TransDigm Group Inc (TDG) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth quarter 2009 TransDigm Group Incorporated earnings conference call. I will be your coordinator for today's call. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Mr. Jonathan Crandall of Investor Relations. Please proceed, sir.

Thank you.

I'd like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2009 fourth quarter earnings conference call. I am Jonathan Crandall, Head of Investor Relations at TransDigm. 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 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 right 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 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 nonGAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures 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 for calling in to hear about our Company.

As you may have noticed Jonathan Crandall has taken over for Sean Maroney. Sean has been promoted to our Corporate Controller job and Jonathan is now handling the Investor Relation function. Let me start off by - - as I did in the past with some comments about our consistent strategy, our recent capital structure activities, as well as our current sense of an unclear aerospace market 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 aerospace cycle. To summarize why we believe this, about 95% of our net sales are generated by proprietary products, about 80% come from products for which we are the sole source provider, about 60% of our revenues and a much higher percentage of our EBITDA comes from aftermarket sales. Aftermarket revenues have historically produced a high gross margin and provided relative stability in the downturn. 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 mid single-digit percent declines in worldwide traffic in 2009 in spite of a very difficult economic situation, with some recovery anticipated in early to mid-calendar year 2010. Because of our uniquely high EBITDA margins, it's about 49% plus or minus, and relatively low capital expenditures, TransDigm has year in, year out generated very strong free cash flow. We have significant liquidity and no near term debt issues. We have no principal payments due under our credit agreement until 2013. As we have regularly said in order to assist in equity value creation we seek to maintain an efficient capital structure appropriate for the high margins, high cash flow and relative stability of our businesses.

With the recent $425 million senior note offering and the related $7.65 per share special cash dividend we believe we have put in place a more efficient capital structure. We anticipate that this structure will contribute to improved returns to shareholders while retaining sufficient financial flexibility to meet our operating and acquisition needs. With about $190 million of cash at year end, that's September 2009, an undrawn revolver of about $200 million, and expected cash generation in the range of $190 million in 2010, we feel we have adequate capacity to meet our likely acquisition needs. Additionally, given the current capital market conditions we believe we have access to significant additional capital if attractive larger opportunities were were to become available. 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 methods. This consistent approach has worked for us through up and down markets and allows us to continually improve and increase the intrinsic value of the businesses while steadily investing in new business and platform positions.

We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace products with significant aftermarket content. We've been able to acquire and improve aerospace component businesses through all phases of the cycle. We have acquired four such businesses from September 2008 to September 2009 in spite of a very difficult acquisition market. 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 again through ups and downs in the market cycles. As in prior downturns, in late 2008 and through 2009, we moved quick to the reduce our cost and try to stay ahead of a softening market. Additionally as in past down cycles, we continue our active new business generation activities as well as our value-based pricing initiatives. All these activities are reflected in our strong 2009 EBITDA margins. With respect to the underlying markets we still see considerable uncertainty as we proceed into FY 2010. I don't know how this cycle ultimately unfolds but at this time of year we have to put some stake in the sand, so here we go.

In the commercial OEM world with the Boeing 777 rate reduction already announced and despite announcements to the contrary we plan conservatively. That is we are planning on other rate reductions by both Airbus and Boeing in 2010. Depending when and if these announcements occur, we would see negative volume impacts in the mid to latter part of FY 2010. We continue to see a slowdown in incoming orders from commercial transport, manufacturers and higher tier manufacturers serving the commercial transport market. All of the business jet OEMs implemented significant rate reductions and related inventory increases in 2009 - - decreases, excuse me. This sector is still in considerable turmoil. We don't believe it is bottomed out yet.

In the commercial aftermarket area we see a glimmer of light in worldwide traffic and other data though the exact timing is still unclear. Based on various industry published reports worldwide RPM on a year-to-date 2009 basis appears to be down in the mid single-digit percents. Though we have not seen any clear sign of a recovery many forecasters anticipate recovery in early to the mid calendar year 2010. We hope this is so. We believe we are close to the bottom of the inventory reduction cycle for this segment but again the data is not particularly clear. Though impacting us to a much less degree the business jet aftermarket demand may well stay down through much of 2010. For fiscal year 2010 we will plan on a modest traffic decline in the first half of our fiscal year and a pick up in the second half. Although quarterly volumes can bounce around over longer periods our real our unit aftermarket volume has generally been able to roughly track overall worldwide passenger traffic.

In our defense business we finished 2009 very strong. Q4 revenues and bookings were again better than anticipated. However, given the uncertainties around the defense budget we are not planning on growth in this segment in fiscal year 2010. We remain cautious regarding the market outlook, but confident in the strength of our unique business model to continue to create value in our management teams ability to respond to the market conditions as they unwind.

