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Text: Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.
The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures.
As usual, I'll provide a quick overview of our strategy, then a few comments about the organizational change we announced.
And Kevin and Mike will give color on the quarter and the performance.
To reiterate, we are unique in the industry in both the consistency of our strategy in good and bad times as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.
To summarize some of the reasons we believe this are about 90% of our net sales are generated by proprietary products and over three-quarters of our net sales come from products for which we believe we are the sole-source provider.
Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period of time have typically provided relative stability in the downturns.
We follow a consistent long-term strategy.
Specifically, we own and operate proprietary aerospace businesses with significant aftermarket content.
Second, we utilize a simple, well-proven, value-based operating methodology.
Third, we have a decentralized organization structure and a unique compensation system closely aligned with shareholders.
Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns.
And fifth, our capital structure and capital allocation are a key part of our value-creation methodology.
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.
As you saw from our earning release, we had a good quarter, especially considering the market environment.
We are still seeing some recovery in the commercial aerospace markets.
We continue to generate significant cash.
We have a little over $4.5 billion as of this quarter -- as of the end of this quarter.
Absent any capital market activity or other disruptions, we should have about $4.8 billion cash by the end of September fiscal year.
And we expect to steadily generate significant additional cash through fiscal year 2022.
We continue to look at possible M&A opportunities and are always attentive to our capital allocation.
Both the M&A and the capital markets are always difficult to predict, but especially so in these times.
On the divestiture front, during Q3, we completed the sale of three less proprietary businesses for about $240 million.
At this time, we have decided not to sell the one remaining primarily defense business that we were previously considering for sale.
For now, our Esterline-related divestitures are about done.
At this time, I don't anticipate that we will make any significant dividend or share buyback for the next two quarters.
We'll keep watching and see if our views change.
We believe we are pretty well positioned.
As usual, we'll closely watch the aerospace and the capital markets develop and react accordingly.
I'd like to address the executive chairman to chairman change that we announced today.
Just to be very clear, there is no change in the duration of my commitment to TransDigm.
My contract had a term that ran through 2024 and this modification anticipates a term through 2024 and likely beyond, if the board and shareholders believe I continue to add value.
Going forward, as chairman of the board and chairman of the executive committee, I will be particularly focused on mergers and acquisition, capital allocation and major strategic issues.
I will, of course, work with Kevin to keep the underlying value of TransDigm moving forward.
Both Kevin and I believe that now is a good time to move into the next phase in the transition.
The board and I believe that Kevin has done a fine job over the last three years as CEO and come up to speed very well.
The last three years have been eventful.
For the first roughly 18 months, Kevin and his team successfully integrated Esterline Technologies, by far, the largest and most complicated acquisition in our history.
For the second roughly 18 months, Kevin and his team dealt with the unprecedented COVID-19-generated downturn in our largest market, the commercial aerospace market.
They responded quickly and effectively.
Additionally, they kept our base business running as smoothly as possible during this tough period and began to integrate another decent-sized acquisition.
No easy task given this level of market disruption.
All in all, a real baptism of fire.
Though there is more value to create, the heavy lifting in the Esterline integration and related portfolio adjustments are about complete.
We believe that we are now starting to see some light at the end of the tunnel on the COVID-related market dislocation.
So the time seems appropriate.
The company also saves a little money by this.
As a personal asset test -- acid test, I remain a sizable investor in TransDigm and feel very confident that Kevin will continue to create substantial value for us all.
Now let me hand you over to Kevin.
He has made the succession planning process a rewarding experience for both of us.
I look forward to continuing our work together with this fantastic team as we embrace our modified rules.
Now to the business of today is I will first provide my regular review of results by key market and profitability of the business for the quarter.
I'll also comment on recent acquisition and divestiture activity and outlook for the remainder of fiscal 2021.
Our current Q3 results have returned to positive growth as we are now lapping the first quarter of fiscal 2020 fully impacted by the pandemic.
However, our results continue to be unfavorably impacted in comparison to pre-pandemic levels due to the reduced demand for air travel.
