Good day, ladies and gentlemen, and welcome to the Parker Hannifin Corporation Webcast and As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Ms. Kathy Seaver, Executive Vice President of Finance and Administration and Chief Financial Officer. Ma'am, you may begin.
Thank you, Crystal. Good morning, everyone. Welcome to our call. We appreciate your participation today as we discuss this morning's announcement that we have reached an agreement to acquire Exotic Metals Forming Company. Joining me today are Tom Williams, Chairman and Chief Executive Officer of Parker and Lee Banks, President and Chief Operating Officer.
Today's presentation slides together with the audio webcast replay will be accessible on the company's Investor Information website at phstock dotcom. On slide 2, you will find the company's Safe Harbor disclosure statement addressing forward looking statements. I would also encourage you to review the language in our press release and SEC filings today for other required legal disclosures. Today's call agenda appears on slide 3. We will give an overview of the transaction and its strategic rationale.
We will then introduce you to Exotic Metals Forming Company and review the financials. Finally, we will open the call up to questions. At this time, I will hand it over to Tom who will review the remaining slides beginning with slide 4. Tom?
So thank you, Kathy and good morning everybody. It's exciting day for Parker and for Exotic and I'd like to welcome all of our shareholders, analysts on the call, Parker team members and a special welcome to all the Exotic team members that are listening in. It's a morning we've been looking forward to. We've been looking forward to working with Exotic and having them join the Parker family. It's a very proud moment for our company as well as for Exotic.
Exotic is a great company. We've known them for a long period of time. We've been working closely with them for the last 10 years and we've kept a relationship with them over that entire period of time. Just a quick backdrop, our acquisition strategy, we rank prospective companies based on actionability and attractiveness. And with those that are both attractive and actionable, we develop a prioritized list that we review with the Board on a frequent basis.
When you look at the aerospace candidates, Exact has been number 1 on the list. We've been hoping the family would decide to sell Exact and they recently started that process and we are fortunate to be joining forces as of this morning. Our acquisition strategy is to be the consolidator of choice in the motion control space. And all things being equal, we like to invest in filtration, engineering materials, aerospace and instrumentation. We feel very fortunate when you look at the last three acquisitions that we've done, CLARCOR, LORD and now EXARC that we've landed the number one choices that we had for filtration, engine materials and aerospace respectively.
So we're bringing on 3 top quartile companies and we couldn't be happier to have them join in Parker. So Kathy took you through 23. So let's start on slide 4, transaction description. So we're acquiring 100 percent of Exact Metals Forming Company. You can see the statement they're leader in critical high temperature, high pressure, air and exhaust management solutions for aerospace and defense.
I'm going to go through what that all means in a lot more detail in subsequent slides. Estimated sales for the calendar year is $450,000,000 and the adjusted EBITDA margin of 29.6%. This significantly expands the Aerospace portion of our portfolio and especially the Engine portion of the portfolio. I'll give you a lot more color on that. The transaction consideration $1,725,000,000 purchase price.
If you adjust it for the $170,000,000 of tax benefit, you get a net transaction value of $1,560,000,000 And this transaction we're treating it as an asset sale for tax purposes hence the tax benefits. When you look at it with synergies and the tax benefit, the multiple that we're paying is 10.5 times adjusted EBITDA for calendar 2019. The financial impact, it's going to be EPS accretive in the 1st 12 months. I'll show you the numbers, but it's accretive to us from organic growth, EBITDA margins and cash flow. About 80% of the revenues under long term agreements, it gives us great visibility into the future is what their revenue is going to be.
High single digit ROIC in year 5 with continued expansion. They're on all the right programs and I'll take you through that which is driving above market growth which is really what's driving the value of the company. We're going to fund this with debt. And at closing, we expect to close within 2 to 3 months pending normal regulatory approvals which we don't see any issues. So if you go to slide 5, the strategic rationale, you've heard me talk about that we wanted to add to the Aerospace business.
It's a strategic decision as part of the company to add to that portion of the company. But there's two points I'd like to make. We like Aerospace and we like it because it utilizes all the motion control technologies into a long cycle high margin market and it helps balance the short cycle portion of the company. And in particular, we like the engine portion of Aerospace. So you might ask why.
So when you look at the engine, the technologies that have to go to meet the demands of the engine, the environment that it has, temperatures, pressures, the stress and vibrations that's all involved. The aftermarket that comes from that all leads to when you add to the engine portion of the portfolio, you typically have higher growth and higher margins. I'll show you the complementary products in the slide momentarily, but they're on critical applications across all the premier programs and I just highlight a couple right now. So on the F-one hundred and thirty five, which is the engine for the F-thirty five fighter, the LEAP engine, the Pratt and Whitney 1100 gear turbofan and the GE9X just to name a few of the premier programs around. They are leading manufacturers.
They tackle all the highly specialized hard to make stuff. And they got tons of manufacturing IP, a lot of trade secrets and how they go about making it. You'll get some color on that as I show you the products. So blue chip customer list, 95% sole sourced. So again, when you're on the right kind of programs and you're 95% sole sourced, you have a very good indicator of what your future growth is going to be.
