TransDigm Group Inc (TDG) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 TransDigm Group Inc. earnings conference call. My name is Jenada and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Liza Sabol, Investor Relations. Please proceed.

Thank you. I would like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2012 first 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 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 through the Investor section of our website, or through the Securities and 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 where 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 turn the call over to Nick.

Good morning, and thanks again for calling in to hear about our Company. As usual, I would like to start with some comments about our consistent strategy. I will also talk a little bit about the pending acquisition of AmSafe and our current sense of the status of 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 our net sales are generated by proprietary product 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 after-market sales. After-market revenues have historically produced a higher gross margin and provided relative stability in the downturns.

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 after-market 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 for $83 million, we also announced an agreement to buy AmSafe for about $750 million. The AmSafe price includes tax benefits s 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.

AmSafe is a good, solid proprietary aerospace business. They do about $260 million per year in revenues with an average EBITDA margin a little under 25%. The commercial aerospace margins are higher than average, and the ground vehicle margins are substantially lower.

About 90% of the EBITDA comes from commercial aerospace and military markets, of which the vast majority is commercial aerospace. We find the low military content about 10% of revenue and a very high commercial aerospace after-market content, particularly attractive.

Excluding the commercial ground vehicle business, about 85% of the revenues are after-market, primarily commercial transport after-market. The major product lines are seatbelts and airbags for commercial aircraft, again primarily commercial transport size. They are qualified, usually exclusively, on all major commercial transport and regional aircraft.

We see opportunity to create value here through a mix of all three of our usual value drivers. Though I don't know that this business can achieve the EBITDA percent as high as the TransDigm average, we do see some significant upside. Since we do not yet own the business and have a confidentiality agreement still in place, that is about all I can say at this time.

We anticipate financing the acquisition with about $500 million of incremental bank debt, with the balance from a cash on hand. The new bank loan is fully committed, and we anticipate an interest rate in the 4.5% percent range based on a 1% LIBOR floor. We are also seeking to increase our revolver availability at the same time.

If we close on the AmSafe business at 3/31 we anticipate about $160 million of cash and over $285 million in undrawn revolver. We also, on average, generate over $80 million a quarter in additional cash. We have additional capacity under our credit agreement.

We estimate that our net debt to EBITDA on a 12/31 pro forma basis reflecting the AmSafe acquisition, will be about for 4.8 times EBITDA. As in the past, absent acquisitions or other capital market activities we soon begin to de-lever.

Now, with respect to our underlying markets and on a pro forma basis, that is assuming we own the same mix of businesses in both periods, the market outlook is somewhat mixed. We see continuing signs of an improving commercial market while the defense market continues less clear.

In the commercial OEM area, industry forecasters and airframe manufacturers continue to be optimistic regarding the commercial transport OEM production cycles. The rate increases seem to be proceeding and Airbus and Boeing, the 787 schedule, is still unclear but that won't materially impact TransDigm in 2012. In total, our full-year commercial transport OEM revenues on a pro forma basis are still expected to be up in the mid teens.

In the Biz Jet, the outlook -- though the outlook is mixed by airframe manufacturers, we're still comfortable with low to mid-teen growth rate versus the prior year. This is in the Biz Jet OEM. In the commercial after-market, we continue to see growth in worldwide passenger traffic, though not as high as last year.

This quarter we saw significant increase over the prior year Q1 in commercial after-market revenues. Incoming orders or bookings are running about even with the shipment levels and well above the prior year Q1 booking levels. Sequentially, commercial after-market revenues were about flat, Q1 has less shipping days than in prior quarters. We are still planning on pro forma commercial after-market revenues to be up about 10% versus last year, though we watch this carefully and I remind you that comps get tougher as the year goes on.

In the defense business, given the uncertainties around the defense budgets, we anticipate defense revenues to be flat to modestly down now in fiscal year 2012. Though Q1 was a little better than we anticipated, we remain very cautious regarding military revenues. Military revenues can be tough to predict, especially given the current US political winds and the worldwide geopolitical situation.

Now let me turn to our financial performance. I'll remind you this is the first quarter of fiscal year 2012. Our year started October 1, 2011. As I have said in the past, quarterly comparisons can be significantly impacted by difference in the OEM after-market mix, timing of large orders and transient inventory fluctuations in the system, modest seasonality and other factors.

But, in any event, the first quarter of fiscal year '12 started off well. GAAP revenues were up 51% versus the prior year Q1. Organic revenues were up about 18% on a quarter-versus-quarter basis. Reviewing the revenues by market category, again on a pro forma basis versus prior Q1, and you can look at slide five to see that, this again assumes we own the same mix of businesses in both periods.

In the commercial markets, which make up about 75% of our revenue, commercial OEM revenues were up about 20% versus the prior year. Commercial transport OEM and Biz Jet OEM revenue percent growth were both very close to the 20%. Commercial after-market revenue was up about 19% on a Q1 versus Q1 basis. This is a strong increase, but I'll remind you, versus a week per year.

Commercial transport after-market revenues were up about 20% versus the prior year and business jet was up somewhat less. Bookings are running about even with shipments, we are watching the trends very carefully in the commercial after-market.

