Triumph Group Inc (TGI) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2011 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. (Operator Instructions).

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 explicit written approval.

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

Thank you and good morning everybody. We are very pleased, as we've indicated in our press release, with our earnings for the third quarter. Our earnings per share from continued operations were $1.79 excluding our integration costs and our organic growth in revenue for the entire Company was about 10%.

We also had improved organic operating income and operating margins in all three business segments. We maintained what was a significant year to date cash flow from earlier in the year. Our total year is $114.7 million of cash flow, which is in excess of our net income for the nine-month period of time.

The Vought transaction will continue to be accretive in the quarter. And we made significant improvement in aftermarket services, revenue growth and margins -- which is, if you remember, was a concern a few quarters back. The integration of Vought is progressing very well and we're on track to deliver annual synergies of $18 million within the first 12 to 18 months.

Our backlog remains strong.

In addition to all of the financial metrics that I went over and Dave will go over, there was another very positive development within the quarter that we have already disclosed in the Form 8-K filed in December with the SEC. On December 22 the Circuit Court of Hinds County, Mississippi dismissed with prejudice all of Eaton's claims in the pending trade secret litigation because the Court concluded that Eaton and certain of its counsel had committed a fraud on the Court in their conduct on the litigation.

While we don't generally comment on pending litigation, the dismissal of Eaton's claims is clearly a positive decision for the Triumph Actuation Systems, Triumph Group and other defendants. Beyond that, we think the Court's opinion in support of its ruling, which is publicly available, speaks for itself and there is no reason for us to add any further comment.

As expected, Eaton has appealed the dismissal to the Mississippi Supreme Court. The criminal case against the engineers remains pending and stayed. We will of course defend the dismissal on appeal. Thus, the litigation of these matters is not over.

Meanwhile our counterclaims against Eaton for significant lost business and other harm remain pending and we intend to pursue that aggressively. Otherwise we will address the issues related to these matters as required in our public disclosures and through our counsel in the court proceedings.

At that, I would like to turn it over to Dave.

Thank you Rick and good morning everyone. I would like to start with a review of the financial results for our third quarter.

Turning first to the income statement, sales for the third quarter were $810.9 million compared to $313.5 million for the prior year period, an increase of 159%. Operating income increased 163% to $86.7 million with an operating margin of 10.7%. Income from continuing operations improved 149% to $45 million resulting in earnings per share from continuing operations of $1.77 per diluted share versus $1.08 per diluted share for the prior year quarter.

Included in these operating results was approximately $1 million pretax or $0.02 per diluted share of integration expenses related to the Vought acquisition. Excluding these costs, income from continuing operations was $45.6 million or $1.79 per diluted share. For the quarter, earnings accretion from the Vought acquisition was approximately $0.40 per diluted share.

The loss from discontinued operations was $300,000 or $0.01 per diluted share. Net income was $44.6 million or $1.75 per diluted share. EBITDA for the quarter increased 127% to $103.1 million.

The number of shares used in computing diluted earnings per share for the quarter increased by 458,000 shares to 25.5 million shares, primarily due to the dilutive effect of the Company's convertible notes.

For the third quarter sales in the Aerostructures segment increased 302% to $613.5 million. Operating income increased 192% from the prior year quarter to $70.6 million with an operating margin of 11.5%. Overall margins in this segment were down approximately 60 basis points sequentially.

While the TGI legacy Aerostructures businesses were essentially flat from a sales perspective in the quarter, Vought sales were up close to 10%. Vought continued to perform from a margin perspective in line with our acquisition model and also in line with Q2.

Because of its size and its growth in the quarter, it represented a larger portion of the Aerostructures growth than it did in Q2. And as such, while accretive to earnings, it caused a decrease in margins for the segment. This is something that we would not expect to occur over a 12 month measurement period, but may occasionally impact one quarter to another quarter.

Organic operating margin increased over prior year by 50 basis points to 16%. In our Aerospace Systems segment, sales for the third quarter increased 12% to $124.7 million. Organic sales growth in the quarter was 7%.

Third-quarter operating income was $17.4 million with a 14% operating margin. Included in the segment's results were $700,000 of legal costs associated with previously disclosed trade secret litigation which, as related to the civil suit, has been dismissed with prejudice.

Our Aftermarket Services segment sales for the third quarter increased 45% to $74.7 million, all of which were organic. Third-quarter operating income increased 583% to $9.5 million with an operating margin of 12.7%, which represents a 370% year-over-year improvement. Q3 corporate expenses were higher than the prior year due to the integration costs previously mentioned, higher Mexico start up costs tied primarily to the timing of incentive recognitions as well as higher compensation costs.

