Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

TransDigm Group Inc (NYSE:TDG)
Q3 2018 Earnings Conference Call
Aug. 7, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 TransDigm Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Ms. Liza Sabol, Director of Investor Relations. You may begin.

Liza Sabol -- Director of Investor Relations

Thank you and welcome to TransDigm's fiscal 2018 third quarter earnings conference call. Presenting on the call this morning are TransDigm's Executive Chairman, Nick Howley; President and Chief Operating Officer, Kevin Stein; and Senior Vice President of Finance, Jim Skulina. A replay of today's broadcast will be available for the next two weeks and replay information is contained in this morning's press release and on our website at transdigm.com. It should also be noted that our Form 10-Q will be filed tomorrow and will also be found on our website. Before we begin, we'd like to remind you that the 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 found through the Investor section of our website or at sec.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 adjusted earnings per share to those measures.

I will now turn the call over to Nick.

Nicholas Howley -- Executive Chairman of the Board

Good morning and thanks to everybody for calling in today. Today, I'll start off with a brief overview of our recent organization announcements, some summary and comments on our consistent strategy, a quick overview summary of the third quarter and fiscal year 2018. Kevin will review the business performance for the quarter and the year, and Jim will then run through the financials. As you may have seen, we recently announced three significant organization changes. Mike Lisman has been elected by the Board to be our new Chief Financial Officer.

Mike brings a very attractive set of skills and experience to the new job. His experience in private equity and investment banking provides a key element to our new management team. Mike has worked with us for about three years in both operations and M&A roles. He knows the company and culture well. Interestingly, Mike has a degree in aerospace engineering, so like Kevin, Bernie, Jorge, and I can help with engineering work in a pinch. That's a joke by the way. Not that he has a degree, but he can help. Mike's a good cultural fit and a great candidate. Kevin and I both believe he's going to do a fine job.

Bernie Iversen will continue to report to me and remains Executive Vice President of Merger and Acquisition. Jim Skulina has agreed to continue as Senior Vice President of Finance and Chief Accounting Officer for a 6 to 12-month period to assist Mike in the transition. Jorge Valladares has been elected by the Board of Directors as the Chief Operating Officer of our Power Systems segment. Jorge comes to TransDigm -- came to TransDigm almost right out of college and has been with the company in a broad range of operating positions for about 20 years. Jorge is a proven executive and an outstanding cultural fit. Kevin will expand on this a little.

Now 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 why we believe that, about 90% of our net sales were generated by proprietary products. 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 sales. Aftermarket revenues have historically produced a higher gross margin and have provided relative stability in the downturns. 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. To do that, we follow a consistent long-term strategy. We own and operate proprietary aerospace businesses with significant aftermarket content.

Second, we have a simple well-proven value-based operating methodology. Third, we maintain a decentralized organization structure and a unique compensation system that very closely aligns our management with the shareholders. Fourth, we acquire businesses that fit our strategy and where we see a clear path, the PE-like returns. And lastly, we view our capital structure and allocation as a key part of our value creation methodology.

As you know, we regularly review our choices for capital allocation. We basically have four and our priorities are typically as follows. One, invest in our existing business. Two, make accretive acquisitions consistent with our strategy and return requirements. These are almost always our first choices. Our third is to give extra money back to the shareholders either through a special dividend or a stock buyback. And our last priority is to pay off the debt. Given the low cost of debt, this is still likely our last choice in the current capital market conditions. Depending on the specific business and capital market, we'll allocate our capital and structure our balance sheet in a manner we think has the best chance to maximize the return to our shareholders.

So far in fiscal year 2018, we have spent about $660 million on acquisitions. In March of fiscal year 2018 we announced two acquisitions, Kirkhill and Extant, for about $575 million that both fit our strategy well. In July we announced the acquisition of Skandia for about $84 million. All these deals meet our PE-like return requirements. We continue active in M&A with a pretty good pipeline, but as usual, I cannot predict or comment on possible closings or any specific business situations. We'll continue to look at our options for capital allocation. The credit market remains strong and reasonably accommodating. Our fiscal year ends on September 30. We'll see where things stand after the start of our new fiscal year and likely make some decisions on capital allocation during the first quarter of our next fiscal year. Our liquidity is strong. We had $1.85 billion of cash at the end of Q3 and absent any additional acquisitions beyond Skandia or other capital market activities, we expect to have about $2 billion in cash at 09/30/18.

We also have roughly $600 million of undrawn revolver and room under our credit agreement. Our Q3 and year-to-date operations; that is revenue, EBITDA as adjusted, and EPS as adjusted; were strong and up nicely over last year. Commercial aftermarket revenues are encouraging. On a year-to-date basis, they're up about 11% versus the prior year. As we told you, the first half seemed to be running a bit hot to us. The rate of growth slowed down a little in Q3, but the underlying drivers still look good. Year-after-year, defense bookings are also up nicely. Based on the year-to-date results, we have adjusted our revenue and EBITDA as Defined guidance midpoint up a bit. This primarily reflects improved operating performance of our businesses.

In summary, fiscal year 2018 looks like a good year. I'm confident though with our consistent value focused strategy and strong mix of businesses, we can continue to create long-term intrinsic value for our shareholders.

And now let me hand this over to Kevin, who will discuss in more color and detail about the quarter and the year-to-date performance as well as expand on the year-to-date guidance. Kevin?

Kevin Stein -- President and Chief Executive Officer

Thanks, Nick, and thanks for joining the call this morning. As you've seen, we had a strong third quarter. Jim will provide more details on the financials, but our third quarter and year-to-date operations in revenue and EBITDA as Defined were up nicely over last year and ran a little ahead of our expectations. Q3 GAAP revenues were up 9% versus prior year Q3 and up 7% versus prior year-to-date. EBITDA as Defined margin ran close to 50% of revenue in both periods.

