TransDigm Group Inc (TDG) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2009 TransDigm Group Incorporated earnings conference call. My name is Francine and I will be your coordinator for today.

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

Thank you. I would like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2009 first-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, 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 on our website at www.TransDigm.com.

Before we begin, the Company would like to remind you that statements made during this call return 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 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 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. With that, I will now turn the call over to Nick.

Good morning, thanks again to everyone for calling in. As in the past, I would like to start off with some comments about both our consistent strategy as well as our current sense of the aerospace market at least as it applies to our business.

Just to reiterate, we believe our business model is unique in the industry in both its consistency and its ability to create intrinsic shareholder value through all phases of the cycle. To summarize again why we believe this or at least a few of the reasons, about 95% of our sales are generated by proprietary products. About 80% of our sales come from products for which we are a sole source provider.

About 60% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales, aftermarket revenues and historically produced a higher gross margin and provided relative stability in the downturns. Even in difficult market environments, the annual worldwide growth in air travel rarely goes negative for any extended period. In fact most reports I have seen forecast a modest decline in worldwide traffic in '09 in spite of very difficult economic situations with some possible recovery in the back end of the year.

Because of our uniquely high EBITDA margins at 47% or more and relatively low capital expenditures, TransDigm has year-end and year-out generated strong free cash flow. We have significant liquidity and no near-term debt issues. We have about $150 million in cash and approximately $200 million of undrawn revolver in spite of making two acquisitions for about $140 million in the last four months and buying back some of our stock.

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 in the past and allowed us to continually improve and increase the intrinsic value of our business while continuing to invest in new business and platform positions. We have been successful in regularly acquiring and integrating businesses.

We acquire proprietary aerospace products with significant aftermarket content. We have in total acquired 24 such businesses including one in September and one in December of 2008. We have been able to acquire and approve aerospace component businesses through all phases of the cycle.

Through our consistent approach on our operating value drivers, a clear acquisition strategy and close attention to our capital structure, we have been able to create value for our shareholders for many years. The performance after 9/11 or EBITDA as defined grew and margins expanded on both a GAAP and pro forma basis right through the downturn was the most recent example.

During that very trying period, all of our value drivers contributed. We quickly reduced our cost, we continued our pricing methodologies and we generated significant new business and improved our acquisitions substantially.

As we have in the past, in Q4 of last year we moved quickly to get out ahead of a potentially softening market. This is reflected somewhat in our Q1 margins. Additionally as in past down cycles, we continue our new business generation as well as our value based pricing initiatives. This consistency seems to us to not be fully recognized and valued at this time.

Now, with respect to the status of our underlying markets, in general we still see a lot of uncertainty in 2009. And I will say right up front, I don't know how this economic cycle is going to unfold but I give you our current sense at least that where the market stands with respect to TransDigm.

In the commercial OEM world, the Boeing strike concluded but we expect we will lose about three months of effective production in our 2009 fiscal year from this strike. We have seen almost all of the business jet OEMs announce significant rate reductions in the last 90 days.

We're still concerned about potential production rate decreases in the commercial transport OEM segment in either late 2009 or into 2010. If that happens with our leadtime, we will begin to see some impact in the second half of 2009.

All in all, our commercial OEM business could be weaker than the flat year-over-year comps we assumed 90 days ago though I will say this still remains quite unclear. In the commercial aftermarket, we are seeing clear signs of a slowdown in growth as the worldwide economic conditions take their tolls.

The worldwide traffic in the first part of our fiscal year 2009 will almost assuredly be down modestly year over year. We may well continue to see some systemwide airline inventory reductions.

Hopefully the second half of the year looks a little better. At this point, the commercial aftermarket is about as we expected 90 days ago, though I will say again we remain quite uncertain about second half of our year. The quarterly numbers can bounce around over longer periods. Our real or unit aftermarket volume has generally been able to grow at or ahead of overall worldwide passenger traffic.