Now let me turn to the latest financial performance. I'll remind you this is a fourth quarter for fiscal year 2009, our fiscal year ended September 30, 2009. As I have said in the past quarterly comparisons could be significantly impacted by differences in OEM and aftermarket mix, large orders, transient inventory fluctuations in the system and modest seasonality. But in spite of a weak economy and a weak aerospace market, we had a decent fourth quarter and a good full year. Revenues were up about 4% versus the prior Q4, and about 7% on a year-to-date basis. Pro forma revenues, that is if we owned the same mix of businesses, is about 1% down on a full year basis and down about 4% on a quarter versus quarter basis. In a nutshell, the overall commercial business was down modestly and defense business is up significantly.

Reviewing the revenues by market segments, and again this is on a pro forma basis versus the prior year and that is assuming we had the same mix of businesses in both periods. In the commercial segment, which makes up about 70% of our revenue, commercial OEM revenues were down over 25% versus the prior fourth quarter basis with business jet revenues down almost 60%. If you look at the fiscal year 2009 versus 2008 commercial OEM for the year is down about 14%. This is reflective primarily of the Q1 Boeing strike and the very sharp decline in business jet OEM shipments. The commercial aftermarket revenues were down about 13% on a Q4 versus Q4 basis, and about 7% on a year-to-date basis. On a year-to-date basis if you remove the severely depressed business jet aftermarket revenues the rest of the commercial aftermarket is down around 5% to 6%.

On a sequential basis the commercial aftermarket revenues were about flat and the bookings were actually up. One quarter doesn't make a trend but it's surely better to see than the alternative. Though tough to quantify we believe in the fourth quarter we still saw some modest system-wide inventory reductions. In the defense segment, which now makes up a little over 30% of our revenue, revenues were up about 30% on a quarter versus quarter basis, and 20% on a full year basis. We continue to see Q4 strength across many of our product lines. Q4 revenues were particularly strong for components used on Bradley fighting vehicles, C-130 and other freighters and various military helicopters. I'll remind you defense shipments can be very lumpy. In total for the quarter our revenues were very close to our expectations with a slight shift in mix between commercial and defense revenues.

Moving along to profitability and on a reported basis, 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 is about $95 million for Q4, and about $375 million for the full year. The - - EBITDA is up about 5% versus the prior Q4 and about 12.5% versus the prior full year. The EBITDA as defined margin is about 49% for the full year, a strong margin performance, up about 2.5 points from the prior year. This continues to reflect the impact of our early cost reduction, a somewhat richer mix as well as our ongoing value pricing activities offset slightly by the dilutive impact of the acquisitions.

With respect to acquisitions as I mentioned, we made four acquisitions from the September 2008 through September 2009 total time period for a total purchase price of about $225 million. We acquired a starter generator business from General Electric, an ignition system magnetos business from General Electric, a battery charger and power control business from Actuant, and a valving business from Woodward Governor. We continue actively looking at opportunities, a pipeline of possibilities is as roughly as it's been in the past, more smaller than larger. Closings are always difficult to predict, so I'm not going to try to do that. But we remain disciplined and very focused on value creation opportunities.

With that let me turn this over to Ray to give you a little more operating color.

Thanks, Nick.

As Nick mentioned, overall we had a good fourth quarter and a good finish to fiscal 2009. Our operating value drivers and our acquisition integration continue to add solid value. Let me explain our fourth quarter and fiscal 2009 operational value creation in a little bit more detail. As Nick mentioned we acquired two more businesses during Q4. On July 27, we purchased Acme Aerospace, they design and manufacture battery and power conversion products. And on August 10 we purchased a fuel and neumatic valve product line from Woodward Governor. We are leaving the Acme business in Tempe, Arizona and we will operate it as a product line reporting to our Avionic Instruments business. However, we are presently operating the Woodward valve business in California and we are preparing to move it to our Painesville, Ohio AeroControlex unit over the next two quarters. At both of these acquisitions we've already started implementing our value pricing initiatives. We've also made a significant cost reduction in restructuring at Acme, and we expect good consolidation savings when we move the Woodward valve business to AeroControlex.

We are also successfully applying our three value drivers to the two Unison acquisitions that we moved and consolidated during the first half of 2009. Now let me turn to a discussion to our other operating units and their value generation activities last quarter. As the market continued to soften in our fiscal second half, we continued to make cost reductions by reducing staff at each of our units. In total we have now reduced headcount by 15% to 20% at our operating units since August of 2008. We will continue to closely watch the market and we will react accordingly. Now in spite of the soft market we continue to invest in product development and generate new business. Our new business activities continued on track in Q4 and we finished the year with a number of significant new business awards. Our development work on the Boeing 787 products is nearing completion and the spending is almost wound down.

