, as a statement about our value driver strategy and, specifically, our ability to capture profitable new business wins in the market, TransDigm was once again named to the Forbes 2017 World's Most Innovative Companies list, an important recognition of our performance and our unique business model in the industry.

So let me conclude on 2017 by stating, all in all, fiscal year 2017 was another solid year for TransDigm, focused on our value drivers of profitable new business, productivity and value pricing. And the successful integration of our acquisitions made in 2016 have allowed us to deliver another year of outstanding value generation.

Now let me touch briefly on some details for our 2018 planned guidance. For 2018, we have the following guidance. Commercial OEM revenues are estimated to grow in the mid-single-digit range as wide-body production rates and related OEM inventory needs stabilize, with continued narrow-body build rate strength and business jet and helo OEM demand remaining flat.

Commercial aftermarket revenues for 2018, we guide to expand by mid-single digits, with our aforementioned commercial aftermarket submarkets performing as follows: commercial transport passenger expands at a mid- to high single-digit range, roughly in line with previous trends for TransDigm; commercial transport interiors expands at flat to low single digits for 2018. It appears that this market has begun to stabilize for us, with some recent opportunities for discretionary interior designs for a number of global regional airlines.

Commercial transport freight expands at mid to high single digits as the freight market and demand for spare parts continues to grow after a number of years of below-average performance. Both proprietary and nonproprietary products should participate in this expansion.

Finally, for the business jet/helicopter aftermarket, we see a largely flat market, as we expect some aftermarket improvements in business jet to counter continued helo softness.

For the total defense market, we are guiding to growth in the low to mid-single-digit range. We see defense aftermarket outpacing OEM growth, although both are positive, as replacing depleted military spare parts and any maintenance backlog provide an opportunity. As always, we will focus on our value drivers in 2018, with a number of productivity projects involving plants, consolidation opportunities on the horizon, from 2017 acquisitions and routine maintenance of our production footprint. This, along with continued emphasis on new products and innovation and value pricing opportunities, will once again be our focus for 2018.

With that, I would now like to turn it over to our Chief Financial Officer, Terry Paradie.

Thank you, Kevin. Before I review the quarterly results, I wanted to give a little color on the financial statement impacts of the Schroth divestiture.

The income statement activity has been excluded from all line items and condensed to a line item in the income statement labeled Loss from Discontinued Operations, Net of Tax. This loss of $32 million is primarily the result of the estimated selling price of Schroth being at a lower price than at what we acquired the business, partially offset by modest operating income after purchase accounting adjustments during the 7 months we owned the business.

Nick already summarized the key events that occurred in fiscal year '17, so I will now review the consolidated financial results for our fourth quarter, give a brief fiscal year-end summary and review certain assumptions for fiscal '18.

Fourth quarter net sales, excluding $10.1 million from discontinued operations, were $924 million, up $49 million or approximately 6% greater than prior year. The collective impact of the acquisitions of Tactair, Young & Franklin and the 3 product lines contributed $26 million of additional sales for the period. Organic sales were up just under 3% for the quarter.

Our fourth quarter gross profit was $531 million, an increase of 10%. Our reported gross profit margin of 57.5% was over 2 margin points higher than the prior year, primarily due to the strength of our proprietary products and continually improving our cost structure and lowering nonoperating acquisition-related costs.

Our selling and administrative expenses were 11.4% of sales for the current quarter compared to 12.7% from the prior year. Excluding all acquisition-related expenses and noncash stock compensation, SG&A was 10.3% of sales in both current year and prior year quarter.

We had an increase in interest expense of approximately $17 million, up 12% versus the prior year quarter. This is a result of an increase in our weighted average total debt to $11.5 billion in the current quarter.

During the quarter, we completed the issuance of $1.8 billion of term loans and drew $100 million on our accounts receivable securitization facility. The proceeds were used, together with cash on hand, to repay $1.2 billion of our existing tranche C term loans and to fund a $22 per share special dividend.

Also, during the quarter, we entered into a new interest rate swap to hedge our exposure to the variable rate of the new term loans. Including all interest rate swaps and caps, approximately 75% of our debt remains fixed or capped.

