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TransDigm Group Inc (NYSE:TDG)
Q1 2020 Earnings Call
Feb 4, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 TransDigm Group Incorporated Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today's program is being recorded.

I would now like to introduce your host for today's program Liza Sabol, Treasurer and Director of Investor Relations. Please go ahead.

Liza Sabol -- Treasurer and Director of Investor Relations

Thank you and welcome to TransDigm's fiscal 2020 first quarter earnings conference call. Presenting this morning are TransDigm's Executive Chairman, Nick Howley; President and Chief Executive Officer, Kevin Stein; and Chief Financial Officer, Mike Lisman.

Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.

Before we begin, we 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 Investor section of our website or at SEC.gov.

We'd 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 applicable reconciliations.

I will now turn the call over to Nick.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning and thanks again for calling in. Today, as usual, I'll start off with some summary comments on our consistent strategy, a few comments on the operating performance and outlook and capital allocation and then Kevin and Mike will expand and give more color.

To reiterate, we're unique in the industry due to both our consistency and our ability to create intrinsic shareholder value through all phases of the cycle. To summarize the reasons why we believe this, about 90% of our sales are generated by proprietary products and about three-quarters of our sales come from products for which we believe we are the sole source provider. Most of our EBITDA comes from aftermarket revenues, which typically have significantly higher margins and provide relative stability in the downturns.

Our long-standing goal is to give our shareholders private equity like returns with the liquidity of a public market. To do this, we have to stay focused on both the details of value creation as well as the careful allocation of our capital. We follow a consistent long-term strategy, specifically one we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple well-proven, value-based operating methodology. Third, we have a very decentralized organization structure and a unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE like returns. And lastly, our capital structure and allocation are a significant portion of our value creation methodology.

As you saw from our press release, we are off to a good start in fiscal year 2020 with solid operating performance in the quarter. Revenues and EBITDA As Defined were up substantially. Of course, much of this is due to the Esterline acquisition, but organic revenue growth was also up nicely. EBITDA margins were up versus the prior year as both the TransDigm base legacy and the acquired businesses all performed well. We continue to generate real intrinsic value for our investors.

Far and away the largest portion of our revenue, our worldwide commercial aerospace revenue, was up about 9% in Q1 versus the prior year, driven primarily by a very strong commercial aftermarket growth. Our smaller worldwide defense revenue was also up, defense bookings were down a little, but defense bookings can be lumpy. At this time, fiscal year 2020 continues to look like a good year for TransDigm though we see possible clouds on the horizon. The commercial aftermarket was quite strong in Q1. However, given the uncertainty around the 737 program production rates, possible attendant [Phonetic] inventory ripples and uncertainty in China related travel, we are leaving our full-year guidance unchanged.

We have begun to trim our cost. However, this is a little more difficult than usual, given the uncertainty in the 737 timing. We're watching this closely and are prepared to react more quickly if required. To put the 737 MAX OE production program in the perspective for TransDigm, at full production rate it makes up somewhere between 3% and 4% of our revenue and a smaller percent of our EBITDA. Kevin will discuss the quarter and the year in more detail.

With respect to M&A and capital allocation, in the last six months we closed and received payment on the sale of both the Souriau business for about $920 million and our EIT group of businesses for about $190 million. As I said last quarter, we may still sell some smaller businesses with less proprietary aerospace and aftermarket content. If we do so, as of today I don't expect that they would be significant in size. With respect to capital allocation, in the last six months we paid both a $30 per share special dividend and a $32.50 per share special dividend. The combined special dividends of $62.50 per share or about $3.5 billion is roughly 12.5% of the equity value at the start of fiscal year '20. This is a pretty substantial payout. Due to the divestitures, combined with a solid cash generation from our operating businesses, we're able to make these payments to our shareholders and still maintain substantial liquidity and firepower. As usual, we will review our go-forward capital allocation over the balance of the year and see where we stand toward the end of the year.

We now expect to have over $3 billion of cash at the end of fiscal year '20. We also have significant additional borrowing capacity under our credit line and our credit agreement. We have the financial flexibility and capital market access to deal with any currently anticipated capital requirements, allocations or other opportunities in the readily foreseeable future. We continue to actively evaluate and seek M&A opportunities. We have a decent pipeline, as usual, mostly in the small to mid-range. I can't predict or comment on any possible closings, but as I said before we are still working steadily at M&A and we're open for business.

And now let me hand this over to Kevin to review our 2020 performance, outlook and some other items.

Kevin Stein -- President, Chief Executive Officer, and Director

Thanks, Nick. Today, I'll review our results by key market then discuss the profitability of the business for the quarter. I'll also comment on the fiscal year guidance and review some other operational items.

As you have seen, we had a strong first quarter and a good start to the year. Mike will provide more details on the financials, but our first quarter operations, specifically revenue and EBITDA As Defined, were up substantially over last year, due in part to good organic growth as well as continued acquisition, integration and performance.

