Triumph Group Inc (TGI) 2013 Q3 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2013 third quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you have having trouble viewing the slide presentation.

You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by Management. On behalf of the Company, I would now like to read the following statement.

Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance, or achievements expressed or implied in the forward-looking statements.

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com.

In addition, please note that this call is the property of Triumph Group Inc., and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time I would like to introduced Jeffry Frisby, the Company's President and Chief Executive Officer; and David Kornblatt, Chief Financial Officer and Executive Vice President of Triumph Group, Inc.

Go ahead, Mr. Frisby.

Thank you and good morning everyone. I want to add my welcome to our third quarter fiscal year 2013 conference call and webcast. As a reminder, there is a slide presentation included along with the audio portion of this webcast for your use.

During last quarter's call I took the time to restate several basic traits of the Triumph Group, describing how it's designed to be different and built to perform. I won't go through all of that again in this introduction but it will be useful to keep these traits in mind as we go through the presentation.

The traits that include how we are Tier 1 capable, that we have a very broad product offering, and that our organization is designed to be very nimble and very responsive.

I also mentioned last quarter that since the acquisition of Vought Aircraft Industries, our aerostructure segment has overshadowed the other two segments, and that over time, we expect it to re-establish the balance that was once very evident.

During the quarter we took strides in that direction with the acquisition of Embee Processing and the signing of the agreement to acquire Goodrich Pump and Engine Control Systems. While the latter acquisition will not likely positively affect Q4, FY14 should certainly benefit.

With that, we'll go over the financials on our fiscal third quarter. Let's start off on slide three. Q3 was in fact a strong quarter for us. We saw increased revenue, operating income growth and year-over-year operating margin expansion in all three of our business segments.

We also exhibited very strong cash flow generation that Dave will also cover. The integration of Vought continues to progress well, as it has, and we are still on track to deliver $50 million a year in run rate synergies by June of 2013.

In the quarter we continued to proactively and effectively manage our pension obligations which once again Dave will touch on. Our balance sheet continues to strengthen. Our backlog is also very strong. It's up from last year and is now approaching $4.1 billion. And as I mentioned earlier, we completed the acquisition of Embee Processing and signed the agreement to acquire Goodrich Pump and Engine Control Systems.

Now, on the next two pages there's some detail regarding the Company's Embee Processing which is now Triumph Processing, Embee Division, and Goodrich Pump and Engine Control Systems. I will not go over these two slides in detail. They're there for your review. I will, however, go over a few highlights.

On the Embee Division page, this -- I want to point out that Embee processing occupies a very strategic place in the aerospace supply chain. It used to be said that all roads lead to Rome. In many ways all parts end up at Embee. Embee does a tremendous amount of processing on a broad array of parts, and they're somewhat program-agnostic.

That is, regardless of who sells an airplane, who wins a contract, typically those parts end up at key suppliers, and Embee is one of those key suppliers. So we're very happy about that, how it complements our existing process capability, how it fits within our aerospace systems group since it processes parts that are manufactured within that group -- things like landing gear, things like actuation systems, and products of that type.

It certainly is a well-known and respected name in the industry, and has a solid, stable management team that will remain in place. So these folks we have in fact acquired and we will -- they will have a positive impact in Q4.

On the next slide, Goodrich Pump and Engine Control Systems, we want to just point out here that this acquisition is -- we've signed an agreement to acquire them. They are not in fact closed. We are still waiting for regulatory approvals, and once we get that then in fact we can welcome the team to Triumph. So as a result we don't see that there will be a positive impact to Q4 on this acquisition, but we do feel it's a very important acquisition for us.

It gives us a new product. This fuel system business is a new product area for us. It matches up very well with our other actuation companies. It's -- if you look at the representative engines and platform section, it's clearly seen here that it helps us to diversify somewhat within the industry, and that's in terms of markets and customers. So it helps us in a number of strategic areas.

It has a good size. It's nearly $200 million in revenue and a solid management team that will be staying with the company. And as I mentioned before, we're looking forward to officially welcoming them to the Triumph Group family as soon as we close.

With that, I'll turn it over to Dave and I will return for our outlook section in a few minutes. Dave.

Thank you, Jeff, 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 $890.6 million, compared to $826 million for the prior-year period, an 8% increase, almost all of which was organic. Operating income increased 14% to $134.4 million.

Included in operating income was approximately $300,000 of integration costs related to the Vought acquisition and a $2 million charge for early retirement incentives offered to certain Triumph Aerostructures employees.

