Triumph Group Inc (TGI) 2018 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 third quarter fiscal year 2018 results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation. (Operator Instructions)

On behalf of the company, I would like to read the following statement. Certain statements on this call constitute forward-looking statements within the meanings 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 property of Triumph Group, Inc. It may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I would like to introduce Daniel J. Crowley, the company's President and Chief Executive Officer; and James F. McCabe, Jr., Senior Vice President and Chief Financial officer of Triumph Group, Inc. Please go ahead, Mr. Crowley.

Okay. Thank you, Brian, and good morning. Welcome, everyone, to our conference call on Triumph's third quarter results. We had a solid quarter in Q3 and are maintaining our fiscal year '18 full year guidance for revenue and earnings, while improving our cash forecast for the year.

Our customers are seeing the benefits of Triumph's transformation, and I'm confident about our ability to translate this progress into shareholder value creation.

Now before we get into the details of the quarter on Page 3, I'll recap the 5 imperatives we set for FY '18 towards our objectives of predictable profitability and positive cash flow. First, eliminate program cost overruns. Q3 was the second consecutive quarter of positive cume catch-ups, reflecting net favorable program performance. Two, ramp down development program spending. We're on track to complete the Bombardier Global 7000 engineering work in Q4 after 6 years of challenging, but ultimately successful design and development work. Three, fix Triumph Aerospace Structures backlog through improved execution, contract renegotiations, outsourcing of less profitable programs and new wins that carry higher margins. We made measurable progress in Q3. Four, reverse the trend of increasing inventory. We set a goal of cutting $100 million in physical inventory in FY '18, and we're confident we can achieve this target. And then fifth, increase our new business backlog to reverse our revenue contraction. Our backlog now stands at $4.36 billion year-to-date, and backlog is up 9.5% year-to-date. Now each of these initiatives required intensive effort and changes in how we operate at the process level. They're making a difference in our overall financial health and create the conditions for predictability in FY '19 and beyond.

Now regarding our results, our revenue of $775 million in the quarter supports our previous guidance of full year revenue of $3.1 billion to $3.2 billion. We anticipate revenue growth in FY '19, after what we expect to be a trough year in FY '18, as we convert backlog and replace sunsetting programs and transition development programs into production.

When we account for adjustments cited in our press release, our earnings per share was $0.76. We did have a noncash impairment of our Precision Components' goodwill in the quarter, in part because of the consolidation with Aerospace Structures and due to competitive challenges in the build-to-print market, reinforcing the need to further reduce cost to improve margins and cash generation. Jim will discuss this further.

We're maintaining our full year adjusted earnings per share guidance of $2.25 to $2.75 and are focused on year-end deliveries to make our fourth quarter earnings.

Free cash use of $92 million in the quarter cover the liquidation of customer advances, $22 million of development program spending and inventory investments, primarily on the Global 7000 as we transition into production. We are improving cash use guidance from $450 million to $500 million to $325 million to $375 million as a result of inventory-reduction efforts and customer advances.

Turning to Page 4. On the cost-reduction front, we're on track to achieve our goal of $96 million for FY '18 and $300 million through the end of fiscal year '19 through our supply chain initiatives, consolidation, lean deployment, and where advantageous, outsourcing work better performed by our supply chain.

The example of this strategic outsourcing is the recently announced placement of the E2 regional jet fuselage work to Korea's ASTK, a proven supplier of Embraer and Boeing aircraft structures, who already builds many of the E2 piece parts. Doing so will free up Aerospace Structures' resources for other production programs and new starts, while fully satisfying Embraer's delivery and quality requirements. Our E2 development is now complete and we're in the early stages of production ramp, so the timing is right to make this transition. And we plan to reallocate the factory space in Red Oak used on E2 to wing production on other platforms, a better use of both Triumph and ASTK's capacity, resulting in an improved business case for both firms while de-risking our backlog.

We also captured significant material savings in Q3 on the Bombardier Global 7000 program through competition. We will continue to outsource work where there is a better match between the program's needs, suppliers' capabilities and Triumph's financial goals as we ensure the right parts are built at the right places at the lowest possible cost.

Another important action in the quarter to enhance profitability was the consolidation of our Precision Components and Aerospace Structures business units. Recall, in April of 2016, we integrated 47 operating companies in overlapping business areas to create 4 focused business units. At that time, Precision Components was about a $1 billion business with 19 operating companies and 27 sites. We since streamlined the group and reduced the number of OpCos to 7 and on our -- are on a path to close 5 sites. We put the right teams and processes in place, which led to better operational results, fewer red programs and higher customer satisfaction. Operationally, we fixed red programs such as the Boeing 767 landing gear machining, the A350 bracket machining and Global Hawk composite part production. We invested in reinforced thermoplastic laminates, and Precision Components also won new business such as the Canadian nuclear end fitting program, Cessna Longitude parts and Boeing 777x interior and composite components. So having stabilized and rightsized Precision Components and jump-started their growth, combining the 2 business now makes sense to improve profitability.