The next slide summarizes some key financial assumptions resulting from the Vought acquisition. None of the assumptions related to pension or OPEB where the preliminary purchase accounting impact had been changed since last quarter. We have included the analysis here as a point of reference.

At the bottom of the slide we're clarifying the EPS impact of transaction and integration costs reflected in our guidance for the year. In Q1 the impact of the transaction and integration costs was $0.71 per diluted share based on 18.7 million shares. In Q2 the impact was $0.03 per diluted share based on 25 million shares. And as previously stated, Q3 integration costs based on 25.5 million shares was $0.02.

Our overall fiscal year 2011 guidance is computed on a share count of 25.8 million shares for the quarter, resulting in a weighted average share count of 23.7 million shares, an increase of [206,000] shares at the end of the fiscal year. This amount reflects the share issued in the Vought acquisition as well as our estimate of shares associated with convertible debt.

Based on these facts and estimates, the EPS impact of the year-to-date transaction costs will be diluted by year-end to $0.61 per diluted share. Similarly, I would suggest to the analysts on the call, as you work through your models for Q4 and full-year results, to take into account the impact of our quarterly versus full-year weighted average share counts.

The tax rate for the remainder of the fiscal year will be approximately 34.5% and reflects the resumption of the R&D tax credit.

Turning now to backlog, our backlog takes into consideration only those firm orders that we're going to ship over the next 24 months and primarily reflects future sales within our Aerostructures and Aerospace Systems groups. The Aftermarket services group does not have a substantial backlog.

Our order backlog as of December 31 was $3.9 billion. Same-store backlog increased 17% year-over-year and 4% sequentially. Military represents approximately 34% of our total backlog.

Total backlog decreased 3% sequentially. But as I indicated last quarter, Triumph Aerostructures' pattern of booking orders is not as uniform as our historical business and this can cause some chunkiness in our backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. In first place is the Boeing 747 program followed by the Gulf Stream G450 and G550 programs in second place. Third is the Boeing 777 followed by the Osprey combat helicopter in fourth place.

And fifth is the C-17 freighter with the Black Hawk helicopter in sixth place, seventh is 737 and in eighth place is the 787. The C-130 program is ninth and in tenth place is the 767 program.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of revenue. Net sales to Boeing commercial, military and space totaled 46.4% of our revenue and is broken down 65% commercial and 35% military.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal 2010, commercial aerospace increased to 49% and military decreased to 35%. Regional jets decreased to 1% while business jets increased to 12%. Nonaviation decreased to 3%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter increased 10% from the prior year. Breaking that down by segment, year-over-year same-store sales for the third quarter for Aerostructures was flat, reflecting C-17 and 777 reductions that offset other growth. Aerospace Systems segment same-store sales were $119.8 million, an increase 7%. All the Aftermarket Services segment sales for the quarter were organic.

Export sales for the third quarter were $111.4 million or an increase of 91% from the prior year.

Turning to the balance sheet in the next slide, we used $3 million of cash flow from operations in the quarter, which was after making $3.2 million of contributions to the Company's defined benefit plans.

As I stated last quarter, because Triumph Aerostructures' cash payments are frequently not tied just to delivery of the product over the course of the year, cash flow will be less uniform than our historic business. An example of this can be seen in the $25 million of inventory increased we saw this quarter. Almost all of this was attributable to a reduction in advance payments balance that Triumph Aerostructures had received and not to an increase in raw materials, [whip] or finished goods.

We remain diligent and focused in our efforts to control working capital, especially inventory. CapEx in the quarter was $27.5 million. We expect CapEx for the year to be approximately $95 million.

Net debt at the end of the third quarter was $1.3 billion, representing 46.8% of total capital.

The effective tax rate for the quarter was 30.5% and was favorably impacted by the effect of the recently enacted expansion of the R&D tax credit.

With that, I will turn it back over to Rick.

Thanks Dave. Looking out toward the future, as Dave has mentioned our backlog remains strong at $3.9 billion. A note here, the legacy Triumph Group numbers and backlog were up 72% year-over-year. We remain focused on improving our execution, driving the integration and controlling our costs.

As a result of all of the above, we are raising our earnings guidance on our APS from continuing operations will be approximately $6.75 excluding transaction and integration costs -- based upon, as you see on the slide, the following. A current production schedule that has been given to us by our customer base; preliminary purchase accounting results; weighted average shares increasing to 23.7 million, which excludes an estimate of shares from comfortable debt; and a tax rate of 34.5% for the fourth quarter.

So, with that I will turn it over to any questions.

(Operator Instructions) Peter Arment, Gleacher and Company.

Good morning, Rick. Good morning, Dave. You increased your -- the cost synergies on Vought. And I know you have given us a lot of color in the past that you have kind of identified initially right out of the box -- the corporate cost synergies. And then there were other areas that you were looking at on the supply chain, and also headcount from -- I guess it was either outsourcing or SAP.