The defense area on the other hand, looks pretty good. Q1 revenues and bookings were better than anticipated and for at least the first half of FY 2009, this segment looks stronger than we expected 90 days ago. Based on what we know today, defense may exceed our previous the mid-single digit growth assumptions.

We remain very cautious regarding the market outlook. The confidence and the strength of our unique business model continually create intrinsic shareholder value and also our management team's ability to respond to changing market conditions. Now let me turn to our latest financial performance. Let me remind you this is the first quarter for our fiscal year 2009. Our year started October 1.

As I said in the past, quarterly comparisons can be significantly impacted by differences in the OEM aftermarket mix, large orders, transient inventory fluctuations, modest seasonality and other factors. But in spite of a weak economy, we had a good first quarter.

Revenues were up 11% versus the prior first year first quarter. Pro forma growth, that is assuming we own the same mix of businesses, is up about 4% on a Q1 versus Q1 basis with the overall commercial business about flat and defense up significantly.

Reviewing the revenues by market segment, again still on a pro forma basis versus the prior year, that is assuming we own the same mix of businesses in both periods; first in the commercial segment which makes up about three-quarters of our revenue, in the commercial OEM was up about 6% versus the prior first quarter basis.

This is compared to a very low previous Q1 comp. I think it is probably more indicative if you look at Q1 versus the average 2008 quarterly run rate. The commercial OEM on that basis was down about 12%. This is primarily reflective of the Boeing strike. The regional business jet revenues were about even with the 2008 runrate.

In the commercial aftermarket, revenues were down about 5% on a Q1 versus Q1 basis. We anticipated the first half of the year would be the most difficult and these results are about on our expectations. Though tough to quantify, we believe we have seen some inventory reductions at the airlines throughout the system. Our major distributor inventories were essentially unchanged through the quarter.

In the defense segment, which is roughly one-quarter of our business, the revenues were up 19% on a quarter versus quarter basis. At least for the first half of our year, defense revenues seemed likely to be above our expectations. In total for the quarter, our revenues were close to our initial expectations with a modest shift in mix between commercial and defense revenues.

If I move over to profitability and now I'm on a reported basis, I'm going to talk primarily about our operating performance or EBITDA as defined. The total adjustments to EBITDA were quite modest this quarter.

Our EBITDA as defined was about $92 million or up 21% versus the prior Q1. The EBITDA defined margin of about 50% in Q1 '09 is the highest quarterly margin we have reported in spite of some modest acquisition dilution and some modest residual 787 development cost. These reflect -- this margin increase reflects the impact of our cost reductions in Q4, a particularly rich mix, the lack of the Boeing lower margin shipments, as well as our ongoing value pricing activities.

I don't think we can plan on this level of EBITDA margin as we moved forward in 2009. As you saw in the press release, we have increased our full-year guidance. Greg is going to review the details with you in his section.

With respect to acquisitions, we made one additional acquisition in Q1, a starter generator business we bought from General Electric. This is the second business we bought from General Electric in the last four months.

We continue actively looking at opportunities. There is a pipeline of possibilities as usual, many more small than large. We saw some modest pickup in activity in the quarter but it is far too soon to tell if that means anything.

We remain disciplined and focus on what we want and the value creation opportunities. Predicting the timing is very difficult and as usual as a general rule, we won't discuss any specifics on acquisitions until they're closed.

With that, let me turn it over to Ray Laubenthal to give you just some sense of some of the operating issues for the quarter.

Thanks, Nick. As Nick mentioned, in total we had a good first quarter. Our operating value drivers and acquisition integration continued to add solid value. Let me explain our first quarter operational value creation in a little more detail.

We acquired GE's unit and aircraft parts corporation, APC, on December 16. APC designs and manufactures proprietary starter generators, generator control units and related components for a turbine engine. The APC operation now reports to and is supported by our existing avionic instruments operations in (inaudible) New Jersey.

