TransDigm Group Inc (TDG) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 TransDigm Group Incorporated earnings conference call. My name is Jennifer and I will be your operator for today. At this time all participants are in listen-only mode and later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jonathan Crandall of Investor Relations. Please proceed.

Thank you, Jennifer. I would like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2011 first-quarter earnings conference call. With me on the call this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; 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 Company's latest filings with the Securities and Exchange Commission. These filings are available through the Investors section of our website or through the Securities and Exchange Commission'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, adjusted net income and adjusted earnings per share, all 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 measures and a reconciliation of the EBITDA, and EBITDA as defined, adjusted net income and adjusted earnings per share to those measures.

With that let me now turn the call over to Nick.

Good morning. Thanks again to everybody for calling in to hear about our Company. I would like to start out as usual with some comments about our consistent strategy, the pending sale of our fastener business, as well as our current sense of the status of the aerospace market, at least as it applies to our businesses.

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 quickly why we believe this, over 90% of our net sales are generated by proprietary products. Around three-quarters of our net sales come from products for which we are the sole source provider.

About 55% of our revenue, and a much higher percentage of our EBITDA, comes from aftermarket sales. Aftermarket revenues have historically produced a much higher gross margin and provided relative stability in the downturns.

Because of our uniquely high EBITDA margins, in the 45% to 50% of revenue range, and relatively low capital expenditure requirements, generally 2% or less of revenue, TransDigm has year in and year out generated strong free cash flows.

We pay close attention to our capital structure and we view it as another means to create shareholder value. As you know, we have in the past and continue to be willing to lever up when we either see good opportunities or view our leverage as suboptimum to equity value creation. We typically begin to delever pretty quickly.

We have a well-proven value-based operating strategy focused around what we refer to as our three value drivers -- new business development, continual cost improvement and value-based pricing. We stick to these concepts as the core of our operating management methodology. This consistent approach has worked for us through up and down markets, and has allowed us to continually improve and increase the intrinsic value of our businesses while steadily investing in new businesses and platform positions.

We have also been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace products with significant aftermarket content. We have been able to acquire and improve aerospace component businesses through all phases of the cycle.

Through our consistent focus on our value drivers, a clear acquisition strategy, and close attention to our capital structure, we have been able to create intrinsic value for our shareholders for many years through up and down markets.

The just completed quarter was very active. We closed on McKechnie, for $1.25 billion, and the Teleflex actuator business, known as Talley Actuation, for about $93 million. McKechnie closed on December 6. Most of McKechnie businesses effectively close down for the one or two weeks around Christmas so the revenue and EBITDA impact was very modest in this quarter. Talley Actuation closed on December 31 and contributed no revenue or EBITDA to the quarter.

We recently announced the execution of a contract to sell the fastener portion of the McKechnie business to Alcoa, subject to HSR approval of course, for about $240 million. We are presently working through the regulatory approval process. We anticipate closing late this quarter or early next quarter. This is a good fastener business with solid prospects; however, it fits much better with Alcoa's business portfolio than it does with ours.

Assuming we close on the fastener business by March 31, we anticipate having about $450 million of cash and about $240 million in undrawn revolver at that time. Additionally, as you know, we typically generate $50 million to $60 million per quarter in additional cash. We also have more capacity under our credit agreement.

Also, by 3/31, with the divestiture complete, we anticipate that our net debt to EBITDA will drop to about 5 times. As in the past, absent acquisitions or other capital market actions, we will continue to delever.

Additionally, we are in the midst of attempting to reprice our $1.6 billion a bank debt. We think we have a decent chance to make a meaningful reduction in the interest somewhere in the area of 1% through of a lowered LIBOR floor and a reduced spread. We are also hopeful that we can eliminate the two maintenance covenants, which are interest coverage and net [leverageable].

Now with respect to our underlying markets, the market outlook is mixed. We continue to see clear signs of an improving commercial market, while the defense market is much less clear. In the commercial OEM market industry forecasters and airframe manufacturers continue to be optimistic regarding the commercial transport OEM production cycle.

As we have said before, by historical measures this has been an unusually moderate downturn. The rate increases all seem to be proceeding at both Airbus and Boeing. Though we are now planning on minimal, if any, 787 shipments, in total we expect our full-year commercial transport OEM revenues on a, I will say, same-store basis to be up in the low double-digit percents.

In the business jet OEM world though the outlook is mixed by airframe manufacturer, it appears that this sector is stabilizing. We still expect our year-over-year shipments to be modestly up.

In the commercial aftermarket segment we continue to see positive signs in worldwide passenger traffic, incoming orders and other data. This quarter we saw significant year-over-year increase in our aftermarket revenues. Incoming orders or bookings continue to run above the shipment levels and well above the prior-year booking levels. We now anticipate pro forma commercial aftermarket revenues to be up in the low double digits versus last year.

In the defense segment, given the uncertainties around the defense budgets, we are planning on a flat to modest decline in this segment in fiscal year 2011. We see nothing so far that changes our view. This segment can be tough to predict, especially given the current US political winds and the worldwide geopolitical situation.

Now let me turn to the latest financial performance. I will remind you this is the first quarter of fiscal year 2011; our year started October 1. As I have said in the past, quarterly comparisons can be significantly impacted by difference in the OEM aftermarket mix, large orders, transient inventory fluctuations, and modest seasonality, among other factors.