Significant customer and aftermarket growth potential leverage that we can have, we did not include any revenue synergies, which is per our normal practice, but there clearly are revenue synergies where you can take the exotic playbook and gain share at other accounts that we have a great relationship with. And we can leverage the Parker aftermarket which is a pretty expansive network of people and operations around the world that we could utilize. We're bringing in a top tier financial company. So if you compare their metrics against other aerospace peers, other diversified industrial peers, you can see that they are top quartile performer. And again, when you're trying to look at future growth, 95% sole sourced 80% long term agreements gives you a lot of confidence what the future is going to look like.
And it will be accretive like I mentioned earlier organic growth, margins, EPS and cash flow. So if you turn to 6, 6 is a little bit of a historical look at growth CAGRs on the left hand side. Just compares Legacy Parker and the most recent Lord acquisition and Exact Metals and you can see a very fast growing company. And then from an EBITDA margin standpoint, you can see significant margins that were bringing into the company. On slide 7, starting to get into a little more color on the company itself.
It is a leader in complex aerospace manufacturing. I've hit a number of the bullets on the left, but I'll highlight maybe some that I haven't. Founded in 1966, I mentioned early on this is a family owned business and this is a family decision that they made as far as picking Parker. Numerous customer awards and recognition. This is again they tackled it really hard manufacturer type of products and they clearly recognize what that with their customers.
On the right hand side is the pie chart shown the key products just by percentages and I'll give you a little more color on these products with pictures and some comments here in a minute. And then by application, you can see why it had so much to the engines. It had 75% engine, 14% airframe, 11% aftermarket. The bulk of that aftermarket is also engine as well. So when you look at the engine it's really more pushing 85%.
And their split on commercial and defense is 53% commercial, 47% defense and we like that. We like the fact that it's a little higher defense content which beefs up our defense content from Legacy Parker Aerospace. So if you go to slide 8, give you a picture of some of the products split between airframe and engine. I'll make a comment about some of the airframe here for a second. So you see high pressure bleed air ducting, APU which is the exhaust power unit exhaust ducting there, water and waste tubing.
So if I was just to characterize ducting in general complex geometries hard to form You've got aerospace alloys titanium nickel based aerospace alloys. And it needs to be exacting dimensions, exacting clearances and be able to withstand very severe environments. So it's not something you can just very easily make. On the engine side, you've got engine buildup. So you'll hear me say EBU and people in the industry will say EBU, I'll explain in a minute.
Engine exhaust nozzles and hot section assembly. So the EBU, what that is that includes all the parts that are installed after the engine is delivered to the nacelle integrator. So that would be things like bleed air ducting, hydraulic lines, fuel lines, oil cooling lines, strain lines as examples. The exhaust nozzle for the engine really helps produce additional thrust from the engine core airflow. And then the hot section assemblies are primarily for the F135 and I have a whole separate page.
I'll give you more visibility on what that is. So if you move to slide 9, just takes just I'm going to give you a couple of cross sections. 1 of the airframe itself and then one of the engine coming up here in a minute. But of the engine of the airframe here on this page, you can see the engine products are in blue. The airframe is in gray.
And really again they specialize in high pressure air and exhaust management throughout the whole aircraft and they've got a good footprint as you can see. On slide 10 shows you their customer list. This is a blue chip customer list, customer list that we know well. 95% sole sourced, 80% long term agreements, so great visibility for the future and on all the premier aerospace programs that you'd want to be on. So it's just a great pedigree for future growth.
On slide 11, we'll dive into the commercial engine products in a little more detail. Really primary offering is around 2 things engine ducting and exhaust system. So on the left is the EBU ducting. And they're kind of small in here, but you can look at the various pictures of the various EBU ducting. These are highly engineered.
They are exact with tight dimensions and clearances that they have to hit high temperature and high stress environments that they have to deal with. They utilize flexible joints and also in their design they compensate for thermal expansion and thermal growth. So again very hard to make and a very important part of the engine. On the exhaust nozzle, the exhaust nozzle as I mentioned earlier produces thrust from the engine core airflow, but they have exhaust nozzles for all the high volume single aisle engines the CFM56, the LEAP engine, the Pratt Wendell 1100, your turbofan. So they're on all the right products and on some great platforms with the single aisle engines.
If you go to 12, I referenced earlier on about the complex hot section products that they make. And again it's primarily for the F-one hundred and thirty five. So they have an attractive portfolio of engine products that really utilizes their manufacturing and their engineering expertise and strengths. So this is really difficult to make highly complex sole source lots of manufacturing IP. I would say most of this is all trade secrets with a growing aftermarket that provides nice upside and they're really an important part of F135.
So without me trying to make everybody aerospace engineers and explaining what all these boxes are in the products, I would just explain in general that these products help straighten and direct airflow in the engine. They help reduce heat transfer and they help to introduce fuel into the right parts of the flow. So that's kind of general comments about what these technologies are. They build upon their forming and their manufacturing technologies with some very intricate machining and precision drilling of holes that they provide. If you go to slide 13, this is kind of the traditional slide we do when we describe acquisitions.
So this is a very complementary fit which is you've seen the theme between CLARCOR and LORD. We've been trying to acquire companies that are very complementary and round out our technology and product offering and Exact Metals does that for sure with this. So you can see our traditional strengths were in hydraulic tubes, hose and fuel tubes. And on the airframe, Exotic brings all the ducting and waste tubes that I referred to on that earlier page. On the engine side, they got the EBU ducting, the exhaust analysis and the hot section assemblies that I just referred to on slide 12.
