Triumph Group Inc (TGI) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss the fiscal year 2009 third-quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation. You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by management.

On behalf of the Company, I would now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without exclusive written approval.

At this time, I would like to introduce Richard Ill, the Company's President and Chief Executive Officer and David Kornblatt, Chief Financial Officer and Senior Vice President of Triumph Group, Inc. Go ahead, Mr. Ill.

Thank you and good morning, everybody. I am assuming you have all read the press release. We are, in fact, very proud of our quarter. In a very uncertain environment, our Company and our people have executed and produced growing earnings and cash flow despite the Boeing strike and the headwinds of an economic downturn.

Reviewing the slides and making some comments, as you will see, we had a very strong quarter, year-over-year growth in sales. Our operating income and earnings grew despite headwinds of, as I mentioned, the Boeing strike, which actually had a longer effect than we had estimated after our second-quarter earnings call, and a delay in the 747-8 and the 787 production.

Our backlog rose to $1.28 billion despite push-outs of the 787, which, since the beginning of the year, has equaled $80 million. Translated, what has happened there, as you remember, we have a backlog that is 24 months of purchase orders in hand. $80 million of that backlog since the beginning of the year has moved out beyond the 24-month period of time. So despite that, our backlog has risen.

Our Aerospace Systems operating margin is up significantly from the prior year. We do have lingering problems in the Aftermarket Services group, which continue to be impacted by losses at our Phoenix op APU operations. I will note here that, outside of the AP unit, the rest of that group is operating successfully, including Thailand that you may recall we had some problems with at the end of last year and that is operating profitably.

Our cash flow from operations was $25.8 million in quarter three and $76.8 million year-to-date. Our balance sheet remains strong and our earnings per share from continuing operations increased 33%, of which we are very proud. With that, I will turn it over to Dave.

Thank you, Rick and good morning, everyone. I would like to start off with a review of the financial results for our third quarter. First, turning to the income statement, sales for the third quarter increased 4% to $285.2 million. Operating income increased 6% over the prior year to $30.4 million with an operating margin of 10.7%. Income from continuing operations was up 22% from $17.9 million to $21.9 million resulting in earnings per share from continuing operations of $1.33 per diluted share versus $1 per diluted share for the prior year. The loss from discontinued operations was $818,000, or $0.05 per diluted share. Net income increased 26% to $21.1 million, or $1.28 per diluted share. EBITDA grew 7% to $42.2 million resulting in a 14.8% EBITDA margin.

Turning to our segment performance, in the Aerospace Systems segment, sales for the third quarter increased 5% to $222.8 million. We estimate that the Boeing strike had about a $26 million impact on quarter sales. Operating income increased 31% to $34.3 million with an operating margin of 15.4%. EBITDA for the segment was $42.8 million at an EBITDA margin of 19.2%.

The segment's third-quarter results included $600,000 of legal expenses net of insurance reimbursement associated with the previously disclosed trade secret litigation. As we said in our press release, the segment's operating income was impacted by a number of unusual items, including the Boeing strike, a charge to standardize the accounting of nonreocurring engineering costs, a charge to terminate a defined benefit pension plan and a favorable retroactive pricing settlement. The net unfavorable impact of these items on operating income was estimated to be approximately $2.8 million.

In our Aftermarket Services segment, sales for the third quarter increased 1% to $63.1 million. Third-quarter operating income decreased 66% from $6.5 million to $2.2 million at an operating margin of 3.5% as compared to 10.4% a year ago. EBITDA in the quarter was $5.4 million, a 45% decrease.

As mentioned in our press release, the segment's results continue to be significantly impacted by losses incurred at our Phoenix APU operations. Year-over-year revenue growth, excluding these operations, was 15% and operating margin was in excess of 10%.

Our order backlog increased 4% over the prior year to $1.28 billion, which is a 2% increase sequentially. Our military backlog increased significantly and now represents approximately 41% of our total backlog, up from approximately 34% over the past couple of years. I will remind you that our backlog takes into consideration only those firm orders that we're going to deliver over the next 24 months and reflects future sales within our Aerospace Systems group since the Aftermarket Services group does not have a substantial backlog.

I think it is important to note, as Rick said earlier, that the increase in our backlog is net of a decrease in our 24-month 787 backlog of approximately $80 million since the beginning of the year due to the push-out in the production schedule. Our overall 787 backlog continues to grow.

