Triumph Group Inc (TGI) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our FY14 third-quarter results. This call is being carried live on the Internet, there is also a slide presentation included with the audio portion of the webcast.

(Operator Instructions)

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 risk, 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 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.

Good morning, everyone. I want to add my welcome to the Triumph Group third-quarter FY14 conference call. As is customary at this point, I will remind you also that there is a slide presentation for your use that accompanies the audio portion.

We will start today with slide 3, titled Q3 in review. As I stated in yesterday's press release, our third quarter was a solid one with the exception of the 747-8 program. Dave we be covering the 747 in some detail as it relates to the quarter, and I am sure we will discuss it in the Q&A session.

That said, I would like to take just a minute to provide a brief overview of the 747 situation, as I see it today. In a nutshell, the second bullet on this slide says it well, improvement has been, and is still being made, but we need to do even more. On the delivery side, at the beginning of the quarter, there were occasional flights of chartered Antonov cargo planes, used to deliver our products to the Boeing production line in Everett.

These flights have ceased, as have all other modes of expedited shipment. In fact, as we speak, we are now one part number shy of 100% delivery compliance on the 747 program. That one part number, while not on schedule, will not require premium freight on its way to Everett.

Quality, as measured by a variety of metrics, is also greatly improved. While the costs to achieve these gains were high in this quarter, and in our now-nearly completed block, they are behind us, and we expect a far more predictable path forward on this program.

Beyond 747, the quarter was also characterized by a surprising number of customer deferrals. Some of them were subtle, a dialing back of customer mid-max levels that represent the combination of destocking and production rate declines on the military side.

Deferrals were seen in growth programs, on the commercial side as well. Although we would expect that these sales will be recovered rather quickly.

The pressure on the military side of our business continued, and the bow wave of demand that we had anticipated in aftermarket did not occur. We're still confident there is still pent up demand, but the timing and pace of the relieving of that demand is not certain. And finally, the third quarter was also another quarter of weakened demand in the low-end business jet market.

Despite these market conditions, our companies performed very well. Our aerostructures segment, excluding the 747-8 impact, delivered solid margins.

Aerospace systems performed well, in light of the military sales decline, and the segment was benefited by continued strong performance at our Triumph Engine Control Systems business. And in aftermarket, sales and margins remained solid, despite the lack of the anticipated pickup in military R&O. Cash flows were good in the quarter, and Dave will provide more detail on that momentarily.

One of the biggest undertakings of the year has clearly been the construction of our new facility in Red Oak and the transfer of manufacturing operations from the Jefferson Street facility. Dave will provide detail, but the summary is that the project is on time and on budget, and should exceed the benefits put forth in the original business case. Right now, it looks like a success story in the making.

There are three additional points of interest that are included in Slide 3 from the quarter. Firstly, as described in a press release that was issued after market close yesterday, Triumph has received an award to machine and assemble structural components for the Airbus A350 XWB program. This win further solidifies our relationship with Airbus, and is a nice piece of business on a promising program for the long term.

Secondly, as we disclosed in November, the Mississippi Supreme Court unanimously affirmed the dismissal of all Eaton claims against us. And finally, and also very importantly, we successfully completed a refinancing of our high-yield debt and extended our revolving credit facility.

With that, I will turn it over to Dave and we will provide some comments on our outlook shortly. Dave?

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

Turning first to the income statement, sales for the third quarter were $915.8 million, compared to $890.6 million for the prior-year period, a 3% increase. Organic sales for the quarter decreased 6%, primarily due to production rate cuts on the 747-8 and 767 programs, a decrease in military sales, and customer deferrals in December. Operating income decreased 37% to $84.8 million.

Included in our results were approximately $13.3 million in pretax costs related to the Jefferson Street move, approximately $11.1 million in pretax costs associated with the refinancing of the 2017 high-yield bonds, and a pretax pension settlement charge of approximately $1.6 million. These items were incorporated into Table A within the press release, to make the impact easier to understand. The prior fiscal year's quarter included approximately $300,000 pretax integration costs, and a charge of $2 million pretax for early retirement incentives.

Net income was $35.4 million, resulting in earnings per share of $0.67, versus $1.43 per diluted share for the prior-year quarter. Excluding the Jefferson Street cost, the refinancing fees, and the pension settlement charge, net income was $52.2 million or $0.99 per diluted share. EBITDA for the quarter was $116.2 million, resulting in an EBITDA margin of 12.7%.

Looking now at our segment performance, sales in the aerostructures segment for the third quarter declined 6% to $637.2 million. Organic sales for the quarter declined 9%, primarily due to rate cuts on the 747-8 and 767 programs, a decrease in military sales, and customer deferrals.

Third-quarter operating income was $54 million, compared to $117.5 million for the prior-year period, and included $13.1 million of charges related to the Jefferson Street facility move, as well as $25 million of pretax charges, resulting from the reductions in the profitability estimates on the 747-8 program. Operating results for the quarter included a net unfavorable cumulative catch-up adjustment of $21.3 million, of which $6.6 million was related to the Jefferson Street move, $2.9 million was related to the 747-8 production rate change, and $9 million was related to additional 747-8 program costs. Of which approximately one-third or $3 million was attributable to disruption cost at the Marshall Street facility, caused by the bump and roll of the Jefferson Street facility.

The remainder was attributable to quality, material, and overtime issues. The $3 million is not included in our add-back to the Jefferson Street costs. Excluding the Jefferson Street facility move and the Marshall Street facility costs, the remaining long-term contracts had a net favorable cumulative catch-up adjustment.

With respect to the quarter's $25 million of additional 747-8 program costs, as the next slide details, in Q2, we had expected to report additional program costs during FY14 of approximately $68 million, with $11 million being included in Q3, and $13 million in Q4. During the third quarter, we further revised our program cost estimates to include an additional $17 million, of which $14 million was included in Q3, and $3 million will be included in Q4. As Jeff said, we have seen improvement in our performance metrics during the quarter, but not to the level previously expected.