Now, let's review our revenues by market category. For the remainder of the call, I will provide some commentary on a pro forma basis compared to the prior year period in 2017 that is assuming we own the same mix of businesses in both periods. Please note this analysis excludes the recent acquisitions of Kirkhill and Skandia. In the commercial markets, which makes up close to 70% of our revenue, we will split our discussion into OEM and aftermarket.

In our commercial OEM market, Q3 revenues increased approximately 1% when compared with Q3 of fiscal year 2017. Commercial transport OEM revenues, which make up the majority of our commercial OEM business, were down slightly in Q3 when compared to the prior year period. As was the case last quarter, the vast majority of the softness is attributed to weakness in the wide-body market and the impact these reductions or delays have on the extended supply chain. As was the case in previous quarters, commercial transport OEM sales can fluctuate from time to time, but at its core, our shipset content remains robust so any softness is simply timing related. Business jet and helicopter OEM revenues make up about 15% of our commercial OEM revenues. In total, year-to-date revenues in this market grew in the low-teens percentage range compared to the same period in 2017. Growth was driven by strength in both business jet and helicopter segments with the helicopter market picking up significantly in the quarter. Year-to-date bookings versus shipments were up even more than revenue growth.

Now moving on to our commercial aftermarket business. Total commercial aftermarket revenues grew by an approximate 8% in the quarter. Commercial transport aftermarket, which makes up about 85% of our total commercial aftermarket, revenues in Q3 fiscal year 2018 were up 7% over the prior year period and up 11% year-to-date. For the freight aftermarket, we are running year-to-date ahead of the average with the interiors aftermarket below average, but starting to show signs of recovery. In general, continued global revenue passenger mile growth and a generally positive economic environment seem to provide a backdrop of improved market dynamics. Finally, for the business jet helicopter aftermarket, which accounts for the final 15% of revenue in our total commercial aftermarket, year-to-date sales growth was up in the high-single digit percentage range. This was the second sequential quarter of solid growth in this end market after an extended period of softness.

Business jet takeoff and landing cycles and used business jet inventories continued their modest improvement from previous quarters albeit still well off of their peak performance, but, clearly, key market indicators have improved. As a reminder, the aftermarket in this segment tends to go through the OEM and as such, we do not have the same level of insight into this market segment. So, cautious optimism remains for this market segment. 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 slightly more than 4% over the prior year Q3. Once again, strong defense aftermarket revenue growth was tempered by slower defense OEM shipments, although the OEM was stronger than we have seen in recent quarters. The vast majority of the defense OEM market softness can be tied to declines in A400M build rates.

Total defense bookings continue to provide an encouraging narrative as bookings are up nicely year-to-date over prior year and have similarly outpaced sales year-to-date. This expansion is characterized by modest OEM bookings growth and stronger aftermarket bookings performance. Year-to-date total defense market sales and bookings are well distributed and appear to be coming from most businesses that support defense related platforms. Defense orders can be booked as far out as two years so the timing of the related shipments can be difficult to predict as actual shipment dates can be delayed based upon a number of factors.

Now moving on to profitability. I'm going to talk primarily about our operating performance or EBITDA As Defined. EBITDA As Defined of about $487 million for Q3 was up 9% versus prior Q3 and $1.35 billion or up 8% on a year-to-date basis. The As Defined adjustments in Q3 were primarily non-cash compensation expense and acquisition-related costs and amortization. Q3 2018 EBITDA as Defined margin came in just under 50% of revenues at 49.7%. This includes about 1 margin point of dilution from the recent acquisitions of Kirkhill and Extant. Excluding the acquisitions, margins improved over 0.5 percentage point year-over-year for the same period. Margin improvement progress is always important to us and indicates that our base businesses continue to find opportunities to drive improvement within our value drivers.

Now let me turn to 2018 guidance, which is found on Slide 6 of your presentation. Based on our year-to-date results and expectations for the fourth quarter, we are adjusting our guidance for the year. The midpoint of our fiscal year 2018 revenue guidance is increased by $20 million to $3.8 billion reflecting -- primarily reflecting improvement in our base business. This revenue guidance is based on the following slightly revised market channel growth rate assumptions.

We now expect commercial aftermarket revenue growth of high single-digit percent versus prior year. This is an increase from our assumptions from last quarter. Commercial OEM revenues are now expected to be roughly flat with prior year. This is a modest decrease from our prior guidance. And we are maintaining defense, military revenue growth at up mid single-digit percent versus prior year.

The midpoint of fiscal year 2018 EBITDA As Defined guidance increased by $15 million to $1.87 billion. Again, most of this increase is due to improved operational performance across our businesses. The midpoint of our adjusted EPS is now anticipated to be $17.61 per share, decreased by $0.06 per share from our last guidance. This decrease in guidance is due to improved EBITDA As Defined, offset by higher interest expense. Jim will discuss in more detail shortly.

I would now like to comment on a few items, including Boeing's latest partnering for success agreements, executive leadership changes, and Skandia. First, I am pleased to announce that in July we successfully completed negotiations and have executed commercial agreements that last into the next decade with Boeing. This was part of Boeing's partnering for success initiative. The new agreements continue a long-standing partnership between our companies encompassing aircraft production and aftermarket support. While the specific details of our agreements are confidential, they represent a win-win for both parties -- for both of our companies and reinforce our commitment to operational excellence and focus on maximizing performance and providing innovative engineered products for existing and future Boeing platforms. We do not expect that this will have any material impact on our financial performance as a result of this mutually beneficial agreement. Again due to our confidentiality agreement, this will be our only comment on the subject similar to our last Boeing PFS agreement.