Now moving on to taxes. Our GAAP effective tax rate was 25.6% in the current quarter compared to 26% in the prior year. Our full year GAAP effective rate is 24.9% compared to 23.7% in the prior year. The higher rate in the current year is primarily due to foreign discrete benefits that were in the prior year that did not recur in 2017. As a reminder, our GAAP tax rate now generally approximates our cash tax rate during an entire fiscal year due to the accounting treatment for excess tax benefits for share-based payments, including stock option exercises and dividend equivalent payments. Excluding the excess tax benefits, our 2017 effective tax rate is 30.5%, the same rate we use for our full year adjusted EPS.

Our net income from continuing operations for the quarter increased $29 million or 19% to $184 million, which is 19.9% of sales. This compares to net income of $155 million or 17.7% of net sales in the prior year. The increase in net income primarily reflects the increase in net sales versus the prior period, improvements to our operating margin and lower acquisition-related costs, partially offset with higher interest expense.

Net loss from discontinued operations in the quarter was $30.7 million or a $0.56 loss per share. GAAP EPS from continuing operations was $2.21 per share in the current quarter, compared to $2.70 per share last year. The current quarter was significantly impacted by the $63 million of dividend equivalent payments or $1.15 per share paid in the quarter due to the $22 per share dividend paid in September.

Our adjusted EPS was $3.48 per share, an increase of 6% compared to $3.29 per share last year. Please reference Table 3 in this morning's press release, which compares and reconciles GAAP EPS to adjusted EPS.

Since this is our fiscal year-end, let me take a minute to quickly summarize some of the significant items for the year. Net sales, excluding $24.6 million from discontinued operations, increased $333 million or by 10.5% through the end -- to our year-end of $3.5 billion in revenues. Acquisitions contributed $256 million of the increase in sales. Organic sales growth was 2.4%. Reported gross profit increased 15% to $1.98 billion and was 56.6% of sales compared to 54.5% in the prior year, improving over 2 margin points.

Selling and administrative expenses of 11.9% of sales in fiscal year 2017 is slightly lower than the 12.1% of sales in fiscal year 2016. Again, excluding all acquisition-related expenses, stock compensation and nonoperating expenses, SG&A was about 10.5% of sales compared to 9.9% of sales last year. The higher SG&A was primarily related to the higher selling and admin expenses of our recent acquisitions.

Net interest expense increased $119 million, up 25% versus the prior year. This is a result of the increase in our weighted average total debt to about $11 billion from $8.8 billion in the prior year.

Our fiscal year '17 weighted average cash interest rate was 5.3%. The average LIBOR rate was approximately 1% for the full year. Adjusted EPS was $12.38 per share, the share up 8% from $11.49 from last year.

Now switching gears to cash and liquidity. The company generated $789 million of cash from operating activities. We closed the year with $651 million of cash on the balance sheet and have over $1 billion of liquidity available to us with our undrawn revolver and our capacity under our credit agreement.

The company's gross debt leverage ratio at the end of the year was approximately 6.9x pro forma EBITDA and 6.5x pro forma EBITDA on a net basis.

Fiscal year '17 was another good year for TransDigm and our shareholders. As we look forward to fiscal year '18, we estimate the midpoint of our GAAP EPS to be $11.93. As Nick previously mentioned, we estimate the midpoint of our adjusted EPS to be $13.10. As we disclosed on Slide 10, there are $1.17 in adjustments to bridge the GAAP EPS to adjusted EPS.

Depreciation and amortization is expected to be approximately $130 million compared to $118 million in fiscal year '17. Interest expense is expected to be around $650 million in fiscal year '18. This estimate reflects the financing completed in Q4 and includes both cash interest and approximately $25 million of amortization of debt issue costs and fees. This estimate assumes an average LIBOR rate of 1.3% for the full year, which then yields a weighted average cash interest rate of approximately 5.3%.

In our materials we provided this morning is an interest rate sensitivity table that you can use to do sensitivity analysis on the LIBOR rate. Just as an example, if LIBOR were to increase to 3%, our weighted average interest rate would increase approximately 0.5% to just under 6%. This would increase our interest expense by approximately $65 million or around $45 million on an after-tax basis.

Our effective tax rate for adjusted EPS in fiscal year '18 is expected to be around 31% and the GAAP rate between 25% and 28%. The main difference in the rates is the estimated benefit from fiscal year '18 stock option exercises and dividend equivalent payments that will be recorded as a discrete adjustment through the quarters as options are exercised. The timing of the exercises is difficult to predict, but as they occur, we will reduce our GAAP tax rate along with our cash taxes. We expect our weighted average shares outstanding will increase very slightly. There will be approximately 55.6 million shares, assuming no buybacks occur during the year. As a result of these items, our adjusted EPS of $13.10 is approximately 6% greater than fiscal year '17.