Our top 10 programs listed on the next slide are ranked according to backlog. Remaining in first place is the Boeing 777 program followed by the 737 next generation in second place. Third is the CH-47 Chinook followed by the Osprey V-22 combat helicopter in fourth place.

During the quarter, we conducted our periodic update of shipset values and at this point, the V-22 has replaced the 787 as our largest shipset value. To avoid any confusion on this point, this is all attributable to our success on the V-22 and is not attributable to any loss of 787 content. In fact, as I said earlier, our 787 content is stable and is actually growing. In fifth place is the Black Hawk helicopter with the C-17 freighter moving up to sixth place. The 787 dropped to seventh place with the A320 family in eighth place. Making its first appearance in the top 10 is the Cessna CJ series in ninth and the F-15 remains in tenth place.

Looking at overall sales, Boeing remains our only customer, which exceeded 10% of our revenue. Billings to Boeing commercial, military and space totaled 23% of our revenue.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal 2008, commercial aerospace decreased to 39% while military increased to 38%. Regional jets increased to 6% and business jets increased to 10%. Non-aviation decreased to 7%. If you adjust for the Boeing strike, however, the quarter sales mix would return to our traditional levels.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic growth for the quarter increased 1% over the prior year from $275.7 million to $278.7 million. Breaking that down by segment, third-quarter same-store sales for the Aerospace Systems segment was $215.6 million, an increase of 1%. If you take the Boeing strike into consideration, the organic sales growth was estimated to be approximately 9%. All of the Aftermarket Services segment's sales for the quarter were organic. Export sales for the third quarter were $64.7 million or an increase of 13%.

Turning to the balance sheet on the next slide, we generated $25.8 million of cash flow from operations in the quarter. CapEx in the quarter was $7.9 million and year-to-date was $31.3 million. You may have noticed that we changed the balance sheet classification of our rotable assets. As the footnote suggests, in the past, we classified some of these assets in inventory and some were classified in fixed assets. During the quarter, we standardized the treatment of all of our rotable assets onto a separate line within current assets.

Our rationale in classifying these assets separate and distinct from our regular inventory was twofold. One, we manage these assets separately and we are planning to increase our investments in rotables, particularly thrust reversers in the future. And two, we believe that separating these assets gives the public greater transparency in how we are progressing in our inventory control initiatives.

Net debt at the end of the quarter was $360.1 million versus $406.1 million at the end of March, representing 32% of total capital. The global effective tax rate in the quarter for income from continuing operations was 24.1%, which reflects the benefit of the retroactive reinstatement of the R&D credit back to January 1, 2008. For the remainder of the fiscal year 2009, we expect the global effective tax rate to be approximately 33%. With that, I will turn it back over to Rick.

Thanks, Dave. I will repeat a couple of things here. Future outlook on that slide, our backlog, particularly our military, as Dave mentioned, remains very strong and we remain very focused on improving execution and controlling our costs as we go forward.

We are, as the press release said, affirming our earnings guidance in that our earnings per share from continuing operations will be in excess of $5.40, which reflects 16.7 million shares and the continuing delay in the 747-8 and 787 production.

We do see headwinds and pressure coming as we approach our business planning. We are in the middle of doing that right now for next year and we approach everything with cautious optimism when most of the world is very pessimistic at most levels. We are not insulated, we realize, from the economic downturn, but we are not prepared, like many others, to make the downturn a self-fulfilling prophecy. We don't, as you remember, give any guidance at this time. We will at the end of our first-quarter call -- our fourth-quarter call rather, this year. So with that, I will open it up to any questions.

(Operator Instructions). Myles Walton, please state your affiliation followed by your question.

Oppenheimer & Co. Good morning, guys. A few questions. First, very good cash flow performance in the quarter and curious if you can give us, Dave, an update on your outlook for the full year. I noticed you have pulled back on the CapEx and just wondering how much that is sustainable at that pulled-back level on a go-forward basis?

Yes, I think our cash flows should remain strong in Q4. We have been pretty steady throughout the year, so I don't -- I would be disappointed to see us not deliver a solid amount of cash flow in the fourth quarter. And we will continue to dial back the CapEx from maybe our original guidance. I think we would see ourselves coming out in that $40 million to $50 million perhaps for the year, but we clearly have dialed back some of the spending.