The segment's operating margin for the quarter was 8.5%. Excluding the Jefferson Street move-related costs and the 747 program impact, the segment's operating margin was 14.8%. EBITDA for the quarter was $75.8 million, with an EBITDA margin of 11.9%.

As Jeff mentioned with regard to the Jefferson Street rented move, our team continues to do a great job planning and executing a complex move, the move of the Blackhawk, V-22, Global Hawk and F-35 have been successfully completed. A substantial portion of the G550 has been moved, and about 50% of the C-17 has been moved. We have completed the closure of approximately 3 million square feet at the Jefferson Street facility.

The next slide updates the original business case model we presented at investor day in support of our decision to move to Red Oak. As shown on the slide, we are positioned to beat the benefits contained in the business case, which we are proud of. As to specific fiscal years, the business case had assumed that we would remain in Jefferson Street for all or part of FY15. Part of that decision at the time was to mitigate risk, and also to allow us to complete any C-17 work at Jefferson Street, rather than in Red Oak, if that made sense.

As you know, post Boeing's decision to terminate production of the C-17, we made the decision to go ahead and move the program to Red Oak in FY14 and exit Jefferson Street by March 31, 2014. That decision was based on a comparison of total cost for the two options. Those being higher operating costs and lower moving costs, or lower operating costs but higher move costs.

The additional expense for FY14, which is reflected in the chart, represents the impairment of certain leasehold improvements, all non-cash, into FY14, since we now not be intending to lease Jefferson Street in FY15. This impact was recorded in Q3. The business case assumed this expense would be recorded in FY15, so this is a timing item only.

Additionally, the decision to accelerate the move into FY14 has resulted in slightly higher labor disruption, particularly around C-17. However, as shown on this slide, these additional costs in FY14 are more than made up for by the impact of close to $16 million in FY15, resulting from the avoidance of rent and overhead costs in Jefferson Street. Completing the move in FY14, amongst other positives, now results in FY16 also being slightly better than the business case.

On the labor front, we have resumed negotiations with the UAW, and we are hopeful that a new contract can be reached. In Red Oak, we continue to see a very high acceptance rate of employees wanting to transfer to Red Oak.

In our aerospace systems segment, sales for the quarter increased 15% to $211.4 million, of which $68 million were attributable to the acquisition of [NV] Triumph Engine Control Systems and Triumph Gear Systems Toronto. Organic sales for the quarter increased 2%. Third-quarter operating income increased 58% from the prior year to $32.5 million, with an operating margin of 15.4%.

EBITDA for the quarter was $37.5 million, and at an EBITDA margin of 17.7%. During the quarter, we settled our insurance claim on Hurricane Sandy, a portion of which booked in Q3, and a portion will be booked in Q4 and early FY15. The segment's operating results included $1.5 million, as compared to $900,000 in the prior-year period, of legal expenses associated with the ongoing trade secret litigation, we expect legal expenses for the fiscal year to be approximately $7 million.

As for the status of the ongoing litigation with Eaton Corporation, we have previously disclosed that in November, the Supreme Court of Mississippi unanimously affirmed the dismissal, with prejudice, of all of Eaton's claims against Triumph and the engineer defendants. Eaton has petitioned the Mississippi Supreme Court for rehearing of the affirmance, that petition is pending.

Meanwhile, Triumph's claims against Eaton remain pending in the trial court in Mississippi, but those proceedings were stayed by the Mississippi Supreme Court, while it considered a separate appeal by Eaton of a ruling by the trial court that would require Eaton to produce documents Eaton claims to be protected by the attorney-client privilege. That appeal is still pending.

There is also the antitrust case Triumph filed against Eaton in the US District Court in North Carolina, which also remains pending. If anyone wants to know more, we refer you to the documents available in the public record, and prefer to let those documents speak for themselves.

Continuing with our segment reviews, sales in the aftermarket services segment in the third quarter were $69.6 million, compared to $74.6 million in the prior-year period. The year over year decrease reflects the impact of the divestiture of the instrument companies.

Organic sales growth for the quarter was 2%. Third-quarter operating income was $9.3 million, with an operating margin of 13.4%. EBITDA for the quarter was $11.2 million, with an EBITDA margin of 16%. In light of the softness in the military aftermarket, we are proud of these results.

The next slide is a pension OPEB analysis for Triumph aerostructures for your reference. As you can see, the table summarized the pension and OPEB P&L impact, as well as the planned cash contributions for FY14 and FY15. The FY15 amounts assume that all remaining FY14 actuarial assumptions are met.

As part of our goal to derisk the pension plan, we completed a successful offer to the deferred vested participants in the aerostructures defined benefit plan, resulting in close to $100 million in GAAP liability being satisfied at approximately of that amount. This action triggered settlement accounting. Settlement accounting requires us to remeasure our assets and liabilities, and reset the pension income or expense for the balance of the year. This resulted in a settlement loss of $1.6 million in the quarter.

While this action helps to de-risk our pension situation and lower further volatility, it results in a lowering of our projected FY15 and FY16 pension income by approximately $10 million each year. These impacts are only estimates, and will be finalized as part of our normal year-end processes. A portion of this has already been reflected in our FY14 results and guidance.

With regard to our pension liability at December 31, our net under funding was reduced approximately 57% to $149 million since the beginning of our fiscal year, primarily due to an increase in discount rates, good asset returns, and the proactive actions we took in FY13 and this year. Looking at the components, our gross liability decreased $350 million, offset by a decrease in assets of $154 million, which was driven by lump sum distributions, partially offset by positive asset returns.

Once settlement accounting is triggered in the year, it applies to all settlements in the year. As such, we are likely to experience some small settlement impact in Q4, which is not reflected in our guidance. Given the employee changes in the Dallas area, there is also a chance that a curtailment may be triggered in Q4, and this is not reflected in our guidance.