But our first quarter of fiscal '11 started off the year well. GAAP revenues were up 30% versus the prior Q1. Organic revenue growth is up a bit over 10% on a quarter versus quarter basis. This is the third quarter in a row of year-over-year organic growth in spite of a decline in military revenues.

Reviewing the revenues by market segment, again on a pro forma basis versus the prior year, that is, assuming we own the same mix of businesses in both periods, but excluding the recent McKechnie and Telley acquisition business -- and the reason for that is that we don't have the historical market segment info at the new acquisitions exactly synced up with the TransDigm definitions, though I don't believe that they are significantly different.

In the commercial aftermarket, which makes up about 70% of our revenue, commercial OEM revenues were up about 9% organically versus the prior year.

Excuse me, Nick, you said commercial aftermarket. It is the commercial (multiple speakers).

Commercial OEM revenues. Commercial transport OEM revenue percent -- the transport OEM revenue increase was up a little less than the overall OEM average. And the BizJet OEM revenues were up about 30%, but this is versus a very low base the prior Q1.

In the commercial aftermarket, the revenue was up about 20% organically on a Q1 versus Q1 basis. This is the best quarter versus quarter compe we have seen in a while, but I will remind you this is versus a weak prior-year.

Both the commercial transport and the business jet aftermarket were up in the same percentage range roughly. Bookings continue to run above the shipping levels.

The defense market, which makes up about 30% of our revenues, the picture was again mixed. The revenues are down about 2% organically on a quarter versus prior quarter basis, and down about 10% versus the prior-year average run rate.

Incoming orders, however, were ahead of the shipping rate and running about even with the prior-year average booking rate. So this picture is not clear, but we remain cautious about the trends in this area. In total for the quarter our revenues were about as we expected, maybe slightly better.

Moving on to profitability and on a reported basis, I'm going to talk primarily about our operating performance or EBITDA as defined. The major as defined adjustments are related to the McKechnie acquisition and the large related financing, and Greg will review these in some detail.

Are EBITDA as defined of about $111 million for Q1 was up about 23% versus the prior year. The EBITDA margin of 46.5% this quarter was diluted about 3% by the impact of acquisition. Q1 was a busy time for our operating people. Ray is going to expand on this a little in just a minute. After 1.5 months of ownership the McKechnie business looks about as we expected and the integration is on track.

With respect to acquisitions, as I mentioned, we completed two acquisitions in Q1, McKechnie and Talley for about $1.4 billion between them. Additionally, we executed a contract to sell the McKechnie Aerospace fastener business for about $240 million, subject to HSR approval.

We continue actively looking at opportunities. We've been pretty busy getting these closings done, restructuring and selling this quarter. The pipeline is a little light. Closings are always difficult to predict but we remain disciplined and clearly focused on value creation opportunities that fit our criteria here.

Regarding the fiscal year 2011 guidance, there are a number of moving pieces impacting our guidance. The interest expense is lower than we originally forecasted. We closed the Talley business. The commercial aftermarket looks a bit better than we originally thought. The R&D tax credit was renewed. And McKechnie closed a little bit later than we originally anticipated and right before the Christmas shutdown.

Based on all of the above we are increasing the midpoint of our EPS as adjusted guidance by about $0.20 a share from $3.69 to $3.89. We now expect TransDigm's revenues to be about $1.21 billion or about $19 million or 2% up from our prior guidance. This assumes no additional acquisitions and does not reflect any divestitures in 2011.

The 2011 EBITDA as defined is now anticipated to be in the range of $554 million a year, up about $7 million from our previous guidance.

We still expect our fiscal 2011 results to be stronger in the second half of the year. Our fiscal year first quarter is typically the slowest, and this year will likely be the same, with steady growth anticipated throughout the year.

Compared to 2010 we are still planning on full-year commercial aerospace OEM revenues to be up around 10%. For the commercial aerospace aftermarket we are planning on revenue growth in the low double-digit percent, based on worldwide traffic up 4% to 6% year-over-year and some modest restocking and/or deferred maintenance recovery. We will keep watching this closely and could see some upside here.

For defense spending we are still planning for year-over-year revenues to be flat to modestly down, but we could see some downside here. We will update this guidance sometime after we close the fastener business.

In summary, 2011 first quarter was a good start to the year. The commercial aftermarket seems to be recovering nicely. And in any event, I am confident that by focusing our consistent strategy we continue to create intrinsic value in good and bad times.

Now let me hand it over to Ray, our COO, to discuss some of the operating items in Q1.

Thanks, Nick. As Nick mentioned, in total we had a good and very busy first quarter. We are quite busy with acquisition due diligence, completing transactions, and transitioning acquired businesses. And our operating units we were also diligently working our value drivers, and we continued to create shareholder value. Let me explain our first-quarter acquisition and operational activities in a little more detail.

Four weeks before our fiscal Q1 started we purchased Semco Instruments. During Q1 we restructured Semco's product pricing to reflect the value they provide, and we accelerated their transfer of work to their Mexico facility. This has allowed us to reduce overall headcount by approximately 17%.

We also installed a new Semco President and new senior staff team. The Semco transition activities are well underway, and we expect this acquisition to meet our value creation expectations.