To date we have already revised some of the APC pricing and we presently have a team of avionic instruments personnel working to ensure a smooth transition. I would also like to report that the physical move of the Unison magneto business that we purchased from GE four months ago is on schedule and nearing completion.

The physical move to our Champion Aerospace facility will be completed this quarter and we should start to see consolidation savings during the second half of our fiscal 2009. Now let me turn the discussion to our other operating units and their value generation activities last quarter.

Recall we enacted a 9% headcount-driven cost reduction in our fiscal fourth quarter of 2008. This action served us well in Q1 as the market softened.

As Q1 progressed, we continued to modestly reduce headcounts further. The disciplined cost actions helped contribute to our favorable first-quarter results.

Going forward we will continue to diligently fine-tune our cost structure as the market demand fluctuates. Although the market has been softening, our new business development continues to be quite active in Q1.

We continued to invest in a broad range of engineered solutions for our customers. To give this a little color, I would like to give a few examples of the first quarter new business activity.

In the military market, we continued to deliver upgraded, low distortion power transformers on the CH46 helicopter fleet and we continue to quote fall on orders for this upgraded equipment. We also secured orders to provide cockpit avionic components on the C130 avionics modernization program and we were awarded orders for expanded electrical power converters on Alenia's (inaudible) program and transformers for the Turkish T38 trainer.

In the commercial segment, we also continued to see significant activity on the new programs. On Gulfstream's new G250 and G650, we were awarded engineered heaters, fuel couplings and composite fuel isolators along with other engineered components.

On the Embraer MSJ, we were awarded the compact water delivery system for the lavoratory and galley and additionally we have been awarded throttle controls on the Hawker premier platform and engine controls on the new Pratt & Whitney VLJ engine used on the the Cessna Mustang.

On the commercial transports, Boeing selected our engineered portable water transmitter solution used for optimizing water weight management on the 777 fleet. This solution will be used on 777 OE production and will eventually be rolled out to the aftermarket fleet.

On the Boeing 747 fleet, we delivered an aftermarket upgrade solution improving the performance of the escape ramp latch. We also have been actively working on a range of engineered products on the new A350 program and we will discuss these in the future as those programs develop.

Our development spending on the Boeing 787 was modestly lower than expected during the first quarter. Recall our 2009 Boeing 787 development spending is expected to be lower compared to 2008 as the work on these projects winds down.

At present we expect our 787 spending in 2009 to be as expected. And lastly, our pricing actions have continued to be effective across most of our businesses. They also contributed to our strong first-quarter margins.

Now let me hand it over to Greg.

Thanks Ray. Good morning everyone and again 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 first quarter compared to the prior year first quarter, commenting on the major line items with a little more detail.

Our quarter one sales were $181.3 million up $18.2 million or 11.1% from the prior year. Organic sales growth was $4.5 million or 2.7% over the prior year. The organic sales growth is a mixed story.

As Nick mentioned, the defense business was up $7.3 million. Commercial OEM revenue was up $2.2 million due to good year-over-year sales in the regional bizjet market that was partially offset by a decrease in sales to Boeing due to their strike. These two increases were offset by a $4.7 million decrease in commercial aftermarket sales mostly due to a decrease in worldwide airline traffic resulting from the weakening global economy.

We also believe there may have been some reduction in end-user inventories that contributed to the decline in commercial aftermarket sales. The remaining $13.7 million of increased sales resulted from the acquisitions of CEF which we acquired last May, the Unison magneto product line which we acquired in September and to a lesser extent, APC which was just acquired on December 16.

All of these acquisitions were not owned in the comparable quarter last year. Reported gross profit was $104.3 million or 57.5% of sales. This is a $16.2 million increase and is 18% greater than the prior year and it is also greater than our sales growth percentage of 11%.