In the defense market, which makes up about 25% of our revenue, the defense picture was again mixed. Revenues were up 7% on a quarter-versus-the-prior-quarter basis, and about flat versus the prior year average quarterly run rate. Incoming orders ran ahead of the shipping rate in Q1, we'll see how this plays out as the year goes on. As I said, the picture is not clear but, for obvious reasons, we remain cautious about military trends.

In total for the quarter our revenues were a bit better than expected. Moving to profitability and now on a reported basis I am going to talk primarily about our operating performance or EBITDA as defined. The major as defined adjustments are primarily made up of acquisition expenses and stock option expenses.

Our EBITDA as defined was about $174 million for Q1, or up 57% versus the prior year. EBITDA as defined margin was 49.5% versus the quarter versus 47.5% for the prior year. The two-point increase is due to a number of items. To innumerate the major ones, the improved operations increased the margin by about 2.75%, a one-time contract settlement increased about 0.75% and these were partially offset by a bout 1.5% of acquisition dilution.

With respect to acquisitions, as I said, we completed one in Q1 2012. That was Harco, for about $83 million. As I said before, we executed a contract by AmSafe for $750 million. This is still subject to final regulatory approval. We continue actively looking at opportunities.

We've been pretty busy working the AmSafe and Harco deals. The pipeline, frankly, is a little light. Closings are always difficult to predict, but we remain disciplined and focused on value creation opportunities.

Now, moving onto the balance of 2012 and regarding the guidance, and this is on slide six. There are a number of moving pieces impacting our increased guidance. Our operations performed well in Q1. The Harco acquisition closed and the tax rate is a little better, are the primary impacts.

I am going to refer to the mid point members of our guidance in the following discussions. I remind everybody these numbers include no contribution from AmSafe or any additional acquisitions.

Based on all of the above, we are increasing the mid point of our EPS as adjusted guidance by $0.32 a share, or from $5.51 per share at the mid point of $5.83. We now expect TransDigm revenues to be about $1.49 million, or up $40 million, which is about 3% from our prior guidance, this is primarily driven by the Harco acquisition.

The 2012 EBITDA as defined is now anticipated to be in the range of $733 million a year, up $18 million from our previous guidance. This is roughly, or a little over half of this, from Harco and the balance primarily from improved operations. We still expect our fiscal year 2012 results to be stronger in the second half, our fiscal first quarter is typically the lowest of the year.

Compared to 2011 we are still planning on full-year commercial aerospace OEM revenues to be up about 15%. For commercial aerospace after-market, we are still planning on revenue growth of about 10%, based on worldwide traffic up 4% to 5% year over year. We will keep watching this closely as the year proceeds, and adjust if it is required. For defense revenues, we are planning year-over-year revenues to be flat to modestly down.

In summary, Q1 was a good start to the year. The market seems to be roughly on track. In any event, I'm confident by focusing on our consistent strategy we can continue to create intrinsic value for our shareholders in good and bad times. And now let me hand this over to Ray Laubenthal, our President and COO, to discuss some of the operating issues from Q1.

Thanks, Nick. As Nick mentioned, in total we had a good first quarter. We were quite busy with acquisitions due diligence, completing transactions and transitioning of acquired businesses. In our operating unit we're also diligent in working our value drivers and we continue to create shareholder value. Let me explain our 2012 first quarter operation of value creation in a little in more detail.

Four weeks before our fiscal Q1 started, we purchased Schneller. During Q1 we restructured Schneller's product pricing to better reflect the value they provide, and we organized this business unit into our proven product line operational structure. We are also working to shut down the Schneller Florida facility and consolidate these operations with the Main Kent Ohio manufacturing site.

To date, the design of the Kent building expansion has been completed and we are set to break ground on a new addition this spring. We expect to complete construction this summer and physically move the Schneller Florida operations this fall. Overall, the Schneller transaction activities are well underway and we expect this acquisition to meet or beat our value creation expectations.

On December 9 we acquired Harco Labs, Inc. To date, we have restructured the Harco spares pricing and tightened up the cost structure with an 18% headcount reduction. We are now working to organize this business into our proven product line operational structure. So far, the transition activities are progressing well, and this also looks to be another good acquisition.

Now, let me turn the discussion to our other operating units and their recent value generation activities. Overall, the TransDigm operating units are performing well. They have diligently controlled their cost structure and have added resources sparingly as the commercial market recovers. Our value generation activities have continued to be effective across our businesses, and they also contributed to our solid first-quarter results.

Our new business development continues to be quite active during Q1. We continue to invest in a broad range of engineered solutions for our customers. Each of our 50 plus product lines have many products in different stages of development each quarter. I won't do this every quarter, but this quarter I would like to give this a little color with some examples of our recent new business program awards for several of these product lines.

Today, I'd like to highlight a few of the innovative solutions we provided for our aviation water systems and electrical power management. In the water system area, we recently developed a line of water management products that reduced the weight of the aircraft and save fuel and maintenance costs. These products provide real quantifiable value for the airline.

