Triumph Group Inc (TGI) 2012 Q3 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2012 third quarter results. This call is being carried live on the Internet. There is a slide presentation included with the audio portion of the webcast. Please ensure your pop-up blocker is disabled if you are having trouble viewing this live 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 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. Good morning, everybody.

We had a third quarter of which we are significantly proud. It's the best profitability quarter in the Company's history. It was record -- obviously means record operating income and earnings per share. We had significant improvements in our operating margins. Specifically our Aerostructures operating margins were substantially higher as a result of our improved execution and realizations of synergies, about which we've been talking for a long time.

We've had a very strong yearto date cash flow generation. Dave will speak about that in a moment.

In addition, the integration of Vought is progressing very well. Those of you who attended our investor day, we spoke about a number of manufacturing decisions at that time, and those decisions have now increased to 30, of which ten of those decisions have been substantially completed, 18 are in the implementation stage, and two are in the planning phase, which means at this point in time we're tracking at approximately a $24 million a year run rate in our integration efforts.

Our backlog remains strong at $3.86 billion.

Just an additional comment. Since we don't give quarterly guidance, we don't feel that we missed any revenue. But to give you some insight, our nonrecurring revenues did drop during the quarter, and787 revenues slowed for the quarter. And this pattern will continue in the fourth quarter, about which I'll talk at the end of this call. In addition, the Aftermarket sales were down, but comparing -- but only compared to a record quarter last year, which was up 45%. In addition, our fourth quarter revenue will be up to somewhere between $888 million to $938 million, reflecting significant growth.

I'll comment on the fourth quarter in the year later. At this point, I'll turn it over for Dave for some information.

Thank you, Rick, and good morning, everyone. I would like to start with a review of the financial results for the third quarter, which as Rick said was the most profitable quarter in the history of our company.

Turning first to the income statement, sales for the quarter $826 million compared to $810.9 million for the prior year period, a 2% increase. As stated in the press release, if we adjusted for a drop in nonrecurring revenue and a decrease in the 787 program, sales growth would have been 5%. Operating income increased 36% to $117.6 million, with an operating margin of 14.2%.

Income from continuing operations increased to $65.9 million, resulting in earnings per share from continuing operations of $1.27 per diluted share, versus $0.88 per diluted share for the prior year quarter. Included this these operating results was $2.1 million pretax,which equates to $1.3 million after tax or $0.03 per diluted share of integrated expenses related to the Vought acquisition. Included this amount was $1.4 million of primarily noncash costs related to manufacturing moves. The prior year's operating results included $1 million pretax or $700,000 after tax of integration costs. Excluding these expenses from the current year third quarter would result in income from continuing operations of $67.2 million or $1.29 per diluted share.

Net income was $65.9 million or $1.27 per diluted share. Included in the line interest expense and other was $2.9 million favorable adjustment due to the revaluation of an earn out liability associated with a prior acquisition. EBITDA for the quarter increased 39% to $142.8 million. The number of shares used in computing diluted earnings per share for the quarter was 52 million shares.

For the third quarter sales in the Aerostructures segment increased 2% to $626 million, all of which was organic. Operating income increased 47% from the prior year quarter to $103.9 million, and included a net favorable cumulative catch up adjustment on long term contracts of $8.4 million. From a program perspective, the [cume catch] is broad based and reflects a balance between improving contracts and contracts where performance lessened. The cume catch is primarily attributable to net improved performance in labor, overhead and material costs, which we believe are sustainable going forward. The segment's operating margin for the quarter increased 510 basis points over the prior year to 16.6%.

In the Aerospace Systems segment, sales for the third quarter increased 7% to $133.3 million, all of which was organic. Third quarter operating income increased 7% for the prior year to $18.6 million,with an operating margin of 14%. The segment's operating results included $800,000 of legal costs associated with the previously disclosed trade secret litigation.

As we had projected and as Rick mentioned, sales in our Aftermarket Services segment declined to $68.6 million,an 8% decline from last year's quarterly record. Operating income was $6.9 million, with an operating margin of 10.1%. The quarter's operating results included $700,000 of expense associated with the American Airlines bankruptcy.

The next slide summarizes some key financial data related to the Vought acquisition for your reference.

With regard to pension, we estimate that our net underfunding at March 31, 2012, will increase by approximately $140 million since year-end,created by a significant decrease in the discount rate, partially offset by strong asset returns. We estimate that our pension expense or income for fiscal year 2013 will remain fairly close to what we had originally projected at the beginning of the year.

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

Our order backlog as of December 31, $3.86 billion. Heritage backlog increased 12.3% and 6.2% sequentially. Military represented approximately 30% of our total backlog.

Our top ten programs listed on the next slide are ranked according to backlog. In first place was the 747 program, followed by the Gulfstream G450 and G550 programs in second place. Third was the Boeing 777 program, followed by the Osprey combat helicopter in fourth. In fifth place Airbus A330, with 737 Next Generation moving up to sixth place. Seventh was the 787, and in eighth place was C-130 program. The 767 program was ninth, and in tenth place was Blackhawk helicopter. The drop in Blackhawk backlog primarily relates to a delay in new orders in anticipation of the next multiyear being awarded, as well as the loss of some Aerostructures volume on certain models to Sikorsky.

