Jeffry D. Frisby - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Finance Committee M. David Kornblatt - Chief Financial Officer and Executive Vice President.

Robert Stallard - RBC Capital Markets, LLC, Research Division Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division David E. Strauss - UBS Investment Bank, Research Division Yair Reiner - Oppenheimer & Co.

Inc., Research Division Cai Von Rumohr - Cowen and Company, LLC, Research Division William Hoffmann - RBC Capital Markets, LLC, Research Division Kenneth Herbert - Canaccord Genuity, Research Division Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division Amit Mehrotra - Deutsche Bank AG, Research Division Peter J.

Arment - Sterne Agee & Leach Inc., Research Division Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division Julie Yates - Crédit Suisse AG, Research Division Eric Hugel - S&P Capital IQ Equity Research J. B. Groh - D.A. Davidson & Co., Research Division Yilma Abebe - JP Morgan Chase & Co, Research Division.

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2014 second quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast.

[Operator Instructions] On behalf of the company, I would now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Please note that the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is the property of Triumph Group, Inc.

and may not be recorded, transcribed or rebroadcast without explicit written approval. At this time, I would like to introduce Jeffry Frisby, the company's President and Chief Executive Officer; and David Kornblatt, Chief Financial Officer and Executive Vice President of Triumph Group, Inc. Go ahead, Mr. Frisby..

Thank you, and good morning, everyone. I'd like to welcome you all to this conference call to review our fiscal year 2014 second quarter results. As has been mentioned, there is a slide presentation to accompany the audio portion of this call, so I invite you to follow along.

Six weeks ago, we announced a recording of a charge to earnings related primarily to the 747-8 program. If memory serves, Boeing announced the impending cessation of C-17 production later that afternoon. Subsequently, the production rate of the 747 was further reduced to 1.5 per month.

I mention these things not to focus on the challenges faced by everyone in this industry, but to illustrate that our marketplace is, and always has been, a dynamic one. Setting aside the charge we took on the 747 program, we will be reviewing a quarter that was strong in many ways.

In terms of the rate reduction on the 747 and the fiscal year '16 cessation of C-17 production, I don't believe anyone who has been involved with this industry for very long could call either event a surprise.

The dynamic nature of our marketplace is one reason that companies that are committed to long-term growth have strategies that are longer and broader than an individual program or 2. Triumph Group is such a company.

We have continued to aggressively pursue our strategies to gain market share, to broaden our customer and program base, to be on the right programs, to continually enhance our competitiveness through cost reduction and to innovate in terms of product, as well as process.

We do these things both internally when we win new business and externally when we make acquisitions. I make these comments to explain why I sit here today, fully understanding the challenges we face, yet still having the same level of confidence in our future than I had a quarter ago or even a year ago.

We have a solid company, a strong management team with an equally strong track record, and in my opinion, a superior operating model for this environment. Some might call me a bit biased, but that's how I see it. With that said, let's look at Slide #3.

Slide is titled, "Q2 in Review." In summary, we had solid second quarter performance, with the exception of the 747-8 program. In the Aerostructures segment, excluding the 747, our businesses performed well. As Dave will delineate, the balance of the segment margins were very strong.

Within Aerospace Systems, it was a solid quarter in light of military sales decline. Overall sales were higher, but this was due to our newly acquired companies. And we were able to report continued margin improvement at Triumph Engine Control Systems, which is going to be a very important part of our future in this segment.

And in our Aftermarket Services segment, we showed continued strength in operating margin performance despite military aftermarket weaknesses.

And we had overall organic growth despite continued, we'll call it military sluggishness, that is still -- that we're still experiencing, although we still believe that we're going to see an uptick in that area. In terms of the status of the 747-8 program, performance is in line with our expectations, with some improvement being made.

We are carefully monitoring our new assumptions, and our continued focus is intended to give us enhanced visibility. With visibility comes an ability to properly manage. Our market conditions continue to be conducive to increased opportunity on the commercial side, and I'll talk about some of those opportunities a bit later.

The pressure on pricing from our customers continues, but it's basically unchanged from prior periods. And the military business is still uncertain. With the total impact of sequestration still up in the air, we've experienced the aftermarket and discretionary type of spending effects.

And we believe that, that is kind of -- we felt the full impact of that. But in terms of the production effects of sequestration and the longer-term effects, we just are not sure yet, and we'll wait and see. However, that being said, we continue to win substantial contracts in the military arena, so it's not as if this business has ceased to perform.

And we have successfully -- we successfully completed the acquisition of General Donlee, which is now operating at Triumph Gear Systems-Toronto, which happened at the beginning of October. That is a very good acquisition for us. We're looking forward to this new product line that should continue helping us implement our strategies.

The construction of the Red Oak facility continues to be on budget and on time. Dave will also cover this, but we should actually deliver our first Sikorsky helicopter cabin later this week, on schedule.

The construction of this facility is, again, a further illustration of our desire to enhance our competitiveness, reduce our costs and build a very strong future for potential growth. This shifting from Jefferson Street to Red Oak is meant to drive our costs down, and the assumptions that we had made going into the project are still sound.

At this point, I'll turn it over to Dave.

Dave?.

Thank you, Jeff, and good morning, everyone. I would like to start with a review of the financial results for our second quarter. Turning first to the income statement. Sales for the second quarter were $967.3 million, compared to $938.2 million for the prior year period, a 3% increase.

Organic sales for the quarter decreased 4%, primarily due to production rate cuts on the 767 and the 747-8 programs, a decrease in military sales and a decline in non-recurring revenue. Operating income decreased 35% to $93 million. Included in our results were approximately $5.8 million of pretax costs related to the Jefferson Street facility move.

Also included in the quarter's results were $43.7 million pretax of previously announced additional program costs associated with the 747-8 program. The prior fiscal year's quarter included $1.4 million of integration costs related to the Vought acquisition and a charge of $2 million for early retirement incentives.

Net income was $49.5 million, resulting in earnings per share of $0.94 per diluted share, versus $1.53 per diluted share for the prior year quarter. Excluding the Jefferson Street move cost and the non-recurring cost in the prior period, net income was $53.2 million or $1.01 per diluted share, versus $82.3 million or $1.57 per diluted share.