For example, we developed and are delivering a series of low flow faucets for use on the Boeing 737, 747 and 777. These faucets conserve water and allow the airlines that use them to fly with less water. On the new Boeing 747-8 we are supplying a hands-free infrared actuated faucet. This faucet only runs when hands are present. This feature conserves water and allows airlines to carry less of it.

On the Boeing 777 we developed, and are selling, a very accurate water level sensor that helps the airline tightly manage and optimize the amount of water they carry. Again, the less water weight carried, the less fuel consumed by the aircraft.

To improve water quality, we've developed a ground cart ozone system that purifies the water as it is being added to the aircraft tanks. The system eliminates the need for chemical additives and the associated labor cost, and it is now in use at many airports, servicing a wide variety of aircraft types.

We have also developed an onboard version of this ozone system for the Boeing 737. This system keeps on-board water clean and potable without the use of chemicals and maintenance labor.

In the area of electric power management, we developed lighter weight electrical power inverter equipment for use on the Boeing 737, 747, 757 and the 777. These units are being used for both OEM production and existing fleet spares. On the Boeing 787 we developed a medical outlet frequency converter. This unit provides onboard portable power for medical emergency defibrillators, ventilators, and similar medical equipment that requires 120-volt power or other voltage standards found in foreign countries.

We have also been successful getting our existing line of micro maintenance nickel cadmium batteries approved by the FAA for use on Airbus A300 and A320 platforms and, lastly, we gained another platform approval for our energy-saving LED mood lighting systems. We are now selling this product on the A330 for a large Asian carrier.

We also continue to develop new power equipment to enhance the capabilities or extend the life of the military fleet. On the CH53 Sea Stallion and the CH47 Chinook helicopters we've developed expanded clean power transformers and uninterrupted power supply equipment to enhance the onboard avionics.

On the new Sikorsky S97 Raider high-speed helicopter we were awarded the electrical power management system, which includes a lithium ion battery, two power supplies and power distribution units. On the KC10 we have developed upgraded cockpit control panels and equipment for the KC10 modernization program.

These new engineered solutions, and many others not discussed, continue to expand our profitable product offerings and add to our future growth. Now, let me hand it over to Greg Rufus, our CFO, who will review the first quarter financial results in more detail.

Okay. Thanks, Ray, and good morning, everyone. I hope everyone had an opportunity to read our press release that was issued this morning. As you compare our quarterly performance versus the first quarter of last year, the impact of acquisitions, financing and operations are all significant in the first quarter comps. Hopefully, I'll keep it simple for you today. Before I begin, please reference slide 7 for our quarterly financial results.

Quarter One net sales were $352.5 million, up $118.9 million or 50.9% from the prior year. There are two significant explanations for this very large increase. The first is the collective impact of the acquisitions of the McKechnie, Talley and Schneller businesses which were acquired in fiscal '11, and Harco which we just acquired in the first quarter.

These acquisitions contributed $75.9 million of additional sales versus the prior period. Not to be overshadowed by the impact of recent acquisitions, our organic growth was very strong at 18.4% over the prior year.

All market channels contributed to this growth as follows. An additional $18.2 million was from the commercial after-market sales, $16.6 million came from the commercial OEM, and $5.6 million from defense sales, driven primarily by the after-market. Reported gross profit was $199.6 million or 56.6% of sales.

The reported gross profit margin increased by approximately two percentage points versus the prior year due to the following. It's the strength of our proprietary products, continued productivity improvements, unfavorable product mix all made a favorable contributions.

Also, a favorable retroactive contract adjustment contributed approximately three-quarters of a percentage point, as well as positive leverage on our fixed overhead costs spread over the higher production volume. Collectively, these items increased our gross profit percentage on our Core businesses by approximately three margin points, which more than offset the dilutive impact from lower margin acquisitions.

As a percent to sales, the impact of purchase priced accounting items, that is inventory step up and related startup costs, were about the same for both periods. Selling and administrative expenses were 11.9% of sales for the quarter, compared to 13.1% versus the prior year.

The decrease as a percent of sales was due to lower costs directly associated with acquisition-related activity such as transaction costs and a severance costs, and this is of approximately $2 million compared to the prior-year quarter. These costs were 1% of sales in the current quarter versus 2.3% of sales in the prior year. Amortization of intangibles was $8.2 million higher versus the prior year, due to the acquisitions made over the past 12 months.

The current quarter comparison is also favorably impacted by the large refinancing cost of $70.7 million recorded last year in December 2010 as a result of the refinancing of TransDigm's then-existing debt structure. This was done in conjunction with the debt raised to require McKechnie. To remind you, these costs are excluded from EBITDA as defined and adjusted EPS for both periods.

Net interest expense was $49.1 million, an increase of $16.5 million versus the prior-year quarter. This increase was primarily caused by the increase in weighted average total debt of approximately $3.1 billion in current quarter versus $2.1 billion in the prior year. This is all related to the previously mentioned refinancing in Quarter One of last year and our acquisitions.

