TransDigm Group Inc (TDG) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 TransDigm Group Inc. 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 from -- Director of Investor Relations. Ma'am, you may begin.

Thank you, and welcome to TransDigm's Fiscal 2018 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, Jim Skulina.

A replay of today's broadcast will be available for the next 2 weeks, and replay information will be contained in this morning's press release and on our website at transdigm.com. It should also be noted that our Form 10-Q will be filed tomorrow and will also be found on our website.

Before we begin, we'd like to remind you that the statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause the 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 the Investors 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, and thanks again for calling in. As usual, I'll start off with a quick review of our consistent strategy. I'll then summarize the first quarter of 2018. Kevin will review the key operational and market issues for the quarter, and Jim will then run through the financials and also discuss the near-term impact of the new tax law.

As you may have seen, Terry Paradie, our former CFO, resigned for personal reasons in early January. Jim Skulina, who is on the call today, has agreed to fill the job until we find and are comfortable with a new CFO, either internally or externally. Jim is with TransDigm for 23 years and has extensive experience at the senior level, both as an operating and a financial executive for the company. For the last 6 years, Jim has been an Executive Vice President Group Officer responsible for a number of our larger operating units and acquisitions. In addition to other responsibilities, Jim has also been the Corporate Controller and Operating Unit President through his career with TransDigm, among other jobs. We are lucky to have Jim willing and available to take this job on.

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 why we believe this, about 90% of our sales are generated by proprietary products. Over 3/4 of our sales come from products for which we believe we are the sole-source provider. Over half of our revenues and a much higher percent of our EBITDA come from aftermarket sales. Aftermarket revenues have historically produced the higher gross margins and relative stability through the cycles and 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. Second, we employ a simple, well-proven, value-based operating methodology based upon our 3 value driver concepts. Third, we maintain a decentralized organizational structure and a unique compensation system closely aligned with shareholders. Fourth, 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 allocation of capital. To remind you, we basically have 4, and our priorities are almost always as follows: first, to invest in our existing business; second, to make accretive acquisitions consistent with our strategy and our tough return requirements; third is to give the money back to the shareholders, either through a special dividend or stock buybacks; and fourth would be to pay down debt, though still given the low cost of debt, especially after tax, this remains likely our last choice in the current capital markets.

In the last 3 years, you've seen different business conditions and examples of how we deal with them. In '15 and '16, we saw a number of attractive acquisitions and we bought about $3 billion of proprietary aerospace businesses. In '17, attractive candidates were fewer and far between. Accordingly, we chose to allocate about $3 billion of our capital to return to the shareholders. We did this through a mix of primarily special dividends but also some opportunistic stock buybacks.

We'll see what the full year fiscal '18 brings, but as we've done consistently in the past, we'll allocate our capital in the manner we think has the best chance to maximize the return to our shareholders.

Now to quickly summarize Q1 of fiscal year '18. Our Q1 operations, that is revenue and EBITDA as adjusted, were right about on our expectations. They were roughly 23% and 22%, respectively, of our full year guidance, about the same percents as they have been in prior years. To remind you, there are about 10% less shipping days in Q1 versus the average of the other 3 quarters.

Our Q1 earnings per share, both GAAP and as adjusted, are both up very substantially. This is primarily the result of the new tax law. Jim will review this in more detail. As I'm sure you are aware, many of the implementing rules and regulations have still not been finalized, so we will be reticent to get too specific at this time, especially beyond fiscal year '18. We do expect to generate roughly $70 million of additional cash in fiscal year '18 as a result of the new tax law changes.

Now on a same-store basis versus prior Q1, in the commercial transport aftermarket, which makes up the vast majority of our commercial aftermarket, Q1 versus the prior year was up just about 11%. Business jet and helicopter revenue growth was softer, and this pulled the overall average for commercial aftermarket down to about 10%. Commercial OEM revenues were roughly flat versus the prior year. Defense revenues were also about flat. However, incoming defense bookings were substantially up versus the prior year. Kevin will expand on all this.

Although one quarter doesn't make a trend, we feel good about the start of the year, especially in the commercial aftermarket. We completed the sale of Schroth at the end of January for about $60 million in cash to Perusa Partners, a midsized PE firm located in Germany. This was not a great outcome, but given the overall situation, we believe it was the most prudent and practical approach to get this behind us and to move on.

With respect to acquisitions, we continue looking at opportunities. The pipeline is active. We've been looking at a lot of opportunities recently. Closings are difficult to predict. We remain disciplined and focused on the value opportunities that can meet our tight PE-like return requirements.