In regards to our liquidity and leverage, assuming no additional acquisitions or capital market transactions, we expect to have between -- around $1.3 billion and $1.4 billion of cash on hand at the end of fiscal year '18. This includes an estimate for CapEx of around 2% of our sales. Assuming no other acquisition activity, our net leverage ratio will be between 5.6x and 5.8x our EBITDA As Defined at September 30, 2018.

We currently have adequate capacity to make over $1 billion of acquisitions without issuing additional equity. This capacity grows steadily to over $3 billion as the year proceeds.

I would also -- I would like -- I would also like to discuss a couple of other items before we open up for Q&A. As you all know, the House Ways and Means Committee released a proposed tax bill last week. We are currently evaluating it, and we know that there will be changes as it progresses through the congressional process. Our preliminary high-level analysis would indicate our tax -- cash tax rate would not materially change from where it is today and may be slightly lower.

Finally, our term loans have been trading above par for a while, and we are in the beginning stages of repricing some of our term loans to reduce our interest expense. We will only proceed if it makes economic sense as we go to market. As we finalize this endeavor, we'll provide an update to our full year interest guidance and an updated interest sensitivity table.

With that, now I'll hand it over to Liza for Q&A.

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

(Operator Instructions) Our first question comes from the line of Carter Copeland from Melius Research.

Two questions for you. One, with Schroth, what changed in the evaluation there? I mean, obviously, when you bought it, you have the AmSafe business, which has a pretty high market share in seatbelts. I just wondered, what was it that you learned or in response to the DOJ that changed that evaluation there? Because coming in, you definitely already had a pretty -- you must have had a firm view to begin with. And then the second question just relates to the '18 guidance. The freight portion of that guide, I mean, clearly it looks like you were up north of 20% in the fourth quarter. So was there something onetime in that? Because I would assume that would carry through into next year's guidance, which was significantly below that. So just trying to square those 2 together.

Yes, Carter, let me talk about the Schroth thing, and then Kevin, why don't you talk about the freight after we get done here? As I think you know, this didn't require an HSR review. We -- essentially, we went through the analysis before we bought it. We thought it was okay. The DOJ, probably, from someone contacted them, started to question it. They took a different view of the way we define the market segments. I don't know that we agree with that view, but at the end of the day, given the size of the deal and sort of the uniqueness of the situation, as I said, in the restraint world, we just decided it wasn't worth dragging out -- dragging this out. And we thought it was just more prudent to just settle it and move on. That's how it came about. And Kevin on the freight business.

On freight, we forecast for fiscal year '18 mid- to high single digits on the commercial transport freight. You're right, we had a very strong Q4. I suspect some of that might have been catch-up. But I think we're being conservative. And the concern remains that -- to what extent will the nonproprietary piece participate in that? But clearly, freight is an important sector for us in '18 and looks pretty good, as we forecast mid- to high.

Kevin, how much of that business is that nonproprietary piece?

It's a reasonable chunk of the business. So it's a reasonable size. We don't disclose the individual pieces, but it's a reasonable chunk of that 15% of the commercial aftermarket.

But I think I'd say it's not half, just to be clear.

Yes, it's not half.

It's not half of it, yes.

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

The first one is really a clarification. I think you said that the cash tax rate you didn't anticipate would change under the new bill. Is that a net basis after including the various pieces and puts and takes, inclusive of the corporate tax rate dropping to 35% to 20%? You still wouldn't get a net cash tax benefit?

Yes, Myles, that's correct. What I meant to say, just to clarify, is that we think our cash tax position will be very similar to where we're at today as we looked at '17 and recast it on the new fees, or maybe slightly lower. So what's happening is, obviously, the impact of the interest deductibility limitation has an impact to us, but the lower rate on the rest of the taxable income is beneficial to us. So we think we're going to be right about where we're at today from a rate standpoint.

Okay. And then the other one, just a clarification, the $900 million you said in cash from operations, that's -- for fiscal '18, that's almost a one-for-one match on incremental EBITDA. So what is benefiting you as you move into '18 from an either working capital or cash tax basis?

