Liza Sabol - TransDigm Group, Inc. Nick Howley - TransDigm Group, Inc. Kevin M. Stein - TransDigm Group, Inc. Terrance M. Paradie - TransDigm Group, Inc..

Michael F. Ciarmoli - KeyBanc Capital Markets, Inc. Gautam Khanna - Cowen & Co. LLC David E. Strauss - UBS Securities LLC Myles Alexander Walton - Deutsche Bank Securities, Inc. Ken Herbert - Canaccord Genuity, Inc. Carter Copeland - Barclays Capital, Inc..

Good day, ladies and gentlemen, and welcome to the Quarter Four TransDigm Group, Incorporated Earnings Conference Call. My name is Mark, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Ms. Liza Sabol, Investor Relations. Please proceed, ma'am..

Thank you, Mark. Thank you all, that have called in today and welcome to TransDigm's fiscal 2015 fourth quarter earnings conference call. Speaking on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; Chief Operating Officer of our Power Group, Kevin Stein; and Chief Financial Officer, Terry Paradie.

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

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 available through the Investors section of our website or at sec.gov.

We 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 our presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA, EBITDA As Defined, adjusted net income and adjusted earnings per share. With that, I will now turn the call over to Nick..

The midpoint of the fiscal year 2016 revenues is $3.1 billion or up about 14% on a GAAP basis year-over-year, organic growth is up about 5% year-over-year. As in the past years, with about 10% less working days, fiscal year 2016 first quarter revenues, EBITDA and EBITDA margins are anticipated to be lower than the other three quarters.

The midpoint of the fiscal year 2016 EBITDA As Defined is $1.42 billion or 46% of revenue, that is up 15% year-over-year. This 46% EBITDA margin is in spite of the year-over-year acquisition dilution. We anticipate EBITDA margins will move up through the year as we've seen in previous years.

The base business, that's excluding now the 2015 acquisitions, is anticipated to achieve an EBITDA margin of about 49% in 2016 or up over two points versus 2015.

As a result of both our concerns about the duration of the OEM cycle and our lower level of industry-wide design activity, we will reduce our employment levels modestly early in the fiscal year. We will watch our cost and market conditions closely as the year proceeds and react accordingly.

The midpoint of EPS as adjusted is anticipated to be $10.45 a share, that's up 16% versus the prior year. This is driven by a significant increase in core operations performance and acquisitions, offset in part by higher interest costs, some taxes, and depreciations and amortizations. Terry will review this in a little more detail.

On a pro forma or same-store basis, the guidance is based on the following growth rate assumptions; commercial aftermarket growth in the mid-single digit percent to high single digit percent based on worldwide RPM growth in the 5%, maybe plus a little range.

We're hopeful there could be some upside here, but we remain cautious due to the factors I discussed earlier. Defense and military revenue is estimated to be up in the low single digit percent versus a very strong 2015. Given world events, there clearly could be variations here in either direction.

Commercial OEM revenue growth; we're guiding to the mid-single digit percent range, primarily due to 2016 and 2017 commercial transport production rates. We're assuming commercial transport unit airframe shipments are up in the low single digit percents for 2016.

We are cautious about the 2017 production rates and how this could reflect itself back in the second half of 2016. Without any additional acquisitions or capital structure activity, we expect to have almost $1.5 billion in cash and over $500 million in undrawn revolver at the end of 2016. We also have additional capacity under our credit agreement.

Again, assuming no acquisitions or other capital market activity, our net leverage is anticipated to be about 4.8 times EBITDA at the end of 2016 or down around one turn. In summary, 2015 was a good year.

I'm confident with our consistent value-based strategy, our strong mix of businesses, we can continue to create long-term intrinsic value for our customers. And now, let me hand this over to Kevin, who will hit some of the highlights from 2015..

Thanks, Nick. Good morning, everyone. As Nick mentioned, in total, we had a good fourth quarter and a strong finish to another very busy year.

