TransDigm Group Inc (TDG) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2007 TransDigm Group Inc. earnings conference call. My name is Shaquanna and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to your host for today, Mr. Sean Maroney, Director of Corporate Accounting and Investor Relations. Please proceed, sir.

Thank you. Good morning, ladies and gentlemen. I would like to thank all of that have called in today and welcome you to TransDigm's fiscal 2007 fourth quarter earnings conference call. We will be discussing the results of operations for the periods ended September 30, 2007. You should have already received our earnings news release that we issued this morning. If you not received the release, you may retrieve it by visiting www.TransDigm.com.

A replay of today's broadcast will be available for the next two weeks. Replay information is contained in our news release.

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. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statement. 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 information regarding forward-looking statements and risk factors included in the Company's latest filings with the SEC. These filings are available through the investor section of our web site or through the SEC's web site www.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 and adjusted net income, both of which are non-GAAP financial measures. Please see the tables and related footnotes in today's press release for a presentation of the most directly comparable GAAP measure and a reconciliation of EBITDA as defined and adjusted net income to that measure.

Now, having taken care of the necessary disclosures, let me introduce Nick Howley, our Chairman and Chief Executive Officer, who will provide an overview of the business for the fourth quarter and fiscal 2007 year. Following Nick, Ray Laubenthal, our President and Chief Operating Officer, will provide a brief overview of 2007 operating activities, followed by Greg Rufus, our Executive Vice President and Chief Financial Officer, will discuss the financial results for the period.

With that, I would like to now turn it over to Nick.

Good morning and thanks to everybody for calling in again to hear about our Company. As I've done in the past, I would like to start with just a short overview of TransDigm since we're still relatively new in the public equity market. To remind you, we completed our initial public offering and our shares began trading on the New York Stock Exchange on March 15, 2006 under the symbol TDG. At that time, we sold about 12.6 million shares, or 28% of the ownership, at a price of $21 a share.

During Q3 2007, we completed the sale of approximately another 11.5 million shares of stock, or about 26% of the outstanding shares at the time in a secondary offering. This transaction closed on May 25, 2007 at a price of $35.25 a share. As a result of this last sale, the Warburg Pincus ownership fell to 45% and we're no longer a controlled company under the New York Stock Exchange rules. Our shares closed last Friday evening at $46.29 a share.

Just to quickly reiterate, TransDigm is a supplier of highly engineered aerospace components. These components are used on nearly all commercial and military aircraft in use today. We estimate that about 90% of our net sales are generated by proprietary products; that is, products where we own the design. Similarly, we estimate that over 75% of our sales come from products for which we are the sole-source provider.

The commercial business currently accounts for about three-quarters of our total revenue with the balance being defense-related. We generated approximately 60% of our revenue from aftermarket sales this year. Aftermarket revenues have historically produced higher gross margins and have been more stable than sales to the OEMs. Because of the large installed base of products, the high margins and relatively low capital expenditure requirements, TransDigm has historically generated very strong free cash flow. This has given us the flexibility to either pursue acquisitions or retire debt. We have a very consistent value-based operating strategy. It's focused around what we refer to as our three value drivers. These are new business development, continual cost improvement and value-based pricing. We stick to these concepts as the core of our operating management method. This consistent approach has allowed us to continually improve and increase the intrinsic value of our businesses. As a key fourth element of our value proposition, we have been active acquirers. We acquire proprietary aerospace products with significant aftermarket content. We have in total acquired 21 such businesses. We acquired four businesses in three separate transactions in 2007 fiscal year just completed.

Now, let me turn to the latest financial performance. I will remind you that this is the fourth quarter review for fiscal year 2007. Our fiscal year ended September 30. In Q1, Q2 and Q3 of '06, we had a lot of financial structuring activity; not so much in Q4. But still, any profit-related comps, particularly versus full year 2006, require significant adjustments to be meaningful. As I have said in the past, quarterly comparisons can be significantly impacted by the OEM aftermarket mix, by large orders, by transient inventory fluctuation in the system, by modest seasonality and similar factors. But by almost any measure, we had a good fourth quarter and a full year 12 months for fiscal year 2007. On a pro forma basis, that is assuming the same mix of businesses in each period, revenues were up about 13.5% on a full-year basis versus the prior year end and about the same percent on a quarter-to-quarter basis. Our commercial aerospace market continues to pick up nicely. Our defense business was up significantly in the fourth quarter and more modestly on a year-to-date basis.

