TransDigm Group Inc (TDG) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2009 TransDigm Group earnings conference call. My name is Yanique. I will be your coordinator for today. At this time all participants are listen-only mode. We will be facilitating a question-and-answer session towards the end of the 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.

Thank you. And I would like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2009 third-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 TransDigm.com.

Before we begin, the company would like to remind you that statements made during this call which are not historical in fact are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the 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 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, let me now turn the call over to Nick.

Good morning. Thanks again everybody for calling in to hear about our company.

As we've done in the past, I would like to start off with some comments about both our consistent strategy as well as our current sense of a -- of an unclear aerospace market, particularly as it applies to our business.

To reiterate, we believe our business model is unique in the industry both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the cycle. To summarize why we believe this, about 95% of our sales come from 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 comes from aftermarket sales. Aftermarket revenues have historically produced a high gross margin and provided relative stability in the downturns. This, assuming we control our costs, can also contribute to our EBITDA margins improving, in spite of declining overall revenues at times.

Even in difficult market environments, the annual worldwide growth in air travel rarely goes negative for any extended period. In fact, most reports that I see forecast modest declines in worldwide traffic in 2009, in spite of very difficult economic conditions with some possible recovery at the end of this calendar year or early next year.

Based on our uniquely high EBITDA margins, which run in the 49%, 50% range as a percent of revenue, and relatively low capital expenditures, TransDigm -- year-in, year-out -- generates very strong free cash flow. We have significant liquidity and no near-term debt issues. As of 6/30, we had about $200 million in cash, approximately $200 million of undrawn revolver, we have no principal payments due under our credit agreement until 2013, and we believe we currently have access to additional debt if we so desire.

We have a well-proven value-based operating strategy focused around what we refer to as our three value drivers, which 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 worked for us through up and down markets 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 component businesses with significant aftermarket contents. We've been able to acquire and improve aerospace businesses through all phases of the cycle. We have acquired three businesses in the last 10 months in spite of a difficult acquisition market.

Through our consistent focus on these value drivers and clear acquisition strategy and close attention to our capital structure, we have been able to create value for many years. To remind you, the performance after 9/11, where 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 tough period, all our value drivers contributed. We quickly reduced our costs. We continued our value pricing activities. We generated new business, and we improved our acquisitions -- all activities which you now see repeating in this downturn.

As they have in the past, in Q4 of last year we moved quickly to reduce our costs and get out ahead of a softening market. We have continued this cost reduction effort through 2009. This is reflected in our margins. Additionally, as in past down cycles, we continue our new business generation activity as well as our value-based pricing initiatives.

With respect to our underlying markets, in general we still see considerable uncertainty. I don't know exactly how this cycle unfolds, but our current sense of the market as it applies to TransDigm is as follows.

In the commercial OEM area, the Boeing strike, as you know, concluded in the first quarter. We will lose about three months of effective Boeing production in our 2009 fiscal year from this. With the Boeing 777 rate reduction and despite announcements to the contrary, we will plan conservatively for next year, that is for other rate reductions by Boeing and Airbus in the next 12 months. Depending when and if these announcements occur and the level of inventory drawdown they generate through the system, we could see some modest negative volume impact in Q4 of fiscal year 2009. We are currently seeing a slowdown in incoming orders from commercial transport higher-tier manufacturers.

All of the business jet OEMs have implemented significant rate reductions. This, along with the related system-wide inventory ripple, is negatively impacting our second-half volume. The sector is in considerable turmoil with both OEM and aftermarket backlog changing on almost a weekly basis. The quarterly business jet OEM revenues were down about 35% versus the prior year with bookings down even more. We don't believe this segment has bottomed out yet.

All in all our commercial OEM business -- for our commercial OEM business, we are now assuming this will be down a bit over 10% versus the prior year rather than the flat year-over-year comps we originally anticipated.

In the commercial aftermarket, we continue to see a slowdown in traffic as worldwide economic conditions take their toll. Based on various industry published reports, worldwide RPMs on a year-to-date basis appear to be down in the midst single-digit percents versus three -- for the first three quarters of our fiscal year.