As we have stated previously, we believe our succession planning process, application of TransDigm value drivers and our organizational focus on accretive acquisitions that meet our strategic vision, are the keys to delivering shareholder value. And as you will see, we made appreciable progress on each of these this past year.

To this point, let me provide some color to these aspects of our strategy. As we do with each acquisition, we follow a detailed and scripted integration plan.

This includes an implementation of our value creation process and metrics, restructuring the business into our product line focus groups, focusing the engineering and business development efforts on winnable and profitable new business. And finally, we tighten up the cost structure.

With nine new units acquired in 2014 and 2015, this integration process was significant. In fiscal year 2014, we acquired three proprietary aerospace businesses in two transactions; Airborne Systems North America, Airborne Systems UK and Elektro-Metall Export, or EME. All are progressing well and have met our strategic and shareholder return criteria.

During 2015, we acquired four businesses, with six different operating units; Telair, Franke, Pexco and PneuDraulics. Telair and Franke were acquired in late March of 2015. At Telair, the business at acquisition was divided into three operational units.

The three operational units have become Telair US Cargo Systems based in Goldsboro, North Carolina; Nordisk Aviation Products based in Norway; and Telair International based in Miesbach, Germany. We believe keeping these as separate business units will allow improved focus and accountability driving value creation.

Each of these businesses made progress, integrating the TransDigm operating model and value generation philosophy. The first phase of productivity restructuring has been completed across all three operating units, including head count reductions and non-core facility closures.

In addition, Neal McKeever, an experienced TransDigm leader, was added as President of Nordisk Aviation. Although, still early in the process, this collection of aerospace cargo-related manufacturers have met or surpassed our expectations.

As a whole, we do not expect this group of businesses to achieve TransDigm average margins within the next three years to four years due to long-term contracts in place and other factors. However, we have seen improvements in all three businesses in EBITDA as a percent of sales and we certainly expect to see more.

Franke was an acquisition of an aviation faucet business and is in the throes of being relocated from its home base in Germany to our operations at Adams Rite Aerospace in Southern California.

Once complete, this product line will be married to our existing Adams Rite faucet business, which will allow us to leverage the greater than 30 years of design and manufacturing of lavatory components for use in commercial transport applications.

In May of 2015, we acquired Pexco, a custom plastics extrusion company, headquartered in Yakima, Washington, which specializes in proprietary commercial aerospace interior products used in the galleys, lavatories, floors, ceiling and stowage bins of aircraft.

Although, a performing business at acquisition, we have still found opportunity to apply the TransDigm value drivers in this business. This includes head count reductions and the closure and relocation of the Huntington Beach operations to Yakima, Washington.

To assist in the integration of this business into TransDigm, we have relocated Herb Mardany, an experienced President, who has been developed from a previous acquisition and most recently as the President of AvtechTyee into this business. In August of 2015, we finalized the acquisition of PneuDraulics into the TransDigm family.

Obviously, it is very early in our integration process, but by all indications, this commercial aerospace hydraulic actuation business is a fit for our portfolio.

Cost reduction efforts are currently being implemented through early 2016 and our focus will now move to the implementation of the rest of our TransDigm value drivers around profitable new business and value pricing. Early feedback should have this business achieving TransDigm like EBITDA margins in the long-term.

Let me now touch on the results of our succession planning process and how we are developing bench strength for future growth. We currently operate with approximately 31 business units and 8,200 employees. Given the size and scope of TransDigm today, additional executive vice presidents were needed for growth and succession purposes.

Each EVP has responsibility for five business units to six business units and $200 million to $300 million of EBITDA. These executives are responsible for ensuring each group of businesses stay well-grounded in the TransDigm value drivers and culture.

To accomplish this, we have recently promoted two experienced TransDigm executives as executive vice presidents to handle our ever expanding portfolio. They have both been with TransDigm for over 15 years and have had a range of functional and senior management assignments.

Roger Jones, previous President of AeroControlex and CEF Aerospace; and Joel Reiss, previous President of Skurka Aerospace and Hartwell Corporation, are these key new additions to our senior management team and ensure we continue to groom and grow our talent to fulfill our future needs.

