Transdigm Group Incorporated

Good day, ladies and gentlemen, and welcome to your Q1 2019 Transigned Group Incorporated earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require operator assistance during the conference, please press star, then zero on your telephone keypad. As a reminder, today's conference will be recorded. I would now like to turn the call over to Liza Stables with Investor Relations. Ma'am, you may begin.

Thank you, and welcome to TransFind's fiscal 2019 first quarter earnings conference call. Presenting this morning are TransFind's Executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Listman. A replay of today's broadcast will be available for the next week, and dial-in information can be found in this morning's press release and on our website at TransLine.com. 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 on 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 EBITDAs defined, adjusted net income, and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA, EBITDA is defined, adjusted net income, and earnings per share to those measures. I will now turn the call over to Nick.

Good morning, and thanks for calling in. Today I'll start off with summary concepts, or comments, as usual, on our consistent strategy. A few comments on the fiscal year, first quarter of the fiscal year. A quick update on the Esther Line deal and related issues. and a few comments on the status of the Inspector General on it. Kevin and Mike will review the business performance for the quarter and the outlook for the year. To reiterate, we believe our business model is unique in the industry, both in its consistency and its ability to create intrinsic shareholder value through all phases of the cycle. To summarize some of the reasons why we believe this, about 90% of our 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 higher margins and provide relative stability in the downturn. Our longstanding 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 and as well as careful allocation of our capital. We follow a consistent 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 very decentralized organization structure and a unique compensation system that closely aligned with our shareholders. Fourth, we acquire businesses that fit with our strategy and where we see a clear path to a PE-like return. And lastly, our capital structure and our capital allocation are a key part of our value creation methodology. Fiscal year 19 is off to a good start. Q1 revenues, EBITDA has adjusted and EBITDA margins were up nicely over the prior year. The incoming orders were strong and well ahead of shipments across all major market segments, voting well for the balance of the year. As you can see, we have increased our guidance for the year. The revised guidance excludes any contribution from the expected esterline acquisition. Though we had a very nice booking quarter, one quarter does not make a trend. But if this continues, we could well increase the guidance again next quarter. Kevin will expand on both the quarter and the full-year outlook. While liquidity is strong, we had $2.3 billion of cash at the end of fiscal year Q1. Based on our recently announced financing and assuming no additional acquisitions or capital market activity other than the esterline transaction, we still expect to be somewhere in the range of $3 billion of cash at the end of the fiscal year. We also expect expect to have over $600 million of unused revolver and some additional room under our credit agreement. We continue to actively evaluate and seek M&A opportunities. We have a decent pipeline of mostly small and mid-sized possibilities. I can't predict or comment on possible closings, but we are still working steadily at M&A. As I said before, we're open for business. A few comments about the afterline transaction status and some related issues. As I think you know, we're paying about $4 billion for roughly $2 billion in revenue. Based on the public consensus information of about $330 million of fiscal year 19 EBITDA, we estimate this is about a 12 times EBITDA multiple, again, times the consensus 19 EBITDA. With respect to regulatory clearance, That is antitrust and foreign investment approval. Things are moving along well so far. In the United States, the HSR waiting period expired back in November, so we are clear to close with the FTC and the Department of Justice. All other required regulatory views are now complete, with the exception of the European Commission antitrust review and the French foreign investment review. These are proceeding through smoothly. and we expect to obtain approvals in a timely manner. As a reminder, we did not need to file for regulatory approval in China. In addition, Esterline has received shareholder approval for the transaction. Overall, the process is moving along well, and at this time, we now hope to close in the March-April timeframe. That is sooner than the Q4 timeframe we originally estimated. However, it's not finished yet, So there's always some uncertainty until it's concluded. As we said before, we think Esterline has been a misunderstood company. Its core aero and defense business make up three-quarters or more of the revenues. This core business has proprietary content and sole source positions quite similar as a percent of revenue to Transdyn. The core aftermarket also appears significant. We estimate this at over 30% of revenues. Though we have not made any final decisions on asset disposition at this time, I do expect that we will be selling certain assets that don't fit well with our focus. We are still working on specifics and timing, so I don't have any more to share on this topic at this time. We have now arranged the financing for the Esterline transaction. Last week, we priced about $4 billion of secured notes with a fixed interest rate of 6.25%. and a term of seven years. This is scheduled to fund on February 13th. This new financing will result in an average weighted cash interest rate on our total debt of about 5.7%. This is very close to the rate that we gave for the year with our original 2019 guidance. Additionally, we decided to refinance the $550 million of our high-yield bonds that come due in 2020. in order to push the maturities out until 2027. Including the new debt and the hedges and collars, we will have approximately 80% of our debt fixed or hedged and will remain close to that level for the next five years. I don't expect that our net leverage at close will be out of line with our recent levels. And if market conditions hold, we should still have the adequate flexibility to consider the full range of capital allocation alternatives. We will likely defer any other 2019 decisions on capital allocation until after we close the Esterline transaction and assess the overall business and capital market environment at that time. Absent any other acquisition or capital market activity, we will still de-lever about one turn a year. With respect to the Inspector General, or IG, on it, We and several Department of Defense contracting agencies, primarily the Defense Logistics Agency, known as DLA, have now received the draft report. The DLA is the largest of the buying agencies that were audited in this report. There has been no allegation of any wrongdoing or illegality. As in the past, the Department of Defense buying agencies are requesting a voluntary refund of some profits. The sum of the various individual requests appears to total about 16 million. Again, this is a voluntary request, and there is no assertion that this is a financial obligation of the company. The government's a good customer, and like any good customer, we want to be responsive where practical. We're glad to have the IG report concluded. We understand that the report will be available to the public within a few months. Now let me hand this over to Kevin, who will discuss both the Q1 2019 performance as well as the full year outlook.

