TransDigm Group Incorporated
Q3 2020 Earnings Call Transcript

Published: 4 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 TransDigm Group Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded.

[Liza Sabol:]

Thank you, and welcome to TransDigm’s fiscal 2020 third quarter earnings conference call. Presenting this morning are TransDigm’s Executive Chairman, Nick Howley, President and Chief Executive Officer, Kevin Stein; and Chief Financial Officer, Mike Lisman. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information. Before we begin, we’d like to remind you that statements made during this call, which are not historical in fact are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company’s latest filings with the SEC, available through the investors section of our website at sec.gov. We would also like to advise you that during the course of our 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 applicable reconciliations. I'll now turn the call over to Nick.

[Nick Howley:]

Good morning, and thanks for calling in. As usual, I'll start with a quick overview of our strategy, a summary of a few significant items in the quarter, and then Kevin and Mike will expand and give more color. To reiterate, we're unique in the industry in both the consistency of our strategy in good and bad times, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. Our long-standing goal is to give our shareholders private equity like returns with the liquidity of a public market. To do this, we must stay very focused on both the details of value creation as well as careful allocation of our capital. To summarize, here are some of the reasons we believe this. About 90% of our net sales are generated by proprietary products and over three-quarters of our net sales come from products, for which we believe we are the sole source products. Most of our EBITDA comes from aftermarket revenues, which typically have significantly higher margin, and over any extended period of time, provide relative stability in the downturns. The commercial aftermarket revenue, the revenue the largest and most profitable portion of our aftermarket, dropped sharply, as we expected due to the steep decline in air travel.

[Kevin Stein:]

Thanks, Nick. Today, I will first provide my regular review of results by key market and profitability of the business for the quarter and then cover outlook and some COVID-19 related topics. Q3 was a challenging quarter against the backdrop of unprecedented slowdown across the commercial aerospace industry and a difficult global economy. In Q3, we saw a significant unfavorable impact on our business from the pandemic as demand for travel declined at a rapid pace and has remained depressed. Despite these headwinds, I am pleased that we were able to achieve an EBITDA as defined margin of 41.5%. Achieving this EBITDA as defined margin was primarily a result of our swift preemptive cost reduction actions and continued focus on our operating strategy. Due to COVID-19, our Q3 GAAP revenues were down approximately 33% versus prior year Q3, and EBITDA as defined, was down 36% versus the prior year. Mike will provide more details on the financials later in the call.

[Mike Lisman:]

Thanks, Kevin, and good morning, everyone. I'm not going to elaborate on the operating results for the quarter in too much more detail, as you can see that information in the press release and the presentation deck for today. Organic growth for the quarter was negative 33%, driven primarily by the commercial end market declines that Kevin referenced. Two quick updates on interest expense and then one more on taxes. Interest expense expectations are unchanged from last quarter and should be approximately $1.03 billion for the fiscal year. On taxes, our fiscal 2020 GAAP cash and adjusted rates will be 4 to 8 percentage points lower than our initial guide for the year due to benefits included in the CARES Act. This quarter, there was a bit of noise with the GAAP tax rate due to our low EBT that resulted in a rate spike to 114%. But as you'll see in the call slides for today, despite the high quarterly rate, our full year expected FY 2020 GAAP rate will still be in the 17% to 19% zipcode. Moving over to the balance sheet and liquidity, as of third quarter end, our net debt-to-EBITDA ratio stood at 6.3 times. Assuming air travel remains depressed, this ratio will continue ticking up in coming quarters, as stronger quarters from last year roll out of the LTM EBITDA computation. On liquidity, cash generation for the quarter was stronger than we expected. This was driven primarily by net working capital inflows as a result of a collection on accounts receivable, mainly from our commercial customers who are now operating at reduced activity levels. While there is substantial uncertainty in our commercial end markets right now, we expect to continue running free cash flow positive going forward for the balance of the year. From an overall cash liquidity and balance sheet standpoint, we think we remain in a good position here and well prepared to withstand the currently depressed commercial environment for quite some time. Our cash balance is now just under $4.6 billion, and additionally, we have access to over $500 million of our revolver should we need it. And as a reminder, on our capital structure, we don't face any sizable debt maturities until July of 2024, so almost four years from now. With that, I'll turn it back to the operator to kick off the Q&A.

