TransDigm Group Incorporated (TDG) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2014 TransDigm Group Incorporated Earnings Conference Call. My name is Sheila, and I'm your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Liza Sabol, Investor Relations. Please proceed ma'am.

Good morning, and welcome to TransDigm's Fiscal 2014 Fourth Quarter Earnings Conference Call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC. These filings are available through the Investors section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA As Defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA and EBITDA As Defined, adjusted net income and adjusted earnings per share to those measures. With that, let me now turn the call over to Nick.

Good morning, and thanks, everybody, for calling in this quarter to hear about our company. Today, I'll start off with comments, as usual, about our consistent strategy, then an overview of a busy fiscal year '14, our financial performance and market summary for '14 and initial guidance for fiscal year '15. A fair amount to cover here today. To restate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the cycle. To summarize some of the reasons why we believe this. About 90% of our net sales are generated by proprietary products, and around 3/4 of our net sales come from products for which we believe we are the sole source provider. Over 1/2 of our revenues and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and have provided relative stability in the downturns. Because of our uniquely high EBITDA margins and relatively low capital expenditures, TransDigm has, year in and year out, generated strong free cash flow. This gives us a lot of operating and capital structure flexibility. We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we have a simple, well-proven, value-based operating strategy based on our 3 value drivers concept. Third, we maintain a decentralized organization structure and a unique compensation system with executives and senior management who think, act and are paid like owners. Fourth, we acquire proprietary aerospace businesses with significant aftermarket content where we can see a clear path to private equity-like returns. And lastly, we view our capital structure and capital allocation as another means to create shareholder value. We have been in the past, and continue to be, willing to lever up where we either see good opportunities or view our leverage as suboptimum for value creation. In keeping with that philosophy, we returned about $1.6 billion to the shareholders in fiscal year 2014, primarily in the form of a $25 per share special dividend and some related payments, and also a modest share buyback. This total payout was about 20% of the market equity value at the start of fiscal year 2014. As part of this effort, we successfully refinanced our capital structure and borrowed approximately $3.4 billion. Almost 1/2 of this was used to pay the dividend I previously mentioned. The majority of the balance we used to refinance the 7 3/4% bonds to reduce the interest expense, extend the maturities and increase flexibility. In deciding to pay out another special dividend this year, as usual, we looked closely at our choices for capital allocation. To remind you, we basically have 4, and our priorities are typically as follows: one, invest in our existing businesses; second, make accretive acquisitions, consistent with our strategy, and these 2 are almost always our first choices; three, giving the extra back to the shareholders either through a special dividend, most often or, at times, a stock buyback; and last, pay off debt, though given the low cost of debt, especially after tax, this is likely our last choice in current capital market conditions. After paying the most recent special dividend, buying back about $160 million of our stock, making 2 acquisitions for $310 million, we still closed fiscal year 2014 with $820 million in cash, about $400 million in unrestricted and undrawn revolver and additional capacity under our credit agreement. We ended the year with a net leverage of about 6.2x EBITDA. At 9/30/14, based on current capital market conditions, we believe we have adequate capacity to make over $2 billion of acquisitions without issuing additional equity. This capacity grows as the year proceeds. This does not imply anything about acquisition opportunities or anticipated acquisition levels for fiscal year 2015. Interestingly, since the beginning of fiscal year 2013, we have returned about $3.6 billion or almost 50% of the market equity at the start of fiscal year 2013 to the shareholders. In that same time frame, we made 5 acquisitions for a little under $800 million, we fully supported our existing businesses and maintained a healthy cash balance and significant dry powder for acquisitions. As you may have seen, we announced a few significant management