The reported gross profit margin increased 3.5 percentage points versus the prior year. This significant expansion in margin was attributable to the strength of our proprietary products which allowed favorable pricing, continued productivity efforts especially from the additional Companywide cost reduction initiative implemented during the fourth quarter of '08 and from positive operating leverage on higher sales with favorable product mix versus the prior year.

This higher margin was also achieved despite a little down-drag in margin which was a little less than 1% due to the dilutive impact of the previously mentioned acquisition. Selling and administrative expense was 10% of sales for the quarter compared to 11% in the prior year.

The reduction in research and development expense related to lower spending on the Boeing 787 program was the primary driver in reduced SG&A spending along with the additional fourth quarter cost reductions just mentioned. Net interest expense was $22 million, a net decrease of $2.5 million versus the prior year quarter.

This decrease in interest expense is primarily attributed to the lower interest rates this year versus prior year. This year our average interest rate is 6.4% versus an average rate of 7.5% last year.

Regarding our tax provision, our effective tax rate was 35% for the quarter versus 36.4% in the prior year. This lower effective tax rate reflects the retroactive reinstatement of the research and development tax credit. We are currently forecasting our '09 effective tax rate to be 36% and we anticipate our '09 cash tax payments to range from $80 million to $85 million.

As you take a step back and look at the income statement, the combination of 11% sales growth, operating expenses growing at a lower rate than sales, interest expense being less than the prior year and a lower effective tax rate versus the prior year all contribute to an outstanding first-quarter net income that was $39.6 million or 21.8% of net sales, an impressive [47]% improvement versus the prior quarter. Regarding our earnings per share on a GAAP basis, quarter one EPS was $0.78 per share compared to $0.54 per share a year ago, a 44% increase in this quarterly comparison.

Our adjusted earnings per share was $0.82 cents in the first quarter which is a 41% improvement versus a year ago. Cash flow from operations was very strong at approximately $66 million for the first quarter. We ended the quarter with $149 million of cash on the balance sheet.

This cash balance reflects the use of approximately $67 million of cash used to acquire APC this past December and it also includes cash used to acquire approximately 384,000 shares of common stock in the quarter. Our net debt leverage ratio was 3.3 times our either EBITDA.

Given the credit crisis the country is going through, we believe our current cash position together with our undrawn revolver of almost $200 million provides sufficient financial flexibility to manage our working capital and support growth included in our guidance. I Speaking of our guidance, I'm sure that you noticed that in this morning's press release that we are increasing our guidance for the fiscal year.

This change in guidance assumes no further acquisitions, no changes in our capital structure or any other type of corporate event. We give full-year guidance on five items. Revenues, EBITDA as defined, GAAP net income, GAAP EPS and adjusted EPS. All five line items have been increased in varying degrees and our press release details all five items with comparisons to the prior year.

To keep things simple on this earnings call, I will focus on the adjusted earnings per share. Our prior guidance for adjusted earnings per share was a range of $2.90 to $3.10 per share or a midpoint of $3.00 per share. Our current guidance is a range of $3.14 to $3.31 per share or a midpoint of $3.23 per share.

The increase in the midpoint adjusted EPS is $0.23 per share. That is the $3.23 less the $3.00. Let me explain the details of this increase.

Approximately $0.06 is from very good operating performance especially from the first quarter. Approximately $0.05 per share recognizes the acquisition of APC made in December.

Approximately another $0.05 is a result of a decrease in weighted shares outstanding resulting from the share repurchase program we implemented in quarter one plus a reduction in our go-forward assumption of stock option exercises for the remainder of the year. Approximately $0.04 improvement is resulting from the lower interest rates versus our prior assumptions and approximately $0.03 to recognize the benefit of the R&D tax credit previously discussed.

The above five categories, all of which are positive, let us improve the full-year forecast by $0.23 in the first quarter of our fiscal year. This current year estimate of adjusted EPS of $3.23 is 16% greater than the FY 08 adjusted EPS of $2.79.

This concludes our prepared remarks and we will now open the lines for questions.

(Operator Instructions) David Strauss, UBS.

