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TransDigm Group Incorporated (NYSE:TDG)

F1Q09 (Qtr End 12/27/08) Earnings Call

February 3, 2009, 11:00 AM ET

Executives

Sean Maroney - Director, Corporate Accounting and IR

Nick Howley - Chairman and CEO

Ray Laubenthal - President and COO

Greg Rufus - EVP, CFO and Secretary

Analysts

David Strauss - UBS

Carter Copeland - Barclays Capital

Robert Spingarn - Credit Suisse

Fred Buonocore - CJS Securities

Karl Oehlschlaeger - Macquarie Research Equities

Jack Wegner - MVX Asset Management

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2009 TransDigm Group Incorporated Earnings Conference Call. My name is Frenzine, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) I would like now to turn the presentation over to your host for today's call, Mr. Sean Maroney, Director of Corporate Accounting and Investor Relations. Please proceed, sir.

Sean Maroney

Thank you. I'd like to thank all of you that have called in today and welcome you to TransDigm's fiscal 2009 first quarter earnings conference call.

With me on the line this morning are TransDigm's Chairman and Chief Executive Officer, Nick Howley; our President and Chief Operating Officer, Ray Laubenthal; and our Executive Vice President and Chief Financial Officer, Greg Rufus. A replay of today's broadcast will be available for the next two weeks. Replay information is contained in this morning's press release and on our website at www.transdigm.com.

Before we begin, the company would like to remind you that statements made during this call which are not historical in fact are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company's latest filings with the SEC. These filings are available through the Investors section of our website or through the SEC's website at www.sec.gov.

The company would also like to advice you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined and adjusted net income, both of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measure and a reconciliation of EBITDA as defined and adjusted net income to that measure.

With that, I will now turn the call over to, Nick.

Nick Howley

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

Just to reiterate we believe our business model is unique in the industry, in both its consistency and its ability to create intrinsic shareholder value through all phases of the cycle.

To summarize again why we believe this or at least few of the reasons. About 95% of our sales are generated by proprietary products, about 80% of our sales come from products for which we are sole source provider, about 60% of our revenue and a much higher percent of our EBITDA comes from aftermarket sales, aftermarket revenues that historically produced a higher gross margin and provided relative stability in the downturns.

Even in difficult market environments the annual worldwide growth in air travel rarely goes negative for any extended period.

In fact, most reports I have seen forecast a modest decline in worldwide traffic in '09 in spite of very difficult economic situation with some possible recovery in the back end of the year. Because of our uniquely high EBITDA margins at 47% or more and relatively low capital expenditures, TransDigm has year-in and year-out generated strong free cash flow.

We have significant liquidity and no near term debt issues. We have about $150 million in cash and approximately $200 million of un-drawn revolver in spite of making two acquisitions for about $140 million in the last four months and buying back some of our stock.

We have a well proven value based operating strategy focused around what we refer to is 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 to up and down markets in the past and allowed us to continually improve and increase the intrinsic value of our business while continuing to invest in new business and platform positions.

We have been successful in regularly acquiring and integrating businesses. We acquire proprietary aerospace products with significant aftermarket content.

We have in total acquired 24 such businesses including one in September and one in December of 2008. We have been able to acquire and approve aerospace component businesses to all phases of the cycle. Though our consistent approach on our operating value drivers, a clear acquisition strategy and close attention to our capital structure we've been able to create value for our shareholders for many years.

The performance after 9/11 our EBITDA as defined grew. And margins expanded on both the GAAP and pro-forma basis right through the downturn was the most recent example.

During that very trying period all our value drivers contributed, we could quickly reduce our cost. We continued our pricing methodologies. And we generated significant new business and improved our acquisition substantially.

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

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

In the commercial OEM world, the Boeing strike concluded but we expect we will loose about three months of effective production in our 2009 fiscal year from the strike.

We have seen almost all of the business jet OEMs announce significant rate reductions in last 90 days. We are still concerned about potential production rate decreases in the commercial transport OEM segments in either late 2009 or in the 2010. If that happens with our lead time, we will begin to see some impact in the second half of 2009.

All-in-all our commercial OEM business could be weaker then the flat year-over-year comps we assumed 90 days ago, though I will say this still remains quite unclear.