Without any additional acquisition or capital structure activity, we now expect to generate closer to $1 billion in cash from operations after considering the cash impact of the new tax law. As we said in the last earning call, as long as our outlook continues to be comfortably in the range, we don't intend to adjust our guidance quarterly. Since it seems too soon in the year to draw any conclusions, we're leaving our revenue and EBITDA as adjusted full year guidance unchanged. If the business situation looks similar at the end of Q2, I expect we may well adjust our full year guidance at that time.

The increase for the net income and the EPS guidance are due to the new tax law's estimated impact. The savings in interest expense from our recent refinancing, we are estimating to be roughly offset by a modest increase in the LIBOR rate. In another words, the actual rates we pay so far are holding about flat. Jim will give a little more color on this.

In summary, Q1 was a good start to the year. So far, fiscal year '18 looks positive, but in any event, I'm confident with our consistent value-focused strategy and our strong mix of business, we can continue to create long-term intrinsic value for our shareholders.

And with that, let me hand it over to Kevin.

Thanks, Nick. As you've seen, Q1 of fiscal year 2018 was an encouraging start to our fiscal 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 compared to the prior year of 2017.

In the commercial market, which makes up about 70% of our revenue, we will split our discussion into OEM and aftermarket as usual. In our commercial OEM market, Q1 fiscal year 2018 revenues were about flat when compared with Q1 of fiscal year 2017. Commercial transport OEM revenues, which make up most of our commercial OEM business, were down slightly when compared to the prior year period. We continue to believe 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. As was the case in 2017, commercial transport OEM sales can be up and down quarter-to-quarter. But at the core, no significant changes in shipset content have occurred. So any softness is simply timing related.

Business jet and helicopter OEM revenues make up about 15% of our commercial OEM revenues. Revenues in this market were up high single digits in Q1 when compared to the year-ago period. Q1 bookings were up even more. Positive for sure but too soon to tell if sustainable, but not dissimilar to what others in the industry are reporting.

Now moving on to our commercial aftermarket business. Total commercial aftermarket revenues grew by about 10% in the quarter. Commercial transport aftermarket, which makes up about 85% of our total commercial aftermarket revenues in Q1 fiscal year '18, were up almost 11% over the prior year period. This revenue increase was driven by strong performance in the freight aftermarket, where both our proprietary Telair Europe-powered freight-handling equipment and our less proprietary nets and containers businesses all demonstrated growth in the quarter. This is not a surprise, given the results reported on the freight market from others in the industry.

For our discretionary interiors aftermarket, a return to modest growth was a welcome change in Q1 of fiscal year '18. However, although Q1 was better, we remain cautious on this market segment after a prolonged period of robust growth and a lack of visibility of new interior retrofit programs.

Finally, for the business jet/helicopter aftermarket, which accounts for the final 15% of revenue in our total commercial aftermarket, sales were up in the low single digits in Q1 of fiscal year 2018. Business jet takeoff and landing cycles have continued the modest improvement from prior quarters, an encouraging sign, albeit still well off of the peak of the 2007 time frame. The aftermarket in this segment tends to go through OEM, as we've discussed previously, and as such, we do not have the same insight into this piece of the market. However, looking forward, some level of cautious optimism is required.

To summarize on our total commercial aftermarket. Our passenger segment is demonstrating continued strength, the freight segment now showing solid performance for all of our business units. Our discretionary interiors markets have shown an improved Q1 of fiscal year '18, but stability in this market is as yet elusive. Business jet and helicopter aftermarket, there are favorable usage metrics in the industry, but we feel it's too early to tell if this will continue.

Now let me speak about 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, were about flat versus prior year Q1. Modest timing-related delays lowered our defense OEM shipments, while our defense aftermarket business grew slightly.

Today, defense bookings continue to provide an encouraging narrative, as bookings for OEM and aftermarket both expanded by greater than 20% in the quarter. Defense market strength can at times be due to only a few businesses. However, revenue and bookings are well distributed and appear to be coming from most businesses in the total defense segment. 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. Specifically, these strong bookings are not a direct tie to Q2 shipments.

Moving to profitability and on a reported basis. Jim will provide more on the numbers, but let me touch on operating margin for TransDigm. The EBITDA As Defined margin from continuing operations came in at about 47.4% of revenues for Q1 of fiscal year 2018, an improvement year-over-year of just under 1 percentage point for the same period. Margin improvement progress is always a focus for us and indicates that our base business continues to find opportunities to drive improvement within our value drivers.

