Transdigm Group Incorporated

Good afternoon, ladies and gentlemen, and welcome to the Q3 2019 TransDynGroup Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone phone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Liza Siebel, Director of Investor Relations.

Thank you, and welcome to TransTime's fiscal 2019 third quarter earnings conference call. Presenting on the call this morning are TransTime's Executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein, and Chief Financial Officer, Mike Lisman. Please visit our website at transtime.com to obtain a supplemental slide deck and call replay information. Before we begin, we'd 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. 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 to those non-GAAP metrics. I will now turn the call over to Nick.

Good morning, and thanks to everybody for calling in. As usual today, I'll start with some summary comments on our consistent strategy, a few comments on our fiscal year 19 performance, outlook, and then our capital allocation. To reiterate, we are unique in the industry due to both our consistency and our ability to create intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons why we believe this, About 90 percent 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 higher margins and provide relative stability in the downturns. 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 as well as the 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 decentralized organization structure and a unique compensation system very closely aligned with our shareholders. Fourth, we acquire businesses that fit with our strategy and where we see a clear path to PE-like returns. And lastly, our capital allocation and capital structure are a key part of our value creation methodologies. As you saw from our press release, we had a strong third quarter with both revenue, EBITDA as defined, and earnings per share well ahead of consensus. This is in spite of the payment of a $16 million voluntary refund to the Department of Defense. Our businesses are seeing strong demand in all major markets. Far and away the largest portion of our business, our worldwide commercial aerospace market is quite strong. The smaller worldwide defense segment is also doing well. Transdime's legacy businesses performed well, and the Esterline acquired businesses exceeded our acquisition model and our prior guidance. We have increased the full-year guidance substantially to reflect both of these factors. We now expect the Esterline businesses to run at an EBITDA margin in the mid-20% range for our six-and-a-half months of ownership, The long-term opportunity at Esterline is quite likely better than we modeled in our evaluation, and at this point, Esterline is improving faster than we originally modeled. We do not intend to comment on the 2020 outlook at this time. We will do so during our November call. With respect to M&A and capital allocation, As I'm sure you saw, we executed an agreement to sell the SORIO business to Eaton for $920 million. We expect this to close during the first quarter of our fiscal year 2020. We currently anticipate that this will be the largest disposition of the Esterline businesses. We do, however, expect to sell some other businesses. SORIO and any other Esterline businesses we may sell have less proprietary aerospace less proprietary aerospace, and aftermarket content than we target. As such, they don't fit well with our consistent long-term strategy. With respect to capital allocation, as we have done a number of times in the past, we've decided to pay a special dividend of about $30 a share, or roughly 6% of the recent 30-day average share price. This will be paid on or about August 23rd. Given the recently announced sale of Suryo for $920 million, the significant amount of cash currently available, our solid operating performance, and our ongoing expectations, we think this is appropriate at this time. This still leaves the company with substantial liquidity and the financial flexibility to deal with any currently anticipated capital requirements or other opportunities that may come up in the readily foreseeable future. After the special dividend payout in late August, we still anticipate having about $1.3 billion of cash and about $725 million of unused and unrestricted revolver as of the end of our fiscal year. That is 9-30-19. We also have additional capacity under our credit agreement. After closing the SORIO sale, and assuming no further acquisitions or capital market activity, we expect our cash balance to be over $2 billion at the end of Q1 fiscal 2020. We still expect to have borrowing capacity under our agreement and the revolver balance still available. As always, we will regularly evaluate our capital requirements and allocation decisions as we go forward. We continue 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 as I said before, we're still working steadily at M&A and we're open for business. And now let me hand it over to Kevin to more fully review our performance, outlook, and a few other items.