Turning now to backlog, our backlog takes into consideration only those firm orders that are going to deliver over the next 24 months, and primarily reflects future sales in the aerostructure and aerospace systems groups. The aftermarket Services group does not have a substantial backlog.

Our order backlog as of 12-31 was $4.75 billion, an increase of 6% over the prior year. Military represents approximately 27% of our backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. In first place was the 747 program, followed by the 777 program, third place was the G450 and G550, followed by the C-17 in fourth place. In fifth place was the Airbus A330, by the 737 next-generation in sixth place.

Seventh was the Boeing 787 program, and eighth place was the Boeing 767 tanker program. The Osprey combat helicopter was ninth, and 10th was the UH-60 Blackhawk helicopter. Just outside the top 10 programs are the C-130, the Bombardier Global 7000 8000, the CH-47 Chinook, the Bell 429, Global Hawk and the A320.

Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military, and space totaled 44.7% 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 FY13, commercial aerospace increased by 3% to $529 million, representing 58% of sales. Military sales of $255 million increased 5% year over year, and represented 28% of sales. Business jet sales decreased 6%, representing 11% of sales. Regional jets increased 114% to $15 million, representing 1% of sales, and non-aviation accounted for 2%.

We have decided for this purpose to continue to report all 767 variants, tanker and freighter, into commercial. It makes prior periods more comparable, and as we are accounting for them in one block, it makes our reporting more consistent and streamlined.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter decreased 6% from the prior year. Breaking that down by segment, the aerostructures segment same-store sales for the third quarter declined 9% to $617.2 million, primarily due to 747-8 and 767 production cuts, military sales decline, and customer deferrals, as mentioned earlier.

Aerospace systems same-store sales increased 2%, the aftermarket services same-store sales for the quarter grew 2% as well. And export sales for the third quarter increased 27%.

Turning to the balance sheet on the next slide, for the nine months ended 12/31, we generated $79.1 million of cash flow from operations, before we made $45.8 of pension contributions to the aerostructure defined benefit plans. After these contributions, cash flow from operations was $33.3 million.

As we mentioned, during Q2, we integrated with a major customer to defer receipts of certain receivables until our Q4. Adjusting for this deferral, which was received in full in January, cash flow from operations of $33.3 million would've increased to $119.8 million.

Inventory for the year increased $139 million. The components of this increase were $45 million in the Bombardier wing, $38 million from acquisitions, $21 million from the Jefferson Street build ahead, $14 million in nonrecurring activity, and the Embraer program. Based on the current forecast, pension contributions of $115 million, the completion of the Jefferson Street move, and excluding acquisitions, we do not expect any FY14 cash flow to be available for debt reduction.

CapEx in the quarter was $42.5 million, of which $1.3 million was for the Bombardier wing, and $16.3 million was attributable to the Jefferson Street relocation. Year-to-date CapEx was $161.8 million. We expect CapEx and investments in major programs for the fiscal year to be approximately $340 million to $360 million.

Net debt at the end of the quarter was $1.6 billion, representing 41% of total capital. During the quarter, we received puts of our convertible securities of approximately $18.5 million, which brought the quarter-end balance to $13.6 million.

During the quarter, we successfully raised $375 million, by entering into a term loan with a maturity date of May 2019, and amended our existing $1 billion revolving credit agreement to modify the fee structure, and extend the maturity by 18 months. We used the proceeds to retire the $175 million of senior subordinated notes due 2017, and pay off existing indebtedness under the credit facility, which had been used to fund the Triumph Gear Systems Toronto acquisition. The call premium, the write-off of the unamortized fees and discounts associated with these bonds, resulted in a charge of $11.1 million in the quarter.

At the present time, it is our intent also to refinance the 2010 senior notes due 2018. Exact details of that plan will be announced at the time it is completed, which we expect to be in July.

The global effective tax rate for the quarter was 35.4%, and reflected the fact that the R&D credit expired in December. In addition, the income tax for the quarter was favorably impacted by the true-up of our financial statement tax expense to the actual tax return that was filed in December. We continue to expect minimal cash tax to be paid in FY14 and FY15.

With respect to our financial guidance, we now expect our revenue for the fiscal year to be approximately $3.8 billion and our full-year EPS to be approximately $4.75 excluding Jefferson Street move-related costs and the pension settlement charge. To be clear, it does include the cost of the high-yield redemption. Our guidance reflects the previously-described impact of the 747-8 and continuation of military weakness at both the OEM and aftermarket levels, and additional weakness in lower-end business jets.

Before I turn it back to Jeff, I would like to add a brief comment. It's been an honor and a privilege to be Triumph's CFO, and I will miss these calls and the interaction with our shareholders and analysts. I greatly appreciate your support over the years. I'm confident you will quickly grow to both respect and enjoy working with Jeff McRae, who is a class act, and a good guy. Jeff?

Thank you, Dave. Turning to slide 17, titled FY14 outlook.

As David detailed, our balance sheet and our backlog remains strong. We remain focused on improving execution, driving integration and reducing costs. As part of our comprehensive plan to reduce costs and enhance our competitiveness across the enterprise, we have launched a supply chain initiative to identify those suppliers who are willing and able to strategically align with Triumph for our joint benefit.

We have contacted 350 of the 836 suppliers we deem large enough and capable enough to participate. While it is early in the process, we believe the benefit to Triumph will be substantial.

Additionally, in January we sold a small aerostructures company in Wichita Kansas back to its previous owner, at book value. This is certainly not a regular occurrence, but in this case, it made a lot of sense.

As Dave reported in terms of FY14 guidance, we now see revenue of approximately $3.8 billion and EPS of approximately $4.75, excluding Jefferson Street move-related costs and pension settlement charge. And this is based on the current market conditions, the current production rates, 747-8 program costs, additional program costs of $1.04 per diluted share, this is a full-year number. 747-8 production rate of 1.5 a month, and a weighted average share count of $52.8 million (sic -- see slide 17 --"52.8 million").