In the commercial aftermarket we are seeing clear signs of a slowdown in growth as the worldwide economic conditions take their toll. So, worldwide traffic in the first part of our fiscal year 2009 will almost assuredly be down modestly year-over-year.

We may well continue to see some system wide airline inventory reductions. Hopefully the second half of the year looks little better.

At this point the commercial aftermarket is about as we expected 90 days ago. Though I will say again, we remain quite uncertain about the second half of our year.

The quarterly numbers can bounce around over longer periods are real or unit aftermarket volume has generally been able to grow at or ahead of overall worldwide passenger traffic.

And the defense area on the other hand looks pretty good. Q1 revenues in bookings were better than anticipated and for at least the first half of FY2009 this segment looks stronger than we expected 90 days ago. Based on what we know today defense may exceed our previous mid-single digit growth assumptions.

We remain very cautious regarding the market outlook, but confident in the strength of our unique business model continually create intrinsic shareholder value and also our management teams' ability to respond the changing market conditions.

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

But in spite of weak economy, we had a good first quarter, revenues were up 11% versus the prior year first quarter, pro-forma growth that is assuming we own the same mix of businesses is up about 4% on a Q1 versus Q1 basis with the overall commercial business about flat and defense up significantly.

Reviewing the revenues by market segment, again still on a pro-forma basis versus the prior year that is assuming we own the same mix of businesses in both periods.

First, in the commercial segment, which makes up about three quarters of our revenue, and the commercial OEM was up about 6% versus the prior first quarter basis. This is compared to a very low previous Q1 comp. I think it's probably more indicative if you look at Q1 versus the average 2008 quarterly run rate. The commercial OEM on that basis was down about 12%, this is primarily reflective of the Boeing strike.

The regional and business jet revenues were about even with the 2008 run rate.

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

In the defense segment, which is roughly a quarter of our business, the revenues were up 19% on a quarter versus quarter basis. At least for the first half of our year, defense revenues seemed likely to be above our expectations.

In total for the quarter, our revenues were closed to our initial expectations with a modest shift in mix, between commercial and defense revenues.

If I move onto profitability, and now on a reported basis, I'm going to talk primarily about our operating performance, our EBITDA as defined.

The total adjustments to EBITDA were quite modest this quarter. Our EBITDA as defined was about $92 million or up 21% versus the prior Q1. The EBITDA defined margin of about 15% in Q1, '09 is the highest quarterly margin we have reported. In spite of some modest acquisition dilution, and some modest residual 787 development cost.

This margin increase reflects the impact of our cost reductions in Q4 a particularly rich mix, the whack of the Boeing lower margin shipments, as well as our ongoing value pricing activities. I don't think we can plan on this level of EBITDA margin as we move forward in 2009.

As you saw in the press release, we have increased our full year guidance. Greg, is going to review the details with you in his section.

With respect to acquisitions we made one additional acquisition in Q1. Our starter generator business we bought from General Electric. This is the second business we have bought from General Electric in last four months. We continue actively looking at opportunities, there is a pipeline of possibilities as usual, many more small than large. We saw some modest pick up in activity in the quarter but it is far too soon to tell well that means anything.

We remain disciplined and focused on what we want in the value creation opportunities predicting the timing is very difficult. And as usual as a general rule we won't discuss any specifics on acquisitions until they are closed.

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

Ray Laubenthal

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

We acquired GE, Unison and Aircraft Parts Corporation, APC on December 16th. APC designs and manufactures proprietary starter generators, generator controller units, and related components for turbine engines.

The APC operation now reports to and is supported by our existing Avionic Instruments operations in Avenel, New Jersey. To date we have already revised some of the APC pricing and we presently have a team of Avionic Instruments personnel working to ensure a smooth transition.

I would also like to report that the physical move of the Unison magneto business that we purchased from GE four months ago is on schedule and nearing completion. The physical move to our Champion Aerospace facility will be completed this quarter. And we should start to see consolidation savings during the second half of our fiscal 2009.

Now let me turn the discussion to our other operating units and their value generation activities last quarter.

Recall we enacted a 9% headcount driven cost reduction in our fiscal fourth quarter 2008. This action served us well in Q1 as the market softened. As Q1 progressed, we continue to modestly reduce head counts further. The disciplined cost actions help contribute to our favorable first quarter results.

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

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

In a military market, we continue to deliver upgraded low distortion power transformers on a CH-46 helicopter fleet. And we continue to quote follow-on orders for this upgraded equipment.

