Earnings Call Transcript - TDG Q3 2021

Operator, Conference Operator

Thank you for standing by, and welcome to the Q3 2021 TransDigm Group Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Director of Investor Relations, Jaimie Stemen. Please go ahead.

Jaimie Stemen, Director of Investor Relations

Thank you, and welcome to TransDigm's Fiscal 2021 Third Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's 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, the company would like to remind you that statements made during this call, which are not historical in fact are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income, and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliation. I will now turn the call over to Nick.

Nick Howley, Chairman

Good morning, and thank you all for joining the call. I'll start with a brief overview of our strategy, followed by some comments on the organizational change we have announced. Kevin and Mike will provide insights on the quarter and our performance. To emphasize, our uniqueness in the industry stems from our consistent strategy during both good and challenging times, along with our unwavering commitment to creating intrinsic shareholder value throughout the aerospace cycle. In summary, approximately 90% of our net sales come from proprietary products, and over 75% of our net sales are from products where we believe we are the sole-source provider. The majority of our EBITDA is derived from aftermarket revenues, which typically offer significantly higher margins and have historically provided stability during downturns. We have a long-term strategy in place. We own and operate proprietary aerospace businesses with considerable aftermarket content. We employ a straightforward, value-based operating methodology. Our organizational structure is decentralized, and our compensation system is closely aligned with our shareholders. We pursue acquisitions that fit this strategy and have a clear potential for private equity-like returns. Our capital structure and allocation are essential components of our approach to value creation. Our goal is to provide shareholders with private equity-like returns while maintaining the liquidity of being a public company. This requires a strong focus on the details of value creation and careful capital allocation. As highlighted in our earnings release, we had a favorable quarter, particularly in light of the current market conditions. We are observing some recovery in the commercial aerospace markets and continue to generate substantial cash, currently over $4.5 billion. If there are no disruptions in capital markets, we anticipate reaching around $4.8 billion in cash by the end of the September fiscal year. We expect to continue generating significant cash throughout fiscal year 2022. We are actively exploring M&A opportunities while remaining vigilant about our capital allocation strategy. Both M&A and capital market conditions are notoriously unpredictable, especially in the current environment. During Q3, we concluded the sale of three less proprietary businesses for about $240 million. We have decided not to proceed with the sale of the remaining primarily defense business we previously considered. Our divestitures related to Esterline are nearing completion. I do not expect any significant dividend or share buyback in the next two quarters, but we will monitor the situation. We believe we are well positioned. As always, we will closely observe the aerospace and capital markets and respond as needed. I want to clarify the transition from Executive Chairman to Chairman that we announced today. My commitment to TransDigm remains unchanged, with my contract running through 2024, and this adjustment reflects that timeline, likely extending beyond if the Board and shareholders feel I continue to deliver value. As the Chairman of the Board and Chairman of the Executive Committee, I will concentrate on mergers and acquisitions, capital allocation, and strategic issues. I will collaborate closely with Kevin to ensure the ongoing value of TransDigm. Both Kevin and I feel it is the right time to transition to the next phase. The Board and I recognize Kevin's strong performance as CEO over the last three years. His leadership has seen us through significant events, including the integration of Esterline Technologies, our largest acquisition, and navigating the unprecedented downturn caused by COVID-19 in the commercial aerospace market. His team acted swiftly and effectively to maintain operations and manage another substantial acquisition during this challenging period. The hard work of integrating Esterline and adjusting our portfolio is nearing completion, and we are beginning to see signs of recovery from the COVID-related market disruptions. This change also offers some cost savings for the company. Personally, I remain a major investor in TransDigm and have confidence in Kevin's ability to continue generating significant value for us all. Now, I will hand the floor over to Kevin.