Could you give us a little more color on what is flowing through here on this initial increase?

I think most of what has happened so far are based upon the original numbers that we identified that would take place over the first 12 to 18 months. And those are essentially in some of the corporate costs and some of the reductions in force that were very obvious.

The balance of what you spoke about, the resourcing and some of the other issues, really referred to the longer-term numbers that we identified as being in the $50 million range. And we also said -- I think I also said at that time that we would be disappointed if those numbers weren't higher than that over an approximately three-year period of time.

But specifically to your question, those numbers -- the $18 million I mentioned is just an increase from the $15 million that we mentioned last quarter, because we have had some additional savings that will be permanent over that 18-month period of time.

Okay, no, that is very helpful.

Just switching on to the aftermarket, very strong year-over-year growth and it continues to see some strength there particularly on the margin front. What are you really seeing there? Are we finally seeing a real step up in the Thailand operations or maybe just some additional comments on that?

I think that is two things. Number one, I think the aftermarket business especially in Asia has stepped up. All of our business in that area in the Aftermarket Services business are performing better.

So I think there is an increase in the overall market, which if you remember we've been saying for two quarters that we were operating [in] better. We felt good about the group and all we needed was a little bit of market push to feel better about it, and that has happened. But specifically you are correct.

Asia, the operation in Thailand is performing very well, significantly better than in the past. We feel good about that. It took us a little longer to get up to full speed there than we would have liked, but I think that is history now and the margins there are very good and the sales there are very good.

In addition to that, we have other operations here in the States that are doing very well. I have to give credit where credit is due, because we publicly announced that we were having trouble in our Phoenix APU operation months and quarters and quarters ago. And now that operation is doing very well as are companies in the group. So generally speaking we feel good about the Aftermarket Services group.

The other thing, Peter, is that when we look at all of the companies in that group -- I think as Rick has suggested -- they are all doing much better. And where we used to have some companies losing money, now there are a few companies, maybe two, that are in single digits and the rest are in double-digit margins. The result is obviously much better average margins, but it's nice to see all of the businesses perform improving.

That's great and just one quick last one. On the business jet OEM kind of market, we've definitely seen some more positive trends just on higher utilization rates and we're hearing about some initial build rate increases for this year. Only 12% of your revenues directly, but what directly are you seeing? [Does] that line up [with] of what you're seeing in terms of your discussions with OEMs?

We see a lot of very good things happening there. We're not -- the reason we are 12%, if you remember, that is a little bit higher than where we were as legacy Triumph.

And the reason for that is, in the business jet area, Triumph Aerostructures is in fact Gulfstream oriented. And we do a lot of business with them on the G450, G550 wings and that business has been very good for Triumph Aerostructures.

The rest of our business is -- some of the companies that are in the business jet business, the Cessnas, Raytheon, are not performing quite as well as the business we have with Gulfstream. So that is the reason that that content or percent of our business has risen.

I would say that I am not particularly bullish about the next upcoming 12 months in the business jet area. I think we will maintain our market share in that area and try to increase it, but I still think that some of the companies in that business are struggling.

Gulfstream is clearly stable, and as Rick said, Cessna -- our backlog had clear deterioration in the quarter on the non-Gulfstream side.

Right. Okay, thanks Rick and Dave.

Myles Walton, Deutsche Bank.

Good morning guys. On the $18 million in synergies as a target for the 12 to 18 months out, Rick is there any way for you to, or Dave, for you to encapsulate how much of that is running through fiscal 2011?

Myles, could you do us a favor and just speak up a little bit? We didn't quite hear all of the question.

Absolutely. So of the $18 million targeted 12 to 18 months out, how much was running through or is running through fiscal 2011?

Fiscal 2011?

Yes.

I would say it is a few million dollars at the most. But it's mainly the people, some people that have left, the real savings on some benefits and some of the insurances. Some will kick in a little bit more this quarter. A lot is tied to July 1. So -- which was a key date in the acquisition agreement in terms of changes to some things.

So there is a little bit of tailwind we're getting this year, but it is not significant.

Okay, that is really helpful. And then with respect to the organic growth in the non-Aftermarket businesses, you talked about the 777 and the C-17 being headwinds there and the backlog up in the organic Triumph Group business nicely year on year.

Myles, you're very low in here and you were cutting out a couple of times on the question. I know you started out asking about Aftermarket Services but I didn't hear much after that.

Sorry. I will try one more time and this will probably be the last question, I don't want to clog it.