On December 6 we acquired McKechnie Aerospace. During December we eliminated the McKechnie corporate office and absorbed those functions into our Cleveland headquarters. We also shuffled the senior operational responsibility. Jim Riley, one of our existing Executive Vice Presidents, has taken responsibility for the majority of the McKechnie operating units.

Two backfill for Jim we have promoted Bernie Iversen to Executive Vice President. Previously Bernie was President of our Champion Aerospace unit. He has also been with TransDigm since our founding.

Jim Riley and others are now working diligently on transitioning the McKechnie operating units into TransDigm's value creation culture. This activity primarily revolves around our three value drivers of value pricing, productivity improvement and profitable new business.

To implement our value drivers Jim is streamlining the operational cost structures at each location and installing our proven product line management structure. It is at this product line level where we believe the best focus on value creation occurs at a TransDigm operating unit.

On a larger scale we also have consolidation plans in process with several of the McKechnie operating units. We began to consolidate our Seattle-based Avtech operating unit with the Seattle-based McKechnie Tyee operating unit. At the McKechnie Electromech operating unit we plan to consolidate their Welco operations into their existing Matamoros, Mexico facility. This expanded Mexico facility will also have additional capacity for future productivity transfers to Mexico.

On the last day of our Q1 we completed the transaction and purchased Talley Actuation from Teleflex Inc. Talley Actuation is located in Simi Valley, California. We plan to consolidate this product line by moving it to our existing aero fluid product operation in Painesville, Ohio.

You may recall we have moved several product lines to the Painesville location, with the most recent being the Woodward Governor valve product line that we moved during our fiscal 2010.

The team at Aero Fluid Products is operationally strong and experienced relocating product line. We are confident they will acquire value drivers and create real shareholder value with this product line consolidation.

Now let me turn the discussion to our other operating units and their recent value generation activity. Overall the TransDigm operating units are performing well. They have diligently controlled their cost structure and have added resources sparingly as this market recovers.

Our new business development continues to be quite active during Q1, and we continue to invest in a broad range of engineered solutions for our customers. Our value pricing actions have continued to be effective across our businesses and they also contributed to our solid first-quarter results.

The first quarter has been very busy; however, we have a strong operational team that is focused on implementing our proven value creation strategy in each of our new acquisitions and our existing businesses.

Now let me hand it over to Greg Rufus, our CFO, who will review our second quarter -- I am sorry -- our first-quarter results.

Thanks, Ray, and good morning to everyone. I hope everyone had an opportunity to read our press release, which was issued this morning.

In typical TransDigm fashion our first quarter was very active, as Ray and Nick just pointed out. Today I will focus on our GAAP results for the first quarter compared to the prior-year first quarter, commenting on the major lines with a little more detail. But first I will comment on some of the quarter activities.

Last month in conjunction with the McKechnie acquisition we refinanced our entire debt structure. Our capital structure now consists of a $245 million undrawn revolver, which matures December 2015. We have a new senior term loan of $1.55 billion with terms as of today at LIBOR with 1.5% floor plus 3.5%. This loan matures December 2016. Our new senior subordinated notes of $1.6 billion carry an interest rate of 7.75% maturing December 2018.

As of today we have two maintenance covenants, a net debt to EBITDA leverage ratio and an interest coverage ratio. At the end of quarter one our net debt leverage ratio was 5.4 times our pro forma EBITDA as defined. We also project our interest coverage ratio to be 2.5 at the end of the year. Both measurements have plenty of cushion versus the defined targets. We will also be required to pay 1% of the principal annually for the senior term loan.

Not resting on this new capital structure, we just initiated a re-pricing of our $1.55 billion senior term loan and hope to close this tomorrow.

As Nick discussed, and as stated in our press release last week, we have entered into a definitive agreement to sell the fastener business to Alcoa for $240 million, subject to the HSR approvals. For GAAP purposes we do not expect to book any significant gain or loss on the sale; however, since this is a stock deal, for tax purposes we will have to pay between $60 million and $80 million in taxes since the cost basis is low in these mature companies.

Now let's switch to the quarter's results. Quarter one net sales were $240 million, up $55.8 million or 30.3% from the prior year. This increase includes $36.3 million, driven by the acquisitions of Dukes and Semco in fiscal 2010, and McKechnie, which was acquired during the first quarter.

Organic sales also increased by $19.5 million. The organic growth was led by an increase of $15.6 million in commercial aftermarket sales and a modest increase of $3.8 million in commercial OEM sales. Both increases are due to improved demand in the commercial aerospace aftermarket.

The increases appear to be spread across most of our product lines. Percent sales were essentially flat for the quarter.

Reported gross profit was $127.7 million or 53.2% of sales. The reported gross profit margin decreased by 2.7 percentage points versus the prior year. Organic sales growth and favorable product pricing in our proprietary products helped offset the dilutive impact of approximately 4 margin points at the gross profit ledger or line from the previously mentioned acquisitions.

Selling and administrative expenses were up 12.9% of sales for the quarter, an increase of $8.6 million or 0.7 margin points greater versus the prior year. This increase is primarily due to $3.5 million of acquisition-related expenses incurred with the McKechnie acquisition. These are made up primarily of severance and some minor other corporate office expenses.