Income from continuing operations improved 14% to $75.2 million, resulting in earnings per share from continuing operations of $1.43 per diluted share versus $1.27 per diluted share for the prior-year quarter. Excluding the integration costs and the early retirement incentives, income from continuing operations was $76.7 million, or $1.46 per diluted share.

EBITDA, excluding the early retirement incentives for the quarter, increased 14% to $162.5 million resulting in an EBITDA margin of 18.2%. The number of shares used in computed diluted earnings per share for the quarter was 52.5 million shares.

Looking now at our segment performance, sales in the aerostructure segment increased 8% to $676.8 million, all of which was organic. Third quarter operating income increased 13% from the prior-year quarter and included a net unfavorable cumulative catch-up adjustment of $5.5 million.

As we have previously pointed out, not all the synergies will contribute to favorable cumulative catch-up adjustments. A sizable portion will favorably impact the margins of our heritage companies, which are indeed higher sequentially and year-over-year. We remain on track, as Jeff said, to deliver or exceed our synergy target of $50 million annual run rate by June 2013.

The segment's operating margin for the quarter increased 80 basis points over the prior year to 17.4%. The segment's operating results included approximately $300,000 of integration costs. EBITDA for the quarter was $135.4 million and an EBITDA margin of 20%. With respect to SAP, we continue to make progress but are not yet in a position to see net savings being added to our operating results.

In our aerospace systems segment, sales for the third quarter increased 6% to $141.1 million, almost all of which was organic. Third quarter operating income increased 10% from the prior-year quarter to $20.6 million, with an operating margin of 14.6%. EBITDA for the quarter was $25.3 million and an EBITDA margin of 17.9%.

With respect to the quarter's acquisitions we made in this segment, we expect Embee to be accretive in fiscal 2014 to earnings and for their margins to be at or above segment average. With respect to Goodrich, we hope to close before the end of the current fiscal year, and intend to finance the acquisition through the issuance of high yield notes.

We expect the acquisition to be immediately accretive to earnings, but dilutive to our margins. With that said we believe the earnings potential of this business is much greater than what it earns today, and we expect the margins to grow the in short to medium term to the point where it reaches at a minimum segment average.

During the quarter, the segment's operating results included $900,000 of legal costs associated with the previously disclosed trade secret litigation as well as $700,000 of costs associated with Hurricane Sandy. As in last quarter's call we thought we would offer a brief note on the status of the trade secret litigation with Eaton Corporation.

The dismissal of all of Eaton's claims against us remains on appeal before the Mississippi Supreme Court. We continue to prosecute our counterclaims against Eaton before the State Trial Court of Mississippi.

The State Trial Court has indicated that it intends to set trial on the counterclaims to begin on November 4, 2013, although no order setting the date has yet been entered. In the meantime, discovery has resumed and pretrial practice will continue.

Our antitrust claim also remains pending in North Carolina. To anyone who wants to know more, we commend you to the documents filed in the public record and prefer to let those documents speak for themselves.

Our aftermarket services segment reported sales in the third quarter of $74.6 million, an increase of 9% over last year, almost all of which was organic. Third quarter operating income increased 42% over the prior year to $9.9 million, with an operating margin of 13.2%. EBITDA for the quarter was $12.1 million and an EBITDA margin of 16.3%. Included in corporate this quarter was approximately $1 million of due diligence costs.

The next slide is a pension OPEB analysis for Triumph Aerostructures for your reference. With regard to our pension liability at December 31, 2012, our net underfunding has improved slightly since the beginning of our fiscal year.

Looking at the components, we estimate our gross liability has increased approximately $120 million, which is almost entirely due to the drop in discount rates. On the asset side the combination of large contribution and excellent asset returns has allowed us to more than offset the increase in the liability.

As we discussed before, the rules on recognizing asset returns in excess of actuarial assumptions and the rules on actuarial losses due to discounts rate decreases are not in symmetry. As such, we expect that our fiscal 2014 pension income may be less than what is reflected on the slide.

Under our accounting method for aerostructures, a portion of this fiscal 2014 unfavorable item will be required to be booked in Q4 of fiscal 2013. While the equity markets for January have been quite stellar and discount rates have ticked up a few basis points, we estimate the impact on Q4 could be in the $5 million to $10 million range.

This could obviously change in either direction based on how discount rates and assets perform between now and March 31st. This potential cost is not reflected in our guidance.

In addition, as we mentioned last quarter, we offered an early retirement incentive to our bargaining unit in Dallas which was concluded in the third quarter and resulted in a $2 million charge in the quarter.

This charge is reflected on the face of the income statement. For segment reporting, you will see that we included this cost in corporate. While these actions create expense in the year, mostly noncash, over the long-term they reduce our pension obligations, reduce risks and volatility in future years.