On a positive note, the commercial aerospace industry has increasingly shown signs of recovery with vaccination rates expanding and increased air traffic, especially in certain domestic markets.
In our business, we saw another quarter of sequential improvement in commercial aftermarket revenues with total commercial aftermarket revenues up 6% over Q2.
Additionally, I am very pleased that we continue to sequentially expand our EBITDA as defined margin.
Contributing to this increase is the continued recovery in our commercial aftermarket revenues as well as the careful management of our cost structure and focus on our operating strategy in this challenging commercial environment.
Now, we will review our revenues by market category.
For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior-year period in 2020.
That is assuming we own the same mix of businesses in both periods.
This market discussion includes the acquisition of Cobham Aero Connectivity.
We began to include Cobham in this market analysis discussion in the second quarter of fiscal 2021.
This market discussion also removes the impact of any divestitures completed by the end of Q3.
In the commercial market, which typically makes up 65% of our revenue, we will split our discussion into OEM and aftermarket.
Our total commercial OEM revenue increased approximately 1% in Q3 compared with Q3 of the prior year.
Bookings in the quarter were very strong and solidly outpaced sales.
Sequentially, both Q3 revenue and bookings improved approximately 10% compared to Q2.
Although we expect demand for our commercial OEM products to continue to be reduced in the short term, we are encouraged by build rates gradually progressing at the commercial OEMs. Recent commentary from Airbus and Boeing also included anticipated rate ramps for their narrow-body platforms in the near future.
Hopefully, this will play out as forecasted.
Now, moving on to our commercial aftermarket business discussion.
Total commercial aftermarket revenues increased by approximately 33% in Q3 when compared to prior-year Q3.
Growth in commercial aftermarket revenues was primarily driven by increased demand in our passenger submarket, although all of our commercial aftermarket submarkets were up significantly compared to prior-year Q3.
Sequentially, total commercial aftermarket revenues grew approximately 6% in Q3.
Commercial aftermarket bookings are up significantly this quarter compared to the same prior-year period and Q3 bookings continued to outpace sales.
To touch on a few key points of consideration.
Global revenue passenger miles are still low but modestly improving each month.
Though the time line and pace of recovery -- of the recovery remains uncertain with expanded vaccine distribution and lifting of travel restrictions, passenger demand across the globe will increase as there is global pent-up demand for travel.
The Delta variant of COVID and other future evolutions may further complicate this picture.
We see evidence of this demand through the recovery in domestic travel.
Domestic air traffic increased each month during our fiscal Q3 and into July.
Airlines also continued to see strength in bookings and strong demand for domestic travel, especially in the U.S. And Europe is also starting to pick up.
China has now become a watch point, however.
The pace of the international air traffic recovery has been slow and international revenue passenger miles have only slightly recovered.
There is potential for international travel opening more as vaccinations increase and governments across the world start to revise travel restrictions.
Cargo demand has recovered quicker than commercial travel due to the loss of passenger belly cargo and the pickup in e-commerce.
Global cargo volumes are now surpassing pre-COVID levels.
Business jet utilization data has shown that activity in certain regions has rebounded to pre-pandemic or even better levels.
This rebound is primarily due to personal and leisure travel as opposed to business travel.
Time will tell if business travel -- or business jet utilization continues to expand but current trends are encouraging.
Now, let me speak about our defense market, which traditionally is at or below 35% of our total revenue.
The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 12% in Q3 when compared with the prior-year period.
Our defense order book remains strong and we continue to expect our defense business to expand throughout the remainder of the year.
No particular program was driving this uptick as the growth was well distributed across the business.
I'm going to talk primarily about our operating performance or EBITDA as defined.
EBITDA as defined of about $559 million for Q3 was up 32% versus prior Q3.
EBITDA as defined margin in the quarter was approximately 45.9%.
We were able to sequentially improve our EBITDA as defined margin versus Q2.
Next, I will provide a quick update on our recent acquisition and divestitures.
The Cobham acquisition integration is progressing well.
We have now owned Cobham a little over seven months and are pleased with the acquisition thus far.