The weighted average interest rate on total borrowings outstanding as of the end of the quarter was approximately 5.9%. Our effective tax rate was 32.3% in the current quarter, down from 34.6% in the prior-year quarter. The lower effective tax rate was primarily due to a favorable non-recurring adjustment to our state income tax expense of $2.6 million, which was related to changes in state tax laws. We now expect our effective tax rate for the full fiscal year to be between 34% and 35%.

Net income for the quarter increased $72.5 million to $65.1 million, which is 18.5% of sales. This compares to a net loss of $7.4 million in the prior year. The net loss last year was primarily due to the one-time cost attributable to refinancing of the debt structure I just discussed.

GAAP EPS was $1.15 per share in the current quarter, compared to a net loss of $0.19 per share a year ago. Please note that last year the impact of refinancing cost net of tax was $0.87 per share on GAAP EPS.

Adjusted EPS was $1.42 per share, an increase of 65% compared to $0.86 per share last year. This percentage change is higher than our sales increase of 51%, which is reflective of our improved EBITDA margin this quarter versus the prior year. The quarter adjustments to GAAP EPS were $0.27 per share.

The adjustments net of tax are acquisition-related expenses of about $0.16 per share, inclusion of the dividend equivalent payment paid in the first quarter of $0.06 per share, and non-cash compensation cost of $0.05 per share. We ended this quarter with a $360 million of cash on the balance sheet and a net debt leverage ratio of 4.2 times our pro forma EBITDA. Now, let me hand it back over to Liza to kick off the Q&A.

Thank you, Greg. In order to give everyone the opportunity to ask questions, I ask that you limit your questions to two per caller. If you have further questions, I ask that you reinsert yourself into the queue and we will answer those questions as time permits. Operator, we're now ready to open the lines.

Thank you. (Operator Instructions) Your first question comes from the line of David Strauss with UBS. Please proceed.

Morning.

Morning, David.

Nick, on the after-market you did close to 20% in the quarter year-over-year, you're guiding to 10% for the full year. I understand the comps get more difficult, but can you give us an idea sequentially as we go through the year what your 19%, 20% -- or, sorry, your 10% guidance assumes sequentially as we go throughout the year?

Well, as you know, David, we don't give quarterly guidance and I don't want to back into it that way but you can back into the math, right? If you take whatever the first quarter is and divide the rest over the rest of the year you get about 6% or 7% a quarter.

Right. Yes. I was just trying to get an idea sequentially what you're looking at.

No, we're not smart enough for that.

You guys are pretty smart.

I would say, it is -- as you know, the comps get significantly harder and we are mostly reflecting there, some -- no Company specific concern but, frankly, just a little bit of discomfort still with where the economy goes and where the airline industry goes around the world.

Right.

That's all we are reflecting there.

But did you see -- you had mentioned last quarter that you had seen some softening in after-market bookings. Did that -- it seems like that recovered in the first quarter, is that correct?

Well, the bookings and shipments were about the same.

Right.

About the same and they were up significantly off of -- over both the -- they were significantly up in the previous year. I would say sequentially the bookings didn't change a whole lot.

If you adjusted it for days from the prior quarter.

Okay. Last one from me. AmSafe, I know you are somewhat limited on what you can say but you made the comment that you might not be able to get AmSafe margins up to kind of TransDigm average. Could you maybe just compare the opportunity to AmSafe relative to the opportunity that you saw at McKechnie when you started there?

Yes. I think, the way we look at this is, as you know, we don't make any money by percent, we make the money by dollars. When we look at that, we see the same kind of -- we think this is an EBITDA that over time, as we always say four years or so, we think we can double this EBITDA which is the same kind of thing we saw at McKechnie and that's a combination of the usual suspects. It's cost reduction, it's pricing, it's some new business and a little market tailwind.

Okay. But over four years, because it looks like with McKechnie you are going to get there a lot quicker than four years?

Well, and hopefully maybe we'll do that here, too. But -- and you know how we look at these. We look at these on a four to five year cash to cash kind of basis and we're looking to get returns up in the high teens to low 20s on our equity and this passes that test or better or we wouldn't be here.

Yes, got it. Okay. Thanks a lot.

Your next question comes from the line of Eric Hugel with Stephens Incorporated. Please proceed.

Hi. Good morning, guys.

Good morning.

Can you talk about on the defense side you talked about the strength in there is really after-market driven. Can you sort of talk about maybe any specific sort of the types of products, helicopters, fixed wing, ground vehicles?

Well, as you may know, about 60% of our defense business, roughly evenly split, comes from helicopters and freighters. So, that's always going to be the primary driver, is helicopters and freighters. I would say if you look across our operating units and product lines it's, I would say, not all but a high percentage of them were up this quarter. Each one has a little bit of a different story, but the spending at least for our products was a little better than we anticipated and I really can't zero it in on one big thing.

Okay, fair enough.

I'd like to give you a more satisfying answer than that but --.

But I guess that's --

Settled about the future. It's frankly hanging in better than we thought.

I guess that's good if it's not any one particular thing. It's broad-based, that's a positive.

Yes.

Also, when you sort of look -- in your guidance, can you sort of give us sort of a range of what you're looking for in terms of the adjustments for EBITDA and net income?