Lastly, one of our major actions related to the synergies will result in the closure of a portion of our Dallas facility. This could create a pension curtailment in the fourth quarter, which we currently estimate to be between $10 million and $12 million.

Turning now to backlog -- our backlog takes into consideration only those firm orders that we are 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 12/31 was $4.07 billion, an increase of 5% over the prior year. Heritage Triumph backlog decreased 2%. Military represented approximately 28% of our total backlog.

Our top ten programs listed on the next slide are ranked according to backlog. In first place is the Boeing 747 followed by the Gulfstream G450 and 550 programs. Third place was the Boeing 777, followed by the C-17 freighter.

In fifth place was the Boeing 787 with the 737 next-generation in sixth place. Seventh was the Airbus A330 and in eighth place was the Osprey combat helicopter. The 767 is ninth, and in tenth place is the C-130.

Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military, and space totaled 50.1% of our revenue and was broken down 73% commercial and 27% military.

Looking at our sales mix among end markets, the next slide shows that compared to Q3 of fiscal year 2012, commercial aerospace sales increased by 22% to $516 million, representing 58% of our sales; whereas military sales of $243 million decreased 9% over year-over-year and represented 27% of total sales.

The drop in military sales was attributable to less C-17 deliveries in the quarter as compared to last year, some deferrals in the current quarter at customer's request, the continued impact of H60 being resourced within Sikorsky, and a significant slowdown on C-130.

Business jet sales decreased 1% to $106 million, and represented 12% of sales. Regional jets remained unchanged at 1% and non-aviation accounted for 2%.

Finishing our sales analysis, the next slide showed our sales trends for the quarter. Total organic sales for the quarter increased 7% from the prior year. Breaking that down by segment, all the aerostructure segment sales for the third quarter were organic.

The aerospace systems segment same-store sales for the quarter grew 5% to $139.8 million. The aftermarket services segment same-store sales grew 6% to $72.1 million. Export sales for the quarter increased 8% to $126.3 million.

Turning to the balance sheet, on the next slide, for the nine months ended December 31, we had very strong cash generation. Year-to-date we generated $334.4 million of cash flow from operations before we made $103.8 million of pension contributions to the aerostructures defined benefit plans.

During the quarter we contributed over $47 million to the aerostructures defined benefit plans. After these contributions, cash flow from operations was $230.6 million.

There was inventory growth of 15% since 3/31/12. A significant portion of this growth is attributable to investment in the Bombardier Wing, investment in Tanker non-recurring costs which will be invoiced in fiscal 2014, an increase in unresolved assertions, and reduction in advances and inventory primarily to support new programs.

We remain focused on improving our inventory management and believe we can do better. For the full fiscal year we expect cash flow available for debt reduction prior to acquisitions to be between $180 million and $200 million.

CapEx in the quarter was $28.5 million and $89.7 million year-to-date. We expect CapEx and investment in major programs for the year to be approximately $140 million to $150 million.

Net debt at the end of the quarter was $1.1 billion representing 36% of total capital.

The global effective tax rate for the quarter was 36% and included a true-up of our tax expense to the actual tax return that was filed in December. We currently estimate the benefit of the retroactive restatement of the R&D tax credit to be approximately $4.5 million, which will be reflected in the fourth quarter. Therefore, the global effective tax rate for Q4 will be approximately 32.3%. We currently expect minimal cash tax to be paid in fiscal 2013 and fiscal 2014.

We are continuing to study the potential move of our Jefferson Street facility. We have made progress with a tentative lease deal with the landlord which, if we decide to relocate, will hopefully de-risk the move from a customer perspective.

As you saw in the press release, we expect our revenue for the fiscal year to be approximately $3.65 billion and raised our full year EPS guidance to approximately $6.05. Therefore, this would imply that we expect Q4 EPS to be approximately $1.53 which includes the benefit of the retroactive reinstatement of the R&D tax credit. It excludes integration costs and early retirement incentives that we have taken to date or those that may occur in Q4. In addition, please note that the EPS guidance does not include any unfavorable cumulative catch-up adjustment in Q4 related to fiscal 2014 pension expense, any pension curtailment, or any deal costs related to the Goodrich acquisition that would be due upon the closing of the transaction.

With that I will turn it back over to Jeff.

Thank you, Dave.

Turning to slide 17, which is our fiscal 2013 outlook, I'll reiterate that the backlog remains strong, so we're in good position to continue our growth. As always, we remain focused on improving execution, driving integration and controlling costs. We are in fact positioned to benefit from increasing OEM build rates and capitalizing on new opportunities. There are a lot of moving pieces out there and we certainly like our chances to take advantage of them.

