TransDigm Group (TDG) Q4 2020 Earnings Call Transcript

TransDigm Group (TDG -2.13%)
Q4 2020 Earnings Call
Nov 12, 2020, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the fourth-quarter 2020 TransDigm Group Incorporated earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jaimie Stemen, manager, investor relations. You may begin.

Jaimie Stemen -- Manager, Investor Relations

Thank you, and welcome to TransDigm's fiscal 2020 fourth-quarter earnings conference call. Presenting on the call 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, the company would like to remind you that statements made during this call which are not historical in fact are forward-looking statements.

For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the investors section of our website or at sec.gov. 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 applicable reconciliation. I will now turn the call over to Nick.

Nick Howley -- Executive Chairman

Good morning, and thanks to everyone for calling in. As usual, I'll start off with a quick overview of our strategy, then a summary of a few significant items in the quarter and next year. And then Kevin and Mike will expand and give a little more color. First, I'd like to start here with a short tribute to my original and long-term business partner at TransDigm and long-term friend, Doug Peacock.

Doug passed away this quarter at 83 years old. We worked together for 30 years with various business roles between us as boss, mentor, partner, advisor and long-term friends. We formed the plan for TransDigm in Doug's basement outside of Princeton, New Jersey in 1992. Doug was involved until almost the end and a participant in almost every major decision along the way.

It's been one hell of a ride and continues to be. Doug lived a good full life, and we'll miss his advice and guidance. He's been a key part of our consistent strategy, so it's only right that we jump into that next. Note the remarkable consistency over the last 20 years.

Doug has been a key part of that. To reiterate, we are unique in the industry in both the consistency of our strategy in good and bad times, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we must stay focused on both the details of value creation, as well as careful allocation of our capital.

To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by proprietary products, and over three quarters of our net 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 over any extended period of time, provide relative stability in the downturn. The commercial aftermarket revenue, typically the largest and most profitable portion of our business, dropped sharply in Q3 as we expected due to the steep decline in air travel.

And though the commercial aftermarket picked up some in Q4, it's still off substantially. Sharp drops have occurred in the past during severe shocks, though not to this magnitude and likely duration. Simply stated, our commercial aftermarket will recover as people worldwide start to fly more, though not necessarily in lockstep. This is starting to happen slowly, but the rate of recovery has been slowed down by the recent resurgence in COVID infections, and the timing of the recovery is far from clear.

We follow a long-term strategy. Specifically 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 decentralized organization structure and a unique compensation system closely aligned with shareholders.

Fourth, we acquire businesses that fit the strategy and where we see a clear path to PE-like returns. And five, our capital structure and allocation are a key part of our value creation methodology. As you saw from our earnings release, we had a decent performance in Q4, but are still in a very tough commercial aerospace market environment. On the positive side, our revenue and EBITDA as defined were up sequentially, that is versus Q3, about 15% and 17%, respectively, with puts and takes roughly in line with the planning scenario we used for sizing.

Obviously, due to the COVID impact on flying, both are down substantially versus the prior year Q4. To roughly frame the Q3 and Q4 revenues combined versus our planning assumptions, the commercial aftermarket wasn't quite as bad. The commercial OEM was a little worse, and our defense business was not quite as strong due to some Q3 timing issues. Defense businesses, however, were up substantially sequentially, that is versus Q3, and up about 7% versus the prior year Q4.

Defense bookings were ahead of shipments for the year. In addition to safety, the two most important items we focus on continue to be reducing and managing our cost. As I've said before, Kevin and his team did an outstanding job of reducing the costs quickly. Our revenues were down in the second half about 30% versus the prior year second half.

With some additional cost reductions in Q4, our run rate costs are now also down by about the same amount. The mixed impact of low commercial aftermarket revenues continues to impact our margin, but we have been able to mitigate part of this impact. Second, assuring liquidity, we raised an additional $1.5 billion at the beginning of the third quarter. The money was an insurance policy for uncertain times.

It's unlikely we will need it, but heading into a storm, we filled our fuel tanks as full as we could at a reasonable price. We continued to generate cash in Q4. We generated over $200 million of positive cash flow and closed the quarter with over $4.7 billion in cash. Mike will give more detail here.

Absent some large additional dislocations or shutdowns, we should come out of this with very substantial firepower. We continue to look at possible M&A opportunities and are always attentive to our allocation. Both the M&A and capital markets are always difficult to predict, but especially so in uncertain times like these. Acquisition opportunities in the last quarter were still slow, but we did start to see some modest pickup in activity.

We are still actively looking for opportunities that fit our model. In general with respect to our capital allocation, we still tend to lean toward caution, but we feel a little more optimistic than we did in Q3. We continue to review the Esterline portfolio of businesses. We are investigating the sale of a few less proprietary defense businesses that don't fit as well with our consistent long-term strategy.

If they are all sold, the go-forward revenue might decrease by roughly 250 to 300 million. The EBITDA margins on these businesses are significantly lower than our average, so the EBITDA impact would not be proportional. At this point, I can't speculate if we will sell all these businesses or not, but we are actively considering the possibility. Heading into our new fiscal year, we will not give 2021 guidance at this time.

When the smoke clears enough for us to feel more confidence, we'll reinstate the guidance. Though we are hopeful that we have bottomed out, there is still just too much uncertainty around commercial air travel, the recent increases in COVID infection rates, timing of vaccine, political situation and various related issues. In general, we are planning to keep very tight control on expenses and hold our organization roughly flat, but it's just too unclear to know exactly at this point. A few clarifications on some of the 2021 set points.

The EBITDA margin as defined for next year is dependent on the rate of recovery in the commercial aftermarket revenue, among other factors. For planning purposes, we are assuming a pickup in the second half of the year. Given the recent surge in COVID cases and the uncertainties I mentioned above, we hope and intend to be cautious in our planning, but we just don't know. Secondly, operating cash flow, that is EBITDA minus capex and interest and cash taxes as we traditionally define it, is more in the range of 40% plus a little of the EBITDA as adjusted.

This is partially offset by some other conservative assumptions that Mike will review in more detail. We believe we are about as well positioned as we can be for right now. We'll watch the market develop and react accordingly. And now let me hand this over to Kevin to review our recent performance and to talk a little more about 2021.

Kevin Stein -- President and Chief Executive Officer

Thanks, Nick. Today, I will first provide my regular review of results by key markets and profitability of the business for the quarter, and then cover fiscal 2021 outlook and some COVID-19-related topics. Q4 was a challenging quarter that closed out our fiscal 2020 against the backdrop of a continued slowdown across the commercial aerospace industry and a difficult global economy. In Q4, we continue to see a significant unfavorable impact on our business from the pandemic as demand for travel has remained depressed.