We have not yet seen any clear signs of a recovery, though we understand many forecasters anticipate some recovery in the latter part of the calendar year, and we surely hope this is so. We are a bit more pessimistic about the 2009 commercial aftermarket revenues than we were originally. We are hopeful we are close to the bottom of the cycle for this segment.

Though impacting us to a much lesser degree, the business jet aftermarket is down far more substantially than other parts of the commercial aftermarket.

We believe it is now likely that our commercial aftermarket revenues, excluding business jets, will be down in the range of 5% for the year. Including the approximate 30% drop in business jet aftermarket, the total aftermarket could be down 7% to 8%. Although quarterly numbers bounce around, over longer periods our real or unit aftermarket volume has generally been able to track at or better than the overall worldwide passenger traffic.

And the defense business, on the other hand, continues to look very good for fiscal year 2009. Our Q3 revenues and bookings were again better than anticipated. Based on what we know today, defense should see mid- to high-teen percentage growth year-over-year. The future sustainability of these defense revenues at this level is not clear to us at this time.

We remain cautious regarding the market outlook, but confident in the strength of our unique business model, continue to create value, and our management's teams -- out management team's ability to respond in this market environment.

Now let me turn to our latest financial performance. I will remind you, this is the third quarter for fiscal year 2009. Our fiscal year started October 1. As I have said in the past, quarterly comparisons can be significantly impacted by differences in mix, large orders, inventory fluctuations, modest seasonality, and other factors.

In spite of a weak economy and a tough market, we had a good third quarter and nine months. The revenues were up nine -- or up 2% versus the prior year Q3 and 8% on a year-to-date basis. Pro forma revenue, that is, if we owned the same mix of business, is about flat on a year-to-date basis and down about 6% on a quarter versus quarter basis.

In a nutshell, the overall commercial business is down, and the defense business is up significantly.

Reviewing the revenues by market segments -- and again, this will be on a pro forma basis. That is assuming we owned the same mix of businesses in both periods. In the commercial segment, which makes up about 70% of our revenues, commercial OEM revenues were down 18% versus the prior third quarter with business jet revenues down about 35%.

If you look at the fiscal 2009 versus the average 2008 quarterly run rate, commercial OEM is down about 9%. This is reflective of both the Boeing strike at the beginning of the year and the recent very sharp decline in business jet shipments -- or OEM shipments.

The commercial aftermarket revenue was down almost 10% on a Q3 versus Q3 basis and about 5% on a year-to-date basis. On a year-to-date basis, if you remove the severely depressed business jet aftermarket revenue, the rest of the commercial aftermarket is down 3% to 4% year-to-date. Though tough to quantify, we still believe we are seeing some system-wide inventory reductions.

In the defense segment, which makes up about 30% of our revenues, revenues are up 16% on both a quarter versus quarter and about the same on a year-to-date basis. We continue to see strength across most of our product lines. As I said before, our defense revenues will be above our original expectations now for the full year.

In total for the quarter, our revenues were close to our expectations with a shift in mix between commercial and defense revenues and a modestly richer mix, again.

Moving on to profitability, and on a reported basis now, I'm going to talk primarily about our operating performance or EBITDA as defined. The total adjustments to EBITDA are quite modest. Our EBITDA as defined of about $95 million per Q3 and $280 million for the first three quarters is up 9% versus the prior Q3 and 15% versus the prior year to date.

EBITDA as defined margin is almost 50% in both periods, that's Q3 and year-to-date, a strong margin performance, up about 3 points from year-to-date last year. This continues to reflect the impact of our early cost reductions, a richer mix, as well as our ongoing value pricing activities.

As you saw in our press release, we have slightly increased our full-year -- or slightly decreased our full-year revenue guidance but increased our profit guidance significantly. We now anticipate revenues to be up slightly in the second half of the year versus the first half. Based on our market assumptions, we anticipate an improvement in EBITDA margin versus our prior guidance, though I want to emphasize this margin is dependent on the mix of OEM versus aftermarket shipments in the quarter.

In total for fiscal year 2009, we now expect revenue growth will be up about 6%, driven by our recent acquisitions, with organic growth slightly down. On the other hand, we expect an increase in 2009 EBITDA as defined of about 12%, and this is roughly evenly divided between organic and acquired growth.

