Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 TransDigm Group Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, to Ms. Liza Sabol, Investor Relations. Please proceed, ma'am.

Thank you. I would like to thank all of you that have called in today and welcome you to TransDigm's Fiscal 2011 Third Quarter Earnings Conference Call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Financial Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. A presentation is available at our website, www.transdigm.com, together with our press release, provides the basis for most of our remarks. A replay of today's broadcast will be available for the next 2 weeks. Replay information is contained in this morning's press release and on our website. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, including statements about our guidance 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 Securities and Exchange Commission. These filings are available through the Investors section of our website or through the Securities and Exchange Commission's website at sec.gov. 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. Please see the tables and related footnotes in the earnings release and at the end of the slide presentation for reconciliation of these measures to their most directly comparable GAAP measures. With that, let me now turn the call over to Nick.

Good morning, and thanks for calling in to hear about our company. As usual, I'd like to start with some comments about our consistent strategy, as well as our current sense of the status of the aerospace market as it applies to our company, and I'll also give a short description of our recently announced acquisition of Schneller -- or contract signing for Schneller. To reiterate, we believe our business model is unique in the industry, both in its consistently and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons we believe this, about 90% or more of our sales were generated by proprietary aerospace products, and most of our net sales come from products for which we are the sole source provider. About 55% of our revenues, and a much higher percent of our EBITDA, come from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and have produced relative stability through the cycles. Because of our uniquely high EBITDA margins, typically in the high 40s to 50% of revenue, and relatively low capital expenditures, 2% or less of revenue, TransDigm has year in, year out generated very strong free cash flow. We pay close attention to our capital structure, and we view it as another means to create shareholder value. As you know, we have been in the past and continue to be willing to lever up when we either see good opportunities or view our leverage as suboptimum for equity value creation. We typically begin to de-lever pretty quickly. We have a well-proven value-based operating strategy focused around what we refer to as our 3 value drivers. Those are new business development, continual cost improvement and value-based pricing. We stick to these…

Thanks, Nick. Overall, we had a busy third quarter, with good operational results. In addition to the continued commercial market recovery, we are quite busy with the acquisition transitions and plant consolidations. At our operating units, we also continue to diligently work our value drivers, and we continue to create shareholder value. Let me explain our third quarter acquisition integration and operational activities in a little more detail, as summarized on Slide 7. Acquisition transition works continues to progress favorably. Recall, last quarter I reported we had 4 plant consolidations occurring in various stages. We just completed 2 of these consolidations. In June, we consolidated our production facility located in Mesa, Arizona and the Dukes facility located in Northridge, California. In July, we physically moved the Talley acquisition business that was -- Actuation business, excuse me, that was located in Simi Valley, California to our Aero Fluid's group in Painesville, Ohio. Both of these consolidations will generate real productivity savings under their lower cost structure, once they work through their learning curve period. The remaining 2 consolidations are also progressing well. These consolidations stem from our McKechnie acquisition. The consolidation of our Avtech unit with the Tyee business is on track to finish this fall. To date, the front office operations have been physically moved. The factory safety stock is being built, and the factory building modifications are well underway. Likewise, the consolidation of the Electromech/Welco Kentucky operations with the Matamoros, Mexico Rotronics facility is also progressing well. At present, the Mexico factory modifications are progressing nicely, and we also expect to complete the consolidation this fall. All of these moves will start to show significant productivity results as we move into our fiscal 2012. Now let me turn the discussion to our base operating units and their recent value-generation…

Thanks, Ray. As Nick mentioned, we have been quite active this year with acquisitions, divestitures and financing as evident in our year-to-date reconciliation of EBITDA as defined, which we have discussed on prior calls and as we've presented in Table 2 of this morning's press release. This quarter, we've completed a few more transactions I'd like to point out. As previously mentioned, and as part of the McKechnie acquisition settling out, we've divested the Fastener and Distribution businesses for a combined total of $270 million, which had a positive impact after taxes of approximately $190 million. We also have recorded a year-to-date net gain shown in our income statement as discontinued ops of $16.8 million. In the quarter, we recorded a small loss on discontinued ops of $2.1 million mostly relating to the distribution divestiture. In addition, on June 27, we entered into a 4-year interest rate swap agreement to hedge approximately $350 million of our term loan. This represents a little over 20% of our variable debt. Our current rate structure on our term loan will continue as is for the next 6 quarters. This rate is defined as LIBOR plus 3% with a 1% LIBOR floor, for a total rate of 4% today. Beginning December 31, 2012, we will then lock into a fixed rate of 5.17% for the remaining 10 quarters on this portion of our variable term loan. At that point, assuming no other changes in our debt structure, our debt will be split approximately 60% fixed and 40% variable. Now please turn to Slide 9 for our quarterly financial results. Third quarter net sales were $325 million, up $111 million or 52% from the prior year. This increase includes $83 million related to the acquisitions of Semco in fiscal 2010, and McKechnie and Talley Actuation,…

Thank you, Greg. [Operator Instructions] Operator, we are now ready to open the line.

