Triumph Group, Inc.

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

Ill.

Thank you, and good morning, everybody. We had a third quarter of which we are significantly proud.

It's the best profitability quarter in the company's history. It was record -- obviously means it had record operating income and earnings per share.

We had significant improvements in our operating margins, specifically our Aerostructures operating margins were substantially higher as a result of our improved execution and realizations of synergies, about which we have been talking for a long time. We've had a very strong year to date.

Cash flow generation, Dave will speak about that in a moment.

In addition, the integration of Vought is progressing very well. Those of you who attended our Investor Day, we spoke about a number of manufacturing decisions at that time.

And those decisions have now increased to 30, of which 10 of those decisions have been substantially completed, 18 are in the implementation stage and 2 are in the planning phase, which means, at this point in time, we're tracking at approximately a $24 million a year run rate in our integration efforts.

Our backlog remains strong at $3.86 billion. Just an additional comment.

Since we don't give quarterly guidance, we don't feel that we missed any revenue, but to give you some insight, our nonrecurring revenues did drop during the quarter and 787 revenues slowed for the quarter. And this pattern will continue in the fourth quarter, about which I'll talk at the end of this call.

In addition, the Aftermarket sales were down but comparing -- but only compared to a record quarter last year, which was up 45%. In addition, our fourth quarter revenue will be up to somewhere between $888 million to $938 million, reflecting significant growth.

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

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

Turning first to the income statement, sales for the quarter were $826 million compared to $810.9 million for the prior-year period, a 2% increase. As stated in the press release, if we adjusted for a drop in nonrecurring revenue and a decrease in the 787 program, sales growth would've been 5%.

Operating income increased 36% to $117.6 million with an operating margin of 14.2%. Income from continuing operations increased to $65.9 million resulting in earnings per share from continuing operations of $1.27 per diluted share versus $0.88 per diluted share for the prior year quarter.

Included in these operating results were $2.1 million pretax, which equates to $1.3 million after tax or $0.03 per diluted share of integration expenses related to the Vought acquisition. Included in this amount was $1.4 million of primarily non-cash cost related to manufacturing moves.

The prior year's operating results included $1 million pretax or $700,000 after tax of integration costs. Excluding these expenses from the current year third quarter, it would result in income from continuing operations of $67.2 million or $1.29 per diluted share.

Net income was $65.9 million or $1.27 per diluted share. Included in the line Interest Expense and Other was a $2.9 million favorable adjustment due to the reevaluation of an earn-out liability associated with a prior acquisition.

EBITDA for the quarter increased 39% to $142.8 million. The number of shares used in computing the diluted earnings per share for the quarter was 52 million shares.

For the third quarter, sales in the Aerostructures segment increased 2% to $626 million, all of which was organic. Operating income increased 47% from the prior quarter to $103.9 million and included a net favorable cumulative catch-up adjustment on long-term contracts of $8.4 million.

From a program perspective, the cume catch is broad-based, and reflects a balance between improving contracts and contracts where performance lessened. The cume catch is primarily attributable to net improved performance in labor, overhead and material costs which we believe are sustainable going forward.

The segment's operating margin for the quarter increased 510 basis points over the prior year to 16.6%.

In the Aerospace Systems segment, sales for the third quarter increased 7% to $133.3 million, all of which was organic. Third quarter operating income increased 7% for the prior year to $18.6 million with an operating margin of 14%.

The segment's operating results included $800,000 of legal costs associated with the previously disclosed trade secret litigation.

As we had projected, and as Rick mentioned, sales in our Aftermarket Services segment declined to $68.6 million, an 8% decline from last year's quarterly record. Operating income was $6.9 million with an operating margin of 10.1%.

The quarter's operating results included $700,000 of expense associated with the American Airlines bankruptcy.

The next slide summarizes some key financial data related to the Vought acquisition for your reference. With regard to pension, we estimate that our net underfunding at March 31, 2012, will increase by approximately $140 million since year end, created by a significant decrease in the discount rate partially offset by strong asset returns.

We estimate that our pension expense or income for fiscal year '13 will remain fairly close to what we had originally projected at the beginning of the year.

Turning now to backlog. Our backlog takes into consideration only those firm orders that we're going to deliver over the next 24 months and primarily reflect future sales within our Aerostructures and Aerospace Systems groups.

The Aftermarket Services group does not have a substantial backlog. Our order backlog as of December 31, was $3.86 billion.