Components and Structures have $110 million of intercompany work. They serve the same customers. They source from the same suppliers. And they're both headquartered in Arlington, Texas, where the staffs are going to be combined. So the combination is among a number of critical steps we're taking to better position Aerospace Structures by reducing cost and improving overall competitiveness.

We will also continue to pursue opportunistic divestitures of noncore capabilities that are better aligned with best-in-class pure play companies. Now taken together, these cost-reduction activities de-risk and strengthen our backlog and profitability as we focus on higher-margin programs with growth opportunities.

Q3 highlights include early results from our inventory attack team, who are tasked to reduce our physical inventory levels from their peak in December by over $100 million by the end of this fiscal year, which we're on track to do. Along with our lean operating system events, these actions get at the heart of how we plan programs, manage our supply chains and factories and will benefit FY '19 and beyond. The combined benefit of customer advances in the quarter and our inventory-reduction efforts improved our overall liquidity, even as we increase inventory levels associated with production ramp-ups.

As we closed out FY '18, our second full year of the transformation, we're beginning to see the benefits of our operational new business and financial improvements, which we expect to benefit our out years.

So turning to Page 5. Let me give you an update on our progress on organic growth. After 3 years of revenue contraction, we are now seeing the impact of our new business development team and processes. You can see a few of our competitive wins in the quarter for Triumph's Integrated Systems division, including the landing gear system for the Sierra Nevada Dream Chaser, engineered components on the 737 and 787, a key takeaway of a Pratt & Whitney military engine-mounted accessory drive and our selection to provide a propeller gearbox for a new Lockheed Martin program. In Product Support, we were awarded an interior refurbishment program from a major U.S. carrier and a contract from Innovative Solutions & Support to provide line labor in the removal and replacement of cockpit equipment from multiple aircraft types.

Touching on follow-on awards. Bell awarded Triumph Aerospace Structures a 5-year extension of our metal bond support on the AH-1Z program and our recent announcement on the Boeing 767 contract extension, spanning all variants over a 10-year period, builds on our partnership with our largest customer. And this partnership continues to gain momentum, not just with Boeing Commercial, but also Boeing Defense and Boeing Global Services, where we were recently notified of our selection to provide MRO services that support a Boeing aircraft through our Thailand facility.

Our new business pipeline stands at $12 billion, roughly half of which is military, while our win rate and book-to-bill, now 1.15 year-to-date, are both up. We are well placed on numerous military pursuits and are driving to increase our military content to at least 30% of our sales.

I recently visited customers, including Honeywell, General Atomics, Northrop Grumman, Boeing Commercial and Boeing Defense. Each of these visits left a positive impression on both parties. And what I take from these visits is our relationships with our long-term customers continue to improve. Building on the recent partnering agreements, Triumph is no longer on any legacy customer no-bid list. OEM difficulties with other suppliers on price negotiations or performance is creating new RFP opportunities for Triumph. And while price remains a strong factor, they appreciate our responsiveness and willingness to align with their supply chain strategies.

Also, competition for new start military programs is heating up, and we're offering greater value-added through integrated structures and system designs at multiple primes.

And then last, partnerships for aftermarket are the future, including new business models and contracting arrangements. It's all about adding value and discriminators, but encouragingly, we're being pulled in, not pushed out.

Turning to Slide 6. I provide my take on the market trends, which influence Triumph's longer-term outlook. The recent continuing resolution ended the government shutdown and it may lead to an agreement on the defense budget, which appears to be converging around $621 billion, plus OCO of $66 billion. Within this budget are marks for key programs such as CH-53, CH-47 and V-22, where Triumph holds substantial content. And JSF, F/A-18, B-21, T-X Trainer, the OA-X light attack fighter, many other programs that are vital to the security of our country. Triumph is bidding on system components for the B-21 Bomber and JSF, structures and components for the MQ-25 refueling drone and life extension programs for the T38 and F-15. To quickly grow our military portfolio, we're also aggressively targeting takeaways on existing programs.

On the commercial side, you're all well aware that rate increases on the narrow-body programs and the revenue lift they will provide to our Integrated Systems business unit, but I want to highlight our work on narrow-body engines. Triumph is well engaged in the engine market overall, where GE is our fourth largest customer. We're also building substantial content with Rolls-Royce and Pratt & Whitney. Triumph provides the internal gearboxes for both the CM -- CFM56 and the LEAP engines through our Integrated Systems division and we anticipate increases in revenue as LEAP rates increase.

From the Structures side, demand for large-cabin business jet market remains robust, and Triumph is well positioned within the market segment. We support 5 Gulfstream aircraft programs today. And with our restructured Global 7000 contract and improved customer alignment, Triumph is ramping up productions of wings in support of anticipated deliveries as this exceptional aircraft prepares to enter the market later this year.