Q1 GAAP revenues were up approximately 48% versus prior-year Q1 and EBITDA As Defined was up 40% versus the prior year, with margins approaching 47% of revenue. Now, we will review our revenue by market category. For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior-year period in 2019, that is assuming we own the same mix of businesses in both periods. Please note that beginning this quarter, this market analysis discussion now includes the results of the former Esterline businesses.

In the commercial market, which makes up close to 70% of our revenue, we will split our discussion into OEM and aftermarket. Our total commercial OEM market revenue increased approximately 1% in Q1 when compared with Q1 of fiscal year 2019. Commercial transport OEM revenues which make up the majority of our commercial OEM business were flat versus prior-year Q1. However, bookings solidly outpaced Q1 sales in the current period by more than 15%. We did see minimal headwind from the impact of 737 MAX production halt this quarter. However, we believe any currently anticipated impact from the MAX issues should not have a material impact on our EBITDA for the full fiscal year. We are very diversified across all platforms worldwide so the impact to the 737 MAX or any single program should not be material to TransDigm in the aggregate.

Aside from isolated issues with a few aerospace platforms, general industry consensus remains mostly favorable long term as significant OEM backlog remains across the industry. We are currently assessing the near-term impact of the 737 MAX rate reduction as well as smaller cuts in production for other Boeing, Airbus and business jet platforms.

As a result of the recent production rate changes and other evolving global concerns, we are implementing a necessary 3% to 10% reduction in direct and indirect headcounts the impact of which will be felt in the second half of the year and will certainly vary by business unit.

Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenues grew by 17% over the prior-year quarter with the commercial transport passenger market outperforming our expectations. In the quarter growth in the commercial transport passenger and business jet markets were significantly offset by very modest declines in the commercial transport freight and commercial transport interior markets.

Overall commercial transport fundamentals continued to remain relatively strong, although a few items still bear watching. Global revenue passenger growth continues to decelerate, albeit growth is still near the long-term average. This might be impacted by weaker economic activity and multiple geopolitical disruptions worldwide. Cargo demand is weaker as FTKs have declined from reaching an all-time high in 2017 and business jet utilization data is pointing to stagnant growth that could create a headwind for the business jet aftermarket.

Finally it is unclear how the 737 MAX situation has or will impact our commercial aftermarket. But it may prove to be a net positive for TransDigm as older aircraft are utilized more.

Now let me speak about our defense market which is just over 30% of our total revenue. The defense market, which includes both OEM and aftermarket revenues was up approximately 9% over the prior-year Q1. As a reminder, we are lapping tougher prior-year comparisons as our defense revenue accelerated in most of fiscal 2019.

Defense bookings declined slightly in the quarter, driven by robust defense OEM bookings growth and a not unexpected decline in defense aftermarket bookings, given the recent restocking pace. Now moving to profitability, I'm going to talk primarily about our operating performance or EBITDA As Defined. EBITDA As Defined of about $681 million for Q1 was up 40% versus prior Q1. EBITDA As Defined margin in the quarter of 46.5% was negatively impacted by acquisition dilution from Esterline. Excluding Esterline, margins in our legacy business were over 51% and improved both sequentially as well as over the prior-year quarter.

Margin improvement progress is always important to us and indicates that our base business continues to drive and find opportunities for improvement by using our value drivers. On Esterline we are now over 10 months post close. The integration continues to progress. To date the acquisition is exceeding our expectations for growth in this largest of TransDigm acquisitions. As we have stated in the past, we will now no longer refer to any Esterline specific metrics as these businesses have now become part of the fabric of TransDigm.

Moving now to the 2020 guidance also found on Slide 7 in the presentation, we are not changing our full-year revenue, EBITDA or adjusted EPS guidance at this time although we saw strong first-quarter results. General market conditions have not meaningfully changed with the exception of the 737 MAX grounding and production halt. This is an evolving situation that could make it challenging for us to achieve the high end of our previously issued revenue guidance. However, as previously mentioned, we believe any impact from the MAX issues should not be material to our EBITDA this fiscal year. There is also a potential upside for us in the commercial aftermarket, resulting from the 737 MAX issues as older aircraft may be utilized more.

We will continue to closely monitor the 737 MAX situation and the expected impact on our business to be prepared to react as necessary, including any further pre-emptive steps that might be warranted. After consideration of these items at this time, we are not adjusting our full year revenue and EBITDA guidance as we still expect them to fall within the range previously issued. We will update again as the situation crystallizes.

In addition, we are not changing our original market growth assumptions at this time. We do, however, realize there could be some shifting between commercial OEM and aftermarket growth rates, but it is just too close to call with only one quarter of data.

I would also like to caution that although our EBITDA margin was strong in the first quarter, margins can be lumpy and margins may fluctuate over the next few quarters. So let me conclude by stating that Q1 of fiscal 2020 was another good quarter for TransDigm. We continue to be very pleased with the Esterline acquisition integration, as well as the strong operational performance in the quarter from our legacy businesses. We look forward to the remainder of 2020 and expect that our consistent strategy will continue to provide the value you have come to expect from us.