As we have done in the past, I will review by market segment on a pro forma basis versus the prior year. That is, again, assuming we owned the same mix of businesses in both periods.

In the Commercial segment, which makes up about three-quarters of our volume, Commercial OEM revenues were up a little over 10% on a comparable quarter and 13% on a year-to-date basis. We saw growth of about 20% in full-year shipments in the business in jet OEM shipments. Commercial transport shipments for the full year were up in the high single-digits percent. This was negatively impacted as the A380 delays impacted prior-year comps, specifically in Q2 and Q3. Q4 versus the prior year picked up significantly again in the commercial transport area.

Commercial aftermarket revenues were up about 15% on a comparable quarter basis and almost 20% on a full-year basis. We continue to see strength across the board in this segment. As we have said in the past, we are skeptical regarding the sustainability of this rate of growth in the commercial aftermarket business through the upcoming year.

In the Defense segment which makes up a little less than a quarter of our business, revenues were up almost 20% on a quarter-versus-quarter basis after being slow for the first three quarters. With the Q4 pickup, Defense revenues ended the year up about 6% versus the prior year. Incoming Defense orders for both full year and Q4 were up significantly over the prior year. This is due to a large degree to a number of multi-year orders, [specifically] some of the larger being Bradley Vehicle chain gun motor upgrades, Sikorsky for the UH-60 helicopter infrared countermeasure electronics upgrades. On the A400-M, orders for our new composite product lines made up a lot of the increase in Defense orders. Defense business is always tough to predict in the near term. We remain cautious. Defense buys are still at historically high levels and always subject to some political wins. Though we don't anticipate significant real growth, we are more bullish on Defense revenues for next year than we have been in the last few years.

If I move to profitability and on a reported basis, I remind you again there was a lot of financing activity over the last two years and Greg will review some of that in his numbers. I'm going to talk primarily about our operating performance, or EBITDA as defined, excluding the various onetime charges. On a Q4 versus comparable quarter basis, our EBITDA as defined of $76.6 million is up 46% versus the prior-year quarter. On a full-year basis, our EBITDA as defined is up about 40%. The EBITDA as defined margin is 45.6 for Q4. This is slightly higher than the Q4 a year ago at 45.1 in spite of the slightly dilutive impact of the acquisitions.

For the full year EBITDA margins were up 46.3, or about 1.5 points higher than last year. This is due primarily to the rich aftermarket mix in the year as well as strong operating performance, offset somewhat again by the dilutive impact of some of our acquisitions. As I have said in the past, small changes in mix can move the margins up or down a few points in the quarters here.

In 2007, we made four acquisitions in three transactions for a total purchase price of about $500 million. We acquired all good, solid proprietary component businesses and they are all generally tracking to our expectations. With respect to the acquisition pipeline, we continue actively looking at opportunities. We have a typical pipeline of possibilities, more small than large. We remain disciplined and very focused on value creation opportunities. Valuations, especially for businesses that go to auction, remain high. We have not seen any significant drop in valuations at this point. Predicting the timing of any closures is always very difficult and we refrain from doing that. In general, as you know, we don't discuss any specifics on acquisitions unless they are closed.

With four acquired businesses, three plant or product line moves and a rising market across the board in 2007, the year was pretty busy. I'm going to ask Ray Laubenthal, our Chief Operating Officer, just to give you a short operating review and some details on the operations. Ray?

Thanks, Nick. Having completed my second full year as President and Chief Operating Officer and my 14th year with TransDigm, I can say 2007 was a very busy and successful year in operations. Throughout 2007, our operating team successfully integrated four new acquisitions while keeping a disciplined focus on our three value drivers. Since June of 2006, we purchased Sweeney Engineering, CDA InterCorp, ATI, which is comprised of three locations -- Avitech, West Coast Specialties and ADS/Transicoil -- and we most recently acquired Bruce Industries. At each of these units, we quickly went to work integrating our proven value drivers of value pricing, productivity improvement and focused new business efforts.