[Operator:]

Thank you. Our first question comes from Robert Spingarn with Credit Suisse. Your line is now open.

[Robert Spingarn:]

Hi, good morning.

[Kevin Stein:]

Good morning.

[Robert Spingarn:]

Kevin, just diving right in, I just wanted to reconcile the aftermarket bookings down 70%, but sales down 52% or, I guess, 57%, if we just think about large jet. What is the lag here? And should we - well, you said, you'd outperform that 70% number? Is there a downside from here? And then as a follow-up to that, how do we think about what the level of pricing you're still able to capture?

[Kevin Stein:]

So your first question is on CAM forecasts, I think and on pricing. I think pricing, I'll hit first. In previous downturns, we have not seen a limit or a restriction on our ability to drive value pricing as needed. Clearly, our costs are going up quite significantly in this. So yes, we're not anticipating any issues on price, and we haven't seen them before. On CAM - our forecast is a little bit uncertain. As you know, a chunk of our commercial aftermarket is book and ship within the quarter, and there's some amount of unknown in how this will unfold. I will tell you that our backlog remains reasonably strong. It's reasonably flat year-over-year or close to flat. So we're not seeing a massive drawdown in our backlog. We are seeing not a lot of cancellations either, which may be a question people have. We're seeing reschedules and pushouts. This leads us to be confident that Q3 will be the bottom and Q4 will be better. The exact market split of how that plays out is little uncertain as there are -- as there is uncertainty as we look forward. But we are anticipating things will get modestly better. But consistency here will not happen until there is consistency in the end market and consistent flights in the world. So we follow that closely.

[Robert Spingarn:]

And just as a follow-up, how are you thinking about what's in the channel, in the distribution channel relative to what you're producing?

[Kevin Stein:]

Well, our distribution channel, which is about 20% of our aftermarket, we do have some visibility to some of them on inventory levels, but that is minor by comparison to the rest of the industry. So no, I don't have visibility on what airlines or on the OEM side, what OEM partners are stocking currently. I tend to be surprised at times that the amount of inventory that's in the channel, but I have no indication of that right now. So we don't know what the inventory is like. We are seeing demand. We're seeing some urgent expedite demand in the aftermarket. So that would tell me that this is going to be fits and starts of recovery as we move forward.

[Robert Spingarn:]

Thanks very much, Kevin.

[Operator:]

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

[Carter Copeland:]

Hey. Good morning, team.

[Kevin Stein:]

Good morning.

[Mike Lisman:]

Good morning, Carter.

[Carter Copeland:]

Just a couple of quick ones. One, just to expand on that inventory comment, Kevin, not so much the channel, but your own inventories, do you anticipate that we're kind of peak here? When do those -- when do you expect that those kind of peak and work themselves down? And then, a second question on, your new opportunities. I know you guys have, in previous downturns, found ways to find niches that get exposed, by an external need that's revealed. And I don't know, if this one is too temporary in nature, but is there anything on that front that you could see developing that might be worth going after profitably? Thanks.

[Kevin Stein:]

So inventory levels and new business opportunity. On inventory levels, we've seen our inventory levels increase more than we would have liked. This is not due to producing finished goods. And sticking them on shelves and continuing to run. These were scheduled raw material receipts largely. So we have work to do there. I think Mike would admit that as well, that our performance on AP and AR has been decent, but inventory, not to the extent it needs to be. So we have some work to do there, as we go forward. We do have that, I think, fully outlined to the team. We've talked about it with every business, as we've gone forward. On new business opportunities, I'll bring you back to 9/11, post-9/11 and opportunities that occurred there with cockpit door modules, and the locking mechanism, and depressurization for the cockpit door. That was developed by us, driven around the world. That has -- was a fantastic product that came out of that dislocation. We're looking for similar opportunities now. And that's why we've put a seasoned veteran of that business and that development of the cockpit door module, with Joel Reiss and to help drive new business opportunities that may be coming about, because of this pandemic. We've had interest from airlines and OEMs. And we'll see how this plays out. There's obviously a lot of interest. And we understand our role in helping to bring people back to flying, with the confidence necessary for the market to continue to grow. So we recognize our position in that and are very active in this. We'll see if anything comes, because of our efforts. But we are busy. Like I said in my comments, antimicrobial, antiviral, touch less technologies, there's so much that we have to offer. It's very exciting…

[Carter Copeland:]

Kevin just very quick…

[Kevin Stein:]

I'd add just one thing -- I'd just add one thing. In the free cash flow, that Mike talks about going forward that's a free cash flow, assuming you don't get any working capital reduction, just to be conservative, so.