EBITDA for the quarter was $122.3 million, resulting in an EBITDA margin of 12.6%. The number of shares used in computed diluted earnings per share for the quarter was 52.8 million shares. Looking now at our segment performance. Sales in the Aerostructures segment for the second quarter declined 3% to $690.7 million.

Organic sales for the quarter declined 5%, primarily due to production rate cuts on the 767 and 747-8 programs, a decline in military sales and a decline in non-recurring revenue.

Second quarter operating income was $64.4 million, compared to $121.4 million for the prior year period, and included $5.6 million of charges related to the Jefferson Street facility move, as well as the $43.7 million of pretax charges resulting from the reduction to the profitability estimates on the 747-8 program.

Operating results for the quarter included a net unfavorable cumulative catch-up adjustment of $25.4 million, of which $2.8 million was related to the Jefferson Street move and $26.2 million was related to the 747-8. Excluding these 2 items, the remaining long-term contracts had a net favorable cum catch adjustment of $3.6 million.

The segment's operating margin for the quarter was 9%. During the quarter, the majority of our Aerostructures segment businesses performed well. Excluding the 747-8 program impact, these businesses had an operating margin of approximately 17%.

This is not meant to downplay the impact costs and our concern around 747-8, but to give you some insight, the majority of our Aerostructures segment's operations and programs continue to perform well. EBITDA for the quarter was $85.3 million at an EBITDA margin of 12.3%.

As Jeff mentioned, with regards to Jefferson Street-Red Oak move, we remain on budget and on time, and our team is doing a great job orchestrating and planning a complex move. while the heavy lifting on the move remains in front of us, we made excellent progress during the quarter.

Examples, as Jeff alluded to, would include that our Black Hawk cabin assembly has already moved, and we expect to deliver the first cabin on time in the week to come. The V-22 move has been substantially completed and assembly will commence next week. We have completed the closure of over 1.4 million square feet at the Jefferson Street facility.

To date, and admittedly with a relatively small sample size of approximately 60 people, mostly on the Black Hawk program, we have seen an excellent rate of our experienced personnel from the Jefferson Street facility accept a new position in Red Oak.

In our Aerospace Systems segment, sales for the second quarter increased 37% to $205.5 million, of which $60 million were attributable to Embee and Triumph Engine Control Systems. Organic sales for the quarter declined 3%, driven primarily by decreased military sales, and to a lesser extent, a decline in non-recurring revenue.

Second quarter operating income increased 23% from the prior year quarter to $31.7 million, with an operating margin of 15%. Both of our acquisitions from fiscal 2013 continue to perform well. EBITDA for the quarter was $36.9 million at an EBITDA margin of 18%.

We continue to deal operationally with the effects of Hurricane Sandy at our Freeport operation. However, from a P&L perspective, the impact was essentially flat in the quarter, net of insurance reimbursements.

The segment's operating results included $1.9 million, versus $1 million last year of costs -- of legal costs associated with the ongoing trade secret litigation, and we expect legal expenses for the fiscal year to be approximately $6 million.

As for the status of the Eaton litigation, we are now awaiting a ruling from the Mississippi Supreme Court on Eaton's appeal, which has been briefed and argued.

Meanwhile, Eaton has also appealed the ruling by the trial court in connection with our counterclaim against Eaton that would have required Eaton to produce several documents Eaton claims to be protected by attorney-client privilege.

The Mississippi Supreme Court has stayed all proceedings in the trial court, pending its decisions whether to order those documents produced. Accordingly, the trial will not begin November 4, as we had long expected, and we will have to wait for a ruling from the Mississippi Supreme Court that lifts the stay.

In the antitrust case we filed in North Carolina, however, the U.S. District Court in North Carolina has granted Triumph's motion to dismiss Eaton's counterclaims, and a scheduling conference has now been set for November 21.

If anyone wants to know more, we refer you to the documents available on the public record and prefer to let those documents speak for themselves. Continuing with our segment review, sales in the Aftermarket Services segment in the second quarter were $73 million, compared to $76.1 million in the prior year period.

The year-over-year decrease reflected the impact of the divestiture of the instrument companies. Organic sales growth for the quarter was 5%. Second quarter operating income was $10.1 million, with an operating margin of 13.8%. EBITDA for the quarter was $12 million, at an EBITDA margin of 16.4%.

We recently secured a nice piece of business with KLM Royal Dutch Airlines in Amsterdam, who awarded Triumph Airborne Structures a 5-year component, maintenance and availability agreement for the nacelle components in their fleet of MD-11 PW4000-powered aircraft. The next slide is a pension/OPEB analysis for Triumph Aerostructures for your reference.

As you could see, the table summarizes the pension and OPEB P&L impact, as well as the planned cash contributions for fiscal '14 and '15. The fiscal '15 amounts assume that all fiscal 2014 actuarial assumptions are met. During the second quarter, we launched and offered to the deferred vested participants in the Aerostructures defined benefits plan.

This should have the effect of reducing both our liability and assets and is consistent with our goal to de-risk the pension plan. The exact acceptance rate and impact are not yet known. However, we do expect this to contribute to a triggering of so-called settlement accounting.

Settlement accounting requires us to remeasure our assets and liabilities and reset the pension income or expense for the balance of the year. It is triggered when a certain amount of our pension liability is settled.

Driving this for Triumph is the large number of people who pursuant to the various initiatives taken last year, opted for lump sums and this year's action for deferred vested participants.

Our current projection based on today's discount rates and year-to-date asset returns is that the settlement will result in a small net positive impact in fiscal '14, reflecting both a settlement loss and a slight increase in pension income for the balance of the year.

Of course, this estimate is dependent on a number of factors, which cannot yet be quantified with any certainty, and as such, is not included in our guidance.

With regard to our pension liability at September 30, we estimate that our net underfunding shrunk approximately 50% to $175 million since the beginning of our fiscal year, primarily due to an increase in discount rates and good asset returns. Looking at the components.

Our gross liability decreased $251 million, offset by a decrease in assets of $76 million, which was driven by large lump sum distributions, partially offset by positive asset returns. Turning now to backlog.