Okay, that's great. And you had previously talked about maybe a $40 million or $50 million sales hit from the Boeing strike. And I think year-to-date, we are looking at $30 million. Is there a lingering effect to come in the 4Q period in the $10 million to $20 million range or did it kind of underrun what your expectations were going to be?

I think it was -- I don't think it was $40 million, $50 million. I think it was $0.40, $0.50 per share.

Okay.

And I think that there has been -- as I referred to -- a little longer lingering effect than the two months we had projected at our last call. And as anything like this, it took them, Boeing, a longer time to ramp us up and tell us to start delivering again after the strike ended. So I think there is still somewhat of a lingering effect there, but it should not, barring anything new, should not affect us any in the fourth quarter.

I think what we are seeing, Myles, there will be a little bit, as Rick said, nothing significant in the fourth quarter, but I think what we are saying is some of the product we sell indirectly to Boeing, it appears to us that perhaps either they are a little slower to gear up or perhaps they are managing their inventory levels. But there is a couple of our clients that won't get back to -- their production won't be at the same level that Boeing's production is at maybe until February, in one case March. So there are some lingering effects, but nothing even remotely close to what we saw in Q3.

Okay. And then your -- with both the Phoenix issues and the strike now kind of sized, do you think you are still in the bottom end of your previous sales guidance range?

I think that we -- we should still be for the year the 1.25 to 1.35.

Okay, great. And then moving over to Phoenix, can you gauge us as to what to look forward to in terms of improvements there? I think you had implied about a $5 million loss versus a $4 million loss last quarter and kind of what does that look like for the next few quarters and kind of give us the exit plan there?

Well, the business plan -- as I mentioned, we are going through our business planning process right now, which involves confirming the fourth quarter for each one of our companies and our groups and then next year's business plan. I think that what we are finding is that the APU unit expects to be back into the breakeven area by the end of this year. We haven't been there yet. We are going there in two weeks to confirm whether we believe that or not.

But I really will -- I read your report that came out this morning, Myles, and you say there are aftermarket trends adversely affecting the APU business. I think that what is affecting the APU business is the APU business. They are not executing the way they should be executing and that is clearly our fault. Whereas, the aftermarket trends and the rest of that group are relatively strong and they are performing very well in most of those companies. So it is the APU unit that is the one that is hurting us and we are working very hard on that, as I mentioned last quarter, with management changes and proper execution and removal of overhead.

We still would project a loss for the Q4, but as Rick said, we hope we would enter April 1 in closer to a breakeven mode at that business. That is the way we see it now.

Okay, and the last one, kind of more of a clarification I guess. You had the Cessna enter the top 10 and Cessna's production seems to be on the downward side of a cycle. Is this a reflection of marketshare gains? It's just surprising to me that your 24-month outlook there would have increased as opposed to decreased.

I think it is a little bit of marketshare gains, Myles, but as I said on a couple of calls, when you get to number 9, 10, 11, 12, 13, 14 in our top 10 programs, it is a couple million dollars. So it has always been in that range. It didn't spike that much. It just spiked enough to get ahead of a few programs. So I think we have had marketshare gains there. We read what you read. So I think it is -- but it's not some monster gain that we had in the quarter.

Fair enough. Good quarter considering the conditions you had to deal with.

Thank you.

Peter Arment.

Broadpoint AmTech. Good morning, Rick and Dave. Congratulations on the quarter.

Thank you.

The military business looks like it's very strong, 22% I think year-over-year comparison and it looks like CH-47 and the Black Hawk continue to be big drivers there. Can you give us a little better outlook whether you think that kind of growth can continue or just was this particularly strong shipments this quarter?

Well, I think if we have gained marketshare in any area, I think it has, in fact, been the military area. So I think I can say that we are very optimistic that our share of our business will remain up in the 40% plus level in military for the foreseeable future. I am not sure I would be willing to project another 10% increase in all of our business being in military because it is an unknown, it is uncharted territory. We don't know what the new administration is going to do about some of the programs that we're on. As we view it right now, the programs that we are on we think are going to be surviving programs. And we have gained some marketshare on those programs. So we remain optimistic, but I don't necessarily see it growing any more than that.