We also secured orders to provide cockpit avionic components on the C-130 avionic modernization program. And we were awarded orders for expanded electrical power converters on Alenia [Malcolm] program and transformers for the Turkish C-38 trainer.

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

On the Embraer MSJ we were awarded the compact water delivery system for the lavatory and galley. And additionally, we have been awarded [thwarter] controls on the Hawker Premier platform and engine controls on and the new prior would be VLJ engine used on the Cessna Mustang.

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

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

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

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

Now let me hand it over to, Greg.

Greg Rufus

Thanks, Ray. Good morning, everyone. And again, thanks for calling in. Nick and Ray gave a very good update of our business, the market and what lies ahead of us. I will now focus on our GAAP results for the first quarter compared to the prior year first quarter commenting on the major line items with the little more detail.

Our quarter one sales were $181.3 million up $18.2 million or 11.1% from the prior year.

Organic sales growth was $4.5 million or 2.7% over the prior year. The organic sales growth is a mix story as Nick mentioned the defense business was up $7.3 million, commercial OEM revenue was up $2.2 million due to good year-over-year sales in the regional business jet market. That was partially offset by a decrease in sales to Boeing due to their strike. These two increases were offset by a $4.7 million decrease in commercial aftermarket sales, mostly due to a decrease in worldwide airline traffic, resulting from the weakening global economy. We also believe there may have been some reduction in end user inventories that contributed to decline in commercial aftermarket sales.

The remaining $13.7 million of increased sales resulted from the acquisitions of CEF, which we acquired last May, the Unison magneto product line which we acquired in September and to a lesser extent, APC, which was just acquired on December 16. All of these acquisitions were not owned in the comparable quarter last year.

Reported gross profit was $104.3 million or 57.5% of sales. This is a $16.2 million increase and is 18% greater than the prior year and it is also greater than our sales growth percentage of 11%.

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

This higher margin was also achieved despite a little down drag in margin, which was a little less than 1% due to the dilutive impact of the previously mentioned acquisition.

Selling and administrative expense was 10% of sales for the quarter compared to 11% in the prior year. The reduction in research and development expense related to lower spending on the Boeing 787 program was the primary driver in reduced SG&A spending along with the additional fourth quarter cost reductions just mentioned.

Net interest expense was $22 million a net decrease of $2.5 million versus the prior year quarter. This decrease in interest expense is primarily attributed to the lower interest rates this year versus prior year.

This year our average interest rate is 6.4% versus an average rate of 7.5% last year. Regarding our tax provision our effective tax rate was 35% for the quarter versus 36.4% in the prior year. This lower effective tax rate reflects the retroactive reinstatement of the research and development tax credits.

We are currently forecasting our '09 effective tax rate to be 36% and we anticipate our '09 cash tax payments to range from $80 million to $85 million. As you take a step back and look at the income statement, the combination of 11% sales growth, operating expenses growing at a lower rate than sales. Interest expense being less than the prior year and a lower effective tax rate versus the prior year all contribute to an outstanding first quarter net income.

That was $39.6 million or 21.8% of net sales an impressive 40% improvement versus the prior quarter. Regarding our earnings per share on a GAAP basis, quarter one EPS was $0.78 per share compared to $0.54 per share a year ago. A 44% increase in this quarterly comparison.

Our adjusted earnings per share was $0.82 in the first quarter which is a 41% improvement versus a year ago.

Cash flow from operations is very strong at approximately $66 million for the first quarter. We ended the quarter with $149 million of cash on the balance sheet. This cash balance reflects the use of approximately $67 million of cash used to acquire APC this past December. And it also includes cash used to acquire approximately 384,000 shares of common stock in the quarter.

Our net debt leverage ratio was 3.3 times our EBITDA. Given the credit crisis the country is going through we believe our current cash position together with our undrawn revolver of almost $200 million provides sufficient financial flexibility to manage our working capital and support growth included in our guidance.

Speaking of our guidance, I am sure that you noticed that this morning press release that we are increasing our guidance for the fiscal year. This change in guidance assumes no further acquisitions, no change within our capital structure or any other type of corporate event.

We give full year guidance on five items, revenues, EBITDA as defined, GAAP net income, GAAP EPS and adjusted EPS. All five line items have been increased in varying degrees. In our press release details, all five items with comparisons to the prior year.

