Good day, ladies and gentlemen, and welcome to today's Q3 2013 TransDigm Group Incorporated Earnings Conference Call, hosted by Liza Sabol, Investor Relations. My name is Chris, and I'll be your conference coordinator today. [Operator Instructions] At this time, I would like to turn the call over to Liza Sabol to begin. Please go ahead.

Thank you, Chris. I would like to thank all of you that have called in today and welcome you to TransDigm's Fiscal 2013 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 Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. 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 at www.transdigm.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 Securities and Exchange Commission. These filings are available through the Investors section of our website or 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 table and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA and EBITDA as defined, adjusted net income and adjusted earnings per share for those measures. With that, please let me now turn the call over to Nick.

Good morning and thanks again to everyone for calling in to hear about our company. Today, as usual, I'll start off with some comments about our consistent strategy, then a short discussion of our capital market activities, some information on our recent acquisitions, and then I'll move on to an overview of third quarter fiscal year '13, and an update on our outlook. To reiterate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the cycle. To quickly summarize why we believe this, about 90% of our net sales are generated by proprietary aerospace products, and around 3/4 of our net sales come from products for which we believe we are the sole source provider. Excluding the small non-aviation segment, about 57% of our revenues and a much higher percent of our EBITDA as defined comes from aftermarket sales. Aftermarket sales have historically produced a higher gross margin and provided relative stability in the downturns. Because of our uniquely high underlying EBITDA margins and relatively low capital expenditure requirements, TransDigm has year in and year out generated very strong free cash flow. We have a well-proven, value-based operating strategy, focused around what we refer to as our 3 value drivers, that is new business development, continual cost improvement and value-based pricing. This consistent approach has allowed us to continuously increase the intrinsic value of our business while steadily investing in new businesses and platform positions. We pay close attention to our capital structure and capital allocation and view it as another means to create value. This has been a very active area this year. I'll talk more about this later. We have also been successful in regularly acquiring and integrating businesses.…

Good morning. Thanks, Nick and good morning again. Before we review the financials, we want to remind you again that this was a very active quarter on a number of fronts. Nick mentioned some of these items already, so I want to take a few minutes to review some of the unique items for the quarter and next quarter. We adopted segment reporting, we had an acceleration of option vesting, we raised $1.4 billion of debt to pay a $22 special dividend and we closed on 3 acquisitions, all in June. We will file Form 10-Q tomorrow. This will be the first quarter where we'll report segment information. Usually, there is a material-precipitating event which causes changes in segment reporting. We did not have such an event, but we have grown into a large company and it was time to make a change in our reporting structure. On a perspective basis, starting with this quarter, we will report a power and control segment, an airframe segment and a small non-aviation segment. The power and control segment includes operations that primarily develop, produce and market systems and components that predominantly provide power to or control power of the aircraft, utilizing electronic, fluid power and mechanical motion control technology. The primary customers of this segment are engine and power system and subsystem suppliers, along with the airline's third-party maintenance suppliers, military buying agencies and repair peoples, products are sold in the original equipment and aftermarket market channels. Year-to-date sales for this segment are $616 million, which represents 45% of our total sales. The EBITDA as defined is $328 million or 53% of sales and represents 49% of our total segment EBITDA as defined. The airframe segment includes operations that primarily develop, produce and market systems and components that are used in non-power…

Thank you, Greg. Operator, we are now ready to open the lines for questions.

[Operator Instructions] Our first question today comes from the line of Joe Nadol from JPMorgan. Seth M. Seifman - JP Morgan Chase & Co, Research Division: Actually, it's Seth on for Joe this morning. If I can maybe ask about the aftermarket, in terms of what's changing, you highlighted that there were areas of strength and weakness, but maybe you can talk a little bit about the 2, what we'll see tomorrow when the Q comes out, how the aftermarket fared in each of the 2 aerospace segments? How it fared maybe geographically relative to what you told us last quarter about areas of strength and weakness? Any additional color would be helpful.

