Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 TransDigm Group Earnings Conference Call. My name is Celia, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Liza Sabol, Investor Relations. Please proceed.

Thank you, Celia, and welcome, everyone, to TransDigm's fiscal 2013 Fourth Quarter Earnings Conference Call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. A replay of today's broadcast will be available for the next few weeks. Replay information is contained in this morning's press release and on our website at transdigm.com. Before we begin, the company would like to remind you that statements made during this call, which are non historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC. These filings are available through the Investor section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA As Defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA and EBITDA As Defined, adjusted net income and adjusted earnings per share for those measures. I will now turn the call over to Nick.

Good morning, and thanks again for calling in here about our company. As I usually do, I'll start off with some comments about our consistent strategy, then an overview of a busy fiscal year '13, the financial performance and some market summary for '13 and our initial guidance for fiscal year 2014. A fair amount to cover. To restate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. To summarize why believe this, about 90% of our sales are generated by proprietary products, around 3/4 of our net sales come from products for which we believe we are the sole source provider; excluding the small non-aviation business, about 54% of our revenues and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced higher gross margins and it provided relative stability in the down cycles. Because of our uniquely high EBITDA margins and relatively low capital expenditure requirements, we have, year-in and year-out, generated very strong free cash flow. We pay close attention to our capital structure and view it as another means to create shareholder value. As you know, we have, in the past and continue to be willing to level up when we either see good opportunities or view our leverage as suboptimal for value creation. We typically begin to delever pretty quickly. In keeping with that philosophy, we paid out $2 billion of special dividends and related payments in fiscal year 2013 or about 25% of our beginning of the year market equity value. During the year, we also raised about $4.3 billion of both senior debt and high-yield bonds at an average interest rate of around 4.4%. About…

Thanks, Nick. As Nick mentioned, in total, we had a good fourth quarter and a good finish to another very busy year. The consistent application of our operating value drivers and the successful integration of our most recent acquisitions continue to add solid value to TransDigm. Let me explain a little more detail our fiscal 2013 and fourth quarter operational value creation. In spite of a small economy, we were able to apply our value drivers and create real value. As Nick mentioned, our year-over-year pro forma growth was about 3%. A higher mix of commercial OEM work, coupled with the lower commercial aftermarket revenue, made managing our cost structure challenging. However, we continue to manage our resources tightly and we were able to continue to reduce our pro forma and total headcount. Our continuing productivity efforts included consolidating certain acquired manufacturing operations, strategically sourcing material from efficient domestic and offshore sources and moving various manufacturing operations to our Mexico, Malaysia, Sri Lanka and China facility. Lastly, we continue to invest in our existing domestic facilities, keeping them up-to-date and productive. We also continue to improve innovative -- we also continue to provide innovative new business solutions to our broad customer base. We have successfully expanded our platform content with significant new business in both the commercial and military markets. In the commercial transport market, we have developed many new applications and here's a few recent examples. Hartwell has been awarded the development contract for engine cowl latches on the A320neo. They're also developing the tail cone and belly fairing engines and latches on the Airbus A350. Champion recently developed and was awarded the ignition systems for the A350 auxiliary power unit. Adams Rite Aerospace is developing the laboratory faucets, valves, water heaters and various door latches on the 737…

Thanks, Ray. Before we review the financials, you may recall, last quarter, I described in depth some of the unique items that would impact our fiscal third and fourth quarters. We incorporated all of these items in last quarter's full year guidance but to review them, first, in early July, we raised $1.4 billion of additional debt to pay a $22 special dividend on July 25, directly related to the special dividend we paid $95 million in dividend equivalent payment to holders of vested stock options. You will see the impact of the additional dividend equivalent payment in our GAAP earnings per share and the additional financing increased interest expense in our fourth quarter results. Second, we successfully closed the 3 acquisitions for a total purchase price of about $475 million in our fiscal third quarter. As a result, higher acquisition costs and purchase price accounted items were recorded in the fourth quarter. Lastly, in the third quarter, we adopted segment reporting and are now reporting on 3 segments. Just to remind you, the power and control segment includes operations that primarily develop, produce and market systems and components that predominantly provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technology. Year-to-date sales for this segment are $872 million, which represents 45% of our total sales. The EBITDA As Defined is $456 million or 52% of sales and represents 49% of our total segment EBITDA As Defined. The airframe segment includes operations that primarily develop, produce and market systems and components that are used in nonpower airframe applications utilizing airframe and cabin structure technologies. Year-to-date sales for this segment are $951 million, which represents approximately 50% of our total sales. The EBITDA As Defined is $440 million or 47% of sales and…

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

[Operator Instructions] The first question comes from the line of Carter Copeland, Barclays.