The organic growth in the non-Aftermarket businesses seem to be awfully low relative to the backlog growth year on year. And I'm curious; do you see a significant reacceleration in the fourth and beginning of next year? And is what we saw in this quarter the C-17 being (multiple speakers)

I think, Myles, the answer to that question really becomes we will see some acceleration, because you've got to realize that the acceleration in the number of aircraft in our backlog really doesn't happen until -- well, most of it frankly doesn't happen until our fiscal 2012. So you will see some acceleration there but you won't see much of it in the balance of our fiscal year 2011. There might be some toward the end of our fourth quarter, but most of it will come in fiscal 2012.

I think if you quickly went program by program, we're seeing increased backlog at 737 and we're not going to see any increased revenue on that probably until the back half of fiscal 2012. 777 backlog is up dramatically.

But keep in mind we're below where we were this quarter as compared to last year. Last year we were still shipping most of our companies at 7 and we're at 5. Yet the backlog is filling up with 7 and probably we're a quarter or two away from getting to the 8 level. 787 is completely divorced in that the backlog is at an all-time high now as we continue to follow the current schedules. And even 747 is high because we're within the vision of two a month.

So we clearly have headwind on C-17 and 777 revenue this quarter, yet the backlog is starting to show the increased production rates primarily at Boeing, a little bit at Airbus too.

Okay, that's perfect. One last one on the balance sheet, Dave it looks like goodwill and intangibles had a shuffling of -- or a bit of an adjustment in the quarter, but I think you said the P&L assumptions remain the same. Did I have those numbers right and should we (multiple speakers)

There was -- without getting into all of the arcane accounting, a little reallocation between some non-amortizable trade names and goodwill which end up in different places and then a little bit of change on some of the smaller acquisitions we did last year as well. So there is no big change to the amortization on Vought at this point. That is completely static. Everything relates to either non-amortizables or non-Vought that changed in the quarter.

Okay, perfect. Thanks a lot.

Ken Herbert, Wedbush.

Good morning everybody. Just wanted to dig a little deeper into the Aerostructures margin. I can appreciate the 60 basis point sequential decline I think you mentioned, primarily because of mix as you had increased sales growth in the legacy Vought part of the business. But how should I think about that over the next few quarters?

Clearly as volumes continue to increase in legacy Vought and ideally soon in the legacy Triumph business, what kind of incremental margins or margin improvement specifically in the legacy 2008 Vought kind of the business should we be thinking about here over the next one to two years in particular, even the next few quarters?

(technical difficulty) Really answer that question a lot better in a couple of months as we go through our business plan reviews. We're in the process of meeting with all of our companies and reviewing their business plan for next year.

But I would expect that obviously as the build rate increases, whether it be at the Triumph Aerostructures or the legacy Triumph companies, that our margins will at minimum maintain where they are and probably increase to a certain extent. It is hard to tell you right now what is going to be because it is a matter of, as you say, the mix. And it is a matter when some of the programs cut in.

For example the 787, we have said it is -- has a positive margin right now but will be significantly positive when they get to production, which we're holding our breath just like everybody else. But we expect to be well into fiscal 2012. That's true with a lot of the aircraft build rates that we're getting.

The other thing, Ken, is the -- you could -- this isn't a precise number, but certainly the majority of the synergies will be in the Aerostructures group. So you could obviously, when you get to the run rate of -- I guess we're showing you $1.5 million a month or $4.5 million a quarter kind of run rate, by second quarter next year all -- the great majority of that should be in Aerostructures. Not all, but most.

And then as Rick said, I think our margins would tend to improve. But then you get 787 coming in, which we have always maintained would be dilutive to margins early but positive to earning dollars. And then after two to three quarters we think we get up to group average or above. So it will be a little bit of a yoyo I think.

Okay, no, I appreciate that.

Do you have a target as you have gone through -- obviously the Aerostructures business and Vought in particular, do you have a target that you're putting out or that you could share in terms of what might be a realistic assumption for an incremental margin on that legacy part of the business? You know, 20%, 25%, 30% is there -- I know obviously volumes as well as the synergies will be -- should make that fairly interesting. Is there anything specifically you can comment on?

Not at this point.

Ken, in our business plan reviews we go through margins on every single program on which we produce a product. And that creates a business plan model that we have and margins by individual location. But that is not something that we translate into public information when we go.

It will get obviously translated into our guidance for the full fiscal year next year. And it has been translated to the $6.75 we just announced this year. But we don't have a public target in that regard, no.

We are only about one-third of the way or less through our business plan reviews, so that really would be something that we'll try and give some color on, but I doubt we'll give you an exact number, in late April or early May when we give our guidance.

Okay, great. Just one final question then; as you look at specifically within the commercial OE side of the business, original equipment, as you are looking at volume increases on 737 obviously 777, 47-8 -- essentially across the portfolio, what kind of additional CapEx requirements are you potentially looking at over the next one to two years, if any, to support the volume increases?