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

Our order backlog as of September 30 was $4.85 billion, an increase of 8% over the prior year. Backlog increased 4% sequentially, and same-store backlog increased 4% from the prior year. Military represented approximately 29% of our total backlog. Our top 10 programs listed on the next slide are ranked according to backlog.

In first place is the 747 program, followed by the 777 program. Third place was the Gulfstream 450 and 550 programs, followed by the C-17 freighter in fourth place. In fifth place was the Airbus A330, followed by the 737 Next Generation in sixth place. Seventh was the Boeing 787 program, and in eighth place was the Osprey Combat helicopter.

The UH-60 BLACK HAWK helicopter is ninth, and in 10th place is the Boeing 767 program. Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military and space totaled 47% of our revenue and was broken down 74% commercial and 26% military.

Looking at our sales mix among end markets, the next slide shows that compared to Q2 of fiscal 2013, commercial aerospace sales increased by 6% to $558 million, representing 58% of total sales. Military sales of $266 million increased 1% year-over-year and represented 28% of total sales.

With respect to military sales on the OEM side, build rates at our customers are generally in line with our prior guidance. However, in situations where we use the min/max system, many of our customers have slid closer to minimum, and that is impacting our sales. We do expect this to be a short-term issue.

On the military aftermarket side, we saw a large decrease in Q2. However, early trends in October indicate that a good portion of that business is returning. Business jets sales increased 10% to $108 million and represented 11% of sales. Regional jets increased 100% to $14 million, representing 1% of total sales, and non-aviation accounted for 2%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter decreased 4% from the prior year. Breaking that down by segment, the Aerostructures segment same-store sales for the second quarter declined 5% to $674.9 million, primarily due to 767 and 747-8 production rate cuts.

Military sales decreased and non-recurring revenue declined, as mentioned earlier. Aerospace Systems segment same-store sales declined 3% to $145.6 million. The Aftermarket Service segment same-store sales for the quarter grew 5% to $73 million, and export sales for the second quarter increased 33% to $151.1 million.

Turning to the balance sheet on the next slide, for the 6 months ended September 30, we generated $89.4 million of cash flow from operations before we made $45.8 million of pension contributions to the Aerostructures defined benefit plans. After these contributions, cash flow from operations was $43.6 million.

Inventory for the year increased $108 million. The components of this increase were $33 million in the Bombardier wing, $19 million from the Primus acquisition, $19 million from the Jefferson Street build ahead, $12 million in Tanker non-recurring development activity and $7 million in non-recurring development activity in the Embraer program.

Based on our current forecast, pension contributions of $115 million, the completion of the Jefferson Street-Red Oak move and excluding acquisitions, we do not expect any fiscal year 2014 cash flow to be available for debt reduction. During quarter 2, we had agreed with a major customer to defer receipts of certain receivables until our Q4.

This will have no impact on the fiscal year, but will create a large difference between Q3 and Q4 in that approximately $90 million of Q3 receipts will be deferred until January. With respect to pension contributions of $115 million, $70 million of which remains to be made, all of these contributions are voluntary.

And given the cash deferral expected in customer receipts in Q3, we may adjust the Q3, Q4 cash outflow to provide a better balance. CapEx in the quarter was $63 million, of which $1.6 million was for Bombardier and $32.2 million was attributable to the Jefferson Street relocation. Year to date, CapEx was $119.3 million.

We expect CapEx and investment in major programs for the fiscal year to be approximately $340 million to $360 million. Net debt at the end of the quarter was $1.4 billion, representing 39.5% of total capital. During the quarter, we had minimal activity around our convertible debentures.

In early Q3, we have puts of approximately $17 million, which will bring the balance of our converts to $15 million. Earlier this month, we notified the holders of our 2017 bonds of our intention to call their bonds in November at the contractual 4% premium.

That premium and the write-off of the unamortized fees and discount associated with these bonds will create a charge of approximately $11 million in Q3, which is now included in our guidance. It is our intent to refinance these bonds and the acquisition of Triumph Gear Systems-Toronto with a term loan.

Exact details of that plan will be announced at the time it is completed, which we expect to be in mid-November. The global effective tax rate for the quarter was 35.4% and reflected the fact that the R&D tax credit will expire in December.

In addition, the income tax expense for the quarter was favorably impacted by an increase to our R&D tax credit carryforward that resulted from a recent change in the law. We continue to expect minimal cash tax to be paid in fiscal '14 and '15. One matter that might be worth addressing here is the status of our negotiations with the UAW.

As of today, the union continues to work under the prior contract. High-level discussions are continuing, and we remain hopeful that a satisfactory resolution will be reached. With respect our financial guidance, excluding Jefferson move-related expense, but including the refinancing costs, we expect EPS in Q3 to be slightly above Q2.

We do expect that Q3 will see the highest level of expenses associated with the move. Our fiscal 2014 projected EPS of approximately $5.25 per diluted share reflects the impact of the 747-8, as discussed in September.

It also includes the high-yield redemption costs and the impact of Boeing's decision to reduce the rate to 1.5, both of which are recent developments. We further include the impact of military uncertainty and the trend we have seen in min/max and the tax benefits reflected in Q2.

With regard to Boeing's September decision to cease production of the C-17 in 2015, we believe there is a chance that the impact to fiscal '16 will be less limited.

While we expect to cease production of the major portion of the work statement in Q1 of fiscal '16, we have received inquiries for substantial spares activity, as we believe the Air Force will want to make sure it is adequately supported for the long term, given the likely scenario that the supply base on C-17 could disappear soon after production ceases.

We will continue to update you on this as it plays out. With that, I'll turn it back over to Jeff..

Thank you, Dave. Turning to our fiscal 2014 outlook slide. As Dave pointed out, our backlog remains strong and that our balance sheet remains solid. We continue and remain focused on improving execution, continuing to drive integration and reducing costs, both internally and externally.

We feel that we're well positioned to capitalize on new opportunities, as I mentioned in the earlier slide. We have, very recently, been awarded the design and build contract for thermal-acoustic insulation systems on the Embraer E-Jets E2 program. We view this win as approximately a $150 million program win.

While this individual win will not move our needle, this is clearly a part of our strategy that I mentioned in my earlier remarks of continuing to broaden our customer and broaden our program base and being on the right programs.

