Nov 14, 2013
Executives
Liza Sabol W. Nicholas Howley - Chairman, Chief Executive Officer and Chairman of Executive Committee Raymond F.
Laubenthal - President and Chief Operating Officer Gregory Rufus - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary
Analysts
Carter Copeland - Barclays Capital, Research Division Robert Spingarn - Crédit Suisse AG, Research Division David E. Strauss - UBS Investment Bank, Research Division Yair Reiner - Oppenheimer & Co.
Inc., Research Division John D. Godyn - Morgan Stanley, Research Division Robert Stallard - RBC Capital Markets, LLC, Research Division Kenneth Herbert - Canaccord Genuity, Research Division Michael F.
Ciarmoli - KeyBanc Capital Markets Inc., Research Division
Operator
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 TransDigm Group Earnings Conference Call. My name is Celia, and I'll be your operator for today.
[Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms.
Liza Sabol, Investor Relations. Please proceed.
Liza Sabol
Thank you, Celia, and welcome, everyone, to TransDigm's fiscal 2013 Fourth Quarter Earnings Conference Call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus.
A replay of today's broadcast will be available for the next few weeks. Replay information is contained in this morning's press release and on our website at transdigm.com.
Before we begin, the company would like to remind you that statements made during this call, which are non historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC.
These filings are available through the Investor section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA As Defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures.
Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA and EBITDA As Defined, adjusted net income and adjusted earnings per share for those measures. I will now turn the call over to Nick.
W. Nicholas Howley
Good morning, and thanks again for calling in here about our company. As I usually do, I'll start off with some comments about our consistent strategy, then an overview of a busy fiscal year '13, the financial performance and some market summary for '13 and our initial guidance for fiscal year 2014.
A fair amount to cover. To restate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle.
To summarize why believe this, about 90% of our sales are generated by proprietary products, around 3/4 of our net sales come from products for which we believe we are the sole source provider; excluding the small non-aviation business, about 54% of our revenues and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced higher gross margins and it provided relative stability in the down cycles.
Because of our uniquely high EBITDA margins and relatively low capital expenditure requirements, we have, year-in and year-out, generated very strong free cash flow. We pay close attention to our capital structure and view it as another means to create shareholder value.
As you know, we have, in the past and continue to be willing to level up when we either see good opportunities or view our leverage as suboptimal for value creation. We typically begin to delever pretty quickly.
In keeping with that philosophy, we paid out $2 billion of special dividends and related payments in fiscal year 2013 or about 25% of our beginning of the year market equity value. During the year, we also raised about $4.3 billion of both senior debt and high-yield bonds at an average interest rate of around 4.4%.
About $2.2 billion of this was used to reduce our interest expense, extend maturities and increase flexibility. After paying the special dividend -- dividends and making 3 significant acquisitions for about $475 million, we closed fiscal year 2013 with about $565 million in cash, $300 million in unrestricted undrawn revolver and additional capacity under our credit agreement.
We ended the year with a net leverage of about 5.5x EBITDA. Just to run through again, in deciding to pay out the special dividend this year, we look loosely at our choices for capital allocation.
To remind you again, we basically have 4. Our priorities are typically as follows: first, invest in our existing business; and second, make accretive acquisitions consistent with our strategy.
These 2 are always our first choice. Third, we can pay off debt, but given the low cost of debt, especially after tax, this is likely our last choice in the current capital market conditions.
And lastly, we can give the extra back to the shareholders either through a special dividend or stock buyback, as you saw us do this year. As we looked at all our likely needs for acquisitions and internal investment requirements, we believe, based on what we knew then and know today, that we had adequate cash and or debt capacity for our near or midterm needs.
Combining that with historically low interest rates and extensive capital availability, we have an opportunity to accelerate returns to our shareholders while maintaining adequate liquidity and borrowing capacity to meet our near and midterm operating and acquisition needs, thus a roughly $3 billion of payouts. At 9/30/13, based on current capital market conditions, we believe we have adequate capacity to make over $1.5 billion of acquisitions without issuing additional equity.
This capacity grows as the year proceeds. This does not imply anything about acquisition opportunities or anticipated levels of acquisition in 2014.
We have a well-proven value-based operating strategy focused around what we refer to as our 3 value drivers, new business development, continual cost improvement and value-based pricing. We stick to these as the core of our operating management methodology.
This consistent approach has worked for us through up and down markets, while allowing us to steadily invest in new business and platform positions. We have also been successful in regularly acquiring and integrating businesses.
We acquire businesses with proprietary aerospace products and significant aftermarket content when able to acquire and improve aerospace businesses through all phases of the cycle. As you probably know, in fiscal year '13, we acquired 3 such aerospace businesses, with over $200 million of combined revenues and about $45 million of EBITDA, for a total price of approximately $475 million.
All 3 of these businesses are proprietary aerospace businesses with significant aftermarket content and we expect all to generate returns above our private equity life targets. Through our consistent focus on our operating value drivers, a clear acquisition strategy and very close attention to our capital structure and capital allocation, we've been able to create intrinsic value for our shareholders for many years through up and down markets.
I'd like to address now the status of our commercial aftermarket. In our fiscal year -- in our Q3 of this fiscal year, we believe we began to see signs of a market recovery.
We, as many in the industry, have been a bit surprised by how long this soft market has continued, especially in light of the decent underlying market trends. The reported Q4 commercial aftermarket revenues were flat and the annual revenues were roughly flat.
However, the quarterly comps are messy, with a lot of noise, particularly around some of the acquisitions. As we dig deeper, we see this early stage in spotty recovery appears to have continued into our fiscal year Q4.