With that, I would now like to turn it over to our CFO, Mike Lisman.

Mike Lisman -- Chief Financial Officer

Good morning, everyone. I'm going to very quickly elaborate on some of the financial results that Kevin just discussed. As a reminder, and as mentioned on our last earning call, the Esterline organization as it used to exist, including the corporate office, is for the most part now gone with the business units, which used to comprise Esterline reporting independently into TransDigm. We're therefore not planning to give too much specific color or details around Esterline's performance separate from that of legacy TransDigm. So for the consolidated TransDigm business, a few quick notes on how we ended the first quarter of FY '20. And as a reminder, Esterline closed mid-March of last year. So it's not included in any of the fiscal '19 stats that I'm about to reference.

As Nick and Kevin both mentioned, first quarter net sales were up approximately 48% versus the prior year. Organic sales growth was strong at 8.7% and this figure still completely excludes Esterline. So it's for the legacy TransDigm business only. The Esterline acquisition drove the remaining 39% of the increase.

On EBITDA As Defined $681 million for the quarter, that was up 40% versus last year and adjusted EPS of $4.93 was up 28%. On cash and liquidity, this gets a little messy due to the timing of the dividend. We declared the $32.50 per share dividend in December but then did not pay it until early January. So I'm just going to give you the pro forma financial stats since that's what matters. So, pro forma for that $32.50 dividend per share that was paid on January 7th, our cash balance is $2.3 billion and net debt to EBITDA is now 6.1 times. We also currently have access to about $720 million of our revolver.

Now a quick update on interest and taxes. Interest expense is expected to be about $1.02 billion in fiscal '20 and this estimate is unchanged from our prior guidance. As some of you may have seen, we're currently in the market with the repricing of our $7.5 billion of term loans. This reprice is still in the process of being finalized and we'll update the interest expense guidance next quarter once the repricing completes.

On taxes, our fiscal 2020 GAAP cash and adjusted rates are all still expected to be in the range of 24% to 26%, which is unchanged from prior guidance. With regard to liquidity and leverage at the end of fiscal '20, assuming no additional acquisitions or capital market transactions, we now expect to have over $3 billion of cash on hand at the end of the year. This is a slight reduction from previous guidance just to account for the $1.9 billion dividend we paid in the first week of January.

In closing, the first quarter was a good start to the year for TransDigm. And with that, I'll turn it back to the operator to start the Q&A.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Noah Poponak from Goldman Sachs. Your question please.

Noah Poponak -- Goldman Sachs & Co. -- Analyst

Hey. Good morning, everybody.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

Noah Poponak -- Goldman Sachs & Co. -- Analyst

Nick, I wanted to try to ask you if you could kind of take a step back and try to provide some context for where the current fundamentals of the aerospace aftermarket are compared to your long history at the Company because we've got the MAX situation, but then we've also got all the MRO facilities telling us there is much longer wait than ever and we've got all these airplanes coming out of the warranty period, you just printed the number you printed. So I'm just kind of curious is this as good as you've ever seen it, is it in line with your average good time or is it something else? Would love to hear from you on that.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Yeah. I don't know that I have any great insight for you there. No -- I mean, I see all those puts and takes too. I mean, I'd have to put it on the better rather than worse side of the ledger though the slowing RPM always get your attention a little bit. As you know that can be a -- that can be sort of a leading indicator sometimes.

The situation in China, who knows where that goes. I guess the closest model would be the SARS situation, whatever that was some number of years ago, and that for a quarter or two had a pretty significant impact. I think -- obviously, I come down the same place as Kevin. We're sort of -- we don't change our view from the beginning of the year. So I'd have to say there is probably a wider band around this than there might have been six months ago.

Noah Poponak -- Goldman Sachs & Co. -- Analyst

Okay. And just looking at the margin performance in the quarter, I think the framework from you for a little while has been 100 basis points a year in the core, not recently acquired business. Is that still the right framework and you continue to do that even from a higher level?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Kevin, do you want to take that?

Kevin Stein -- President, Chief Executive Officer, and Director

Yeah, I think that's still the right magnitude and I think we can continue to do that.

Noah Poponak -- Goldman Sachs & Co. -- Analyst

Okay. Thanks so much.

Operator

Thank you. Our next question comes from the line of Robert Spingarn from Credit Suisse. Your question please.

Robert Spingarn -- Credit Suisse -- Analyst

Good morning.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

Robert Spingarn -- Credit Suisse -- Analyst

Nick or Kevin, I have a question for you and it relates to the MAX but it's higher level. Nick, you've always had that chart about the life cycle of a TransDigm program like 50 years you have this different colors and so forth. How long does a platform need to stay in service before your MPV positive? When you get past the development costs and the zero to low margin OE, how much of a run until you are in the black?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

I don't think I can give a number. We get so many different part numbers now in so many different economic situations. Some are significant, essentially upfront and some aren't much. I don't think I can give you a very good number on that, Rob. I would say if you look at a program, it's going to have a development that goes on, pick your number, three, four, five, six, seven years depending on the situation. You're not going to make much money until you get through the first four or five-year period, because either you are on warranty or even if it's not a warranty, practical matter of things don't break much, [Indecipherable] don't get much in the first four or five years. So you're surely out four or five years after production before you're starting to see any significant, I'd say, positive net on the whole thing. Beyond that, it's just too dependent on the specific part and program.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then I just had one on Esterline. Now that you've guided, I think Kevin, you said it's 10 months post deal, have you found anything either more positive or more negative under the hood in that business being a publicly traded company versus the private companies you've bought? Anything specific there that would be interesting to us?