In terms of long-term guidance, this has been an unusual year for Triumph, in many respects. At this point in our year, we would not typically comment at all about our next fiscal year, as we're not yet halfway through our FY15 visit calendar. That said, and since we have been discussing our FY16 outlook regularly, we believe it appropriate to comment our preliminary view on FY15 and our outlook on FY16.

I preliminary, and I will say for the record again, preliminary guidance for FY15, and our update of FY16 reflects an EPS figure of approximately $5.75, and $6.75 respectively. These represent strong year-on-year growth numbers from our current levels, and a return to earnings growth.

As compared to our prior long-term guidance, these numbers reflect the following: first the impact of the 747 program, both in build rate and performance. Two, the impact of the C-17 production program ending in FY16.

Three, lower military sales of both the OEM and aftermarket level, which remain a fluid and uncertain market. And four, lower than expected pension income. Now, I want to also add that our cash flow should be in excess of $600 million over the next two years.

Finally, we have recently announced a change in our senior management team. Dave Kornblatt, as you know will be stepping down as CFO to take on another role within Triumph. We are pleased that Jeff McRae has accepted the position of CFO, and I look forward to working with him in the future, to achieve the goals we've set forth.

Jeff joined us by way of the Vought acquisition, although his background, outlined in the press release, is more extensive. I would like to point out that Jeff's responsibilities at Vought Aircraft Division, until very recently, were limited to the integrated program divisions in Dallas. Said another way, Jeff was not the person in charge of the 747 program.

Since November, he has been one of the key people helping us to sort it out, and to fix it. He has also been the one spear-heading the effort to transition Jefferson Street to Red Oak. So I view the change as the best of two worlds, we get all of the benefit of having Jeff here full-time and utilizing his many talents for Triumph's gain, and at the same time Dave will still be on board, providing useful insights derived over the years, he so ably served the company in the CFO role.

As this point, I would like open the lines to answer whatever questions you may have.

(Operator Instructions)

Joe Nadol, JPMorgan

My first question is just on the customer deferrals you mentioned. Can you help quantify that a little bit more? Perhaps mention what commercial programs you saw it on, and how quickly you expect to get it back?

Yes the impact was probably in the $30 million, $35 million range across the Company. The min-max was a little subjective, but we did see a slow down.

And we did see it on a number of programs, sometimes in indirect sales, programs like the 737, 777, the 650 and again, those were not necessarily all to Boeing or Gulfstream, but through indirect sales. So those are programs you would not have expected to see any deferrals on, and yet we clearly saw them.

And we would expect the commercial ones to pick back up. I think the military sales, some of those have already slipped out of the year, like Global Hawk and a few others that will not be recovered.

Okay. Just secondly within the aerostructures, the 9% organic growth decline, could you quantify how much of that or what commercial was versus military? Even roughly?

Oh, I would think the lion's share is, if you consider 67 commercial, at least two-thirds or more is commercial.

Okay. All right. Thank you.

Julie Yates Stewart, Credit Suisse.

Jeff, the Airbus win announced last night, is this one of the two that you've been waiting to announce since last year, or this an incremental win?

This is an incremental win, Julie, we have got additional projects that have been painfully slow in finalizing with our customers. So we've got more in the pipeline, that hopefully we'll be able to announce.

Okay. Your prior FY16 target included what you had termed a revenue wedge for new wins and M&A, does the new 675 include something for new wins and M&A?

Not a significant amount for -- new wins, probably there are some -- as we look at our existing companies, and as their business plans include some incremental new wins, as they normally would, that would be in there. We are not including any major program wins in that, nor are we including any significant acquisition.

Okay. And one last housekeeping for Dave, what is the quarterly run rate we should for interest after the refinancing?

I think -- well -- it's not going to be too recurring. Interest should be about $17 million in this quarter, and that should be a good number for first quarter, hopefully a little less as we get a little cash. There will be a nice step down for the balance of FY15, as we pay off the 8.6% bonds in fiscal -- in July of next year. And whether -- I can't give not give you the interest rate savings on that until we see with the high yield markets are like, or another term loan, or cash flows so strong we do some of it off the revolver. There's a lot of variable that we will look at over the next couple of months.

Okay. Thank you.

Yair Reiner, Oppenheimer & Co.

David, I wanted to offer you my best wishes on the new post in Triumph, and your other endeavors.

Thank you.

So first other housekeeping question, the amortization of acquired intangibles has been coming in a bit higher than you forecast at the beginning of the year in both the structures and the systems business, can you give us a sense of what has been behind that? How we should think about those lines going forward?

Yes. That is really a result of continuing to refine our estimates surrounding the Triumph Engine Controls business, and the Triumph Structures International, the former Primus business. As we further refine those estimates, we start to take that amortization.

There is also a negative impact in that does impact the purchase price, and you end a up little more depreciation and amortization as well. I think this is about the right run rate for the next quarter.

And I believe next year, though, that number comes down, because some of the fair value at aerostructures is going to start to disappear in greater numbers. We will include that in our guidance when we give the detailed guidance in 2015.

Great, thank you. And then a question about aftermarket. First, can you give us a sense of how things have been shaping up, in terms of commercial versus military?

And then, if I could compare your comments with those are some of your peers, it seems as though there has been some bifurcation -- some companies out there have been seeing a bit of bounce back in aftermarket, others haven't. Any kind of qualitative commentary you might have about some of the imbalance in the market? Thank you.

Well I think that -- there has always been different forces that drive, just call them airlines and those type of customers to bring their products out to repair. Some of those being seasonality, and some of them being the type of aircraft that they have, and maybe they're going to be utilizing parts off of aircraft that they are no longer parked, maybe they've or put into the desert.