changes recently. Ray Laubenthal decided to retire after 21 years with TransDigm. Ray has been involved in most major decisions and activities with me at TransDigm since the formation of the company. He has been a key part of building the company. Ray remains a significant investor in TransDigm, and we intend that he will move to the board early in calendar year 2015. The board and I regularly discuss succession planning for the CEO, senior executives and key operating unit managers. It's an essential part of our long-term value generation efforts. As we reflected on our growth -- as we reflected on our growth in long-term succession planning, the board and I thought that it would be advisable to add a few additional high-caliber executives to our senior management team. In keeping with that plan, we hired Kevin Stein to be a Chief Operating Officer of our power segment. This segment makes up about half of our business. Kevin is an impressive senior aerospace executive with extensive operating experience. He comes from Precision Castparts, an aerospace company I respect. It's well managed and has consistently generated substantial shareholder value. We gave some additional background on Kevin in the recent 8-K and press release. Kevin is a high-caliber upwardly mobile addition to our management team. He's coming into a job that will allow him to quickly learn both our business and also contribute meaningfully to our value generation activity. Additionally, Bob Henderson, the new COO of the company's airframe business group, has been a key member of our team for the last 20 years. Bob has also been a significant partner in the company's growth and brings a unique understanding of our culture, history and value creation process. Bob has been closely involved in most major decisions and activities at TransDigm for many years. He's been an Executive Vice President for years and responsible for a broad range of the company's businesses and many acquisition integrations. As you may know, I have recently extended my contract through 2019. TransDigm has no mandatory retirement age nor do we have any specific timing for me to transition out of the CEO role. My contract does have a mechanism for me to become an active executive chairman, if that is appropriate at some time. At such time, as my transition to Executive Chairman becomes appropriate, we will pick the best available internal or external candidate for the CEO job. To be clear, we have no fixed time schedule for CEO transition nor have we settled on a specific successor. Now to summarize fiscal year 2014. 2014 was a busy year. As I said, we raised and distributed significant amounts of capital. We acquired Airborne Systems and EME for $310 million, and we continued the integration of our various other acquisitions. All the while, we contribute to generate real, intrinsic value in our new and existing businesses and create shareholder value. Turning to our 2014 performance. I'll remind you, this is the fourth quarter and full year summary for fiscal year 2014. Our fiscal year ended in September 30, 2014. As I've said in the past, quarterly comparisons can be significantly impacted by differences in OEM, aftermarket mix, large orders, transient inventory fluctuations and modest seasonality and other factors. But after a bumpy 2013, the commercial aftermarket recovered nicely in 2014. The total company GAAP revenues were up 19% versus the prior Q4 and 23% on a full year basis. Organic revenues were up 10% on a quarter-versus-quarter basis and 8% on a full year growth basis. Reviewing the revenues by market category. Again, on a pro forma basis versus the prior Q4 and prior full year -- this is Slide 5, by the way. That is assuming we own the same mix of businesses in both periods. In the commercial market, which makes up about 70% of our revenue, total commercial OEM revenues were up 7% versus the prior Q4 and 8% on a fiscal year basis. This is primarily driven by commercial transport OEM revenues, which were up 12% on a full year basis. The commercial transport growth primarily reflects increasing production rates. Biz jet, helicopter and GA revenues were, in total, about flat year-over-year. After a softer 2013, total commercial aftermarket revenues recovered well in fiscal year '14. On a Q4 versus prior Q4 basis, revenues were up 18% and up 12% on a full year basis. For both the fourth quarter and the full year, commercial transport aftermarket revenues were up even higher percentages. However, this was offset by biz jet, helicopter and GE aftermarket revenues -- Oh, I'm sorry, biz jet, helicopter and GA aftermarket revenues, which were up only very slightly. Sequentially, revenues were up modestly. The defense market, which makes up about 30% of our revenue. Defense revenues were about as anticipated. Revenues were up 3% versus the prior year fourth quarter and roughly flat