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TransDigm Group Incorporated (NYSE:TDG)

F4Q12 Earnings Call

November 15, 2012 11:00 am ET

Executives

Raymond F. Laubenthal – President and Chief Operating Officer

Gregory Rufus – Executive Vice President, Chief Financial Officer and Secretary

Liza Sabol – Investor Relations

W. Nicholas Howley – Chief Executive Officer and Chairman

Analysts

David Strauss – UBS Securities, LLC

Seth Seifman – JPMorgan Securities, LLC

Carter Copeland – Barclays Capital, PLC

Ross D Cowley – Credit Suisse Securities (NYSE:USA) LLC

Noah Poponak – Goldman Sachs & Co.

Myles Walton – Deutsche Bank Securities, Inc.

Ken Herbert – Imperial Capital, LLC

Gautam Khanna – Cowen and Company, LLC

Kevin Ciabattoni – KeyBanc Capital Markets, Inc.

Carter Leake – BB&T Capital Markets

J. B. Groh – D.A. Davidson & Co.

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 TransDigm Incorporated Earnings Conference Call. My name is Charlene, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Liza Sabol. Please proceed.

Liza Sabol

Thank you. I would like to thank all of you that have called in today, and welcome you to TransDigm’s fiscal 2012 fourth 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 on our website at transdigm.com. It should be also noted that our Form 10-K will be filed tomorrow and also will be found on our website.

Before we begin, the Company would like to remind you that statements made during this call, which are not historical in facts, 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 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.

W. Nicholas Howley

Good morning and thanks again to everyone for calling in to hear about our company. Today I’ll start off with comments as always about our consistent strategy, then an overview of a busy fiscal year 2012, and a financial performance and market summary for 2012 and then our initial guidance and then Ray and Greg will speak a little; fair amount to cover here today.

Anyway to restate, we believe our business model is unique in the industry, both in its consistency and its ability to sustain and create intrinsic shareholder value through all phases of the cycle. To summarize some of the reasons why we believe this and I believe these are shown on Page 4 of the slides. About 90% of our sales were generated by proprietary products and around three quarters of our sales come from products which we believe we are the sole source provider.

Excluding, a small ground transportation business, about 57% of our revenues and a much higher percent of our EBITDA comes from after-market sales. After-market revenues over the cycles have historically produced a higher gross margin and been more stable than OEM sales. Because of our uniquely high EBITDA margins, typically in the 48% to 50% of revenue and relatively low capital expenditures typically 2% or less than revenue, TransDigm year-in and year-out generated strong free cash flow.

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 for value creation. We typically begin to delever pretty quickly. And keeping with that philosophy due to a combination of what we perceive as a suboptimum capital structure, a hot credit market, substantial liquidity and significant borrowing capacity post dividend, we’ve recently declared and paid $12.85 a share of special dividend which will result in a total pay-out of about $70 million for the dividend and related or $700 million for the dividend and related items.

Coinciding with this, we raised about $550 million of high yield bonds, and a $150 million of senior debt at an average interest rate of about 5%. Immediately after paying the dividend, we have about $500 million in cash, $300 million in unrestricted and undrawn revolver and additional borrowing capacity under our credit agreement. With no additional acquisition activity, cash should be about $900 million by fiscal year 2013 year-end.

We have a well proven value-based operating strategy focused around what we refer to as our three value drivers; new business development, continued cost improvement and value-based pricing. We stick to these concepts as the core of our operating management method. This consistent approach has worked for us through up and down markets and has allowed us to continually improve and increase the intrinsic value of our business, 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 have been able to acquire and improve aerospace businesses through all phases of the cycle. In fiscal year 2012 we acquired three businesses with four operating units for a total price of about $870 million. Additionally, about three weeks ago we announced an agreement to acquire the Goodrich pump and engine control business for about $235 million. This is subject to final antitrust review. We hope this will close in December-January timeframe.

We have given you some rough numbers on the UTC-Goodrich deal to help with your modeling. We don’t yet own the business and are still under a confidentiality agreement, so I can’t say much more. However to reiterate, calendar year 2012 revenues are expected to be about $195 million and the EBITDA as adjusted is in the low-teen percent of revenues. The business is about 55% aftermarket and primarily supplies the military helicopter and business jet markets.

Just to be clear, there is no impact of this UTC-Goodrich pending acquisition in any of the fiscal year 2013 financial guidance dollars here. Through our consistent focus on our operating value drivers, a very 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.

2012 was a busy year. Let me give you a little color here. In the first half of the year, we acquired AmSafe for $750 million, our second largest acquisition. AmSafe was a holding company with three major operating units. We raised about $500 million of debt at that time to pay for AmSafe and still maintain ready liquidity. We acquired the Harco business for about $85 million. We continued to integrate various prior year acquisitions in TDG and we initiated more plant relocations and consolidations.

In the second half of the year we acquired the Aero-Instruments Company for $35 million. We sold the AmSafe distribution business to Wencor West in August and the CSafe, the AmSafe-CSafe joint venture to our joint venture partner on October 1, 2012. These sold for a combined $35 million. And we continued the integration of the various units that we’ve acquired over the last two years. All the while we continued to generate value in our new and existing businesses and create value for our shareholders.

And with that I’ll turn to the 2012 performance. I’ll remind you this is the fourth quarter and full-year report for fiscal year 2012, our fiscal year ended September 30. As I’ve said in the past, quarterly comparisons can be significantly impacted by difference in OEM aftermarket mix, large orders, transient inventory fluctuations, modest seasonality and the like, but though we started to see some softness in the back half of fiscal year 2012, overall fiscal year 2012 was a good year for TransDigm.

Our GAAP revenues were up 35% versus the prior Q4 and 41% on a full year basis. Pro forma revenues that is, if we own the same mix of businesses in both periods were up about 8% on a quarter versus quarter basis and about 11% on a full year basis. Reviewing the revenues by market category, again this is on a pro forma basis versus the prior Q4 that is assuming we own the same mix of businesses in both periods.

In the commercial market, which makes up about three quarters of our revenue, total commercial OEM revenues were up 18% versus the prior Q4 and 23% on a full-year basis. This is primarily driven by the commercial transport OEM revenues. This pick-up also reflects both the increasing airplane production rates and certain one-time contract settlements mostly having to do with the 787. The substantially smaller Biz Jet OEM segment growth was roughly comparable.

Total commercial aftermarket revenues were up about 4% versus the prior Q4 and 8% on a full year basis. On a sequential basis, our commercial aftermarket revenues were about flat. Bookings were roughly even with shipments for the full year. Hopefully we are only seeing a temporary stall in the economy, but time will tell.

The defense markets, which make up about a quarter of our revenue, defense revenues continued better than we anticipated. Revenues were up about 5% on both the quarter versus prior year quarter basis, and on a full year basis. Surprisingly, the incoming orders are still running a bit ahead of shipments.