Kevin Stein, President and CEO

Thanks, Nick. I would like to take this opportunity to personally thank Nick for his counsel, support, and mentorship over the last seven years. He has made the succession planning process a rewarding experience for both of us. I look forward to continuing our work together with this fantastic team as we embrace our modified roles. Now to the business of today. I will first provide my regular review of results by key market and profitability of the business for the quarter. I'll also comment on recent acquisition and divestiture activity and outlook for the remainder of fiscal 2021. Our current Q3 results have returned to positive growth as we are now lapping the first quarter of fiscal 2020 fully impacted by the pandemic. However, our results continue to be unfavorably impacted in comparison to pre-pandemic levels due to the reduced demand for air travel. On a positive note, the commercial aerospace industry has increasingly shown signs of recovery, with vaccination rates expanding and increased air traffic, especially in certain domestic markets. In our business, we saw another quarter of sequential improvement in commercial aftermarket revenues, with total commercial aftermarket revenues up 6% over Q2. Additionally, I am very pleased that we continue to sequentially expand our EBITDA as defined margin. Contributing to this increase is the continued recovery in our commercial aftermarket revenues as well as the careful management of our cost structure and focus on our operating strategy in this challenging commercial environment. Now, we will review our revenues by market category. For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior year period in 2020. That is assuming we own the same mix of businesses in both periods. This market discussion includes the acquisition of Cobham Aero Connectivity. We began to include Cobham in this market analysis discussion in the second quarter of fiscal 2021. This market discussion also removes the impact of any divestitures completed by the end of Q3. In the commercial market, which typically makes up 65% of our revenue, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 1% in Q3 compared with Q3 of the prior year. Bookings in the quarter were very strong and solidly outpaced sales. Sequentially, both Q3 revenue and bookings improved approximately 10% compared to Q2. Although we expect demand for our commercial OEM products to continue to be reduced in the short term, we are encouraged by build rates gradually progressing at the commercial OEMs. Recent commentary from Airbus and Boeing also included anticipated rate ramps for their narrow-body platforms in the near future. Hopefully, this will play out as forecasted. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenues increased by approximately 33% in Q3 when compared to prior year Q3. Growth in commercial aftermarket revenues was primarily driven by increased demand in our passenger submarket, although all of our commercial aftermarket submarkets were up significantly compared to prior year Q3. Sequentially, total commercial aftermarket revenues grew approximately 6% in Q3. Commercial aftermarket bookings are up significantly this quarter compared to the same prior year period, and Q3 bookings continued to outpace sales. To touch on a few key points of consideration. Global revenue passenger miles are still low but modestly improving each month. Though the timeline and pace of the recovery remains uncertain with expanded vaccine distribution and lifting of travel restrictions, passenger demand across the globe will increase as there is global pent-up demand for travel. The Delta variant of COVID and other future evolutions may further complicate this picture. Time will tell. We see evidence of this demand through the recovery in domestic travel. Domestic air traffic increased each month during our fiscal Q3 and into July. Airlines also continued to see strength in bookings and strong demand for domestic travel, especially in the U.S. Europe is also starting to pick up. China has now become a watch point, however. The pace of the international air traffic recovery has been slow, and international revenue passenger miles have only slightly recovered. There is potential for international travel opening more as vaccinations increase and governments across the world start to revise travel restrictions. Cargo demand has recovered quicker than commercial travel due to the loss of passenger belly cargo and the pickup in e-commerce. Global cargo volumes are now surpassing pre-COVID levels. Business jet utilization data has shown that activity in certain regions has rebounded to pre-pandemic or even better levels. This rebound is primarily due to personal and leisure travel as opposed to business travel. Time will tell if business jet utilization continues to expand, but current trends are encouraging. Now let me speak about our defense market, which traditionally is at or below 35% of our total revenue. The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 12% in Q3 when compared with the prior year period. Our defense order book remains strong, and we continue to expect our defense business to expand throughout the remainder of the year. No particular program was driving this uptick as the growth was well distributed across the business. Moving to profitability. I'm going to talk primarily about our operating performance or EBITDA as defined. EBITDA as defined of about $559 million for Q3 was up 32% versus prior Q3. EBITDA as defined margin in the quarter was approximately 45.9%. We were able to sequentially improve our EBITDA as defined margin versus Q2. Next, I will provide a quick update on our recent acquisition and divestitures. The Cobham acquisition integration is progressing well. We have now owned Cobham for a little over seven months and are pleased with the acquisition thus far. On the divestiture front, we closed the sales of Technical Airborne Components, ScioTeq, and TREALITY during Q3. The divestiture of these three less proprietary and mostly defense businesses was previously discussed on our Q2 earnings call. As a reminder, for the divestitures, the financial results of these businesses will remain in continuing operations for all periods they were under TransDigm ownership. Now moving to our outlook for 2021. We are still not in a position to issue formal guidance for the remainder of fiscal 2021. We will look to reinstitute guidance when we have a clearer picture of the future. We, like most aero suppliers, are hopeful that we will realize a more meaningful return of activity in the second half of the calendar year. We continue to be encouraged by the recovery we have seen in our commercial OEM and aftermarket bookings throughout the fiscal year, along with the continued improvement we have seen in our commercial aftermarket revenues. As for the defense market and consistent with our commentary on the Q2 earnings call, we expect defense revenue growth in the mid-single-digit percent range for fiscal 2021 versus the prior year. Additionally, given the continued uncertainty in the commercial market channels and consistent with our past commentary, we are not providing an expected dollar range for fiscal 2021 EBITDA as defined. We expect another steady increase in commercial aftermarket revenue in this last quarter of our fiscal year and expect full-year fiscal 2021 EBITDA margin roughly in the area of 44%, which could be higher or lower based on the rate of commercial aftermarket recovery. This includes a dilutive effect to our EBITDA margin from Cobham Aero Connectivity. Mike will provide details on other fiscal '21 financial assumptions and updates. Let me conclude by stating that I'm pleased with the company's performance in this challenging time for the commercial aerospace industry and with our commitment to driving value for our stakeholders. The commercial aerospace market recovery continues to progress, and current trends are encouraging. There is still uncertainty about the pace of recovery, but the team remains focused on controlling what we can control. We continue to closely monitor the ongoing developments in the commercial aerospace industry and are ready to meet the demand as it returns. We look forward to this final quarter of our fiscal 2021 and expect that our consistent strategy will continue to provide the value you have come to expect from us. With that, I would now like to turn it over to our Chief Financial Officer, Mike Lisman.