Just a couple of quick ones. The first on the margin, the comment you made, Nick, around the core business at 49% next year. It looks like that's comparable to where you're exiting this year and you don't -- you're not implying any adverse mix shift OE versus aftermarket or commercial versus military. But there is -- there should be some good volume leverage there. I wondered if you might just elaborate on why it doesn't seem to be any expansion there?

I don't know if I can answer that, Greg. Greg?

I didn't follow that either. We've been going back and forth in so many different margins.

Yes, yes. The question, I guess, was at least when you do the adjustments and you adjust the other one, it looked like margins are about flat. Does that...

If you take the 47% and you add back the 200 basis points, you get to 49% on the core business, which is what you're guiding to for next year. So you've got some incremental volume and you don't have the same mix headwinds for next year, so I was just wondering why it wasn't up.

No, we do have some special non-repeat items this year. So when I looked at it my way, I was getting the margin improvement of about 1.5...

Yeah, I thought you were, too, that's why...

Carter, you've got to take FY '13 because we booked -- we still have 1 or 2 what we call onetime favorable adjustments or events that took place.

We think the number -- we think the underlying organic number is about 1 point.

1 point of expansion?

Yes. I think that's -- Greg says a hair more, by the way.

Okay. On the revenue side, the pro forma versus normalized aftermarket growth, it sounds like you pulled something out of distribution. Did that happen this quarter?

Yes, maybe...

Will this have some impacts in the next couple of quarters?

Yes. That's worth a little clarification. I mean, there's a couple of things. Carter, when we -- the data points we were getting and the stuff we were picking up in the industry and the data points we're picking right now, didn't seem to exactly jive with our segment number said. So we dug into that a little more and there were probably 8 to 10 items that impacted that. And you have big ones, or the most significant ones are, I'll say, primarily acquisition related. And some of them are -- make things a little higher in the previous quarter and some of them make things lower in this quarter. But let me give you a sense of it. The Whippany business that we bought from GE, the distributor inventories were too high. I think we told you this last quarter. And we decided when we bought, we saw this in diligence and decided we had to draw them down. So we purposely drew down their inventories this quarter and that will continue a little into next year. At the Arkwin business that we bought, they had a consignment inventory agreement with a distributor. We, essentially, that they recognize -- had recognized, sort of the way they looked at it, was in a similar consignment, it was a sale. We did away with that and changed the contract, but that essentially meant we didn't recognize the ones that revenue be recognized because we had burned off the consignment inventory distributor. We divested a -- if you may or may not recall, we divested a distribution business in Q4 of last year, but we didn't sell the AmSafe net product line with it. We kept that ourselves, then we had to find and restock another distributor in the prior Q4. And we also replaced the Pacific Rim distributor for one of our recent acquisitions and that sure got the inventory bouncing around. So that will give you a sense of the stuff. Those are some of the most significant ones that we tried to adjust for. I think the other way that I got some comfort here and -- is that we did these direct sale channel checks at our businesses and our large distributors and saw somewhere a little above the mid-single-digit pickup there, too.

Okay. So the guidance for next year on the high single-digit on the commercial aftermarket corresponds to the pro forma growth or does that correspond to normalized?

That is the number. That's the number we expect to see, okay? Carter, Carter, let me back up a minute. It is same-store sales basis. It's not GAAP, because GAAP number will always be bigger, right, before buying.