A few examples. Recent product line acquisitions of Preece, Cablecraft and North Hills are being integrated into AdelWiggins, AeroControlex and Data Device Corporation, respectively. These relocation integrations are an important part of our acquisition value-creation strategy, especially for product line acquisitions such as these. All of these moves will be completed within the year.

Additionally, in an ongoing effort to streamline and improve our cost structure, we periodically take the decision to consolidate some manufacturing locations to better drive organizational focus and productivity. We have recently announced the closure and relocation of our Dukes facility in Northridge, California to our Aero Fluid Products business in Northeast Ohio. This move will allow us to lower costs and leverage our customer relations and expertise to further grow what will become a product line for our Aero Fluid Products business.

Finally, let me speak to our organizational structure very briefly. As you are aware, Jim Skulina has accepted the role of Chief Financial Officer for TransDigm and, in doing so, has created a hole in our Executive Vice President leadership for our operating units. To backfill this need, we have promoted the following 2 individuals from within our President ranks: Alex Feil, who has been with TransDigm since 2002, working initially in sales in a number of business units before ultimately becoming the President of Schneller; and Rodrigo Rubiano, who has served as the President of Whippany Actuation Systems for the past 3 years. Both have been promoted to EVP, Executive Vice President, and will have a collection of business units reporting to them, with Rodrigo eventually moving to Europe as our European EVP. This action will provide TransDigm with capacity to grow and take on future acquisitions and ensure culture carriers are in place for future succession needs.

So let me conclude by stating, all in all, Q1 of fiscal year 2018 was another solid quarter for TransDigm. Focus on our value drivers of profitable new business, productivity and value pricing and the successful integration of our recent acquisitions will set us up for a strong 2018.

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

Thank you, Kevin. I'd like to expand on a few items included in our quarterly financial results and provide some color regarding the impact from tax reform.

First quarter net sales were $848 million, up $34 million or approximately 4% greater than the prior year. Our first quarter gross profit was $477 million, an increase of 7%. Our reported gross profit margin of 56.2% was 1.6 margin points higher than the prior year, primarily due to lower nonoperating acquisition-related costs, the strength of our proprietary products and a favorable product mix.

Our selling and administrative expenses were 12.6% of sales for the current quarter compared to 12.5% in the prior year. We had an increase in interest expense of approximately $15 million, up 10% versus the prior quarter. This is primarily a result of an increase in the weighted average total debt of $11.9 billion in the current quarter versus $11 billion in the prior year.

During the quarter, we repriced approximately $5 billion of our term loans to take advantage of better rates, decreasing LIBOR to plus 2.75% from LIBOR plus 3%. The expected annualized interest expense savings before fees is approximately $13 million related to this repricing. However, LIBOR has increased since our last earnings call, so we are now currently assuming an average LIBOR of about 1.7% for the full year instead of 1.3%. The 1.7% assumes LIBOR rates approach 2% by the end of our fiscal year. As a reminder, once the rates hit 2%, our credit swaps start to kick in. To analyze the impact of increasing LIBOR rates, there is an interest rate sensitivity table included in the slides we provided this morning. We are also actively looking to reprice our loans should the opportunity present itself.

The net impact of repricing and related fees was offset by the increase in LIBOR rate. As a result, we still expect our full year interest expense to stay at approximately $650 million.

Refinancing expense in the quarter was $1 million compared to $32 million in the prior year due to lower financing completed in Q1 of this year.

Now moving on to taxes. The U.S. enacted the Tax Cuts and Jobs Act on December 22, which significantly reduce the tax rates in Q1. The statutory federal rate dropped from 35% to a blended 24.5% for our fiscal '18 operations and to 21% for fiscal '19 and after. The changes related to interest, international operations and other law changes will not impact our effective tax rate until fiscal '19.

The tax act includes a onetime repatriation tax of historical foreign earnings of foreign subsidiaries. We recorded a provisional $23 million charge during the quarter for the transitional repatriation tax. In addition, we recorded a tax benefit of $170 million related to the remeasurement of our deferred tax balances related to the U.S. tax law changes. As a result, the effective GAAP tax rate was a benefit of 63.4% for the current quarter compared to a 14.4% provision in the prior year.

We now estimate our full year GAAP tax rate to be around 6% to 7%, and the adjusted tax rate is estimated to be 9% to 10%. The cash tax rate is expected to be between 19% to 21%.