To fortify these efforts, we installed proven TransDigm managers in various key positions at these new locations. During fiscal 2007, we reaped productivity gains by physically moving and consolidating three businesses and reducing the headcounts in the acquired businesses by 17% while the associated revenue percents increased by double-digits. We also continued to invest in profitable new business programs. On the Boeing 787 and the Airbus A380 and A400-M aircraft, we secured contracts totaling more than double our [ships at] dollar content versus the dollar content we had on the predecessor aircrafts. Here are just a few examples of the new applications that broaden our product offerings.

On the Boeing 787, we provide a highly engineered composite tubing and isolation connectors for the fuel and hydraulic systems. Will also supply the entire digital flight deck audio communications system. On the Airbus A380, we're providing the horizontal stabilizers hydraulic control module and the cockpit door security system. On the A400-M, we're providing the propulsion system's main and auxiliary hydraulic pumps and we're providing a set of six hydraulic valve modules to control landing gear articulation.

We continue to be very active in finalizing our Boeing 787 design and manufacturing processes. The spending and activity continues particularly heavy in our new composite fuel line products at Adel Wiggins and the audio systems at Avitech. This development and expense will likely continue through most of fiscal year 2008 with the recent Boeing 787 schedule change.

In addition to these new programs, we renegotiated several large long-term agreements on existing production platforms whereby we solidified our market positions and improved our overall economics. We also continued to implement favorable pricing that reflected our fair share of the value we provide.

Greg will review the financial information in more detail.

Thanks. As Nick and Ray have mentioned, FY '06 and '07 have been very dynamic with an IPO in FY '06, a follow-on secondary offering in FY '07, a financial restructuring in FY '06 and debt borrowings in FY '07, all while completing five acquisitions during this two-year reporting time frame.

As we have said all year, associated with these activities are several cash and non-cash accounting charges and very specific roles for acquisition accounting. We have highlighted the major items in the supplemental information included in today's press release and there will be full descriptions of these items in our 10-K which we anticipate filing this Wednesday, November 21. I point this out because these items do come into play when comparing results to prior periods.

With that, I will now focus on our GAAP results for the fourth quarter compared to the prior-year fourth quarter commenting on the major line items in this morning's press release. As you could see, fourth quarter sales were $168 million, up $52.1 million, or 45% from the prior year. Excluding acquisitions, our organic sales growth was up $19.2 million, or a 16.6% increase over the prior year. Our recent acquisitions -- that, is CDA, Aviation Technologies and Bruce -- contributed $32.9 million, or 28.4%, to the quarter. Reported gross profit was $88.1 million, or 52.4% of sales. This [is] $29.6 million increase is 50.6% greater than the prior year and greater than our sales growth. The reported gross profit margin increased 180 basis points despite the dilutive impact of our recent acquisition of ATI.

As I mentioned last quarter, our GAAP results are negatively impacted by non-cash purchase price accounting charges for inventory step-up and other acquisition-related expenses. This quarter, we expensed $2 million of acquisition-related expenses in cost of sales. $1.6 million was for inventory step-up amortization primarily related to the ATI acquisition which was completed in February. The remainder was start-up expenses. This $2 million compares to $800,000 of similar charges in the prior period. Excluding charges for acquisition-related expenses, the current quarter gross profit margin would have been 53.6%, up approximately 250 basis points versus the prior fourth quarter. The significant expansion in margin was attributable to the strength of our proprietary products, the favorable market mix on the increase in commercial aftermarket sales and continued productivity efforts from both our reason acquisitions and our more mature operating units, along with operating leverage on higher sales.

Selling and administrative expense was 11.2% of sales for the quarter compared to prior-year expense at 9.7% of sales. Research and development spending was 140 basis points greater than the prior period in support of the new business programs Ray spoke of earlier. Amortization expense increased $2.2 million, or 90 basis points versus the prior-year quarter. This increase is primarily a result of the acquisitions of CDA and ATI made during this fiscal year. Over half of the increase, or $1.3 million, is accelerated amortization for order backlog which is typically expensed over a 12-month period, the majority of which will be fully amortized by the second quarter of 2008.

The above activity resulted in fourth-quarter income from operations to be $65.5 million, or 39% of sales. This compares to the prior-year income from operations of $45.5 million, or 39.3% of sales.

Net interest expense was $25.4 million, a net increase of $7.4 million versus the prior-year fourth quarter. This increase in interest expense reflects the additional $430 million of debt we added in February with the ATI acquisition. For the quarter, our weighted average level of borrowings was about $1.4 billion versus about $900 million a year ago and the average interest rate was flat at approximately 7.7% for both quarters.