Transaction-related expenses were $1.8 million. This is a $350,000 net increase in expense versus prior-year activity of $1.4 million. Current year activity is in connection with the acquisitions of Semco, McKechnie and Talley Actuation. The remainder is due to incremental selling and administrative expenses related to recent acquisitions and some other new business initiatives. Excluding acquisitions and transaction-related expenses, selling and administrative expenses were 10.6 percent of sales.

Amortization of intangibles was about $300,000 higher versus the prior year. This line item reflects all resent acquisition activity.

Refinancing costs were recorded in December 2010 as a result of the refinancing of TransDigm's entire debt structure. The charge was $70.7 million consisted of the premium of $40.7 million paid to redeem our 7.75% senior subordinated notes, the non-cash write-off of debt issued costs and unamortized note premium and discount of $25.7 million, and the settlement of an interest rate swap agreement and other expenses totaling $4.3 million.

Net interest expense was $32.6 million, an increase of $4.1 million versus the prior-year quarter. This increase was primarily due to the debt refinancing transactions and the McKechnie acquisition financing which occurred in December.

The average interest rate on our total debt was approximately 6.1% for the quarter, down from 6.4% during the comparable quarter last year. The weighted average interest rate on total borrowings outstanding as of the end of the quarter was approximately 6.4%.

Our effective tax rate was 33.2% in the current quarter, down from 35.8% in the prior-year quarter. The lower effective tax rate was primarily due to the retroactive reinstatement of the research and development tax credit and the continued phase-in of the domestic manufacturing deduction.

The effective tax rate for our fiscal 2011 will remain unchanged at 35%, which now includes the statement of the R&D tax credit, but is offset by changes in state rates arising from the inclusion of the McKechnie locations.

A net loss for the quarter of $7.3 million reflects the one-time costs attributable to the refinancing of the capital structure and the acquisition- and transaction-related costs associated with both the McKechnie and Talley Actuation businesses just discussed.

As a reminder, TransDigm uses the two-class method of calculating EPS, as it is [fraught] with GAAP accounting treatment, instead of the more commonly used treasury method. Our press release includes several tables. Please reference tables 3 and 4, which show the calculation of the two-class method of EPS.

For the quarter our adjusted earnings per share was $0.89 per share on 53.3 million diluted weighted average shares outstanding. This represents a 32.8% improvement over the prior comparable quarter.

GAAP EPS was reported as a loss of $0.19 per share, which compared to net earnings per share of $0.01 a year ago. This quarter included $2.8 million of dividend-equivalent payments or $0.05 per share charge. Please refer to table 4 of the press release for a full reconciliation.

This quarter's adjustments to GAAP EPS were $1.08 per to arrive as an adjusted earnings per share of $0.89 positive. The two most significant adjustments, net of tax, are the impact of refinancing costs, which was about $0.89 per share, and acquisition and transaction-related expenses of about $0.12 per share. A more detailed reconciliation is presented, again, in table 4 in this morning's press release.

We ended with $234 million of cash on the balance sheet; however, we still had $31.4 million of senior subordinated notes outstanding, which was subsequently redeemed January 15, 2011. As Nick discussed, and as spelled out in this morning's press release, we are making changes to our full-year adjusted earnings per share guidance, which was the impact -- which has the impact of increasing the midpoint of our guidance to $3.89 per share, up $0.20 from the previous guidance.

Now let me hand it over to Jonathan to kick off the Q&A.

Thank you, Greg. In order to give everyone the opportunity to ask questions, I would ask that you limit your questions to two per caller. If you have further questions, I would ask that you reinsert yourself into the queue and we will answer those questions as time permits. Jennifer, we are now ready to open the line.

(Operator Instructions). David Strauss, UBS.

Nick or Greg, could you maybe just walk through the -- I know you did this a little bit in your prepared remarks, but maybe a little additional color on the $0.20 increase in guidance? I would think with Talley adding like $0.08 and with lower interest expense, it sounds like you're not getting anything on the tax rate side. But combined with a pretty big move up in your aftermarket guidance, it would be worth more than $0.20. So any color there and maybe some of the offsets.

Maybe I could just start off. About half the guidance change is interest. So that is about half of it. I think -- Greg, I'm not looking at the chart here, but the tax is essentially a push, right?

Yes. Taxes were minor.

You have some good and some bad. You have some increased state tax and you have some -- state is a little worse, because of the venues we are in now, and the R&D tax credit is offset, so you don't get much out of that.

Greg, I'm just not looking at (multiple speakers).

Now this is versus the guidance, not versus the prior year, we do get a small uptick, a little over $0.05 for Teleflex. Base operations were pretty good, but as Nick mentioned, versus our original guidance we were off in the timing of the McKechnie acquisition. We effectively had earnings for about 10 operating days because we bought it December 6, so you are already one week into December, and most of the locations were closed for one to two weeks during that.

So versus our timing of guidance we didn't pick up as much as we anticipated. And then the other offset was the interest rate was a little better. So I don't want you to get confused between versus prior year, but this is just the reconciliation versus our guidance. We have a little better ops performance as we see for the year, and we missed the timing on McKechnie.

I think on McKechnie, Greg, I think your prior midpoint assumed $0.07 of accretion just straight from McKechnie and before concerning the additional interest expenses. Where is that number now?

It is a little under $0.05.

My last -- well, I guess before on fastener, on the divestiture there are you assuming anything in terms of doing anything with the proceeds in your guidance?