The next question comes from the line of Robert Spingarn, Crédit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: Just going back to the aftermarket sales you just talked about. I'm understanding that there's a little bit of growth there if you look through some of the items that Nick just reviewed. But it does seem to suggest that even at the low growth rate you come up with there against the flat, the volumes were probably down for the year and for the quarter with offset, to some extent, by pricing. So I wanted to ask you, how we could look at the difference between volume decline or just relative volume performance between out of production models and in production models fares for those 2 groups?

Rob, I don't know that I can tell you that. The real answer is I don't know the answer. But I don't know of anything unusually disproportionate between them. Robert Spingarn - Crédit Suisse AG, Research Division: But how would you characterize your relative exposure to the 2?

Oh, our exposure -- in the out of production stuff you're talking about? Robert Spingarn - Crédit Suisse AG, Research Division: Yes, 737.

737, 727, MD-80s, that kind of stuff, is that what you mean? Robert Spingarn - Crédit Suisse AG, Research Division: That kind of thing.

Yes. I mean, I haven't looked at that for about a year or so now, but I know the numbers that we -- that it was running were somewhere in the -- Greg, I want to say 3%, 4%, 5% of our aftermarket volume of [indiscernible] stuff.

Yes, yes. That's high.

I may be high on that. It's not a big number. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And then I wanted to ask -- and maybe we can go into more detail offline on that, but I wanted to also ask you about defense. So I think it's been better than expected the last couple of years.

Yes. Robert Spingarn - Crédit Suisse AG, Research Division: And wondering, in your assumption for flat next year, don't you think you might see some negative catch up from [indiscernible] volumes this year?

Are we clear -- Rob, that is clearly a risk. That's clearly a risk. I wouldn't tell you that's not a possibility. Robert Spingarn - Crédit Suisse AG, Research Division: Well -- and then maybe we can fine-tune it a little bit. Have you worked through -- if sequester were to happen as written, since it's not in your number, what kind of guidance sensitivity is there to that?

That's a very hard number. There's so many things bouncing all around. Rob, when we say a flat year-over-year, remember, there's price in there, right? So flat year-over-year means an absolute decline. So pick your number, but it's probably above inflation. So could you be down 10% rather than 4% units? If you told me that, I don't think I could argue with you. I wouldn't say I -- that doesn't appear to our operating units to be what they expect and at least, so far, from our bookings, we don't see it or we haven't seen the fourth quarter. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And then just, Greg, a clarification. If I look at your guidance and what you've said about the contribution of the acquisitions, is it fair to calculate you had about $80 million, $90 million in revenues in '13 from these 3 businesses and next year would be about the $200 million or a little higher? And so, about half of your -- what Nick said, about half of your revenue growth is from that and then the other $100 million something is...

Right, yes. It's roughly half of that.

Our next question comes from the line of David Strauss, UBS.

Greg, you mentioned about, I think it was $450 million in cash generation; and, Nick, you said about $1 billion. I would've thought it was a little bit higher than that by the end of next year, maybe around 1 1, is there any unusual movements in cash next year? It looks like you're forecasting about flat in line with this year.

We'll, pay quite a bit more in cash taxes next year. This year, my cash taxes were about $82 million, which was extremely low versus my provision. Next year, my cash taxes are going to be more like $160 million. So you got to factor that as you're just looking at year-over-year. That might be one of the things that might help you, Dave.

Yes, yes, that's probably it. Back on the defense side. Nick, how long is it carrying over or how much longer does that run? Does that benefit your numbers at all next year?

Yes, it benefited some. We -- if we're lucky or hopefully, we can sell some more of it, but we booked about $18 million, I want to say $18 million of it and roughly half of it is shipped this year and half of it will ship next year.

Okay. So X that, things you're forecasting a little bit worse than might be taking it face up?

Yes, yes, yes. If you took that out, you'd be down a little more.

Yes. And we're actively trying to roll that out to other governments and we have active negotiations that I don't want to get into the details with, with other governments on that product.

Okay. And then lastly, Nick, maybe any additional color, perspective on discussions with Boeing, Partnering for Success or royalties or any progress update with regard to that?

I think, David, we've got to say the same thing we always said. We're not going to get into the details of a negotiation with our customer. It's an ongoing activity. I think we, along with many people around the industry, sort of -- probably the activity levels sped up a bit in the last quarter. But I don't know if our position is a heck of a lot different than it's in the past.