I think it's -- from cash from operations, we're looking at $900 million. I think that's -- from a cash tax standpoint, the rate's going to be consistent. We're within the range that we took before. We'll see some of our interest costs go up. And net of CapEx, it's around 2% of sales, so our free cash flow number should be in the low 800s to mid-800s for the year. So I'm not seeing anything unusual other than the growth in our EBITDA, to be honest with you.

Yes, but I mean, it's a one-for-one growth, usually, that obviously, you've got higher interest. And usually, your conversion of EBITDA to operating cash flow is about 50%. So I'm just curious, I mean, obviously it's a better working capital performance.

Well, I think the interest expense is going to be -- it'll take that 50% down a little bit this year on the conversion. And yes, that'll drive it. And then we are going to see a little bit benefit of working capital from where we were this year.

Okay. And then just the last one on Schroth. Nick, what's the ability for look-backs for deals in your past? I mean, is there a statute of limitations, a time line? Is there anything like that? And then how comfortable are you that this is kind of a one-off situation? Or do you have to put a scrubber to the deals in the pipeline a little bit harder going forward?

Yes, I don't -- I have no idea what the look-back rule is. But I don't -- I would just -- Myles, this is a pretty unique situation. If you look at the -- if you look at sort of our position in the seatbelt and restraint market, it is pretty unique compared to our other products. We rarely see significant overlap when we buy anything. I don't -- I think this is a one-off kind of thing. I don't know of any exposure in the back. I surely haven't heard of any. No one's said anything about it.

Our next question comes from the line of Ken Herbert from Canaccord.

Nick, I just wanted to follow up on that comment. So is it fair to assume that Schroth hasn't had any sort of impact on your screening or as you look at potential M&A activity or opportunities?

Not -- it has not so far. And I don't -- I would say it's probably unlikely we'd try and buy a seatbelt business. Unfortunately, there -- fortunately or unfortunately, there are hardly any out there, so it doesn't much matter. But it's business as usual. As I said, this is a very unusual situation with the set of facts here and sort of the substantive market position we have here.

Okay. Okay, no, I can appreciate that. I just wanted to follow up, you started the call off with sort of commenting on sort of the broad picture in terms of the environment that enabled some of the M&A activity a few years ago. I guess, my question would be, as you look moving forward, you still comment on a fairly robust pipeline. But are you looking in particular -- or have you placed any different priorities on markets you're perhaps looking at when you look at defense versus commercially, the OE or aftermarket? And then as a second part of that, are you seeing anything that might have changed just in availability of assets that might explain part of the lower recent activity? Or is it just normal lumpiness that we should expect on the M&A front?

I think it's normal lumpiness. I can say -- most people I talk to tell me things -- there wasn't a whole lot in '17 in sort of the size we did. Of course, there was a -- one big mega buy. Our criteria hasn't changed, proprietary aerospace is a significant aftermarket. I would say we see more defense stuff now than we used to see. Just as you probably know, defense valuations are higher than they were. And people that have been holding defense stuff that want to sell it are more inclined to try and sell it now. So I'd say if you look at the list of things we see, it's probably more heavily weighted towards defense than it maybe was 2 or 3 years ago. But I have no way of predicting whether that's how they'll close or whether they'll make sense to us. I will say, the activity, just the number of things we've looked at and sort of the list is reasonably robust.

Okay, great. And just finally, your preference for assets by market hasn't changed, whether it be defense or commercial?

I don't think so. I don't think so. Our requirement, proprietary, significant aftermarket, PE kind of return, which you know how we define that, I mean, those are the big screens.

Our next question comes from the line of Matt McConnell from RBC Capital Markets.

Just a real quick follow-up on that M&A question. Are you seeing any properties that you were interested in go to -- just go to other buyers? Whether you were missing out on price or something else? Or is it just you're not seeing ones that meet your criteria?

Yes, I don't -- I hate to say never, but I can't think of anything, Matt, that we wanted that we didn't get -- that we wanted to go after, which basically says, in the last -- through '17, we just didn't see good things of any magnitude that we wanted to buy. I think that's the answer to your question. It's not -- I wouldn't say that -- it's not that we wanted to buy Company A and we got outbid. We've not seen that.

Right. Okay. Okay, got it. And then, Kevin, you had a pretty optimistic assessment of your defense markets right now. And could you square that with the guidance for low to mid-single-digit growth next year? Just what's visibility into that market? It seems like there's a lot of activity there. And I don't know if you're being conservative on the outlook. Or what's your visibility on the defense side?