And this contract is just part of the significant contract potential that exists in a very active pipeline of opportunities. At this point, we are reaffirming our fiscal year 2014 revenue guidance of $3.8 billion to $4 billion.

And as Dave mentioned, our current earnings guidance is for EPS of approximately $5.25, excluding Jefferson Street move-related costs, based on current market conditions, current production rates, the previously announced 747-8 additional program costs of $0.83 per diluted share, recently announced 747-8 production rate of 1.5 per month, refinancing costs of approximately $11 million pretax and a weighted average shares of 52.9 million.

With that, I would like to open up the line for questions..

[Operator Instructions] Our first question comes from Robert Stallard..

It's Royal Bank of Canada. Dave, I was wondering if we could first start off -- or actually -- we'll hear from Dave, on the 747. You said that it stayed in line with your plan and there were some signs of improvement. I was wondering if you can give us some concrete examples of how you're comfortable that it is on plan.

For example, how much of your parts you're currently air freighting?.

Yes, we've instituted a pretty detailed review weekly with the teams in our 2 factories that support 747-8. We're looking at the key metrics of getting back to schedule, number of quality tags, level of overtime, labor efficiency, things like that.

And we're looking at those, comparing them weekly, as well as to the calculations we made in coming up with our Q2 results. And what we're seeing is that most, but not all, most of those items are either trending slightly favorably or are on schedule.

And we do believe that we are a couple of weeks away from getting out of the premium freight business, which is consistent with what we had built into the forecast..

And maybe one for Jeff.

On the FY '16 target, you didn't specifically talk about it this quarter, but I was wondering if you still feel comfortable with that long-term EPS target given the known negatives like the C-17 coming to an end?.

Well, I guess what I'd like to -- I would like to address that, so I thank you for bringing that up, there really has been no material change to our view of our long-term guidance since we last spoke. We've talked about $8.25 or $7.75 as adjusted for C-17, and that remains our goal.

Boeing's decision to reduce the production rate on 747-8 is certainly going to add some additional challenge, both in the form of lost margin on the lost sales, as well as pressure on overhead recovery. We're in the process now or just beginning the process of our annual budget and midterm budget analysis at our individual companies.

There have been a lot of positive and negatives since our guidance in our last Investor Day, that some of them are obviously negative, and we've been talking about those, but there have been a lot of positive changes as well.

And so we're going to gain some clarity over the next quarter, in terms of really, I guess -- and give some granularity to what it is that we put out there as a goal. And this process is going to give us additional information to help us to refine those calculations, which we will provide to you as soon as we properly vet them.

With that caveat said, the major movers of our earnings do remain in place. And specifically, I'm talking about the Red Oak savings, margin improvement that we feel we'll achieve, lower interest, improved pension and new wins and acquisition.

So with that said, at the macro level and taking into account the major items listed that I've delineated, we now see the fiscal year guidance to be $8.25 less, approximately, the $0.50 for the C-17, less some impact from the rate reduction on the 747 to 1.5 a month.

The status of the military market in 2 years could either be a positive or a negative. And if you -- I talked about the dynamics of the marketplace, and if you think about the $0.50 kind of cost or reduction that we put in place for C-17, we don't have a purely static view of C-17.

By fiscal year '16, a large number of our companies will have replaced the work that they lost on C-17 with other products. So I do believe there's some room for some upside there.

So I guess the way that I'm answering this is that we still hold the $7.75 as a goal, although over the course of the next quarter, we will gain some additional insight, and we'll be able to provide some more specifics on it..

Our next question comes from Sam Pearlstein..

I'm with Wells Fargo. Dave, can you just help me, if I just look at your old $6.30 to $6.40 and take out the 747, and call it, $0.13 for the refinancing, that still seems like there's about $0.10 from other changes in the outlook.

I mean, what other things have been adjusted since then?.

Well, there's -- we baked in something for the rate drop of 1.5 on Boeing that was not known at the time. And probably, while we see some recovery in the military, I would say a slightly bearish view than we would have had 90 days ago, let's say.

So those are the 2 negatives that sort of bridge that gap, little improvement in tax, but those are sort of the larger items..

Okay.

And then the improvement you talked about just in terms of some of the military aftermarket earlier in this, I guess, in this month, was that the C-17 comment as well, or has there been another change or improvement in the aftermarket?.

I think it's a different C-17. I mean, that is one of our larger, in our Aftermarket Services segment, one of our larger contracts. And we did see some inputs in early October and sort of a plan for the rest of the year from our customer, whereas I think we had seen no inputs for 2 months.

So it's that, it's some refueling work, and just across the board, a lot of our companies saw military declines. I mean, in the Aftermarket segment, it was down 55% in Q2 year-on-year. And were it not for engine controls, that was down double digits in the Aerospace Systems group as well. So we're starting to see some pickup.

Whether we get back to prior years, I think it's too early to tell. So I think we have put a little bit of cushion in for that, not fully recovered..

And then one last question.

Just on Red Oak, how are you thinking about the C-17 coming to an end and whether you're going to be moving C-17, whether you're not going to move C-17, how is that going to play out?.

We're going to move C-17. I think it's in the best interest of Triumph, our customer, the ability to exit Red Oak....

Exit Jefferson Street..

Exit Jefferson Street. That's clearly in our -- everyone's best interest..

Our next question comes from David Strauss..

UBS.

Back on Red Oak, so you talked about Black Hawk being moved, but I think you're now in the process of moving, I guess, C-17, the Gulfstream program, is that right? And is this kind of the peak period of risk overall for the move, as you sit here today?.

Well, any time you move something, there's some inherent risk. But there have been plans that are put in place that should mitigate those risks. This next quarter is when there are going to be an awful lot of moving parts.

That said, things like the G5 wing move is -- we're not, for example, taking an individual tool and moving it from Jefferson Street to Red Oak. We are creating an additional tool so that we, in fact, never really stop the production of that product. The C-17 is already in the process of moving in terms of some of the smaller components.

So it's all very carefully laid out. And to the best of our abilities, we have mitigated the risks that are in place..

David, my comment about the expenses, I mean, there will be some disruption that's planned, but when I said that the expenses would be the highest in Q3, I was mostly referring to the moving costs themselves, the rigging, trucking them, putting them back together, testing them, all that has to be expensed. So that was the comment.