Okay, no, that's great. And then Rick, maybe you could just talk more about macro and I know you are obviously getting into your planning right now, but how do you approach it, the planning, from a strategic perspective versus previous beginnings of a downcycle from your experience? Can you just give us maybe a little insight on how you are approaching it?

Well, we are not really approaching it any differently than we have. I think that what we have seen so far at a number of our companies, they read the same things that we read and everybody reads in the morning. You open up and you read all the reports and you read how Boeing laid off 10,000 people or is going to. Cessna let off thousands of people, this that and the other thing. Our employees, when I go around and speak to all our employees, are asking what is going to happen to our Company. And as a result, when they sit down and do their reviews, they have a tendency of being very conservative in their point of view.

Our job at that point in time is to understand from all facets of their company -- their salespeople, their production people, etc. -- as to how much we should believe a downturn type of thing in their forecast or not. At this point in time, our business plan or our forecast, which we haven't finished yet, is relatively optimistic across the board. Where we will come out on this thing -- they submitted that in the middle of December and then we review it every month going forward with the group presidents and other people. So that is really the way we view it and we do it from the bottoms up and we see what -- like any other company, we have people who are very optimistic and project big numbers and then we have the people that fall in the sandbagger category.

Okay, that's great. Thanks very much. Congratulations.

Thank you.

Steve Levenson.

Stifel Nicolaus. Good morning, Rick and Dave. Nice to see the continued good results. Do you think -- I know you mentioned Cessna before. Do you think that is something that will stay on there for a long time or was this something that is fairly short order shipments?

I think, as Dave mentioned, I think it will stay either just in our top 10 or in our top 13 or 14, if you will, because it goes back and forth in current backlog. We all read that Cessna let some people off and Cessna is a very good customer of ours. So I would expect that a lot of the programs that Cessna will remain very significant to us and it is one of the things we would be concerned with going forward, but we don't see any end-of-the world situations at Cessna.

Okay, thanks. On the APUs, I guess, what, last quarter, you said you changed management and so this quarter, it is just a function of the decreases in capacity and less hours on the units that are out there?

It's a matter of working your way out of a -- digging yourself out of a hole, Steve. As I mentioned last quarter, one of the things that we have done is that we have changed and eliminated a lot of overhead. And that changes the functions of the people in the operation so we can become more efficient and build an operation that is, in fact, profitable with less overhead and that just takes time to accomplish.

Okay, thanks. The balance sheet obviously looking really good. What are you seeing in the acquisition pipeline and are there -- is there news about valuations, what you are seeing these days?

We have -- the acquisition pipeline is -- the acquisitions are clearly there. We're working on any number of them. The valuations -- at least from our perspective, we are being very, very careful on the valuations because, even though the government has given a lot of bailouts to a lot of people, the banks aren't rushing to the fore to lend money at this point in time.

So one of the reasons that we are being very judicious in regards to the multiples we pay and the fact that we are working very hard on our cash flow and our working capital management is to produce that cash so we don't put ourselves in a position where we are out of the cash to make judicious acquisitions.

I think that, in the multiple area, I think the sellers -- this may be overly obvious -- the sellers are not so quick to reduce their expectations of the multiple they should receive, especially when they are advised by investment bankers. So we are being very careful on that. They are coming down slowly, but surely.

Sounds like a good strategy. Last is a question for Dave. The new FASB regulations come in on the convertible next year. Could you tell us a little bit how that may or may not impact Triumph?

It will impact Triumph and I think you would be pretty close if you used about an increase of 400 basis points on I guess now $191 million of debt. That is all non-cash, but we will have higher interest expense of a significant amount next year as the new provision applies and basically saying that the debt has to carry a what would have been a normal interest rate at the time you did the deal. So it will not affect our cash flow, but will be a headwind on the earnings per share.

Got it. Thanks for the help with that. And we saw you did buy back some of those notes. If the acquisitions are expensive, do you see the repurchase of any of those notes as a continuing program?

I think we would continue to be opportunistic there. I think the prices we were able to get those at made that very compelling with an instant payback and anything that reduces the -- that is a real gain. That is an amount we won't have to refinance one day or pay down, so I think we would be opportunistic if those bonds were to get back into what I call silly territory. Be able to buy a Triumph bond at $0.80 on the dollar with an embedded equity upside for three years seems like a pretty compelling investment.

Great. Thanks very much.

Eric Hugel.