Thanks, Nick. Today I'll review our results by key market, then discuss the profitability of the business for the quarter, and finally provide revised guidance for the fiscal year. 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, revenue and EBITDA as defined, were up nicely over last year. Q1 gap revenues were up 17% versus prior year Q1, and EBITDA, as defined, was up 21% over the prior year, with strong margins at 49% of revenue. Bookings or incoming orders are the real story here, however, with pro forma Q1 bookings up 20% compared with the year-ago period, a robust increase observed across all aerospace market segments. Now we will review our revenues by market categories. For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior year period in 2018. That is assuming we own the same mix of businesses in both periods. In the commercial market, which makes up close to 70% of our revenue, we will split our discussion to OEM and aftermarket. In our commercial OEM market, Q1 revenues have increased approximately 13% when compared with Q1 of fiscal year 2018. Commercial transport OEM revenues, which make up the majority of our commercial OEM business, were up 10% in Q1 when compared to the prior year period. Bookings in the quarter were strong and outpaced sales by a wide margin. For most of 2018, we commented that the softness we were experiencing in the OEM market was a transient as our shift set content had experienced no negative revisions. Now in Q1 of fiscal year 19, we are seeing growth across narrow body and wide body form factors once again. As we said at the time, revenues can be lumpy due to a number of factors. Business jet and helicopter OEM revenues make up around 20% of our commercial OEM revenues. Revenues in this combined market were up over 20% compared to the same period in 2018. Bookings in this sub-market outpaced sales in total with strong business jet bookings slightly offset by some weakness in helicopter bookings. Although business jet delivery forecasts continue to look positive for 2019, driven largely by larger cabin jets, the robust sales growth experience this quarter is not likely sustainable. In addition, the smaller revenue helicopter market may be a slight headwind going forward. Now moving on to our commercial aftermarket business. Total commercial aftermarket revenues grew by just over 6% in the quarter. Both the commercial transport and business jet helicopter aftermarket revenues were up close to the average of 6% over the prior year quarter. Bookings well outpaced sales in the quarter, and year over year bookings growth came in at over 20% in this important market segment. The aftermarket freight segment continues to outperform our expectations within this composite, Time will tell if this continues as the freight market fundamentals have slowed. 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 15% over the prior year Q1. Revenue growth was well distributed across our business. For Q1 of fiscal year 19, defense aftermarket revenue growth also outpaced defense OEM growth. Total defense bookings continued the recent trend and were up significantly over prior year and have similarly outpaced sales by a nice margin. This is a similar narrative to fiscal year 18, but we are now seeing those bookings materialize into sales. Moving to profitability, I'm going to talk primarily about our operating performance or EBITDA as defined. EBITDA as defined of about 487 million for Q1 was up 21% versus prior Q1. EBITDA's defined margin in the quarter was 49% of revenues. This includes one margin point of dilution from the fiscal year 18 acquisitions of Kirkhill, Extent, and Scandia. Excluding the acquisitions, margins improved approximately two and a half points year over year for the same period. Margin improvement progress is always important to us. It indicates that our base business continues to find opportunities to drive improvement within our value drivers. we are relentless in our approach to value generation. Turning now to 2019 guidance. We are modestly increasing our fiscal year 2019 full year sales and EBITDA guidance both by 20 million to reflect our strong first quarter results. However, until we see more data, we are not updating the full year market assumptions at this time as the underlying fundamentals do not seem to have meaningfully changed. The midpoint of our fiscal year 2019 revenue guidance is now $4.19 billion. The revenue guidance is still based on the following market channel growth rate assumptions. We expect commercial aftermarket revenue growth of mid to high single digit percent versus prior year, commercial OEM revenue growth in the low to mid single digit percent range, and defense military revenue growth of mid to high single digit percent versus prior year. The midpoint of fiscal year 2019 EBITDA as defined guidance is now $2.09 billion with an expected margin of around 50%. This includes approximately one margin point of delusion for the recent acquisitions purchased in fiscal year 18, implying our pre-fiscal year 18 core is now at about 51% margin. We are increasing the midpoint of our adjusted EPS 50 cents to $16.76 per share, primarily resulting from higher EBITDA guidance and slightly lower interest expense. Mike will discuss in more detail shortly. Finally, let me briefly speak to our organization's structure. With the impending completion of the Esterline acquisition, the need for experienced leadership increases. To account for this, we have moved Jim Scalina, a long-term TransZyme operations executive, and most recently, our interim CFO, to lead the financial integration of Estherline, and additionally added two seasoned executive vice presidents, Joel Reese and Pete Palmer, to also be part of the Estherline acquisition integration team, reporting to Bob Henderson. To backfill this need, we have promoted Paula Wheeler to executive vice president. Paula has been with TransZyme since 1995 and has served in a number of leadership roles. She was most recently president of Aerofluid Products for the past seven years. As a reminder, we promoted Rodrigo Rubiano and Alex Feil in early 2018 to build capacity in the EVP ranks for expected acquisitions. As always, we continue to focus on developing a deep bench of diverse culture carriers for future succession needs. With that, I would now like to turn it over to our new Chief Financial Officer, Mike Wilson.