I think we always try to be appropriately conservative. But yes, there's good activity. There's a lot of requests for a quote. There's a lot of quoting activity around the ranch, but it's always difficult to predict. And there's external factors, with budgets and the like, that impact defense. So versus our historical guidance, the up low to mid-single digits is higher than usual, and that's where we stand with it with the visibility that we have. Again, things can be lumpy in the defense business and hard to predict.

Our next question comes from the line of Noah Poponak from Goldman Sachs.

Nick, so the revenue guidance looks to imply 3% to 5% organic. That's a little light of kind of your long-run normalized pace of growth. I'd really kind of have to be at the very low end of the -- of how you define each end market to be at 3% for the total company. I guess, I'm just sort of wondering if you decided to put extra contingency in the revenue guidance this year, given some of the choppiness and some of the things you experienced last year.

I guess another way of asking that is do you think we're conservative in our guidance, right, for the revenue?

Well, I know you always are, so I guess the question is, actually, were you incrementally so compared to normal?

Well, I don't know how to answer that because we gave guidance that we want to give. But I would say we surely don't think we're extra aggressive here.

Maybe I'll just leave it at that.

Otherwise, Noah, I'm going to end up giving just another guidance number.

Yes -- no...

We're hopefully -- hopefully, we don't believe we're aggressive here in these ranges.

Okay, that's fair enough. I guess, the question was more sort of if you just took any different approach after what happened last year with some of the unexpected things in the aftermarket and the like. But I appreciate the nature of your answer.

The organic growth -- I think the organic last year was more about 2.5. This is essentially all organic now. So there's almost no acquisition impact year-over-year.

Right, right. Okay. Can you tell us what -- can you tell us how orders in both the commercial aerospace aftermarket and the defense aftermarket compared to revenue in the quarter and the year for '17?

Kevin, you talked about the year, didn't you? I just don't remember the quarter.

Yes. So your question was on defense aftermarket or total defense business? So looking at...

Basically trying to get bookings compared to revenue, so a book-to-bill.

You mean like a book -- Noah, you're after like a book-to-bill ratio?

Yes, which I think you've given in the past a few times. And I'm specifically curious for defense aftermarket and commercial aftermarket. If you had it for defense OE as well, that'd be helpful, too.

Wait just a bit. So let me track -- if you took a book-to-bill, in the defense, I would say it's up, but pretty modestly. I would say in the commercial aftermarket, the book-to-bill is above 1, but it's not 1.1. It's just kind of in the middle. And the commercial OEM's probably about flat if you take both of those.

Okay. And those are full year '17 numbers?

Yes, that's book-to-bill. Book-to-bill. And I wouldn't -- you might get slightly different numbers in the fourth quarter, but I -- Noah, I wouldn't draw much from a quarter worth of bookings. They bounce all around.

Yes, no, agreed. It sometimes helpful to know how you're exiting the year compared to the year. But that's helpful for the year. And then just the last one from me. Just to make sure I've buttoned it up for myself, on this Schroth situation, am I hearing you correctly that you are not currently actively looking at divesting anything else? You wouldn't expect to be divesting anything else anytime soon? Is that correct?

Well, we surely -- as of right now, we're not looking to divest of anything else. That's not to say we couldn't decide some business we didn't like at some point in the future we could divest. There's nothing to do with Schroth that would make us divest anything else. It would purely be our decision to do it, of which presently, we don't have any in the queue to do that. But there's nothing -- there's no bleed across or additional DOJ activity or anything like that, that we know of. Of course, you never know what you don't know. Noah, I think we've given you the whole story there.

Our next question comes from the line of Michael Ciarmoli with SunTrust.

Nick, maybe just a last one on Schroth. Would you be willing to give us what the sort of revenue run rate was tracking for at Schroth? Just trying to kind of calibrate...

I think we gave you what came out of it.

I think we gave you what came out of it, right, and you can figure how many months we had it.

Sure. Okay.

I'm not sure it's exactly linear, but you'll get in the ballpark if you do that.

Okay. Just on the interiors market, I mean, I think last quarter, you guys -- it was still down mid-teens. It finished down around that range. You weren't really seeing bottom. And it sounds like we've hit bottom here. I mean, you talked about some new opportunities. Do you think any of the weakness -- certainly, there were some wide-body challenges. Was any of the weakness this year may be tied to just the 2 big interior guys kind of being acquired? Or just anything else you can elaborate? And I mean, it seems like you're going to have some fairly easy comps. We're certainly seeing, I think, a pickup in some of the retrofit activity that's out there. But any other color you could add?