Despite these headwinds, I am pleased that we were able to achieve a Q4 EBITDA as defined margin of 42.4%, which was a sequential improvement from our Q3 EBITDA as defined margin and in spite of the mix impact of low commercial aftermarket sales. Achieving this Q4 margin was primarily a result of our quick pre-emptive cost reduction actions and continued focus on our operating strategy. Now we will review our revenues 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.

In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket. Our total commercial OEM market revenue declined approximately 42% in Q4 and approximately 23% for full-year fiscal 2020 when compared with prior-year periods. The pandemic has caused a significant negative impact on the commercial OEM market. We are under the assumption that demand for our commercial OEM products will continue to be significantly reduced during fiscal 2021 due to reductions in OEM production rates and airlines deferring or canceling new aircraft orders.

Longer term, the impact of COVID-19 is fluid and continues to evolve, but we anticipate significant negative impacts on our commercial OEM end market for some uncertain period of time. On a positive note, it is encouraging that the MAX is moving closer to recertification in several countries, although the near-term impact to our business will likely be minimal given the low build rates. Now moving to our commercial aftermarkets business discussion. Total commercial aftermarket revenues declined by approximately 50% in Q4 and approximately 22% for full-year fiscal 2020 when compared with prior-year periods.

In the quarter, the decline in the commercial transport aftermarket was primarily driven by decreased demand in the passenger and interior submarkets. There was also a decline in the commercial transport freight market, but at a less impactful rate. Our quarterly commercial aftermarket bookings were down in line with observed revenue passenger mile declines as a result of the decrease in air travel demand and uncertainty surrounding COVID. Q4 did demonstrate sequential bookings improvement, although modest.

The decline in demand for air travel began late in our Q2 as global restrictions on business and shelter-in-place orders went into effect in response to the pandemic. This led to a significant reduction in global flight capacity and parked aircraft across the world. Certain markets have reopened, while others, particularly international markets, remain closed or are enforcing strict quarantines. Airlines have added back some flight capacity, and there have been relatively steady increases in global passenger travel since its trough in April, but it has been a slow recovery thus far.

Recent resurgences of global COVID-19 cases and renewed lockdowns in certain countries, along with the end of the summer leisure travel season, have also compounded the slow recovery. Recent vaccine news is certainly encouraging and should drive recovery. However, the timing of vaccine approval and rollout is still not clear. Considering these variables, the shape and speed of the recovery remains uncertain.

To touch on a few key points of consideration: global revenue passenger miles are still at unprecedented lows, though off of the bottom. As a result of the pandemic, IATA recently forecast a 66% decrease in revenue passenger miles in calendar year 2020 compared with 2019. Cargo demand was weaker prior to COVID-19 crisis as FTKs had declined from an all-time high in 2017. However, a loss of passenger belly cargo due to flight restrictions and reduced passenger demand has helped cargo operations to be impacted to a less extent by COVID-19 than commercial travel.

Business jet utilization data was pointing to stagnant growth before this downturn. Now during the pandemic and in the aftermath, the outlook for business jets remains unpredictable as business jet flights are rebounding, but due to personal and leisure travel as opposed to business travel. And now that we have exited the summer leisure travel season and face the winter season, the sustainability of this trend is especially difficult to foresee. Although the long-term impacts of the pandemic are hard to predict, we do believe the commercial aftermarket will recover as long as air traffic continues to improve.

Clearly, a COVID vaccine would accelerate this. We believe the world will once again embrace travel in ever-growing numbers, but for now the timing of the recovery is uncertain. In the meantime, we will continue to make the necessary business decisions and remain focused on our value drivers. Now let me speak about our defense market, which is typically about 35% of our total revenue.

The defense market, which includes both OEM and aftermarket revenues, grew by approximately 7% in Q4 and approximately 1% for full-year 2020 when compared with prior-year periods. As a reminder, we are lapping tough prior-year comparisons as our defense revenue accelerated in most of fiscal year 2019. Year-to-date, defense bookings were up high single digits and have solidly outpaced year-to-date sales.Sequentially, quarterly defense sales grew over 20% quarter to quarter, but as we have said many times, defense sales and bookings can be lumpy. We continue to expect our defense business to expand due to the strength of the current order book.

Now moving to profitability. I'm going to talk primarily about our operating performance or EBITDA as defined. EBITDA as defined of about $498 million for Q4 was down 30% versus prior Q4. On a full-year basis, EBITDA as defined was about $2.28 billion, down 6% from the prior year.

EBITDA as defined margin in the quarter was approximately 42.4%. I'm pleased that amid a disrupted commercial aerospace industry, we were able to expand our EBITDA as defined margin by almost 100 basis points sequentially. We were able to achieve such an EBITDA as defined margin primarily as a result of our stringent cost mitigation efforts and consistent focus on our operating strategy. Our COO, Jorge Valladares, and really the entire operations and business unit team structure that we have, provided strong leadership during this very difficult time.

Now moving to our outlook for 2021. As Nick previously mentioned, we will not provide fiscal 2021 sales, EBITDA as defined and net income guidance at this time. We will look to reinstate guidance when there is less uncertainty and we have a clearer picture of the future. Currently, we expect COVID-19 to continue to have a significant adverse impact on our financial results during fiscal 2021, under the assumption that both our commercial OEM and aftermarket customer demand will remain depressed due to lower worldwide air travel, although recent news of an effective vaccine could impact these assumptions quite favorably.

As for the defense market, customer demand here is more stable, and we feel comfortable giving some color on expectations. We currently expect defense revenue growth in the low single-digit to mid-single-digit percent range for fiscal 2021 versus prior year. Given the uncertainty in the aftermarket channels, we are not providing an expected dollar range for EBITDA as defined for the new fiscal year. We assume a steady increase in commercial aftermarket revenue going forward and expect full-year fiscal 2021 EBITDA margin to be roughly in the area of 44%, which could be higher or lower based on the rate of commercial aftermarket recovery.

Barring any other substantial disruption of the commercial aerospace industry recovery, we anticipate EBITDA margins will move up throughout the year, with Q1 being the lowest and sequentially lower than Q4. As in past years with roughly 10% less working days than the subsequent quarters, fiscal year 2021 Q1 revenues, EBITDA, EBITDA margins are anticipated to be lower than the other three quarters of fiscal year 2021, roughly in proportion to the lower working days. Additionally, as discussed on the Q3 earnings call, many of our businesses have taken the opportunity to explore new business opportunities by working on developing highly engineered solutions for emerging needs arising from COVID, including antiviral or antimicrobial technologies, air purification and touchless technologies, to name a few. A cross-TransDigm team is in place led by Joel Reese, one of our most experienced executive vice presidents, to help drive this effort and is continuing to look for opportunities, and we'll update in the future.