So when you looked at that combination, this is really a powerfully enhanced offering for customers to differentiate ourselves versus competitors and to just provide more value creation for our customers when we go to them. On slide 14, give you a little more insight into the alignment of the engine products. We're in the upper left. And I would say we started out on the engine side with fuel nozzles, oil tanks, oil pumps and actuation early on the full mechanical portion. And then in 1988, we acquired a company that got us into the hose and tubes.
And that's something we've always wanted to expand upon. It was very natural where we were on the engine to expand more into the ductwork and some of the other more complex hot section work that Exact is doing which you can see which is on the right hand side. So when you look at this cutaway the engine in the lower right, the gold portion there of Parker legacy is a rigid tubing. The orange like I said, orangered is kind of is our hose offering. And then in blue is all the EBU ducting.
So you can see it's a very natural expansion of what we are doing, but with more complex technologies, more complex metal forming. And so we're very we've always wanted to get into that. We always used Exotic as a best in class way to do that and we're very excited to be able to finish this transaction. So let's move to 15 slide 15 and lift the discussion up a hair and talk about the whole group. So on the left hand side is the current state of all of our platforms and we're in a strong position in all these platforms and we're very excited and happy to play in all these platforms.
It really rounds out provides a very diversified offering and very compelling offering for customers. But that being said, we've always wanted to add to the engine portion, so the green portion of the portfolio. And you can see particularly when you go from the current state to the performer with Exotic, the engine and EBU Technologies was up by a factor of 3 from 6% to 17% drives the total engine from 24% of the portfolio to 33%. So we've been expanding it organically. If you look at our wins that we've had organically over the last 7 years or so, we've won probably half of our wins organically, 50% were engine related.
And now this was a way inorganically to drive that portfolio shift as well. And again, so why should you care about this? You ship more on the engine side, as I mentioned earlier, typically higher margins, faster growth and a better aftermarket. So if you go to slide 16, by our previous deal standards it's very modest synergies. We're going to run this as a standalone division in the Aerospace Group.
The people that are leading it today, which have done a fantastic job, Bill Bender and his staff are going to be able to lead it tomorrow when we eventually close on the transaction. As a result, there's a lot the normal kind of synergies you would get from corporate over to those type of things are not existent here. The synergies really here and the value of this company is driven by the attractive platforms it's on, the attractive growth rates and attractive margins. So this is going to be very easy to integrate. The $13,000,000 is the normal areas that you would expect on synergies to win strategy.
Supply chain here, we're really going to be focused on leveraging the combined machining spend between Exotic and Parker. And on the operating leverage, this is a very well run company. You see the growth rates and you see the margins. You don't get there by being a very well run company. So what we're going to be able to do is continue to just leverage that growth that they're going to have in the future and we're going to drive revenue at a faster rate than cost and hence we will get a nice operating leverage as we go out into the future.
Very modest cost to achieve at $5,000,000 From an integration standpoint compared to the prior year deals, this is a very easy to integrate business. And then just in summary, great value for Parker's shareholders on page 17. Again EPS accretive in the 1st 12 months. The ROIC will be high single digits by year 5 with the continued expansion. Their EBITDA margin comes in very accretive to the base Parker business at 29.6%.
And when you take the base Parker business and all the changes we've made into the Win Strategy, you include Lord and you include Exotic Metals, we're going to drive our EBITDA margins over the next 5 years by and expand them by more than 400 basis points. So that's a significant expansion to the profitability of the company and significant expansion to the cash flow of the company. This is a top quartile performer. You looked at numbers. I think pretty easy to say that this is top quartile business and all the right kind of platforms that will drive growth into the future.
And this in our mind is a really strategic capital deployment. We wanted to add to Aerospace. This is very nicely accretive on EPS and margins and growth. And we're going to maintain our dividend payout record of that 30% to 35 percent of net income. We're going to keep we're not going to break our increased record on annual dividends.
And we fully expect to grow net income. And as a result of that with the base business, Board and Exotic, you would fully expect to see the dividends will grow at the same time. So that concludes the opening slide presentation and we'd be happy to take questions. Crystal, if you would like to facilitate that now?
Thank
And our first question comes from Andrew Obin from Bank of America. Your line is open.
Yes. Good morning. Congratulations.
Thank you, Andrew.
Just a question. Just thinking about customers on aviation, could you give us a breakdown as to who are the largest customers Pratt versus GE versus Honeywell, if you could do that just by percentages?
Yes. I'm not going to necessarily give percentage. I'm just I'll give you the top programs and the top customers. So the top customers is first Pratt and Whitney, second with Boeing, third Safran, then Collins Aerospace, Airbus Honeywell kind of in that order. Top programs the F-one hundred and thirty five which is a big part of the portfolio.
I showed you that on the pie chart it was 41%. The 737 family would be second to gear turbofan family. 3rd, the 777 and 777X would be 4th, the 787 5th and then the F1 '19 will be 6th. That kind of rounds out the bulk of all the revenue.