Thanks, Kevin. I'll recap the financial highlights for the first quarter and then provide some more info on the guidance update. First quarter net sales were $993 million, up 17% from the prior year. Organic sales growth for the quarter was 11.6%, and the balance of the sales increase was from our three fiscal 18 acquisitions, Kirkhill, Extant, and Scandia. Our first quarter gross profit increased 18% to $564 million. and was 56.8% of sales compared to 56.2% in the first quarter of the prior year. As called out on the slide comments, we had 1.5 points of margin headwind from the new acquisitions, but still netted to over one half point of gross margin improvement from the execution of our value drivers on the base business. Moving on to taxes, the year-over-year comparisons get slightly confusing here due to the one-time impact of tax reform last year. This also muddies the year-over-year EPS comparisons. For the first quarter, our effective gap income tax rate was a provision of 21.5% compared to a benefit of 63.4% in last year's first quarter. To remind you, last year our tax rates were significantly reduced due to the enactment of tax reform in the U.S., and we reported a one-time net benefit of $147 million. There is no update to our full-year effective tax rate assumptions at this time, so excluding Esterline, we're still anticipating the GAF, cash, and adjusted rates to all be in the range of 21% to 23%. Moving on to EPS, I want to first point out that the decrease in both the current quarter GAF and adjusted EPS was due to the previously mentioned enactment of tax reform. If you remove the one-time benefit of $147 million, which equates to $2.65 per share, so that you can do an apples-to-apples comparison of the 18 to 19 growth rates, you get Q1 FY18 gap EPS of $1.95. The current quarter gap EPS of $3.05 per share then represents an increase of 56% over this prior year figure. Similarly, excluding the one-time impact of tax reform, Q1 FY18 adjusted EPS would be 293 per share. Our current quarter adjusted EPS of 385 is then up 31% over this prior year figure. Table 3 in this morning's press release reconciles GAAP EPS to adjusted EPS, so you can look for more detail there. Switching gears to cash and liquidity, we generated almost $330 million of cash from operating activities and ended the quarter with over $2.3 billion of cash on the balance sheet. Our net debt leverage ratio at quarter end was 5.4 times pro forma EBITDA as defined, and gross leverage was 6.6 times. Excluding Esterline, we still estimate that our cash will grow steadily throughout the year to around $3 billion, and our net leverage at September 30th, 2019, will be around 4.8 times our EBITDA as defined. With regards to our guidance, we now estimate the midpoint of our GAAP earnings per share to be $15.10, and we estimate the midpoint of our adjusted earnings per share to be $16.76. The primary reasons for the increase in both GAAP and adjusted EPS were the increase in our EBITDA guidance and also lower expected interest expense. However, the increase to the GAAP EPS was partially offset by higher expected acquisition-related costs related to Esterline. Excluding any new debt from the Esterline acquisition, we're now expecting that interest expense to be $725 million for the full year, a decrease from our previous expectation of $745 million. The lower expected interest expense is primarily due to a slight decline in the projected LIBOR rate for the year, and higher interest income booked in Q1 compared to a conservative forecast. This $725 million completely excludes any interest expense from the $4 billion of new debt we'll be incurring to complete the ESCO line acquisition. Slide 9 shows a bridge detailing the $1.66 of adjustments between GAAP to adjusted earnings per share. In summary, Q1 was a solid start to fiscal 2019. Finally, a quick organizational update. During the quarter, Sarah Wynn became our chief accounting officer. Sarah has worked at Transdime in various accounting functions for the past 15 years, both as a group controller and prior to that as the controller at Aerofluid Products. Sarah has a solid financial background, is a strong promoter of the Transdime culture, and has already settled into her new role. With that, I'll turn it back over to Liza.