Fiscal year 2013 revenue, as Dave pointed out, is expected to be approximately $3.65 billion, and we are raising our earnings guidance, that's earnings-per-share from continuing operations, to approximately $6.05, which includes benefit of retroactive reinstatement of R&D tax credit, and excludes integration costs and early retirement incentives. And this is based on our year-to-date performance, the current market conditions, the current production rates and the weighted average shares of 52.5 million.

And as a reminder, there is an important day coming up. We have Investor Day scheduled on February 20 of this year in New York City. We hope as many of you as possible will attend.

At that time you will learn a great deal about Triumph gaining insight into why we are in fact designed to be different and built to perform. You will meet some of our senior executives, and learn more about our plans for our Jefferson Street facility.

On the financial side we will not be providing fiscal year 2014 guidance at that time, as we normally provide that during our May call. We will, however, be updating our long-term guidance.

While short-term uncertainty leads us to be somewhat conservative in the short-term, we remain very bullish on our long-term prospects. And we're confident that when we lay out our view of our future, you will share in our optimism.

At that, we will open the line for questions.

At this time, the Officers of the Company would like to open the forum to any questions that you may have. (Operator Instructions). Our first question comes from David Strauss. Please state your affiliation followed by your question.

Good Morning. David Strauss, UBS.

Morning.

The implied guidance for the fourth quarter on the sale side when I -- when I adjust for Embee being in there it looks like organically, you're expecting revenues to be down a little bit year-over-year. Could you just talk about what's going on there? Is there anything unusual in the fourth quarter?

I don't think there's anything unusual, David. I think that, you know, it's -- I think it's a little bit of uncertainty on military and a few more customer deferral requests coming in. So it is consistent with our overall guidance. Embee is not a huge amount of revenue, but nothing overly different than what we have talked about before or talked about on the calls in our earlier comments.

Okay. And, Dave, on these unfavorable cumulative catches, you guys have been taking on aerostructures, do they relate specifically to -- are they to the same program or are they across different programs that you are talking these unfavorable cumulative catches?

The cumulative catch is primarily the last two courts was a little bit on C-17 and the balance on 47. There also are some programs where we're having favorable. So obviously what you see there is a net. But those are the two programs at this point that are -- that have contributed the most to the negative and those are, one is in Jefferson Street and one is across a number of plants.

Okay. Last question I have. If you look at your top ten programs listed that you give out every quarter, I know 787 is lower margin than corporate average. If you look at that list, are there any outliers there either high or low beyond 787, and just as you look at the margin profile by program relative to the corporate average?

Nothing -- nothing like way out of whack. I mean they all have different margins, but I wouldn't say any of those are dramatically above or big losers, no.

Okay. All right. Great. Thanks.

Yes.

Our next question comes from Noah Poponak. Please state your affiliation followed by your question.

Hi. It's Noah Poponak from Goldman Sachs. Good morning Jeff and Dave.

Morning.

Morning.

Dave, just as a clarification it sounds like the EPS guidance revision for the year is just the tax rate. Is that correct or is there anything else?

From your perspective, yes. There's always lots of moving pieces internally but when you look at the -- when you look at it, it's $0.09, we took it up about $0.10, so yes.

Okay.

Right, and we would hope to beat that number.

Okay. So that -- so net operationally, no change basically?

That's a good assumption.

Question on the Goodrich Pump and Engine Control deal and a little bit more on what you want to do next and where you want to take the business. So on the topic of that -- of part of the strategy there to be diversifying away from the revenue mix having shifted so far to aerostructures.

It looks like if I put the revenue in there you would take that aerostructures mix down to call it $70 million from the current $75 million. So, you know, not to diminish what you have done with this acquisition, but the mix used to be 40/40/20 or something like that for the three segments. So basically the question is -- where do you ultimately want that revenue mix to be and, therefore, how much more acquisitive do you plan to be to get there?

Well, Noah, it's a good question and it's one that is certainly part of our long-term view. We will be going over that in a bit more detail at Investor Day.

I would say that what we -- the direction that we're going now is the direction that we'll continue to go, which is reasserting the balance that used to be there.

And that does not say we're going to attempt to get to specifically those numbers that we had prior to the Vought acquisition. It's also not to say that we won't continue to make acquisitions in aerostructures, because there are going to be opportunities there that will provide us other benefits.