[Operator Instructions] Your first question is from the line of Myles Walton with Deutsche Bank.

Wondering if you could talk a bit about realtime dynamics. Obviously, it's been a pretty rocky market. And curious if you're hearing, seeing anything, with respect to your customers, that is making you wander away from what would otherwise be pretty good confidence in your underlying business. Whether that's conversations with airlines or general buying trends that you're seeing through your realtime buying.

Miles, I'd have to say no. Something could change tomorrow, of course. But as of right now, if we felt uncomfortable, we wouldn't have put the guidance we put out.

And then on the cash balance, obviously great cash generation, it looks like you got another $100 million in operating cash flow on the fourth quarter. So [ph] even correcting for the transaction, the Schneller transaction, you'd still have $350 million, $370 million, something like that, of cash on balance at the end of the year. Is the pipeline still pretty rich? Is the desire still pretty high to close on more or will there be other deployments for capital as well?

Well, as we always say, our first choice to use our capital is to make accretive acquisitions of companies that meet our criteria. Doesn't say the pipeline is in decent shape. Just about every couple of months here, for all through this year, we've sort of been taking it and watching it, watching the pipeline, watching our cash and trying to make a judgment what's the best thing to do to keep moving the equity value. We just made an acquisition. We think we have a decent pipeline, but we're also building up cash. I mean, we'll keep measuring that. I'm not sure is the real answer. We'll do, again every 30 or 60 days, we'll kind of take a look at what we've got, take a look at what we think might close, take a look at our cash and make another short-term call.

Our next question is from the line of Ron Epstein with Bank of America Merrill Lynch.

Can you speak to it all, the supply chain itself? I mean, your suppliers in terms of -- are you starting to see any lead time stretch out in terms of raw materials? And then maybe the Tier 3 guys and Tier 2s who supply to you. Are there any bits and pieces that are starting to get a little more shorter in supply, given the impending ramp?

Want to answer that, Ray?

Yes. No, we're not seeing any jam up in the supply chain. Generally, the lead times are long enough, and this ramp up has been occurring over a good number of months. It's spread out. We're not experiencing anything that you might be asking there.

And then maybe one just follow-up in terms of the world of M&A right now. Just realizing you made the announcement Friday. When we look out on the landscape of what's potentially available out there, I mean, how does the M&A market look right now?

I would say it is reasonably active. I mean, we're seeing a reasonable amount of things.

Your next question is from the line of Rob Spingarn with Credit Suisse. Robert Spingarn - Crédit Suisse AG: You talked about a little softness on the defense side. Would you attribute that to the op tempo overseas? Is it the CR? Can you sense where that's coming from?

I don't know that I can really can, Rob. As you know, we've been concerned about this all year. The revenue started to drop earlier in the year. But we were cautiously optimistic because the bookings were holding up. That's not been the case now for the last 90 days. I really don't know that I can attribute it to any one thing other than just an attempt to spend less money. I will say, by types of platforms, helicopter things continue to be pretty robust. Other stuff's shaky. Robert Spingarn - Crédit Suisse AG: And then it makes it sound like it's therefore the op tempo is the driver because...

That's my sense. Rob, my sense is this is becoming and I'd love to be wrong, but it's becoming something like as the tide drops down, all the ships drop a little. Robert Spingarn - Crédit Suisse AG: And then going back to Myles' question on the realtime dynamics. Have you seen any pricing behavior change on the part of the customer here? Are you still getting the pricing that you've been getting?

The dynamics haven't changed. Robert Spingarn - Crédit Suisse AG: And then the only other thing I would ask you is on your latest acquisition. At least as a multiple of sales, it looked like you picked a little bit less. I mean, are prices coming in a little?

I don't know that I can say that. I think, I mean, you could pretty well figure out what we paid, right? I gave you the revenue and I gave you an approximate EBITDA margin. I would say it's in the way -- we didn't pay as much as we paid for McKechnie for sure, but it's more in the range we saw -- about for McKechnie.

Your next question is from the line of Ken Herbert with Wedbush.