Regarding our tax provision, our effective tax rate was 38.5% this quarter and 37.6% for the year compared to 39.4% for FY '06. The lower effective tax rate was primarily due to lower state and local taxes as a percentage of EBIT along with a decrease of nondeductible public offering expenses year over year. We are forecasting our '08 effective tax rate at approximately 36.5%. We anticipate our '08 cash tax payments to be approximately $45 million.

Our fourth quarter net income was $24.7 million or 14.7% of net sales compared to $15.2 million, or 13.1% of net sales in the prior year. This is a 62% improvement for the quarter. With the net income improvement, on a GAAP basis Q4 diluted EPS was $0.50 per share compared to $0.32 per share a year ago, a 56% improvement in the quarterly comparisons. Our adjusted diluted EPS which more closely matches our EBITDA as defined, was $0.57 per share, which is a 63% improvement versus the prior-year quarter.

Cash flow from operations totaled approximately $110 million for the year. We ended the year with $106 million of cash on the balance sheet. This cash balance included the use of approximately $90 million for the three acquisitions made during the year. Adjusted for acquisitions, our accounts receivable and inventory metrics are within our normal operating parameters. As you know, we finance the majority of the ATI acquisition with debt. At the end of the year, our net debt to EBITDA leverage ratio was 4.3 times compared to 5.0 at the end of March, just after the ATI acquisition. Assuming no acquisitions or other unusual items, we anticipate this ratio to decrease one full turn in '08.

Let me now take a minute or two to summarize our fiscal '07 performance. For those of you who have closely followed our performance during this very active and challenging period, I hope you will be just as pleased that we are about the following.

For the fiscal year compared to the prior-year, our net sales are up 36%. Our EBITDA as defined was 46% of sales and up 41%. Our adjusted diluted EPS $2.10 is up 60%. Our GAAP net income is up 253% and our GAAP diluted EPS of $1.83 is up 245%. With all that we had going on, these are darned good numbers and we closed out with one heck of a year.

Having said that, '07 is now over and it is a new year, so let's review the '08 guidance in this morning's press release. Back to you, Nick.

I will just take a second to run through the '08 guidance and give you a little more information on it, and then we can get to questions. If I look at next year, again assuming the existing mix of business and generally the market trends continuing as we anticipate, we now expect the revenues to be in the 680 to $700 million range. That's about 16% up on a reported basis. This is about 10% organic growth with the balance coming from the full year of acquisitions. We expect our fiscal 2008 results to be stronger in the second half with fewer shipping days. Our fiscal first quarter is typically the slowest. Also, just to remind you, the interest expense and the other acquisition-related amortization expenses will likely be significantly higher in the first quarter of FY 2008 compared to the first quarter of FY 2007.

We expect the 2008 EBITDA as defined to be in the range of 312 to $324 million, also up about 16% versus the prior year. As usual, the new acquisitions mix our EBITDA percent down modestly. We expect our conversion of EBITDA as defined to cash absent any acquisitions to be consistent with our prior year's conversions. Or in other words, we don't see any unusual working capital or capital expenditure issues. The adjusted diluted EPS on the same basis as above -- that is excluding deferred comps, stock options, acquisition kind of expenses -- should be in the range of $2.43 to $2.53 per share, up 15 to 20%. If we compare the 2007 on a pro forma basis, again, that's as though we own the same mix businesses in both years, we are anticipating that our Commercial aerospace OEM revenues will grow at about 10% with the growth a little higher than that in commercial transport and a little lower in the other sectors.

Our Commercial aerospace aftermarket revenue we are currently forecasting to grow in the low double-digit percents. Our Defense revenue we are expecting growth in the high single-digit percents. In fiscal year 2008, the recent Boeing 787 schedule stretch-out will likely result in some higher development expenses than we originally anticipated for 2008. There will be some very modest revenue reduction and some very modest working capital increases. At this point, we do not believe any of these are significant to the 2008 expected financial performance.

Just in summary, 2007 was a good year and we look to 2008 at this time to be another good year.

With that, can we open this for questions?

(OPERATOR INSTRUCTIONS). Carter Copeland, Lehman Brothers.

Really good quarter and a really nice year, Nick, congratulations. I wondered if you would tell us a little bit more about 787, not with respect to development expenses, but the delivery schedule. Have you changed, either Nick or Ray, that the deliveries you had scheduled to [in the] other suppliers on the program, or do you expect to change those? Can you give us a little more color there?