Your next question comes from the line of Yair Reiner, Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Just some questions on the M&A environment. You mentioned that there are more prospects right now on the defense side. Can you maybe give us a flavor for the difference in the purchase price? And also maybe you can discuss your tolerance for turning TransDigm into more of a defense company and what is the limit you're willing to go towards?

We don't -- don't have any rule on that. What I said is we see more -- I didn't necessarily say there were more defense businesses than there were commercial. I said there were probably more defense businesses in our prospects than there typically are. Doesn't mean there's absolutely more than there are commercial. We evaluate defense businesses just like we evaluate commercial businesses. They -- in all likelihood, the revenue is -- the growth is going to be lower or declining, which means the price, we can't pay as much of a price. But we still have to see a private equity like we heard, which we see, say, is a 20% IRR our equity in the thing. But we look at them the same way. We don't have a rule for what percent of defense we go to, but, I mean, we have no intention of turning this into a primarily defense business. Yair Reiner - Oppenheimer & Co. Inc., Research Division: Got it. And then just one more. You mentioned that in the current interest rate environment, paying down debt is not very appealing and that makes sense. Where do interest rates need to go for you to think maybe this could take some leverage off and conservatize the balance sheet?

Well, I would -- first, I don't know the answer to that. It would be very dependent on what the situation with acquisitions and the like was at the time. Our first choice is always going to be to fund our existing businesses for the next accretive acquisitions. So that's a tough one to answer theoretically. But I would also say that our goal here is to give our shareholders over time private equity like returns, which we define is 15% to 20% return on their equity over time. We are not going to get that without staying in a reasonable leverage level.

The next question comes from the line of John Godyn, Morgan Stanley.

John Godyn here. I wanted to follow up on the last question on M&A. We've seen other acquisitive companies out there respond to what might be a little bit of a tougher aerospace deal environment by looking at verticals outside of A&D, oil and gas has come up. Is there any appetite for TransDigm to look outside of A&D for M&A?

Not at this time. We think we got enough runway in front of us. If that turned out to be the case, then we'd have to decide. But we have other alternatives. One alternative is to open the aperture up a little on proprietary content and then you see many more things. That's not our desire nor our intention right now, just to be clear.

But that's all within aerospace.

Yes, but that's all within aerospace. The other alternative we frankly have, we always have, is to be more aggressive with our capital structure and more path. If we don't see enough to buy that meets our criteria. But our goal now hasn't changed. We want to buy proprietary aerospace businesses with significant aftermarket content.

That's very helpful. And if I could ask one on aftermarket in general, how much capacity is there to sort of accelerate price growth to offset some of the volume weakness or some of the volume weakness that we're seeing price sensitivity among customers and then responding one way or another?

No, it's just the -- I don't want to speak much to the price, what we might or might not do with the prices. But I -- there's not a lot of elasticity and demand here for the price. I mean, the stuff tends to be sole source.

Your next question comes from the line of Robert Stallard, Royal Bank of Canada.

Nick, I think on the last call you mentioned you had a survey done about what was going on the aftermarket and one of the things you called out was the Asian airlines have destocking and deferring. Have you seen that regional trend improve since then?

I honestly can't say whether that's changed much in the last 90 days, I don't think it has. Clearly, the European airlines have gotten a little better. And I don't believe the situation has changed much in the Asian airlines on stocking, but I honestly can't say we took another set point in the last 90 days. I cannot say we have.

And maybe to follow up on the defense side of things. Obviously, the DOD has got some spending challenges at the moment. Are you seeing them being anymore strict on pricing or inventory levels or anything like that?

We haven't yet. As I say, our defense is holding up better than we anticipated and at least, so far, the bookings are holding up, too. And we really haven't seen significant changes.

The next question comes from the line of Ken Herbert, Canaccord.