As we have stated previously, the order flow of Triumph Aerostructures can be quite chunky. For example, we have already booked almost $400 million of backlog in January. Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military and state total 46.9% of our revenue, and was broken down 69% commercial and 31% military.

Looking at our sales mix among end markets, the next slide shows that compared fiscal 2011 commercial increased to 51% and military decreased to 33%. Business jets increased 13%, while regional jets remained unchanged at 1%. Non-aviation decreased to 2%.

Finishing our sales analysis, the next slide shows our export sales for the quarter were $117 million, or an increase of 5% for the prior year.

Turning to the balance sheet on the next slide. For the nine months ended December 31, we generated $241.2 million cash flow from the operations before we made $97.7 million in pension contributions to the Aerostructures defined benefit plan. After these contributions, cash flow from operations was $143.5 million. CapEx in the quarter was $24.8 million, and$58.7 million year to date.

While we are pleased with our cash flow for the year, we have invested a fairly large amount, $66 million in inventory. The bulk of this investment is represented by investments in nonrecurring work and tooling associated with new programs and work statements, which will be turned into cash in the next few quarters as those projects have tools are completed and customers sign off is obtained. Included in this category is approximately $10 million associated with the Bombardier Global [7/8000].

In terms of production related inventory, we have remained diligent and have seen continued good work in that area. We now expect CapEx and investments in major programs for the year to be $110 million to $130 million. Net debt at the ends of the third quarter was $1.2 billion, representing 39.5% of total capital. Conversion activity on our convertible debt was $21.6 million for the quarter and $50.4 million year to date.

The global effective of tax rate for the quarter was 36.1% and reflects only nine months of estimated R&D tax credit due to its expiration on December 31. In addition, we filed a refund claim for approximately $29 million as a result of carrying back some of our post acquisition tax losses prior years. The quarters effective tax rate included approximately $1.6 million or $0.03 per diluted share of tax due to the recapture of the domestic production deductions taken in those years offset, by a net tax benefit related to the filing of our fiscal 2011 return.

Finally, as a reminder, our fiscal 2012 guidance excludes integration costs associated with delivery on the Vought synergy target, which totaled $3.7 million pretax for the nine months ended December 31, 2011, as well as any Q4 pension cumulative cash impact.

With $3.44 of earnings per share delivered through three quarters, approximately $4.70 of guidance suggests that Q4 EPS of approximately $1.26.

With that, I'll turn it back over to Rick.

Thanks, Dave. A few comments on the three quarters.

Our backlog, as we both indicated, remains strong. We remain focused on improving our execution, driving the integration and controlling our costs. As Dave mentioned, we are raising our guidance for the year. Our EPS from continuing operations will be approximately $4.70, excluding integration costs as Dave mentioned, based upon, A, our strong performance to date, current market conditions, current production rates, weighted average shares of 52 million, and revenues of $3.35 billionto $3.4 billion for the year.

Our approach in giving this guidance includes a couple of things that I'd like to comment on. We have to remember that we're coming off the best quarter in the history of the Company, and a quarter in which we saw a dramatic, almost step change level of margin improvement in our Aerospace -- I'm sorry -- our Aerostructures segment. We have a large increase in revenue, production and shipments, even at the bottom ends of our guidance, and a significant increase in the upper end despite the aforementioned slowdown in 787 sales and lower nonrecurring revenue. In addition, Boeing will make shipments of the 787 and 747 partially from inventory, which will delay some of our shipments to Boeing. For example, Boeing announced 747 shipments going from 35 to 42 next year. But some of these shipments will be made from inventory of planes already produced.

At that -- I'm sorry. A couple more things here I almost forgot. SAP, we mentioned before, is improving every day, as it -- but it continues to be a drag on our performance in Aerostructures. And that's against -- suggests a prudent approach to Triumph Aerostructures' portion of our guidance.

The activity level on our manufacturing sites associated with synergies continues to escalate, which creates long term savings of which we feel good, but has inherent short-term risk. Taking that into consideration, we are committing to a level of about equal to our very successful quarter three, as Dave indicated. We do not expect to go backwards in margins, and we expect to continue to improve in the light of quarter three's success. We are guiding to a number we can deliver. We will be disappointed if we don't surpass that number, but we don't want to overcommit and underdeliver, and that shouldn't be a surprise to anybody.

At that, I'll open it up for some questions.

At this time the officers of the Company would like to open the forum to any questions you may have. (Operator Instructions). Please stand by for your first question. Our first question comes from Julia Yates. Please state your affiliation, followed by your question.

Credit Suisse. Good morning, guys. Nice quarter.

Good morning, Julie.

Dave, on the Aerostructures margin can you parse out the improvement from the different items you mentioned; execution, synergies and lower pension? And then how do we think about the sustainable level going forward? Can we look at X cume catch, the underlying 15.3% as a starting point?

Yes, I think that our margins will -- to your point, will -- are sustainable. Both Rick and I had commented on that. I think we don't anticipate going backwards, and that's a place to build from. And particularly as more synergies come in.