With AmSafe, it's going to change a lot, obviously, because it's a large acquisition. What we have on the table what our current adjustments are, but I would ask you to be patient when we give out the AmSafe guidance because the amortization and things like that -- the dividend payment stays the same, that only happens in the first quarter. You could annualize the comp cost. That will probably go up because we'll issue more options with the acquisition, and then we'll have the various acquisition-related expenses. So it won't be any different subjects but, again, what you are seeing now will be updated and changed with AmSafe.

Would you plan to update the guidance when you closed AmSafe or just at the next conference call?

No, at our next conference call because we will be in the middle of our operating base business that quarter so our intention right now is to do at the next conference call.

But let me just add to that, Greg. I think between the public information that we put out, I think you have the basis for making some judgments there.

Great. Thanks a lot guys. Good quarter.

Your next question comes from the line of Robert Springer with Credit Suisse. Please proceed.

Good morning.

Good morning.

Nick, just to go back to spares growth for a minute, would you characterize the 19% in the quarter as what you were looking for or did that come in ahead?

I guess I would have to say I don't -- I can't say it is materially different, Rob. We were thinking 10% in the year. We're still somewhere around 10% for the year. I don't know, maybe a little better. Maybe a little worse, but I can't say there's a material difference.

I only asked the question because you actually adjusted your annual outlook on defense growth but not here.

Yes.

So, I'm wondering if this just actually came in, you really expected a front-ended year.

I can -- I would say, I guess I'd maybe front-end it, Rob, if you compare to percents. Remember, the comps get a lot harder as you go forward.

True. Fair enough. Okay. Can you can give us the latest on pricing?

Pricing of what?

Just pricing in general. The customer's acceptance of pricing and how prices are faring in this environment perhaps compared to previous periods?

There's been no significant change in the pricing dynamics in the industry for our products, Rob. It's -- we haven't seen any change this quarter and this period as we did in previous up and down cycles. Our process and our activities remain the same and the results remain the same.

Okay and just for Greg, you mentioned the contract adjustment. Are there any others embedded in the guidance going forward? Should we see any more adjustment like that?

No. Right now that happened in this quarter so we wanted to carve it out for you.

Let me just add to that. We have some number of these kind of negotiations going on at any one time. Sometimes they stretch out forever and never get resolved, sometimes they all of a sudden pop overnight and get resolved. So, it doesn't mean there is no possibility anymore, but there is no -- but it's not in the guidance. (multiple speakers)

Okay, thanks so much.

Your next question comes from the line of Myles Walton with Deutsche Bank. Please proceed.

Hi, there. Good morning. It is Amit Mehrotra here for Myles. Just looking at the guidance, the $0.32 increase at the mid point, it looks like maybe $0.10 is from Harco, another $0.05 from tax, so that leaves about $0.15 to $0.20 from improved operations. Can you just give us some color on where specifically you're seeing the better performance?

It is better to look at almost a third, a third, a third by the subjects you mentioned. So, I don't know what you read, but those improvements really course out in that way. The tax a third, Harco third, and ops a third.

Okay. And then the third that is from better performance, could you just point to specifically where in the business you're seeing that?

We are just generally being pretty tight with adding headcount as the market recovers and we're also enjoying the benefits of some of the reductions we have had with acquisitions over the last 12 months with being a full year.

Okay. And then just the commercial after-market performance up at 19% was quite strong and I think the comp was up 20% the same quarter a year ago so, just considering global capacity was up 5% in the quarter, can you help us bridge the gap between the up 19% and the up 5% for capacity growth?

Well, obviously somebody was buying more than the capacity growth was. This is the same issue we saw all of last year and we are continuing some of it here in the beginning. The first -- the quarter to quarter, first quarter to first quarter is the easiest comp. It gets tougher from here on in. So, the answer is generally the same answer we had last year. We are aware that people are buying, they're buying ahead of the -- I would say the consumption and the pricing and there is a little extra buying we suspect for inventory and some deferred maintenance. We don't know -- as these comps get tougher we don't know if that can continue.

Okay. And just last question, just a quick clarification. On the pro forma growth by end market that you provide in the deck, does pro forma mean you include acquisition-related revenue in both periods or does it exclude acquisition-related revenue in both periods?

It included. It presumes we own the same mix of businesses the prior year that we own this year.

Got it. Okay. Thanks. Great quarter.

Thank you.

Your next question comes from the line of JB Groh with DA Davidson. Please proceed.

Hi, guys. Thanks for taking my call. I just want to clarify. I think you mentioned some pricing action on Harco and Schneller, but from the other questions it sounds like you didn't take any other pricing action with the core business this quarter?

We mentioned Harco and Schneller just because, after we acquire a business, we quickly go to work on that stuff, but in our base businesses our pricing actions have been the same as they have been every year and every quarter.

So, was there a general price increase in Q1?

We don't have a general price increase, necessarily, the product line gets handled differently but I mean, it's kind of tack back on the question that Rob asked. Our pricing pattern, our pricing methodology has not changed.

We just don't talk about it every quarter. Ray talks a little about the new acquisitions.