on a fiscal year versus fiscal year basis. Excluding Airborne, defense revenues were up 6% for the full fiscal year. Defense revenues were spotty by unit. With no clear trends, though more were up than down. Fourth quarter defense bookings were down significantly versus the prior Q4. Year-over-year bookings were about flat. We saw weak Q4 military bookings in most of our operating units. Though the world doesn't seem safe, given the -- doesn't seem too safe, given the uncertain political situation and the lumpy bookings, we remain cautious about trends in the military. In total, for fiscal year '14, our revenues for commercial aftermarket ended up a little better than we expected, while the commercial OEM and military revenues were about the same as we expected at the start of the year. Moving on now to profitability and, on a reported basis, I'm going to talk primarily about our operating performance or EBITDA As Defined. The As Defined adjustments in Q4 were noncash compensation expenses and some acquisition-related costs. Our EBITDA As Defined of about $291 million for Q4 was up 17% versus the prior Q4. On a full year basis, our EBITDA As Defined was $1.07 billion or up 19% from the prior year. The EBITDA margin was about 40 -- As Defined was about 45% of revenue for both Q4 and the full year. The full year margin, without dilution from the impact of the 5 acquisitions purchased in '13 and '14, was approximately 48% or up 1% versus fiscal year '13. With respect to acquisitions, we continue actively looking at opportunities. The pipeline of possibilities is active. The closings have been slow. We have seen a fair amount of activity recently, but the closings are always difficult to predict. We remain disciplined and focused on value creation that meets our tight criteria. Moving now on to 2015 guidance, and I believe this is Slide 6. Once again, the military situation is unclear. I know that sounds like a broken record, but that's how we see it. The commercial aftermarket appears to recovery -- to be recovering nicely as we head into 2015. This is our best current estimate. As you know, we'll update this as the year proceeds. But based on the above and assuming no additional acquisitions in fiscal year 2015, guidance is as follows. The midpoint of the 2015 revenue guidance is $2.53 billion or up about 7% on a GAAP basis year-over-year. The fiscal year 2015 Q1 is currently anticipated to be lower than the other quarters, roughly in similar percentage relationship as fiscal year '14. The midpoint of the 2015 EBITDA As Defined guidance is $1.17 billion or about 46.5% of revenues. That is up 9% in total year-over-year. We anticipate EBITDA margins will move up throughout the year as we've seen in previous years. The base business, that is, excluding the same 5 most recent acquisitions I talked about just a minute ago, is anticipated to achieve an EBITDA margin of a little over 49% or up a bit over 1 point. The midpoint of the EPS as adjusted is anticipated to be $8.16 a share or up 5% versus the prior year. This is negatively impacted primarily by higher interest rates and, to a lesser degree, the higher tax rates. Greg will go through some of the details with you on that. On a pro forma or same-store basis, this guidance is based on the following growth rate assumptions. Commercial aftermarket revenue growth in the high single digits based on worldwide RPM growth in the 4% to 5% range. We're a little cautious here due to both tough comps as the year proceeds and also some pretty heavy buying in the second half of fiscal year 2014. The defense and military revenue is estimated, again, to be about flat versus 2014. We'll continue to evaluate this as the political situation unfolds. Given the world events, there could clearly be some variation here, but recent bookings have been broadly weak, and the military and political situation is unclear. In summary, this all leaves us pretty uncertain. The commercial OEM revenue growth is anticipated to be in the mid-single-digit percent range primarily due to the 2015 and '16 commercial transport production rates. Without any additional acquisitions or capital structure activity, we expect to have almost $1.3 billion in cash, a $400 million undrawn revolver at year-end 2015. Again, assuming no acquisitions or other capital structure activity, our net leverage is anticipated to be about 5.2x EBITDA at the end of '15. We also have additional capacity under our credit agreement. In summary, 2014 was a good year. I'm confident with our consistent value-focused strategy and strong mix of business, we can continue to create long-term intrinsic value for our investors. And now let me hand this over to Ray who will discuss some operating high points of fiscal year 2014. And Ray will also sign off. To quote a famous politician, after this call, "You won't have Ray Laubenthal to kick around anymore."