To keep things simple on this earnings call, I will focus on the adjusted earnings per share. Our prior guidance for adjusted earnings per share was a range of $2.90 to $3.10 per share or a mid point of $3 per share.

Our current guidance is a range of $3.14 to $3.31 per share or a mid point of $3.23 per share. The increase in the mid point adjusted EPS is $0.23 per share, that is the $3.23 less $3.

Let me explain the details of this increase. Approximately $0.06 is from very good operating performance especially from the first quarter, approximately $0.05 per share recognizes the acquisition of APC made in December.

Approximately another $0.05 is a result of a decrease in weighted shares outstanding resulting from the share repurchase program, we implemented in quarter one plus a reduction in our go forward assumption of stock option exercises for the remainder of the year.

Approximately $0.04 improvement is resulting from the lower interest rates versus our prior assumptions and approximately $0.03, to recognize the benefit of the R&D tax credit previously discussed.

The above five categories all of which are positive, let us improve the full year forecast by $0.23 in our first quarter of our fiscal year. This current year estimate of adjusted EPS is $3.23 is 16% greater than the FY08 adjusted EPS of $2.79.

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

Question-and-Answer-Session

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

David Strauss - UBS

Good morning.

Nick Howley

Good morning, David.

David Strauss - UBS

Nick, did I hear you say the aftermarket was modestly lower in the first quarter?

Nick Howley

Yeah, down 5%.

David Strauss - UBS

Okay and that's.

Nick Howley

This is commercial aftermarket, le me be clear on that.

David Strauss - UBS

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

Nick Howley

Correct.

David Strauss - UBS

Okay.

Nick Howley

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

David Strauss - UBS

Okay. But it's tough to quantify.

Nick Howley

Yes, tough to quantify.

David Strauss - UBS

Okay. And then on the OE side, to your holding this flat, but the business shift side has deteriorated, I think, fairly significantly since your prior guidance, I think that's roughly about 15% of your sales.

Nick Howley

Well, that’s business and regional, you got some regional in there.

David Strauss - UBS

Okay. Well, I guess on a business shift side, where you have concentrated?

Nick Howley

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

David Strauss - UBS

Okay. Is that weaker forecast? Is that incorporated into the some big answer now?

Nick Howley

Yes.

David Strauss - UBS

Okay.

Nick Howley

Yes. I would say, we're very uncertain, I mean, who knows what we're going to see on these OEM rates. One of the big uncertainties in my mind is where are we going to see another shoe drop on these commercial transport rates?

David Strauss - UBS

And then, last one. The 9% headcount reduction that you have already undertaken, what does that size you for, I mean, are you probably aside at this point for Boeing production rates to come down or would you look at potential take an additional headcount out if that would happen?

Nick Howley

David, it depends how much. We are appropriately sized for sort of the guidance we gave you. We look at this month-by-month now. This is a time in the market that needs just continual tension. We will keep trimming a little bit, each time we see softening across individual operating years. We did little of that in the first quarter, I suspect that's a tweaking we are going to be doing all year.

David Strauss - UBS

Okay great thanks guys, good quarter.

Nick Howley

Thanks.

Operator

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

Carter Copeland - Barclays Capital

Good morning guys.

Nick Howley

Good morning Cart.

Carter Copeland - Barclays Capital

Really nice set of numbers guys. A quick question Nick, it sounds like in the plan, and in the guidance if we were to look at the margins and not sustaining the kind of 50% level seen in Q1. There is the implication that at least it sounds like to me that you are planning on having to cut in the back half on the commercial OE rates. Given the fact that Boeing was saying they want to keep them flat just last week. And we are already five, you are in your fifth month of the fiscal year.

Is, am I missing something here or is it you just don't get as much sort of lead time from a sub system supplier who wants to take the rate down when Boeing tells them. Because it seems pretty clear that Boeing have not given the firing orders yet to take the rates down. So it just seems maybe the guidance is incorporating, a bit of down turn that could be a little bit early to me?

Nick Howley

I hope so, I would like that to be true, I will tell you Carter you are clearly reflecting the fact that we are feeling very uncertain.