I know I understand why you don't want to give too much away there. And then maybe you could -- sort of playing off the last question maybe give us a thought on the level of inventory at customers. How are you seeing that? Obviously, there is a little bit of inventory build here but do you have a sense of what those inventory levels are relative to historic levels?

Don't have a good sense of it. I think the best way to think about that is sort of look at our guidance for the balance of the year.

Okay. Thanks for your help.

Your next question comes from the line of Carter Leake with BB&T Capital Markets. Please proceed.

Thanks for taking my question. Defense last quarter, we had down low single digits and now it is flat to modestly down. Is that an improvement in the defense outlook just because you're handing us flat or is there no change?

Yes, we probably feel a little -- I think our previous guidance is modestly down. We changed from flat to modestly down primarily because we had a good -- better first quarter than we expected. There is nothing -- I would say -- I can't tell you there's anything about the defense world or the outlook that makes me feel a whole lot different than I did 90 days ago other than we got 90 days under the belt that was a little better than we expected.

Okay. And this is really splitting hairs, but I'll ask it. Last quarter for OEM it was mid teens and now it is 15%, that's the same. Your outlook hasn't really changed?

No, the outlook hasn't changed.

Last quarter also we had 787 commentary as one of the assumptions, 15 and 12, 50 and 13. That's been dropped. Does that matter anymore or do you have a more favorable outlook?

No. I think what I said about the 787 is it's unclear to me exactly what the shipment rates are going to be this year. As you probably know, the number seems to sort of move around but I would say it isn't going to make a lot of difference. It's not a material impact on TransDigm's performance this year. Surely, not on the profitability.

Your next question comes from the line of Carter Copeland with Barclays Capital. Please proceed.

Hi, good morning, guys this [Amir] in for Carter. First, let me just congratulate you on a good quarter. Nick, can you talk a little bit about the deal pipeline. Specifically, can you talk about any changes that you are seeing with regards to seller expectations?

I really -- I don't know that we are seeing any changes. As I think I told you, as I look at it today probably the pipeline is a little light. I don't know that I can attribute that to anything other than normal fluctuations. And, as you probably know, if you have been following our calls, the relationship between what I say about our pipeline and the timing of closing seems to have almost no relationship to each other. So take it for what it is worth. It is just hard to predict. We are out there slugging away every day, looking for things and sometimes they have a slow bubble, they boil and sort of go through a pipeline and contract and sometimes they just come up fast and we have to hit quick.

And in terms of the seller expectations, any changes there in terms --?

I don't think so. I can't say that the pricing expectations have changed materially.

Okay, great. Thank you very much and good quarter.

Thanks.

Your next question comes from the line of Joe Nadol with JPMorgan. Please proceed.

Thanks. Good morning, guys, and good quarter. The EBITDA as defined margin guidance for the rest of the year is flat to a little down from Q1. Is that just mix as you think OE will grow faster or is there anything else to consider in there?

It's acquisition mix mostly.

AmSafe is not in there?

That's correct.

No, there's nothing in --.

That's correct.

So, why would there be acquisition mix?

We have Harco, we just acquired Schneller. Typically, when we buy something it's, mathematically, we will mix down in that first year.

Right, but you got a lot of that in the first quarter and I would've thought there would've been upside from those as you pulled some cost out?

Harco was bought the first week of December. And we did tell you we had that unusual favorable pricing adjustment in our first quarter, too, which distorts the first quarter in your analysis.

Right. Okay. On AmSafe, this may be too early for you to talk about this before you close, but is there potentially a non-core piece to it as there was with McKechnie and obviously looking at the ground vehicle piece in particular, is that separable in theory maybe would be the right question? And then also on AmSafe, just to get this in, on slide 39 of the deck for the lenders that you put out a few days ago, you have $25 million of amortization in there. Is that intangibles and is that going to change once you kind of re-adjust the balance sheet?

That won't change. That has to -- that will go with us forward.

Okay. And separability of the business?

It is reasonably separable. We don't -- we're undecided yet what we will do with that. We are going to have to look at it and see what the market is for it and see how we feel about the prospects when we get right into the middle of it. It's a relatively small part of the value of the business. So, we're not as intimately familiar with it as we are with the aerospace and military portion.

But it is, the answer is yes, it is separable.

Perfect. Thank you.

Not to get technical on that amortization, that's part of that tax savings with the [three third] (inaudible) if you follow that in that other presentation.

Your next question comes from the line of Ken Herbert with Wedbush. Please proceed.

Hi, good morning. Just wanted to revisit McKechnie. Can you provide an update on where you stand? I know obviously with the facilities and the reorganizations you're doing there and the broader progress relative to what you expected to be at this point?

Yes. The unit of McKechnie that saw the most facility closures and moves was the Electro-Mech division and the Tyee move up with Avtech, both of those pretty much are completed. During the last call I reported on that. The Avtech -- our existing Avtech facility moved into the Tyee plant and that is all consolidated. We're marketing the Avtech property. That hasn't sold yet. And then Electro-Mech, we consolidated a bunch of units into their Mexico facility, but we had to move across town in Matamoros, Mexico, because we outgrew the facility and all that work was done in the prior three quarters and completed last quarter and that's running smoothly. We're happy with that.