We're not expecting a huge spike in disruption or certainly any more than what was built into the business case..

Okay, and then on C-17, you've highlighted the hit as being around $0.50.

Is that -- I mean, can you talk, Dave, I guess, how it plays out? I mean, could it potentially be worse than that as you come down in terms of overhead absorption issues? Or just anything that could play out, that the hit would, could actually be larger than that or maybe a little bit more accelerated than the hit coming in '16 or beyond?.

I mean, it's always been approximately $0.50, David, so I guess that gives us some cushion, hopefully, on the -- hopefully, that also reflects a little bit of opportunity.

It's not an ultraprecise number, but that accounts for -- we did build in some loss of overhead absorption, as Jeff referred to, we certainly hope that, that's not the case and that we'll replace the business.

I can guarantee you in the situation with Red Oak, we're not going to allow arguably our most state-of-the-art new facility to have a big hole sitting in it. And that will drive other decisions that will make us more competitive. So there will be a lot of moving pieces, but I don't see that number at this point growing to like $1.

I mean, could it be $0.60? Sure. But it's a calculation that will be refined over time. So that's where that stands..

I think it's also important to remember that there are very few kind of capital items, really large items, that are strictly related to C-17, that once we cease production of C-17, there's going to need to be any type of write-off.

We have -- we're depreciating our assets in sync with the cessation of the program, so we're not really looking at anything significant in terms of future write-offs, if that is a concern. And as I said, there are going to be opportunities, when the C-17 disappears from our plants over time, to replace it with other work.

So it's not just kind of a uniform overhead issue, it will be kind of spotty..

Okay, and last one I had, Dave, you're addressing the 2017 debt. I think you're also -- you've also been thinking about 2018.

What's the plan there, the high-rate debt in 2018?.

Our plan would do -- our plan will clearly be, assuming interest rates continue to cooperate, which I think is a good assumption, that shortly before those bonds are due next summer, we would do the same thing. Generally, it's not economic to do that prematurely, but it's something we'll look at. But I think you'd see the same thing.

Obviously, those are twice the size, so we'll certainly have a cost in fiscal '15 to redeem those bonds. But those are like 8.6%, so there will be some very significant savings there..

Our next question comes from Yair Reiner..

Oppenheimer & Co. I just wanted to ask a question about the systems business. It sounds like the military part of it was what was putting on the most pressure.

Can you give us a sense of how the commercial OE part is doing and also how the commercial aftermarket is trending these days?.

The commercial OE was up in Aerospace Systems, as I think the spares were about flat. So it's all a military story. And I will say -- you've made the comment about pressure, and a few of your colleagues in your early reports. We're really pleased with the margins there.

At the end of Q1, we had indicated that, that rate, short term, was not sustainable because of the -- just blowout first quarter of aftermarket parts, particularly engine controls.

And this is above where we saw fiscal '14 being, and that really reflects good performance by most of our companies and the fact that our original prediction that engine controls would drive their margin higher is coming to fruition.

So I realize nobody likes a sequential decline, but this was exactly as we projected, and it could have been better had it not been for the military aftermarket decline..

Fair enough.

And so should we think about this kind of mid-teens level as kind of the right baseline going forward?.

Yes. In fact, I would hope it's, on average, a little better for the balance of the year..

Great. And then just another, another question about some of the main programs for you. I guess the 2 where, I guess, some of us see some incremental risks are the V-22 and the G450 and 550.

Can you help us think about how you view those programs? And when you think about those targets for FY '16, what are you baking in, in terms of the run rates on those?.

Well, I'll let Dave comment on what was in the FY '16. But we're really not seeing much of a degradation in G4 and G5. The order bookings have been pretty solid with those. And I think that we're going to find that those have continued lives that are certainly respectable.

The V-22 is one that has already been reduced in terms of sequestration, and so I guess it was really reduced in terms of the initial round of defense cuts that were prior to sequestration. So there's been a multiyear that has been entered into that has a set number of aircraft for the next several years.

There's discussion on a further multiyear that is being discussed, and there is actually a fairly significant international demand for this aircraft. So we feel fairly positive about the V-22, not in terms of it growing greatly to some past level, but we think it's going to be very stable, as we also believe the G4 and G5 sales to be..

I think that -- I hear the number that was out there from the DoD was -- were sort of sliding right now from 36 to 30 to 24. And we certainly don't have -- we have not gotten any indication that, that's going to be further reduced.

And I think there was some relatively bullish news out of Gulfstream, I believe, that I think 70% of their orders in their -- I think they're a calendar year company and their Q3 were 450, 550 orders. So we certainly are not getting any sort of "get ready to slow down" signals from Gulfstream on those 2 programs..

Our next question comes from Cai Von Rumohr..

Yes, Cowen and Company.

So could you give us a little -- the tax rate looked lower, could you give us some sense as to what you're now looking for, for the tax rate and maybe some color on the margin for the year, by the 3 sectors?.

Yes, the tax rate for the balance of the year, absent any new assessments or positive developments, is 35.4%. So that lowers the rate slightly from where we started the year.

And then the difference between 35.4% and where we ended the quarter was all driven by some additional R&D credits that our tax department identified in regard to some new rules about certain costs qualifying for the R&D credit.

I think as to segment performance, I think if you look at the easiest one first, Aftermarket, we see it staying essentially in the range it's at today, maybe picking up a little bit from here, but not too much higher. In Aerospace Systems, I think you're going to see it be, on balance, slightly better than Q2, but obviously below Q1.

And I think in Aerostructures, that's a tough one, depends -- I think we see them going north from here because we're not going to have the same level of charge on 47. But I think you'll see, if you take out the impacts of 747, it will continue to perform very well.

But the margins, GAAP margins, should go up from here nicely, if that's the metric you're using..

Terrific. And then sort of a follow-up on the change in the estimate, you'd mentioned 747-8, but kind of just doing the math, it looks like going from 1.75 to 1.5 is about $35 million. And with the reduced run rate on the profit, it looks like that's maybe $1 million to $2 million. I mean, it doesn't look like that's that big a factor.