As we mentioned in the past, roughly 60% of our military revenues come from helicopters and freighter and tanker platforms. These seem to be more stable than other programs, and we are hopeful that this may partially damp the likely military spending slowdown. We remain very cautious about trends in the military markets.

In total for fiscal year 2012, our revenues for commercial aftermarket were slightly less than we anticipated at the beginning of the year, while the commercial OEM and military revenues were a bit better than we expected.

Moving on to profitability and now on a reported basis, I’m going to talk primarily about our operating performance or EBITDA as defined adjustments were pretty modest in Q4. Our EBITDA as defined of about $215 million for Q4 was up 25% versus the prior year. The EBITDA as defined margin was 47% of revenue for Q4. On a full-year basis, our EBITDA margin was about 47.5%. The full year margin was diluted about 3% from the impact of the Schneller, AmSafe, and Harco acquisitions. We also experienced some additional commercial OEM versus commercial aftermarket mix dilution.

With respect to acquisitions, we continue actively looking at opportunities. The pipeline of possibilities is reasonably active. Closings are always difficult to predict. We remain disciplined and focused on value creation opportunities that meet our tight criteria.

And with that let me move on now to the 2013 guidance, which is on Slide 6. Given the current economic and political environment, the military budget and commercial markets are both quite unclear as we head into 2013. For fiscal year 2013, this is our best estimate at this time in these uncertain times. Hopefully, the situation will clarify, but in the meantime we remain cautious and careful with our spending levels and we’ll keep you informed if our views change one way or another.

We gave you some of our market assumptions in an earlier press release, but I’ll repeat most of them here. As in the past, we will adjust the guidance through the year if and when it seems appropriate. Based on the above and assuming no additional acquisitions, in other words, these numbers do not include the recently announced UTC Goodrich acquisition. 2013 guidance is as follows; the midpoint of the 2013 revenue guidance is $1.85 billion or up 9% on a GAAP basis.

At the midpoint, a little less than 50% of the growth is organic with the balance from a full year of acquisitions. The midpoint of the 2013 EBITDA as defined guidance is $890 million or 48% of revenue; this still includes about 3% of margin dilution from prior acquisitions. This is up about 10% on a GAAP basis. Fiscal year 2013, Q1 is currently anticipated to be lower than the other quarters roughly in the same percent relationship as in prior years. We could also see some modest additional negative impact in Q1 for most production days in a few product lines due to the power losses from hurricane Sandy. If so that should catch up in Q2.

The midpoint of the EPS as adjusted is anticipated to be $6.76 a share. This is up about 1% from prior year. This reflects the negative impact, primarily of higher interest payments and higher tax rate. Greg is going to go through that in some detail. Again these dollars do not reflect any impact of the recently signed UTC Goodrich transaction. The 2013 adjustments to EBITDA and EPS primarily reflect dividend equivalency payouts, non-cash compensation expense and some remaining acquisition related activities.

On a pro forma basis, again assuming we own the same mix of business, this guidance is based on the following growth rate assumptions. These are materially the same fiscal year 2013 assumptions as we released a few weeks ago. We’ll continue to assess the impact of the economic uncertainty as the year proceeds.

The commercial aftermarket revenue growth of 5% to 10% based on a worldwide RPM growth in the 4% to 5% range. Due to the apparent industry wide softening in the back half of our 2012 fiscal year and the related uncertainties, we’re cautious here. We’ll watch this closely as the year proceeds.

Defense military revenues are estimated to decline in the low single-digit percents versus 2012. This assumes no significant sequestration impact. We’ll again evaluate this as the political situation unfolds. Commercial OEM revenue growth is assumed to be in the low single-digit percent range. Some additional color on the commercial market assumptions, they are based on the following. We are assuming an average commercial transport production rate, excluding the 787, of about 1,140 planes per year in 2013 and 2014.

As a reminder, 2014 airplane production rates will likely impact at least the second half of our fiscal year 2013. We’re assuming 787 shipments of 75 to 80 planes in both 2013 and 2014. There is significant inventory overhang from the 787 program. There’s a non-repeat of certain one-time settlements in fiscal year 2012 and we have the sale of the small AmSafe distribution business in August.

Without any additional acquisitions or capital structure activity, we expect to have about $900 million in cash and $300 million in undrawn revolver at year-end 2013. Again, assuming no additional acquisitions, our net leverage is anticipated to be a bit under 4 times EBITDA at the end of 2013. We also have additional borrowing capacity under our credit agreement.

In summary, 2012 was good year. Hopefully, the economy will start to pick up and the political situation will stabilize and 2013 will be all sell. But in any event, I’m confident that with our consistent value focused strategy and strong mix of businesses. We can continue to create long-term intrinsic value through up and down cycles for our investors.

And now, let me hand it over to Ray to talk a little bit about fiscal year 2012.

Raymond F. Laubenthal

Thanks Nick. As Nick mentioned, in total we had a good fourth quarter, a good finish to another very busy year. The consistent application of our three operating value drivers and the successful integration of our recent acquisitions continued to add solid value to TransDigm. Let me explain a little more detail, our fiscal 2012 and fourth quarter operational value creation.

In spite of the sputtering economy, we’re able to apply our three value drivers and create real value. We continue to manage our resources tightly. During the last two years, we’ve grown our pro forma revenue by 28% by reducing our pro forma headcount by 7%.

Our continued productivity efforts include moving more manufacturing operations to our Mexico, Malaysia, Sri Lanka and China facility. We have also conducted competitive options for selected machining and assembly work and entered into long-term agreements with suppliers to lock in these savings.

Lastly, we continue to invest in our facilities with modern machine tools and automated assembly and test equipment where the return is attractive. We’ve also continued to invest in new business development and as discussed in prior quarter calls, we have successfully expanded our content with significant new business in both the commercial and military markets. Our proprietary positions have also allowed us to create real value using our prudent value generation processes.

On our largest new business platform, the Boeing 787, we had acquired significant investment and effort to design, develop, test and create manufacturing, processing and tooling. Our work on the 787 has been heavy and the production ramp up has gone well. We are now starting to develop and test many new products for the A350 platform.

In fiscal 2012, we also acquired seven operating units, sold off to consolidated one, which netted four separate new standalone operating units. Integrating these four businesses created a flurry of integration and value creation activity. We acquired the AmSafe businesses and Harco Laboratories during the first half of 2012. We quickly went to work on transitioning these businesses into TransDigm value creation mode.

As we have done with each prior acquisition, we applied our proven value creation processes. We’ve restructured these businesses into product line focus groups and implemented our value creation metrics. We focused the engineering and new business efforts on winnable and profitable new business and we tightened up the cost structure.