By in large I would say on the McKechnie business it continues to meet or exceed our expectations when we bought it.

But it sounds like, from the commentary you just gave, that you still characterize it as ahead of plan in terms of the actions and the improvements?

Yes, I would say it meets or exceeds our expectations where we thought we would be today.

Got it. And then if I could on the after-market, book to bill this quarter of about one, does the guidance assume that sort of holds at around the one rate for the rest of the year or does the guidance assume that you maybe see a point later on in the year where bookings maybe start to trail billings a little bit in any particularly quarters. Is there any commentary you can make around that?

I can't say that. I mean, we forecast the revenues, not the bookings. Generally, they aren't way disconnected in the after-market because the turn times aren't that long.

Okay. Great. Thank you very much and great quarter.

Thanks.

Your next question comes from the line of Michael Callahan with Auriga Securities. Please proceed.

Thanks, guys and great quarter. I guess there's a couple of questions about the organic growth rate here in the first quarter and I guess the delta between general market growth. You guys always seem to outpace that in general. I was curious, can you give us any insight as to I guess volume versus price on that 18% and if price took maybe a little bit bigger share than usual just because you have so many acquired businesses that are all going through that price adjustment process?

Well, we don't comment on the pricing, on our pricing but -- we just don't comment on that. I don't know what else to say.

Okay. I will take a stab in a different way. Is it greater magnitude than other quarters?

We just don't comment on the price.

Alright. Fair enough.

You're welcome to try again if you want.

No, I will take two strikes. I guess on the -- the other thing I was curious about, on the SG&A line it seems like SG&A is kind of drifting higher a little bit. I would presume there's a lot of acquisition-related expenses that you're going through and what not kind of pushing that higher but as they kind of normalized run rate, I guess how should we think about SG&A, have some of the acquisitions maybe added permanent cost to that or should we expect it to come back down a little bit?

Your first assumption in the first quarter is exactly right. There was some severance costs and some transaction costs I think that totaled about $3 million, you'll see that in the Q when we file that tomorrow. When you say what the normal run rate is, it depends on how you slice it with acquisition cost and accounting cost because now you have to expense all those things where a couple two years ago you could put them on the balance sheet, but if you took that out, you are just a little north I think right around 11% or just south of 11% if you took out the acquisitions for the first quarter.

And that's not terribly off from how we've been reporting for several years.

Okay, fair enough. Thank you.

Your next question comes from the line of Michael Ciarmoli with KeyBanc Capital Market. Please proceed.

Good morning, guys. Thanks for taking my questions. Nick, I guess you kind of detailed a lot here about after-market and maybe what the trajectory is for the next couple quarters. Can you comment on maybe how the order activity has been for sparing on sort of the 787, 747-8 if that's had an impact and maybe what you're expecting on that side going forward?

I haven't seen anything significant on the 787, I don't know if we have seen anything, right?

The big initial provision in price we haven't seen that.

We haven't seen that yet. With the 747 -- I don't.

747-8.

Yes, -8, It's not been significant. I can't say that we didn't get anything. Frankly, it's a little hard to sort out from an existing 747 order, so the answer that one is I don't know whether we've got any but I know it's not been significant.

Okay, fair enough. I just on the deal side, given AmSafe, is it fair to say you might be opening up the aperture a little bit looking for larger transactions? I mean even maybe expanding the margin profile given that AmSafe didn't quite have maybe EBITDA margins that you're historically used to? Just how should we look at the deal pipeline? I guess, are we going to be seeing deals of a larger size going forward?

The real answer to that is I don't know. Our criteria has stayed the same. We're looking for proprietary aerospace businesses with significant after-market content. I would tell you AmSafe, if we separate out the ground vehicle business, is pretty well right down the pipe on that.

Okay.

The size, Michael, we deal with the size as we see. The market there are many more small businesses that will -- there are many more businesses -- or many more transactions in the [$50 million - $100] million range than there are in the $700 million to $800 million range. We deal with the ones that come up.

When Harco came up, it was small.

I mean, were not systematically changing what we are looking for.

Okay, that's fair. And then just structurally, it seems like EBITDA margins might be under pressure given this deal, given maybe OE revenues growing faster than after-market, so 2013 we might see EBITDA, adjusted EBITDA margins, be dow a little bit from 2012, is that a fair assumption?

We're not going to give guidance for 2013 yet, but you can do -- the base of business is, I would say, we gave you guidance where we kind of look like we are for the year, and we gave you some rough numbers on AmSafe, so you can do some math there. Add 25% to 50%, you get a lower average.

Got you.

Again, we don't manage to a margin. We manage the absolute dollars in value and so if the market mix changes so be it, we are not going to do anything to manage the margin, we are doing it to manage the value.

Okay, fair enough. Thanks a lot, guys.

Your next question comes from the line of Robert Stallard with Royal Bank of Canada. Please proceed.

Good morning.

Morning, Rob.

Nick, how do we kick off with the slide on the guidance. You said you expect after-market to be normal going forward.

Be what?