Thanks, Nick. As Nick mentioned, in total, we had a good fourth quarter and a good finish to another very busy year. The consistent application of our value drivers and the successful integration of our recent acquisitions continue to add solid value to TransDigm. Let me explain in a little more detail our fiscal 2014 and fourth quarter operational value creation. Although the commercial transport market is on the upswing, we've continued to tightly manage our cost structure, and we were able to continue to reduce our pro forma total headcount. Our continuing productivity efforts include consolidating certain acquired manufacturing operations, strategically sourcing material from efficient domestic and offshore sources, moving various manufacturing operations to Mexico, Malaysia, Sri Lanka and China facility and investing in our existing manufacturing facility, keeping them up to date and productive. 2014 was also another record year for new business orders. We continue to provide innovative new business solutions to our broad customer base. We have successfully expanded our platform content with significant new business in both the commercial and military markets. I would like to briefly highlight one of the significant new business programs we were awarded during the second half of 2014. In the commercial transport market, we have continued to provide engineered solutions and expand our content on the new platforms. On prior calls, I spoke in detail about our new business awards on the A350 program. Those design programs have continued to progress well, and we are now bidding on and developing engineered products for the new engine options on the Airbus and Boeing fleet. On the A320neo, our Arkwin unit's providing the engine fans, cowl latches and engine nacelle hold-open rods. Our Harco group is providing the engine fan case temperature sensors. Our Champion aerospace group is providing the ignition system on the Pratt & Whitney PurePower PW1100G geared turbofan engine option. And on the 737 MAX, Hartwell is also developing the engine nacelle latches and thrust reverser latches. They're also developing the pressure relief doors for the engine pilot [ph]. And on the 777X, it's in the early stages, and we're quoting many of the similar engine-related accessories, power products and engine nacelle and cowling latches and hinge applications as listed above. We're being told by Boeing and Airbus -- we're being told, Boeing and Airbus are targeting to primarily just upgrade the existing Boeing 737, Boeing 777 and the A320 platform with more fuel-efficient engines. We expect the vast majority of the airframe configuration to remain the same as the legacy aircrafts. That being said, we expect our numerous existing engineered product applications on those platforms to remain in place and our shipset content to remain stable or increase modestly. Also, during the second half of fiscal 2014, we continued to supply the commercial airlines with interior upgrades. Our Schneller unit recently was awarded Boeing 777 cabin interior laminates and seat laminate refurbishments at KLM, Air France, Singapore Airlines and China Eastern. Our AmSafe unit continued to get new applications of their airbag seatbelt restraint system primarily used in the first class and business sections when the new seat configurations are pivoted or angled. And our Bruce lighting group has been awarded energy-efficient, bi-color LED lighting at Delta on their Boeing 737 and 757 fleet. They're also providing new LED cabin lighting at Swissair and Canada Jet Airlines -- CanJet Airlines, excuse me. In the military market segment, our Arkwin unit was awarded the hydraulic system reservoir for the upper and lower rotors on the new joint multi-role helicopter that Boeing and Sikorsky are designing. On the predator drone, our Aero Fluid Products group was awarded the extended range fuel valves. On the C-130J, our Avionic Instruments unit is supplying an upgraded regulated transformer rectifier unit and also a frequency converter system to supply hospital-grade 230-volt electrical power for essential airborne medical equipment. And our recently acquired Airborne North America unit was awarded the reentry vehicle parachute system on the Boeing commercial crew transport capsule. They also continue to receive large orders for their new T-11 and MC-6 military parachutes. The normal progression of their product sales are, first, to the U.S. government, which occurred in prior years, and then they roll out their products to our allies. So far this year, Israel, India and Jordan all placed orders for the T-11 and MC-6 parachutes. All these orders will ship out in fiscal '15. Airborne's newest ram-air parachute, the RA-1 had orders in 2014 totaling $24 million from the U.S. government. The bulk of these new orders will also ship in 2015, and we expect the RA-s1 will also eventually be sold to our allies. These new engineered solutions from our operating units, and many others not discussed, continue to expand our profitable product offering and add to our future growth. In fiscal '14 -- 2014, we also acquired 2 proprietary aerospace businesses: Airborne Systems and Elektro-Metall Export. We quickly went to work transitioning these businesses into TransDigm's value-creation mode. To provide better product focus, we split the Airborne Systems business into 2 separate operating units: one, in North America, focusing primarily on the military personnel parachutes and cargo system parachutes; and one in the U.K., focusing primarily on parachute aerial delivery systems and electronic warfare. As we have done with each prior acquisition, we applied our proven value-creation processes. One, we restructured the businesses into product line focused groups and implemented our value-creation metrics. And we focused the engineering and new business efforts on winnable and profitable new business. And we tightened up the cost structure. Lastly, I'd like to say my 21 years working with the team at TransDigm has been exceptional. I believe our TransDigm business culture is truly unique. We work hard creating a lot of value and have a hell of a lot of fun working with each other. I intend to continue as a significant investor as I move on to the TransDigm board. I'll enjoy watching the continued growth and success of this great company. Now let me sign off, and hand it over to Greg, who will review our 2014 financial results in more detail.