Mike Lisman, Chief Financial Officer

Good morning, everyone. I'm going to quickly hit on a few additional financial matters. Regarding organic growth, we're now done lapping the pre-COVID quarterly comps and have therefore returned to positive growth territory. Organic growth was positive 15% on the quarter. I won't rehash the results for revenue, EBITDA, and adjusted EPS, as you can see all of that information in the press release for today. On taxes, our expectations for the full year have changed. We now anticipate a lower GAAP and cash tax rate in the range of 0% to 3%, revised downward from a previous range of 18% to 22%, and an adjusted tax rate in the range of 18% to 20%. The reductions in the GAAP and cash rates for the current fiscal year are onetime in nature and were driven by the release of a valuation allowance pertaining to our net interest deduction limitation and some discrete benefits from exercises of employee stock options. Regarding tax rates out beyond FY '21, we're still monitoring potential changes in the U.S. tax code under the new administration, and we'll provide some guidance on our future rate expectations once any legislation is finalized. On interest expense, we still expect a full-year charge to be $1.06 billion. Moving over to cash and liquidity. We had another quarter of positive free cash flow. Free cash flow, which we traditionally define at TransDigm as EBITDA as defined less cash interest payments, CapEx, and cash taxes, was roughly $305 million. For the full fiscal year, we expect to continue running free cash flow-positive. In line with our prior guidance on free cash flow, we still expect this metric to be in the $800 million to $900 million area for our fiscal '21 and likely at the high end of this range. We ended the third quarter with $4.5 billion of cash, up from $4.1 billion at last quarter end. Finally, our Q3 net debt to LTM EBITDA ratio was 7.6x, down from 8.2x at last quarter end. In coming quarters, this ratio should at worst remain relatively stable, but more likely continue to show gradual improvement as our commercial end markets rebound. The pace of this improvement remains highly uncertain and will depend heavily on the shape of the commercial end-market recovery. From an overall cash, liquidity, and balance sheet standpoint, we think we remain in good position and well prepared to withstand the currently depressed commercial environment for quite some time. With that, I'll turn it back to the operator to start the Q&A.

Operator, Conference Operator

Our first question comes from Robert Spingarn of Credit Suisse.

Robert Spingarn, Analyst

Kevin, you are still looking for EBITDA as defined margins, I think, of 44% for the year, but you had this uptick in the third quarter. I guess the year-to-date is 44%. Are you expecting the margin mix to deteriorate in the last quarter? Or is this just a little bit of conservatism?

Kevin Stein, President and CEO

Hopefully, we're conservative. We feel comfortable given the visibility we have right now that 44% makes sense. So hopefully, it's conservative and we'll do better. We're not anticipating anything detrimental in the fourth quarter.