And so I think we're -- what you can take from that is that we're going to continue to grow, we're going to continue to attempt to diversify ourselves in terms of segment balance, in terms of customer balance. We will continue to attempt to do all of those things while growing each of our segments. But at the same time you will see them growing at different rates in an attempt to rebalance ourselves. Is that fair?

Okay. Yes. That's very helpful. If I could just sneak in one more -- the Gulfstream G4/G5 -- is that a growing or declining or flat business for you currently? I'm sort of just curious what's happening with that business given the 650 ramp.

Yes. It's pretty stable. The 450 and 550 are continuing to sell and continuing to produce at solid rates for us.

Okay. Thanks a lot, guys.

Thank you.

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

Thanks. Good morning. Deutsche Bank. First question is on the military side. I think in the quarter, I don't want to look just in the quarter, but it looked like it was down 9% and then if I look at the C-17 in the top programs it moves up two spaces and I guess a couple things to ask about.

One is this is just a lumpy order coming in from kind of a legacy business on the C-17? And, number two, what is the kind of contributing to the nearer term defense downdraft program specifically? And then the third piece of this question is C-17 when does it start to drive -- or be a material headwind as that program kind of sunsets?

Yes. Myles. So a bunch of questions there -- let's address C-17 first. During the quarter we did receive authorization to initiate a long-lead procurement on lot 26.

Okay.

So I think that -- we take that as some indication of bullishness on behalf of Boeing that there will be future orders. And we also got a substantial order on engine kits that will go out many years, and that part of the C-17 --

Yes.

-- program will continue as long as the planes fly. So we are becoming increasingly more confident that we're going to see meaningful revenue from C-17 at least into fiscal 2015. Now that could change, but initiating the long-lead procurement on lot 26 and I would say the activity in how we're pricing lot 26 and 27 indicates a certain amount of bullishness from our customer.

On the revenue drop on military it is 9%, so you got the math. That is correct. One was purely the timing on C-17. So both years -- or both quarters we have been in a build rate of ten, but we did deliver actually two more ship sets last year than we did this year. We did have the customer deferrals which were about $8 million or so.

And as I said, really C-130 sales, which we don't really have a great understanding of yet, have really dropped off in the quarter. We don't think the types of parts we produce would be something that would be destocking, but we're seeing of all our programs the most volatility in orders probably around that program, yet build rates are not supposed to go down that much.

Right.

So that I think will correct itself over time, but those are the facts for Q3.

Okay. That's helpful. Then the other question I had was on the margin side for the Goodrich transaction. I think at least the way I was looking at it the pumps business is kind of high single-digit EBIT margins when it was captive at UTX. And the implication is that you're going to double those margins, which I don't doubt that you will.

I'm just curious when you say the timeline -- are we talking within your long-term target planning horizon, i.e., the next couple of years?

Yes.

Yes. Well, I won't go as far to say that we will double the margins in the next -- in the next couple of years, but I will say that certainly we expect the having this company within the Triumph Group family will have a relatively immediate enhancement to their margins and a continuous improvement until we get to those segment averages.

And when do you think it closes? I know this one can be a little tricky with the DOJ, but --

We're guessing sometime in March, but that's the pace and frequency of requests we get indicates it's not tomorrow.

Okay. All right. Thanks again.

Sure.

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

Yes. Sterne Agee. Good morning, Jeff and Dave.

Morning.

Question really I guess is follows up a little bit on Myles with the military, and related to kind of the Goodrich business -- but in general, Jeff, could you give us some kind of high level thoughts how you think Triumph fares in a kind of an adoption of a sequestration? I know we're not talking about fiscal 2014 guidance but just from a high level perspective how you are thinking about that.

Sequestration is a question that is one that obviously constantly raised now, the specter is increasing and I still don't even know what it means. As defined, sequestration is a 10% reduction in all the programs.

I think a definition in any way is helpful to us because the alternative of having, for example a continuing resolution and continuing the prior year defense budget which will then limit the amount of money spent on new programs and actually tie the services' hands can be argued to be far more detrimental to us because of the uncertainty.

So I guess we still feel the same way we did in the last quarter about military that the defense budget is going to be under pressure. We will in fact see a reduction in the amount of spending there, but that we will not be primarily affected because of the reasons that we had laid out before.

That is, that we have a far more flexible work -- we have far more flexible companies than say the primes do in this area. We talked about C-130 before, and we don't really understand why our orders are dropping on C-130. We've lost no market share.

We -- it's either a destocking, either our customer has too much of our parts in the short-term or they have forgotten to order them and we will be getting orders to hurry up.

So I think that what we're looking at is nothing different than we looked at before. So we still see over the next few years, we still see the potential of up to about a 10% reduction in our defense business cumulative.