To expand on this a little bit and share with you how we look at this internally, our pro forma revenues on a same-store basis for Q4 normalized, primarily for changes in business practices at recently acquired acquisitions, distributor changes and some related inventory movements, appear to have trended up in the range of 4% versus the prior Q4 at about the same percent sequentially. Additionally, we take weekly samples of direct sales of our spare parts to airlines, both from certain operating units and our larger distributors.
This is a sample of a significant percent of our spare parts revenues and showed increases a bit above the mid-single-digit percent, both in Q4 of fiscal year '13 versus the prior, as well as Q4 fiscal year '13 versus Q3 or sequentially. So roughly in the same range as the normalization adjustment I talked about above.
I would say it's too soon here to declare victory. We're very comfortable with our market positions.
I doubt this recovery will be linear. I suspect there'll be quarterly ups and downs.
Many forecasters, however, believe and our data seems to indicate that we are at or past the commercial aftermarket inflection point. Time will of course tell here.
As a point of interest, as we look at Q1 of fiscal year '14, it has about 10% less working or shipping days than Q4 fiscal year '13. So it may be tough to see an absolute sequential improvement.
Now to summarize fiscal year 2013. It was a busy year.
As I said before, we raised about $4.3 billion of debt. We acquired Arkwin for $286 million.
We acquired the GE Whippany actuation business for $149 million. We acquired Aerosonics for $40 million.
We paid out $2 billion or about 25% of our initial market value in 2 special dividends. We continued integration of our various acquisitions.
And we dealt with a softer commercial aftermarket than we anticipated. All the while, we think we continue to generate real intrinsic value in our new and existing businesses.
Turning to the performance. I remind you again, this is the first quarter and full year for fiscal -- and full year report for our fiscal year 2013.
Our year ends September 30. As I have said in the past, quarterly comparisons can be significantly impacted by OEM aftermarket mix, large orders, inventory fluctuations in the system, modest seasonality and the like.
Although the commercial aftermarket was soft, fiscal year '13 was generally a good year for TransDigm. GAAP revenues were up 17% versus the prior Q4 and 13% on a full year basis.
Pro forma revenues, that is if we own the same mix of businesses, was up about 5% on a quarter-versus-quarter and about 3% on a full year basis. Reviewing the revenue by market category, again, on a pro forma basis versus the prior Q4, that's assuming we own the same mix of businesses in both periods.
In the commercial markets, which make up roughly 3/4 of our revenue, total commercial OEM revenues were up 10% versus prior Q4 and 7% on a full year basis. This is primarily driven by commercial transport OEM revenues.
The commercial transport growth rate primarily reflects increase in airframe production rates. The smaller full year business jet segment growth was lower, more like in the 3% range.
I remind you that total commercial aerospace OEM was up 23% the prior year. Total commercial aftermarket revenue comps are a bit messy, as I said before.
As I described, normalized on a Q4 versus Q4 basis, they appear to be trending up roughly in the mid-single-digit range and about the same sequentially. Our individual operating units continue to be a little spotty, was about 3/4 or 75% of our units on the same basis were up in Q4 '13 versus the prior year Q4.
The defense markets, which roughly make up 1/4 of our revenue, our defense revenue continues better than we anticipated. Revenues were up about 11% versus the prior year fourth quarter and 7% on a full year versus full year basis.
The U.K. Ministry of Defence new Tarian product shipments made up about 2% of the full year 7% growth.
Adjusted for the U.K. order, full year incoming orders are still running slightly ahead of shipments.
We remain cautious about trends in the military. In total for the year, our revenues for commercial aftermarket were lower, while commercial OEM and military revenues were better than we expected going into the year.
Now moving along to profitability. I'm going to talk primarily about our operating performance or EBITDA As Defined.
The as defined adjustments in Q4 were primarily due to acquisition-related cost. Our EBITDA of about $248 million for Q4 was up 15% versus the prior Q4.
On a full year basis, our EBITDA As Defined, again, was just about $900 million, or up about 11% from the prior year. The EBITDA As Defined Margin was about 46% of revenues for Q4.
On a full year basis, our EBITDA margins were just about 47%. The full year margins was diluted about 2% from the impact of acquisitions and, to a lesser extent, the commercial aftermarket mix.
The Q4 margin was also diluted about 2.5%, primarily for the same reasons. With respect to acquisitions, we continue actively looking at opportunities.
The pipeline of possibilities is pretty active. It's about the same mix of sizes as we usually see.
We're seeing a bit more defense-related businesses than we probably have in the past. Closings are tough to predict, but we remain disciplined and focused on the value-creation opportunities that meet our tight criteria.
Now moving on to 2014 guidance, which I think is Slide 6. Once again, military businesses budget is unclear.
The rate of recovery in the commercial aftermarket seems to be turning up but is still somewhat uncertain heading into 2014. This is our best current estimate.
As the year proceeds, we'll let you know if our views change. But based on the above and assuming no additional acquisitions in 2014, our guidance is as follows: the midpoint of our 2014 revenue guidance is about $2.19 billion or $2.2 billion or up 14% on a GAAP basis.
At the midpoint of the guidance, the growth is roughly half organic, with the balance coming from a full year of acquisitions. Fiscal year -- Q1 fiscal year 2014 is currently anticipated to be lower than the other quarters, roughly in the same relationship as you've seen in past years.
The midpoint of 2014 EBITDA As Defined guidance is $1.02 billion or about 47% of revenue. This includes about 1.5% of margin dilution from prior acquisitions.
The businesses, excluding the 3 acquisitions, are anticipated to have margins of approximately 49%. In total, this EBITDA is up about 13% year-over-year.
The mid point of our EPS as adjusted is anticipated to be $7.16 a share or up about 4% versus the prior year. This is negatively impacted by interest expense, tax rate and a higher share count.