Thanks, Ray. Nick already summarized the key events that occurred in FY '14. So I will now review the consolidated financial results, starting on Slide 7, for our fourth quarter and then give a brief fiscal year summary. Q4 sales were $642 million and 19% greater than the prior year. Our organic sales were 10% higher than last year, driven primarily by strong growth in commercial aftermarket and, to a lesser extent, commercial OEM and defense sales. Reported gross profit was $349 million or 54.3% of sales. The reported gross profit margin was approximately 1.9 margin points higher than the prior-year margin of 52.4%. Although margins in the current quarter were negatively impacted by approximately 1.5 margin points by acquisition mix from Airborne and EME, this was more than offset by decreased nonoperating acquisition-related costs versus the prior year. These costs consist primarily of inventory step-up and start-up expenses. Excluding all acquisition activities, our gross profit margin in the remaining business versus the prior-year quarter improved approximately 2 margin points. The base business has continued to expand margins as a result of the strength of our proprietary products and to continually improving our cost structure. Selling and administrative expenses were 11.9% of sales for the current year -- for the current quarter compared to 11.3% for the prior year. The current quarter was running a little higher than the prior period, primarily due to the acquisition mix, but was about flat for the full year after excluding stock comp expense and acquisition-related costs. Interest expense was $97 million, an increase of approximately $16 million or 20% versus the prior year quarter. This is the result of a 32% increase in the weighted average total debt to $7.5 billion in the current quarter versus $5.7 billion in the prior year. The higher average debt year-over-year was due to the third quarter dividend financing discussed earlier. The weighted average cost -- cash interest rate on the total debt at the end of the current quarter is approximately 4.9% compared to 5.4% at September 30, 2013. Our effective tax rate for the year was 31.6% for fiscal 2014 compared to 32.5% for fiscal '13. The lower current year tax rate benefited from some favorable foreign tax credits. Our net income for the quarter increased $30 million or 36% to $114 million, which is 18% of sales. This compares to our net income of $84 million in the prior year. The increase in net income primarily reflects the growth in net sales and lower nonoperating acquisition-related costs, partially offset by the higher interest expense. GAAP earnings per share was $1.91 per share in the current quarter compared to a loss of $0.20 per share a year ago or an increase of $2.11. 3/4 of this increase is attributable to the dividend equivalent payments made in the prior year. The current quarter included dividend equivalent payments of $0.11 per share compared to $1.67 paid in the prior year. Our adjusted earnings per share was $2.21 per share, an increase of 26% compared to $1.75 per share last year. The increase in adjusted earnings per share is higher than the increase in EBITDA As Defined of 17%, primarily due to the benefit of the lower effective tax rate in the current quarter. Again, please reference Table 3 in this morning's press release, which compares and reconciles GAAP to adjusted earnings per share. Since this is our fiscal year-end, let me take a minute to quickly summarize some significant items. Net sales for the year increased $449 million or by 23% to end our year at $2.4 billion in revenues. Acquisitions contributed approximately 65% of the increase in sales, and our organic sales were strong at 8% above the prior year. Reported gross profit increased 21% to $1.27 billion and was 53.4% of sales compared to 54.5% in the prior year. Excluding all acquisition activity and stock compensation expense, our full year margin versus the prior year improved approximately 1 margin point. Selling and administrative expenses of 11.7% of sales for fiscal '14 is lower than the 13.2% of sales in fiscal '13 due primarily to lower noncash stock compensation expense. Additionally, the current year includes lower acquisition-related costs. Excluding noncash compensation expense and acquisition-related costs, selling, general and administrative expense was about 10.5% of sales for both periods. Net interest expense increased $77 million due to the additional debt incurred to fund the quarter third dividend of $25 dividend -- I'm sorry, of the 2014 $25 dividend discussed earlier and the July 2013 financing associated with last year's $22 special dividend. Despite increasing total debt, we decreased our weighted average cash interest rate for fiscal 2014 to 5.3% compared to 5.6% in the prior year. Adjusted EPS was $7.76 per share this year, up almost 13% from $6.90 per share a year ago. The increase in EBITDA As Defined of 19% was partially offset by higher interest expense and share count. Switching gears to cash and liquidity. The company generated $540 million of cash from operating activities, and we closed the year with $820 million of cash on the balance sheet. The company's gross debt leverage ratio at September 2014 was approximately 6.9x pro forma EBITDA and 6.2x on a net basis. All things considered, we believe FY '14 was another great year for TransDigm and our shareholders. As we look forward to fiscal '15, we estimate that the midpoint of our GAAP earnings per share to be $7.64. And as Nick previously mentioned, we estimate the midpoint of our adjusted earnings per share to be $8.16. As we disclosed on Slide 9, there are $0.52 in adjustments to bridge GAAP EPS to adjusted EPS. In addition, there are a few other items for FY '15. Depreciation and amortization, that's including backlog amortization of approximately $2 million, is expected to total $83 million in 2015 compared to $96 million in '14, which included backlog amortization of approximately $17 million. Interest expense is expected to increase 15% to approximately $400 million in FY '15. We use the weighted average cash interest rate of approximately 5.1%. Interest expense includes an additional $20 million related to interest rate swaps. Our effective tax rate for FY '15 is expected to be around 33%. Our cash taxes will be approximately $180 million. We expect our weighted average shares outstanding will decrease slightly to be approximately 56.6 million shares, reflecting the shares we repurchased in FY '14. As a result of these items, our adjusted earnings per share of $8.16 is approximately 5% greater than FY '14. Finally, with regards to our liquidity and leverage, we expect to generate $475 million of cash, which includes higher capital expenditures of approximately $60 million or 2.4% of sales. This is higher than our historical run rate. The increase supports 2 significant capacity-related projects at Schneller and AmSafe. Again, assuming no other acquisition activity, we expect our gross debt leverage ratio to be approximately 6.3x EBITDA As Defined, and our net leverage ratio will be nearly 5.2x our EBITDA As Defined at September 30, 2015, or de-levering approximately 1 full turn. Now let me hand it back over to Liza to kick off the Q&A.