However, we are now ramping up development work on the A-350 and other platforms. One of our larger projects is the development of a new cockpit door module system for the Airbus A-350 and it will also be used on the A-380. During our mid year 2009 call I discussed over a dozen new business programs in detail. I spoke of new business awards in both the commercial and military segment. The second half of our fiscal year was also very active and we continue to add more new business awards and projects. For example, we continue to expand our composite tube applications, our power conditioning equipment applications, our cockpit security applications and our valve and fluid control applications, just to name a few. Typically these new business programs take awhile to develop and turn into any meaningful revenue. However, they do seed the growth of our OEM and our future aftermarket sales. Also in spite of a tough market we continue to successfully implement our value-based pricing in all of our business units.

Now let me hand it over to Greg, and he'll review the fourth quarter and 2009 financial results in more detail.

Okay. Thanks, Ray. Good morning, everyone. Again, thanks for calling in. Nick and Ray did a very good update of our business, the market and what lies ahead of us.

I'll 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 $197.4 million, up $8.1 million, or 4.3% from the prior year. The increase in sales was primarily driven by the acquisitions of the Unison product line made in fiscal 2008 as well as the recent acquisitions of APC, Acme and the Woodward HRT product line. Total revenues this quarter from these acquisitions was $16.8 million. Sales excluding acquisitions modestly decreased by $8.7 million which represented a 4.6% decrease from the prior year. The net decline in organic sales was primarily due to the following three items. A decrease of $16 million in commercial OEM sales resulting primarily from the significant decline in production rates in the business jet market. The commercial aftermarket sales decreased $9 million versus the prior quarter - - prior year quarter primarily due to the impact of the global economic downturn resulting in a decline in worldwide airline traffic. Partially offsetting the decline in commercial sales was an increase of $16.9 million in defense sales primarily due to increased demand in aftermarket spare parts and repairs across all of our product lines as Nick had mentioned.

The reported gross profit for the quarter was $108.4 million, or 54.9% of sales. This $5 million increase is 4.8% greater than the prior year and slightly higher than our sales growth percentage of 4.3%. The reported gross profit margin was flat versus the prior year. However, the current quarter included about $2.5 million of additional acquisition related costs and the current margins were also reduced by the dilutive impact from the previously mentioned recent acquisitions. These two items reduced the gross profit margin by a little over two margin points. The underlying profitability of TransDigm remains very strong. Selling and administrative expenses was $22.1 million, or 11.2% of sales, versus the prior year quarter at 10.1% of sales. The increase as a percentage of sales was primarily driven by an increase in research and development spending.

As Ray mentioned, although our R&D spending was lower for the 787 program, we continue to invest in other new programs. Net interest expense was $19.6 million, a decrease of $2.8 million versus the prior year quarter. The level of debt was the same for both quarters. The average interest rate decreased to 5.5% for the quarter compared to 6.6% a year ago. The decrease in interest expense was partially offset also by lower interest income. Our effective tax rate was 33.9% for the quarter, and 35.1% for the full year. We are forecasting our fiscal year 2010 effective tax rate to be just below 36%, and we anticipate our fiscal 2010 cash tax payments to be approximately $60 million. Net income for the quarter was $41.6 million which was 21.1% of net sales and up $3.6 million versus the prior year. The 9.5% improvement versus prior year compares well given the sales growth of 4%. The results are a combination of all the items just discussed.

Our press release includes all the EPS calculations and supporting tables. For the fourth quarter, I'll focus on our adjusted diluted EPS which was $0.89 per share, up 14.1% from the prior year. This percentage increase mirrors the improvement in the adjusted net income quarter over quarter. Now let me just summarize the fiscal year on a GAAP basis. Net sales increased by 6.7% to $762 million, gross profit increased by 11% to $429 million, as a percent to sales gross profit was 56.4%. Selling and administrative expense was flat as a percent to sales versus the prior year. Net interest expense decreased by approximately 9%, and finally, net income was $162.9 million, 21.4% of sales and 22.4% greater than the prior year. GAAP full year diluted EPS was $3.23 per share, compared to $2.65 per share a year ago, a 22% improvement in the yearly comparison. This financial performance is very impressive considering the difficult aerospace market and worldwide economic conditions. On an adjusted basis which primarily excludes acquisition related costs and non-cash compensation costs, fiscal 2009 earnings per share increased 22.6% and finished at $3.42 per share. We believe this was another good year for TransDigm.

Let me switch gears and talk about cash and liquidity. The Company generated $197.1 million of cash from operating activities during fiscal 2009. This represents 121% of our net income. We closed this year with $190.2 million of cash on the balance sheet, a net cash increase of $31 million for the year. This increase includes the use of $155 million of cash for the three acquisitions we made during the year. Our net debt leverage ratio was three times EBITDA as defined. On a gross debt basis the leverage ratio was 3.5 times.

