TransDigm Group Inc (TDG) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 TransDigm Group, Inc., fourth quarter earnings conference call. My name is Dan, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes.

I would like to turn the call over to your host for today's calling, Mr. Sean Maroney, Director of Accounting and Investor Relations. Please proceed, sir.

Thank you. I would like to thank all of that you have called in today and welcome you to TransDigm's fiscal 2008 fourth quarter earnings conference call. With me on the line this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley, our President and Chief Operating Officer, Raymond 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 on our website at TransDigm.com.

Before we begin, the Company would like to remind that you 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 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 website or through the SEC's website at sec.gov.

The Company would also like to advise you that you 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 the earnings 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.

Before I turn the call over to Nick, I would like to clarify some media reports that mistakenly reported our Q4 EPS was below analyst estimates. It looks like they compared our GAAP EPS to the analysts' adjusted EPS, so I am pleased to report that our Q4 EPS both on a GAAP basis and an adjusted basis was above the analyst estimates. Now, with that, let me turn the call over to Nick.

Good morning. Thanks all of you for calling in. I would like to start off with some comments again about our stock price, our consistent strategy and ability to create intrinsic equity value, and our current sense of the aerospace market as it applies to our businesses.

In spite of year-over-year revenue growth of 20% and adjusted EPS growth of 33%, our stock price has dropped about 40% since the start of our fiscal year. We don't believe this to be reflective of our underlying value though we do understand that it is directionally consistent with the decrease in valuations among other aerospace companies. Originally, this seemed driven by fuel cost concerns and related airline actions. I suspect it is now primarily driven by cycle concerns, credit market issues and the world economic softening. However, we still believe our business model is unique in its consistency, in its ability to create intrinsic shareholder value through all phases of the cycle.

Just to summarize again some of the reasons why we believe this, about 95% of our sales are generated by proprietary products, about 80% of our sales come from products for which we are the sole source provider, about 60% of our revenue and a much higher percent of our EBITDA come from aftermarket sales. Aftermarket revenues have historically produced a higher gross margin and provided relative stability in the downturns. The equity market reaction and the discounted values seem inconsistent to us with the relative long-term stability of aftermarket demand.

Even in difficult market environments, the annual worldwide air travel rarely goes negative for any extended period of time. In fact, many reports I have seen forecast a flat to very modest decline in worldwide traffic in the next year in spite of very difficult economic situation with some possible recovery in the back end of the calendar year. Because of our uniquely high EBITDA margins, about 47%, and relatively low capital expenditures in the 2% area of revenues, TransDigm has year in year out generated strong cash flow. We have strong free cash flow. We have significant liquidity and no near-term debt issues.

Our term loan has no scheduled principle payments until 2013 and our bonds until 2014. We have $160 million about in cash, and approximately $200 million of undrawn revolver. We have the flexibility to pursue acquisitions, optimize our capital structure, or take whatever other actions we feel best maximize the value. We have a well-proven value-based operating strategy focused around what we refer to as our three value drivers. This is new business development, continual cost improvement, and value-based pricing. We stick to these concepts as the core of our operating management methods. This consistent approach has worked for us through up and down markets and has allowed us to continually improve and increase the intrinsic value of the business while continuing to invest in significant new positions on platforms such as the 787, the A380, the A400 and similar such projects.

We have been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace product businesses with significant aftermarket content. We have, in total, acquired 23 such properties including one more at the end of the fourth quarter. We have been able to acquire and improve these 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 value for our shareholders for many years. The performance after 9/11 where EBITDA as defined grew and margins expanded right through the downturn was a prime example. During that very trying period, all of our value drivers contributed. We quickly reduced our costs, we continued our value-based pricing strategy, we generated significant new business, and we improved our acquisitions substantially.

As in the past, in Q4 of this year we moved quickly to get out ahead of a potentially softening market. We completed significant cost reductions. We completed the significant cost reductions we outlined in the last quarter's conference call. This will help us to continue to create value if the market softens as much as some anticipate. This consistency does not seem to us to be fully recognized and valued at this time.

With respect to our underlying markets, in general we see a lot of uncertainty as we go into 2009. I surely don't know exactly how this will unfold, but we have to put a stake in the sand somewhere, so here is our current thinking. In the commercial OEM segment, the Boeing strike is now concluded but we expect we will lose two to three months of effective production in our 2009 fiscal year from this strike. We are also concerned about the potential 2010 production rate decreases in all commercial OEM segments. With our lead time, we could begin to see some of this in late 2009.