The pension has nothing to do with the cume catch, because we use a pension expense at the beginning of the year and it stays that way. There will be an impact in Q4 when we set the forward year rate, but the pension has nothing to do with the cume catch. It did have something to do with improved performance year on year, but not the cume catch. And it's probably about $5 million for quarter would be pension.

The rest is really just solid execution by the people in the Aerostructures businesses on labor, overhead, and material costs. They're doing a very good job. Some of it is synergies, but most of it is just hand to hand daily blocking and tackling is really driving it. There's no big reserved that we flipped in getting to our cume catch adjustment.

Okay, great. And then on Aerospace Systems you guys anticipated the decline, and we obviously saw that with some increase in the legal. Do you expect this pressure to continue, and then what are the latest expectation on the litigation?

The margins really was -- it was something we had projected after Q1, and we're pleasantly surprised it didn't happen in Q2. And it's really the -- our Aftermarket business, particularly with some foreign militaries, just tends to all get bunched in one or two quarters here and there. So the whole drop in margins sequentially for Aerospace Systems was the aftermarket. And we think Q4 will come back a little bit in that regard. I'll let Rick address the legal.

I think the legal -- only one minor change in -- I don't know how minor it is, but minor change in the legal. Number one, you're all aware that the case was dismissed in Mississippi -- the civil case was dismissed. That's being appealed by Eaton. I don't know who knows how long that will take. Forever is my guess. Which is the plan for -- from some parts of the world. But I don't want to comment anymore, because the General Counsel's in the room here. He'll kick me.

But the other change -- the minor change in that is that there is a date set for later in 2012 for the criminal trial to go ahead in Mississippi, and our comment on that is the same as it's always been. We're going to vigorously defend the engineers. We don't think they did anything wrong. And that will proceed and go during -- go forward during this year, which means by definition the legal costs will increase to a certain extent.

And that's really all I have to say about that. I hope that answers your question.

We've built $1.2 million into the -- into our guidance for Q4 for legal. So slightly elevated level from Q3.

Okay. Great. Thank you.

Thank you.

Our next question comes from Rama Bondada. Please state your affiliation followed by your question.

Sure. Royal Bank of Canada. Good morning, gentlemen. Nice quarter

Good morning.

My first question was, can you give us a quick update on 747, 787? You said last quarter two 747s had slipped into the second half. Is that still on track, and where are we on the 787 ramp at Triumph?

I think both of them are going to ramp up as far as Boeing is concerned. As I indicated in my comments, some of the shipments that we have had on the 787 have been pushed to the right a little bit, and I think the 747 will also. But only because Boeing has planes in inventory now, and therefore they don't need some of the product that we ship them on both those aircraft. But both of those aircraft will help us relatively significantly in 2013. I think the fourth quarter will still be a little bit low on the shipments on the 787, but they're not going to stop us from hitting the announced revenue that we just talked about.

And remember, Rama, we had said we lost two last quarter and there would be a loss of one for the year. So we're gaining one of those back this quarter, Q4, and that's part of what is making Q4 -- our revenue is going to be up fairly dramatically from Q3. We're not addressing fiscal 2013 yet in terms of deliveries.

Right. And then on the Aftermarket side -- Aftermarket Services side, you said there was a slowdown that was military related? Can you give us the color on this?

Well, we've had some of the military business that is starting to -- and we haven't seen a big downfall on that thing, but obviously the -- a certain part of our business is in fact our military business, and some of the shortfall in revenue there was because of some of the APUs that we do for the military.

I think in Q -- the only place we've seen that decline so far, as Rick said, is in the Aftermarket. We -- you'll recall last year we sold a small business that -- in Milwaukee that was foreign military sales, very small million -- a couple million a year. And part of last year's huge Q3 in Aftermarket was just a slew of C-17 APUs that we had repaired. And we had commented all year that we weren't going to repeat that third quarter. But I don't think we've seen anything yet on the OEM side in terms of hitting this year's performance on military.

Great. Thanks a lot. Appreciate it.

Our next question comes from David Strauss. Please state your affiliation, followed by your question.

David Strauss, UBS. Good morning.

Good morning.

Good morning. On 787, just going back on that, can you give us a little bit more color in terms of what rate you're at right now when you -- when this Boeing schedule calls for you to ramp up, and are you actually a lower rate today than you were say six to 12 months ago on 787?

Our Q3 was clearly down from what it was a year ago. So when you -- we gave in the script -- in the press release that there would have been 3% extra revenue attributable to 787 in nonrecurring. Those are about 50/50 in terms of their contribution to that extra 3% of sales. You can calculate that. And we're all over the place on 787 because we sell to so many different customers. We sell to a little bit to Boeing and a lot to Saab and others. But we clearly have gotten the message in the schedule that Q4 is not going to be the ramp up quarter for us. And we're hopeful that that's Q1, butwe're not prepared to give that guidance yet. But it's not going to be Q4.

It doesn't indicate that we have any concern at all about the program in general.

Okay.

The program, in general, continues to be a good program and will contribute to our revenue and earnings going forward.

So when you look at Q4 with nice revenue growth, you're going to hear again in 90 days Rick and I tell you that nonrecurring revenue is down and 787 is probably down. And yet we're still going to deliver some nice revenue growth. So I think that's coming from the other programs.