Greg will review the details. On a pro forma or same-store basis, this guidance is based on the following growth rate assumptions: commercial aftermarket revenue growth is assumed to be in the high-single digits based on worldwide RPM growth of about 4% to 5%.
We are still cautious here and expect growth to be lower in the first half than the second half of our fiscal year. We anticipate seeing our revenues begin to more closely reconnect to air travel as the year proceeds.
Defense military revenues is estimated to be about flat versus 2013. This assumes no significant additional sequestration impact.
We'll continue to evaluate this, of course, as the situation unfolds. The commercial OEM revenue growth is anticipated to be in the high single-digit percent range.
Without any additional acquisitions or capital structure activity, we expect to have almost $1 billion in cash at the end of '14, $300 million in undrawn revolver. Assuming no acquisitions, our net leverage is -- or capital structure activity, our net leverage is anticipated to be about 4.6x EBITDA at the end of 2014.
We also have additional capacity under our credit agreement. In summary, 2013 was a decent year and a tougher commercial aftermarket environment than we expected.
Hopefully, this sector has turned and the political situation stabilizes. But in any event, I'm confident that our consistent, value-focused strategy and strong mix of businesses, we can continue to create long-term intrinsic value for our investors.
Now let me hand it over to Ray, who will discuss some of the operating high points of the year.
Raymond F. Laubenthal
Thanks, Nick. As Nick mentioned, in total, we had a good fourth quarter and a good finish to another very busy year.
The consistent application of our operating value drivers and the successful integration of our most recent acquisitions continue to add solid value to TransDigm. Let me explain a little more detail our fiscal 2013 and fourth quarter operational value creation.
In spite of a small economy, we were able to apply our value drivers and create real value. As Nick mentioned, our year-over-year pro forma growth was about 3%.
A higher mix of commercial OEM work, coupled with the lower commercial aftermarket revenue, made managing our cost structure challenging. However, we continue to manage our resources tightly and we were able to continue to reduce our pro forma and total headcount.
Our continuing productivity efforts included consolidating certain acquired manufacturing operations, strategically sourcing material from efficient domestic and offshore sources and moving various manufacturing operations to our Mexico, Malaysia, Sri Lanka and China facility. Lastly, we continue to invest in our existing domestic facilities, keeping them up-to-date and productive.
We also continue to improve innovative -- we also continue to provide innovative new business solutions to our broad customer base. We have successfully expanded our platform content with significant new business in both the commercial and military markets.
In the commercial transport market, we have developed many new applications and here's a few recent examples. Hartwell has been awarded the development contract for engine cowl latches on the A320neo.
They're also developing the tail cone and belly fairing engines and latches on the Airbus A350. Champion recently developed and was awarded the ignition systems for the A350 auxiliary power unit.
Adams Rite Aerospace is developing the laboratory faucets, valves, water heaters and various door latches on the 737 MAX. They're also actively providing upgraded water, conserving laboratory faucets and equipment for several airlines, existing triple 7 fleets.
Our Dukes unit is providing a de-icing system, bleed air valves for the Bombardier CSeries and also for the Mitsubishi Regional Jets. Likewise, on those 2 platforms, AdelWiggins continues to expand their composite fuel and hydraulic isolator applications.
Our engineered laminates continue to be specified on upgrades to business class seats, cabin walls and flooring. Schneller has been awarded the Singapore Airlines' triple 7 fleet business class seats laminate refurbishment.
Delta has also selected them to provide the laminates for their Boeing 717 interior refurbishment program. And American is using Schneller laminates on their upgrade business class seats for their A321 and triple 7 fleets.
On the new Bell 525 relentless helicopter, Adams Rite providing the door bolting systems. Aero Fluid Products is providing 7 fuel system valves and AeroControlex is providing the in-tank fuel boost pumps, the APU loop pumps and various pitot tube probes for sensing airspeed.
In the military markets, we continue to be selected to provide upgrade on the C-130J. Our Avionic Instruments group is now supplying the upgraded A400-amp transformer XFIRE units that supply low static, clean electrical power on the aircraft's upgraded avionic and electrical systems.
Our AmSafe cargo unit has developed automatic quick drop cargo release actuation systems, which allow military helicopters to automatically and quickly release on their swung cargo loads remotely from the cockpit, thus reducing ground crew risk and speeding the military operational tempo. On the new Cessna Scorpion, which they just unveiled as their newest attack jet, AeroControlex group has been awarded 8 throttle control actuators and gearbox applications.
Champion will be supplying igniters, Duke is supplying several engine and windshield anti-icing valves and Electromech is providing pitch trim and roll trim motor actuators. On the Alenia Aermacchi M-346, Avionic Instruments has won an order to supply 3 phase electrical power inverters that provide upgraded clean power and expands electrical capacity of the aircraft.
And on the C-17, Avionic Instruments is also supplying frequency converters that provide hospital grade 230 volt electrical power for a central airborne medical equipment. These new engineered solutions and many others not discussed continue to expand our profitable product offering and add to future growth.
In fiscal 2013, we also acquired 3 proprietary aerospace businesses: Aerosonic, Arkwin and Whippany Actuation. Integrating these businesses created a flurry of integration and value creation activity and we quickly went to work on transitioning these businesses into TransDigm value creation mode.
As we have done with each prior acquisition, we applied our proven value creation process. We restructure the businesses into product line focus groups and implemented our value creation metrics.
We focused the engineering and new business efforts on winnable and profitable new business and we tightened up the cost structures. Again, I'd like to switch gears and talk about our management team.
These acquisitions drove a significant number of management structure changes. Our continual emphasis on succession planning and talent development again paid off well for us.