Secondly, as Nick mentioned, we have recently announced a few executive management changes. I will not comment further on our promotion of Mike Lisman to CFO, but to say how excited I am to have him in this new role as it further augments our private equity-like value-driven culture. I would like to expand on the promotion of Jorge Valladares to Chief Operating Officer of our Power Group. All of our Power Group businesses now report to Jorge along with several Executive Vice Presidents. Jorge will continue to report directly to me, as will the remaining businesses in the airframe group and the other EVPs. This will keep me intimately involved in our operations while we continue our deliberate succession plan.

Jorge is steeped in our TransDigm culture and moves into this position after serving four years as an Executive Vice President. Prior to that, Jorge held the position of President at AvtechTyee and AdelWiggins. Jorge initially started with the AdelWiggins Group and held various positions of increasing levels of management responsibility in engineering, manufacturing, and sales.

Now finally in July we closed the acquisition of Skandia, a leading provider of highly engineered seating foam, foam fabrication, flammability testing, and acoustic solutions for the business jet market. Headquartered in Davis Junction, Illinois, Skandia's annual revenues are approximately $26 million and the company currently employs about 70 people. It is too early in our integration process to provide any specific color on this acquisition. However, we do expect this business to create equity value well in line with our long-term private equity type return objectives.

Next quarter we will provide you an update on the integration progress of Kirkhill and Extant and our initial thoughts on Skandia. So, let me conclude by stating all-in-all Q3 of fiscal year 2018 was another solid quarter for TransDigm.

With that, I would now like to turn it over to our Senior Vice President of Finance, Jim Skulina.

Jim Skulina -- Senior Vice President of Finance

Thank you, Kevin. I will now review the third quarter financial results. Third quarter net sales were $981 million, up $83 million or approximately 9% greater than the prior year. Organic sales were up 4.4%. The balance of the sales increase was from our recent acquisitions, primarily Kirkhill and Extant. Our third quarter gross profit was $570 million, an increase of approximately 10%. Our reported gross profit of 58.1% was modestly higher than the prior year margin of 57.9%. This was due to several puts and takes. First, dilutive impact of the acquisition mix and the acquisition-related costs decreased gross profit percent by just under 2 margin points. This was offset by the margin expansion in our existing businesses due to the strength of our proprietary products as well as a favorable product mix. Our selling and administrative expenses were 11.5% of sales for the current quarter compared to 12% in the prior year.

Interest expense increased by approximately $15 million, up 10% versus the prior year quarter. This is a result of an increase in the weighted average total debt of $12.4 billion in the current quarter versus $11.2 billion in the prior year. During the quarter, we were very busy in the capital markets. We successfully raised $1.2 billion of incremental debt, including $500 million of new senior subordinated notes and $700 million in additional tranche E term loans. The proceeds were used to replenish cash used to fund the purchase price of Kirkhill and Extant with the remainder of the net proceeds to be used for general corporate purposes, which include future acquisitions, dividends, or share repurchases. In addition, we repriced $5.1 billion of existing term loans to lower rates from LIBOR plus 2.75% to LIBOR plus 2.5%.

We extended the term of our tranche E term loans and the revolver and we entered into additional hedges to align the new term loans with extended maturities on existing debt to remain at approximately 75% fixed through 2025. We now expect our full-year interest expense to be approximately $670 million. This estimate reflects the impact of all of our third quarter financing activities.

Now, moving on to taxes. The US enacted the Tax Cuts and Job Act in December 2017. That significantly reduced our expected effective tax rate for fiscal 2018. As a result, the effective GAAP tax rate was 18.1% for the current quarter compared to 28% in the prior year quarter. We are now estimating our full-year GAAP tax rate to be approximately 4%, the adjusted tax rate to be approximately 9%, and the cash tax rate to be approximately 15%. The estimated GAAP and cash tax rates were lower this quarter, primarily due to higher excess tax benefits and stock option exercises. In fiscal 2019, we expect our effective tax rate to be between 21% and 23%.

Our net income from continuing operations in the quarter increased $48 million or 28% to $217 million, which is 22% of sales. This compares to net income of $170 million or 19% of net sales in the prior year. The increase in net income primarily reflects the increase in net sales and lower effective tax rate, partially offset by higher interest expense versus the prior period. GAAP EPS from continuing operations was $3.91 per share in the current quarter compared to $3.09 per share last year.

Our adjusted net income for the quarter rose 20.8% to $223.2 million or $4.01 per share from $184.7 million or $3.37 per share in the comparable quarter a year ago. Adjusted earnings per share in the current fiscal year includes $0.42 of favorable impact from the enactment of the tax reform. Excluding this favorable tax impact, current earnings per share of $3.59 increased 6.5% over the prior year. Please refer to Table 3 of this morning's press release, which compares and reconciles GAAP EPS to adjusted EPS.

Switching gears to cash and liquidity. We generated approximately $691 million of cash from operating activities year-to-date and ended the quarter with approximately $1.85 billion of cash on the balance sheet. This quarter-end cash balance does not reflect the payment of approximately $84 million for the acquisition of Skandia, which occurred in July. Our net debt leverage ratio for quarter-end was 6.1 times pro forma EBITDA as Defined and gross leverage was 7.1 times pro forma EBITDA.

With regards to our guidance, we now estimate the midpoint of our GAAP earnings per share to be $15.84 and, as Kevin previously mentioned, we estimate the midpoint of our adjusted earnings per share to be $17.61. The increase at the midpoint of the GAAP EPS is due to the increase in EBITDA as Defined and lower effective tax rate, partially offset by higher interest expense. The increase at the midpoint of the adjusted EPS was due to two factors. The largest was the increase in EBITDA as Defined. This is partially reduced by higher interest expense. Please see Slide 9 for a bridged detail on the $1.77 of adjustments between GAAP to adjusted earnings per share related to our guidance.