Finally, I wanted to bring your attention to an impressive award TransDigm recently won. In August of this year, Forbes announced that TransDigm had been named to their list of The World's Most Innovative Companies.

This award identifies TransDigm as one of the top 100 global companies in innovation, and the only aerospace company so recognized; clearly, a validation of our strategy and our ability to generate shareholder value. Examples of this type of innovation can be found in a number of businesses.

For Schneller, a global leader in highly engineered decorative solutions for the transportation industry, this year, they won a large award from a major global airline for a complete fleet rebranding campaign, including color, look and feel. This will include a refresh of the galleys, lavatories, cabins, floors and seating areas.

At Hartwell Corporation, they were awarded the 737 MAX thrust reverser latch package of significant value at full production rate with initial design unit shipped to the customer with production requirements shipping later this fiscal year. Additionally, Hartwell was awarded the A330neo thrust reverser and fan color latch packages.

One of these latches is a derivative of a recently developed latch in support of Airbus to address fan color loss prevention on the A320 current engine option fleet.

Champion Aerospace and United Technologies Corporation announced jointly that they have finalized a Life of Program supply agreement for to support production at UTC's aerospace businesses. Ignition components include exciters, ignition leads and igniters.

Champion has now been positioned as the sole source provider of these ignition systems and components on the entire PurePower family of engines powering platforms, such as the Airbus A320neo, Embraer E-Jets E2, Mitsubishi MRJ, and the Gulfstream G500 and G600. AvtechTyee recently developed two new communications products for commercial aerospace.

First is a redesigned audio control panel for the 737 platform, which provides improved reliability and decreased maintenance in the cockpit. This sealed audio control panel is gaining traction in both the OEM and aftermarket.

Additionally, AvtechTyee recently won business with a number of airlines for a 737 MAX and 777 applications for a newly designed radio, the SELCAL or selective-calling radio, which is in essence, a pager in the sky that allows the pilots to activate their radio when needed to avoid constant listening to static and squawk on the radio, eliminating a key source of pilot fatigue.

These are just a small sample of the new business wins from the past year, and with that let me now hand it over to our CFO, Terry Paradie, who will review our financial results in more detail..

Thank you, Kevin. Nick already summarized the key events that occurred in fiscal year 2015. So, I'll now review the consolidated financial results for our fourth quarter; then give a brief fiscal year end summary. Fourth quarter net sales were $810 million, up $168 million or approximately 26% greater than the prior year.

The collective impact of the acquisitions; Telair, Pexco, PneuDraulics and Franke, contributed over 80% of the additional sales for the period. Our organic sales were approximately 4.5% higher than last year, primarily driven by growth in defense, partially offset by lower growth rates in commercial OEM and aftermarket.

Our fourth quarter gross profit was $428 million or 52.8% of sales. Our reported gross profit margin of 52.8% was 1.5 margin points lower than prior year. This quarter's decline in margin was due to the dilutive impact from acquisition mix and higher acquisition-related costs, which accounted for a decrease of almost three margin points.

Excluding all acquisition activity, our gross profit margins in the remaining businesses versus the prior year quarter improved almost 1.5 margin points due to the strength of our proprietary products and continually improving our cost structure.

Our selling and administrative expenses were 12.1% of sales for the current quarter compared to 11.9% in the prior year. Excluding all acquisition-related expenses and non-cash stock comp, SG&A was about 10.2% of sales compared to 10.9% of sales a year ago.

We had an increase in interest expense of approximately $16 million versus the prior year quarter. This was the result of an increase of outstanding borrowings of $950 million in the current quarter versus the prior year. The increase in outstanding borrowings was to fund acquisitions.

Our net income for the quarter increased $27 million or 24% to $142 million, which is 17.5% of sales. This compares to net income of $114 million or 17.8% of net sales in the prior year.