Robert Spingarn, Analyst

Okay. And then just in the past, I think you've characterized the cost structure at about 30% labor, 50% materials, and 20% other. With all the moving pieces and the cost takeout over the last one and a half years, how, if at all, have those ratios changed on a go-forward basis?

Mike Lisman, Chief Financial Officer

Yes. I think it was 35%, 50%, and 15% to be more specific. There haven't really been any significant changes. Those percentages have remained consistent for a while, and the 35% does not include labor.

Robert Spingarn, Analyst

Okay. So which is it? Just to clarify...

Mike Lisman, Chief Financial Officer

About 15%, rough justice, is all other, 50% materials, and some direct costs, and 35% overhead. And there are some labor elements in there.

Nick Howley, Chairman

But it's almost all wages and benefits.

Mike Lisman, Chief Financial Officer

Yes. Wages and benefits.

Operator, Conference Operator

Our next question comes from David Strauss of Barclays.

David Strauss, Analyst

Mike, you talked about, it sounds like, your measure for cash generation coming in towards the higher end. What has been better than you expected this year? I guess it's working capital. But specifically within working capital, what's been better? And as we think about things continuing to improve in the next year, what do you expect for working capital?

Mike Lisman, Chief Financial Officer

Yes. It is mainly the working capital. Specifically within the working capital buckets, we're doing better on accounts receivable, most importantly. Inventory has been a little bit of improvement as well, but accounts receivable has been the main driver. Typically, our business tracks at something like 57, 58 days on DSO days, but we're down now closer to 50. Quite a bit of working capital has come out of the business, $350 million, $400 million out of AR. Over time, as we get further into the recovery, that's going to have to go back into accounts receivable, so it will be a use of cash. The pace at which that happens depends on the pace of the recovery, and we have the cash to support it and fuel that increase, of course. It's kind of a good problem to have. But it will be a $350 million to $400 million headwind as we come out of this.

David Strauss, Analyst

Okay. And the comment around getting back to capital deployment, is that really just governed by when you get back to, call it, looks like right around 6x net leverage? Is that really the biggest governing factor at this point?

Mike Lisman, Chief Financial Officer

On dividend and share repurchases, I think, is what you're referring to rather than M&A. I think for now, we just want to be conservative and keep the cash that we have as we come out of the current situation that our end markets are in. Then we'll assess things in real-time. On average, 6x net debt to EBITDA is where the business has operated historically. We see no rationale or reason to change that going forward. Now it's obviously elevated at 7.6x. So we'll give it some time to settle down. Then we will assess the repurchase and dividend alternatives quarterly.

Nick Howley, Chairman

And options.

David Strauss, Analyst

Okay. It looks like you're going to get back to around 6x early in calendar year 2022. Is that right?

Mike Lisman, Chief Financial Officer

It's going to continue to decrease. I think I can't provide guidance on future leverage levels yet, so it’s difficult to determine. It will depend on how quickly the recovery progresses. However, it should keep decreasing, as I mentioned earlier, just as the end markets improve, by a couple of tenths of a point each quarter.

Operator, Conference Operator

Our next question comes from Myles Walton of UBS.

Myles Walton, Analyst

Kevin, I was wondering if you could comment on the bookings trends in the quarter. I know you said the book-to-bill was greater than 1 in aftermarket, but maybe sizing it sequentially. I think last quarter, it was up sequentially 30%. I don't know where the booking is better sequentially as well this quarter.

Kevin Stein, President and CEO

Yes. For year-to-date, we're up considerably. For the quarter, it can be variable. You're correct to note that it's slightly off, down 7%. We had significant growth last quarter. We are still booking more than we are shipping in both quarters, which is also an important aspect to consider.

Myles Walton, Analyst

Okay. And anything with respect to the channels you're seeing? Your distribution channels, in particular, any signs of them having inventory stocks or destocks? Or is this progressing as normally as you'd expect?

Kevin Stein, President and CEO

I think it's progressing reasonably normally. They're placing orders. We're filling them. Distribution is a smaller part of our business than it used to be. It's somewhere below 20% of our business now. The rest of it, we handle directly in the aftermarket. Their POS, their sales to the market look similar to ours, quite frankly. So the business is performing about how we would expect. We don't offer volume-based discounts for a significant percentage of our business. So it doesn't encourage overstocking in the channel.