Kevin Stein -- President, Chief Executive Officer, and Director

As we've talked about, you get limited due diligence upfront. So we went in, not sure all that we would find. I think in general, we've found that things have been better than we assumed upfront and there hasn't really been yet anything that is bad news, anything that we didn't anticipate or expect. It certainly emboldens us for the future to continue to look at acquisitions like this.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. Was there anything different about their aftermarket pricing dynamic because they were public versus the smaller private companies that you've bought in the past?

Kevin Stein -- President, Chief Executive Officer, and Director

No, no, not that we have seen. No.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, thank you.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Sure.

Operator

Thank you. Our next question comes from the line of Gautam Khanna from Cowen and Company. Your question please.

Gautam Khanna -- Cowen and Company -- Analyst

Yes. Thanks. Good morning, guys.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

Gautam Khanna -- Cowen and Company -- Analyst

I had two questions. First, I was wondering, have you noticed any continued or incremental hesitation by the Defense Department in placing orders given the whole overhang of the IG investigation? Does that explain anything in terms of lumpiness of bookings or anything you just point you there?

Kevin Stein -- President, Chief Executive Officer, and Director

So to answer that one, first off we have -- initially we saw some slowdown. We have been meeting frequently with the DoD, DLA, IG and other important stakeholders in the process to continue to communicate answer questions. Once we started doing that, I think some of the pent-up demand started to flow a little bit. So I'm not believing that has slowed down to get to the point. I think that you're driving out of slowdown and defense aftermarket bookings is anything more than a filling of the bins around the ranch. That's still what we believe.

We have seen that our interaction with the DoD, DLA has been positive. We're communicating spending time going through the issues and it's positive.

Gautam Khanna -- Cowen and Company -- Analyst

Okay, that's helpful. And then just on the commercial air transport aftermarket, in the quarter and maybe subsequent to the quarter, anything you can comment on by region? I mean, have you seen any coronavirus impact in Asia-Pac and/or between the various channels, distributor versus non-distribution and what have? Anything you can parse out?

Kevin Stein -- President, Chief Executive Officer, and Director

No, we -- we don't look at -- we don't look at our business like that from a geography and it's also the way that our products are distributed and sold. You can sell to one region and that's where the distributor is based and it goes all over the world. So we're -- we don't have great data on individual consumption by country or airline or platform. So no, we don't have that kind of visibility to offer you.

Gautam Khanna -- Cowen and Company -- Analyst

Okay. And any change -- any disconnect between the distribution channel and direct in the quarter? Any restarting or anything of that nature?

Kevin Stein -- President, Chief Executive Officer, and Director

No, no, we -- we don't have a composite POS any longer that -- the flow-through sales from our distribution partners that we can comment on after the combination of Esterline into the TransDigm businesses because they tended to use different distributors. It made the metric not as useful for us so far. So I don't have any good comment on POS in distribution by region.

I know what you're driving at and we keep looking for that as well to see if there is a pickup in 737 MAX related to the aftermarket in specific regions, are there any slowdown. But we don't have that kind of granularity to be able to give you that commentary.

Gautam Khanna -- Cowen and Company -- Analyst

Thanks, guys.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

I mean, the only thing I'd add is, we're pretty well distributed across the fleet. So, I mean if you look at where the fleet is around the world and you look at where the miles are flowing around the world, ultimately if those change the weighted impact of that will reflect on our demand at some point.

Gautam Khanna -- Cowen and Company -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Carter Copeland from Melius Research. Your question please.

Carter Copeland -- Melius Research -- Analyst

Hey, good morning everyone.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning, Carter.

Carter Copeland -- Melius Research -- Analyst

Kevin or Nick, just wondered -- I mean if I've learned anything about you guys over the last decade or plus it's that you don't let resources sit around idle. So to the extent you've got folks in your factories that are perhaps over staffed, even if it's a temporary basis because of this MAX situation, do you -- would you have any intent on attacking productivity with those resources in the meantime? And could you end up coming on on the backside of this uncertainty with some better efficiency in your factories? How are you thinking about using that?

Kevin Stein -- President, Chief Executive Officer, and Director

Of course, we look at -- all of these are opportunities to drive productivity. Productivity is an important part of our value driver mindset. We announced a 3% to 10% headcount reduction in the call. So far, I think that is -- that's going to vary by business. We'll see the impact of that far out in the second half of the year. It will vary by business depending on impact and what they're seeing and what the order book looks like.

