Transdigm Group Incorporated ( TDG) F1Q12 Earnings Conference Call February 25, 2011 11:00 AM ET Executives Raymond F. Laubenthal – President and COO Gregory Rufus – EVP, CFO and Secretary Liza Sabol – Investor Relations Nicholas Howley – Chairman and CEO Analysts David Strauss – UBS Eric Hugel – Stephens Inc Robert Spingarn – Credit Suisse Amit Mehrotra – Deutsche Bank J. B. Groh – D. A. Davidson & Co Carter Leake – BB&T Capital Markets Mayur Manmohansingh – Barclays Capital Joe Nadol – JPMorgan Kenneth Herbert – Wedbush Michael Callahan – Auriga Securities Michael Ciarmoli – KeyBanc Robert Stallard – Royal Bank of Canada Yair Reiner – Oppenheimer Yumar Habib – JPMorgan Presentation Operator
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A replay of today's broadcast will be available for the next two weeks. Replay information is contained in this morning's press release and our website at transdigm.com.Before we begin, the Company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the Company's latest filings with the Securities and Exchange Commission. These filings are available in the Investor section of our website or through the Securities Exchange Commission's website at sec.gov. The Company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income, and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and a reconciliation of EBITDA and EBITDA as defined, adjusted net income, and adjusted earnings per share to those measures. Also please note that the slides that accompany today's release, can be found on our website, but will not be advanced automatically. You will need to manually advance them. We apologize for any inconvenience. With that, let me now turn the call over to Nick. Nicholas Howley Good morning and thanks again for calling in to hear about our company. As usual, I’d like to start with some comments about our consistent strategy. I’ll also talk a little bit about the pending acquisition of AmSafe and our current status in the aerospace market, particularly how it applies to TransDigm. To reiterate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the aerospace cycle. To summarize some of the reasons why we believe this and this is on Page 4 of the slide, about 90% of more of our net sales are generated by proprietary products, and around three-quarters of our sales come from products for which we are the sole source provider.
About 55% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and provided relative stability in the downtimes. Because of our uniquely high EBITDA margins, typically approaching 50%, and relatively low capital expenditure requirements, about 2% or less of revenue, TransDigm has year in and year out generated strong free cash flow. We pay close attention to our capital structure and view it as another means to create shareholder value. As you know, we have been in the past and continue to be willing to lever up when we either see good opportunity or view our leverage as sub-optimum for value creation. We typically begin to deleverage pretty quickly.We have a well-proven, value-based operating strategy, focused around what we refer to as our three value drivers; new business development, continual cost improvement and value-based pricing. We stick to these concepts as the core of our operating management methodology. This consistent approach has worked for us through up and down markets and has allowed us to continually improve and increase the intrinsic value of our business while steadily investing in new business and platform positions. We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace products with significant aftermarket content. We've been able to acquire and improve proprietary aerospace businesses through all phases of the cycle. Through our consistent focus on our operating value drivers, a clear acquisition strategy, and close attention to our capital structure, we've been able to create intrinsic value for our shareholders for many years through up and down markets. This just completed quarter was again active. In addition to all the operating activity, we closed on Harco $83 million. We also announced an agreement to buy AmSafe for about $750 million. The AmSafe price includes tax benefits over the next 10 years to TransDigm in the range of $70 million on a net present value basis. The tax benefits are front-end weighted to a certain degree. Read the rest of this transcript for free on seekingalpha.com