The impact of the U.S. Tax Cuts and Jobs Act after 2018 is a little less clear. Some of the regulations are not yet fully defined. For planning purposes, I would assume our GAAP tax rate will be slightly higher than the statutory rates going forward as the interest expense cap will begin to impact us in 2019.

To answer the next obvious question, we do not see the tax law changes having an impact on our capitalization strategy. Debt will still be significantly lower in cost than equity despite the tax changes.

Our net income from continuing operations in the quarter increased $193 million, or 163%, to $312 million, which is 37% of sales. This compares to net income of $119 million or 15% of net sales in the prior year. The increase in net income primarily reflects a lower effective rate and, to a lesser degree, increases its net sales, lower refinancing costs and acquisition-related costs, partially offset by higher interest expense.

GAAP EPS from continuing operations was $4.60 per share in the current quarter compared to $0.41 per share last year. Both quarters were significantly impacted by the dividend equivalent payments paid on vested stock options of $56 million or $1.01 per share paid in the current quarter compared to $96 million or $1.70 per share paid in the prior period. Both payments were primarily related to the $46 of dividends we paid to shareholders in fiscal 2017. As a reminder, the accounting treatment requires this payment to be deducted from the actual net income before earnings per share is calculated.

Our adjusted EPS was $5.58 per share, an increase of 121% compared to $2.52 per share last year. This includes a $2.96 per share favorable impact from tax reforms. Excluding the favorable tax impact, current earnings per share increased 4% over the prior 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 almost $300 million of cash from operating activities and ended the quarter with $858 million of cash on the balance sheet. We are increasing our expected cash balance for the end of fiscal 2018 to be between $1.4 billion and $1.5 billion for the lower estimated cash taxes and to include the proceeds from the sale of Schroth. This assumes no additional acquisitions or capital structure activities.

Our net debt leverage ratio at quarter-end was 6.3x pro forma EBITDA As Defined, and gross leverage was 6.8x pro forma EBITDA. We still estimate our net leverage at September 30, 2018, will be between 5.6 and 5.5 -- 5.8 our EBITDA As Defined, assuming no acquisitions or capital market transactions.

We currently have adequate capacity to make $1 billion to $1.5 billion of acquisitions without issuing additional equity. This capacity grows steadily to over $3 billion as the year proceeds.

With regard to our guidance, we now estimate the midpoint of our GAAP earnings per share to be $15.61 per share, and we estimate the midpoint of our adjusted earnings per share to be $17.27. The increase in both GAAP and adjusted EPS was due to the change in estimated effective tax rates related to tax reform. Please see Slide 9 for a bridge detailing the $1.66 of adjustments between GAAP to adjusted earnings per share related to our guidance.

In summary, Q1 was a good start to fiscal 2018. Now I'll hand it back to Liza to kick off the Q&A.

Thank you, Jim. So we are ready to open the lines. (Operator Instructions)

(Operator Instructions) Our first question comes from the line of Robert Stallard from Vertical Research.

Nick, I thought we'd start on the aerospace aftermarket. You had a very good first quarter, but your guidance for the year suggests that things beginning to slow down from here. Was there anything unusual that you saw in Q1? Or is this just a bit of natural caution, given it's the start of the year?

I think it's just a bit of natural caution, Rob. As I said, if sort of things hang in at the end of the next quarter, it wouldn't surprise me if we move the guidance up. It's just after some bouncing around over the last few years, we tend to believe that one data point doesn't -- isn't enough to move on yet. But there's nothing quirky about it.

Okay. And then maybe as a follow-up, you mentioned that you're active in the M&A arena at the moment. Just wondering if you could give us a little bit of color of what you're seeing out there in terms of the properties, if there's anything that's looking particularly strong or weak or attractive at the moment?

Yes. Rob, as you obviously -- when I say we're active, we're active sort of, I guess, running around in circles, we're on a treadmill because we didn't close anything. But I mean, the same kind of stuff. Proprietary businesses is what we're looking at. We have 2 or 3 or 4 we've been quite active in, but not substantively different than our patterns in the past.

Our next question comes from the line of Carter Copeland from Melius Research.

Just a couple of quick ones. On the OEM piece, I wondered if you might be able to elaborate a little bit more on the timing. I mean, I know we had some wide-body rates that are down. But did you see any destocking of any significance on the A350? I know a couple of other guys had talked about that this quarter.

Yes. I lump that all into wide-body opportunity pushing to the left and slowed down some of the start-up. So the answer is yes, across the board to wide-body. Again, on that OEM side, we're not seeing any change in shipset content. So the opportunities we have continue to grow and expand. It's just the timing related. That's what we see so far.