As you all may imagine, we've had that conversation with Boeing and they have asked us a question if they go to -- when they go to 38, can we handle the volume going to 38? And the answer was, yes, we could handle 38. But if you go beyond, and Boeing has mentioned higher numbers than that, but if they go higher than that we would like some advance notice because there may be CapEx needed to support higher than 38.

But at this point in time, we have nothing in the planning phase for any more CapEx because we're not building in any more than what they have already told us that we would -- the build rate they would go to. So the answer to your question is none.

Okay, so 777 you can support the step up from 7 to 8.3 with existing capacity?

Yes.

Excellent. Thank you very much.

Steve Levenson, Stifel Nicolaus.

Everybody knows C-17 is declining. I guess my question is will the ramp up in 787 and some of the other programs be enough to maybe even more than offset them? And what do you have in the bullpen down below number 10?

Well, first of all, I will say that we're still expecting the C-17 to produce at least 10 aircraft through 2012 into 2013.

Secondly, the answer to your question on the increase in the other programs is yes. That will cover the loss of the C-17. Going forward, we're looking at significant increases in programs like the 747 Intercontinental, the 747 freighter, products like that. We have the A330 that looks good for us at a couple of our plants.

At some point in time we expect that they will award the tanker. And if they award the tanker (multiple speakers) we always do a lot of work on the A330 as I mentioned if it goes to EADS. Otherwise, if it goes 767, we do a lot of work on that. So there is enough in the bullpen, as you say, to offset the issue of the C-17.

Steve the one -- first of all at the bottom of the backlog ninth, 10th, 11th, 12th, 13th places are all very close to one another. So there is say lot of programs with strength there. And we don't disclose shipset values as you know.

The only one we've ever thrown out there is 787 and publicly we commented that prior to Vought it was well in excess of $1 million. And Vought, although they sold Charleston, has a decent amount of 787 contact in their other factories. So if you use the $1.5 million as a placeholder -- I'm not saying that is the number, but if you believe Boeing gets to build rate 10 at 120 shipsets a year times 1.5 million, you're looking at an awfully large number just from 787.

Great, thanks. Separately on Mexico, I know you've still got some start up costs. When do you think those will be down to nothing or nominal?

I think during fiscal 2012. We are -- all the -- two of the three buildings are finished. One is operational, the third one will be finished this fiscal year. And we're looking at a net contribution next year, small but net positive from Mexico in fiscal 2012.

Okay, great. Thanks a lot and I'm glad to hear the outcome on the legal action, of course.

As are we.

David Strauss, UBS.

Good morning. Dave, did you actually take up the guidance for anything other than the benefit of the R&D tax credit extension?

Say that again David.

Did the guidance go up at all excluding the benefit from the R&D tax credit extension?

Yes, it's primarily the R&D tax credit offset by the share count impact.

Okay. Could you give us an update on pension, maybe the outlook there and where you think discount rates might come in looking out three months, your plan performance year to date?

I wish it was March 31 because we like where we're at right now in the pension. Discount rates are below where we started the year -- where we started the acquisition of Vought. We were at 6.03%. I think right now -- I haven't gotten the January 31 update from our actuaries, but it will probably be down 30 basis points or so from there.

So there will be some headwind on the liability side, but our asset performance has been well above average -- in the high teens year to date. So we would expect, if today was March 31, that our unfunded liability would shrink rather by a substantial amount. And we would also expect that our expense for next year would moderate slightly.

Unfortunately there is a little bit of delay gratification on the cash side and that goodness really won't translate into reduced cash contributions until fiscal 2013. So the early view of cash for fiscal 2012 would be pretty comparable to this year.

Okay. And then could you give a little bit color what you're expecting full-year cash flow to operating cash flow and CapEx to look like?

CapEx will be $95 million approximately. I said that in the script. And I think cash flow in the fourth quarter will be around breakeven, maybe slightly negative.

There's still some negotiations going around with some customers on the timing of advances right near the end of the quarter that could have a [decent] impact. But I think we will still hold pretty close to net income for the year and if -- there could be a little bit of a swing there on the timing of some big milestone payments for Vought.

I will say that the legacy Triumph businesses are continuing to perform well on almost every measure of cash flow. Our DSOs are down. Our over 90 days are down at 31 of our companies. Most of our companies have less inventory. So I think it's -- I think we continue to make progress and we're just living with the chunkiness of Vought.

You're still on track for around $165 million in pension and OPEB contributions?

Yes, so it will be a heavy quarter; close to $60 million in pension for the quarter.

And then last one for me, corporate -- ex the acquisition and integration costs, is a good number to use going forward kind of in that $8 million to $10 million range?