Tom, I think you've been talking about growing your presence on engines for years as long as I remember as you were the CEO. So can you just talk about the path for increasing your content on LEAP and GTF, if you've had any conversations with GE, Safran and Pratt about because it seems that these guys really want partners who will invest in the supply chain and clearly you're making a big investment. You have investment in 3 d technology, in additive manufacturing on your own. Could you just talk about the path about growing your content on LEAP and GTF going forward? Thank you.
Yes, Andrew. So it's Tom again. I mentioned briefly and maybe I might say it too fast. On the organic side, there's 2 ways to really grow the portfolio with Aerospace is what programs you decide to bid on and try to win. So we particularly have been focusing on growing the organic portion of the engine.
So when we look at the program wins that we've had since like 2013 to today, 50% of those wins have been on the engine side. So we've been making a conscious effort to just kind of balance that portfolio out to the pie chart that I showed earlier on and add to engines. We have a great relationship with all engine makers. What we're really excited about with this acquisition is that they have a fantastic relationship with Pratt and Whitney and that's going to add to what we do with GE Enrolls. We already did work with Pratt, but this really steps up our position with Pratt and we like engines for all the reasons that I mentioned earlier on.
So we've been working on it organically. We've had that prioritized list inorganically. This was at the top of our list to add to. Part of why we reason why we picked Exact and other reason is that it makes money at the 1st fit level and that helps balance out the other parts of the portfolio that don't really make money at the 1st fit and make it up later on in the life of the program on the aftermarket. So it's nice to have a little more portion of the portfolio that makes good margins at the first fit standpoint to help provide that kind of cash flow and margins in near term as well as fund future development for other things.
And have you had conversations? I assume you've spoken to Pratt and GE about the deal, right?
Yes. We've connected with a lot of the customers. They haven't hit with all of them so far. We did talk to Pratt and they were very positive. And we talked to Boeing.
Those would be the 2 leading customers. And we have a great relation with GE our joint venture. We have a deep relationship with GE. And so I don't look for any issues with all the customers. To your point and that's one of the reasons why Exotic was very careful with their selecting who they wanted to have the company as who could take the company and build on the success of what Exotic did the whole concept of 1 +1 equals 3.
And the Exotic team and the family, the owners really felt that we could do that. Congratulations. Thanks, Andrew.
Thanks, Andrew.
Thank you. Our next question comes from Andy Casey from Wells Fargo Securities. Your line is open.
Good morning.
Good morning, Andy.
Just a question on ongoing amortization. Do you have an estimate on that?
Yes. With the modeling we've done, Andy, we're estimating $46,000,000 of amortization and about $3,000,000 of additional depreciation. Early days in getting the real true value on their assets but that's what we have in our models.
Okay. Thank you, Kathy. And then
could you go over the structure
of the debt funding please?
Sure. We want to keep the debt very flexible. Exotic has a very nice cash flow and so we're confident that we can pay down the debt that we take on for this quite easily and have the flexibility to do it in the next few years. So we will be borrowing a combination of commercial paper and a 4 year term loan split fairly evenly about $800,000,000 of commercial paper $900,000,000 of a 4 year term loan and we fully expect to be able to pay both of those down within 3 years. With the combination of Exotic and LORD and Parker's cash flow, we expect to be able to pay down $3,000,000,000 of flexible debt in the 1st 3 years of owning both companies.
Okay. Thank you very much.
Thank you, Andy. Thank you. Our next question comes from Jamie Cook from Credit Suisse. Your line is open.
Hi, good morning and congratulations. I guess just 2 companies understanding it's not in your synergy forecast, but is there any way you could help us frame the potential revenue synergy opportunity for the 2 companies on a combined basis? And then also the aftermarket relative to total sales looks low relative to Parker. So just wondering if there's an opportunity there as well? Thank you.
Yes, Jamie, it's Tom. So we were conservative on the revenue forecast here from what the sellers had just because that's typically how we model things. So we modeled a 7.5% CAGR over the next 5 years based on that 95% sole sourced and the programs that they're on. We did not include it and that's just really the base business trajectory taking them. We did not include any revenue synergies as per our normal practice, but you're right.
There are revenue synergies as they have a much deeper concentration with Pratt and Whitney and with Boeing and the opportunities to take that exotic playbook and to take it to GE and to Rolls Royce on the engine side and then obviously Airbus on the airframe side. So we see lots of revenue synergies in that regard. You mentioned the aftermarket. There's a couple of things there. We're early days of the F135 in the geared turbofan which is why you see the aftermarket so low.
So that's we did factor some of that growth in there, but we were very careful on putting being conservative with that. So that's an upside. And we know those programs are going to have nice aftermarket coming in going forward. That mix that you see is not unusual because the part of the business that we're in that we bought years ago on hose and fittings tends to not have the same aftermarket density as say the fluid mechanical side of the engine. So it's not unusual how that's split.
However that aftermarket will grow. So on the F135, your turbofan in particular And then we have a huge aftermarket organization that supports our existing aerospace business. So we will leverage that network and allow us to capture even more. So there is upside there. We didn't factor that in again because that's just how we are when we do these type of acquisitions.
We only put the cost items in there.
Okay. Thank you.
Thanks, Jamie.
Thank you. Our next question comes from Jeff Sprague from Vertical Research. Your line is open.
Thank you. Good morning, everyone.
Good morning, Jeff.
Hey, good morning. A couple of things. First, Tom, just following up on that last point, understand kind of the relative use of the F135 and GTF may skew the aftermarket percentage a little bit. But what would you say is normal? The company does have pretty long term history.