Change from what, Carter?

From the pre-delay schedule. Have you changed at all the units that you were going to ship to the other tier 1 guys on some of these products?

Carter, as I said at the end of the '08 -- a little bit, but not much. We are seeing a mix of a little bit of delays on some. On the other hand, many of our products are just trying to hurry, hurry, hurry, get as much as you can. Everything is behind anyway, so keep shipping. So I think net, it will be down a little lower than we might have expected, but not proportional to the drop-off in deliveries. And we don't think it has any material impact on our numbers for the year.

But it is more accelerating and loaded in the back half than your original plan, correct?

That's right, I think that's fair. (MULTIPLE SPEAKERS) Carter, let me just add, that's a little unclear at this point because we sort of have a mix. Some people are telling us to hurry up and ship as much as you can, and others are kind of tempering a little bit. So a little hard to sort out that timing exactly. But again for the year, don't see much impact.

And, again, it doesn't impact the pre-tax (MULTIPLE SPEAKERS) a lot.

Okay. Second one, on ATI, I wondered if you would comment a little bit about the growth if you looked at that business as a stand-alone, how that came in in the quarter. It looks to be pretty flat if I look at Q2 versus Q3. On a sequential basis, I would have expected it maybe to have grown a little bit sequentially and I wondered if the growth at ATI was living up to your expectations.

Honestly, Carter, I just don't remember what the sequential quarters over quarter basis were, but I can say that in general it is meeting our revenue expectations that we did when we bought it. With puts and takes, the commercial business is running a little ahead of where we thought and the defense business is running a little behind, but the net of the two is it's just about on our expectations; as I said, with those kind of puts and takes.

And one for Greg. Greg, the options and the pretty sizable jump in the share count it seems like is related to those performance-based options that you had, which I guess are now being included into the share count. When does that jump sort of conclude and we get more of a leveling off in the share creep, as opposed to maybe the last couple of quarters?

The share creep is really more a function of the 10b-51 programs. As you know, we've had a lot of options within the Company for a long time, Carter, and some of these options are really from prior plans and they mature in the 2/9-2/10 time frame, so some people are exercising them as the due dates come. When that happens, as they sell them into the market, they go one-for-one as the share of common stock opposed to the treasury method that we calculated when we first went public. So you will see the share count. I would anticipate the share conversion could approach about 1 million shares during '08, and we disclosed that in the earnings release, which really doesn't have anything to do where the current program is. But having said that, the current program was established in 2003 and it matures in 2008. And there was some [cliff vesting] in 2008, so there will be quite a few shares that go from untested to vested at the end of '08 after we had our five-year and current year cumulative numbers.

That's very helpful. Thank you very much, and good quarter, guys.

Carter, just to expand. We Greg says mature in '09 and '010, he means expire, right?

Yes. (MULTIPLE SPEAKERS) So that's why you get some people moving on them.

Great, thanks guys.

Robert Spingarn, Credit Suisse.

Nick, I think you started to answer one of my first questions at the tail end of your monologue there with the organic growth in '08 by segment or market area. And I think you said the commercial transport would edge higher, sort of above the 10% level. Could you talk a little bit there about how the OE mix shifts as 787 and A380 ramp?

Let me ask you to clarify the question again. Are you asking how our overall mix or how our sales on 787 and A380 shift?

The context would be, I think you said earlier that about 60% of '07 was aftermarket.

That's right.

So how should we think about '08 because favorable aftermarket mix has clearly played a supporting role on margins. So that's where I'm going with this.

Yes. I guess the way you might think about that is, if you look at next year, the numbers we gave you, we disclosed here, are that the aftermarket is growing in the low double-digit percent and the OEM is growing at around 10%. So if you apply that our current 60/40 mix, that won't change the mix a whole heck of a lot.

It will raise the aftermarket a little bit.

A little bit but, not a heck of a lot. If you run the arithmetic, you'll see it won't change it a heck of a lot.

Plus, the other part of this though is that the OE will increasingly become less mature program.

That's right, that's right.

So how should we think about that with respect to margins?

I think we gave you some margin guidance. If you look at -- we gave you the EBITDA as adjusted. And I want to say the percent is roughly flat year-over-year. That sort of passes the smell test to me in that the aftermarket is growing slightly higher than the OEM, but not a lot.