In the commercial after aftermarket we are beginning to see clear signs of a slowdown in growth as the worldwide economic conditions begin to take their toll. Worldwide traffic in the first part of our fiscal year 2009 could well be down modestly year-over-year. We could also see some system wide inventory reductions. Hopefully the second half could look a little better.

Though quarterly numbers bounce around, over any extended period of time our real or unit aftermarket volume has generally been able to grow at or ahead of overall worldwide passenger traffic. Of interest and as many of you know, most of this passenger traffic is now outside of North America. To remind everyone again, the DC-9 MD80, Classic 787s and 727 platforms, most at risk of retirement, make up only about 3% of our last year's revenue.

In the defense markets, on the other hand, still look good. We do not anticipate double digit growth again in 2009, but we do anticipate some modest growth. We are cautious regarding the market outlook, but we're confident in the strength of our unique business model to continually create intrinsic shareholder value, and now let me turn to the latest financial performance.

I will remind you this is the fourth quarter and full year review for fiscal year 2008. Our fiscal year ended September 30. As I've said in the past, quarterly comparisons could be significantly impacted by differences in the OEM aftermarket mix, large orders, transient inventory fluctuations and modest seasonality among other factors. In spite of a softening economy, we had a good year and a good fourth quarter.

Revenues were up about 20% on a full year basis and 13% on a quarter versus prior quarter basis. Pro forma growth, that is assuming we own the same mix of businesses, was up about 9% on a full year basis and about 7% on a quarter versus quarter basis. Reviewing the revenues by market segment again on a pro forma basis versus the prior year just to repeat, that's assuming we own the same mix of businesses in both periods, in the commercial segment, which makes up about three quarters of our revenue, the commercial OEM portion of that was up 13% on a quarter over quarter basis and about 9% on a full year basis. Both the commercial transport and the regional [biz] jet sectors grew both on a quarterly and a full year basis. The 9% revenue growth for the year is right about on our revised guidance.

The commercial aftermarket revenue was up about 5% on a full year basis and about 3% on a quarter versus quarter basis. This full year growth is impacted by two items which we've mentioned previously. One was the extended maintenance cycle for certain cockpit security components and second was some modest inventory adjustments we saw through the year. If you remove the impact of these two items, our core commercial aftermarket was up about 8% to 9% on a full year basis. This growth, however, appears to have slowed in the second half.

The commercial aftermarket revenues were lower than our revised guidance for the year. This concerns us clearly as we move into 2009. The defense segment, which makes up approximately a quarter of our business, the revenues were up about 7% on a quarter over quarter basis and about 16% on a full year. This is just about on our revised guidance for the year. In total, for the full year our revenues were about on our initial expectation with some shift in the aftermarket mix between commercial and defense aftermarket revenues. Our overall revenue growth at 9% was very close to both our previous and our original guidance.

If I move onto the profitability and now I am on a reported basis, I am going to talk primarily about our operating performance, our EBITDA as defined, the total adjustments to EBITDA are lower in this current year due to both less acquisition expenses and secondary operating costs than it was in 2007. In Q4 versus the comparable quarter basis our EBITDA as defined of about $89.5 million is up 17% versus the prior Q4. The EBITDA as defined margin of about 47% for both Q4 '08 and on a full year basis is up slightly over the full prior year in spite of the dilutive impact of acquisitions and the ongoing higher 787 development expenses. Greg is going to give you some more detail on these financials.

With respect to acquisitions, we made one additional acquisition in Q4. We bought an ignition component business from General Electric. This will be relocated to our Champion business and fits well with our other Champion ignition products. We continue to actively look at opportunities. We have a pipeline of possibilities still, again more small than large. They remain slow to close. We stay disciplined and focused on opportunities that meet our criteria, and where we see clear value creation opportunity. Predicting the timing is difficult as always, and as a general rule I will just repeat, we don't discuss any specifics on acquisitions until they're closed. With that, let me just pass it to onto Ray Laubenthal, our Chief Financial Officer, who is going to give you a short operating review.

Thanks, Nick. Before I start, I just to want clarify one statement you made, Nick, to remind everybody the DC9 and the MD80, the Classic 737 and I think you said 787 there. Those platforms, those older platforms, only make up 3% of our last year's revenue. With that clarification, let me move forward.