About the OEM production rates, if Boeing would decide, if Airbus would decide if they are going to make a cut back in 2010. We are concerned that we could start to see sort of inventory fluctuation and tweaking in the system inventory before that. That can give sort of bounce around when you get into those transition points. So we are reflecting some of that, we are also reflecting the fact that I don't know that we have seen the bottom of this business yet turn down either.

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

Carter Copeland - Barclays Capital

Much better but it would be fair to say though that if Boeing or airbus weren't to make up their mind about new firing orders until say the third calendar year quarter. Your fiscal fourth quarter then there would be some upside to your guidance. I mean it starts the time line given the lack of visibility, but it would seem that this is being pushed further off than you were originally anticipating?

Nick Howley

I would hope so Carter but I honestly would not want to say that today the guidance we give is the guidance we give. We are trying to capture our best assessment in there.

Carter Copeland - Barclays Capital

That is totally fair, totally fair. On unrelated topic I wondered if you might provide some commentary on what you are seeing in terms of the credit market and whether or not the ability to do acquisitions is opening up anything more than the last. The last quarter, when things were pretty closed up?

Nick Howley

I know what I would you are right, the strong portions of the credit markets specifically the high yield bond market and probably opened up something in the last I would say in the last two or three weeks anyway and I do not know if the bank markets opened up a lot of late. I can't say we have seen any impact on acquisitions, honestly I do not, there is no acquisitions in the last 6 or 12 months that we passed on, because we did not have the money to buy them.

Carter Copeland - Barclays Capital

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

Nick Howley

I don't know, that depends on the seller, I don’t, I guess the point I am trying to make Carter as we haven’t been, we have not yet been capital constrained on our side. It's the people have not been selling as much as we might have hopped, we will see if this changes it.

Carter Copeland - Barclays Capital

Great, thanks a lot guys.

Operator

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

Robert Spingarn - Credit Suisse

Hey, guys.

Nick Howley

Hey, Rob.

Greg Rufus

Good morning Rob.

Robert Spingarn - Credit Suisse

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

Greg Rufus

Rob, given the mathematical reconciliation to our EBITDA margin, I do not have all that data right in front of me now but again its when we talk about our value drivers, we leave them and I think this was pretty good proof. We got good productivity, we laid off 7% of or 9% of our headcount, in the fourth quarter and obviously that's coming through because the volume has not followed in total, we do not disclose the price details in granularity, it's just a confirmation of what we have been telling everybody all along with our value drivers and you are seeing that we had a good quarter where we hit on these things, plus we got some good mix.

Robert Spingarn - Credit Suisse

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

Greg Rufus

As in holding our prices, well, there has not been any change in our pricing ability, Rob. But, I guess, may be let me take another crack at that. The biggest two impacts of the margin expansion are cost cuts in the fourth quarter and the pricing.

Robert Spingarn - Credit Suisse

Okay.

Greg Rufus

Those are far and away the biggest cracks.

Robert Spingarn - Credit Suisse

You're still getting an increase.

Greg Rufus

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

Robert Spingarn - Credit Suisse

That’s true. But when you said --

Greg Rufus

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

Robert Spingarn - Credit Suisse

Now, you said, pricing held. Does that mean it doesn't rise or it is isn't enough this hold.

Greg Rufus

Rob, what I mean, hold is the same kind of a patterns you've seen in the past. And there was our process, our results have not changed significantly.

Robert Spingarn - Credit Suisse

Okay. And if we go back to --

Greg Rufus

Now, the market has not hurt it.

Robert Spingarn - Credit Suisse

Right. And Carter was asking you about the flow and timing and I would agree that if the airliners see some kind of production cut that may not happen till the back end of this calendar year, may not even happen until your fiscal first quarter, next year. How about on the business jet side? Though you've touched on business jet earlier, do you have the same relationship in OE to aftermarket at business, regional and commercial, should we think about it that way? Sort of 25% OE, 75% aftermarket in each of those segments?

Greg Rufus

25% OE, 75%, let me just think about that, regional its probably not a lot different, because they are in, they are flying commercial transport kind of hours.

Robert Spingarn - Credit Suisse

Okay.

Greg Rufus

On business jet it is less so because the business jet on average only flies, pick your number 3-400 hours a year.

Robert Spingarn - Credit Suisse

Right.

Greg Rufus

So the relationship between the aftermarket and the OEM is not as pronounced just because there is not as much flying hours.