At AmSafe, we physically consolidated a number of satellite locations to gain greater operational control and reduce operating cost. We also divested the AmSafe distribution business and our part ownership in the AmSafe’s CSafe business.

Looking forward to 2013, we’ll continue to work our value drivers and create value. We also have a pipeline of integration work. Last quarter we acquired Aero-Instruments. So far this looks to be another good acquisition. We’ve planned on consolidating this Cleveland, Ohio business with our nearby AeroControlex Group located on the other side of town in South Euclid, Ohio. We expect this move to occur next summer after some modest building expansion.

Additionally, as Nick mentioned, we announced the deal. We negotiated to buy by Goodrich Pump & Engine Control business, which we’ll call Chandler Evans. We hope to complete this transaction and take possession in December or January. We will then go to work, transitioning this business into our value creation culture during 2013.

Now I’d like to switch gears and talk about our management team. These acquisitions drove a significant number of management structure changes. Our continual emphasis on succession planning and talent development has again paid off well for us. We’re able to populate most of the key management positions with internal candidates. These proven candidates are steepening our value focused culture and value creation processes.

During 2012 we promoted Jim Skulina, Pete Palmer, and John Leary to Executive VP positions. Prior to their promotions, each of them had over a dozen years, creating value at TransDigm. All three had previously been Presidents over various TransDigm operating units. They also had significant acquisition-integration assignments.

We also added six new division Presidents. Five of these six new were internal promotions. These internal promotions bring the strong TransDigm value creation culture to their operating units.

Of all the division Presidents level we’ve added 15 senior operational function managers, the majority of which were also internal promotions. We were also fortunate in acquiring some very good management talent in some of the acquisitions in this past year. Our succession planning and talent development system is working and we have a good pipeline of talented people exposed to our value creation methods and our defined training programs. This talent development process is key to our ability to regularly acquire and integrate new businesses.

Now let me hand it over to Greg who will review our fourth quarter and 2012 financial results in more detail.

Gregory Rufus

Thanks, Ray, and good morning again. I hope everyone had an opportunity to read our press release which was issued this morning. Before I begin and I think you know I’d like to remind you that Nick’s narrative of the business, including some of our financial results is mostly on a pro forma basis. That is assuming we own the same mix of businesses in both periods, while my focus is on GAAP results.

For obvious reasons driven by the timing of the acquisitions made during the fiscal year, there will be differences in our year-over-year comparisons. Switching to the sales, our fourth quarter net sales were $463 million, up $120 million or 35% from the prior year. The collective impact of the acquisitions of Schneller, Harco, AmSafe and Aero-Instruments contributed approximately $97 million of additional sales versus the prior period. This represents approximately 80% of the increase. In addition, our organic growth was about 7% greater than the prior year. The organic growth was driven by $17 million from commercial OEM and aftermarket revenue and $6 million from defense.

Reported gross profit was $257 million, or 55.5% of sales. The reported gross profit margin was eight tenths of a percent less than the prior year margin of 56.3%. The dilutive impact of the acquisition mix from Schneller, Harco and AmSafe was approximately two margin points. Partially offsetting this negative acquisition mix was a decrease in non-operating acquisition related costs of approximately one margin point. Excluding all acquisition activity, our gross profit margins in the base business versus the prior year quarter was about flat despite unfavorable OEM to aftermarket mix.

Selling and administrative expenses were 11.7% of sales for the current quarter compared to 11.2% in the prior year. The increase is primarily due to again the dilutive impact of the previously mentioned acquisitions, which was approximately one margin point in SG&A. We also had a higher run rate of R&D as a percent of sales in the quarter, partially offset by some lower non-operating related costs.

Net interest expense was $55 million, an increase of approximately $6 million versus the prior year quarter. This is a result of an increase in the weighted average total debt to $3.6 billion in the current quarter versus $3.1 billion in the prior year. The higher average of debt was due to the additional term-loan related to the AmSafe acquisition made this past February.

The weighted average cash interest rate on total debt at the end of the current quarter is approximately 5.7%. Our effective tax rate was 35.5% in the current quarter compared to a low 31.3% in the prior year. For the year, our effective tax rate was 33.4% for fiscal 2012 compared to 33.6% for fiscal 2011.

Net income from continuing operations for the quarter increased $24 million or 37% to $88 million, which is 19% of sales. This compares to net income from continuing operations of $64 million in the prior year. The increase in net income primarily reflects the growth in net sales and lower acquisition-related cost partially offset by higher interest expense and the higher effective tax rate.

EBITDA as defined for the quarter increased $43 million or 25%. EBITDA as defined margin is 46.5% versus 50.1% in the prior year quarter. The dilutive impact of acquisition mix from Schneller, Harco and AmSafe were approximately three margin points. As mentioned earlier, we also experienced unfavorable OEMs to aftermarket mix versus the prior year quarter.

GAAP earnings per share from continuing operations was $1.63 per share in the current quarter compared to a $1.20 per share a year ago due to the items I just discussed. Adjusted earnings per share was $1.72 per share for the quarter, an increase of 19% compared to a $1.45 per share last year. The fourth quarter earnings per share was significantly impacted by our tax rate in the quarter, which I just mentioned. For the year our adjusted earnings per share is up 49%.

As Nick mentioned earlier and so did Ray, we had a hectic but very good year, continuing to improve intrinsic shareholder value. Let me take a minute to quickly summarize the fiscal year on a GAAP basis. Net sales increased $495 million, or by 41%, to end our year at $1.7 billion. Acquisitions contributed approximately 70% of the increase in sales and organic growth was approximately 30% of this increase. Reported gross profit dollars increased 43% and was 55.6% of sales compared to 54.8% of sales for fiscal 2011. The negative impact of acquisition dilution was more than offset by lower purchase price amortization and lower acquisition integration costs plus continued improvement in our base business.

Selling and administrative expenses were 11.9% of sales in fiscal 2012 is higher than 11.1% of sales in fiscal 2011 due primarily to higher selling and administrative expenses related to the recent acquisitions. Net interest expense increased to $27 million due to a full year of interest expense related to the acquisition of McKechnie and the addition of term loan related to the AmSafe acquisition in February of 2012.

In addition, fiscal 2011 included $72 million of refinancing costs associated with the refinancing of our capital structure in the first quarter of fiscal 2011; that was unique to that fiscal year. AAP net income from continuing operations was $325 million or 19.1% of sales. EBITDA as defined was $809 million or about 48% of sales, up 37% from the prior year.

Now let me switch to GAAP EPS from continuing operations. It was $5.97 per share compared to $2.80 per share a year ago, but on an adjusted basis, which primarily excludes the refinancing cost, acquisition-related cost, non-cash comp cost and dividend equivalent payments, earnings per share was $6.67 per share this year, up 49% from $4.48 per share a year ago.