Okay, great. And on the freight piece, clearly encouraging to see that bouncing a little bit here. Can you give us any color on just how significant that growth was, either in bookings or shipments?

Well, we don't want to -- I was just trying to give you guys some color. We don't want to go through what we presented last year with all the details for the submarkets. It is up nicely. It's not unlike, I think, the demand in the industry. You've seen the FTKs, the freight tons shipped metrics out there that continue to grow. I think 2017 expanded it 9%. I can't tie our freight business to that, but just to say that there is, both in the metrics and from what other folks are reporting, there's strength in the freight sector and we have seen it in our orders and shipments.

I think it's safe to say, if anything, that's probably a little better than we might have thought.

It is, it is.

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

Can we talk about the commercial aftermarket? It was up very nicely, up 10%, but your EBITDA grew 5%. So maybe just mix and what drove some of maybe the more muted profitability growth.

Kevin, do you want to touch on that?

Yes, sure. So it's a good question. Our profitability was up close to 1% year-over-year. I know that with the 10% growth in aftermarket, some would feel that maybe should be higher. As we look through it, the shipments that we had, we were impacted by some margin softness on the defense side that lowered our margins as a whole business. Specifically, I look to the parachute business that we have, our Airborne's businesses in North America and Europe. Certainly, we've seen some lumpiness in shipments and that has impacted some margins a bit across the business. Beyond the shipments that we had available to us we shipped, that's the only thing that I can see that might explain or does explain the somewhat lower margin than we would have expected. Some headwinds on the defense side of the business specific to our parachute business, which we've seen in the past, can be extremely lumpy and that came to pass this Q1 as well. Now for the year in those businesses, I think we still feel confident in our plans. That's just what we saw in the first quarter.

And for our year, we're still comfortable that we get up just a little under 50% of EBITDA.

Yes, that's right. Good point. So we have a first half and a second half ramp that is not unusual for us, getting close to the 50%, which is in our full year margin guidance. It's ramping over the year as per usual. I don't think there's any concern that we have that there's anything impacting us there.

Sure. And then, I guess, just one more. How does tax reform change capital deployment? Does it -- how does that...

Can you speak up? We can't hear you. Could you speak up a little?

Believe it or not, Nick, I'm yelling, but I always come off (inaudible). I'm loud. But how does tax reform change and interest rate deductibility change your acquisition hurdle from here?

Is the question, just to be clear I have it, how does the tax rules, the change in tax laws change our acquisition criteria?

Yes, exactly.

I don't think it changes it at all. I mean, we go through the same math we always go through, maybe you pay a little net more for -- our tax -- for interest. But on the other hand, you pay less taxes in total. I doubt if it has any material impact.

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

Just to follow up on the transport OEM sales decline. Any -- are you seeing any change in the portion of your sales that are sole-sourced? Or are there pricing dynamics? Or I just ask because most of your biggest content programs are probably seeing increases in production rates. So anything else there that we should be thinking about?

Nothing that I could put my finger on. No changes in shipset content. No change to sole-sourced position. No changes. It's very clear, as I look across the business, there are -- there's really nothing to report there.

Okay, great. And maybe just another one on tax and how it might impact M&A. Is it changing seller expectations in any way? I don't know if private companies are seeing better after-tax cash flow and that changes their willingness to sell. Is it impacting the M&A market in any way like that?

This is Nick, Matt. Not that -- I mean, if it is, it's too soon to tell. I suspect, I think that's probably slicing it too thin. I think people, by and large, make the decisions for sort of more macro issues than that. But it's too soon to tell, but I'd be very surprised.

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

Nick, can you update us on the status of your Partnering for Success negotiations and when you expect to conclude them?

Yes. I mean, I can tell you where we stand, which is we really -- there's no great progress going forward. We're in periodic discussions. The contract runs out at the end -- Kevin, I want to say calendar year '18?

Yes.

Calendar year '18, right, not fiscal year '18. I suspect there'll be little to report until we get very close to that. And we will still have the issue. If you recall, they typically conclude with a mutual confidentiality agreement, which would say you can't report a lot anyway.

Right. That makes sense. And then it sounded like things were kind of tracking to your expectations in the interior retrofits business. But I was wondering kind of when you thought you might start to get some better visibility there, given that, I would think, it's one of your aftermarket businesses that has a relatively large backlog relative to sales.

Yes, I think as the year progresses, we'll get more visibility on backlog orders business as it splits out. There's a lot that the teams are working on, on retrofits and fleet upgrades that continues to be promising. So time will tell as the orders are booked and placed, but there's a lot of activity.

