Transdigm Group Incorporated (TDG) — Q3 2015 Earnings Call Transcript

Thank you, and welcome to TransDigm's fiscal 2015 third quarter earnings conference call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; Chief Financial Officer, Terry Paradie; Chief Operating Officer of our Power Group, Kevin Stein; and our Executive Vice President, Greg Rufus. A replay of today's broadcast will be available for two weeks, and details are contained in this morning's press release and on our website at transdigm.com. Before we begin, we would like to remind you that the statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause 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 and are available through our 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, 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 for calling in. Today, I'll review our consistent business strategy. I'll give a short update on our recently completed acquisitions as well as some information on the recently announced PneuDraulics deal. I'll review the financial performance and market summary for Q3 and year-to-date for fiscal year 2015. And I'll discuss our revised guidance for fiscal year 2015. To repeat, 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 we believe this, about 90% of our sales are generated by proprietary engineered products, around three-quarters of our sales come from products for which, we believe, we are the sole source provider, over half of our revenues and a much higher percent of our EBITDA comes from aftermarket sales, and aftermarket revenues have historically produced higher gross margins and provided relative stability in downturns. Because of our uniquely high EBITDA margins and relatively low capital expenditures, TransDigm has year-in and year-out generated very strong free cash flow. This gives us a lot of operating and capital structure flexibility. We follow a consistent long-term strategy. We own and operate proprietary aerospace businesses with significant aftermarket content. Second, we have a simple, well-proven value-based operating strategy based around our three value driver concept, that is, steady cost reduction, profitable new business and value-based pricing. Third, we maintain a decentralized organization structure and a unique compensation system with executives and senior managers who think, act and are paid like owners. Fourth, we acquire proprietary aerospace businesses with significant aftermarket content, where we see a clear path to PE-like returns. And lastly, we view our capital structure and capital allocation as another means to create shareholder value. To remind you, we basically have four alternatives for capital allocation, and our priorities are consistently as follows. First is to invest in our existing businesses. Second is to make accretive acquisitions consistent with our strategy. And these two are almost always our first choices. Our third is to give extra money back to our shareholders, either through a special dividend or a stock buyback. And our fourth alternative is to pay off debt. Given the low cost of debt, especially after tax, this is likely our last choice in the current capital market conditions. Now, with respect to financial capacity, we have about $915 million in cash, roughly $535 million in undrawn revolver and additional capacity under our credit agreement. After raising an additional $925 million in May, we ended the quarter with a net leverage of six times EBITDA, well below our credit agreement limit. At June 27, 2015, based on current capital market conditions and after all our recently announced financing and M&A activity, including PneuDraulics, we believe we still have adequate capacity to make about $1.5 billion of additional acquisitions without having to issue any equities. This capacity grows as the year proceeds. This does not imply anything about acquisition opportunities or anticipated acquisition levels for the balance of the year. As you know, we recently closed on three transactions: Telair cargo handling business for about $730 million, and that was at the end of Q2, the Franke aerospace faucet business for $75 million at the beginning of Q3 and Pexco for $496 million during Q3. Though it's too early to know with certainty, so far all three acquisitions are performing at or above our expectations. The integrations are proceeding well. We have seen nothing so far that makes us question either the quality of the businesses or our value creation thesis. And in other words, we still think these are good deals. As with all our acquisitions, we expect to generate private equity-like returns from these transactions. Now additionally, we recently announced the execution of an agreement to acquire PneuDraulics for $325 million. This includes approximately $107 million of tax benefits spread evenly over the next 15 years. We don't own this company yet, but we believe it will be a strong addition to our portfolio of companies. The company manufactures proprietary aerospace valves and actuators; it has about 275 non-union employees, all in Southern California. The company's revenues are about 85% commercial aerospace, with the balance military aerospace. The company's products are used on all major Boeing platforms, including the 787, as well as on the Airbus A320 and the new Airbus A350 family. The products are on all major regional jets and turboprops. They have substantial positions in the biz jet world on the Gulfstream, Cessna and Canadair family of business jets. Almost all the revenues are proprietary and mostly sole-source. The aftermarket makes up about 35% of their revenues. Also in Q3, we closed on new financing of about $925 million, about $575 million of which was used to pay for Pexco and Franke acquisitions, and the balance is in cash on our balance sheet. We also extended the maturities on about $1.1 million of our existing debt and lowered our overall interest rate a little bit. Currently, about 75% of our debt is fixed, swapped or capped. For the next four to five years, we are reasonably well hedged against large swings in interest rate. As an example, given our current structure, a dramatic 8% increase in the LIBOR rate, far above what anyone is anticipating or expecting, would only