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

[Operator Instructions] Your first question comes from the line of Robert Spingarn of Crédit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: I have a question -- well, first, best wishes to Ray. I'll start with that.

Thank you, Rob. Robert Spingarn - Crédit Suisse AG, Research Division: I wanted to ask -- I have a question for Nick and for Greg. Greg, I just want to start with you. When I think about the gross margin improving in the quarter and the EBITDA As Defined declining, it sounds like the difference there is the SG&A, I guess, associated with the acquisitions, to some extent, because you don't have acquisition costs in the quarter. And does -- is that the basis for the improvement, the 100-basis-point improvement in margins next year, the absence of that SG&A? Or is it pricing or both? That's the question for Greg.

Well, I know our SG&A consolidated is lower as a percent of sale in 2015. I think it's 11.9% and it's going to drop to 11.3% or 11.4% next year. So we'll get improvement in SG&A, and it was up a little because of acquisition mix. The other part of the question, Rob? Robert Spingarn - Crédit Suisse AG, Research Division: I wanted to understand if I've got that right, that the SG&A is the reason you've got one margin rising and the other one falling. Or -- and then also, is there any pricing component to the improvement in margins next year?

Rob, I'm not following because I don't know if you're going quarter-to-quarter or year-to-year here, but our interest... Robert Spingarn - Crédit Suisse AG, Research Division: Well, that's the point. It's odd to see gross margins improve and EBITDA As Defined margins decline in Q4, to begin with, especially in a quarter where you're citing lower acquisition-related costs, which would go into the, I assume, into the SG&A.

Rob, this is a lot of reconciling. Maybe we could take this after the call or offline because... Robert Spingarn - Crédit Suisse AG, Research Division: Okay, so let me just ask the back half of that one again. The 100 basis points next year, is that the absence of this SG&A or is it pricing or is it both?

It's both. Robert Spingarn - Crédit Suisse AG, Research Division: Okay.

Hold it, can I just stop a minute. 100 basis points is -- I threw a couple of margins around. So let's be sure we're talking about the same one. Robert Spingarn - Crédit Suisse AG, Research Division: EBITDA As Defined goes up about 100 bps into the low 46s, I think.

Yes, got it. The other one I threw around, Rob, was the -- if you pull out the 5 acquisitions, most recent, I gave you the margins for the base businesses that we had going into '13, how they did year to year to year. I was trying to give you a sense of what the base was doing. Robert Spingarn - Crédit Suisse AG, Research Division: Right. No, and that's fair, Nick, what I'm trying to figure out is what pricing is doing.

The pricing, Rob, is the normal kind of pricing we get. There's no change in our pricing patterns. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And then that being the case, the 18% was mostly volume in the quarter on the aftermarket?

Well, the 18% is, as you know, Rob, we don't disclose the pricing in our different segments. The 18% is a mix of -- it's the normal mix of unit and price. Robert Spingarn - Crédit Suisse AG, Research Division: Okay, but it sounds like it's more...

I think you're -- if you're trying to back me into the price, it isn't going to work. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. Fair enough, Nick. High-level question, this next one was intended to be the question for you. Since the spring, we've seen public aerospace valuations all over the map, largely on cycle noise and the like. You guys have held up very well but some of the others haven't. Are depressed valuations in the sector making certain assets more attractive now?