We won't see how it fared geographically. We don't -- that's not part of what we disclosed. I don't think the trends changed significantly from last quarter. Where the softness is there's softness in Europe and you're not seeing as much growth as we would've anticipated in China. Now that being said, obviously, it looks like they all may be getting a little better. With respect to the 2 segments, I don't think you'll see anything significantly different in them, and if it is, it's just a quirk in the timing. The airframe segment, just by the nature of the products, has a little less aftermarket. So its margins will always be a little lower. It just has some of the products in there going in an airplane and staying on longer, so you don't have quite as much aftermarket in that segment. Seth M. Seifman - JP Morgan Chase & Co, Research Division: Okay. And if I can follow-up with just one more, you talked about maybe having a little bit more confidence incrementally regarding the outlook for defense. What's giving you that confidence? What's changed relative to the past?

Well, maybe a little more confidence. I think you might be overstated there. I think, I said I feel a little less negative about kind of the degree of the downturn. I mean, very simply, everything I read from other aerospace companies, and I look at our underlying numbers and they're hanging in better than I expected. And that happens 3 or 4 quarters and it starts to influence a little bit your view of it.

Our next question is from the line of Michael Ciarmoli from KeyBanc.

Nick, maybe on the -- can you comment a little bit about the pricing environment in the aftermarket around the OE side? Boeing's Partnering for Success, a lot of the larger Tier 1 suppliers looking to get cost out of the business. Is that having any sort of impact on your ability to kind of get price and execute on the value-creation process?

Well, I would say there's no -- I can't say there's any substantive change in the pricing environment. Surely, that's true in the aftermarket. Many of the large OEMs are around seeking to get their cost down. I don't -- I'm not going to comment on any customer relationship specifically, but I would be surprised if it materially impacts the company at the end of the day, whatever sorts out on those issues.

Okay. And then, just one other follow-up on the aftermarket, you've got this sort of the mix here with OE and aftermarket as a little bit of a reason for the margin pressure. What kind of improvement do you need to see in aftermarket to maybe help offset that OE strength? I mean, is it just getting back to a more normalized sort of...

I would say, as you can see, you can almost look at the differences in growth this year between the 2, the OEM grew faster than the aftermarket, or we have the aftermarket almost flat, the OEM up whatever we said, I'm saying this from memory now, about 10%. That generated about a 1-point margin movement. You can sort of work backwards on that.

Our next question is from the line of John Godyn from Morgan Stanley.

I just wanted to follow-up on the M&A pipeline. Nick, I think you said that you had the ability to do $1 billion in deals. When we look out 12 to 18 months, of course, we don't know what deals are going to pop, like you mentioned, it's difficult to predict but should we be surprised to see $1 billion of deals? If you could just help add some clarity on the pipeline.

Yes. That is purely -- all that is just a math calculation to say how much we could do. That's not speaking at all to what may or may not be available. We wanted to be sure, and want to be sure our shareholders knew, that after we paid this dividend out, that it didn't materially impact our ability to buy. That was the point of that.

Got it. And could you add some color on this sort of pace or nature or activity levels around M&A conversations going on in the background? Of course, it's difficult for us to quantify but any kind of qualitative commentary would be helpful.

Yes. I can't say it has significantly -- if I say the chatter, well, I can't say it's particularly higher or lower than it was over the last 3 or 4 months. Obviously, there's 3 less companies on the list than there were a month ago because we bought them. But other things fill in.

Our next question is from the line of Gautam Khanna from Cowen & Company.

Gautam Khanna here. Nick, can you comment on your comfort going above your 6x -- that number, you throw out sometimes as 6x as your comfort zone on leverage. Given the aftermarket seems to be strengthening, are you comfortable going to 7 or perhaps above that?