When comparing GAAP EPS from continuing ops of the $5.97 per share in the current year to adjusted net income of $6.67 per share, the difference of $0.70 is comprised of the following items; $0.06 is related to the dividend equivalent payment in quarter one; $0.27 for non-cash compensation expense; and $0.37 for acquisition-related expenses, including integration cost such as startup inventory purchase accounting adjustments and backlog amortization.

Switching gears to cash and liquidity, the Company generated $414 million of cash from operating activities for our cash flow statement during fiscal 2012. We closed the year with $440 million of cash on the balance sheet, a net cash increase of $64 million.

As mentioned we financed AmSafe with both cash and debt and we acquired Harco and Aero-Instrument from cash on the balance sheet. Excluding the AmSafe debt rebate, we used $368 million of cash from the balance sheet for these acquisitions.

The Company’s debt leverage ratio at September 2012 was approximately 4.4 times pro forma EBITDA on a gross basis, and 3.8 times on a net basis. Adjusting for the November dividend just paid; our gross debt-to-EBITDA leverage would have been 5.2 times and 4.7 times on a net basis. As we look forward to fiscal 2013, we estimate the midpoint of our GAAP EPS to be $5.66 and as Nick previously mentioned, we estimate the midpoint of our adjusted EPS to be $6.76.

As we disclosed on Slide 9 which was behind the press release this morning, the $1.10 in adjustments to bridge GAAP EPS to adjusted EPS includes the following items; $0.71 from the dividend equivalent payment versus $0.06 of this year, $0.34 from non-cash stock compensation expense, compared to $0.27 this year and $0.05 of carryforward activity for acquisition-related expenses from our reported acquisitions.

Nick provided color on fiscal 2013 sales and EBITDA as defined. As a result of recent acquisition activity and the announced dividend, I am going to walk through the cost below EBITDA as defined and explain why adjusted net income per share increases 1% despite EBITDA, as defined, growing at 10%. Both growth percentages assume the midpoint of guidance.

Depreciation and amortization excluding backlog amortization of $3 million is expected to total about $62 million next year. This is a 9% increase over FY12. Interest expense is forecasted to increase approximately 23% or almost $50 million for total interest payments of $260 million in FY13. The increase is due to the dividend financing of $700 million as well as a full year of interest related to the AmSafe financing. This large year-over-year interest expense directly impacts our earnings before tax. Our earnings before tax is $565 million or 5% greater than fiscal 2012.

Our effective tax rate in FY13 is expected to increase to be between 34% and 35% compared to 33% in FY12. Our adjusted net income will be up 3% versus FY12. And finally, our weighted average shares outstanding will be approximately $54.5 million, compared to $53.9 million in FY12. This dilutive impact is almost an additional 1 percentage point.

As a result of these items, our adjusted EPS of $6.76 is approximately 1% greater than FY2012. These assumptions do not include the impact of the anticipated UTC-Goodrich acquisition as mentioned earlier. Finally with regards to our liquidity and leverage, we expect to generate $450 million of cash, again excluding UTC-Goodrich and assuming no other acquisition activity, we expect gross debt leverage ratio to be below five times pro forma EBITDA and our net leverage ratio will be below four times our pro forma EBITDA Defined at September 30, 2013.

With that let me hand it over to Liza.

Liza Sabol

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question from the line of David Strauss from UBS. Please go ahead.

David Strauss – UBS Securities, LLC

Good morning.

Gregory Rufus

Good morning, David.

W. Nicholas Howley

Good morning, David.

David Strauss – UBS Securities, LLC

Nick or Greg, just on the margin side, adjusted EBITDA margins sequentially were lower. The revenue number was pretty similar. The mix was pretty similar. Can you just talk about what’s going on there? And then as we look to 2013, it sounds like you are assuming the same level of dilution related to the acquisitions, why one that decline and your mix overall is better. So just wondering why EBITDA margins won’t improve a little bit more than what you are talking about in 2013?

W. Nicholas Howley

Let me try and stab at some of those questions, David, I don’t know if I got them all. We did have some OEM to aftermarket or negative of the mix flow from quarter four compared to quarter three. And we have a little bit more R&D spending in the quarter, but my R&D spending as a percent of sales for the year was roughly flat. So that’s more of a timing issue. So I think that answers that quarter. The impact of the acquisitions this year was only a partial year of the 3%. Next year we’ll have all of the acquisitions for the full year and their margins are lower. So, even though the margin will improve they will still have a 2% impact.

Gregory Rufus

Because the margins will get better if the hold time is longer.

W. Nicholas Howley

Yeah, when you’re holding to 12 months (inaudible) less months.

David Strauss – UBS Securities, LLC

Right, but that’s equivalent to the impact that we saw in Q3 and Q4, is right. I mean I’m just talking kind of off of that level?

W. Nicholas Howley

I don’t know, that’s a partial question, I thought I answered it why the impact is still 3% next year.

David Strauss – UBS Securities, LLC

Okay, okay.

W. Nicholas Howley

The margins in those businesses will improve though.

David Strauss – UBS Securities, LLC

Okay, I’ll take it offline and then in terms of on the interest expense, Greg, can you help just I can get to like 245 to 250, I am struggling to get to 260. I think you talked about you cash rate is like 5%, 7%, what is the actual rate that we should be using on the blended rate that we should be using on the debt.

Gregory Rufus

Well going forward, it will be less than that because the 500, we just raised, the coupon rate on the high yield was…

Raymond F. Laubenthal

The weighted was 5% on the new rate.

Gregory Rufus

We have on the total was 5%, so that will lower our interest rate but we’ll have four points and I will get mix of my dividend now. What would be my debt in $4.2 billion?

Raymond F. Laubenthal

Yeah, like $4.3 billion around $4.3 billion…

W. Nicholas Howley

I mean I’m talking about cash interest, we also have the amortization in OID (inaudible) going to the GAAP rate base.

David Strauss – UBS Securities, LLC

Okay. Okay, and then last one on, Nick, on the aftermarket guidance by the 10%, is your pricing assumptions the same at the low end and the high end mean that?

W. Nicholas Howley

Yes.

David Strauss – UBS Securities, LLC

Okay.

W. Nicholas Howley

Yes. David what you’re seeing, I mean what you’re seeing there is, we are unsettled with what it’s hard to look at the back-end of the year. I look at everybody else’s sort of announcement on their aftermarket and not be unsettled. As you go into next year that’s all you’re seeing there.

David Strauss – UBS Securities, LLC

Okay. Thanks guys.

Operator

Thank you. Our next question from the line of Joe Nadol from JPMorgan. Please go ahead.

Seth Seifman – JPMorgan Securities, LLC

Hi, good morning guys. It’s actually Seth on for Joe this morning. Well, I guess the first question I have was sort of how concerned you are about, what’s going on in the aftermarket and I know that in 2008, you’re relatively quick to take action when you thought that the market was turning against you and how you would compare what you’re seeing now to then and what things you might or might not be considering doing?