I just wonder what you view as kind of a typical OE aftermarket mix for this business kind of at maturity?
I think it's going to grow a little bit. It's not going to be like how we are with legacy Parker that is like 65%, 35%, 60%, 40%. It won't get to that kind of level. It's going to be somewhere in that potentially getting up to 20% aftermarket from the current ninety-ten. So that's an attractive growth on the aftermarket side.
The other part again to just reiterate part of why we really like Exotics so much as they make money on a first fit which is nice to have as part of your portfolio.
Sure. And then just thinking about the sole sourcing that sounds great. It also sounds like a potential risk. Certainly, when Pratt was struggling with the GTF, they actually made a very big point of driving to dual source on every critical part. What kind of the tightness in the aero supply chain, you hear other OEMs talking about kind of the reliability of supply and sourcing.
Just how sticky do you think that is? And how do you protect that over time?
Well, that's been part of Exotic's strategy. They particularly have picked a really hard to make products and that's been our strategy. We're going to pick the things that nobody else wants to do, nobody else can do. While we feel good about the stickiness, if you take LTA on the F135 is out to 2,038. So it's a long term LTA and they've had a great relationship with them.
You'd have to just walk through their plant and know that these products are not easy are not going to be easily moved to anybody. The manufacturing IP, the trade secret, the way that they put all these together, I spent a fair amount of time looking at their facility and their products before we acquired them and the team spent even more time after me. We feel very good about the stickiness and that's been part of Exotic's strategy all along.
Great. Thanks. I'll leave it there.
Thanks, Jeff.
Thank you. Our next question comes from Mig Dobre from Baird. Your line is open.
Good morning, everyone. So Tom, can you give us maybe a little bit of historical perspective on margins for Exotic? And as you look going forward at the growth that you have planned here, is there anything from an investment standpoint that might change that margin dynamic that you're aware of?
No. They've been very their margins have been very consistent at that high level, the upper 20s. And obviously with a little bit of synergies, we're going to take them a hair higher. But they have a very consistent track record on growth and our margins. That's part of our diligence that we do all the time.
We look at have you consistently been able to do this and the answer is yes.
I see. Okay. And then in your remarks, you talked a little bit about the integration here. And I'm kind of wondering if we can get a little more color on that and maybe frame it with LORD as well. Obviously, there are some concerns over the robustness of the cycle broadly speaking in industrials.
And I guess my real question is, how do you feel from a capacity standpoint as a management team? Can you essentially integrate both these businesses and still sort of have the leverage to be able to react at whatever the cycle might go down the line for you?
Yes. Mig, it's a good question. It's one I wanted to be able to talk about with everybody. So let me put it along a couple levels. 1st, integrating this thing operationally.
We see no issues The other three deals recently done this will be the easiest to integrate because it's going to be a separate division and we're taking that leadership team which is so well established and so successful and they're going to lead it in the future. The event with LORD and with Exotic is these are 2 separate groups that are doing the operational integration. So, engineered materials team is integrating Lord with a dedicated team there and a separate group the Aerospace group is integrating Exotic. When I think about it financially, when we went into the CLARCOR acquisition, we were making 14.7 percent EBITDA and now we're at 18.2%. We were at 1,700,000,000 dollars of EBITDA and now we're $2,600,000,000 of EBITDA.
So we from a financial strength standpoint are able to digest this at the same feeling that we had when we took on just one acquisition with CLARCOR. When we look at both deals and maybe I'm going to take an opportunity to talk about putting LORD and Exotic together as far as in the same fiscal year. And we can't predict the closing date. But if we've looked at assume say an October 1 close and we looked at Exotic it's going to be slightly accretive. And since the last time we talked to you about LORD, we've been able to find opportunities to pull in some of the cost synergies that were out into the FY 2021 time period.
And the amortization schedule is always we're always very conservative when we first announce it and it takes time to digest and go through that and assign those synergies as you go through it. That amortization schedule looks like it's going to be quite a bit less than what we had told you at the deal announcement. So long story short because I'd like to get the balance sheet set up before we make final calls on this. You take the positive accretion of Exotic and you take Lord with the improvements that we've been able to make and they're going to be pretty much neutral for us if we assume an October one close in FY 2020. And we'll talk more about FY 2020 on Thursday.
So we feel very good. We're going to maintain a strong investment grade. That's our strategy. And let me just talk a little bit about the capital deployment side of things, because I think it's important to your point as you have leverage if things were to weaken. Recognize that this cash flow is going to go from $2,600,000,000 to $4,100,000,000 if you go out 5 years so we're going to and a lot of that comes from the Win Strategy.
That $1,000,000,000 of increase we did from CLARCOR, yes CLARCOR helped, But as the base business got significantly better from all the changes that you saw us make the margin improvements etcetera. So capital deployment first on the list will be our dividends maintaining that increased record and paying out 30% to 35% of net income. 2nd will be organic growth and productivity which is always the most efficient deployment of capital for our shareholders. We will maintain the 10b5-1, but after that we're going to be paying down debt. And we're going to pause on the acquisition front and we're going to pause till we get our leverage down to approximately 2.0 and we feel very comfortable we're going to do that within a 3 year period of time.