[Carter Copeland:]

Okay.

[Kevin Stein:]

That also we can deal with it, yes, its important point.

[Mike Lisman:]

When I mentioned inventory issues, that's from my -- with my operating cash, not from a cash flow.

[Carter Copeland:]

Okay. And just as a follow-up, Kevin, to that, the comment on the new business. Is the primary hurdle here certification? And making whatever it is that you're going to produce, I guess, insulated in some way, like many of the other products you provide?

[Kevin Stein:]

I don't know how to answer that. I think certification will of course be an issue and I think that gets put on to a thing needs to be certified. It will really be around desire and seeing how the market unfolds? And what the demand is. Certainly, touchless technology, I think, would be useful, always. I don't -- I think there will need to be a different way of thinking around flying, well, I suppose, in a lot of aspects of society. So, this is just one aspect of trying to put products in place that would make people feel more comfortable about flying, being stuck on a plane for 10 hours or more. And what does that look like and what can we offer to help achieve that.

[Carter Copeland:]

Okay. Thanks, guys.

[Operator:]

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

[David Strauss:]

Thanks. Good morning, everyone.

[Kevin Stein:]

Morning.

[David Strauss:]

In thinking about the aftermarket from here, and Kevin, given your commentary around limited exposure to USM, would you expect overall the -- your aftermarket to track just overall departure levels or flight hours? Do you think there still is the potential to see a wide level of variation between your aftermarket and the underlying just level of flight activity?

[Kevin Stein:]

I think Nick said in the prepared comments that he would anticipate that it would be lumpy and there could be some dislocation to people flying more and how the market recovers. There's always a bit of a lag. That's natural. As the whipsaw flows through the supply chain, we have -- we're not seeing that yet. We'll be prepared for it when it happens. But I mean those are our thoughts right now. We - again, I want to stress; we react quickly to the market. We react quickly to what we see happening and coming at us. We adjust costs. We look at driving everything to variable cost, eliminating the thought of these are fixed costs and how do we -- how quickly how can we respond. Our forecasts are fluid often, as you know. What we can promise is quick execution, and that's what we delivered this last quarter and that's what we'll continue to deliver as the aftermarket unfolds in front of us. It could be lumpy. There could be some disconnects here and there. I don't see USM impacting us. I don't see PMA impacting us. So, eventually, as people fly, the business will come.

[Nick Howley:]

I'd just add, the primary thing we are watching now is flights -- it's the number of flights, because to some degree, there's not much use worrying about how many people are on the flights until the flight start taking off.

[Kevin Stein:]

Yeah, take-off and landing.

[Nick Howley:]

I mean that's what we're watching now.

[David Strauss:]

Okay. And then one to ask about the margin comment, I think you said you would expect there's a potential for margin improvement in the fourth quarter relative to what we saw in Q3. What are you assuming for kind of underlying mix in that comment? And at this point, given where we stand today, do you think above -- continued above 40% adjusted EBITDA margins are sustainable from here? Thanks.

[Mike Lisman:]

Yes, let me take that because I made the comment. I think the above 40% -- we're not going to speak out into next year, but I think the above 40% is a good -- is a fine assumption for next quarter, again, absent some substantial dislocation or shutdown or something like that. We are -- we should -- we expect and we know we will have some additional cost reductions in the next quarter. But I'm not so sure -- Kevin or I am so sure, is exactly what will be the mix of shipments. You do get the place -- you do get some book and ship is in the commercial aftermarket, and that is -- that's the highest margin portion of the business. And I would say the -- I would say the tolerance band around that could be larger than the savings you might get out of the cost reduction. So it's a little -- it's just a little hard to predict. I think the above 40 is fine. I would expect we might get a little increase, but it's hard to know until we get the mix more exact.

[David Strauss:]

All right. Thanks very much.