Thanks, Mike. Before we open the lines, we'd like to ask you to just keep your questions to two per caller and then reinsert yourself into the queue to allow everyone to have an opportunity to ask questions. Operator, please open the lines.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask you please place your line on mute once your question has been stated. And our first question comes from the line of Carter Copeland with Mellius Research. Your line is now open.

Hey, good morning, all. Morning. Just two quick ones. One, Kevin or Nick, I wondered if you could comment on what looked like – Pretty strong quarter of performance out of Esterline. I mean, I know you obviously haven't closed and whatnot, but just looking at that set of results, it sort of stood out, and I wondered if you might give us some color on what you, from the outside in, what you thought may have driven that and how you feel about it. Secondly, just with respect to the recent kind of news flow around the A380 and the potential closure of that line and end of that product, what you think the risks may be. I mean, obviously, when we close a product line, there's destocking and stuff that happens that can be somewhat abrupt, and I just wondered if you could maybe walk us through your thoughts on that. Thanks.

Yeah, let me address the first, and Kevin will take the second question. Carter, we just don't want to comment on the first quarter public filing by Esterline. We don't own it yet, and I don't think it's our place to elaborate on the it's not our place yet to elaborate on their public filing. So I'm just going to have to pass on that.

Okay. And Carter, on the A380, I've read the same announcements and news. You know, we're starting to study what, if any, real impact that would be. The A380 rates have come down quite a bit over the last little while. So effective and real. So the contribution in our numbers is not huge. So we need to study that more and have a better answer in the future.

Do you sense, Kevin, that there's a decent amount of inventory in the system?

I do not have a sense for that, to be honest. I think that it's been held pretty closely, so I don't have better insight there. All right. Thanks, guys.

Thank you. Our next question comes from Robert Bingarn with Credit Suisse. Your line is now open.

Good morning.

Good morning.

I wanted to talk about the margin a little bit. It was quite strong, notwithstanding, I guess, some of that dilution from acquisitions. The gross margin, I think, both in the fourth quarter, the fourth fiscal quarter, and in this quarter, are as good as I've seen in a while. Kevin, could you delve into that a little bit, and to what extent is that operating leverage, productivity, pricing? What are we looking at here?

I think we're looking at all of our value drivers coming into play. It's all of contributions, whether it's we're driving value pricing or productivity. we're winning new business. So it's really everything. I can't comment that one is, you know, more successful than the other in the current quarter.

Okay. And then just for, you know, just a quick one, you mentioned the higher acquisition expenses for Estroline, I guess Mike did. Is there anything specific to that?

It's banker fees and legal fees for the most part that you see rippling through what's in there today.

Just higher than expected? I mean, is that typical in what you've seen in the past, or is there anything notable?

Given the size of this acquisition, those dollar amounts are higher than would typically be.

Given the size of the acquisition, but I don't think the fees are any different than we thought they'd be. No, the fees are what we thought they'd be. We're patient.

Okay.

Thanks, guys. Thank you. Our following question comes from Miles Walton with UBS. Your line is now open.

Thanks. Good morning. Morning. Hey, Nick, I was wondering if you could, or Kevin, comment on the integration that's going to be required. Obviously, it sounds like you've hired and or promoted a few people to add to Bob's integration team for EstroLine. And I'm curious, you have $3 billion pro forma cash on the balance sheet at year end. Would you enter enough acquisitions to satisfy that amount or do you almost feel a little overwhelmed with Esterline integration? How do you balance the availability of your cash versus the availability of your talent to integrate?

Yeah. I mean, let me say you're right. We have a lot of cash we're building up and we borrowed a lot of money and we're maintaining that. I don't know Miles, what we'll do with that? I would say we would be reticent to take on right now an acquisition, you know, of the size of Esterline again. So we swallowed that for a little bit. It would have to be a hugely compelling value for us to look at that. But the normal range of acquisitions I would think we're fine for. And I think your follow-up question is what are you going to do with all the cash? And the answer to that is we'll decide after we buy. You know, we'll take a look after we get this acquisition closed. We'll see what the range of opportunities look like, and we'll make a decision.