No.

Caller: Then you touched a little bit on some of the cost savings on McKechnie. What about from a headcount standpoint or a productivity standpoint, what do you think you can do with that business?

I think we told you before that we think if we look at the value creation or the EBITDA expansion there, and this is before any adjustments for fasteners now, we thought we could about double it. And we think -- we told you it was about half market, half productivity and half price.

Thanks a lot.

You are going to have to excuse me -- one-third, one-third, one-third.

Got it, thanks.

(multiple speakers). In other words, I guess I'm changing my number. It is one-third, one-third, one-third. (laughter).

Joe Nadel, JPMorgan.

I was wondering if first off we could -- so we understand where the $0.20 is coming from on the adjusted. You took down the middle of the range, I think, the GAAP number by $0.10. So what is the -- I am just wondering what the mix of the $0.30 there is?

The biggest charge is the transaction cost which was about -- I don't have the exact number. It is on table -- if I could point you right to table 4, the refinancing costs were at $0.89 a share. And we had additional transaction and acquisition costs also. So that $1.08 swing was driven by expensing $70 million of refinancing costs.

So it was just refinancing costs over your previous expectations?

Right, when we gave the guidance before we didn't have the refinancing costs. We didn't know we were refinancing when we did the initial year guidance.

Right, right, okay.

We didn't know we were refinancing the whole --.

(multiple speakers). The whole debt package.

We were just financing enough to deal with the $1.4 billion and something to deal with McKechnie.

Got it. Then the EBITDA specifically of the fastener business, I don't think you ever gave us the exact margin breakdown between the bigger part you're keeping of McKechnie and the part you are selling. Can you give us that?

(multiple speakers). You are right. We don't disclose margin by individual product lines or pieces.

What we did tell you is it makes up about 20% of the McKechnie revenue. And we told you that it was a less proprietary product and the EBITDA was proportionally lower than the revenue was. So you can make your own judgment. It is a less proprietary business.

Right, okay. Then just finally, Nick, you mentioned you are happy with the way things are going with McKechnie so far. They are coming in sort of on track. Now that you have owned it for a couple of months I am sure you have gotten in there and really gotten your hands dirty. Any more color on, as we think about the remaining quarters of they year, how quickly we can see some of these things start to come through?

I think we have given you our guidance for the year. The only change, as we sit here now we see is that we've got it closed a little later, closer to Christmas than we thought. Everything else seems to be tracking.

But no other surprises, actually you got (multiple speakers).

Not at this time, no. Right now we look, as I told you. As I said, it looks like we got what we thought and the integration is tracking along.

Thanks.

Rob Spingarn, Credit Suisse.

On the McKechnie -- on the fastener divestiture, Nick, based on what you just said, it sounds like you are selling it for about 5 times sales. Is that a little bit higher multiple than what you paid, given the fact that the -- especially on EBITDA since it is a lower margin EBITDA business?

No, Rob, that is just math. You can do your estimate of EBITDA and you will kind of come to what you come to.

Okay, it is a pretty quick arbitrage.

Yes, it is a good -- we think it is a decent business and we think we've got a good price for it.

I assume that Alcoa wasn't the only one interested in it.

We don't talk about that.

Okay, we will leave that there. You talked about -- you and I have had a long-running discussion about the difference between aftermarket growth and whether it tracks RPMs or ASMs. You are clearly guiding above RPMs this year on restock and maintenance -- deferred maintenance. How long do you expect that to continue?

I don't know. We have talked about this before. As you know, on the front end of these pickups you typically get a period of time where the demand runs out ahead of the underlying demand, whether you call it ASM or RPM. I think it is a question of the more we get above that this year probably the less we get about it next year, if you know what I mean. Ultimately it is going to settle down to about the underlying demand.

So I simply -- I just don't know. I suspect, as again, we'll see a little this year. And as I said, I think there could be some upside here in these aftermarket members in the commercial aftermarket. On the other hand, I'm concerned there can be some downside on the defense.

Okay, and then just as a final question. You mentioned the M&A pipeline is a little light. Why do you think that is?

I think there is a combination. We don't seem to see quite as much right now. And I have to tell you, frankly, we just did $1.4 billion of acquisitions. We just finished negotiating the sale of this fastener business. It is the same guys doing all of them. And they are also involved in some of the restructuring business at the operating units to make sure that our processes are at least tracking what we used in our acquisition models.

So is it the end market is light or TransDigm's bandwidth is just redirected at this time?

It is a little of both. I think it is a little of both.

Ron Epstein, Banc of America - Merrill Lynch.

It is actually Elizabeth for Ron this morning. Can you just speak to what your free cash flow conversion was this quarter?

Free cash conversion from what?

Just your free cash flow as a percentage of your net income.

How about just the number?

That's fine too.

It is about -- on the cash flow -- free cash from operations about $63 million. (multiple speakers).

(multiple speakers) financing stuff.

It has a little bit of that labeled in. There is a good month's cash flow, but there is a lot of activity to get it pure. But it was that -- if we didn't have some of that acquisition it would be most of that.

That is [here] from operating activities?

Yes.

Yes.

That doesn't include --

What is your CapEx?

It is the GAAP definition. I don't know what your definition is. You go straight to the cash flow in the middle of the page that excludes CapEx and things like that.

Right. So what was the CapEx for the quarter?