A lot of the work we had seen was around rebranding campaigns that had gone on over the last couple of years. And it would appear that we had gone through a lull in that activity. Certainly, some of the interior guys were off more than others, but I don't really trace it back to a specific slowness with them being acquired. I think we all go through peaks and valleys in this largely discretionary market. It is a step-up to go from down to flat to up a small amount. But that's what our teams are forecasting to us. The question was asked earlier, did we change anything in our process as we collected the 2018 numbers? And we followed the same process. We trust our teams. It is true that they didn't see a lot of the interior slowness coming, but they are -- they do see indications, as we have guided, on a flat to low uptick in the interiors business. So that's the color that I can give you. We have scrubbed and looked at were there any changes in market share? Did someone clean up at our expense? And there's no real indication that anything like that happened. It's just the particular customers that we worked with, that we generally work with, didn't have as many of these general marketing campaign changes to their fleets.

Got it. That's helpful. And then just on the overall aftermarket view. We're seeing a lot of your peers talk about elevated levels of provisioning for some of the new narrow bodies, even the A350. And do you guys have that level of granularity to see provisioning be a little bit of a tailwind as we move into next year?

No.

We're not figuring on any provisioning. If we see some, that'll be a tailwind.

Okay. Okay, fair. And then just the last one for me here. EBITDA margin, I guess, for the year, pushing up close to 50%. I mean, that would be an all-time high. I mean, you obviously aren't going to have any acquisition-related dilution there. It would seem like the value-creation story is not changing at all for any of the acquired companies. I mean, what are you sort of thinking long-term for that EBITDA margin? Is there a little bit more runway there?

Well, I think, the reason -- I mean, the reason it's pushing up near 50%, and it's been there or very close to that before, is because we didn't buy much in '17. And we -- it'll grind up there. It'll pick up oh, I don't know, if the mix stays the same, there's no mix shift or something like that, you'll pick up a point or so a year. It's unusual that we don't buy something and it sort of averages it down.

But I still think there's plenty of juice in our value drivers as we go forward. It's not -- we're not approaching the end of that by any stretch.

Our next question comes from the line of Seth Seifman from JPMorgan.

Just to ask that margin question in a slightly different way. Are there any of the businesses that you bought over the course of '16 and '17 that are -- where you're still driving toward the target margin? Or would you say that the whole company is about at the target margin now and we're just at the place where you go sort of at that point a year pace?

Well, '17, there isn't enough to move the needle at all. So we bought a couple of -- 3 relatively small product lines. So whatever they -- they're all going along fine, but they're going to be irrelevant in the overall margin. The '16 businesses are all marching along nicely against their acquisition plan. I don't quite know how to answer the question. I would say if you take those businesses out, which is primarily Breeze and DDC, they're still marching along very nicely against their plan. And we see no reason to think they won't get to where we planned them. I think DDC, as we said when we bought it, is a company that's margins look like TransDigm margins as it stabilizes out. Breeze may not get quite that far up. And all the rest of the businesses, if you run the businesses with the value drivers and the way we do, in total, they move about a point a year.

Right. Okay, great. And then just to follow-up, a question on an old theme. Boeing obviously increasingly less shy about intentions in the aftermarket. And I think a lot of us have heard probably about efforts that they've been making to feed more IP into the supply base. Are you coming up against that at all? And if so, sort of how are you dealing with it?

We have not come across any -- we have not had any attempts to take our IP or anything like that. We would be extremely resistant to that. In the aftermarket, we -- so far, we haven't seen much. We read the same things you read. We haven't seen a lot. Now we -- for Boeing's aftermarket, we're a fairly significant customer to them for their Aviall distribution business. So we -- they get some contribution that way from us.

Right. Okay. But just in your conversations with them, when your sales engineers are looking to sell a new product...

I guess I mean supplier. We hire them to provide us with a distribution service, right. Maybe that's the best way to put it. I got it backwards.

Right. And then are your sales engineers sort of seeing a greater effort on their part when you're trying to sell new products to them to insert more of their IP?

Not that we've seen.

Not that we've seen, no.

Our next question comes from the line of Sheila Kahyaoglu from Jefferies.