I just wanted to follow-up on the question regarding the aftermarket. When you talked about some of the work that you had, [indiscernible], a couple of quarters ago, you talked about the inventory issues in Europe and Asia as ideally in sort of the bucket of sort of onetime or near-term issues. It sounds like you haven't seen maybe much change on that front. Do you think -- to what extent do you think this is still sort of a near-term issue that gets corrected as volumes start to pick up again versus structurally, are you getting a sense that maybe there's some changes with your airline customers that are -- maybe you want to have a bigger impact perhaps than we've seen in prior cycles?

Well, what I don't -- in prior cycles, what has happened is eventually the, inventories snap back. So you got a year or 2 of very high growth. The most recent instance I want to say was probably 2011, after a bad year '09 and '10 it probably jumped up around the industry 20%. And then, obviously, that was a little bit of an overshoot, which we probably gave some back in '13. Different people -- I hear speculation that the airlines are getting better with their inventory control. And you may not see as much snapback, it may just more start to couple with underlying air travel. Obviously, you can see in our go-forward numbers, we are not planning on an inventory snapback. There is -- if there is one, that would be unusual, by the way, if there wasn't a snapback, that would say their airlines are getting better at managing their inventory. If there is, that's an upside to our forecast in the year.

And is it safe to say that the guidance implies maybe a strengthening commercial aftermarket as we go through the year? I mean, your commentary on the first quarter seemed to imply that maybe things strengthen as we go through the year. How do you see that cadence playing out?

Well, I think I specifically said, we expect the second half to be better than the first half. And the -- our first quarter of our year is always lower than the rest of the year and it has about 10% less days in it, in the quarter, our Q1. Our Q1 captures Christmas and Thanksgiving.

Okay, okay. So most of the first quarter impact is, obviously, just a reduction in working days?

Right. I mean, if you got -- and just what I -- the point I try to make and maybe I wasn't clear with it, if you got the same shipments in dollars from Q4 to Q1, effectively, you would have had a 10% pickup in shipments per day if that's clear.

Our next question comes from the line of Michael Ciarmoli, KeyBanc.

Nick, I know you don't want to get too much into price, but just to get a sense here, Ray had a number of comments about the value creation, mentioned cost consolidation, headcount, but didn't mention price on any of those recently acquired businesses. Can we assume that price is still the same value creation lever it is, say, a couple of years ago?

Nothing's changed in the businesses, the recent businesses we bought. We look at them the same way, we evaluate them the same way. They've got to have the same attributes and we got to see what I call a private equity like return, which means we have to change the margin.

Okay, okay. And then can you remind us, I mean, a couple of years back in your, I think it was in your Investor Day presentation, you used to call out some of the major platform exposure. Within the defense kind of market, should we still be thinking at Black Hawk, C-130, C-17 as your biggest programs or has that changed to some extent?

You mean in aftermarket or production?

I would say aftermarket or production. What do you think could have a bigger -- be the biggest variable? I mean, if we see Black Hawk OE units go down significantly, is that going to create a headwind? I mean, what's the most sensitive to revenues?

We -- let me answer that this way. C-130 is still our biggest, by the way. In the aftermarket, it's pretty well spread. I would say, if I look at next year, in the OEM production rate, I don't think there's a whole lot of risk there. Those are -- we tend to be sole sourced, the things are pretty well locked for the next, what do we got now, 10.5 months or something is what you're looking out on. And the variation will come in the aftermarket. That's right, that's where the risk is.

Okay, okay. And can we assume that, that would be more helicopter exposure aftermarket if readiness levels go down, would that be a factor?

Yes, probably. As I think we've told you, roughly our defense business, in our defense aftermarket is something like 1/3 transport, 1/3 helicopter and 1/3 other, which is mostly fighters.

\ Other odds and ends of things, too.

Got you. Okay. That's helpful. And then last one, just a housekeeping. Greg, on the interest for next year, is that sort of annual interest expense you're looking at pretty fixed? I know you've got a portion the debt that floats. How much variability is there to that interest expense next year?

I think '14 as the base, that there's a little bit, but most of it will get fixed toward the end of the calendar year of '14. So we're still guiding the floating rate.

At this time, I will now turn the call back over to Ms. Liza Sabol, Investor Relations. Please proceed.

Just wanted to thank everyone again for joining this morning's call, and just wanted to point out that we expect to file our 10-K some time tomorrow.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.