Okay. Don't have much to add there, but to say that, you know, succession planning has been an important part of this company's process for quite a long time, and we've been focused on adding talent, developing talent for quite a while. So I do not think we're tapped out organizationally on what we can take on. As Nick said, we would probably wait a little while to bite off another esterline size acquisition if that came along today. But the general course of business flow, we continue to stay in the acquisition market and believe we're not tapped out on bandwidth. It really has a lot to do with the way we integrate businesses and our decentralized control. allows us to have more bandwidth to take on acquisitions. Got it.

And just one clarification, the size of your aftermarket for defense versus OE defense at this point is what relative basis?

We don't comment on the individual pieces, do we? Yeah, they're about the same, but we don't comment on the exact magnitude. All right. Thanks.

Thank you. Our next question comes from Robert Dollard with Vertigo Research. Your line is now open.

Thanks so much. Good morning. Good morning. Nick or Kevin, the big debt issuance you did last week, one of the rating agencies downgraded your debt rating as a result of that. Can you comment, you know, what their beef was with this situation, whether this might have an impact on the cost of debt going forward? Mike, do you mind?

I don't think they downgraded it. Sorry, guys. I think the corporate rating remained B1, B plus with negative outlook from each. Right.

And they almost always get, when you're going to do a big issue and they hold the rating, they almost always give a negative outlook, which just says we're going to evaluate it as we go forward. Yeah, it's the outlook.

I think that's right, Mike.

It's the B1, B plus.

Yeah, that's the same thing I saw last week.

Okay. Okay. And then on the defense side, you also had a very good result in the first quarter. You commented that the bookings were also strong. I was wondering if you could maybe characterize what you think is driving that. Is it more shorter cycle demand that's coming through, which makes it a little bit less than to raise the guidance for the year? Or is this something that's slightly longer term, more visible, that could have legs?

Yeah, I think the defense aftermarket business would fall into your shorter term horizon bucket. We are seeing stronger performance there in terms of bookings growth. Yeah, I think we're looking at the guidance, as I said in the prepared comments. One quarter, it's hard to develop a trend from that. I need to see some more data points to evaluate the market segments. Certainly, it's encouraging so far, and maybe we're just being conservative.

Okay. Thanks, Ken.

Thank you. And our next question comes from Ken Herbert with Canaccord. Your line is now open.

Hi, good morning. Either Kevin or Nick, I just wanted to see if you could provide a little more detail on the commercial aftermarket. I mean, you highlighted that, you know, broadly you had very strong bookings across the business, and I think you said commercial aftermarket bookings up over 20%. But you also commented, Kevin, that you really weren't you know, didn't see any meaningful change, I guess, across the businesses with the strength that continued here. On the commercial aftermarket in particular, can you just remind us again how much of that business would you estimate as sort of book and ship? And then maybe what else would you like to see there, you know, to get a little bit more comfortable with perhaps upside to the full year guide in terms of that market?

I think, you know, what I would say is we're just being – We're one quarter in and would like to see some more. The bookings were strong in the quarter as we commented, up 20%. I did comment that maybe some of the freight fundamentals were not as strong. We've seen some going forward, maybe that that will ease a bit in growth in the future, maybe. I was just trying to provide some color for the future. that it may not be as rosy as the bookings might indicate. The interiors market, discretionary interiors, a little soft to start the year, but that's anticipated to come back strong in the second half. So, I mean, I think we feel comfortable with our mid to high single digits guidance around the commercial aftermarket segment. If we continue to see strong bookings, the bulk of which are still book and ship in the quarter, then we'll look to evaluate that in the future. But one quarter does not a trend make yet.

I think there's a couple of things. One, we don't mean to indicate any negative view on that. No. Just that we're always wary when the fundamental of the underlying demand hasn't, you know, still looks good. It looks about the same as at the beginning of the year. We'd like to see more than one data point before we before we change the trend.

No, that makes sense. I can appreciate that. Specifically on the freighter markets, I know 2018 was a really big year for conversions, and I know some of the freight traffic seems to have been slowing on the margin. I think it probably was a pretty good year for you last year. Can you just quantify maybe how much you think that could be down this year? And I know it's not a big piece of the business overall, but is that a material headwind that we should really watch that could soften, or how should we think about freighter markets in particular?

Well, it isn't yet. I see the same fundamentals that you see in FTKs cooling, slowing down, maybe some concerns about the macroeconomic trade environment. I don't know. So I'm just cautious there. I think we're all surprised that freight was as strong as it was. in the quarter. Just commenting that that strength may not continue, but I don't have any indication to say that it's cooling except the fundamentals of the market.

Perfect. Thank you very much.

Thank you. Our following question comes from David Strauss with Barclays. Your line is now open.

Good morning. Morning. So, I guess Nick or Kevin, the, you know, I I thought with the announcement with, you know, when you announced Esther Line that, you know, you were considering using some of the cash on the balance sheet, what made you decide to, you know, finance the entire deal? Was it the M&A pipeline that you see out there? Was it just solely the attractiveness of the capital markets and where you could do the deal?