Mike will provide details on other fiscal 2021 financial assumptions. Let me conclude by stating that although fiscal 2020 was a challenging year, it is a statement to our ability to expertly execute through difficult and unexpected circumstances. I am very pleased with the speed at which TransDigm has responded to the unprecedented pandemic, taking immediate actions to protect employees from the spread of the virus, while also dealing with the disruption impacting the broader commercial aerospace industry. There is still much uncertainty about the commercial aerospace market recovery.

However, we have a strong tenured management team that continues to remain agile and ready to act as necessary. We are not taking our foot off the gas. The team is focused on controlling what we can control, while also monitoring the ongoing developments in the commercial aerospace industry and ensuring that we are ready to respond to the demand as it comes back. I have the utmost confidence that through our swift cost mitigation efforts and focus on our operating strategy, the company will emerge more strongly from the ongoing weakness in our primary commercial end markets.

We look forward to 2021 and the opportunity to create value for our stakeholders. With that, I'll hand it over to our CFO, Mike Lisman.

Mike Lisman -- Chief Financial Officer

Good morning, everyone. I'm going to quickly hit on a few additional financial matters for the 2020 fiscal year that just completed and then also our expectations for the upcoming fiscal '21. First, for the full '20 fiscal year, you can see the details on revenue, EBITDA and EPS in the press release for today, so I'm not going to rehash it. On the taxes, our FY '20 GAAP and cash rates were about 12% and the adjusted rate was about 19%.

These were both aided by the CARES Act. On cash and liquidity, we ended the year with approximately $4.7 billion of cash on the balance sheet. And our net debt-to-EBITDA ratio was 6.8 times. Assuming air travel remains depressed, this ratio will continue ticking up in the coming quarters as the stronger pre-COVID quarters roll out of the LTM EBITDA computation.

Next, on the FY '21 expectations. We aren't giving full guidance as Nick and Kevin mentioned, but I'll highlight quickly just a few additional financial assumptions. Interest expense is expected to be in the ballpark of $1.08 billion for the year, and this equates to a weighted average interest rate of about 5.2%. On taxes, our 21 GAAP cash and adjusted rates are all anticipated to be in the range of 18 to 22%.

And on the share count, we expect our weighted average shares outstanding to increase by about 1 million to 58.4 million shares, assuming no buybacks occur during the fiscal year. Similar to prior years, the increase in the shares outstanding is driven by employee stock options that vested at the end of FY '20. With regard to liquidity in '21, we expect to continue running free cash flow positive throughout the year. There's been some confusion on the FY '21 cash guide that we gave in the call slides for today, so just a few quick words to hopefully alleviate the confusion.

As we would traditionally define our free cash flow from operations at TransDigm, which is EBITDA as defined less debt interest payments, capex and cash taxes, we expect this metric to be in the 800 to 900 million area, maybe a little better during fiscal '21. However, the actual cash balance over the course of the year should increase by 400 to 600 million. And the actual cash balance grows by less than the free cash flow from operations because it is reduced by term loan amortization, paybacks, a potential uptick in the working capital investment assuming we do see a commercial aftermarket uptick later in the year, small product line acquisitions in some of our business units, and delayed cash severance payouts related to the COVID-19 reductions in force in a few of our European op units. As you know, we tend to issue guidance that in time proves to be conservative.

From an overall cash liquidity and balance sheet standpoint, we think we remain in good position here and well prepared to withstand the currently depressed commercial environment for quite some time. With that, I'll turn it back to the operator to kick off the Q&A.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Kristine Liwag with Morgan Stanley. You may now ask your question.

Kristine Liwag -- Morgan Stanley -- Analyst

Hi, good morning everyone. With the cost takeout that you've done last quarter on SG&A and the repositioning actions you've taken so far, can you provide more color about how much of these costs you think you could keep as volumes recover? And ultimately how should we think about incremental margins as aerospace recovers?

Kevin Stein -- President and Chief Executive Officer

I'll take that first. I think incremental margins as we guided would -- we believe they will continue to improve during the year. I think that's important to note, but dependent on aerospace recovery and people continuing to fly, is there a second wave? Is that a concern that slows us down? I think all of these factors will weigh in. But right now, we anticipate things will continue to improve.

We will make the most, I've said this before on our earnings calls and I'll say it again. We will make the most of the opportunity of whatever revenue comes our way in this lumpy recovery that we're seeing. And we will make the most of it. We just don't see enough visibility yet to give more clarity on the go forward.

Kristine Liwag -- Morgan Stanley -- Analyst

And maybe one clarifying question. When you had the 400 million-plus in cash generation on your slide, and then with the commentary on 800 to 900 million in fiscal year '21, can you bridge the 2? What's the difference in the definition of what's in the slide versus your defined free cash flow?

Mike Lisman -- Chief Financial Officer

Yes. It's Mike. The disconnect between the actual cash build to the balance sheet of 400 to 600 million versus the cash from ops of 800 to 900 is just some assumptions around a couple different things. First, just net working capital build.

We've had a benefit here as cash has come out of work -- as cash has come out of accounts receivable. But as we go into the recovery, that's going to go back in and become a source of cash. We've baked in some product line acquisitions too at a couple of our op units. And there are some severance payments at European op units related to the COVID reduction in force where we simply have taken the accrual, but we haven't made the cash payout yet.

Hopefully, all those assumptions in those bridging items prove to be conservative in time. We think the amount we put into the estimates, what I provided today, is a little conservative. But we'll see.

Kevin Stein -- President and Chief Executive Officer

I think there was also an earlier part to your question, which was about how many heads will we bring back and costs will return. And I'll say the same point on that we've made many times, and I think similar to what Nick has said in the past, is we will bring heads back as the volume dictates, but in a very reduced manner. We will be stringent on that and ensure that we bring costs back in a very slow and timely manner, so that we don't let things run away.

Nick Howley -- Executive Chairman

And I would think when the dust settles and everything normalizes, we'll likely come out at the end of this with an improved cost structure.

Kevin Stein -- President and Chief Executive Officer

Absolutely.

Kristine Liwag -- Morgan Stanley -- Analyst

Thank you for the color guys.

Operator

Our next question comes from Myles Walton with UBS. You may now ask your question.

Louis Raffetto -- UBS -- Analyst

Good morning. This is actually Louis Raffetto on for Myles. Can you just give us a little bit more of the assumptions you have built into the 44% EBITDA margin? I know you sort of -- it assumes the aftermarket, I guess, recovery starts in the second half. And you've got the mid-single-digit growth in defense.

Are you sort of expecting this minus 40-plus percent to continue through '21? Or just any additional color on those assumptions.

Nick Howley -- Executive Chairman

Go ahead.

Mike Lisman -- Chief Financial Officer

Yes. I think the assumptions driving the 44% for the first half of the year, we roughly assumed the current environment, so sort of what we've been seeing for the past six months. And then we put in an uptick, as Nick mentioned, in the back half of the year. The defense forecast should be as we mentioned.