move our after-tax interest rate about 1.25%. Now, turning to our Q3 fiscal year 2015 performance, and I remind you this is the third quarter, our year started October 1. And I've said in the past, quarterly comparisons can be significantly impacted by differences in OEM-aftermarket mix, large orders, inventory fluctuations in the system, modest seasonality and other factors. The total GAAP revenues were up 13% versus the prior year Q3 and up 10% on a year-to-date basis. Organic revenue was up about 3% on a quarter versus prior quarter and year-to-date basis. Commercial year-to-date bookings are running modestly ahead of revenues in commercial OEM and aftermarket segments. Defense bookings are up significantly over revenues. I remind you that due to cut-offs in timing, as we mentioned last quarter, Q3 only includes two months of Telair and Franke. Q4 will have four months of these businesses. Reviewing the revenue by market category on a pro forma basis versus the prior year Q3 and the prior year-to-date, and this is on slide five; this now includes the recent acquisitions of Telair, Franke and Pexco. Pro forma, to remind you, means we assume we own the same mix of businesses in both periods. In the commercial aftermarket, which makes up about 70% of our revenue, total commercial OEM revenues were up 1% versus the prior year Q3 and 5% on a year-to-date basis. This is primarily driven by commercial transport shipments, which are up 6% on a year-to-date basis and a little over 1% for the quarter. Our business jet OEM revenues were up modestly in Q3 versus prior-year Q3. Though small in dollars, commercial helicopter shipments continue to decrease. On a year-to-date basis, commercial OEM bookings continue modestly ahead of revenues. Total commercial aftermarket revenues were up about 3% versus the prior-year Q3 on tough comps and up about 5% on a year-to-date basis. Sequentially, Q3 revenues were up 5% versus Q2. On both a Q3 and year-to-date basis, the commercial transport segment was up a little more than this average, but this was offset by slower growth in bizjet and general aviation and declines in commercial helicopters. The commercial aftermarket growth by operating unit showed no clear picture. Our businesses were all over the map here. Year-to-date commercial aftermarket bookings are running slightly ahead of revenues. The defense market, which makes up about 30% of our revenues, defense revenues were up 9% versus the prior-year third quarter and 8% on a year-to-date basis. On a year-to-date basis, the largest contributors to the growth are A400 shipments at Telair, parachute shipments at Airborne and C-130 shipments at AeroControlex after a prior-year inventory drawdown at Lockheed on the C-130. Bookings continue to run well ahead of revenues on both a quarter and year-to-date basis. We could see some full-year revenue upside here. Moving to profitability and on a reported basis now, I'm going to talk primarily about our operating performance, or EBITDA As Defined. The As Defined adjustments in Q3 were primarily made up of financing-related expenses, non-cash compensation and acquisition-related costs and amortization. Our EBITDA As Defined is about $313 million for Q3. This is up 13.5% versus the prior Q3. Year-to-date, on the same basis, is $871 million or up about 11.5% versus the prior year. The EBITDA As Defined Margin was about 45% of revenues in the quarter and almost 46% year-to-date. This is roughly flat from prior-year Q3 and up 1% from prior-year year-to-date in spite of the addition of the lower margin acquisitions in the numbers. The Q3 and year-to-date EBITDA margins, without dilution from the impact of the acquisitions purchased in 2015, that is Telair, Pexco and Franke, was approximately 47%. We expect this core group of businesses to also be at roughly 47% for the full year. I remind you, the core group I just defined now includes the lower margin Airborne and EME businesses. If we also excluded these two 2014 acquisitions, the core should be about 49% EBITDA margin on a full year basis. With respect to acquisitions, we've been busy, as I've discussed. We continue looking at opportunities. We still see a reasonable amount of activity, but the closings are always difficult to predict. We remain disciplined and focused on value creation opportunities that meet our tight criteria. Now moving on to the guidance. We're adjusting our total company guidance upward to reflect primarily our Pexco acquisition and a more favorable tax rate, offset in part by higher interest expenses. As usual, our guidance does not include any additional acquisitions other than Telair, Franke and Pexco. It does not include PneuDraulics since we have not closed on that yet. Our revised guidance for the total company is as follows: Revenue guidance is now $2.7 billion to the midpoint, up about $24 million versus the prior midpoint. Our EBITDA As Adjusted guidance is now $1.22 billion, again to the midpoint, up about $15 million versus the prior. EPS as adjusted guidance is $8.71 to the midpoint; this is up $0.09 versus the prior midpoint. Of the increase in adjusted EPS of $0.09 at the midpoint, as I said before, the most significant contributor is from the Pexco acquisition with most of the balance due to a more favorable tax rate. These are offset in part by the higher interest expense from our recent borrowing. By market segments, we are using the following assumptions in our guidance: Commercial OEM, mid-single-digit growth, this is unchanged from prior guidance; commercial aftermarket, mid-single growth, this is unchanged from our prior guidance, but could be a little tight; defense, mid-single growth, as you can see we're stuck on mid-single growth here, but this is up modestly from our prior guidance and we may have some upside here. All in all, a good quarter. Our operating results were strong. We closed on two solid acquisitions and we expect PneuDraulics will close soon. Assuming PneuDraulics closes, we will have invested about $1.6 billion in high-quality aero businesses with strong value generation prospects over about a 180-day period. It's been a busy few quarters. And with that, I'm going to pass this on to Terry Paradie, our new CFO, for his first at-bat with TransDigm.