With respect to our acquisitions, as I mentioned, we've made three acquisitions in the last 10 months for a total of about $180 million -- a starter generator business we bought from GE, an ignition system magneto business we also bought from GE, and a battery charger and power control business we just acquired from Actuant.

We continue actively looking at opportunities. The pipeline of opportunities still tends to have more small opportunities than large. We are seeing more activity, but closings are always tough to predict. We remain disciplined and focused on our value generating opportunities.

And with that, let me ask Ray to just expand a little bit on the operating performance.

Thanks Nick. As Nick mentioned, in spite of a challenging commercial market, we had a good profit growth in the third quarter and year-to-date. Let me add some color to our third-quarter operations and value creation.

We made good progress integrating our two most recent acquisitions. The GE Unison magneto business finished a full quarter of production at its new location at our Champion Aerospace facility in South Carolina. Recall we completed the move of this business in March from the GE Rockford, Illinois facility. We are seeing solid operational savings from this most recent consolidation.

The other acquisition, GE Unison's Aircraft Parts Corporation, or APC, is also progressing through its integration into our operations. APC designs and manufactures starter generators and the related electronic generator controller units on Long Island. The move of the electronic controller unit production to our Avionic Instruments New Jersey facility is nearly complete, and these units are now starting to be built there. The starter generator products will move next month into our existing Skurka motor operations in California.

Just recently, on July 24, we purchased Acme Aerospace from Actuant Corporation. Located in Tempe, Arizona, Acme produces fibrous nickel cadmium main ship batteries, battery chargers, battery backup systems, and power conversion equipment. The majority of the company's revenues are attributed to Boeing's 777 program. Other platforms include a range of aircraft such as the Boeing 737, the 747, the 757 and 767, the MD-90, the Apache helicopter, C-17 and F-18 as well as certain regional and business jets. Over 80% of Acme sales are to commercial customers, and approximately 60% of total sales come from the aftermarket.

Acme Aerospace's operations will remain in Tempe and report to and be supported by our existing Avionic Instruments group. We see significant opportunities for value generation using all three of our value drivers.

Now let me turn the discussion to our other operating units and their value generation activities last quarter. We continued to make headcount-driven cost reductions during the third quarter. Year to date we have reduced headcount by just over 6%. Recall we enacted a 9% headcount-driven cost reduction in our fiscal fourth quarter of 2008. So in less than a year we have now reduced our headcount by over 15%. These cost reduction actions served us well in 2009 as the market softened. Going forward, we will continue to diligently fine tune our cost structure as the market demand fluctuates.

On last call I mentioned numerous new business program awards and their applications on the corresponding commercial and military platforms. We continue to be quite active developing new products, and we continue to invest in a broad range of engineered solutions for our customers. The development spending associated with these programs continues to be normal and similar to the spending in prior periods.

Our development spending on the 787, which was significant in 2008, declined during 2009. Recall our 2009 Boeing 787 development spending was expected to the lower compared to 2008 as the work on these projects winds down. However, we now expect some expense to continue into 2010 as Boeing continues to stretch out the program. Lastly, on the 787, we are also making modest favorable progress settling project scope changes -- scope change issues with Boeing.

Our pricing actions have continued to be effective across most of our businesses, and they also contribute to our strong fiscal 2009 margins.

And now let me hand it over to Greg.

Thanks Ray. And again, good morning and thank you to everyone who has called in to hear about TransDigm.

Let me review our third-quarter results now.

Third-quarter sales were $189.9 million, up $3.8 million or 2.1% from the prior year. The increase in sales was primarily driven by the acquisitions of CEF and the Unison product line made in fiscal 2008 and the APC acquisition made at the end of the first quarter this year. Total amount of revenues from acquisitions this quarter was $14 million. Sales excluding acquisitions decreased $10.2 million and represented a 5.5% decrease from the prior year.

The decline in organic sales was due from the following. A decrease of $9.5 million of commercial OEM sales resulting primarily from the significant decline in production rates in the business jet market. Commercial aftermarket sales decreased $6 million versus the prior quarter due to the impact of the global economic downturn resulting in a decline in worldwide airline traffic, business jet and to a lesser extent general aviation activity.