On the commercial OE side, we do expect it to be down for the first two quarters sequentially versus last year in the aftermarket as well, and then a modest uptick in the back half of the year on commercial aftermarket.

Kevin Stein -- President and Chief Executive Officer

I think the best way to follow this is to look at the flight takeoff and landings. And as we've seen them increase, we're at about 50% of where we were globally. I think that's the way to follow. We need people flying.

We need planes taking off and landing. That's what generates aftermarket content, and that's what we need to follow. And right now, that's largely plateauing with this second wave. We'll see how this comes -- how this changes over the next couple of months with this -- the advent of a vaccine.

Louis Raffetto -- UBS -- Analyst

OK. Great. And then just one quick modeling. Is there any backlog amortization expected this year? I think you had 50 million or so this year, I guess, or in '20?

Jaimie Stemen -- Manager, Investor Relations

De minimis.

Mike Lisman -- Chief Financial Officer

No. I think it's de minimis this year. That was mainly just from the acquisition of Esterline that we sold out now.

Louis Raffetto -- UBS -- Analyst

OK, thank you.

Operator

Your next question comes from Carter Copeland with Melius Research. You may now ask your question.

Carter Copeland -- Melius Research -- Analyst

You don't read that one every day. There you go.

Nick Howley -- Executive Chairman

I know where you work though.

Carter Copeland -- Melius Research -- Analyst

I like it. Nick, I'm sorry to hear about Doug. You guys really built something amazing. And that's sad news, so apologies about that.

But --

Nick Howley -- Executive Chairman

Thanks. Thanks.

Carter Copeland -- Melius Research -- Analyst

But Kevin, I wondered if you can talk about a couple things. One of them just stocking dynamics, if there's anything unique that you're seeing across the product lines or in particular geographies or customer sets? Just anything to be aware of in terms of inventory in the channel or buying behaviors, anything like that we should be aware of?

Kevin Stein -- President and Chief Executive Officer

Clearly, inventory in the channel is something to consider. We don't get a lot of visibility on inventory in the channel with OEM partners or airlines. It is largely unknown. What we do know is our distribution partners.

And I will tell you that their POS is running in line with our performance. So they're very much in lockstep and very much in lockstep with takeoff and landings. So we're seeing that come together. What was the rest of the question? Repeat that, Carter.

Carter Copeland -- Melius Research -- Analyst

Just in terms of both products and geographies, if there's anything --

Kevin Stein -- President and Chief Executive Officer

Yes. Geographies, Carter, we don't comment on. It's hard for us to see geographies anyway because of the way our products are sold either through OEMs or airlines distribution partners. We don't see much on the geography side.

I know in talking to our partners in Asia, the distribution partners there that we have, that they are seeing an uptick. They're seeing more consumption because of the domestic business that has now returned to largely the same internal China flight metrics as before. So that continues to be good performance geographically. That's probably the only color I can give you is that things appear to be improving, although at a conservative rate there.

I think the lack of international flight activity is certainly slowing that business down. But I think the piece -- we've touched on USM in the past and how that's not a big driver for us. I think the only piece you have to keep in mind is the amount of inventory that may be present is dependent on our sales process and philosophy. We do not give volume discounts to the field, so there's going to be less available inventory as some people may give volume discounts.

If you buy 100 pieces, you may save something. We don't do that at all. It's one of the things that we look to remove on acquisition. So that's something to keep in mind.

Carter Copeland -- Melius Research -- Analyst

OK. And then just a quick follow-up. I think you'll be below the hurdle for some of the interest deductibility just given the income, I think, that's implied for next year. Does that put any emphasis on getting a deal done in capital deployment? Or is it just de minimis in the impact?

Mike Lisman -- Chief Financial Officer

I think it's de minimis. You're right on the math there. We are slightly above it. We got a lot of a benefit just from the CARES Act expansion and the deduction of 50% of the U.S.

EBITDA. But I don't think that factors into any of the capital allocation or M&A thinking.

Nick Howley -- Executive Chairman

Yes. Carter, you know how we go through at least M&A allocation. I can't imagine that calculation would materially change our return. It surely wouldn't change judgments on individual businesses.

Carter Copeland -- Melius Research -- Analyst

OK. Thanks for the color guys and keep up the good work.

Nick Howley -- Executive Chairman

Thanks Carter.

Operator

Our next question comes from David Strauss with Barclays. You may now ask your question.

David Strauss -- Barclays -- Analyst

Thanks, good morning everyone. So Mike, just going back to this cash generation , just trying to put a finer point on it. So it looks like working capital was maybe a 200 million positive this year. Are you assuming that that reverses in a similar fashion next year, and it looks --

Mike Lisman -- Chief Financial Officer

We're assuming a chunk of it reverses, yes. If you peel that onion back a little bit, you would see accounts receivable was basically a source of cash for us of about 350 million. It was down 36% or so on the year. That was just driven by the commercial end market declines and the fact that we've been driving collections from the customers.

So as the sales dropped, provided you keep collecting in 57 days which is about our average, your accounts receivable sort of resets to your current sales levels. That amount of cash is obviously when we get back up to -- and the commercial markets fully recovered, the 350 million is going to have to go back in, but the pace at which that happens is really uncertain. It depends how quick the recovery happens. The quicker it is, the sooner we'll see that being a source of capital -- source of cash usage.

But we've baked in some conservatism here into the forecast because we frankly don't want to give you guys a target that just doesn't take that into consideration and ends up being too high.

Nick Howley -- Executive Chairman

And I think assuming it's appropriate, we'd love to see the receivables run up because that means the market is picking up.

Kevin Stein -- President and Chief Executive Officer

Yes. That's right, yes.

David Strauss -- Barclays -- Analyst

Yes. I got it. And then cash taxes are maybe 50, 100 million or higher. And what does that assume for the payroll tax deferral? Are you going to take care of that next year? Or is that a beginning of fiscal '22 item?

Mike Lisman -- Chief Financial Officer

We'll take care of it this year. The cash taxes should be somewhere in the -- as we've modeled it, we expect something north of 100 million, but not above 200 million. Again, it depends on the pace of the recovery. It's just really uncertain obviously and hard to forecast.

David Strauss -- Barclays -- Analyst

OK. And then last one on leverage, I think Mike, you talked about it's going to -- your net leverage will go up. It looks like it will peak out maybe around eight times, somewhere in that range. I guess how are you guys thinking about where you want your net leverage to be kind of when things start recovering and get back to normal, given we've got an even lower interest rate environment today than when we came into this?

Mike Lisman -- Chief Financial Officer

Yes. If you look back over the past say three years, pre-COVID, our average net debt to EBITDA was about almost exactly 6.0 times. I don't think we have any inclination to change that once things reset. It's obviously going to pick up a bit here.