W. Nicholas Howley

Well, when I think I said, this is Nick, I think I said in part of my lead-in on fiscal year 2013, we are being very careful about our spending and adding employment, about hiring and the like. You know we have not made any decision that we need to go the other way promptly or do any restructuring at this point, but we’re watching it. I mean I’ll say again it is hard to read the economic news, read the announcements from all the other aerospace people about the aftermarket, the general economy around the world, and not have some concern. That’s what you’re seeing reflected there. I hope, we haven’t banded well enough. If you told me it was four, I’d say I hope not. If you told me it was 11, I’d say I hope so.

Seth Seifman – JPMorgan Securities, LLC

Okay, thanks. And just as a quick follow-up. On the commercial OE side, you talk about this year we’re looking at low single-digit growth and you mentioned in your comments concern about flattening in 2014, 2015 as some of the rate increases kind or I guess the rates flatten out and the rate increases are finished. And you talk about expecting 787 in the range of 75 to 80 aircraft. I think for 2013 and 2014, even though Boeing should be producing at a much higher rate by then. Have we kind of hit the growth rate and kind of are peeking out here in commercial OE?

W. Nicholas Howley

Well, we are pretty well distributed across the fleet, the Boeing and Airbus. So we gave you what our assumptions were, for 2013 and 2014. If you essentially think those assumptions are low, if you know don’t think 11.40 is the right number, you think its 12.40, you can darn adjust our commercial transport business accordingly. That’s what we try to get and that’s just a call. You can be as aggressive or conservative as you want, that’s just a call. That’s what we’re using to come up with our numbers.

Seth Seifman – JPMorgan Securities, LLC

Okay, thanks very much.

Operator

Thank you. Our next question from the line of Carter Copeland from Barclays, please go ahead.

Carter Copeland – Barclays Capital, PLC

Hey, good morning guys.

W. Nicholas Howley

Hey Carter, good morning.

Carter Copeland – Barclays Capital, PLC

A couple of quick ones, one Nick, I wondered if you might expand very briefly on the comment you had around bookings. You said for the full year, on a full year basis, bookings were running roughly in line with shipments.

W. Nicholas Howley

Right

Carter Copeland – Barclays Capital, PLC

I thought I recall the last three quarters, they had been running a little bit ahead, did that implies to fourth quarter?

W. Nicholas Howley

You are correct. They ran a little under in the fourth quarter.

Carter Copeland – Barclays Capital, PLC

Anyway, you can size that?

W. Nicholas Howley

You could probably figure it out. May be we can give you the numbers how much we had before.

Carter Copeland – Barclays Capital, PLC

I mean I’m not very good at addition but.

W. Nicholas Howley

That’s the problem.

Carter Copeland – Barclays Capital, PLC

I’m not sure if I have all the numbers. I mean would it be, is it 0.9 on a book-to-bill? Are we just a couple of percent shy or?

W. Nicholas Howley

I mean just a second and I’ll let you the (inaudible) Yeah, anything I give you now is pro forma.

Carter Copeland – Barclays Capital, PLC

Of course.

W. Nicholas Howley

It’s probably on a same-store basis it’s a same kind of thing.

Gregory Rufus

Yeah, it’s maybe 4%, 5% lower something like that.

Carter Copeland – Barclays Capital, PLC

Okay, and there any trends in area?

W. Nicholas Howley

Just to be clear what I am talking about there, it’s essentially the book-to-bill, 0.96, 0.95.

Carter Copeland – Barclays Capital, PLC

0.96 okay. Are you seeing anything if you look in the individual product lines buried in that number, are you seeing any particular areas of weakness or strength or is this pretty broad-based in that number?

W. Nicholas Howley

It’s fairly broad-based. Surprisingly the product lines that I might have thought were most discretionary, aren’t seeing much different motion at least through the fourth quarter that the other ones are and it’s kind of spotty. We have a couple of things that tend to be the canary in the coal mines and they aren’t moving a lot yet, or at least now through the end of the fourth quarter. We’ll see what the next quarter brings?

Carter Copeland – Barclays Capital, PLC

Okay, and just one point of clarification on just the planning and the cost side, are you back to sort of the first question and what we saw in late ‘08 early ‘09, you cut heads, you made a quick comment about employment, but can you be specific? Are you adding headcount or you holding it flat while getting the uncertainty?

W. Nicholas Howley

We caught it very, very carefully.

Carter Copeland – Barclays Capital, PLC

So adding, but not much.

W. Nicholas Howley

Only if it’s, in other words we’re not going to be dumb and fall behind on the development program or something because we need another engineer or two, but I mean, it is very cautious and spotty. Our preference is not to be putting on any additional expenses right now because frankly, I don’t know where we’ll be 90 days from now or 180 days from now.

Carter Copeland – Barclays Capital, PLC

Okay. And lastly very quickly, the Hurricane Sandy impact you called out. Any chance you can size how much that might have been or is that too tough?

W. Nicholas Howley

I can’t and the reason I can’t is because we have a business in North Jersey and a business in Connecticut and they lost, the one in New Jersey lost a fair amount of shipping days, wonder if that gets a little bit and I don’t know. I mean, they may catch it all up. It’s just where they catch it all up, but not (inaudible) quarter. I mean, it’s not a big number and it could be almost de minimis or it could be some recognizable number. But it’s not going to make a big impact, Carter, and whatever, it’s all work we have. It just slips into the next quarter.

Carter Copeland – Barclays Capital, PLC

Okay. Thanks, guys.

W. Nicholas Howley

Thanks.

Operator

Thank you. The next question is from the line of Robert Spingarn from Credit Suisse. Please go ahead.

Ross D Cowley – Credit Suisse Securities (USA) LLC

Good morning, gentlemen. It’s actually Ross Cowley standing in for Rob. I’ve got a question on the organic growth in the way you calculate it. So I’m assuming it includes some of the initial price increases at AmSafe. If that’s the case, is it fair to imply that unit volumes were negative in Q4?

Gregory Rufus

You mean against the prior Q4.

Ross D Cowley – Credit Suisse Securities (USA) LLC

Yeah.

Gregory Rufus

You mean in the commercial aftermarket?

Ross D Cowley – Credit Suisse Securities (USA) LLC

Yeah.

Gregory Rufus

Well, you have to draw your own conclusion. We don’t disclose the pricing, but they surely weren’t very robust.

Ross D Cowley – Credit Suisse Securities (USA) LLC

Okay, yeah. Then just one follow-up, are you seeing anything from Boeing and Airbus with respect to them seeking royalties as they try and get more of the aftermarket stream?

Gregory Rufus

Say that again.

Ross D Cowley – Credit Suisse Securities (USA) LLC

Are you seeing anything from Boeing and Airbus with respect to them looking for royalties?