Partially offsetting the decline in commercial sales was an increase of $7.4 million in defense sales, primarily due to increased demand for aftermarket spare parts and repairs across most of our product lines.

Reported gross profit was $107.9 million or 56.8% of sales. This $7.4 million increase is 7.3% greater than the prior year and significantly higher than our sales growth percentage of 2.1%. The reported gross profit margin increased almost 3 percentage points versus the prior year.

This expansion in margin is attributable to the strength of our proprietary products, which allowed favorable pricing, continued productivity efforts including the companywide headcount reductions during the fourth quarter of 2008 and throughout FY 2009, as well as our ongoing efforts to continually reduce our cost structure through outsourcing, process improvements, automation, and other projects. Also contributing to the margin expansion was a favorable product mix versus the prior year and a modest favorable reimbursement from prior period 787 project development scope creep.

This higher margin was also achieved despite a downgrade in margin, which was almost 1 margin point, due to the dilutive impact of the previously mentioned acquisitions.

Selling and administrative expense for the quarter was consistent with the prior year on a percent to sales basis and an absolute dollar basis.

Net interest expense was $21.2 million, a decrease of $600,000 versus the prior year quarter. The level of debt was the same for both quarters. The average interest rate decreased to 6% for the quarter compared to 6.4% a year ago. The gross decrease in interest expense was partially offset by lower interest income during the quarter.

Our effective tax rate was 35.3% versus 36.4% in the prior year. The lower effective tax rate this quarter was primarily due to an increase in the domestic manufacturing deduction and a reduction in state and local tax expense.

Net income for the quarter was $41.4 million, which was 21.8% of net sales and up $5.0 million versus the prior year. The 15% improvement versus prior year compares well given the sales growth of 2%. The results are a combination of all the items we just discussed.

Our press release includes all the EPS calculations and supporting tables. I will focus on our adjusted diluted EPS. For the quarter, adjusted diluted earnings per share was $0.87 per share, up 16% from the prior year. This increase mirrors the 15% improvement in net income.

Cash flow from operations was very strong at $129 million, which is 106% of our net income three quarters through this year. We ended the quarter with $203 million of cash on the balance sheet. This balance excludes the $40 million we paid for Acme Aerospace in July.

Our net debt leverage ratio was 3.1 times our EBITDA as defined. Given the credit crisis the country is going through, we believe our current cash position together with our undrawn revolver of almost $200 million is more than adequate for our operating needs.

As Nick discussed and as spelled out in this morning's press release, we increased our full-year adjusted diluted EPS guidance significantly, raising the midpoint of our guidance to $3.39, up $0.14 from the prior guidance. Our revised adjusted EPS is up 21.5% from the prior year. This increase is roughly split between operations, that is, from the strong third-quarter EBITDA and our expectation for the fourth quarter EBITDA margins, with the balance coming from lower interest and taxes.

In conclusion, we are especially pleased with our current financial performance during the severe worldwide economic slump and decline in the commercial OEM production in airline traffic.

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

(Operator Instructions). Carter Copeland, Barclays Capital.

Really, another nice quarter, guys. Great job.

Just a -- some broad-based commentary. I know you don't have 2010 guidance yet and there are obviously many moving pieces here, but if you were to go through these things in broad terms, it would seem you've got military growth supported by the recent bookings. You've got the inclusion of Acme. You've got some sort of modest flow-through of the headcount reductions you've done this year. You should have a favorable comp on Boeing OE, but -- given the strike, but that's probably a wash given the already announced wide-body cuts. So there's some sort of small positives at the margin but obviously some uncertainty in business jets and narrow-body rates and the like.

So it would seem that this year from a volume perspective -- or not this year, 2010 -- is certainly shaping up to be challenging to generate that kind of earnings growth that's consistent with your normal target. So is there more you can do internally to drive earnings growth on the cost side, despite the volume challenges that I know you are keenly aware of?