And your math is correct, with the current -- we're run rating at slightly over eight times net debt to EBITDA. We're currently at 6.8 because we have two pre-COVID quarters in the LTM EBITDA computation. But I think coming out of this thing, the views on where we're comfortable operating the business from a leverage standpoint won't change from what you saw three years ago, that average period pre-COVID.

Nick Howley -- Executive Chairman

All I'd add is that specific calls on capital allocation and leverage levels as they maybe came around acquisition opportunities, as you know if we saw the right opportunity and felt comfortable with the market situation, we'd be willing to go up above that six on a steady state, but generally it then drifts back down.

David Strauss -- Barclays -- Analyst

All right thanks very much.

Operator

Our next question comes from Robert Spingarn with Credit Suisse. You may now ask your question.

Robert Spingarn -- Credit Suisse -- Analyst

Hi, good morning. Kevin, on the MA pipeline, is it still the way you've described it previously, a lot of defense properties against commercial properties maybe being a bit overpriced in this environment? And do you think the prospect of maybe better recovery visibility with this vaccine news changes that dynamic at all?

Nick Howley -- Executive Chairman

I'll take a crack at that. The answer is yes, more defense and we're not seeing quality commercial businesses, hardly at all. So what we tend to be seeing is defense. And I just don't know how to speculate, but I would suspect if you start to get a robust recovery, people would become more willing to sell.

It's just tough to get a valuation around something now.

Kevin Stein -- President and Chief Executive Officer

Right.

Robert Spingarn -- Credit Suisse -- Analyst

OK. And then just --

Nick Howley -- Executive Chairman

With valuation that anybody is going to like.

Kevin Stein -- President and Chief Executive Officer

Yes.

Robert Spingarn -- Credit Suisse -- Analyst

Right. And just as a follow-up on the defense with the big sequential growth and it being 43% of the current sales profile, we know that will change with the recovery. But what are the -- and OE I guess growing a bit stronger than aftermarket. What are the main platforms that are driving this?

Kevin Stein -- President and Chief Executive Officer

On the defense side?

Robert Spingarn -- Credit Suisse -- Analyst

Yes.

Kevin Stein -- President and Chief Executive Officer

Yes. I think it's F-35. APKWS is a major program for us. It hits several platforms.

But beyond that, we're nicely market weighted to the key opportunities. I can hit on a couple of some parachutes business here or there that's important to us. But we're market weighted on platforms, but I ticked off two that -- APKWS and F-35, that immediately come to mind.

Nick Howley -- Executive Chairman

And Rob, as you know, we're on most of the fighters, most of the freighters, most of the helicopters across sort of the U.S. defense fleet and many of the European ones.

Robert Spingarn -- Credit Suisse -- Analyst

Yes. I thought it was interesting though, your comment on OE versus aftermarket, so that prompted the question.

Kevin Stein -- President and Chief Executive Officer

Got it.

Robert Spingarn -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question comes from Noah Poponak with Goldman Sachs. You may now ask your question.

Noah Poponak -- Goldman Sachs -- Analyst

Hi, good morning everybody. I just wanted to stay on defense actually for a second. 2021 will have a pretty easy comparison given the low growth rate in 2020. And given an approximation of where your pricing power is in that business, to be low single, I think units would have to be negative.

And just given outlays will still be growing, given the easy comp you have there, given the pricing power, how would you get to low single? Is there any programmatic headwind following up to that last question?

Kevin Stein -- President and Chief Executive Officer

Yes. I would say hopefully we're conservative in our approach. We don't know of any headwind necessarily. It's interesting that you note low growth rate in 2020, but that's -- historically that's been right where we historically are, 0 to 1 or 2%.

So low given where we were over the last couple of years, but historically in line. So we don't really see it so low, but there's more opportunity as we go into '21. We have a strong order book. You saw the way we closed the year out with very strong bookings in the fourth quarter.

I think we're in a good position. It's just can we get it out and do they want to receive it per the original order schedule?

Nick Howley -- Executive Chairman

I think the OEM business other than inventory switches -- inventory movements in defense, ain't going to change a lot over what we assume now. On the other hand, the aftermarket business in defense is not booked out. You could easily see some swings down. I wouldn't think it would be dramatic or up in that.

I mean that's where the movement could be.

Noah Poponak -- Goldman Sachs -- Analyst

OK. In the aerospace business, both OE and aftermarket, the first half of '21, the first two quarters of '21 will still be comping to normal times. Should we think about the sequential revenues in each of those just being reasonably similar to the fourth quarter, and therefore the year-over-year rates of decline there may be a little better, but just kind of similar? Or is there an inventory component or some other component that would change that significantly?

Mike Lisman -- Chief Financial Officer

No inventory components or anything that would change it significantly. I think you should expect -- we expect in Q1 and Q2 of this fiscal year some pretty sizable downticks in the revenue in the upper 20 to 30% area.

Nick Howley -- Executive Chairman

Because of the difficult times. It's not because of anything that's changed versus the run rate.

Mike Lisman -- Chief Financial Officer

Because the comp is --

Noah Poponak -- Goldman Sachs -- Analyst

It's basically the same run rate sequentially, so you just --

Kevin Stein -- President and Chief Executive Officer

I think that's the right way to look at it, we would hope that it would be up a little bit in key areas, and that's the way we're looking at it, but we don't know what up a little bit means. We're just seeing a little bit of increased flight activity. And until that crystallizes with vaccine, it's not going to lead to greater aftermarket growth numbers.

Nick Howley -- Executive Chairman

And I think we're very reticent to get out of our skis and forecast, as you know, historically. Whether -- it will be better to plan conservative, size conservative, and you can always deal with the upside.

Noah Poponak -- Goldman Sachs -- Analyst

Yes. I mean hopefully in the back half of the year, there's a lot of upside.

Kevin Stein -- President and Chief Executive Officer

Yes.

Noah Poponak -- Goldman Sachs -- Analyst

Just wanted to make sure there wasn't something that took the first half actually down while -- even if the market is just kind of moving sideways. It sounds like there's not.

Mike Lisman -- Chief Financial Officer

There isn't anything that's taking us down.

Nick Howley -- Executive Chairman

Yes, that's right.

Mike Lisman -- Chief Financial Officer

We're counting on it being the same, a little bit better with an uptick in the second half.

Noah Poponak -- Goldman Sachs -- Analyst

And then lastly on your margins, if I look at 2019 if I attempt to strip out Esterline, it looks like the margin ex Esterline was -- EBITDA as defined was kind of 50% on the nose. If I assumed that 2023 revenues matched 2019, I think there's reasons it could be better. But I just gave you that hypothetical, could the EBITDA margin of the business, is it reasonable to assume it's back to that close to 50% on the nose type of EBITDA margin?

Kevin Stein -- President and Chief Executive Officer

I don't know if we know enough to say that, if I can tick off all of the reasons why it might fall short with uncertainty and unknowns. But I think it's maybe an OK way to look at it that we're still thinking that 2023, we would see things returning back to normal or a significant of the way to normal. I'm not sure we're still back all the way to where we were in '19. I think there'll still be some overhang, but I think there'll be a significant uptick between now and then.