Myles Walton, Analyst

Okay. And Nick or Kevin, any update on the DoD IG audit?

Kevin Stein, President and CEO

Yes. The DoD IG audit, we look to have a rough draft this fall and a publication shortly thereafter. We still have not seen that but still anticipate similar conclusions to prior audits. So that's what we see right now. We have closely worked with the DoD, the IG, in regular weekly meetings to review information data and build a working group to continue to improve our relationship with the DoD and the important players on the defense side of the house. So that's what we know so far. But yes, sometime this fall.

Operator, Conference Operator

Our next question comes from the line of Kristine Liwag of Morgan Stanley.

Kristine Liwag, Analyst

In aftermarket, Kevin, can you provide more color in terms of action events that are driving the strong bookings? Are these driven by general air traffic recovery demand? Or are there specific events like aircraft coming off storage that's driving this incremental growth?

Kevin Stein, President and CEO

I think it has to be all of the above. We're certainly seeing whatever destocking they had come to an end. But we are seeing increased takeoff and landing cycles, which we think are important to follow this industry and certainly preparing for future capacity and needs. I think all three are at play here. I don't have any ability to differentiate which one is the most important, but I think they're all happening.

Kristine Liwag, Analyst

And on divestitures, you mentioned that you're not proceeding with that one defense divestiture. Can you provide more color on what happened there? And also, overall, how do you think about the portfolio? Do you foresee future divestitures coming up?

Mike Lisman, Chief Financial Officer

Yes. On the first question on the divestiture, ultimately, any divestiture for us, it just comes down to a question of value and whether or not the offers on the table are prices at which you're a seller. For us, the expectation wasn't met here, so we're happy to go on owning this business. In the early innings of the Esterline integration, we divested the pieces quickly that didn't fit us most, and we're happy to go on owning the businesses for which the value expectation just wasn't met.

Kristine Liwag, Analyst

And for future divestitures in terms of your portfolio, are there things that you're earmarking for potential sale?

Mike Lisman, Chief Financial Officer

Not at this time. As Nick said in his comments, we've now pretty much completed most of the Esterline divestitures that we anticipated doing. And this last one, we're happy to go on owning.

Operator, Conference Operator

Our next question comes from Peter Arment of Baird.

Peter Arment, Analyst

Kevin, Nick, Mike, nice results. Kevin, you mentioned that China is something to keep an eye on. Could you provide a bit more detail on your international sales mix or break it down by region, including domestic sales?

Kevin Stein, President and CEO

We don't break down our sales by region. It's difficult for us to tell as we sell to airlines, and we still sell 20% or so through distribution. So it's difficult for me to tell you geographic split. Obviously, we follow the takeoffs and landings, flight cycles very closely. Many of you publish different reports on that. What we've seen recently is similar to what we saw a few months ago. China domestically will retreat and then come back. We're in a retreat period right now. I can only assume that's because of something COVID-related, but I don't know beyond that. So hence, why I say it's a watch item. Obviously, our visibility and knowledge of what's happening on the ground there is somewhat limited.

Peter Arment, Analyst

Okay. And just as a quick follow-up, just your liquidity continues to be very good and new cash generation. Can you talk about maybe just your appetite for on the M&A front? I know you've completed all your divestitures. Just if you're seeing much or you're having confidence of looking at any commercial aerospace deals?

Nick Howley, Chairman

We're always actively looking at the aerospace businesses, and we remain active. We're not constrained at all here. We're only constrained by good ideas, but we just don't comment on anything that we're working on.

Operator, Conference Operator

Our next question comes from Sheila Kahyaoglu of Jefferies.

Sheila Kahyaoglu, Analyst

Nick, congrats on the move. I like how you squeezed that in there that you're going to save TransDigm some money. So my first question is on defense. The business is one-third of your business, and it's growing 12%. That's pretty surprising, given what we've seen from other suppliers. Can you maybe parse your defense exposure, if at all, and how you kind of expect that to trend?

Kevin Stein, President and CEO

We have experienced strong growth in our defense sector this year, which is a crucial area for us. We are actively seeking opportunities to refine our offerings. Our defense portfolio is performing well, and I anticipate modest growth moving forward, primarily due to ongoing geopolitical tensions. Our focus is on technology and unmanned systems, rather than ground troops, positioning us favorably in the defense market for continued expansion. In reviewing our growth for the quarter, I couldn't identify a single standout program; rather, we have seen positive performance across the board. Our parachutes division is thriving, and the F-35 business is also doing well, contributing to our overall success.