That's a hard one to answer. It would be very difficult to say, no, there's nothing else we are going to do, you know. I would say, on the volume side, as you know, there's a lot of moving pieces. I will just -- we are not all that comfortable with the commercial transport production rates. As I said in the beginning, I -- we will probably figure they're coming down more, those narrow bodies, in spite of protestations to the contrary.

But the implication of that would be that you've got -- that if you are planning accordingly for another cut, say in narrow bodies, then you would be ready to take more cost out if and when that occurs.

I think that's right. I think that's right. What we will do is we will do the same thing we always do. We will try and manage our costs as tight as we can.

I think the obvious follow-up question is, how much further can you get that down? If you told me it was coming down 25% more, I would say I probably can't do that. If you told me it was 5%, 6%, 7%, 10%, I would say I think we could probably do that -- to give you some calibration there.

I think we will continue to get our pricing. We will continue to chase the acquisitions. I would be surprised if we couldn't find something to help us again next year. But that's always iffy. And other than that, I don't know that we have any magic bullet.

Great. Thanks guys.

David Strauss, UBS.

Nick, any additional color on the defense side, really what's driving that? I assume it's the aftermarket side of that business, but anything by platform that you could give us to help out?

It is -- you are right. It's primarily aftermarket. As you know, the production rates don't change very dramatically in that world. They are at least -- at least they don't change upward very dramatically. It is -- anything having to do with helicopters continues very active. Things having to do with ground vehicles, rehabs and upgrades and things like that continue very active. Power supply upgrades, those kind of things.

But I have to say, though they are the most active, almost all the product lines are up to different degrees. So it's almost a rising tide picking up all the ships. As I said, I don't know how sustainable that is, but we're thankful it's there now.

And do you attribute this generally to just the pace of overseas operations? Or is there anything else?

I think so. I think so. I don't know of anything that's different other than that. And all the churning that goes on too. As you come out of Iraq and get the things ready to go to Afghanistan, they all get upgraded and overhauled and looked at again, so there's some churning going on there.

On the business jets side, can you remind me, when did you start seeing the pain there? In other words, when will you lap -- or how many quarters -- just based on where the production rates are today, how many quarters in the next year before you kind of -- that business would stabilize?

Well, we started seeing in the -- our first quarter, just to remind you, starts October 1. So our first quarter is the fourth quarter of most people's year. We didn't start -- we started to see a drop in our second quarter, which is the January/March time frame, and it just sort of fell off the edge of the earth in the third quarter.

Okay. But you are kind of -- barring any further cuts, you feel like your business is kind of at a sustainable run rate at these levels?

No, I don't think so. What I said in the lead-in, I don't think the business jets, I want to say the run rate in the -- what did we just -- I think the run rate in the third quarter was 30%, 35% down? On the production rates. David, I'm not comfortable that that is the bottom yet. I'm not sure that doesn't come down 45%, 50% before it hits bottom.

Okay.

Because I mean, that's sort of -- we are pretty broadly spread, so you can -- you sort of pays your money and takes your choice on what the future brings there, but I tend to be a little more conservative about that.

Right. But you are going to at least have difficult comparisons for -- even without further cuts, you're going to have difficult comparisons for the first couple of quarters next year.

Okay. And last one, Greg, what do you see as your average interest rate right now on your debt?

6% I think is what I just mentioned as our average interest rate for the third quarter, David.

Okay. Thanks guys.

Fred Buonocore, CJS Securities.

Just to follow up on Carter's question in talking about prospects for growth or what you could do in this environment to try and generate some growth next year. You've talked in the past about some new product development opportunities, and as Ray mentioned, you detailed them on the last call. I shouldn't say new product development but new business opportunities. Are these new business opportunities you've been talking about incremental? And do you have anything additional in the hopper that could potentially be incremental to your current revenue base?

Well, we will -- first, we would give 2010 guidance when we give it, which is in November, but generally the new business doesn't ramp up fast. I -- you may get a little tailwind, but I wouldn't count on a lot of tailwind from that, particularly since some slug of it is in the 787, and who knows what to use there.

Right.

But on all those other platforms -- I think you also asked has that curtailed off or is that continuing?