Did I hear you say the aftermarket was modestly lower in the first quarter?

Yes, it was down 5% (multiple speakers) this is commercial aftermarket, let me be clear on that.

Right, so down 5% and I assume embedded in that is decent kind of price increase. So volumes were obviously down even more than that.

Right.

And then on the --

I think as I said, David, we believe -- it's hard to quantify. We think there is some restocking going on through the system. (multiple speakers)

Tough to quantify.

Yes, it's tough to quantify.

And then on the OE side, so you're holding it flat but the business shift side has deteriorated I think fairly significantly since your prior guidance and I think that is roughly, what, about 15% of your sales?

Well that's business and regional. You have got some regional in there.

Okay, well I guess and on a business jet side, where would be your (multiple speakers) where are you concentrated?

I think, David, just to be a little clear on there, what we said for the year on the OEM is that we think it may be weaker than the flat year-over-year costs we gave you 90 days ago.

Is that weaker forecast, is that incorporated into this updated guidance or not?

Yes -- I will say we're very uncertain. Who knows what we are going to see on these OEM rates. One of the big uncertainties in my mind is are way going to see another shoe drop on these commercial transport rates.

And then last one, the 9% headcount reduction that you have already undertaken, what does that size you for? Are you appropriately sized at this point for Boeing production rates to come down or would you look at potentially taking additional headcount out if that were to happen?

It depends on how much. We are appropriately sized for sort of the guidance we gave you. We look at this month by month now.

This is a time in the market that needs just continual attention. We will keep trimming a little bit each time we see softening across individual operating units. We did a little of that in the first quarter. I suspect that is a tweaking we are going to be doing all year.

Great, thanks guys. Good quarter.

Carter Copeland, Barclays Capital.

Really a nice set of numbers, guys. A quick question. Nick, it sounds like in the plan and in the guidance if we were to look at the margins and not sustaining the kind of 50% level seen in Q1, there is the implication that at least it sounds like to me that you are planning on having to cut in the back half on the commercial OE rates.

Given the fact that Boeing was saying they want to keep them flat just last week and we are already -- you're in your fifth month of the fiscal year -- am I missing something here or is it you just don't get as much sort of leadtime from a subsystem supplier who wants to take the rate down when Boeing tells them? Because it seems pretty clear that Boeing hasn't given the firing orders yet to take the rates down. It just seems maybe the guidance is incorporating a bit of a downturn that could be a little bit early to me.

I hope so. I would like that to be true. I will tell you, Carter, you're clearly reflecting the fact that we are feeling very uncertain about the OEM production rates. You know, if Boeing would decide or Airbus would decide that they're going to make a cutback in 2010, we're concerned that we could start to see sort of inventory fluctuation and tweaking in the system inventory before that.

That can get sort of bounced around when you get into those transition points. So we are reflecting some of that. We are also reflecting the fact that I don't know that we have seen the bottom of this business jet turndown either.

But I guess the main way I would answer your question is I'm simply unsure. And being unsure, we tend to be somewhat conservative. I would love to be back here next quarter saying things look better. But I just -- I don't have much confidence in this right now.

That's fair but it would be fair to say thought that if Boeing or Airbus were to make up their mind about new firing orders until say the third calendar year quarter, your fiscal fourth quarter, that there would be some upside to your guidance. It's tough to count on it today given the lack of visibility but it would seem that this is being pushed further off than you were originally anticipating.

I would hope so, Carter, but I honestly wouldn't want to say that today the guidance we gave is the guidance we give. We're trying to capture our best assessment of that in there.

Totally fair. Totally fair. On an unrelated topic, I wondered if you might provide some commentary on what you're seeing in terms of the credit market and whether or not the ability to do acquisitions is opening up anything more than the last quarter where things were pretty close up.

I don't -- I would say you are right. At least some portions of the credit market, specifically the high yield bond market, have probably opened up some in the last -- I would say in the last two or three weeks anyway.