As Nick mentioned, over all we had a good fourth quarter and a good finish to fiscal 2008. Our operating value drivers and acquisition integration continue to add solid value. Let me review our fourth quarter and fiscal 2008 operational value creation in a little more detail.

On September 26, four days before the end of our fiscal 2008, we acquired GE Unison's Magneto and related ignition and components products business. These products are manufactured in GE's Rockford, Illinois plant. Over the next four to five months we'll be relocating the product line's manufacturing and support activities to our Champion aerospace facility located in Liberty, South Carolina. We have already revised some of the product pricing, and we have numerous Champion personnel working to ensure a smooth transition of operations to South Carolina.

I am also happy to report the CEF business, which was purchased in May of 2008 and discussed during the last quarter, is making good progress incorporating our three value drivers. Now let me turn the discussion to our other operating units and their value generation activities last quarter.

In preparation for the potentially softening market, we made a significant cost reduction by reducing staff at each of our units. In total, we reduced head count by over 9% along with other cost reduction efforts. Going forward, we will continue to closely watch the market and react accordingly.

In addition to these staffing reductions, we continue to progress favorably with our numerous productivity projects spanning all areas of our operations. We also began to expand our offshore machining and assembly content, especially in China and Malaysia. All of these activities contribute to our value creation in 2008 and they've laid the foundation for further productivity value creation in 2009. We also installed three new operating unit presidents during 2008. At mid year, George Valadares became president of AdelWiggins Group and at the beginning of Q4 Pete Palmer became the president of CEF Industries. Both of these were internal promotions that came up through our succession develop process. Also last quarter we hired Jack Stiffler as the President of our MarathonNorco Aerospace Group. Previously, Jack Stiffler was Vice President of Cessna Citation Parts business.

Our new business development continued on track in Q4, and we finished the year booking new business orders above our expectations. We were also very active finalizing our Boeing 787 design and manufacturing processes. We expected development and expense on these projects to be modest during our fiscal 2009 and should decline over the course of the year. In addition to these new programs our value pricing efforts were again effective and contributed to our results. Now let me hand it over to Greg Rufus, our CFO, who will review our fourth quarter and 2008 financial results in more detail.

Thanks, Ray. Again, good morning and thanks for calling in. Nick and Ray gave a very good update of our business, the market, and what lies ahead of us. 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 with a little more detail.

Our fourth quarter sales were $189.2 million or 12.6% greater than the prior year. Organic sales growth accounted approximately half of the growth or 6%. All market segments contributed to this growth led by low double-digit growth in commercial OEM, high single-digit growth for defense, and low single-digit growth in the commercial aftermarket. The acquisitions of CEF and Bruce accounted for the balance of the increase. Reported gross profit was $103.4 million or 54.7% of sales. This is 17.4% greater than the prior year. Excluding acquisition related expenses and cost of sales, gross profit grew 15% which is above our sales growth despite the dilutive effect of strong OEM sales and acquisitions. This margin expansion continues to confirm the strength of our proprietary products and cost reduction programs.

Selling and administrative expenses were 10.1% of sales for the quarter compared to the prior year expense which was 11.2% of sales. The major reason for a lower cost as a percent of sales this quarter was due to a modest reduction in R&D expenditures. If you remember during prior calls, we discussed the heavy R&D spending we would incur in '08 in support of the 787 program. They just started to begin winding down.

Net interest expense was $22.3 million, a net decrease of $3.1 million or 12% decrease compared to the fourth quarter of the prior year. The decrease in interest expense was due to the lower interest rate. The average interest rate decreased to approximately 6.6% this quarter compared to 7.7% last year. Regarding our tax provision, our effective tax rate was 35.5% this quarter and 35.6% for the year compared to an effective tax rate of 37.6% for all of FY '07. The favorable reduction in our effective tax rate was primarily due to a reduction in state and local taxes which resulted from a state legal entity reorganization we affected in fourth quarter FY '07. We also had some favorable one-time favorable tax settlements during the year.

We're forecasting our FY '09 effective tax rate to be 36.5%. We also anticipate our '09 cash tax payments to be approximately $75 million. Our fourth quarter net income was $38 million or 21.1% of our fourth quarter sales. This represented a 54% increase over the prior year. Taking a step back, the combination of the higher sales of approximately 13% and expansion of gross margin with the higher volume, lower selling and administrative expenses as a percent of sales, lower amortization expense and lower interest expense versus the prior year quarter and a lower effective tax rate all contributed to the net income being 54% greater than the prior year. With this net income improvement on a GAAP basis, fourth quarter diluted earnings per share was $0.75 per share compared to $0.50 per share a year ago, a 50% improvement in the quarterly comparison.