I want to congratulate Bombardier and our dedicated team on Tuesday's first flight of flight test vehicle #5, called the Masterpiece, which joins a test fleet as has flown over 1,300 hours now. This fifth aircraft will allow final validation of test results to date. And with our design and certification efforts completing in the coming months, these flight tests represent significant risk-reduction events for both Bombardier and Triumph.

As Airbus announced, the A380 program received the anticipated order from Emirates, and this will provide greater out-year revenues for Triumph as well.

Finally, we are following developments related to the vertical integration of the OEMs, the most recent being the JV between Boeing and Adient to provide aircraft seating. These actions reinforce my perception that commercial markets are adopting automotive approaches, while military markets are adopting commercial practices. When taken with recent OEM actions in cockpit and cabin electronics and nacelle/wing integration, it reinforces the importance of maintaining partnerships in the industry to preserve Triumph's platform content.

To better understand customer and market trends on the corporate governance side, we recently added 2 new directors to the Triumph board: General Larry Spencer is a retired 4-star general, who had a distinguished career in the U.S. Air Force and brings extensive leadership experience, including in logistics and MRO; Dan Garton is the former American Eagle CEO and American Airline CFO, and has extensive experience working with many of the aerospace OEMs we serve, as well as the Tier 2 major component and engine suppliers and aftermarket providers. These appointments add financial acumen and extensive experience in the growing markets we serve and underscore our commitment to refreshing and adding expertise to our already strong board.

So in conclusion, Q3 is another step forward towards our overall recovery. We're seeing the improvements with each new quarter as we continue to do what we said we would do.

Jim McCabe will now provide highlights on our current performance and full year outlook. Jim?

Thanks, Dan, and good morning, everyone. Our third quarter continued to show progress with our transformation, as evidenced by the sequential improvement in our results and makes us increasingly confident in our prospects to deliver year-over-year growth in fiscal 2019.

On Slide 7, you'll find Triumph Group's consolidated results for the quarter. Our net sales of $775 million improved sequentially, and on an organic basis, declined modestly from last year as higher production rates on the 767/Tanker largely offset the impacts of the completion of production on 2 large legacy programs, the gradual wind-down of several others and the timing of deliveries on certain programs. Notably, our sales comps are improving as the year-over-year decline in Q3 was our smallest in over a year. As we indicated in our last call, we believe that the second quarter of fiscal 2018 was our sales trough and that we've made the turn in the trajectory of our consolidated net sales.

Adjusted operating income improved sequentially to $62 million, representing an 8% adjusted operating margin. As noted on the slide, our adjusted operating income includes a few items -- excludes a few items, the most significant of which is a $190 million charge for impairment of goodwill in our Precision Components segment related to our decision to combine this segment and our Aerospace Structures segment. We view this as an important strategic decision that will enable us to maximize the profitability of the combined operation. Looking ahead, we will impair the remaining $345 million balance of goodwill in Precision Components in the fourth quarter when the segments are combined.

3/4 of the way through fiscal 2018, our sales remain on track with the expectations we set at the beginning of the year and we continue to anticipate that our earnings in the fourth quarter will be our strongest of the year.

Turning to our results by segment. On Slide 8, Integrated Systems, after accounting for the divestiture of our Embee business, posted an organic sales decline of approximately 3%, due predominantly to rate reductions on the 777 and A380 as well as the timing of deliveries on certain other programs. Segment operating margin, including $1.3 million of restructuring costs, remains strong at 18% and improved sequentially, including the impact of our cost-reduction initiatives. Integrated Systems continued to expand its backlog during the third quarter. The segment's year-to-date book-to-bill ratio was 1.3:1, driven in part by wins in the Dream Chaser, which is pictured here on the slide, and wins on the 737 MAX and 787 programs.

Turning to Slide 9. Continued robust demand from OEM customers for accessory components led to growth in sales in our Product Support group. After accounting for the divestiture of our engines and APU repair businesses, segment sales increased by more than 9% over the third quarter of last year. Product Support's already healthy profitability improved further in the third quarter on both a sequential and year-over-year basis. Segment operating margin of 18% included operational efficiencies from our transformation initiatives. Product Support is a high-potential opportunity for Triumph as we anticipate continued top line growth in the business, coupled with mid- to high teens margins to translate into increasingly meaningful source of cash generation for the company.

Moving on to Slide 10. Decline in sales in our Precision Components segment was the result of continued lower production rates and pricing on the 777 in addition to lower pricing on the 787. Segment margins, adjusted for the previously discussed goodwill impairment, improved slightly, both sequentially and year-over-year, reflecting the benefits of our cost-reduction initiatives and lower consolidation spend.