I will now hand this back to Liza to kick off the Q&A.

Liza Sabol -- Director of Investor Relations

Thank you. We ask that you limit your questions to two per person and then please reinsert yourself into the queue to allow everyone an opportunity to ask a question. Operator, we are ready to open the line.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Robert Spingarn with Credit Suisse. Your line is open.

Robert Spingarn -- Credit Suisse -- Analyst

Couple of things. First, on the organic sales, I think you said those were 4% plus growth in the quarter. But assuming fair amount of that is pricing, is it fair to conclude that volumes were flattish overall?

Nicholas Howley -- Executive Chairman of the Board

I think so. I think it's fair to assume that the volumes were flattish overall.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then Kevin, following up on that. If volumes are flattish and reconciling to this wide-body pressure that you showed in your results and you've talked about, how is that possible with 87 and 350 ramping? The OE also includes ramping narrow body. I just is struggling to reconcile where the pressure is coming from, is it timing, is it 777?

Kevin Stein -- President and Chief Executive Officer

It's timing, it's 777, it's some other program delays, I think it's across the board. We've gone through and looked at all the places that we've missed versus expectations and everything correlates back to A380 declines and inventory adjustments, 777 declines and adjustments, and on it goes. The encouraging piece for us is that bookings in the commercial transport OEM are starting to improve a little bit. We saw some nice rebound in bookings in Q3 there. So, I think this is just a timing related function that our shipset content hasn't changed on these and it just has to come through the system.

Robert Spingarn -- Credit Suisse -- Analyst

And just to follow up, Kevin. Is another element of this where you get pricing on the aftermarket, you're getting the opposite on the OE so to the extent that we see 10% type increases in narrow bodies and on a couple of those wide-body lines something similar, you're actually going the other way on pricing?

Kevin Stein -- President and Chief Executive Officer

Yes. We don't comment on the individual pieces of price. So, I don't want to get into the -- into slicing and dicing that. But again I think we're looking forward and saying this should be a better story going forward due to the bookings.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. Thank you very much.

Kevin Stein -- President and Chief Executive Officer

Sure.

Operator

Thank you. And our next question comes from Robert Stallard with Vertical Research. Your line is open.

Robert Stallard -- Vertical Research Partners -- Analyst

Good morning.

Nicholas Howley -- Executive Chairman of the Board

Good morning.

Robert Stallard -- Vertical Research Partners -- Analyst

Nick or Kevin, first on the aftermarket, strong result year-to-date, up 11%. How much of that do you think is being influenced by the unusually low rates of old aircraft for timing and the lack of surplus parts that are out there at the moment?

Kevin Stein -- President and Chief Executive Officer

It's hard for me to comment, it would just be speculation; but I'm positive it doesn't hurt our case to have less retirements out there, but I don't know the exact correlation.

Nicholas Howley -- Executive Chairman of the Board

I think I might just add on the surplus stuff, we did a fair amount of work on that whenever it was, Kevin, a year or two ago and talked about it. The amount of surplus sold for our product is very small. So I -- hard to believe that has any significant impact.

Robert Stallard -- Vertical Research Partners -- Analyst

Right. And secondly, on the quarter-end cash balance, unusually high for TransDigm. Does that reflect some opportunistic timing in terms of taking out the debt here or was there something else going on?

Nicholas Howley -- Executive Chairman of the Board

I don't -- I'm not -- Rob, I'm not quite sure I follow your question. We borrowed as you know a little more than we borrowed essentially. We replenished what we spent for the $600 million of acquisition, reloaded that again. We'll do what we normally do. We'll have about -- if we don't buy anything, we'll have a couple of billion dollars at the end of the year. We'll see where things stand. If we don't see a good use for it, we'd probably pay something out in the beginning of next year.

Robert Stallard -- Vertical Research Partners -- Analyst

Okay. So it's just normal practice then, as a way to see that?

Nicholas Howley -- Executive Chairman of the Board

Yes, right. And we'll see what comes along. I mean we're fairly busy, we see opportunity. You know, we will see how things unwind here because I think, you know, we don't sit on money too long.

Robert Stallard -- Vertical Research Partners -- Analyst

Yes, exactly. All right. Thanks so much, Nick.

Operator

Thank you. And our next question comes from Noah Poponak with Goldman Sachs. Your line is open.

Noah Poponak -- Goldman Sachs -- Analyst

Nick, just following up on that. In your prepared remarks, you actually specifically said that you'll make some decisions on capital allocation during the first quarter of next fiscal year. So, should we read that to mean you will make -- you will either be making an acquisition or announcing a special dividend by the end of 1Q19?

Nicholas Howley -- Executive Chairman of the Board

Yes, I wouldn't want to get nailed down that much. I'd say we'd make a decision. The decision could be we'll make a decision next quarter. But as you know, if we don't see something moving along -- I mean that's the best I can tell you. If we don't see something moving along, we don't sit on the money very long. If we have $2 billion and significant capacity and we don't see some decent deals, we'd do something. I hate to back into a corner.

Noah Poponak -- Goldman Sachs -- Analyst

I didn't mean to attempt to back you into a corner, I actually was just a little surprised by the specificity of the comments in your prepared remarks, but...

Nicholas Howley -- Executive Chairman of the Board

Yes. That may be a good point. What I really was trying to say is we probably aren't going to do anything for the next 60 days or so and I maybe oversold the point.