[Mike Lisman:]

Sure.

[Operator:]

Thank you. Our next question comes from Ken Herbert with Canaccord. Your line is now open.

[Ken Herbert:]

Hi, good morning.

[Kevin Stein:]

Good morning.

[Ken Herbert:]

Just -- Kevin or Nick, I just wanted to follow-up on the aftermarket comments. Kevin, your comments, specifically called out some variability in what we've seen geographically. And I'm just wondering if you could comment on trends you're seeing in the aftermarket by various geographic regions and if there's any reason why your aftermarket revenues might be over or underweighted in a particular region relative to the broader industry breakout?

[Kevin Stein:]

Ken, we don't review our aftermarket performance orders, booking, sales by geography like that. So it's difficult for us. When things go through distribution or some of the OEM partners, we don't get that visibility where things end up. So I don't have any insight for you on the geographies. I've heard from our partners that China is improving, that Asia is doing much better. We're using that as the canary in the coal mine for how the rest of the business should be doing. We're starting to see that pick up. I can only use, say that anecdotally, again, from conversations with our distribution partners. That's the only thing I can offer on geography right now.

[Ken Herbert:]

Okay. That's helpful. And it sounds, obviously, that you're expecting or seeing some sequential improvement. Can you just provide any commentary on maybe bookings through July in the aftermarket, and sequentially, any of the trends you've seen coming out of the second quarter?

[Kevin Stein:]

Yeah, I can't comment on July. What I can say is that -- and again, this is just an indicator. During the quarter, we saw our total bookings improve month-over-month during the quarter across the business. And also POS, as I look at our distribution partners, we've seen POS improve month-over-month. Directionally, it's down the same amount that our business is down, but we've seen it start to start to improve off of the very deep low in – early on in the quarter in April. So I try to – I offer that as some color on things are gradually improving from demand and shipments.

[Ken Herbert:]

Okay. I leave it there. Thank you very much.

[Kevin Stein:]

Sure.

[Operator:]

Thank you. And our next question comes from Myles Walton with UBS. Your line is now open.

[Myles Walton:]

Thanks. Good morning. Nick, you commented on the lack of – maybe lack of desire and counterparties to sell in a downturn. Just kind of looking back to prior 2008-2009 or even softer situations in the mid-2000s, it's not clear that there was any big pauses in your deal flow during that period of time. So I'm just curious, are you sensing that, that be reluctant? Or are you seeing the reluctance of offerings to the market?

[Nick Howley:]

We aren't seeing much. We aren't seeing much. And this – if you have particularly a commercial business, it seems to me to be not a particularly good time to be selling it, if you have any choice. And, as frankly, the data would say that we aren't seeing any or any significant number.

[Myles Walton:]

Yeah. Okay. And then, Kevin, maybe can you comment on the Armtec safety situation you mentioned? And this, I think, came with Esterline. Is there something, can you quantify it and how quickly it resolves itself?

[Kevin Stein:]

Yeah. It's an ongoing effort for us. The Armtec business makes, well, armament products, chaff, flares and the like. And we had a safety incident that has caused us to shut down production and to have to rework some of our manufacturing processes, procedures. This will be resolved, but this competitive business is not – it's a driver of revenue for us, but is very competitive, military. So it's a big driver of revenue, not a great driver of EBITDA. This has been a headache for us, but the team is working through it.

[Myles Walton:]

Is it necessary to get back up to get to that mid-single-digit for the year? Is that the precursor?

[Kevin Stein:]

Interesting question. As I – I don't think it's necessary for Armtec to be back up and running. We continue to make progress there, as we do across airborne and a few other businesses that we called out some of this, which was just lumpiness. As we look forward, we – as we look forward into Q4, we have the backlog necessary to support our forecast. We just need to now see if it all comes to pass. But it's – the military backlog tends to be more consistent. It tends to be – you can count on that. It's booked out further in advance. So we feel reasonably confident about this – the next quarter here, Q4.

[Myles Walton:]

Okay, great. Thanks.

[Kevin Stein:]

Yeah.

[Operator:]

Thank you. Our next question comes from Gautam Khanna with Cowen. Your line is now open.

[Gautam Khanna:]

Yeah. Thanks. Good morning guys.