Yeah, I... I think, David, we were pretty vague about how we would finance it when we announced it. I think what we said is we had a fair amount of cash. I don't think we went much further than that. I think the credit markets looked quite good to us. And we don't have anything specific on the horizon. Just credit markets look good to us. It looked like a very attractive – source of capital, so we decided to go a little bigger.

Okay, fair enough. Kirkhill, how is that progressing?

Kirkhill continues to perform well. We've seen some improvements since ownership. You know, we don't comment on the margins or the individual details, but we've seen gradual improvement there as we plan. So, I think Nick or I or we've all talked about Kerkil was a nice lab experiment for esterline and it continues to perform well. So we're happy with what we've got there and the way it's performing.

Okay. And last one, the esterline intangible amortization that you would expect to run through your adjusted numbers, do you have an estimate for that at this point?

I think you probably looked at the pro forma financials that were filed with the bond documents, and it's $20 million, and that could change as we work through the final accounting.

Okay, great. Thanks, Mike.

Thank you. Our next question comes from Hunter Key with Wolf Research. Your line is now open.

Hi. Good morning, everybody.

Good morning.

I just wanted to just flush out a comment. I think you guys, you said OE, Bizjet, and Hilo said top line growth of over 20%. But you said it was hard to sustain that. But you also said bookings were up over 20%. Did I hear that correctly? And can you just flesh that out a little bit more, please?

Yeah. Let me read the exact quote here back just so I'm not confusing myself. I said Bizjet and Helicopter OEM revenues make up 20%. Revenues in this combined market were up over 20% compared to the same period. Bookings in this sub-market outpaced sales in total with strong business jet bookings but weaker helicopter bookings. So that's what I said. What was the question again about that?

Well, yeah, I think you also noted some questions around the sustainability of that growth rate. I'm just going to tie that to the booking commentary you gave as well.

Well, we see strong bookings there largely, or they are in the business jet sector and its large format cabins mostly. That's what we're seeing. We're seeing some slowness in orders on the helicopter side. So the bookings are strong, sales are up, but we do see some weakness there. Again, I'm trying to comment, provide a little color on the fundamentals of the business jet, We do see growing OEM demand, large form factor, of course. But we, you know, just look for the stability in the market. And the takeoff and landing cycles has not been robust. We're not seeing a tremendous amount of growth there. So we're cautious. And I'm just trying to highlight, much like in the freight market, some caution around the future.

Okay. That makes sense. Thanks. And then a question for Mike. Mike, I'm kind of curious to hear your personal views on leverage, how they've evolved maybe over the course of your career, before you got to Transdime, and how your time at Transdime has maybe evolved your own views on balance sheet maintenance and leverage. Thanks.

My background is in the private equity industry, so I think I'm more familiar with seeing companies that operate at Transdime's type leverage ratios. And I think going forward, as we've shared with you guys previously, we kind of intend to continue to keep relatively high leverage ratios relative to the rest of our A&D peers. But I don't think my thinking or background has evolved a ton over time and hasn't changed a ton since coming to TransTime either.

Obviously, Mike's – I would add there that obviously Mike's significant background in private equity was a very attractive attribute to us.

Yeah, absolutely. Thanks, both. Appreciate it.

Thank you. Our next question comes from Michael Fiamoli with SunTrust. Your line is now open.

Hey, good morning, guys. Thanks for taking the question. Nick or Kevin, I can understand and appreciate the conservatism, especially in some of the shorter cycle markets, but you had the real strong commercial owing growth in the current quarter. I mean, I would think just given the rate increases, the visibility there, you'd have a little bit more comfort in that market channel, maybe, you know, A380 aside. But anything, you know, that you're seeing in the OE side of the market that would give you reason for pause on the commercial side?

No, nothing is giving us pause. We are just the same concerns about the you know, raising guidance one data point does not align make. So, you know, if it continues this way and we see future quarters, we would look to revise. But right now, yeah, maybe it's just conservative, but we're leaving it as is for right now.

Okay, that's fair. And then just on the On the overall kind of revenue front, you know, organic growth, I know it seems, you know, maybe two years ago there was speculation you guys couldn't really grow organically anymore. And here you put up one of the best organic growth rates, you know, in quite some time. I mean, can you give any color, you know? You know, what really drove that, you know, volume versus price? I mean, did you see volume, material volume increases in all markets, or was there, you know, more price in certain markets? Any kind of color, if you could parse out that growth, just it was such a good rate that we haven't really seen in quite some time.