To summarize the fiscal year on a GAAP basis, net sales increased by 20% to $714 million, gross profit increased by 25% to $386 million. As a percent of sales, gross profit was 54%. Selling and administrative expenses were flat as a percent of sales, interest plus amortization were about the same in absolute dollars but less as a percent of sales by almost 300 basis points. Our effective tax rate improved by 200 basis points, and the combination of all the above items resulted in our FY '08 net income being 50% better than FY '07.

GAAP full year diluted earnings per share was $2.65 per share compared to $1.83 per share a year ago, a 45% improvement in the quarterly -- or in the yearly comparison. On an adjusted basis, which primarily excludes acquisition related costs and noncash compensation costs, FY '08 earnings per share increased 33% and finished at $2.79 per share. Again, this was another outstanding year.

Switching gears to cash and liquidity, the Company generated $189.6 million of cash from operating activities during fiscal 2008. This represents 142% of net income and is almost 70% improvement over the $112.4 million generated in FY '07. We closed this year with $159 million of cash on the balance sheet. Net cash increased $53 million for the year. This increase includes the use of $154 million of cash for the two acquisitions we discussed earlier.

Excluding the acquisitions, our cash on the balance sheet would have increased $[207] million during the year. At the end of the year our net debt leverage ratio was 3.5 times compared to 4.3 times a year ago, and that's compared to EBITDA. Given the credit crisis this country is going through, we believe our current cash position together with our undrawn committed revolver of almost $200 million provides sufficient financial flexibility to manage our working capital and support growth included in our guidance. Again, our '08 performance was very good. I will now turn it back over to Nick who will discuss our '09 guidance.

Thanks, Greg. Looking into 2009, and again our guidance assumes no acquisitions as usual, we go into 2009, as I said before, with more market uncertainty than usual. However, rather than delay any guidance, here is our stake in the sand. We are guiding revenue in the range of $740 to $770 million, up 6% from the midpoint on a reported basis. The organic growth is in the low single digits with a balance in the increase due to a full year of acquisitions. We expect our fiscal 2009 results to be somewhat stronger in the second half of the year with fewer shipping days our first fiscal quarter is typically the slowest. We expect 2009 EBITDA as defined to be in the range of $348 to $365 million, up about 7% versus the prior year. The EBITDA as a percent of revenue is forecast to be up slightly year-over-year.

We expect our conversion of EBITDA as defined to cash flow absent any acquisitions will be about $170 million. This is in spite of significantly higher cash tax payments this year. Our adjusted diluted EPS on the same basis as above, that's excluding primarily noncash compensation expenses and acquisition related expenses, should be in the range of $2.90 to $3.10 per share or up 8%.

To give you a little background, this guidance is based on the following market assumptions. I will remind you that our fiscal year starts October 1, so we will see the full impact of the Boeing strike in this fiscal year, and we also will see what many feel may be the more difficult year-over-year air traffic comps in the first half of our '09. Compared to 2008, on a pro forma basis, we are assuming our commercial aerospace revenues will be about flat with the commercial OEM transport segment impacted by the Boeing strike in fiscal -- in Q1 and potential rate reductions in the back end of the year. We now anticipate minimal 787 shipments in 2009 also. We're also assuming some softening of the business jet revenues in the back end of the year.

In the commercial aerospace aftermarket, our revenues assume growth in the low single-digit percent. This is based on a worldwide air traffic being down in the low -- very low single-digit percents, some inventory reduction in the system offset by pricing actions and some modest new business activities. Our defense revenues we're assuming will be up in the mid single-digit percent. Hopefully our view of the market is conservative but in this uncertain period we prefer to plan that way. We'll watch the market closely and we'll tweak our cost structure and adjust our guidance as we see the situation unfold through the year. To summarize this, 2008 was a good year, 2009 may be tougher, but I'm confident sticking with our consistent strategy, we continue to create long-term intrinsic value in good and bad times for all our equity holders. With that, we'll now open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Fred Buonocore from CJS Securities. Please proceed, sir.

Good morning, Fred.