[Kevin Stein:]

Good morning.

[Gautam Khanna:]

Just two questions. First, I was wondering if – what would you anticipate the duration of the OEM product destocking will be, how many quarters. And just based on indications from customers? And then lastly, to follow-up on Myles' question, how much of an impact did the two issues you cited at the defense units. Like, can you quantify the sales impact from those that we are going to make up eventually?

[Kevin Stein:]

Well, yes, as far as that impact, it was – you follow the lion's share rule. I mean, those are the things that jump out to you. Obviously, that doesn't account for all of it. There was some lumpiness in the rest of the business that bore out in the scheduled deliveries. That seems to shake out in Q4. But again, we'll have to watch that closely. On anticipated product restocking order, you know, the inventory levels that are in the system, how long they will have to burn down, I really don't know. I don't have any visibility on inventory levels. I anticipate that they don't have a lot of our products, but we really don't know that for certain. So I can't give you any time frame on how long destocking will last.

[Gautam Khanna:]

Thank you.

[Operator:]

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

[Robert Stallard:]

Thank you so much. Good morning.

[Kevin Stein:]

Good morning.

[Robert Stallard:]

This is probably a question for Nick. Kevin, you described the downturn you've seen so far as unprecedented. But I was wondering, if you look at what your airline customers have done so far, are they doing anything different from what you've seen in prior down cycles?

[Nick Howley:]

I would say the slam down in value is harder and appears to last longer. I mean it just essentially just froze up in April and is still not very good, the ordering levels in the aftermarket. Even after 9/11, by this point, it was probably starting to come back.

[Robert Stallard:]

Right. That’s helpful.

[Nick Howley:]

I mean, you all know, you can watch the flights around the world. I can't remember but I think David Strauss who publishes it every day. Ultimately, that will determine the rate of pickup and if you look at that, the U.S. has stalled a little at about 50 -- 45% to 50% off run rate. They've stalled a little. China seems to be coming back fairly well, particularly the domestic wounds. And Europe is picking up a little but slowly. But the rate of recovery is slow and spotty.

[Robert Stallard:]

I was wondering if there'd been anything more structural if you've seen any more like aggressive destocking or restructuring of just the phasing of maintenance, you know, a lot of these airlines are in survival mode. I was just wondering about that.

[Nick Howley:]

We haven't -- I don't think Kevin, have we?

[Kevin Stein:]

No. We've not seen anything like that. Yes, just not there.

[Robert Stallard:]

Okay. And then as a follow-up to that, have you seen any problems as yet with bad debts on the airline side?

[A -:]

Mike?

[Mike Lisman:]

Very limited in the area of $1 million. We look at weekly and monitor it, but nothing material.

[Robert Stallard:]

Okay. That’s great. Thank you.

[Operator:]

Thank you. Our next question comes from Seth Seifman with JPMorgan. Your line is now open.

[Seth Seifman:]

Thanks. Thanks very much and good morning.

[Kevin Stein:]

Good morning.

[Seth Seifman:]

I guess, if we think about kind of where IATA forecasts traffic levels coming back to 2019, which, I guess, was 2023, now it's kind of 2024, say, it's in that time range, I'd imagine your aftermarket revenues can probably get back there sooner. How would you think about the lead time where your aftermarket revenues would return to the prior level?

[Kevin Stein:]

We don't really know. We're just -- we're planning on following it closely. I follow the same estimates and guidance that the analyst community throw out, whether it's 2023 or slightly thereafter. I don't have any reason to have a better number than that. But again, I will say our goal is to react quickly, to execute quickly on whatever we see in the marketplace, you can count on us to do that. So that's how we look at the world.

[Nick Howley:]

And the only thing I'd add is -- and again, I don't -- I have no insight into the future. I'd watch the flights first. How are the flights picking up around the world? And then once the flights start to get start to get back up close to a number, then how full are they getting.

[Seth Seifman:]

Yes. Okay. And then as a follow-up, just to maybe beat the Armtec dead horse a little bit further. Was there any -- you mentioned it was probably a lower than average margin business. But were there costs related to the safety issues in the quarter that were in the adjusted EBITDA that then go away in the fourth quarter? And if there were…

[Kevin Stein:]

I don't think so. Mike is shaking his head.