The increase in net income primarily reflects the increase in net sales versus the prior period, partially offset by higher interest expense and higher acquisition-related costs. GAAP EPS was $2.50 per share in the current quarter compared to $1.91 per share last year.

Our adjusted EPS was $2.83 per share, an increase of 28% compared to $2.21 per share last year. Please reference Table 3 in this morning's press release, which compares and reconciles GAAP EPS to adjusted EPS. Since this is our fiscal year end, let me take a minute to quickly summarize some significant items.

Net sales increased $334 million or by 14% to end our year at $2.7 billion in revenue. Acquisitions contributed just over 75% of the increase in sales, organic sales were about 3% above prior year. Reported gross profit increased 14% to $1.45 billion and was 53.6% of sales compared to 53.4% in prior year.

Excluding all acquisition activity and stock comp expense, our full year margin versus prior year improved 1.5 margin points. Selling and administrative expenses of 11.9% of sales in fiscal year 2015 is slightly higher than the 11.7% of sales in fiscal year 2014.

Again, excluding all acquisition-related expenses, stock compensation and non-operating expenses, SG&A was about 10.3% of sales compared to 10.4% of sales last year. Net interest expense increased $71 million due to the increase in the weighted average outstanding borrowings to $7.8 billion from $6.3 billion last year.

Our fiscal year 2015 weighted average interest rate was 5.2%. Our effective tax rate for the year was 29.8% for fiscal year 2015, compared to 31.6% for fiscal year 2014.

The lower current year tax rate was primarily due to recognizing the benefit from the utilization of foreign tax credits, foreign earnings taxed at lower statutory rates, as well as favorable discrete adjustments related to the finalization of prior year IRS audits. Adjusted EPS was $9.01 per share this year, up 16% from $7.76 per share a year ago.

Now, switching gears to cash and liquidity; the company generated $521 million of cash from operating activities and we closed the year with $714 million of cash on the balance sheet. The company's gross debt leverage ratio at September 30, 2015, was approximately 6.4 times pro forma EBITDA and 5.9 times pro forma EBITDA on a net basis.

We believe fiscal year 2015 was another great year for TransDigm and our shareholders. As we look forward to fiscal year 2016, we estimate the midpoint of our GAAP EPS to be $9.32 and as Nick previously mentioned, we estimate the midpoint of our adjusted EPS to be $10.45.

As we disclosed on slide nine, there is $1.13 in adjustments to bridge GAAP EPS to adjusted EPS. In addition, here are a few other fiscal year 2016 assumptions.

Depreciation and amortization including backlog amortization of approximately $14 million is expected to be approximately $118 million compared to approximately $94 million in fiscal year 2015. Interest expense is expected to increase 7% to around $450 million in fiscal year 2016.

As we discussed on the last call, 75% of our debt is fixed, swapped or capped. For the next four years or five years, we are reasonably hedged against large swings in interest rates. Given our current structure, a large increase in the LIBOR rate of 8%, far above what anybody is anticipating, would increase our after-tax interest rate by 1.25%.

In essence, we have approximately $15 million after-tax interest expense sensitivity to every 1% change in the LIBOR rate. Our effective tax rate for fiscal year 2016 is expected to be 31% and our cash taxes to be approximately $200 million.

We expect our weighted average shares outstanding will increase slightly and be approximately 56.8 million shares. As a result of these items, our adjusted EPS of $10.45 is approximately 16% greater than fiscal year 2015.

Finally, with regards to our liquidity and leverage, assuming no acquisitions or capital market transaction, we expect to have almost $1.5 billion of cash on hand at the end of fiscal year 2016.

Again, as Nick mentioned, assuming no acquisition activity, our net leverage ratio will be 4.8 times our EBITDA As Defined at September 30, 2016, or deleveraging a little over a full turn. I will now hand it over to Liza to kick off the Q&A session..

Thank you, Terry. Operator, we are now ready to open the line for questions..

Thank you. Your first question comes from the line of Michael Ciarmoli, KeyBanc Capital. Please proceed..