Good morning, gentlemen, very nice quarter. One thing that I wanted to get a sense for, you talked about your pricing actions benefiting 2008 and Q4, but given the difficult environment and potentially deflationary environment, are you starting to see customers giving more pushback than normal on price increases?

No.

Okay.

I don't know how else to expand that.

No. We like straight forward, Nick. Thank you. And then you talked about the underlying components of your '09 guidance for commercial OEM you mentioned rate reductions in the second half. Could you elaborated on that a little bit, please?

Let me start off and say we don't know. I guess it is the market is uncertain. It is unclear as we move in. I will tell you that we run, on average, roughly 6% to 7% -- six to seven months ahead of the OEM production rates, and God knows I don't know what they're going to be in 2010, but there is enough sort of I will say clouds on the horizon and concern and forecast going all over the place that we think it is prudent to figure we'll start to see some ramp down of production rates in 2010 which will probably begin to show up in our -- at the end of '09 in our shipments. Now, we'll watch that as the year goes forward, and we'll assess that. You guys can make the calls as well as we can.

Yes. Sure. And just speaking in terms of in the recent weeks, what have you been seeing in terms of distributor inventory adjustments?

I can't speak to it that contemporaneously. I don't know week by week. I think I gave you some rough guidance on what we think we saw through the year.

Got it. And then you talked a little bit about some --

By the way, when I say inventory adjustment, I don't mean just distributors, I mean through the whole system. The airlines tend to get a little herky jerky on their ordering, too, when they get worried.

Right, right, understood. Finally, you referenced offshore machining and assembly content, particularly in China. Could you talk a little bit more about what you're doing there, please? Thank you.

We just start -- this is Ray. We started to expand some of our efforts there, have people quote work and so forth. It hasn't really shown up in any of the '08 numbers too much. We do already -- we do have a Malaysian plant that has been in our group since we acquired ATI, and we're moving a little bit more work there in '09, and we're expanding some assembly and machining outsourcing in China in '09.

We think it is a go-forward, and a little this year. We think it is a significant productivity opportunity for us.

Is this something where you develop your own facility in some Asian markets?

No, there is no bricks or mortar in our current plans.

No. We would be using third parties.

Got it. Thank you very much.

Your next question comes from the line of David Strauss from UBS. Please proceed, sir.

Good morning.

Good morning, David.

Nick, obviously open up a bit of a can of worms here with the comments about rates in 2010. What are you potentially thinking about in terms of where you think rates can go? Obviously, Boeing is kind of a 40, 41 a month right now. Does this cycle -- you obviously lived through prior down turns, does this cycle feel that much different than prior cycles? What is there to believe that production rates don't go down 20% or 30%?

The truth of the matter is, David, I don't know. I tend to be -- we tend to be conservative. We tend to assume that rates downturn will start to look like other downturns as it picks up speed. We are starting to see -- we haven't seen anything from the commercial transport people, but we are starting to see business jet manufacturers announce rate downturns.

Yes. And in terms of --

If you were to ask them six months ago or if you were to ask the question six months ago, everybody would have professed not a chance of that.

Right, right. In terms of thinking about the potential downturn in production rates, what do you think that means for your margins? Obviously your aftermarket business makes up the majority of your overwhelming majority of your profit, but just from an over head absorption standpoint, do you still feel like you have got the ability to hold margins relatively flattish in an environment where production rates go down fairly significantly?

Well, I think we gave guidance, and we gave you the assumptions that were in our guidance, and those assumptions we think we can slightly expand the margin. Now, that depends how far they go down. If they go down substantially further than we assume, it could become difficult. I think we could probably down rate the volume modestly and still hold our margins.

So can you tell us what you assumed for production rates in the second half of the year for you guys?

We're very uncertain on that. I can tell you we are subjectively concerned. We honestly don't -- we're uncomfortable with where we think the rates will be on each of the platforms and really don't want to get into forecasting that.

Okay. And on 787 are you still -- ?

Hopefully what I am conveying is significant uncertainty here.

I appreciate it. It is better than others are doing. On 787 are you guys still seeing change orders come through from Boeing or has that kind of stopped at this point?

Greg, you want to talk on that?

Yes. On the 787 the change orders have slowed way down and the program is winding down and we're not seeing --

We hope.

We hope. We're not seeing nearly what we saw six to nine months ago.

Okay. And last one, Greg, you gave guidance for the share count. Are you assuming any share repurchase? I know you have this amount outstanding at this point.

We just released that press release so in our guidance we don't have any assumption built in for share repurchase at this time, David.