On the divestiture front, we closed the sales of Technical Airborne Components, ScioTeq and TREALITY during Q3.
The divestiture of these three less proprietary and mostly defense businesses was previously discussed on our Q2 earnings call.
As a reminder, for the divestitures, the financial results of these businesses will remain in continuing operations for all periods they were under TransDigm ownership.
Now moving to our outlook for 2021.
We are still not in a position to issue formal guidance for the remainder of fiscal 2021.
We will look to reinstitute guidance when we have a clearer picture of the future.
We, like most aero suppliers, are hopeful that we will realize a more meaningful return of activity in the second half of the calendar year.
We continue to be encouraged by the recovery we have seen in our commercial OEM and aftermarket bookings throughout the fiscal year, along with the continued improvement we have seen in our commercial aftermarket revenues.
As for the defense market and consistent with our commentary on the Q2 earnings call, we expect defense revenue growth in the mid-single-digit percent range for fiscal 2021 versus prior year.
Additionally, given the continued uncertainty in the commercial market channels and consistent with our past commentary, we are not providing an expected dollar range for fiscal 2021 EBITDA as defined.
We assume another steady increase in commercial aftermarket revenue in this last quarter of our fiscal year and expect full-year fiscal 2021 EBITDA margin roughly in the area of 44%, which could be higher or lower based on the rate of commercial aftermarket recovery.
This includes a dilutive effect to our EBITDA margin from Cobham Aero Connectivity.
Mike will provide details on other fiscal '21 financial assumptions and updates.
Let me conclude by stating that I'm pleased with the company's performance in this challenging time for the commercial aerospace industry and with our commitment to driving value for our stakeholders.
The commercial aerospace market recovery continues to progress and current trends are encouraging.
There is still uncertainty about the pace of recovery, but the team remains focused on controlling what we can control.
We continue to closely monitor the ongoing developments in the commercial aerospace industry and are ready to meet the demand as it returns.
We look forward to this final quarter of our fiscal 2021 and expect that our consistent strategy will continue to provide the value you have come to expect from us.
I'm going to quickly hit on a few additional financial matters.
Regarding organic growth, we're now done lapping the pre-COVID quarterly comps and have therefore returned to positive growth territory.
Organic growth was positive 15% on the quarter.
On taxes, our expectations for the full year have changed.
We now anticipate a lower GAAP and cash tax rate in the range of 0% to 3%, revised downward from a previous range of 18% to 22% and an adjusted tax rate in the range of 18% to 20%.
The reductions in the GAAP and cash rates for the current fiscal year are onetime in nature and were driven by the release of a valuation allowance pertaining to our net interest deduction limitation and some discrete benefits from exercises of employee stock options.
Regarding tax rates out beyond FY '21, we're still monitoring potential changes in the U.S. tax code under the new administration.
And we'll provide some guidance on our future rate expectations once any legislation is finalized.
On interest expense, we still expect the full-year charge to be $1.06 billion.
Moving over to cash and liquidity.
We had another quarter of positive free cash flow.
Free cash flow, which we traditionally define at TransDigm as EBITDA as defined less cash interest payments, capex and cash taxes, was roughly $305 million.
For the full fiscal year, we expect to continue running free cash flow-positive.
And in line with our prior guidance on free cash flow, we still expect this metric to be in the $800 million to $900 million area for our fiscal '21 and likely at the high end of this range.
We ended the third quarter with $4.5 billion of cash, up from $4.1 billion at last quarter end.
And finally, our Q3 net debt to LTM EBITDA ratio was 7.6 times, down from 8.2 times at last quarter end.
In coming quarters, this ratio should at worst remain relatively stable but more likely continue to show gradual improvement as our commercial end markets rebound.
The pace of this improvement remains highly uncertain and will depend heavily on the shape of the commercial end-market recovery.
From an overall cash liquidity and balance sheet standpoint, we think we remain in good position and well prepared to withstand the currently depressed commercial environment for quite some time.

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fiscal 2021 financial guidance remains suspended at this time.

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