(MULTIPLE SPEAKERS) higher margin, and so the OE margin would be a little lower?

Yes -- no, we would be a little lower and with a little bit of a dilutive impact to the acquisition, that kind of passes a logic test.

Well then, digging a little deeper into 787 like Carter did, who are your major customers on this program? Who are you shipping most of this stuff to?

Either -- our biggest our Boeing or the Boeing subcontract manufactures, like Mitsubishi and MHI and people like that.

So it's more on the aerostructure [side]?

Let me finish. Rockwell Collins, particularly on the audio systems we sell, and we're selling a lot of audio systems now with that. Honeywell is a big one. Ray, am I missing any?

No, you hit the big ones -- Mitsubishi heavy industries and FHI and Rockwell.

And Rockwell Collins and Honeywell.

Yes.

And, Ray, maybe this is a question for you. Are you generally doing -- you mentioned R&D earlier, Nick. Are you doing most of your own design work here, are you building to print? How does this work?

We're doing all of our own design work. We're not a build to print company.

Okay. And then, have you gotten timely schematics on all of this to the extent that you need them? Because we understand that one of the issues here with this program is the design change activity, and there are different levels of performance from different tiered suppliers across the chain here and there has been a lot of movement. Could you give us any context?

Let me just say, we're seeing somewhat the same thing. Getting the scope finalized and dealing with sort of scope creep here as the project approaches the end is an issue for us too, and that's one of the reasons Ray pointed out that we expect the '08 R&D expense to stay up a little longer in the year than we anticipated. If you had asked us six months ago, we would have said, we would have been shutting most of this down in the first half of the year. We don't see that happening now.

Two other brief things, I hope; one for Greg, one for Nick and Ray. For Greg, can you give us some reconciliation of the differences between GAAP and adjusted EBITDA in '08?

Can I give it to you in EPS?

Yes, (MULTIPLE SPEAKERS) really qualitatively from a -- I just want to make sure I have the right line items and the right magnitude.

In EPS space, our adjusted EPS guidance has a difference of $0.16 in '08 and we're coming out at $0.27 in '07, okay. The biggest difference or the decline in that is the reduction in the purchase price accounting and a lot of start-up expense and backlog amortization. That was about $0.19 of the $0.27 in '07, and it will be about $0.04 to $0.05 in '08.

Okay, that's very, very helpful. And the last question guys, again, more for Nick and Ray -- the pricing environment for your products out there today,

We don't see any difference in the pricing environment this year versus last year.

Okay, excellent. Thank you.

David Strauss, UBS.

Almost all of my questions have been asked. I have a couple more. SG&A as a percent of sales, Greg, has ticked up the last couple of quarters. What is included in that and what is driving that?

There's two items on a GAAP basis. Some of it is, our recent acquisitions had a little more than the [core], and our R&D expense has ticked up a bit, David.

Okay, so R&D is baked in there as well?

Yes.

And CapEx -- your CapEx outlook into 2008?

(MULTIPLE SPEAKERS) in our normal numbers, but the absolute dollars I want to say -- $16 million? 15 -- $16 million, in and around there, which is within that 2% of sales that is -- we've historically used, David.

Okay. Greg, what do you think is the maintenance CapEx number for the business?

You know, David, we really don't break it out between maintenance and new product developments. Each year, you have your fair slug of what you have to replace, but if there's nothing unusual in the current plan or nothing in the next year or two that would signify a change in our capital spending pattern. Ray?

That's correct, Greg. We didn't not have anything in the '08 plan that pumped up the maintenance. In fact, it's a very modest lower than '07. But it's unchanged.

I think the number we've always given people to use for planning is to 2.5% of our revenues. We see no reason to give us any other number. And the high end of that usually ends up being conservative.

Okay. And then your tax rate, 36.5% for '08, it's a little bit lower than what you have been running at historically. Is that kind of a normal run rate going forward and in the out years you think, is there anything unusual in that tax rate?

No, we believe that that's going to be more normal going out. At the end of '07, we went through a significant state tax reorganization which we have disclosed. With all of the entities we had, we cleaned up our legal organization. And as a benefit of that, we were able to lower our state tax rate, which helps get it down to that 36.5.