Just wanted the first -- on the commercial OE side, you looked like you sort of nudged up guidance a little bit there, but you also indicated you're not, specifically on the 87, you're not seeing anything yet. Safe to say that the guidance raise is driven more by sort of legacy 777, 37, other programs and when are you expecting to start to see any material impact from the 87?

Well, I guess when they start shipping them. We're sort of reticent to forecast a lot till Boeing starts shipping some airplanes. There's inventory in the system. I think we'll speak to next year's guidance when we speak to it, but I would expect we will see some in next year's guidance.

And then in terms of the guidance raised. Is there any particular platforms you'd point to? Or I'm assuming it's more on the transport side than, of course, on the regional biz jets side.

Yes. The transport, some at the OEM, but probably more in the aftermarket. There's no specific platform, it's across the board.

To some degree, this is the flip side of the military. The rising tide picks all the ships out.

Gentlemen, your next question is from the line of Joe Nadol with JPMorgan. Joseph Nadol - JP Morgan Chase & Co: Just wondering about the Q4 guidance. Looks like you guys aren't looking for much improvement sequentially. You still have your actions underway with McKechnie integration. It just seems like -- one would normally think with sequential growth and incremental margins and some of the integration further behind you that you might be looking for a stronger fourth quarter. Is that just conservatism?

Well, two things. One, 49.7% is pretty damn high in my book. If you recall, I said we had a favorable accrual adjustment of about $3 million, which is about a full margin point. If I didn't have an accrual adjustment I'd be up a full margin point, Joe. Joseph Nadol - JP Morgan Chase & Co: Just one more on Schneller. This seems to be a slightly different type of a business in terms of the things that they make compare to your existing businesses. Maybe just provide some commentary on how this is -- if you look at it that way or if you think it's sort of right down the fairway for you. Or if this may be is a sign that you're opening the aperture a little bit in terms of the types of the products you consider.

Yes, I would say it's a little different than we bought in the past, if you looked at the products. But the fundamental characteristics that we look for, which is a proprietary aerospace business with significant aftermarket content is right down the bike. We see the same kind of characteristics that we like when we bought it on the same basis, I think as we've told you, we have to see private equity kind of returns on our equity in a business. We see the same opportunities here. It's not a hard component. I mean, in other words, it's not a bump. But we think it has the same characteristics, and I think, by and large, when we see proprietary aerospace businesses with significant aftermarket content, if we can get comfortable with the proprietary content and the security of their platform positions, we're going to be interested in them. Joseph Nadol - JP Morgan Chase & Co: So you consider these products to be as protectable and as proprietary, and the pricing power to be as strong as your existing businesses?

Well, I think, to give you a sense, we told you it's got a mid-30s EBITDA margin, which is pretty good, and we see movement in that. If you pay a decent price for these things, you've got to change the economics to get your return, and we see the same opportunities we see at most of our acquisitions.

Your next question here is from the line of Fred Buonocore with CJS Securities.

So I realize you're kind of moving into the process where you do all your business reviews. And as you're going through that process, I'm just wondering, if in the course of starting your quarterly business reviews and the information that -- or your year-end business reviews and the information that you're gathering in that process, if you -- all things being equal, assuming no major change in the environment, if you'd be able to give us some sort of outlook for 2012. If you had to give it a go this year.

It's premature. We're in the middle of it as you said, and we'll give the guidance out when we're ready to give it out. It'd be premature to do that especially we're in the middle of it.

And then my next question is, Nick, back at the Analyst Day in June, you talked about potentially widening the envelope on your acquisition criteria as you kind of absorbed a lot of the really attractive aftermarket businesses. Just wondering if you're starting to add that into your process, where you're looking at maybe some businesses that maybe are a little bit less aftermarket, a little bit more OEM. Is Schneller kind of falling into that type of category where you're widening...

I would say Schneller is more aftermarket. I think it's been a while since we bought a business that was close to 70% aftermarket. So, I mean, we like that. We also like the fact we got a business that's got almost no defense, which is practically hard to find. Most people have 25%, 30% defense when we look at these [indiscernible] businesses. I don't think we'll run out of the traditional component businesses, but we're bigger. And as I've always said, a proprietary aerospace business with significant aftermarket content meets our return criteria, we're going to be interested in it. We're not hung up on whether it's a fuel system component or hydraulics system. It's got to meet those, it's got to meet our criteria and have the private equity kind of return.

Your next question is from the line of Eric Hugel with Stephens.

Nick, maybe you can just clarify. When you were talking about your commercial aftermarket, in the terms of the shipments, you said your inventory at distributors look to be in line with demand. Are you sort of implying there that your -- because you're talking about seeing restocking going into the future. Are you implying that we're not seeing a restocking or is that in line with running above shipments?