I think so, yes.

Thanks a lot guys.

J.B. Groh, DA Davidson.

Down to kind of some clarification issues. I think someone asked on sort of breakpoints on CapEx for some of the programs. But on 787 in particular, you probably -- ready to go on that for quite a while, but what is the max you could do there? I know the goal is to get to 10, 12 a month at some point. Is there CapEx requirements to get to that level?

No. You're correct in your thought. We have been prepared for that for, like the rest of the world, longer than we wanted to be prepared for it. (multiple speakers) But at this point in time we have nothing more that we really have to do.

I want to make sure we couch this. We said for the next few years CapEx would be in that $90 million range, $100 million range. So will there be something for 787 and 777? Of course.

But I think your question is, are we looking at some big spike associated with that? The answer will be no. They will be covered in our -- I'd hate to say $90 million is normal. It's a lot of money. But it should be covered in that.

Right, okay, understandable. And then on the sort of the working capital portion inventory that sort of thing, all the -- of these five commercial Boeing programs in your top 10, four of them have all announced pretty big ramps here. When does that start to impact the cash flow? I guess the earliest would be 777.

I think you will see a little bit of headwind there in fiscal 2012, maybe a little bit at year-end here. And then you start to see a little bid of increase of 737 later in the year. But frankly, I think when we look at our business plans we would hope that we could get better in our inventory on other programs to help offset that.

So it mainly would be receivables, and as long as the quality of those receivables is good I think there will be a little bit of headwind there. That's what we're seeing in most of the reviews we're doing, is inventory mostly staying flat except for brand-new programs. But receivables could obviously be a headwind.

And I know that (multiple speakers) I'm sorry, go ahead.

(multiple speakers) Not huge. I guess the benefit of all of these things coming in little pieces is we're not going to go from 31 to 38 or 40 737s in one month. You're going to see a step to 35 and than a year later a step to 38. So it should be rather smooth.

Right. And then I'm guessing of course the leadtimes for each one of your operating companies is different. But it is pretty consistent between the different programs for 777, etc.? Or is it longer on the larger plans? Or how should we think of that?

It's a hard question to answer. We were discussing this a little while ago. Because of the diversity of our companies and the products they produce for Boeing, a lot of them are the same.

For example, in the company that we produced the acoustical and thermal blankets for the inside of the aircraft, that is all about the same time on any aircraft. Yet in some of the other aircraft where we have things like duct work can be in the early part of the production and some of our other products can be later on. So it depends on the mix and when the number actually gets [risen], when 787 comes in, etc. But we think we're prepared for that and the mix is what the mix is. When Boeing launched the product, that's when they get it.

Okay. And then lastly, obviously the legal cloud is certainly getting a lot better. But you are still budgeting for a little bit under $1 million a quarter for the time being in expenses?

Ronald Epstein.

Christine Lee Watt, BofA Merrill Lynch. My question is on aftermarket. It looks like organic sales are up 45% in the quarter. Can you give more color on what you are seeing? Is this something -- the kind of improvement we should expect going forward? Or is this a one-time thing in the quarter?

I think we were up rather dramatically in Q2. We were not expecting, when we started the quarter, to be at 45%. So I wouldn't dial in 45% for Q4, but the market is good, led by Asia as Rick said earlier. And there is clearly opportunities there.

So it's a good market right now. And I think we are performing well, which generally means you get more business, the better you perform.

I think the thing we have to guard against is -- well, we don't have to guard against it. Perhaps you have to guard against the fact that you hear the build rates are going up. I think we have to pay attention as to when those build rates are going up and when the 787 kicks in. Those are some of the unknowns.

And I think a lot of them, as we have said before, are going to kick in a little bit later and in the mid-to late part of our fiscal 2012. So I think that is what we're planning on. And that is what we're seeing in our business plan reviews with our companies.

And a follow-up. How about (inaudible) can you give us more color what you're seeing there?

On what?

The business jets.

As I said a little earlier in the call. I think we see the business that we have with Gulfstream has been very good. Our breakdown of business -- as Dave mentioned, the business jets are now about 12% of our business. And if you went back prior to the acquisition of Vought, it was about 9% of our business.

But we do see some lag in orders from some of our very good customers. As we mentioned in the acquisition call, legacy Triumph was somewhat Cessna-centric and the legacy Vought was somewhat Gulfstream-centric. I think we have seen and you have seen that the Cessna, Hawker and some others haven't quite done as well in their sales as Gulfstream has.

That is the way we -- that is what is happening with us. I am sure it is different with different people producing different things with business jet. I think it will get a little better toward the latter part of the next fiscal year, but I don't see any big growth right now.

Okay. Thank you.