So we're looking at this as the right thing to do to drive productivity. Is it opportunistic and will we see better productivity out the other end, I don't know. We certainly aim to be very efficient in the way we run our businesses, not let extra labor sit around, not go after pet programs or other projects. We're already working productivity aggressively. So there is maybe nothing additional to be gained by putting more people on productivity. But we want to manage our headcount efficiently and all of our resources the correct way.

Carter Copeland -- Melius Research -- Analyst

Great. And just... Go ahead.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

The only thing I'd add -- the only thing I'd add, Kevin, is I believe the 3% to 10% it's not just factory, it's across the head count.

Kevin Stein -- President, Chief Executive Officer, and Director

Yes, it's a direct and indirect.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Yeah, absolutely, and it will probably -- yeah, I don't know how it will split out on that. And the reason why I'm giving you a range is because we're still early in this process of implementing. I think most people have already been notified, but given our decentralized nature in this, the actions happen at the plants, they don't happen at corporate. So I'm still waiting to hear back on all of that.

Carter Copeland -- Melius Research -- Analyst

But just thinking through the history, I mean -- I think [Indecipherable] Nick in the past, there was a -- sort of a measurable impact on the back end, if memory serves me right. Is that correct?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

I would hope so. We would expect that would be the case. I mean, our hope is, Carter, to be out ahead of this not behind it.

Carter Copeland -- Melius Research -- Analyst

Yeah, understood. Thanks, guys.

Kevin Stein -- President, Chief Executive Officer, and Director

Sure.

Operator

Thank you. Our next question comes from the line of David Strauss from Barclays. Your question please.

David Strauss -- Barclays -- Analyst

Thanks. Good morning everyone.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

David Strauss -- Barclays -- Analyst

Nick, you talked about the MAX being 3% to 4% of revenues less on an EBIT basis. Is the 787 similar in magnitude?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

I think the 787 is a little bit less, but I don't -- I'm not looking at that right in front of me. But we have modeled that that would drop by, I believe, it's four units a month in early 2021. So, yeah that's factored into our thoughts.

David Strauss -- Barclays -- Analyst

Okay. And...

Kevin Stein -- President, Chief Executive Officer, and Director

And I just add the 3% or 4% on the 737, just to be clear, that is more like a full production.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Yeah, that's full production, great point.

David Strauss -- Barclays -- Analyst

Right. Right. I know you don't want to get too much into separating out Esterline anymore, but you gave some -- you gave enough detail for us to back end to kind of where their EBITDA margins are and approximately where their EBIT margins are. Can you just talk -- I mean obviously a bit away from the corporate average, but can you just talk about maybe broad based use of where the margins on underlying Esterline could go based on now having the company for -- approaching a year?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Yeah, that's -- obviously, we don't know. But in the fullness of time it should continue to move in the direction that that TransDigm is at. Whether it gets all the way there or not remains to be seen. But in the fullness of time, we don't see that this is a business that hampered in any way fundamentally.

David Strauss -- Barclays -- Analyst

Okay. And Mike on free cash flow, it looks like, backing into everything you're looking at $1.2 billion to $1.3 billion this year, roughly.

Mike Lisman -- Chief Financial Officer

That's right, that's right. It was stronger quarter than it will be next quarter just because of the timing of interest in tax payments. We have fewer payments this quarter and next quarter our fiscal Q2 double payments on interest and taxes. So it's a little bit less, but that's right for the year.

David Strauss -- Barclays -- Analyst

All right. Thanks guys.

Operator

Thank you. Our next question comes from the line of Robert Stallard from Vertical Research. Your question please.

Robert Stallard -- Vertical Research -- Analyst

Thanks so much. Good morning.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

Robert Stallard -- Vertical Research -- Analyst

Kevin, I think you mentioned the biz jet aftermarket was strong in the quarter but underlying FAA activity, it's still flat. I was wondering if maybe you could perhaps explain that disconnect there, perhaps why the number was so strong this quarter.

Kevin Stein -- President, Chief Executive Officer, and Director

Yeah, I wish I had some better -- it's surprising to us as well. Given the take-offs and landings, after a few years of strength, still not back to the pre 2008 levels, but we just haven't seen anything. And recently it's gone [Phonetic] negative. So our -- what we're seeing here is a little bit of a surprise I'll have to say, and I don't know how long it will last. Certainly the fundamentals of the industry don't appear to be good, but we're still seeing solid demand. So we will continue to ship it, but I wish I had a better explanation for you on why or where it's coming from.

What we see across this business given the aftermarket nature, whether it's defense, it's commercial, it's biz jet, is that aftermarket orders can be lumpy and that's part of what we're seeing, I think.

Robert Stallard -- Vertical Research -- Analyst

Yeah. And then on the whole MAX issue, have you actually taken -- I know you're making lots of different products, but then have you taken your rate down to zero or are you still running some of your products at some sort of raise so you can keep your supply chain ticking along?