Noah Poponak -- Goldman Sachs -- Analyst

Got it. Glad to clarify that. And then just one other, on the defense business, if I strip out what I believe you do roughly in price in the business, it looks like units have -- were kind of flattish in the quarter and was maybe even flattish for a few quarters in a row. And I was just kind of reading back through your order commentary on the end market and it's now been several quarters in a row where the order commentary has been quite robust; DoD, treasury LAs [ph] were up well into the double digits in the quarter. Maybe you could parse out a little bit more. I mean I know there can be long lead times in the business, you mentioned the A400M, but perhaps you could give us a little more on why it looks like you're trailing the market a little bit there right now?

Kevin Stein -- President and Chief Executive Officer

Yes, I will comment on what I see in our business. The defense aftermarket is strong in sales and in bookings. Defense OEM, a little less so. The defense business bookings and including shipments can be very lumpy, you can be impacted by delays in contracts, in budgets. There's a number of factors that go into this, so it's always difficult to predict when these bookings will come out as sales. Clearly this is a good position to be in that we're building up some backlog, specifically in the aftermarket side, but aimed [ph] in, on the OEM side of defense. This will eventually come out. It just takes time and it's why we don't emphasize the defense side as much because it's difficult to predict when this will all come out as shipments. There are many delays and movements in when things can be shipped even though there are bookings associated with it. So I don't know about trailing market or not, for our shipset business, this continues to look robust and encouraging as we look into the future.

Noah Poponak -- Goldman Sachs -- Analyst

So Kevin, do you feel like you have a reasonably high probability of the rate of organic growth in that segment accelerating for you next year versus this year?

Kevin Stein -- President and Chief Executive Officer

I think, yes. I think we should expect that given -- I mean all of these bookings have to come out sometime. I am as curious about it as you are as to when all this will come out. So we do look at this regularly and it's just difficult to predict, but I would anticipate things will get better here.

Nicholas Howley -- Executive Chairman of the Board

And we'll have a forecast when we go through the next year's guidance.

Kevin Stein -- President and Chief Executive Officer

That's right. Next quarter we'll give you some guidance.

Noah Poponak -- Goldman Sachs -- Analyst

Yes. That's why I passed sort of from a probability perspective. But I appreciate the comments, guys. Thanks so much.

Kevin Stein -- President and Chief Executive Officer

I understand why you asked for sure.

Noah Poponak -- Goldman Sachs -- Analyst

Thank you.

Operator

Our next question comes from Gautam Khanna with Cohen & Company. Your line is open.

Gautam Khanna -- Cowen & Company -- Analyst

I was wondering if maybe you could comment on aftermarket trends more recently because we've heard of some capacity cuts being planned...

Kevin Stein -- President and Chief Executive Officer

You're breaking up, I can't really hear the question. Can you repeat that?

Gautam Khanna -- Cowen & Company -- Analyst

Sure. Can you hear me better now?

Kevin Stein -- President and Chief Executive Officer

You're still fading in and out.

Gautam Khanna -- Cowen & Company -- Analyst

Apologies. Okay. I'll try one last time, hopefully it works. Wondering if you had any comments on trends in aftermarket bookings late in the quarter and early in this quarter, just given some of the capacity cuts announced by US airlines?

Kevin Stein -- President and Chief Executive Officer

I believe you're asking about have we seen a difference in aftermarket bookings or activity because of slowdowns at the end of the quarter, beginning of this quarter. Is that your question?

Gautam Khanna -- Cowen & Company -- Analyst

Yes.

Kevin Stein -- President and Chief Executive Officer

I don't believe we've seen any of that, but I'm not sure. I look at it granularly enough on a week to week basis to have seen that, but there's nothing that's been highlighted that there has been any difference that I have seen in the aftermarket at the end of the quarter.

Gautam Khanna -- Cowen & Company -- Analyst

Thank you.

Kevin Stein -- President and Chief Executive Officer

Sure.

Operator

Our next question comes from Ronald Epstein with Bank of America Merrill Lynch. Your line is open.

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Good morning, good afternoon, guys.

Kevin Stein -- President and Chief Executive Officer

Good morning.

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Kevin, can you talk a little bit about Kirkhill and how that's going? And when you look out in the market for other opportunities, that one seems like it was like pretty low hanging fruit, I mean are there other opportunities? And maybe more specifically, are there other opportunities from that same tree?

Kevin Stein -- President and Chief Executive Officer

Yes, I don't know. I'll let Nick comment on whether there's other opportunities from the tree. I think Kirkhill has been a good acquisition for TransDigm and we believe that we'll deliver the private equity like returns we're looking for. So, we're confident in that. I would tell you that it's still taking some time to understand some of the market segmentation and to determine where some of the opportunities are to improve. I will tell you that so far, so good. I'll give you more of an update next quarter as we have more to update. We've only owned the business for a short period of time, really took control at the beginning of June if I remember right. So, there's a limit on how much we can comment so far. There's still a lot of the integration ongoing. But everything we've seen, this is encouraging and we would certainly entertain other opportunities like that.

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

And maybe as a follow-on question there, some -- a couple of other people tried to ask different ways, but I'll just be more direct. I think investors are trying to get their head around we're seeing the commercial aftermarket business broadly surging for a lot of different companies. Why isn't it surging for you guys?

Kevin Stein -- President and Chief Executive Officer

It's not. So, we're up double digits year-to-date in aftermarket. Hard for me to comment on that, defend that. But our total commercial aerospace aftermarket is up 11% year-to-date. And I think our POS so far year-to-date, we're seeing modest improvements over what we've seen in prior quarters on POS so it's running above the 11% rate that I discussed. I think we're seeing it. I'm not sure that we're not.

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Seth Seifman with JP Morgan. Your line is open.