And it will be gradual at first. And with virus -- or vaccine, I should say, I would expect a sharp change when -- because there's pent-up demand to fly. I don't know how else to think about it than that. And to keep yourself lean and nimble so that you can respond to the orders that come in and be prepared to bring people back if needed, that's the way we're viewing this.

Nick Howley -- Executive Chairman

I might take just a little expansion on that, Noah. I'll say again, I think fullness of time, we're at steady state again. I think we come out of this with a better cost structure than we went into it. We typically don't put back everything ratably on the pickup.

So I guess so in general, things get a little better in the margin. Now I guess the crux of your question is do you think you get all the Esterline businesses up or over 50%? Because that's what you have to do to have that happen. And I just -- I'm not sure we're ready to say that yet.

Noah Poponak -- Goldman Sachs -- Analyst

Yes. I guess if Esterline is a little short of that, depending on mix, those are kind of the question marks. But then the cost structure is better, so you're -- if it's not quite 50, maybe it's at least pretty close to where --

Nick Howley -- Executive Chairman

Yes, you get the point. I mean –

Noah Poponak -- Goldman Sachs -- Analyst

OK, thanks so much.

Operator

Next question comes from Sheila Kahyaoglu with Jefferies. You may now ask your question.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hey, good morning guys. Thanks for the time. So maybe we could just stick on margins, if that's OK, for a second. On '21, I think you guided to 44% margins.

And that implies H1 is at around 42% so same as H2 2020. So it's -- that actually assumes you're down -- flat to down in the second half of next year. And just wondering why that would be the case.

Kevin Stein -- President and Chief Executive Officer

I don't --

Mike Lisman -- Chief Financial Officer

Sheila, I don't -- I guess --

Sheila Kahyaoglu -- Jefferies -- Analyst

Flat to down versus H1 '20, so because in H1 '20, your margins were almost 47%.

Kevin Stein -- President and Chief Executive Officer

Yes. But the volume difference in H1 '20 versus H1 '21 will be dramatically different. We have adjusted costs, but I don't expect to see the margin run up quite that fast.

Sheila Kahyaoglu -- Jefferies -- Analyst

OK. No, that makes sense. And then I understand you guys have limited visibility in the aftermarket, but your story is the best proxy for it. So I just wanted to ask more on this.

Kevin, you talked about it earlier. What are you seeing in terms of pricing, either from competition in the market with other smaller suppliers or maybe even airline MROS? Are they being more price conscious? They're actually less price conscious because they're doing their own cost initiatives within their maintenance departments and furloughing people and so on.

Kevin Stein -- President and Chief Executive Officer

I really -- I don't have that much visibility to that. I -- yes, I don't have that much visibility to it. So I don't know if I have a nice answer for you. I think -- I'm sure in this market, people are price-sensitive.

I'm sure they're concerned about prices. We have historically been able to maintain pricing in downturns. That's historically what we've been able to do, and we would assume we would be able to do that through this downturn.

Nick Howley -- Executive Chairman

I don't think we've seen any change in the fundamental dynamic.

Kevin Stein -- President and Chief Executive Officer

No change.

Sheila Kahyaoglu -- Jefferies -- Analyst

OK, thanks guys.

Kevin Stein -- President and Chief Executive Officer

Sure.

Operator

Next question comes from Seth Seifman with J.P. Morgan. You may now ask your question.

Seth Seifman -- J.P. Morgan -- Analyst

Thanks very much and good morning everyone. Just a question, I realized and can kind of bounced around a little bit quarter to quarter, but you talked about the 57% down revenue for the commercial part of commercial aftermarket. If we look at take offs and landings probably down 49, 50, and you guys get the top line portion of your value drivers, so there's probably kind of at least low double-digit gap there between the decline in the revenues and the takeoffs and landing. It doesn't sound like inventory is really an issue.

So I guess what do you attribute that to? And even if we kind of run rate it at this down 50% for a while, when would you expect to kind of converge with the market?

Kevin Stein -- President and Chief Executive Officer

I'm not sure that we're not already with the market. I'm sure there's a -- there's some sort of a discount to the takeoff and landings that we see. I simply pointed out that I think it's a good way to look at our business. I'm not sure that -- I see things coalescing so much as people fly more.

As there's more activity, we will see more aftermarket activity necessarily. I think we're in a pretty good place as I look at POS down about the same as flight activity is. I think that we're in line with where I would expect to be. And as people fly more, that we will see the aftermarket improve.

Does that answer your question?

Nick Howley -- Executive Chairman

I might just pitch in, the flights maybe are running at 40 to 50% down. The RPMs are probably down 70, 75%, something like that.

Seth Seifman -- J.P. Morgan -- Analyst

That was something I thought.

Nick Howley -- Executive Chairman

Yes. So the answer sort of the market answer is probably somewhere in the middle, I don't know. If I look at what other people seem to be saying, they seem to be saying down the same kind of range we are. I just don't think you can call it much closer than that.

We used to use -- I think RPMs is what we always talked about. And RPMs don't seem like they're so well a linked indicator. So I'm just trying to point out that takeoff and landings probably are a better way to look at aftermarket recovery.

Kevin Stein -- President and Chief Executive Officer

But RPM, surely -- they surely aren't giving you a tailwind. They are not.

Seth Seifman -- J.P. Morgan -- Analyst

Yes, yes, shorter flights absolutely. Then maybe as a follow-up, you spoke a little bit about leverage earlier. When we think about that leverage heading up toward the eight level and I know where you want to be kind of long term. But in the interim, capital deployment initiatives that temporarily increased leverage from the seven and a half to eight level, is that something feasible? Is there -- should we think about there being any kind of near-term cap on leverage? Or it just really doesn't matter?

Nick Howley -- Executive Chairman

I think you ought to think of our capital allocation rule priority the same way you always think of it. Fund the existing businesses first, accretive acquisitions, third; give money back to the shareholders, fourth. And at this kind of I would say, debt markets and the cost, that's fourth and a distant fourth.

Seth Seifman -- J.P. Morgan -- Analyst

OK, great. Thanks very much.

Operator

Our next question comes from Gautam Khanna with Cowen. You may now ask your question.

Gautam Khanna -- Cowen and Company -- Analyst

Yes. Thank you, guys. Congratulations on the good margins in the quarter. I wanted to just ask a little bit in the numbers here.

Bizjet and helicopter aftermarket was down less this quarter than it was in the June quarter. Any sort of comment on sequential trends there? Did it get better? Or is that just a compare issue?