[Mike Lisman:]

Nothing really material, guys. They have a facility that had an issue that's partial shutdown and ramping back up, but nothing material that we took as add-back in the quarter on costs.

[Seth Seifman:]

Okay. Thanks very much.

[Operator:]

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

[Sheila Kahyaoglu:]

Hey, good morning guys. I apologize if I missed it, but just on airline commentary, what are you seeing in terms of pricing commentary, what are you seeing in terms of pricing as some of these airlines cut maintenance CapEx or expenses more than RPKs?

[Kevin Stein:]

Yes. The pricing possibility -- the pricing lever in the commercial space, commercial world, we've seen this -- our prices stick, I guess, in previous downturns, and we're anticipating something similar. We have seen our costs go up quite significantly as we've worked our way through this. And that is justification to work with our customers to pass along some of that. The market is -- yes, it's fits and starts as we go forward.

[Sheila Kahyaoglu:]

Okay, great. And then just on free cash flow conversion, it was really good in the quarter. How do we think about the cash balance to end the year? And then just on capital deployment, given uncertainty in a commercial aftermarket recovery, does it make debt paydown more appealing for the first time?

[Mike Lisman:]

Well, on the cash balance, we expect it to be higher at the end of the year, but we -- I don't think it will be $400 million higher. It will be higher. The bulk of it came out this quarter from accounts receivable. It should pick up a little bit next quarter, but obviously, it depends on the EBITDA we generate and what happens in Q4. But we are running free cash flow positive. It will tick up by at a minimum several tens of millions of dollars, but not $400 million like it did this quarter and hopefully, more than just a few ten millions. That's number one. What was the second question?

[Sheila Kahyaoglu:]

Just on aftermarket recovery, prolonged recovery, nobody is selling, you probably don't want to buy with revenue projections. So, what about debt paydown?

[Kevin Stein:]

Instead of acquisitions.

[Nick Howley:]

Instead of acquisitions. I'd be surprised if we do anything like that in the next quarter.

[Sheila Kahyaoglu:]

Okay. Thank you.

[Operator:]

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

[Peter Arment:]

Yes, good morning Nick, Kevin, Mike. Nick, maybe just this is just a quick follow-up question for you just regarding when you said you raised the $1.5 billion this past quarter, but you probably won't need it. Just what were you thinking over the terms of time throughout this downturn that you won't need it? Or just maybe I was looking for a time line of what your thinking was on that?

[Nick Howley:]

Well, our thinking on raising, it was pretty simple. It looked like the whole world was dislocating at the end of March and the beginning of April. And as I said, this is a great business and the only way you could possibly follow it up during this market condition was to have it get much worse and going much longer than anybody anticipates and run out of fuel. And we just wanted to be absolutely sure that wasn't a risk for us. And we were now – price the debt market and the price of a little more insurance didn't seem excessive for the protection it might give you. I think it's very unlikely we need it. I believe, again, absent some large dislocation or additional national shutdown or international shutdown, I think we will continue to pile up cash, and we will develop very substantial firepower. When we feel more comfortable and we feel like we got a little clearer view of the world, then we'll decide what to do with that. I would say, as always, once the smoke clears, our preference is always to make accretive acquisitions. Well, our first preference is to fund our businesses, but that shouldn't be a problem, because they’re on cash positive. Our next choice is always to make accretive acquisitions that fit our strategy when we can find them. If we can't find them, our third choice is to give it back to the shareholders in some form, and our last choice is probably to pay off the debt, particularly given the level of our cost of debt now. And that priority hasn't changed. As we ring down our – we kind of dropped through our priorities. Exactly where we will end up depends on how the market – both the capital market, the acquisition market and the aerospace market play out.

[Peter Arment:]

That’s good color. Thanks, Nick.

[Operator:]

Thank you. Our next question comes from Ron Epstein with Bank of America. Your line is now open.

[Ron Epstein:]

Good morning, guys.

[Kevin Stein:]

Good morning.

[Ron Epstein:]

This is a follow-up on maybe a couple of questions that happened earlier. If had it actually right, and we don't get back to 2019 global air traffic levels until 2024, right, does that change at all how you think about the strategy of the business? What would you do differently? Does M&A become more important? Do you think about diversifying into other engineered, highly engineered products? I mean, or is everything just stay the same, it just takes a little longer to get back to where we were?