When do we issue the Q?

Tomorror.

So you'll see it in the Q.

Okay. All right, thank you.

It is actually -- if you take a look, when you have to do all these doggone tables for GAAP purposes, on table 5 it starts with net cash from operations of $62.1 million.

Right, thank you.

If you look at table 5 you'll see that.

Ken Herbert, Wedbush.

It sounds like from your comments you're clearly seeing some of the -- maybe some of the lessening of the discipline we heard about from the airlines for all of 2010 in terms of the restocking and the purchasing and the addressing of some of the deferred maintenance. Can you just give any color, Nick, and specifically around how much of that you are seeing, and any context relative to maybe prior cycles in terms of the airline behavior and the purchasing and the intensity that you are seeing right now?

I would say it is too soon to draw any conclusions. We haven't seen much of it until this quarter. We expect to see a little for the full year. If our orders are up or if our revenues are up -- I think we said low double-digit percent -- I would say by historical standards that isn't a real high run up.

And I think that is about the best I could say right now. It is too soon to draw any conclusion, other than it seems to be running a little ahead.

Okay, but it sounds like sequentially in terms of your core business things definitely picked up from the fourth quarter to the first quarter.

It picked up sequentially, not a lot, but they picked up a little sequentially. Now what you have to always keep in mind is the first quarter of our year, which is the fourth quarter by the way of most people's years, but the quarter with Thanksgiving and Christmas is almost always lower because you have almost 10 less working days in it when you do the math.

So if you are even, you're probably up 10% or 12% in days -- in shipments per day.

Okay. Just finally on pricing, is there any color you can provide? It sounds like the pricing environment was much better this year on the commercial aftermarket side relative to heading into 2010 in terms of what companies were able to push through. Did you see similar trends across your businesses or any color you can provide on that environment?

I can't speak to other people. And we haven't seen -- basically our pricing philosophy has been consistent and the same for years. We haven't seen -- I can't say that we sought a significantly different environment this year than we did last year.

Okay, very good. Thank you very much. Great quarter.

Myles Walton, Deutsche Bank.

Just to follow up a little bit on the -- Nick, your comment about the cash balance at the end of this quarter, and also the continued strong cash flow that you have read, and in tying that to your comments about the pipeline being a little lighter right around this period, and you're working on integration, given you are not a guy to have cash drag on the balance sheet, what do you think about from a standpoint of deployment is a dividend potential or is M&A still very much the focus, or is there something that ties into the refinancing of this bank line?

As you know, our first and foremost preference is to make accretive acquisitions with our money. I would also say that it is a little early for me to speculate on what we might do. A couple of things. One, we haven't closed the fastener business yet. I am very hopeful it closes, but we haven't closed it yet.

When we do, what we'll do is we'll take a look. We will look at our cash. We will look at what our prospects look like for the next 12 or 18 months, and how much money we've got available, and what we got in our credit line. We will take a look at the capital markets. We will try and make the best calls as to what we think is the best thing to do to keep the equity value moving along. I think it is premature to speculate on that now.

Is there anything with respect to the refinancing that you would look to lower the outstanding credit there or is this a refinancing at the current level?

You mean we dropped the value down?

Yes.

I don't think so. It is pretty cheap. This is the senior portion of the debt we are redoing. You're probably going to redo it at --.

4% -- 4% and change?

You take that after-tax it is -- what is that -- 3.7% or something like that? That is pretty cheap money.

Okay, fair enough. Then the other question, Ray, I guess when you talked about Semco you gave the 17% headcount reduction following the transaction. How does that compare relative to what your general takeout is? That seems pretty successful in a short period of time.

Yes, that is higher than we have seen with others. Primarily Semco was working on a move to Mexico prior to us purchasing them, and we helped finish up that move to Mexico and clean it up or make it a little bit more efficient. So we are kind of riding a little bit on some of that improvement that was put in place prior to the acquisition.

Got it, okay, that makes a lot of sense. Then, lastly, on the guidance, I think you're talking about relative to the prior guidance that McKechnie closed a little bit later than you were expecting. Is the underlying organic growth in the sales guidance unchanged or has that actually gone up as a result of everything you talked about, and then McKechnie has just come down a month of sales?

McKechnie is just timing. In other words, I think you picked up. If you close a week late in December, essentially you lose damn near the month. I would say the rest of it is mostly puts and takes. I don't think -- maybe a little bit of a bump up in the commercial aftermarket, but I have to tell you we remain -- we're concerned about the defense aftermarket.

Okay, good enough. Thanks so much.

Fred Buonocore, CJS Securities.

So with respect to the topline guidance and the range there, and Nick had mentioned that the commercial aftermarket could potentially have some upside to it versus your current expectations, and conversely on the defense side, represents downside.

Do one of those taken individually, if it does -- if commercial aftermarket is stronger than you expected, does that essentially put you at the top end of your guidance, or is that something that could represent outperformance to your guidance? And similarly on the downside for defense.

And you know, Fred, it depends how much they change. The lever arm is on the side of the commercial aftermarket. It is at least double or more than double the defense aftermarket -- more than double. So that is where the lever arm is. And you can sort of play with it however you want and get yourself up to the top or over the top range based on what assumptions you make on the two of them. I think I would stick with our range right now.