We were able to populate almost all of the key management positions with internal candidates. These proven candidates are steeped in our value focused culture and value creation processes.
During 2013, we promoted Jorge Valladares to Executive Vice President. Prior to his promotion, Jorge has been an operating unit president at both AdelWiggins and more recently, AvtechTyee.
Jorge has also had significant acquisition integration assignments. We also added 6 new division presidents, all 6 were internal promotions.
These internal promotions bring the strong TransDigm value creation culture to their operating units. Then below the division presidents level, we've added 17 senior operational function managers, 16 of the 17 were also internal promotions.
We believe our succession planning and talent development system is working. We have a good pipeline of talented people exposed to our value-creation methods and our defined training programs.
We believe the availability of promotable internal talent and our consistent succession development process effectively complements our disciplined value-creation method and is key to our ability to regularly acquire and integrate new businesses. Now let me hand it over to Greg, who will review our financial results in more detail.
Gregory Rufus
Thanks, Ray. Before we review the financials, you may recall, last quarter, I described in depth some of the unique items that would impact our fiscal third and fourth quarters.
We incorporated all of these items in last quarter's full year guidance but to review them, first, in early July, we raised $1.4 billion of additional debt to pay a $22 special dividend on July 25, directly related to the special dividend we paid $95 million in dividend equivalent payment to holders of vested stock options. You will see the impact of the additional dividend equivalent payment in our GAAP earnings per share and the additional financing increased interest expense in our fourth quarter results.
Second, we successfully closed the 3 acquisitions for a total purchase price of about $475 million in our fiscal third quarter. As a result, higher acquisition costs and purchase price accounted items were recorded in the fourth quarter.
Lastly, in the third quarter, we adopted segment reporting and are now reporting on 3 segments. Just to remind you, the power and control segment includes operations that primarily develop, produce and market systems and components that predominantly provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technology.
Year-to-date sales for this segment are $872 million, which represents 45% of our total sales. The EBITDA As Defined is $456 million or 52% of sales and represents 49% of our total segment EBITDA As Defined.
The airframe segment includes operations that primarily develop, produce and market systems and components that are used in nonpower airframe applications utilizing airframe and cabin structure technologies. Year-to-date sales for this segment are $951 million, which represents approximately 50% of our total sales.
The EBITDA As Defined is $440 million or 47% of sales and represents 48% of our total segment EBITDA As Defined. The non-aviation segment includes operations that primarily develop, produce and market products for non-aviation markets.
Year-to-date sales for this segment are $101 million, which represents 5% of our total sales. The EBITDA As Defined is $24 million or 23% of sales and represents 3% of our total segment EBITDA As Defined.
And with that, let me now review the consolidated financials on Slide 7. Fourth quarter net sales were $540 million, up $77 million or 17% from the prior year.
The collective impact of acquisitions, primarily Arkwin and Whippany and Aerosonic, contributed approximately $57 million of the additional sales for the prior period. Our organic sales growth was about 6% over the prior year, primarily due to the commercial OEM and defense markets.
Reported gross profit was $283 million or 52.4% of sales. The reported gross profit margin was approximately 3 margin points less than the prior year margin of 55.5%.
The dilutive impact of acquisition mix from primarily Arkwin, Whippany and Aerosonic was approximately 2 margin points. In addition, an increase in nonoperating acquisition-related costs, that is primarily inventory step-up and start-up expenses resulting from the 3 acquisitions we acquired in June, reduced gross profit margin by approximately 1.5 margin points.
Excluding all acquisition activity, our gross profit margins in the base business versus the prior year quarter were up modestly despite unfavorable OEM aftermarket mix, which negatively impacted the current quarter. Selling and administrative expenses were 11.3% of sales for the current quarter compared to 11.7% for the prior year.
The decrease is primarily due to a lower run rate of stock compensation expense as a result of the accelerated vesting of $2.4 million stock options that occurred last quarter and that was partially offset by higher acquisition related costs. Net interest expense was $81 million, an increase of approximately $26 million versus the prior year quarter.
This is a result of an increase in our weighted average outstanding borrowings to $5.7 billion in the current quarter versus $3.6 billion in the prior year. The additional debt was incurred to fund the $12.85 dividend paid in November and the $22 dividend paid in July.
We used cash to fund the acquisitions. The weighted average cash interest rate on total debt at the end of the current quarter is approximately 5.4% compared to 5.7% at the end of last year.
Our effective tax rate for the year was 32.5% for fiscal 2013 compared to 33.4% for fiscal 2012. Net income for the quarter decreased $4 million or 4% to $84 million, which is 16% of sales.
This compares to net income of $88 million in the prior year. The decrease in net income primarily reflects the higher interest expense and acquisition-related costs, partially offset by the growth in net sales and the lower effective tax rate.
Our GAAP loss per share was $0.20 per share in the current quarter compared to earnings of $1.63 per share a year ago. In addition to the increased interest expense and other items previously mentioned, the current quarter reported loss per share was significantly impacted by the $95 million of dividend equivalent payments or $1.67 per share in connection with the $22 dividend.
If you recall, the accounting treatment requires this payment to be deducted from the actual net income before earnings per share is calculated. The details of this calculation are included on Table 3 of this morning's press release.
The adjusted earnings per share was $1.75 per share, an increase of 2% compared to $1.72 per share last year. In addition to higher interest expense just mentioned, the fourth quarter earnings per share was negatively impacted by $0.10 due to higher share count of 56.9 million shares compared to 53.9 million shares in the prior period.
Since this is our fiscal year end, let me take a minute to quickly summarize the full year results. Net sales increased $224 million or by 13% to end our year at $1.9 billion.