So another question on EBITDA growth for you guys. I think the 7% at your midpoint that you're guiding to growth is sort of -- is in line with what you've done historically because this is a core clean year. I just wanted to ask about the productivity. You obviously have a very high EBITDA margin. What sort of opportunities are you finding for additional takeout of the existing business?

For productivity, yes, we still -- and I commented, I think, briefly that for going forward, we will see some opportunities around some limited plant consolidations. We don't love to do a lot of those things but as we -- some of the product line acquisitions that we did in 2017, moving those into the various facilities, there will be a number of those opportunities as well as some rationalization of our manufacturing footprint. We'll be looking for those opportunities for routine maintenance. And they do provide nice improvements in productivity. So yes, there are a number of those, along with our capital spending to drive productivity projects around the ranch. I would say that the productivity deck is as vibrant as ever for opportunities, and we continue to find those even in businesses that have been in the fold for a long time.

And then just one more. Another supplier last night noted some changes in just the market dynamics. They said they're seeing an increase in RFPs for content on existing platforms. I just wanted to know if you're seeing any of that? Is that an opportunity for TransDigm?

Say that again. I'm not sure I followed the question.

They noted that they're seeing a pickup in content because of higher RFP opportunities on existing commercial platforms. So some takeaways as Boeing and Airbus decide to in-source. So I was just wondering if you're seeing any of that, is that a benefit for you kind of the...

No, we haven't...

No. We've not seen that, Sheila.

Our next question comes from the line of Robert Stallard from Vertical Research.

Nick, you highlighted in your sort of review of the year that you made some share buybacks during the year due to volatility in the stock price. How do you feel about buybacks going forward? Is this a lever you feel more comfortable pulling than maybe you would have done in the past?

I think we just look at buybacks -- we look at them just like an acquisition opportunity. I mean, if it's a somewhat close call against an acquisition, we'd probably make the acquisition. But when they become a shriekingly good buy, like they did early in this year, I think we bought 400-ish, Terry?

Yes.

400-ish. Rob, we were in a blackout period then, and we were stuck with our 10b5 filing. We'd probably have bought twice that much if we could have. It's a capital allocation investment decision for us. We don't have any rule, like hold the shares even or something like that.

Yes. And referring back to the drama earlier in the year and all that fun. The commentary about the defense customer. Has there been any feedback from the DoD about these issues that were raised?

Well, as you know, we started down a -- or not we, the IG audit. There's an IG audit of the buying agencies, which is pretty common in the industry. It's on the website. Almost everybody in the industry gets one of these every few years. That's just moving down the track. They take a long time to complete, and it's just sort of slowly moving along.

Okay. And then just a final one. On the DOJ acquisition front, have you ever seen this happen before? Or is it the first time this has impacted TransDigm?

No. We had -- well, I guess it's the first time we ever had something that the Hart-Scott-Rodino filing come back and be questioned. We had one stopped on a buy from Goodrich about 3 or 4 years ago.

But it wasn't for competition.

Yes, but we don't -- it was stopped by the DOJ. But we don't -- frankly, we don't quite know why. But it was. This was probably 5 years ago.

Our next question comes from the line of Hunter Keay from Wolfe Research.

How -- Nick, how do you define a shriekingly good buy? What metric do you use to evaluate the value of your stock? And how much of it...

We knows it when we sees it.

I mean, is there a metric you actually use that's like that's triggered to -- I mean...

Yes, I mean, we have our own view of when we should be buying. You see something like -- you see the kind of things we saw early in the year. We bought a bunch of stock at $220 or $225. I mean, it was -- we looked at that and said, "Unless we're miles off, this is a 25%, 30% IRR here." Obviously, we're heavy buyers in there. I mean, that's the way we look at it. When it gets closer to -- we look at -- we're looking for returns on our acquisitions up over 20 on the equity we put in them. When it's getting up there, it's looking pretty good to us. When it's more in the mid-teens return, that's good, but it's not shrieking alternative to making buys, acquisitions. Whereas, I'll say again, at $225, we thought we're not going to see any acquisition that returns to us the way this does.

Right. So you know it when you see it, basically. Okay, that's helpful. And then you brought up C Series in the prepared remarks, significant content. Can you talk about how much content you have on that program, or maybe with Bombardier in general? And do you have long-term pricing agreements in place with them to protect yourself in the event that they make a sort of renewed push down the supply chain for some cost savings?