Sheila Kahyaoglu, Analyst

Okay, cool. And then on commercial aftermarket, it's trending at about 65% of 2019 revenue. Correct me if I'm wrong on that stat. But do you kind of expect that to improve every quarter from here? Or does it stall out as we kind of see like hiccups in China or Asia Pacific air traffic?

Kevin Stein, President and CEO

I expect this situation to be uneven with some ups and downs. I don't anticipate a flawless growth trajectory from this point onward. However, I do expect progress in a positive direction. It's important to note that, similar to our earlier comments about defense being sometimes inconsistent, we have always anticipated that this recovery will also be inconsistent in terms of how we deliver products.

Operator, Conference Operator

Our next question comes from Gautam Khanna of Cowen.

Gautam Khanna, Analyst

I was wondering if you could elaborate on the trends you saw during the quarter and through July in the aftermarket and in commercial OE. Sort of month by month, where things just getting better and better, kind of how it compared to the exit rate at last quarter's end?

Kevin Stein, President and CEO

Things have improved. They were improving monthly, similar to the world's global takeoffs and landings, which have continued to progress. Europe has returned, and that is certainly driving our business in the commercial aftermarket segment. Does that help clarify your question?

Gautam Khanna, Analyst

Yes. I'm wondering if the improvements are broad-based across the product suite. We discussed some variability in performance. I'm curious if there was any particularly strong month or if there's a trend, like whether April performed better than March or if May was significantly better than June. Is there anything noteworthy?

Kevin Stein, President and CEO

I don't think so. I think things are gradually improving, and the bookings are gradually improving. Within the quarter, you can get lumpiness within the quarter as well. So what we look at is flight activity continuing to ramp up, and it is. That's what gives us encouragement for the future. We also see an order book that's up significantly year-over-year and sequentially improving.

Gautam Khanna, Analyst

Are there any areas in the aftermarket portfolio of products that are still lagging, like interiors? I'm just curious if you're seeing certain items being bought.

Kevin Stein, President and CEO

We've seen some improvement from Schneller business. Sorry, we've seen some improvement from Schneller business. We've also seen some of our higher-volume runners have been slower on some products, some of our larger aftermarket businesses is the way I mean. But in general, it's happening across the business. I don't think we're seeing any loss of business, any loss of shipset content as we go forward. We continue to monitor the PMA and used market very closely. So anything that's happening is just timing in the marketplace and airlines picking and choosing what they're working on.

Operator, Conference Operator

Our next question comes from Hunter Keay of Wolfe Research.

Hunter Keay, Analyst

I was wondering if you could talk about biz jets a little bit. You obviously have been noting it's leisure-oriented. You've been saying that now for a while. I'm kind of curious, are these individually owned aircraft? Are these corporate fleets that are being used for personal trips? Is it wheels up? I mean I'm trying to get a sense for sort of how demand and usage in that market is translating to what we're seeing in the aftermarket sales for you guys.

Kevin Stein, President and CEO

Well, we've certainly seen an uptick in biz jet cycles, I think, up quite dramatically this last quarter. We're getting back close to the pre-pandemic levels. I think the bulk of it is still leisure-oriented, it has to be. Most of travel is leisure-oriented. I think we're starting to see some business travel mix in there. But business jet has been a bright spot, but it's a very small part of our business, I think about 15%.

Hunter Keay, Analyst

Got it. Okay. And then on R&D, you saw a decent uptick last year in R&D dollar spend in fiscal '20 despite COVID. Kind of curious how much of that is sort of organic growth versus maybe incremental spend that you acquired from companies that you bought. And sort of just looking forward where you're going to prioritize your R&D dollars over the next couple of quarters.

Mike Lisman, Chief Financial Officer

Do you mean, Hunter, a step-up on a dollar basis or a percent of revenue basis?

Hunter Keay, Analyst

No, not on a percentage basis. Yes, that was exactly a function of being bigger or also just a matter of other factors.

Mike Lisman, Chief Financial Officer

On a dollar basis, it's likely a function of it being bigger. Generally, when we acquire businesses, we tend to keep the R&D in place. So that could be what's driving the step-up that you're seeing on a dollar basis.