Kevin Stein -- President, Chief Executive Officer, and Director

Yeah, we have had some communication with Boeing on what this will look like. We have taken our rates down to zero more or less where we are right now. And it will gradually build out based on what Boeing is communicating to a switch. Again this is early days in the communication process. So we're following their guidance on this. I'm not hedging it further.

Robert Stallard -- Vertical Research -- Analyst

That's great. Thank you.

Operator

Thank you. Our next question comes from the line of Myles Walton from UBS. Your question please.

Myles Walton -- UBS -- Analyst

Thanks, good morning.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

Myles Walton -- UBS -- Analyst

I was wondering, Kevin, maybe you can clarify a little bit on the cost actions you're taking. Is the cost action effect to 2020 net neutral,positive or negative to EBITDA?

Kevin Stein -- President, Chief Executive Officer, and Director

I think it's too early to tell right now. We are still figuring out the downside of some of the headwinds we're talking about and balancing this out. I think I need a little more time to comment on that, on whether it's neutral or will add anything to the EBITDA for the year. So I just need a little more time on that. It's too early in the year to change that.

Myles Walton -- UBS -- Analyst

Okay.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

But there's no reason to think the adjustments could be negative. I don't think, yes, [Phonetic] but I'm just not -- I don't want to give you an idea that it's going to be one way or the other.

Kevin Stein -- President, Chief Executive Officer, and Director

Yes.

Myles Walton -- UBS -- Analyst

Yes, sorry. I mean, is there a cost to achieve that will be front-loaded to the second quarter or third quarter that we should kind of be mindful forward and you catch up in the benefit in the back half of the year? That's all.

Kevin Stein -- President, Chief Executive Officer, and Director

Myles, are you talking about severance charges?

Myles Walton -- UBS -- Analyst

Yeah. Exactly.

Kevin Stein -- President, Chief Executive Officer, and Director

We don't expect those to be too material.

Myles Walton -- UBS -- Analyst

Okay.

Kevin Stein -- President, Chief Executive Officer, and Director

No.

Myles Walton -- UBS -- Analyst

And then...

W. Nicholas Howley -- Executive Chairman of the Board of Directors

But, yeah, they will -- but still they would hit us earlier.

Kevin Stein -- President, Chief Executive Officer, and Director

Yeah, they'd hit us earlier next quarter, Q2.

Myles Walton -- UBS -- Analyst

Okay. And then, Nick, a little bit off topic, but I think still relevant. Your role at FRR [Phonetic], I'm just curious as you look at you dividing your time between here and as that business matures. Can you just talk about how you think your roles may stay the same or change over time? Thanks.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Yeah. My primary activity is here of course. As you probably know, I'm Chairman there, not an active manager and an investor.

Myles Walton -- UBS -- Analyst

Okay, so no anticipation of any role changes at all?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

No.

Myles Walton -- UBS -- Analyst

Okay, great. Thanks.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

No.

Operator

Thank you. Our next question comes from the line of Ken Herbert from Canaccord. Your question please.

Ken Herbert -- Canaccord -- Analyst

Hi, good morning.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

Ken Herbert -- Canaccord -- Analyst

Kevin, I just -- sorry, but I just wanted to follow up one more time on the commercial aftermarket and you are up 17% [Phonetic] in the quarter. I mean it sounds like there wasn't anything unusual but I just wanted to confirm that you didn't see anything in terms of maybe airline budget dumping around into the calendar year, or any of the recent distribution agreements or anything else you've signed that could have been sort of one-time beyond just fundamental growth in the quarter?

Kevin Stein -- President, Chief Executive Officer, and Director

No, we look for it. It was a surprise that it was as solid and strong as it was. I will say that that's the 17% [Phonetic] in the quarter isn't just an artifact of the acquisition. TransDigm legacy, although I said I wouldn't refer to this, I wanted to give you some reassurance that the TransDigm legacy business would have still been a highlight, a headline number that everyone would have reacted to. So we're seeing strength across the board. It's not due to a program. It's not due to a single business unit, and it really wasn't any one-timers that we saw in there.

Ken Herbert -- Canaccord -- Analyst

That's helpful. And if I could just bigger picture, I mean as you talked about, you're almost a year into closing Esterline. As you think about your acquisition pipeline and as you think about opportunities moving forward, can you just talk a little bit about maybe what you'll do differently moving forward on acquisitions or some of the lessons learned that you can apply, which would make what already was, from the outside, a very good process potentially even better?

Kevin Stein -- President, Chief Executive Officer, and Director

I'll start on it and I'll let Mike and Nick jump in. I don't know if there is so much that we learned except that maybe we're a little conservative in some of our modeling. So that's good. It's good for all of us, good for you. I think we've learned that we can go after a significant business multifaceted many moving pieces and with our model and the way we handle the integration that we can tackle them and do a nice job of bringing them into the fold, into the fabric of TransDigm. That's what I think I've learned and -- from what I've seen on the operational side.

And also the folks in the acquired company are very interested in being on a winning team and it's amazing the attitude, the morale, the real positive perspective that the employees have as they are now part of this team, is really incredible and it's why I think we're accomplishing some pretty heavy lifting so quickly.