Hey. Good morning, guys; a real nice quarter. Thanks for taking the questions. Maybe, Nick, you talked about concerns on the OE cycle more pronounced into 2017.

Can you just elaborate are you looking at specific platforms there or are you looking at your exposure to the 777 or maybe just kind of expand on what's giving you the specific concerns?.

Yes. I can't – I mean, you know, guys, I know all – I hear all the announcements on potential production cuts or up or down as you guys do; so I know nothing unique there. I would say it's more of a general concern. You know, we have an expansion that's been going on now for 11 years or something like that.

It's generally forecast to run another three years, four years, pick the person, that's getting up in the 14-year, 15-year range, that's started to look awful long in the tooth to me. I can't give you a specific.

I understand the backlogs in place still look pretty good, but that's starting to look pretty long to me and something that bears watching and when I combine that with the fact that you see a lot of noise in press releases now around the worldwide economy and the U.S. economy softening a bit. The combination of those two things concerns me.

It's not any specific insight different than any you have. We are roughly market weighted on the airplane. So there is no one airplane that's going to drastically knock us out of – that's going to significantly change our numbers versus others..

Got it.

And then just maybe one last one for me, just broadly on the commercial aerospace aftermarket; can you give us an update on kind of what you're seeing from airline behavior? And if we look at suppliers out there, I mean there continues to be wide variations of reported growth with, I guess, GE and Safran leading the way, UTX and Pratt kind of lagging; how do you guys tend to correlate with those suppliers and maybe what you are seeing?.

Yes, I don't know. On the engine, guys, I frankly don't know how to correlate that. I'm sure all of you watch them too. It seems to me, they swing up and down all over the place. They go up fast and down fast and I don't know how to correlate them with us.

We tend to correlate ourselves more with the – with the more componenty kind of people, you know, that you see, UTAS and Honeywell and people like that. I think we're probably running a little ahead of those kind of businesses. I'd say in the marketplace, it still seems to me, as though they should be ordering more, or taking more.

And that's why I've said, I think there is some upside in next year's number. But when you see the numbers and you see the discussion in the economy and the numbers other people are turning in and talking about it, it gives you some concern about being overly bullish..

Got it. That's helpful. Thanks, guys, I'll jump back into queue..

Thank you. Your next question comes from the line of Gautam Khanna, Cowen and Co. Please proceed..

Good morning and great results..

Thank you..

Thank you..

Wanted to just have you elaborate on what you're seeing on the defense side of the business, aftermarket NOE (40:26) and if there's any tough comps we should be mindful of as we look through fiscal 2016? I remember the Airborne Systems piece had a bit of a comeback. So, how should we think about sort of the....

Yes, I think, you mean as far as quarters or something like that?.

Yes..

Yes, well, first, we don't give quarterly guidance. I think you just have to look at the guidance we gave for the year. The specific things that moved it up are the parachute business, as we said, the international orders and those still look pretty strong.

The Airbus 400 have a fair amount of a lot of activity, a lot of it being sort of catch-up for backed up stuff. That I think doesn't – you don't get a lot of growth off of that, just because it spiked up pretty well.

The C-130, which we caught up a fair amount due to inventory drawdown at Lockheed and AeroControlex, I think that's kind of at rate, but I don't think the C-130 – the rates aren't going up on the C-130. I think you probably saw the catch-up you see there.

And the combination of all those is why we're – we're not expecting another, whatever, at 9% to 12% growth next year. Now, I will admit, the defense business, it's an uncertain world out there. It could move down. I think it could move up too..

Okay. And that's helpful....

I think the chances of the OEM portion of the business, which is less than the majority of the business moving dramatically from what we expect is small. Where you can get the movement is if operating tempo picks up, they start buying more spares and repairs..

That's fair. Thank you, Nick. And I was wondering if you could also just comment on your balance sheet capacity for a special dividend versus M&A in this environment.

We did see some perturbations in the high yield market during the quarter, and I just wondered what you think you could actually lever up to for either a special or a corporate acquisition?.