Kevin Stein -- President and Chief Executive Officer

I think we've seen in general that bizjet, heli markets get a little bit better. I tried to comment a little bit on it in my prepared notes that that has -- it's been a source of steady improvement as we have seen the takeoff and landing cycles for business jet get closer to where they were pre-COVID. Still way off of 2008, but back closer to where they were pre-COVID faster than large aerospace has recovered. But it appears to be due largely to leisure COVID avoidance activities, if you will, not necessarily business travel.

As the weather cools, we're not sure that that will continue, but it has been a source of modest strength. Now this is a small market segment for us, about 15%, so it's not a major place for us to see a driver.

Gautam Khanna -- Cowen and Company -- Analyst

OK. And then separately on the commercial aero OE business, do you think that destocking has now kind of abated? Or I'm just curious, like how much of the results do you think in the September quarter were impacted by destocking relative to underlying demand. And how long might that persist as you look forward?

Kevin Stein -- President and Chief Executive Officer

It's hard for me to know -- I commented earlier that we don't get inventory information or much of it from the large OEMS. We guess that there's not as much there. But beyond that, there's not much to know. So yes, we watch it closely.

From an order book point of view, things are down a little bit more than what we might, or basically in line with their building -- their adjustments to build rates. But I think it just bears close watching. I don't see that changing down much more faster or up until we see more stability in the build rates. I know there is some indication that Airbus may raise rates, we'll have to see.

I don't doubt them. We'll do whatever they book to the market, we will deliver parts for. But with the MAX coming back on board, I think OEM is a concern a little bit as we go forward on how much inventory is out there. We are seeing consistent results quarter over quarter.

So that may indicate that the inventory is being dealt with and being dealt with reasonably quickly, but we'll have to see how this rolls forward. I don't have much better visibility than that for you.

Gautam Khanna -- Cowen and Company -- Analyst

OK. Thank you very much.

Operator

Your next question comes from Robert Stallard with Vertical Research. You may now ask your question.

Robert Stallard -- Vertical Research -- Analyst

Thanks so much and good afternoon. So Mike, I've got a couple of cash questions for you. First of all, on the European cash restructuring, can you give us an idea of how much of a cash expense that is going to be in 2021? And also what your expectation might be for capex in 2021?

Mike Lisman -- Chief Financial Officer

Yes. On the capex, we don't want to give an exact stat, but I think if you -- to assume something that was in line with 2020 which was on the order of $120 million, maybe a little more, is fair. On the severance costs in Europe, it's several tens of millions of dollars, not quite $100 million. But as you know, we've got a couple op units over there.

And when you let folks go, it's more expensive than doing it in the U.S.

Robert Stallard -- Vertical Research -- Analyst

Yes. And then just for Nick or Kevin, some of the other aerospace suppliers has been talking about airlines deferring maintenance, and one of them talking about the potential risk of more surplus activity out there in 2021. Have you factored any of this into your conservative thoughts for where aerospace could be going this year?

Kevin Stein -- President and Chief Executive Officer

I would -- I guess holistically say, sure. We factored all of that into our general concerns about the market as we go forward. Available green time, what planes they have available, I think all of this adds to the general uncertainty of the market as we go forward. And we just continue to focus on just takeoffs and landings as a predictor for what the market is going to do.

Nick Howley -- Executive Chairman

Rob, we're hopefully conservative. We -- that's what we want to be. Hopefully we're right, but we just don't know.

Robert Stallard -- Vertical Research -- Analyst

Fair enough. Thanks Nick.

Operator

Next question comes from Ken Herbert with Canaccord. You may now ask your question.

Ken Herbert -- Canaccord Genuity -- Analyst

Hi, thanks. I wanted to first ask Nick or Kevin the potential divestitures you called out defense business, it sounds like, if I remember, legacy Esterline. Did anything fundamentally change in these businesses, either in your ability to sort of get costs where you wanted? Or maybe the top line outlook wasn't what you'd expected? I'm just curious on timing of that, and if anything fundamentally changed with those businesses?

Nick Howley -- Executive Chairman

Well, other than -- I mean I guess the thing that fundamentally changed is the whole commercial market tanked. But I mean other than that, the businesses are what we thought. The structure is what it is. The cost savings are done and quite achievable.

And I don't see any difference in their proprietary content, sole-source content, aftermarket content, etc., other than the huge dislocation in the market.

Kevin Stein -- President and Chief Executive Officer

Yes. I would just agree completely. I don't think there is anything that has come up there. On the defense side, we have continued to implement the cost reductions and the like to improve the businesses.

And I think they're better than the way we found them. We just don't see the same level of shareholder value generation in those businesses as we might see in some other ones. So we want to focus where we can make a difference in those businesses that align with our strategy. That's the only thing that's different here.

And we did comment from the beginning, I think much like you saw was Souriau and -- that some businesses we would evaluate and look to offload if we didn't see the value-generation possibilities there.

Ken Herbert -- Canaccord Genuity -- Analyst

OK. So I guess the way to think about it is these businesses, now that you've had your -- now that you've been into it for two years, don't quite provide sort of the upside maybe that fits with what you'd like to see across the portfolio?

Nick Howley -- Executive Chairman

No. I don't think I'd say that. I don't think I'd say that. What I'd say is that they don't -- our strategy is proprietary aerospace businesses with significant aftermarket content.

I would say the things that we are looking at typically are not as proprietary as we'd like or don't have as much aftermarket as we'd like. I mean that's the issue.

Ken Herbert -- Canaccord Genuity -- Analyst

OK. OK. Perfect. And if I could just on the commercial aftermarket, you've talked in the past, Kevin, I believe about sort of the whipsaw effect as things do eventually come back at some point.

And I know, who knows when that will be exactly. But has anything changed this down cycle? Or is there anything structurally different now that would lead you to believe we don't see sort of similar pace of recovery, if and when we get to that, or when we get to that point?

Kevin Stein -- President and Chief Executive Officer

I've not seen anything that looks different to me yet at all. I've not seen any fundamental changes to the market or the way business is done to indicate that there would be a delay in the way we would see a recovery as people started to fly more.

Ken Herbert -- Canaccord Genuity -- Analyst

OK, great. Thanks a lot.

Operator

Your next question comes from Michael Ciarmoli with Truist Securities. You may now ask your question.

Michael Ciarmoli -- Truist Securities -- Analyst

Hey, good afternoon. Thanks for taking my question. Kevin, just on the aftermarket, I guess, I think you said it a couple of times with RPMs down 70%. Are the incoming bookings tracking with that down 70%? And if so, how do we get comfortable if the incoming order flow is at that depressed level?

Kevin Stein -- President and Chief Executive Officer

Yes. We -- remember, aftermarket bookings are booked and shipped within the quarter. There is backlog that carries over from quarter to quarter. So you can, I guess, draw the wrong conclusions by just looking at that.

We're still seeing strong bid activity in general as we look at the POS data. Order book is in line with the takeoff and landing activities. So it's in line with what we're talking about. I'm not -- I don't know the exact percentage as I'm sitting -- as I'm talking to you right now.