Stephens. Good quarter, guys. Sort of you talked about in the Aerospace business, you took -- you had a laundry list of sort of charges, but one of them you talked about is the Boeing strike. When you talk about that, are you talking about costs associated with the Boeing strike? Like I know you had to shut down or lay off some people temporarily. Are you -- in that number, are you estimating sort of profit that you would have made delivering the $26 million of revenue that you didn't deliver?

It's really more focused on the latter, Eric. It is really the lost sales and our typical gross margin that we would have gotten. That is why you saw in our comments and the press release that we used approximately, whereas, normally on actuals, we are pretty precise. That is not an exact science. We have not tried to capture all the inefficiencies and all the other things that would have impacted us. That is clearly a negative that we did not throw into that number. We were really looking at the lost sales and margin.

I am assuming then that the favorable retroactive pricing settlement was a sizable number to offset that?

It was a good number. It didn't offset it, but it was -- all the impacts, but it was a good number.

Okay. With regards to the Phoenix APU business, I am just trying to get my arms around why the business all of a sudden just seemed to fall on its face. I am just trying to figure out -- I mean it seems like -- did the business sort of drop off and then just you were left with too much overhead and is that a function of sort of the Thailand facility because I know Thailand was really built to sort of keep work locally and it probably -- a lot of that work came at the expense of Phoenix, is why that work was being done in Phoenix before Thailand. Is that sort of close to what is going on here?

I think that there are times, Eric, that we all try to read too much into certain things. Yes, we have somewhat of a problem with competition and macro issues within that parent overall industry -- a.k.a. the people at the airlines parking aircraft -- and therefore, you have some fewer throughput through the plant and that hurts. But the bottom line and the very direct thing, we had management there that built way too much overhead, so when you have a little sink in business like I just referred to and too much overhead, the throughput is significantly less profitable and in this case, goes to a loss and that has to be changed. That is why I tried to say the fact is -- it is not a big issue in regards to the industry necessarily. It was systemic with us and our management did not execute the way they should execute. I mean it is that simple. I don't know how -- what else to --

No, I understand. I guess my final question and I'll get back into the queue is -- I think I know the answer, but I just sort of want to hear you say it pretty much. With regards to I guess the $5.40, in excess of $5.40, I guess if you use just over $5.40, the implication is that fourth-quarter earnings are going to be, let's say, around $1. You talked about Boeing, the Boeing work versus third quarter being better. Is there anything that you are thinking about potentially? What are some of the potential issues that you are looking at? I mean I know traditionally you have always been conservative, but I am just trying to figure out is this your natural conservative or are there real headwinds in other places that we need to sort of think about?

Well, I would admit to being naturally conservative. I don't necessarily -- we didn't say just in excess of $5.40 also. We said it would be in excess of $5.40. I am not -- we are not building any specific item into that by the end of the year. We just didn't feel -- I mean I have used -- when I have talked to people a lot, I have used the thought that I'm sitting at my desk sitting in a chair and reading all the reports every morning and I'm expecting the anvil to come through the ceiling and hit me on the head because there is nobody who has much to say that is optimistic about the aerospace industry. We, on the other hand, are trying to be cautious, but at the same time be optimistic and not have all these reports be a self-fulfilling prophecy.

Understood. Thank you, guys.

Tyler Hojo.

Sidoti. Good morning, guys. I guess just in regards to -- I guess you made it pretty clear what the sales impact or what the perceived sales impact was from the Boeing strike. But what was it on an earnings base in the quarter?

We put it in that category, it's a lot of moving pieces, so I think we would prefer not to dissect that $2.8 million. I mean it was $26 million approximately of sales. We used our standard margins and as I said, we did not try and goose that number up sucking in every inefficiency and every medical cost that we had to incur for a furloughed employee. We really just tried to keep it at the gross margin level. So undoubtedly, the number would be higher than that. But we try to just bring out the largest piece of that.

Okay. All right. I guess that makes sense. And then just to kind of follow-on to Eric's question just a second ago, you know you look at kind of the fourth quarter and seasonally it has always been kind of your strongest quarter of the year due, I guess, to that year-end incentive plan that you guys have. You know, how do you kind of look at that weighing some of the delays that you guys mentioned in the press release and in the prepared comments?

How do we look at -- could you repeat the end of that? How do we look at what?