Okay. Thanks, guys.

Your next question is from the line of Carter Copeland from Barclays Capital. Please proceed, sir.

Good morning, gentlemen, nice quarter.

Thank you.

Thank you.

Nick, just to kind of clarify here, how far out can you see? If you could talk about the visibility and whether it is through distributors or with the airlines, what gives you confidence that we're being conservative enough here? How far out in the distribution channel can you see a quarter or two quarters?

Probably not much more than a quarter.

Okay. So this is --

Probably not much more than a quarter, so, Carter, I realize I sound like a broken record. There is uncertainty here. We're hopeful that we captured it.

It seems that way. Where is there more? Is it in distributors or in the airlines themselves?

You're speaking now in the inventory situation?

Yes.

We know as I think I have said before, we are quite comfortable with our distributor inventory situation. In other words, they're about at the appropriate level for the demands. Of course, if the demand starts to drop a little more, then they also can draw the inventory down a little more. What is less certain to me is how much inventory is out in the airlines. I know there is some. As you know, Carter, and I am sure most people on this call know, '07 was a very big year for buying. Exactly how much of that ended up spread around in inventory, I am not sure, but I suspect some.

Yes. Presumably because we have this margin increase implicit in the guidance it would be reasonable to assume that your cost-cutting efforts are done for now. Is that correct?

We hope so. We hope so, Carter, but I would tell you this is something we'll watch very closely. If we start to see a market that's starting to move away on us, we'll make some more cost adjustments. As of right now, we don't plan to make any, but that's not to say we don't have plans in place so that we can move quickly.

Okay. One last one. On this repurchase authority, obviously the stock is at a level that historically is pretty cheap. How are you considering the pace with which you may engage in some of the repurchase activity? I know it is not assumed, but are you thinking opportunistically? Should we be thinking you'll be aggressive now? You have $160 million in cash on the balance sheet.

I think --

Seems like a good opportunistic place to be buying back stock.

We think it's a good buy. We think our stock is a good buy for sure. We're sort of going to feel our way down the road as to how much we buy and at what price and at what time, but, Carter, we clearly view it as a very good value right now.

All right. Thanks a lot, guys.

Your next question is from the line of Karl Oehlschlaeger from (inaudible). Please proceed.

Thanks, guys. Looking into next year and where the margins are at --

Can you speak up a little?

Can you hear me now?

Yes.

Sorry about that. Looking into next year's margins and some of the cost savings measures you took last quarter, I guess want to get a sense of how big of an impact two margins (inaudible) cost saving measures in the quarter and then I am assuming that there is a full quarter benefit in the first quarter of next year, and so when we think about margin trends for next year, how should we be thinking about what the cost cutting measures meant for sort of a full year revenue number? In terms of basis points if you can.

It is baked in our numbers. You have -- it is baked in the forecast we gave you. You have a couple of things working in different directions here. You have a little bit of dilution from acquisitions on the negative side. You have a little bit of mix on the negative side. On the positive side you have cost-cutting and pricing. Sort of when you parse them all out, you end up with where we are, I think the expansion is what is it, Sean, about half a point?

Yes, (multiple speakers) [447].

About half a point year-over-year.

So I was thinking if you hadn't done the cost-cutting measures, how different would margins be in terms of basis points? How big of a benefit has that proven to be versus your forecast? What's built into your forecast?

I don't know if I can exactly calibrate that for you because it is very hard for me to foresee a scenario where our volume would drop and we wouldn't have reacted at all.

Sure.

I guess presumptively if we did nothing, you would have 9% or 9% to 10% more people with nothing to cover them. (multiple speakers)

That's the right way. Because it is a function of volume also.

Right. How about the R&D? That's trending down on the 787. How big of a tail wind is that to the margins in '09?

I think what we disclosed is that for the year, the mix of acquisition dilution and higher R&D spending was somewhere in the 1.5% or so range. Margin impact, I think about half of that was R&D spending I want to say. This is a number we disclosed at one of the --

I think Carl's question led more towards '09, Carl?

Yes,

Well, I was trying to giver a sense of how much extra was in '08.

Right. We're going to continue to have R&D expenditures in '09. We see some opportunities, so in our plan it is not going to be a material tail wind. The spending will be less, but it won't be a material issue because we see some good things we want to fund right now.

And, Karl, the 787 isn't going to zero in the (inaudible). They're not -- it is just it is starting to tail down.