Well, I would say that -- we don't have a hard rule here. Our general range is in the 4x to 6x. We've said and continue to say that we're willing to be outside of that range for short periods of time as the circumstances dictate, I could envision a situation that you got -- that you were willing to go below it if there was either something pending or you have some particular concern. And we surely, as you see here, we went up -- where do we jump up here, 6 2 or 6 3?

Yes.

Something like that. But we expect we'll be down in relatively short order into the range we typically run. I don't -- I think we gave you the rough range. When we move outside of it, there's usually some transient reasons that makes sense to do for a short period of time.

Got it. But you're not structurally comfortably running well above 6?

Yes, depending on the facts and circumstances. We haven't changed our fundamental idea of where we target.

Okay. And just to switch subjects so I understand the share count better. Have both of the tranches, the 1 70 originally before dividend adjustments, and the 1 60 is clearly coming to the share count, but is the 1 70, the other stretch target, has that also...

No, that's still open.

How many shares, do you have the numbers for that?

Well, how many shares is the 1 70? About 5 million? No, 500,000 shares would be impacted by the 1 70.

Okay. So conceptually, we could have -- the 56.9 going forward could rise by 500,000?

That would take place -- it could take place in FY '14.

Okay. And just given -- obviously, you guys have done a great job and well-earned, no criticism there. My question is what are you guys going to do to kind of realign kind of longer-term interest with the shareholders? Are you guys going to issue a similar plan, 5-year option vests, what have you? What's going to be new in this year's proxy relative to what we've seen recently?

I don't know if I'm following your question.

Well, just...

Let me see where at least I'm coming from all that. I don't see anything disconnecting. I mean, we are still primarily compensated on our equity. The company will continue to do that. So I guess I'm seeking what is you're after here on this.

Well, I guess, I'm asking, if I recall, you had a 2-year extension to the existing plan, right? So 2015 on the option grants? Is there a new plan in the works that runs out for a longer period of time that we can expect to see?

Okay. I get it. Typically, what we do, and I'll speak now to the senior management and we typically do this also for the operating management, we renew -- we give a new award -- let me put aside, assuming someone isn't promoted into a new job, because then that's handled differently, but in the existing job, what we typically do and at least anticipate continuing to do is every 2 years, a person gets a new 2-year award that they vest in the fourth or fifth year out in front of them. So the idea is they always have 4 or 5 years of performance-based vested options in front of you. If you follow that, we used to, some number of years ago, let them -- up until about 3 or 4 years ago probably, we gave out 5 years at a time, then we let them run down to almost zero then reload everybody. We decided to smooth that a little more. I think you get to the same place, but we didn't want this cliff thing going on.

Our next question is from the line of Amit Mehrotra from Deutsche Bank.

It's Amit here for Myles. Nick, just another question on the commercial aftermarket inflection point comment on the press release, maybe you can provide the book-to-bill for commercial aftermarket in the quarter and also how defense order trends are maybe looking into the end of the fiscal year?

Yes. I would say the book-to-bill in the commercial aftermarket was a little better in the quarter. It's up about, what did I say, 4% for the year. And it's up a little less than that for the quarter. So I wouldn't -- I'd draw more conclusion from the full year book-to-bill. The book-to-bill for the year is running in defense ahead, I want to say -- did we publish that number, how much ahead?

It's running -- I don't remember the exact number. That's just a quarter of it.

If I can find it here before we get done, I'll tell you.

It's running about -- it looks like it's running -- that's against bookings?

It's running ahead, it looks like almost 10%. So actually, in this last quarter, it was below. So I wouldn't take any -- I wouldn't draw much from that just because it's running strongly ahead for the year.

Okay. Just one question follow-up on the M&A. Just one question on the pricing environment. Obviously, general economic conditions are getting better, I'd just be curious if deals are getting tougher to do because of price expectations?

I can't say I've seen that, I can't say that it's changed materially.

Okay. One last question, just a follow-up on Gautam's question on the share count. If the stock stays where it currently is, stock price stays where it currently is through September, is there any dilution that we should expect beyond what was reported in the third quarter? I was under the impression that may be another slug of accelerated vesting but...