Yes, our distributors have a stocking requirement based on it's different months of inventory, based on -- some of them, it's the rolling 90 days average shipment, some it's 6 months, some it's less. They mostly have rules for what they have to stock, and sometimes they can drift over or under where the stocking requirement are, which means you can get a little spurt or cut back on orders. What I was trying to say is we don't see that. So we don't think there's a significant bubble either direction at distribution. The airlines, on the other hand, do appear to be ordering above their consumption rate.

Just in terms of cash flow. The numbers that you have in the cash flow page, I think on Page 10, that's year-to-date, correct?

Let me take a -- yes, it is.

So how much was the onetime sort of payment this quarter? I think you said there was a large interest payment. Tax payment or something?

No, I don't have the exact number with all the pieces. I don't have the exact number in front of me. We paid about $78 million in interest and about $45 million in taxes in the third quarter.

And just lastly, the $100 million that you're talking about for the fourth quarter. Is that a free cash or is that cash flow from ops number? The $100 million cash that you said you were going to generate in the fourth quarter. Is that a free cash flow number or a cash flow from operations number?

That is the ultimate cash that'll go on our balance sheet. There's different definitions for free cash flow. Given where our balances at the end of the third quarter, I expect us, when we close that, at least $100 million more, minus the acquisition for Schneller.

Your next question is from the line of J.B. Groh with DA Davidson. J. B. Groh - D.A. Davidson & Co.: I just had a couple of quick ones on the sort of this ramp up in OEM. Can you kind of talk about what sort of margin drag that could represent if you get OEM growing at a faster rate organically than aftermarket, given your leverage aftermarket?

I mean, it's sort of math. If one grows substantially faster than the other, you'll get some margin swing. I would tell you, historically, rarely over a year has it been more than a couple of margin points. And you can do the math, it depends how much you believe each one is going to grow, right? We'll go give the guidance when we give guidance, but I'd be surprised if it's a big impact on next year's margin. J. B. Groh - D.A. Davidson & Co.: And then I think I know the answer to this question, but in Schneller, I mean, it sounds like there's virtually no product overlap with what you're doing currently, correct?

No.

[Operator Instructions] And your next question is from the line of Michael Ciarmoli with KeyBanc Capital Markets.

Nick, just a follow-up on Schneller. These products appear, maybe, not to be as flight critical as some of your other products. And looking at it, maybe they're more bound by interior cabin retrofits, where maybe there's a 5- to 7-year cycle there. Does that make it easier for those products to get displaced or is that a sort of new market for you guys to learn?

Well, let me address the flight critical. We make other things in the interiors that aren't flight critical. We make a goodly chunk of the faucets. We make a fair amount of overhead bin latches, I guess cockpit security systems are now flight critical, but they don't make the airplane fly. This business has similar characteristics to the one we have. We think the products are very sticky, and not just to the walls by the way, also to the customers. There is an element of refurbishment in this business that's probably a little bigger than some of our others that gives it maybe a little more exposure to cyclicality. But not, less than you think. At least as big is the repairs and spares that are -- when things get nicked and dented and need a quick fix, that's at least as big in the aftermarket as the refurbishment business.

And then just on the aftermarket for the remainder of the year here. Are you guys thinking that -- based on what you're seeing today, you could see further acceleration into the fourth quarter? You think we're sort of at a peak growth environment and you'll see this sort of growth rate with tougher comps begin to level off?

I think I'd have to stick with our guidance. I think you can figure out from our guidance what we're saying, which is we're sort of about at the growth rate we're running. It'd be great if it picked up more, but I don't think I can give you any better feel than we did with our full year guidance.

Your next question is from the line of Jason Rogers with Great Lakes Review.

I wonder if you could talk about the whole process for getting new products approved through the FAA and if there's been any changes there as far as getting those approved. Just wanted to know about the whole process of getting the products approved through the FAA, if there's been any changes there?

I would say, one, we don't do a whole lot of that. It's a very small part of our business. But I would say, in general, if anything the approval through the FAA is slower and more cumbersome. General rule of thumb is, as with many government processes, each year it's a little slower and more cumbersome than it was the year before.

There are no other questions at this time, so I'd like to turn the call back over to, Ms. Liza Sabol, for closing remarks.

Thank you. I'd like to thank everyone for participating on this morning's call. We expect to file our 10-Q for the third quarter of our fiscal year 2011 no later than tomorrow. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect. Everyone, have a great day.