Right. Okay. Switching to the business jet side, you've had some nice growth there the last couple quarters, yet it looks to us at least that 450 and 550 rates are relatively flat. Can you give us any color there, what's driving the bit of a pickup on the business jet side?

Well, I think the first thing that's happening, there is a -- there is life at Cessna. There is some increase looking there. We feel optimistic about that. If you listen to the Textron call, they said the same thing. We'll see an increased business from there, albeit from a very low base over the last year.

In addition to that, our Gulfstream business is in fact good, and our margins there are good. So we continue to produce those products. And as you know, we have won some longer term programs. So the business jet business that we're involved in is in fact good, but has room to get a lot better, significantly,as I said, coming from a very low base.

Okay. And last one from me, Dave, on pension, can you mechanically give us some help how -- with what looks like a meaningful drop in discount rates next year, how things haven't changed at least from the income standpoint?It looks like you're still talking about a decent boost in the income [side]. I know some of that comes through -- some of that gets hung up in inventory and comes through with a lag, but just mechanically how that's going to happen?

Okay,I'll give it a shot, but let me state for the record that I'm not an actuary, nor am I aspiring to be one.

But what's going on is there's about 100 basis points drop in discount rates. That's going to inflate our liability about $260 million, if we assume they stay flat between now and the end of the year, and that we earn exactly 8.5% prorated for the fourth quarter. And our assets will go up about $124 million. So that's how you get to the $140 million that I mentioned in the script.

And what I would tell you is that the bulk of our pension expense is on retirees, and we're -- there's still a significant number of actives, butthe bulk are retirees. So mechanically when the discount rate drops, that's also the number you use for the interest expense part of pension expense. And for us, that's going to largely offset the higher costs on the increased liability. So when you have an overly retired work force, the drop in the discount rate on expense does not have the same impact it might with a very active population.

In addition, we had blowout performance last year in terms of deferred gains, which are helping that as well. So that probably exhausts my detailed knowledge of pension. But it is going to be a little worse, we think, than what we projected, but not dramatically. And that's assuming things stay where they're at right now.

Okay. I kind of got it. Thanks. Helpful.

Okay.

Our next question --

If you feel any better, David, it exceeded my knowledge.

Our next question comes from Peter Arment. Please state your affiliation, followed by your question

Yes, Peter Arment with Sterne, Agee. Nice quarter, Rick and Dave.

Thank you, Peter.

A question, I guess -- I wanted to flush out on military, and not to pin you down, I'm talking about 2013, but we're not that far away, and you've seen kind of what has been discussed where the budgets are going. But when you think about kind of your top military programs, whether V-22 or C-130 or Blackhawk, C-17, how does the discussions -- or how does it look when you're thinking about those programs over the next 12 months?

I think there's -- on the programs that you mentioned, for example the C-17, we still continue to believe that there is at least short-term life in the C-17. I happen to think it's a longer term life. But a short-term life, which I'm defining as the next couple of years. Every time you turn around, they're going to cut the budget, they add one more C-17. So we are optimistic that's going to remain going.

The V-22 and the other programs that you mentioned, what we see is continued pressure for lower pricing on multiyear and/or short-term single aircraft type of margins. Our margins will be under pressure as we go forward. And that's no different than it's been the last two or three quarters.

I think there are a couple of programs that we're concerned about as we go forward, mostly in 2013. For example, the Global Hawk where we do the wings on that, we look at over a four year period of time, we'll have about between $50 million and $60 million of less sales in those four year period of time, which is 1% less sales in that product. So we are concerned about items like that as we go forward.

But other than the margin pressure on some of the aircraft, we have not -- we don't have any indication of cancellations or things of that nature. But there is uncertainty.

Yes, I mean, uncertainty, but it's fair to assume that when you look at some of the stability of those programs, you're not expecting on the OE side kind of a step down in terms of volume?

Not fiscal 2013.

Yes. And then, Dave, just a quick question on the CapEx, the guidance calls for $110 million to130 million kind of as a range for the year. You're at $59 million year to date. Can you kind of flush out a little bit what's going to go on in the next 90 days that's going to have such a big step up?

Well, first of all, Peter, all year we've been talking about CapEx and investments in major programs, so we're really $68 million, because that includes the $10 million of Bombardier.

Okay. Great.

And so we'll probably see -- when you look at the low end of the range, that's $42 million, you're probably going to see $10 million, $15 million on Bombardier in the fourth quarter. It will be some capital and some engineering that will go into inventory, and the rest will be normal CapEx. So I'm not -- other than that maybe $10 million on CapEx for Bombardier,I don't think we're expecting any step change here.

Okay, no, that's helpful. Thank you.

Our next question comes from Ron Epstein. Please state your affiliation, followed by your question.

Good morning.

Good morning.

In the supply chain, when you think about it as your ramping up, are there any areas you see tightness in terms of raw materials or fasteners or you name it?

No, no really. We don't see -- we're doing the same thing with our suppliers on some pressure on pricing, just like our customers are doing to us. But, no, we have not had any slow down or difficulty of obtaining any of our raw materials or parts that we need to acquire.

Lead times are going out a little bit, Ron, but as Rick said, we're not having -- as long as we're staying close to our suppliers, we're able to get the supplies. Okay. Great. Thank you.