Kathy told you we're going to be paying down $3,000,000,000 worth of So we feel very good about integrating this operationally. Financially from a fit standpoint, this is a perfect fit. We've known the Exotic team for a long time. When I was in some of the meetings there, I couldn't tell the Parker people from the Exotic people. Obviously, I knew the difference, but it just shows you how a tight relationship that we've had.
So we feel very good about bringing the company on.
Great. Thanks, Tom.
Thanks, Mig.
Thank you. Our next question comes from Nathan Jones from Stifel. Your line is open.
Good morning, everyone.
Good morning, Nathan.
Tom, just a follow-up on the revenue synergy questions you've got. Aerospace tends to be very long cycle. When we're thinking about revenue synergies here, should we be thinking that when those do crop up that they're multiple years out into the future? Or are there opportunities for you to generate revenue synergies more
in the shorter term? They would be longer term Nathan as you might expect. Exotic is already getting approved or has been approved as part of a cured turbofan family for doing repair work and aftermarket will only F135. So that will happen. We know that's going to happen.
That will be down the road a little bit. And growing share with other accounts, Like I mentioned GE and Rolls and Airbus and etcetera will take a little time. But clearly we're going to be able to go to customers with a lot more compelling value proposition than we had before. And this is back to my comment about 1 +1equaland3. We're going to take the best of what both companies do.
But we are conservative in nature in how we model these things. So we didn't model any of those revenue synergies in there.
Okay. That makes sense. And then typically on these kinds of deals Parker has a pretty large cost synergy target that you don't have a very big one here. Maybe you can talk about where Exotic is in terms of its evolution in terms of lean operational excellence and all those kinds of things that Park has been at for 20 plus years now and where you think they are in that evolution relative to you guys?
This is a very good manufacturing company. I would put their manufacturing expertise up against anybody. I think some of the more formal lean techniques is an opportunity for us to introduce and to help bring that, but they are really, really good manufacturers. So there's some things we can learn from them and how their manufacturing techniques and their trade secret processes. But I think some of the rigor around that The Win Strategy brings is part of the complementary nature that we're going to be able to help.
And again, I think most of the there's some obvious supply chain things that we see in the machining side take our spend and their spend. This will be the machining that they don't do in house. And so there's some obviously leverage we'll get there. But then the leverage will be they're growing that 7.5% growth rate. If you can grow with maintaining your fixed costs and adding less variable cost for every dollar revenue you get and they've already been doing that that's how you get to the kind of margins they've got.
And hopefully we can help with that a little bit and that's part of the $13,000,000 leverage there. But it's modest because this is not it doesn't have a giant overhead. It basically has an overhead structure that matches what we've typically seen in the division. We're going to bring that in just as is. And that's why this is a different synergy and different integration versus the prior two deals.
Maybe just one more. You talked about being able to maintain fixed costs add small amounts of variable costs. Can you maybe give us some detail on what their gross margins are? What kind of incremental margins on growth we should be expecting out of these guys?
I don't really want to get into gross margins and all that. I would just suggest part of why I feel good about the fixed cost side is they've been adding their CapEx has been running kind of in that mid single digits for a number of years as they have added some equipment. They added the Phoenix operation. So they're in they have 4 locations in Kent, 1 in Spokane and one down in Phoenix. So from a fixed cost from a building infrastructure standpoint, they're set up to be able to handle their growth for the next number of years.
So their CapEx is going to come down into that low single digits similar to what Parker has. This is a company that generates equal to or better cash flow than we do. So there's lots of reasons to like it. I'll put it that way.
Thanks very much guys.
Thanks Nathan.
Thank you. Our next question comes from Joel Tiss from BMO. Your line is open.
Hey, how's it going guys?
Good morning, Joel.
Everything's been pretty much answered. I just wondered if, it sounded like the upside in the operating margins weren't very much at EMF. But is what kind of things can EMF teach Parker to try to improve the overall margins of their aerospace division?
Yes. I think as I walked the floor and I saw what they do, they have a really strong contracts team. We have a good contracts team too, but if we could compare notes on contracts in general just that whole process and how they interface with customers. They have a level of stickiness that is remarkable. So their strategy of picking that really hard complex things was a very interesting strategy.
They've gone deep with customers on the really hard stuff. And so we'd like to take that and just expand it into our product customers. They have a really tight relationship between supply chain manufacturing, engineering. The folks work very cohesively and they have some really I think when we look at their processing, their machining processing, their forming processing, their drilling just to pick a couple of welding. They're really best in class from what I can see.
So I think we may have an advantage from maybe the formal lean techniques. I think they have an advantage from the trade secret processes and that's why I'm pretty excited about putting both of these together.
Great. Thank you.
Thanks,
Joel. Thank you. Our next question comes from Ann Duignan from JPMorgan. Your line is open.
Hi, good morning everybody. Likewise most of my questions have been answered, but maybe Tom, could you talk a little bit about what specifically their intellectual property is based on? An exotic metal sounds like material science, but when I see the products, it looks a little bit more like mechanical pure aerospace. So if you could just talk about where the intellectual property is and what it really is? Thank you.
Yes. Ann, this is Tom. It would be less on the metal side. It's more on the forming and all the subsequent processes. And I would say most of their IP is trade secret around their manufacturing processes.