[Nick Howley:]

I think we'll have to watch that as it goes along. Our inclination, our strong inclination is to stay what we do -- stay with what we do well. We'd love to see some good acquisitions in our space come up, but again, that's always hard to predict. But if we're out there chipping away at the rock, I can't imagine we won't find something. And our next choice generally would be if we have extra money to give it back to the shareholders. And I think that's -- those are still our priorities. Now if things went on and on and on, and we saw no way to accrete value, we have to think about what else we might want to do. But that's pretty far down the pecking order right now.

[Ron Epstein:]

Okay, great. Thanks.

[Operator:]

Thank you. And our next question comes from Michael Ciarmoli with SunTrust. Your line is now open.

[Michael Ciarmoli:]

Hey, good morning, guys. Thanks for taking the question. Maybe, Nick, just to think about improvement into the fourth quarter, I mean, clearly, it sounds like defense is going to improve. But without knowing the inventory in the channel on the OEM side, taking into account the recent cuts by Boeing and Airbus. And I mean, I guess I'm looking at the aftermarket bookings being down 70%. And you kind of touched kind of touched on some of the older planes being retired from a USM perspective. But I can recall you guys had – I don't know if it was a real old slide deck exposures to 777s, 57s. Thinking about the headwinds just from those planes not flying anymore from consuming your parts. I mean, how do – I mean, I guess, I'm just trying to figure out the probabilities or how you guys are thinking about the scenarios of improvement in this coming fourth quarter? It still seems like there's a lot of unknowns out there.

[Nick Howley:]

There are of course, unknowns and I don’t – we’re surely not going to give a number for the fourth quarter, particularly because the commercial aftermarket is kind of hard to get your arms around exactly. But we – again, absent any significant dislocation or additional shutdown, we're pretty comfortable that the revenue will be higher next – in the fourth quarter than it was in the third quarter. I think much more specificity than that we're not comfortable with. Kevin, do you agree?

[Kevin Stein:]

I do. And I would also add that the – what we think is important to our business is, I think we talked about earlier, and Nick alluded to it, it's not necessarily passengers on the plane. It's takeoff and landings. It's cycles. It's flights. Whether there's people on them or not or they're load factors, those impact airlines. But there's a lot of our products that have to be changed no matter what. No matter how many people are on the plane, that's not true for everything. In the aftermarkets, obviously, boarding and disembarking from a flight certainly will wear out some of the materials on the walls and floors and seat belts. But a lot of the plane needs to be serviced no matter what. And that's what we're counting on. We believe we're market weighted as we look at wide-bodies and narrow bodies. Clearly, international wide-bodies account for a large – a disproportionate share of RPMS, that's why takeoff and landing cycles, we think, are a great way to look at a driver for aftermarket content.

[Michael Ciarmoli:]

What about those legacy platforms that have gotten retired? I mean, is that a big headwind? I mean, those cycles are just going to be gone for the marketplace.

[Kevin Stein:]

Yes. It's certainly a headwind. There's no doubt about it. We're not going to bury our heads in the sand on this and pretend that, that's not going to be an impact. Certainly, and as planes are brought back from retirements, it's generally newer planes that are brought back. Clearly, that's in the mix. But let's remember that what matters most to us in the aftermarket is plans off of warranty. Whether they're very old legacy or newer planes that have entered the aftermarket realm, yes, you make more money on old legacy planes slightly more percentage points but there's many less of them flying. So again, it's market weighted that matters to us. And that's – again, what we're following is those takeoff and landings, the cycles, the flights. That's what we'll drive in. I think our results so far have shown that. We'll see how this continues. I expect it will be lumpy. As we go forward, including the aftermarket, defense business on both markets. But it will improve as people fly.

[Michael Ciarmoli:]

Got it. Helpful. Thanks, guys.

[Nick Howley:]

We don't believe there's any disproportionate waiting when old airplanes that are being retired.

[Kevin Stein:]

That's right.

[Michael Ciarmoli:]

Okay. Thanks, guys.

[Operator:]

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

[Liza Sabol:]

Thank you, again. This concludes today's call. Thank you for your time and for joining us today.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.