But it's not a -- yes, it's a concern as we go forward as we're looking. We have to continually follow the takeoff and landing cycles. There is some backlog in aftermarket, but not to the extent of OEM or defense. So it is booked and shipped within the quarter.

So that's part of the uncertainty as we go forward, as we look forward and why it would be difficult to provide guidance right now. If I had better visibility on that, we would be able to do that. Right now, we can't. So we'll have to see how this unfolds with people flying.

Right now, we're -- we feel like we're in the right place for the way the business is recovering. We've not seen any fundamental changes. We've not seen more use of USM, more USM flooding, more delays in any maintenance activity in reality. The bulk of our products are not exposed to C and D checks.

They're A and B checks as we reviewed in previous quarters with you guys. We don't see any reason why the aftermarket activity will not return to the same extent that is was before as people are flying like they were before. It's just going to be a little hard to predict from now to then as we recover.

Nick Howley -- Executive Chairman

Yes. The good and the bad of that is you can't see out further than 60 or 90 days in your aftermarket, and that's the most profitable chunk of it. That's the good and the bad of it. You can move up quickly or you -- when it starts to move up, but you can't see out much further than that right now.

Michael Ciarmoli -- Truist Securities -- Analyst

Yes. Understood. Got it. And then just one on margins, I mean obviously a lot of focus on the EBITDA margins and a real good sequential increase.

What was going on with the gross margins ticking down sequentially, despite the higher volumes and the continued cost takeout? And how should we expect those gross margins to traject here?

Mike Lisman -- Chief Financial Officer

Yes. We had some noise in the gross margins over the quarter because of just an accounting classification and the way it works on the French facility that we mentioned to you guys before where we had a fire, the way the insurance recovery accounting works. That's what drove the majority of the impact, the weird trend that you're seeing. If you were to normalize for that, I think it would make a lot more sense.

Kevin Stein -- President and Chief Executive Officer

Yes.

Michael Ciarmoli -- Truist Securities -- Analyst

Got it. Perfect. Thanks guys.

Operator

Next question comes from Ron Epstein with Bank of America. You may now ask your question.

Ron Epstein -- Bank of America Merrill Lynch -- Analyst

Hey guys. Just have a quick financial detail and then maybe a broader question. So when you look at in '22 when interest deductibility switches from an EBITDA standard to an EBIT standard, how does that impact you guys?

Mike Lisman -- Chief Financial Officer

Obviously, right now based on the tax plan in place nationally in the U.S., it would result in a slight uptick in the tax rate by a couple percentage points.

Ron Epstein -- Bank of America Merrill Lynch -- Analyst

OK. OK. Great. And then for Nick and Kevin, these disruptions can create opportunities, right? Do you think any differently about the business today than you did before the pandemic, right? I mean has the pandemic brought into focus for you guys aspects of the business, changes to the business, things that you did really well, things you didn't do well, that you know now that you might not have known before, right? I mean do you get a sense of the question?

Kevin Stein -- President and Chief Executive Officer

Yes. I do. We have learned about the business. We've learned about what indicators might be better predictors.

Is it RPM? Is it what? We have learned some things about how to follow the business. We've learned that more reinforcing of our business model that -- as Nick has always said at the beginning, we're consistent in our approach. And that consistency, we continued and the model proved that it was resilient going through really a once-in-a-lifetime, once-in-100-year pandemic as it impacted our business that we were right. We could continue to pay the debt and the like and keep the business moving forward.

We were right. I don't know beyond that what we've learned about the business. It just validated some things for me that this is the incredible business we thought. The team is really strong and can lead and respond quickly and they know what to do.

It was more reinforcing than learning things, Ron.

Nick Howley -- Executive Chairman

And I would agree with that. I would say what it did for me, not that I doubted it, but it just reinforced sort of the strength of the business and the strategy and the model we have. I mean we quickly got the costs readjusted with the -- far and away, the most substantial dislocation I've seen in my career in this industry. But we ran the same play and got the costs down.

We've done these different downside models to deal with leverage issues, but frankly we never did one this bad, and we easily dealt with it all without a bump in the road. In fact, we're able to raise money right through it. So we felt pretty good about that.

Ron Epstein -- Bank of America Merrill Lynch -- Analyst

Great, all right guys. Thank you.

Nick Howley -- Executive Chairman

Sure.

Operator

Your next question comes from Hunter Keay with Wolfe Research. You may now ask your question.

Hunter Keay -- Wolfe Research -- Analyst

Thanks for getting me on here. Hi, everybody. Can you guys just clarify a little bit, Kevin, what you said on the A and the B checks versus the C and the D checks? Can you give me a sense for what your exposure is in the commercial aftermarket relative to those two buckets?

Kevin Stein -- President and Chief Executive Officer

We have talked about this in the past. We're more exposed to A and B than we are to C and D. So there's significant more exposure on the A and B side to those checks than to the C and D checks. We don't have to go through major checks to see opportunities for aftermarket for us.

Hunter Keay -- Wolfe Research -- Analyst

So -- OK. I'm kind of wondering about the order of magnitude. Is it 75%, two thirds, something in that nature in that area?

Kevin Stein -- President and Chief Executive Officer

It's more, but I don't know if we've clarified exactly how much in the past.

Hunter Keay -- Wolfe Research -- Analyst

OK. That's great. And then do your commercial OEMs ever get involved in your aftermarket pricing decisions? Have they ever in the past? And would you expect that to happen in the future?

Kevin Stein -- President and Chief Executive Officer

No. I wouldn't expect any difference from current status quo, yes. We've not seen that involvement, and I wouldn't expect it.

Hunter Keay -- Wolfe Research -- Analyst

Got it, thanks a lot.

Kevin Stein -- President and Chief Executive Officer

Sure.

Operator

[Operator instructions] I am showing no further question at this time. I would like to turn the conference back to Jaimie Stemen.

Jaimie Stemen -- Manager, Investor Relations

Thank you all for joining us today. This concludes today's call. We appreciate your time. And again, thanks for joining us today.

Operator

[Operator signoff]

Duration: 76 minutes

Call participants:

Jaimie Stemen -- Manager, Investor Relations

Nick Howley -- Executive Chairman

Kevin Stein -- President and Chief Executive Officer

Mike Lisman -- Chief Financial Officer

Kristine Liwag -- Morgan Stanley -- Analyst

Louis Raffetto -- UBS -- Analyst

Carter Copeland -- Melius Research -- Analyst

David Strauss -- Barclays -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Seth Seifman -- J.P. Morgan -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Robert Stallard -- Vertical Research -- Analyst

Ken Herbert -- Canaccord Genuity -- Analyst

Michael Ciarmoli -- Truist Securities -- Analyst

Ron Epstein -- Bank of America Merrill Lynch -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

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