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

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

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

I can't say there's significant difference between the discretionary and the nondiscretionary. It's a rising tide right now. If you look at our units, almost -- not all, but almost all of our units are up. As I said, I think in the press release, and little bit when I talked about the guidance for next year, I'm a little concerned that we're running out ahead of ourselves. 15% and 18% is not a sustainable number, and if you -- I don't think, and if you peel back, as I mentioned, and you look at the commercial transport, which is where the bulk of the numbers are, that's rising even faster. Because, as I said, the biz jet helicopter and GA stuff is about flat or slightly up. So I think it could be a little ahead of itself, and it's pretty broad.

Broad regionally as well?

Yes.

Okay. And maybe if you could just give us some flavor on -- you've announced a -- or you authorized a share buyback, but you also talked a little bit -- I think a little bit more positively about some of the M&A prospects. And maybe if you could just give us some flavor on how that pipeline has changed, if it has, relative to 3 and 6 months ago. Can you talk about are you seeing more stuff and maybe more internationally? However you want to answer it.

Yes, let me first answer on the stock buyback. All we did there was we had $200 million of authorization, of which, we used about $160 million of it. So all we did there was just refill the -- we just refilled the availability. I wouldn't draw anything from that. We had $2 million [ph] before, I think I now have $250 million. That's just reflective that the company's a little bigger so we approved a little more. We have no specific plans other than we may well opportunistically buy things from time to time. So that answers that. The M&A activity, yes, we got -- we see a little more activity now. We see -- clearly, we see more activity in Europe but we see some in the U.S., too. I have no ability to predict when or, if any, of them will close, but we're more active now than we were, say, 3, 4 months ago.

And could you comment maybe on the size of this -- on the size of the opportunities...

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

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

Nick, hoping to kick off maybe talking about the leverage situation, obviously, ending the year above your normal historical level at 6.2x EBITDA As Defined. Are you comfortable up at this level? Could you potentially take it higher? Or do you see it moving down towards more normal historical levels going forward from here?

Rob, I think that's very dependent on the capital market situation, where our outlook is for acquisitions. I don't think, over the long haul, our kind of range is changing but, as you know, the credit markets have been uniquely accommodating for the last 12 to 24 months. So we'll take a look at that over the next 3, 4, 5, 6 months and see what the future looks like and see what it looks like. I don't -- I wouldn't want to get -- I wouldn't want to get committed into a band or a number one way or the other just because the market has been so accommodating.

Are some of these potential discussions open to then moving the leverage even higher? But again, depending on the market.

Say that again?

Which discussions?

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

Oh, we could surely -- we could lever up. I mean, the market would allow us to lever up higher than the current level. The market would allow us. That's...

Our credit agreement allows us...

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

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

A combination of those. A combination of those. I mean, we were at 15 and 18 [ph] so what's that? Average 16.5 [ph]. And if you peel off, you throw out the business jet and helicopter business, it was up higher than that. Well, the underlying consumption is not that high. So there is a mix in which I can't exactly draw a beat on it, but there is some mix of some deferred maintenance and some stocking in there. Now there was clearly a de-stocking and a deferral in '13, so we likely are just catching a little of that back up.

And your next question comes from the line of Joe Nadol of JPMorgan. Seth M. Seifman - JP Morgan Chase & Co, Research Division: It's Seth on the line for Joe this morning. I wanted to ask a question about defense. You've got it to flat, which I think you've got it around there in the past and you guys typically take a pretty conservative approach, I think based on what's gone on in the market there. But it sounds like there are some tough trends with regard to bookings in the fourth quarter. What sort of gives you confidence in getting to flat? Are there sort of some good things that are happening in defense this year that should offset maybe some of what you're seeing now on the bookings front?

Well, it's only a one down quarter, and we've seen down quarters before in the bookings, so we don't want to overreact to it. But I will clearly say it's uncertain and unclear. If you look at what's going on in the world, you would expect you may see some pickup in defense ordering activity for repairs and spares and replenishment, things like that. So we were a little surprised that we haven't seen them, and that makes us cautious. But I would tell you, if you told me it was 5% one way or the other, I would say I can't call it that close. Seth M. Seifman - JP Morgan Chase & Co, Research Division: Okay. And just a quick follow-up on the biz jets and helicopter and GA, I guess, particularly the biz jet. Flat on the OE and it sounded like modest growth in the aftermarket...

