TransDigm Group Incorporated's CEO Discusses Q2 2012 Results - Earnings Call Transcript

TransDigm Group Incorporated (TDG)

Q2 2012 Earnings Call

May 08, 2012 11:00 am ET


Liza Sabol -

W. Nicholas Howley - Chairman, Chief Executive Officer and Chairman of Executive Committee

Raymond F. Laubenthal - President and Chief Operating Officer

Gregory Rufus - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary


Julie Yates - Crédit Suisse AG, Research Division

Carter Copeland - Barclays Capital, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

R. Rama Bondada - RBC Capital Markets, LLC, Research Division

Seth M. Seifman - JP Morgan Chase & Co, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Eric Hugel - Stephens Inc., Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

F. Carter Leake - BB&T Capital Markets, Research Division



Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 TransDigm Group Incorporated Earnings Conference Call. My name is Colby, and I will be your operator for today. [Operator Instructions] And as a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Liza Sabol, Investor Relations. Please proceed, ma'am.

Liza Sabol

Thank you. I would like to thank all of you that have called in today, and welcome you to TransDigm's Fiscal 2012 Second Quarter Earnings Conference Call.

With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. A replay of today's broadcast will be available for the next 2 weeks. Replay information is contained in this morning's press release and on our website at

Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the Securities and Exchange Commission. These filings are available through the Investors section of our website or through the Securities and Exchange Commission's website at

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.

With that, let me turn the call over to Nick.

W. Nicholas Howley

Good morning, and thanks for calling in to hear about our company again. I'd like to start with some comments about our consistent strategy, the acquisition of AmSafe, our current sense of the status of the aerospace market as it applies to our business and a few miscellaneous items.

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 you can look at Page 4 of the slides, about 90% of our net sales are generated by proprietary products, and around 3/4 of our net sales come from products for which we are the sole source provider. About 60% 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 have provided relative stability in the downturns.

Because of our uniquely high EBITDA margins, typically about 50% of revenues and relatively low capital expenditure requirements, typically less than 2% of revenue, TransDigm's year in, year out generated very 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 in the past and continue to be willing to lever up when we either see good opportunities or view our leverage as sub-optimum for value creation. We typically begin to delever pretty quickly.

We have a well-proven, value-based operating strategy focused around what we refer to as our 3 value drivers: new business development, continual cost improvement and value-based pricing. We stick to these concepts as the core of our operating management methods. 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 businesses with significant aftermarket content. We've been able to acquire and improve proprietary aerospace businesses through all phases in the cycle. Through our consistent focus on our operating value drivers, a very clear acquisition strategy and close attention to our capital structure, we have been able to create intrinsic value for our shareholders for many years through up and down markets.

The just-completed quarter was active. We closed on the AmSafe acquisition for $750 million. To remind you, 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 with about $20 million of them accruing to us in the first fiscal year of ownership.

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