Heritage backlog increased 12.3% and 6.2% sequentially. Military represented approximately 30% of our total 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 Gulfstream G450 and 550 programs in second place.

Third was the Boeing 777 program, followed by the Osprey Combat Helicopter in fourth. In fifth place was the Airbus 8330, with the 737 Next-Generation moving up to sixth place.

Seventh was the 787, and in eighth place was the C-130 program. The 767 program was ninth, and in tenth place was the Black Hawk helicopter.

The drop in Black Hawk backlog primarily relates to a delay in new orders in anticipation of the next multi-year being awarded, as well as the loss of some Aerostructures volume on certain models to Sikorsky. As we have stated previously, the order flow of Triumph Aerostructures can be quite chunky.

For example, we have already booked almost $400 million of backlog in January.

Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing Commercial, Military and Space totaled 46.9% of our revenue, and was broken down 69% commercial and 31% military.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal '11, Commercial increased to 51% and Military decreased to 33%, Business Jets increased to 13% while Regional Jets remained unchanged at 1%, Non-aviation decreased to 2%. Finishing our sales analysis, the next slide shows our export sales for the quarter were $117 million or an increase of 5% from the prior year.

Turning to the balance sheet. In the next slide, for the months ended December 31, we generated $241.2 million of cash flow from operations before we made $97.7 million of pension contributions to the Aerostructures defined benefit plans.

After these contributions, cash flow from operations was $143.5 million. CapEx in the quarter was $24.8 million and $58.7 million year-to-date.

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

Included in this category is approximately $10 million associated with the Bombardier Global 7 8000.

In terms of production related inventory, we have remained diligent and have seen continued good work in that area. We now expect CapEx and investments in major programs for the year to be $110 million to $130 million.

Net debt at the end of the third quarter was $1.2 billion representing 39.5% of total capital. Conversion activity on our convertible debt was $21.6 million for the quarter and $50.4 million year-to-date.

The global effective tax rate for the quarter was 36.1%, and reflects only 9 months of estimated R&D tax credit due to its expiration on December 31. In addition, we filed a refund claim for approximately $29 million as a result of carrying back some of our post-acquisition tax losses to prior years.

The quarter's effective tax rate included approximately $1.6 million or $0.03 per diluted share of tax, due to the recapture of the domestic production deductions taken in those years, offset by a net tax benefit related to the filing of our fiscal '11 return.

Finally, as a reminder, our fiscal '12 guidance excludes integration costs associated with delivering on the Vought synergy targets, which totaled $3.7 million, pretax, for the 9 months ended 12/31/11, as well as any Q4 pension cumulative catch impact. With $3.44 of earnings per share delivered through 3 quarters, approximately $4.70 of guidance suggests a Q4 EPS of approximately $1.26.

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

Thanks, Dave. A few comments on the 3 quarters.

Our backlog, as we both indicated, remains strong. We remain focused on improving our execution, driving the integration and controlling our costs.

As Dave mentioned, we are raising our guidance for the year. Our EPS from continuing operations will be approximately $4.70, excluding integration cost as Dave mentioned, based upon: a, our strong performance to date, current market conditions, current production rates, weighted average shares of 52 million and revenues of $3.35 billion to $3.4 billion for the year.

Our approach in giving this guidance includes a couple of things that I'd like to comment on. We have to remember that we're coming off the best quarter in the history of the company and a quarter in which we saw a dramatic almost step change level of margin improvement at our Aerospace -- amongst our Aerostructures segment.

We have a large increase in revenue production and shipments even at the bottom end of our guidance and a significant increase at the upper end despite the aforementioned slowdown in 787 sales and lower nonrecurring revenue. In addition, Boeing will make shipments of the 787 and 747 partially from inventory, which will delay some of our shipments to Boeing.

For example, Boeing announced 747 shipments going from 35 to 42 next year, but some of these shipments will be made from inventory of planes already produced.

At that -- I'm sorry, a couple more things here, I almost forgot. SAP, we've mentioned before, is improving every day.

But it continues to be a drag on our performance in Aerostructures, and that suggests a prudent approach to Triumph Aerostructure's portion of our guidance. The activity level at our manufacturing sites associated with synergies continues to escalate, which creates long-term savings of which we feel good but has inherent short-term risk.

Taking that into consideration, we are committing to a level of about equal to our very successful quarter 3, as Dave indicated. We do not expect to go backwards in margins and we expect to continue to improve in the light of quarter 3 success.

We are guiding to number we know we can deliver. We will be disappointed if we don't surpass that number, but we don't want to overcommit and under-deliver and that shouldn't be a surprise to anybody.