And we do see great opportunities out there because we have, in fact, gained market share in certain military programs that have come about through some of our military customers that have decided to outsource activities that they had previously done in-house.

So we still see the mixed bag, we still see the opportunity to thrive within this kind of uncertain market and that is largely because of the way that the Triumph Group is designed. We have an awful lot of companies with their ears to the rail and are very responsive to these opportunities that will pop up in this marketplace.

So while, you know, sequestration is an unknown and while we certainly -- the directional arrow points down across the market, we still think that we are in pretty good shape.

Okay. And just, related to Goodrich business, I guess all -- that same analysis applies when you look at that, given the mix that they have seems very similar to what you have in some of your military businesses.

Correct.

Okay. And then just one other question, just following up on that 747 -- Boeing has been very cautious about, they need to get some orders in by the middle of this year to keep production up at two a month, for next year. What are your lead times on the 747 program?

747 program is one that has a relatively extensive lead time throughout the whole supply chain. It has a pretty long tail, but by and large we react in the six to nine month time period.

Okay. Six to nine months. Okay. Great.

I thought Boeing was relatively bullish, Peter, on that.

It's -- I'm trying to be glass half full, to be but I think there was just some commentary afterwards regarding their thoughts that they still had to fill-in some white space for next year. So they were hoping to win some orders. But yes, you're right. Thanks again, good quarter.

Thanks.

Next question comes from Steve Levenson. Please state your affiliation followed by your question.

Stifel. Thanks. Good morning, Jeff and Dave.

Hi Steve.

Since we're on the Boeing subject one of the things they said on their call yesterday was that they are going to offer their supplier partners who step up to the challenge a win-win opportunity to share. It sounds like they're asking for price reductions, sounds like they're offering a chance to win something. Just curious as to what your approach will be.

Well, what we hear from Boeing is that they're affording us an opportunity to retain our margins at lower price. That sound nice? It's really -- the intent is good. And the intent is to work together in a new and collaborative way with their key suppliers to help drive costs out of the system.

As we do that we, in fact, should both benefit. That's the theory and, in fact, early on we have seen, in fact, Boeing is true to their word in that we have started to see them implement some cost improvement suggestions that we have been making over the last -- I will even go back ten years or so that we have been kind of straight armed and now in fact they are -- they are accepting these change. So they are serious about reducing costs, which will reduce our costs, and in return I'm sure we will have to be more aggressive with our pricing.

So I think it actually can be a win-win. It's just it will be a question to see how the facts roll out as the program unfolds.

Okay. Thanks. Do you think that squeezes the smaller suppliers more than companies like Triumph? And does that give you an opportunity to pick up business or to acquire some of those guys?

You know, I can't really say whether it affects one group of companies more than another. But I would say to you this -- that in any time of turbulence, any time of potential change, I like our chances because we do have a group of companies who are very responsive, who are very cost-aware and can, in fact, drive a great deal of value. And it's part of who we are.

So usually in those kind of stable times then the -- it's almost a thing of nature that in kind of stable times organisms that are, that rapidly change are kind of selected against, but in these kind of turbulent times, our type of organizations are kind of benefitting from the natural selection process because we are, in fact, responsive, we can act like a small company but at the same time we have the resources of the entire Triumph Group behind us.

Sounds goods. Thanks. One last one for Dave. You didn't mention the ERP system. Does that mean it's now providing benefits or at least breaking even?

I would say it's approaching breaking even, but it's still -- there's still a lot of heavy lifting going on, Steve. There's no way to sugarcoat that.

Okay. Thanks very much.

Our next question comes from Yair Reiner. Please state your affiliation followed by your question.

Yes. Yair Reiner from Oppenheimer & Company. A couple questions. First, on the 787 -- Boeing yesterday indicated that it's going to deliver somewhere around 60 planes, maybe a few more, and it sounded like they may be planning to also manufacture around that number, although I guess their statements today were not entirely clear. Did you hear anything new yesterday in terms of Boeing's plans for 787 production?

I listened to the call, Yair. I was slightly confused. So we look at our orders, we look at the skyline and we're most of our companies are in the -- that ramp from 5 thinking about 7. And it seems like at those rates they're going to be taking part on in a much greater rate than 60.

But that could be what they're going to sell and complete, and so we're seeing shipments sort in excess of what they're going to deliver. But they're -- they haven't indicated any indication of slowing down.

Thank you. And then a question on the aftermarket and aerospace margins. They were up nicely year-on-year, down sequentially. What should we understand from the sequential decline?