Gregory Rufus

Yeah, they are asking all the time, not Airbus but the Boeing is a, Airbus is not, but Boeing is consistently pecking at it.

Ross D Cowley – Credit Suisse Securities (USA) LLC

Okay, perfect, thank you.

Operator

Thank you. The next question is from the line of Noah Poponak from Goldman Sachs. Please go ahead.

Noah Poponak – Goldman Sachs & Co.

Hi, good morning everybody.

W. Nicholas Howley

Good morning.

Gregory Rufus

Good morning.

Noah Poponak – Goldman Sachs & Co.

With respect to the fiscal 2013 aftermarket growth guidance, can you see that the next two quarters are something like flat to up five and you logically think you might be in a low double-digits in the back half of the year or actually see that you’re in that 5% to 10% range in the first half and then there’s maybe upside if you get acceleration into the double digits in the back half of the year?

W. Nicholas Howley

We can’t see half the year out.

Raymond F. Laubenthal

Yeah.

W. Nicholas Howley

We can’t see any more. Maybe we can see out into the first quarter, but I am reticent to comment on that. So we get the number, it’s only, it’s not done yet.

Noah Poponak – Goldman Sachs & Co.

Okay.

Gregory Rufus

But we can see, we cannot see six months out in the aftermarket, in the commercial aftermarket.

Noah Poponak – Goldman Sachs & Co.

Can you…

Gregory Rufus

And then by see I presume you mean, you got the bookings in your hand.

Noah Poponak – Goldman Sachs & Co.

Yeah, I mean well…

Gregory Rufus

That’s what I mean.

Noah Poponak – Goldman Sachs & Co.

And maybe going a little further based on conversations with the customer, I guess I’m just trying to discern how back-end loaded you expect the year to be first and then secondarily?

W. Nicholas Howley

Well, I think we gave you some guidance on the first quarter.

Gregory Rufus

Yeah.

Noah Poponak – Goldman Sachs & Co.

I think if you look at our first quarter revenues in prior years against the total, I think you’ll see the first quarter tends to run, I want to say it tends to run something like 21.5%, 22% of the year and that’s what we were, if you would go back and do the math, I was trying to point you back to the math without doing it so. And so it’s something like that maybe minus if we get a little slippage from this Hurricane Sandy delays which won’t be a big number, but could be something.

Gregory Rufus

Okay.

W. Nicholas Howley

That gives you some feel at least.

Noah Poponak – Goldman Sachs & Co.

Okay. And then on the balance sheet and capital deployment, even though you’ve announced a few actions recently, they still don’t really take the balance sheet leverage to levels you’ve talked about kind of wanting to be at on a run rate basis and certainly not levels that you’ve gone to before with even bigger actions. Can you maybe just talk about where that balance sheet comfort or desired level is now and how active do you think you can be this year on an M&A front, given what you see out there in the pipeline?

W. Nicholas Howley

I would say the M&A pipeline is okay. It was probably a little stronger three months ago, but I don’t draw a whole lot from that. It’s still decent. It’s really very difficult to estimate close rates or whether we’ll close something. On the capital structure what we’ve said is we’re typically going to be in the 4% to 6% kind of multiple of EBITDA range. When we get done doing this dividend, we’re up a hair over 5% and we’ll draw that. We don’t buy anything else, we’ll draw that down to 4% or under and I would say what we we’ll do is we’ll reassess the situation and see what the economy looks like, see what the credit markets looks like, see what the M&A and we’ll make a call.

Noah Poponak – Goldman Sachs & Co.

Okay. Okay. Thank you very much.

W. Nicholas Howley

Yeah.

Operator

Thank you. The next question is from the line of Myles Walton from Deutsche Bank. Please go ahead.

Myles Walton – Deutsche Bank Securities, Inc.

Thanks good morning.

Gregory Rufus

Good morning.

W. Nicholas Howley

Good morning, Myles.

Myles Walton – Deutsche Bank Securities, Inc.

One quick one, first a clarification, I think you said $450 million cash generation in fiscal 2013, was that free cash or operating cash, Greg?

Gregory Rufus

Total cash on the balance sheet?

Raymond F. Laubenthal

There would be an increase of that amount year-to-year?

Myles Walton – Deutsche Bank Securities, Inc.

Got it. So free cash.

W. Nicholas Howley

Myles, the other way to look at is I gave you a number about $900 million.

Myles Walton – Deutsche Bank Securities, Inc.

Yeah.

W. Nicholas Howley

Yeah.

Raymond F. Laubenthal

Yeah, we’re going to have $900 million of cash on our balance sheet at the end of the year.

W. Nicholas Howley

Yeah.

Myles Walton – Deutsche Bank Securities, Inc.

And sorry just to clarify that even more, so that’s excluding the Goodrich transaction now?

Gregory Rufus

That’s correct. That’s excluding Goodrich.

W. Nicholas Howley

Yeah.

Myles Walton – Deutsche Bank Securities, Inc.

Okay, great.

Gregory Rufus

We don’t want to put it in until we finally on it.

Myles Walton – Deutsche Bank Securities, Inc.

Yeah that makes sense. And then the other question I guess 1,140 was the number I think heard ex-787s for 2013 and 2014?

Gregory Rufus

Yes.

Myles Walton – Deutsche Bank Securities, Inc.

So what production rates are you assuming don’t take place because that’s where we are for 2012?

Gregory Rufus

We’re assuming – well maybe we have a little difference there, but 1,140 is what we’re assuming. I mean I don’t, as I kind of can’t go down and tell you airframe by airframe, which one you may have and we don’t.

Myles Walton – Deutsche Bank Securities, Inc.

Okay.

Gregory Rufus

You can think of us, as Myles you can think of us as being pretty well spread across the platforms.

Myles Walton – Deutsche Bank Securities, Inc.

Yeah.

Gregory Rufus

So if you think that’s 5%, well, then maybe the answer is 5%, well

Myles Walton – Deutsche Bank Securities, Inc.

Okay. I was just curious if there’s anywhere…

Gregory Rufus

You do get depending on your call on 2014 we may be a little more conservative than some people on sort of the assumption as it kind of flattens out in 2014. If you think that doesn’t happen 2014 is going to drive the back half of our 2013.

Myles Walton – Deutsche Bank Securities, Inc.

Okay. The last one for me is the Goodrich deal obviously it’s margin diluted pretty substantially versus other deals you’ve done in the past and just curious obviously it’s one that fits into the composition and clearly was on the market. Should we expect more of these type of deals, where they’ll be certainly accretive to the EBITDA on a gross basis, but we’re just going to have to deal with the scarcity of EBITDA companies, where you exist or close to where you exist?

W. Nicholas Howley

I can’t answer that, I just don’t know. We bought AmSafe and McKechnie and they were more in the 25, 30 range. Sort of I can’t draw any collusion from that other than that’s what this will look like.