Bill Hoffman, RBC Capital Markets.

Good morning guys. Just a question on -- you talked about the backlogs for obviously 777, 787 and 747 jumping pretty significantly. I just wondered if you could give us some thoughts on how, over the next couple of quarters, when you start to see the actual quarter orders ramp up, i.e. the revenues start to come out of those programs.

I think on 777 we will start to see the resumption in some of our companies to seven a month this quarter, but we won't be fully phased in until Q1. 737 will continue to build in the backlog. And we're not going to see that probably until our third quarter.

And 747 we probably don't see that jump in deliveries until this time next year, or maybe halfway through next year. And 787 and we'll leave to your judgment on when that will ramp up. But that backlog is at an all-time high based on the current production schedule that we have, so we are not going to predict 787.

That's fine. Just a second question -- Dave, you also talked about the jump in the receivables in the current quarter. Does that normalize next quarter? Do you start to get cash back out again? Or is that sort of a new level?

Receivables I think were actually down in the quarter. It was (multiple speakers)

I'm sorry, I meant the inventory.

The advances.

Yes.

Those are tied to -- a big chunk of those are tied to C-17. So with that build rate declining, we will not see that restored. It will probably -- we may even have a little more eating into that. And then it should level out as Boeing goes into a few years of consistent production at 10.

And then 747 is another program where we have historically gotten some advances in that should hold relatively stable. I don't see this quarter's amount being immediately replenished. That could be somewhat permanent.

And just from a seasonality standpoint, last year you had a pretty decent surge in deliveries I guess in fiscal fourth quarter. Do you expect a similar sort of move this first quarter or this March quarter?

I hesitate to be bullish on the answer to that question, but we have been in business since 1993. And the fourth-quarter has always had some sort of surge, whether it be build rate or companies positioning themselves so they receive their annual bonus or whatever. So we are -- we have reason to expect a good fourth quarter, which was the reason we raised our guidance.

Great, thank you.

Myles Walton, Deutsche Bank.

Just a follow-up, Dave, I wanted to clarify the cash side. I guess I didn't quite understand your comment previously about the fourth quarter. I think you said breakeven, but then you also said for the full year full conversion of net income and I was just trying to flip the two.

They're not dramatically off, Myles. We're really -- it comes down to the timing of a few big advanced payments. So I think that we'll be close to that number, whether we are at 110% of it or 100% of it.

I would like to give you a higher level of precision. We're in active negotiations. And the difference between some of these milestone payment showing up on March 28 and April 1, that is what we are talking about. And in some cases we just can't control it.

But what I was trying to signal was that the legacy Triumph businesses are continuing to generate cash very predictably, month after month, quarter after quarter. And the acquisition of Vought overall is performing well or as expected from a cash flow perspective. But it just has chunkiness.

So if it's negative in Q4, I would expect Q1 to be very good. If Q4 is better, then Q1 could suffer a little bit. That is just the reality of what Aerostructures looks like now.

So you're talking full conversion of cash from operations, not free cash flow?

Cash flow from operations for the full year, that is right.

Okay. And one other follow-up on Mexico within the quarter. How much was that?

It was just a little bit under $3 million. (multiple speakers) And again we'll -- some of that was tied to when we could recognize some incentives that were already baked into our guidance back when we gave our additional guidance in May. And so Q4 should be much less if we get to the point that we can recognize those incentives, which we think we will.

Got it. And this 34.5% rate in the fourth quarter, is that the go forward rate for future fiscal years as well?

Correct. It will certainly be -- Congress has done it to us again, so next year it expires and we will get nine months. So the bottom line is if we keep the R&D credit rolling along it will be 34.5% around that. But if we lose the last quarter next year it will be -- probably spike up to 36% or so.

Okay, that makes sense. Thanks a lot.

Ken Herbert, Wedbush.

Good morning. Just wanted to clarify; can you talk at all about any differences you're seeing within the aftermarket from commercial versus military demand?

Not really. To be honest with you, our commercial demand in the Company that has picked up, the two that I spoke about earlier, Asia and the APU and Phoenix are predominantly commercial in nature. So I think most of the uptick that we have seen has been from the commercial area and the commercial airlines.

With that said, military did not crater the way commercial did. So I think military has been more stable through these last two years and the down was commercial. And I think Rick is right; the spike up is primarily commercial.

So, interpret that as sequentially over the last few quarters, military has been relatively stable, then, in terms of aftermarket demand?

We have not seen an uptick or a downward issue for military at all in the Aftermarket Services.

Excellent. Okay, thank you.

Eric Hugel, Stephens.

Good morning guys. Just wanted to maybe follow-up a little bit, maybe hit some questions in a slightly different angle that were already asked. But your sales guidance for the year, adjust slightly under $3 billion you guys had said in the past. That is still good?