Acquisitions contributed approximately 75% of the increase in sales. Reported gross profit dollars increased 11% and was 54.5% of sales compared to 55.6% in the prior year.
The full year margin would be closer to 58% after adjustment for the dilutive impact of acquisitions and unfavorable OEM to aftermarket mix versus 57% on the same basis in the prior year. Selling and administrative expenses of 13.2% of sales for fiscal '13 is higher than the 11.9% of sales in fiscal '12, due primarily to the higher noncash stock compensation expense.
This expense as a percent of sales increased to 2.2% this year from 1.1% in the prior year. Additionally, the current year includes incrementally higher acquisition rate cost about a half a point.
Net interest expense increased $59 million due to the additional debt incurred to fund the 2 special dividends, as previously mentioned. In addition, fiscal 2013 included $3 million of refinancing costs associated with refinancing the senior secured credit facility this past February.
GAAP net income was $303 million or 16% of sales. GAAP earnings per share was $2.39 per share compared to $5.97 per share a year ago.
However, on an adjusted basis, which excludes the dividend equivalent payments, the noncash compensation cost and the acquisition-related and refinancing costs, earnings per share was $6.90 per share this year, up 3% from $6.67 a year ago. When comparing GAAP EPS of $2.39 per share to the current year -- in the current year to the adjusted net income of $6.90 per share, the difference of $4.51 is comprised of the following items: $3.11 related to the dividend equivalent payments; $0.60 for noncash compensation expense, this includes an additional $25 million of expense in quarter 3 due to the accelerated vesting of options; $0.41 for acquisition related expenses, including integration costs such as startup, inventory purchase accounting adjustments and backlog amortization; and $0.39 for refinancing costs and other charges.
It was a hectic year, but well worth it. Switching gears to cash and liquidity.
The company generated $470 million of cash from operating activities. After consideration of the financing discussed, dividends paid and acquisitions made, we closed the year with $565 million of cash on the balance sheet.
The company's gross debt levered at September of 2013 was approximately 6.1x pro forma EBITDA and 5.5x on a net basis. As we look forward to FY '14, we estimate the midpoint of our GAAP earnings per share to be $6.32 and, as Nick previously mentioned, we estimate the midpoint of our adjusted earnings per share to be $7.16.
As we disclosed on Slide 9, the $0.84 of adjustments to bridge GAAP EPS to the adjusted EPS includes the following assumptions: $0.33 for dividend equivalent payments versus the $3.11 this year; $0.30 for noncash stock comp expense versus $0.60 this year; and $0.21 of carryforward activity related to the Arkwin, Whippany and Aerosonic acquisitions. Nick provided color on the FY '14 sales and EBITDA As Defined.
I will walk through and explain why adjusted net income for share only increased 4% despite sales and EBITDA As Defined growth of approximately 13%. All growth percentages assume the midpoint of the guidance.
Depreciation and amortization and that's excluding the backlog amortization, is expected to total $72 million. This is a 9% increase over '13.
Interest expense is expected to increase approximately 20% or almost $54 million to $325 million in FY '14. We used the weighted average interest rate of 5.5%.
Our effective tax rate in FY '14 is expected to increase to be around 34% compared to the 32.5% this year. And our adjusted net income will be up about 8% versus FY '13.
Finally, our weighted average shares outstanding will increase about 4% to be approximately 57.2 million compared to 55.1 million this year. As a result of these items, the adjusted earnings per share of $7.16 is approximately 4% greater than fiscal '13.
Finally, with regards to our liquidity and leverage, we expect to generate $450 million of cash. Again, assuming no acquisition activity, we expect our gross debt leverage to be approximately 5.6x EBITDA As Defined and our net leverage ratio will be near 4.6x our EBITDA As Defined at September 30, 2014, or almost a full term of deleverage.
Now with that, let me hand it over to Liza to kick off the Q&A
Liza Sabol
Thank you, Greg. [Operator Instructions] Operator, we are now ready to open the lines.
Operator
[Operator Instructions] The first question comes from the line of Carter Copeland, Barclays.
Carter Copeland - Barclays Capital, Research Division
Just a couple of quick ones. The first on the margin, the comment you made, Nick, around the core business at 49% next year.
It looks like that's comparable to where you're exiting this year and you don't -- you're not implying any adverse mix shift OE versus aftermarket or commercial versus military. But there is -- there should be some good volume leverage there.
I wondered if you might just elaborate on why it doesn't seem to be any expansion there?
W. Nicholas Howley
I don't know if I can answer that, Greg. Greg?
Gregory Rufus
I didn't follow that either. We've been going back and forth in so many different margins.
W. Nicholas Howley
Yes, yes. The question, I guess, was at least when you do the adjustments and you adjust the other one, it looked like margins are about flat.
Does that...
Carter Copeland - Barclays Capital, Research Division
If you take the 47% and you add back the 200 basis points, you get to 49% on the core business, which is what you're guiding to for next year. So you've got some incremental volume and you don't have the same mix headwinds for next year, so I was just wondering why it wasn't up.
Gregory Rufus
No, we do have some special non-repeat items this year. So when I looked at it my way, I was getting the margin improvement of about 1.5...
W. Nicholas Howley
Yeah, I thought you were, too, that's why...
Gregory Rufus
Carter, you've got to take FY '13 because we booked -- we still have 1 or 2 what we call onetime favorable adjustments or events that took place.
W. Nicholas Howley
We think the number -- we think the underlying organic number is about 1 point.
Carter Copeland - Barclays Capital, Research Division
1 point of expansion?
W. Nicholas Howley
Yes. I think that's -- Greg says a hair more, by the way.