Myles Walton – Deutsche Bank Securities, Inc.

Okay.

W. Nicholas Howley

We are fine by the way, we have no problem. We’re buying the business and low EBITDA tends to ultimately mean you’ve probably got more upside.

Myles Walton – Deutsche Bank Securities, Inc.

Okay, all right. Fair enough thanks.

Operator

Thank you. Our next question from the line of Ken Herbert from Imperial Capital. Please go ahead.

Ken Herbert – Imperial Capital, LLC

Hi, good morning.

W. Nicholas Howley

Good morning, Ken.

Ken Herbert – Imperial Capital, LLC

Hey, just a quick question on the commercial aftermarket. I mean over the last couple of years, we’ve seen some I guess much more volatility in the growth rates, whether it would be from surplus material impact, inventory levels, anything like that. As you look into 2013, would you characterize the situation we are in now where you expect a much more close outlook inline with capacity and passenger travel or are there any parts of your product line where you still see the potential for some volatility either because of some of the these extraneous factors?

W. Nicholas Howley

Well I think if the economy around the world slows down, as a result air travel slows down a little, I think you could well see some volatility. People get nervous, they start freezing up on what they buy. We tried our best to kind of a bracket what we thought it could run, but I’ll say again what you’re seeing reflected is no view on the lack of strength in our business, but an uncertainty about the economy.

Ken Herbert – Imperial Capital, LLC

So if things weaken you could see some select destocking I guess from some of your customers?

W. Nicholas Howley

Of course, if RPMs came in at 3% or 4%, which would be kind of weak and we only ended up at 5% in all likelihood you would have seen some destocking or deferrals just on the [north] of it..

Ken Herbert – Imperial Capital, LLC

Yeah, yeah, okay. On the flip side, if RPMs come in at 5% to 6% would you, are there any areas you would identify as maybe inventory levels are a little low or there is deferrals that might lead to any sort of catch up as you look into fiscal 2013?

W. Nicholas Howley

I would just I think we gave you a range and I’m very reticent to open that range up.

Ken Herbert – Imperial Capital, LLC

Okay. Now I can appreciate it. I mean, there is a lot of uncertainty out there obviously.

W. Nicholas Howley

But as I said to somebody else’s question, if you told me it was 12%, I’d say, hope so, that would be great. If you told me it was 3%, I’d say, hope not.

Ken Herbert – Imperial Capital, LLC

Okay, no that’s helpful. And if I could just…

W. Nicholas Howley

May be that last comment which helped you.

Ken Herbert – Imperial Capital, LLC

Well, the comments in total have been helpful. But if I could just on the flip side on the defense market, I mean you clearly continue to see strengthen and taking a very rightfully so sort of cautious outlook. Are you seeing just any inflection point recently or anything in the change of thinking or is it really just, clearly you’ve got to be conservative in this business and everything would indicate that that’s the right approach, but you continue to see pockets of strength there. Have you seen anything in the last quarter, the changes you are thinking or outlook at all?

W. Nicholas Howley

Only in the overall economic and political ambient. I mean, as I said our bookings ran ahead.

Ken Herbert – Imperial Capital, LLC

Yeah

W. Nicholas Howley

Of the shipments, which is we’re happy to have it. We’re not exactly sure why, but we’re happy to have it and they are not sort of continue through the air. It’s held up better than we expected. I’m starting to feel like the broken clock. If I keep saying the same thing eventually I’ll be right.

Ken Herbert – Imperial Capital, LLC

Well, you’re right twice a day anyway. Okay. Hey, thank you very much.

Operator

Thank you. The next question is from the line of Gautam Khanna from Cowen and Company. Please go ahead.

Gautam Khanna – Cowen and Company, LLC

Yes. Thank you. Just wanted to get back to Carter’s book-to-bill question, can you comment on any intra-quarter trend within that book-to-bill? Are we sort of stable now at this level do you think, or did things weaken through the quarter or even subsequent to the quarter?

W. Nicholas Howley

Well, I can’t talk about the first quarter. I can just talk about the fourth quarter.

Gautam Khanna – Cowen and Company, LLC

Fair.

W. Nicholas Howley

I would tell you I view this is as a call on the economy. That’s what’s concerning us. I would say depending on your view of what you think the economy is going to be like in the United States and generally around the world, ultimately that impacts RPMs and ultimately impacts what people try and defer. That’s the call. I would say, as I sit here today, I don’t know that I see any of the macroeconomic news that makes me feel lot more confident.

Gautam Khanna – Cowen and Company, LLC

Could you maybe talk about the difference, because you do have better visibility in the distribution channel into what inventories are and the like? I mean is it just sort of matching underlying demand right now or…?

W. Nicholas Howley

We don’t think we’re very disconnected. We don’t think we’re in total. We maybe a distributor here and there, but I mean they’re offset. In total we don’t think we’re significant, we’re substantially disconnected on the inventory levels distribution.

Raymond F. Laubenthal

I mean mostly what you’re seeing is reflection of demand. Now you maybe, you never know exactly what the inventory levels are at airlines. In distributors we know exactly.

Gautam Khanna – Cowen and Company, LLC

Right, okay, and then we think of your firm as you know being very, runs very lean, but I wondered if you just took a step back and we do have a more depressing kind of environment, macro environment next year. What kind of cost do you think you could take out fairly quickly, what’s the (inaudible)?

W. Nicholas Howley

We’ll take out what we have to take out in the downturn. We don’t take the position that we have a fixed cost that we can’t get down below. I mean if we think there’s a 5% drop, we’ll get 5% of the cost down.

Gautam Khanna – Cowen and Company, LLC

Thank you, I appreciate it.

Operator

Thank you. Next question comes from the line of Kevin Ciabattoni at KeyBanc Capital Markets. Please proceed.

Kevin Ciabattoni – KeyBanc Capital Markets, Inc.

Thanks good afternoon guys.

W. Nicholas Howley

Good afternoon.

Kevin Ciabattoni – KeyBanc Capital Markets, Inc.

Most of my questions have been answered. I realize you’re probably somewhat limited in what you can say on this, but looking at the Goodrich acquisition, you guys are rightfully pretty cautious on defense looking out to next year. I’m just wondering what was given the defense exposure within that business, what was kind of so compelling about that acquisition, given the defense and biz jet exposure there.

W. Nicholas Howley

Well, it’s a let me start off, it’s a proprietary aerospace business with significant aftermarket content. So right away that puts all our antennas up, then it becomes a value proposition. When we layout the platforms and layout our estimates on the market and what we can do with it, we see a good return on the money we put in and it looks to us like it works. You will note as a dollar per equity or a price for a dollar revenue, it’s substantially lower price than we typically pay.

Kevin Ciabattoni – KeyBanc Capital Markets, Inc.