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

Credit Suisse. Dave, on the Aerostructures margin, can you parse the improvement from the different items you mentioned?

Execution, synergies and lower pension. And then, how do we think about the sustainable level going forward?

Can we look at, x cume catch, the underlying 15.3% margin as a starting point?

Yes. I mean, I think our margins will, to your point, are sustainable.

Both Rick and I had commented on that. So I think we don't anticipate going backwards and that's a place to build from, and particularly as more synergies come in.

The pension has nothing to do with the cume catch because we use a pension expense at the beginning of the year and it stays that way. There'll be an impact in Q4 when we set the forward year rates.

But the pension had nothing to do with the cume catch. It did have something to do with improved performance year-on-year, but not the cume catch, and it's probably about $5 million for the quarter, would be pension.

The rest is really just solid execution by the people in the Aerostructures businesses on labor, overhead and material costs as they're doing a very good job. Some of it is the synergies but most of it is just hand-to-hand, daily blocking-and-tackling is really driving it.

There's no big reserves that we flipped in getting to our cume catch adjustment.

Okay, great. And then on Aerospace Systems you guys had anticipated a decline, and we obviously saw that with some increase in the legal.

Do you expect this pressure to continue? And then, what are the latest expectations on the litigation?

Yes. The margins really was -- it was something we had projected after Q1, and we're pleasantly surprised it didn't happened in Q2.

And it's really our Aftermarket business, particularly with some foreign militaries, just tends to get all bunched in 1 or 2 quarters here and there. So the whole drop in margins, sequentially, for Aerospace Systems was the Aftermarket, and we think Q4 will come back a little bit in that regard.

I'll let Rick address the legal.

I think the legal, only one minor change, and I don't know how minor it is, but minor change in the legal. Number one, you're all aware that the case was dismissed in Mississippi.

The civil case was dismissed. That's being appealed by Eaton.

I don't know who knows how long that'll take, forever is my guess, which is the plan from some parts of the world. But I don't want to comment anymore because the general counsel's in the room here, he'll kick me.

But the other change, the minor change in that is that there is a date set for later in 2012 for the criminal trial to go ahead in Mississippi. And our comment on that is the same as it's always been.

We're going to vigorously defend the engineers. We don't think they did anything wrong, and that will proceed and go forward during this year which means, by definition, the legal costs will increase to a certain extent.

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

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

Royal Bank of Canada. My first question was, can you just give us a quick update on 747, 787.

You said last quarter 2 747s had slipped into the second half. Is that still on track?

And where are we on the 787 ramp trial?

I think both of them are going to ramp up as far as Boeing is concerned. As I indicated in some of the shipments that we have had on the 787 have been pushed to the right a little bit, and I think the 747 will also.

But only because Boeing has planes in inventory now. And therefore, they don't need some of the product that we shipped them on both those aircraft.

But both of those aircraft will help us relatively significantly in 2013. I think the fourth quarter will still be a little bit low on the shipments on the 787, but they're not going to stop us from hitting the announced revenue that we just talked about.

And remember, Rama, we had said we lost 2 last quarter, and there'll be a loss of 1 for the year. So we're gaining 1 of those back this quarter, Q4, and that's part of what is making Q4.

Our revenue is going to be up fairly dramatically from Q3. We're not addressing fiscal '13 yet in terms of deliveries.

Right. And then on the Aftermarket Services side, you said there was a slowdown that was military related.

Can you give us some color on this?

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

Yes, I think that too [ph]. The only place we've seen that decline so far, as Rick said, is in the aftermarket.

You'll recall, last year, we sold a small business in Milwaukee that was foreign military sales. Very small.

Million, a couple million a year. And part of last year's huge Q3 and Aftermarket was just a slew of C-17 APUs that we had repaired, and we had commented all year that we weren't going to repeat that third quarter.

But I don't think we've seen anything yet, on the OEM side, in terms of hitting this year's performance on military.

David Strauss, UBS. On 787, just going back on that.

Can you give us a little bit more color in terms of what rate you're at right now, when does Boeing schedule call for you to ramp up? And are you actually at a lower rate today than you were, say 6 to 12 months ago on 787?

Our Q3 was clearly down from what it was a year ago. We gave in the script, in the press release, that there would've been 3% extra revenue attributable to 787 in nonrecurring.

Those are about 50-50 in terms of their contribution to that extra 3% of sales, so you can calculate that. And we're all over the place on 787 because we sell to so many different customers.