I think it's probably safe to say, Kevin, we gave some rough guidance in the beginning of the year. And we really don't see any need to really change that now.

That's right.

Yes.

Our next question comes from the line of Rajeev Lalwani from Morgan Stanley.

Kevin, a question for you on the aftermarket front. Are you seeing a growing incidence of interactions with Boeing at all as a customer, that is, just given their push to take over some of the maintenance and procurement activities of some of the airlines?

I would say we're not seeing any activity there that is any different from the past. Nothing that I'm aware of.

Okay, that's helpful. And then just a clarification or a quick question on the tax side. Can you maybe just go over what you're expecting the tax rate to be going forward? I think before you were highlighting no real benefit from tax reform, but that seems to maybe have changed a bit. Maybe I'm just misreading what you guys are highlighting now.

Well, let me try at least -- I'll just answer the cash, and Jim, you can answer the rest of it. I think as we said, we expect $70 million extra cash this year in 2018. So that's one clear benefit. And Jim, do you want...

Yes. I mean, is your question 2018 or 2019 going forward?

Yes, more of the rest of fiscal '18 and then just on a go-forward basis, so 2019 and beyond, both tax rate and maybe the -- from a GAAP perspective and then a cash perspective.

It's a little bit hard to forecast 2019 and forward. All the regulations aren't yet fully defined. We believe it's going to be slightly higher than the statutory rate of 21%. The interest rate cap of 30% EBITDA kicks in, 2019 through 2021. That's going to be -- that's the piece you should probably take a look at that will impact us the most. But it's still going to be down from what it's been historically, so it's still going to be a positive for TransDigm. So -- but if you're going to -- for planning purposes, slightly higher than the statutory rate of 21% is what I'd suggest you use.

And I think it's safe to say, Jim, that we'll be reasonably significantly cash [in the plus each year.]

Correct.

Versus what it would have been otherwise.

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

I just wanted to ask first on the defense side. I mean, you highlighted or called out some really strong bookings for both the OE and the aftermarket. Can you just remind us again maybe how the business splits on the defense between OE and aftermarket or maybe what portion of your sales are book and ship? I mean, it sounded like you were clearly not wanting to get too excited about the bookings, specifically as it relates to the second quarter. But how should we think about this from a timing standpoint or the business mix?

So you asked a few things there. Let me -- just to -- for the split of OEM and aftermarket for defense business, it about splits like the rest of our business, 40-60, 45-55, about on with the rest of the business of OEM being slightly less than the aftermarket. What were the follow-up pieces to your question again? Can you repeat those?

Just how much of the businesses is book and ship, perhaps? Or what's the timing with the really strong bookings? Because it sounded like you were a little cautious about direct readthrough to the second quarter.

Well, I do that because, sometimes, we give -- or we try to give some bookings guidance and there's always confusion about when that will come in. We book -- or allow our businesses to place orders that -- or put orders into the booking system that are due in the next 2 years. So on the defense side, you have a lot more planning into the future on both the OEM and aftermarket side. So I was cautious that I wouldn't expect Q2 to go up some dramatic number. We're confident with our guidance on the defense side, and -- we see the opportunities coming in, and the order book seems to support that. That's -- it's just a caution as well as the timing of defense orders and when they're due to be shipped.

Yes. I think, Kevin, we don't know that we can draw any conclusion versus our year yet other than it's -- you got to look at it as a positive rather than...

Yes, not an unfavorable...

It's kind of a favorable data point.

Yes. And if I could, just one on the commercial aftermarket. I'm just curious, with the OEMs sort of getting maybe a little bit more aggressive on the aftermarket, airframe OEMs, has anything changed in your thinking or philosophy around distributors and maybe the types of distributors you use or for your aftermarket business going direct versus distributors?

We use distributors significantly in aftermarket. That is something that, I think, will continue. We always evaluate our relations on a business unit by business unit. But as a company, TransDigm, we do not direct our business units what to do. They have that local autonomy that we encourage as a key part of our culture. So they make decisions on what's best for their business. The major distributors that we track and sometimes report on, they only make up 25% to 30% of our business. So we already take a considerable amount of our aftermarket business direct. So moving distributors is a small part that -- of the aftermarket business and is really up to that individual business units to decide on. That's what we see and how we drive the business.

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

Nick, I may have missed this, but did you give details on the commercial aftermarket bookings? I know you talked about the strength in defense on the OEM aftermarket, but any color on how the commercial aftermarket trended in the quarter?