I think it's important in this business to recognize that revenues can at times be lumpy. They can be really strong and unexpectedly strong at times. one quarter to the next. It's a lumpy business. It has to do with managing of inventories in the supply chain and other factors. So, yeah, we, again, want to be appropriately conservative in the way we look at this. Not seeing concerns in the future, but just want to be appropriately conservative, you know, without getting ourselves ahead of

Got it. Was there anything in the quarter? I mean, any big, chunky kind of deliveries or positive?

No, actually, there weren't any. On the OEM side, commercial OEM, we did see a return of wide bodies that we had seen some related softness to last year. I think I was a little surprised at the amount of narrow body orders that came in as well. So I think, you know, orders and sales are both pointing to better wide-body and narrow-body performance.

Got it. And I think in the overall, you know, the fundamental market conditions seem like what we thought they were a year ago. And as Kevin says, you know, we're always careful that one data point doesn't make a line.

Got it. Nick, just one last one on Esterline. You're probably going to punt on this, but I'll try and ask it. Can you give us a sense of what you guys might be targeting for cost synergies? I mean, just knowing the Esterline model, knowing that you had Kirk Hill as the lab experiment, I mean, do you have a ballpark synergy target just on the cost side of what you realistically think you can kind of immediately take out of that business?

I'd like to comment on it, except they snapped the ball over my head. I think we've kind of given you as much guidance as we can on that. We've told you we expect the private equity-like return based on a certain capital structure that we've given you as an assumption, and I think that's about the most specificity I can give.

Got it. Next time I'll give you a better snap. Thanks, Gus. Okay.

Thank you. Our following question comes from Gutam Khanna with Cohen. Your line is now open.

Yeah, thank you, guys. Appreciate the disclosure. Hey, I wanted to ask you just if you could comment on the interiors kind of market within the commercial airspace aftermarket and if you're seeing any change in trend there, positive or negative.

On the discretionary interiors, that's our Schneller and Pexco business, we have seen the year begin a little slower than we had liked or than we anticipated. But the order book for the second half of the year seems to indicate that that will be a transient softness. So we're anticipating the interiors will recover and perform well for the year.

Okay. And Nick, maybe just for you, if you could talk about, you know, what level of leverage would you actually be comfortable taking to balance you up to in this type of credit and economic environment for the right transaction recognizing?

Yeah, I wouldn't want to, you know, I just wouldn't want to comment on that. I think, you know, you've seen a number of your history of our leverage. You know, if I was trying to figure out what we're going to do. That's probably not a bad idea to look at what the history has been. And I think that's around where we feel comfortable. But I wouldn't want to comment on what we might do if the situation was right, you know, on some interim basis. We have no plans right now, but I'm very reticent to comment on what you do in a capital market condition before it exists.

I hear you. I guess what I'm asking is – Generally, you feel pretty strong about the macro, it seems like. About what? About the macro and the health of the aero market and the like.

Yeah, we don't have any unique insight other than anybody else does. We saw all the market data, and we know what our numbers look like, and we still feel pretty good. I get it that we're getting late in the cycle, but we try – they'd be pretty consistent with the way we run the businesses and the way we capitalize them.

Well, congratulations. Appreciate it.

Thanks. Thank you. Our next question comes from Sheila Kazuglu with Jefferies. Your line is now open.

Good morning, guys. Good morning, Sheila. Kevin, Nick, you talked about a few organizational changes and promotions. Just going back to Miles' question, a bit more. Can you give us how you're going to tackle this deal versus other deals just given the relative size? Any qualitative color would be helpful.

I actually don't think we're going to approach it really all that different. We are going to have a focused team to work on it. We're putting some dedicated resources on it but we're going to use the same integration playbook that we always use and we have some resources to apply to it both in Finance, as you've heard, there's obviously other folks that were able to dedicate to the Estherline integration team, senior group controllers and the like that will help round out the team. We've been, I think, planning for something significant for a while and putting resources in place, stretching folks, getting our EVPs ready. We have another wave of potential folks ready depending on what's needed. So the succession planning and people development as a way of business is really what we've been working on for a very long time. So I don't feel I'm not as concerned on the resource side. I think we will have the people to put on the Astraline integration team to make it successful.

Great. Thanks, Kevin. And then just one follow-up on commercial aftermarket. I know it could be lumpy, and you guys had tough comps last year, but just looking at the passenger side of the business, it seems to have grown at about a 6% rate. You know, you look at air traffic, it's that rate. So it's growing slightly below that if you exclude price. Any color you could give, what you saw in the quarter on maybe repairs versus ad hoc or replacement business,

I don't have a lot of additional color to offer on that. It tends to come out in time. I think the repair and overhaul market has been solid for us. You're directionally correct in your passenger segment of the commercial transport. It was a strong quarter for us and we continue to see good opportunity both on MRO repairs, overhaul, and spare parts. The outside, you know, the look through sales for the distribution sales, the POS for them remains very strong as well.