Okay. And then on the 787, Rob and Carter both asked about it, just to be clear. So you are still in the process of finalizing or Boeing I guess finalizing the design of some of your parts? And if so, can you specify exactly which parts those are?

No, we cannot specify exactly which parts they are, but I would say, this is a fairly complicated engineering project and it's not unusual that there will be scope changes and tweaks in design at the end, and that's what we're seeing. We're seeing that and that's stretching out the development a little longer than we thought.

And when does this all need to happen by you think for Boeing to kind of keep to its revised schedule? When do we need to see everything finalized?

First off -- remind me, Ray, when the first flight is again?

The first flight was in May, and they pushed that out.

And they pushed that out to when again -- October, November?

They pushed about three to six months.

You can't be going a lot past -- the middle of our year is February-March time frame. It's going to get pretty tough if you're still moving around then.

Okay, thanks very much.

[Evan Anderson], Calyon Securities.

I'm going back to the operating margin for a moment here. Looking at it on an adjusted basis, on the last conference call your guidance sort of indicated that it would be down a bit in this quarter, and that it would probably be impacted by the product mix. And now that the results are out, was it primarily the mix and the elevated SG&A, or was there anything else going on?

Versus -- what's your comparison -- versus the third quarter or the fourth quarter of the prior year?

It was down both year-over-year and sequentially, but we can look it quarter over quarter.

When I look at the EBITDA as defined, I thought we were up a little bit over the prior year, so I'm not sure where your number is going. The two items we mentioned, a little bit of R&D and so mix are the two drivers. There's nothing underneath those numbers that would cause this to meet any different.

Going back to the elevated SG&A --.

The EBITDA margin is up, not down.

(MULTIPLE SPEAKERS) I'm sorry, the operating margin.

We look at the EBITDA because we have purchase price accounting items that hit. The amortizations and things like that are included in the operating, correct Sean?

Yes.

Yes, so that's why we take you to the supplemental pages in our press release because the amortizations of backlog, etc., hit operating profit margin. That's how we get to back to EBITDA as defined, Evan.

Okay. And then I guess you would expect the SG&A to remain a little bit elevated into the first half of '08 as you are expecting the higher R&D expenses to (MULTIPLE SPEAKERS).

That's fair.

My last question -- could you disclose the sales order backlog for the quarter, where it stood?

I don't remember the number, but it's in the 10-K, isn't it?

Oh, that will be in the 10-K (MULTIPLE SPEAKERS).

-- be in the 10-K.

Okay, fair enough.

We show it out for the year; we don't break it out by quarter.

Alright, thank you.

(OPERATOR INSTRUCTIONS). Bob Franklin, Prudential Financial.

You mentioned you're going to delever a turn in the next year. Where were you comfortable or where do you want to be with leverage?

Let me just say that we don't publish a number on that and we don't have a number on that. I will say that this is a business that is used to running at a pretty good leverage level. We had a pretty predictable cash flow. We generate a lot of cash from our businesses. This is -- we look at the management of the capital structure as just another way to generate equity value in addition to the operations. Our goal is to hit the right mix of the right debt level to maximize the equity, and that can change in different capital market conditions. What I would think, our range in the past has typically run probably from a low of 3.5 to a high of 5.5 or 6 -- this is multiple of EBITDA. 3.5 frankly is too low for this Company. That's not an optimal capital structure.

Okay. So if you're 4.3 now by your math and you go down to 3.3, we can expect that not to last for very long?

Our first choice would be to find good accretive acquisitions. That would be our first choice, and that would be our overwhelming choice. If we cannot find that, we find some other way to optimize the capital structure.

It sounds like it's not by prepaying debt, then.

Whatever makes sense. Our goal will always be to maximize the equity value. We are big shareholders, we're not afraid of leverage, but our goal will always be to maximize the equity value. And wherever makes sense -- wherever the capital markets stand at the time we have to make the call, that's what we'll try and do.

What's the market looking like right now for good accretive acquisitions?

It is -- I don't know that it's substantially different than it was for the last couple of years. It's tough to find. Prices are higher than we would like, but we continue to beat the bushes like we always do. We have a backlog not terribly dissimilar to what we have had in the past, and the rate at which they can close, I just don't know.

Okay, thank you.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. It would now like to turn the call back over to Mr. Maroney for closing remarks.

We would like to thank everyone for calling in today and we'll look forward to our next conference call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.