How do you look at kind of that being your seasonally strongest fourth quarter against what you kind of indicated with some of the push-outs in Boeing and some of the concerns that you had?

Well I don't -- the last month specifically and the last quarter and the last month of the quarter and the fourth quarter has always been a very strong period of time. Regardless of when -- years ago, our year-end was a different month and it was still the strongest month of the year. So I think that -- I think the fact that it is the end of the year and there is an incentive package overrides some of the issues with Boeing. We don't -- I think that we would have seen any further pushbacks with Boeing by now with two months left essentially. So I don't see that that is going to be a big issue. I think it will be -- I mean what we have on the books and what we are producing right now, I don't see any downturn on that at all. If anything, I see an upturn on what the military wants to produce and some of the other things. But I don't think it is a big issue.

Okay, thanks for that. And just on one other item here, I know you guys don't like to talk about kind of the legal trial, but there actually was an article that hit kind of earlier in the month just in regards to a potential hold being sought on the suit against -- Eaton's suit against you guys. Could you maybe just comment on that and what the implications are for legal expense going forward?

Well, our General Counsel is sitting across the table with a gun pointed at my head. There's really nothing more for us to comment on. I mean there is -- we certainly want to have a hold on the civil trial. Eaton certainly doesn't and that is what the article said in the paper. That is really no change from the last six months or whatever it has been. It is a very frustrating thing for us. I am sure Eaton would probably tell you it is frustrating for them, but I don't think there is any change in that. We haven't had any different rulings and there is going to be -- the lawyers have got to go through their stuff. They have got a budget.

And with regard to the expense, we now project the annual expense will be about $5 million and there has been $2.7 million incurred through nine months for this year. So essentially $2 million to $2.3 million in the last quarter.

But again, that's simply an indication that not a lot has been happening. That is the only reason for the drop. We haven't been expending any money because not a whole bunch has been happening.

I understand. Okay, great. Thanks, guys.

J.B. Groh.

D.A. Davidson. All my questions have been answered, but I just want to say congratulations on the quarter.

Thank you.

Karl Oehlschlaeger.

Hi, guys. Yes, it's Macquarie Capital and I just wanted to say congratulations on the quarter. It was well done. When you look at -- you talked about the anvil versus cautious optimism earlier. When you think about some of the data we have seen on the traffic side -- so we had some pretty -- we had basically capacity cuts in December, but your Aerospace -- your Aftermarket business, that segment increased 1% on the quarter. And I am not sure how much visibility you have in what is Aftermarket and your Aerospace Systems business, but when you think about aftermarket trends versus traffic and capacity trends, how do you sort of reconcile the two?

Well, I think that we look at certain areas of the country and the airlines that we serve. I referred to the fact that there are and we follow the reports of aircraft being parked and there is no doubt about the fact that that has affected our business and other businesses within the Aftermarket group and our Aerospace Systems where we have aftermarket and we look at that very much. And I think the other thing that we have seen recently is just subjective conversation with the Asian airline, which we serve in Thailand and they are not particularly optimistic going forward, except some of the major airlines like Singapore and Thai and some of the others that are the larger ones.

We are concerning that and we are concerned about that, but we also have specialty products, some of the nacelle work that we do on thrust reversers, etc. and we are working with customers that already have orders for certain things going through the fourth quarter. That is why we remain optimistic in a lot of those areas.

You also have to remember, a lot of the companies in our Aftermarket Services group are relatively small and they have a tendency of being specialized in certain products. So we are concerned about that and we are not eliminating that from our thought process certainly and we follow those statistics. Airplanes parked, seat miles flown, etc., but just don't -- not quite as pessimistic about it as some others are.

I think another way to look at it, and we have been very candid about our Phoenix operation and that has a whole lot more to do with execution than market, the rest of our businesses grew significantly in the third quarter and whether that is because we are gaining share consistent with our philosophy of a broad range of products and services. The airlines and the cargo companies want to buy more things from less people and we can offer an awful lot. We still see the opportunity to gain share and we are making the right investments, as Rick said, in thrust reversers and things where we think we are best-in-class. And again, we don't see a doomsday scenario.

We are also doing some business militarily in the repair and overhaul area, which has become a bigger part of our business in the last year.

And just sort of talking about the share gains and maybe -- can you talk a little bit about what it is on the V-22, where you are gaining share there. Is there any sort of overhaul work that is happening there that you are gaining share? You are saying that the shipset value increased, so I guess that is at the OEM side.