We sell to, a little bit to Boeing and a lot to Saab and others. But we clearly have gotten the message and the schedule that Q4 is not going to be the ramp-up quarter for us.

And we're hopeful that that's Q1, but we're not prepared to give that guidance yet. But it's not going to be Q4.

It doesn't indicate that we have any concern at all about the program in general. The program, in general, continues to be a good program and will contribute to our revenues and earnings going forward.

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

So I think that's coming from the other programs.

Right, okay. Switching to the Business Jet side, you've had some nice growth there the last couple of quarters yet it looks, to us at least, the 450 and 550 rates are relatively flat.

Could you give us any color there? What's driving the bit of a pickup on the Business Jet side?

Well, I think that the first thing that's happening there is, there is life at Cessna. There is some increase looking there.

We feel optimistic about that. If you listen to the Textron call, they said the same thing.

We'll see an increased business from there, albeit from a very low base over the last year. In addition to that, our Gulfstream business is in fact good, and our margins there are good so we continue to produce those products.

And as you know, we had won some longer-term programs. So the Business Jet business that we're involved in is, in fact, good but has room to get a lot better, significantly.

As I said, coming from a very low base.

Okay. And lastly for me, Dave, on pension.

Can you mechanically give us some help how, with what looks like a meaningful drop in discount rates next year, how things haven't changed at least from the income standpoint? It looks like you're still talking about a decent boost in the income side.

I know some of that comes through with a -- some of that gets hung up in inventory and comes through with a lag. But just mechanically, how that's going to happen.

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

But what's going on is there's about a 100 basis point drop in discount rates. That's going to inflate our liability about $260 million if we assume they stay flat between now and the end of the year and that we earn exactly 8.5%, prorated, for the fourth quarter and our assets will go [indiscernible] $124 million.

So that's how you get to the $140 million that I mentioned in the script. And what I would tell you is that the bulk of our pension expense is on retirees, and there's still a significant number of actives.

But the bulk of them are retirees. So mechanically, when the discount rate drops, that's also the number you use for the interest expense, part of pension expense and for us, that's going to largely offset the higher cost on the increased liability.

So when you have an overly retired workforce, the drop in the discount rate on expense does not have the same impact it might with a very active population. In addition, we had blowout performance last year in terms of deferred gains which are helping that as well.

So that probably exhausts my detailed knowledge of pension. But it is going to be a little worse, we think, than what we projected but not dramatically.

And that's assuming things stay where they're at right now.

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

Yes. Peter Arment, Sterne Agee.

Hey, a question I guess. I want to flush out a little bit more on military and not to pin you down.

I'm kind of talking about '13, but we're not that far way. And you've seen kind of what has been discussed on where the budgets are going.

But when you think about kind of your top Military programs, whether it's V-22 or C-130 or Black Hawk, C-17. How does the discussions -- or how does it look when you're think about those programs over the next 12 months?

I think there is -- on the programs that you mentioned, for example the C-17, we still continue to believe that there is at least short-term life in the C-17. I happen to think it's a longer-term life, but a short-term life, which I'm defining as the next couple of years.

Every time you turn around, they're going to cut the budget, they add 1 more C-17. So we are optimistic that's going to remain going.

The V-22 and the other programs that you mentioned, what we see is continued pressure for lower pricing on multi-year and/or short-term single-aircraft type of margins. Our margins will be under pressure as we go forward, and that's no different than it's been the last 2 or 3 quarters.

I think there are a couple of programs that we're concerned about as we go forward, mostly in 2013. For example, the Global Hawk, where we do the wings on that, we look at over a 4-year period of time.

We'll have about between $50 million and $60 million of less sales in those 4-year period of time, which is 1% less sales in that product. So we are concerned about items like that as we go forward.

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

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

Not in fiscal '13.

Yes, okay. And then, Dave, just a quick question on the CapEx.

The guidance calls for $110 million to $130 million kind of as a range for the year. You're at $59 million year-to-date.

Can you kind of just flush out a little bit what's going to go on in the next 90 days that's going to have such a big step up?

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

And so we'll probably see -- when you look at the low end of the range that's $42 million, you're probably going to see $10 million, $15 million on Bombardier in the fourth quarter. There'll be some capital and some engineering that'll go into inventory and then the rest would be normal CapEx.

Other than that, maybe $10 million on CapEx for Bombardier. I don't think we're expecting any step change here.

In the supply chain, when you think about as you're ramping up. Are there any areas where you're seeing tightness in terms of raw materials or fasteners or you name it?