So forming of those aerospace superalloys is hard to do. They don't like to move. And so having them form and hit the tolerances that they have to hit is hard to do. So they're forming technologies, they're heat treating technologies, they're welding, they're drilling, they're machining those would be the ones that come top to mind as far as the technology that they have. And they've gone down the path which is what I prefer typically being trade secret and how they do the things.
And when you have trade secrets, it creates a lot of stickiness. And all you would have to do is walk their floor and see the kind of products that they do. Your average company can't do what they do, which is why they've won out the spot that they have.
And then just a question on the asset sale versus stock sale. Can you just talk a little bit about how the tax treatment will work? Will it be upfront or just from modeling standpoint, how should we think about the tax benefit?
Yes. Ann, so it's a cash advantage. So we're able to write up the assets to market value and depreciate them for tax purposes at that higher value. We'll also be able to amortize the goodwill for the tax return, but that will not affect the tax rate. We're estimating a tax rate of 23% for the business through the book taxes, but it will be a definite cash advantage as we pay less taxes.
Okay. And just to that point, was this an auction process? Or was this the family decision and they called on Parker? And I'll leave it there.
Yes. And it's Tom. This was a process. The family ran and had a banker and they engaged strategic potential buyers as well as private equity companies. And I really would just suffice it because obviously I don't know who all was in there.
You could potentially guess based on the space. But I think we really won because of a combination of factors and I would say it's this whole package not with just one entity. Obviously value and the value that the family saw and the price speed and certainty and then the fit. And the fit was something that was important to the family as far as strategic, technical, cultural fit. And really the family is very conscious of they wanted to find a great home for their business and a home that would be there for the future.
And they wanted to make the business stronger. They wanted to see it prosper and they wanted to see it have a better future than even what they did. And they did a remarkable job obviously with it. And we were fortunate to win. And I think it was that whole package as I would describe that enabled us to win.
Okay. Thank you. I'll leave it there. Appreciate it.
Thanks, Ann.
Thank you. Our next question comes from Nigel Coe from Wolfe Research. Your line is open.
Thanks. Good morning. We've kept a lot of ground already, but you touched on this already, Tom, about the CapEx coming down. I'm just curious, there's been a lot of supply chain constraints on the engine side, mainly forchants and castings. Is Exotic now through that CapEx bulge or is there still some CapEx to come through here?
Nigel, it's Tom. They're through it. They're pretty much done what they needed to do to put themselves in position from a capital structure to support that growth in the future and we'll see them be at more nominal CapEx going forward.
Okay. And you said low single digits very similar to the Pocahannockin 2% or so going forward.
2 plus or minus. Okay.
And then maybe one for Kathy. On the cost of debt side, with your leverage pushing up to just over 3 times, does that impact the cost of financing for Parker or would you expect it to be much in line with kind of a 3%, 3.5% tap rate?
Yes. So the new debt that we will be taking on will be an average effective rate of 3%. And we think at the higher multiple, we may see just a minor tweak in our commercial paper rate. But other than that we don't expect any impact to our financing. We have met with the rating agencies.
They were very favorable on this acquisition. It's great cash flow and they could see that. And with our ability to pay down and get back to a 2 multiple within a 3 year period, it really is a nice addition, brings in nice cash and doesn't hurt us in terms of our ratings that much.
Okay. And then just a quick one maybe for Tom. The motivation for selling now, obviously there are a variety of reasons potentially, but you alluded to the fact that taking the business to the next level. And I'm just curious what that would be. How can Parker take this business to the next level?
Well, let me first talk about why the family decided to sell. So it's family owned. They really wanted to explore some different things and looked at different priorities and they saw the consolidation happening throughout the industry. And I think as they evaluated all their different options, they came to the conclusion that selling the business was the best thing for everybody involved and they're very sensitive. They want to do the right thing on behalf of the family, but also the right thing on all the people, all the team members at Exotic.
And they really wanted to ensure the long term health of the company. So they we've had a long relationship with them. So they've known us for a long period of time. This wasn't just once the process started that all of a sudden we started engaging with them. I met Bill Bender 10 years ago and Roger Sherrard our Group President and his team have been interfacing with their team for that entire 10 years.
So I think there was a comfort and an intimacy with Parker that we would be the right home. And Bill and I talked a lot about Bill Bender I'm referring to about this concept of 1 +1 equals 3. So bringing the best of what they do with the best of what we do and having it grow. So like I talked about on the operating side their manufacturing expertise in the trade secret processes are are lean and digital management systems to help facilitate that. There's opportunities on supply chain.
And then there's the revenue side of things where they've gone deep with Pratt and Whitney and Boeing and some others but to lure us or extend and others And we can take the exact playbook as we have deep relationships with all the other engine makers and all the other air framers to take their products as well. Even with what they have, they have a very robust growth rate for them. That's a 7% growth rate I'm talking about for the next 5 years. Our goal is obviously to help build upon that going forward.
That's great. Thanks very much.
Thanks, Nigel.
Thank you. Our next question comes from Joe Giordano from Cowen. Your line is open.
Hey, guys. Good morning.
Good morning, Joe.
Curious, were you guys already purchasing anything from Exotic? Was any part of this somewhat defensive in nature to prevent others from potentially acquiring this technology?
Joe, it's Tom. No, we were not purchasing anything from them.