Our next question comes from Ken Herbert. Please stateyour affiliation, followed by your question.

Wedbush. Hi. Good morning.

Good morning, Ken.

I just wanted to follow up on the synergies. You've again obviously updated the run rate since we met in November. Can you talk about the bridge now from the $24 million to the $50 million essentially over the next five quarters? And is that something we should think about on as sort of a linear, or are there any meaningful step ups you could -- you can at least talk to that we should be looking for as you move forward with this?

I think, just like we've said all along on that integration, they -- we have said consistently that the first $18 million was relatively low hanging fruit, and the balance up to $50 million was, in fact, longer term things such as shifting products from one area to another, one plant to another to become more efficient in determining where -- which plants can be more efficient in various products.

It's hard to point to one thing without going down every one of our product lines to give you -- there's no big bang in the month of June of next year that creates another $20 million. It's a matter -- it's a culmination of a lot of moves. And that's why we referred to in the beginning of my comments some of the manufacturing decisions that are still in the planning phase, or they're in the execution phase as we speak. And those are the decisions that will create significant more integration savings as we go forward.

So I think it's going to be semi-linear, Ken. I think it's going to grow every quarter, but it's not going to be exactly a straight line to $50 million.

Okay. That's helpful. Do these 30 projects you've identified and you've talked about, do those get to you the $50 million, or is that something where you've got --

Yes.

-- substantially more than $50 million?

More than $50 million.

It will get us to the $50 million. As we've consistently said, we would be disappointed if the number and time doesn't exceed $50 million. But, once again, that's a significant achievement getting to $50 million. So we want to make sure we achieve that and don't over commit. But we would be disappointed if it didn't go beyond that.

Okay. That's great. And just one final question on these. As you -- you're starting now to complete projects, it looks like, and you're making what I would argue is very significant progress here, tracking to what you've outlined and the goals you put in place, which is very encouraging. Has there been anything, as you look back over the last one to two quarters, anything that's been particularly surprising or issues that have come up in completing or implementing any of these decisions that maybe wasn't expected or has either gone perhaps more difficult or easier than you expected?

Nothing's easy.

Fair enough.

But I would say that -- I mean, some of the expenses and costs that we worked on over the last 18 to 24 months is -- some have surprised us. But on the other hand, they probably shouldn't have. The two companies, as I said consistently, come from different cultures. And so they've -- the companies have done things a little differently. But nothing that is -- we couldn't overcome. And there's going to be challenges in going beyond the $24 million run rate that we said we're at now. But nothing that we won't address and won't overcome.

Okay. Thank you very much. An excellent quarter.

Thank you.

Thank you.

Our next question comes from Michael Ciarmoli. Please state your affiliation, followed by your question.

KeyBanc. Thanks, guys. Good morning.

Good morning.

Dave, just for clarity, I want to make sure I got this straight on the operating margin. So going forward, you guys are comfortable with Aerostructures at that 16% to 16.5% and maybe a corporate operating margin at around that 14% level?

Yes.

Okay.

I mean I think -- I mean, are we going to hit that Q4? We're going to be around that. Obviously, the cume catch helps in the quarter, but when we look out, we believe our margins in this quarter are, in fact, sustainable. But as Rick just alluded,we've got a lot of manufacturing moves going on. That creates some distraction that we don't completely capture within our integration costs. So I think you're going to see a good result in Q4, but it's not going to be -- it could be a little less. But I think long term, we believe for sure those margins are sustainable.

Got you. How should we think about -- you talked about the military pressures on pricing. You'll obviously get some benefit from commercial volume increases -- 787 increases. Do you think that washes out at the margin line? Will there be a net gain or some net loss with maybe some of the mature military programs coming off line, or is it still too early to tell?

My view is it's too early to tell. We're in the middle of our business plan reviews. We're trying to see what we're going through, what military things are locked up, what has to be booked. I think we'll give you a good feel for that when we give our guidance in May, or late April, early May. I think it's a little too early.

Great. Then can you quantify or will you quantify any of the benefits that you're getting from the ERP? I know you guys haven't disclosed that in the past.

Well, we've never come up with a number, and frankly, Ken, we're not going to start now. We've had -- that SAPs been live for a while. We're -- like a lot of people who have gone through a conversion to SAP, some of the items are going a little bit slower than we had hoped, and it will affect some of the issues going forward. I talked about the SAP a little bit in my comments. It improves every day, but it does drag on our performance at the Aerostructures, the ex-Vought plants. And we're aware of that.

But in the long term, it's getting better every day. So in the long term, it will be a benefit to us. But I don't think -- I know we're not building anything in certainly in the fourth quarter. But during fiscal year 2013, it will build in some benefits.

I think on that one, Mike, I think we're really going to wait and see. And when we get to the point that it's back to where it was before SAP, and then when we start to get the benefits, I think we'll give you a "here's what we delivered," and maybe at some point we would then give a future "here's what we expect the benefit to be." But right now, [added to] distractions, I think we're reluctant to put out a savings target at this point.

Okay.

But that will come. That will come.