I hesitate to guess at that, only because we see the same thing you see. It's sort of bouncing around, though I think yesterday, our bonds were trading just about at par. But it's kind of moved around a bit.

Let me just see; our credit agreement is public, right?.

Our credit agreement, yes, it is..

As you know, our credit agreement allows us to go up to 7.25% net. I think it might be tough in today's environment to get up to 7.25% net. I'm not sure we couldn't do it, the question is, whether we want to do it with the price movement it would take. We are thinking more like sort of 7%-s around our limit rather than 7.25%. Which I don't... (43:23).

And that would be for M&A or....

We're probably a little more cautious around that mark with that now than we were a year ago..

Okay. And....

I don't think in either case....

...for dividends, would it be lower or would it be....

Yes, and well, probably a little bit; it's hard to get an exact beat on that until you go out and try and raise it, but probably a little lower..

Okay. Thank you very much, guys..

Thank you. Your next question comes from David Strauss, UBS. Please proceed..

Good morning..

Morning..

Morning..

Morning..

Nick, just looking at your revenue forecast, I'm having a hard time reconciling mid-single digit organic growth plus you've got, it looks like, about 2.5 full quarters of additional acquired revenues from all the deals you've done recently.

Is it truly 5% organic you're assuming, because I'm just having a hard time getting down to kind of where you're guiding revenues to?.

We gave you the number. I don't follow you, David. The number is not clear or when you add acquisitions....

Well, yes, if you take 5% organic revenue growth plus basically 2.5 additional quarters of about the similar amount of acquired revenues you had this quarter, you come up with a fair amount higher than the top end of your range..

I think we're somehow disconnected maybe on our definition of organic..

Okay..

David, I just don't know, but I suspect we may be calculating organic different than you're calculating. But it's hard for me to answer that without seeing the calculation, but I think, Liza, we'd be glad to look at it..

Yes (45:08)..

Okay, all right. That's fine. I can take it offline..

Yes..

And then, you gave us a lot of data around what you're assuming for kind of base business margins and all of that.

If you look at your adjusted EBITDA growth, Nick, of 15% that you're guiding to for next year, how does that break out between base business and acquired, the acquisitions in terms of that 15%?.

Yes, I mean, it always is a – you're going to get a reasonable slug of it out of acquisitions, because they're new and you've got them for a full year. We don't break that number out, mostly because we don't want to go make judgments on allocations of overhead and things like that on it. But the new ones are a pretty good contributor.

The existing businesses, you're not going to get the kind of margin movement you see in a new one..

Yes, then historically, we've always increased the margins on these existing businesses, and we'll continue to do that on these acquired businesses. So we expect it to move on..

Okay.

And last one for me, did I hear correctly $1.5 billion in ending cash at 2016, so are you implying, as we think about free cash flow somewhere in the $700 million to $800 million range next year?.

Yes, I think what we said was almost $1.5 billion, and I think with what we're expecting midpoint on EBITDA and our cash conversion rate of that EBITDA, that puts you in the right range of what you're mentioning..

But the answer to the question is yes..

Yes..

Okay. Thank you..

Thank you. Your next question comes from Myles Walton, Deutsche Bank. Please proceed..

Thanks. Good morning. Just wanted to follow up on Dave's last question, first. So, you usually get about $100 million of cash from financing activity from the options and excess tax benefits.

So the free cash flow would be somewhere in the $600 million to $700 million as opposed to $700 million to $800 million, is that right?.

I guess it depends how you define free cash flow. We define free cash flow as operating cash minus CapEx. And the way we look at the business is we really look at EBITDA conversion after paying cash taxes, interest, and working capital and that we see that's always over 50% and that's what we target..

Got it. Okay, to follow up on that one....

But the math is just $750 million and goes to a little under $1.5 billion..

$1 billion to $1.5 billion..

Sure..

You can do the math on the free cash flow..

Yes. But, you would pick up some extra cash in financing is all I was getting at from the options..