Ken Herbert -- Canaccord -- Analyst

Guys, anything?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

I think that's right.

Mike Lisman -- Chief Financial Officer

One thing I'd add too is just on the aftermarket point. We looked at Esterline from the outside in for years before the acquisition finally happened and looked at the aftermarket and couldn't make sense of the low 10% to 12% rate that was published. And I think from an M&A due diligence standpoint, one thing going forward is we might put less faith on what a company tells us just because they might not be tracking it the way TransDigm would.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Yeah. I guess I'd say a couple of things. I think our organizational method of keeping it separate for the first 12 months or so, I think was a plus in that there is -- you buy something with that many operating units and there's a lot of heavy lifting to be done in the first year. So keeping that so it didn't confuse and leak over into our base business, I think was a good call for us and I think that's a model we probably think to repeat again if we bought something like that.

I think we also had a combination of what I'll call good luck and good management. By the good management, I'd say where we in a space we know pretty well. So we can make judgments even when some of the numbers don't make sense. And I think our operating methodology works well and proven over and over. I'd say in the good luck category -- I'd say we were conservative in the forecast, because we -- you don't get as much information as you usually get. And when you buy something the good luck category didn't turn out to be a big bomb in there somewhere. So that's the comments I have.

Ken Herbert -- Canaccord -- Analyst

That's very helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Michael Ciarmoli from SunTrust. Your question please.

Michael Ciarmoli -- SunTrust -- Analyst

Hey, good morning guys. Thanks for taking the questions. Nick or Kevin, I think you mentioned in the prepared remarks that the Esterline growth was tracking ahead of expectations. Can you just maybe give a little bit more color there? Knowing that you're not going to parse it out, but was it just more general end market strength that you're seeing across all of your product line? Was it a little bit of pricing, better execution? I mean, is there -- are you seeing that aftermarket capture that maybe Esterline didn't execute on in the past, maybe just if you can give some color there?

Kevin Stein -- President, Chief Executive Officer, and Director

Yeah, I'll take a stab at it and then Mike has some more maybe insight. I think productivity and value-based pricing, I think we've seen great opportunities in both specifically on the commercial side. It's encouraging what we've seen. Beyond that, we have seen certainly productivity improvements, we've seen opportunities to inject cash to get delinquencies down. There were some significant delinquencies in parts of the business. There were some capitalization issues that need to be addressed.

I think we've approached this on an operational front to drive the Esterline business much like we focus the TransDigm legacy business on being the best operations performers they can be, having the best quality, the best on-time delivery, being an organization that you can really count on. That's really been our focus here and we've seen opportunities.

We've said in the past equally split on productivity and price and winning new business. I think that still holds. Mike, you have any...?

Mike Lisman -- Chief Financial Officer

Yeah, I think that's right. In addition to some of the productivity and op [Phonetic] point Kevin made, the Esterline business has seen good growth. So for the TransDigm legacy business, we referenced the 8.7% organic growth that the Esterline business is growing in that same sort of ballpark. So pretty strong revenue growth and it's from a mix of both price and volume.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. That's helpful. And then maybe Mike, just one last one. The full year interest expense, I think $1.02 billion, any color as to how the debt repricing might impact that expense as you sit here today and go through the process?

Mike Lisman -- Chief Financial Officer

Yes, we're crossing Is and -- crossing Ts and dotting Is to finish it this week. It should wrap up this Thursday and we'll issue an 8-K. We expect the rate to tick down slightly on the term loans. We also got package of amendments.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. Thanks guys.

Operator

Thank you. Our next question comes from the line of Greg Konrad from Jefferies. Your question please.

Greg Konrad -- Jefferies -- Analyst

Good morning.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

Greg Konrad -- Jefferies -- Analyst

Just to go back to the MAX really quickly, just a clarification question, you said it was 3% to 4% of sales. And you had some head count reductions later on this year. I mean, how much of the MAX capacity is fungible and can be reallocated to aftermarket or OE programs versus just idle capacity today?

Kevin Stein -- President, Chief Executive Officer, and Director

Yeah, I would say not much of it. Aftermarket is built on the same lines as the OEM products for the largest extent. So the volume occurs on the OEM side, you can't make it up. In aftermarket you can't move people around. Necessarily they're trained on certain pieces of equipment or processes. So I would say it's not that fungible that you can so easily move people around. We certainly try to do that first. And where there are needs we try to certainly move people. It's -- you have to take a RIF or a reduction when you don't see those opportunities out there.

Greg Konrad -- Jefferies -- Analyst

Thanks. And then I know it's small, but you mentioned a modest decline in the interior aftermarket. I think last quarter you talked about some international wins kind of converting to sales as we move forward. What are you seeing in that particular end market?

Kevin Stein -- President, Chief Executive Officer, and Director

Yeah, the -- for the quarter, for Q1, it was a little soft. So I think I commented that we saw some negative growth there. And then in the freight side, the freight side, it made sense. We've seen slowing FTKs for a while. On the interiors, I noted previously that we were starting to see some orders, some interest here that would turn things around and that's I think the case when I look at the bookings for the future and our interior side of the business they're starting to grow again. So that may be an indication that future quarters will be better on the interior side of the aftermarket.