No, not really. We don't see -- we're doing the same thing with our suppliers on some pressure on pricing just like our customers are doing to us.

But no, we have not had any slowdown or difficulty of obtaining any of our raw materials or parts that we need to acquire.

Lead times are going out a little bit, Ron. But as Rick said, we're not having -- as long as we're staying close to our suppliers, we're able to get the supply.

Wedbush. I just wanted to follow-up on the synergies.

You've, again, obviously updated the run rate since we met in November. Can you talk about the bridge now, from the $24 million to the $50 million, essentially over the next 5 quarters.

And is that something we should think about on, as sort of a linear or are there any meaningful step ups you can at least talk to that we should be looking for as you move forward with this?

I think, just like we've said all along on that integration, we have said consistently that the first $18 million was relatively low-hanging fruit and the balance, up to $50 million, was in fact longer-term things such as shifting products from one area to another, one plant to another, to become more efficient in determining which plants can be more efficient in various products. It's hard to point to one thing without going down every one of our product lines to give you -- there's no big bang in the month of June of next year that creates another $20 million.

It's a culmination of a lot of moves and that's why we referred to, in the beginning of my comments, some of the manufacturing decisions that are still in the planning phase or they're in the execution phase as we speak. And those are the decisions that will create significant, more integration savings as we go forward.

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

Okay, now that's helpful. And do the 30 projects you've identified and you talked about, do those get you to the $50 million or is that something where we've got substantially more than the $50 million or...

Yes. More than $50 million.

It'll get it to the $50 million. As we've consistently said, we would be disappointed if the number, in time, doesn't exceed $50 million.

But, once again, that's a significant achievement getting to $50 million. So we want to make sure we achieve that and don't overcommit, but we would be disappointed if it didn't go beyond that.

Okay, that's great. And just one final question on these.

As you're starting, now, to complete projects, it looks like, and you're making what I would argue is very significant progress here, tracking to what you've outlined and the goals you put in place, which is very encouraging. Has there been anything, as you look back over the last 1 to 2 quarters, anything that's been particular surprising or issues that come up in completed or implementing any of these decisions that maybe wasn't expected or has either gone perhaps more difficult or easier than you expected?

Nothing's easy, but I would say that -- I mean, some of the expenses and costs that we worked on over the last 18 to 24 months is -- some have surprised us, but on the other hand, they probably shouldn't have. The 2 companies, as I've said consistently, come from different cultures and so they -- companies have done things a little differently, but nothing that we couldn't overcome.

And there's going to be challenges in going beyond the $24 million run rate that we said we're at now. But nothing that we won't address and won't overcome.

KeyBanc. Dave, just for clarity, I want to make sure I got this straight, on the operating margins.

So going forward, you guys are comfortable with Aerostructures at that 16% to 16.5% and maybe a corporate operating margin at around that 14% level?

Yes. I mean, are we going to hit that in Q4?

We're going be around that. Obviously, the cume catch helps in the quarter but when we look out we believe our margins, this quarter, are in fact sustainable.

But as Rick just alluded, we've got a lot of manufacturing moves going on. That creates some distraction that we don't completely capture within our integration costs.

So I think you're going to see a good result in Q4, but it's not going to be -- it could be a little less but I think, long term, we believe for sure those margins are sustainable.

Got you. How should we think about -- you talked about pressures on pricing.

You'll obviously get some benefit from commercial volume increases, 787 increases. Do think that washes out at the margin line?

Will there be a net gain or some net loss with maybe some of the mature military programs coming off line or is it still too early to tell?

My view is it's too early to tell. We're in the middle of our business plan reviews.

We're trying to see what we're going through, what military things are locked up, what has to be booked. I think we'll give you a good feel for that when we give our guidance in May, or late April or early May.

I think it's a little too early.

Great. And then can you quantify, or will you quantify, any of the benefits are getting from the ERP?

I know you guys haven't disclosed that in the past.

We've never come up with a number and frankly, Ken, we're not going to start now. SAP has been live for a while.

We're, like a lot of people, who have gone through a conversion to SAP, some of the items are going a little bit slower than we had hoped. And it will affect some of the issues going forward.

I've talked about the SAP a little bit in my comments. It improves every day but it does drag on our performance at the Aerostructures, the ex Vought plants.

And we're aware of that. But in the long term, it's getting better every day.

So in the long-term it'll be a benefit to us. But I don't think we're -- I know we're not building anything in, certainly, in the fourth quarter.