Thanks, Nick. Good morning, everyone. I'm very happy to be here and, hopefully over time, I can hit the ball as well as Greg has over the past. So before we discuss the operating results for the quarter, as Nick mentioned, we borrowed an incremental $925 million in the current quarter, primarily to pay for acquisitions, and refinanced approximately $1.1 billion of our senior secured debt to extend maturities, lower our interest rates and increase our liquidity. In addition, I want to remind you that the prior period also included refinancing activity in June 2014 to mainly pay a $25 per share dividend and refinance $1.6 billion of existing notes at lower interest rates. Both of these events impacted several line items significantly in the quarter and prior quarter comparisons, especially refinancing costs that occurred in both periods. This quarter included $18 million of refinancing costs versus $131 million in the prior-year period. With that in mind, let's turn to our quarterly financial results. Third quarter net sales were approximately $691 million, up $81 million or approximately 13% greater than the prior year. The collective impact of acquisitions, Telair, Pexco and Franke, contributed $64 million of the additional sales for the period. Our organic sales were approximately 3% higher than last year, primarily driven by growth in defense, offset by lower growth rates in commercial OEM and aftermarket. Our third quarter gross profit was $359 million, or 52% of sales. Our reported gross profit margin of 52% was 1.6 margin points lower than the prior year. This quarter's decline in margin was due to dilutive impact from acquisition mix and higher acquisition-related costs, which accounted for a decrease of almost 2.5 margin points. Excluding all acquisition activity, our gross profit margins in the remaining businesses versus the prior-year quarter improved almost 1 margin point due to the strength of our proprietary products and continually improving our cost structure. Our SG&A expenses were 11.8% of sales for the current quarter compared to 11.7% in the prior year. Excluding acquisition-related expenses, non-cash stock compensation expense and other non-operating expenses, SG&A was about 10% of sales compared to 10.4% of sales a year ago. We had an increase in interest expense of approximately $19 million or 22% versus the prior-year quarter. This is a result of an increase on our weighted average total debt to $7.9 billion in the current quarter versus $6.3 billion in the prior year. The higher average debt year-over-year was primarily due to both of the refinancings previously discussed. Our weighted average cash interest rate at the end of the quarter is approximately 5.1%. Including the new incremental debt, we now expect our full year fiscal 2015 net interest expense to be approximately $420 million. Our effective tax rate for the quarter was 28.6% compared to 22.5% in the prior year. We now expect our effective tax rate, including discrete items for the full fiscal year to be below 31%, which is lower than we estimated last quarter due primarily to additional benefits from foreign tax credits. We now expect cash taxes to be $150 million for the year. Our net income for the quarter increased $83 million or 513% to $99 million, which is 14% of sales. This compares to net income of $16 million or 3% of net sales in the prior year. The increase in net income primarily reflects the increase in net sales and lower refinancing costs versus the prior period. These items were partially offset by the higher interest expense previously discussed. GAAP EPS was $1.75 per share in the current quarter compared to a loss per share of $1.66 last year. The prior-period loss was due to the inclusion of $111 million or $1.94 per share of dividend equivalent payments paid in the prior quarter primarily related to the $25 per share dividend that we did not have in the current year quarter. Our adjusted EPS was $2.26 per share, an increase of 12% compared to $2.02 per share last year. Please refer to Table 3 in this morning's press release, which compares and reconciles GAAP to adjusted EPS. Now switching gears to cash and liquidity. We ended the quarter with approximately $915 million of cash on the balance sheet. This includes approximately $350 million of proceeds from the refinancing we put on the balance sheet to use for general corporate purposes after paying for the acquisitions of Pexco and Franke and refinancing our senior secured debt and related fees during the quarter. The company's net debt leverage ratio was 6 times our pro forma EBITDA As Defined. Excluding any acquisition in the previously-announced PneuDraulics acquisition, we now expect our cash balance to be just over $1 billion and net leverage to be approximately 5.7 times at the end of fiscal 2015. With regards to our guidance, we estimate the midpoint of our GAAP earnings per share to be $7.53. And, as Nick previously mentioned, we estimate the midpoint of our adjusted EPS to be $8.71. The GAAP guidance midpoint was lowered due to the additional interest and refinancing costs in the quarter. The $1.18 of adjustments to bridge GAAP to adjusted EPS includes the following assumptions: $0.06 from the dividend equivalent payments, $0.22 from refinancing cost, $0.41 from non-cash stock option expense, and $0.49 of acquisition-related expenses and other. Our full year depreciation and amortization, including backlog, is now expected to total approximately $98 million. Now, I'll hand it back to Liza to kick off the Q&A.