Great, thank you.

Thank you. Our next question comes from Peter Arment with Baird. Your line is now open.

Yes, good morning, Mick, Kevin. Very nice results. Kevin, maybe just a quick one for you. Given all this growth that you're seeing, are you seeing any stretch out in lead times within the supply chain or anything that is a watch item for you, just given the strength that you mentioned across all your end markets?

Thanks. We have seen some limited supply hiccups. Generally speaking, we try to cover that with inventory buffers and our own work in progress to ensure that we can survive that. But, yeah, we've seen some limited. I don't want to say that we've seen none of that. I think it's isolated to a few areas, mostly around chemical processing, outside processing. not fundamental across the business. So we've seen a little bit of that, but so far we're handling it.

Appreciate the caller. I'll leave it at one. Thanks, guys.

Thank you. Our next question comes from Jason Rogers with Great Lakes Review. Your line is now open.

Yes, morning. Morning. What is the pro forma net leverage ratio including Astraline?

As of 3-31, it's going to tick up slightly to just over six times, but obviously that assumes no kind of cash payout or anything, just to footnote that.

Sorry. The next question was, are you planning on providing updated guidance once the acquisition closes, or are you planning on waiting for the order?

Once the acquisition closes, we'll update our guidance. And assumptions.

Well, I think I'd say once acquisition closes and we feel comfortable with it, then I'll be immediate. I wouldn't expect something the day after we close.

And then finally, as far as your fiscal 19 forecast, not including Esterline, what is the organic growth rate and tariff impacts you have embedded in that guidance?

We don't have any tariff impact in our guidance at all. And, you know, so far we haven't seen anything significant.

And I just don't think I know what the year is. Yeah, yeah.

It's whatever we gave at the beginning of the year.

It's involved in our long-term guidance range of six to seven.

Yeah, six to seven. It's whatever we gave at the beginning of the year plus the bump. Yeah, six to seven percent.

All right. Thank you.

Thank you. Our next question comes from Seth Seisman with J.P. Morgan. Your line is now open.

Thanks very much. Good morning, everyone.

Good morning, Seth.

I was wondering if you could talk – you know, you guys have always managed costs pretty tightly. Margins were very impressive in the quarter. Were there any headcount actions or specific cost actions you took in either the September or December quarter that, you know, supported the profitability in the quarter?

No, nothing other than our normal, you know, approach to driving – productivity on a daily basis, daily, weekly, monthly. It's a constant process. Other than, you know, our normal approach, nothing specific that we can call out. We're always looking to drive productivity and contain costs across our businesses.

Right. And then just to follow up on that real quick, you know, to what extent did you view the strong growth in commercial OE and that becoming a bigger part of the mix as a headwind for profitability that needed to be overcome in the quarter to put up the kind of margins you did? Or was that not really an issue?

That was not an issue. I did not know that ahead of time that we would have such strong OE and you'd have to overcome that. There was no special one-timers in the quarter that helped our profitability. So, you Yeah, there was none of that. The commercial OE helped deliver what it did. We saw the increases on the defense side and on the defense aftermarket side. Those all contributed, including commercial OE, to our profitability. Great.

And it is still fair to think, though, about commercial OE as fairly well below average margin.

That's right, yes. And it also takes more headcount, so there's a lot of volume there. The commercial OE side of the house, yeah, we have to watch that closely.

Great. Thanks very much. Good work.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and the number one key on your telephone keypad. Our next question comes from Rajiv Lalani with Morgan Stanley. Your line is now open.

Thanks. Hey, guys. Hey, Morgan.

Good morning.

Nick, just coming back to your comments on getting close to wrapping up the IG audit, is there any ongoing impact associated with that? You talked about the $16 million voluntary refund. I'm assuming that's one time in nature. So just trying to get a sense of, is there any pricing concessions going forward, any changes in business practice that you have to assume, such that it may impact margins or revenues? Nothing that we know.

Yes, you're right. It would be a one time. And we're not suggesting we concur with that, by the way, just to be clear. And we don't know of any impact going forward. I just repeat, there's no allegations of any illegality or wrongdoing or anything like that.

And then, Kevin, this may be for you. In terms of just your dialogue with the OEMs over the last couple of quarters, has there been maybe a change in tone in terms of how they're trying to work with you, specifically pushing more for royalties on some of your revenues? Any color you can provide would be great.

Yeah, we've not seen any change in approach from OEMs asking for Anything different than the approach that we always see. Nothing new.

Okay. Thank you, guys.

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Liza Sable for any closing remarks.

Thank you. That concludes our call for today. We'd like to thank you all for calling in this morning.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.