Normal going forward. Now, are you referring to the sort of mathematical 6% to 7% or more likely sort of 10% number for the full year?

I'm not sure I follow the question. Let me repeat what we said. We said 10% for the full year.

Yes.

Which, if you do the math, if it was, what, 18% or 19% for the first quarter that solves the 7%-ish for the next three quarters, assuming they are all weighted equally and all that.

Do you see 7% as normal [in inverted columns] or is that really impacted by the tough comps because that would seem to be the low versus what --?

I think more impacted by the tough comps. I would say what we are basically doing is we are sticking with our 10% for the year.

Okay. And then, --.

Let me back up on that. I don't mean to imply that we think there's any structural change.

Yes.

It makes after-market go forward growth look like 6% or 7% forever rather than 5% plus price or something.

Yes, exactly. And then on the capital front, I'll see AmSafe relatively large acquisition for you. Have you seen any change in your lenders in terms of their willingness and ability to lend you the amounts you're after or the rates you would like given the capital constraints of banks?

No we have not. We have very, I don't want to say easy, but ready access to capital markets still. We could raise more than we need right now.

Is that something that worries you going forward or are you pretty comfortable with it still?

Worries what? Our need or our ability to get it?

Well, just generally the situation the banks out there and the tougher capital requirements and the rest.

I mean, obviously, tougher capital requirements ultimately can squeeze down the market. I would tell you we have, so far, have not frankly ever had difficulty accessing the capital markets and we don't see any right now.

Great, okay thanks, Nick.

Your next question comes from the line of Yair Reiner with Oppenheimer. Please proceed.

Great. Good morning. Thanks for taking my call. I want to ask you about the AmSafe acquisition. Can you give us a little more color about how the tax benefits layer in and how those impact reported earnings?

You won't see it in our effective tax rate. Those benefits will lower our cash taxes paid. We said the net present value is right around $70 million, about $30 million to $35 million of that we'll recognize in the first two years. That might stretch over two of our reporting years, maybe three, because we are going to buy it in the middle of our year, but over the first 24 months I anticipate our cash taxes to be reduced by $35 million but, again, you won't see that in any change to our effective tax rate.

Got it. Thank you. And then a question about the guidance for OEM growth. You mentioned the 787 and the 747 are going to be major drivers. Maybe you can discuss which platforms will be responsible for the bulk of that growth? Thank you.

I think the way to do that is we are pretty well spread across the platforms. So if you look at the growth rates the Boeing Airbus are projecting, the different platforms, that roughly is reflective of the growth rate we're seeing in the platforms. The 787 we are, frankly we don't know how many we are going to ship this year, I don't think anybody does, but it won't impact -- it won't make a big impact on the business. It's not a material impact. Anything in the range being talked about isn't an impact this year for us.

Thank you.

Your next question is a followup from the line of Robert Spingarn with Credit Suisse. Please proceed.

Yes, I wanted to ask you, Nick, I don't know if this is you or Greg, especially I think Ray made a comment on the new acquisitions and the pricing there, but is it fair to say that you get the greatest increase from pricing in the first anniversary of an acquisition because the initial price increases?

I would say, Rob, as a general statement, though I think you have to be a little careful business by business because it is somewhat of a function of whether they've contracted for fixed periods of time. In general that is right, but it is not right in every specific.

The reason I'm asking, and I'm not sure exactly how you calculate it, you've talked about organic reflects the same mix of businesses in the prior-year quarter I guess to true things up, so is what we are seeing here in Q1 some benefit of the price increases coming through from McKechnie and maybe for the other two? I know you bought McKechnie or you had closed in the first week of December.

Yes, some.

And so is that a more significant contribution than it might be in a normalized quarter where you didn't have some large acquisitions in the prior year?

You mean you're talking specifically about the after-market now, Rob?

I'm talking about the after-market and the fact that maybe what we are doing here in Q1 this year versus Q1 last year is comparing McKechnie on a pre-price increase and a post price increase basis.

In the prior quarter, we only effectively owned McKechnie for about two weeks.

Well, I know you bought it on December 6 but do you -- in calculating your organic growth, do you push it back to the beginning of the quarter?

Yes. There's probably -- I don't think it's a whole lot just in that period but, yes, there is some.

Okay, wanted to check on it. Thank you.

Just by the math there is, Rob. There has to be.

Appreciate it, thank you.

Your next question comes from the line of Yilma Abebe with JPMorgan. Please proceed.

Thank you. One financial policy capital structure question. Can you walk us through your thought process in deciding in financing acquisitions via the bank market versus a high-yield market?

This time it was -- we wanted to do something both our bank and high yield just a year ago so the agreements were pretty fresh. And at the end of the day the bank interest rate's quite a bit cheaper than the high yield and so at this state we elected to just go with the bank debt to go quick and we had agreements that were pretty fresh and it was pretty easy for us to execute.

Thank you, that's all I had.

At this time, we have no further questions. I would now like to turn the call back over to Liza Sabol for any closing remarks.

Thank you. I would like to thank everyone for participating on this morning's call and we expect to file our first quarter 10-Q tomorrow.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, have a great day.