Thank you, Terry. In order to give everyone the opportunity to ask questions, I'd ask that you limit your questions to two per caller. If you have further questions, please re-insert yourself back into the queue. Operator, we are now ready to open the line.

Good morning.

Good morning.

Good morning.

So, Nick, if you're able to answer this, it would be very helpful, but do you have the organic growth in your EBITDA As Defined in the quarter? I think you did 13% total, but do you have the organic equivalent to that?

About half of that is organic.

Yeah, yeah. I don't know the exact number, but I...

About 6.5% of it.

Okay. You hear that, about half.

Okay. Okay, that's good. And then a question – a high-level question, Nick, on commercial aftermarket. I think when you parsed it out, the air transport sounded a little better than it looked.

Yeah, not a lot. I don't want to be – it's the lion's share, so it can't be way different.

Well. So, at the risk of just treading right into the heart of the matter, I think aftermarket's confused or confounded people over the past couple of weeks as it has all year, it's come in softer than we thought it might, especially given what traffic is supposedly doing. And I'm wondering if you can shed some light on how we have – I understand it was a tougher comp and so on, but how we have aftermarket trending at like half of RPMs?

No. I get that, Rob, and I must admit it's a little baffling to us too. And we look at everything and read everybody else's numbers as they come out. So I don't think we're unique in this. I don't honestly, Rob, I – other than airlines aren't buying as much or some mix of inventory drawdown or deferrals of some discretionary items, I don't know that I can give you any other particular insight into it. I will say, if you look across our operating units, it isn't a clear picture. They're sort of all over the map. It isn't that discretionary ones are up and nondiscretionary are down or vice versa. It's just not a clear picture and frankly it's lower than we expected.

Well, I mean, are we seeing just a real sea change in the way airlines think about aftermarket and overhauls and that this is just a new disciplined world? I guess, the U.S. airlines are driving this and maybe it spreads and that they're just figuring out how to work just in time or something that's a little bit more permanent rather than a soft patch?