Right. Okay. On the M&A side, you guys are still have the pipeline, that's working. Can you talk about what you're seeing in terms of asset valuation? Are people a lot more eager now to talk to you than they've been in the past and more willing to --?

Prices surprisingly, the private prices are still high. I mean, they -- I would say we have seen bid ask spread where a deal didn't go because there was just a bid ask spread on it, but the things that closed in the private market are still closing at pretty healthy prices, surely very healthy compared to the public market valuation.

Right.

We haven't seen it come down a whole lot.

That's interesting.

Which by the way should not be in my mind, but that's what it is.

Just keep waiting, I suppose. There is a lot of questions on the inventory adjustments or the potential ones. Maybe you could talk about it a different way, and post 9/11 you guys did a great job in terms of actually growing margins through that downturn, but what did you see then in terms of inventory adjustments versus what you've seen so far and kind of what you baked into expectations? Can you talk about that at all?

I really don't -- I am not prepared to give any more specifics on that. The answers for 2000 after 9/11 is I don't remember.

Right. Right. All right .

Your next question is from the line of [Daniel Smith] from [Ticom Capital]. Please proceed.

Hi, guys. Congrats on a great quarter. Couple questions. On the units and acquisition it looks like you paid a little bit higher revenue multiple than you historically have. I think you normally pay about three times and it looks like you paid more like four times for Unison. Does Unison have better margins or better margin potential or why was that?

I have to tell you that has little significance to us. I don't -- I guess you're right. I haven't really looked at what we paid on revenue. We typically look at it on two things. One is a multiple of EBITDA but primarily on what we can do with the business as it goes forward.

Clearly you just think Unison has higher than normal margin potential?

And potential going forward. The combination of that justify the price to us. I understand some people look at it as revenue, how much revenue you buy and --.

Well, it is all we have.

It is just not the way we look at it and I --.

I understand, but that's all we have.

Okay.

Are you willing to talk about the EBITDA margins?

No, but I would be willing to tell that you we think it is a good buy. We think it will be a good accretive acquisition, and if we didn't see the opportunity for good return and good margin expansion that gives us sort of, as we said before, kind of a private equity-ish kind of an IRR, we wouldn't buy it.

Okay. Secondly, the cash tax rate looks a little higher than I would have expected. Why is it going up in '09?

More it is a function of '07's cash tax rate was extremely low. We only paid about $40 million or $38 million to $40 million in cash taxes in '08. We were still benefiting from some reduced or from favorable tax treatment for some purchase price accounting, some equity debt restructuring we did, and some stock option expense that we got tax deductions for. Those things will not repeat to that magnitude in '09.

One other thing, too, we did get some refunds back. After we bought ACI we had some NOLs and we benefited from cash refunds from that acquisition as well.

Okay. And you guys -- I couldn't tell, did you say you didn't want to say what the 787 development costs were in '08?

I don't think -- (multiple speakers)

I think we said about -- no, I think we said about what the margin impact was which I think we said was something like three quarters to 1% impact on our EBITDA margin.

Okay.

So you could pretty well figure it out from that, I think. That's sort of the excess spending.

Okay. Versus '09?

No. It was versus the -- I guess it was versus the prior year or expectations. I can't remember now.

Versus depends what part of the year we were talking about.

So it is not safe to assume that the 787 costs decline will contributed 100 basis points in '09?

No, that's right. Some of it remains. It goes down, but it doesn't all go away.

Okay. So maybe 50 basis points or something?

Again, as I said, we're funding newer projects, too. [In our own] pipeline.

Okay.

I think you have to take -- we gave you an EBITDA margin, an EBITDA forecast, and I think you have to use that.

Okay. Thanks, guys.

(OPERATOR INSTRUCTIONS) Your next question is from the line of [Kenu Shah] from [Magnetar] Capital. Please proceed.

Hi, guys. One quick question. Could you disclose what your adjusted EBITDA was pro forma for all acquisitions for the year?

We typically don't disclose that. It is not materially different than the LTM EBITDA that we have reported.

Okay.

I would be hesitant to do it because I've never reported it publicly.

Okay. That's all I have. Thank you.

There are no further questions in the queue. I would like to turn the call back over to Mr. Sean Maroney for closing remarks.

Thanks, Dan. Thanks all for joining us today and participating on this morning's call. I would also like to tell you that we plan on filing our 10-K early next week. Thanks again.

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