Slide 11 summarizes the third quarter results for our Aerospace Structures segment. Rate increases on the 767/Tanker were largely offset with the anticipated impact of the continued rate reductions on certain Boeing and Gulfstream programs. Also worth noting, segment sales increased sequentially and reached their highest level this fiscal year. Aerospace Structures year-to-date book-to-bill ratio was 1.1:1, supported by the Global 7000, 767/Tanker and V-22 programs.

During the third quarter, Structures had a net favorable cume catch-up adjustment of $5 million, reflecting both our improved operating performance and our enhanced customer relationships. Segment operating margin include the impact of R&D investments and increased amortization expense on certain intangible assets as well as reduced fixed cost absorption on lower volume.

Our Aerospace Structures operation has made tremendous progress, overcoming numerous challenges since we began our transformation nearly 2 years ago. Additionally, we expect our decision to combine the Precision Components segment and Aerospace Structures to yield synergies that will enable us to better serve our customers while improving margins.

Turning to Slide 12. Free cash flow was $92 million during the quarter. This includes $250 million of customer advances, which will liquidate over the next several years. These advances, like the advances we negotiated last year, are evidence of our strong customer relationships and our improved working capital management. Our revised FY '18 cash use guidance reflects the receipt of the customer advances during the third quarter, along with the liquidation of these advances and the previously received advances. Also impacting our cash use expectation for the year is the extended timing of deliveries on certain development programs.

Looking beyond the current fiscal year with respect to cash, we are increasingly confident that we've taken the steps necessary to make a dramatic swing from the cash use that we've had in the past 2 years to a healthy level of cash flow by FY '20. As we enter our annual planning process, we are using the previously stated planning targets of at least breakeven to normalize free cash flow in FY '19 and in the range of $200 million in FY '20. Normalize means excluding the impacts of customer advances. We expect to provide our guidance for FY '19 on next quarter's call after we complete our planning process.

On Slide 13 is a summary of our net debt and liquidity. Our net debt at the end of the December was approximately $1.3 billion. Our cash and availability are sufficient for our needs at about $780 million. And we are in compliance with our debt covenants.

Regarding our outlook on Slide 14, we are maintaining our previous guidance ranges for sales and adjusted EPS. We are improving our outlook for free cash use to a range of $325 million to $375 million. We continue to expect that our fiscal 2018 quarterly sales and adjusted earnings per share will peak in the fourth quarter.

With regard to the new tax law, we recorded a provisional net benefit during the quarter of about $22 million, of which $24 million was due to the remeasurement of our deferred taxes at the new lower rate, partially offset by approximately $2 million of tax imposed on unremitted foreign earnings. Excluding this estimated impact of the new tax law, on a full year adjusted basis, we are reducing our effective tax rate to approximately 1% for the year. We've also modestly reduced our expected CapEx range to $45 million to $55 million.

So in closing, we continue to take numerous large and small steps down our transformation path, and the results to date are consistent with our expectations. At this point, the actions we've taken with respect to cost reductions, operating performance improvements, divestitures of noncore businesses and business development and backlog replenishment have put us in an excellent position to establish a growth trajectory and begin delivering sustained profitability and positive free cash flow over the next 24 months.

Now I'll hand it back over to Dan to wrap up, after which we'll welcome your questions.

Thanks, Jim. So closing out on Slide 15. Our Q3 performance reflects our continuous improvement mindset as we improve sequentially quarter-over-quarter and see the leading indicators of recovery and execution on new business wins. Consolidating our Structures and Components will save money and will allow us to better support our customers. And as investments in development spending and restructuring begin to pay off, we expect FY '19 to be an inflection point for Triumph as we celebrate our 25th anniversary as a stand-alone company.

At this point, Jim and I would be happy to answer any questions you have.

(Operator Instructions) Matt McConnell.

RBC Capital Markets. So you've announced a bunch of wins with Boeing over the past few months or really few quarters, not many of them have much, I guess, financial information. Could you just size what these wins have kind of totaled or how much your content has changed on some of these platforms, maybe 767 in particular? And what's the typical lag between when you announce these wins and when they start hitting your revenue?

Sure. The 767 is one of our biggest programs with Boeing. It's performed at 2 sites, in our Grand Prairie, Texas and Stuart, Florida facility. We make structures like the large wing center section, which is essentially the cruciform the wing and the fuselage are built on. And we do approximately $14 million per ship set worth of content on the 767. So what this contract extension does is it allows us to build not only the tanker variant, but follow-on for commercial, which was otherwise going to come to an end and potentially could be competed. So it extends the program now for a full 10 years. And this is consistent with Boeing's desire to create centers of excellence, as they call it, both inside Boeing and at their supply chain that focus on a set of products and perform it well. And we're investing cash right now to consolidate the work from our Grand Prairie plant down to Florida and that will further improve our business case. So you can think about that program as being worth -- over the life of the program, the extension over $100 million worth of work. The other awards that we have from Boeing coming out of Integrated Systems and our Precision Components -- I won't attempt to dollarize them here on the contract. They tend to be smaller. They're in the sort of $10 million to $15 million range, depending on the individual contract. But the most important thing I'd take away is that we were in the doghouse with Boeing 2 years ago and we had some struggles to deliver on time and with quality on 747, 767. And the turnaround on these programs is really opening the door to follow-on, not just with Boeing Commercial, but with Boeing Defense.