Kevin Stein, President and CEO

We run R&D through our individual businesses. So it's a function of the programs and what they do at our individual. We don't have a central R&D team, as you probably know. So this is all linked to programs and projects locally for the business.

Hunter Keay, Analyst

Got it. And then sort of prioritizing going forward R&D spend, any particular areas you're going to be focused on?

Mike Lisman, Chief Financial Officer

It varies by individual op unit. They all decide where to invest their dollars. They run their own R&D budgets.

Kevin Stein, President and CEO

Yes. We'll work on good stuff. Nick is telling me we only work on good stuff, and I think he's right.

Operator, Conference Operator

Our next question comes from Michael Ciarmoli of Truist Securities.

Michael Ciarmoli, Analyst

Maybe Nick or Kevin, is there any way to parse out what the drag currently is on the aftermarket revenues in terms of like wide-body, narrow-body? I mean, obviously, the bulk of the utilization we're seeing is still narrow-body driven. Are you guys able to kind of give any specifics to maybe what you're seeing as you're looking at product getting pulled into distribution or what the airlines are buying? Are you seeing any noticeable pickup there? Or is wide-body still a pretty big headwind?

Kevin Stein, President and CEO

Yes, I believe that given the takeoff and landing trends, it poses a reasonable challenge for us. However, we are aligned with the market. We need to focus on what is currently in operation. Recently, we have observed an increase in wide-body aircraft operating domestic routes, such as A350s and 787s, engaging in longer domestic flights than before. As we analyze the situation, we are slightly surprised that the performance of wide-body aircraft is better than our initial expectations, as we had anticipated a primarily narrow-body market. While we don’t break it down on a quarterly basis, we tend to follow market trends, monitoring the takeoffs and landings closely.

Michael Ciarmoli, Analyst

Got it. Regarding takeoff and landing activity, it appears that through August, there has been some flattening in that activity and a decline of around mid-20% compared to 2019. While you won't provide full guidance, it seems that analysts are likely projecting a sequential increase of about 8.5% to 9% into the fourth quarter. Based on the trends observed, particularly with the APAC region experiencing some setbacks, is there anything we should be aware of as we approach the upcoming quarter or the next couple of quarters?

Mike Lisman, Chief Financial Officer

Just on the outlook and as it refers to FY '22 guidance, I think we don't want to give guidance yet. We don't want to give guidance just for the sake of giving guidance. We think we'll give it when the market stabilizes and we feel like we can accurately predict what's to come. So for now, it's hard to give too much commentary on what the next couple of quarters will look like given the lumpiness of the recovery.

Operator, Conference Operator

Our next question comes from Seth Seifman of JPMorgan.

Seth Seifman, Analyst

I would like to ask about the part of the improved adjusted gross margin and EBITDA margin that seems to have come from an increase in loss contract amortization. It appears to be around $20 million for the quarter, which is slightly down from Q2. What factors are driving that, and what should we expect in the future?

Mike Lisman, Chief Financial Officer

Yes. Seth, there are puts and takes every quarter on the accounting side. You get pluses from a loss contract reserve release, but there must be a couple of minuses from reserve increases on issues that arise that go against EBITDA. This quarter, we netted to a spot that's not that different from where we typically end up every quarter. But you're right, the loss contract reserve did step up a bit. It was $20 million this quarter. Last year, the same quarter was about $7 million or $8 million. So it did step up. What drives it is, from an accounting standpoint, it's a GAAP convention. It’s tied to individual loss contracts and products, and based on when they ship, you release the reserves.

Seth Seifman, Analyst

Okay. Okay. Great. And then Kevin or Nick, do you guys think at all about the new sort of aggressive Antitrust regime that the Biden administration is trying to implement and what that could mean for capital deployment going forward?

Nick Howley, Chairman

I don't have any way of making a judgment on that, so I don't want to comment.

Kevin Stein, President and CEO

Yes. It's challenging for us to engage in the political arena. Therefore, we will respond to situations as they arise but will not make predictions.

Operator, Conference Operator

At this time, I'd like to turn the call back over to Jaimie Stemen for closing remarks.

Jaimie Stemen, Director of Investor Relations

Thank you all for joining us today. This concludes today's call. We appreciate your time, and have a good rest of your day. Thank you.

Operator, Conference Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.