Versus the military one right now, which -- things that we have heard, the customers who have assets for us to repair, indicate to us they have them ready for repair, they don't have the money to do it. And there are some, I guess, reluctance of those customers to turn loose those parts if they get the money, not knowing for example how many hours these aircraft are going to be flying and those types of things.

I think we have two different dynamics in play in terms of the decision-making process, and I think how that manifests itself is that we're seeing a far better market in terms of the commercial at this point, than the military. That said, once we just got a new defense budget passed, they are talking about some additional money being available.

How exactly that's going to fall through, and whether that will open a floodgate, or whether that will just allow the military depots and such to just meter the product out? I don't know how that will play out, but it certainly is a bifurcated state.

Great. Thank you.

Ron Epstein, Bank of America-Merrill Lynch.

A couple of quick questions. It looks like you lowered the guide by about $0.50, $0.22 of that looks like it's attributable to the 747-8. What is the other $0.28?

I think that is primarily the military aftermarket not coming back, as I mentioned earlier. We did lose orders out of the year, so some of those deferrals will help in Q4, others have slid out of the year. So it is mostly losing a few big shipments, and certainly a more pessimistic view.

We are running out of time, even at 30-day turn times, for the aftermarket to return the way we wanted it to. A little bit of pension hit hurt a little bit in the year because of the settlement, but not a huge amount.

To help me understand, what is up with the 747-8, how did that thing get so far off the rails, right? Your piece of it isn't all that different that what you were making before, right?

How that this program get so out of control? And I guess what I'm asking is, why shouldn't we worry about other programs doing the same thing?

Well -- I think there is a couple questions there. We talked about the problems that we have, had in terms of -- since the -8 became the -8, we have had a number of issues attempting to build the aircraft.

That has resulted in a high amount of quality concerns. That has specifically affected us in this quarter, as we are at the end of our block, and there were late arriving material charges -- that I think were specifically attributable to parts that we've had to replace over the last few aircraft for our internal quality issues.

The fact they we're actually getting positive Q catches on the other programs, are indications that we are not just systematically falling apart in this division, that we have a specific program that is giving us quite a lot of challenge. In this quarter specifically, we have spent an awful lot of time, effort and money to recover a schedule that we were far behind, that we were flying large pieces of aircraft into Everett at enormous costs.

And we, for example, did not anticipate spending a great deal of time over the two holiday periods working, but in fact we saw an opportunity to regain schedule and reset ourselves, which we have now achieved. At considerable cost for the quarter, but where we sit now, basically at the beginning of a new block, and at a time we are basically on schedule now, which means we are not running around like chickens with our heads cut off, and not experiencing a awful lot of -- you could argue, I think, correctly that a fair percentage of the quality issues come from a great deal of haste and working so much over time.

So I think we are going to see some improvement there, and I also believe that as we enter a new block we will have far more predictability, as we have seen in the early days of that. So I think that is what is going on with the 747-8 has been basically, even though basically it's been a program that's been around for many, many years, it is as advertised, a relatively new aircraft. And so we have been developing it as it goes.

And we are making the improvements now we need to make, and we are now in a position where we no longer have to work excessive overtime, we should not see any more premium freight. So I think we'll have far more predictability going forward.

Okay. Have you thought about -- I'm certain you have, but can you share with us your thoughts about -- the 747-8, there is a lot of discussion that the 777-X can vent the demand for the 747-8 program, even more so than it is. If that were to happen, do you have a plan in place if the 747-8 rate were to go down to say, one a month, or less than one a month, or something like that?

Yes. We do. This is certainly not something that is lost on us, the 777-X is an exciting new aircraft. And Boeing laid the case that there is always going to be a place in the market, primarily in the freighter side, I think they would say, for a four-engine aircraft of this particular size.

But I think we will still have to see about that. But in the meantime we are, in fact, putting plans together in terms of what may happen with a reduction, a further reduction of the 747. We certainly don't see that happening any time in the near future, because it's certainly expensive for everyone to do that, not just us, but Boeing Company as well.

Okay. Great. Thank you very much.

Peter Arment, Sterne, Agee.

Just a question I guess -- I know you talked initially, preliminary about the 2015 and 2016 outlook. Can you give me just a little you know color on what you are assuming, in terms of just overall defense. What that looks like?

Is it flat or only modestly down? Are you assuming something different than we currently experience, in terms of the negative growth?

Yes. I think it is modestly down, Peter, we are looking at the -- we have our Washington people, and looking at what the government has put out in terms of build rates and the key programs. Other than that, perhaps tanker, eventually CH-53K, there aren't many programs.

JSF should be going up, but that's not a huge program for us. I think you've got some programs that are flat, other programs that are down. There seems to be some optimistic views on some foreign military sales of V-22, that is working their way through Congress.

It is not clear to us, I do not believe Boeing or Bell has stated whether they would use those orders to hold rates and not drop. Or perhaps extend their backlog? That is a little fluid.

Obviously selling those planes is positive. So, I think it is generally down.

Okay. David just quickly on the military again, on the 20% on overall sales mix, what is the mix of international? Do you break out that way at all?

No, we don't. I'm not sure we always know, and it is not something that we track.

Okay. Thank you.

Peter one other comment on the FY15 plan versus say an FY16 plan, we are talking about macro views here of how we think V-22 is going to go, or what we think is going to happen on F-35. Those numbers change, as we issue, whenever it is, end of April, beginning of May, whenever we come out and actually issue our official guidance for FY15, this is done at a far more molecular level in terms of -- within those programs, we see some swings that are continually happening with our companies, who are daily fighting to gain market share on those same number of aircraft.

What you will get from us in the near future is a picture that should be far more certain, than just our ideas of maybe how many V-22s will be delivered to Israel versus wherever else they are going to be going over the next couple of years. So I think there is a lot more going on in each of these markets than just the overall macro stuff, which is usually what drives our longer-term forecasts and outlooks.

Cai Von Rumohr, Cowen and Company.

I did not really catch when you talk to 2015 and 2016, $600 million in cash flow? Is that cash flow from ops, is that two years? Give us a little clarity.