Okay, Howley that’s helpful. Any thoughts there on kind of how quickly you can get some margin expansion out of that business, when you bring it in house?

W. Nicholas Howley

I’ll tell you again, we don’t own it yet. We are not cleared through the regulatory process. We have a confidentiality agreement. We’ve got what we’ve told you already, we have an agreement with the other party that we can say, and that’s about all we can say.

Kevin Ciabattoni – KeyBanc Capital Markets, Inc.

Okay, that’s all I have.

W. Nicholas Howley

Okay.

Operator

Thank you. Next question comes from Carter Leake of BB&T Capital Markets. Please proceed.

Carter Leake – BB&T Capital Markets

Thanks for taking my question. Commercial OEM sales, do you have a sequential number on that as well?

W. Nicholas Howley

Yeah, you mean next year?

Carter Leake – BB&T Capital Markets

No, no this quarter versus last quarter.

W. Nicholas Howley

Okay, let me not give you the exact number, but I will tell you it’s up. So I wouldn’t draw a lot of conclusion from a quarterly movement on OEM sales; that can be very dependent on just when a shipment happened to occur.

Carter Leake – BB&T Capital Markets

I’ve got a same question on these are channel questions. So, on defense if I look at your full-year number it does look like sequentially that we were almost down 24%, maybe down 8% year-over-year. Do those numbers sync up with what…?

W. Nicholas Howley

On what defense?

Carter Leake – BB&T Capital Markets

On defense yeah.

W. Nicholas Howley

No.

Gregory Rufus

No, no.

W. Nicholas Howley

No.

Carter Leake – BB&T Capital Markets

So how about, do you have a sequential number on defense?

W. Nicholas Howley

Yeah I don’t want to start going through all these sequential numbers, but it’s not down.

Carter Leake – BB&T Capital Markets

It’s not down. Okay, that helps. I’d like to go back to the production rate. I don’t really understand using sort of this sort of arbitrarily low assumption on production, unless you have some conviction non-787 that rates are going down and just adds an element of confusion. So what I would ask is to your low single-digit guidance on OE, is that driven more by the 75 to 80 787s or is that driven by this what appears to be sort of an arbitrarily low assumption on non-787 production?

Gregory Rufus

Well, the low assumption probably is mostly maybe in 2014 and so how much you’re going to level out in 2014 and how much is that going to reflect back on to 2013, that’s probably the biggest.

W. Nicholas Howley

Yeah.

Gregory Rufus

If you think it continues to rise through 2014, you’ll get a better number and we may well be conservative on that, but our view in unsettled times is better to be conservative and size your business accordingly. I would say on the 787 not so much mostly because there is a fairly significant overhang there in inventory, which we see everybody I think there is a number of people reporting that, that’s reflective of the fact that the development process took way longer than anybody expected and each time they taught it was concluded they gunned up the ordering motor and then took the foot off and gunned it up again, and took the foot off and you ended up with stuff all over the place. There is also, remember, there these one-time 787 settlements in last year’s number that we quantified through the year.

Carter Leake – BB&T Capital Markets

Okay.

Gregory Rufus

So those you can get a beat on probably, you can figure out what those settlements were.

Carter Leake – BB&T Capital Markets

Right.

Gregory Rufus

I think the production rates, we gave you the numbers, so that you could make adjustments.

Carter Leake – BB&T Capital Markets

What about the comment of concern over 2014, 2015 flattening, maybe you can clarify that, because if in fact this is a low number and we’re conservative and the 787 numbers you are quoting are well below sort of the 120 run rate once we clear out the overhang I would think that comment would be more along the lines of conservative on our production guidance, 2014, 2015 likely up or up significantly, right, on the 787s alone you would have that?

W. Nicholas Howley

We gave you the assumptions. If you have another judgment on it clearly you can make it, you’ll get a different number.

Carter Leake – BB&T Capital Markets

Okay. Acquisitions, if you could help, if I look…

W. Nicholas Howley

The only thing I would remind you to be careful at, and I’ll just back up, if you remember in the beginning of last year we used 10% aftermarket guidance and frankly got a fair amount of comments that that was way too low. The reality is we and everybody else were lucky to crawl over to finish anywhere near that number.

Carter Leake – BB&T Capital Markets

Do we have about a quarter and a half that we should assume for AmSafe in 2013 just using the sort of acquisitions plug, if you will, as we…

W. Nicholas Howley

Yeah, we acquired them in February, February 15, so I think you’re exactly a quarter and half.

Carter Leake – BB&T Capital Markets

Yeah, all right and then last one, defense you were sort of remaining silent on sequestration and I appreciate the conservatism, but it would seem at this point that similar to what Collins did which said whether it would be sequestration or whether it would be a kick the can scenario, we are going to take our defense down 10%, 5% sequestration and then 5% core. Is there anything you can tell us let’s forget sequestration and just speak about what you look at right now, it certainly seems to be best case to kick the can scenario. Is that included in your model say down or would there be a revision?

Gregory Rufus

No, as I said, this does not include any substantive dislocation from sequestration. So if they ended up in some settlement that didn’t impact the stuff that they buy from us, it has little impact. If there is some significant cut that impacts the things they do buy from us. It will have an impact, but our assumption is I think the words we used I’m not looking at exactly were no significant disruption from sequestration.

Carter Leake - BB&T Capital Markets

Okay great. Thanks.

Operator

Thank you for your question. The next question is from J. B. Groh of D.A. Davidson. Please proceed.

J. B. Groh – D.A. Davidson & Co.

Hey guys, thanks for taking my call. Just two quickies. Obviously, your after-market margins are much better than OE. Does that differ between commercial and defense or is that pretty consistent between defense after-market and defense OE and commercial after-market?

W. Nicholas Howley

I would say these are very rough kind of directional numbers, roughly the defense business isn’t substantively differed in total in the commercial business, maybe a little less but not a lot less, but I would say the mix is a little different, commercial or defense OEMs probably a little better than commercial and the after-market is not quite as good.

J. B. Groh – D.A. Davidson & Co.

Okay.

W. Nicholas Howley

When you add them up, you are not way off the same spot, though you’re a little off.

J. B. Groh – D.A. Davidson & Co.

Okay, good. Okay and then maybe a housekeeping one for Greg, obviously the $1.10 in adjustments going to be weighted towards the first quarter because of that dividend equivalent?

Gregory Rufus

That will all be in the first quarter.

J. B. Groh – D.A. Davidson & Co.

Right, okay, good. Okay, thank you.

Operator

Thanks for your question. I’d now like to turn the call over to Liza Sabol for closing remarks.

Liza Sabol

Thank you. I would like to thank you all again for participating on this morning’s call. And again as a reminder, we expect to file our 10-K tomorrow.

W. Nicholas Howley

Thanks everybody.

Operator

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect. Have a good day.

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