You completed Donlee, and I assume that was not, maybe incorrectly, that was not in your guidance before, and that should be slightly accretive. And the military numbers in this quarter looked okay, and you seem to be saying that hopefully, they'll get a little bit better from what you've seen.

So I'm still a little confused in terms of why the estimate, excluding the debt retirement, came down..

I think you're -- I'm not going to comment on your shipset value there on 47, but when we factor in the loss margins and some overhead impacts, I think your number is very light there. Donlee was in our number, because remember, even though we hadn't closed on it, we knew -- we had already signed and announced it by the time we spoke last.

So that small accretion for the 6 months was already in the numbers. Obviously, there were some legal costs there and due diligence costs, which sort of hurt that. You can't capitalize those anymore. So I think those are the -- I think that might be why you're a little off.

And I mean, Cai, I'm not -- I think engine controls, because of their strong military profile, may have skewed your view of military. I mean, in Aerospace Systems, military was down 19% year-on-year, organic. So Triumph Engine Control Systems may have made up for a lot of that, but that's pretty dramatic.

So it's -- now again, we're hopeful that, that comes back. I'm not trying to be doom and gloom, but it was not a robust quarter on that front..

Our next question comes from Bill Hoffmann..

RBC Capital Markets. Dave, just 2 questions. One, you talked a little bit about some of the working capital, this increase in the inventory and then also the receivables. I just wondered if you could go through that again. And then my second question just has to do with the export sales. They're up strongly.

I'm just wondering if you can give some guidance and thoughts on the sustainability of that level of exports?.

Yes, the inventory, I listed sort of the major sort of what I would say intentional increases in inventory. We don't like any increases, but we knew at the beginning of the year that there would be these items.

So you're looking at $33 million on the Bombardier wing; $19 million came with the Primus acquisitions; $19 million on the Jefferson Street build ahead, so there's always a build ahead in that business case to avoid disruption and missing customer deliveries; $12 million in the conversion of the 767 commercial to Tanker, at least our portion of it; and $7 million in Embraer, the big win we had on Embraer.

So you add those up, I think that takes care of $99 million of the $108 million of inventory. I think receivables are following their normal pattern of, I think, year to date, it's pretty flat in terms of usage or it was negative in the second quarter, positive in the first. And I would think that export sales, which we consider really non-U.S.

sales, I mean, a lot of it is exported, but some of it is just the sales of -- by our non-U.S. companies. That's going to increase, certainly with the Primus acquisition, Triumph Structures International. And certainly, when we are successful with gaining more Airbus and Embraer business, that's only going to move that number north.

So I think it is sustainable..

So just with regards to the inventory, I mean, it looks like just the Jefferson Street sort of buffer is the only one that sort of comes back out again eventually?.

Well, the Tanker, non-recurring, we should be paid for in a relative short period, let's say, this year. And Jefferson Street build ahead would be probably peak in Q3, a little more and then start to wane down, but you probably don't get through all of that until early next fiscal year..

Our next question comes from Ken Herbert..

It's with Canaccord. Dave, I just wanted to -- Dave and Jeff, just to further -- you used to speak a lot about significant margin improvement within the Aerostructures business. And I know there's significant amount of moving parts over the next few years, with obviously military, Red Oak, everything else going on.

How, Dave, has your outlook for margin improvement in that business changed at all with what's happened, certainly in the last few quarters, when you think about out to 2 to 3 years? And if I remember well, you always talked about 200-basis-point type improvement from where we were sort of running in fiscal '13.

Can you provide any updated thinking on that, please?.

Yes, I think if you exclude 747, I think that story is very much intact. I mean, Red Oak is essentially a very significant cost reduction that will drive margins higher.

And I think there continues to be integration opportunities, both with Aerostructures and with Triumph Structures International, given the facility they have in Thailand, where there's plenty of capacity, as well as our own supply chain efforts. So I think that this year, we're taking a backward step, obviously, because of the impact of 47.

But if you re-baseline from there, I don't -- we're not coming off that story, and the Red Oak will be very impactful to that. So I don't think we have a different view other than what 747 has done to the margins in the near term..

And it sounds like on Red Oak, you're starting to see benefit now on the Black Hawk. How does benefit on other programs -- when would you really see the benefit from Red Oak over the next couple of years? Is it right away or are there -- there's certainly a lot of issues with move, I can imagine..

Yes, there's no benefit now, Ken. I mean, we're -- there would never be a benefit this year given all the move expenses and the cost of maintaining 2 facilities or running 2 facilities. So the projections always were that next year, we'd sort of be breakeven-ish. So that you start with fiscal '13, we go down dramatically in '14.

We sort of get back to fiscal '13 numbers in '15. And then '16, we're looking at the $40 million or so of improvement that should be a constant run rate from there and hopefully prove to be conservative. But there won't be any -- I mean, will the cost to build it at Red Oak be technically lower than it was at Jefferson Street? Maybe.

But there's too many other activities going on that there's no way that helps margin on a GAAP basis this year..

Yes, yes. Well, I'm not expecting it this year, but just it sounds like there's a fairly, fairly immediate impact as you're able to move programs over..

I think the real time that margins will be felt in Red Oak is when we give the keys back on Jefferson Street..

Okay, okay.

And then just finally, Jeff, can you comment on the M&A pipeline and some of your thinking there either by segments or anything that's changed since we last spoke on that front?.

In terms of M&A, we certainly have a -- I guess we'd call everything a pipeline now -- but the deal flow has continued to be very robust. We continue to participate in those areas that match our strategies.

And so we're just continuing to look for those opportunities that help us be the company that we need to be, those things that give us broader program exposure, the right programs, the right customers and the right segments, so that we can continue our strategy of diversification and kind of rebalancing, striking the optimal balance that we're going for..

Our next question comes from Steve Levenson..

Stifel. Looking forward to transitions to new models like the MAX, Neo, and -- MAX and Neo, and soon hopefully, we'll hear some more on 777X.

What do you think the likelihood is? And what do you have to do to increase your content there? Or are you feeling you're going to have to just fight to maintain the content, particularly as it relates to whether you want to call it partnering for success or anything else like that? And Jeff, on the last call, you mentioned Triumph's own version of partnering for success.

Is there anything else to talk about that today?.

