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…

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…

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…

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.