Good day, ladies and gentlemen, and welcome to your Q1 2019 TransDigm 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. As a reminder, today's conference will be recorded. I would now like to turn the call over to Liza Sabol with Investor Relations.
Ma'am, you may begin.
Thank you, and welcome to TransDigm's fiscal 2019 Q1 earnings conference call. Presenting this morning are TransDigm's Executive Chairman, Nick Howley President and Chief Executive Officer, Kevin Stein and Chief Financial Officer, Mike Lisman. 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 transcyme.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 atsec.gov.
We'd also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA, EBITDA as 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 comments as usual on our consistent strategy, a few comments on the fiscal year, Q1 of fiscal year, a quick update on the Esterline deal and related issues, and a few comments on the status of the Inspector General audit. 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 3 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 long standing goal is to give our shareholders private equity like returns with the liquidity of a public market. To do this, we have to stay focused on both the details of value creation as well as careful allocation of our capital. We follow a consistent long term strategy. Specifically, we own and operate proprietary aerospace businesses with significant aftermarket content.
2nd, we utilize a simple well proven value based operating methodology. 3rd, we have a very decentralized organization structure and a unique compensation system closely aligned with our shareholders. 4th, 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 2019 is off to a good start.
Q1 revenues, EBITDA as 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 boding 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, 1 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. Our liquidity
is strong. We had $2,300,000,000 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 $3,000,000,000 of cash at the end of the fiscal year. We also expect to have over $600,000,000 of unused revolver and some additional room under our credit agreement. We continue to actively evaluate and seek M and 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 and A. And as I said before, we're open for business. A few comments about the Esterline transaction status and some related issues. As I think you know, we're paying about $4,000,000,000 for roughly $2,000,000,000 in revenue. Based on the public consensus information of about 3 $30,000,000 of fiscal year 2019 EBITDA, we estimate this is about a 12 times EBITDA multiple, again times the consensus 2019 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 till it's concluded. As we said before, we think Esterline has been a misunderstood company. Its core aero and defense business make up 3 quarters or more of the revenues. This core business has proprietary content, sole source and sole source positions quite similar as a percent of revenue to TransDigm. The core aftermarket also appears significant.
We estimate this at over 30% of revenue. 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 $4,000,000,000 of secured notes with a fixed interest rate of 6.25% and a term of 7 years.
This is scheduled to fund on February 13. 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 $550,000,000 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 5 years.
I don't expect that our net leverage to 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 would still delever about 1 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 $16,000,000 Again, this is a voluntary request and there is no assertion that this is a financial obligation of the company. The government is a good customer and like any good customer, we want to be responsive Now let me hand this over to Kevin, who will discuss both 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 Q1 and a good start to the year. Mike will provide more details on the financials, but our Q1 operations revenue and EBITDA as defined were up nicely over last year. Q1 GAAP 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 form a 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 category. For the remainder of the call, I will provide color commentary on a pro form a 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 chipset content had experienced no negative revisions. Now in Q1 of fiscal year 2019, 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 percent compared to the same period in 2018. Bookings in this submarket 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 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 2019, 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 2018, 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 $487,000,000 for Q1 was up 21% versus prior Q1. EBITDA as defined margin in the quarter was 49% of revenues. This includes one margin point of dilution from the fiscal year 2018 acquisitions of Kirk Kirkhill, Extant and Scandia.
Excluding the acquisitions, margins improved approximately 2.5 points year over year for the same period. Margin improvement progress is always important to us and 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 $20,000,000 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 $4,190,000,000 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 $2,090,000,000 with an expected margin of around 50%. This includes approximately one margin point of dilution for the recent acquisitions purchased in fiscal year 2018, implying our pre fiscal year 2018 core is now at about 51% margin.
We are increasing the midpoint of our adjusted EPS $0.50 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 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 TransDigm Operations Executive and most recently our Interim CFO to lead the financial integration of Esterline and additionally added 2 seasoned Executive Vice Presidents, Joel Rees and Pete Palmer to also be part of the Esterline acquisition integration team reporting to Bob Henderson.