Yes, because the exercise of the options..

Yes. So, to back up, for 2015, so, you target 50% conversion of adjusted EBITDA to operating cash flow, it didn't play out in 2015. Was it simply cash taxes in the flow of those in the course....

So, I think and believe it did pay out. I think the number, we look at free cash flow of $521 million, back off $55 million, we're – or, excuse me, our EBITDA of $1.2 billion, converted after interest and cash tax and CapEx, were almost 53% conversion..

Your EBITDA As Defined was $1,233 million..

Yes, that's what – yes, so, we have....

You have operating cash flow of $521 million..

Yes, but again, as I mentioned, we look at it as, take your EBITDA, back off cash interest and cash tax. The other piece of it is working capital, that you're factoring in your free cash and you can see from a working capital, we've made some investments this year..

I think, you're just trying to calibrate them. Miles, when we say it's over 50%, there is a definition of what we mean by that..

Yes. Okay..

We mean, what we call operating, which is EBITDA minus cash interest minus cash tax minus CapEx, right..

Okay, got it. Because in prior years, the working capital actually has not been a source, it's been more of a – excuse me, not been a use, it has been more of a source, so, I guess that's the differential this year..

Yes. You heard Kevin talk about, as we move to integrating some of these new businesses, and growing our businesses, we built some working capital in the inventory area this year and that's what you're seeing..

Got it. And the only other one that I had was, the 31% as a starting point for tax, is that a good ongoing rate beyond 2016, is there anything one-off in 2016 that's helping drive down....

Yes, we don't predict what the discretes will be. That is our estimate for our full year effective tax rate. So the 31% is that number. And it's down from 33%, where we started last year, because of the Telair acquisition structure we put in place..

Okay. Great. Thanks, guys..

Yes, yes. That's the recurring rate..

Great. Thanks..

Thank you. Your next question comes from the line of Ken Herbert, Canaccord. Please proceed..

Hi. Good morning..

Morning..

Morning..

Morning.

I just wanted to follow up on that working capital question if I could. Was almost all of the growth, it looks like about half was inventory this year and then some on the accounts receivable.

Was that all associated with the acquisitions and positioning them or was there anything else going on in the base business?.

No, I don't believe there's anything going on in the base business. It's really driven by acquisitions. If we look at our DSOs, they're very consistent year-over-year as well as from an inventory turn, the same thing. The acquisitions as well as we are building up a little bit of safety stock....

And volumes have gone up..

And volumes have gone up, absolutely..

Yes..

Yes. And then – okay.

So as you think about 2016 and the guidance I guess, a lot of that is helped I guess into 2016 when you think about at least some of the inventory and the ability to sort of work that down through the year?.

I think that's, we'll see how that all plays out. I think one thing we have to recognize is that we really are focusing on EBITDA and we are willing to give up a little bit of working capital to generate further EBITDA. So that's really our strategy..

But I think as far as looking at the basic business model, what we define as working capital is receivables and inventory minus accounts payable, that's what we track. That number runs 27%-ish, 26% to 28%, and it doesn't change much, and any change you see in there from year-to-year is just a random perturbation.

You can use that number and feel pretty comfortable that it's a pretty good predictor, that kind of range. As percent of revenue, I'm talking about..

Yes, yes. Okay, no, that's helpful..

That's what we use when we model it..

Okay, okay. That's helpful. So I guess the only variability would be obviously incremental acquisitions which obviously are not in the guides..

Right..

And if I could just finally, Nick, on the aftermarket, I know last time we spoke you were commenting around still some inventory in, not at the distribution level, but at the airline level.

Do you see that as – is that part of your conservatism here in 2016, and how that plays out or you get a sense that specific inventory levels are close to normalized and the caution around the guidance is really just, obviously 2015 had a lot of surprises maybe and obviously you don't want to get too far ahead of things here?.

Well, first, I have no specific way to exactly put my finger on what the inventory is that all the airlines have. I would say they seem to be buying less than they should be consuming and I don't think we are alone in saying that.