The real is, I don't know, obviously. I would say on the fundamental demand, like use of our product, there isn't any change. So to the extent that there is inventory adjustments going on and rippling around the place, it would seem to me that that should settle out eventually. Though honestly, it has been more volatile for the last three years, four years than I would have expected. If I look back, Rob, over any extended period of time, two years, three years, four years, it seems to kind of all cancel itself out as you average that out and the numbers still look about what you expect. But I will admit it's bouncing around more than I would have expected.

Okay. And then just a clarification on your comment – I think it was yours, Nick; maybe it was yours, Terry. On the debt and rates, if I understood you correctly, you threw out a very large 8% increase in, did you say, LIBOR?

Yeah, I did. I said that.

And you're talking about 800 basis points, I want to make sure I understand what 8% increase?

8% increase. Rob, I would say that is, I'm only trying to show how much – how well we're hedged against that. I have no reason to believe rates are going to go up 8%.

So, again, 8%...

Essentially, LIBOR today is zero.

Right. Right. Okay.

And what I was trying to say is, if it went from effectively zero – I think it's 0.2% or 0.3%...

0.19%.

If it went from that up to 8%, a far greater move than anyone anticipates or anything like that over the next four years or five years, our after-tax rate would move about 1.25%.

Yeah, 1.25%.

And the pre-tax would be a little higher than that. I was just trying to give you a sense that we think we've gotten ourselves reasonably well hedged here for the next four years or five years.

Okay. And then just to tie the loop and put some math to that, that would be going from, I think, a blended rate right now of like 5% and change, 5.3% up to about 6.5%?

I don't have the calculation in front of me. Well, yes...

That's after ...

Well now we're getting pre-tax in it – this is again an 8% – I want to be clear to everybody.

Well, 5.3% pre-tax and 6.5% is pre-tax. And when you do the math in the tax, when we're done, it's about $1.30 clip to earnings – if it happened.

Yeah, I'm not sure how you're doing the math.

Rob, I've lost track of the math. Remember, all the debt doesn't move with LIBOR.

Okay, fair enough. But I was applying the new interest rate to all of the debt based on the way you phrased it.

Yeah, Rob, maybe we can take this one offline. We'll do the math with you.

Half of that is fixed.

Yeah.

So I don't think I'm following your numbers and I don't want to try and parse them out on the fly.

Yeah. It just...

No, I was applying the new rate to the whole thing. And if that's wrong, we'll just do it offline.

Yeah, Rob, I think Nick used 1.25%, but on a pre-tax basis the interest rate, if it went up to 8%, LIBOR increased to 8%, it was about a 2% impact pre-tax to our interest rate.

Yeah.

Okay. All right.

And again, Rob, I want to be clear, I am not suggesting that we anticipate an 8% increase in LIBOR.

No, you're trying to show that you're fairly resilient here if it starts to move...

Yes.

Yes.

...to move against you. I fully appreciate that. That's why I wanted to have the discussion online and take it the full distance. Okay. Thanks, Nick.

Hey, good morning, guys.

Hey, Carter.

Good morning.

I was going to go with a financial riddle, but my head's spinning now, so we'll skip that one. Nick, two questions for you. The first is, obviously you closed or announced a lot of deals in the last 180 days, I guess, you put it. We've seen these waves in the past at points in the cycle that I think most industry observers would call late, and as we get sellers who are sort of eager to not hang on too long and sell before the risk of a downturn kind of come to pass. Is there any of that driving the uptick in the number of transactions you've announced or is this just sheer coincidence that you've come across four of them that really seem to fit the power alley of what you're looking for out there?

Yeah. I mean that's hard. It's always hard to speculate on why someone's selling. I wouldn't surprise me if it contributes somewhat to it. I mean, if you just run back through them, we bought one from AAR. They were going through – they're going through a fair amount of restructuring. Whether the market cycle is the precipitating event, I think they were going through the restructuring anyway. It's hard for me to tell exactly why the timing was. I think the Franke one is pretty well something we've been working for a while and I think that just kind of hit when it hit. Pexco is a PE sale. And so I think a PE seller surely doesn't want to try and sell something right at the top of the cycle and they don't want to risk getting stuck having to hold for three years or four years. So I suspect that's a contributor on that one. And PneuDraulics is a family business and it's always hard to sort out the politics or rationale for a family sale. But I can't imagine the fact that the cycle's pretty good was a negative on their thought process.