To backfill this need, we have promoted Paula Wheeler to Executive Vice President. Paula has been with TransDigm since 1995 and has served in a number of leadership roles. She was most recently President of Aero Fluid Products for the past 7 years. As a reminder, we promoted Rodrigo Rubiano and Alex Pyle 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 Lissing.
Thanks, Kevin. I'll recap the financial highlights for the Q1 and then provide some more info on the guidance update. 1st quarter net sales were $993,000,000 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 3 fiscal 2018 acquisitions, Kirkhill, Xtant and Scania. Our first quarter gross profit increased 18% to 564,000,000 dollars and was 56.8 percent of sales compared to 56.2% in the Q1 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 1.5 point
of
tax reform last year. This also muddies of tax reform last year. This also muddies the year over year EPS comparisons. For the Q1, our effective GAAP income tax rate was a provision of 21.5% compared to a benefit of 63.4% in last year's Q1. 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 140 $7,000,000 There is no update to our full year effective tax rate assumptions at this time. So excluding Esterline, we're still anticipating the GAAP 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 GAAP and adjusted EPS was due to the previously mentioned enactment of tax reform.
If you remove the one time benefit of $147,000,000 which equates to $2.65 per share, so that you can do an apples to apples comparison of the 2018 to 2019 growth rates, you'd get Q1 FY 2018 GAAP EPS of 1 $0.95 The current quarter GAAP 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 FY 2018 adjusted EPS would be $2.93 per share. Our current quarter adjusted EPS $3.85 is then up 31% over this prior year figure. Table 3 in this morning's press release GAAP EPS to adjusted EPS. So you can look for more detail there.
Switching gears to cash and liquidity, we generated almost $330,000,000 of cash from operating activities and ended the quarter with over $2,300,000,000 of cash on the balance sheet. Our net debt leverage ratio at quarter end was 5.4 times pro form a 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 $3,000,000,000 and our net leverage at September 30, 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 dollars and we estimate the midpoint of our adjusted earnings per share to be $16.76 The primary reasons for the and adjusted EPS were the increase in our EBITDA guidance and also lower expected interest expense. However, the increase to the GAAP EPS partially offset by higher expected acquisition related costs related to Esterline.
Excluding any new debt from the Esterline acquisition, we're now expecting net interest expense to be $725,000,000 for the full year, a decrease from our previous expectation of $745,000,000 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 $725,000,000 completely excludes any interest expense from the $4,000,000,000 of new debt we'll be incurring to complete the Esterline 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 Wynne became our Chief Accounting Officer. Sarah has worked at TransDigm 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 TransDigm 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 2 first caller and then reinsert yourself into the queue to allow everyone to have an opportunity to ask questions. Operator, please open the line.
Thank you.
Hey, good morning all.
Good morning.
Just two quick ones. 1, 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? And 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.
Yes. Let me address first and Kevin will take the second question. Carter, we just don't want to comment on the Q1 public filing by Esterline. We don't own it yet. And I just I 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. 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 number 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 Spingarn with Credit Suisse. Your line is now open.
Good morning. 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, think, both in the Q4, the 4th 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 or winning new business. So it's really everything. I can't comment that one is more successful than the other in the current quarter.
Okay. And then just for just a quick one. You mentioned the higher acquisition expenses for Esterline, I guess Mike did. Is there anything specific to that?
It's banker fees and legal fees for the most part that you see written through what's in there today.
And 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. Okay. Given the size
of the acquisition, but I don't think the fees are any different than we thought. No, the fees are what we thought they'd be. We're patient.
Okay.
Thanks guys.
Thank you.
Our following question comes from Myles Walton UBS.
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 Esterline. And I'm curious, you have $3,000,000,000 pro form a 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?
Yes. I mean, let me say, you're right. We have a lot of cash flow building up and we borrowed a lot of money to and we borrowed and we're maintaining that. I don't know Myles what we'll do with that. I would say we would be reticent to take on right now an acquisition 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. 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.