Okay. Great. And then maybe just a follow-up on cash. It's the second year in a row of pretty sizable customer advances. And would it be fair to consider that almost a new normal? Or is this a fundamental change in the way you're trying to get paid on these programs or -- I know last time you had a big inflow of advances. We said, "Okay. It's going to reverse over the next 12 to 18 months." Could there be a continued stream of these advances just from a structural change in how you're getting paid?

Yes. In the past, Triumph was often a source of vendor financing across multiple OEMs to the point where it was putting our liquidity under great pressure. And so -- and having a cards-facing-up discussion with the prime saying, "We need operating cash to support our supply chain cost and payroll and making investments in capital equipment." We got great responses, and the expression I use is, "Better a borrower than a lender be." And we were a lender at very high levels for a long time. So it's the right thing. It's in the interest of the primes because -- I mentioned the 767 consolidation. They're going to get improvements in performance on 767. We'll benefit on cost. We'll make investments in tooling and automation that allow us to do all 3 versions on the same line. So it's a win-win. They're not just doing it for charity, and we have to earn it through performance. Jim?

Yes. It's an -- Matt, it's an optimization of cash, if you think about. The OEMs' cost of borrowing is much less than ours. So part of the mix, we can negotiate that, which we try to do all that time. We're going to do that. It's going to improve our working capital. And it's going to lower the overall cost of making parts.

Sam Pearlstein.

Wells Fargo. Can we talk a little bit about the advances? I just -- you've got a $250 million advance, but cash flow only went up by about $125 million. So what's the difference here -- did -- I know CapEx dropped by about $5 million, but what actually changed for the worse, like working capital, in terms of the overall cash flow picture?

We ended up spending more on production on a couple of programs. Global 7000 was one, and also one was transition costs I mentioned. However, those are temporary. And as production deliveries accelerate on Global 7000, we'll see that inventory position unwind as well. So that's really the net of the 2 advances versus additional spend on working capital, but it was still a favorable adjustment and we expect it to continue to improve in FY '19.

Yes. Within the quarter, absent the advances, we did better than we were planning internally. For the full year though, as you saw, our guidance is a little lower net of the advances. That's why we got the advances, so we could have better guidance. But the way I look at it is, this is really timing of deliveries. And it's a lot better than a year ago when we were putting money into development. We weren't sure when we were going to be able to collect it. So it's just timing.

Sam, we're also not as efficient, I think, in some of our material and supply chain processes as we need to be. This inventory attack team is finding some low-hanging fruit on the way that we issue purchase orders and accept parts from suppliers, lot sizes and min-max quantities. And so that's contributed to $100 million improvement into working capital that we wouldn't otherwise have had if we hadn't launched it. So watch for follow-through on that next year.

Okay. And then just to think through into next year, into fiscal '19, I know you're not providing guidance at this point. But Jim, you talked about a normalized level of cash excluding advances. So if I think about just on a reported basis for fiscal '19, will you actually now be cash negative because now you're paying back some of these advances even if on a -- I guess, excluding advances, you might be close to that breakeven level?

Yes. So good question. And that's why I said excluding advances because we do anticipate getting new advances going forward. I just don't know what the timing and magnitude of them might be. As we said earlier, we're looking to this to be the new normal. We're managing our business to use working capital from the customers, which is less expensive. It benefits us both. So if we didn't get any new advances, I think that would be the case. But we're always working towards those.

Sam, what I'd ask you to recognize is that this will be the second year in a row where we outperformed our planned cash for the year and we're going to continue to pull all the levers and find all the ways to meet cash every year. That's our commitment.

Sheila Kahyaoglu.

It's Jefferies. Another one on cash flow, I guess. You've spent about -- deployed about $90 million on the development programs as it regards to the Global mainly. Can you maybe give us an update on how you're tracking there versus your target of $65 million to $100 million? Where you are in the program progress?

Yes. Sheila, so it's great to be looking at the end of the development spending on the Bombardier Global 7000. And over the last quarter, the team has been furiously wrapping up all of the engineering artifacts, the documentation that support entry into service. And for our work, that will complete in Q4. So you can look back now over years of trade studies to create this high-performance wing, the design of the wing box, all the control surfaces, all the harnesses, brackets, fuel systems, lightning protection, and that work's all done now. And I mentioned 1,300 hours of flight time now on Bombardier's test fleet. The feedback we're getting is very positive from them in terms of the wing performance. So coming to an end on development spending and then positive feedback on performance, it retires significant risk that we'd have future development spending in the future on the program. And now our energies are shifting entirely towards both supply chain readiness and the factory ramp-up. So we're excited to be where we are in the program after several years of hard work.