Then focusing in a little more on the defense side. Are there specific programs that concern you? Is there anything from Secretary Gates' recent proposal of cuts that comes out that gives you more reason for concern? Anything specific you can address there?

I don't think so. This is just a -- the rising tide lifts all the ships and the receding tide drops all the ships.

I would tell you again it is a mixed picture. The revenues are down a bit, but the bookings are hanging in pretty well. So it is hard to draw -- sort of the same place we have been in the last 6 to 12 months, it is hard to draw a clear conclusion. But it is hard to feel good about it, given the ambient now.

With the shifts in theaters in the Middle East, are you seeing significantly less volume as it relates to ground vehicles or --?

Yes, yes. Where we are, we are seeing ground vehicles. If you pull the pieces out, ground vehicles are down and they were down last year significantly, and they haven't come back up. They may be down a little more, but I'm not sure of that. They surely haven't recovered. On the other hand, helicopters continue to do well.

Okay, thanks a lot.

Carter Leake, Davenport & Company.

If I look at the EBITDA as defined implied margins in your 2011 guidance I see a range of 44.6 to 47. That seems a little bit low given the divestiture of the fastener business. Any color on this?

We haven't adjusted it for the fastener business. I think I told you the guidelines just reflect the businesses we have today. We will reflect that when and if we close it, which I expect we will, we will reflect it.

I'm sorry. I missed that. So if I look at the -- I looks like previous guidance if you look at the EBITDA to find the revenues, you did still have a range that would go from say 43.6% to 48.4%. And this has sort of tightened up -- it is sort of, even with this it has tightened down the top end. The top end at sort of 47%. What would be driving that?

Well, we had a -- we have one quarter under our belts. The quarter was pretty good, and we have just tightened it up a bit. Now that we have nine months to go and we understand what we have a little better.

I would tell you, I can't tell 0.5 point from here.

Okay, let me (multiple speakers).

Do you agree with that, Greg? I can't tell 0.5 point (inaudible).

How about this, pre-spinoff off McKechnie aftermarket was approximately 40%. With this -- the fastener spinoff is there any update to that mix? Would you be willing to give that?

When we do -- when we sell the fastener business, whenever the next time we revise our guidance we will talk a little about it.

Okay, and one last one. Inventory step up and backlog amortization for McKechnie, can you give those figures? I was going to try to get it ex-fastener business, but don't -- I can get that.

I don't have those at the tip of my finger. And what I would remind you is right now we are still using our estimates. We are going through the formal procedures with an independent outside valuation firm that will true up during the quarter. So we are using our best guess is [9], and I just don't have those at the tip of my fingers.

Okay, all right. Thank you.

Michael Ciarmoli, KeyBanc Capital Markets.

Nick, could an you give us an update -- you said you reduced, I guess, your outlook for 787. Would had been your assumptions and what are your assumptions now? And if you could also just remind us what is your leadtime on those products?

Well, our leadtime is all over the map, and the inventory they have by products is all over the map. So that is not terribly meaningful.

I would say we had a relatively modest, maybe 15 to 20, 25 chipsets or something like that in our forecast originally. Maybe closer to 25 then 15. We are figuring now if it ships much of anything we will be lucky.

Okay, that is fair.

Because you also got to work through -- as I said, we've got all different product lines. They've got different leadtimes. The inventory situation is all over the map. Some of the -- some things they got more than they know what to do it, and other things they are still expediting.

Okay. Just in terms of looking at aggregate volumes from more so on the OE production side, certainly we are hearing of a lot of production increases. I think the latest whisper out of the Airbus might be 42 A320s per month. What sort of capacity or room do you have for -- when do you have to start adding back to some of your business lines? I guess, what can you guys handling your current run rates?

You know, I just read that, and those increases aren't until about end of 2011, 2012, so we've got some room in front of us. That is an increase of maybe three or four chipsets from the current run rate, which is something we could absorb easily.

Capacity isn't a problem. We have plenty of capacity. And much of what we do we can job out if we need to, but capacity is not an issue.

Okay. Fair enough, guys, I will jump back in the queue. Thanks.

Eric Hugel, Stephens.

Nick, can you give us an update in terms of the commercial aftermarket distribution chain? What are you hearing out of them regarding their desire to maintain or maybe even increase inventory levels to meet demand?

I don't think -- as we told you before, that was something on the order of half of our commercial aftermarket, maybe just in distribution. It might be a little less than that.

They all have contractually required levels of inventory they have to maintain, or at least the major ones do. Generally they are in-line with the requirements, which means there is not a disproportionate inventory swing up or down right now that is affecting our revenues. So we think we are seeing a pretty clear shot through now with the demand is around what we are selling them.

Most of them -- the distributors tell us they are seeing the same kind of things. They are seeing -- they are starting to see reasonably significant pickups.

And you would expect that as -- I guess, let's say it this way, maybe in the past given that kind of circumstances is it reasonable to assume that the distributor start overstocking their required level?

Well, it depends on what they -- well, all I can tell you is they haven't done that yet.

Okay.

Sometimes in the past they have. We will watch that and see. It is not -- we are not overly enthusiastic about that either. You just got to pay the piper later if you do that.

Sure, I understand. Moving on, interest expense you noted was a little lower in the quarter than you he would have expected. I guess that was related to the timing difference. Can you talk about, given some of the moving parts here, you're going to refinance some stuff, what is a good quarterly run rate going forward on interest expense that we should be modeling?