At this time before Nick discusses next year's guidance, I would like to talk about the $7.65 special cash dividend we paid in October which Nick mentioned earlier. The $425 million of new senior subordinated debt are mirror notes of our existing seven and three-quarter notes. This adds 1.1 turns to our debt-to-EBITDA ratio. On a pro forma basis, our net debt leverage ratio would have been 4.1 times versus the 3.0 I just discussed. We expect to generate approximately $190 million in cash next year, which will help us deleverage by approximately half a turn next year, excluding any acquisitions or other changes to our capital structure. With regards to the fiscal 2010 earnings per share on an annual GAAP basis the special dividend had, is going to have a $0.90 negative impact. $0.46 is associated with interest expense on the new debt and will impact both GAAP and adjusted EPS. The remaining $0.44 reflects the impact of the dividend equivalency payments which will be added back as an adjustment to EBITDA and EPS.

In fiscal 2010 total adjustments between GAAP EPS and adjusted EPS will be $0.62 made up of the following. The $0.44 dividend equivalent payment of which $0.40 will be expensed - - will be reflected in the first quarter of this year. $0.07 for stock option expense and then $0.11 for acquisition related expenses. So the three items totaled to $0.62 which will be our adjustment to fully diluted EPS. Let me also remind you that the dividend equivalent payments will continue through fiscal 2013. Assuming the stock option issued in fiscal 2009 become vested, if we assume 100% of these options vest, the annual dividend equivalent payment will be approximately $4.5 million before-tax from 2010 through 2013, and we will continue to add back this amount to our EBITDA adjustments.

I will now turn the conversation back over to Nick who will discuss the fiscal 2010 guidance.

Looking ahead to fiscal year 2010 and as always our guidance assumes no additional acquisitions. We go into 2010 with more market uncertainty than usual. However as I said earlier, rather than delay any guidance, here is our stake in the sand. We are guiding revenue in the range of $770 million to $800 million, up about 3% from the midpoint on a reported basis. The organic growth is down slightly with the increase due to a full year of acquisitions. We expect our fiscal 2010 results to be stronger in the second half of the year than the first half. Our fiscal first quarter is typically the slowest, the lowest of the year and this year will likely be below our prior year Q1. We expect the 2010 EBITDA as defined to be in the range of $376 million to $390 million, up about 3% from the midpoint on a reported basis. The EBITDA as a percent of revenue is approximately flat year-over-year. Margins in 2009 were very strong. In 2010, we have a slightly richer mix, offset by higher engineering costs and modest acquisition dilution.

We expect our conversion of EBITDA as defined to cash flow absent any acquisitions will be around $190 million in spite of significantly higher interest payments. Adjusted diluted EPS on the same basis as above, that is excluding stock option expense, dividend equivalency payments and acquisition related expenses should be in the range of $2.90 to $3.10 a share. This includes about $37 million of interest expense on the new debt. This guidance is based on the following market assumptions. I'll remind you that our fiscal year starts October 1, so we saw the full impact of the Boeing strike in fiscal year 2009. Compared to 2009, we are planning on full year commercial transport OEM revenue to be down in the mid single-digit percent. This assumes a reduction in commercial transport production rates in the second half of the year. Minimal and also by the way minimal if any 787 shipments in 2010. We are also assuming a further mid-teen percent reduction in OEM business jet revenues.

In the commercial aftermarket, we are planning on revenue growth in the mid single-digits based on worldwide traffic about flat for the full year. This assumes traffic is down in the first half modestly and picks up modestly in the second half. We could see more upside if the inventory adjustments begin to recover or traffic returns more quickly. For defense revenues, we are planning on year-over-year revenues to be down in the low single-digits 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 adjust our cost structure and guidance as the market situation unfolds. In summary, 2009 was a good year in a tough market. For 2010 it doesn't feel like we are out of the woods yet, but I'm confident that if we focus on our consistent strategy we will continue to create intrinsic value through good and bad times.

With that, we'll now open up the call for questions.

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

Good morning.

Good morning, David.

Nick, you talked about a mid single-digit decline at commercial OE. I guess comprised of low single-digit on the year transport side and 20/50, 20% on the business jet side. What exactly are you assuming in terms of a cut out of Boeing and Airbus, in terms of size?

Well it's both the cut and the timing of it. But in the narrow bodies, we are thinking maybe it comes down, let me just see, it comes down something in the 15% kind of range something like that.

Okay. And are you assuming anything further on the wide-body side? We haven't seen anything out of Airbus yet.

The truth is I don't remember what we assumed on the wide-body. In general we are figuring the rates come down in total somewhere in the 10%, 15% range and again, most of that is in narrow bodies.

Okay. Greg, that - - the $190 million that you're referring to is that cash from ops or is that after CapEx?

Before CapEx. Cash from Ops, David.

Okay. Then on the acquisition side, the costs in the quarter were pretty high. It seems like you're guiding to an increase in acquisition related expenses next year as well. What is going on there? What's driving that spending?

Can you repeat that question, David?

So the acquisition related costs, I think they were $2.8 million in the quarter, that's higher than what you've been running at. And I think - - backing into your numbers it seems like you're implying $8 million to $9 million in acquisition related spending next year as well. I just wanted to know what's driving the pick up there?