We just chose on this call not to go through a laundry list of the new business, but we are continuing to slog through and win little pieces here and there of new business programs. They will generate revenue next year and the year after and the year after that, but as Nick said, they take a while to gestate.

Sure. Understand. And then on the gross margins, you'd indicated that one contributor has been a richer mix. Is this just really another way of saying that commercial OEM is down and so things have shifted towards aftermarket?

Yes. There's surely some of that, that the OEM is down more than the aftermarket, and that just gives you a little bit of movement. But I don't want to imply that that's the only thing or the big driver. The fact that we have gotten our cost structure down faster than our volume, and the fact that we get -- or get reasonable pricing are significant contributors.

Right.

I don't want to leave you the impression that this is just a mix impact.

Got it. And then, just going back to your initial comments talking about -- you said commercial aftermarket including business jets was down on a pro forma basis 5% year-over-year? Is that correct?

Let me just look at my comment to remember. I get the quarter and the year to date -- what was it for the -- I got the quarter and year-to-date on this one.

Yes. We think for the year it's going to be down about 5% without the business jets. And if you put the business jets in, which we think will be down 30% or more in the aftermarket, you are down 7%, 8%. Was that your question?

Got it. And.

Was that your question?

Right. And so that's talking about it as it relates to your revenues?

That's revenues. Always talking about revenues.

Right. And so that's inclusive of price increases.

That's right.

Okay. Gotcha. And then finally, just on the Acme acquisition, you cited $18 million in revenue in the press release for full-year revenue. Is that like last year's revenue? Or is that kind of your best estimate based on the fact that the 777 is (multiple speakers)

That's roughly the LTM.

Got it. So moving forward we could think about it as being down somewhat from there as the 777 production (multiple speakers)

Yes. Though it sort of depends on what your call is in the aftermarket primarily.

Sure.

That's the biggest contributor is the aftermarket. And frankly, that 777 aftermarket, the installed base of 777 is growing.

Right. Right. Got it. Thank you very much. Good quarter.

Robert Stallard, Macquarie.

First of all a follow-up, Nick. You mentioned about destocking. I was wondering if you could give us an idea how much of a factor you think this is and at what point do you think this tide could start turning in your favor?

It's hard to quantify it exactly, but I think in the commercial aftermarket, it's significant. It's a significant impact this year on the commercial aftermarket. Is very hard to quantify exactly, but it's not -- it's not 1% or 2%. I think it's more than that.

I've sort of -- I have to admit, I've kind of given up guessing at it. Each quarter I speculate that it's done, but it doesn't seem to be. I believe it's approaching the bottom. I don't think there's a whole lot more you could squeeze out, but I have to tell you, I remain cautious after being burnt a couple of quarters here.

Yes. And do you look at your entire product range -- it's certainly very vast -- but are there any areas in particular that you are seeing most affected by this?

I can't say that I am. The destocking -- I would hypothesize that it's probably a little stronger in the North American, but I -- but that's pure -- I don't have any good data on that. That's just sense.

Okay. Secondly, on the pricing you said you'd seen continued progress on the pricing fronts in the quarter. Have you continued to be able to price above inflation over the last three months, particularly with the acquisitions?

Yes.

Any sort of idea of how much that is? Modest (multiple speakers)

No, we don't disclose that, but we've -- our pricing has been consistent with our past practice.

Okay. And then just finally on the cash and the debt front, how have you seen the potential cost of debt shifting over the last three months? Would there be any economic benefit for you to retire some of your debt early?

As we said in the past, when we look at our cash and our use of cash, the first thing we would like to do is to make accretive acquisitions, and in the beginning of this quarter we just spent another $40 million on Acme. And then in that spectrum there, the debt and the covenants and the interest rates are so favorable, right now we don't have any short-term plans to retire any debt.

Okay. And if you were to go back to the market, there were some good deals that came along or something, have you seen your cost of debt -- potential cost of debt -- out there shift at all in the last three months?

Our average interest rate right now is 6%. If we were to go out on the market, it would be north of that.

I think the likelihood is, depending on the magnitude of the financing, today -- I can only speak to -- for a very approximate time, we would likely have to -- we would likely go to the high-yield bond market first, because we kind of like our bank debt deal with almost no covenants, and we'd pay more than 6% for that.