That would be the total for both years after everything.

Free cash flow for both years?

Right. After dividends, after CapEx.

Free cash flow? Cash flow available to reduce debt after dividends?

Exactly. Cash flow to reduce debt after dividends.

Got it. What is the revenue number that would go with those EPS numbers? Approximately?

I don't think we're prepared to give those yet, I think we wanted to update the big punch line items, as Jeff said, we are less than halfway through our business plan reviews. So -- we would ask for your patience on that one.

Got it. Tax rate for this year, for the full year, expected to be approximately what?

35.4%.

Great. Thanks so much.

David Strauss, UBS.

On the FY15 and FY16 guidance, I might have missed this, on 747-8, it looks like you are still booking that at a low single-digit margin? Is that roughly correct? Is that the assumed margin out, in 2015 and 2016 on your revised guidance?

It is almost at zero, it is at 1%.

That is what's baked into 2015 and 2016 as well?

Correct.

Okay. Cai asked about the cash available, what have you assumed in 2015 and 2016 as far as deleveraging?

Right now that would assume that the cash flow goes mostly to deleveraging, so like with the 2015 cash flow, would help with interest. But again, that is mostly revolver interest, so it's not a huge savings. I mean, we would obviously look at where we are at the end of 2015 or during, and look at the cash flow, acquisition pipeline, what the pension world is like, share repurchase, I mean -- our model would say it is used for debt reduction.

Okay. And on 2015 and 2016, the guidance that you gave, does that include any step down at all in the C-17 in terms of overall production rate or booking rates on that program?

Yes. It projects some level of spares, some of the Triumph companies will lose some work in 2015, most will lose work in 3016. In terms of the aerostructure, it is a half bag, we'll get one quarter of production, and perhaps some spares. The larger opportunity we talk about in prior quarters, has not played out yet.

Okay. So it is mostly out of the numbers -- (technical issue)

Okay. Operator, next question.

Ken Herbert, Canaccord.

Jeff and Dave, just wanted to -- on a slightly different track, the announcement you announced on the A350, looks like that leverages the Nashville facility pretty extensively. Can you talk about capacity you have there? And ability to add more volume, specifically on the composite side within the organization?

I think that a couple of things -- it does not really add a tremendous amount of volume to our Nashville facility. A lot of that machining, for example, is going to be done in Kansas City.

We have a lot of room in Nashville, and so we do not have capacity constraints there. And in terms of composite capacity, we still have extensive capability, not only in Nashville, but in other sites, and not only in the US. We have one of our best opportunities for future composite expansion is our Thailand facility.

Okay, that is helpful. Can you provide an update on the Global 7000 and 8000. You haven't talked about those programs much.

I assume they are on schedule, have you seen any slippage with any concerns from your customer there, from a cash standpoint? Anything else you can talk about the schedule there? And provide an update, that would be helpful?

I think from a marketing perspective, while the information is really -- confidential, we don't see the details. Bombardier indicates to us that it is selling well. We have not seen any cash problems, although we are mostly in the investment mode.

But there is a milestone payment that is due this quarter. We have no reason at this time to believe they are not going to honor the commitment.

And I think we are in the difficult challenging parts of the design. And there is the normal back and forth, but there is nothing that we are overly concerned about on the program, but it is a normal program that has its challenges.

Okay. Just finally, can you comment at all on the M&A pipeline, and specifically, anything you can say about the due diligence process you are in, regarding the Tulsa assets?

I think the acquisition pipeline remains robust. We are seeing good opportunities, and as we have indicated, our direction was more in the aerospace systems aftermarket world.

There are some good things we are looking at. Some competitive bid, some more negotiated, so that pipeline remains pretty good, and we hope to get some deals done.

The Tulsa facility, the Gulfstream part, the only acquisition that we've ever talked about before we did it, and we continue to invest a lot of time and effort doing the diligence. We remain very interested in getting on those two wings, because those are two fantastic programs. We are working it hard, but there is nothing to announce.

Okay. Thank you. Good luck, Dave.

Myles Walton, Deutsche Bank.

The first one was clarification, Dave, on the cash flow for this year. I think previously it was break even free cash flow, or cash available for debt reduction. Is that still a reiteration, or has it now crept into a use given the outlook for net income?

I think is about the same, Myles.

In terms of the walk between where you will end up from 2014 into the $5.75 in 2015, it looks like you will pick up, correct me if I am wrong, you'll pick up about $0.25 or $0.28 on the pension, you will pick up about $0.10 on the refi, you will pick up another $0.25 from the Jefferson Street move.

And then slightly lower 747s charges get you to that number, I am kind of curious, what are the puts and takes in the underlying business? That are getting to that, not a lot of core EBIT growth in the year, or have I got a couple of numbers off?

No. You may be a little light on interest, because, keep in mind we will get, absent of cost to get to redeem the high-yield bonds. We will get nine months of savings on those next year. So --

Non-operational items lock you to almost $5.75, is the core business having big puts in the military side offsetting some growth in commercial?

There is a little bit of that, I would say that quarter from Red Oak is very operational. And again, we are not finished with our review, we did lose -- I mean, pension will be up, but not up as much as we had hoped originally. So I think -- I think you have it about right, again, we are just trying to give you a directional number here.

We just snapped a rough line here, we will be able to provide an awful lot more detail and a firmer number when we talk again at the end of the year.

Okay as you go into the next accounting block, Jeff, is the plan to effectively book at zero, to recapture some contingency at the start of that accounting block? Will you be in profit from day one at the start of the accounting block?

0 to 1.

Okay. The last one, in terms of the pension longer-term strategy with your funding ratio now towards almost fully funded. How are you waiting the benefit of immunization versus the detriments of headline income over the next several years?

We think about it a lot, Myles. That is a balance that we will have to weigh. I think immunization can happen in a variety of scenarios by going more fixed income, and de-risking it that way.