I don't know that the bank market has opened up a lot. I can't say we have seen any impact on acquisitions. Honestly there is no acquisitions in the last six or twelve months that we passed on because we didn't have the money to buy them.

But are there acquisitions that will suddenly become available once you can finance them?

That depends on the seller. That depends on the seller. I guess the point I'm trying to make, Carter, is we have not yet been capital constrained on our side. It is the people haven't been selling as much as we might have hoped. We will see if this changes it.

Robert Spingarn, Credit Suisse.

A couple of different questions. One thing is obviously your margins were just very impressive and maybe you can walk through -- Greg, you talked about the different components of the strength. But maybe we can get a little bit more color especially on that gross margin which -- what was it? A 350 basis point increase in terms of productivity versus pricing, how should we think about the various components? How will we size those relatively?

Rob, given the mathematical reconciliation to our EBITDA margin, I don't have all of that data right in front of me now. But again, when we talk about our value drivers, we live them and I think this is pretty good proof.

We have got good productivity. We laid off 7% -- 9% of our headcount in the fourth quarter and obviously that is coming through because the volume hasn't followed it in total and we don't disclose the price details in granularity. It's just a confirmation of what we have been telling everybody all along with our value drivers and you're seeing that we had a good quarter where we hit on these things plus we've got some good mix.

Let me ask it this way then, Greg. How is pricing relative -- the price increases relative to where they might have been six months or a year ago in terms of percentage terms? Are you doing the same things that you have been doing or has that become a little bit more difficult?

(multiple speakers) there hasn't been any change in our pricing ability Rob. But I guess maybe let me take another crack at that.

The biggest two impacts to the margin expansion are cost cuts in the fourth quarter and the pricing. Those are far and away the biggest cracks.

You can almost do the math Rob. You take out 9% which is close to a couple hundred people and take your guess at that and what those people cost and the volume did not come down. The pricing held, a smaller impact but contributing is we shipped damn near nothing to Boeing in the quarter and that is the lowest margin stuff usually.

That's true. But when you (multiple speakers)

And the mix sort of within the mix, within the segments was pretty good. But those are secondary issues, secondary effects. The primary effect is the productivity and price.

You said pricing held. Does that mean it doesn't rise or (multiple speakers) hold?

Rob, what I mean hold is the same kind of patterns you have seen in the past. In other words, our process, our results have not changed significantly. The market hasn't hurt it.

Right, Carter was asking you about flow and timing and I would agree if the airliners see some kind of production cut, that may not happen until the back end of this calendar year. It may not even happen until your fiscal first quarter next year.

How about on the bizjet side though? You touched on bizjet earlier. Do you have the same relationship in OE to aftermarket and biz, regional and commercial? Should we think about it that way, sort of 25% OE, 75% aftermarket in each of those segments?

25% OE, 75% (inaudible) let me just think about that. Regional is probably not a lot different because they are flying commercial transport kind of hours. Business jet is less so.

Because a business jet on average only flies -- pick your number -- 300, 400 hours a year? So the relationship between the aftermarket and OEM is not as pronounced just because there are not as many flight hours.

And should I assume that you're going to see a recovery or your plan expects a recovery in bizjet aftermarket before OE? 8?

I don't know that I can speak to that. I don't expect that this year and that would be something out in the future. I don't know that I could comment on that yet. Are you just asking business jet only?

Yes, I'm focused on bizjet just because clearly that seems to be from a traffic perspective the hardest hit right now, maybe the most discretionary portion of the flying that's out there. And we have actually seen production rate decreases announced by several manufacturers where we have yet to see that from the airliner, the commercial airliner manufacturers.

I would say -- I can't put an exact number on it. But I would say again to repeat myself, the relationship between the aftermarket and the OEM and the business jet is nowhere near as pronounced as it is at commercial transport or defense business or regional business.

And which another way of saying that is the bizjet OE may be more important than on a relative basis?