I think there is some probability or if not possibility, that there were overbuys before that that are being drawn down, and I think there is some possibility that they're getting a little better on inventory management. All those combined with the fact that some economic concern is what has us a little softer.

But you know, you take our guidance for aftermarket, take off the price and you can make whatever estimate you want on that, you guys probably won't be too far off. You'll see, we're still pretty modest in our assumptions on the real growth, the unit growth, it probably still doesn't track airline activity..

Yes, exactly.

Well obviously coming off of 2015, that's probably a fair assumption, a safe assumption heading into 2016?.

Yes. But we hope there could be upside there..

Yes..

We'd love to be wrong on the upside..

All right. I appreciate it. Thank you very much..

Thank you. Your next question comes from the line of David Strauss, UBS. Please proceed..

Hey. Thanks for taking my follow-up.

Nick, back on the aftermarket; any distinction on what you're seeing in terms of kind of the more discretionary part of the aftermarket versus the non-discretionary part?.

I don't think I can realistically make that argument. If I look quarter-by-quarter, it's spotty across the businesses that are discretionary and non-discretionary. The vast majority of our businesses are not discretionary stuff. You just need them when you run the hours and I can't say there is a marked difference in the more discretionary things..

Okay.

And, Terry, the gap, the difference between the adjusted EPS and GAAP EPS guidance; can you reconcile how much of that is stock comp versus acquisition or integration-related cost?.

Yes, I think it's in the slides, David. I think if you looked at slide nine, you will see that the biggest component there is the non-cash stock comp of about $0.64 and then acquisition related expenses of $0.44 that makes up $1.13..

Got it. Okay. Yes. Okay, haven't seen that. Thanks..

Yeah..

Thank you. Your next question comes from the line of Carter Copeland of Barclays. Please proceed..

Hey, good morning, guys, and nice numbers as always, Nick..

Thanks..

Couple of questions; first off, just on the order trends, Nick, when you look regionally I think real-time, do you see any difference in order activity out of some of the places that we're all worried about, whether it's Asia or Middle East or Latin America; you're spread across those places, is there anything to note in terms of order differentials on the aftermarket?.

Nothing that I feel comfortable enough to talk about, Carter. I don't see any particular conclusion I can draw other than the normal; people are flying more and buying more. But I can't say I see any dislocation in one place different than another at least on the data we have..

All right. And then just a quick follow-up, you mentioned really quickly the head count reduction; I wondered if you might kind of compare that to – obviously you did one in – I believe it was 2008.

Is this something like that in terms of a magnitude or presumably it's a bit smaller and maybe you can give us just some color on?.

Smaller. Yes, it's smaller. I mean, it's more in the low single digit kind of percents..

Than the 10% you did?.

Yes, yes, yes, and the logic there is as I think I told you we're a little concerned about the length of the cycle and in fact anything that happens in 2017 will start to ripple back into 2016. As you know quite quickly and the overall economic news across the whole economy doesn't look great to us.

And you combine that with the fact that there isn't quite as much development activity as there was three years ago or four years ago. Our view also, Carter, as you know, is to get out ahead of that stuff.

We're not ready to make a sort of a definitive statement or an adjustment as we did back then, but we'll keep watching that very closely and we quickly will, if our view changes..

So you think this is more engineering and overhead-oriented at least, at first?.

Impacted by – yes. We primarily are making adjustments in the non-hourly, though we're adjusting some of the hourly. The bigger adjustments are in the non-hourly, and the reason for that is, we've still got the backlog. So I mean we're still cranking stuff out, just like the production rates are cranking out.

But that almost naturally take care of itself, if the backlog starts to soften at all. Where you have to get proactive is in all the overhead structure. And we're sort of getting a little ahead of that..

Great. Makes perfect sense. Thanks, Nick..

I would now like to turn the call over to Liza Sabol for closing remarks..

Thank you, again, for calling in today and I want to remind you to look for our 10-K that will be filed sometime tomorrow..

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