In aerospace systems it's -- other than the Sandy costs, it's virtually entirely what we have spoken about before, that it's a direct result of the aftermarket portion of that business being down, which is where the margins are the highest.

So when you look at our sequential drop in revenue in the aftermarket multiplied by fairly stellar margins, that's the impact. And this is at least the second possibly third year in a row where that quarter seems to be low on aftermarket particularly on the foreign military side. And so that explains aerospace systems.

We think we had a great quarter in aftermarket. I've repeatedly said that I don't think 13% and 14% is much different in that business. We're trying to be in that range. It could be a couple items that just don't get done or get ordered slightly later. I think you would be mistaken to look at sequential quarterly movements there, good or bad, with too much meaning.

Okay. So 13% to 14% is the range there.

That's right. And if we spike to 15, you know, it could just be a couple nice orders with very good margins in that particular quarter. So we think we can go higher, and I think the better way to measure that is sort of trailing 12-months. But we were very pleased with the performance, especially given ramp-up of those new FedEx contracts which are always a challenge. So we actually thought that was a great quarter.

Great. That's helpful. Then just one more on the margins. Aerostructures, if they exclude the cumulative catch-up adjustments, the margins there were a little bit north of 18%. Any reason to think that that is not the right base level for the business going forward?

I think our margins are going to go higher.

Great, thank you.

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

Imperial Capital. Good morning.

Morning.

It sounded like, Dave, from your comments that you made the decision to -- or set a time frame for closing the fabrication shop down on Jefferson Street which could lead to the pension curtailment.

Can you provide any more details on that from a timing standpoint or impact? And then broadly, just give maybe a little more update on where you stand with Jefferson Street in the broader issue? Obviously with the ownership and you mentioned you're negotiating a potential new lease and what we should be thinking about there?

Yes. The fab portion of Jefferson Street was, prior to Triumph acquiring Vought was, scheduled to be -- to eliminate that activity at Jefferson Street. And we expect that to happen during fiscal 2014 and it's purely an actuarial calculation, that when you trip over a certain threshold it triggers a curtailment.

You have got to remember a lot of the options we've been taking over the last year, some of those people were fab employees. So, you know, it's not necessarily easy to calculate when you know you have a curtailment. It will happen. I think it's likely to be Q4, but it's purely math, so that remains a little uncertain.

And we'll be -- we're looking at a variety of scenarios on Jefferson Street. And we have a Board meeting next week at which that will be debated and probably a decision will be made and that's why Jeff indicated at Investor Day we will likely have something to tell you that's definitive.

The lease activity with the current landlord at Jefferson Street really was designed to be able to have the move be at a more manageable pace. So I wouldn't take that as any indication that we're staying, or don't take that as some indication that we have made the decision on Jefferson Street.

Okay. So it's just designed to give you obviously more flexibility in timing as you look to make this because it could be a fairly -- obviously we have talked in the past, a fairly significant or potentially disruptive event.

Absolutely. Yes.

Yes. And then I just wanted to follow up on your discussion earlier and this is -- you talked to, Jeff, about the pricing pressure today and some of what you're seeing with Boeing. As you look at your -- and you talked about this a lot in the past -- as you look at your follow the part strategy, can you talk about, in light of the environment today, any change in your appetite and what you're doing specifically as it relates to the MAX and the neo and some of the new opportunities there?

And have you maybe come in at all in terms of some of your desire to push new business, or do you see even more opportunity now? Or where does your thinking stand when you look out over these programs in particular?

Well, in terms of MAX and neo, obviously they're going to be growth programs and so we want to be a part of that. As with any program you don't necessarily just want to -- well, you don't want to at all just chase revenue, and at whatever cost.

So we have to continually look for opportunities that match our model going forward, and we do think that there are going to be those opportunities. Our appetite has not been, for new work, has not been decreased because of increased competitiveness. In fact, we welcome that and we think that we are, as I said, we are responsive, innovative, creative, and I like our chances in a tougher environment.

Every year we talk to our company Presidents about raising the bar. And it's for times like this that we have done so. So I do like where we're positioned and we're going to go forward with a continued aggression in the marketplace, understanding that we have to continue to maintain our margins, and continue to improve it as we go forward.

Okay. That's helpful. So it sounds like when you go back a few years you were very -- when you talked with Boeing on the 787 insistent that you weren't going to take on what you viewed as an unnecessarily risky profile on that program and weren't one of the so-called risk sharing partners perhaps. Do you feel like your position relative to Boeing now is I'm not going to say similar, but you're still in a pretty good position as you look to maybe take share on newer programs?

I think so. Yes.