It is basically in the shipset value and some other things. I mean we provide, for example, a highlift actuation system that -- the tiltrotor on the V-22 and we have just gained -- the program is doing well and we are garnering more shipset value.

I mean how are you doing that? Was the incumbent dropping the ball or what is driving that ability to gain share?

I think it is a little bit of both. I think that we are gaining share because we are performing well and some others are not. And also I think we are proposing in certain cases that we go to a higher level assembly and given our performance, I think Boeing and the government have confidence that we can do that. So I think it is a good Triumph story, our success there.

Are you sort of kind of transitioning or trying to apply that success you had on the V-22 with other military programs too? Can you talk about that?

Well, it depends on whether it applies to the other military programs, but surely, yes. Our helicopter business across the board has done very well on the last year and continues to do very well.

Okay.

I don't know this for a fact, but I would -- I think it is a very good guess that our increase in revenue, despite the downturn, is to a great extent due to the helicopter business and that manifests itself in our top 10 programs and has virtually all year long.

Okay. And then sort of last question, thinking about -- well, the military is obviously doing well, commercial a little bit more sort of uncertainty in the outlook. Just regarding the leverage impact of higher sales or lower sales, what do you think you have left to do in terms of chopping wood on the margin side, irregardless of sort of volume or operating leverage? Obviously, you talked about the Phoenix APU business, but beyond that in the rest of the business overall, but maybe in terms of sort of an overall company EBIT margin percentage, how much wood do you have left to chop?

I would probably stop short of saying how much higher can we go with our margins, but I think that that is what we were referring to when we talk about addressing costs in the system, addressing -- becoming more efficient, notwithstanding you would become more efficient with more throughput, as you said. But I think that we work on that, we work on the working capital management. All of our company has done a better job in working capital management this year.

There are things happening in the marketplace, which are unusual. Some of the big companies -- I know this is a shock to everybody -- but some of the big companies are paying us slower today than they did before. I will purposely, at this point in time, eliminate Boeing in that regard because they don't do that. We are on another program with them. But it is working on the working capital area and working on the efficiency in the plants.

The APU situation is an extreme example of working more efficiently, but I think all our plants are looking at that. We have initiatives throughout the Company, up from training to a lot of other initiatives that are lean in nature to get better at what we do.

I think our margin improvement, particularly in Aerospace Systems, Karl, has been -- it has been somewhat volume, of course, but it has also been execution and to a certain extent price. So I think the execution price formula can continue and if volume holds, margins should continue to get better. If volumes drop, I mean that is a serious headwind, but I think it has been way more than a volume story. We have done a better job, period.

Okay, thank you.

Ron Epstein.

This is actually [Christine Leewag]. My question is from Ron Epstein. I'm calling from Banc of America-Merrill Lynch. And following up on the Cessna question from before, when do you see a -- when do you expect to see a slowdown in business jet production?

Damned if I know. I really don't know. Clearly, with two things happening, number one, an economic downturn and the government discouraging private aircraft. You will note that the last TARP bill initially included any private planes for anybody who took TARP money. When the bill came out, it didn't have that in it and that was as a result of a lot of people in the industry working very hard to stop the punishment of an industry that supplies a lot of high-paying jobs and growth going forward.

Having said that, I think two things are happening. Companies are tightening their belt and I think the use of private aircraft will, in fact, go down because of that, which in turn affects Cessna, Gulfstream, you can go on and on. So I think that clearly the deliveries in 2009 calendar will be a lot less than they were in 2008. But I think, again, there will probably be delivery levels that were equivalent to 2007 say, which were still at very high levels. So I think they will drop down from last year certainly or last year meaning the year we are in now fiscally next year. But I think it is still an industry that is, in fact, needed and will continue to grow over time, although perhaps not in the next year or so.

Keep in mind, its impact on our backlog remains to be seen because it is 24 months. At this point, I would say we don't have the visibility as to whether some of those drop-offs from Cessna are more deferrals or cancellations. So it could very well be that our backlog holds in there, but perhaps slides to the later part of the 24 months. So we just don't have that visibility yet.

Christine Leewag. Okay, thank you.

Eric Hugel.