Carter Copeland - Barclays Capital, Research Division
Okay. On the revenue side, the pro forma versus normalized aftermarket growth, it sounds like you pulled something out of distribution.
Did that happen this quarter?
W. Nicholas Howley
Yes, maybe...
Carter Copeland - Barclays Capital, Research Division
Will this have some impacts in the next couple of quarters?
W. Nicholas Howley
Yes. That's worth a little clarification.
I mean, there's a couple of things. Carter, when we -- the data points we were getting and the stuff we were picking up in the industry and the data points we're picking right now, didn't seem to exactly jive with our segment number said.
So we dug into that a little more and there were probably 8 to 10 items that impacted that. And you have big ones, or the most significant ones are, I'll say, primarily acquisition related.
And some of them are -- make things a little higher in the previous quarter and some of them make things lower in this quarter. But let me give you a sense of it.
The Whippany business that we bought from GE, the distributor inventories were too high. I think we told you this last quarter.
And we decided when we bought, we saw this in diligence and decided we had to draw them down. So we purposely drew down their inventories this quarter and that will continue a little into next year.
At the Arkwin business that we bought, they had a consignment inventory agreement with a distributor. We, essentially, that they recognize -- had recognized, sort of the way they looked at it, was in a similar consignment, it was a sale.
We did away with that and changed the contract, but that essentially meant we didn't recognize the ones that revenue be recognized because we had burned off the consignment inventory distributor. We divested a -- if you may or may not recall, we divested a distribution business in Q4 of last year, but we didn't sell the AmSafe net product line with it.
We kept that ourselves, then we had to find and restock another distributor in the prior Q4. And we also replaced the Pacific Rim distributor for one of our recent acquisitions and that sure got the inventory bouncing around.
So that will give you a sense of the stuff. Those are some of the most significant ones that we tried to adjust for.
I think the other way that I got some comfort here and -- is that we did these direct sale channel checks at our businesses and our large distributors and saw somewhere a little above the mid-single-digit pickup there, too.
Carter Copeland - Barclays Capital, Research Division
Okay. So the guidance for next year on the high single-digit on the commercial aftermarket corresponds to the pro forma growth or does that correspond to normalized?
W. Nicholas Howley
That is the number. That's the number we expect to see, okay?
Carter, Carter, let me back up a minute. It is same-store sales basis.
It's not GAAP, because GAAP number will always be bigger, right, before buying.
Operator
The next question comes from the line of Robert Spingarn, Crédit Suisse.
Robert Spingarn - Crédit Suisse AG, Research Division
Just going back to the aftermarket sales you just talked about. I'm understanding that there's a little bit of growth there if you look through some of the items that Nick just reviewed.
But it does seem to suggest that even at the low growth rate you come up with there against the flat, the volumes were probably down for the year and for the quarter with offset, to some extent, by pricing. So I wanted to ask you, how we could look at the difference between volume decline or just relative volume performance between out of production models and in production models fares for those 2 groups?
W. Nicholas Howley
Rob, I don't know that I can tell you that. The real answer is I don't know the answer.
But I don't know of anything unusually disproportionate between them.
Robert Spingarn - Crédit Suisse AG, Research Division
But how would you characterize your relative exposure to the 2?
W. Nicholas Howley
Oh, our exposure -- in the out of production stuff you're talking about?
Robert Spingarn - Crédit Suisse AG, Research Division
Yes, 737.
W. Nicholas Howley
737, 727, MD-80s, that kind of stuff, is that what you mean?
Robert Spingarn - Crédit Suisse AG, Research Division
That kind of thing.
W. Nicholas Howley
Yes. I mean, I haven't looked at that for about a year or so now, but I know the numbers that we -- that it was running were somewhere in the -- Greg, I want to say 3%, 4%, 5% of our aftermarket volume of [indiscernible] stuff.
Gregory Rufus
Yes, yes. That's high.
W. Nicholas Howley
I may be high on that. It's not a big number.
Robert Spingarn - Crédit Suisse AG, Research Division
Okay. And then I wanted to ask -- and maybe we can go into more detail offline on that, but I wanted to also ask you about defense.
So I think it's been better than expected the last couple of years.
W. Nicholas Howley
Yes.
Robert Spingarn - Crédit Suisse AG, Research Division
And wondering, in your assumption for flat next year, don't you think you might see some negative catch up from [indiscernible] volumes this year?
W. Nicholas Howley
Are we clear -- Rob, that is clearly a risk. That's clearly a risk.
I wouldn't tell you that's not a possibility.
Robert Spingarn - Crédit Suisse AG, Research Division
Well -- and then maybe we can fine-tune it a little bit. Have you worked through -- if sequester were to happen as written, since it's not in your number, what kind of guidance sensitivity is there to that?
W. Nicholas Howley
That's a very hard number. There's so many things bouncing all around.
Rob, when we say a flat year-over-year, remember, there's price in there, right? So flat year-over-year means an absolute decline.
So pick your number, but it's probably above inflation. So could you be down 10% rather than 4% units?
If you told me that, I don't think I could argue with you. I wouldn't say I -- that doesn't appear to our operating units to be what they expect and at least, so far, from our bookings, we don't see it or we haven't seen the fourth quarter.
Robert Spingarn - Crédit Suisse AG, Research Division
Okay. And then just, Greg, a clarification.
If I look at your guidance and what you've said about the contribution of the acquisitions, is it fair to calculate you had about $80 million, $90 million in revenues in '13 from these 3 businesses and next year would be about the $200 million or a little higher? And so, about half of your -- what Nick said, about half of your revenue growth is from that and then the other $100 million something is...
W. Nicholas Howley
Right, yes. It's roughly half of that.
Operator
Our next question comes from the line of David Strauss, UBS.