Okay. Fair enough. And then last one for me, at the investor day you guys talked about new business, strategic partnerships. You mentioned discussions with Spirit. Can we get an update on how some of those discussions are progressing and if you see anything getting across the finish line in the near term?

I wouldn't say that anything's across the finish line. I'm not so sure that anybody would ever look at it as being across the finish line. We're doing business with all the people that we mentioned at investor day, andwe're trying to forge solid partnerships with them. I can't point to anything concrete that we've done. I think the relationships are good, and we'll continue to work on it.

Okay. Fair enough. Great. Thanks a lot, guys.

Thank you.

Our next question comes from Myles Walton. Please state your affiliation, followed by your question.

Deutsche Bank. Thanks. Good morning, guys.

Good morning, Myles.

I guess to go back to the cash outlook for a second, you talked about previously I think better than $100 million in free cash flow, and certainly it looks like you're well on track to do that. Dave, you also mentioned the inventory. It sounded as though the inventory wouldn't be a source of cash in the fourth quarter, and you've done most of the pension contributions, with I guess $20 million left to go. Can you update us on the free cash flow for the full year, and maybe is the excess free cash flow going to be voluntary pension?

I don't think we'll -- I mean, I think if we get to the end of the year, late March, and everything's going very well, we may get a jump start on fiscal 2013 pension, butthere's not going to be a large amount that we're going to prefund. I mean, I think when you think of Q4, CapEx and investment in Bombardier is going to exceed depreciation by probably $15 million to 25 million, so there's a little bit of use there. No taxes will be paid, and, in fact, we might get the $29 million back. Obviously, that will be right to the bottom line to the cash flow statement.

I think receivables will be a mild use of as the sales go up, and I think we only have about $15 million -- actually, $15 million in pensions -- maybe $20 million, you're right -- that we're going to make -- we've already made it in Q4. So I think it's going to be another strong quarter, and I think we'll deliver more cash flow, certainly by year-end. But there's a few variables that are tied to how exactly we spend on Bombardier and whether we get the tax refund, but I think it will be a good quarter.

Okay. And then I guess on the cume catch-ups, this quarter is roughly the size of last quarter's cume catch-up. If you look at those two, can you compare and contrast where they were coming from? And also, maybe another way to look at, are these coming from long lived commercial programs that are starting their lives and initial conservative booking or from military contracts that are maybe in the end of life -- periods?

I think it's a little bit of all that, Myles. I mean, we don't use the real long blocks. Most of our blocks are a year or a little more, so we don't have this huge maturity, three years running off. We did have a few start-up programs that we were conservative on. I think we still have distraction of SAP, but that's coming down. So that was a head wind in both quarters, but probably much less so in Q3.

But I think as the synergies kick in -- and we're clearly doing a wait and see approach on these savings until they're locked in, I think it's -- I think it's mostly the synergies on the blocking and tackling in the factories. It's not -- I don't think it's much different, to answer your specific question, to what went on in Q2. There are a few closeouts that have a million here, a million there, but at the same time we have a couple contracts that have gotten worse, and we've set up provisions. So it's not all going in the right direction.

So as you progress through the synergy target though, isn't it natural to think that just mechanically you're going to trigger more EACs as you go along?

More cume cash -- more favorableness?

Exactly.

Yes, I would think so, sure. But I think there's too much uncertainty in the exact timing of when these synergies come in. I mean sometimes you need customer sign-offs,we've to build first articles, so I think we're trying to be rather prudent and not jumping those -- jumping the gun on including those good things in our EACs until they're sort of locked and loaded.

Okay. No, that makes sense. And then the military side. So I guess one question at a higher level, it looks like the bulk of it is coming from C-17 step down, or at least Boeing related military sales step down. When does that start to abate? I know fourth quarter last year was a fairly big military sales quarter. I mean does that continue to be a similar pressure point in 2013 conceptually?

Well, I think it's a pressure point all along. But as we said, consistently, there's still enough aircraft in the system -- backlog system to sustain us through at least 2013. Now tomorrow morning the military could cancel everything. I mean, that's the level of the uncertainty in all that stuff. But I don't see that happening, and I think that we'll hold on pretty well through fiscal 2013. Beyond that, it's hard to predict. But in the short term, I think we're in good shape there.

Is your production rate in 2013 the same as 2012?

Approximately. There might be one less. But on the other hand, the last budget that went through, they added one more. So it should be approximately the same as 2012.

Okay. And then one last one. You mentioned SAP a couple times. I think it may be a drag, but I'm not sure if it's a break even or a drag. Can you -- anyway to quantify whether or not it is working against the business?

It's definitely working against the business, Myles. We think it's --the rate of the headwind is coming down. But we took a provision in all our contracts, a we update our EACs every quarter, in the beginning of the yearonce we went live, and we assess that each quarter. And each quarter you experience some of it, and then you look out as to how much more is to come, and I think we're -- that's gotten better, but not dramatically. But it's still a negative.

And just to wrap up on the EACs, though, it sounds like a lot of this thing is [certainly] tied to the SAPs running better than may be expected at the beginning of the year. Synergies coming faster, they're spurring more EACs. So really the EACs are just an underlying indication of your performing ahead of your planned schedule at the beginning of the year, and it seems like if you continue to perform ahead of that plan, the EACs in some sense -- maybe material side the last couple quarters, but in some sense would continue.