Not in the fourth quarter. If that other suit takes place -- it will come probably more ratably in FY '14. We don't anticipate any in the first quarter either. This is Nick Howley. Let me back up a minute. I had the wrong number. The bookings to shipments for defense for the year is 7%, about, not 10%. It's always a danger just pulling the number quickly off the chart.

Our next question is from the line of J.B. Groh from DA Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: On aftermarket, is there any product line differentiation or is there -- are the pockets of strength associated with any, say engine or anything like that or is there any discernible patterns there give you some clarity?

I mean, I would say subject -- and this is subjective, I don't have a good number for you though. So Ray and I have been doing next year's business plan review, so we've been sort of getting a pretty good subjective feel here. I would say the discretionary type product lines or the guys running them are still not feeling so good. Ones that are less discretionary, are feeling a little more upbeat. J. B. Groh - D.A. Davidson & Co., Research Division: So that would be maybe interior product not as strong as something in engine would be an example.

Yes, that would be an example. Now it depends on the interior product, but that would be -- an example might be faucets, interior faucets. If the faucet gets ugly and just drips a little bit, you can not replace it. Or fin latches, you can let them get sloppy. J. B. Groh - D.A. Davidson & Co., Research Division: Got you. Okay. And then, in defense, same sort of thing, is it aftermarket or OE that's really driving the unexpected strength there?

I would -- I don't know that I can draw a clear distinction there, probably both a little better than we thought. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. And then, a quick one for Greg. What should the run rate on SG&A be inflated this quarter for the reasons you mentioned?

The full year, it will be a 13%, and that will have some of these unusual charges I just talked about. J. B. Groh - D.A. Davidson & Co., Research Division: So on a GAAP basis, 13% for the full year?

13% on a GAAP basis with both charges.

Our next question is from the line of Karl Oehlschlaeger from RBC Capital Markets.

Nick, you talked about capital deployment to the shareholders and cash versus buybacks. Can you maybe talk about how you evaluate between the 2? And maybe related to that, is it fair to think about special dividends making up maybe a similar percentage of cash deployment going forward as it has over the last couple of years?

Well, let me ask to go forward first. I just can't make any prediction there. That's just a function of how much cash we think is available based on how much we're generating and what we see and what our needs are. I mean, to some degree, that's what we handle in the special dividends. But we do generate a lot of cash and to the extent that we have extra cash, we'll continue to do things with it or we'll continue to give back to the shareholders. I would say, as far as the special dividend versus buyback, if -- I would say we will look at that on a case-by-case basis. As a general rule, and again, many times, the specifics of the situation overrule it, but as a general rule, a significant payout like we just did, 10%, 15%, 20% of the value that would make you buy back in 10%, 20% of the shares probably would concern us about the -- that we could get that done quickly and we wouldn't have a lot of execution risk on the price. As the number drop down lower, we're probably more inclined to do a buyback. We view them as the same thing, just going one way or the other.

Okay. And then maybe can you talk about the...

Also, by the way, I would add, there was -- at least now and there could be in the future, there were some tax advantage due to the return of capital calculation of the dividend.

Right. Now on the -- defense has been stronger than expected I guess and maybe this is difficult to kind of get a sense of given where that market has been going. But if you think about defense aftermarket, like over the next 12 months with this sequester and maybe OCO spending coming down, like how are you seeing that or do you have any good sense?

Well, I think, we'll wait and forecast '14 when we give the guidance out for '14.

Our next question is -- I do apologize, we have no further questions in the queue at this time. I would like to turn the call back to Liza Sabol for closing remarks.

Thank you again, Chris. Thank you, everyone, for calling in and for participating in this morning's call and I'd like to remind you to look for our 10-Q that will be filed tomorrow.

Thank you. Okay, ladies and gentlemen, that does now conclude your conference call for today. You may now disconnect your lines. Have a great day. Thank you very much for joining.