Yes. Sheila, the -- we're at the high end of the range, like we said last quarter. And the good thing is it really hasn't changed much. We're now focused on the hardware, managing that physical inventory that goes with ramping production as development winds down.

Got it. So does the program become cash positive in 2019? How do we think about that?

We haven't talked about when it's going to be cash positive. I think when we give guidance, we might be able to give more outlook around that.

Sorry, getting ahead of them. And then, just to clarify, not to beat a dead horse on this advances issue. It seems like it's a normalized course of business. Do we expect sort of a $250 million run rate every year with advances and paybacks over time? Or is this just a transitional period?

So that number as a percent of sales is not unreasonable, but we're not going to speculate. They tend to be episodic between -- across different OEMs based on the timing of negotiations or new starts. So it's a little bit difficult to model, Sheila. But as an aggregate, that level of advances wouldn't surprise me. We're not going to see $1 billion advances, nor should we just see $10 million. It's probably that order of magnitude.

Seth Seifman.

JP Morgan. I wonder if you could talk a little bit about Integrated Systems and it -- were sales down organically on a year-on-year basis if we adjust for the Embee divestiture? And if so, is there something that is keeping sales declining there? I might have thought, especially given the exposure to the narrow-bodies in that segment, by this point, we might have seen some growth?

Yes. Seth, this is Jim. The Integrated Systems, when you exclude the fact of the divestiture of the Embee coating business, was down about 3% year-over-year. And what drove that was rate reductions on 777 and A380 as well as deliveries of certain programs. We didn't get as much out the door this quarter as we'd like to. And we hope to make it up in the fourth quarter. So we do have a little bit of (inaudible) backlog. But looking forward for that group -- I mean, the book-to-bill is very strong at 1.3:1 year-to-date. So we're still very bullish on this group. We think it's just timing in the quarter.

Right. And with some of that delivery timing, the margin was also a little bit lower than it has been or is some of that related to delivery timing as well?

Yes, it's delivery timing, but also we had $1.3 million restructuring costs running through as well in that -- so you -- if you look at it on an adjusted basis, it's basically a little different.

Yes. They consolidated 3 Connecticut plants into 1 and they're consolidating the Maryland plant into Connecticut. So their spending this year on that has degraded their margins and cash.

Yes.

But the payoff comes in FY '19.

Okay. And then maybe as a follow-up, can you talk a little bit more about what's happening with the E2 and, I guess, the outsourcing that you talked about there? And what that means in terms of the financials of the program for you going forward?

Yes, I can. So E2 development's all done now and we're building both vertical tails and the fuselage and performing well in the contract. And we are ready to ramp-up the line. And as we began to look at both our factory space needs and our business case on the program as well as our supply chain, we concluded that Korea's ASTK, they already build most of the details that go into our fuselage. So logistically, they're going from Korea to Texas and then back to Brazil. And we did a trade study with them and found that it was economically better for us and for ASTK to do that work there. So our business case will improve. And then logistically, ASTK is going to put a facility in Brazil near Embraer's plant to make sure they maintain buffer stock on fuselage. So it really is a win-win-win. And you can look to us to make similar trades. And we'll put work that is higher complexity, wing work, in its place in that same factory and not have to expand as we up the rate on programs like Global 7000.

Rob Spingarn.

Crédit Suisse. This is Joe on for Rob. Quick question that I just wanted to clarify on your earnings guidance. You've got 2 months left here in your fiscal year and still a $0.50 range in the earnings guidance. And Dan, I know you mentioned that there was some -- potentially some timing of deliveries here in the fourth quarter. But just wanted to see if there are any major puts and takes or risk items that would get you to the high end versus the low end and how we should think about that?

No. It's mostly deliveries. You said it right. And it's not any one program. It's a lot of small deliveries across mostly Integrated Systems and Precision Components. So those leaders are working weekends and through the holidays to finish their year consistent with their plan.

Yes. And, Joe, as you know, EACs can be volatile when you do an update of estimates going forward, so I think that acts as a caution. We want to leave the range wider, but we are targeting the midpoint.

Got it. Okay. And then just one more, if I may. Dan, you mentioned OEM difficulties with some suppliers on price negotiations is creating new RFP opportunities for you. And I just wanted to ask if that's a -- well, first, if that's a go-forward comment or has -- in terms of future RFPs and bids that are in the pipeline now? Or if that's already been driving some of your recent new business wins? And then the second part of the question is, is it really just a price-driven discussion or are there any other considerations that are bringing the OEMs to the table?