Yeah. I guess what it gets at is just are you seeing more motivation, I guess, among sellers and is this a trend we should look to continue or is the pipeline as it's been for the past couple of years, I guess is the way I'd ask it.

It surely seems more active to me, but I don't know how that predicts and we surely have not bought a bunch here in the last, whatever it is, 150 days or 180 days. I'm quite comfortable, Carter, we're not going keep that pace up.

Yeah. And just to follow up on cash flow. I know, for at least one of these transactions, you said you were going to go through a facility relocation. Now that you've done a couple of them, I'm not sure what all the aggregate plans are, but just wondering if there's an inventory build of significance associated with facility rationalization.

I don't think these were any – I don't know what percent most of you use in your model for working capital, by which I mean receivables inventory, receivables inventory amounts payables 25%, 27%, 28% something like that. I don't think there's anything that'll move it outside of that range. A little, but I don't think materially I don't think anything that shows or makes any impact on the model.

On the cash flow, great.

Yeah. Yeah, sorry.

All right. Thank you, gentlemen, and welcome Terry.

Thank you.

Hey. Good morning, guys. Thanks for taking my questions. Nick, maybe just back to the overall aftermarket, we saw some suppliers get caught off guard with 787 provisioning. Have you seen any changes in 787 provisioning, how are you sort of baking that into the model going forward? And also how are you thinking about the A350 provisioning as that starts to happen?

We tend to not plan on much provisioning for our products. And when it comes along, we sort of look at it as a – I was going to say the bird flew over and got us on the head, but I'll say a nice hurricane, a nice upswing, because our experience has been one, our products aren't hugely amenable to provisioning, amenable is maybe the wrong word, but they tend to not provision big quantities of it. And we've also found it to be very unpredictable, so we tend to not count on it. And you know what you're all really is doing is you're pulling shipments forward that you would get eventually out in another year or two, and we'll probably look at, Mike, we'll probably look at the A350 the same way.

Okay.

I wouldn't count on much. And we may get some, but we wouldn't count on it.

Okay. And then just you guys used to break down sort of your revenue exposure by platform. I mean just getting back to Rob's question around aftermarket growing half of RPMs. Are you guys seeing notable changes when you maybe slice up the data by the older generation of platforms, 757, 767s, 747s? Is that creating the headwind or do you guys not have that visibility?

I can't answer that. But I just don't know the answer, Mike. Not that I'm not willing to answer it, I just don't know the answer. I would say we are pretty well market-weighted with all the group of parts and businesses we have. And I can't say it's been obvious to us that one class of airframe has been disproportionately either buying or not buying versus what we would have expected. That's my general impression just from business reviews and things like that, but I can't give you an exact number.

Okay. Okay, perfect. I'll jump back in the queue. Thanks, guys.

Hi. Good morning.

Good morning.

Good morning.

Hey, Nick, I just wanted to follow up on the original equipment side of the business. And I'm just curious, in prior calls you've provided detail on sort of your step-up in content on major platforms and if I go back to the Investor Day last year, when you gave some specifics around the 787, A350 et cetera. I'm just curious organically in two acquisitions. Are you able to provide any sort of refresh on maybe specifically for the 787 or the new narrow-bodies or the A350? Are you still capturing content organically and maybe what some of the recent acquisitions do to some of your exposure by some of these major programs just purely on a relative basis as you've talked about it in the past?

Liza, don't we once a year update our website in our formal presentation the top 10 platforms and the next 10 platforms and the like?

We did. It doesn't have all the acquisitions.

Doesn't have all the acquisitions in it. Yeah. I would say, in general, and I can't recall each one of the every acquisition, but our content on the new platforms continues to improve. The 787, Pexco is a big supplier on the 787, it's a big part of their program and the content has substantially stepped up. At Telair, the A350, they have the cargo handling system, which is a big cargo handling system for them. Whom I'm missing? Franke is relatively small, but – so it's not going to move it much. But in general, we think we are continuing to move up. We know that if you look at on a pro forma basis that same-store basis, we know our content is moving up on the – is up significantly on the 787 and the A350 – by pro forma I mean same-store basis.