We're not -- we haven't changed our outlook on risk. You know, we're not now saying that we've got to win on a particular project, damn the torpedoes, we're going to win this. We still feel like we're in great position to continue to operate as we have been.

Great. Thank you very much and good quarter.

Thank you.

Thanks, Ken.

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

KeyBanc. Good morning, guys. Thanks for taking the questions. Most of mine have been covered. I guess, Jeff, just on the Goodrich, they do have a significant portion of aftermarket exposure. What's the plan? Does any of that revenue shift into your aftermarket services? Or is there any way to leverage the aftermarket volumes there in the services group? Or does it just stay as a kind of standalone entity?

Well, you know, there's an awful lot more I guess that we can get into once they become part of the Triumph Group, but there certainly should be some synergy there. There is some -- some of these products that are repaired in the third-party world that we have capability of doing.

But similar to the Vought acquisition, we only want to take advantage of those if it makes sense. And so we think there are going to be any number of opportunities to make not only Triumph but also the Goodrich division, which will not be called the Goodrich division by the way, but to make that more profitable, more competitive as we go forward so we can continue to grow that company.

Okay. That's fair. And then just on Embee, you used the phrase all roads lead to Embee. Given that the nature here of volumes increasing maybe an uptick in aftermarket later this year, is there any capacity constraint there that you guys have to address, or can they deal with the increased volumes that are presumably coming down the pipe here?

Well, they -- I guess one of the Company's favorite actions once becoming part of Triumph is filling out capital equipment requests and sending them on in.

Okay.

So we're already addressing some capacity concerns, and really they become opportunity concerns to continue to grow the business. So Triumph has generally been a catalyst for growth for the companies we acquire.

Embee is not going to be any exception. I would say that they have plenty of room to grow, and will require some level of investment but not anything that's beyond what we would normally see in a new acquisition.

All right. Fair enough. Great. Thanks, guys. Nice quarter.

Thank you.

Our next question comes from Sam Pearlstein. Please state your affiliation followed by your question.

Good morning. Wells Fargo.

Good morning.

Can I ask you just -- if you look at the subsegments in terms of the sales by market where you have commercial military business, Jeff, what -- I don't think of anything in business jets as having fallen off from the September quarter to the December quarter but why did that sequentially look like it dropped $14 million or $15 million?

I think we called out in Q2 -- I could be just the timing of a couple wings, but you should remember that we called out that we were the beneficiary of some misguided forklift operators around FBO airports and they crashed into a couple wings.

So we had a couple extra wings that we were able to deliver in Q2. You don't normally think of a wing as having after aftermarket but if somebody in a truck runs into it, it shows up. So I think we had two of those -- one or two of those in Q2, which I guess unfortunately did not repeat.

So this is a more normal run rate then as to where it should be unless --

Yes. I mean keep in mind it was the holiday week, whether somebody shut us down early it could have been a little bit of pain. That always happens, but I think that's right. And then, of course, as we get into fiscal 2014 and 2015 when we start delivering on the Bombardier Wing this is going to show some awfully nice growth.

Thank you.

Yes.

Our next question comes from JB Groh. Please state your affiliation followed by your question.

D.A. Davidson. Morning, guys. I've been popping between a couple calls here so if you covered this I apologize. But the 787, you know, I know lead times vary between your different operations. How would you characterize the percent of those that have moved to the seven rate that Boeing seems to be sticking to? And is anyone -- is there anyone in that list that you would have expected to receive the call to go to seven that you haven't yet?

No. I mean some of our companies are still at five, but I think they -- they have seven on their horizon and nothing has changed in that regard.

So that the timing hasn't shifted to the right or anything like that?

If you're talking battery impact, we're not seeing anything.

Okay. Okay. And then you mentioned available for debt reduction. I mean would you say -- you're not over-leveraged. Is that a lower priority than looking at other deals?

I don't think it was meant to indicate a priority of any kind. I think that we don't -- we're trying to say if we don't do any more acquisitions, or even ex-acquisitions, that's sort of the free cash flow. But given that we made commitments post-Vought to reduce debt and we're certainly in a comfortable place --

Yes?

We think the ultimate definition of cash flow is available for debt reduction. So if a good acquisition comes along, I don't think we're going to -- we're going to pass on that because of the cash reduction target.

Okay. Good. All right. Thanks. Everything else has been covered for me. Thanks.

Okay.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2013 third quarter earnings conference call. This call will be available for replay after 11.30 AM today through February 7, 2013 at 11.59 PM. You may access the replay by dialing 888-266-2081, and international participants may dial 703-925-2533, entering access code 160-2339. Thank you all for participating. You may now have a nice day and disconnect now.