In this quarter we made two acquisitions this quarter, David.

Right, I know.

What you get is, you get a bit hit for inventory step up of about $1.7 million, and we incurred about $1 million of start up costs with the combination of the two plants.

Okay. What about what you're talking about next year? Is there something specific driving that?

You'll continue because Ray mentioned we will be moving the Woodward product line to Painesville over the next few quarters. And you'll also continue to get your step up amortization.

Okay. Thanks, guys.

The next question comes from the line of Lucy [Wu] with Macquarie. Please proceed.

Hi. Just wanted to see if you have any sensitivity analysis on the commercial aftermarket part of your revenue guidance next year? If you were to see say a 2% more aftermarket growth or more on top of the mid single-digit revenue growth, how much more EPS will you be seeing on top of the guidance?

I think you would have to figure that out. But you would have to figure that out yourself. But - - about what our commercial aftermarket is as part of our business and I will say the commercial aftermarket is higher than average profitability.

Right, so the, up mid-single digits versus the flat traffic guidance, what's the difference there? Is that pricing increase and share gain?

The unit sales we are saying are about flat. So the increase primarily what we are saying is what passes through is the price increase and maybe a little inventory adjustment if we see it.

And can you just talk about what's driving the low single-digit decline in the funds? Is it just tough comps or - -

We think - - not to be a smart answer but we think they are going to buy less. It's been a very strong 2008, very strong 2009. We of course don't know what's going to happen next year. But in light of the high level of spending and in light of we have a new administration, it appears that different priorities, we are concerned about that.

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

Good morning, guys.

Good morning.

A couple of questions. On the commercial OE order trends that you talked about, either Nick or Ray here.

I think I did.

If you can exclude, which I would think you can on the Boeing wide-body cuts, you seem to be implying some softness in orders that would be inconsistent with the public stance of the big OEs.

That's exactly true, Carter.

Can you (inaudible) that?

That's exactly true.

What level of weakness are we talking about? What sort of trends if you were to try to size what percentage decline in the things that we think the production is flat - -

Significant. Greater - - I told you we are thinking we may see 10% to 15% drop in the second half of the year, sometime in the latter part of the year. The incoming orders are down more than that.

Interesting. And that's on, excluding the things that you would think should be flat.

That's right. That's right. That's right. Now, Carter, some of that can be inventory adjustment - - it's hard to exactly sort that out but it's a significant difference.

Is there a difference - - are you seeing it across the board, is it in long lead time stuff, short lead time stuff?

I can't slice the onion that thin.

All right. And on defense, obviously, there's some tough compares. And I'm just trying to get to in a couple of, in the release and in your second comments, you said down and earlier you said we're planning on no growth. How much of this is based on order flow you can see? And how much is a little bit of an estimate knowing that you've got tough compares and we've seen some weakness elsewhere in - -

A fair amount of it is estimates, Carter. I have got to tell you, we go through all our businesses, do a roll off of what they think. And the roll up most peoples judgment was they may be down a little bit. We don't, we probably have some visibility for maybe the first three, four months. And beyond that it's sort of on the comp.

Are there spots you worry more about? I mean I know you have these Bradley motors and what not. Presumably some of that stuff is higher focused.

I don't know that I can really sort that out, Carter. I think what you are seeing a reflection, and we are seeing it from our operating units is - - there's been a big run up. There's specific things as I said like the fighting vehicles, the helicopters, the freighters, had a big run up. But most of the product lines have seen significant increases. We put that in the context of all sorts of political noise and priorities around the fence and we are just nervous about it. I don't know that I can give you a lot more specific than that.

That's completely fair. Last one on cash deployment. You end the year at almost $200 million of cash. You're operating at a run rate of, I don't know, 170, 175 in free cash flow. If, if the M&A environment stays a little slow as it seems to be right now, as people are holding back for better prices for 12, 18 months or something like that. You got a little bit of remaining share repurchase authority, would you envision using some of that or how will you think about the cash that builds up on the balance sheet?

You know, Carter, I think I would sort of answer that like we always do. Trying to predict, first predict the acquisition market is very difficult. We like some flexibility so that we can move quick when we need to. But as you saw if it becomes apparent to us that we are piling up cash, faster than we think we can put it to use, or we are delevering to a point that we don't think is the most efficient model, we will do something.

All right.

I would be surprised if that happened quickly over the next six, nine, 12 months, but who knows.

We keep all our options open.

Of course. All right. Thanks a lot, guys.

The next question comes from the line of Robert Spingarn with Credit Suisse. Please proceed.

Hi, guys.

Good morning, Rob.

Hi, Rob.

I need a little help with the aftermarket performance in the quarter. It was down 13% which I think was the worst number in the year. And you site biz jet as being a key piece of that. I guess it would have been down about half that rate you said without biz jet.

I don't think so. I don't think we said that.