But during fiscal year '13, it'll build in some benefits.

Yes. I think, on that one, Mike, I think we're really going to wait and see.

And when we get to the point that it's back to where it was before SAP, and then when we start to get the benefits, I think we'll sort of give you here's what delivered. And maybe at some point, we would then give a future, here is what we expect the benefit to be.

But right now, as it's a distraction, I think we're reluctant to put out of a savings target at this point. But that will come.

That will come.

Okay, fair enough. And then last one for me.

At the Investor Day, you guys talked about new business, strategic partnerships. You mentioned discussions with Spirit.

Can we get an update on how some of those discussions are progressing and if you see anything getting across the finish line in the near term?

I wouldn't say that anything is across the finish line. I'm not so sure that anybody would ever look at it as being across the finish line.

We're doing business with all the people that we mentioned at Investor Day, and we're trying to forge solid partnerships with them. I can't point to anything concrete that we've done.

I think the relationships are good and we'll continue to work on it.

Deutsche Bank. I guess to go back to the cash outlook for a second.

You talked about, previously I think, better than a $100 million in free cash flow, and certainly it looks like you're well on track to do that. Dave, you mentioned also the inventory.

It sounded as though your inventory wouldn't be a source of cash in the fourth quarter and you've done most of the pension contributions, with I guess $20 million left to go. Can you update us on the free cash flow outlook for the full year and, maybe, is the excess free cash flow going be voluntary pension?

Yes, I don't think we'll -- I mean, I think if we get to the end of year, late March and everything's going very well, we may get a jump-start on fiscal '13 pension but there's not going to be a large amount that we're going to pre-fund. I mean, I think when you think of Q4, CapEx and investment in Bombardier is going to exceed depreciation by probably $15 million to $25 million.

So there's a little bit of a use there. No taxes will be paid and, in fact, we might get the $29 million back.

Obviously, that'll be right to the bottom line in the cash flow statement. I think receivables will be a mild use as the sales go up.

And I think we only have about 15 -- it's actually $15 million in pension, maybe $20 million, you're right, that we're going to make. We've already made it in Q4.

So I think it's going be another strong quarter and I think we'll deliver more cash flow certainly by year-end. But there's a few variables that are tied to how exactly we spend on Bombardier and whether we get the tax refund, but I think it'll be a good quarter.

Okay. And then I guess on cume catch-ups.

This quarter is roughly the size of last quarter's cume catch-up. If you look at those 2, can you compare and contrast where they were coming from?

And also, maybe another way look at it, are these coming from long-lived commercial programs that are starting their lives in initial conservative booking or from military contracts that are maybe in the end-of-life true-up periods?

I think it's a little bit of all that, Myles, I mean we don't use the real long blocks. So most of our blocks are a year or a little more.

So we don't have this huge maturity, 3 years running off. We did have a few start-up programs that we were conservative on.

I think we still have distraction of SAP, but that's coming down. So that was a headwind in both quarters, but probably much less so in Q3.

But I think, as the synergies kick in and we're clearly doing a wait-and-see approach on the savings until they're locked in, I think it's mostly the synergies on the blocking-and-tackling in the factories. I don't think it's much different, to answer your specific question, to what went on in Q2.

There are a few closeouts that have $1 million here, $1 million there, but at the same time we have a couple of contracts that have gotten worse and we've set up provisions. So it's not all going in the right direction.

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

More favorable than this?

Exactly.

Yes, I would think so, sure. But I think there's too much uncertainty in the exact timing of when the synergies come in.

I mean, sometimes you need customer sign-off, we've got to build first articles. So I think we’re trying to be rather prudent in not jumping those -- jumping the gun on including those good things in our EACs until they're sort of locked and loaded.

Now that makes sense. And then the military side.

So I guess, one question at a higher level, it looks like the bulk of it is coming from C-17 step down or at least Boeing-related military sales step down. When does that start to abate?

I know fourth quarter last year was a fairly big military sales quarter. I mean, does that continue to be a similar pressure point in '13 conceptually?

Well, I think it's a pressure point all along. But as we've said consistently, there's still enough aircraft in the system, backlog system, to sustain us through at least '13.

Now, tomorrow morning, the military could cancel everything. I mean, that's the level of the uncertainly in all that stuff, but I don't see that happening and I think we'll hold on to the well through fiscal '13.

Beyond that, it's hard to predict, but in the short term I think we're in good shape there.

Is your production rate in '13 the same as '12?