We do have long-term agreements in place. It's different business-by-business, but I would say we do have long-term agreements in place. Our content is significantly higher. We don't want to get into the differences in one program to another. But versus current narrow bodies, it's a significant difference. It's a great program for all of TransDigm, and many of our groups participate.

Our next question comes from the line of Gautam Khanna from Cowen and Company.

This is Bill on for Gautam. Wanted to follow up on a couple of the questions around Boeing. I think a couple of calls ago, you said PF -- your renegotiation of PFS is starting this year, so I'm just wondering where you are with that and if there's anything we should be watchful for throughout the year.

I mean, it's moving slowly, slowly forward, sort of in fits and starts. I can't say that there's any particular acceleration. I mean, the contract runs out at the end of -- I want to say calendar year '18, is that right, Kevin?

Yes.

Calendar year '18. Usually, these go right up to the end.

Okay. And are you seeing any different behavior out of Boeing in these rounds? Or is it still too early to tell?

We're seeing no difference in behavior this round versus the original one from several years ago. We're working through the details. The teams are meeting on a regular basis, but it's difficult to predict when this will be all put to bed.

Okay. And then just a question going back to the M&A deals in '16. Have you seen any pushback on post-M&A price hikes? Or has your ability to generate value with these acquisitions been sort of in line with what you thought?

In line. We haven't seen any material change in the dynamics in the industry. We've been -- we're right in line, or in total -- I'm not going to comment price versus cost. But I would say the price dynamics are fine. No change. And in total, the acquisitions are, at least the 2 most recent ones of any substance, are running nicely ahead of our expectations.

Okay. And then just one last one on Schroth. You mentioned you had a buyer lined up. Is this a strategic buyer or a financial buyer?

Well, we don't -- I don't want to identify the buyer until we're closing it.

Our next question comes from the line of Drew Lipke from Stephens.

Just piggybacking on a question from earlier, if we look at the interiors business and think about the consolidation there that was mentioned and thinking about the sales channel there and Airbus standing up their dedicated interior services division, has that been at all impactful for the trends that we've seen, just in terms of the channel, with interiors?

I'm not seeing any real changes there. I could be wrong, but the guidance I have from the teams are that there really isn't any change. It's just the timing. And it's not OEM-dependent. It's how the teams want to refurbish on what is very much so a discretionary decision.

Okay. And then if we think about business jet, and you've mentioned in the past that it's hard to determine what's OEM and what's aftermarket, just given the channel that it flows through. And we have seen business jet utilization up 3% in the U.S. and 8% in Europe over the last 12 months. And a lot of the OEMs are posting pretty strong aftermarket growth. And so I'm curious, has that -- has the sales -- have you seen a change in the sales channel within biz jet getting more flowing through the OEM and that's maybe part of what's impacting your biz jet aftermarket?

I don't think so. The aftermarket for business jet always flows through the OEM. So we have varying degrees of visibility as to what's happening. I would love to see it up more, but we forecast a flat market there for business jet and helicopter into '18. I think I alluded to maybe business jet would be a little bit better, but it would be offset by not a great helicopter market, I believe. So that is what we see. I would love to be wrong about that. We've discussed that amongst ourselves that, eventually, you hit the bottom and you start to come out of it. But so far, we're not seeing a lot of that.

Okay. So fair to say you don't think the channel has been impactful, like as we think about you mentioned Aviall, a lot of your sales with Boeing go through Aviall. And I think you've had some instances where they've required a pound of flesh in terms of distributing more with, like, Whippany through Aviall, that hasn't been impactful on business jet or interiors?

No, not at all. We don't distribute that way in those markets anyway. So we don't go through Aviall for -- or Satair, the big distributors, for business jet. That largely goes through the OEMs.

And the interiors largely go direct.

Go direct, direct to the airline.

Yes.

Okay. All right. And just last one. I know your ability to comment here is more limited, but just regarding the Inspector General audit, your comments previously alluded to the audit being focused only on contracting procedures for certain TransDigm awards. And if you look at the DoD memorandum, it states a much broader objective. I'm curious, could you reconcile that for us just in terms of the potential scope of the audit?

I don't know what I'm reconciling. So it's hard for me to answer that. We've had these before, and it seems to be following the same path and the same kind of path I see when I read the other ones that are on the IG website.

And I am currently showing no further questions. And I would now like to turn the call back to Liza Sabol for any further remarks.

Thank you for participating on this morning's call. And again, as a reminder, look for our 10-K on Monday. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.