Yes, the bookings -- we didn't talk about it. The bookings are -- we didn't give a specific number, but the bookings are coming in ahead of the revenues. Because the book to ships is up.

Okay, okay. And then just sticking with the aftermarket. We're seeing a lot of provisioning strength in the marketplace on some of the newer platforms. You obviously had the good growth this quarter. Know you're hesitant to change anything for the rest of the year, but are you seeing any on some of your products where you have positions on those new airframes, are you seeing any provision-related growth in that aftermarket?

No. Generally speaking, provisioning -- additional provisioning is not a significant piece for us. And so we don't see provisioning as a headwind or a tailwind to any given quarter or year.

Got it, that's helpful. And then just last one, any color on the defense booking strength, specific product lines or platforms?

It's largely spread across our business units as well. In the past, we had called out a unit here or there that had significant bookings in a quarter, and that's not been the case. It is nicely spread both on the bookings and shipments across all of our business units -- or most of our business units, I should say. So it's nicely spread. It's not due to one program or one product or one company.

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

Nick, could you comment on your comfort with leverage here just in terms of, in the past, I think you've talked about willingness to go to 7x or 8x for the right acquisition? Is that still your level of comfort, given tax reform in the market and where we are in the cycle?

I don't think the tax reform changes my view on that. I mean, the fundamental question -- the fundamental issue there is that debt is very substantially cheaper than equity on an after-tax basis. And to the extent you feel comfortable carrying it, which a business like this should with its stability, you ought to be very biased on the debt side if you want to maximize the equity return. I don't think the tax law changes that. I think it's a fairly small tweak in the calculus there. What was the other question? On the leverage level, I would say, as a practical matter in the marketplace, you've been limited to around 7x in the last probably year or so. That may be loosening up a little bit, but it's too soon to tell.

Okay. And you mentioned an active M&A pipeline. Are you seeing larger properties in that pipeline that meet your criteria (inaudible)?

I would say more our typical size range of stuff. I can't say there's any -- I can't say there's disproportionately large group of candidates.

Got it. And is it mostly privates or are there also some public?

All of the above, which does not -- as I say all the time, predicting closing rates or closures is very difficult.

Understood. Last one for you, Nick, maybe you could just talk a little bit about your plans. I know you had this comp agreement that goes a number of years. And just what do you see kind of the next 5 years? Do you expect to be with the firm and in the same role or if any of your thoughts had evolved on that?

Yes. I don't think my thoughts have changed from all the things I've shared with people. As you know, I have a contract that runs out through 2019. And that contemplates, at some point, I would transition into a role like [playing] Executive Chairman that would be probably maintain a reasonable amount of responsibility for capital allocation and M&A activity and things like that. I don't think my thoughts have changed on that. I'm in no hurry to get out of here, and no hurry to disengage.

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

How do you think about the risks and the opportunities prevented from Boeing potentially forming a JV with Embraer?

I don't -- I can't really assess that. I don't see where there's any big particular impact to us of that. Embraer is one of many customers for airplanes not disproportionately large or small. So I think, in total, I think probably -- probably is always risky, but I'll say it anyway. I think we -- our content at Canadair is larger than our content at Embraer, just -- yes, just to put it into context.

But Embraer is good--

It's a good account.

Good accounts, good partnership we have.

I got you. And then, Nick, last summer you said you -- last May, you talked about there's been no growth in -- real growth in commercial aftermarket revenues in terms of pricing, ex pricing over the last 2 years. It's early in the year, obviously, but given the start, you're off with 10% commercial aftermarket revenues. And then what you just said about bookings being up more than that, are you hesitating to raise the guide, even though you're suggesting it's obviously possible. But are you hesitant to maybe raise the guide so soon because maybe you are seeing some pricing improvements and you haven't seen that in so many years that you're hesitant to sort of bank on it?

All of it. I never said we weren't seeing pricing improvements.

I thought you were saying there was no growth like ex pricing or whatever it was last May.

What I said is across the industry. What I said is last year, we went through a road show and also posted it up on our website, a look at the organic growth across the industry and for ourselves. And we concluded that over the last 5 years, if you strip out price, the commercial aftermarket in total growth was de minimis. I guess, that's what you're referring to?

I guess -- yes, I guess, I misinterpreted that.