Okay. And then, Tom, just more broadly, when we think about acquisitions and ROICs, I mean, I think it's certainly something we're noticing across companies where a single digit ROIC becoming more and more the norm.
So how do you kind
of think that through in terms of cycle timing and where this is a company growing very quickly. I think you mentioned you're modeling 7.5% off of a CAGR of 16%. So more conservative, but still certainly good. And we're looking at high single digit ROIC. So how do you look at that compression over the last several years?
And how you think about the attractiveness of deployment into these things over time?
Well, we look at what it can do for us from an organic growth standpoint. So you see I had that one slide in it that showed Lourdes numbers and showed Exotic numbers significantly faster growing. Its margin significantly higher than ours And the ROIC exceeds our WACC by a nice amount. So it's going to be incremental to the returns on invested capital. We will pause here for a little while as we've done 3 deals and where we stand.
We want to work down that debt structure maintain a strong investment grade. And we think the cash flow from the base business which has been very strong, the cash flow from these deals which is equal to or better than the base business will enable us to quickly delever and be able to look back at acquisitions. I would just tell you that we will continue to build those relationships. Part of why we've won these last three transactions is we've been building those relationships for a long period of time. And so we will continue to do that.
We will just not be quite as active on the finish line here in the next little while, but we'll continue to build those relationships. And we're very strategic. We pick things that make sense and that fit within the motion control space and our properties that we think we can help and build upon their success. I hope you noticed the trend has been we're buying companies that are top quartile companies. I talked a lot about being a top quartile company.
And you do that by a couple of ways. You improve from within, which clearly we've done that over the last number of years and with a lot more to go. And you buy companies that are equal to or better than you.
Fair enough. Thanks, Tom.
Thanks, Joe. Crystal, I think we have time for one more question.
Thank you. And we'll take our final question from John Inch from Gordon Haskett. Your line is open.
Thank you. Thanks, everyone. Good morning. Hey, Tom, I think you said defense in the mix is 43%, but the F-thirty five is 41%. Are those numbers correct?
And what is the other 2%? Like how do you go from sort of what actually happened here? So obviously, I guess F-thirty 5 was the big breakout. Is that it? What was the genesis of that?
And is there a prospective kind of breakout in other program areas as you kind of look at the runway?
Yeah, John. The numbers are 53% commercial, 47 percent. Okay. 47%. Yes, 47%.
And then the balance of the F1 2019, there's probably some other ones that I don't know off the top of my head. But obviously, the F135 being the lion's share of that.
And then how would say you put up the slide with Exotic 16% sales CAGR, right, I think over the past 3 years. What would that number look like if you were to exclude the F-thirty five? So it's almost like what's the pro form a ex that one program?
Well, John, I want to give you follow-up with you offline on that. I don't know that one off the top of my head.
Well, that's fine. But is the 7.5, Tom, that you mentioned in your planning, is that assuming kind of as rapid a ramp for the F-thirty 5? Or I'm just trying to understand sort of because F-thirty 5 is so big in the factoring of this, right? How does that factor into your own sort of equation, if you will? Yes.
Kind of John, in general, I would say a slower ramp and then reaching kind of a plateau when F-thirty five hits mature production rates.
Got it. And then just Tom lastly in terms of the MAX exposure, you mentioned the MAX, I think it's on one of the slides here. Is the grounding having any kind of incremental impact to the financials near term? I mean we can all sort of speculate as to when the MAX flies again, but is there any sort of impact one way or another in the short run as the MAX is grounded?
Yes. I'm glad you brought that up John. It's Tom again. So on the MAX approximately 20% of the revenue they've seen no near term impact. You got to remember that Boeing has been very careful with how they manage their suppliers based on the complexity of what they do, their lead times on material, the people dynamics that associates.
So suppliers are anywhere from that 42 to 52 in that range and they're currently at 52. Now we have complete confidence in Boeing's success in being able to get the MAX flying again. There's no doubt in my mind. But we wanted to model very conservatively the forecast into the future and that's part of why the 7.5% is a little more modest. And so what we did and again this is only for modeling is we modeled a 42% rate all the way I'm talking about for exotic all the way till mid of 2021.
So it's a very conservative qualification and a very conservative assumption I'm bleeding through all the inventory that's in the system. And then we allowed for a much slower ramp up on the MAX. So a slow methodical ramp up to 52 not until 2022 and then we hold it flat at that to the rest of the DCF time period. So you can see we were very conservative on DCF more because of our own modeling. We have complete confidence that this thing is going to be flying significantly faster than that, but we wanted to be able to look at our shareholders in the eye and our Board in the eye and ourselves that we modeled this conservatively and had assumptions that we clearly could meet and beat and hence that's what we did on the MAX.
Got it. And just to clarify, you said the MAX is 20%. I'm assuming that's of revenues in the fiscal 2019 forecast estimate. Is that correct?
Yes, approximately 20% of revenues.
Awesome. Thank you very much. Appreciate it.
Okay. Thank you, John.
Thank you. And I'd now like to turn the conference back over to Kathy Siever for any closing remarks.
Okay. Thanks, Crystal. I'd like to thank everybody for joining us today. Robin Davenport and Jeff Miller will be available throughout the day to take your calls if you have any further questions. So have a great day everyone.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.