Yes. That's great. Thanks very much.

Robert Spingarn, Credit Suisse.

Couple of things. First, if I'm doing the math right on the acquisitions, and I think that CEF rolls off here in the last fiscal quarter, but you add Acme. It looks like organic growth on the midpoint of your guidance deteriorates a little bit from this third quarter, a couple of percentage points, maybe down 7% or so. Nick, where you think that bottoms out? I know this is a little bit like the other questions that have been asked, but just trend-wise, how would you see that flowing in the sequential quarters?

I don't mean to be too evasive here, but I simply am unsure. We are in the process of our business planning process now. We are right in the middle of doing reviews. I really -- we have to get our thoughts together before we are ready to put a stake in the ground there. There's a lot of moving parts, and as you know, it's not clear at all. You could get -- depending what assumptions you make on the commercial aftermarket and the changes in destocking activity, you could get a significant swing one way or the other, as you know.

Well, let's talk about that for a second. What (multiple speakers)

It's the same thing in the defense business.

What are you hearing from your airline customers and your MRO customers about inventory levels?

That they are approaching the bottom, that they are -- we hear kind of anecdotally that they are generally about in line or getting close to in line, where they want to be with this demand level. Now of course, if the demand level keeps coming down, that will come down. And I, as you know from previous calls, I would have expected it to bottom-out by now.

When you all measure inventories and think about exactly what you just talked about, is there any multiplier in there? In other words, if demand is down 10% or so, inventories have dropped by more than that. Right? Because it's the difference of saying I want a month's worth of inventory on the shelf. Now I want two week's. So inventories are dropping and demand is dropping at a greater rate than ASMs.

Yes. I think that's correct.

And I don't know if this is -- maybe Ray wants to jump in on this. You guys have done well here. You've had, ex-bus jet, something like 3% to 4% type declines in aftermarket, yet your peers are down in many cases well more than that. How can we figure out why that is?

Well, I think as I've said before, we think we have a pretty good mix of product. We don't have a lot of exposure to the old stuff that's really getting hammered. Our business jet exposure is not a big part of our aftermarket, where you are really getting hammered. As you know, the cycles of takeoff and landings there probably down 25% to 30% in that world, which means that essentially the aftermarket demand is down at least that much. I think we get some pricing. And those are the way I would account for it.

Okay. Switching gears for a moment, you just talked about your content mix toward the newer platforms. Let's talk about Acme for a moment. I did notice that while it's got a very strong presence on the 777 and that fleet is clearly going to continue to grow for another half a decade or more, most of the rest of it is -- are out of production or older production airplanes.

Well, they're -- if your point is they don't have much or they have de minimis (technical difficulty) on the 777 -- or on the 787.

Well, that's -- I didn't see 787 on the list. I saw the seven (multiple speakers)

You didn't see it because there's hardly any of it in there.

Fair enough. Or A350 or CSeries or any of these sort of up-and-coming things. So what's the point at which we see the zenith on the installed base at Acme?

Well, it is primarily what -- probably far and away the biggest program is the 777 at Acme. We like that installed base. There's roughly -- I'm saying this from memory. I could be off a little, but I want to say there's about 700 airplanes in the installed base of 777s. And then the steady-state. I realize it's down a little now, but they are probably shipping -- what do you think, 60 -- somewhere between 60 and 70 airplanes a year. So that looks to us like a fairly healthy installed base growth for the next 10 years or so.

And that will offset the attrition in the other fleets they've got like the MD-90s (multiple speakers)

We think so. We look at these -- if we didn't think it would work, we wouldn't buy it.

Clearly. But I looked at the NiCad technology, and are they developing for newer platforms? Or is this really focused -- is this is a 777 (multiple speakers)

Yes, they are developing for newer platforms, but this is far and -- if you didn't believe in the 777, you wouldn't buy this business.

Fair enough.

The other one, by the way, they have a fair content with the Apache helicopter, which we kind of like too.

Yes. And then, there's new business activity in the military segment for other upgrades on other helicopters. That -- it's modest, but it's not as big as the 777, as Nick said.