Seth Seifman -- JP Morgan -- Analyst

Kevin, when you mentioned some of the pressure that you're seeing, you mentioned both wide-body production rate reductions and delays as pressuring OE sales. Do the delays refer solely to the wide-body programs as well or is that a broader phenomenon?

Kevin Stein -- President and Chief Executive Officer

It refers to wide-body. So -- we've seen some selective slowdowns in narrow bodies here and there, but nothing to really comment on. The main driver is wide-body. And it's true for us all -- really all wide-body platforms. Yes.

Seth Seifman -- JP Morgan -- Analyst

Okay. And then maybe just following-up a little bit on Ron's question, it seems like the guidance implies kind of a 6%-ish growth number for aftermarket in the fourth quarter. And so when you look at what makes that up, kind of where is the deceleration coming from in terms of the double-digit growth we saw in the first half to the kind of 6% to 8% for the second half?

Kevin Stein -- President and Chief Executive Officer

I understand the question and where you're coming from on that and maybe we're being too conservative in this, but my goal is to not get out ahead of ourselves. We told everyone last quarter that we thought things were running a little too hot and we were a little bit lower this last quarter. I don't know where it's going to come in. The order book continues to look strong. This is just our forecast from what we see and our desire to be a little conservative in this market segment.

Seth Seifman -- JP Morgan -- Analyst

Great. Thanks very much.

Kevin Stein -- President and Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from David Strauss with Barclays. Your line is open.

David Strauss -- Barclays -- Analyst

Thanks. Just following up there on the aftermarket, obviously the comp was more difficult here year-over-year in the third quarter. Sequentially, Kevin, was the aftermarket up, flat, or down in the quarter?

Kevin Stein -- President and Chief Executive Officer

Was it up, flat, or down; I'm looking at that. Aftermarket was up a little, a little.

David Strauss -- Barclays -- Analyst

Got it. Okay. And then following up on Seth's questions. So on the narrow-body side, are you seeing anything related to kind of the ramp-up issues that both Airbus and Boeing seem to be having on narrow-bodies in general, but also in particular on the new narrow-body side?

Kevin Stein -- President and Chief Executive Officer

Not really. I would say that I'm not hearing any trends or concerns across the company that any kind of engine delays or issues in this extended supply chain are causing us any problems that I can see on narrow bodies. Yeah, so, nothing that we've seen.

David Strauss -- Barclays -- Analyst

Okay. And last one for me. Your margin performance in the quarter was really good. I think you said adjusted EBITDA margins from the base business were up 50 bps. Was that just mix or was there anything kind of exceptional in that number?

Kevin Stein -- President and Chief Executive Officer

I think it's mix and operational performance. It's ongoing what we do day-in and day-out to drive value driver performance in our business, productivity and the like. So, I can't point to any one thing which is good. It goes across all of our businesses in the organization.

David Strauss -- Barclays -- Analyst

Okay. Thanks, guys.

Kevin Stein -- President and Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from Peter Arment with Baird. Your line is open.

Peter Arment -- Baird -- Analyst

Yes, thanks. Good morning, Nick, Kevin. Congratulations, Mike. Kevin, I guess this is just more of a clarification because we've talked a lot about the OEM. So, just circling back to I think Rob's original question. So it sounds like the takeaway is this is all timing related and that ultimately, I know you're not giving 2019 guidance, but you would expect commercial OEM to be up when we're thinking about these rate increases next year?

Kevin Stein -- President and Chief Executive Officer

We'll provide next year's guidance next quarter. I haven't seen it all come in. But yes, this is a wide-body phenomenon. We haven't -- again, we haven't lost any shipset content. This is 100% timing related and we'll give you some more guidance next quarter for the following year, but I see this as a timing related phenomenon.

Peter Arment -- Baird -- Analyst

Okay. And then just as a follow-up. Just -- Nick, just a bigger picture question. I guess defense is now 35% of the mix and I know M&A is very deal specific and has to meet your criteria but is there a natural cap on how big you would let the defense exposure to get, if you saw the right deals?

Nicholas Howley -- Executive Chairman of the Board

Yes. I mean we don't look at deals based on whether defense or commercial, we look at them whether they meet our proprietary aerospace significant aftermarket, our criteria, and whether we get the return. We have obviously seen more attractive defense stuff the last year or so than we did in the past, not surprisingly. I don't know that we have a hard limit. We sure wouldn't want to -- we don't want to turn this into a defense company. So, I mean I think we kind of like the range we're in, whether it's 35% or 37% or 32%, I don't know makes a whole lot of difference.

Peter Arment -- Baird -- Analyst

Okay. Appreciate the color. Thanks, Nick.

Operator

Thank you. Our next question comes from Michael Ciarmoli with SunTrust. Your line is open.

Unidentified Participant -- -- Analyst

(inaudible) for Michael. Just to go on to the A220 with Airbus C series, Airbus commenting that they're asking for 20% price concessions from current suppliers. Any impact for you guys there?

Kevin Stein -- President and Chief Executive Officer

I've read that as well, but I have not heard of any requests or changes for us. The C Series is a great program. We hope that it's a very successful platform, but I have not heard of any concrete requests or changes for us.

Unidentified Participant -- -- Analyst

Okay, thanks. On the aftermarket interior side, you commented that you've seen some color on recovery there, what's driving it? I mean is it interior retrofit activity, any impacts on the Pexco and Schneller product lines for you?

Kevin Stein -- President and Chief Executive Officer

Well, the interiors business is really Schneller and Pexco largely. So as we look at that, we've seen a slowdown in some of the OEM programs on the interior side as they are doing fleet refurbishments, rebranding campaigns, and the like as well as some of those refurbishments. But where we are seeing pickup quite dramatically is the repairs and upkeep of the interiors that were put in over the last couple of years. So our interiors business has -- from the aftermarket side has recovered nicely in the last quarter and having a decent year I think really ahead of our expectations on the interior side on the aftermarket.