So I'll start with the second part. The OEMs value right now, continuity of supply is the #1 thing. That's what gets buyers fired if they don't have parts on dock. Price is second. And then third is alignment with their terms and conditions. And one of the reasons that Triumph created a common operating system is these primes wanted to have a single set of terms and conditions, and they didn't want to deal with all these different entities. So we're much more easy to deal with now and there's fewer points of contact. And they do value responsiveness. And so where we've seen suppliers gap their lines and -- Airbus and Boeing and others have had to pay expedite fees, the phone rings for us. Or where they feel like they're not getting the price concessions year-over-year from some of the competitors, the phone rings for us. And then lastly, when they do some of these changes in aircraft architecture, like nacelle/wing integration or electrification of systems, we can come in and propose new solutions that take out weight and cost in step functions, and the phone rings for us. So it's really all of those things together. We got to earn it every day, but I think Triumph is a much more easy-to-deal-with company than we were in years past.

And has that dynamic -- just the first part of the question, has that already been one of the drivers behind some of your impressive recent new business wins? Or is that more of a kind of going forward?

I'd say the takeaways that we've had so far have mainly been the third category of design improvements, but we have seen more RFP traffic as a result of what the OEMs perceive as price gouging by others. Look for that to be a tailwind for us going forward.

Peter Arment.

Baird. Dan, maybe if you could just give us one -- an update on how things are progressing on the cost side for the G650 and the outlook there? And then, Jim, if you don't mind, maybe if you could just give us an update on the expectations around the adoption of the revenue recognition with 606.

Sure. So one thing -- G650 followed our production on G450 and G550 and both of those legacy programs were profitable and 550 continues to be so. 650 is a -- is really a stretch forward in terms of production tolerances and quality standards. It's a very challenging wing to build because the performance is high. And when we did the transition from Spirit to Triumph, it didn't go very well. And so they -- it took us much longer to get in the groove in production, but we recently recovered the purchase order dates. Our labor hours are coming down. They're not coming down fast enough to suit me. Know that the work is performed at 2 locations, the wing box in Tulsa and then wing completion in Nashville. And we recently revamped the Nashville line, and they're making very good improvement ship-over-ship. So we're excited about those hours coming down, and now we're focusing intensely on getting the Tulsa labor hours down as well. So we are not yet positive. We're not yet positive cash flow on that program, but we're working hard to get there.

Peter, it's Jim, on the second part of the question about 606. So -- actually we put in the slide deck on Page 20, you can see a few notes about it, but we're not putting any quantification of the impact yet. That will come next quarter. You'll see some disclosures in our Q about it. But generally, as you know, it's likely to accelerate revenue for us because you go to a cost-to-cost method instead of the units delivered method. But it could also trigger some nonrecurring forward losses as a result of the change in the way we recognize revenue. So we'll have to quantify that for you in the fourth quarter, so you'll know what to look for going forward.

Robert Stallard.

It's Vertical Research. I thought we'd stay on -- a couple of the issues that have been discussed already, cash and pricing. First of all, on these advances. If you don't get any advances next year, which may seem like an outlandish chance, what do you think the actual free cash flow burn will be? And then secondly on the pricing. How confident are you that with these more aggressive pricing terms you are signing up to together with cash up front, that you'll actually be able to make free cash flow profits on these contracts over the length of the contract?

So Robert, on the first part on the cash flow. So we're not going to give cash guidance on next year until we finish our planning process. But as I told you -- said before, we're looking towards much improved cash flow next year over the past 2 years. The advances will impact what the operating cash flow would otherwise be. And the advances, if they aren't replaced, there's probably about 180 of what's out there now that would burn off next year. So as we get closer to next year when we give guidance, we'll tell you what's in the guidance and what portion of that is advances that are burned.

Jim and I are focused on the cash components that are within our control, so headcount, facilities costs, working capital. And we put in a lot of time into those items. Advances do help. We're going to continue to seek them. What we're seeing with the primes, Robert, is that they are flush with cash and they're using it to help drive both capacity and price reductions in the supply chain. So they're not shy about deploying their cash to improve their supply chain efficiency.

But in terms of your profitability and cash flow, given that they're effectively doing you a favor on the cash side, are you still confident that over the length of the full contract, that they will be cash breakeven and profitable?

Yes, especially contracts that we've negotiated of late, like Bombardier and Boeing 767. Now these are programs that we put a lot of time and energy into the business case analysis. We didn't just take cash and give up margin to the point where the business case no longer closes. Absolutely not.

And then just a quick follow-up maybe, Jim, on the tax. A lot of stuff moving around at the moment. Do you have an idea of what the stable underlying tax rate will be going forward, maybe looking into next year?