I agree with everything you said except you said SAPs is doing better than we thought. You started with that. It's worse. But your punch line is correct that it's sustainable, if that's where you were going.

Okay. Great. Thanks.

And I don't -- Myles, I don't believe necessarily that the integration savings are coming faster than we had said they would. We said that the first 18 months would be up to $18 million. And after that, we'd get increases. And now we've said $24 million. I don't think that's better than we said. I think it's approximately what we did say at that point in time.

Okay.

So, I mean, I'm not integrating what we've done. I'm just saying that it's not that much better than we said. It's right on target, frankly.

Okay. Got it.

Thanks.

Our next question comes from Eric Hugel. Please state your affiliation, followed by your question.

Stephens. Good morning, guys. Good quarter.

Thank you. Good morning.

Can you talk about -- just to follow up, I think, Myles's question withregards to the SAP. I guess last quarter, you talked about [beginning] to thinking SAP would be a positive earnings contributor beginning in the first quarter of 2013. Are we still on target for that?

What I said, Eric, was, when I -- what I hope I said and I think I said was that in the first quarter we would get back to where we were pre-SAP.

Okay.

So we went live May 1. We're hoping during the first quarter we get back to that same level of productivity. And that during 2013 -- that would give us the base that during 2013, we would start to see improvement from SAP. So we're still trying to get back to where we were before we turned the switch on May 1. And when we give our 2013 guidance, I think we'll be able to give you a little bit of an idea of whether that's third quarter, fourth quarter. But it's not going to be in the four -- it's not going to be in the first quarter. We hope it's just sort of level at that point.

Okay. Fair enough. With regards to as we look at the Q4, with regards to the tax rate in terms of the R&D tax credit, does the tax rate step up because of lack of the R&D tax credit, or is that blended in for the year already?

It's already blended in, so that the rate for the fourth quarter should be like 35.6%. But it's already blended in.

Okay. Fair enough. Can you talk about where -- what you're seeing, where your heads are in terms of M&A opportunities? What you're seeing in terms of pricing and availability.

I think we have a number of companies that have been available. We've had a couple of acquisitions that we have looked at that have a very high military content that we've slowed down on, andour due diligence is working harder because we have that uncertainty to deal with. I think there's a number of other acquisitions that we have been the preferred acquirer without the preferred price. So some of the multiples are still a little higher than we wish to pay. And there remains a fairly steady input of acquisitions that we can, in fact, look at, and we're looking at them very diligently. But on the other hand, as we mentioned many, many times, we're focusing on our operations, our efficiencies in operations, and being very circumspective to the multiples that we pay or would be asked to pay going forward. But there's no lack of potential acquisitions

Is it safe to assume that the deals that you would be looking at or really entertaining would be more on the smaller side?

If you're defining smaller side by companies that range from $25 million to $90 million to $100 million, then the answer to that's yes. If you're defining as smaller as $500 million, that would be large. The last time I said that, we acquired Vought. So -- but on the other hand we're trying to be very disciplined in how we grow the Company. We're proud of the fact that we got below 40% debt to capital and will work very hard to have it maintain that level, et cetera, et cetera. But we are still an inquisitive company.

If you look at your military sales, I guess year over year, they were down about 5%, maybe $15 million. I guess you talked about some of that being the C-17 APU work that you had last year that didn't recur this year. Maybe that was $4 million or $5 million of that. Can you talk about -- is the bulk of that just C -- of that difference maybe C-17 production coming down or are there other things in there we should be thinking about.

Well, by all the programs, it would certainly be the C 17 would be the one that is down. There is -- some of that differential would be the Blackhawk, where Sikorsky is doing some of their production in their own plant that used to go to us, and those would be the two biggest reductions, if you will.

Great. Thanks a lot, guys.

Thank you.

Our next question comes from Steve Levenson. Please state your affiliation, followed by your question.

Stifel Nicolaus. Good morning, Rick and Dave.

Good morning, Steve

Thanks for all the detail up to now. On the manufacturing decisions, does that include or exclude other situations where you may have been able to renegotiate terms with suppliers?

Well, I think right from the beginning, we have been enthused by the fact that a lot of our suppliers right after the acquisition came to us and said, look, we know you want to potentially rationalize the suppliers. We'll help you out and give you a significant discount now so you won't rationalize out -- us out of the system. And that's been significant in some cases. So we continue to do that.

But that's not in the 30, Steve.

Okay, sothat's in addition.

Those are very real benefits that Rick talk about, but the 30 manufacturing moves are, indeed, manufacturing moves. Not just better prices from existing suppliers.

Okay. Among the suppliers, not included in that 30, do you see any situations that are actually becoming acquisition opportunities?

Not --

Not really

Not really at this point in time. And we haven't really approached it from that point of view, either.

Okay. Thanks. Seconds, Boeing's just completed a bump in the build rate on 737. There's another one or two more coming, and a 777 rate increase. Can you give us an idea of the timetable about when you start to deliver parts to satisfy the increased build rate?

I think in reality most of that will be in the new fiscal year, after -- in fiscal 2013.