Unidentified Participant -- -- Analyst

Got it. Thank you. Actually one more if I may. On the supply chain side, I mean we've heard a number of industry participants commenting that they're seeing some constraints or perhaps bottlenecks. Any impact for you guys perhaps looking at raw materials, maybe even components, any impact, any color there that we can add?

Kevin Stein -- President and Chief Executive Officer

No, I don't have any color that concerns. We monitor our on-time delivery, our days delinquent, how we're doing and servicing our customers across the business. And we're not seeing any dramatic dips across the company in on-time delivery performance, we're not seeing problems sourcing raw materials. But you have to also understand where we are in the supply chain, maybe simpler at the beginning and so maybe not an issue for us. So, I'm not hearing any real complaints on capacity or ability to produce right now at the rates that we have.

Nicholas Howley -- Executive Chairman of the Board

I think it's safe to say, Kevin, we're not having to stretch out our lead times significantly.

Kevin Stein -- President and Chief Executive Officer

We are not.

Nicholas Howley -- Executive Chairman of the Board

Would you see -- would you -- (inaudible).

Kevin Stein -- President and Chief Executive Officer

And you might also see your on-time delivery dip. And you do see that once in a while in a business that has a surge, but everyone recovers quickly. I don't -- I haven't seen any problem here.

Unidentified Participant -- -- Analyst

Thank you for the additional color, guys.

Kevin Stein -- President and Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from Hunter Keay with Wolfe Research. Your line is open.

Hunter Keay -- Wolfe Research -- Analyst

Hi, thank you. Good morning.

Nicholas Howley -- Executive Chairman of the Board

Good morning.

Hunter Keay -- Wolfe Research -- Analyst

Good morning. Nick, what kind of a correlation have you seen between fuel prices and commercial aftermarket spend as in the level of correlation or maybe a lag and how are you planning for higher fuel prices as you think about how your customers budget their own discretionary spend for 2019?

Nicholas Howley -- Executive Chairman of the Board

I don't know how to correlate it and I don't know that we've seen a great correlation. Obviously when your customer is not as profitable, you'd prefer your customer will be more profitable. But I don't know that we've seen any particular correlation and I don't know how we really planned for it. I guess that's probably all I know to say about it.

Kevin Stein -- President and Chief Executive Officer

I mean we'd react to the orders that come in and deal with it. In terms of predicting that, it's difficult. There doesn't seem to be a lot of correlations possible.

Nicholas Howley -- Executive Chairman of the Board

And we haven't seen anything.

Kevin Stein -- President and Chief Executive Officer

Yeah.

Hunter Keay -- Wolfe Research -- Analyst

Right, yes. I guess I was just wondering if you are in regular contact with your customers around their own planning process so you're not sort of caught by surprise because it can be a lumpy business.

Kevin Stein -- President and Chief Executive Officer

We are in constant contact with our customers, but we're not talking about their necessarily planning needs long-term on this and how fuel prices may impact them, but we certainly are talking about what they need, what their issues are, and how we can help them but that hasn't been an overwhelming point of discussion.

Hunter Keay -- Wolfe Research -- Analyst

Okay, thanks. And maybe a little bit more on that. Can you tell us a little bit about discretionary spend to the extent that you can? Maybe how much of your sales come through like multi-quarter -- under the umbrella of dissolving discretionary like multi-quarter improvement projects versus sort of like one-off things that may kind of be lumpy and come in through sort of like master purchase agreements or something that you may have with the customer?

Kevin Stein -- President and Chief Executive Officer

I don't know how to answer that question. We don't look at our data that way so -- and I don't want to speculate or guess on that. So, I don't really have a good answer for you.

Nicholas Howley -- Executive Chairman of the Board

But I think we can say the vast majority of our aftermarket is not lumpy special project business. It's stuff they order due to activity.

Kevin Stein -- President and Chief Executive Officer

And anything -- one business is lumpy one year, but someone else may be lumpy the next. So, it has a tendency to average out, but beyond that, I don't know how to answer that question.

Hunter Keay -- Wolfe Research -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you.

Kevin Stein -- President and Chief Executive Officer

Good morning.

Sheila Kahyaoglu -- Jefferies -- Analyst

Good morning. EBITDA grew 9% in the quarter in line with the topline. How do we think about timing of EBITDA acceleration? And are there any material cost or mixed headwinds or offsets with the curtail we should thinking about?

Kevin Stein -- President and Chief Executive Officer

I don't know of any headwinds or issues that we have to think about right now. So, I continue to see us improving margins as we go forward in line with our guidance that we've provided. We -- the value drivers continue to show the same level of engagement as always on price, productivity, and profitable new business, so I don't see any change.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thanks, Kevin. And then just one more on aftermarket, is it sort of a normalized high-single-digit rate we should be thinking about now that interiors is picking up and freight is probably normalizing off the highs?

Kevin Stein -- President and Chief Executive Officer

Can you repeat that question, Sheila? I missed a couple of words there.

Sheila Kahyaoglu -- Jefferies -- Analyst

Sorry. No, no, it's my fault. On commercial aftermarket, is the high single-digit growth rate what we should be thinking about on a normalized basis now that Interiors is picking up off the bottom and freight is normalizing off of very high levels?

Kevin Stein -- President and Chief Executive Officer

Yes. We'll give -- Sheila, we'll give next year's guidance next year. There's a lot to think about in that as we unpack it and go forward. So, can I get back to you on that and give you some more concrete guidance on that as we go forward. Clearly, this isn't a bad situation as we go forward, but we need to unpack that and give you some exact numbers.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you.