We don't yet. It's very dynamic. Actually, the law itself needs some interpretation by Treasury. So we should have better guidance for that next quarter. But overall, we believe it's a positive for us and that the lower rate more than offsets any of the disallowed deductions.

Ronald Epstein.

Ron Epstein, Bank of America Merrill Lynch. Following up on one of Rob's questions. So to get the business case to close on some of the wins that you've gotten and assuming this is new business to you, so you've taken it from somebody else, what gives you the confidence that you can make money doing it? That's one. And then the follow-on is -- because I'm not so confident that Triumph before you guys, to be fair, could, what have you changed to make that happen?

So where to start, Ron? Leadership has changed, especially in Structures and Components. The processes by which we estimate and bid have changed. New product introduction. The levels of reviews. I review all 4 -- now 3 business areas every 30 days in detail in much of the same fashion we did at Raytheon. We've upgraded program managers. We're fixing our IT systems. We got a stronger culture of accountability. We're -- I'll say the biggest lever in terms of where we've seen improvement is in the leadership area. An example is -- I recruited a president from one of the companies I used to work at to come in and run our Stuart, Florida operation. And he immediately put in a management control room of all the key metrics. He brought in additional talent. He engaged the workforce. The workforce was drifting. There were some morale issues at that plant. There were quality issues. He understands how to build structures, so he immediately began to work on the producibility and tooling issues that were contributing to nonconformances. So there's no magic wand. It's hard work and competency in the right roles has been the biggest lever. Because some of the people in various roles in the company, they weren't bidding the work right, there weren't starting it up right and they weren't running it right. And the results showed as you indicated. So that's probably the biggest lever. But the close scrutiny that my EVPs and I and Jim have on the programs, the risk and opportunity register which we didn't have before, so we do a look-ahead as to where problems might bite us and try to mitigate them ahead of time. It's all those things. And that's what's allowed us to reduce the number of red programs and get to a positive cume catch-up in the quarter, now 2 quarters in a row. So it's a lot of hard work. Not -- it's in the detail level, but it's starting to pay off.

Cai Von Rumohr.

Cowen and Company. So Dan, you mentioned $180 million burn off next year. I guess, at the end of this quarter, it looks like progress payments were $409 million and they've been burning about $20 million a quarter, which would suggest ex any new advances that you'd still have a substantial number, $200 million area on the books at the end of '19. Is the burn off in '20 the same or does it kind of feather out so that that's less of a burden on your cash flow as we think about '20 and '21?

So Cai, it's Jim. In terms of the advances, yes, the burn off of the ones we receive this year is primarily in next year. So it would tend to feather out, but I think we have to look at the -- take a holistic look at cash flows and give you the guidance next quarter for '19 and maybe we'll have some indication of ranges beyond that.

Terrific. And then if I look at this quarter, it looks like contract liability amortization was up $7 million sequentially. Why was that? And maybe you can detail the EACs by the divisions, how big they were?

So I have to take a look at the contract liability. Typically, that's going to be on a unit basis as we ship out. So that would have meant higher shipments than previous periods on those units that were in a loss position and were amortizing fair value.

And we are looking forward to getting beyond the fair market contract liability amortization. It's really been difficult for analysts and investors to follow Triumph and understand earnings. And that's something that is going to sunset over the next 2 years or so.

Yes. And we certainly exclude that as we're looking internally at plans. We take into account that that's not cash income.

And our last question will come from the line of Noah Poponak.

Goldman Sachs. Can you just go back to exactly what happened with the Global 7000 that drove the change in the cash guidance ex the $250 million advance? I heard you saying extra spending. I heard you saying delivery timing. Was it the program itself or was it your products? Or can you just give us more detail on what happened there?

What I can say, of course, Bombardier should speak for the program level. And what I'll say is that we're working jointly with them to complete development and to ramp up early production. And if you came to our factory in Red Oak, you'd see a large number of wings that are in flow, and the clip at which we're shipping these is accelerating it. So Bombardier is now starting to deliver production aircraft to their completion center in support of their entry into service. So this period is unique in its concurrency of development, flight tests, ground tests and production transition. So next year, for us, FY '19, it's going to be more of a clean build process. We won't be doing any engineering change or we won't be supporting completion of aircraft up at the final assembly line in Toronto. We'll be shipping wings that have less travel work, which is always common in new programs. So those are some of those nonrecurring start-up line priming issues that we're working through jointly. And it's going quite well. And Bombardier is very pleased with our performance. We're in a better place from a working relationship. We're making joint decisions every day. And once the line smooths out, you'll see us burn off that working capital and have more predictable cash.

Ladies and gentlemen, at this time, this concludes the Triumph Group's Third Quarter Fiscal Year 2018 Earnings Conference Call. A replay of this call will be available later today by dialing toll-free number (800) 585-8367 or toll number (404) 537-3406 by using code 699508. Thank you all for participating today, and have a nice day. All parties may now disconnect.