Approximately, there might be 1 less. But on the other hand, the last budget that went through they added 1 more.

So it should be approximately the same as '12.

Okay. And then one last one.

You mentioned SAP a couple times and I think it may be a drag, but I'm not sure if it's breakeven or a drag. Any way to quantify whether or not it is working against the business?

It's definitely working against the business, Myles. We think the rate of the headwind is coming down, but we took a provision in all our contracts as we update our EACs every quarter and at the beginning of the year once we went live and we've assessed that each quarter.

Each quarter, you experience some of it and then you look out as to how much more is to come and I think that's gotten better but not dramatically. But it's still a negative.

And just to wrap up on the EACs though. I mean, it sounds like a lot of this thing is circularly tied, so the SAP is running better than you may be expecting in the beginning of the year.

Synergies coming through faster, they're spurring more EACs. So really, the EACs are just an underlying indication of your performing ahead of your planned schedule at the beginning of the year.

And it seems like if you continue to perform ahead of that plan, the EACs in some sense, maybe not the material size that have been last in the couple of quarters, but some sense would continue?

I agree with everything you said except you said SAP is doing better than we thought. You started with that, but it's worse.

But your punchline is correct and it's sustainable if that's where you're going.

Myles, I don't believe, necessarily, that the integration savings are coming faster than we had said they would. We said that the first 18 months would be up to $18 million.

And after that, we'd get increases and now, we've said 24. I don't think that's better than what we've said.

I think it's approximately what we did say at that point in time. So I mean, I'm not denigrating what we've done, I'm just saying it's not that much better than we said.

It's right on target frankly.

Stephens. Hey, can you talk about -- just to follow-up on, I think, Myles' sort of question with regards to the SAP.

I guess last quarter, you talked about beginning -- thinking that SAP would be a positive earnings contributor sort of beginning in the first quarter of 2013. Are we still on target for that?

No, what I said, Eric, was I -- what I hope I said, and I think I said was that in the first quarter we would get back to where we were pre-SAP. So we went live May 1, we're hoping that during the first quarter we get back to that same level of productivity.

And that, during '13, that would give us the base. That during '13, we would start to see improvement from SAP.

So we're still trying to get back to where we were before we turned the switch on, on May 1. And when we give our '13 guidance, I think we'll be able to give you a little bit of an idea of whether that's third quarter, fourth quarter.

But it's not going be in the first quarter. We hope it's just sort of level at that point.

Okay, fair enough. As we look into Q4, with regards to tax rate, in terms of the R&D tax credit.

Does the tax rate step up because of the lack of the R&D tax credit or is that blended in for the year already?

It's already blended in. So the rate for the fourth quarter should be like 35.6%.

It's already blended in.

Okay, fair enough. Can you sort of talk about what you're seeing, where your heads are, in terms of the M&A opportunities?

What you're seeing in pricing and availability?

I think we have a number of companies that have been available. We've had a couple of acquisitions that we have looked at, that have a very high military content that we've slowed down on, and our due diligence is working harder because we have that uncertainty to deal with.

I think there's a number of other acquisitions that we have been the preferred acquirer without the preferred price. So some of the multiples are still a little higher than we wish to pay and there remains a fairly steady input of acquisitions that we can, in fact, look at.

And we're looking at them very diligently, but on the other hand, as we've mentioned many, many times, we're focusing on our operations, our efficiencies in operations and being very circumspect as to the multiples that we pay or would be asked to pay going forward. But there's no lack of potential acquisitions.

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

If you're defining smaller side by companies that range from $25 million to $90 million to $100 million, the answer to that is yes. If you're defining smaller as $500 million, that would be large.

The last time I said that, we acquired Vought. But on the other hand, we're trying to be very disciplined in how we grow the company.

We're proud of the fact the we got below 40% debt-to-capital and we'll work very hard to have it maintain level, et cetera, et cetera. but we are still an acquisitive company.

Okay. If you look at your military sales, I guess year-over-year, they were down about 5%, maybe $15 million.

I guess you talked about some of that being the C-17 APU work that you had last year that didn't sort of recur this year. Maybe that was $4 million or $5 million of that.

Can you sort of talk about -- is the bulk of that difference maybe just C-17 production coming down or are there some other things in there that we should be thinking about?

Well by all the programs, it'll certainly be the C-17, would be the one that is down. Some of that differential would be the Black Hawk, where Sikorsky is doing some of their production in their Poland plant, that used to go to us.

And those would be the 2 biggest reductions if you will.