Greg Konrad -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Hunter Keay from Wolfe Research. Your question please.

Mike Loncheriyan -- Wolfe Research -- Analyst

Hi. This is actually Mike on for -- Mike Loncheriyan [Phonetic] on for Hunter. So you mentioned some cuts to some business jet programs. Are those production cuts due to end market weakness, product transitions or is it a large-cabin multiple market segments, any color would help.

Kevin Stein -- President, Chief Executive Officer, and Director

I don't think I said that we were seeing any cuts in biz jet [Phonetic]. I think what we're seeing on the OEM side is new programs. We're on all of the important new programs here on the business jet side and we're seeing bookings come in, we're seeing shipments on that.

On the aftermarket side, I think pleasantly surprised that the aftermarket in the biz jet sector is holding up so well given the take off and landing cycles have been anemic. That's what we said. Yeah, business jet is a tougher market to understand. It's a small part of our business now as we've grown other sectors faster, but it has been difficult to predict over the last, I think even a couple of years.

Mike Loncheriyan -- Wolfe Research -- Analyst

Okay. That helps. Thank you. And then one for Mike. How are you thinking about taxes and thinking like over the next three to five years? So how are you thinking about changes to tax code beyond 2021 or are there any things that we need to be thinking about there? Thank you.

Mike Lisman -- Chief Financial Officer

I don't think so. The long-term guidance on across all three rate is still 24% to 26% and if you were looking for something to plug into a model, I'd encourage you to just stick in that range at this point.

Operator

Thank you. Our next question comes from the line of Seth Seifman from JP Morgan. Your question please.

Seth Seifman -- JP Morgan -- Analyst

Thanks very much and good morning everyone.

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Good morning.

Seth Seifman -- JP Morgan -- Analyst

Just with regard to the margin guide, the seasonal pattern is to see improvement off of Q1 and Q1 was relatively strong versus the guidance. I appreciate the idea of having some caution in the guidance given all the unknowns out there for this year. But given that the severance is not supposed to be that material, is there anything else that we should be aware of that would keep that kind of sequential margin improvement from happening other than just trying to be very cautious amid MAX, coronavirus, whatever else is happening in the world?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

I think that the guidance just reflects our best judgment and we're hopefully being a little bit cautious and conservative to your margin point.

Kevin Stein -- President, Chief Executive Officer, and Director

I completely agree with that. It's caution in there, there is -- a lot of information isn't known and we don't want to send the wrong signals and have to change them or modify them. We'd rather be cautious on this.

Liza Sabol -- Treasurer and Director of Investor Relations

Yeah. Also to remind you, though, that the aftermarket grew ahead of what we expected for Q1 and so that there very well could be sequential decline in the margin from Q1 to Q2.

Kevin Stein -- President, Chief Executive Officer, and Director

It's a good point.

Seth Seifman -- JP Morgan -- Analyst

Okay, great, thanks. And then as a quick follow-up, Nick, just when you think about the impact that the MAX situation might have on M&A opportunities over time, do you have any initial thoughts on maybe suppliers who might be more apt to be looking to sell now?

W. Nicholas Howley -- Executive Chairman of the Board of Directors

No, not that I know of. It would surprise me if it had much impact. As you know we buy proprietary aerospace stuff with a decent aftermarket. In other words, we buy good businesses. People usually don't sell good businesses in times of temporary down cycle. Now if you told me this was going to drop down like a rock and go on for a long period of time, I'd say that might stress some people. But given the situation that exists today, I'd be surprised if it changes anyone's view of either the whole period or what they want to buy or sell for good business. Now I would say for non-proprietary businesses that are very heavily weighted toward OEM or particularly the 737, it could stress the hell out of them. But that's not the kind of stuff that we typically buy.

Seth Seifman -- JP Morgan -- Analyst

Great. Thank you very much.

Operator

Thank you. And this does conclude the question-and-answer session of today's program. I would like to hand the program back to Liza Sabol for any further remarks.

Liza Sabol -- Treasurer and Director of Investor Relations

We just like to thank you all for calling in this morning and that concludes our call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Liza Sabol -- Treasurer and Director of Investor Relations

W. Nicholas Howley -- Executive Chairman of the Board of Directors

Kevin Stein -- President, Chief Executive Officer, and Director

Mike Lisman -- Chief Financial Officer

Noah Poponak -- Goldman Sachs & Co. -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Carter Copeland -- Melius Research -- Analyst

David Strauss -- Barclays -- Analyst

Robert Stallard -- Vertical Research -- Analyst

Myles Walton -- UBS -- Analyst

Ken Herbert -- Canaccord -- Analyst

Michael Ciarmoli -- SunTrust -- Analyst

Greg Konrad -- Jefferies -- Analyst

Mike Loncheriyan -- Wolfe Research -- Analyst

Seth Seifman -- JP Morgan -- Analyst

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