Hi, guys. It's Eric Hugel again from Stephens. Following up on the business jet exposure, I guess we know Cessna, are you heavily exposed to any of the other business jet manufacturers or is it primarily Cessna?

I think it depends on what you mean by heavily. We do a lot of business with Gulfstream. We do obviously a lot of business with Cessna. We do business with virtually all of them, Eric, but when you use the word heavily, the answer is no. I think Cessna is our biggest exposure there and Gulfstream to a certain extent, a lesser extent and it is not -- as Dave said, we don't really have much visibility on what is going on there. But one of the reasons that I think we are in decent shape with Cessna, we might fall down a little, but most of the business we do with Cessna, we have plants right in Wichita and Cessna historically has liked to do business locally. So we think we can help them out if they are coming down a little bit. So I don't really think it is going to be -- it will have some effect certainly in the next year, but I don't look at it being disastrous.

You noted in your press release also that you took a $500,000 hit for some kind of acquisition fee, acquisition cost, a deal didn't go through. Is that pretax, after-tax and where is that? In the corporate expense item?

Pretax at corporate.

It is in corporate. It is worthy of a comment. When we make an acquisition, we use outside suppliers, if you will, to help us with the due diligence. And we are using law firms and outside accountants and in both cases, that translates to a lot of money. So it is not as if -- I mean when you get up to $500,000 for a decent sized acquisition, if you don't do the acquisition, well, you have got to expense all that.

Understood. And can you give us an update as to sort of how things are going with the sale of the casting business? It has been awhile.

Well, it is probably been entirely too long. We are still working very diligently on it. We have customers that we have to deal with in regards to finishing projects for them and the different buyers we talk to, some of them want certain customers, other they don't want certain customers. So it is pushing one button or one side of the water balloon and something happened on the other side of the water balloon. But we will get it done.

And I guess finally maybe just more philosophically, I guess referring back to your anvil falling on your head sort of waiting in your office, I mean do you have notions of being maybe more proactive in terms of sort of trying to anticipate a potential downturn and sort of really going after -- really going after maybe some of the fat ahead of a potential slowdown and hey, if it doesn't happen, great, but you are sort of ahead of the curve if it does?

I think the answer to that is yes, but the other side of that coin is any growing company has initiatives that they may or may not want to take to grow their business. So our major job is to figure out where do we cut some of the fat, if you will, and be diligent in the costs at our Company, while at the same time we have any number of initiatives that are potentially costly that will benefit our Company in the future. So we are not letting them go by the wayside either. So yes, we are trying to be -- we are always trying to be proactive in what products make sense, what costs don't make some sense, etc. And that is what we try to do all the time. In fact, maybe even more so now with everybody telling us that the world is ending by next Friday.

Can you give us a guesstimate, with your top 10 programs in your backlog, I mean what percentage is that approximately of your total backlog?

70% to 80%.

The top 10 are 70% to 80% of your backlog? Great. Thanks a lot, guys.

I'd go down toward the 70% range, but there is an awful lot -- we know -- we can give you our top 100 if we wanted to, but I think that the -- those are the big numbers.

All right, great. No, that's perfect. I appreciate it, guys. Thanks.

Myles Walton.

Just one quick modeling question if I could. Sometimes the unallocated corporate expense pops in the fourth quarter as incentive comp and I guess insurance, maybe self-insurance costs run through the P&L. Can you give us some sense as to whether or not you expect that to happen in 4Q and kind of the magnitude there?

It should not.

It should not?

Only on a minor basis, if there are things that we haven't considered. Most of the things we try to accrue all during the course of the year.

It won't be comp that drives it up. It would be maybe surprise on workmen's comp, surprise on IBNR on the health insurance or perhaps another due diligence type cost, which we certainly hope doesn't happen, but it won't be on the compensation front.

It should be less -- it should be a little less than Q3 hopefully.

That's helpful. Thanks a lot.

(Operator Instructions). Since there are no further questions, this concludes the Triumph Group's fiscal 2009 third-quarter earnings conference call. This conference will be available for replay starting today, January 30, 2009, until February 6, 2009. You may access the replay system at any time between those dates by dialing 1-888-266-2081. International participants dial 703-925-2533. Enter the access code 1323587. Once again, those numbers are 1-888-266-2081 and 703-925-2533, access code 1323587. Thank you all for participating and have a nice day. All parties may now disconnect.