Nicholas Howley -- Executive Chairman of the Board

Yes. Now we've given -- we gave at the Investor Day. We've given some sense of long-term growth kind of numbers that make sense and I don't know of any reason that they don't still make sense.

Kevin Stein -- President and Chief Executive Officer

Yes.

Sheila Kahyaoglu -- Jefferies -- Analyst

Makes sense. Thank you.

Kevin Stein -- President and Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from Drew Lipke with Stephens. Your line is open.

Drew Lipke -- Stephens -- Analyst

Yes, thank you for taking the question. I guess can you remind us how much of your commercial aftermarket sales are engine related? And then just tied to that on the aftermarket settlement that CSM signed last week to allow the use of third-party PMA parts, how do you think this could change the aftermarket competitive landscape just in the engine piece of the aftermarket itself?

Kevin Stein -- President and Chief Executive Officer

Well, we don't slice and dice the aftermarket by engine and non-engine sellers. I would tell you that although the engine side is important for us, it's not a driver for us. So there are opportunities there, but I don't know how to think about it beyond that. And in terms of the settlement, I don't believe there will be any impact to us in our business going forward as that segment isn't a huge segment for us just naturally for our products.

Drew Lipke -- Stephens -- Analyst

Okay. And the better growth in aftermarket that you saw in the second quarter, I think you were up 15%, how much was tied to the distribution agreement that Adams Rite signed with Vencore? How much was kind of a pull forward there?

Kevin Stein -- President and Chief Executive Officer

There was some movement of distributors over the last several quarters for two businesses specifically, but I wouldn't say that that has a material impact on our aftermarket. It's in those numbers, but I don't think it has a material impact.

Drew Lipke -- Stephens -- Analyst

Alright. Thanks, guys.

Operator

Thank you. Our next question comes from Carter Copeland with Melius. Your line is open.

Carter Copeland -- Melius -- Analyst

This is the last good morning you're going to get, alright and you got three minutes left.

Kevin Stein -- President and Chief Executive Officer

Good morning.

Carter Copeland -- Melius -- Analyst

Good morning, gents. Wondered if you could give us just a clarification on one of the earlier answers, Kevin, on the volumes. If you split that out and said, I think you would imply that OEM volumes were down modestly and aftermarket volumes were up modestly if we correct for price, maybe a little bit better than that on the aftermarket depending on military volumes. But just wanted that clarification, if you could.

Kevin Stein -- President and Chief Executive Officer

Yes, I don't disagree with your clarification.

Carter Copeland -- Melius -- Analyst

Okay, good. And then just another one on -- this kind of gets to Hunter's question a little bit. When you look at buying behavior among the customer set globally in the aftermarket, are there any notable differences in behavior as you take a step around the world and look at various regions or are we seeing relatively coordinated activity among the customer set?

Kevin Stein -- President and Chief Executive Officer

I would say that each region has its own idiosyncrasies. So, they have different practices and -- but it's still directionally accurate. The procedures, processes, the way people go to market, their ordering practices; I haven't seen any changes. Yes, there are some subtle differences when you go like I said region to region, but I haven't seen any differences in anyone's approach to the market, their buying practices, their inventory stocking; whether it's airlines or distribution, I really haven't seen any market changes.

Carter Copeland -- Melius -- Analyst

Yes. Just trying to understand you said directionally, so when you look at bookings trends in Asia versus Europe versus US versus LatAm or whatever, take your pick; directionally they're all similar is what you're saying or not?

Kevin Stein -- President and Chief Executive Officer

I won't say they're all directionally similar and dependent on the air fleet that's present in the region, but I think they're all directionally equal. I'm not seeing any -- if your question is are they -- has one region more PMA activity than another and you don't see the same growth, we don't see those kinds of changes region to region. It's amazingly robust around the world and follows pretty similar practices.

Carter Copeland -- Melius -- Analyst

Okay.

Nicholas Howley -- Executive Chairman of the Board

I guess it's safe to say in the last three to six -- you don't see any discontinuity.

Kevin Stein -- President and Chief Executive Officer

I haven't seen anything like that.

Nicholas Howley -- Executive Chairman of the Board

No discontinuity whatever the practice was and [ph] is.

Kevin Stein -- President and Chief Executive Officer

Yes, nothing has really changed. Do I -- am I interested in Asia and inventory practices there and the like, sure but I really haven't seen anything manifest itself differently.

Carter Copeland -- Melius -- Analyst

Okay. Thanks, guys.

Kevin Stein -- President and Chief Executive Officer

Yes, sure.

Operator

Thank you. And I'm showing no further questions at this time, I'd like to turn the call back to Liza Sabol for any closing remarks.

Liza Sabol -- Director of Investor Relations

Thank you again for calling in to listen this morning and please look for our 10-Q, which will be filed tomorrow.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

Duration: 60 minutes

Call participants:

Liza Sabol -- Director of Investor Relations

Nicholas Howley -- Executive Chairman of the Board

Kevin Stein -- President and Chief Executive Officer

Jim Skulina -- Senior Vice President of Finance

Robert Spingarn -- Credit Suisse -- Analyst

Robert Stallard -- Vertical Research Partners -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

Gautam Khanna -- Cowen & Company -- Analyst

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Seth Seifman -- JP Morgan -- Analyst

David Strauss -- Barclays -- Analyst

Peter Arment -- Baird -- Analyst

Unidentified Participant -- -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Drew Lipke -- Stephens -- Analyst

Carter Copeland -- Melius -- Analyst

More TDG analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool has a disclosure policy.