Correct.

With regard to the aftermarket sales rate, the $74 million, $75 million, nice number. I guess, one, is that sort of a good run rate we should expect? Or is there any seasonality in the third quarter?

And I guess, two, in terms of the margins was there anything sort of onetime-ish, sort of a gain or a booking rate change? Historically we've talked about the margins in that business being in the 10 to 12% range. I'm just trying to figure out if whether there is anything onetime-ish that we should be more cautious about going forward.

I think the run rate you saw this quarter -- I don't want to give too much forward-looking prediction in a business with no backlog. But one month into the quarter, I don't think we're seeing any slow down from Q3 rates and there was no onetime goodies.

(multiple speakers) Nothing special in the quarter that happened.

No big reversals or resetting of estimated profit margins on power by the hour, which is very small for us anyway.

It's just the volume there, that's great.

Volume and execution.

Volume and execution, perfect. In terms of -- can you quantify the R&D tax credit in the quarter, what the EPS impact was or the dollar amount?

About $0.16 and then offset by $0.03, $0.04 of shares, $0.05 of shares.

And I guess lastly, and maybe if your legal counsel is in the room with regards to the Eaton -- from a procedural basis with regards to the Eaton appeal, is there a timeframe where the Mississippi Supreme Court must rule? And if, let's say, they rule against Eaton, is there another court they can appeal to?

I don't know if there's another court they can appeal to. But we are told that the appeal could take another 12 to 15 months, something like that.

Okay, fair enough. Thanks a lot guys.

Chris de Young, Schroder Investment Management.

My questions have been answered. I just had a couple of quick accounting maintenance questions. On the liquidity situation, could you just talk about that?

Liquidity, we've got close to $400 million of availability under our revolver that is available. We have obviously some ability to do some leases under our debt agreements. And at the end of the quarter our accounts receivable securitization was at only $75 million and that is available up to $125 million.

I thought that you were upping that to $175 million in connection with Vought; not yet done or not necessary?

The facility is at $175 million. We have to hit a leverage target to go above $150 million. But today we're sort of constrained that the $120 million to $125 million level simply by the nature of our receivables.

And as you probably know, the only debt maturity that we have is October 2011. Eight months from now, nine months from now [with] a convert has a put and call feature that will most likely have the convert be redeemed and that is $179 million in cash.

That is the majority of the current [purse of] long-term debt in the balance sheet?

That and the receivables.

Okay, excellent. Thanks much.

Kevin Ciabattoni, KeyBanc Capital Markets.

Most of my questions have been answered; just one quick one. Can you talk a little bit about your ability to date to rework any of the Vought contracts where they were purchasing externally to bring that in-house?

The Vought contracts in regards to what?

(multiple speakers) In terms of their ability to bring an external purchases now in-house and obtain synergies that way.

Well, we are -- as we spoke about the synergies that we see and the savings that we see, and I referred to the $50 million minimum of synergies and savings we see, that relates to -- those numbers relate to the ability to bring some of their purchases in-house. And in-house in our case is defined as within the Triumph Group, not necessarily within their own Vought plants, but within the Triumph group.

And that is an ongoing process that we meet very regularly on and we're addressing that issue. So they are ready and some of the things are in fact being brought in-house. Or, we're getting synergy savings from our current suppliers if they are not coming back in-house. So there are issues that are very positive along those lines.

We already have a few early quick wins that were, again, easy to do. But that is the big difference between the 12 to 18 month target of $18 million and the [$50 million], is those take time to plan, execute them as you mention. And in many cases there's contracts with outside parties that have to be either honored or renegotiated.

So, we're expecting to deliver on those but not within the 12 to 18 months in a dramatic way.

That is helpful. That is all that I have. Thanks.

Are there any additional questions? Chris de Young.

One quick question for you on the convert which is under current [portion of] long-time long-term debt. Why do you have that categorized accordingly? There's not a put option on the part of the holders. Isn't it just you have the right to call them in beginning October '11?

The main reason it is current, and this happened before I think in 2008, is that because our stock has performed at the level it does, the holders have the right in these 90 days -- meaning January 1 to March 31 they have a special put rate. And we filed I believe an 8-K to that effect. As a result of that, even though I don't think anybody will do it, it makes it short-term under the accounting rules.

Excellent, thank you.

Since there no further questions, this concludes the Triumph Group fiscal 2011 third-quarter earnings conference call. This conference call will be available for replay starting today, February 1 through Tuesday, February 8.

You may access the replay system at any time by dialing 1-888-266-2081. International participants I'll 703-925-2533. Enter the access code 150-6608. (Repeats numbers). Thank you all for participating and have a nice day. All parties may disconnect now.