Yes, good question, Steve. On the first part of the question, in terms of 777X, in terms of MAX and Neo, we are already gaining market share on those programs. Each of these wins that we have made over recent months have not been sufficient to individually cause us to issue press releases and such.

But that's mostly the nature of how we continue to gain market share. But we are already establishing a stronger position in the newer-version aircraft than we have been in the more classic ones. And I think that you'll see that, that's going to be the case going forward.

We are actively discussing with Boeing opportunities on 777X as well, even though a lot of those systems have not been designed -- defined yet. In terms of the -- we are not calling our initiative partnering for success. We have not yet come up with a catchy term, but we will.

And what we're actually doing, I believe, it's actually today, our supply chain team is meeting in Dallas to formally kick off this program, which is one that should, in fact -- we're going to be looking for suppliers that will, in fact, participate with us in the same manner that our customers are asking us to participate with them.

And that is a joint partnership, an agreement to strategically align to drive costs out of the system. And with driving costs out of the system, obviously, reduced prices are a part of that. So what we're going to be asking our suppliers is much the same that our customers are asking of us.

And we do believe we will have substantial success in that arena. And I will add that we have yet to quantify the level of success that we're expecting. And as a result, we have not specifically plugged that into any guidance that we've issued..

Okay, and are there likely to be cases where you will have a desire to make those parts yourself? Or is it really just working with suppliers to get lower costs?.

I think that we're going to have to have lower costs and that to the extent that we can just keep the same supply base and just have lower cost, that would clearly be the least risk, most immediate opportunity to improve. And so that would be our desired effect.

But Triumph does have a tremendous amount of manufacturing capability and capacity, so we certainly have the ability to bring things in-house if we feel that, that's our best long-term solution..

Our next question comes from Amit Mehrotra..

Deutsche Bank. This is Amit Mehrotra here for Myles Walton. Dave, can you give us some indication on cash flow for fiscal '15? I know it's a bit early, but it's looking like a pretty significant uptick on maybe a step down in CapEx and restructuring savings and little to no cash taxes.

Can just give us some color on how you're thinking about the puts and takes on the free cash flow into next year?.

Yes, I think you've got it right. I would say the big movers is probably couple hundred million better on CapEx and new programs, assuming -- I mean, I hope it's less than that because I hope we win some new programs. But it should be $150 million or higher improvement there. We already indicated that pension steps down, I think, $75 million.

And then you have some of the relief from the Jefferson Street move inventory build ahead. So we agree with you. We're looking at a very substantial cash inflow next year on the back of those sort of major items, as well as an increase in profitability. So it should be rather significant..

That's helpful. And just, Jeff, on the new business outlook. Clearly, the E2 win is a positive one. And you've talked a lot about new business potential.

But can you just help us put maybe a little bit of a finer point on that, give us a little color on how much new business opportunity Triumph currently sees and how much can actually the company realistically win or actually realize?.

Yes. This is always kind of a moving target. And if -- again, I'm going on somewhat questionable memory, but in Investor Day, Jim Cudd stood before folks and talked about a pipeline that I believe was something in the $1.7 billion range. And so you think about the percentage of the business that we might win of that.

Well, we won a $1.7 billion contract since then. So clearly, we're not winning 100% of things that are in our pipeline, so that there are wins that come from beyond that as well. So I think the size of the pipeline is something that is useful for us to indicate kind of how the level of our activity is going.

And I actually asked Jim to put together kind of a quick shot at what the pipeline looks like today, and it came out really almost the same, slightly over $1.6 billion. And we do, in fact, feel very good about the fact that we will be announcing additional contracts soon. This is unfortunately a record that we played over and over again.

But we have won the installation contract, which is great. We do have contracts that our customers won't allow us to announce. But the fact is that there are many other opportunities that we are winning, and some of them will be substantial enough that we will announce.

So we're very optimistic about our ability to participate in the market and to be on the right programs, and so we continue to be bullish on that..

Okay, if I could just sneak one more in. On the FY '16 target of $7.75, plus or minus, I just want to confirm that, that does not have any assumption of M&A in that number.

Is that correct?.

No, it's always had an assumption of new wins/acquisitions. And so we've done -- we feel good about how much of that pipeline, so to speak, or how much of that amount we've already filled with Primus, with General Donlee and some other wins that will take place by fiscal '16. So we haven't filled that bucket yet, but we've made good progress.

But there's always a growth target that was in there between the buildup of our individual plans of existing plane shipsets times number of planes. There was always that wedge, so to speak, and I think we're making good progress filling it..

And in terms of underlying organic growth assumption, is that sort of in the low mid-single digits? Is that the right way to think about that?.

Yes..

Our next question comes from Peter Arment..

Jeff and Dave, this is just a quick question, given most of my questions have been answered, but on the 787, Jeff, the step-up to 12 a month and eventually 14, does that have any sort of material impact on your kind of CapEx spending heading into '16? Or how do we think about that?.

Well, I don't think we're going to be talking about substantial CapEx requirements to get to 12. I'm not really seeing the map of how we get to 14. We'll have to look at that. And again, when we talk about the difference between 10, 12 or 14, there may be additional machine tools we may need to acquire.

There may need to be -- I already think we own most of the world's autoclaves, but we might need another one. So these are investments, but they're not of such a large level of significance that they're overly concerning. I think that it would be great if Boeing can get to those rates.

And I think it's fair to point out that rates of 12 to 14 787s are not, in fact, in any guidance that we have provided, so that they would actually provide a bit of a tailwind..

Right, and just are you currently synced up today with -- on their path to 10 a month? I know there's -- some competitors talk about an overhang still on the fastener side of things.

Are you -- where are you on -- relatively in sync with their rates?.

Well, we supply to different parts of the supply chain, as you know. And it's almost like any question you ask about Triumph, we always have to start out with the 2 words, "It depends." But I would say we're largely in sync with their rate.

Not all of our factories are delivering at 10, but we have -- I think we're getting close to -- I think we're at least at 7 now, I would think, right, heading towards 10?.

Yes..

Our next question comes from Michael Ciarmoli..