No, when we pulled the biz jet out it was for the full year.

So the 13% number, was that for the quarter?

That was the quarter.

Okay. That's still - -

I want to say the year was, I want to say it was seven gross and five or six if you pulled the biz jet out.

Okay. So the point is that the September quarter was the worst aftermarket quarter.

Yes.

Why is it progressing at this stage which I think is a late stage, why is it worse now especially - - I was going to say the biz jet ops were up, domestically September versus June. So I would think there would be a little bit more spares activity. But can you talk a little bit about the conversations you're having with your customers. You did mention that inventory destocking was still present in the quarter but not as bad. So I'm having a tough time figuring out why this has gotten progressively worse. And then can you talk about what things look like in the first six weeks of the current first quarter?

Well we can't talk about the first quarter.

Why not.

I'll be clear with that, because we are not going to talk about that until we come out with that. The - - I would say, Rob, you've seen all the numbers around the industry just like I have. And I think our results are pretty consistent with what we see other people reporting if not a little better. Frankly it surprises me, too. I would have hoped and thought we would have started to level out. But the practical reality is we are not seeing a pick up yet and we are still seeing some inventory drawdown.

So the trends is still - -

As I think I led in, we see glimmers in the published reports and peoples forecasts and RPMs, but if you look at our underlying data in our business, I think most other peoples businesses I think we don't see it yet.

So when you call for flat units next year, it sounds like it's negative in the front half of the year and positive in the back end and it's flat overall?

Exactly. That's what I said, down modestly in the first half, up modestly in the second half.

Okay. All right. And then on the margin, if I do your - -

And, again, Rob, as you know that's very much a fielders choice where you call that turn.

Right. And the other thing, this is actually what Carter was talking about, on the OE side, do you have a sense, I mean, other companies have talked about destocking on the OE side. Could that explain - - you touched on this, could that explain what you are seeing in the lower order rates?

Yes, it absolutely could. It absolutely could. But it seems - - it frankly seems to me, and too much unless there's, unless there may be some rate downturn coming. But that will work out over time.

Okay. Just a couple of financial questions. One on the margin. It looks like the EBITDA margin as defined for next year is about a percentage point below the first nine months of this year. I'm not figuring in this last quarter because of the reasons that you mentioned. So is that further just acquisition dilution? Is there anything, anything else that's going on there? It's a modest difference but nonetheless it's a lower number.

We do have some acquisition dilution going in. You are looking at a set of numbers that I don't look at nine months versus a year. I typically don't look at it that way, Rob, so you're catching me a little cold.

I think what we said, Greg, is what we said is that we have a little bit richer mix. And a little bit richer mix is primarily because we have the OEM dropping and the aftermarket not dropping. But it's offset by two things, one we have some acquisition dilution from the four acquisitions, and second, we have some modestly higher engineering expenses.

That's right.

Particularly, we have some significant A-350 programs that their spending is kicking in.

Okay. And, Greg, one other thing just to help here get to this quickly, you started last year with $3 guidance. And you ended up doing about $3.42. How much of that difference was acquisitions versus just upside of the business?

I haven't sliced it that way, Rob. I'll have to get back to everybody on that. I just haven't sliced it that way.

Okay. That's very helpful. Thanks, guys.

I just don't remember.

The next question comes from Fred Buonocore with CJS Securities. Please proceed.

Yes, good morning. One question you talked about, I guess it sounds like you've made continued headcount reductions through the fourth quarter. So the, first of all, are you continuing to do that through Q1? And really where is the inflection point at which you wind up maybe flat footed where you've cut back so much that you are needing to scramble to increase production capacity? Or is a lot of this really related to acquisitions that you've made and done your normal cost reduction through headcount reduction that's kind of lumped into that? What was it that you said, 15% to 20% cut back?

Let me - - yes, some of it is is with acquisitions but I will tell you, we significantly reduced the employment in the base businesses. We took a big slug out last summer and we continued to tweak all the base through the year. Now, the acquisitions got hit, too. I would say moving into next year, we are just going to be watching this quarter by quarter. I think it's, I think it's fair that - - we are uncertain. I mean we will keep tweaking and turning the dial as we move forward in the year. I think we still have room that we could do that. If you told me the world was going to dislocate another 25% or 30%, I would say I don't think we could do that. But in the likely range of outcomes that we might see here I think we could probably adjust.

What if there's a surprise on the positive side. As many have pointed out it seems like your expectations on the defense side may have some conservatism built in there. And clearly, RPM recovery is a moving target both as the win and as to the magnitude?

We would like that to happen. And if it happens we will ad resources back. In the past we usually don't add the resources back as fast as the market turns up and we get a little bit of an expansion there.

Yes, that's a good problem to have, I guess.

I don't think there's - -

It's not problematic. Plant capacity isn't an issue. We can generally hire as we need.