Robert Spingarn - Credit Suisse

And should I assume you are going to see a recovery, or your plan expects recovery in biz jet aftermarket before OE?

Greg Rufus

I don't know that I can speak to that, I don't expect that this year. And that would be something out in the future. So I don't know if I can comment on that yet.

Robert Spingarn - Credit Suisse

Okay.

Greg Rufus

You are just asking business jets only?

Robert Spingarn - Credit Suisse

Yeah, I am focused on business jet because clearly that seems to be from a traffic perspective the hardest hit right now, maybe the most discretionary portion of the flying that's out there. And we have actually seen production rate decreases announced by several manufactures. But we've yet to see that from a airliner the commercial airliner manufacturers?

Nick Howley

That's right. I would say, I can't put an exact number on it, but I would say again to repeat myself. The relationship between the aftermarket and the OEM and the business jet is no where near as pronounced, a commercial transport or defense business or regional business.

Robert Spingarn - Credit Suisse

Okay. And another way of saying that is the biz jet OE maybe more important than on our OEM basis.

Greg Rufus

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

Robert Spingarn - Credit Suisse

And then on Boeing you talked a bit of the strike effect in the three months, are they, are you delivering to Boeing at the pre strike levels at this point?

Nick Howley

Ray, you have the we are close, I don’t have.

Robert Spingarn - Credit Suisse

Up there or not.

Ray Laubenthal

First off, we not only delivered a Boeing but we also delivered Honeywell and others that supply to Boeing. And you get a little bit muddiness or murkiness and exactly the flow of things since their inventories fluctuate. But we are about their contract I would say, we saw some fluctuations in the first quarter or push outs of orders and even push out the deliveries. We also saw some customers they keep shifting to us we don't want to disrupt any supply during the strike or not. So, some of those inventories will come out perhaps. As the year goes out in the net muddy the picture because some orders will pickup that point place during the first quarters. So it's a tougher thing to quantify but we think it's getting back on track.

Nick Howley

So, Rob just to clarify on that little bit. I think the three month impact we will see over the year it is probably we saw the majority of that maybe two-thirds of it or so in the first quarter. Rest of its going to kind of dribble out through the year but people would not sit here inventory bills and things like that.

Robert Spingarn - Credit Suisse

Okay. And then just finally 787 are we are done with design changes there?

Ray Laubenthal

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

Greg Rufus

We believe it's captured in our guidance, so we pick the numbers Rob, our balance we expected going into the year.

Robert Spingarn - Credit Suisse

While we’re topic, when does A350 ramp from an R&D perspective?

Greg Rufus

I am trying to remember.

Ray Laubenthal

Well, 2012 I believe is their first flight target but if A380 and 787 are any predictor we might want to add a year or two on to the first dates. So no significant impact in 2009, I doubt there is a big impact in 2010, Rob but we honestly; I am not sure of that yet.

Robert Spingarn - Credit Suisse

Thanks guys, very impressive quarter.

Nick Howley

Thank you.

Operator

Our next question comes from the line of Fred Buonocore of CJS Securities, please proceed.

Fred Buonocore - CJS Securities

Yes, good morning gentlemen, excellent quarter.

Nick Howley

Hi, Fred.

Fred Buonocore - CJS Securities

I just wanted to clarify Nick, and I know David and Carter touched on this is well. So if you look at your top line guidance and you strip out the contribution from APC. It appears that your revenue guidance is actually down from your original guidance, is that entirely comprised of your expectations on OEM are there other drivers of that?

Nick Howley

I guess, I would say Fred, it is sort of capturing our whole concern about the marketplace, I think if you do that math, ends up short of what $10 million or something like that, is that? First I would say that it is not a very big number on $800 million. And I would say, what you are seeing there, is our uncertainty, we are unsure about the OEM we are not feeling terribly confident about the commercial aftermarket we don’t think there is a big downside there and the question is there enough defense upside, to offset those risks. And we are concerned.

Fred Buonocore - CJS Securities

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

Greg Rufus

Now I will give you a wise guidance, Fred. If it weaken then please stop buying.

Fred Buonocore - CJS Securities

That’s very helpful

Greg Rufus

I told you that you'll find that helpful.

Fred Buonocore - CJS Securities

I laughed right into it.