KeyBanc. Most of mine have been answered. Maybe just one point of clarity here, Dave, on the 747 program as it relates to the accounting and just general costs. You noted a couple of weeks back that moving that program to full rate, there were price de-escalators. Now obviously, we've seen the program get cut by 25%.

Does the pricing at all change as you've kind of scaled back down? I mean, do you get any kind of relief from Boeing on the pricing given the volumes?.

I don't believe we do at 1.5..

Okay.

Where would you get relief?.

I think if it goes lower, I think there is an adjustment at that point..

Okay. And then just the last one I had, we've seen from some of the other OEMs out there, Black Hawk volumes could be down next year. What are you guys planning for? Have you seen any signs that Black Hawk is going to be trending lower, performing below your expectations? Maybe just some color there..

Well, the Black Hawk is still a solid program, and there are -- we have not only production opportunities there, but support opportunities for the many, many Black Hawks that are out there. As you know, with our cabin business, we are no longer supplying the M version. We're just supplying the S version of that helicopter.

So that becomes a less significant concern for us..

But the companies, our like Tier 2 aerostructures companies that have significant Black Hawk, have not sent up any flares that their business is weakening, and in fact, some of them are gaining share, so that's not something we've heard yet as a big concern.

I think there's a lot of movements going around in the short term, as I think our customer is doing their best to deal with some potential labor issues. But I think that's more short-term noise than anything..

Our next question comes from Julie Yates Stewart..

Crédit Suisse. Just back to the M&A question.

Are you guys still looking at some of the programs or even all of Tulsa?.

Well, we've -- as I've mentioned before, we have a number of items that we're looking at now. And we have said all along that we would have some interest in at least part of Tulsa. So I guess beyond that, being that we're still in some level of discussions, that we really ought not to comment on it too much more..

Okay, but nothing's changed in terms of your level of interest in particular programs or even all of Tulsa?.

No, nothing's changed..

Okay, and then is there any update on the timing of the new program wins you guys have talked about since May?.

No, other than I always see them as just around the corner. Of course, they've just been around the corner since May. Things tend to always take a little longer than I think that they will, but I do believe that we will see some contract wins. I would hope that we would see them this calendar year.

But again, I'll just hold off on that until we actually announce them. But again, the pipeline is robust. We are very optimistic that we will have some significant wins, and we will be very happy to finally announce some of these things..

Okay, great. And then just one last one. Dave, on military, you mentioned it was down 19% organically in Aerospace Systems.

Can you parse out what the organic decline was by end markets, so for military OE and then for military aftermarket?.

So in Aerospace Systems, it was down 19% in total, and organically, the military aftermarket was 20%. So just about the same. And in Aftermarket, it was down 55%. And in Aerostructures, which is almost exclusively OE, it was down 10%..

Our next question comes from Eric Hugel..

S&P Capital IQ.

With regards to the 747-8, is there any opportunity to see any moderation in your expectations of additional program costs, given the slower drumbeat on the program now?.

Let me try to understand your question. Does slowing it down....

To help you catch up quicker and maybe more efficiently..

Yes, yes. So when we came up with what the hit was for 1.5, we had built in a small amount of mitigation of some costs, but obviously did not cover the impact. But yes, there should be -- that should make it easier for us to catch up..

Okay.

With regards to the $11 million that you have factored into the guidance for the debt refinancing, what assumptions have you made in terms of lower interest expense going forward for that? Or is that a net number?.

Well, though that's the cost we will incur to get out, we believe we'll drop multiple hundreds of basis points on the 1.75. Unfortunately, what's happened this year in terms of our original interest forecast is that debt is much higher. So all net in, we're still probably on budget for interest plus these costs.

But that is in our forecast for the half year -- for 4.5 months, let's say, because we really can't do it until, I think, November 15..

Okay.

So you have a lower interest expense factored in?.

That's right..

And I guess lastly, you mentioned the KLM deal in the Aftermarket business.

Can you sort of put any size to that, sort of maybe an annual run rate on that? Is it meaningful?.

It's meaningful because it's our first long-term contract with a substantial airline in Europe. Normally, we're on a one-at-a-time basis. The impact on revenue is not dramatic. It's less than $5 million a year. But it does give us the ability to demonstrate our capabilities there. And any time you win a 5-year deal with a good airline, it feels good.

So it's not going to move the needle, but it's a very nice win for that business..

Our next question comes from J. B. Groh..

D.A. Davidson. I have a question just on the movement in the backlog of a couple of programs, A330, 787.

Is that just kind of timing of receipts of orders and that kind of thing? Or is there anything else there we should be aware of?.

No, mostly timing. A330 is at an all-time high..

Our next question comes from Yilma Abebe..

JPMorgan. Two quick ones. Firstly, perhaps if you can comment on the thought process in terms of financing these existing bonds and your acquisition and the term loan market versus the high-yield market.

And then secondly, maybe broadly, in '15, where you expect incremental cash flows, any comments around expectations for further debt reduction?.

Yes, I mean, we did a careful analysis of the high-yield market, the term loan, the relative savings, the tenor, the ability to repay a term loan, given our potential nice cash flow in the next couple of years.

And when you -- it was not an overwhelmingly -- it was a slam dunk to go term loan, but when we looked at all the factors, the fact that banks are awfully anxious to lend money and like funded assets, we're getting a very attractive rate, we will swap it. If assuming we go ahead with the plan, we'll swap it fully into fixed.

So it's not a -- we're not playing the variable rate curve, 5.5-year money is what we're looking at versus 7, at substantially better rates, and that's with the rule today.

And I think we'll go through a similar exercise depending upon new program wins, acquisitions, things like that, pension levels, when we fast-forward 5 or 6 months and we have an opportunity to deal with next year's bonds. So I think that will be the thought pattern..

And on, I guess, debt reductions in '15 with higher cash flows?.

I think our intention would be to continue to deal with the pension and to deleverage a little bit. I think that would be our intention. We're sort of at the high end of our comfort zone right now..

Since there are no further questions, this concludes the Triumph Group's Fiscal 2014 Second Quarter Earnings Conference Call. This call will be available for replay today after 11:30 a.m. through November 6, 2013, at 11:59 p.m. You may access the replay system by dialing (888) 266-2081 and entering access code 1624471.

Thank you all for participating, and have a nice day. All parties may now disconnect..