David E. Strauss - UBS Investment Bank, Research Division
Greg, you mentioned about, I think it was $450 million in cash generation; and, Nick, you said about $1 billion. I would've thought it was a little bit higher than that by the end of next year, maybe around 1 1, is there any unusual movements in cash next year?
It looks like you're forecasting about flat in line with this year.
Gregory Rufus
We'll, pay quite a bit more in cash taxes next year. This year, my cash taxes were about $82 million, which was extremely low versus my provision.
Next year, my cash taxes are going to be more like $160 million. So you got to factor that as you're just looking at year-over-year.
That might be one of the things that might help you, Dave.
David E. Strauss - UBS Investment Bank, Research Division
Yes, yes, that's probably it. Back on the defense side.
Nick, how long is it carrying over or how much longer does that run? Does that benefit your numbers at all next year?
W. Nicholas Howley
Yes, it benefited some. We -- if we're lucky or hopefully, we can sell some more of it, but we booked about $18 million, I want to say $18 million of it and roughly half of it is shipped this year and half of it will ship next year.
David E. Strauss - UBS Investment Bank, Research Division
Okay. So X that, things you're forecasting a little bit worse than might be taking it face up?
W. Nicholas Howley
Yes, yes, yes. If you took that out, you'd be down a little more.
Gregory Rufus
Yes. And we're actively trying to roll that out to other governments and we have active negotiations that I don't want to get into the details with, with other governments on that product.
David E. Strauss - UBS Investment Bank, Research Division
Okay. And then lastly, Nick, maybe any additional color, perspective on discussions with Boeing, Partnering for Success or royalties or any progress update with regard to that?
W. Nicholas Howley
I think, David, we've got to say the same thing we always said. We're not going to get into the details of a negotiation with our customer.
It's an ongoing activity. I think we, along with many people around the industry, sort of -- probably the activity levels sped up a bit in the last quarter.
But I don't know if our position is a heck of a lot different than it's in the past.
Operator
Your next question comes from the line of Yair Reiner, Oppenheimer.
Yair Reiner - Oppenheimer & Co. Inc., Research Division
Just some questions on the M&A environment. You mentioned that there are more prospects right now on the defense side.
Can you maybe give us a flavor for the difference in the purchase price? And also maybe you can discuss your tolerance for turning TransDigm into more of a defense company and what is the limit you're willing to go towards?
W. Nicholas Howley
We don't -- don't have any rule on that. What I said is we see more -- I didn't necessarily say there were more defense businesses than there were commercial.
I said there were probably more defense businesses in our prospects than there typically are. Doesn't mean there's absolutely more than there are commercial.
We evaluate defense businesses just like we evaluate commercial businesses. They -- in all likelihood, the revenue is -- the growth is going to be lower or declining, which means the price, we can't pay as much of a price.
But we still have to see a private equity like we heard, which we see, say, is a 20% IRR our equity in the thing. But we look at them the same way.
We don't have a rule for what percent of defense we go to, but, I mean, we have no intention of turning this into a primarily defense business.
Yair Reiner - Oppenheimer & Co. Inc., Research Division
Got it. And then just one more.
You mentioned that in the current interest rate environment, paying down debt is not very appealing and that makes sense. Where do interest rates need to go for you to think maybe this could take some leverage off and conservatize the balance sheet?
W. Nicholas Howley
Well, I would -- first, I don't know the answer to that. It would be very dependent on what the situation with acquisitions and the like was at the time.
Our first choice is always going to be to fund our existing businesses for the next accretive acquisitions. So that's a tough one to answer theoretically.
But I would also say that our goal here is to give our shareholders over time private equity like returns, which we define is 15% to 20% return on their equity over time. We are not going to get that without staying in a reasonable leverage level.
Operator
The next question comes from the line of John Godyn, Morgan Stanley.
John D. Godyn - Morgan Stanley, Research Division
John Godyn here. I wanted to follow up on the last question on M&A.
We've seen other acquisitive companies out there respond to what might be a little bit of a tougher aerospace deal environment by looking at verticals outside of A&D, oil and gas has come up. Is there any appetite for TransDigm to look outside of A&D for M&A?
W. Nicholas Howley
Not at this time. We think we got enough runway in front of us.
If that turned out to be the case, then we'd have to decide. But we have other alternatives.
One alternative is to open the aperture up a little on proprietary content and then you see many more things. That's not our desire nor our intention right now, just to be clear.
Gregory Rufus
But that's all within aerospace.
W. Nicholas Howley
Yes, but that's all within aerospace. The other alternative we frankly have, we always have, is to be more aggressive with our capital structure and more path.
If we don't see enough to buy that meets our criteria. But our goal now hasn't changed.
We want to buy proprietary aerospace businesses with significant aftermarket content.
John D. Godyn - Morgan Stanley, Research Division
That's very helpful. And if I could ask one on aftermarket in general, how much capacity is there to sort of accelerate price growth to offset some of the volume weakness or some of the volume weakness that we're seeing price sensitivity among customers and then responding one way or another?
W. Nicholas Howley
No, it's just the -- I don't want to speak much to the price, what we might or might not do with the prices. But I -- there's not a lot of elasticity and demand here for the price.
I mean, the stuff tends to be sole source.
Operator
Your next question comes from the line of Robert Stallard, Royal Bank of Canada.
Robert Stallard - RBC Capital Markets, LLC, Research Division
Nick, I think on the last call you mentioned you had a survey done about what was going on the aftermarket and one of the things you called out was the Asian airlines have destocking and deferring. Have you seen that regional trend improve since then?
W. Nicholas Howley
I honestly can't say whether that's changed much in the last 90 days, I don't think it has. Clearly, the European airlines have gotten a little better.