Nick Howley

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

Fred Buonocore - CJS Securities

And is this replacement equipment for aircraft that are being just chewed up in the Middle East or --

Nick Howley

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

Fred Buonocore - CJS Securities

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

Nick Howley

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

Fred Buonocore - CJS Securities

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

Greg Rufus

I guess there is two ways to look at, two areas of inventory to look at. In the distribution channel we think it was roughly flat over the quarter.

Fred Buonocore - CJS Securities

Right.

Greg Rufus

And as we've told before they have contractual levels of inventory. Now if the demand continues to drop, that will be impacted, but it was roughly flat over the quarter. It's tough to get a number on the system wide airline inventory. But our general sense is there was some de-stocking over the quarter. And I don't, again Fred I don't have real good I don’t have good numbers on this. But just as history repeats itself I suspect that's not done. There is probably some more of that to come.

Fred Buonocore - CJS Securities

Okay got it.

Nick Howley

And we would hope, I would hope it can't go on through the air. And it would start to bottom out, somewhere mid year for us.

Fred Buonocore - CJS Securities

Okay well thanks very much and great quarter.

Operator

(Operator Instructions). Our next question comes from the line of Karl Oehlschlaeger of Macquarie Capital. Please proceed.

Karl Oehlschlaeger - Macquarie Research Equities

Hey guys good morning.

Nick Howley

Good morning.

Karl Oehlschlaeger - Macquarie Research Equities

Congratulations for the quarter. In terms of your margin, it's the real strong margin. We saw in the quarter, you talked a little bit about different things that were impacting it. One of them being mix and obviously the Boeing strike that lower margin business there was less. But can you talk about the impact, in sort of, in terms of numbers in basis points so what that was on the quarter. And then beyond that there was favorable mix sort of in general maybe give little bit more color around what that favorable mix was a result of?

Greg Rufus

Karl, to do detailed reconciliation would I think cause confusion. But again as Nick said, the big numbers for the quarter were the impact of the rift that we had in the fourth quarter and we had strong pricing. By far those were the two biggest items that improved our margin for the quarter of the EBITDA line.

If I start throwing numbers around, it would just confuse a lot of people with detailed reconciliations over a phone call.

Karl Oehlschlaeger - Macquarie Research Equities

Okay. With in terms of just sort of the favorable mix can you talk just qualitatively where is that outlook, what sort of products are generating higher margin time? When you say favorable mix are you talking OEM versus aftermarket or you are talking specific products versus or --?

Greg Rufus

What I would say is the favorable mix is made up of two things. One, we didn't shift pretty much to Boeing, and that's the lowest margin stock to be shifted typically. So that is just not doing that tends to give you little mix up. And I would say just sort of when I call the mix within the mix sort of the selection of parts and items that's sold through the quarter, were a little better than usual. But what I wanted to keep emphasizing here Karl is that, that's the tail kind of, that's the small number. The big number in the margin, in the better margin is cost reduction. This cost reduction carrying in terms of prior quarter and our normal pricing activity.

Karl Oehlschlaeger - Macquarie Research Equities

Alright, great, thanks.

Operator

Our next question comes from the line [Jack Wegner with MVX Asset Management]. Please proceed.

Jack Wegner - MVX Asset Management

Good morning. Could you just share with us breakdown of the backlog between defense and the commercial?

Greg Rufus

No, we do not disclose that.

Jack Wegner - MVX Asset Management

Okay. And is there any flexibility regarding the backlog of customers canceling contracts or orders?

Nick Howley

You mean can they go away?

Jack Wegner - MVX Asset Management

Yes.

Nick Howley

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

Jack Wegner - MVX Asset Management

Okay.

Nick Howley

We can not keep giving them 100 parts when they are going to produce only 60 airplanes. They can not cancel although they can stretch them out for sure, Defense Department always has the right to reject the contracts as long as they pay you for any cost incurred.

Jack Wegner - MVX Asset Management

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

Nick Howley

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

Jack Wegner - MVX Asset Management

Okay, thank you. Also lastly, you purchased some stock in the last quarter, do you plan on continue to buyback stock, or is there any plans to pay down debt?

Nick Howley

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

Jack Wegner - MVX Asset Management

Okay. Thank you.

Operator

You have no further questions.

Sean Maroney

Okay. Thanks everyone for calling in and participating in today's call this morning. And one last thing is you could expect to see our 10-Q files in the next day or so. Thanks again.

Operator

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

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