As I mentioned, our rates, the high yields are at 7.75%. And currently effectively our current bank is at about a 5%, because we have a [$0.035] added to a floor of 1.5% And, as Nick mentioned, with this repricing we are hopeful we get it down about 1 point. So you could do the math on that simple mix.

So that is a point on half --.

On half of it.

So maybe you've got -- there is [no way] we can get this done, presuming it all sells at this price maybe it comes down to 6, rather than 6.4.

Something like that, yes.

Okay, fair enough. Greg, you talked about the tax rate, do you think 35% for the full year or for the rest of the year?

No, that will be for our full year. We are still giving guidance on that. Again, as I said, we got credit for the R&D tax credit, but the underlying McKechnie businesses that pay tax rates are higher than us (inaudible) and we will have to look into that as we get more familiar with it.

I guess, lastly, assuming you guys don't do anything with the fastener business proceeds, should we be thinking somewhere in the range of -- assuming it closes let's say mid-year, sort of maybe something in the $0.05 to $0.10 dilutive type of range?

On a full-year basis?

Well, for the half-year.

It is judgmental with how you handle the debt that was associated with the total acquisition. But if you just strip that piece out by itself you are in the ballpark.

Okay, thank you.

Maybe another way to frame that is if you -- if both of these complete, in other words, if we restructure the debt and drop the rate down and sell the fastener business and everything concludes the way we hope, it is close to a push.

Okay, great. Thanks a lot, guys.

That is in EPS.

Yes.

J.B. Groh, D.A. Davidson.

Just one left on my list here. I was curious as to this -- you talk about this a little bit the ramp-up, especially in the wide-bodies, when does that sort of margin headwind start to hit you? Probably not this year, is it next year?

I know, like you said, there is a lot of different moving pieces with the operating companies that you own, but just in a general sense.

You mean the 787?

No, I am not talking 787 specifically. I'm just talking about all the wide-body programs ramping up over the next couple of years.

Well, what is your question? Is there a margin down drag when that happens? Is there [the question]?

Yes, yes, yes.

It depends what is happening to all the rest of the market. In general the wide-bodies aren't any better or worse than most of the other OEM business. The commercial aftermarket is continuing to rise, so I don't know how to answer that in total. I don't know that we've see any margin degradation.

It will be a question of mix. How much does that rise versus how much does the aftermarket rise versus what happens to the defense. I doubt the wide-bodies by themselves wold impact much.

Okay, but just -- that higher -- in general higher OEM production rates do you think you can offset any margin drag on that by a good aftermarket and other operating performance?

Yes, it is a -- again, it is a mix question. OEM business is not as profitable as aftermarket business. If they both grow the same it makes no difference. Now if one grows little more, one grows a little less, you get a little movement. Usually it is not a lot of movement.

Okay, all right, thank you.

Greg Halter, Great Lakes Review.

Ray, given your discussion on the R&D and so forth, I wondered if you could maybe elaborate on some of the new products that you are working on currently or some you recently introduced?

In general there is a lot of little products. And this holds true for if you look at any of our call scripts from prior quarterly calls. We have almost now 50 different product lines, and each of them have many different new business programs in each of their engineering departments.

So there isn't one single big program other than the others -- you know, there is a few big ones we have talked about in the past, like the digital flight audio equipment that was done at Avtech and developed. That is a 787 program.

And if and when that takes off, the sale of those products will take off. They are done being developed. We have composites on the 787 program that will also ramp up when that program goes into fuller production.

We are developing cockpit door modules, I mentioned on prior calls, for the A350 and A380 platforms. But other than those three big ones, most of the new business programs are small programs that either upgrade existing aircraft. I think on prior calls I talked a lot about helicopter upgrades in both the power area for infrared countermeasures and so forth. There has been a lot of that kind of work. That is still ongoing.

We continue to see a level of new business program that are running higher than they have been in prior years. Not by big amounts, but probably in the high single digits better than the prior years, which is good. We have a good new business pipeline.

Okay. Given McKechnie now in the fold, what would you expect your total capital spending to be for the year fiscal '11? As well as do you anticipate any kind of proceeds from facilities that might be sold?

I would continue to use 2% or less of revenues.

Greg, while we've got you, do you have the equity balance. And I know the Q is coming out tomorrow.

I don't in front of me, no. I apologize.

Carter Copeland, Barclays Capital.

This is [Mier] on for Carter. I just had a quick -- a couple of questions related to business jets. The business jet OEs were up 30% you said from a [low year]. Can you just talk a little bit about where you are versus the prior peaks?

Well below, well below. I don't know exactly where we are, but we are well, well below the prior peak. We have no risk of bumping up against that for a while.

Also, I may have missed it, but I thought the BizJet RJ OE guidance for the year was about flat performance. Does this still remain the same?

Pardon? You say what is the guidance for the year on business -- I think we said modestly up, didn't we for business jets -- modestly up. And we will see. We will see how that goes through there.

Okay, great. Thanks, guys.

There are no questions at this time. We will now turn the call back over to Mr. Jonathan Crandall for closing remarks.

Thank you. I would like to thank everyone for participating on this morning's call. We expect to file our 10-Q for the first quarter of our fiscal year 2011 no later than tomorrow. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.