But those are things that we -- not only is it just the P&L at risk or the taking away, it is also the capital allocation issue. When you say we're getting close to fully funded, you are looking at about -- insurance companies, that is why they are profitable, they take a pretty big premium over and above your GAAP liability to immunize, so you will not get out for your GAAP liability, so when we think about being fully funded, that might be $200 million light.

To me, it is way more a capital allocation issue about debt reduction, share repurchase, better dividends, investment in new programs. Than just sort of accounting and engineering. Capital allocation issue.

Thank you. Good luck, Dave.

Michael Ciarmoli, KeyBanc Capital Markets.

On the top program movement, you saw some struggles with the tanker, but that leap frogged the Blackhawk and the V-22. What kind of conditions are those programs in? Did they get materially worse in the quarter?

V-22 was not, it could have been an order issue. The 67 leaped a little bit because more of the tankers are filling up the 24-month backlog. And we are on -- we talked about this before, that our contract at aerostructures on Blackhawk is one that is winding down, we knew that when we bought that.

So I think although the heritage company has continued to pick up Blackhawk work, and we are always hopeful that Sikorsky would extend the contract. Right now, I think the aerostructures piece of Blackhawk is probably continuing to diminish third quarter.

Fair enough.

You think about the 767, you know that we talked about a significant reduction this year in the production rates. You think about our backlog and that list as being a forward-looking 24 months, as we go through, and just get the gaps behind us, it will naturally be -- it will look like a higher growth and they move up the list in that regard.

Okay, fair enough. Dave, I know you have rough estimates out there. But if I were to bridge the gap from the $8.25 now, down to your $6.75, you have the C-17 and the 747, is there anything else in the outlook?

Is the military a bit softer? Any other material movements resulting in that $1.50 step down?

We will not get into individual programs, but what I can tell you is that, particularly in military, it is just a little bit here, a little bit there, and all of a sudden, it adds up to a decent number at this point. There isn't another C-17 or 747 out there, in terms of either a program dying or profitability vanishing. Since we gave that guidance, I think we are a little bit more bearish on military build rates.

Okay.

I doubt that would surprise anyone.

Sure. The last one, the A350, a nice win, $20 million annual run rate. Is this the tip of the iceberg? Can you get more content on that program? Should we think about this as a max content on the A350?

No. Clearly don't do that. We have one additional product on the A350 that we have not announced, simply because it is the kind of stuff that we normally win.

It is done, for example in the systems companies, and so we are adding A350 contact regularly. When we put some headline wind out there, and hopefully we'll be putting some more out, that is just simply what it is, the headline does not in any way encompass our ship set value on A350.

Fair enough. Thanks.

Sam Pearlstein, Wells Fargo.

Can you help me with the $7.75 down to $6.75 for FY16, call it $1. Jefferson Street is getting better, and I know pension is a little bit less, but what are the moving pieces that take you down that $1?

I think the 747 is the lion's share of it. It is probably close to $0.80, just in aerostructures. Keep in mind that heritage Triumph companies have decent content on that so they are losing the 2 to 1.5 per month.

So even on our -- there are very good programs there, so I think that is the biggest. There are some step downs, or in a couple of cases, programs that were scheduled to go up, that are now staying flat, that have been built into our original guidance. But the lion's share of it would be the 747.

I thought when you had taken the charge back in September, the sense was that the future blocks would also still be a relatively low margin? Therefore, when you were still comfortable with that number, $7.75, that some of that already embedded a lower margin on the 47. Is that different now?

We were using a slightly higher starting point, given -- you are asking for the -- I'm not sure which one you're trying to bridge, Sam, but the biggest drop from investor day to now is the 47. If you're asking for the bridge from September, when we believed it was still achievable, I think there, it's -- as we went through our business planning process, it's -- this isn't going to ramp, this is going down, this is being deferred, still good program.

And we will detail all of that, so it depends on which one --

I was thinking more the latter. It is still program by program?

That is right.

A bigger picture question is, we've now seen the September change to now. Why should we believe there is not another 47 adjustment to come? What are you doing differently about your forecasting or estimating, now versus back in September?

I think it is -- it's probably at a different level of detail, but the point that Jeff made earlier, now that we're back on schedule, virtually 100%, we are not judging when we are going to have the premium freight or when it will stop. We are, in many cases, early. That has a tremendous number of benefits.

I think we have taken out a lot of the variables that would lead to a repeat of this. But the question is a good one, and it is up to us to show you that it does not recur. We have been shocked if you didn't ask it, but I think the fact that we are on time is a very good indicator that a lot of the variables, as long as we can keep them sustained and get even better, is what leads us to conclude that program, A, stays profitable, and B, that we are not looking at another disappointment in 90 days.

Okay. Thank you.

Eric Hugel, S&P Capital IQ.

Dave, to follow-up on that last question, how long have you been running on the 747-8 at this caught-up rate now? That you are comfortable that you can maintain this?

Weeks.

Really, not long. Certainly within this month, I would say.

That was to Jeff's point earlier, we decided over the holidays in December to put the foot on the throttle and get caught up. And that was -- our guidance did a good job in Dallas, that was not without a cost and some of that is reflected in the numbers you are seeing. Getting caught up was very important.

The schedule that you have, this Table B, does any of these cost extend into 2015? Or is all of these costs -- you're not expecting any more of these charges to play out into 2015?

Correct. We haven't issued the guidance for 2015. That would be in our number for -- we would assume this very, very low nominal profitability in the number that Jeff gave you for FY15. There isn't another stow-on effect that has been deferred.

Okay. One more question on the 747-8, just remind in terms of your contract with Boeing, if Boeing reduces the rate farther below 1.5, is there a point where you can re-negotiate the price per unit?

Yes. But I don't believe, depends what the rate cut is, whether that would cover 100% of the impact.

There is a contractual figure point with lower rates, but I don't think anybody wants to go there.