Stifel, Nicolaus. On the manufacturing decisions, does that include or exclude other situations where you may have been able to renegotiate terms with suppliers?

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

So we continue to do that.

But that's not in the 30, Steve.

Okay, so that's an addition?

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

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

Not really.

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

Okay. Second, Boeing has just completed a bump in the build rate on the 737.

There's another one, or 2 more coming, and the 777 rate increase. Can you give us an idea of the timetable, about when you start to deliver parts to satisfy the increased build rate?

I think in reality, most of that will be in the new fiscal year after -- in fiscal '13.

We'll see a little bit of it, Steve. We're generally 3, 4 months before they would start to -- I mean, some small amount might be before that.

But generally, we've guided people that if you take the month when Boeing delivers more and back up maybe 1.5 to 2 quarters is when we should start to see some increased revenue.

That's a harder question to answer than you may think because, as we've consistently said, various of our plants have different delivery times depending on the product they're delivering to Boeing. So if we're delivering a composite ductwork for the aircraft, that's early on.

The insulation for the aircraft is early on and some of them are a little later, so it varies with our companies.

Sidoti. Just curious if you could talk a little bit about Aftermarket Services.

Was wondering how much of that business unit stems from the military market as opposed to commercial. And what I'm really trying to understand is how much a headwind is there in that segment and maybe if you could kind of discuss what the growth outlook for that segment looks like?

I'm not looking at the -- I don't have, in front of me, the information on the Aftermarket Services, but memory tells that it's about, in that business, it's a higher percentage Commercial than the others. So it's less than 30%, which is our overall rate of Military.

And I think that the biggest exposure there, as some people have mentioned, is the C-17 APU in regard to that. So I don't think -- other than that, I don't think that there's a specific -- anymore of a danger there of losing more business than the pressure we've already seen on the C-17.

Yes, I would agree. I mean, I think that, that is an important part of our business but the repair of APUs on the 200-some C-17s that are flying or at least that the U.S.

Military flies, we're going to see that stream of revenue for a long time. And so I think that we -- I don't think the Military business there is under pressure.

We do repair all the booms on the existing refueling tankers. And that tends to make the business -- you don't get one of those a quarter unfortunately, but we're going to get that work.

It's just that it's a little uneven, but I think you're just seeing this quarter because of the dramatic increase last year. It showed up as headwind.

We don't see a lot of headwind in military going forward.

The other thing to mention, as Dave mentioned a little while back, the foreign military sales company that we sold last year was part of the Aftermarket business. So those sales will not recur, obviously, because that company is no longer with us.

And I even forget the sales on that, they were relatively small.

Couple million a year, $2 million, $3 million a year.

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

I mean is that fair?

Yes. I think that we'll be -- our margins will be sustainable at low single, 9%, up to 9%, 10%, 11% in that area.

And I think that our sales growth will be right along the lines of traffic and freight, passenger traffic and freight growth.

And we've also always talked, from a key driver, the age of aircraft. There's a lot of aircraft, particularly on the commercial side, that are sort of getting through their warranty period which we think is a big plus for us as a third-party.

So I think we have some good demographics going on there.

Okay, great. And the second thing I wanted to ask you was just on the Mexican start up.

How is that tracking? Just if you could give us an update there.

I think it's tracking very well as we have planned right from the beginning. We have spent a fair amount of money down there, but the benefits of the U.S.

companies which are utilizing Mexico for products that are being produced down there are benefiting by the low-cost labor that we went there for and that was our purpose of doing that. I'm just underlining that because our purpose was to get low-cost labor parts built while at the same time, bring it back to the states and not have our plants in the states suffer from a labor point of view.

So it's approaching breakeven, Tyler, which is good.

Credit Suisse. Earlier this month, there was an announcement that Airbus is outsourcing some of the lower wing panels to South Korea on the A320, and I think Airbus described it as non-core work.

And you've talked, in the past, about an opportunity here for additional work on the A320. Is this something that you were targeting and is there more non-core work like this that Airbus is trying to offload?

I'm sure there is, and we have targeted and we're still working very hard on increasing our market share with Airbus. We have people working on it.

I think that we have the ability to do so. We've been frustrated, very frankly, with Airbus.

Every time they announce they're going to dollarize some product, somebody reminds them they'll be losing European jobs and they don't dollarize it. We've quoted them any number of times.

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

UBS. Just a clarification.

The $4 billion revenue target that you put out there for fiscal '15. What specifically does that assume for C-17?

Does it assume you're kind of at a constant rate there?

10.