And organic -

And if we didn't make it same-store that's – I mean same-store and organic is the same. And if you didn't – if you did it on a GAAP basis, it's going up very substantively.

Okay. Okay. That's helpful.

Yeah.

And then if I could on the defense market, it sounds like obviously your – you had maybe a little upside, your mid single-digit or it sounds like if there is any opportunity to maybe outperform on the guidance, it's in that market. Can you just provide a little bit more color on where you're seeing the bookings and the strength and if there is maybe any near-term risk to the subside or it sounds like it continues to surprise to the upside? But any more detail on the defense markets would be helpful.

Well, I think I gave you – I gave you some detail on it. It is – I don't think there is near-term – much near-term risk, by near-term, I mean the balance of the year here. I mean that's stuff pretty well locked and loaded at this point in the year. The upside has been a relatively few programs. It's been a relatively few programs. If you pull them out, the rest of the businesses are flattish. But it's been the A400 shipments and I think we told primarily Telair. I think we told you and we bought that, they were going to be way up which is one of the reasons we expected maybe a little flattening in that next year. The parachute shipments both personnel and cargo, mostly outside the United States and our Airborne business have been just exploding this year. And the other is the C-130, we have a fair amount of content on that, particularly in the cargo handling at our AeroControlex and CEF businesses. And Lockheed last year had been drawing the inventory down, primarily because they've build inventory for a higher rate and drew it down substantively last year and this year are now behind back up to the rate, which has a – means a year-over-year it's a significant step up. So those are the three big drivers of it.

Okay. So, ex those three, you say, it sounds like you're running flat?

I'd say you are modestly up, modestly down, flattish kind of number across all the rest of the business as an aggregate.

Okay. Great. That's helpful. Well, thank you very much.

Thanks so much. Good morning.

Good morning.

Good morning.

Nick, just to carry on on the aftermarket trend here. Have you seen any change in your pricing strategy impacts in the quarter and have you seen any impact in terms of regional trends because of foreign exchange?

Well, we surely have seen foreign exchange adjustments, but we price in dollars and we have not changed our pricing history pattern strategy, et cetera at all.

Yeah. And the foreign exchange impacts have been pretty minor for us for the quarter.

Yeah. Have you seen any airlines maybe buying fewer spares, because of the foreign exchange pressures that they are dealing with?

Well, we surely have seen some buying fewer spares, obviously. If you see across the industry, I don't know that I can attribute it to that, I surely haven't heard anyone say that.

Yeah. And I think the airlines are looking very carefully at their inventory and tends to be a bit more compact than perhaps they have historically. So no doubt there is a little bit of a hesitance, but it wasn't particularly impacting your business too much. What we have, from a PneuDraulics standpoint is we will get a tax benefit of just over $100 million taken over the next 15 years, that won't impact the rate, it will impact our cash taxes. So from a GAAP standpoint, the tax rate will be sort of our normal effective rate, which right now is around 32%. We've lowered it for this year down to 31% because of discrete items but our normal rate's around 32% going forward.

Thanks so much.

Yeah.

Yes. Good morning.

Good morning.

Nick, I was wondering if you could refresh us, last year in the quarter you just reported...

You're breaking up. You're breaking up.

Okay. Can you hear me better now?

Yes.

Okay, great. Last June and September, you had very strong aftermarket sales growth and was there anything looking back by region or by product that made the compare much tougher this time around? I mean, was there any geography that stood out when you looked back, and so maybe on a year-on-year basis that would explain some difference?

Not that is obvious to me. It could be, but I don't recall it and I don't know the answer to that question, is the real answer. I would say the big spike ups in those two quarters came after probably a two or three quarter period where there was very low growth. Once again, that we and everybody in the industry were trying to figure out what was happening, and then all of sudden we get two huge quarters of orders, which looks like what was happening was people were deferring and drawing maintenance down.

Right. And could you remind us with Franke and Telair and Pexco, how quickly – or what contractual barriers there may be to your value-based pricing strategy coming into play? I mean, is it going to be a several quarter kind of ramp or how should we think about the phase-in there?

I think Pexco will move relatively quickly. I think Franke will move relatively quickly though it's pretty small. Telair, I think we gave you some guidance on that, that one will move more slowly.