We'll see a little bit of it, Steve. We're generally three, four months before they would start to -- I mean, some small amount might be before that. But generally we've guided people that if you take the month when Boeing delivers more and back up, maybe a quarter and a half to two quarters is when we should start to see some increased revenue.

That's a harder question to answer than you may think,because as we've consistently said, various of our plants have different delivery times, depending on the product they're delivering to Boeing. So if we're delivering the composite ductwork for the aircraft, that's early on. The insulation for the aircraft is early on, and some of them are a little later. So it varies with our companies.

Thank you very much. I guess that's it. Thanks a lot.

Thank you.

Thanks, Steve.

Our next question comes from Tyler Hojo. Please state your affiliation, followed by your question.

Sure. It's Sidoti. Good morning. Just curious if you could talk a little bit about Aftermarket Services?I was wondering how many of that business unit stems from the military market as opposed to commercial?And what I'm really trying to understand is just how much of a headwind is there in that segment, and maybe if you could kind of discuss what the -- what the growth outlook for that segment looks like?

I'm not looking at the -- I don't have in front of me the information on that -- on the Aftermarket Services. But memory tells me that it's about -- in that business, it's higher percentage commercial than the other. So it's a little -- it's less than 30%, which is our overall rate of military. And I think that the biggest exposure there, as some people have mentioned, is the C-17 APU in regards to that. So I don't think other than that, I don't think that there's a specific -- any more of a danger there of losing more business than the pressure we've already seen on the C-17.

Yes, I would agree. I mean, I think that is an important part of our business, butthe repair of APUs on the 200-some C-17s that are flying ,or at least that the USmilitary flies, we're going to see that stream of revenue for a long time. And so I think that we -- I don't think that the military business there is under pressure.

We do repair all the booms on the existing refueling tankers, and that tends to make the business -- you do I want get one of those a quarter, unfortunately. But we're going to get that work, it'sjust a little uneven. But I think you're just seeing this quarter, because of the dramatic increase last year, it'd show up as head wind. We don't see a lot of head wind in military going forward.

The other thing to mention, as Dave mention ad little while back, the foreign military sales company that we sold last year was part of the Aftermarket business. So those sales will not recur, obviously, because that company's no longer with us. And I forget the sales on that. They were relatively small

A couple million a year. $2 million, $3 million a year.

Okay. Great. So when think about the growth trajectory of this business, I mean is air traffic kind of growth going to get you close to kind of your organic growth prospects of this business? I mean, is that fair?

Yes,I think that we'll be -- our margins will be sustainable at low single -- 9% -- up to 9%, 10%, 11%, in that area. And I think our sales growth will be right along the lines of traffic and freight -- passenger traffic and freight growth.

And we've also always talked from a key driver, the age of aircraft, and there's a lot of aircraft, particularly on the commercial side, that are sort of getting through their warranty period, which I think is a big plus for us as a third party. So I think we have some good demographics going on there.

Okay. Great. And the second thing I wanted to ask you was just on the Mexican start-up. How's that tracking? Just if you could give us an update there.

I think it's tracking very well. As we planned right from the beginning, we spent have fair amount of money down there, but the benefits of the UScompanies, which are utilizing Mexico or products that are being produced down there, are benefiting by the low cost labor that we went there for. And that was our purpose in doing that. I'm just underlining that, because our purpose was to get low cost labor parts built while at the same time bring it back to the states and not have our plants and the states suffer from a labor point of view.

So it's approaching break even, Tyler, which is good.

All right. Great. Thanks a lot.

Thank you.

Our next question comes from J.B. Groh. Please state your affiliation, followed by your question.

D.A. Davidson. I think all my questions have been answered. Congratulations on the quarter, andthanks.

Thank you.

We have a follow-up question or comment from Julia Yates. Please state your affiliation followed by your question.

Credit Suisse. Hello again. Earlier this month there was an announcement that Airbus is outsourcing some of the lower wing panels to South Korea on the A320, and they -- I think Airbus described it as noncore work. And you talked in the past about an opportunity here for additional work on A320. Is this something that you were targeting, and is there more noncore work like this that Airbus is trying to offload?

I'm sure there is, and we have targeted and we're still working very hard on increasing our market share with Airbus. We have people working on it. I think that we have the ability to do so. We've been frustrated, very frankly, with Airbus. Every time they announce they're going to dollarize some product, somebody reminds them they are losing European jobs and they don't dollarize it. We've quoted them any number of times.

As you know, we supply the A330 wing, which is a very good program for us, and we hope to increase that, and we hope to increase working on other projects with them. I don't have anything specifically to tell you, but it's certainly a project that we want to increase our market share with them.

Okay. Thank you.

We have a follow-up question or comment from David Strauss. Please state your affiliation, followed by your question.

UBS. Just a clarification. The $4 billion revenue target that you put out there for fiscal 2015, what specifically does that assume for C-17? Does it assume you're kind of at a constant rate there?

Ten

Ten. Okay. Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group'sfiscal 2012 third quarter earnings conference call. This call will be available for replay after 11.30 AM today through February 7, 2012, at 11.59 PM. You may access the replay system by dialing 888-266-2081 and entering access code 1564054. International participants may dial 703-925-2533. Thank you all for participating, and have a nice day. All parties may now disconnect.