Yes, that's right. And again the simple fact is they don't fly as many hours.

And then Boeing, you talked a bit about the strike effect and the three months. Are you delivering to Boeing at the pre-strike levels at this point?

Greg do you have the -- we're close I don't know if (multiple speakers) not.

We're up there or not. First off, we not only delivered a Boeing but we also delivered a Honeywell and others that supply to Boeing. You get a little bit of muddiness or murkiness in exactly the flow of things since their inventories fluctuate.

But we are about back on track I would say. We saw some fluctuations in the first quarter of pushouts of orders and even pushouts of deliveries. We also saw some customers say keep shipping to us. We don't want to disrupt any supply during this strike or not.

Some of those inventories will come out perhaps (multiple speakers) year goes on and then that muddies the picture because some orders will pick up that were not placed during the first quarter. It is a tougher thing to quantify but we think it is getting back on track.

Rob, just to clarify on that a little bit, I think the three-month impact we will see over the year, it is probably we saw the majority of that, maybe two-thirds of it or so in the first quarter. The rest of it is going to kind of dribble out through the year. People are going to have to deal with inventory builds and things like that.

Okay and then just finally on 787, are we done with design changes there?

We hope but it's not done yet. The bulk of our 787 spending this year as I mentioned is lower than last year where the bulk of the work was being done but there's still some work to be completed. We're hoping to contain that and if there is a scope creep going forward, we will work to get our fair share.

We believe it is captured in our guidance and we think the numbers Rob are about as we expected going into the year.

While we are on the topic, when does A350 ramp from an R&D perspective?

I'm trying to remember when the --

2012 is I believe their first flight target but if the A380 and the 787 are any predictor, we might want to add a year or two onto those dates. But no significant impact in 2009. I doubt there's a big impact in 2010. But we honestly -- I'm not sure of that yet.

Thanks guys. Very impressive quarter.

Fred Buonocore, CJS Securities.

Excellent quarter. I just wanted to clarify, Nick, and I know David and Carter touched on this as well. So if you look at your topline guidance and you strip out the contribution from APC, it appears that your revenue guidance is actually down from your original guidance. Is that reflecting -- is that entirely comprised of your expectations on OEM? Or are there other drivers of that?

I guess I would say, Fred, that it is sort of capturing our whole concern about the marketplace. I think if you do that math, you end up short, what $10 million or something like that?

First I would say that is not a very big number on $800 million and I would say what you're seeing there is our uncertainty. We are unsure about the OEM.

We are not feeling terribly confident about the commercial aftermarket. We don't think there's a big downside there and the question is there enough defense upside to offset those risks and we are concerned.

Got it. And as you mentioned on the defense side being stronger than anticipated and you expect that at least through the first half of the year, what would make it weaken? Is there any reason to think that it shouldn't continue at this level?

Now I'm going to be a wise guy, Fred. What would make it weak is if they stopped buying.

That's very helpful Nick.

I thought you would find that helpful.

I walked right into it (multiple speakers)

We are essentially -- it is an uncertain time. We have a transition of administration. They're buying at a very high level, higher than we would have expected. They bought at a higher level frankly than we would have expected last year. We see no indication yet that that's softening.

Is this replacement equipment for aircraft that are being chewed up in the Middle East or is it --?

It's almost across the board. It's repair and overhaul of cycled out stuff, it's upgrades of products, it is ground equipment where the gun motors are getting reworked, spare parts. I can't -- it's still sort of a rising tide is picking up all the ships.

Got it and then on the cargo side of things, do you have any sense for what your exposure to the cargo aircraft market is just given the huge drops that market has seen in the last couple of quarters?

I would say it's less than the installed base of cargo aircraft which is relatively low in percentage of the total base. I can't remember the exact number. But we don't have any disproportionate exposure. If any cargos probably a little less because you don't have a lot of the passenger related spare parts in there.