Sure. Got it. And then secondly, just drilling down into the destocking a little bit more. Maybe you said this this but I didn't catch. Where is it if you think it's continuing to happen, where is it largely occurring? Is it still at the distributor level or would you say it's entirely within the airlines which is harder to get your arms around?

It's very modest if any at the distributor level. It's primarily, that's the problem. The distributors we can measure very easily and we know the answer. It's, it's tough to track it all down at the airlines.

Right.

Anecdotally we think it's close to the bottom, but honestly - - those of you have listened to our other calls, I have to say, we've been surprised at the depth of it and we thought it would have hit bottom three months ago or so.

Right. And then I'm not sure if you track this just in terms of how much of the huge fleet of aircraft your parts go on. But if you have a sense for how much is on air freighter, air cargo related planes. But that's something that's certainly seems to be improving albeit off of a really ridiculously low year last year. But do you have a sense for if that improvement could contribute to your results in any meaningful way in 2010, and if that's a potential source for surprise?

Well we are to some degree we are on freighters in proportion to their install base to the total which isn't that big. To the extent they pick up we'll pick up. I mean we are pretty well evenly distributed.

Okay. And then, let's see, finally, did you mention what your expected CapEx number should be? Usually it's not very high and just wondering what it should be in 2010 and if there is anything unusual happening in that number this year?

It will be no different. We are going to be consistent with how we've been in the prior, Fred. Nothing unusual.

Nothing at the plant that's going to spike this year. We are expecting CapEx to be the same kind of run rate we've had in the last year.

And our modeling is in the $20 million.

And we usually use - -

We use about 2% of revenue and frankly that's usually a little - -

We don't get that all spent.

Great. Okay. Thanks a lot, guys.

The next question comes from the line of Eric Hugall with Stevens. Please proceed.

Hi. Good morning, guys.

Good morning.

In terms of the defense sales, historically typically what kind of visibility do you have as you go into a quarter? How much is in backlog when you sort of start out that you know is going to ship versus orders that you have to take during the quarter?

For defense?

Yes.

We generally have the bulk of it in hand for the quarter.

So you pretty much know at least what first quarter is going to look like. So I guess, and you said the bookings in the quarter were, in the fourth quarter were pretty solid. So if we are thinking about it in our minds, we should see pretty strong first half or at least first quarter and then sort of tailing off as we go through the back of the year, if that happens? That's how we should be thinking?

Just so I'm clear on that, the bookings were very strong versus the prior fourth quarter.

Okay.

Not necessarily versus the other, I was talking about quarter versus quarter.

Okay. So.

We we really can't give you much more color on the quarters.

Okay. Fair enough. I guess I'm just asking from the standpoint of trying to determine sort of how much of that, how much of what you're forecasting is what you are seeing in current orders versus what you are just sort of expecting or planning potentially?

I think I answered that question to some degree before. We have a pretty good guidance, or we have pretty good visibility three to four months out. Beyond that it is a combination of the judgment of our operating unit guys and our overall just concern about the budget priorities of the government and the like.

Fair enough. You gave what aftermarket sales were in the quarter, the last quarter down 13%. Can you break that out as to what that number was ex biz jet? You gave it for the year.

I gave it for the year. I don't know if I can.

If I happen to have it hear I will be glad to tell you. It isn't going to make that big a change because the biz jet isn't a real big slug of it.

Okay.

As you see for the year, a very poor business jet environment only moved it down about one point.

Okay. Fair enough.

The mix isn't going to be a heck of a lot different.

Okay. Fair enough. And lastly, can you give us a sense, you've, again, you've let go of a lot of people in the downturn. Can you give us a sense of in terms of I guess revenue or volumes, how much if volumes start to recover here, how much revenue do you think you can generate sort of at good sort of EBITDA drop through margins where you wouldn't have to add people back? But how much can volumes decline before you really start to have to adding people back?

I don't know that I can answer that. That's very dependent on where it comes from. What product line, what business, what segment. Aftermarket, OEM, I mean, OEM you get less - - you get less profit, you have more cost. Aftermarket, you get a pretty healthy drop through.

I'm thinking more on the top line.

I not going to assume what sort of drop through. We try to use good judgment before we add resources.

Okay. Thanks a lot, guys.

The next question comes from the line of Jason Rogers with Great Lakes Review. Please proceed.

Good morning. Just had a few questions on the balance sheet for Greg. If you could provide the goodwill and intangibles figure for the quarter?

Yes. On the balance sheet I believe isn't it in our press release? I don't have those numbers memorized to be honest with you. Let me just take a quick look here. No, I don't have that - - we will be issuing the K Monday which will, all of that will be out. But again, I don't memorize those kind of numbers.

Do you happen to have the equity figure or should I wait for that one.

Wait for that. The queue should be out Monday or Tuesday - - or the K.

Okay. Just looking at what you provided on the inventory and receivables being up, is that just related to acquisitions?