And I don't believe the situation has changed much in the Asian airlines on stocking, but I honestly can't say we took another set point in the last 90 days. I cannot say we have.
Robert Stallard - RBC Capital Markets, LLC, Research Division
And maybe to follow up on the defense side of things. Obviously, the DOD has got some spending challenges at the moment.
Are you seeing them being anymore strict on pricing or inventory levels or anything like that?
W. Nicholas Howley
We haven't yet. As I say, our defense is holding up better than we anticipated and at least, so far, the bookings are holding up, too.
And we really haven't seen significant changes.
Operator
The next question comes from the line of Ken Herbert, Canaccord.
Kenneth Herbert - Canaccord Genuity, Research Division
I just wanted to follow-up on the question regarding the aftermarket. When you talked about some of the work that you had, [indiscernible], a couple of quarters ago, you talked about the inventory issues in Europe and Asia as ideally in sort of the bucket of sort of onetime or near-term issues.
It sounds like you haven't seen maybe much change on that front. Do you think -- to what extent do you think this is still sort of a near-term issue that gets corrected as volumes start to pick up again versus structurally, are you getting a sense that maybe there's some changes with your airline customers that are -- maybe you want to have a bigger impact perhaps than we've seen in prior cycles?
W. Nicholas Howley
Well, what I don't -- in prior cycles, what has happened is eventually the, inventories snap back. So you got a year or 2 of very high growth.
The most recent instance I want to say was probably 2011, after a bad year '09 and '10 it probably jumped up around the industry 20%. And then, obviously, that was a little bit of an overshoot, which we probably gave some back in '13.
Different people -- I hear speculation that the airlines are getting better with their inventory control. And you may not see as much snapback, it may just more start to couple with underlying air travel.
Obviously, you can see in our go-forward numbers, we are not planning on an inventory snapback. There is -- if there is one, that would be unusual, by the way, if there wasn't a snapback, that would say their airlines are getting better at managing their inventory.
If there is, that's an upside to our forecast in the year.
Kenneth Herbert - Canaccord Genuity, Research Division
And is it safe to say that the guidance implies maybe a strengthening commercial aftermarket as we go through the year? I mean, your commentary on the first quarter seemed to imply that maybe things strengthen as we go through the year.
How do you see that cadence playing out?
W. Nicholas Howley
Well, I think I specifically said, we expect the second half to be better than the first half. And the -- our first quarter of our year is always lower than the rest of the year and it has about 10% less days in it, in the quarter, our Q1.
Our Q1 captures Christmas and Thanksgiving.
Kenneth Herbert - Canaccord Genuity, Research Division
Okay, okay. So most of the first quarter impact is, obviously, just a reduction in working days?
W. Nicholas Howley
Right. I mean, if you got -- and just what I -- the point I try to make and maybe I wasn't clear with it, if you got the same shipments in dollars from Q4 to Q1, effectively, you would have had a 10% pickup in shipments per day if that's clear.
Operator
Our next question comes from the line of Michael Ciarmoli, KeyBanc.
Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division
Nick, I know you don't want to get too much into price, but just to get a sense here, Ray had a number of comments about the value creation, mentioned cost consolidation, headcount, but didn't mention price on any of those recently acquired businesses. Can we assume that price is still the same value creation lever it is, say, a couple of years ago?
W. Nicholas Howley
Nothing's changed in the businesses, the recent businesses we bought. We look at them the same way, we evaluate them the same way.
They've got to have the same attributes and we got to see what I call a private equity like return, which means we have to change the margin.
Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division
Okay, okay. And then can you remind us, I mean, a couple of years back in your, I think it was in your Investor Day presentation, you used to call out some of the major platform exposure.
Within the defense kind of market, should we still be thinking at Black Hawk, C-130, C-17 as your biggest programs or has that changed to some extent?
W. Nicholas Howley
You mean in aftermarket or production?
Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division
I would say aftermarket or production. What do you think could have a bigger -- be the biggest variable?
I mean, if we see Black Hawk OE units go down significantly, is that going to create a headwind? I mean, what's the most sensitive to revenues?
W. Nicholas Howley
We -- let me answer that this way. C-130 is still our biggest, by the way.
In the aftermarket, it's pretty well spread. I would say, if I look at next year, in the OEM production rate, I don't think there's a whole lot of risk there.
Those are -- we tend to be sole sourced, the things are pretty well locked for the next, what do we got now, 10.5 months or something is what you're looking out on. And the variation will come in the aftermarket.
That's right, that's where the risk is.
Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division
Okay, okay. And can we assume that, that would be more helicopter exposure aftermarket if readiness levels go down, would that be a factor?
W. Nicholas Howley
Yes, probably. As I think we've told you, roughly our defense business, in our defense aftermarket is something like 1/3 transport, 1/3 helicopter and 1/3 other, which is mostly fighters.
Gregory Rufus
\ Other odds and ends of things, too.
Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division
Got you. Okay.
That's helpful. And then last one, just a housekeeping.
Greg, on the interest for next year, is that sort of annual interest expense you're looking at pretty fixed? I know you've got a portion the debt that floats.
How much variability is there to that interest expense next year?
Gregory Rufus
I think '14 as the base, that there's a little bit, but most of it will get fixed toward the end of the calendar year of '14. So we're still guiding the floating rate.
Operator
At this time, I will now turn the call back over to Ms. Liza Sabol, Investor Relations.
Please proceed.
Liza Sabol
Just wanted to thank everyone again for joining this morning's call, and just wanted to point out that we expect to file our 10-K some time tomorrow.
Operator
Ladies and gentlemen, that concludes today's conference. Thank you for your participation.
You may now disconnect. Have a great day.