Okay. And last one, if you could just comment on the amortization we should anticipate going forward on a quarterly run rate basis?

Yeah. We said for the full year around $91 million. So I'm assuming it would be probably in that $20 million to $25 million a quarter going forward – excuse me, $98 million.

That's including backlog.

Including backlog.

You'll get it in our guidance actually...

And that does include depreciation, you've got depreciation and amortization.

Yes, depreciation, amortization and including backlog at $98 million for the full year. So, you can probably model $25 a quarter.

Okay. And the actual amortization of intangibles?

That's all of it.

That's all of it. Okay, all right. Thank you very much.

Good morning.

Good morning.

Nick, I might have missed it but did you give what order activity looked like for the aftermarket in the quarter?

I did not. I said that it was running slightly ahead year-to-date. And I would say for the quarter, it was roughly flat. The orders were roughly flat. By orders I mean bookings quarter-to-quarter sequentially.

Okay.

But I would say – I'm trying to figure out this big jumble of numbers here sitting in front of me. The – yeah, up some over the previous Q3.

So up a little bit year-over-year and flat sequentially?

Yeah, flat sequentially and up a little bit yeah, year-over-year in the quarter.

Okay. All right. The acquisitions, the couple you've completed here and the one still to go, how should we think about the margin potential of those businesses? I know the past couple of acquisitions you've done prior to this you talked about there wasn't a chance to get kind of the TransDigm average but how should we think about these recent acquisitions?

I don't know where – let me run back through them, I'm not sure where we're starting with recent, but let's say the ones over the last 100 maybe days, which I presume that's what you mean, David. Franke, I think a very good possibility. Pexco, I think very good possibility. Telair, probably not all the way there, but – for a number of reasons, but good growth but not – the margins won't get all the way there, I don't think. And PneuDraulics, since we don't own it, I'd rather not talk about it yet.

Okay. That's helpful. And going back to the aftermarket volume versus price. I mean, is it right to think about it, Nick, based on, looks like about 5%, 5-or-so percent pro forma aftermarket growth for the year that volumes have been relatively flat?

Yeah. We don't disclose the price, but it sure isn't very robust growth.

Okay.

And Terry, you talked about cash taxes, it looks like this year you're going to be kind of in the 20% cash tax range with the cash benefits – tax benefits from these two deals. Is that the right way to think about cash taxes going forward, probably in the 20% or so range beyond this year? Yeah. I'm not sure. We'd like to forecast – give you that guidance out next year. What we have done is changed our guidance for this year down from last quarter. And the main reason for that is being driven by the timing of actually getting our refund from – we just filed our tax return. We expected it'd take a lot longer than we had planned in the forecast last quarter and we actually received it already and that makes up half the – approximately half the change from last quarter this year in cash taxes. We also had the foreign tax credit which we weren't expecting to help reduce cash taxes and then the rate probably makes up a difference.

All right. Thanks, guys.

Hey, thanks. Good morning, everyone. Another question on the aftermarket and maybe the answer to this question is obvious just looking at the words. But I just want to clarify, when you say proprietary and sole source, for each of those, does that mean that there is zero chance for competition from, let's say, retired aircraft or parts coming out of the secondary market or PMA or any alternative sources?

Well, there is proprietary and sole source that somewhat could clearly chop up an old airplane, take the part out, fix it up, and try and resell it. We don't see much of that, we don't believe primarily because the price points of what our parts tend to be, they tend to be lower than the food chain in pricing and usually not 100%, but usually not worth that. PMA activity is – I don't believe has changed much. It's quite modest. It's a very, very low percent of a penetration in our aftermarket, well down in the single-digits, and I don't think it's changed much over the last six years, seven years, eight years or 10 years.

Okay. And then maybe as a follow-up. I know we're probably a little early here to talk about next year. But if you roll up all your end markets and you think about a typical year with kind of typical economic growth, maybe it's 4% or 5% organic growth, and I think that's probably the assumption that you have based in your kind of return calculation. Is there any reason to think at this point that 2016 should be any different than that?

I just don't want get into speculating on 2016 yet. We'll give the guidance when we give it. And we hate to sort of paint ourselves in corners.

Understand. Thank you.