Very modest. Very modest. Seth M. Seifman - JP Morgan Chase & Co, Research Division: What's baked into your expectations for '15 in both the OE and the aftermarket side?

Kind of a continuation of the normal, not much recovery. Seth M. Seifman - JP Morgan Chase & Co, Research Division: You're not seeing much of a biz jet recovery at all?

We're not -- we're not -- I mean, maybe a little bit but not a lot. I mean, someday, we will see a pickup in that, but it's been out in front of us every year for the last 3 or 4 years, so we're a little wary of it.

And your next question comes from the line of Ken Herbert of Canaccord.

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

It's all kinds of power, it's not just engine. I don't know the exact number but frequently, they say an engine makes up -- and the claptrap that goes with it, makes up 25% to 30% of the plane. I suspect we're somewhere in that kind of range.

Okay. And would it be fair to say you've maybe seen those products, from a volume standpoint, doing a little better than other products in the aftermarket or is that...

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

Okay. Okay, now that's helpful. And if I could, the slight step-up in investment to support some of the new programs in fiscal '15, does that roll back down again in '16 or you may be looking at maybe a couple years here of a little more investment considering some of the wins or incremental opportunities you've had, specifically on A350 and some of the other programs that Ray outlined?

I don't know that I would change the go-forward forecast. Frankly, we haven't -- I don't know of anything discontinuous in 2016. But honestly, we haven't looked very closely at it. It won't materially change the cash flow one way or the other. So -- but I don't think we're setting a new level, but I just can't tell what 2016 is yet.

And your next question comes from the line of Kevin Ciabattoni of KeyBanc.

Congratulations, Ray.

Thanks.

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

On the oil, I mean, you know the traditional rule of thumb is if the oil prices drop down, they keep the old planes running longer and that would tend to give you a little more aftermarket. Whether that'll happen, I have no idea how to speculate on that. But that's the traditional wisdom. I don't have a good view for the A350 provisioning, and we clearly don't have anything baked into our forecast.

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

You mean for selling things?

Yes.

I don't think so. I mean, we don't have any immediate plans, but that's not to say we couldn't sell something small if it didn't fit [ph]. But we don't -- we have no immediate plans to sell anything.

And your next question comes from the line of David Strauss with UBS.

Congratulations, Ray.

Thanks.

So your -- Nick, your adjusted EBITDA guidance, I know you guys targeted 10% to 12%. Today, you put out 8% to 10%. I mean, is this just conservatism? I mean, is there anything out there that you see stopping you from getting to kind of the normal 10% to 12% adjusted EBITDA growth?

Other than the guidance we gave you.

Right.

I mean, I think the guidance we gave is the guidance we gave. Could there be some upside? Of course, there could. Could there be some downside? There could. But I think, I've got to stick, David, with the guidance we gave.

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

No, they're moving up some, too. They're moving up some, too. Frankly, I haven't solved back into that math. Have you, Liza? I haven't solved back into it.

I don't have it here.

But I know they're up some.

We are. They're up.

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

Less from operating working capital. I think you'll notice, though, our cash taxes will be higher next year than this year. Just a little color on the CapEx, our normal DSOs and inventory turns should be as normal.

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

Under $100 million. This year, as a percent of the provision, it was like 70% and next year, it's 80%. So I thought it was working those [ph] out.

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

So the first one was on the core margin expansion into next year, the 100 basis points x the 5 acquisitions. Is it similar margin expansion between power control and the airframe segments? Or is the implied EBITDA incremental margins, which look really good, more indicative that you're going to have faster growth in power control and faster expansion there?

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

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

I don't know how to parse that out. Clearly, the fact that we have a bad comp coming into the year is not a plus. So I just, I don't know how to parse those 2 out, Myles.

Okay. But sequentially, the bookings are deteriorating -- did deteriorate this quarter?

Yes.

They were high in Q3...

In defense. In defense, yes. Defense bookings were surprisingly down this quarter and broadly down. Not just if you looked at 1 unit, you get [indiscernible] order before and now it went away, it's broadly down.

In Q3.

Yes, yes.

Now we've seen that before and have it just remedy itself 90 days later, but...

Yes. No, that makes sense. And then last one, though, is so you're starting the year at a high single digit guide for aftermarket and in prior years you, where you've had a tough comp, you usually start at a mid-single-digit range and -- but it sounds at the same time like you have -- you're running superheated in the second half. You must have a pretty good sightline into the first half, continuing to be superheated?

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

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

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.