And Kevin? Don't have
much to add there, but to say that 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 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? Yes, they're about the same, but we don't comment on the exact management
All right. Thanks.
Thank you. Our next question comes from Robert Stallard with Vertical 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. I was wondering if you could comment what their beef was with this situation, whether this might have an impact on the cost of debt going forward?
Mike, you might I don't think they downgraded. 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 evaluate as we go forward.
I think
that's right, Mike. That's all the thoughts.
It just changed. It's still B1, B plus. Yes, something I saw last
week. Okay. And then on the defense side, you obviously had very good result in the Q1. 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 reticent to raise the guidance for the year? Or is this something that's slightly longer term more visible that could have legs?
Yes. I think that the defense aftermarket business would fall into your shorter term horizon bucket. We are seeing stronger performance there in terms of bookings growth. Yes, I think we're looking at the guidance. As I said in the prepared comments, 1 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, Karen.
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 can provide a little more detail on the commercial aftermarket. I mean, you highlighted that 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 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 is sort of book and ship?
And then maybe what else would you like to see there to get a little bit more comfortable with perhaps upside to the full year guide in terms of that market?
I think what I would say is we're just being cautious. We're 1 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 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 1 quarter does not a trend made yet.
I think there's a couple of things. 1, 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 still looks good, looks about the same as it did at the beginning of the year, we like to see more than 1 or 2 one data point 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?
It isn't yet. I just I see the same fundamentals that you see in cooling, slowing down, maybe some concerns about the macroeconomic trade environment, I don't know. So I'm just cautious there that I was we 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. Good morning. Good morning. So I guess Nick or Kevin, the I thought with the announcement with when you announced Esterline that you were considering using some of the cash on the balance sheet. What made you decide to finance the entire deal?
Was it the pipe the M and A pipeline that you see out there? Was it just solely the attractiveness of the capital markets and where you could do the deal?
Yes. I think David we were pretty vague about how we would finance 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. 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 Kirkhill 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 numbers? Do you have an estimate for that at this point?
I think you probably looked at the pro form a financials that were filed with the bond documents and it's $20,000,000 and that could change as we work through the final accounting.
Our next question comes from Hunter Keay with Wolfe Research. Your line is now open.
Hi, good morning, everybody.
Good morning. Hey, Roy, I just wanted to
just flush out a comment. I think you guys you said OE, BizJet and Helos 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 flush that out a little bit more please?
Yes. Let me read the exact quote here back, just so I'm not confusing myself. I said business jet and helicopter OEM revenues make up 20%. Revenues in this combined market were up over 20% compared to the same period. Bookings in this submarket 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?
Yes. Well, yes, I think you also noted some questions around the sustainability of that growth rate. I'm just trying 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 it's large format cabins mostly. That's what we're seeing. We're seeing some slowness in orders on the helicopter side. So that's 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, Jed.
We do see growing OEM demand, large form factor, of course, but we 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 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 TransDigm and how your time at TransDigm 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 TransDigm'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 and 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
TransDigm either. Obviously, Mike's I would add there that obviously Mike's significant background in private equity was a very attractive attribute to us.
Yes, absolutely. Thanks, Bo. Appreciate it.
Thank you. Our next question comes from Michael Ciarmoli with SunTrust. Your line is now open.
Hey, good morning guys. Thanks for taking the question. Nick or Kevin, just I can understand and appreciate the conservatism, especially in some of the shorter cycle markets. But you had the real strong commercial OE 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 A380 aside.
But anything 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 raising guidance, one data point does not align make. So if it continues this way and we see future quarters, we would look to revise. But right now, yes, maybe it's just conservative, but we're leaving it as is for right now.
Okay. That's fair. And then just on the overall kind of revenue front, organic growth, I know it seems maybe 2 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 in quite some time. I mean, can you give any color what really drove that volume versus price?