Okay and then just finally you touched on this a little bit in your prepared remarks, inventory in the channel. So is what you're kind of saying that you think that the airline inventories may kind of be in better shape or maybe more right-sized at this point than maybe they were 90 days ago?

I guess there's two areas of inventory to look at. In the distribution channel, we think it was roughly flat over the quarter and as we've told you before, they have contractual levels of inventory.

If the demand continues to drop, you know that will be impacted. But it was roughly flat over the quarter. It is tough to get a number on the systemwide airline inventory but our general sense is there was some destocking over the quarter. And I don't -- again, Fred, I don't have good numbers on this. But just if history repeats itself, I suspect that is not done. There's probably some more of that to come. I would hope it cannot go on through the year and it would start to bottom out somewhere midyear for us.

Thanks very much and great quarter.

(Operator Instructions) Karl Oehlschlaeger, Macquarie Capital.

Congratulations on the quarter. In terms of your margin, the real strong margins you saw in the quarter, you talked a little bit about sort of different things that were impacted and one of them being mix. And obviously with the Boeing strike, that lower margin business, there was less but can you talk about the impact sort of in terms of numbers (inaudible) in basis points of what that was on the quarter? And then beyond that, there was favorable mix sort of in general. Maybe give a little bit more color around what that favorable mix was the result of.

To do a detailed reconciliation would I think cause confusion but again as Nick said, the big numbers for the quarter were the impact of the rift that we had in the fourth quarter and we had strong pricing. By far those were the two biggest items that improved our margin for the quarter in the BEITDA line. You know if I start throwing numbers around, it would just confuse a lot of people with detailed reconciliations over a phone call.

Okay, well in terms of just sort of the favorable mix, can you talk kind of just qualitatively what -- where is that at? What sort of products are generating higher margin? When you say favorable mix, are you talking OEM versus aftermarket or are you talking specific products versus (multiple speakers)

Both. What I would say is the favorable mix made up two things. One we didn't ship very much to Boeing and that's the lowest margin stuff we shipped (inaudible). So that just not doing that tends to give you a little mix-up.

And I would say just sort of what I call the mix within the mix, sort of the selection of parts and items that sold through the quarter were a little better than usual. But what I want to keep emphasizing here Carl is that is the tail kind of, that's the small number. The big number in the margin -- in the better margin is cost reduction, is cost reduction carrying in from the prior quarter and our normal pricing activity.

[Jack Wagner, (inaudible) Asset Management.]

Could you share with us a breakdown of the backlog between defense and commercial?

No, we don't disclose that.

Is there any flexibility regarding the backlog of customers canceling contracts or orders?

You mean can they go away?

Yes.

Well I mean they can always -- the commercial transport guys can always reschedule. In other words, if they're producing 100 planes a year, we are selling them 100 parts a year, if they drop the rate down to 60 planes a year, they can drop their consumption rate down to 60.

In other words, we can't keep keep giving them 100 parts when they're only producing 60 airplanes. They cannot cancel them but they can stretch them out, for sure. Defense Department always has the right to rejigger their contracts as long as they pay you for any costs incurred.

Okay and regarding seasonality, can you share with us your seasonality that you experienced during the year in there is any?

I would say there isn't a heck of a lot of seasonality in revenues. Usually and this can vary particularly when you are in a market transition point, these rules can get knocked. But in a steady-state, usually our first quarter is a little lower because there's less production days primarily, not because there's a big change in intrinsic demand.

Thank you. Also lastly you purchased some stock in the last quarter. Do you continue -- do you plan on continuing to buy back stock or is there any plans to pay down debt?

Well, we approved a $50 million stock buyback with the the rate -- whether we will do that or the rate at which we do it is something we don't disclose and we just kind of play that as we look at the value and move forward each -- day by day.

You have no further questions.

Thanks everyone for calling in and participating in today's call this morning. One last thing is you can expect to see our 10-Q filed in the next day or so. Thanks again.

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