I don't -- just to be clear. I don't think we ever said that there was particular pricing pressure. It was the underlying real growth, and we saw that across the whole industry when we went through all the public comps of our competitors. I would say 10% is obviously better than that. The prices aren't up 10%, so that's obviously real growth. And are we a little wary because of the volatility in the last 3 or 4? Yes, we are. The whole -- or that's not to say that -- we would very much like to be wrong. And I think we feel quite comfortable with our guidance. And as I said, if it hangs in pretty well, it wouldn't surprise me if we bumped it up next quarter. But we're reticent, as we said at the beginning of the year, unless there -- unless our guidance changes outside of the ranges, we're going to stick with our original guidance until we think we have a material change.

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

Maybe just sticking on that last point there and to your commentary last May about traffic no longer really driving aftermarket volume just due to the impact of younger aircraft. I'm curious, if you look at the number of aircraft that are reaching 5 years in service, maybe just using that as a proxy, it kind of points to double-digit growth in calendar '17, high single-digit growth in 2018 and 2019. And I think the ultimate conclusion from that was that the aircraft coming on lease was a bigger factor. So it seems like we should be seeing that now. And I'm curious, are you seeing that come to fruition or not? And can you just kind of talk around that a little bit?

Well, I think you saw in the quarter. I would say, and I just want to emphasize, 1 quarter, 1 data point doesn't make a trend. But obviously, what we saw in the first quarter, we view it as a positive. I also think, as we went through this last year, I don't think this is something that changes rapidly. This age of the -- this aircraft over -- percents less than 5 years and over 5 years, that doesn't make a step change. That's sort of a gradual thing. As it changes -- it'll change fastest if the production rates drop off. Now that doesn't mean we're cheerleading for production rates to drop off, but just mathematically, that will happen. But I think you have to look at the first quarter as a good data point.

Yes. And I think you guys always talk about rolling 4-quarter averages for your commercial aftermarket organic growth. And I think the last 4 quarters it's been kind of 4% and that includes price. And so I mean, maybe is that a reason that we should point to for the mid-single-digit growth maintaining for fiscal '18 for that guidance?

I think we gave you the guidance for the year, and I think what we're telling you is that's the guidance we continue to stick with. If we see -- if we get more data points that would make us think differently, then we'd likely adjust it. But as of right now, I think we're comfortable just staying with it.

Okay. And then just a quick one, maybe for Jim. It looks like you restated the December 16 adjusted EBITDA and adjusted earnings lower, and I wasn't quite clear in the release as to why that was. Perhaps I missed it, but can you just talk through that a little bit?

From Q1?

Yes, '16, fiscal '16.

All right. Yes. Basically, what we did from Q1 '17, we basically aligned our EBITDA As Defined with our credit agreement, all right? So when we report EBITDA As Defined, the as defined is basically per our credit agreement. We found a disconnect in that we were including the FX adjustments for revaluating the balance sheet. So we went back and corrected that.

Both periods.

In both periods so that we had apples and apples, correct.

Our next question comes from the line of Peter Arment from Baird.

Nick, just a quick one on the defense bookings or, I guess, the environment. Looks like we'll go out and get another CR extended out into March. Are you guys seeing any impact from that? Or when would you start to feel an impact if it got extended again?

I don't -- by the time that dribbles down to our level of buy, it's awful hard to see. I would be surprised if we see much. But the truth is, that's got to dribble its way, way down the -- way down the waterfall before it gets our orders. I don't see much change at least. Now if you made some assumption there's going to be a substantive dislocation of defense spending, well then, we'll start to see that, but I don't see people saying that.

Okay, great. And then just a quick one, Jim, a clarification. You said net leverage by the end of the year if you did no M&A or any sort of cash to shareholders?

It was 5.6 to 5.8.

Which is what we said at the beginning of the year, so no change.

(Operator Instructions) Our next question is coming from the line of David Stratton from Great Lakes Review.

Can you hear me now?

Yes.

Okay, sorry about that. The question was, given your credit swaps, what do you estimate is the percentage of your fixed debt to total debt?

It's about 74%, 75% fixed.

Yes. Fixed or collared.

Right. And then given that LIBOR is increasing, at what point do you get away from that derivative-based protection and transition your balance sheet to more fixed-rate debt in general?

You're talking about now a future philosophy, correct, not where it exists now?

Right, exactly, if it continues to rise, the interest rate.

We'd -- I would say we just have to evaluate that as the situation comes up. I'm very wary to speculate on what we do in different capital market conditions until we see them. As of right now, interestingly enough, though the LIBOR is rising, essentially, the spread on our debt for variable debt is dropping. This is so far such that the net interest paid isn't changing.

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

We just want to thank everyone for calling in today, and that concludes this morning's earnings call.

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