I mean, did you see volume material volume increases in all markets? Or was there 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 1 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, yes, we again want to conservative without getting ourselves ahead.
Got it. Was there anything in the quarter? I mean, any big chunky 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 that the amount of narrow body orders that came in as well. So I think orders and sales are both pointing to better wide body and narrow body performance. Got it.
And I think in the overall, the fundamental market conditions seem like what we thought they were a year ago. And as Kevin says, 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 Kirkhill 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. So I guess, I missed 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 the 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. Got it. Next time,
give. Our following question comes from Gautam Khanna with
I wanted Good morning. Hey, I wanted to ask you just if you could comment on the interiors kind of market within the commercial aerospace 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 what level of leverage would you actually be comfortable taking the balance sheet up to in this type of credit and economic environment for the right transaction recognizing?
Yes. I wouldn't want to I just wouldn't want to comment on that. I think you've seen a number of year history of our leverage. If I
was trying to figure out we're going to do
it, that's probably not a bad idea to look at
what the history is trying to
figure out we're going to
do it, that's probably not a bad idea to look at what the history has been. But 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 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. I mean you've played into a cycle. How about the macro and the health of the aero market
and the like?
Yes. We feel we don't have any unique insight other than anybody else does. We see all the 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 to 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 Kahyaoglu with Jefferies. Your line is now open. Good morning, guys. Good morning,
Sheila. Kevin, Nick, you talked about a few organizational changes in promotions. Just going back to Miles' question a bit more, can you give us how you're going to tackle 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 Esterline 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 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 Esterline integration team to make it successful.
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 just looking at the passenger side of the business, it seems to have grown at about a 6% rate. 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
I think the repair and overhaul market has been solid for us. You're directionally correct in your passenger segments 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 the look through sales for the distribution sales, the POS for them remains very strong as well.
Our next Our next question comes from Peter Arment with Baird.
Yes. Good morning, Mick, Kevin. Very nice results. Kevin, maybe just a quick one for you. Given the supply 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 yes, we've had 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 color. I'll leave it at one. Thanks, guys.
Thank you. Our next question comes from Jason Rodgers with Great Lakes Review. Your line is now open.
Yes, good morning. Good morning. What is the pro form a net leverage ratio including Esterline?
As of threethirty one, it's going to tick up slightly to just over 6 times, but obviously that assumes no kind of cash payout or anything, just to footnote that.
And are you planning
on Sorry.
The next question was, are you planning on providing updated guidance once the acquisition closes or are you planning on waiting
for the quarter? 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, it may not be immediate. I
wouldn't expect something the day after we close.
And then finally, as far as your fiscal 'nineteen 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 so far, we haven't seen anything significant.
And I don't I just don't think I know what the
year
revenue. Basically that's what we gave at the beginning of the year plus the bump.
Yes, 6%, 7%. All right. Thank you.
Thank you. Our next question comes from Seth Seifman with JPMorgan. Your line is now
I was wondering if you could talk 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 supported the profitability in the quarter?
No. Nothing other than our normal approach to driving productivity on a daily basis, daily, weekly, monthly, it's a constant process. Other than our normal approach, nothing specific that we can call out. So we're always looking to drive productivity and contain costs across our businesses.
Right. And then just to follow-up on
that real quick. 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 yes, there was none of that 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 headcounts, so there's a lot of volume there. The commercial OE side of the house, yes, we have to watch that
closely. Great. Thanks very much. Good quarter.
Thank
you. Our next question comes from Rajeev Lalwani with Morgan Stanley. Your line is now open.
Thanks. Hey, guys. Hey, 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 $16,000,000 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? I think 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'll just repeat, there was there's no allegations of any illegality or wrongdoing or anything like that.
Okay. 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.
Yes. We've not seen any change in approach from OEMs asking for anything different than the approach that we always see. Nothing new.
Thanks. Thank you, guys.
And I'm showing no further questions at this time. I would now like to turn the call back to Liza Sabol 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.