But you just wouldn't buy this. If you felt uncomfortable with the 777 future, you would pass on this.

And does your same approach apply here? There's opportunities to adjust the cost structure, adjust the pricing structure, etc.

Yes. All of the above. Our typical kind of three-value driver play. We only got the one play. I go out there as the quarterback, and those are the only three plays I know.

Right. A couple others, minor things here. Nick, if you could just talk about the evolution of the M&A environment, the pricing environment, the pipeline.

I would say it is active. We are seeing a better flow than we saw in the past. In the past -- not the past ever, but in the past probably six to nine months. They tend to be the same kind of sizes that we've talked about. Every now and then we see some bigger things pass through, but they -- either the value wasn't there or the deal didn't happen.

I don't think the prices have changed substantially. I might be able to say they've come down a little bit, but I don't know that I have enough data to feel comfortable with that.

Okay. That's all very helpful. Thanks very much.

Carter Leake, Davenport & Company.

Good morning. I would like to focus on cost. Part of your business model is obviously running a lean operation. Could you provide some color on how you do actually -- how you have taken costs out? Is it headcount? Is there any other areas you can help me out understanding how you are getting cost and how you might take it out further?

It is primarily headcount. If you strip out most of the cost in the business and look at it, it's basically headcount driven, and we don't just do it in the factory. We do it across all the departments within an operating unit. We also do work on outsourcing and other cost reductions with our supplier base. But primarily it's headcount driven.

Okay. And you are sort of noticeably cautious of not really calling a bottom in destocking like some of the other suppliers have. Does that in any way -- should we draw any conclusions on that on how acquisitions might go for 2010?

I don't follow what the destocking and acquisitions have to do with each other.

It would be that if you feel that we have not hit a bottom, that we are going to -- that there is more to come, if you were pessimistic on organic that you might want to say preserve cash.

No, we are not concerned about the -- we have -- our cash is fine. We have access to capital. Capital won't constrain us. What will constrain us is good opportunities.

And then, this is -- I know it's a personal opinion, but on 737 production rates, do you have an opinion on what you think they should be?

I don't know the answer. I read the same reports you guys do. We tend to plan conservatively. Our experience has been, you are better off planning conservatively and then you can always adjust up. We will figure they come down 10%, 20% went do our plan for next year.

Again, I don't have any unique insight into that. We just tend to be conservative in our planning.

And to the extent that they are not cut, I assume that you could respond?

Yes. Moving up isn't a problem. At least our experience in this and other engineer businesses is, it's getting down is the problem.

And then CapEx on cash flow, any guidance for fourth quarter?

About the same run rate. We've spent $9 million year-to-date, so I see a couple -- $3 million, $4 million in the fourth quarter.

Great. Thank you.

Daniel Schmidt, [Ten Capital].

Very good quarter. I apologize if you already talked about this, but what is the closing date for the Acme acquisition?

It already happened.

Yes. It happened on the twenty (multiple speakers)

The 27th?

24th I believe of July.

24th. Okay. And did you assume any debt in that acquisition?

No.

Okay. So is it fair to assume that they can get margin similar to the rest of the business?

I think over time we would hope for them to work up close. I don't know if they can get all the way up to the average, but we hope they could get close.

Well, it seems like a very attractive acquisition if you can do that. It seems like pro forma something less than three times EBITDA, so it seems like a great acquisition.

And you guys said a negative 7% to 8% organic revenue growth for the year? Or was that just for commercial aftermarket?

That was commercial aftermarket.

Yes, that was commercial aftermarket.

Okay. And defense would offset that?

That's right. We gave the number -- where is it? I just don't remember. What's the percent? I think we said for the year the organic growth was slightly down. I think the overall growth was up about -- I'm looking. Isn't it about 6%? The overall revenue?

Okay.

Well, it's up about 6%. That's almost all acquisitions, and the organic is down slightly.

Okay.

It's a story of commercial down, defense up.

Okay. Great. Thanks a lot. Great quarter.

At the moment I show no questions. You may proceed, Mr. Maroney.

Okay, thanks. I would like to thank everyone for participating in this morning's call, and we expect to file the 10-Q tomorrow.

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