Yes, the actual turnovers in the normal operating working capital that are in line. A lot of the increase you are seeing year-to-year is due to the acquisitions.

Okay. Why did accounts payable increase so much?

Well, some of that has to do actually, there is about $8 million hit tied into the bond offering we did, we accrued. It was all balance sheet. There was about $8 million tied into the bond offering which was one of the bigger items because of making payables (inaudible).

Do you have a current pro forma debt figure?

Well the debt figure when you say current pro forma.

Just including the additional 425.

We really just take our long-term debt in the press release and add about 425 to it.

And take off the cash.

Was there any short term debt in that figure.

No. There are no payments due to until 2013.

Okay. And finally, looking at your sales for the quarter, what impact did pricing have?

Say that?

The impact overall pricing.

We don't disclose that.

Okay. Thank you.

The next question comes from the line of Peter Brim with First Q Capital. Please proceed.

Good morning, gentlemen. I had a question on inventory there. The working capital overall is about in line, but part of that is because the payables are up. The inventory turns have come below two on a historic basis. And I was wondering as the previous caller mentioned, about how much that is acquired mark up or how much of that is built to stock? And in your $190 million operating cash flow guidance for next year, how much of that is going to be involved in getting those turns back above two?

Our inventory turns historically have been a little bit, a little bit over two. And they haven't changed that dramatically. We do build some inventory stock when we make acquisitions. That hurts us a little bit there. And as we had mentioned during the year, inventory was a challenge when your market changes as rapidly as they do, it does take a little bit of time to correct that. You don't correct it on a dime. But in total when you look at the consolidated inventory turn, it's been a little low but not dramatically worse so the increases are tied into acquisitions, building safety stock per move, a little bit of deterioration but nothing dramatic.

(Inaudible) expand on that a little bit, particularly in biz jet, guys. Essentially the biz jet people just slam down, just essentially shut down receipts down there for a period of time - - and you can't turn the inventory down that fast.

Okay, is it safe to assume that the majority of that is in sort of work in process and finished good and not raw materials?

There's also inventory to prepare the move. We are moving two facilities. And as we move facilities, we build up inventory to, that's sort of your buffer if anything, for any bumps in the road in the move.

Okay. So that increase is mostly finished goods, then?

I don't know that I can answer that.

What Nick is saying is a portion is finished goods but there's a lot of other inventory.

Okay. All right. Thanks.

The next question comes from the line of Randy Gwirtzman with Baron Capital. Please proceed.

Hi, guys. Good morning. I just want to do dig in a little bit on the defense just to try to get a little color on it. Do you guys, are most of your orders coming through the supplemental portion of the defense budget? Or do you have sort of is there any kind of standing order under the normal fiscal year budget? And how do you guys look at that? Thanks.

Randy, it's, it's both is the answer. And if you ask me to split it, I am going to tell you I don't know the answer. The bulk of the movement comes in the aftermarket. The OEM programs, the production rates don't, with the exception of maybe the C-130, which changes to the good, don't change that much. What changes is sort of the operational tempo and some of that's in the base budget. And some of it's in the supplemental, and I don't know thousand split it out.

Yes. I can appreciate that. - - presumably, there's still clearly a lot of usage going on in Afghanistan. The Iraq drawdown is not about - - but there's also reset as well. I guess you guys don't - - you just don't know how the [whumpiness] of that is going to go through.

That's right.

And you're not sure of the up tempo and that's basically what you're trying to describe - -

That's exactly what we're trying to describe. And we - - I would say, Randy, I'm hopeful that we are conservative here. But the reality is, we just don't feel very comfortable with it right now.

Okay. Thanks.

(Operator Instructions). The next question comes from the line of Lucy Wu with Macquarie. Please proceed.

Hi. Just a follow-up on R&D. I was wondering if R&D as a percentage of sales will be higher next year as well? You said the engineering costs, absolute costs, will be higher. But is there any other program (inaudible, several people talking at once).

Engineering costs are more than just R&D. There's engineering other places. They are up somewhat, I think very slightly as a percent of sales. (Inaudible - two speakers) Yes, I don't have all that. It's up modestly as a percent of sales, not a lot. With our engineering expenditures are up and the main driver of the up is we have a couple of significant A-350 programs. But it isn't a big impact.

And what about SG&A expense before the acquisition cost and stock option expense?

SG&A cost and when we're looking at 2010 - - we finished the year just a little under 10% of the percent to sales. And going into next year it will be a little over 10%. It will be 10% to 10.5%.

Okay. Great.

Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Jonathan Crandall for closing remarks.

We do have one other question. Sorry. And it comes from the line of Jack Kelly, private investor. Please proceed. Mr. Kelly, your line is open. Please proceed.

It looks like we lost him.

Well let's conclude.

Yes.

Okay.

All right. Well I would like to thank everyone for participating on this mornings call. We expect to file our 10-K early next week. Thank you, again.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.