Sure, that is all that I have. Good luck, Dave.

Steve Levenson, Stifel Nicolaus.

Just in relation to the deferrals, we have seen this with at least one other company, do you think this is going to become a pattern, where the onus to hold inventory goes on to the suppliers, or do you think this was just a calendar year-end situation, that is a one-time event?

We see it every quarter, Steve, but this was on steroids. And I think -- it was very much working capital driven. We are not -- I don't think we're anticipating anything like this at the end of our fiscal year.

Okay.

I'm sure we will get a few, but not -- we always get that, by the way. It's just, this quarter seemed to be unprecedented.

Got it, thanks. Are there still at Boeing personnel at Marshall Street, or have they now gone home?

There are. There are still Boeing personnel there. I think that's that there is still American military personnel in Germany.

I think that we are always going to have Boeing people in our plants, and they should probably should be there. And most of them are very helpful. That would be kind of the armies of folks they have had there, have certainly been reduced, and we just have a small contingent there.

Got it, thanks. Last one. Apparently Boeing is getting pretty serious about partnering for success, and we have heard that they have sent out some letters to certain suppliers, telling them not to bother bidding for 777-X work, did you get one of those letters?

We have not received such a letter. In fact, we are working with Boeing on 777-X now.

Got it. Thanks very much, and thanks for everything, Dave.

J.B. Groh, D.A. Davidson.

Jeff, you mentioned briefly your supplier initiative that you have. Can you go into done details on that? One, how should we gauge the success of that, going forward?

And two, is any favorable impact from that baked into these 2015 and 2016 numbers? Or is there incremental potential there?

Well that we'll, I'll keep you updated on what is going on with that. I think it will be successful from a cost reduction standpoint, and should in fact also benefit the suppliers that want to participate. The benefit that we expect to achieve there, at this point, I think can be counted maybe in the low tens of millions of dollars, potentially, on a annual basis.

Is that baked in? I would say that it is not entirely baked in, I think if we went to our companies and say, they would try to convince us that it is already in their plans for next year. That may partially be correct, but I think there is incremental benefit that should provide us some conservatism in the numbers that we are putting out, so there will be a benefit to that.

Thanks, and good luck, Dave.

Steven Cahill, Royal Bank of Canada.

I was wondering if first you can talk about the $17 million in addition 747 program charges. How much of that was expedited shipments versus everything else that you gave some color on?

I think that was probably -- $3 million or so. That was the Antonovs. There probably some premium rail in there that I do not quite have a handle on.

Okay. My follow-on is, that looks like then we had a pretty significant increase in program costs, outside of the shipping stuff. I guess, what can you say to give us the most confidence that the $3 million for Q4 doesn't do something similar to what the $11 million did in Q3? How do we think about that?

Well I think you just -- basically say it again, there is a certain pace, there's a certain frenetic activity that happens when you are behind, and that leads to quality issues, that leads to all types of things. We are now back on schedule working at a overtime level that is more normal. We will have, in fact, some impact on additional bump and roll as Jefferson Street shuts down and more new mechanics had over to Marshall Street.

We think we are in far better shape, not only being in good stead on delivery, but also on the fact we are basically starting a new block, a new block that has been projected to come in at basically break even, and one that has some ability to fail in minor ways and not negatively impact our EAC. I just don't expect to see it.

Okay that is very helpful. A quick follow-on, a couple assumptions that are in the FY15, FY16 numbers?

Can you tell us what the assumption is on both the 747-8 production rate, and also just roughly, what you're expecting in terms of commercial aftermarket growth? Thank you very much.

I think the 747 is 1.5 per month, for basically forever now. I think that is our marching orders for the foreseeable future. In commercial aftermarket growth, I prefer to defer that until we give specific guidance.

Okay. Thank you very much.

Yoma Abibi, JPMorgan.

My question is a follow-up on the $600 million of cash flow over the next two years. As we look at 2015 and 2016, is there anything to believe one year would be significantly better or worse than the other?

They're both very good. They are both around $300 million, so no, it is not like it is $100 million and $500 million, they are relatively even.

Okay. Thank you. One last one, your leverage is relatively low, you're talking about debt reduction, why do you need to reduce debt from the current level?

I think we have plenty of debt capacity. We have always highlighted that we view ourselves as a pretty conservative company. And frankly, we are sort of at the higher end of our comfort level, and that is a very traditional view of Triumph since probably 1993.

The bankers would lend us all kinds of money, given our pretty typically good cash flow, and our EBITDA, but I don't believe we think we are lowly leveraged at this point. So we would like to reduce the debt a decent amount, and then balance it with other things. I think that is more of a philosophy issue.

Thank you. That is all that I have.

Myles Walton, Deutsche Bank.

One follow-on question, I asked last time, what the stock word is, I think it is pertinent to ask again. So share repurchase as an option of capital deployment, given you'll have $100 million of free cash flow in the fourth quarter, $300 million each in the next couple of years being generated, why not go on the aggressive for share repurchase at this point?

Well, I'm sure we will talk about it Myles in our upcoming Board meeting, in terms of aggressive buy, I don't think that is in the cards in the near term. Again, I think we look at our debt levels, I think we would like to clear the year and see 47 stabilize before we would get aggressive. But I don't think we are way off from your thinking, that it is something that we might want to do.

There are no deals or kind of M&A that's in the pipeline, that is preventing you from doing it, it's just a measure of whether or not you have made a decision to do that yet?

Correct. It's not like, if these three deals fall apart, we're jumping in head-first, no. That is not the analysis.

Okay. Thanks.

(Operator Instructions)

Since there are no further questions, this concludes the Triumph Group FY14 third-quarter earnings conference call. This call will be available for replay after 11:30 AM today through February 5, 2014, at 11:59 PM.

You may access the replay system by dialing 888-266-2081 and entering access code 1630473. Thank you all for participating and have a nice day. All parties may now disconnect.